Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]


Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show, and moderator for the firm's digital events. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm [...]

Published On
October 18, 2022

Are there any holes in a 5 year plan to retire from the Air Force, buy a house and a plane, and become a commercial pilot? Can you claim an unpaid loan to a start-up as a tax loss, do a Roth conversion, and pay no tax? Are Roth Conversions a good idea in a low-earnings year? Does it matter if you convert to Roth before or after changing custodians? What retirement savings options do independent contractors have besides the Solo 401(k)? Does it make sense to cash out a 529 college savings plan that’s losing money? Plus, Joe and Big Al spitball a real estate strategy, and they discuss a state retirement account held at an insurance company. 

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Show Notes

    • (01:00) 5-Year Plan on Track to Retire From the Air Force & Become a Commercial Pilot? (Mike, Germany)
    • (08:15) Claim an Unpaid Loan as a Tax Loss, Do a Roth Conversion, Pay No Tax? (Cynthia, TN)
    • (15:18) Converting to Roth IRA in a Low-Earnings Year: How’s My Strategy? (Christine, Seattle)
    • (23:04) Independent Contractor Retirement Savings Options Besides Solo 401(k)? (Casi, San Angelo, TX)
    • (25:52) Roth Conversion Then Change Custodian or Vice Versa? (Rhonda)
    • (29:27) Real Estate: Taxes, Depreciation, and the Primary Residence Exclusion (Kenneth, Chicago)
    • (36:15) Should I Cash Out 529 Plan for College Savings That’s Losing Money? (Todd, La Mesa)
    • (38:58) My State Retirement is Held at an Insurance Company. What Can I Do?

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Today on Your Money, Your Wealth®, Joe and Big Al are celebrating YMYW podcast episode 400 by doing what they always do – answering your money questions. Are there any holes in a 5-year plan to retire from the Air Force, buy a house and a plane, and become a commercial pilot? Can you claim an unpaid loan to a start-up as a tax loss, do a Roth conversion, and pay no tax? Are Roth Conversions a good idea in a low-earnings year? Does it matter if you convert to Roth before or after changing custodians? What retirement savings options do independent contractors have besides the Solo 401(k)? Does it make sense to cash out a 529 college savings plan that’s losing money? Plus, Joe and Big Al spitball a real estate strategy, and they discuss a state retirement account held at an insurance company. Visit YourMoneyYourWealth.com and click Ask Joe & Al On Air to get your money questions answered. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.

5-Year Plan on Track to Retire From the Air Force and Become a Commercial Pilot? (Mike, Germany)

Joe: OK, we got Mike writes in from Germany. ”Hey, Big Al, Joe, Andi, on your show a couple of months ago, and I’m burning through older episodes quickly and look forward to every new episode on Tuesday. I drive a 2013 Tacoma and my wife drives a 2017 Subaru Legacy, both paid off. My favorite drink is an Old Fashioned. She’s falling in love with Hefeweizen beer recently.” Old Fashioneds.

Andi: I was just thinking about your drink machine.

Joe: Yeah, the drink machine. That thing is a-

Al: That’s not happening anymore right?

Joe: The drink machine just got- “My wife and I are both in the Air Force, orthopedics, and we’re currently stationed near Ramstein-“

Al: -stein probably-

Joe: “- Ramstein Air Base in Germany. “My wife will retire in two years. I’ll retire in a year after her. We will both be 40 years old when we hang up the uniform.” Oh, wow. 40 years old.

Al: Very good.

Joe: All right. Thank you for your service. “Our plan is to head to Denver and grow some roots until we’re on the other side of the dirt or arthritis makes us move somewhere warmer. We currently have $250,000 in Roth TSP and Roth IRAs, $360,000 in cash, $50,000 in 529 plans for our two kids, 14 and 11, $20,000 in I Bonds. Our Air Force pensions will be right around $10,000 per month. I understand we have way too much in liquid cash right now, but our plan is to take two years off after the Air Force so I can finish up flight training and become a commercial pilot. And my wife will probably become a full-time hippie and stink up the basement with her-“

Andi: -glaucoma medicine.

Joe: “-glaucoma medicine.”

Andi: I love that. And it’s in quotes, of course.

Al: That’s what they say, huh?

Joe: Yes.

Al: I wonder what really happens down there.

Joe: “We currently invest 22% of our income into TSP and IRA, both Roth. But we’ll stop contributing to the TSP when we retire, and we’ll continue to max out the IRAs each year moving forward. We will buy a house when we move to Colorado, and we’ll use some of the cash for the down payment and buy an airplane, for building flight hours or buzzing around the neighbors’ house.” And continue- Mike, this is pretty long here. Should go into journalism. “My estimated putting $150,000 down on a house, paying $3500 a month for the mortgage payment, $1000 a month for the plane. I thought about just paying the plane off immediately, but will most likely just make payments until I start flying commercially and bringing in our income so that we do not deflate the liquid accounts too quickly. I know we have a big percentage of our net worth in liquid cash. But I’m planning on that money being there in case we need it for anything unexpected that our pensions do not cover. And I’d love to be able- for my wife to be able to chill for a couple of years and go back to work only when she wants to. Although my GI bill will cover most of the flight training costs, I’m sure there will be additional expenses, which is why I haven’t moved the money from the high-yield savings account during the two- or 3-year bridge period where we’re not working. I feel comfortable earning less return on the liquid cash due to the recent security and freedom it gives us. I decided to not put the money into a brokerage account due to us needing it within the next two to 3 years. And I’m a moron when it comes to reading and timing the market, and I’m afraid of making a bad move right now, so close to retiring and buying a house and a plane. My questions for you are-“ man, that was, like, a lot of stuff there to say, hey, ‘I got some cash- I want to buy- should I-?

Al: I might need it in two or 3 years- What do you think?’

Joe: Yeah, no, you’re buying a plane and- you’re good. Yeah, he’s trying to like- I know, I got a lot of money in cash and you’re going to say something about it. Yeah. Good for you.

Al: Right. So I’ll tell you what if you need the cash within-

Joe: – 5 years-

Al: 5 years. I was going to say 3 to 5, but 5 years is safer- then don’t invest it. Because you don’t know what the market’s going to do in between now and then.

Joe: “Are there are obvious holes in our 5-year plan? Is anything you think I overlooked or that is stupid?” No, Mike, nothing stupid or overlooked. “If you were in my position, would you keep all $360,000 in a high-yield savings account, or would you put it towards maxing out our TSP accounts while we’re still active duty or possibly putting some in a brokerage account? I do not think we need all the money in the account over the next couple of years, but I am having a hard time touching or moving it. We worked hard to build it up, and I’m worried about putting it in a fund that ends up losing money in the short term.” You can tell he’s really been thinking about this. It’s two pages of the same question.

Al: But he’s looking at possible rates of return, particularly with the market down, and he just wants to get some better return.

Joe: Keep it in cash. You’re in a high-yield savings account, the market is volatile as ever. You want to buy a plane and a house. You did your service in the Air Force. You want to be a commercial pilot, you got to get a plane, I guess, to fly people around. So that’s an expense. You need that money for that. You need a roof over your head.

Al: Yeah. And you got $10,000 of income per month, so you’re good.

Joe: Wife is doing a little 420 in the basement.

Andi: Hey, it’s glaucoma medicine now.

Joe: Is that what it’s called?

Andi: That’s what she means. Yes.

Al: Yeah, that’s what it’s called.

Joe: Just trying to be hip.

Al: Yeah, yeah. You showed it.

Joe: Pretty cool, huh?

Al: It was very clever.

Joe: I was just so good. “Sorry for the long email, but at least I didn’t ask anything about the backdoor Roth conversion. Love the show. It’s awesome to have found a financial podcast where the hosts show their real personalities. And that don’t put me to sleep, especially since I’m listening to the episode on my drive to work. Thanks so much for the entertainment, and the spitball on our situation would be greatly appreciated. Mikey V. Feel free to use my name if it gets read on the podcast so I can feel important. And when I force my family to listen to it”

Andi: I’m surprised Mike is the first person to actually acknowledge that that’s what they do, is force their family to listen to YMYW.

Joe: Yes. Well, a couple of things here. Congratulations. They’ve done a really good job. He’s 40 years old. They’re going to retire. He’s going to have a fat pension. You know what I mean?

Al: And then he’s going to go back to work and make some more money.

Joe: Yeah, he’s following his dream. But $1,000 a month on a plane?

Al: That seems cheap.

Joe: Yeah. Right?

Al: What does the plane cost?

Joe: Who knows? I’m clueless on planes.

Al: Yeah. I think it’s more than a car.

Joe: I would think so.

Al: I sort of questioned that, too. It seems like you’d have to have a down payment and a much higher monthly payment, but-

Joe: He’s got $350,000.

Al: Or maybe it’s just like leasing it’s, not really buying it. I don’t know. I have no idea.

Joe: Well, Mike, once you get the plane, why don’t you come down to San Diego, we’ll have a Hefeweizen and an Old Fashioned with my drink machine.

Claim an Unpaid Loan as a Tax Loss, Do a Roth Conversion, Pay No Tax? (Cynthia, TN)

All right. Cynthia writes in from Tennessee, Big Al. She goes “Hey, Andi” Or “Andre-”

Andi: Yeah, that’s a first.

Joe: Well, “Andre, Joe and Al. In June of 2021, I made a business loan of $300,000 to a Connecticut LLC that is a startup company in the medical equipment business. The money was used to buy medical equipment for the business. It is clearly A LOAN.” all capitals, “-and I have no equity interest. I have no personal relationship involved with the transaction, nor this company.”

Al: Okay. Pretty clear.

Joe: We are not attorneys. We don’t care.

Al: We might. Depends on the question.

Joe: “The company has never made a profit since its inception of two years. The income received does not cover costs, expenses, and continues to borrow funds to keep it going. They cannot make payroll and no employees wages payable. The loan agreement was for a 60-day bridge loan with additional capital was secured by local bank. The loan is document is written agreement and signed by two members of the LLC, secured by collateral, medical equipment units, has interest of 2% per month, 24% APR.” That’s pretty good.

Al: Great.

Joe: “Calls for all costs of collection to be responsible to of the borrower. If a breach occurs, the entire loan could be called immediately. To date, I’ve received $71,000 interest only through February 2022. No payments have been made to me since February 2022 and no payments have ever been made toward the principal. I did report the portion of interest income received on my 2021 federal tax return, even though I did not receive a 1099 INT from this business.”

Al: And you wouldn’t because they’re not a bank.

Joe: “Currently, I am owed $42,000 in interest and $300,000 of the base loan principal. Assuming the loan defaults and I will receive/collect, nothing more on this business loan, here is my question. Can I claim this loss on my 2022 federal income taxes? My federal tax liability for 2022 would normally be about $50,000 on approximately $265,000 in taxable income.” No. “My tax bracket is 24% with an effective tax rate of 17%. I have approximately $4,000,000 in traditional IRAs. I want to convert enough money to the Roth IRA to equal/cover the business loan loss and reduce or eliminate my tax liability.” I knew that was going to happen when I started reading this. Loan. I’m not involved. I don’t know anyone. These jerks didn’t pay me. So can I do a Roth conversion of the same amount and not pay any tax?

Al: That is the question. The answer is no. Well, first of all, do you even have a loss? Right? And so the way the IRS looks at this is if the loan had value, in other words, it still had value at the beginning of the year and it had no value at the end of the year, which you have to go through some hoops to be able to prove, which it doesn’t sound like you’re there yet, but let’s just say you can. Even if you can prove the loan had no value and you got to look at an IRS publication or talk to a CPA, it’s pretty complicated how this works, but that’s the idea. Had value at the beginning of the year, no value at the end of the year, then you do have a loss. It’s in almost all cases, it’s a capital loss. It’s not an ordinary loss, which means you’ll get to use $3000 against your Roth conversion. The other amount would be used against future capital gains, which have nothing to do with Roth conversions.

Joe: Yeah, Roth conversions. Ordinary income. A capital loss is a capital asset. So just like if you bought a bond fund, so a bond fund is a loan. It’s a loan. You don’t know anyone on the other side of the loan, let’s say, interest rates go up, bond prices go down. Sometimes bonds, they don’t pay. So that is a capital loss. Just because this was a private investment doesn’t necessarily make it an ordinary loss.

Al: Now, I will say there is something called a business loan loss and that you usually- which is an ordinary loss. Usually you have to be a bank or in the business of making loans to businesses and which does not necessarily sound like the case based upon these facts.

Joe: I wish it was true, though, because it’s like, hey, I made this investment to the small startup and I thought, I’m funding the company, I’m helping them pay payroll, and I feel like part of it. And then all of a sudden- hey, she got paid.

Al: She got paid pretty good.

Joe: Yeah, $70,000. It was like, oh, well, I’m killing it. And then I was in oo- That’s what startups do, right?

Al: That’s why you got a 24% interest rate. There’s a lot of risk here.

Joe: There’s a ton of risk. Risk and expected return are related. They kind of went defunct and weren’t able to pay. But you did get $72,000. But that’s interest only, I guess-

Al: And once you do have a deductible loss, I’m not even sure if it’s 2022 because of what I just said. But when you do have a loss, you’ll have, in all likelihood, a very large capital loss, which you’ll be able to use for many years against future capital gains. So it’s not all bad, necessarily.

Joe: She’s got two rescue mutts, drives a 2018 Genesis G80.

Andi: I don’t even know what that is.

Joe: I know what a Genesis is. I don’t know what the G80 is. Sounds kind of expensive.

Al: That’s probably a big one.

Joe: Yeah. “And enjoy a cold, cold, cold, cold Tito’s, neat.

Al: Not a warm one.

Joe: I like cold Tito’s, neat too. Alright, that’s it. Thanks. Cynthia, I’m sorry that you can write the loss off on a Roth conversion. But you can write it off against stock or bond losses- or gains.

Individual Retirement Accounts or IRAs were created to give us a leg up on saving money for retirement, but there are several flavors of IRAs, with different purposes, rules, and tax treatment. Learn about 8 different IRAs – the traditional, Roth, SEP, spousal, simple, self-directed, inherited, and stretch IRAs. You’ll find out their differences, limitations, and benefits, in our Ultimate IRA Guide. Download it for free from the podcast show notes – just click the link in the description of today’s episode in your favorite podcast app to get there. Then make sure you hit that “share” button to spread the love, share YMYW and the free financial resources, and help us grow the show.

Converting to Roth IRA in a Low-Earnings Year: How’s My Strategy? (Christine, Seattle)

Joe: Got Christine from Seattle, writes in. Let’s see. “This didn’t go through last time, so trying from another device. You can use this if it goes through, to replace the email I sent.”

Andi: We actually did get both of the ones that Christine sent, so apparently there was success somewhere. I don’t know if she sent it 10 times, though, but we got it twice.

Joe: “Dear Joe and Al, been listening to your show for a few months now, I’m really enjoying it-” See? Another one. Just found us.

Al: Just found us.

Joe: Okay. “-and feel it’s making- and feel it made me a little bit smarter. Joe’s an acquired taste, but happily a taste I’ve acquired.”

Al: Yeah. Takes a while to warm to ya.

Joe: It just takes a couple of episodes and then you fall in love, right?

Al: Yeah.

Joe: It’s just like – except for that one guy. It’s like ‘I’ve subscribed and unsubscribed 10 times. I just can’t do it. Something just draws me back, but then flippant Anderson makes me unsubscribe and give you a one-star review.’ Yeah, I’ve been told that. So I appreciate that, Christine. That’s nice. Good taste.

Al: But she’s now acquired that taste.

Joe: Yes. “It can be a little hard to follow when he and Al process out loud, but they either gotten better at summarizing or I’ve gotten better at tracking. It would definitely be easier if I listened at home with a pencil in hand.”

Andi: We do have transcripts of the episodes, so Christine, if you need to go back and review, they are available on the website.

Joe: I like the feedback.

Al: Yeah, I like it, too. Are we getting better? Are we getting worse?

Joe: I don’t know. I think she’s tracking better.

Al: That’s what I think, too.

Joe: She’s acquired the taste. She’s tracking. She gets it. She doesn’t even know she’s getting smarter. As soon as I start being annoying then it’s like, wow, it clicks.

Al: Right. Okay.

Joe: “I left my job in the Spring, and I’m pursuing a career change after decades of fundraising for non-profits. Some days I definitely wonder if I’ve gone mad, especially since I’m over 50 and I’ve seen my retirement savings drop about 25% so far. Gulp. In any case, I’m trying to take advantage of the lower earnings year to convert some of my rollover 401(k) to my Roth IRA. I also want to add $1700 to my HSA to bring me to $4650 max for 2022. And finally, I may need an additional $20,000 beyond the 6 months I’ve saved for living expenses.” So single filer. Washington, no state income tax. Year to date, gross earnings, $95,000. Estimated itemized deductions, $25,000. Roth conversion year-to-date, $60,000, estimated taxes on conversion paid $14,000, that’s due 1-15-23. HSA fill up contribution $1700, additional living expenses $20,000. To pay for the above, here’s what I’m thinking. I have two positions, both long-term holdings in my brokerage account that are currently, as of 9-23, showing a total of $8000 loss and a total value of $48,000. I could sell one or both these positions to pay for the tax and spending needs for the remainder of 2022. If I sell the entirety of both positions, I would have an extra $12,000, although I realize these values will likely change by the time you read this. I could keep this in cash or use it for additional Roth conversion taxes. See notes below. Or to buy an I Bond to hold the money and gain some interest on the $10,000 special assessment by the HOA that will be due in 2025. No, I don’t earn any additional income in the final quarter of the year. I’ll have another $40,000 more if I have the loss sale- Will I have another $40,000 more if I have the loss sale up to the $170,000 ceiling of the 24% tax bracket? I could use the extra to pay the tax. Where are the holes in thinking in this calculation? How would the brokerage sales impact my income? I don’t want to go above $170,000 ceiling for the 24% tax bracket. What should I consider as far as timing of the sale of the two brokerage positions? Just sell as high as I can? I know I’ll sleep better after hearing your spitball on this. Many thanks for all you do to make us smarter about retirement planning. Christine in Seattle. P.S. I almost forgot, my warm weather drink is Mount Gay and Tonic with a lime. I drive a Tesla Model 3 and I never thought I could love a car this much.” Isn’t that what you’ve got, Big Al?

Al: I just got it. I agree. That’s the best car I ever had.

Joe: You just love it?

Al: Love it.

Joe: Really?

Al: Yeah.

Joe: Okay. Model 3 guy.

Al: Yep. Love it. I got the blue color with the white seats, the special wheels.

Joe: Model 3, Big Al, cruising around. Okay, so what do we got here? So she needs some cash, and then her question is, so should she sell the brokerage account at $8000 loss when she’s-?

Al: Yeah, why not?

Joe: Does that affect her tax?

Al: So you have an $8000 capital loss. If you have any other capital gains from any other investments, it will net against that. If not, you’ll be able to use the $3000 of that this year against other income. So if you need the cash, those are good assets to sell.

Joe: The $8000 loss will not affect the Roth conversion.

Al: No. Except for if it- yeah, correct. Because, well, I don’t want to go in all this. The capital gains sit on top of the ordinary income. But I think that’s what you’re referring to.

Joe: But I think that’s what she’s asking. “If I don’t earn any additional income in the final quarter of the year, I’ll have another $40,000 up to the $170,000 ceiling on the 24% tax bracket.”

Al: True.

Joe: Okay, I don’t know what that means.

Al: I think she’s thinking maybe I’d convert another $40,000.

Joe: I’ll have another $40,000 more if I have the loss sale. No. Okay, so now I understand her question here. So if she doesn’t have any more income, she’s got $40,000 room in the 24% tax bracket, is what she’s saying. And she’s saying there could be more if I have this $8000 tax loss. But that’s a capital loss, not an ordinary loss.

Al: Right, but if there’s any capital gain, she’s probably included- I don’t know what she’s doing with the other income. But the truth is, you would get a $3000 loss, so you will get benefit there against ordinary income but not the full $8000.

Joe: So what are the holes of thinking in this calculation? Is the calculation the one of staying at the top of the 24% tax bracket?

Al: Yes. There’s no problem there. My question is, can you afford it? Because you got to pay for the tax on the conversion you already made in January. You got additional living expenses. Then if you do more Roth conversions, you’ve got more cash needed to pay the tax. So the tax planning is perfect. Cash flow, I don’t know. It sounds like you might be a little bit tight here, cash-flow wise.

Joe: All right, cool. Thanks, Christine. Hopefully that helps. Appreciate the question and the feedback.

Independent Contractor Retirement Savings Options Besides Solo 401(k)? (Casi, San Angelo, TX)

Joe: I got Casi from San-

Al: – Angelo.

Joe: -Angelo, Texas. “Hi all, love the show. Independent contractor. I want to set up retirement contributions for myself this year. Most sites recommend the solo 401(k), but what are other options should I consider? And what are the ideas on personal contributions and business contributions? Any good options to convert to a Roth since you all are the Roth show? My deets-” deets-

Andi: Details.

Joe: Got it. “Married, filing jointly. DINKs.

Andi: You know that one, right?

Joe: Dual income, no kids. “Him, $140,000. My biz $75,000.” All right, Casi.

Al: Likes to talk in code. That’s good.

Joe: Casi.

Al: So, retirement plans, self-employed, there’s all kinds of plans. You can just do like a regular IRA. You could do a simple IRA. You could do a solo 401(k). You could do a defined benefit plan. I would say solo 401(k) is probably the best choice when you have a small business, because you can put more into it as long as you don’t have other employees. Because you can put the same amount that you could put into a SEP IRA. You can put in more than you would put into a simple IRA or regular IRA, and you can have an employer contribution. And it’s really no cost. I mean, there’s an extra form they have to fill out, which is the plan itself. But the brokerage companies already have that done for you. Just sign some paperwork so it’s pretty easy.

Joe: So Casi’s biz brings in $75,000, solo 401(k) is definitely the way to go just because it’s a defined contribution plan. Contributions are defined and you have discretionary of when you can save into those.
If the business were to create more income, then there’s the defined benefit plan that you can establish that you could put a lot more money into.

Al: Let’s say you start making $200,000 or $300,000. Then you might want to consider the defined benefit plan. But with a solo 401(k), you can put in, I’m just rounding, $20,000 for the employer part and you could probably put in another $15,000 or so for the employer part. Something like that.

Joe: Yeah. What’s her name? Someone wrote in solo401k.com or remember-?

Andi: Oh, was it mysolo401k?

Joe: I forget.

Al: Yeah, I forget too.

Joe: Priya. Isn’t our girlfriend Priya from Orange County, didn’t she-?

Al: That could be.

Andi: I believe so. And yeah, I think it was mysolo401k.net.

Joe: She was all over that. She really liked that. So we’ll pass it along to Casi.

Al: There you go.

Roth Conversion Then Change Custodian or Vice Versa? (Rhonda)

Joe: All right, we got Rhonda. Help me, Rhonda. “Hi. I have a traditional IRA, Morgan Stanley, that I want to convert to Roth and move to Fidelity. The IRA is roughly $24,000. I understand that I have to pay taxes on the money that will be converted, and I won’t be able to withdraw anything onto the Roth for 5 years without penalty. We will still be in the 12% tax bracket this year since my husband is the only one bringing in the income. Married, filing joint with one 18-year-old child at home. Total income and interest dividends before deductions, roughly $65,000. So even with a $24,000 IRA, we will be at $89,000 before deduction. The IRA is in the following couple of different mutual funds. My question, do I convert my traditional IRA to Roth at Morgan Stanley, then move to Fidelity? Or do I move the traditional IRA to Fidelity and have Fidelity convert it to Roth? Thank you so much for your help, Rhonda.” Six and half dozen.

Al: Yeah, the answer is, it doesn’t matter. Whatever is easier.

Joe: Yeah, totally. Convert it at Morgan and then move it over, or just-

Al: – move it first to Fidelity? Yeah, it doesn’t matter at all.

Joe: Andi, what is ticker PONCX.

Andi: Pimco Income Fund Class C.

Joe: Pimco. And then FHYCX.

Andi: Federated Hermes Opportunistic High yield bond fund.

Al: Nevermind.

Joe: Federated. Okay. So both those companies would be on Fidelity’s platform. You could transfer it in-kind and just do an ACAT transfer from Morgan Stanley to Fidelity and then convert at Fidelity. And you could use those same funds if you wanted to. I wouldn’t. I don’t really care for those funds. But-

Andi: Wait, what kind of transfer did you say?

Joe: ACAT.

Andi: Which is?

Joe: You just transfer it from one brokerage to another brokerage, and it just kind of wires the funds and the shares to the other brokerage account.

Andi: Got it.

Joe: So you don’t have to sell it. It doesn’t go into cash. It doesn’t do anything like that. It’s just basically in-kind like transfer.

Al: Yeah, you don’t need to know that term. Fidelity will handle it.

Joe: I would- Rhonda, if you want to sound pretty cool at the bar, say-

Al: I did an ACAT.

Joe: I did an ACAT, little ACAT transfer.

Al: I think I’m going to say I’ve got a slight preference to moving the assets to Fidelity first. Because if you’re going to get, let’s say if you get rid of Morgan Stanley, all the paperwork will be through Fidelity. If there’s any questions, it’s your current broker. How about that?

Joe: I like that.

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Real Estate: Taxes, Depreciation, and the Primary Residence Exclusion (Kenneth, Chicago)

Joe: “Hey, Andi, Al, Joe. I have a 2017 Audi A4, a new Husky mix, and I drink bourbon” – and a lot of it.

Al: That was added for emphasis.

Joe: “And single malts. 2007, I purchased a classic Chicago two flat, two-unit building. I renovated the building, made capital improvements to the upstairs unit, which I rent out. And the downstairs unit, which I made my primary residence. The units were of equal living area when I purchased the building, capital improvements of the primary unit, including duplexing the downstairs unit into the basement, adding a master bedroom, master bath and additional bedroom. The ratio of living space unit is now 65% primary/35% rental.” Oh, I just fell asleep.

Al: Go as long as you want. Then I’ll answer the question. There’s a lot here we don’t want to read on the air.

Joe: Kenneth. This is like, all right, let’s fix up that house.

Al: Let me take it from here.

Joe: I’ll finish this.

Al: Okay.

Joe: “I have carefully kept track of all capital improvements. The rental unit, my primary unit and the common areas, new roof, new back porch, deck, etc. I’ve been taking depreciation for the rental, which includes half of the building original purchase price, capital improvements of the rental unit, and half of the capital improvements to those shared units- shared areas. I purchased the building for $573,000. I made $160,000 in total capital improvements. Rental depreciation to date is $196,000. Assume I now convert my two flat into a single family home this year. My total basis is $569,000. I still $195,000 depreciation. I wait two years, 2024 to sell. Assuming $900,000? what are the taxes that I owe?” It’s like I feel like I’m sitting in a CPA’s office.

Al: This is actually a better question for your CPA.

Joe: What do I owe? I’m going to take this, double the unit and turn it into a chicken flat, and then I put some capital improvements on it. Put a little extra bathroom in there.

Al: So when you do this- so you’ve got a mixed use property. So some is rental, some is primary residence. So when you sell that property, then some of it, the residence part, you get the exclusion. You get $250,000 exclusion for selling a property as long as you lived in it and owned it for two of the last 5 years. So I think that’s partly what he’s trying to do, and that works. And then the rental part, so he’s already taken a bunch of depreciation, and depreciation gets recaptured. So in his text here, $196,000 of depreciation. Then that gets recaptured to the extent of your gain. And if we read down further, his profit’s $100,000. So only $100,000 gets recaptured. In essence, what you’re saying is you lost $90,000 on your property, which only occurred because you originally called it 50/50. Now you’re calling it 35/65. So your ratio is off. It may raise some eyebrows to go from- because your depreciation is based upon a lot higher allocation than your sales amount, which is what you’d want to do if you’re trying to get that home exclusion, trying to get more gain deferred. But I think you may have a little bit of issue here.

Joe: So let me break this down for the simple man.

Al: Yeah, please.

Joe: So he bought a multiuse property, rented one area, lived in the other. When he purchased it, let’s call it $500,000. So he’s going to say half of this I’m going to rent out, half of it I’m going to live in. I bought it for $500,000. So we’re going to split it, $250,000 basis for each. And that’s what he started with, basis 50/50.

Al: That’s right.

Joe: $250,000 for my primary, $250,000 for the rental. But what I did is that I did a lot of improvements to my primary. I put in another bathroom. I did this and I did some extra stuff here. So I think it’s probably worth more. So now I want to change my ratio when I sell it to 60/40 or 70/30.

Al: That’s what he’s doing.

Joe: Because if I sell my- and then he wants to sell it for $1,000,000, and let’s just assume there’s a total of $500,000 of gain and if I split that 50/50, $250,000 would go to the primary, $250,000 would go to the rental. And then plus depreciation recapture whatever he recaptured.

Al: Yeah. So the rental gain would be higher. Right, because you got depreciation recapture.

Joe: So because I lived in the house two of the last 5 years, I get the 121 tax exclusion, which allows me to exclude $250,000 of gain or $500,000 of gain if I’m married or single. So maybe he’s single and he’s like, you know what, I got $250,000 tax-free coming to me because I’ve lived in the primary two out of the last 5 years. But you know what, maybe I’m married and I want more of that exclusion because I can exclude up to $500,000. So I’m going to flip my ratios a little bit and have more gain on the primary than on the rental.

Al: Yeah, you got it right.

Joe: And so now I could say, you know what, 60% of that $500,000 gain is on my primary, which is going to get wiped out because I get the 121 tax exclusion. I’ll pay my depreciation recapture, and then I’ll pay whatever gain is on the 40% or 30% of the rental.

Al: That’s what he’s doing. But here’s the smell test. So the smell test is he made money on his residence and he lost money on the rental, same property. That’s why I’m having a little trouble with these numbers. And that happened because of the ratio changing.

Joe: So it started at 50/50 and all of a sudden you’re tweaking the ratios here. But he could say, well, look at the rental is a piece of whatever, I didn’t do anything to it, but look at my primary. Look at all the-

Al: You could but that’s the question. And actually the truth is in his numbers, he’s making profits on both. It’s just that when you add back the depreciation, he’s losing $100,000 on the rental, which probably isn’t likely. But just be aware of that. You got to pass the smell test.

Joe: All right, cool. Thank you for the interesting email, Kenneth. Good luck with that.

Should I Cash Out 529 Plan for College Savings That’s Losing Money? (Todd, La Mesa)

Joe: All right. Got Todd from La Mesa writes in “The company that manages my 529 for my daughter increased the percentage of growth investments to 16% from 0% over 18 in college was 0%.” Are you following that?

Al: No. Are you?

Joe: Not even close. “The company that manages my 529 for my daughter increased the percentage of growth investments to 16% from 0%-“

Al: Oh, I guess they’re saying it was all fixed income now there’s 16% in growth companies. How about that? Let’s go with that one.

Joe: All right. “-over 18 and in college was 0%. Should I cash out of my daughter’s 529 plan? She’s 20 and in her third year. It’s already losing money.” Okay, Todd.

Al: I think it’s just the allocation shifted from no stocks to 16% stocks. That’s how I read it.

Joe: Why would that happen if she’s 20?

Al: I don’t know.

Joe: It goes the other way, doesn’t it?

Al: It does, but what if she doesn’t need it all? So maybe she only needs 84% of it and so the rest is in growth for- I don’t know. Have no idea.

Joe: -I don’t have-

Al: It sounds kind of weird.

Joe: Like there’s what they call the glide path.

Al: But that’s for retirement, not for college.

Joe: 529 plans is the same thing.

Al: Yeah, well, right. And it’s the reverse. No, it’s the same. You go more conservative.

Joe: Yeah, because right now put money when my kid is one years old and then when the child is 17, it should be a lot more conservative because I got to spend the money.

Al: Yes. So now this is switching to more growth investments. The only thing I could think of is just what I said, is if she doesn’t need it all and is not going to need it for a while, maybe you switch some of it to growth. I don’t know.

Joe: She’s 20 years old, it’s down, it’s her third year. You cash it out. Well, if it’s at a loss and you sell it, there’s no tax. If it’s at a gain and you sell it and you don’t use it for college, it’s going to be tax-free. She’s got another year. You could put it in cash inside the 529 plan. I would just keep it in the- until your daughter’s fully out of school and then just be super conservative. Just put it in a fixed account.

Al: Yeah. And she might go to graduate school or she might go later. So, yeah, you don’t necessarily want to cash it out, but you can change the investment. 16% is not a lot in growth, but it just seems weird, the timing of the change.

My State Retirement is Held at an Insurance Company. What Can I Do?

Joe: We got “Hello from Oregon.” Hello. “I’m a state employee with a Voya TDF held at AIG.”

Andi: Is that a target date fund?

Joe: Tax-deferred- state employee, it’s a tax-deferred fund- or tax-deferred retirement account, TDF?

Al: Yes.

Andi: I thought it was a target date fund.

Joe: Target date fund?

Al: Yeah, there you go. Target date fund.

Joe: Voya, held at AIG. Okay. I’ve learned from listening to your podcast that you don’t know what TDF means.

Al: That’s true, educate us. We don’t like acronyms that much, and our listeners don’t know what they mean either. Just spell them out.

Joe: Sometimes- half the time it’s like, oh, what are we doing here? “I’ve learned from listening to your podcasts such as yours- listening to podcasts such as yours, that investment in insurance products should be combined. And I agree with this thought. Until I retire, I don’t have an option about where this account is held. I was wondering, if because a state entity has selected this company, does that change whether it is better or worse to have my retirement account remain in this insurance company after retirement? I also have a retirement account at TIAA CREF and Fidelity. So those would be my other choices for where to put this money upon retirement. I drive a 2015 Kia Soul, which is a perfect vehicle with the back seats down to cart around my two rescue pups with their heads poking out of the window.” I just got a little picture.

Al: Yep, we do.

Joe: Yeah. Very nice.

Al: Very cute.

Joe: “One came from Korean meat market.” Oh boy-

Al: That was a rescue.

Andi: A rescue, yeah.

Joe: Okay. “And the other came from the streets of California. The picture I’ve sent is of them looking at the Starbucks barista waiting for their pups. Thanks for educating the masses. Me, Sadie Fiona, and Carly Rae Su.

Andi: So there’s Sadie Fiona and Carly Rae Su:

Sadie Fiona and Carly Rae Su getting coffee | Your Money, Your Wealth® podcast episode 400

Al: Got it.

Joe: Okay, so she’s got an account at Voya.

Al: Yes. Which sounds like has some insurance product associated with the retirement account.

Joe: No, it doesn’t.

Al: It seem like it, does it? Because it’s a-

Joe: It’s a retirement account.

Al: Target date fund.

Joe: It sounds like it’s a 457 plan through the state, and they picked Voya to be the custodian. And that doesn’t necessarily mean it’s in an insurance product. The insurance companies have multiple products.

Al: Yeah, that’s right. It is an insurance company, but it may be just a regular investment.

Joe: You could do whatever you want when you retire. I think, basically, if you want to consolidate, do that. Just know that TIAA is an insurance company, too. Okay. I got my money at Voya, TIAA and Mass Mutual. I want to put it-

Al: – in something that’s not insurance.

Joe: Yeah, then put it in Fidelity. It doesn’t necessarily matter. They’re all really good, strong companies. It’s what investments that you’re choosing inside your individual retirement account once you retire. So there’s the custodian, right? And then there’s the account, and then there’s the product. So the custodian could be TD Ameritrade, Fidelity, Voya, Charles Schwab, Merrill Lynch, Mass Mutual, whatever. And then you pick the account. The account in your case would be an IRA, and then from there, where you would want to look is, what are you going to fund the IRA with? Do you want to use an insurance product? So that would be like an annuity. Or you could use mutual funds. You could use ETFs. You could use individual stocks. I mean, then you could use CDs, bonds, whatever. The list goes on and on and on. And on. So just because maybe there’s an insurance wrapper associated with it, it doesn’t necessarily mean it’s an insurance product. Most cases, it might probably is. Like with TIAA CREF, the CREF is the mutual fund and TIAA is the insurance, the annuity. So you just have to kind of educate yourself a little bit more of what you want to do. But I would suggest you consolidate to one company once you retire so you have one retirement account that you can take your distributions and live off of.

Al: Yeah. And you have to realize when you’re working for, in this case, the state, you are limited with your retirement accounts what investments they have. After you retire, then you can move wherever you want to, if you want to.


Check out that picture of Sadie Fiona and Carly Rae Su at the Starbucks drive thru in the podcast show notes. Just click the link – eh, you know how to get there. 

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