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
January 7, 2020

Joe & Big Al explain, once and for all, the 5-year clocks for Roth conversions and Roth contributions, and pro-rata rules. We’ll also find out what they think about holding cash until the inevitable economic downturn, lump-sum investing versus dollar-cost averaging, and the Total World Stock Index Fund.

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Show Notes

  • (01:08) How Do the 5-Year Roth Clocks Work? 5-Year Rules for Roth Contributions and Roth Conversions
  • (16:16) Does the Pro-Rata Rule Apply for In-Plan Roth Conversion to Roth 401(k)? Mega Backdoor Roth Contributions
  • (22:21) Roth Conversion Strategy for a 38-Year-Old Retirement Millionaire
  • (28:45) In-Service Roth Conversion Persistence, The Power of Zero and Estimated Tax
  • (35:17) Is It Dumb to Hold Cash Until the Economic Downturn? What Should I Do With My Investments?
  • (37:52) Lump-Sum Investing Vs. Dollar-Cost Averaging
  • (42:46) What Do You Think of the Total World Stock Index Fund?
  • (50:34) YMYW East Coast Showcase

Resources mentioned in this episode:

READ THE BLOG | 12 Financial Tips for the New Year

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Educational Workshops and 2-Day Retirement Classes

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Happy New Year and welcome to Your Money, Your Wealth® #255, the first episode of 2020! Today Joe and Big Al will answer all your remaining questions from 2019, which is why this ep is a little lengthy: they’ll explain, once and for all, the 5 year clocks for Roth conversions and Roth contributions and they’ll cover pro-rata rules. (Well, hopefully it’ll all make more sense to you by the time they get through it. If not, let us know: click the link in the description of today’s episode in your podcast app, then click the banner that says “Ask Joe and Big Al On Air” and send us a voice message or an email with your questions and comments.) Also today on YMYW, we’ll find out what Joe and Big Al think about holding cash until the inevitable economic downturn, lump sum investing versus dollar-cost averaging, and the Total World Stock Index Fund. We’ve also got a bunch of derails at the end, also adding to the length of today’s episode. I’m producer Andi Last, and now, from Apple Podcasts, Google Podcasts, Stitcher, Spotify, Pandora, YouTube, Amazon Echo devices and your favorite podcast app, here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

01:08 – How Do the 5-Year Roth Clocks Work? 5-Year Rules for Roth Contributions and Roth Conversions

Joe: Going to the email bag, Big Al.

Al: Already? I didn’t hear your New Year’s resolutions yet.

Joe: I don’t have any.

Al: No? Did you have any last year?

Joe: Yeah.

Al: What?

Joe: I write them down and I achieve them.

Al: It’s like old news. Haven’t even thought about it for months because you already finished it.

Joe: Yes you’re right. Have you done your financial summit yet? At Chili’s?

Al: No. In January.

Joe:  When you do your financial summit, I’ll give you my New Year’s resolutions. I want to answer more questions, for the new year.

Al: Okay. That is your resolution.

Joe: We’re on our way. Number one. I don’t know why I just numbered that.

Andi: I don’t either.

Al: Because I’m rubbing off on you.

Joe: Oh God that’s awful.

Al: The first question is-

Joe: No, this guy’s got 3 questions.

Al: Yeah he does.

Joe: “Hi Joe, Al and Andi. This is Stephen again from Orange County.” All right Stephen, welcome back to the show. “I would like to thank you for your recent recommendation you made of taking out equity from my house to pay the taxes needed to make large Roth conversions over the next few years.”

Al: Wait one second, it wasn’t really a recommendation. It was a possible suggestion based upon the limited facts that we had.

Joe: Thank you Big Al.

Al: Compliance.

Joe: This was all hypothetical too. We just made up Stephen. He’s not a real person. I’m kidding Stephen. “This will help me reduce the large RMDs that will occur when I’m 70 and help to reduce future taxes when my income will be the highest. Now I have several questions that I hope you can answer concerning the 5-year rules, 2 of which I never heard discussed.” All right well we can discuss them now.

Al: First time on the show.

Joe: “I’ve listened several times to your recent Roth podcasts and still not completely clear on the rules especially concerning my first question.” Stephen trust me you’re not the only one that gets confused listening to this podcast.

Al: It’s normal, actually.

Joe: It is very normal. Okay let’s see, number one, “For people over age 60 specifically to try to simplify this, if I made $10,000 yearly Roth conversions, and $6000 yearly Roth contributions, each year from 2015 through 2019, and kept the contribution and conversion accounts separate, would the entire amount of both of the accounts’ 5-year totals including growth be eligible to be taken out 2020 since 5 years have passed from the opening of accounts and I’m over the age of 60? Or only on the contribution conversion amounts made in 2015?” Reading the question just confused all of our listeners. So let me just explain the 5-year rules.

Al: Oh boy. Here we go. Let’s just start with when you’re 60 and older, 59 and a half and older. Because it gets way more confusing when you’re younger.

Joe: There’s two 5-year clocks. 5-year-clock on contributions and there’s a 5-year clock on conversions. If you are over 50, the 5- year- there’s really no 2-year clocks. I mean if you’re over 60 or 59 and a half, I’m sorry.

Al: Wow you got me confused there.

Joe: Son of a gun.

Al: It’s like wow. That’s the new rule that you just made up.

Joe: It just came out in the SECURE Act! Let me start over. There are two 5-year rules. And the 5-year rule applies to individuals taking money out of a Roth IRA tax free. So if I am over the age of 59 and a half-

Al: I’m with you.

Joe: The 5-year rule is basically the same for conversions and for contributions.

Al: So 59 and a half and older it’s actually much simpler. So we’re going to start there.

Joe: So if I make a contribution, if I’m 59 and a half and older my first year, I’ve never established a Roth before, I establish a Roth today, I’m 59 and a half. I put money into that Roth IRA. I have full access to the money. Next day if I do a conversion or if I do a contribution, of the principal only-

Al: Principal only. So that’s the key.

Joe: Now I have to wait 5 years to have tax free earnings off my contributions or conversions. Make sense?

Al: Yep. Makes sense.

Joe: So let’s say I have to wait until I’m basically 65 years old to take all of the dollars out tax-free.

Al: 100%.

Joe: 100%. However I have full access to the contribution dollars and I have full access to the conversion dollars.

Al: So to use your example, Stephen, so your $10,000 conversion and your $6000 contribution, you’re 60 years old, so this applies to anyone 59 and a half and older you have access to those funds, dollar for dollar next day. You don’t have to wait 5 years. Now if that’s $6000 becomes $6100 because of earnings, that extra $100 you have to wait 5 years. But you have access to the first $6000 or that first $10,000 on a conversion immediately.

Joe: The 5-year clock starts with the first $1 that hits your first Roth IRA.

Al: And that affects all future IRA contributions, conversions- so it’s not separate 5-year clocks.

Joe: The separate 5-year clock is only calculated if you’re under 59 and a half for conversions.

Al: But I want to come back to that one sec. I don’t want to confuse people. So in other words, let’s say if you use your example, $10,000 is converted for 5 years. So that’s $50,000 and $6000 is contributed for 5 years, that’s $30,000. So over a 5 year period, it’s $80,000. Any time between day 1 and before year 5 you can take those contribution, conversion amounts out at any point. You just have to wait. You just have to wait until, on the earnings part, you have to wait the 5 years. Now the fact that you do a contribution in year 2, your 5-year clock started in year 1. You do a contribution year 3, the 5-year clock started in year 1. It’s that first Roth that you have starts the 5-year clock.

Joe: So now the separate 5-year clock for conversions happens if you’re under 59 and a half. And the reason why that is, if you just think of it logically is that, let’s say I’m 40 years old and I do a Roth IRA conversion. So I convert $10,000 into my Roth IRA. I have to wait 5 years, 45, to have access to the dollars even the principal.

Al: The principal.

Joe: Because people avoided the 10% penalty by converting dollars and then taking the money right out. And say no I converted it to a Roth and then I took it out of the Roth the next day. So they’re like no, each conversion needs its own 5-year clock. It’s kind of that same thing is like if you buy something on Amazon, wait the next day to hit send. Because the likelihood of you buying it. Now you guys never do this stuff? Am I the only one addicted to buying stuff on Amazon?

Andi: If I need it, I just buy it, Joe.

Al: I know what you’re saying. I know exactly what you’re saying. Actually I had a very wise financial planner years ago that told me when you really want something, wait 30 days and see if you still really want it.

Joe: See if you still want it.

Al: And usually you don’t. Although you would have still bought your Darth Vader mask.

Joe: I guarantee. Guarantee. That could’ve been a buzzed purchase.

Andi: Could have been. Ha.

Al: Maybe you could have waited until the next morning and say what was I thinking?

Joe: I could have just had a sandwich and a cup of coffee and I probably would have bought that. So what they were trying to avoid, to skirt around the law. So they established a separate 5-year clock for conversions.

Al: So that makes a lot of sense. And again just to reiterate. So if you’re 40 years old and you need to take money out of your IRA you have to pay a tax and penalty. So what people were doing is they were converting and then pulling it out. Oh, I don’t have to pay a penalty. Well IRS said no that’s not fair. So they make you wait 5 years before you can get that principal. You’ve already paid taxes on it when you do the conversion but you have to wait 5 years to get at that principal. But I will tell you the day you turn 59 and a half of that rule doesn’t apply anymore.

Joe: It doesn’t apply anymore. But if you’ve done a conversion and you’ve never established a Roth IRA before then the 5-year clock applies. So you just have to look at when did you first establish a Roth IRA? When was your first conversion? And how old you are? And then it sounds like Stephen is 60, so don’t worry about the second 5-year clock. If I got all these different conversions so I have to look at a separate 5-year clock for the conversions, that’s only if you’re under 59 and a half. And that’s for people trying to skirt the system to try to avoid the 10% penalty. You are over 60 Stephen it sounds like. But you write like a 52-year-old.

Al: One other quick thing I want to say is when you do take money out of your Roth they assume that you’re taking principal out first and earnings second. They don’t make you pro-rate it. So, in other words, you can take that full $6000 out or that full $10,000 out even if it’s made money and they treat that as principal first. So a lot of people don’t realize you really do have access to these funds a lot sooner than you think.

Joe: And it’s a 4-tier. So how it- I mean to really get in the weeds here Stephen-

Al: Oh boy.

Joe: Jeez, I know-

Andi: He’s got 2 more questions.

Joe: I know. But it’s 4-tiered. So first they take out contributions then conversions then the earnings from contributions then the earnings from conversions.

Al: That’s good.  Good to know.

Joe: It’s great to know. When you’re having a cocktail at the old Christmas party, ‘hey do you know Roth contribution or Roth IRAs have a 4-tiered distribution?’ but see that’s why I’m just- OK. Next question Stephen. “Does it make sense any longer once past age 59 to separate Roth contributions and conversion accounts.” No. Commingle them. Put them together. “I was going to roll over a single Roth 401(k) account started in 2016 consisting of both contributions and conversions from Schwab to a Vanguard Roth IRA that was started in 2018. But the Vanguard representative told me that it would mean that the Schwab money would be rolled back from 2016 to 2018. Concerning the 5-year rule of commingled which account that has begun in 2018. Is she correct? Thank you very much for your insight.” Did you catch that third question there, bub?

Al: Well it’s essentially closing one Roth opening of a new Roth, does that restart the 5-year clock?

Joe: On a 401(k)?

Al: Yeah. On a Roth 401(k).

Joe: Yes. But just roll it into an IRA and you’re fine. Know what I mean?

Al: Sure.

Joe: So if you have- like Roth 401(k)s and Roth IRAs have 2 separate rules.

Al: To make this even more complicated.

Joe: To make it even more complicated. But Stephen I think you’re doing the right things. I think you’re doing all right. I wouldn’t split too many hairs with this stuff. You can commingle the accounts. If you start another Roth 401(k), maybe keep that in the Roth- I would just roll it all together. You know what I mean?

Al: Roll it into an IRA. Roth IRA.

Joe: Unless he’s still contributing to the account by all means. But just off the surface of kind of what I’m looking at here. I think we answered his question.

Al: I think so.

Joe: But one thing I do want to address because if you have a Roth IRA from Schwab and a Roth IRA from Vanguard and a Roth IRA from TD Ameritrade it doesn’t matter-

Al: As far as the 5-year clock.

Joe: 5-year clock. It does not matter. The IRS does not care if you have 15 different Roth IRAs from 15 different custodians.

Al: So the 5-year clock starts at the first $1 in the first Roth.

Joe: Yes. Because they’re not asking can you give me your plan doc? There is now the E- what’s the form now, 64, 58-

Andi: What is it?

Joe: It’s your IRA balances at the end of the year now that the IRS kind of gets this.

Al: Oh, 5498, maybe? I think it’s 5498.

Joe: Yeah, so it’s 5498.Yeah. So it’s 5498.

Andi: 5498.

Al:  It helps when you say something more than ‘what’s that form? You know, the form.’

Joe: Well we’re talking about Roth IRAs and multiple custodians and now that the IRS has got the 5498, they kind of know what the balances are. So they’re getting a little bit tighter on this.

Al: I suppose.

Joe: But it doesn’t necessarily matter if you have multiple custodians.

Al: But what if you open one at Vanguard and then you close that one and start one Schwab?

Joe: Doesn’t matter, you opened it.

Al: Yeah that’s exactly right.

Joe: It doesn’t matter.

Al: If you can show that you opened your first one- you also have would have to- what about this? What if you open one at Vanguard and then withdraw all the money?

Joe: It doesn’t matter.

Al: And then start another one later.

Joe: Totally fine.  Totally fine.

Al: You sure?

Joe: I’m absolutely 100% positive. Bring me an IRS agent and I will take him down.

Al: I’m not sure about that. You’re sure?

Joe: Yes. 99%. I’ll give myself 1% out. So the question is you open up a Roth IRA-

Al: You do a $5000 contribution.

Joe: So you open it let’s say in 1998. Then 199- , no, 2000, the dot coms. Because you bought toilet dot com and it went down the toilet.

Al: And it went down the toilet.

Joe: So now the account balance is worth zero? Or are you saying you took the $5000 distribution and spent it?

Al: No I’m saying you took a distribution.

Joe: $5000?

Al: Yeah.

Joe: It doesn’t matter. You open it up in 1998.

Al: You took it all out so you never actually made 5 years.

Joe: When did you take it out ? 2000?

Al: 2000.

Joe: That doesn’t matter. You opened it up in 1998.

Al: So then in 2017 you open up a new one. So you’re saying the 5-year clock already works.

Joe: Correct.

Al: Even though you never had a Roth for 5 years.

Joe: Yes you did. You started in 1998.

Andi: But then you closed it.

Al: See I’m not sure about that.

Joe: I am. If someone can beat me in Roth knowledge I will give you $1.

Al: I know someone that can beat you in Roth knowledge.

Joe: Who?

Al: Ed Slott.

Joe: Oh, he doesn’t count.

Al: He’s a pro.

Joe: That guy’s- I mean wow. And then what, Jeff Levine.

Al: Yeah. Oh, he could beat you.

Joe: For sure. Without question. I would think probably most people could in our industry. But not you guys that are listening to me because you’re under the spell of your magic- of Your Money, Your Wealth®.

Andi: Your magic, your wealth!

Al: Your magic, your wealth. That’s the new title.

Joe: Thanks for the questions Stephen. Good luck with all of this stuff. And it’s as clear as mud isn’t it?

Al: I think so.

Joe: All right.

16:16 – Does the Pro-Rata Rule Apply for In-Plan Roth Conversion to Roth 401(k)? Mega Backdoor Roth Contributions

Joe: We got Jesse from Lafayette, Louisiana. “I have a question pertaining to an in-plan conversion from after-tax 401(k) contributions to a Roth 401(k). I have been making after-tax contributions in excess of the $19,000 contribution limit and then immediately doing an in-plan conversion to the Roth 401(k) option.” Mega backdoor. Love it, Jesse. “I also have a rollover traditional IRA outside of the 401(k). My question is this. Does the pro-rata rule apply to my in-plan Roth conversions? In other words, will I pay tax on a portion of the conversion? For reference, I converted about $6,000 this year and my rollover traditional balance is $230,000.” Before I answer that question Jesse I want to explain a few different things. Let’s talk about after-tax contributions in a mega backdoor.

Al: Okay. Good.

Joe: Go for it, Al.

Al: So with your 401(k) you’re allowed to contribute $19,000 if you’re under 50; $25,000 if you’re 50 and older. This is through the end of 2019 by the way. And in some plans they allow you to contribute additional dollars for after-tax money, in other words, money that you’ve already paid tax on. You can still contribute that to the plan and they have these upper limits of $56,000 for a person under 50, and $62,000 if you’re 50 and older.

Joe: And that’s the total contribution to the plan.

Al: Which also includes the employer match and employer profit sharing if there is such a thing. But if you have a plan that allows you to do after-tax contributions and it’s not already being done by the employer, then that’s what this after tax-

Joe: And apparently our 401(k) provider does not understand. And it’s so frustrating.

Al: It is frustrating and it makes us want to change.

Joe: It’s like ‘are you a complete imbecile?’ ‘No, you can’t do that.’ I go ‘do you understand what profession I’m in?’ ‘You can only do $19,000, sir.’ I’m like ‘no, I could do a lot more.’

Al: I actually sent him a bunch of sites and they came back and said ‘well we don’t do this.’

Joe: So some plans- look into this. Please look into this all of you that are listening. If you can do after-tax contributions talk to your HR. Talk to your plan provider. Because this is a very good benefit that a lot of you have is that if you could put additional dollars after-tax into the plan if you can afford to please do so. But then automatically when you get done with that you convert it to a Roth. Google just came out with a plan. We have some clients at Google, hypothetically, and they have in their 401(k) plan it automatically converts it for them. How cool is that?

Al: That’s nice. So automatic in-plan.

Joe: Yes. Automatic in-plan conversion. So you’re putting money into your regular Roth account or 401(k) pre-tax, after-tax. And then you do an additional after-tax dollars. That plan will automatically convert it.

Al: OK. That’s cool. I hadn’t heard about that.

Andi: Let’s get their plan.

Joe: No doubt.

Al: So it’s another way to basically do a much higher Roth contribution if you will.

Joe: And so he’s asking pro-rata rules. So the pro-rata rule is this is that- Let’s say if- So this has to do with backdoor Roth IRA contribution. So when we get the mega backdoor and we’ll go with the mini backdoor. The mini backdoor is this, that if you do not qualify to do a Roth IRA contribution so there are AGI limitations for that. If you’re married it’s about $200,000, if you’re single it’s about $140,000. Roughly.

Al: $135,000. Ish.

Joe: I knew he was going to do that. So if you make too much income you cannot directly make a contribution to a Roth IRA. So you can do an after-tax IRA contribution and then convert it because there are no AGI limitations on conversions. So now you’ve got the money in the Roth that’s compounding tax-free. But there are pro-rata rules. So if I already have an IRA and I make an after-tax contribution to another IRA they’re going to take an aggregate of the total amount of IRAs that I have and then they’re going to do a pro-rata. Well, how much is after-tax versus how much is pre-tax? And they’re going to do that percentage to see what is tax-free. Jesse’s asking the same question here. He’s like I did $6000 after tax conversion and I have about $230,000 in my IRA. Is there a pro-rata issue that he’s wondering about? The answer is no, Jesse. Because it’s 401(k) to 401(k). You’re not even touching the IRA so you have completely different rules. Continue to do what you’re doing because you’re doing some good things.

Al: And it is kind of surprising to people that pro-rata rule is IRAs only. And any type of IRA could be a SEP IRA or a Simple IRA or a traditional regular IRA. You have to add all those together as if they were one single account. You could have 20 different IRA accounts and the IRS treats it as one. However, if you have a 401(k), 403(b), TSP, that’s not included in this calculation for IRAs.

Speaking of the TSP, which was the topic of episode #254, the fellas will address this next week, but in the meantime, thank you to Nick in Alaska, Dan in Phoenix, Dave in Jacksonville, Dale in Santa Rosa, David on Facebook, and Richard for clarifying that TSP contributions made by military service members while in combat zones are tax-exempt. I’ve updated last week’s show notes with some relevant links that you’ve sent, so thank you for those as well, and most importantly, thank you for your service to our country. I’ve said it before, listener contributions make YMYW what it is, and we appreciate all of you. Click the Ask Joe and Big Al banner in the show notes at YourMoneyYourWealth.com to send in your questions and comments and Joe and Big Al will answer in a future podcast. Get there by clicking the link in the description of today’s episode in your podcast app. Now let’s get to some more Roth conversion questions.

22:21 – Roth Conversion Strategy for a 38-Year-Old Retirement Millionaire

Joe: Kenny. Granite City, Illinois. I have no idea where Granite City is but kind of a cool name. Do you know where Granite City is?

Al: No. But it’s near Chicago maybe. That’s the best I got.

Joe: That’s the only city you know in Illinois.

Al: Yeah probably.

Joe: Okay. “Exciting news if you’re not aware. Amazon Echo has moved from TuneIn to Apple Podcasts as its default podcast player. What this means, it’s easier to say ‘Alexa, play the podcast Your Money, Your Wealth®.’ So happy I can finally listen on my Echo devices.” Wow.

Al: Wow. We’re on Echo now. That is cool.

Joe: Yeah Kenny! Echo! Alexa. Alexa.

Andi: You’re screwing with people’s Alexas.

Joe: Someone’s listening to it on Alexa and I’m just blowing ’em up. I was gonna say something totally inappropriate.

Al: Yeah I know you were.

Joe: I refrained.  “Rather than a question, I’d like to lay out my scenario and ask for a strategy in converting my IRAs to Roth that’s beneficial. I’m 38, single, employed, disabled (blind), and currently making $110,000 a year. I have $200,000 in a brokerage account, $120,000 in a Roth, $680,000 in a 401(k), and $150,000 in my pension. If I wanted to pay minimal taxes in retirement, what type of conversion strategy would you recommend? Topic for another day is to discuss dividend stocks.” Well, we can do that. Man, I gotta say first of all, Kenny from Granite City is absolutely crushing the ball at 38. This guy just jamming.

Al: He’s got quite a side hustle in addition to his regular job.

Joe: What’s he doin’? Okay, so he’s 38.

Al: He’s saved a lot of money.

Joe: Saved a ton of dough.

Al: And he said he didn’t really want to pay any taxes, minimal taxes in retirement.

Joe: So when do you want to retire? When- you know what I mean? Does he have a conversion- he makes- But his pension is $150,000 and he makes $110,000 a year. He’s single, right? Yeah, he’s single, $110,000; he’s in the what, the 24% tax bracket. I would- if he’s got an option-

Al: But he’s in the 22% bracket now. But he could be in the 24% later.

Joe: He’s single.

Al: Yeah. The 22% goes up to about $160,000.

Joe: No. For married is 1- ok- $160,000? For single?

Al: No, maybe I got married.

Joe: Yeah yeah yeah. You got married.

Al: I think you’re right this time.

Joe: I know I’m right.

Al: It’s $84,000.

Joe: Yes. Yes. I was like-

Al: Or whatever. I can’t read it. But it’s something in the $80,000s.

Joe: Yeah. $110,000. He’s single. $160,000’s for married.

Al: Yeah.

Joe: $80,000 to $160,000 is married.

Andi: $80,000 to $160,000 is in the 24% bracket.

Al: $160,000. That’s the top of the 24%. Yeah, you’re right. He’s in the 24%. I stand corrected.

Joe: So what’s a conversion strategy? He’s gonna have a ton of- He’s 38. He’s already got that much money in a 401(k). He’s got $150,000 pension. I have no idea what he’s saving on an annual basis but it seems like probably quite a bit. Or unless he works for Netflix and then he had Netflix stock that boosted up to $680. But I don’t think Netflix is in Granite City, Illinois.

Al: Could be. Well, I have 2 ideas for a strategy. How about that?

Andi: And he’s got a pension. So-

Al: So here’s my first idea and that is if the $110,000 per year is going to continue for quite some time I would convert to the top of the 24% bracket-

Joe: Without question.

Al: – which is $160,000 of taxable income. Now if your income’s $110,000 and the standard deductions about $12,000, let’s just call it $15,000 easier math, so $95,000, so you could do about $65,000 conversion give or take and stay in the 24%. So that’s one potential approach.

Joe: But Kenny you gonna take a look- it’s in your 401(k) plan. I’m not sure if you have a Roth component in the 401(k) plan that allows you to do an inner-plan conversion. Because he’s 38.

Al: True. That’s a good point. Or if there’s an in-service withdrawal provision. Probably not, at that age. But you would still want to check that. But hopefully you’d have a Roth component in your 401(k) that you could convert in-plan. Here’s another strategy though and that is if you’re going to retire, you’re 38, let’s say you’re gonna retire in 5 years just to make up a number. But you may be years off from your Social Security, your pension, as well as your required minimum distributions, then you’re going to be in a super low bracket and then you start doing aggressive conversions at that point. If you feel like there’ll be a point in time where you can live off of your brokerage account and have very little income and do your conversions at that time. So there’s a couple ways to go potentially.

Joe: Kenny wee just need a lot more information in regards to how much money are you saving? When do you actually want to retire? Do you have a Roth component within the overall 401(k)? If you’re looking to do conversions. are you looking to retire now? And did this $150,000 pension get paid out? Whatever at 38. I’ve never seen that. But I’ve seen stranger things. So yeah it’s just kind of dialing this thing in just a little bit better. But first of all, good for you brother. You’re killing it there.

Al: Yeah it’s a tremendous savings program.

Joe: Unless he’s given us future values.

Al: Maybe.

Joe: He’s 38. ‘When I’m 68, I hope to have $120,000 in my-

Al: Maybe he woke up from a dream and that’s what he wanted.

Andi: Check out his comment.

Joe: “You guys are the best financial podcast out there.”

Al: That’s very nice.

Joe: “All others describe the basics on saving money.” We don’t do any of that crap.

Al: We’ve graduated first grade.

Joe: “I enjoy that you actually share strategies for maximizing return and minimizing taxation after a person has done as well as they should saved for retirement.” Kenny thank you for the fine, nice words.

Al: Awesome.

Joe: We really appreciate you listening and thanks Alexa. Alexa play-

Al: -play Your Money, Your Wealth®, please. That will confuse it.

Joe: Keep playing. “I am playing Your Money, Your Wealth®, Kenny.”

Al: Alexa.

28:45 – In-Service Roth Conversion Persistence, The Power of Zero and Estimated Tax

Joe: We got James from Arizona. “Hello again, Gents and Lady. Thank you for responding to my question a few weeks ago regarding my idea of converting about $315,000 the year I retire, 2024, since that is the year before the current tax rate expires. What I failed to tell you is that this money is currently in my 401(k). My plan was to roll to an IRA at retirement and then do the conversions. You suggested doing a little each year and not wait until 2024 for the entire conversion.” OK, now we’ve got an update here, Alan. “Nowhere in our 401(k) plan documents does it say anything about being able to do an in-service Roth conversion. I called customer service at the plan they said I could not do a conversion until I’m 59 and a half. Since that person did not sound too confident, I finally contacted the corporate plan administrator and found out I can do a conversion and I’ll be doing one in December to fill up my 24% rate. I wanted to thank you for the idea and to also suggest you should let your listeners know to be persistent since sometimes you may get a different answer depending on what you ask. I also want to suggest the book I recently read called The Power of Zero.” OK. You want to suggest it or recommend it because that book is not great.

Al: Have you read it?

Joe: Yes I’ve read David McKnight. He’s kind of a tease out there. If that doesn’t push someone to contribute to a Roth 401(k), Roth conversion I don’t know which will. He’s a big life insurance guy.

Al: Oh OK.

Joe: IUL boy.

Al: Yes. Okay.

Joe: James got to tell you. Thank you for that because I don’t know how many- we do that for our clients. So if someone is like I want to do a Roth conversion can I do an in-service withdrawal? Or this and that? Then they come back to us and they say no we can’t do it. And I was like well here no, I have a client that works at your firm and we did it. We’ve already done it. So let me get on the phone with you because you have to sometimes- because that first person that picks up the phone I would say 50% of the time you’re probably not going to get the right answer. Unfortunately.

Al: Yeah.

Joe: Especially when you get into complex stuff.

Al: And that’s in defense of all those great HR people out there. This is complex stuff. And unless you’re a tax specialist you probably don’t even know fully what the answers are.

Joe: Right. We’re looking at- we have after-tax dollars. We’d like to get the after-tax dollars out, put those into a Roth IRA. And speaking of just really bad advice. I just ran into, hypothetically, a gentleman that had $250,000 of after-tax money. Took the money out and with advice from his adviser, took the $250,000 out and bought a non-qualified indexed annuity.

Al: Oh boy.

Joe: I was like, are you kidding me? So be careful were you getting your advice from too. David McKnight. I actually love the music of David McKnight. Oh Brian-

Andi: Brian McNight.

Joe: Brian McNight. Love Brian McNight. I love me some Brian McKnight. David McKnight not so much. Because I would not want to put on the Power of Zero when I got a little you know candlelight and some-

Al: Boy that wouldn’t help you on your date?

Joe: It probably would.

Al: Have the book on tape and the candelight? And you too can-

Joe: “Alexa, put on David McNight.” “The Power of Zero!”

Al: “No I mean Brian.”

Joe: “Oh shoot! I mean Brian McKnight!” Yeah The Power of Zero. The concept behind the book is that you could be in a zero% tax bracket. So Roth contributions- you know this storm is coming and he’s more fear mongrel than anyone that I’ve ever heard. Tax rates are going to triple, they’re gonna quadruple. They’re gonna take more money.

Andi: He’s not a fear monger, he’s a fear mongrel.

Joe: No it’s a mongrel. I know, I looked it up. Look up fear mongrel. You’ll see David and Brian McKnight, their picture. He’s got a last quick question. “What is the easiest way to calculate and estimate the tax for current year so I don’t go over the 24% tax bracket? Is there a website download spreadsheet you can suggest? I’m doing a tally on a spreadsheet but I don’t want to miss anything. It looks like I’m straddling a 24% tax bracket. I don’t want to tip the wrong way now that I’ll be doing these conversions each December. I enjoy your show and can’t get enough of this stuff.”

Al: I would say for me personally it’s hard to find good free tax projection software out there. I’m sure maybe there’s some that exists. I know TurboTax and H&R Block have free versions of some but it’s not really designed for projections so I don’t know. The way we do we actually use tax projection software and if you don’t have that you can sort of do back of the envelope. But I agree with James’ comment is you can easily miss something in terms of deductions getting phased out and so forth. So if you-

Joe: Especially in the 24%. I mean that’s a giant bracket.

Al: You know what I probably do is I would probably just get 2018 TurboTax. It would be pretty close to 2019. Just put in what you think you’re income’s going to be in 19 see how it comes out. That should be pretty close.

Visit YourMoneyYourWealth.com and click “Financial Resources” in the upper left to access our blog with 12 Financial Tips for the New Year, all our white papers including the 2019 Tax Checklist and Tax Planning Guide to help you prepare for April 15th, the guide to the new SECURE Act for retirement savings, the Retirement Readiness Guide, the Social Security Handbook, the Retirement Lifestyles Guide and tons more. Plus we have a whole section of educational videos on topics like ETFs, fiduciary duty, annuities, and stepped-up cost basis. And of course, if you can’t get enough of Joe and Big Al, there are also 5 seasons-worth of the Your Money, Your Wealth TV show. Get your fill of personal finance at YourMoneyYourWealth.com – and click Ask Joe and Big Al to send in your money questions.

35:17 – Is It Dumb to Hold Cash Until the Economic Downturn? What Should I Do With My Investments?

Al: So where do we go from that?

Joe: I don’t know.

Al: We go to Ryan.

Joe: Yeah. Ryan.  Hey, we’re on the same page, Big Al.

Al: My son, Ryan from San Diego.

Joe: Oh he wrote in huh? ‘Hi, Dad.’

Al: Love your show.

Joe: Love your show. I was curious.

Al: ‘I listen to you guys at an unhealthy level.’  Ryan. You need to start dating.

Joe: That’s awesome. Oh boy. “All right guys and gal. Excellent podcast. I listen to you guys at-“

Al: -“an unhealthy level. I probably listen and read too much.”

Joe: “Too much.” Wow-what is he doing here? I want to make smart decisions with my money. As we enter into the next inevitable downturn of our economy, whether it’s this year, next year or soon after, I was wondering what advice you give for 1) investments already in accounts. I have a 401(k), 529s, and emergency fund. I have an emergency fund as well, and $16,000 in stock. So he’s got emergency fund slash and $16,000 in stock? Or is his emergency fund $16,000 in stock?

Al: I think he’s got an emergency fund as well as $16,000 in stock. In addition to.

Joe: Got it. “Money that I receive I would normally invest. I’m expecting about $60,000 in bonuses. Is it dumb to just hold on to the cash and wait until a downturn-?” Yeah, I would say-. I mean it’s so hard to predict.

Al: It is.

Joe: “-or maybe until it’s over. But at least wait until we are through the initial stages? Or am I just trying to time the market?” That is the definition of timing the market, Ryan.

Al: You know our good buddy Larry Swedroe talked about this at one point. And he basically said this that everyone that tries this strategy ends up losing more of the upside than they ever gain on trying to get that downturn market. And you could have made this argument 2012, 13, 14, 15, 16, and you would have missed the biggest bull market in our history. So I wouldn’t do that.

Joe: Ryan you’re young enough where you have time. It’s like I would not try to time the market. You’re 38 years old. You have plenty of time to get through any type of downturn. I would be fully invested. Keep saving as much as you can. And trust me it’s all gonna work out for you.

37:52 – Lump-Sum Investing Vs. Dollar-Cost Averaging

Joe: We got Marion writing in from Fresno. Marion goes on to say “My daughter and I were talking about her account with the Vanguard advisor. He insisted that lump sum investing, not dollar-cost averaging, is the only way to invest. I’m wondering what your position is on this.” Marion, Marion, Marion.

Al: By the way Marion is female and frequent listener and emailer.

Joe: Awesome. Well, thanks for joining the program Marion. I’ve never heard of a Marion as a man.

Al: I have.

Andi: Marion Barry.

Joe: Marion Barry.  Who the hell’s Marion Barry? Wasn’t he like the governor of Chicago?

Andi: Well you said you had never heard of a man named Marion. I just gave you one.

Joe: I don’t know, you said Marion Barry and I was like oh boy that reminds me-

Andi: “He was an American politician who served as the second mayor of the District of Columbia from ’79 to ’91.”

Joe: Oh, DC-

Al: It’s really close to Chicago.

Joe: Very close. Same with Granite City.

Al: Oh yeah. Right next to Chicago. Or St. Louis is what I meant.

Joe: So there’s two, mathematically speaking or I guess- if you look at the academic research-

Al: Wade Pfau?

Joe: Yeah.

Al:  Pretend you’re Wade Pfau for a second.

Joe: I’ll do my Wade Pfau impression.

Al: Please.

Joe: If you look at lump sum investing you will get a premium on your dollar because you’re-

Al: more is invested sooner and the market goes up more than it goes down on average.

Joe: 70% it goes up; 30% it goes down. So you have the lump sum over time you would be better off if you did lump-sum investing. He insisted though that’s the only way to invest. Well, this guy-

Al: She.

Joe: No, the advisor. The Vanguard advisor.

Al: Okay.

Joe:  He shouldn’t insist on anything when it comes to this. Because it needs to be what you’re comfortable with.

Al: Yeah. Good point.

Joe: The reason why people dollar cost average and if you have a lump sum is that you’re worried about a market downturn as soon as you invest this money. So I have $100,000 I just received from an inheritance. Do I invest it all at once? Or do I maybe do $1000 biweekly? You know what I mean?

Al: Into the market. Sure.

Joe: For the next 5 years? Well, that would make people feel a little bit better just because they could be risk-averse. Maybe they’re not experienced in investing. Do I agree with the Vanguard advisor of saying that lump sum investing is the only way to go? No, I don’t agree with that at all. But over time- because I know Vanguard did a study on this stuff too and they looked at it more like- I think it’s 2% more over time depending on how many markets and Monte Carlo simulations they ran. But do what you feel comfortable with, what you and your daughter feel comfortable with. It sounds to me that you probably feel more comfortable dollar-cost averaging into the overall market. That’s going to keep you on track then do that. But you cannot do a dollar-cost averaging investment based on certain decisions. You need a set a policy statement. You’re gonna say I’m going to invest X amount of dollars every single week into this portfolio until all the money is totally invested.

Al: Right. Not when I feel like it.

Joe: Not when you feel like it. Not when you feel like the market is up or when the market’s down like our buddy that Ryan was just on it was like we know the market is going to crash so I’m just going to wait until that cycle hits and then I’m going to invest my money. Well, we don’t know when that’s going to be. It could be another 2 years, 3 years, and we could have another huge bull market over the next several years.

Al: We could. So just to reiterate what you said Joe, and I agree with that is the lump sum mathematically is a better strategy to get that all invested. But here’s the worst thing that can happen is you put a lump sum in the market. The market tanks. You take everything out because the market doesn’t work. And you never get back into the market because you’re tainted and we see people do this. And if you’re concerned that that’s what’s going to happen with you then don’t do it. Do the dollar-cost averaging something that you’re comfortable with. But it needs to be regular. It needs to be systematic; otherwise, it will never get done.

Joe: So it’s like I’m going to put in X amount of dollars in the market every month, every week, every biweekly, whatever. And don’t stop until all done.

Al: Yeah, until it’s done.  Right.

Joe: Well good luck Marion. See? Way better than Vanguard advisors. Way better.

42:46 – What Do You Think of the Total World Stock Index Fund?

Joe: We’re going to Shane from Hamden, Connecticut. Shane. I remember Shane from Yale. Right? Didn’t he go to Yale?

Andi:  His wife is attending Yale. That’s why they’re there.

Al: Wow what a memory you have.

Joe: It’s called a steel trap Al.

Andi: It’s called Andi, Al.

Joe: I remember Hamden.

Al: It is called Andi.

Joe: I remember Hamden. Remember we were like ‘where the hell is Hamden?’ And then he wrote back and he’s like ‘you’re an idiot.’

Al: Yeah. I remember that.

Joe: Because apparently you don’t go to Yale where you don’t know where Hamden is. Hamden is a nice little suburb, he’s got a couple of kids and a dog and they go outside and it’s-

Al: We got educated. Yep.

Joe: I remember everything about Shane. “Hi Joe, Al, and Andi. I’ve asked the question in the past-” see? Boom “-about being 100% Roth and thoroughly enjoying listening to your response.” Well, Shane just wait for this one.

Al: It’s getting worse. We should have answered it right at the front of the show when we had energy.

Joe: “Thank you. I got another one for you. What are your thoughts on using total world stock index fund for our Roth accounts as index investing is meant to be passive; I feel that I am making an active bet holding a different international allocation percentage. I’m personally comfortable with owning the world market and not biased toward the U.S. My wife and I are 31.” And she goes to Yale. No, he didn’t write that. I just threw that in there.

Al: You knew that though.

Joe: They “consistently put in money each month. I am coming to the point where I just want one fund to throw our money into, ignore the noise, don’t think about rebalancing truly invest passive etc. We invest enough where we don’t need to shoot for the moon as for our annual return and I would be fine with a modest market return. Maybe 20 years from now I would consider allocating a portion to the total bond index to control risk. But since the intent is to leave legacy for our kids I’m considering saying 100% stocks if we accumulate enough and we stay on track. Well anyways we’d love to know your feeling about the world stock fund, the good the bad. Look forward to another informative answer. Thanks.” All right Shane. I like it. To be honest with you, yet our portfolio looks very similar to that. But in a little bit more complex and Shane wants things easy and simple.

Al: Yeah, one fund.

Joe: One fund. Total world index- so you got the total U.S. stock market index and you got the total international index. I’m down with that, I have no qualms with that. It’s cheap. You’re fully diversified. You got thousands of different companies, probably 30 different countries.

Al: So my analysis is identical to you. I like it too. I think your Roth account is going to be invested for 10 years or more.

Joe: I think he’s got everything in the Roth. Remember his question? Didn’t it say something like can I put everything into the Roth?

Andi: No he suggested- he was asking ‘what do you think about having all of my money in Roth?’ So yeah. But as far as what actually is in there, I don’t remember that.

Joe: No I don’t think he mentioned that.

Al: But at any rate it’s long term money so I would go all stock market if you can handle the ups and downs. A lot of people can’t. So a lot of people will tell them do 80% in the market or 60% in the market. So it’s the safe part kind of smooths out the ride a little bit. But if you can handle the ups and downs you’ll do better longer term. And it’s- you’re gonna hold it for a while. You get a lot of international exposure. A lot of U.S. exposure. And it’s a passive investment, low cost. That’s pretty good.

Joe: The only thing that I would add Shane is I know they have emerging markets within the international sector, but you might want to break it out there. But if you only want one fund, who am I? Who cares?

Al: I know and if you want to get- you could also have a little bit more value and a little bit smaller companies that they tend to do better than the total stock market. But emerging markets would be- That would probably be the first pull out I would do. If you wanted two funds, I would do 90% of this and 10% emerging markets. How about that? Something like that.

Joe: So Shane, if you set it, forget it, don’t worry about it. I’m totally cool with that at 31. But I think once you start accumulating more dollars, you start getting several hundred thousand dollars saved and it sounds like you’re well on your way to that if you’re not already there, then you might want to look at maybe a little bit more sophisticated strategies just to maximize your return. Because you’ve got such a long time horizon. If you could squeak out maybe another 50-basis points or 1% on the overall portfolio over a 20, 30-year period. That legacy for your kids just got a lot bigger.

Al: I will say one other thing too, and that is as your balances grow bigger and bigger, not all spouses are on the same page in terms of one may be more fearful that they might lose the account and-

Joe: Or the more money you get the more interesting life becomes.

Al: And that’s what I’m saying and particularly even if you are very comfortable with risk. If your account balance gets up to $1,000,000 your spouse may not be.

Joe: Because all of a sudden you lose 30% of that. That’s $300,000. You lose 40%.

Al: And if you’re in charge that investment and then your spouse- we’ve seen this before. They come into the office and they’re looking at their husband or wife, whoever’s doing the investing. And that person has to basically say yeah we made a mistake there.

Joe: Another downfall of just only using one fund is that when you look at rebalancing, when you look at tax managing, there are different I guess advantages by having different types of asset class and funds. So when you only have one fund you got one share price and it’s at the NAV of the mutual fund. And so within that, you have 55% U.S., 44% non-U.S. And let’s say you start taking dollars from this account that you have to live off or maybe you just live off the dividends you’re not going to sell any shares. I don’t know, with one fund it’s very inefficient when you start trying to create income from it.

Al: I agree with that.

Joe: But you’re only 31 so-

Al: That’s a long ways off.

Joe: So that’s a long ways to go. So I even would like maybe something a little bit more aggressive than that. If he wants to stay all stock, he seems all stock, so look for- you could probably find I could do some research for you- but I get paid for that Shane and you went to Yale and so you should know that.

Al: I like my idea. Just add a second fund with emerging markets. Because emerging markets is the biggest rollercoaster asset class there is. But over a 20-year period it’s often the leader.

Joe: Yep.  If you guys got money questions, we got some really terrible answers for you. Ask Joe and Al on the air. You could do a little voice recording. It’s kind of cool.

Al: Yeah we’ve had two of those.

Joe: I know.

Al: In the history of our show.

Joe: Yes.

Al: Please do another one.

Joe: But we get multiple multiple emails each and every week and we try to get them all done. But there’s several that are kind of backlogged and we try our best-

Al: We do try to get to them. But if you do a voice recording we don’t have to read it. We can get to this faster.

Joe: Yeah. If you hate listening to me fumble through your emails, just send a recording so I don’t gotta read this.

YMYW East Coast Showcase

Andi: I want to mention the fact that we did get a comment from somebody named Derek in Brooklyn who says, “I enjoy your insight and you should have a showcase on the East Coast.” I don’t know what he wants you to showcase, but I thought that was pretty cool.

Joe: All right. Little showcase.

Al: Yeah let’s do a road tour.

Joe: Absolutely not. I could imagine going on the road with you Al.

Al: Let’s do shows from pubs on the East Coast.

Joe: Oh I could do that.

Al: I knew you could.

Joe: I see, all right, I’m in. I’m in.  Sounds good. We gotta go. We’ll see you next week. The show is called Your Money, Your Wealth®.


We’ve got a ton of Derails at the very end of the episode, so if you like the non-financial silliness of YMYW, stick around.

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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.