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Published On
July 13, 2021

Spitballing retirement readiness for Sean in Texas and for Little Al in Chantilly, VA, who has UK retirement funds and is desperate to quit work now. Plus, how can Doug in Missouri do some tax arbitrage with pensions, Roth conversions, and Social Security? Can Mary switch to her ex-spouse’s Social Security benefit? But first, Tyler in Ohio has questions about restricted stock units (RSUs) and net unrealized appreciation (NUA).

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Show Notes

  • (00:47) Restricted Stock Units and Net Unrealized Appreciation of Company Stock (Tyler, OH) 
  • (12:19) Spitball Analysis: Are We on Track for Retirement? (Sean, TX)
  • (16:34) Overseas Savings & Retirement Spitball Analysis (Al, Chantilly, VA)
  • (27:11) Tax Arbitrage: Pensions, Roth Conversions and Social Security (Doug, St. Charles, MO)
  • (43:16) Can I Switch to My Ex-Spouse’s Social Security Benefits? (Mary)

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Strategies for Diversifying Concentrated Stock Positions

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Transcription

Today on Your Money, Your Wealth® podcast #334 Joe and Big Al spitball about retirement readiness for Sean in Texas, and Little Al in Chantilly, who has a UK retirement account and is desperate to quit now. Plus, how can Doug in Saint Charles Missouri do some tax arbitrage with pensions, Roth conversions and Social Security? And, can Mary switch to her ex-spouse’s Social Security benefit? But first, we mentioned that if you go to YourMoneyYourWealth.com, click Ask Joe and Al On Air, and leave your question as a voice message, it would get first priority. I’m producer Andi Last, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA, and today, our first priority is Tyler, with questions about restricted stock units and net unrealized appreciation:

Restricted Stock Units and Net Unrealized Appreciation of Company Stock (Tyler, OH)

Tyler: “Hi, guys, this is Tyler from Ohio. I am new to the show, only 3 episodes in. Since I heard audio messages would get priority, I thought I’d call and see if you would be so kind as to answer two questions for me. First, I just received $25,000 in restricted stock units that vest in ‘23. This is a first for me. So hearing about them in your episode 331 piqued my interest. Is it possible to move RSUs into a donor-advised fund for charity and not pay taxes as ordinary income? Second, you briefly mentioned net unrealized appreciation in episode 332. My company has contributed to my retirement plan in company stock. My plan was once I hit 50, which I have several more years before that happens, I was going to start selling that off to diversify my 401(k) since having half of my retirement savings in one company isn’t a great thing. Should I rethink that strategy because of the net unrealized depreciation potential? Would love your thoughts. By the way, I have a 2014 Toyota Sienna and a 3-year-old cockapoo. Thanks, guys.”

Joe: Wow.

Al: You didn’t have to read it. How about that?

Joe: I think we should hire her.

Al: She should read them all.

Joe: You think she wrote that down and read it?

Andi: It really sounded like it to me.

Al: It could be. I don’t know. Or maybe she’s that good. Maybe it’s just off the cuff.

Joe: Super smart.

Al: Yeah.

Andi: But thank goodness for people who do actually, like, read stuff in advance, it really helps out a lot.

Al: Like Mr. Joe Anderson?

Joe: OK, thank you, Tyler, for the question. Let’s go to RSUs first, Al. So she’s getting restricted share units.

Al: Yeah. So restricted stock unit is when a company- it’s like a stock option. It’s a little bit different. But how it works is basically you’re given a certain amount of units to end up with company stock. And generally you don’t get the stock right up front. You get a right to a stock when it vests. So let’s say you got 100 restricted stock units that vest over 4 years. So every year another 25 units vest, whatever the stock price is worth at that point is what you have to pay tax on. That gets added to your compensation and then you have a choice. You can either sell the stock that now you own, to pay the taxes and pocket the difference; or you can keep the stock and that’s fine, too. But then you’d have to pay the company the employment taxes, the federal withholding, the state withholding, the FICA, Medicare, that sort of thing. So that’s what a restricted stock unit is. Unfortunately, you don’t really own the stock when you get the restricted stock units. So it’s like a stock option. You can’t give that directly to charity. But one thing you can do is when they vest, you could actually donate those proceeds to charity. And you can only do up 30% of your adjusted gross income, but you could potentially get a dollar-for-dollar deduction depending upon whether you itemize or not.

Joe: So $25,000 in restricted stock units. They don’t vest until 2023. $25,000 is going to show up on Tyler’s tax return as income.

Al: Well, it’s whatever it’s worth at that time. So it could be worth the same or it could be worth double. So it’s whatever it’s worth at the time they vest is what goes on the W2.

Joe: OK. You’re just getting really into the gnat’s ass there, Al.

Al: Well, what you said was false. So I had to correct you.

Joe: Roughly $25,000 will be income, depending on the movement of the stock price. I guess my point is this-

Al: What if the stock goes up 10 times?

Joe: I got it. I got it.

Al: Then it’s $250,000?

Joe: Sure, sure. Sure, I got that. What she’s asking is, she wants to offset the taxes with the donor advised fund. So she could easily invest in a donor advised fund to offset the taxes in the year that the taxes hit.

Al: Correct. But she can’t put the RSUs directly into it.

Joe: Correct. Right. So the strategy is not putting the RSUs of $25,000, which Al thinks is going to go 10x on ya, which will be $250,000. Whatever it is, you can offset the taxes for that given year by contributing to a donor advised fund. But you would need cash or a stock that is not the RSU to contribute to the donor advised fund.

Al: Yes. So mechanically, theoretically, you get the restricted stock, you sell it, you’ve got the cash proceeds, you put the cash proceeds in a donor advised fund and you get a deduction. And there’s some restrictions on deductions, but in theory, it could be a dollar-for-dollar offset.

Joe: So it’s looking at when they vest, what that tax liability is going to be and then figuring out the tax strategy for that year, to then offset any additional taxes because of the RSUs.

Al: Yeah, that’s accurate. And if that’s the desired strategy Tyler, then even better than that, is if you have other securities outside of your retirement account that have appreciated you put those in the donor advised fund, then you don’t have to pay taxes on the gain and use that to offset the income you have on the restricted stock units that vest.

Joe: Second, net unrealized appreciation. So let me briefly explain what that is, is that if you have company stock inside your 401(k) plan and you’re an active participant of the 401(k), you can then- once a triggering event happens, you can take the stock out of the 401(k) plan and put it into a brokerage account. You pay taxes on whatever the basis is. So because Tyler works for a company that is going to go 10x-

Al: I don’t think I said that. I said what if.

Joe: What if. So if Tyler’s company had highly appreciated company stock inside the 401(k) plan, she could take that out. For instance, let’s say the company’s stock is worth $1,000,000, but her contribution to it is $100,000. She could move the full $1,000,000 out of the 401(k) plan, pay ordinary income tax on whatever her cost basis is, in this example, $100,000. So as she sells the stock, she’s taxed at capital gains rate versus ordinary income if she keeps everything in the 401(k). Her question is that- she’s not- she’s retiring- or what ” My plan once I hit 50, which is several years from now-“, she was going to start selling off. So her plan at age 50 is to start, I’m getting closer to retirement. I want to be more conservative.

Al: I want to diversify.

Joe: Diversify a little bit more.

Al: Which we would agree with.

Joe: But if she works for the same company for quite some time until her retirement date, she’s going to end up selling some of the company’s stock and diversifying it in other mutual funds. That would then not- if she sold out all the company stock and bought mutual funds, then that eliminates the net unrealized appreciation.

Al: Right. Once you diversify, you can’t do that anymore. So the question is, should- that’s what she is planning on doing. But should she rethink that?

Joe: And I don’t know what company she works for.

Al: It’s going up 10x, Joe.

Joe: If that’s the case, hold on. Who cares? You could build a portfolio around the stock. But you don’t want to- what’s the stupid saying that all the other guys, the tax, the tax tail-

Al: Don’t let the-

Andi: – tail wag the dog.

Joe:- the dog.

Al: Yeah. Don’t let the tax tail-

Andi: – wag the dog.

Joe: – the investment dog?

Al: Or maybe the other way around. I don’t know.

Joe: I think it depends on a lot of-

Al: It does depend because, well, first of all, there has to be a triggering event. So if you turn 50 and you’re not going to retire till 65, you’ve got to wait. I don’t know how old you are now, but you’re before 50. You’re younger than 50, Tyler, you said. So if you’re going to wait another 20 years, then you take a huge pause. Do I really think this company in 20 years from now is going to be in a good spot? Maybe, maybe not. But if it’s just a few- like let’s say Tyler’s 48 and she’s going to retire at 50, then yeah, that would be a great strategy, as long as you didn’t feel like the company was about to go over the cliff.

Joe: Right. So there’s timing, it’s percentage. It seems to me that she’s half her portfolio. Is that what she said?

Al: Yeah. Half of her portfolio-

Al/Joe: – is in the company stock.

Joe: Well, maybe you stop contributing to the company stock. You keep that there and then you diversify with your future contributions.

Al: Do it that way. I like that.

Joe: And then so over time your percentage is going to be lower, because your account balance should be theoretically larger, because you’re saving more over the years.

Al: Right. Right. Let’s talk about- so a triggering event, that would be-

Joe: – separation of service, retirement-

Al: – separation of service, retirement, or-

Joe: – 59 and a half-

Al: Does 59 and a half count as a triggering event?

Joe: It could in some plans.

Al: In some plans.

Joe: But then you ____ do, let’s say if they do an in-service withdrawal with net unrealized appreciation at 59 and a half, then that freezes the plan.

Al: Yeah, in some cases. we’ve seen that.

Joe: So you can’t contribute to the plan anymore.

Al: Which may not be what you want to do.

Joe: So you were able to get the stock out of the plan, diversify that way, do the tax strategy. But then you’re SOL in regards to saving any more money into the plan.

Al: Yeah, right.

Joe: So a lot of options. Great questions, Tyler.

Al: Wonderful questions.

Joe: Hopefully that does a halfway decent job of answering.

Al: She’s never gonna ask a question again.

Joe: Well she’s only listened to 3 episodes, now it’s 4 and then that’s it.

Al: Usually that’s the limit. Once people get to 5, it’s like, oh God.

Like Tyler said, having half your retirement savings in one company probably is not a great thing – it may represent an unnecessary risk to your overall wealth. So how do you diversify a concentrated stock position in the most tax-efficient way possible to minimize capital gains tax? And Is tax efficiency even the most important consideration? Click the link in the description of today’s episode in your podcast app to go to the show notes and watch Brian Perry, CFP®, CFA®, the Director of Research and EVP here at Pure Financial Advisors, as he outlines some of the strategies available to diversify that concentrated stock position, depending on your specific circumstances. All that said, since your specific circumstances are different than everyone else’s, you may benefit from a more personalized, comprehensive look at your retirement readiness. Click the Get an Assessment button there in the podcast show notes and schedule a free financial assessment at a time and date convenient for you. There is no cost and no obligation, and chances are, no matter where you are in the country, one of the CERTIFIED FINANCIAL PLANNER professionals at Pure will be able to pinpoint strategies to help you create a more successful retirement.

Spitball Analysis: Are We on Track for Retirement? (Sean, TX)

Joe: How about Sean from Texas?

Al: Yep.

Joe: “ARE WE ON TRACK FOR RETIREMENT? ME (43) 100K SALARY. WIFE (42) 55K SALARY” What’s this me and wife stuff? This double whammy with giving us the information here. “ME ROTH 401K (700K) MAXING OUT. ME ROTH IRA (46K) MAXING OUT. JOINT BROKERAGE (70K) CONTRIBUTE 14K PER YEAR. WIFE ROTH IRA (30K) MAXING OUT. WIFE ROTH 401K (5K) 5% OF SALARY PER YEAR. HOME VALUE (415K). MORTGAGE (300K). CARS ARE PAID FOR AND NO DEBT BUT MORTGAGE.” So that’s the email. All in caps.

Al: We’re missing a fairly key point here, which is how much do you want to spend? and when do you want to retire? But I did do a little math just because I had extra time.

Joe: Let’s say $155,000 is what their income is minus him maxing out, so call that- he’s 43 years old?

Al: Yeah.

Joe: OK, so I’m going to do real simple math. $20,000, let’s say in 401(k) savings, for the both of them. Because she is 5% and he’s maxing out. So can we just say $20,000? Would you buy that?

Al: I’ll buy that.

Joe: Plus $14,000. So that’s another- so $35,000 roughly in savings but $20,000 is pre-tax.

Al: Well, plus two Roth IRAs, so call it $50,000, close enough.

Joe: $50,000. So $100,000 minus the tax on that, with the standard deduction, call it I don’t know, $8000, $10,000 total tax? state? federal? FICA? So say they’re spending $90,000. That’s my guess. $80,000?

Al: Yeah, I’d say- yeah. OK, that’s probably pretty close. $80,000, $90,000. So I see where you going. So it’s like he’s starting with- let’s see $70,000- he’s starting with- call it- starting with $900,000, let’s just say. And he’s saving $50,000 a year. You plug that in for-

Joe: No, no, let me do this. $80,000 dollars living expenses. That’s the present value. He’s 43. Say he wants to retire in 20 years at 63. Let’s use a 3% inflation rate so living expenses are going to be $144,000. Social Security is probably going to be call it $40,000 with inflation on him. So we’ll be conservative, $40,000. He’s going to need $100,000 to retire, .04 divided- So he needs around $3,000,000 in the next 20 years. And he currently has how much?

Al: Call it $850,000.

Joe: He’s got $850,000 and he’s saving $50,000 a year.

Al: Correct.

Joe: And he’s going to retire in 20 years. And let’s assume he gets 7% on his money. That would be $5,500,000. So hey MR. ALL CAPS. Very terrible information. Yes. You’re on track.

Al: Now, that’s if you want to retire at age- in 20 years from now. And that’s if you’re spending what we guessed you’re spending.

Joe: So hopefully people with this example, you know what information we need.

Al: Yeah, right.

Joe: There’s certain things in the equation that we need to put in. When do you want to retire? How much money are you spending?

Al: If you would have said I want to retire two years, we would say, no, you’re not there.

Joe: Well, let’s say if he wants to retire today. So if he’s got $800,000. $850,000?

Al: Yeah. Call it $850,000. So 4%’s probably $35,000- ish.

Joe: But he wouldn’t want to do that. It’s probably 3%, right?

Al: Probably 3%, retiring, yeah.

Joe: So if he could spend $25,500, you’re on track. But it seems to me that he’s spending a lot more than that, given that the incomes of the two.

Al: Plus if you retire earlier than 65, you got to figure out your health insurance.

Joe: So all caps. ARE WE ON TRACK FOR RETIREMENT? ME, HER, ME, HER, CARS PAID, NO DEBT BUT MORTGAGE.

Al: It is-

Joe: First of all, mortgage is a debt.

Al: It is to the point.

Andi: They know you like brevity.

Joe: Yeah, thanks Sean from Texas. Appreciate that one.

Overseas Savings & Retirement Spitball Analysis (Al, Chantilly, VA)

Joe: “Hi Joe, Big Al, and Andi, thank you for the great podcast and for making me smarter and making me laugh as I drive my 2013 Gray Subaru, Tribeca around the D.C. suburbs. Some background. I’m 50 years old, earn a base salary of $120,000. My expenses are $50,000 a year. But in retirement, I’d like to spend net $80,000 to $100,000. Ideally, I’ll scale back to half-time work at 55 and retire completely at 62. In terms of savings, I have a small brokerage account. The bulk of my money’s in the old retirement accounts, $1,700,000 total. However, $950,000’s in a Roth IRA.”

Al: Wow, that’s impressive.

Joe: Wow. “$200,000 in a Traditional 401(k); and $550,000 in a foreign UK retirement account.” UK.

Al: Must have worked in the UK.

Joe: “For US tax purposes, the UK account is a tax-deferred and distributions which I can take at 55 are treated as ordinary income. The funds can’t be rolled out or converted into US retirement account. No RMD equivalent, but a lifetime allowance capped at $1,500,000 apply. Distributions exceeding the lifetime allowance attract a special tax, that source of at least 25%. In addition to savings, I expect to have some inflation adjusted income later in life. He’s got $12,000 a year from a UK state pension at 68, $36,000 from Social Security at age 70. I don’t anticipate a WEP impact- or a windfall elimination provision for ya rookies out there- provided I work to 62. My questions- ” Ok, about time. “One, currently max out an HSA, a Roth IRA and a Traditional 401(k) rather than the Roth option. Oh, I currently max out HSA, a Roth IRA, and a Traditional 401(k) rather than the Roth option. I also put $12,000 a year into my brokerage account, along with half of any discretionary bonus. Am I allocating my savings appropriately across the right accounts? Should I make further Roth conversions before turning 55? I have $35,000 left in an old 401(k). Number two, I’m inclined to drain my UK account as quickly as possible to reduce the exchange rate risk and stay clear of any lifetime allowances. How should I approach taking those withdrawals? Number 3, is it feasible for me to slow to half time in 5 years, or do I have to stay on the treadmill until 58 or 60? Longevity runs in my family, so I expect to enjoy a super long retirement, but frankly, I’m desperate to start now.” So am I.

Al: Right? We want to stop this show in fact.

Joe: After reading this, I am desperate to end this show. “I look forward to your thoughts and jokes. Thanks so much for taking the time and for an awesome podcast. All the best, Little Al, near Chantilly, Virginia.” Chantilly, Chantilly. Don’t we have another Chantilly person?

Al: I remember that.

Andi: I believe it’s Tom from Chantilly.

Joe: Tom.

Andi: And now they’ve both told us that it’s Chantilly.

Al: Not Chantilly.

Joe: I don’t care. It’s Chaniquitilly.

Andi: Wow.

Joe: So he’s going to have- what does he spend? $50,000 a year? Something like that?

Al: His expenses are $50,000. Yep. But he wants to retire on $80,000 to $100,000 . His salary’s $120,000, base salary is $120,000.

Joe: OK, so he’s got $1,700,000.

Al: Yep.

Joe: At age 55, he gets the UK pension at $12,000 a year. So he’s going to need $38,000 a year from the overall portfolio because he can get that at age 55. Am I reading that right? Did I miss something? ‘I also have $12,000”- is this?

Al: Well no, he’s got a pension, which is different from the amount in the retirement account.

Joe: What’s the pension amount?

Al: The pension’s $12,000 a year. But that doesn’t start till 68.

Joe: Oh, I thought it was 55. Oh, he could take the $550,000 from the UK retirement account at 55.

Al: Right. Right.

Joe: OK. He’s currently maxing out the 401(k), Roth IRA and HSA. Let’s answer this question. Should he be saving differently? He’s got $1,700,000, but almost $1,000,000 of that Al, is in a Roth IRA. Should he continue to go pre-tax? Should he go more Roth conversions? What should he do there?

Al: Yeah, if his pensions eventually between Social Security, which isn’t even fully taxable, let’s call it $45,000, call it $50,000, let’s say. And his- he said he’s going to probably try to drain out his UK account. So that leaves $200,000 in the Traditional 401(k), which the RMD on that’s $8000 a year. I’m not too worried about that. Even if he leaves all the money in the foreign UK account, I don’t know enough about UK retirement accounts and how that works, but we’ll just pretend it’s like US. So even if that stays, 4% of that is $20,000. I mean, even if these things double, it’s not a horrendous RMD.

Joe: He doesn’t have an RMD in the UK account.

Al: I understand that. But I don’t understand how it does work because we don’t understand what the lifetime cap of $1,500,000.

Joe: Well, that is-

Al: Probably that means that’s how much you can put in there.

Joe: Well that’s the distributions coming back out, I guess.

Andi: Yes. It says lifetime allowance is capped at. And then at the end he says-

Al: We have no idea how that works. So I’m just pretending it’s US for the time being because we don’t know how the UK retirement system works. But at any rate, I guess my point is at this point, he doesn’t have a ton in deferred accounts that are going to cause big RMDs. So, I don’t think- does he have to do more Roth conversions before turning 55? No, I don’t think so.

Joe: I don’t think so either. I think he’s got a good balance.

Al: Yeah, I think so too. I think Al, you do Roth conversions if you- well you can’t do it on the foreign UK account, but you could do it on the Traditional. I think you do that when you retire and your income’s lower.

Joe: Yeah. He’s got $35,000 left in an old 401(k). Suppose he would want to just blow it out. You’re 50, so you still got plenty of time for that thing to grow. If your living expenses are only $50,000. You got $1,700,000, you can just do the math at 3% at $1,700,000 is a pretty good number.

Al: It’s a good number, yep. No, that’s right.

Joe: But he’s still going to work part-time.

Al: Let’s say he earns half as much or a third as much.

Joe: Let’s say he makes $25,000, then his shortfall is $25,000. You put $25,000 into $1,700,000. That’s a1.5% burn rate.

Al: So I would think you could Al, if you want to, but you’re thinking of working half time in 5 years. And I can tell you from experience, your feelings change as you get older. So what you’re feeling, you may not necessarily want to go to half-time in 5 years, but if that’s what you really are planning on, I mean, just from this-

Joe: What are your feelings, Al?

Al: – very quick- Your feelings are-

Joe: Let’s have the feelings time.

Al: Your feelings are this, Joe. When you get a little bit older, it’s like no, I’m not really ready to retire yet. I got a lot to give.

Joe: Got it.

Al: That’s- those are my feelings anyway. Until after this show. I just changed my mind.

Joe: “Is it possible, feasible for me to slow to half-time in 5 years or do I stay on the treadmill?” I say punch, if you want. I think financially, Little Al, I think you’re good to go.

Al: I do too. You’re just going to have to figure out how much you need to make part-time. But it shouldn’t be that complicated.

Joe: Right. Because you don’t spend a ton, you spend $50,000, you’ve saved a couple of million bucks. You’re going to have fixed income sources that almost cover your entire fixed income need. So you’re going to have larger distributions from now until 68 and 70. But you want to retire, let’s say at 50. I still think that there’s- you want to run the numbers of course. This is just a spitball.

Al: Yeah, it is a spitball. Because really, to get this right, you would need to do cash flow planning from now to end of life. And we can’t do it in our head. You can’t even do it on your calculator. We need some help.

Joe: Yeah, we’re not that smart.

Al: What are you doing? You doing some kind of calculation.

Joe: Well at $50,000 into $1,700,000 it’s 2.9%, 3%.

Al: I understand. But he wants to spend $80,000 to $100,000. So he’s trying to fatten it up so he can get to that level. And I think he probably can even working half-time. But, you know, again, it’s-

Joe: So if he makes $50,000, spends $100,000. So then $50,000 needs to come from the portfolio. That’s 3% at age 50. I’m pretty good with that burn rate.

Al: Yeah I know. But that the $50,000 pension didn’t start till 68 and 70.

Joe: I’m saying he’s working part-time.

Al: Got it. And then he replaces- then he stops working part-time when he’s got the pension.

Joe: Got it.

Al: Very cool.

Joe: So he’s desperate, Al. He’s desperate. And so, if he can stop the normal grind and get a job making $50,000 and then get the other $50,000 from the portfolio, he should be OK.

Al: OK, I’ll go along with it.

Joe: Thanks Little Al.

How about you, are you desperately ready to punch? With pandemics and market volatility and whatever the future holds for inflation and Social Security and taxes, it’s hard to know if you’re financially ready. Click the link in the description of today’s episode in your podcast app to go to the show notes at YourMoneyYourWealth.com and download our Retirement Readiness Guide for free. Find out how to control your taxes in retirement, create income to last a lifetime, and learn 7 plays to help you get retirement ready, despite all the uncertainties – and The Retirement Readiness Guide won’t even cost you a thing. If you have more money questions, fill up our inbox! Click the Ask Joe and Al On Air banner in the show notes and shoot us a voice message or an email.

Tax Arbitrage: Pensions, Roth Conversions and Social Security (Doug, St. Charles, MO)

Joe: All right. We got a novel, Al. We got Doug from St. Charles, Missouri, spent about a week writing this email.

Al: Yeah, this spans a few pages.

Joe: “Hi Andi, Joe and Al. Giving Andi top billing because I believe in ladies first And I’m sure that both of you are gentlemen and are in complete agreement.” Uh… yeah.

Al: 100%.

Joe: All right, Doug.

Andi: Joe had to think about that one for a minute.

Al: I was going to wait for Joe’s answer. Yes, I do agree with you, Doug.

Joe: Alright. “I really enjoy listening to your podcasts. The information you provide is helpful and the constant banter’s fun to hear. I also appreciate when there’s a question and there’s some disagreement between the two of you so we can get a better appreciation of all sides of the situation. I came across your podcast about 6 months ago and liked it. As a result, I went back to the start of 2020 to listen to all of your show since then.” OK, now Doug is a serious problem. He’s a psychopath.

Andi: Well, at least he didn’t start in 2016.

Joe: “Only a few shows remaining until I get caught up.”

Al: Well Doug when you get caught up go back to 2019. That was our best year. Ever.

Joe: It’s like a fine wine. “I’ve only been able to listen to one show a week. In all of the shows I’ve listened to, I’ve not heard a question like mine.” That’s why you gotta go back in time, I guarantee you we’ve answered this question 14 times. “My wife and I live in St. Charles, Missouri, which is just west of St. Louis and the Missouri River. I used to drive a low mileage 2002 Ford F150 until recently when I lost an argument with a deer at 45 miles an hour. I fared much better than the deer. I’m almost 62. I’m currently making around $150,000 a year and hope to retire in about two years. I’ve been maxing out my Roth 401(k) and also making Roth IRA contributions for the both of us. My wonderful wife is 60, stays home and has been watching our 3-year-old granddaughter. We have no debt at all. We have approximately $2,000,000 in our investment accounts currently. At this time, it’s split fair evenly between qualified Roth and regular accounts. The question involves pensions. My wife and I each get one. Roth conversions and Social Security taxation- We each get one-  Roth conversions and Social Security taxation-  “

Al: That’s his question- about all those things.

Joe: It is basically tax rate arbitrage- ” oooh, big word-

Al: Oh boy.

Joe: Oh boy.

Andi: He got that from you Joe.

Joe: Here we go.

Al: We’ve said that on the air.

Andi: Joe says it all the time.

Joe: Do I say that?

Al/Andi: Yeah.

Al: Said it today already.

Joe: Well then I must be super smart because only really smart people start throwing out the word ‘arbitrage’. “It is basically tax rate arbitrage that deals- ” see, when I read and then when I talk, I think I’m two different people.

Al: Got it.

Joe: I’m just super concentrating on reading words, since we’re just chatting. I’m getting better at reading though.

Al: You’re spectacular.

Joe: This is my second career. Just going to read like nursery rhymes to the elderly.

Al: Got it. Perfect. Well, this is good practice.

Joe: “It is basically tax rate arbitrage that deals with paying much taxes now in exchange for eliminating most or all taxes in the future. We are currently in the 22% tax bracket and will likely be in either the 25% or 28% tax bracket Obama era tax rates, once we start taking RMDs, assuming no conversions. We are evaluating two different options. Both options assume a full conversion of our existing IRAs over the next 10 years or so. In both of our options, we are assuming that we will be consuming and converting our qualifying money from age 65 to age 70.” Here are the two options, Al.

Al: OK.

Joe: “Number one, take our Social Security at age 72 and 70 and our pensions as a monthly annuity at age 65.” OK, first of all, out the gate there Doug, you’re talking arbitrage, you’re kind of getting fancy with your words-

Al: – and you’re throwing money away.

Andi: I know here.

Joe: – that you’re going to start taking Social Security at 72. No.

Andi: Take it at 70.

Joe: You have to- just take it at 70.

Al: Yeah. Follow Andi’s advice. Take it at 70.

Joe: Yes. Andi’s giving advice now.

Andi: Well I have even learned from this show that there’s no point in taking it after 70, because 70 is where you max out how much benefit you can get.

Joe: That is correct.

Al: You throw away two years of arbitrage.

Joe: Yes. So you’re taking your benefit at 70. So there you go. We just saved you probably $100,000. “-and our pensions as a monthly income at age 65. At age 70, we will have a total income of $166,000 per year, pension of $76,000, Social Security of $89,000. Using the AARP current online calculator, this would result in annual taxes of approximately $20,000. We would also have retirement assets of $1,500,000. We would likely not need to take much from here since our monthly income would exceed what we would likely spend.”

Al: So that’s one option.

Joe: He’s going to push out Social Security, take the annuity pension at 65, $76,000’s the pension. $90,000 Social Security, so combined income of $167,000? Is that right?

Al: Yep. $166,000, he says it right here, he says.

Joe: I’m trying to do some math quick.

Al: Yeah, you were right.

Joe: $166,000.

Al: You’re very good. You’re within $1000. Right answer.

Joe: Yeah. So I can say arbitrage. That sounds like a solid plan. “Number 2, take our Social Security at age 70, we would take our pensions as lump sum, $1,100,000 at 65, roll them into IRAs and convert/consume over the next 5 to 7 years. At age 72 and 70 that time we will have total income of $89,000 per year, all of it being Social Security. Using the AARP current online calculator, this would result in annual taxes of $0. We would also have retirement assets of $2,300,000. We would need to access some of the minimal amount in our mid-80s for all the necessities as well as a bunch for fun spending. Comparison one will give us a guaranteed income for the life in excess of our basic necessities and will pay approximately $20,000 a year in taxes using current tax law. Option two will require paying taxes on income in higher taxes over the next 10 years than we would in option one. Based on an ROM analysis, I am calculating that we could pay up to an extra $150,000 in additional taxes in IRMAA surcharges over the next 10 years. After that time, the tax savings from having only Social Security income will $20,000 in year 11 and out.” Now he’s kind of messing up his writing skills. “I would also eliminate the widow/widower tax penalty, possible IRMAA penalties later in life, help simplify our estate and likely benefit our heirs. It would also likely eliminate the potential risk and means testing of Social Security in the future, similar to today, with IRMAA’s surcharges. As a data point, in looking at our Social Security income, it will cover all of our anticipated spending on a minimum dignity floor or necessities, at least until the mid-80s. These expenses forecasts are very conservative. We assume 7% for health care, 4% for other expenses. Since you don’t give advice, I would love to have you guys spitball, get your thoughts on this line of thinking. And if it’s reasonable for you to shed light on where this is flawed. Hopefully this is enough information. Doug from Missouri.” OK.

Al: Oh boy. OK, so let’s see. So we have- let me try to recap. He’s got $2,000,000 in investment accounts currently, which is fairly equally split between qualified, which is non-retirement, Roth and regular accounts, which are IRAs 401(k)s. So 1/3, 1/3, 1/3. So call it $650,000 each.

Joe: The major question, I believe, is that if he takes a pension, it’s going to be a plenty of fixed income that’s going to cover him and his wife’s needs. And then he’s going to have these other assets that he could potentially do whatever he wants with. That’s the liquidity. So he’s got conservative, it’s safety. You’re locked in. You’re good to go. You got a pension, you got your Social Security. All good. Then the RMD is going to be the issue, right?

Al: Sure.

Joe: So now he’s got $166,000 of income. He’s going to have, I don’t know what’s left in the IRA, that RMD is going to get kicked out and he’s going to be paying tax on whatever rate. And it’s going to be stuck at that rate just because of the large fixed income that he has.

Al: Correct. And so- let’s see what age is he right now? I got lost in the text here.

Andi: He’s almost 62.

Al: OK, so basically 10 years before RMD age. So right now let’s call it $600,000. Let’s say it doubles. So $1,200,000. So the RMD will be almost $50,000, roughly $50,000. So that would be added to the $166,000.

Joe: $210,000-

Al: – $210,000 minus standard deduction would be, in what is now, the 24% bracket, barely, but into the 24% bracket, which will probably be the 28% bracket. So would conversions be in order? And I think that was one option. I don’t think you have to necessarily convert every penny. I think that was option one.

Joe: Yeah, he was going to convert everything over a 10 year period.

Al: Right. I’m not so sure you need to do that because part of your analysis is you’re basically paying no tax. But your Social Security and pension is high enough, it’s going to cause taxation, at least if I understood your options here. I think you are going to pay taxes even if you don’t have any RMDs.

Joe: That’s option one. So if he does option one, here’s your planning. You take the pension, you have your Social Security, take your Social Security at age 70, take your pension at 65, and then take a look right now, what tax bracket are you in? You make $150,000 a year. You’re in the 22% tax bracket. It still makes sense to convert today to the top of the 22% tax bracket. And then if you take the pension, you keep converting to the top of whatever bracket until the tax rates change. So either go to the top at 22% or 24% because you will be in the 25% or 28%. So getting to the top of the 24% might be the right answer. And that bracket’s huge. It’s up to $350,000 of taxable income. So that’s if you take the pension. The second step that you have to do, if you don’t take the pension, you’re only fixed income sources is the $90,000 in Social Security that you won’t take until age 70. So then you have now $2,300,000 in retirement accounts. But he has other assets in the Roth and brokerage account. You live off the brokerage account and you convert the $2,300,000 up to the top of the 22% tax bracket.

Al: Or 24%.

Joe: Or 24%, depending on how much money that you have outside of the retirement accounts to pay the tax. And then you want to look at the IRMAA limits, which is $177,000. Maybe so you do a conversion of the $177,000. Everyone’s so up in arms on the stupid IRMAA. You have $4,000,000. Who cares if it’s another $700 a year for a couple of years to get several hundred thousands of dollars into a Roth that you’ll never ever pay tax on again? So I don’t know. That bugs me if you can’t tell.

Al: It seemed like you got a little hot. So I’ll try to go back and see if I agree with you. So option one is basically you’re taking your pension, you’re taking your Social Security. And let’s see, are we converting in that one?

Joe: I would.

Al: I would too. I don’t know if he said that or not.

Joe: Convert to the top of the 22% tax bracket.

Al: I would convert to the top of the 22% maybe even the 24%, I would consider it. As far as the second one, doing a lump sum. So now it’s all in the deferred. Again, I would- it’s the same idea whether you do one or the other. You would want to convert as much as you can in reasonable tax brackets. But here’s what some people do, is they convert so much, they push themselves to such a higher bracket to be in such a low bracket. They could have had 12% bracket, which is a low bracket. They’re paying 32% taxes to get there.

Joe: At the end of the day, his Social Security is going to cover his basic living expenses. So now we’re just really, sharpening the saw here and probably wasting everyone’s time listening to this, because either way, he’s fine.

Al: True.

Joe: His goals are accomplished. So now it’s, how conservative are you? Do you want the guaranteed income? If you want the guaranteed income and don’t worry about trying to create income from the overall portfolio, take the fixed income pension and then do everything that you can outside of the liquid assets that you have to get it more tax-efficient to go to the heirs. If you want more flexibility but also more responsibility, then you take on the lump sum. The other thing he’s got to think about is, what’s the lump sum number? Was it $1,700,000? or $1,100,000?

Al: $1,100,000.

Joe: So $1,100,000 versus-

Al: – and the payout’s $76,000.

Joe: OK, so your internal rate of return on that, depending on when he dies, is probably 4.5%. And how you figure that out is you just figure out the IRR of when you’re going to collect a pension. What do you think your life expectancy is? What your payment is? And then you can kind of figure out what your rate of return would be. And that’s a guaranteed rate of return. So let’s say the pension is going to be a guaranteed rate of return of 4%. If you feel that you cannot achieve 4% of the overall markets or in your portfolio over the next 20, 30 years, whatever, then absolutely take the pension. And I don’t know, you probably listen to a bunch of these podcasts because I’ve heard of the dignity floor before- and I can’t stand on that term-

Al: Anyway, either option is fine. So I’m going to go back to an answer I already did with another question. If you want the exact appropriate answer, you’ve got to do cash flow planning and you’ve got to do some present value analysis, just like Joe mentioned, which is basically would just go down to the pension versus lump sum. You look at all the pension payments you’re going to receive over your lifetime, whatever you think you’re going to live to. You do the present value analysis of that or net present value compared to the lump sum. And you see which one’s better, right? I mean, that’s what it comes down to. But, yeah, I would personally, if it were just me, I’m just going to spitball me, I would do option one. If I already had $2,000,000. It’s nice to have a fixed income guarantee too. It’s like I got the best of both worlds. Now relax. Have fun.

Joe: I would take option two.

Al: There you go.

Joe: Because I think that I have a little bit more liquidity. I have a little bit more control. I don’t want to pay taxes on income that I’m not necessarily spending. And maybe some years I’m going to have leaner years that I’m not going to spend nearly as much. Well then, it’s my choice to take on as much as I want, besides the required minimum distribution. But I got 10 years, to kind of put myself in the absolute best position before RMDs. I’m going to have 5 years until my pension kicks in and then I got another 5 years after that till Social Security. I know I’m fine. I’m not going to blow myself completely up because I’m going to have a lot of conservative investments in the portfolio. But it’s going to give me more flexibility.

Al: It also depends upon your wife. Does she like the fixed income? So in my case, that’s part of my- what I’m factoring in because Anne would like to have fixed income. Then I would think, I already got $2,000,000. That’s pretty good. I would probably work hard on converting the $600,000 or so that I have in an IRA to at least reduce the tax problem that way and then just enjoy my life. That’s what I would do.

Joe: I would ask the cart girl what she thought about it all.

Al: Is that right?

Can I Switch to My Ex-Spouse’s Social Security Benefits? (Mary)

Joe: So now it’s Mary’s turn:

“Mary. And my question is, if you’re retired and I’ve been collecting benefits since I was 62 and that’s quite a few years ago, but now I’m looking to increase my income. Can I switch to my former spouse’s Social Security benefits? And we were married 10 years. If you can answer that question. Thank you.”

Joe: Hmm, interesting. OK, so Mary’s 62-

Al: Well, she’s been collecting benefits since 62, and that was quite a few years ago.

Joe: OK.

Al:  She says.

Joe: And so now she’s like, hey, I want a little bit larger benefit.

Al: Yeah, yeah. And can I switch to my former spouse’s Social Security benefits? Because she’s been married 10 years or more. Which is important. If it’s 10 years or more, the answer is yes. If it’s less than 10 years, the answer’s no.

Joe: What do you think, Al?

Al: Yeah, you can. But the question is, is the former spouse living or not? and are they Social Security age? So there’s a few questions that you’d have to answer to figure out what the benefit could be and whether it makes sense.

Joe: So she claims the ex-spouse’s spousal benefit. So that is going to be 50% of the full retirement age. But she’s already claimed at 62.

Al: I know. So it’s going to be reduced.

Joe: It’s going to be 33% of his benefit.

Al: Well, right. Because had she waited for full retirement age, she’d get the full 50% of that benefit.

Joe: But since she claimed at 62, she’s going to have a reduction of the spousal benefit.

Al: Correct. But now what if that other spouse had passed away? the former spouse had passed away?

Joe: So then the survivor benefit is what you’re getting then.

Al: Yes, right.

Joe: So if he’s deceased and married for 10 years and she has not remarried, then she would be eligible for the survivor benefits.

Al: Which is the whole thing.

Joe: Correct. Which I don’t know if he’s- do we know if he’s dead?

Al: It doesn’t say.

Andi: She didn’t tell us.

Al: That’s what I’m saying, we need- or, what if Mary married a young guy, maybe he’s only 55.

Joe: And hasn’t claimed his benefit.

Al: Yeah. Because he can’t. So then the answer’s no.

Joe: So to claim a spousal benefit, the person needs to be claiming. But it’s a divorced spouse.

Al: Right. If it’s a divorced spouse, I think it’s that if the person is eligible to claim.

Joe: Correct. They don’t have to claim, but they’re eligible.

Al: Right. Which means they have to be at least 62.

Joe: But I think where the question comes in is that she wants to increase her income. Do you think her benefit at age 62 is going to be more or less than 30% of his full retirement age benefit? It’s probably going to be a wash.

Al: Could be. But we don’t know.

Joe: Or her’s might even be- we don’t know the numbers, of course.

Al: But that’s the thing, because sometimes people hear that and they think I can claim my former spouse’s benefit. If they’re living, it’s the spousal benefit, which is 50%, if you did it at full retirement age, which she didn’t, she did it at age 62. So it’s a reduced 50%, which is kind of where you’re at, the 33%- ish, somewhere in there.

Joe: So if Mary had any type of, even the median or average benefit, I would imagine that’s probably the same or-

Al:  On the other hand, if he’s passed away, then it’s the full benefit. And what’s interesting about Social Security is year by year, like let’s say you’re married 5 times, 10 years each, you can go back and forth. So you’re claiming the spouse on this one and oops, this one died. That’s a better fit. I’m going to switch to that one. And then the other one died that you’re getting the spousal, oh I’m gonna switch- you can make that switch whenever it is better for you.

Joe: So as long as you’ve been married for 10 years.

Al: Yeah, 10 year, per. So that’s a little tip.

Joe: Yeah. A little dating tip.

Andi: It’s too bad Social Security doesn’t just figure out what is the best for you and send it to you, you have to do all the work yourself.

Joe: Well you know how understaffed Social Security is. There’s 500- some odd thousand different rules with Social Security and how many claimants that they have. There’s no way. They’re not even allowed to give you advice. It’s like you trying to give- hey what’s the best claiming? You know, it’s like calling the IRS and asking them for tax advice. So they’re not going to give you any advice. They’ll tell you what the rules are. But that’s about it.

Andi: Hopefully they get it right when you call.

Joe: Right. But in most cases with Social Security, it’s tough. Their job is not to give advice. Their job is to tell you what you can and cannot do. Can I claim at 62? Yes. Can I claim at 67? You know what I mean? Am I eligible for this or that, that’s really their function, not necessarily to maximize the overall benefit. So hopefully that helps, Mary. Did we lose Andi?

Andi: No. I’m still here. But you gotta go.

Joe: We gotta go. The show’s called Your Money, Your Wealth®.

_______

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