Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:06 – Can I Withdraw Roth 401(k) Contributions That Were Rolled to IRA? (Peter LemonJello, FL)
• 05:32 – Paying the Tax to Pay the Tax” on Roth Conversions Clarified (David)
• 09:13 – Should We Save to Tax-Deferred Accounts, Backdoor Roth, or Brokerage? (David & Victoria, Cincinnati, OH)
• 15:23 – Watch How to Break Through Retirement Barriers on YMYW TV, Calculate Your Free Financial Blueprint
• 16:17 – Should I Do Roth Conversions at Age 66 If I Want to Retire at 70? (Mike, PA)
• 17:49 – You’re Wrong About Roth Conversion Tax Payments (Robert, YouTube)
• 20:20 – Can I Pay Roth Conversion Tax From Monthly Pension Withholding? (Big Toe Knee, YouTube)
• 20:45 – Should I Consolidate Individual Stocks Into ETFs? (Lu, YouTube)
• 22:44 – Do I Understand the 5-Year Rules for Roth Withdrawals? (NR, YouTube)
• 25:51 – Download the 5-Year Rules for Roth IRA Withdrawals and the Withdrawal Strategy Guide
• 26:39 – Was the Home Office Deduction Eliminated Under the Tax Cuts and Jobs Act? (George, YouTube)
• 27:30 – Contributing to Roth vs. Pre-Tax: Would It Count as Long-Term Capital Gains? (Moriel, YouTube)
• 30:16 – Is it a Good Idea to Pay Roth Conversion Tax Out of the Roth? (Michelle, Facebook)
• 31:35 – Joe is Completely Checked Out (Anonymous Apple Podcasts Review)
• 33:19 – Outro: Next Week on the YMYW Podcast

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Transcription

Intro: This Week on the YMYW Podcast

Andi: Joe and Big Al spitball on paying the tax on your Roth conversions, today on Your Money, Your Wealth® podcast number 507. If you take the money out of your retirement account, what does Joe mean that you’ll be paying the tax to pay the tax to pay the tax? Can you pay it from the Roth account itself, or from your monthly pension tax withholding? Are the fellas wrong on this whole topic altogether? They also spitball on withdrawing Roth 401(k) contributions that were rolled to an IRA, and those infamous 5 year rules for withdrawals from Roth accounts, as well as when to do Roth conversions, saving to tax-deferred, taxable, or tax-free accounts, and how long term capital gains taxes fit into the picture. Plus, consolidating individual stock investments and the fate of the home office deduction, as Joe and Big Al spitball for Peter Lemonjello, David and Victoria, Mike in Pennsylvania, and a whole bunch of our YouTube viewers and one of our Facebook followers. Finally, what does Joe think about the Apple Podcasts reviewer that says he’s checked out? I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Can I Withdraw Roth 401(k) Contributions That Were Rolled to IRA? (Peter LemonJello, FL)

Joe:  Got Peter LemonJello calling in from Florida. He goes, “Hi gentlemen and Andi, I’m reaching out while drinking a Dos Equis Amber contemplating my upcoming early retirement.  I have sufficient savings and retirement plans for retirement. I also have enough current savings to make it to approximately age 58, maybe longer. I’m worried about not being able to cover the last year or two before I hit that magic 59 and a half age. I know about the 72(t) tax election, but that isn’t really ideal as I want to have to stretch it out over 5 years, not one or two as I need it. I was thinking about the removal of some Roth contributions, and that led me to feel the need to write you. In the IRA world, I know Roth contributions can be removed at any age for any reason without penalty or taxes. But what happens if most of my Roth contributions were made to a 401(k), then rolled over to an IRA in 2025?  Can I still remove the Roth contributions as if they were made directly to the IRA? If so, do I now have to wait 5 years from the rollover? I’m only 51, so the 5-year wait would be okay.  I’m just not sure about the rules related to removing Roth contributions that have been removed around from different plans. And more importantly, removing them before age 59 and a half. Thanks always, Peter.” All right, so he wants to retire at 55, it sounds like?

Al: He wants to retire- well, he doesn’t say.

Joe: “I’m 51.”

Al: “Upcoming early retirement”, so I’m guessing soon.

Joe: Got it. Peter, don’t touch the Roth. I mean, we could explain the rules, but I think that’s the last place that I would want to be pulling from, especially if I’m in my mid 50s.

Al: I 100% agree. However, to answer his question, if you have basis in your Roth 401(k) when you convert it- not convert it- you, when you roll it to a Roth IRA, you still have that same basis. You can still pull it out.  The only difference on the 5-year rule there is you have to wait 5 years or 59 and a half for earnings. Yeah. Whichever is longer. So that’s true. But yeah, don’t do that.  Let’s try to think of another way. Maybe you work part time, maybe you cut your spending or here’s another way-

Joe: Roll everything into the 401(k). Then you take the money out at age 55.

Al: I think he wants to retire before then. I’m guessing-

Joe: But he says, “I also have enough current savings to make it to approximately age 58.”

Al: Yeah, well, he didn’t, he doesn’t say exactly what he just said- he’s “contemplating my upcoming early retirement”, so I assume that means soon. Here’s a thought.  If there’s no other option, do the 72(t) when you retire, and then just bank the savings for those last two years where you need it, and then you take care of that 5-year. I think that’s what I would say.

Joe: So a 72 tax election avoids a 10% penalty out of an IRA,  but you have to take separate equal periodic payments, and there’s 3 different kind of calculations. It’s still not a ton of money that you can pull out of there.

Al: It’s not, but maybe it’s enough to get him through that last year and a half or two years or whatever it is.

Joe: Yeah, so the rule states that you can pull the money out for 5 years or until age 59 and a half, whichever is longer. So if he’s 51 years of age, he could start pulling money from his retirement accounts and not be in a 10% penalty, but he would have to pull the money out until 59 and a half.

Al: Right.

Joe: Yeah, that’s just a long time. And then if you look at the calculation, depending on how much money he has in his retirement account, it’s going to be pennies.

Al: Yeah, well, right. And that’s the problem with a 72(t). You never get as much as you need or want. All I’m suggesting is if you look at it and do the math, maybe you start it when you retire and maybe in those 5 or 6 or 7 years, you will have pulled out enough to be able to cover this shortfall for a year and a half for two years. I don’t know. We don’t know the numbers, but that’s what I would look at.

Joe: Right. And then taking that money out of the Roth IRA, you want that to compound as long as you possibly can tax-free.  If you’re pulling that out in mid-50s, I just think that you’re ignoring your future self. And so-

Al: Yeah, it was hard enough to get it in there. Let’s try to keep it in if we can for.

Joe: Yeah, for a little longer.

“Paying the Tax to Pay the Tax” on Roth Conversions Clarified (David)

Joe: We got David. “Podcast 501, Jim 2179-“ Oh my god  “-asked if it mattered where you pay the tax from the Roth conversion. Joe didn’t like paying the tax out of the retirement account because you’re paying a tax to pay the tax. Then you said you don’t want to pay the tax to pay the tax on top of the tax to pay the tax. I’m not sure what the hell you meant.”

Al:  What did you mean?

Joe: So I get a tax bill. Let’s say the tax bill is $10,000.

Al: Yes.

Joe: I don’t have any liquid assets but my 401(k) plan. So then I pulled $10,000 out. But I have to pay tax on the $10,000 to pay the tax of $10,000 that I owe the IRS. So I don’t really owe the IRS $10,000 because I gotta pull more money than $10,000 because I have to pay the tax on the $10,000 to pay the tax.

Al: Yeah, so let me maybe say it another way. You do a Roth conversion. To use your example, you owe $10,000 in tax, but you don’t have it. Right? And so the tax bill comes.

Joe: Well, you don’t have that outside of your retirement.

Al: That’s right. That’s what I mean. So, tax- April 15th comes around next year. You don’t have the money to pay the tax. So now you got to get the $10,000 out of your 401(k), or if you can, or your IRA, right? So now you got $10,000 of income. Now you got to pay the tax on that. Next year comes around. Now you got to pay $3000 or $4000. Because you got to pay the tax on the $10,000. So now you got to pull $3000, $4000 out. And then the following year, you got to pay the tax on the tax and on the tax.

Joe: Well, here’s why I started saying that. Cause this happened, now several years ago, but a person came into the office and they bought their dream home for like $500,000. And it was like in the desert and it was, yeah. Well. We cleaned out our 401(k) to buy the house.

Al: Yeah, we had a mortgage and I decided to pay it off.

Joe: Pay it off. So that was the liquid assets. They took out $400,000 or $500,000 from the retirement account to pay off the mortgage and they blew out most of their liquid assets. The next year they got a little tax bill of $200,000.

Al: So they had to go get a mortgage so they paid off-  Mortgage to pay off the tax-

Al: They’re in a giant tax bracket, ’cause they pulled it out all at once.

Joe: So, I mean, a lot of mistakes that happen in retirement accounts because of the taxation of those accounts. So if you’re doing Roth conversions and you’re paying tax within the retirement account, just understand that it, it has to come out. It’s not liquid, it’s not after-tax dollars. And the more that you convert potentially the more tax that you’re going to have to pay. And if tax rates continue to go up then it’s like you’re just- you’re compounding the effect. So in some cases it does work. Right. So it really depends on what tax bracket that you’re in, how much money that you have in a retirement account. What assumptions that you’re using for growth rates, what you think tax rates are going to do, right? There’s a lot of assumptions involved there and how long that you live. So if all those assumptions come into play, well, yeah, then of course, it’s going to make a lot of sense to pay the tax from the retirement account. But in general purposes, you probably don’t want to do that.

Al: Yeah. and I will just add as long as you’re 59 and a half, because if you pay the tax out of your retirement account, when you’re younger than 59 and a half, then you get the tax and the penalty. Right. So just be careful of that.

Joe: Okay. Hopefully that explains. I think I said tax quite a bit.

Should We Save to Tax-Deferred Accounts, Backdoor Roth, or Brokerage? (David & Victoria, Cincinnati, OH)

Joe: Okay. We’re off to- where are we off to? Cincinnati. “Hi, Joe. Big Al. Andi. Thanks for taking my question. The show has become the highlight of my Tuesday.  My name is David. My wife’s name is Victoria. We live in Cincinnati, Ohio.  Probably one of the younger listeners at age 30 and have many years of work ahead. But I’m doing the best I can to set my wife and I up for a successful retirement by making good choices now. Hearing the spitballs and all your thoughts on a weekly basis helps me think about our situation at a deeper level.  And while we have a long way to go on our journey, I enjoy the fact that we still have time for even small choices.” All right. “I like the small choices that we make now will have a greater impact or a great impact by the time we need it when we retire. Now for the question. My background, my wife and I both make good salaries and a combined household income of $350,000. We currently have no kids, but they are in the plan here in the next future. We have the following assets as of today. We have retirement accounts of traditional $250,000, Roth $200,000, brokerage account $20,000, profit sharing plan $70,000, HSA $40,000, cash $50,000, home worth $600,000, mortgage $40,000.” So total assets there, Big Al?

Al: Keeping track, about $630,000.

Joe: At age 30?

Al: That’s amazing.

Joe: All right, we are we have we are- “We have become good savers, saving 20% of our gross salary at about 50/50 in the Roth and traditional 401(k)s for tax advantage savings, with my wife’s company matching 6% to her 401(k) and my employer contribution, 10% of salary to the PST plan, profit sharing plan. Because of our age, we have 100% of invested assets in equities, 50% S&P, 25% in small, 25% in international. My questions, we currently max out contributions to all tax advantaged accounts, other than the backdoor Roth. And my question is, should I pursue this or continue to contribute excess savings into the brokerage account? I recognize there is likely not a right answer, but would be very interested in your thoughts on the tradeoffs between those two options. From what I can see, the main tradeoff between tax is between tax and flexibility. The backdoor Roth will help avoid capital gains tax, the breach-“  okay,  I would do backdoor Roth.

Al: I think I would do, I wouldn’t do that.  And the reason I wouldn’t do the backdoor Roth is because at age 30, kids on the way, you might want a nicer home. You might have some expenses with the kids. I think I’d rather build up the non-qualified account more.

Joe: Well, that’s savings. That’s not non-qual. I guess, what is it earmarked for? So the excess savings, is it earmarked for retirement, or is it earmarked for the unknown?

Al: I’m just saying, if I’m 30, and I’m married, and kids are in the plan, I think I want to build up my non-qualified assets. Joe: But he still has access to the Roth IRA accounts.

Al: I know. But you’ve said a million times, don’t pull out your contributions.

Joe: Right. But he’s not fully funding the Roth. I would much rather fully fund the Roth because if he doesn’t necessarily need to touch it, it’s going to all compound tax-free. If he does need it- All right. Well, okay. Well, just know that you have this other pool that you might touch because you could put it into a brokerage account, save exactly the same way. It’s both after-tax. One’s going to be taxed at a capital gains, one’s going to be zero. I would take zero all day.

Al: I get it. But I think he’s going to want it before. If I were 50, I would agree with you.

Joe: Okay.

Al: At 30, I think I would build up my non-qual.

Joe: Well, I’m closer to 30 than you are to 50.

Al: I don’t think that’s right, actually, when you do the math.

Joe: Okay. All right. There’s a related question.  “If we do proceed with the backdoor Roth-“See, he’s already thinking. He’s on the right track here. “-could we withdraw backdoor rollover Roth IRA contributions prior to 59 and a half without a penalty, similar to what we can do with the typical Roth IRA contributions?” Yes.

Al: Well, with a caveat, because it’s a conversion, you still have to wait the 5 years.

Joe: Understand, but he’s got other Roth dollars that he has contributions in.

Al: Sure.

Joe: So how the rule works. It’s like 4 tiered. So you look at contributions come out first.

Al: Yes.

Joe: Conversion dollars come out second.

Al: Right.

Joe: Then the earnings on contributions come out third and then earnings on conversion dollars come out fourth. I believe that’s right. It’s been a while since I looked that up. Al: That sounds right.

Joe: But do you think anyone from the IRS actually, you know, I don’t know how you track that. It’s very difficult to track.

Al: It is.

Joe: But if you already have Roth dollars, let’s say you do a backdoor, you’ve already contributed to Roth IRAs for a while, you know, and then you start doing backdoor Roths over the next couple of years. Yeah, you have to wait 5 years for those conversion dollars because you’re under 59 and a half. But you might have X other dollars that you contributed years prior that you would have access to.

Al: Agree. I agree with that.

Joe: So but yeah, I guess we’re both right and wrong because I think he’s thinking about the, you know, liquidity of it. Yeah, he’s got kids on potentially in the plan.

Al: Yeah, I think it’s, more of a personal choice. Either one’s a fine answer. I think for me, I would want to build up non-qual a bit more because $630,000, but only $70,000- I should, it’s not only- $70,000 is a lot of money, but $70,000 outside of retirement. If, if, they want to buy a nicer home, maybe it’s going to be a good size down payment. They want to get different furniture for the little babies coming. I think I don’t know. I think I want to build up the non-qual myself.

Watch How to Break Through Retirement Barriers on YMYW TV, Calculate Your Free Financial Blueprint

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Should I Do Roth Conversions at Age 66 If I Want to Retire at 70? (Mike, PA)

Joe: All right.  We got Mike from PA. He goes, “I’m 66 years old. My wife is 59. We have $4,000,000 in pre-tax retirement and $1,000,000 in Roth. We plan to start using retirement funds in 4 years. And collect my Social Security with spousal benefits in 4 years. Should I be considering Roth conversions at this age with my time horizon to retirement at age 70? I’ll still be making income of about $350,000 annually until age 70.” All right, so he’s 66, he’s got $4,000,000, he’s still working, $350,000 annually until age 70. If he continues to save into that retirement plan until age 70?

Al: Yep. And then RMDs at 75.

Joe: It’s gonna be a $350,000 RMD.

Al: Yeah, at least, right?

Joe: Yeah. So, does it make sense that if you, well, you’re making $350,000 now. And you’re going to be making $350,000 as a forced distribution in retirement.

Al: Right. And it only goes up from there. Plus Social Security. Right. So you’re going to be in a giant bracket. So Roth conversions probably do make sense. The hard part is you don’t have money outside of retirement to pay the tax. This is a case where, because you’re over 59 and a half, I think it’s fine to pay the tax through your retirement account.

Joe: 32% tax bracket, the tax rates go up.  He’s right on the cusp there.  Yeah, I think you chip away at this thing for sure.

Al: Oh yeah, for sure.

You’re Wrong About Roth Conversion Tax Payments (Robert, YouTube)

Joe: So, we’re switching gears here, going a little YouTube.

Andi: Yeah, all of these have come from people that have left comments on our YouTube channel on various videos throughout the channel, and you can do that too. Just go to your, the Your Money, Your Wealth® channel on YouTube, subscribe, and you can comment and join the conversation.

Al: Okay. All right.

Joe: I can’t wait. All right.  Love people blowing us up. We got Robert, he’s like, “On podcast clip ‘when to pay tax on the Roth conversion’ Big Al said you’re supposed to make quarterly payments. If you don’t, you get charged interest. WRONG.”  Wow. He was aggressive.

Al: Wasn’t he?

Joe: “If you wait and do a withdraw at the end of the year and withhold the taxes owed at that time, it is deemed to have been equally paid throughout the year and no penalties or interest is owed.”

Al: Okay. I can probably think of 3 or 4 reasons you don’t have to make quarterly estimated payments. And this is one of them, right? I’m not sure I said that was the only way to do it, but who knows what I’ve said. But anyway, as far as estimated pay- you do a Roth conversion, you have tax to pay, you need to pay that tax somehow, right? And so typically, if you don’t have enough withholding, you have to make quarterly estimated payments. But if you increase your withholding, right, and you do this in December, then in fact it’s treated as you paid it ratably or evenly throughout the year. You didn’t have to make quarterly estimated payments. If you-

Joe: Yeah, this withholding from your paycheck.

Al: From your paycheck.

Joe: How about if you don’t have a paycheck?

Al: Yeah. Well, then you withhold from the 401(k) or the IRA, right?

Joe: But if you do the conversion in January, when are you gonna withhold? Then you’re withholding what? You’re paying tax out of the retirement account.

Al: Yeah, which we generally don’t want people to do. Plus, if, I mean, there’s a lot of reasons you don’t have to make quarterly estimated payments. I’m not going to go into all of those right now, but if you don’t follow, if you don’t have any of these exceptions, and you do a Roth conversion, and you do it in April- Yeah, you have to make quarterly estimated payments if you’re not able to add to withholding. If you do it in December, and you can’t do additional withholding, then you just have to make the payment on January 15th, because that’s Q4, you do the annualization method on your tax return.

Joe: Wrong!  Are all of these going to be like this?

Can I Pay Roth Conversion Tax From Monthly Pension Withholding? (Big Toe Knee, YouTube)

Joe: Wrong!  Are all of these going to be like this?

Andi: No, and actually if you jump down a few to Big Toe Knee, he says, “Can I just pay Roth conversion taxes from my monthly pension withholding? I can easily increase or decrease withholding as needed.”

Al: All right, next page.  The answer is yes, you can, but just, be aware that, you, I mean, if you’re under 59 and a half, you’re going to pay a 10% penalty on that, but you can do that. Sure. And that’s treated as withheld ratably throughout the year.

Should I Consolidate Individual Stocks Into ETFs? (Lu, YouTube)

Joe: All right. We got Lu, 10, eight on video podcast 498 “RMD is reduced or spend.” Make some sense on this for me. Oh, “can you make some sense for this? On this for this, please. I currently have a Schwab account. It was transferred from TD. My question is, I sell and buy stocks on my own. I have 20 different stock positions and I’m wondering is it a good idea to consider to consolidate to an ETF that have the same holdings. For example, put into an S&P 500 or VOO to name a few and just go with that. Sorry for being so wordy but it took me a long time to get it from thought to paper. LOL. Just came across your show. Love it. Thank you.”  All right. I don’t know. You got 20 different stock positions and he wants to say, should I just sell it and just go and do a S&P 500 ETF or index fund?

Al: You can do that.

Joe: I don’t know what 20 different stocks that you own.

Al: I don’t either. See that the main difference here S&P 500 has 500 stocks so- Give or take. Sure. On any given day, it might be 498 or 502. I don’t know. But yeah, you have 20 different stocks, so S&P 500 is more diversified. On the other hand, your 20 different stock positions, maybe you got a lot of gains in. I mean, you don’t necessarily want to sell them, because then you got to pay all these capital gains. So, I guess it depends. I mean, having an index type fund like S&P 500 is, it’s easier. You don’t have to do much with it. When you have 20 different stocks, you might want to be watching them. You might want to do more tax loss harvesting and things like that. So it’s a little bit more labor intensive and you don’t have the diversification, but it’s not a bad way to invest.

Joe: Sure.  Yeah, I don’t know what stocks that you own, but I agree with everything you said there, bud.

Do I Understand the 5-Year Rules for Roth Withdrawals? (NR, YouTube)

Joe: Okay. Alright. “5-year rule is confusing.” Yes, I know it is.

Al: Yeah, we, yeah, you’re not kidding.

Joe: This is NR.  He’s like, “I’m making after-tax contributions to my 401(k) that Vanguard automatically converts to Roth, and then I move the contributions to a self-directed Roth IRA account.” All right, so he’s doing after-tax contributions to the 401(k) that they convert to Roth within the 401(k).  Then he’s moving those into a self-directed Roth IRA account. “The conversions to Roth in my case is not taxable event, so why would the 5-year rule conversion rule apply to me? My understanding is that the 5-year rule on a Roth conversion only applies to taxable Roth conversions.”  No, it’s any conversion. Well these- YouTube, you can’t type? I mean these questions are- it’s not me reading and I know people make fun of me all the time on that, but- “The 5-year rule is confusing. I’m making after-tax contributions to my 401(k) that Vanguard automatically converts to Roth and then I moved the contributions to a self-directed Roth account.”  Al: Okay, so far so good.

Joe: “The conversion to Roth in my case is not taxable event. So why would the 5-year Roth conversion rule apply to me? My understanding is that the 5-year Roth conversion rule only applies to taxable Roth conversions and if the conversion isn’t taxable, you can withdraw the principal at any time. Can you correct me if I’m wrong in my understanding?”  Maybe it was me reading.

Andi: I wasn’t gonna say anything, but-

Joe: That worked out pretty well.

Al: Yeah, that’s a good question.

Joe: Yeah, what’s a conversion? Conversions have the 5-year clock. And contributions do, do not on the contributions.

Al: That’s the tricky part. Yeah.  So, yeah, you still have a, whenever there’s a conversion, you have a 5-year clock on the principal part.

Joe: The reason for that, because it was in a tax-deferred environment. And tax-deferred environments that are pre-tax or after-tax in a shell of a 401(k) or an IRA, you have to pay a 10% penalty on any of those earnings or all of those dollars if it’s in a pre-tax account.

Al: Yeah. Now, but let’s take a step back. “I’m making after tax contributions to my 401(k).”

Joe: That’s fine.  But it’s not a Roth, he’s making after-tax contributions, that he’s converting into a Roth.

Al: And it has basis, but it’s still the principal.

Joe: It’s a conversion, so the rule is based on conversion versus contribution.

Al: Unless you’re over 59 and a half.

Joe: Correct, if you’re over 59 and a half, you’re fine.

Al: Doesn’t matter.

Joe: Doesn’t matter.

Al: If you had a Roth already.  That’s why this is so confusing.

Joe: Yeah, but I could be 100% wrong, too. But I’m standing by my answer.

Al: I think you’re right.

Joe: I think so, too.

Download the 5-Year Rules for Roth IRA Withdrawals and the Withdrawal Strategy Guide

Andi: If you haven’t already downloaded our guide to the 5-year rules for Roth IRA Withdrawals, this would be the time to do it. This handy one-pager shows how those 5-year clocks work for Roth contributions vs conversions, whether you’re over or under age 59 and a half, and the order of withdrawals. You’ll find the link in the episode description to download it for free, along with the Withdrawal Strategy Guide. Learn tactics that’ll help you to prolong the life of your retirement savings in the most tax-smart way possible. Get both the 5-Year Rules for Roth IRA Withdrawals and the Withdrawal Strategy Guide from the links in the description of today’s episode either in your favorite podcast app or on YouTube. And when’s the last time you browsed our website at YourMoneyYourWealth.com? There’s a ton more free and valuable financial resources there waiting for you.

Was the Home Office Deduction Eliminated Under the Tax Cuts and Jobs Act? (George, YouTube)

Joe: George, let’s see. “Was the home office deduction eliminated in the Tax Cuts and Jobs Act?”  I have no idea.

Al: The answer is no. It’s still available. However, if you’re an employee, the home office deduction was a miscellaneous itemized deduction, which is no longer allowable.  If you have your own business, it’s allowable on your Schedule C or your partnership or whatever it may be. You still can take that deduction. It’s, I guess it’s worth noting that many states did not conform to this federal rule. So you can still take that, if you qualify, you can still take the deduction on the state return. But as an employee, that has been eliminated because there’s no miscellaneous itemized deductions. If you’re self-employed, you can still take the home office deduction.

Contributing to Roth vs. Pre-Tax: Would It Count as Long Term Capital Gains? (Moriel, YouTube)

Joe: All right. Moriel?

Andi: I think that’s correct. Yeah.

Al: Moriel.

Joe: “There’s a little podcast clip that says I’m contributing 15% pre-tax, 5% Roth. Is this a good retirement savings mix?” I think the intent is that most people try to decide between either Roth or pre-tax, but is this a viable strategy to mix the two? I assume it would count as long term capital gains, right?”  No.  So, anything pre-tax is going to come out as ordinary income. Anything Roth is going to come out tax-free. There’s no capital gains in either of these equations. So, based on the current numbers, a single person could withdraw $47,000 out of a taxable pre-tax bucket. Taxable pre-tax bucket $47,000 would be taxed at ordinary income rates.

Al: Correct.

Joe: “So then whatever you need over that for the year take out of the untaxed Roth bucket just like taking it out- It would be just like taking it all out of Roth except the first chunk has more room to grow.  Doesn’t it work that way?” And if so, what happens if you throw some dividend income on top of that? Presuming pretty decent savings in the low end of the 24% tax bracket?  I prefer not to give details on my progress or else friends start needing loans.” Okay. All right.

Al: Well, Joseph, I, actually had a chance to read this before this, I read it 4 times. And I think I know what’s being asked, although it’s not very clear on the first- I think what’s being asked is how/when I do a Roth conversion, how does it work? Does it start with the lower brackets? And then I got this other income tax at the higher rates. and if that’s what the question is-

Joe: I don’t even see a conversion anywhere in this question.

Al: Well, not a conversion. It’s just whether to go pre-tax or Roth, so, but, then withdrawing $47,000 out of, yeah, it’s hard to make any sense of this one. But here’s I’m going to answer what I think is being asked, and that is if you have a bunch of other income, that income happens first, and then if you’re deciding then to go 401(k) traditional or 401(k) Roth or do a Roth conversion? It’s your current marginal rate that’s going to determine what the tax is. So all the other stuff is there to start with and then anything else you do on top of that sits on top. That’s how I would answer that question. I’m not sure if that’s what the question was, but it’s the best I can do.

Is it a Good Idea to Pay Roth Conversion Tax out of the Roth? (Michelle, Facebook)

Joe: Michelle. “Great show.”

Andi: This one came from Facebook.

Al: Okay, Facebook.

Joe: Don’t have a Facebook account. Is Facebook still thing?

Andi: Facebook is still a thing. Pure Financial Advisors has a Facebook page. So this is where she commented.

Joe: Got it. All right. “Great show. Question. Would it make sense to do, use Roth dollars to pay for larger conversions, i.e., convert $100,000 of 401(k) funds to Roth and use $24,000 of Roth dollars to pay the tax? This would prevent needing to take out $131,000 to end up with $100,000 in the Roth.”  Okay. “So this would gain me about $7500.  What am I missing?”  I like that versus paying the tax out of the retirement account. But if you had the money in a non-qualified account, I would love that even the most.

Al: Yeah, I would love that more too. I think if you ran the math out, it works out the same, but maybe psychologically it looks better.  Because you’re only giving up $24,000 instead of $31,000.

Joe: Correct.

Al: But you’re giving up the $24,000 that’s tax-free instead of the $32,000 that’s taxable. I don’t know.  I think it works out the same.

Joe is Completely Checked Out (Anonymous Apple Podcasts Review)

Joe: Alright, we got a review here.  “So, Joe is clearly checked out.”

Al: You checked out?

Joe: “Decent advice from Big Al.”

Al: Yeah.

Joe: “But Joe can’t follow the questions or the numbers or what’s going on.”  He’s not lying.

Al: Is that right?

Joe: Sometimes.  “If it’s a couple of questions, he lets Al just take them over. And he has very little to add. He thinks he’s funny. I think it’s annoying.”

Al: Well, you don’t have to listen.

Joe: “Yeah, I can’t listen to him anymore. It’s just because of him. Al needs to drop Joe.

Al: Ha.

Joe: Will you drop me, bud?

Al: No, this is what makes it fun.  It’s, it’s Joe.

Joe: Yeah.

Al: Can you imagine a show with just me reading questions?

Joe: I clearly checked out.

Al: Ha.

Joe: I checked out half, half the time. I mean, I try to read some of these and I’m like, I have no idea where we’re going with this one. Right. Well, you have all the time to prep too. I just throw you the pot, you know, throw you-

Al: Yeah, you gimme the, yeah, the hard ones. ‘Cause I already looked at ’em.

Joe: Yeah. Yeah.  So. Well, thank you, for not even sharing your- two, two-star review though.

Al: Well, because of me? Because of me?

Joe: Yeah. You got two.

Al: I got a couple.

Joe: I got zero. I got a negative. I got negative three. So. All right. That’s it for us. We’re, that’s a wrap.  I’ve definitely checked out of this show right now. So we’ll see you guys next week. Thanks for listening. Thanks for your questions. Andi, great job for putting all this together. Big Al, thanks for taking all those questions.

Al: That was fun.

Joe: And, yeah, we’ll see you guys next time. Show’s called Your Money, Your Wealth®.

Outro: Next Week on the YMYW Podcast

Andi: John in Pennsylvania, Tiger NotWoods and Lioness, Charlie in Castlerock, CO, Worrywart Mom in Seattle, Esther in the Bay Area, and James in Tierrasanta, listen for answers to your questions next week in YMYW podcast episode 508.

Dedicated listeners, did you know Your Money, Your Wealth is also a video podcast? Has been for a couple months now! Watch us, subscribe, and find me responding to you in the comments on YouTube, follow and watch on Spotify, or keep listening in your favorite podcast app, especially if you’re driving. Have you left your honest reviews and ratings in Apple Podcasts, like our anonymous friend earlier? We love it when you do.

Your Money, Your Wealth is presented by Pure Financial Advisors. Making the most of your money and your wealth in retirement requires more than just a spitball: the experienced professionals on Joe and Big Al’s team at Pure will meet with you in person or online to take a deep dive – they’ll review your Financial Blueprint and help you devise a flexible and secure road map for your retirement future. Just click the Financial Assessment link in the episode description, click Get an Assessment at YourMoneyYour Wealth.com, or call 888-994-6257. Tell ‘em you heard about it on the podcast.

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.

_______

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