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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 153 out of 715 RIA’s nationwide by total assets under management by [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CFO & Chairman of the Board of Pure Financial Advisors. He has been an executive leader of the Company for over a decade. As CFO he is responsible for the financial operations of the company as well as investor relations. Alan joined the firm in 2008, about one year after it [...]

Published On
March 6, 2017

How to prioritize where you save, to maximize what you save. Why you might want to retire in the great state of Georgia. How waiting just one more day before you retire could save you a lot of money. And how to totally screw up your retirement. This is Your Money Your Wealth.

Today on Your Money Your Wealth, two thirds of Americans aren’t saving for the most expensive purchase of their lives, and today, Joe and Big Al have solutions! Big Al lists the 8 IRA-Related Mistakes Young Professionals and everyone else should avoid, and Joe breaks out tax breaks state by state to help you decide where to retire. The fellas also answer email questions on advisor credentials, what to do with your 401(k) when you head off to grad school, the 60 day rollover rule, and which is safer, T-bills or fixed indexed annuities? Here are Joe Anderson CFP, and Big Al Clopine, CPA to clear it all up for us.

:53 – Retirement is the most expensive purchase you’ll make

JA: There’s such a disconnect when it comes to retirement, retirement planning and everything else. I think everyone knows that they need to save. But if you look at life’s most expensive purchases. Merrill Lynch came out with the study.

AC: Oh yeah, I saw that article.

JA: Did you? Yeah, our crack research team is hot. So did you read it?

AC: Yeah I did it was very short.

JA: Yeah that’s why I grabbed it. (laughs)

AC: It was under 100 words, I memorized it.

JA: You can read the whole thing in 30 seconds. That shows.

AC: That was one of those where you had, like, you know, usually you have slides and they have 10 or 12 slides? This had two. (laughs)

JA: Yeah, I don’t even look at slides. (laughs) But the study shows average cost of retirement is two and a half times that of an average house.

AC: Yeah. So what, $700,000 I think?

JA: $700,000. The average cost retirement is more than $700,000, or about two and a half times that of an average house, and nine times more than the average cost of college education.

AC: Got it. So in other words, your most expensive purchase is retirement.

JA: So if we want to compare the average cost of a home is $278,000. The cost of college education. Take a guess. What do you think.

AC: I don’t know.

JA: $83,000. That’s what you pay per quarter. (laughs)

AC: That’s not my experience. Out of state, University of Colorado. No, it was more net.

JA: And then the cost of raising a child to age 18. $245,000.

AC: Oh wow. So retirement, yeah that’s the most expensive purchase.

JA: So despite retirements hefty price tag, the report goes on, the report finds that 81% of Americans don’t know how much they need to fund their retirement. In addition, a growing number of younger generations think they’ll need to personally fund a larger portion of their retirement and therefore expect to rely less on employers and the government. But that’s always been the case and we’ve talked about that in the past. I think every generation felt that they weren’t necessarily going to get a huge subsidy from the government.

AC: And it does continue but there is always that concern.

JA: All right so $700,000 price tag folks that’s what you have to shoot for, that’s on average.

AC: That’s on average. Our listeners, it’s probably a little bit more.

JA: It could be, yeah. It depends on, of course, and we can go through the arithmetic of how much money that you want to spend and what other fixed income sources that you have, how old you are.

AC: I mean if you want to spend $100,000 a year and you live 25 years, that’s $2.5 million.

JA: It’s a little bit more than $700,000. (laughs) Good math, right off the cuff there Clopine!

AC: Just like that! I don’t need one of those fancy calculators, I can do that in my head.

JA: No you don’t. But still. So then I’m looking at this and like $700,000. That’s a lot of money. And I would say most of our listeners are saying, wow that is a lot. And then there’s two sides of the coin. But some of our listeners are saying, “hey, you know what, that’s pretty good, because I think I have that.” But I think the other half or maybe the majority are saying, “man, there’s no way I’m going to get to $700,000.

AC: Yeah I think a lot of people would say that.

JA: And then I looked at this. Two thirds of Americans aren’t putting any money into their 401(k) plans.

AC: Two thirds. That’s crazy.

JA So you need $700,000 to have a retirement. And two thirds of Americans aren’t putting money in their 401(k)s.

AC: And usually when you have a 401(k) you put some money in and so does your employer. There’s a match. So why wouldn’t you do that?

JA: We talk about studies and censuses and things like that. But what they did is they took a look at the actual tax returns. And so instead of surveying individuals, because you’ll get a phone call or something like that. “Hey, are you saving in your 401(k) plan?” What do you think – “of course I am!”

AC: And they don’t ask the second question, when. Well yeah, about 20 years ago I did.

JA: Right. Well are you saving for retirement. “Yes absolutely I am.” Right?

AC: Yeah they got a slush fund.

JA: It’s like, yes, of course you’re going to answer that way. So they’re like, “you know what, I think people might be lying to us.”

AC: I learned that as a tax accountant. I mean people always say they made money on their investments and then they brought me their tax returns. They almost always lost money.

JA: “Clopine, I’m pretty good at picking stocks.” “Well, I’m looking at your tax return, and your schedule D says the opposite there, buddy.”

AC: But then if they’re sophisticated they say, “yeah, but I did tax loss harvesting.” And I would say, “OK, you got me there.”

JA: Yeah whatever. So here we go. So they analyzed W-2 records from 2012 and identified 6.2 million unique employers. So there’s 6.2 million unique employers. And 155 million individual workers who held 219 million distinct jobs. So they took a look at all of that, and they said you know what, out of all of that, only 14% of employers actually offer a 401(k) plan.

AC: 14? Well you know partly because most of those are super small. They’re one or two person companies.

JA: Bigger companies are the likeliest to hold 401(k) plans… you’ve probably read this one too. I don’t got nothing on ya.

AC: No, I didn’t. I just got that knowledge in the noggin.

JA: But then they said this, then they estimate that about 79% of Americans work at those places, at the larger employers. OK. So let’s just call it 80% work in an employer that has a 401(k) plan. So the other 20% work at a small company, maybe I’m a sole proprietor it’s one or two man shop that you’re referring to.

AC: Sure. The old Clopine Financial days.

JA: Yes. Well you had, what, two or three employees?

AC: Myself and I don’t know who else.

JA: All right, so it’s 80% of the people that have a 401(k) plan. How many people then are…. It says here that just 41% of workers at those employers are making any contributions to the plan.

AC: So you’re saying about 60% are not putting any money in at all.

JA: Correct.

AC: Wow that is shocking.

JA: So how do we connect the dots here? How do we create solutions? Because we got emails over the past couple of weeks… (laughs)

AC: It’s like you guys bring up problems and never have an answer.

JA: It’s like well if you’re looking for solutions you’re listening to the wrong show. (laughs)

AC: Yeah there’s a there’s probably way better show than ours.

JA: Yeah we just talk about problems all day!

AC: Yeah. So what is the solution?

JA: Oh it’s easy it’s save a little bit of money. Let’s just save a couple of bucks.

AC: Put some money in your 401(k).

JA: $700,000. If everyone would just shoot for that. I mean, not everyone, but most people that are listening to the show. Because there’s a lot of you that are making several hundred thousand dollars a year and you know you don’t have several hundred thousand dollars saved.

AC: But I was thinking about that Joe, that little snippet article that you just quoted, and I was thinking, $700,000 is the cost of retirement but it’s not all funded from you. I mean, let’s say you get $30,000 in Social Security each year. So 20 years that’s $600,000 of the $700,000 just right there. So it’s not like you have to have $700,000 in the bank.

JA: Exactly. Here’s another thing that’s also skewed a little bit by the industry itself, is saying the average cost of healthcare for a 65 year old couple is going to cost you $250,000

AC: That’s right. Exactly.

JA: So then they’re thinking, “Man do I need $250,000 additional? Today? Right now, just to cover those health care costs? No not necessarily. But, you have to look at, there is a true cost of retirement. $700,000 is pretty low. To be honest with you.

AC: Yes. For our listeners I would agree. People that live in Southern California, we have a more expensive lifestyle, so you’ve got to plan on more than that.

JA: Just like with your math. I mean, that’s just the actual expense. So if you have, let’s say you’re married, you have $15,000 of Social Security coming in, your spouse has $15,000. So that’s $30,000. Thirty thousand times. What did you use, 20?

AC: I used 20 because it was easy, $600,000. I just do easy math. (laughs)

JA: 3 times 2 is 6, add a couple zeroes. Carry the one (laughs)

AC: No carrying. (laughs)

JA: So then at that point you need $100,000. Then you’re good. But what’s the average balance of retirement accounts?

AC: Well we know it’s well below $100,000.

JA: Right. So, I guess the point or the solution here, is just to take a look. And all right, so let’s say a few things. Two things: if you work for a small employer or maybe you’re a sole proprietor, you still have options, you have a 401(k) plan that’s available to you. It’s called a solo 401(k). You can set up your own individual 401(k), which is phenomenal. You can put $24,000 pretax if you’re over 50, $18,000 if you’re under 50, or you could put in $5000 or $2000, it doesn’t matter it’s a defined contribution plan. You could put in some years a lot, some years a little. It doesn’t matter. So everyone has the ability to basically set up their own retirement account, if you don’t want to go to a solo 401(k) plan you can set up a SEP plan. You could just do a standard IRA. Depends on how much money that you’re making, how much money that you want to save. But there are options. But the problem is it’s not as easy as working for an employer that has that 401(k) plan where I could go to HR, get the paperwork, and say all right, yes, I want to put 4% of my salary, deferred, into the retirement account. Out of sight, out of mind, forget about it. Where if you don’t have the luxury of those plans, then you actually have to do a little bit more work. You have to establish your own plan, either through a mutual fund company like T Rowe Price or Vanguard, or whatever funds you like. Or you can go to a brokerage firm like a Merrill Lynch or Morgan Stanley or you could go to a discount brokerage firm such as Charles Schwab, TD Ameritrade or Fidelity, something like that. But it’s not as difficult as it might seem. It’s just another step in the process. Let’s just say, if you save $5500 into a standard IRA. So everyone is eligible to do an IRA contribution unless you are over 70.

AC: Correct. Because a lot of people don’t have retirement plans at work. You have to have earned income. So you have to have a job or you have to be self-employed, profitable self-employment. But let’s just say you max out an IRA each year starting at age 25. You go to age 65, 40 years. You put $5500 into an IRA. Now, of course, you can do $6500 when you’re over 50. But I’m just keeping itat $5500 per year. Forty years. 7% rate of return. Guess how much you would have at retirement at age 65? You would have $1.1 million. $5500 dollars per year. And so a lot of people say there’s no way I can save for retirement. $5500 is something that you can do and should do. And if you do this repeatedly, year after year, with compound earnings and growth, it’s amazing what can happen.

JA: Yeah but then you have to start saving at age 25 Al.

AC: Why not? Why shouldn’t people be saving money.

JA: I agree with you, but there’s a lack of information and education when it comes to money, with people in their 20s, because it’s like, OK, well here, I’m just trying to pay off student loan debt. I’m trying to get out of mom and dad’s house. I want to buy a new car. Maybe I’d like to go to the bar and have a couple of beers.

AC: Let’s do it this way. You start at age 35. They only have 30 years to save. So you’ve had ten years to figure this stuff out.

JA: OK.

AC: That’s more realistic?

JA: I think so.

AC: And it’s still a good number. It’s $519,000.

JA: So here’s the real crux of this math. If ten years is $500,000. And your contributions of $5000 over that 10 years is not $500,000.

AC: Right. That’s a lot lower.

JA: Right. $50,000 turns to $500,000. So if you wait, it’s the cost of waiting. So if you say this $5000 or a few hundred dollars a month. I’d much rather blow at the bar? Well that is costing you five hundred grand!!

AC: Yeah. $500,000, $600,000 even. So to say that again, if you start maxing out your IRA at age 25 that’s $5500 per year and you save that amount for 40 years until you retire at age 65. At 7% rate of return you have $1.1 million dollars. On the other hand, let’s just say you start 10 years later. You start at age 35 and do it for 30 years. Now you have about a little over $500,000. So you’re short about $600,000. You have less than half. In other words those first 10 years make a big difference and talk about news you can use, the earlier you start the better. Now we know some of our listeners, they’re behind the eight ball. And the truth is, then get started right now, ’cause you can improve your situation no matter what it is, at what age, just by getting started right now.

JA: And I think we’re just looking at this in a silo too. It’s like all right well if you save $5500, you’re in 7% rate of return, of course all of this is hypothetical. And then, as the years go on, you have X amount of dollars. But guess what, at age 65 there’s other factors that are going to affect your overall retirement. You will receive some fixed income such as Social Security. So as individuals age, now you have a little bit more levers to kind of maneuver here. To have a successful retirement, and we’ve ran these numbers before on the show, but let’s say if someone is 55 years old or 60, that has zero saved, and they want to retire at 70, so they got a 10 year game plan. Well usually at age 60, they might be in their peak earning years where they might be able to save a little bit more than $5000. If you’re one of the 80% of individuals that work for a larger employer that has a 401(k) plan, they have a match potentially as well. So maybe you put in the $5000, they might match $2500, so now you got $7500, or maybe you could get into $10,000 where they might match $4000 or $5000, and then over that 10 year time period, now you’re working till age 70, versus maybe 65. But you know what? We’re living a lot longer, we’re lot more active and healthy than ever before. And then now, you’re at age 70, your Social Security has increased in value as well. And then maybe you decrease your overall living expenses a little bit. So there’s a lot of things that you can potentially do, but it always starts with planning. What are you trying to accomplish? What’s really important to you in your life? And then putting things through the acid test. But I think that the delayed gratification is always challenging.

AC: Well, so here’s that example that you just went over: you’re at 60, you got nothing5. And you want to get serious about saving, you can max out your 401(k) $24,000. And I just threw in a $6,000 match. So just as an example. So other words $30,000 going into your 401(k) for 10 years at 7%, you end up with $414,000, which is so far ahead of the average, It’s unbelievable.

JA: Right. So that could, at age 70, could create $20,000 of income, or maybe your Social Security since you delayed it to age 70, might be, I don’t know, $25-30,000.

AC: Even $40,000. On the low end let’s call it 30, plus the 20 that you have from your investments. Now you got $50,000. Plus you’ve got the $400,000 savings that you can draw upon in case of emergency. So you’re actually in a decent spot.

JA: Right. And so again looking at what’s important, map this out, and then put things through the acid test. Like OK, well, here, should I be saving or should I be spending? And I know a lot of individuals they just say, “I just can’t find an extra dollar anywhere.”

AC: Well, you’re going to have to eventually, might as well start now.

17:00 – The 14 states with the best tax breaks for retirement

JA: Right, you’re going to have to at some point. So you better look at it now. Real quickly, so let’s say, if you live in Southern California where Al and I live, and maybe you don’t have a lot of money. I’m going to go through real quickly: maybe move to Alabama. Ever been to Alabama, Al?

AC: I have not.

JA: It’s an unlimited exclusion for pension income from defined benefit retirement plans. So if you have a defined benefit plan, you know, you’ve got a pension, move to Alabama. Tax free to you.

AC: Well so does Hawaii. I’d rather pick Hawaii. (laughs)

JA: Arkansas. How about Arkansas? (laughs)

AC: Are you going alphabetical? (laughs)

JA: You get up to $6000 in retirement plan benefits including IRAs if you’re over 59 and a half. You could go to to Delaware. They give you about $12,500 of dividends, capital gains interest, rental income and distributions from qualified retirement plans once you’re 60. You get about twelve five tax free. Georgia’s $65,000.

AC: $65,000, that’s pretty good.

JA: That’s pretty good, right? For income if you’re 65 years of age or older, up to $35,000 if you’re 62 to 64. Hawaii, there you go Al, unlimited from defined benefit pension plans. That’s what you did, you looked. That’s the only thing you looked in this article.

AC: No I already knew that, because we have a client that did that. But I did look at that just to verify. (laughs)

JA: And then, how about Kentucky: you can up to $41,110 coming out of annuity contracts, profit sharing plans, IRAs. So depending on the state that you live in, or maybe where you potentially want to live, take a look at the tax law when it comes to that, because it’s important. If I can pay less tax on those distributions coming out, and this is just on the state side of course, you’l still have to pay federal taxes. Or you can move to a state that doesn’t have state tax.

AC: Yeah like Nevada, Washington State, Florida, let’s see Texas, South Dakota, Wyoming, to name a few. Alaska. Those are states without individual income taxes and so that’s even better than some of these exclusions. California? We all love California but there is a sunshine tax as they say.

JA: Yeah. I mean it can get up to 13% here.

AC: It can. 13.3%.

JA: And there’s some whispering, saying hey they might get rid of the state tax deduction if they lower individual income tax rates.

AC: Yeah, they might. It’s being talked about, in fact that’s what’s in the Republican plan, is to eliminate state tax deduction.

JA: Yeah that would be great for Californians.

AC: Yes. So we get we get bumped in a higher bracket because of that.

JA: Right. So you’ve got to be careful too, what some of these proposals that are coming out right now. Well that’s great, we get lower tax rates. But then…

AC: What’s happening on the back end?

JA: Yeah what’s happening on the back end, because taxes are revenue for the federal government. We all know that there’s a little bit of deficit there, so we can go supply-side and say hey, we’re going to have that much more profitability, because there’s more cash on hand that we can reinvest, which is great, but there’s still entitlements. There’s still Social Security, Medicare, we have roads and everything else in between that needs to be paid for. So that’s why again planning is so, so important.

20:16 – Big Al’s List: 8 IRA-Related Mistakes Young Professionals (And Everyone Else) Should Avoid

AC: This is from Forbes Magazine. This is a recent article, Joe. We started the show talking to young professionals, I guess we’re sort of going to continue that a little bit. But anyway this was written by Maya Kachroo-Levine. (laughs)

JA: Thank you for that disclaimer.

AC: Yes. And she starts the article by saying, “Opening and contributing to an IRA requires a lot of nuanced decision-making, and it isn’t just about making choices, it’s about understanding why one option works better for your financial plan.” She said that when she was opening an IRA, “I was lucky enough to have both family members and an accountant point me in the right direction.”

JA: Oh, come on. You go online. Here’s what you do. Fidelity.com. Open up an account. Vanguard.com. Whatever.

AC: Yeah but who does that at age 22?

JA: Everyone at 22! If you’re 80, then I can see why you might have some issues, because you probably don’t have a computer!

AC: Anyway. So you want to know what the mistakes are? Number one is not understanding the distinction between a traditional and a Roth IRA. What’s the distinction Joe?

JA: A Roth IRA is after tax you can put the money in, it grows 100% tax free. There’s a couple of different caveats with a Roth in regards to when you can take the money out. It’s a little bit more flexible than a standard IRA in the sense it’s an after tax contribution. All that means is that you take the money after you get your paycheck. Well and that’s the same is an IRA, but you get the deduction, so you can deduct it on your tax return in April, and you might get a little bit of money back. So it’s after tax money, goes in, grows tax free. A couple of things with Roths though. It has FIFO tax treatment. What that stands for is First In First Out. So any dollar that you put into the Roth at any age you always have access to it.

AC: So you contribute, you can withdraw it without penalty. The contribution part.

JA: You got it. Only the contribution so if you’re 40 years old, you put $5,000 in, 42 you need the money. You can always pull the $5,000 back out. No taxes, no penalties, no harm, no foul.

AC: Yeah. I think a lot of people don’t realize that. Now, that $5,000 grew to $7,000. You can’t touch the $2,000 in growth until you’re 59 and a half.

JA: Correct. Then the other five year clock when it comes to Roths is that, if you do not have a Roth IRA established, let’s say, and you’re over 59 and a half – so you’re 65, and you put the $5,000 in, the same rule applies that you can always take your contributions out at any time. But now you have to wait five years to take that earnings out, versus the 59 and a half rule. So it’s 59 and a half or five years, whichever is longer. And so what I would encourage a lot of you to do, if you haven’t established a Roth IRA yet, you have until April 15th of this year, we’re in 2017. So we still have some time that you can make a 2016 Roth IRA contribution. So maybe you put $100 in it. It doesn’t matter. If you’ve never established one, that would start your five year clock January 1st 2016.

AC: Right. All the way back there.

JA: All the way back to Jan. 1, 2016. So if you do not have a Roth IRA you want to get this five year clock started. I would consider highly, if you can’t afford the full contribution just put something into it. The IRS doesn’t care how much is in it as long as that account is established and funded with at least you know a dollar. But I don’t know where you can find an investment for a dollar, so it’s probably going to be a couple of hundred bucks, or maybe a thousand bucks or something.

AC: Yeah that’s probably a good way to start. And by the way, not everyone qualifies for a Roth IRA contribution, if you’re single your income has to be below $118,000 to do a full Roth IRA, $5500. And once it gets to $133,000, you can’t do a Roth IRA contribution anymore. If you’re married those phase-out numbers are between $186,000 and $196,000.

JA: And that’s for 2017, if you want to still go for 2016, it’s a couple of bucks less than that, 184, 194.

AC: That’s right.

JA: But I guess you could put money into a traditional IRA and then convert it too.

AC: You can do that if your income is too high.

JA: Yes. So if you’re under 70 and a half, just try anything or talk to a qualified professional to see how you can get a couple of bucks into the Roth because that starts your five year clock.

AC: Yeah. And the number two mistake is choosing a traditional IRA just for the immediate tax deduction. And again, this is directed towards young professionals, and they quote our friend Ed Slott. Ed Slott recommends millennials choose the Roth IRA over the traditional one. He says that contributing to a traditional IRA to get the tax deduction is ultimately not worth it. And the reason it’s not its because, you think about it, you’re in a lower tax bracket probably, so that IRA deduction is not saving you that much in taxes. But yet if you get into a Roth IRA, you could have 30-40 years of tax free growth. That’s gigantic.

JA: I don’t care if you’re in the highest tax bracket Clopine, because let’s do the math here. Let’s say you’re in the 40% tax bracket. I put $5,000 into the Roth IRA instead of getting that tax reduction of 40%. 40% of $5,000 is?

AC: 40$ of $5,000 is $2,000! I wasn’t even listening but I still picked it up! (laughs)

JA: Look at that. Look at the big brain on Big Al! (laughs) So that’s a $2000 tax savings. So that $5000, it grows to, I don’t know, you pick a number. $100,000. Let’s say over the next course of 30 years. Can that happen?

AC: Sure, that could happen.

JA: So then you pull up that $100,000 and let’s just assume, you’re not the 40% tax bracket, you’re going to be in a lower bracket. Let’s say you’re in the 25% tax bracket. So I got a couple of thousand dollar tax savings for that $5000 contribution, over the next 30 years, it grows to $100,000. Of course this is all hypothetical. I’m just proving my point. Then I’m at a lower tax bracket in retirement. 25%, almost half my bracket. So I pull the $100,000 out, what do I pay in tax, 25 grand. It’s not worth it. Who cares about the $2,000, you’re going to save $25,000 in the future.

AC: Yeah I think that’s right. And actually if we want to go real world, here’s what happens. You save 2000 bucks in tax and you spend it. So there is no advantage.

JA: Right. And then the deduction that you get is not a true deduction in my opinion. I think it’s just a loan because you got to pay that deduction back when you pull the money out of the account.

AC: Right. Yes. So Joe, another one is not opening an IRA as soon as you qualify. And it’s difficult for young people to do that because they have so many other things tugging at them, you know like student loans tugging at them.

JA: Tugging at them? (laughs)

AC: Tugging at them. You like that word? Credit card debt, student loans, they want a better car, they want to move into a better rental, or they want to save for a down payment for a home, or they want to start a family. All this stuff. But the point is, start your IRAs early, we just went through the math. You start maxing your IRA at age 25, you’ve got over a million bucks by 65 at a 7% rate of return to be assertive. 35, it’s about $500,000.

JA: So 5000 bucks per year. Is that what we did, for how many years?

AC: $5500 for 40 years at 7% comes out to $1.1 million. That’s what you got. So if you started at 35, you end up with about $520,000.

JA: So you put in $200,000 and they grew to $1.1 million, basically, at a 7% growth rate. And so now going back to my tax math, $200,000, and if you paid tax but you’ve got that tax deduction of 25% on $200,000 25% of $200,000, Big Al, is what?

AC: That is $50,000.

JA: 50 grand. So you saved $50,000 in tax, but now the $1.1 million that you have to pull out of the account, guess what it’s all taxed at ordinary income. So if you use that same 25% on $1.1 million, that’s about what, three…

AC: That’s about $270,000 that you pay.

JA: So I don’t know. It’s pretty simple to me, 270 versus 50. That’s why Roth IRA, man, I’m telling you. And then I know some older listeners are saying well that doesn’t apply to me. You know what, we’re going to dismiss that myth later.

AC: We’re talking about Eight IRA-Related Mistakes Young Professionals Need To Avoid, and the next one is not contributing early in the year. Why would they say that?

JA: Well then you get more tax deferred growth. The sooner that you get the money in there.

AC: Sure, and even better, if you put it in a Roth then you get more tax free growth.

JA: If the market grows if the market grows.

AC: Yeah, if the market grows, which we learned today is about 7 out of 10 years. 70% of the time.

JA: 70% of the time the market goes up, 30% of the time the market goes down.

AC: Yeah. At least, that’s based on prior history. It’s no indication of future.

JA: Yeah in the future it’s probably going to be 30-70. Just our luck. (laughs)

AC: Who knows. But that’s what we know, those are the stats from 1945 to today.

JA: I mean if he even go back to 1927 it’s about 68.

AC: Yeah pretty close. Pretty close but, yeah, that makes sense. Get the money and as soon as you can. Another one is not opening an IRA because you have an employer matched 401(k). So you’re allowed to do an IRA with a 401(k)?

JA: Absolutely. That’s very key for individuals that want to save more money. If I’m fully funding the 401(k) plan, one of the myths is that you cannot contribute to any other type of retirement plan. And that’s not true. You can absolutely still contribute to an IRA or a Roth IRA depending on your qualifications. So we encourage you. Here’s Joe Anderson’s list of savings.

AC: Oh, order of savings?

JA: Orders of savings.

AC: So you got X number of dollars, where do you save into first?

JA: You go to the 401(k) plan first. If you have a match. So let’s say you have a 4% match, you put 4% into your 401(k) plan up to the 4% match.

AC: OK. So let’s say I make $100,000 a year, just to make it easy math, so I’m going to put $4,000 into the 401(k). But I can save 10 grand, so I got $6000 more.

JA: So now I’m goin’ Roth IRA. So then what you do is you go, “4% match, I’m going to go to the 4% match, 4000 bucks, hey, I still have a little bit more money, now I’m going to go back to the Roth. I’m going to maximize the Roth IRA if I qualify.”

AC: OK so I’m going to do a Roth contribution. And that has nothing to do with my employer. That’s my own account that I set up at whatever place, the bank, or brokerage house, or discount broker, or whatever.

JA: You got it. Individual retirement account, it’s your account, your number, your name on it, you control it, you invest it how you choose.

AC: And you can pick a traditional IRA and maybe or maybe not get a tax deduction, you can do a Roth IRA, no tax deduction, but it grows tax free.

JA: So then, if I still want to save a little bit more money, then I go back to the 401(k).

AC: OK, so in that example I have $4000 in the 401(k), and then I put $5500 in the Roth, I still got 500 bucks extra. I put that back in the 401(k).

JA: You got it. And then, now let’s say you get a big bonus. All right well then you keep going to the 401(k) plan until you maximize the 401(k) plan. And then if you still have dollars that you want to save, then that’s when you start a brokerage account. And then that’s where you start funding, you know, mutual funds or stocks or bonds outside of any type of retirement accounts. It’ll just be in your name only.

AC: Yeah. OK I agree with that. So 401(k) to the match, Roth IRA, Roth contribution, back to the 401(k), max that thing out, and then start saving in a non-retirement account.

JA: You got it.

AC: Yeah. OK. I like that.

JA: So here’s a few other things too, is that, let’s say that your paycheck or the amount of income, will not allow you to save that much. But maybe you sold an asset, such as a property at a profit, or maybe you got an inheritance or maybe you’ve got a gift, and you have money sitting in cash that’s over and above your cash reserves. So I’m just going to use $50,000. $25,000 of that is my cash reserves, the other $25000 I’m not sure what to do with. We get this question all the time. “Hey I just inherited $25,000, $50,000, $100,000. What do you suggest I do with this?” Go back to the sequence orders again. Go to the 401(K) plan, go to the match. Then you go to the Roth IRA, fund the Roth IRA. $5500, if you’re over 50, go to $6500. Then go back to the 401(k) and max that thing out. And I know some of you are saying, “hey I don’t have the income to do it.” Yes you do. I don’t care if your paycheck comes back in it’s only $500. You have the cash. Now you’re going to spend down some of that cash because the only way to get money into. let’s say a qualified 401(k) plan, or 403(b), or an employer sponsored plan, has to come through your paycheck. You can’t just write a check from your checking account and deposit it. So here, your paycheck, your net pay, is going to be reduced, but now you have that cash. It’s just like stealing from Peter to pay Paul.

AC: But you end up with money in the accounts that you want to. So let’s say normally you have a net payment, net check or payroll of $1000 and now it’s $500. So you’re $500 short because you put another $500 in the 401(k), well you just take $500 out of your cash account to pay for your bills. And in effect, now you’ve taken the cash, in a roundabout way, and got it into the place you want it to be.

JA: You got it. Yeah. So just thinking outside the box here a little bit. So then, all right, then you go back max out the 401(k). Hey I still have some money left over. Then that’s when you start opening up the brokerage account. And then how should it be invested is going to depend upon how’s that 401(k) invested? How is the Roth IRA invested?

AC: Yeah you wanna look at the whole picture.

JA: You got it. Then you start taking a look at an overall strategy on all the different accounts, because there has been multiple times, I know you guys will call us and say, “I just inherited $100,000. What do you think? Where should I put it?” OK well let’s take a step back first, right? And just use those orders, I think more and more people might be a little bit more successful.

AC: I think you’re right Joe. Here’s another one. We see this all the time. Cashing out your 401(k) from an old job instead of rolling it over to an IRA. And here’s where this happens is maybe you’re in your 30s or 40s and you end up with a 401(k) of $10,000 and you think, “well, that’s too much of a hassle to roll that into an IRA.” And so you cash it out, you spend it and then you realize when you’ve spent it, not only do you have to pay income taxes on it, but you pay penalties because you cashed out before you’re 59 and a half. And in most cases between federal and state taxes, in California, you’re going to approach – and penalties – it will be about 50% tax. So that $10,000 that you didn’t roll over cost you about $5000. And that becomes a big surprise April 15th.

AC: We’re talking about Eight IRA-Related Mistakes Young Professionals Need To Avoid, turns out this is true for all of us. Number seven is being too eager to use your IRA before retirement. Have we ever seen that?

JA: Multiple times, brother.

AC: All the time. And when you take your IRA out before retirement, of course, you are jeopardizing your retirement lifestyle, that’s what it’s for, but you’re paying a hefty tax, because in most cases you’re probably taking it out before 59 and a half. So you’re paying a 10% federal penalty. In California you pay a 2.5% penalty plus you got to pay income taxes at your normal tax rate. And if you add all these together you end up at about a 50% tax rate in California.

JA: How many times have we seen people take that money out to buy real estate.

AC: All the time. And then they’re shocked when they owe taxes, they thought, “well, I thought I’d get a write off when I bought real estate.” I mean we see that time and time again.

JA: It’s like, “Well Joe, I needed a place to live.” All right. Yes I understand that. But you don’t have to pay cash, take it out of your retirement account. Where are you going to come up with the additional couple of hundred thousand dollars in taxes and penalties for doing it?

AC: And sometimes, Joe, we see people that are close to retirement. They’re in their 60s, they can take it out, and they do for the wrong reasons, like they take out a big lump sum to pay off their mortgage. You know pull out $300,000 to pay the mortgage.

JA: Well, it makes me feel good to not have debt. I’m not going to have any debt.

AC: I’m debt free. I’m good.

JA: Yeah but now you’re back in debt because you owe the IRS another couple hundred grand. I mean I would much rather have a small interest payment that I can write off to a mortgage company right versus having the Franchise Tax Board looming over me.

AC: For sure. I mean just that simple example, and we’ve seen this before, this is why we’re talking about it, we’ve seen people that, their final year retirement, they get all kinds of extra severance and whatever they got. Vacation pay. So their salary is higher than usual. Then they pull out several hundred thousand dollars out of their IRA, 401(k) to pay off the mortgage so their taxable income is like $500,000, and they get this bill. April 15th they owe $200,000 and guess what, they don’t have it. So then they go back to the IRA they pull out $200,000 and the next year they owe $100,000, they got to pull out that. And this just continues goes on and on.

JA: Couple of things. We’ll get to your final point there. Brought something up. Your retirement date. There’s usually two very popular dates that people retire. Wanna take a guess, Big Al, what those two dates are?

AC: Well 62 is probably one of ’em.

JA: No, I mean like during the year. Let’s say I’m retiring this year. There’s gonna be two dates that I’m probably going to pick. What would you think those two dates are?

AC: I’m going to say one would be, I don’t know, like the first of January.

JA: OK. Wrong. (laughs) That’s the right move. Coming from a CPA, he knows when to retire. No, it’s usually the end of the year, December 31st – I’m going to make it through 2017.

AC: Yeah, and then be done.

JA: And be done, right. Or I’m going to retire on my birthday.

AC: Yes we did get that a lot. You’re right.

JA: So it’s either birthday, or it’s the end of the year. Hey, I’ll give the company to the end of the year, I’m going to let them know, or, you know what. I turned 66 in June. I’m done. I’m out of here. So I’m fine with the June date. But be careful with the December date. Just as Al was talking about it’s like all right, well, let’s say you worked for that company for quite some time, and you have this sick pay that’s accumulated or vacation pay and things like that. Well they pay that out to you on the your last paycheck. And so if I wait till December 31st and say, all right, I’m going to close out the year. Well that last paycheck might be your largest paycheck, but then you have that 12 months of earnings. If you take Big Al’s advice, wait a day, retire January 1st then you don’t have the 12 months of ordinary income of wages.

AC: Yes, so you’re in a much lower bracket for that year. And this happens more often than you think. I mean, how many times have – maybe it’s happened to you, or somebody that you know has been offered early retirement from their company. And so early retirement, of course, it’s all over the place. But often you get some sort of salary to retire maybe six months or three months salary. And they don’t necessarily pay it over time.

JA: That’s a nice way to say, “hey, you, get the hell out.” (laughs)

AC: We don’t want you. But they’ll give you a lump sum. And if you left in December and then you’ve got a six month lump sum it’s like you made a year and a half salary in one year. Do you think that throws you in a higher tax bracket? It certainly does.

JA: Right. And then you probably might have already fully funded your 401(k) plan at that point, or whatever employer sponsored plan. You can’t shelter it. But if you wait till January and let’s say you get a $30,000 check. Well you could put $24,000 of that right in your 401(k) plan, max that plan now for the following year, and then you just have a lot smaller check that’s taxable to you. So, just FYI, couple little news you can use.

AC: Tidbits. We’re giving solutions today, aren’t we?
AC: Because you brought this thing up and you didn’t say what the solution was. Well that’s alright.

JA: I forget what it was. I forgot his email, I was gonna talk about that, but it was some app about passwords.

AC: Yeah we were talking about how to password protect everything, and you know, we didn’t really have a great answer. So he gave us one. It was an app. I forget the name of the app.

JA: You know what? Next week.

AC: Yeah. Next week. We’ll get on that.

JA: Yeah. We’ll get the solution next week.

AC: Number eight here is not pushing yourself to contribute more early on. And this is key, Joe. Not pushing yourself to contribute more early on. In other words, maybe you open up an IRA, if you even think of it, and you just put it a few hundred bucks in it. If you can put more money into it, it’s that compound earnings for 20 years, 30 years, 40 years, that makes such a difference in your retirement nest egg.

JA: So what did we learn today. Save early save often.

AC: Yeah that’s like not new news is it? We didn’t we didn’t talk about pay yourself first. That’s a good one. What is that? (laughs)

JA: We’re really getting complex. Pay yourself first and then pay everything else after that. The IRS does that to us, you know this.
Because our tax bill isn’t really due until April. But guess what, they garnish that stuff.

AC: They take their cut, don’t they.

JA: Because they know, if they didn’t?

AC: Yeah we wouldn’t pay it. They do know that. (laughs) And the same way with the retirement plan. Pay it first. If you have a 401(k) that’s the easiest and best because it’s right through your payroll. But if you don’t have a 401(k) then go down to your discount broker, your bank, whatever, and set up an auto withdrawal from your checking account on the same day as your paycheck and so that automatically goes into your IRA, or your Roth IRA. You don’t even have to think about it and you just do 100 bucks a paycheck or 200 bucks or whatever it is for you. And it’s automatic. And so then it’s like you’re not tempted at that point to spend it because it’s already out of sight out of mind.

JA: Yeah. You don’t have to spend it. And then don’t look at the statements saying “well, I still got this, well maybe, do I want to buy that?” No. Forget about it. That’s money for the next 5-10-15-20-30 years, depending on your age, of course.

AC: Yes exactly. So Joe, you know when we talk about IRAs, and we talk about Roth IRAs, and boy we’re big believers in Roth IRAs, and certainly to do a Roth contribution is a great way to go, to do a Roth conversion can be even better, because then you’re taking money out of your IRA, out of your 401(k), you’re converting it to a Roth. And yes, you pay taxes on what you convert, but then all those dollars in the Roth grow forever tax free, and it’s the growth, it’s the income, the principal is tax free, and that’s tax free forever. That’s a pretty long time, if you pass away, your spouse or kids still get that one.

JA: (laughs) Forever! That’s a pretty long time!

AC: infinity. (laughs) So I think Joseph, that if more people would contribute to Roth IRAs and convert to Roth IRAs, they would gain more control over their taxes. Do you agree with that.

JA: I would agree with that. I absolutely would. (laughs)

AC: Are you listening. (laughs)

JA: No I wasn’t. (laughs)

45:00 – Joe and Big Al are always willing to answer your money questions! Email info@purefinancial.com – or you can send your questions directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com

JA: We didn’t get any from- well, we got some complaints about us not giving solutions. (laughs)

AC: It’s OK, we want your criticism, we want to make this show better.

JA: Please. Yes absolutely. Feedback is welcome. It helps us grow.

AC: Yeah. And if it’s negative, we send it to our marketing department, and if it’s positive we read it.

JA: Yes. No, I like the negative ones. Because I can’t pro-nunciate words often. Like just there.

AC: What did you say, let’s “regoop?”

JA: Yeah. And then I have these little ticks than I do. I’m from Minnesota. So I still have a little bit of an accent there. So we’re getting into this, from Investopedia Advisor Insights. That’s full disclosure. They send me questions weekly and because I answer them – well, Big Al does, and I take credit for it.

AC: Do you send them the podcast?

46:00 – JA: No, no. So, first one right out the gates here. Title of this email is, “How do I review a financial advisor’s credentials?” Interesting. “I’m very interested in working with a specific investment advisor who has recommended a fixed annuity. I have been unable to find any information on this individual from FINRA after 2010. How do I check them out.”

AC: Great question, I’ll let you answer that one.

JA: Well FINRA, that’s Broker Check. So, if you go to brokercheck.com, then you can kind of take a look at the past history of a particular broker. And so. it can tell you if there’s, basically, if they’ve stolen a pack of cigarettes when they’re 16, it would be on there. For the most part. Any any legal issues that they’ve had, bankruptcies, or, I think more importantly, customer complaints. Hey, this person swindled me this, or they sold me this, or did whatever, and you could kind of take a look. So that’s brokercheck.com, you can just put in your individual brokerage name.

AC: That’s a national thing?

JA: Oh yeah it’s under FINRA.

AC: OK.

JA: And that’s a regulatory industry. So this individual is like, “all right, well here, I went to FINRA.” But here’s what this is telling me. There’s nothing there from 2010. So what is that. They don’t have a securities license anymore. That’s what that’s saying.

AC: Oh, that’s not good.

JA: Well not necessarily.

AC: Well, if he’s if he’s selling a fixed annuity.

JA: Well you don’t need a securities license for fixed annuities. This individual is like, “you know what, I’m just going to get into the annuity business. I don’t want to deal with the securities industry.” So they’re selling this person a fixed annuity.

AC: So if it were a variable annuity or equity indexed annuity, he’d need the license?

JA: No. Not an equity indexed annuity too, that’s the problem. An equity indexed annuity is still a fixed annuity.

AC: OK. It’s just how it’s calculated. I guess.

JA: It’s still fixed. What they are stating is that they’re crediting interest based on a particular index, such as the S&P 500. But if you actually do all the calculation… if someone just said, “here, here’s a fixed indexed annuity,” and said “the likelihood ranges of return is anywhere from 2 to 4% over 30 years.” Then I’d be totally fine with that disclosure, because that basically is more accurate. But how they sell it is that, “hey, would you like stock market like returns with no downside risk.” Because then you have to take a look at what’s the caps, because what those products do, is that they’ll cap out. Let’s say the market does 5% in a month, and they might have a cap of 2.5% for that month. Hypothetically. There’s hundreds of different iterations here. So then you don’t get the 5%, you get the 2.5%, but then the next month, let’s say the market’s down 5%. That will wipe out the 2.5% that you just made. So they take a look at point to point, depending on how long that point is.

AC: So yes, I guess the point is, the S&P could earn 10%, but you wouldn’t necessarily earn 10%.

JA: Not even close to that. In most cases. So, with a fixed annuity or fixed indexed annuity, you do not need a securities license. You don’t need your series 7, you don’t need a 65, or they’re not an investment advisor. But the problem is that, with a lot of these fixed annuity sales type individuals, they might say, “Al, you’ve got this 401(k) plan that’s full of mutual funds, that’s in the market, that is a security.” And they’re given advice on that, to roll that thing out into, let’s say, a fixed annuity or fixed product. You need a securities license to do that. But every day that happens. So there’s a lot of different things that you might want to take a look at. So if someone’s selling someone a fixed annuity, how do you look them up. Well, first of all, look at their credentials. So are5 there any initials behind their name? There’s basically maybe four that matter. Everything else is garbage in my opinion.

AC: So what matters?

JA: I would say a CPA, like yourself, CPA. PFS, which is, what, a personal financial specialist?

AC: Yeah. CPA PFS.

JA: Yeah. Whatever. It’s really important! Listen to me! Whatever. It’s a CPA. It’s Big Al. Tell ’em Big Al sent ya! (laughs) Certified Financial Planner, CFP®, I think that’s the gold standard in financial planning.

AC: Yes agreed.

JA: There’s the chartered financial analyst, CFA®. And then the ChFC®. That’s a chartered financial consultant. In my opinion those are the ones that you want to look for. So again, CPA CFP®, CFA®, chartered financial analyst, or ChFC®, Chartered Financial Consultant. Those have very rigorous tests, you have to have a Bachelor’s. There’s a lot of – there’s ethics, and then there’s everything else in between. Then there’s hundreds of these other designations. CRLCP, I’m a chartered retirement fund specialist.

AC: Sometimes you get these cards, they must have seven or eight acronyms after their name.

JA: So, that’s first, if they don’t have that, I might look elsewhere, first of all. But if you really like the individual, then you’re like, “well, what’s the background.” You have to look at the background. OK well FINRA, they stopped at 2010 in this example. Then you’ve got to go to the Department of Insurance because they’re selling an insurance product. So you get to see if there’s any complaints there. So it’s kind of a pain. I wish it was a lot easier, but I think the easiest thing is to see how they’re compensated, is there a conflict of interest, and what are their credentials? And if you feel good with all those, if they say, “I make a commission, I don’t have any credentials, and the insurance company pays me the commission, you don’t have to worry about it.” Those are red flags. If someone says yes I’m a certified financial planner I have 15 years of financial planning experience. Here’s how I’m compensated, via fee only. And then if that agrees with you, it eliminates a lot of the conflicts, then maybe that’s who you go with. That was a long winded answer for a short, quick question.

AC: Sure was. Very quick question.

52:45 – JA: Number two, here’s the title, Big Al. “Where should my extra income go, towards my 401(k), Roth IRA or non-retirement account?”

AC: Oh I like it.

JA: Wow. I’m a 26 year old professional with the 401(k), a Roth IRA and a non-retirement account. I contribute enough to my 401(k) to get my employer’s match and I try to max out my Roth IRA every year, but of those three accounts where should my extra income be going? I’m not sure what’s the best focus at this point in my life. Additionally, I work for a nonprofit so I only have an extra $5,000 to $10,000 to play with.

AC: OK. $5,000-$10.000.

JA: At 26 years old.

AC: That’s good for him. I mean that’s great.

JA: Or her.

AC: Or her. Yeah, sure. I guess they didn’t say. Sorry ladies. (laughs) Well, I guess you heard Joe’s order of savings which I tend to agree with. The first thing that you do, is you save into your 401(k) plan up to the match. So this individual is already doing that. Excellent. The second, then you stop. Then you go contribute to a Roth IRA, it sounds like they’re doing that too. And that’s up to $5500. If there’s still extra, you go back to the 401(k) and you put some more money there. You can get up to $18,000 into 401(k). They don’t have that much, but that would be the order. But I’m going to do a little exception, Joe. And that is, let’s just say that you do your 401(k) to the match, you do your Roth IRA, and you have a goal, like saving for a down payment for a home. Well that’s OK. Put it in a non retirement account and start saving for that goal, and then maybe in three or four or five years, or whatever it is, you can buy that home.

JA: Absolutely. And I was thinking the same thing. I think with my order of savings would be strictly for a retirement goal. If you had no other financial goals. But of course, we all have other financial goals. This individual is 26. Hey, maybe I want to buy a new home, or maybe a wedding. I just got married. Or maybe what’s your cash reserves? So what is the actual balance of it too? At 26, maybe he already has a couple hundred thousand saved. I don’t know. Well then, does it really make sense to keep jammin’ a lot more money into the retirement account? So there’s always exceptions to the rule. Thank you very much for that.

AC: Good question.

55:00 – JA: OK. The next question, “Will I be exempt from the early distribution penalty if I roll over my 401(k) to an IRA within 60 days, and take out distributions?” Summary: “I’m 57 years old. If I retire and rollover my 401(k) to an IRA within 60 days of separating from my company, where I have the 401(k), will I be exempt from that 10% early distribution penalty in the IRA If I take distributions out of the IRA before 59 and a half? I heard conflicting stories on if the 401(k) is rolled over within 60 days of separating, whether the IRA is also exempt from the 10% early tax penalty, the just like a 401(k) would have been.”

AC: Good question. So let me tell you what the rule is: if you retire, in other words, separate from service and you’re 55 years of age, you can take money directly out of your 401(k), and you have to pay income tax on it, but there’s no penalty. Once you roll it to an IRA, you lose that status. And so now it’s an IRA and you’re going to pay penalties until 59 and a half. So in this particular case, if you want to roll over part of your 401(k) to an IRA, great, go for it. But the money that you want to withdraw between 57 and 59 and a half, leave that in the 401(k). So when you take it out there’s no tax penalty.

JA: Great advice. So I guess to say it a different way. I’m 57. I separated from service. I need some additional cash flow.

AC: Right, because I’m retired early.

JA: Sure. So it’s like, “well here, let me roll that money into an IRA.” He’s talking about a 60 day roll over here too. So let me explain the 60 day rollover, and then I’ll reiterate Al’s advice. 60 day rollover is that. you can take money out of a qualified account, IRA, and you have 60 days to put that money back in. There is no taxes there is no penalty on those dollars, as long as those dollars get back in the retirement account within a 60 day time period. For instance January 1st, I retire. February 1st, I need a little bit more cash. I take $20,000 out of my IRA. OK, well now I have 60 days from that February 1st date. So then it’s like If I don’t make that money back within that 60 day time period, then that’s a distribution, then it would be taxed and penalized, but if I get the money back in within that 60 day time period then I’m all good. So you’re just taking a loan from yourself.

AC: Yeah, in essence. And you can only do it once per calendar year. And this is a little different. I mean, about two, three years ago they changed the rule, because people were doing it with every single IRA and they would set up ten IRAs so they could keep doing this shell game, and the IRS said “no, you can’t do that.” You can do it once per year and that’s it. And then, in that example, you take the money out on February 1st and you put it back in within 60 days, well then you can’t do it again till February 1st of the following year. I

JA: Right. It’s a calendar year. It’s a 12 month period.

AC: It’s NOT a calendar year, it is a 12 month, 365 day period of time. (laughs)

JA: We’re tight! We’re tight today folks! Woo! (laughs)

AC: Except for leap year. 366 days. (laughs)

JA: OK. And then so going back to Al’s point, it’s like, if you need a little bit of capital, keep money in the 401(k) plan.

AC: You’re allowed to take money out of the 401(k) directly, for your own purposes. Yes, you pay income taxes on it, but no penalty. And that’s just a different rule. 401(k), you separate from service, you’re 55 years of age, you can pull money out and no penalty. IRA, it’s 59 and a half. There are different rules for different kinds of retirement accounts.

JA: And you don’t have to roll everything out of the plan.

AC: Yeah, you can do some of it.

JA: Yeah, you got a half a million bucks, you put $250,000 into the IRA, keep $250,000 in the 401(k). Then you take the distributions out of the 401(k). That avoids the 10% penalty, because you’re under 59 and a half. And then once you reach age 59 and a half, then you can roll it all into the same IRA. Whatever you want to do. If you made the mistake already though, you already moved it into the IRA, and you’re 57, and you do need the money, there is a way around the 10% penalty, it’s using the 72(t) tax election, or separate equal periodic payment. But then there’s three different ways to calculate that. And that may or may not be enough money for you.

AC: I think a lot of times it’s not enough. When you look at the calculation.

JA: You would think, “oh man, I got a million bucks.” Well here, you can take 12 bucks out. (laughs)

AC: Every other week. (laughs)

JA: So it’s a little bit more than that, but you want to make sure that you run that calculation to see exactly how much that you can take out in the 72(t) tax election. At 57, if you started at 57, you would have to wait until age 62 to unwind it, because it’s a separate equal periodic payment. What that means is that you have to take the same amount of money out of the account, each year, until you’re 59 and a half, or five years, whichever is longer.

1:00:08 – JA: Getting to your e-mail questions, here’s one from Tennessee. “What should I do with my 401(k) when I leave for grad school? I’m 25 years old and know nothing about investing. I’ve grown a small 401(k) at my current job, but I’m leaving soon for grad school. What is the best option to transfer it? Should I transfer it to a different retirement account so it stays untaxed? I would especially like to choose my own investments based on my own ethical choices. What is the best option for my case?”

AC: I like that question. Good for you for having a 401(k).

JA: Why do you like it? Tell me more specifically Al. (laughs)

AC: Because I like to hear myself answer a question. So anyway there’s a couple of choices. At least three choices I suppose, one is you can leave it in the 401(k). Most plans, you don’t have to take it out, even though you don’t work there. Although it’s a small balance, some plans will make you take it out. You could cash it out, which we wouldn’t normally recommend, because you’ve got to pay taxes and penalties, or you can roll it to an IRA. And based upon what your stated goals are, to have more investment choices that you have more control over, that’s probably the best answer is to roll it out to an IRA. There’s no taxation, then you have complete control over what you invest in.

JA: Yeah, it sounds like with ethical choices.

AC: Right, so maybe there’s some question on the investments in the 401(k).

JA: No, I’m thinking socially responsible.

AC: Could be. Oh, you’re thinking that way. Yeah you’re probably right.

JA: (laughs) What did you think?

AC: I don’t know. Not thinking. I was answering the question. (laughs)

JA: Right. So if you want to, let’s say, open up an individual IRA, you could go socially responsible, where you don’t invest in oil companies, alcohol or cigarettes, tobacco.

AC: Yeah, all the sin type of companies.

JA: Is that what they are?

AC: That’s what they are.

JA: (laughs) Sin companies. Oh my God.

AC: You haven’t been to church lately have you. (laughs)

JA: Hey, wow. Yes I have. Is that what they say at your church. “These are sin companies.”

AC: Yeah, every week. “Do not invest in sin companies.” And I’m sitting in the front row, they’re looking right at me. (laughs)

JA: But in your own individual IRA you could invest in individual stock. What’s the holiest stock you can purchase, Clopine?

AC: The holiest? I don’t know. I’ll think about it. I’ll have my answer next week. (laughs)

1:02:30 – JA: There you go. We will do some research. OK. Well we got time for maybe one or two more. So, “are T-bills safer than an indexed fixed annuity when you take into consideration the debt our government has? I am considering an indexed fixed annuity. I’m 60 years old and have $125,000 to invest. I do not trust the market, especially since it is rising so quick.” So there’s a lot of things going on in that e-mail we can break them all down.

AC: Well I’ll start with the safety issue. In spite of the debt in our country, the T-bill is definitely safer than an indexed fixed annuity. Because, our government, think about it. Our government is in debt, but it also prints money. An insurance company cannot print money, so if they get into trouble, they don’t have the ability to print money like our government has.

JA: What do you think this gentleman heard – or lady – to feel this way? This is a full on fear sales tactic.

AC: Yeah. I’m going to guess that they went to an advisor that focuses on insurance type products.

JA: Fixed indexed annuities. Indexed fixed annuity. He got it backwards.

AC: Yeah but that’s OK. Fixed index annuity. Yeah. I would agree with that.

JA: So it’s like, well here. Look at the debt that we’re in. $18 trillion in debt, 19!

AC: Why would you trust a T-bill?

JA: Oh my God! The T-Bills! That will blow up on you! The U.S. government is going to default. But guess what, American Equity Life Insurance Company, they’re going to weather the storm!

AC: They’re fine!

JA: They’re fine! Nothing’s going to happen to Allianz! When the U.S. government is blown up. Come on. Jeez Louise. (laughs)

AC: Right. They’ll be fine. (laughs) When you think about it, just go back to my money-printing thing. So, if you invest in a bond in California, municipal bonds are generally pretty safe. It’s still not going to be as safe as a government T-bill, because California does not print its own money.

JA: Treasuries are the safest investment on the planet. They call it the risk free rate. It’s a riskless asset class. The entire world invests in T-bills.

AC: So the entire world doesn’t invest in fixed index annuities?

JA: No. (laughs) What, Lafayette Life Insurance Company. Yeah there are a lot stronger than the US Government. “Look at the balance sheet of this insurance company!” laughs) Yes, insurance companies, you know why they’re so profitable? It’s because they got pretty good sales people on the front line, telling people that the U.S. treasuries are not safe. But this fixed indexed annuity is.

AC: So all this, like China for example, there’s a lot of extra capital there, and they don’t invest in an fixed index annuities? (laughs)

JA: I don’t know. Maybe they do. They might be going to a dinner seminar, giving them a free steak. (laughs)

AC: Hey China, did you know? (laughs) No. T-bills are the way to go if you want safety.

JA: Now I’ll wrap this thing up too. It’s like, I don’t trust the market. Yeah, most people don’t necessarily trust the market. When you are, I guess, uneducated on basically how the markets work. And the market is rising so quickly, there’s a lot of reasons why the market is rising so quickly, if you think it’s rising so quickly. But let’s put things into perspective. So the market is at 22,000. I’m going to tell you it’s at 20,821. So 21,000. So I don’t know the exact date. This is off the cuff. Please don’t hold me to this, but, I’m going to go back to let’s say 1997-ish. Then that’s when the market hit 10,000. So 10,000 to 21,000. That is roughly doubling. Correct? But 1997 to 2017 is how many years Alan? 20 years. So it took 20 years to double. Is that craziness? Isn’t that what you would expect?

AC: Yeah, that’s kind of low, actually.

JA: Yeah, because we had a couple of bad years in there.

AC: So that’s about, what, 3.5% on average.

JA: On average. So you’ve got to put things kind of in perspective. God I’ve said “perspective” a lot of times. I apologize. Awful. Yes send me an e-mail. Count how many times I said perspective.

AC: We’re going to get a lot e-mails this week. (laughs)

JA: It’s awful. It’s absolutely awfulness. (laughs)

AC: And I just started tuning in, I can’t believe you’ve been around for 10 years. We can’t either.

JA: Now a few things to consider here too, is that lower tax rates or the anticipation of lower tax rates is spurring a lot of market activity. And here’s why. If I’m a company that has, let’s say, real simple terms, ten million dollars of profits. And next year let’s say if my corporate tax rate gets cut in half, that $10 million of profit might go to $15 million in profit?

AC: Because I’m paying less tax.

JA: Because I’m paying half in tax. Give or take. This is not exact science, I’m just throwing out numbers. But that’s if I don’t do anything, Al. I just do the status quo. I just keep all of my customers fine. I sell the same amount of widgets, I’m not killing any records here. But all of a sudden, my bottom line increases significantly.

AC: So people are willing to pay more for that, aren’t they?

JA: Well, wait a minute, yeah, because I’m more profitable. And then, guess what, when you invest in a company you want some of that profit.

AC: Right, dividends.

JA: And so the company’s value is going to increase just due to the fact that they do nothing else, they’re going to be paying less tax, less tax means more profit. That means the company’s stock price has to go up. It has to. It’s not going to go down because of it, it’s going to go up. Now, here’s what’s going on in the marketplace. And I’ll shut this down in two seconds. I would say maybe let’s say 60% of the market feels that, yes, tax rates are going to get cut, 40%, maybe not so much. It’s not 50/50 or we wouldn’t see this move. Maybe it’s 70/30. So there’s still people that might not think it’s going to happen. And as we get closer to certain dates, they talked about it last week. What’s his name wants to have it by August. May. Throwing this stuff out there. Well as we get closer to these dates, if nothing happens, we’re going to see a pullback in the overall markets. So just anticipate that. If it happens the market is going to shoot up, if that doesn’t happen it’s going to blow up. Just know what you’re holding and there shouldn’t be any surprises in your overall portfolio. That’s it for us today.
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So, to recap today’s show: Retirement is expensive! $700,000 on average, so don’t mess it up: save early, save often, save in the right order, and retire at the right time, and in the right place. For more smart retirement advice,

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