Show Notes

• (00:53) Do I Need to Worry About a Tax Underpayment Penalty with My Roth Strategy? (Peggy Lee, North Dakota)
• (07:17) What Am I Doing Wrong? Can I Retire Now? What About Taxes? (Dave, Germany)
• (15:28) Back Door Roth vs. Lower Fees: Which Would You Choose? (Carl Spackler, FL)
• (21:40) Should We Go All Roth or Three Tax-Diversified Buckets? (Kevin, NJ )
• (28:53) Can I Claim Extra Allowances to Contribute More to Roth IRA? (Lily, San Diego)
• (33:46) Should I Split Money Between Multiple Brokerage Firms to Avoid Hacking? (Wesley from Unincorporated Gwinnett County, GA)
• (40:18) The Derails

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Transcription

Andi: Should Carl Spackler stick with his backdoor Roth strategy, or go for lower fees? Should Kevin go all Roth, or stick with his current three tax-diversified buckets strategy? Can Lily claim all the extra allowances she can, in order to jam as much money as possible into her Roth? All of that is today on Your Money, Your Wealth® podcast 439. But kicking it off, can Dave retire now and ride his motorcycle into the Bavarian Alpine sunset, and does Peggy Lee need to be feverish about the tax underpayment penalty with her Roth strategy? Get your own Retirement Spitball Analysis – visit YourMoneyYourWealth.com and click “Ask Joe and Big Al On Air” –  use your real name, give us a fake name, or I can come up with one for you.  I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Do I Need to Worry About a Tax Underpayment Penalty with My Roth Strategy? (Peggy Lee, North Dakota)

Joe: So Andi, we got Peggy Lee from North Dakota, but that’s really not her real name?

Andi: She started her email with “Andi, please give me a cool pseudonym.” And she’s from North Dakota. So I did a quick search and I found that one of my favorite jazz singers, Peggy Lee was actually from Jamestown, North Dakota. So I decided we’re going to name her after Peggy Lee, who had more than 70 hit singles. And you guys probably know her because she was the one that did the song Fever, which was originally written by Little Willie John, but she had the hit with it.

Al: There you go. But thanks for reminding us.

Andi: Yeah.

Joe: Fever. You give me fever?

Andi: (sings) “You give me fever.” Yeah.

Joe: Wow. All right. “Dear YMYW team. YMYW is the best personal finance podcast. Hands down.” All right.

Andi: Nice. Thanks Peggy Lee.

Joe: “I frequently recommend it anonymously on social media.”

Andi: Or something like that.

Al: We know what he meant.

Joe: She’s very private person.

Al: She is.

Joe: “I don’t recommend it to people I know in real life because they don’t need any more reason to think I’m super boring. No offense. I listen while walking and working in the garden. I enjoy a nice gin and tonic, among other things. We have an extremely adorable cat. I drive a 2004 Hyundai Accent that is currently filled with mulch.”

Andi: Gardener.

Joe: Yeah, she got a little green thumb. “One of the few benefits of driving a 2004 Hyundai Accent is you don’t care too much about shoveling wood chips into the trunk. I have a Roth conversion question. I’m sorry. I want to make sure I understand tax withholding rules correctly. My hot husband and I are doing Roth conversions to the top of the 12% tax bracket starting this year. We did about $20,000 of conversions in January, and we’ll be doing another $20,000, $25,000 later this year, as soon as we have a better idea of our taxable income. To pay the taxes on the conversion, we’ve increased his salary withholding to the point where we should hit the 100% of last year’s tax safe harbor for 2023.” Oh boy, really getting into the weeds here. Big Al.

Al: Yeah, this sounds like it’s going to be a question for me.

Joe: “My understanding is that withholding always considered to be timely. However, most of the withholding will happen toward the end of the year. Since he’ll max out his traditional 457(b) contribution in July. There’s no Roth option on this plan. When his take home will be increased, the withholding will bump up quite a bit. Do I need to worry about when during the year  the withholding happens for purpose of the underpayment penalty. I don’t think so, but that seems wrong. There will also be a 2% state income tax due, but that is low enough that we won’t be subject to the underpayment penalty in any event.” Okay, so she’s doing a conversion of $20,000. She’s going to do another conversion in 2025 to keep the family in the 12% tax bracket. The hot husband, he’s jamming away at the 457 plan pre-tax. He’s going to fully fund that by July. And she’s like, we need to pay the tax on these conversions. I’m worried about not paying enough tax to get the underpayment penalty. But she already knows the rules of, yeah, I think I’m pretty good at 100% of tax of last year for the safe harbor. I think she’s worried about $4 here.

Al: Well, I will say, well, Peggy Lee, contrary to Joe’s commentary, a very good question. And let’s take a deep breath, deep breath. One second. You’re okay. You’re just fine. You do understand the rules. And as long as you have enough withholding from salary, it doesn’t matter when it happens and you think, well, that can’t be right. Well, it is right. And here’s why it’s right. The IRS has no way of knowing when that withholding was. They have decent computer systems, but nowhere near good enough to figure out when the withholding came in. So they have always just said, whatever the withholding is, let’s just assume it’s equal, equal, equal, equal, equal. So you get absolutely nothing to worry about it. But you really have nothing to worry about anyway, even if you don’t even have any withholding. Why? Because it’s not very much tax. So let’s just say we’ll say $40,000, Joe, and taxes are 12% plus 2%, we’ll call it 15% just to do a round number. So what’s that? $6000. That’d be the taxes. You have to pay that, no matter what, what if you forgot to make those payments? So the IRS, I believe now it’s a 5% interest rate, maybe even 6%. It’s gone up recently, but so what’s the worst case 6%, $6000 for a whole year. 360, but you didn’t not do it the whole year because the way it works is you should have hit a quarter, a quarter, a quarter, a quarter. So probably in that scenario, the underpayment penalty would probably be, I don’t know, $200, $150, right? I know for a lot of people, they don’t want to pay an extra dollar to the IRS and I get it. But I wouldn’t lose sleep over it either way. But the way you’re structuring it is completely fine. There will be no underpayment penalty. And furthermore, even if you had no withholding, like let’s say you did your Roth conversion in December, for example. Well, you didn’t know it in the 4 quarters. So you just make it right after that payment, actually in January 15th. And there’s a form that you can fill out on the IRS that allows you to annualize your income. And if all your income came in the fourth quarter, you’re not going to be penalized because you’re timely. So there’s so many ways to get out of this penalty. Plus it’s not even very much, which Joe is alluding to the $4.

Joe: All right. Well, thank you very much for the question. Good job, Al. I know you love those pre-payment penalties.

Al: You know, dream about those at night show because I hardly ever get to talk about this on air. So this is like a red letter day, I think.

What Am I Doing Wrong? Can I Retire Now? What About Taxes? (Dave, Germany)

Joe: All right, we got Dave from Germany. He goes, “Greetings Andi. I was hoping having Big Joe and Big Al spitball my story. I’ve been listening to your show religiously for the past 3 years, like pushups in the morning. And recommend your show to anyone who will listen to me.” Well, if he’s listened to this for 3 years, he knows you’re Big Al and I’m Joe.

Andi: True. He probably also knows that you hate being called little Joe, so he’s just calling both of you big.

Joe: Got it. “Nothing but the best 21-year-old scotch whiskey for me.” Sounds pretty good.

Al: Yeah. Would that work for you, Joe?

Joe: That would work just fine. “Six years old divorce. Kids are all grown, doing their own thing. I worked for the U S army as a DOD civilian in Germany.” Interesting. “26 years army retired.” Thank you very much for your service, sir. He’s got military pension, about $42,000. He’s got a VA pension of $44,000. So that’s a pretty healthy pension, Al. One is free and one is taxable.

Al: Yeah. Half taxable, half tax-free, probably what about $85,000?

Joe: Yeah. Uh, He’s got civilian salary of $115,000. He’s got rental income. He’s got a house in South Carolina earning about $12,500. He’s got $400,000 in the TSP. He’s got another $450,000 in cash, $150,000 in a Roth, plans on taking Social Security at 65. So at 65, he’s got an estimate of about $2500 a month. He’s also going to receive a first pension of another $1500 a month, a little bit more than that. All right, he maxes out the TSP, maxes out the Roth. Pretty good to me. “I pretty much saved my military retirement and VA pension except for European trips, rental maintenance, the apartment here in Germany, and of course, the whiskey. I’m looking to spend about $50,000 or less per year when I retire.” $50,000 Al, he’s got already $80,000 coming in as fixed income. I think the numbers are matching up pretty good for our buddy here.

Al: I’m feeling like this might be a good answer, but let’s continue.

Joe: Yeah, he’s got a 2016 Volvo XC60. Okay, that sounds a SUV Vehicle there.

Al: Yeah, that’s a that’s a smooth looking car.

Joe: Then he’s got a BMW motorcycle, 2016 R1200RT. Oh.

Al: I don’t know much about motorcycles, not my thing.

Joe: I like to, yeah, I like motorcycles, but I don’t think I’d ever.

Andi: Have you ever driven a motorcycle?

Joe: Have I?

Andi: Either of you.

Joe: I think it’s called ride versus drive.

Andi: Okay, have you ever ridden? Well, there’s a difference between being on the back and being on the front and being in control.

Joe: Does a moped-?

Andi: Oh my gosh, can you imagine 6’5” Joe on a moped?

Al: That would be- it would take you a long time to get there, I think. Hey, yeah, yeah, I’ve ridden and driven. They’re actually kind of fun. But for me, not fun enough for- to compensate for the risk of getting injured. So that’s not my thing.

Andi: So this is his touring bike.

Joe: It’s bad ass.

Al: Yeah, it is. I get it.

Joe: He “spends most of his time riding the Alps in Austria, Italy, France, Switzerland, etc.”

Al: Now that actually would be fine. I might do that.

Joe: Look at Dave. He’s also got another motorcycle. He’s got a roadster 2018 R9T. Oh, those are kind of cool. That’s all paid off. He’s got an apartment in the Bavarian Alps? Wow. “Where I’ll probably live upon retirement until the fun is over and then return back to South Carolina, maybe Tennessee, Texas or Florida. Scheduled payoff August 2024. We have a balance on that house of 86,000- 86,000 euros. Questions, what am I doing wrong or right? Should I be looking at Roth conversions? What about taxes? Can I retire? Work is getting on my nerves. I feel like a 3-legged, one-eyed mule.” What the hell is a 3-legged, one-eyed mule?

Al: I don’t know, but it doesn’t sound good.

Joe: It doesn’t. It doesn’t.

Andi: It sounds like he needs to quit.

Joe: Get out of there, Dave. What are you doing? “I’m thinking about punching out now. Deferring my first retirement until age 62, so not to be penalized at 5% per year, then first pension will begin January 2026. I would like to tighten up my financial shot group, so to speak. Love to hear your spitball. Thank you. You guys and gal rock.” So Dave’s kind of seems like a pretty cool dude.

Andi: He’s got quite a life setup for himself in Germany.

Joe: He likes little 21-year-old Scotch. He’s got two motorcycles. And he cruises around the Alps, Switzerland, France.

Al: Yeah, he lives there, he lives in the U. S.

Joe: You know, 26-year Army veteran.

Andi: What’s he doing right? Pretty much everything.

Joe: Yeah.

Al: I got something. I can tell you exactly what it is.

Joe: What’s the over/under that Dave’s got a couple tattoos?

Al: Oh, I’d say that’s a pretty high percentage.

Joe: I bet they’re cool. I bet there’s some-

Al: – military driving a motorcycle. That’s gotta be in the 98 percentile.

Joe: Having his nice 21-year-old Scotch. I bet he is a very handsome man.

Al: Probably. So Dave, David, two things you’re doing wrong. One is you’re still working. And two is you’re not spending enough. So, just quit tomorrow if you want to. Spend, at least double what you’re spending. Have some fun. You, you’ve earned it. So, yeah, there’s nothing to worry about here if you want to do Roth conversions, yeah, I agree, that would be helpful. But, it’s not required.

Joe: Yeah, I mean, so he’s single. His taxable income because he’s- half his pensions tax-free the other pension $42,000, right? He’s got probably room in the 22% tax bracket to get some of that TSP out. He’s not gonna touch it, right? So he’s 60. He’s got about 15 years that could grow. His RMDs are gonna be probably around $40,000, $40,000, $45,000. And at that point he’s going to have full fixed income of his VA disability, his Social Security, plus his first pension. So he’ll probably be in a higher tax bracket once Dave reaches that full retirement age. I mean, or his RMD age. So yeah, I think Roth conversions probably make sense. Probably not- he doesn’t have to do a ton. But I’ll just take a look at the tax bracket. But you’re right, Al. He should quit tomorrow and spend a little bit more money and buy 25-year-old scotch.

Al: And have a lot of fun, but yeah, Roth conversions. I mean, if I’m being critical and serious, that’s the one thing that I would probably do. Because your fixed income is already pushing you to a higher bracket, right? So if you can get some of that out now in a staged manner where you have control over it. Cool. But yeah, the main thing is you need to give your notice tomorrow.

Andi: Hey Dave, our Q3 Financial Market Outlook webinar is tomorrow, so after you give notice, you can check out the financial markets. Wednesday, July 26th, at noon Pacific, 3pm Eastern. What’s next for interest rates? Is it too soon to go global with your investments? Should you be buying tech stocks right now? Get these and all your investing questions answered live, and find out what’s happened in the financial markets so far this year – and what we might be able to expect for for the rest of the year – in this free webinar hosted by Brian Perry, CFP®, CFA®. He’s the Executive Vice President and Chief Investment Officer at Pure Financial Advisors. Click the link in the description of today’s episode in your favorite podcast app, go to the show notes, and register for tomorrow’s Q3 Market Outlook webinar now. If you listen to this too late, check the podcast show notes – you’ll probably find the recording in the next few days.

Back Door Roth vs. Lower Fees: Which Would You Choose? (Carl Spackler, FL)

Joe: All right. We got “Hey, Joe, Al.” We got Carl Spackler. He’s back. Here’s another question yet again. “My company is being acquired later this year. Upon the sale, I have an option of rolling my $1,500,000 401(k) to a new 401(k) administrator, or I can mold the money into an IRA of my choosing. In my mind, I prefer the IRA because I can invest in ETFs or mutual funds with little to no fees. However, doing so will screw up my ability to do backdoor Roth contributions. I’ve been doing these for the last 5 years, but I currently have no traditional IRA, so the pro rata rule will screw me up. If you were in my shoes, would you be willing to skip future backdoor Roth contributions in favor of low administration fees on $1,500,000? From what I’ve read, 401(k) admin fees can range from 0.37% for large plans to 1.42% for smaller plans. I would hate to pass up approximately $15,000 in annual fee savings for a $6500 Roth contribution. Am I looking at this accurately? Would you mind spitballing this scenario? Thank you, as always. It’s in the hole! Carl in Florida.”

Al: Well, I already know your answer. I’ll let you- I want you to answer and then I will agree with you, I’m sure.

Joe: Okay. Let’s see. Well, first of all, I think his fees might be off.

Al: Could be.

Joe: I would want to look a little bit more into the admin fees in the 401(k) plan because he’s got $1,500,000. I don’t know if it’s a really small company. It’s probably a pretty small company because it’s getting acquired. I don’t know. I’m just assuming here, go to the plan doc Carl, and get the facts first before you make any decisions. If you move it into an IRA, you can still move $6500 or $7000 into a Roth IRA and pay the same amount of tax as you are in a backdoor Roth. The only difference if you convert $7000 versus doing a backdoor Roth is that you’re getting cash from cash or a non-qualified position into a Roth IRA versus converting a traditional IRA into the Roth. Cause the taxes are exactly the same. So everyone’s all big keen on these backdoor Roths and I get it.

They’re great. And I think Al and I started the trend several years ago.

Al: We took it a little too far, didn’t we?

Joe: Yes. I think so. We became the Roth Brothers. But I don’t know- if you like the backdoor and it’s easy, you can keep it in the 401(k) plan. If you want more investment options, then move it into the IRA and do conversions.  I think you might be splitting some hairs here. But if the administration fees are 1.5%, then absolutely move it into an IRA and do conversions. But I would want to know the fees, the investment options in the 401(k) before I move it, but it probably makes sense to move it into an IRA. You can have your choice of investments. You can diversify more. You can manage it yourself. Carl seems like a pretty sharp guy. what say you, Al?

Al: 100% agree. I would actually without any hesitation, roll it to an IRA, even if the fee structure was the same, because now you’ve got more investment choices. Carl, it sounds like you’re savvy enough to make some good picks. You probably have better access in an IRA to low-cost ETFs, maybe than what’s in the 401(k) plan. The point about the backdoor Roth, it’s kind of hard to conceptualize, but Joe is 100% right on. It’s just splitting hairs on when you pay the tax, right? So if you do a backdoor Roth, that means that’s money you already paid tax on, and now you’re putting it to a Roth IRA, right? On the other hand, if you do a Roth conversion, you haven’t paid- you pay the taxes now, but it’s the same tax either way. And I think this is a point that people kind of miss. It’s the same. Right.

Joe: Exactly the same.

Al: 100%. Go back- take backdoor Roth out of the equation. You do what’s the best for you between the IRA and the 401(k) based on what you told us. It’s a no brainer. The IRA. I also agree, Joe, maybe the fees are off because this is a, it looks like a general amount. I probably would look more at the fees inside the investments that you have versus what you’re going to have as a better proxy to what you might be saving. But yeah, don’t worry about the backdoor Roth. You can do a Roth conversion every year, end up in the same exact place. You’re not going to pay any more tax. It’s just a matter of timing.

Joe: Yep. Yeah. It’s like, oh, I don’t want to do that. Cause it’s going to screw up my backdoor Roth. Well, for those of you that this is your first time listening to the show, backdoor Roth is where you’re putting money into an IRA after-tax, because you don’t qualify for direct Roth IRA contribution. You have basis in that IRA. So then you can convert the IRA into a Roth IRA and avoid any tax on conversion because you’ve already paid the tax on the dollars that already came from your paycheck or whatever. It’s an after-tax contribution. A Roth conversion is that you had pre-tax dollars going into the retirement account. So you never paid tax on those dollars yet. So let’s say you do a backdoor Roth contribution, then conversion of $7000. Well, you paid tax on that $7000 already. If I do a conversion of $7000, now I pay the tax on conversion. The taxes are the same. So who cares? When do you wanna pay it out?

Al: It’s just what year you pay it in.  And furthermore you know what, the way you’re doing it right now, you’re limited to the backdoor Roth amount, which is $7500. If you do it the way we’re suggesting, there’s no limit. If you want to do $100,000, go for it. There’s no backdoor Roth limit. Roth conversion, you can do anything you want and the tax will be the same.

Joe: Well, the tax will be whatever bracket that you’re in. Right?

Al: Right. You have to look at that. Sure.

Joe: All right, Carl. Hopefully that helps.

Should We Go All Roth or Three Tax-Diversified Buckets? (Kevin, NJ)

Joe: We got Joe, Al, Andi. Love your show. Just can’t get enough.” Wow. It’s terrible. “I’m always laughing when listening to it between sales calls in my Ford Fusion and recommend it to all my friends and family.”

Andi: Hey, thank you, Kevin.

Joe: “My wife is getting ready to go back to her teaching job after a two year hiatus while she was taking care of our twin girls. And we have a question on our investment strategy and tax planning. Originally, we were using the 3-bucket strategy by both maxing out our Roth IRAs while my 401(k) went to the Roth and our 403(b) went pre-tax along with some other minor investments into our joint taxable account.” Is that the bucket strategy, Al? You’re familiar with this bucket strategy?

Al: Yeah, but this is a different bucket strategy I believe.

Joe: These are different buckets?

Al: These are different buckets than what you and I are thinking of.

Joe: You got it. These are pails, maybe. All right.

Al: These are round containers, but they’re not buckets.

Joe: “With my new job and increased income and her return to work, our gross income will be around $325,000 putting us squarely in the 24% tax bracket, plus 6% for New Jersey. To hit our target of 20% invested every year we’ll be maxing out all of our retirement accounts plus some into a taxable brokerage account. I’m inclined to change her 403(b) to Roth contributions as well, as the $22,500 limit is for either pre or post-tax investing. That way, we can technically invest more net taxes. I think about it as $22,500 into a Roth, the same as investing $29,600 pre-tax in the 24% tax bracket. This would move almost all of our investing into a Roth account instead of all 3 buckets. So I’d love to hear your thoughts on this. If our income ever increased to the point where we were in the 32% tax bracket, would your spitball change to some Roth and some pre-tax? My wife and I are both 34 years old. We currently have invested around $100,000 pre-tax, $300,000 post-tax and $20,000 taxable. Drink of choice is an old fashioned for me and a margarita on the rocks for my wife.” Old fashioneds. Love old fashioneds.

Joe: “Thanks for everything you do and keep up the great work. Look forward to your show every week. Kevin from New Jersey.” All right. He’s got the bucket strategy and I think he’s talking about kind of the diversification of taxes in a savings perspective. He’s got savings in a pre-tax. He’s got savings in Roths. He’s got savings in a taxable account. He’s 34 years old. The wife and him are the same age. He’s in the 24% tax bracket. He wants to go all Roth and I would say I like that. Go for it.

Al: 100%. And I think Kevin is savvy on how this works. It’s like people think, well, if I invest $29,000 in the pre-tax, that’s a lot better than $22,000 in a Roth because I’ll have a bunch more money. And trust me, you can do the math on a calculator or you can ask a friend to do the math for you. If your tax rate stays the same, it’s exact- you’ll end up in exactly the same place. In other words, the Roth dollars will be cheaper, but they’ll have the same spending power because the other dollars are more, but then you have to pay tax to get them out. Now, where this really starts to make a lot of sense is if your tax rate is going to be higher, number one, in the future. You do this all the time, right? That would be that would be one scenario. If you have some investments in the Roth long term investments that grow more, you’ll be in better shape. And I would say a third one that comes to mind Joe, is a lot of people when they get the pre-tax and they get the tax savings, they spend it. So it’s kind of, they lost it anyway, right? So this is almost a forced saving. So there’s a lot of reasons why I would do it in your current tax bracket. Once you hit 32%, you might want to reevaluate. The truth is you don’t necessarily want to end up with zero pre-tax because you want to fill up those lower brackets when you get to retirement age. So it’s okay to have some, but yeah, I think Kevin’s doing the right thing.

Joe: Okay. Kevin. Kevin’s going to save 20% of his income. That’s, that’s the goal, right?

Al: Yeah. Which is fantastic.

Joe: He makes $325,000 a year. That’s $65,000 a year. And if he could put all of that $65,000 in a Roth IRA, he already has roughly $420,000 saved. He’s 34 years old. Say he works until 64, I don’t know, 30 years. So you take $400,000, you add $60,000 a year to that, you get 7% on your money. He’s going to have over $7,000,000. And let’s say all of that is Roth.

Al: Tax-free.

Joe: Tax free. And it’s like, yes, he made the right decision. It’s like, you know, who cares about the couple of bucks that I saved in tax? Look at my account. I got $7,000,000, all tax-free, and it’s going to continue to compound tax-free. It’s like, pound sand everyone else, I mean, he’s right on track if he could do that.

Al: Yeah, and if you could even find someone that would do it in parallel with you, which you probably won’t be able to find, but let’s say you did, and they end up with $10,000,000, you’re in a better spot.

Joe: It’s pre-tax, you’re in a better spot, yeah-

Al: Way better spot.

Joe: The question to Kevin would be, Kevin, do you want $7,000,000 tax-free? Or would you rather have $10,000,000 in a retirement account that’s going to be subject, everything is going to be subject to tax? What would you rather have? Well, $10,000,000 looks cooler. You can probably get into the clubs where Big Al’s hanging out, but you’re worth more with $7,000,000 in the Roth. Because 100% of that you can spend where you’re going to have to pay the piper when you pull the money out of the other account.

Al: Yeah. Kevin, I’ll put in a good word for you. So don’t worry about it. I’ll get you in.

Andi: Wanna know how you can get into these clubs where all the members have millions of tax-free dollars growing in their Roth accounts? First you’ve gotta understand Roth accounts. Go to the podcast show notes at YourMoneyYourWealth.com and download the Ultimate Guide to Roth IRAs for free. You’ll have valuable information – in print, mind you – about not only Roth IRA contributions and conversions, but also the infamous Backdoor Roth strategy, for when you make too much money to contribute directly to a Roth. Plus, learn the differences and pros and cons of saving in a traditional IRA vs. a Roth IRA vs. a Roth 401(k), and the rules for taking money from your Roth account, and much more. Click the link in the description of today’s episode in your podcast app, go to the show notes, download the Ultimate Guide to Roth IRAs, and share YMYW and the free financial resources with your friends and neighbors and colleagues and strangers on the street.

Can I Claim Extra Allowances to Contribute More to Roth IRA? (Lily, San Diego)

Joe: We got Lily in San Diego and goes, “Hello, Joe, Al and Andi, I recently discovered your podcast and absolutely love it. I listen to it whenever I have free time. By the way, I drive a Tesla. And tea’s my beverage of choice. I work at the university and currently have the ability to contribute up to $66,000 per year to a backdoor Roth IRA. I’ve been maximizing my contributions each year for the past couple of years. However, I’m planning to retire on July 1st of next year, which means I only have 6 months to contribute in 2024. Currently, my gross income is about $15,000 per month. My take home pay after taxes is about $7000. Even if I were to put the entire post-tax paycheck into the Roth IRA, I still wouldn’t be able to reach the $66,000 limit within the remaining 6 months. My question is, can I claim extra allowances to increase my post-tax income and use it all to contribute to the Roth IRA? Subsequently, I would pay the old taxes to the IRS quarterly utilizing my bank funds to cover the tax liability.” Oh, look at the big brain on Lily.

Andi: I have never heard that strategy before.

Al: That’s a great question.

Joe: Look at Lily. She’s like, man, I got a jam- because putting money into an employer sponsored plan, it needs to come from your paycheck.

Al: It does. Yeah. So you are limited to that.

Joe: So she’s like, I want to put all of this $66,000, that’s the maximum she can put into the Roth and after-tax and conversion, I think is probably what she’s doing. So she’s got a Roth component to her plan, and then there’s an after-tax component to her retirement plan that allows her to convert it to a Roth. So the maximum contribution limits for 2023 is $66,000.

Al: Yeah, it’s good you explained that because this isn’t backdoor Roth and how people think about it. This is in conjunction with a 401(k) that has a Roth option and allows post-tax money to go into it.

Joe: This is the garage door. This is the megatron.

Al: Mega, mega.

Joe: This is the barn door. The backyard barn door option.

Al: But don’t look that up on Google because we made those terms up.

Joe: All right. So let’s say she- because you can file on your tax or- or on your what W9 or I9 or what’s it called? your little form to-

Al: It’s a W4.

Joe: W4. Thank you, buddy. So let’s say she claims 99. So zero taxes come out of her paycheck, but she’s going to pay quarterly. What do you think? Can she do it?

Al: I don’t see a problem. I mean, it depends what your employer’s comfortable with. But theoretically, you could have your salary- your net salary would be zero, right? And, and in fact, it just depends what your employer’s comfortable with, because once you claim over 10, they’re required to notify the IRS. So anyway, just be aware of that.

Joe: But that notification, I mean, is that a phone call?

Al: It’s a, no-

Joe: It’s a form, isn’t it? That probably gets lost in the shuffle and she’s already gone 6 months-

Al: They do a snapshot and they sent it right in direct- No, it’s a letter. It’s some kind of- it’s probably electronic transmission. They get millions of a year. So I wouldn’t even worry about it, but it depends what your employer is comfortable with doing. Technically, this works just fine, right?

Joe: Because she’s paying the tax. She’s going to pay the tax. She’s paying it quarterly. She just wants to pay the tax a different way. She doesn’t want to come directly from her paycheck and she would be like, I get it. You’re taking it from my paycheck, so you get the taxes. I will pay you out of my bank account, but let me have those funds so I can fully fund the Roth. Because the only way that I can get into the employer Roth is through the paycheck.

Al: Now this is, this is, this is not the right answer either, but you can check a box that says exempt, you believe you’re exempt from taxes. And then the employer won’t withhold. I mean, they have to withhold FICA, Social Security, and a few things like that. But anyway, there’s ways to do this. You’re going to have to talk with your employer and what they’re comfortable with.

Joe: Interesting strategy, Lily. Very interesting strategy.

Al: I like it. I like it a lot, actually.

Joe: Well, she works at the university, Alan. Pretty smart. Probably smarter than us.

Al: At the University of San Diego, which I went to one of them. I went to University of California San Diego, but there’s also San Diego State and University of San Diego. I’m not sure which one she’s at. I guess it could be San Marcos State.

Should I Split Money Between Multiple Brokerage Firms to Avoid Hacking? (Wesley from Unincorporated Gwinnett County, GA)

Joe: We got Wesley writes in from the unincorporated Gwinnett County, Georgia. Gwinnett?

Andi: I’ve heard GWINnett. I’ve also heard GwinNETT. So-

Joe: All right. “Hello guys and gal. You know who you are. Enjoy the show immensely. I have a security question. No, this is not about stock equities. Rather I’m interested in your take on the safety of brokerage houses from hacking. You’re sitting around a bar and shooting some spit balls into some empty glasses piling up, would you suggest people split their money between two or 3 brokerage firms? Let’s say Vanguard or Fidelity, M1 Finance, to limit potential adverse impacts from future hacks of your account. I can’t believe that some firms haven’t already experienced a noteworthy breach that would give all the financial channels something to talk about for a while. Maybe these things already happened and they’re just hushed-hushed about it. How safe are brokerage firms from cyber-attack? Drive a Honda Fit. Unfortunately, I’m a teetotaler, so it wouldn’t be much fun on the golf course with Joe.” That’s all right. Put around some Gatorades, water.

Al: Yeah, plenty of drinks would work, right?

Joe: Iced tea. Yeah.

Al: You like Arnold Palmers, right?

Joe: I do.

Andi: Sunkist.

Joe: I am an ar, ar ar- Arnold-

Al: I couldn’t say it either.

Joe: Arnold Palmer.

Al: It’s a really hard word today.

Joe: Or John Daly. You know what a John Daly is.

Al: I don’t, well, I know, well, I know who John Daly is, is that a drink too?

Joe: Yeah, it’s an Arnold Palmer. You just throw vodka in it.

Al: Oh. That sounds right. And it comes with a cigarette?

Joe: It’s probably a pack. You want to take a stab at this cyber Sam?

Al: Sure. Yeah. Yeah. Well, this is just spitballing. That’s just my opinion. I’m not worried. I have one brokerage house myself. What I do have though is, I like to keep extra money outside of my investments, just in case something were to happen. I mean that actually lasts me a couple of 3 years. I’m not worried anything like that’s going to happen, but no, I don’t really have much concern. I have heard people that have a lot of money, Joe, maybe we’re talking tens and twenties of millions of dollars or more that might feel-

Joe:  So your people.

Al: No. They might-

Joe: So, your people.

Al: Oh, yeah. My people.

Andi: The big wallet people.

Al: I’ve heard some of my people say-

Joe: Yeah, my closest friends at the cocktail parties.

Al: – that they’re more comfortable. I would say this, if it makes you more comfortable, go for it. I’m not worried about it myself, but it’s not necessarily a bad thing. The reason I don’t do it is I like everything in one place. It’s easier to track. It’s easier to follow and all this stuff.

Andi: Is there any kind of recourse if a place does get hacked? Is the institution responsible for getting the money back to its customers?

Al: Well, there’s all kinds of insurance. And also if there was something big that would take down the country, which that would take down the country, but federal government’s getting involved.

Andi: Yeah.

Joe: We have cyber insurance with our firm.

Al: We do.

Joe: I would imagine Fidelity, Schwab and Vanguard, TD, they have insurance. You’re buying stocks, so you already have shares of those stocks, so if there’s a breach-

Al: I mean, if there’s a breach, they-

Joe: – then they get into your account and they steal your money. Yeah.

Al:  I mean, they would have to get the passwords. They don’t have access to your investments unless somehow they could get the passwords. But I would think if there was a breach, Schwab or whoever would just turn everything off so that that wouldn’t happen.

Joe: Yeah, I have no idea.

Al: I don’t know. It doesn’t seem like a huge risk to me. But this is all about you and your comfort level, and if it will help you sleep better at night, then go for it.

Joe: Yeah. I bet he has a generator too.

Al: And guns and bullets and whiskey.

Andi: No, he’s a teetotaler.

Al: Oh yeah. He’s got plenty of tea, plenty of tea.

Joe: Great question. I wish we had a better answer for you.

Al: But we gave our answer. We’re spitballing.

Joe: Yeah. We’re spitballing. We’re just kind of hanging out at the bar. Just trying to think of-

Al: Doomsday.

Joe: Yeah. Doomsday scenario where, you know, there’s big breaches.

Al: Remember early radio, we had this caller call in and say, he said knowing that the world is going to end in a year, how should you invest right now? And it’s like, Hmm, well, I don’t sure. Not sure I agree with your premise. However, if that were true, yeah, that was an interesting question.

Joe: All right. See you next week folks. The show is called Your Money, Your Wealth®.

Andi: Al’s island studio, the movie The Contractor, and the fate of Joe’s drink maker in the Derails at the end of the episode, so stick around.

Thanks to Maryalene LaPonsie for including Your Money, Your Wealth® in US News and World Report’s list of 10 personal finance podcasts to listen to in 2023. You can check out the full list in the podcast show notes. And thanks to you, our listeners, for popping us up into the top 40 investing podcasts on Apple Podcasts earlier this month! 

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Your Money, Your Wealth® is presented by Pure Financial Advisors. Click the “Get An Assessment” button in the podcast show notes at YourMoneyYourWealth.com or call 888-994-6257 to schedule your free financial assessment, in person at one of our seven offices around the country or online, a time and date convenient for you, no matter where you are. Chances are, one of the experienced financial professionals at Pure will be able to identify strategies to help you create a more successful retirement.

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.

The Derails

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