Show Notes

• 00:00 – Intro
• 01:09 – Roth 401(k) Contributions and Distributions, Age Plus 20 Rule, and Social Security Claiming Strategy (Ralph and Marie, Wilmington, DE)
• 12:35 – Download the Social Security Handbook, Download the Medicare Check-Up Guide, Watch Medicare Check-Up: How to Keep Your Retirement Plan Off Life Support on YMYW TV, Register for the Medicare Basics webinar Wed. Sept 25, 12P/3E
• 13:37 – Are Listeners Ignoring Government Pension Offset and Windfall Elimination Provision for Social Security? (Shawn)
• 17:30 – Can We Retire in 5 Years Or Do We Need to Work After Age 60? (Jake & Amy, Iowa)
• 26.36 – Financial Blueprint – calculate your complementary retirement analysis
• 27:45 – Should I Stop Roth Contributions and Do Roth Conversions instead? (Edwin)
• 31:24 – American Opportunity Tax Credit for College Age Son (Jeff, ND)
• 35:58 – Outro

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Transcription

Intro

Andi: What is the age plus 20 rule for retirement savings, and what do Joe and Big Al think about it? That’s today on Your Money, Your Wealth® podcast number 496, as the fellas spitball on Roth 401(k) contributions and distributions, and a Social Security claiming strategy, for Ralph and Marie in Wilmington, Delaware. Shawn wonders if YMYW listeners are ignoring the WEP and GPO when it comes to Social Security, that is, the Windfall Elimination Provision and the Government Pension Offset. Plus, can Jake and Amy in Iowa retire in 5 years, or do they need to work beyond age 60? Should Edwin stop making Roth contributions and start doing Roth conversions instead? And finally, how can Jeff in North Dakota’s son qualify for the American Opportunity Tax Credit? To get your money questions answered or for a Retirement Spitball Analysis of your own, click the Ask Joe and Big Al link in the episode description and check out my new video that walks you through how to get a good spitball. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Roth 401(k) Contributions and Distributions, Age Plus 20 Rule, and Social Security Claiming Strategy (Ralph and Marie, Wilmington, DE)

Joe: All right. “Hey, Joe, Big Al, Andi, hope you’re all well. Ralph and Marie here from Willing- Wilmington, Delaware.”  All right. “Love the show. Look forward to the podcast drop every Tuesday. I usually listen or catch up on older episodes when working out in the evening. You’re still my favorite financial podcast. I’ve been listening regularly since episode 320.”  It’s two and a half years, Big Al.”

Al: That’s pretty good.

Joe: According to Spotify, I’ve worked through some of the back episodes and am amused by Joe’s fixation on all Roth all the time.”

Al: It amuses me too.

Joe: Yeah, because I’m hooked. An addict on Roth.  “It’s hard to tell which super old back episodes are 100% relevant today. Not that they’re not entertaining, but with tax law, SECURE Act changes, but I’ll continue working through the catalog as time permits.”

Andi: He’s committed to this show. Just like you Joe.

Joe: Very committed. I’m super committed today. All right. So “Ralph is a 50 yo IT propeller head and he drives a 2007 Ford  7 lug  AKA heavy half.”  What’s a 7 lug? Or AKA heavy half?

Andi: You know when I look it up, it actually refers to the hubcaps, 7 lugs in the hubcap. So I assume that that means it’s a big vehicle.

Al: I would think.

Joe: A little 7 lug. It’s heavy.  She’s a half ton.

Al: And he likes beer and something stronger.

Joe: Yeah.  What kind of, what kind of beer does he like, Andi?

Andi: Narragansett and Yuengling lager.

Joe: Narragansett and a Yuengling lager.

Andi: Close enough.

Joe: Stronger. Cuba Libre. I can say that. A little rum runner. Or a little gin and tonic. “Marie is a 54-year-old teacher and drives an Infiniti Q50. She barely drinks. But when she does, it’s Bumba.”

Al: Bumbu.

Andi: I looked it up. That is also rum. Bumbu.

Joe; Oh, little boom boo little- yes. Little side rocks of Bumbu.  “Happily married 32 years, two children launched. We’re now empty nesters. We have a 7-year-old rescue dog that we learned is a plot hound mix. He’s a great dog, but when his nose is active, his ears shut off. Never get a hunting dog as a pet.  We later learned that these things are used to treat- used to tree bears.”

Andi: Chase bears up into trees.

Al: I guess.

Joe: Okay. “We right-sized that last year. Don’t want to insult the new neighbors by saying downsized.” Okay, so the house paid off. “This has permitted us to begin maxing out the Roths, workplace plans and catch-up contributions. For 2024 that works out to $77,000 a year of estimated retirement savings right between the two of us. That’s best case scenario. Marie doesn’t have as much retirement assets because we’re blessed to have her home with the kids when they were younger. Doesn’t have a match and she’s got that nice teacher’s pension.  Which I would swag present value of around $650,000. I’m not sure y’all need all of this for my questions, but here it goes.” Big Al said no, we don’t need all that information.

Al: Let me summarize, because we got about a hundred numbers.  So Ralph and Marie have about $300,000 in qualified retirement accounts, about $125,000 in Roth IRAs, and about $75,000 outside of retirement in a non-qualified. And when you look at Joe, their fixed income between pension and Social Security, it’s about $100,000.

Joe: Okay, fixed income, $100,000, total.

Al: Yeah, $500,000.

Joe: Okay, very good. Yep.  Okay, “Number one. Our company recently froze its 401(k) plan due to-“

Al: – divestiture.

Joe: “-divestiture.” I think he’s putting in these words just to mess with me.

Al: I think so.

Joe: I swear.

Andi: Good day to do it too.

Joe: Yes, it’s a perfect day to do it.

Al: Sure.

Joe: “This gave me another opportunity to roll over my IRAs. This has happened a couple of times. Fidelity is sending 3 direct rollover checks. They don’t do electronic rollovers with Schwab. Number one, pre-tax $62 to be deposited in my IRA. Roth non-taxable, $11,000 to be deposited in my Roth IRA. Roth taxable, $250. Growth that has not met the 5-year rule?”  What’s the question here?

Al: What do I do with it?

Joe: “What do I do with a small Roth taxable check? Cash it? Deposit it into the brokerage account? Deposit it in my Roth? How is it managed on my tax return?”  So, what, he has an after-tax dollars of $250 bucks?

Al: Yeah, so I would roll that into your IRA and then you’re allowed to do- you can’t roll into the Roth, but you can roll into the regular IRA.

Joe: Why does it say Roth taxable?

Al: Well, because it’s in the, it’s, it’s, it’s in the Roth, it’s the growth on the Roth, over and above the contributions.

Joe: Oh, I see. But it’s a rollover.

Al: Yeah, well, that’s, that’s right, you just put that in the IRA account.

Joe: The Roth, no, he’s got $11,250 into the Roth. In his 401(k) plan, he’s getting, I don’t know why they would send him two checks. Because if it’s in a Roth 401(k), you would take the whole Roth 401(k) into the Roth IRA.

Al: Well, you can do that. You just pay $250 tax on the gain.

Joe: Why would you do, no, it’s a Roth 401(k) plan.

Al: Because it’s, it’s, it’s not your, it’s not a contribution.

Joe: I have a Roth 401(k).  And I have $12,000 in my Roth 401(k). And they say we’re canceling the plan. You’re telling me I can’t take the $11,000 that’s in my Roth 401(k) and roll it into a Roth IRA?

Al: Well, a lot of these plans, Joe, had the, the contributions you could roll. But they didn’t necessarily have a separate designated part. So any growth in that side became taxable. I think that’s what this is saying.

Joe: ____ agree on an after-tax contribution.  So the after-tax contribution is never going to be double taxed. So you can get that out, but then the growth on the after-tax would have to come out, you pay tax on that, or you can put that into an IRA.

Al: All right. So maybe we’re finally meeting of the minds. I think that’s, I think that’s what this is.

Joe: If it’s a Roth, move 100% into the Roth. If it’s after-tax dollars, that is not a designated Roth account, then do what he’s doing.

Al: I agree with you there.

Joe: All right.

Al: Okay.  On the other hand, $250, I don’t really care.

Joe: Yeah, I don’t care either.  “We seem to have a good tax diversification just by the way things are, have worked out over the years. Our focus has been catching up, so we have not done a lot in the way of conversions. RMDs seemed way too off- way too long off, and we’re probably drained off the non-retirement accounts to fill up our lower brackets of retirement anyway. I’ve read a few interesting articles about splitting your 401(k) contributions between Roth and regular, namely Scott Cederburg and David Brown-” Never heard of Scott or David, but. “- they got the age plus 20 rule.” Ever heard of that, Big Al?

Al: No. No, never heard of it.

Joe: Me neither.  “So, if you are 54, allocate your 401(k) contributions as 74% in regular, 26% in Roth, and adjust each year. The basic idea is that you will get further along in your career- you need more tax savings. As you grow further along in your career. You need more tax savings rather than gaming it out on a spreadsheet. I like the rule of thumb. I’m guessing Joe’s answer will be all Roth, being that we’re on the closer end of our working years than the beginning. What do you guys think?” I think that is just really bad.

Al: I don’t know who would have come up with that, Joe.

Joe: It’s-

Andi: Scott and David.

Al: I know, but…

Joe: Age plus 20 rule.  You have to look at your tax bracket to determine what is going to make the most sense. I like what he’s saying here. And I guess I’m, I’m like all in, I don’t care what tax bracket that you’re in. This is what he thinks. I say, he’s like, I don’t care what tax bracket that you’re in. You’re not going to care about taxes. Just let it ride. Yeah. I mean, that’s in some cases that’s true.  I guess I could come up with a corny rule and just say 100% Roth all the time, at any time.

Al: Let’s see, they’re in their 50s, they, I mean, so they have $300,000 in a qualified account.

Joe: How much do they make?

Al: I’m not sure we, oh yeah, $130,000.

Joe: $130,000. Oh, that’s his. Hers is $95,000. Okay, so over $200,000. And then they’re fully funding the 401(k) plan, so I’m guessing taxable income is going to be about $130,000. They’re in the 22% tax bracket. 100% Roth. There you go.

Al: Yeah. I, especially these next two years, Joe, when the tax rates are lower.

Joe: 22%. 100% Roth. If you were in the 24%, you’re probably going to be in a lower tax bracket in retirement. So you probably go pre-tax. What is going to determine the amount of money, especially in a situation like this, you’re, you might have, the wife is going to have a teacher’s pension that you already said is going to be worth about $650,000. You have another $500,000 saved. You have some decent tax diversification here. I wouldn’t follow some funny rule. You could spreadsheet this out very easily just by looking at what you think approximately is your income. It’s $100,000 fixed income in retirement potentially. Okay. What tax bracket is that going to be in? With a married couple, you’re in probably, what, the 12% or 15%?

Al: Yeah, and, right, and could, could inch up to the future 25%, yeah, so.

Joe: Does it make sense to pay 22% versus 25%?

Al: And here’s the thing, at 54, maybe they work another 10 years, and so now they’re, they’re supercharging their savings, so this actually could get to a fairly large RMD. So, yeah, why not, especially while it’s a 22% bracket, go Roth right now.

Joe: Alright, we got a bonus question here.  “If Marie retires-“  So we get the bonus question. It’s like it’s a gift. We got a bonus question.

Al: Yes.

Joe: Thank you.

Andi: You get to work more.

Joe: Yes.  “If Marie retires before me, starts working part time and draws Social Security before FRA, is only her part time income subject to the retirement earnings test? Or mine as well?  What about her pension income?  Assume a joint return. Appreciate all your thoughts on all this. I know it’s not advice. Have a great labor day weekend.” I did have a wonderful labor day weekend. Thank you so much for asking.

Al: And me too.

Joe: And yes, no, it’s just on her income.  It’s not on a joint return, it’s not on adjusted gross income. The earnings test for Social Security would be based on her earned income.

Al: Yeah, her, and not her pension income, her earned income. So any income that she has, that she’s paying Social Security or self-employment taxes.

Download the Social Security Handbook, Download the Medicare Check-Up Guide, Watch Medicare Check-Up: How to Keep Your Retirement Plan Off Life Support, Register for the Medicare Basics webinar Wed. Sept 25, 12P/3E

Andi: Deciding when and how to take your Social Security benefits are among the most important decisions you’ll make about your retirement, and Medicare open enrollment is right around the corner. We’ve got a slew of free resources so you can arm yourself with the information you need to make the most of both of these critical retirement programs. Check the links in the episode description to download our comprehensive Social Security Handbook and Medicare Checkup Guide, watch the YMYW TV episode Medicare Check-Up, to learn how to keep your retirement plan off life support, and register to join me tomorrow at noon Pacific, 3pm Eastern for a Medicare Basics Webinar. Medicare specialists Robert Dow and Lisa Velasco from The Dow Agency will answer your Medicare questions live. Do you know how to make the best choices for your needs? Learn what Medicare is and who can get it, the types of Medicare coverage and costs, where you can enroll in Medicare, and much more. Download the guides, watch YMYW TV, and register for tomorrow’s webinar – all in the links are in the episode description.

Are Listeners Ignoring Government Pension Offset and Windfall Elimination Provision for Social Security? (Shawn)

Joe: Got Shawn. He writes in. He goes, “Hey, found the YMYW podcast last week. I’ve been listening to many episodes where folks have government pensions, such as school teachers, and also say that they are going to get Social Security at what sounds like the normal level. Are they ignoring the government pension offset? As well as the windfall elimination provision, which seems like to almost eliminate my wife’s Social Security. Her pension is $75,000. My Social Security will be about $38,000 at full retirement age, to $52,000 at age 70. Her spouse’s Social Security would be half mine, but the GPO and WEP is more like $6000.” Well, sure, it really depends on the pension. And if it goes into the windfall elimination provision, or the, the government offset.  Some pensions, well, you have a pension and you would have full Social Security because you’re putting into both programs. So it sounds like your wife is a school teacher. Is if I don’t know where Shawn lives, but in California, it’s CalSTRS. So they don’t put money into Social Security anymore. Everything goes into the CalSTRS program. So she’s going to receive a pension. If she qualifies for those benefits, for Social Security benefits. So she has 40 quarters or 10 years, she would, they would calculate what that benefit is, but they claw back some of those dollars for lack of a better term. They call it the windfall elimination provision, where because she didn’t put into the Social Security system for a longer period of time, she’s not going to receive that full benefit. And it’s a calculation that you can do pretty simply if you have your Social Security statement and you just kind of plug it into their computer or another software program to kind of find out exactly what your benefit is. Also on the spousal benefit, so he has $50,000 or $40,000 roughly at his full retirement age. A normal spousal benefit, if she wanted to claim the spousal benefit, would be half that, so $20,000. However, she contributed into another program where she wasn’t putting into Social Security, so they’re going to offset that benefit as well. So it really depends on the program that the person’s in. So some people will get their full Social Security benefit and a pension. Some will have the offset in the windfall.

Al: Is, Joe, is it a good way to say it? if you’re paying into Social Security and pension, right? Maybe you get both. But in many cases, you don’t pay into Social Security when you have these other government pensions. That’s why you just get the one benefit.

Joe: In most cases, you’re not.

Al: Yeah.

Joe: Right. But if, like civil service, you’re going to get both.

Al: Get both. Okay.

Joe: So it depends.

Can We Retire in 5 Years Or Do We Need to Work After Age 60? (Jake & Amy, Iowa)

Joe: We got Jake and Amy from Iowa. “Hello gang or YMW- YMYW gang? I’m 50, wife’s 49. We live in the middle of Iowa. We’ve been listening to the show for about 3 years.”  Very cool. “My drink of choice is a pina colada or coconut rum with diet coke, and we enjoy Margaritas, plenty of salt. She drives a big German SUV and I drive small crossover SUV. It’s the best value when it’s time to periodically replace the daily driver. We have 250+ plus pound dogs-”

Andi: That’s a lot of dog.

Joe: That’s a big ass dog. “- and I’ve lost count how many cats that my wife has brought home. I probably need to make a spreadsheet for that.  We’re planning to sell our small business sometime in the next 4 to 5 years or 4 to 6 years. And we’ll completely fund our spending until age 60 with the proceeds of that sale, our taxable account and any part time work that we need to choose to do.” All right. “Starting at age 60, we’ll have non-COLA joint life pensions of $20,000 a year, an existing TIPS ladder that will fund $55,000 a year in today’s dollars until age 70.”  A TIPS ladder? He already bought the TIPS?

Al: I think so.

Joe: All right. “My wife is planning on starting her Social Security at $11,000 a year at 62. I’m going to claim mine at 70. If she starts her spousal benefit, the total Social Security payment should be about $60,000 a year. After removing the portion of our assets that we have mentally dedicated to getting us from age 55 to age 70, our remaining risk portfolio is $1,400,000, $670,000 in a Roth, and $650,000 in tax-deferred 401(k)s and $150,000 in the HSA. We plan to add $63,000 a year for 4 more years, $30,000 in my Roth, $9000 match, $8000 in the HSA, and $16,000 to our Roth IRAs, and then let that grow for another 5 to 6 years with no further contributions. We would like to start withdrawing about $100,000 per year from the risk portfolio at age 60, reducing the withdrawals to $90,000 once we’re both on Medicare and then reducing them to $60,000 once we are in our late or mid to late 70s and we’re doing fewer big trips. We have long term care funded through other accounts outside our risk portfolio.  Okay, are we looking like we’ll be able to spend our days traveling and annoying our children and hopefully future grandchildren in 5 years? Or do you think we need a few more years of contributions  or part time work after 60 to make this goal more likely? Thanks in advance for the barstool banter.”

Andi: We gotta get you guys some barstools in there. So it actually looks like that. But then I think you’d be tempted to drink while you’re working. And that might be a problem.

Al: Yeah, we might. Then we’d have to bring our drinks in.

Andi: Convert it all! Every day!

Joe: That would totally blow it up.

Al: It probably would.

Joe: Yeah.  Okay. I don’t understand what Jake and Amy are doing here with-

Al: I had the- I’ve looked at it.

Joe: They got this money doing this and this money doing that. We got this TIPS ladder. Then they got this risk portfolio.

Al: So, so here, so first of all, we don’t like to do planning in a bubble and that’s kind of how this is. Because you’ve taken a bunch of your assets and income off the table. So it’s hard to see the whole picture. However, Joe, if we just look at what he just said, which is he’s got $1,400,000, he’s going to be adding $63,000 for another 4 years. I just did that at 6%. It works out to $2,000,000. So that’s about what they’ll have when they retire.  And then he wants to take out $100,000 a year, for- until he gets to 60 and then $90,000 in Medicare. So 5 years, maybe at $100,000, 5 years at $90,000. So this is kind of a, it’s sort of a complex calculation. I just went simple. Let me show you what I did.

Joe: You’re missing that he sold a business. That’s going to cover his expenses-

Al: I know.

Joe: – but we don’t know what the cost or what he sold the business for.

Al: He’s telling us to keep that off the table because he’s going to have that used up. So I’m just going with that assumption. But if he’s got $10,000,000. If he takes out $100,000 a year for 10 years, then that’s $1,000,000 bucks, right? But if the average balance, again, this is just a quick back of the envelope, if the average account balance is $1,500,000 over that 10-year period and he’s earning 6%, that’s another $900,000 of income. So I think he ends up, you know, $1,500,000, $1,900,000, whatever, at the time that he wants to start pulling out less.  So I think it does work based upon what he said. But to me, there’s, some pretty big caveats. And that is when you’re taking out $100,000, at age 55 or yeah, let’s say at age 55, out of $2,000,000, that’s a 5% distribution rate. Right. And so that here’s the danger that is sequence of returns. If the market doesn’t cooperate and you’re taking out money while the market tanks, it might be very hard to recover. So for that reason, I might think about either working a little bit longer or having a part time job just as a cushion.

Joe: Yeah. It’d be helpful to say, here’s my business. We’re selling that. Well, here’s what we’re netting and here’s the total value of all of our assets. We want to spend X amount of dollars a year and here’s my fixed income. But he’s already started to do this financial plan of, hey, the seller of the business is going to do this. I bought these TIPS and that’s going to fund $50,000, $55,000 a year in today’s dollars, until age 70, and then he’s got $20,000 a year in pension, so that’s going to be $75,000. And then she’s going to take her Social Security at 62, which is $11,000, but then he’s going to wait until age 70. So you have all these different moving parts within your overall strategy. So, again, I think you’ve done a good job. You’ve saved enough assets and you’re going to continue to save another $60,000 some odd a year, including the match over the next 4 to 6 years. And if the market cooperates, I think you’re going to have a pretty good size nest egg. But for us to give any type of spitball, I think we need to see a bigger picture to say, well, what are these holes? What are the gaps within the certain years that you have to fulfill from your liquid assets? And you’re already kind of doing that, but I don’t know why you made those decisions. I’m not saying they’re bad. I’m just curious on okay, what was the thought process of going through buying the TIPS and then doing this and that and kind of segregating your assets of how you’re doing it. Hey, these assets are going to cover this years, and it’s all my taxable assets versus my tax-deferred assets. We want to continue to let grow and then we have some Roth assets and we’re saving $60,000. But I don’t know- If you look at everything in aggregate, you’ll probably make a little bit different decisions. Because if you’re just going to live off of a small pension and the TIPS for the first 5 years of retirement, and then why would you be looking at conversions depending on what tax bracket that you’re in? Or does that even make sense? What tax bracket are you going to look at? So it’s if you’re selecting investments or putting these investments in like a category versus making sure that you’re looking at everything as an aggregate. But yeah, I think Jake and Amy, they’ve done a great job and I think they’re pretty close. But I think I just look at planning maybe a little bit different than how he’s kind of forecasting this thing out.

Al: Yeah, I think we always say that we prefer to look at all assets, all available assets, all assumptions, and then take a look and see if this works or not. But anyway, that’s all I’ll say is, in a bubble, I’m just taking his assumptions in a bubble.  I think it probably works, but there’s some risks when you’re drawing that much of your portfolio down. If the market tanks at the same time, it might be hard to recover. So just be aware of that.

Joe: Sure. But I think he’s thinking he’s got a guaranteed TIP ladder plus his pension that might cover a lot of it.

Al: Well, I know, but what he’s saying is he wants the, once he uses up the business money, the sale of the business, at least that’s what I got out of it, now he needs to draw $100,000 out of his portfolio. So anyway, it’s just, it’s, a fair amount to pull out at a younger age. So just be aware of that.

Joe: All right.  There you have it. Thanks for the question.

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Should I Stop Roth Contributions and Do Roth Conversions instead? (Edwin)

We got Edwin. I got the Aaron voice. He’s my new voice coach.

Al: Yeah. I don’t know if I like it or not.

Joe: “Hello, Andi.  I have a few questions for the team.”  Okay. “Should I stop contributing-? Or should I stop Roth contributions at $24,000 a year instead of using $24,000 to do Roth conversions while I’m still working? Wifey works part time after being retired for 3 years helping out her old boss. And I work full time and expect to retire at 60. Here’s the personal stuff. Wifey drives a 2015 Subaru BRZ. I drive a 29-“ are these guys from Seattle? “I drive a Subaru WRX.”  When’s the last time you’ve been in a Subaru, Al?

Al: It’s been maybe about a year. I have a friend that lives in- he used to live there.

Joe: “She loves a sangria, and I enjoy Diet Coke. We have a beautiful elderly dog named Thor, who is a Pug Pekingese mix. We live in sunny California, and we’re both 54. Both children have launched, so we’re on our own. Financial stuff, net worth $4,300,000 with $1,300,000 of this in a fully paid house, $1,400,000 in tax-deferred savings, $0,300,000 in tax-free savings, $0,300,000 in cash, $1,000,000 in a brokerage account. We bring in anywhere from $200,000 to $300,000 per year depending on if we sell stocks.  I do this as I have earned options from prior jobs. So when I sell I move them to an S&P ETF. Random, reading a book called Die With Zero, so really trying to embrace spending more and saving less. My sense is that we’ve done enough, so okay to spend what we make.” Have you ever read that book? Heard of it?

Al: I’ve heard of it. I have not read it.

Joe: Mixed reviews.

Al: Have you read it?

Joe: I’ve not read it. I’ve seen some people love it. Some people like yeah, like spend it all, just die with zero.

Al: Yeah. Well, if you have to know when you’re gonna die, that’s the tricky part.

Joe:  That’s some good math. “I also expect two pensions that will total around $80,000 per year that are not inflated, adjusted. One will kick in when I leave my current job and the other at 65. Thanks.” So he wants to know what does he have and he doesn’t have much liquid assets most of it- Well, he’s got $1,000,000 in a brokerage.

Al: Yeah, he’s got actually quite a bit.

Joe: “So should I stop Roth contributions of $24,000 a year. Instead, use the $24,000 to do conversions?” No, you do both.

Al: Yeah, exactly. You do both. You might have heard us on a podcast talk about if you only have enough to do one, do conversions. Because $24,000, right, will allow you to pay the tax on a conversion.

Joe: A $100,000 conversion.

Al: Yeah, or whatever your tax rate is. $75,000, whatever it may be. But if you got the money and you got the money, you’ve got $300,000 in cash, $1,000,000 in brokerage, $300,000 in tax-free savings. Yeah, you do both. Of course, you do both. And of course, it depends upon your tax bracket to figure out how much you should be converting. But in terms of contributions, yeah, keep that up.

Joe: So it sounds like his wife retired. He’s still working. He’s going to work for another 4 years, 6 years, I think. So yeah, you continue to fully fund the Roth 401(k), Roth IRAs, if you can, and then convert to the top of the bracket for sure, because you have plenty of liquid cash and capital. All right. Good question, Edwin.

American Opportunity Tax Credit for College Age Son (Jeff, ND)

Joe: We got Jeff from North Dakota, ND.  When’s the last time you’ve been in North Dakota, Big Al?

Al: Not been there in quite some time. It’s actually probably never come to think of it.

Andi: Probably never.

Joe: That’s the whole-

Al: That’s it. Or at least I don’t recall.

Joe: Yeah. Dominic Knauf is from North Dakota. All right. let’s get into it. “Joe and Al, you can help with this college related question. Our 19-year-old son will be attending university in the Fall. We have purposely chosen not to list him as a dependent on our tax return for 2024. He, we will be gifting him $36,000 this year to attend the university, $18,000 from my wife, $18,000 from me.  He’ll be using these funds to pay for the university. He would like to file his own taxes this year and qualify for the American Opportunity Credit. A portion of this is refundable, and we think he’d be eligible.  In discussions with our CPA, we were told if he has more than 50% of his living needs provided by us, i.e., food, shelter, clothing, tuition, etc., he would not be eligible for the credit. However, after reading the publication 970, addressing the AOC-“he’s reading the publication-

Al: Yeah, right.

Joe: He really wants this credit. “-I question if this is correct.  He will not be our dependent for tax purposes.  Important considerations. A. We will not be declaring him as a dependent on our taxes. B. We have gifted money to him to pay for the university. C. He will use these funds to pay for his college costs. We will not pay the bills directly. D. The university will provide him with a receipt for the payments he makes for his education. E.  He will file his taxes at the end of the year independent of us. Publication 970 provides an example of grandparents gifting a child who then uses the money to pay for school, and the child was able to claim the credit. The emphasis is on the documentation appears to be whether he is claimed as a dependent. Based on your reading of the publication, do you believe he would be eligible? Thanks. Jeff.”  He says university. It sounds like he’s from, like, Britain.

Andi: UK or something?

Joe: Yeah. UK.

Al: Yeah. Yeah. Yeah. It very well could be.

Joe; Instead of like college costs?

Al: So the question, Joe, is whether parent claims the credit or does the kid claim the credit? And it’s, it has to do with who’s the dependent, right? Is the dependent claiming on the parent’s return or the kid’s return?  In some ways, it’s kind of almost an irrelevant thing these days because there’s no dependency deduction. Nevertheless, all those rules still apply with regards to who claims the credit. And typically, if you’re under 18, you’re a dependent of your parents. If you’re between 19 and 24. You are dependent of your parents if you’re a full-time student. But there’s exceptions, and one of the exceptions is, you have to qualify for all of them, but one of the exception is the student has to pay more than 50% of their support. So I think I agree with the accountant. But the question is, when you make a gift to a child, it’s their money, so it’s not from their parents, at least in form. Remember that, Joe? Form over substance?

Joe: I tried to forget.

Al: At least in substance, I don’t think it really works because it still comes from the parent. I think you could probably have 10 accountants all with different opinions. Me personally, I’d probably take it, but it’s not ironclad because the money came from the parents. It was gifted, so now it’s the kid’s money, but it originally came from the parents. When you look at the-

Joe: The tracing rules?

Al: Yeah. Well, yeah, you could call it that. Good. Very good. when you look at the example, it’s grandparents and grandparents typically don’t claim a grandchild as a dependent. So the rules are a little bit different than a parent. So I get why the accountant said you can’t do it, but I think, you could certainly make an argument. Would it be, would it pass under audit?  Maybe, maybe not. Not a great answer, but that’s the reality of taxes. Sometimes it’s not always a clear answer.

Joe: How much is the credit?

Al: $2500. So-

Joe: There you go. Alright.

Al: Yeah. I’d probably take it.

Joe: Would I take? Yeah, I’d probably take it.

Al: Yeah. We’re not giving advice. We’re just saying would you take it? Yeah, probably.

Joe: We’ll see you guys next week. Show’s called Your Money, Your Wealth®.

Outro

Andi: If you enjoy YMYW, tell your friends and help us reach more listeners like you. And don’t forget to leave your honest reviews, comments, and ratings for Your Money, Your Wealth in Apple Podcasts, YouTube, Spotify, and all the other apps that let you do that.

Your Money, Your Wealth is presented by Pure Financial Advisors, 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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