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 [...]

Published On
February 16, 2021

A retirement plan spitball analysis for an engineer wondering if he can afford to retire, required minimum distribution questions answered, and discussion on when to stop contributing to tax-deferred accounts, when to start Roth conversions, and a conversion strategy for someone with no income. Plus, “conversation” – not advice – about Joe’s possible wallet syndrome, and a limerick and music from a listener.

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Show Notes

  • (00:53) Am I Financially Ready for Retirement? Retirement Plan Spitball Analysis (David, Sacramento)
  • (13:48) CRD Repayment and Roth Contribution Withdrawals into SIMPLE IRA (Johnny No Dough)
  • (22:16) Roth Conversion Strategy with No Income? (Jeremy, Cookeville, TN)
  • (26:17) Required Minimum Distributions: Substantiation of Basis? (Karen)
  • (28:59) When to Stop Contributing to Tax-Deferred Accounts? (Andy)
  • (38:10) RMDs: When and What Percentage Do I Have to Take from Retirement Accounts? (Denis)
  • (39:38) Should I Start Roth Conversions? (Rich, Long Island)
  • (44:40) Advice for Joe’s Butt (Kenny, Granite City, IL)
  • (51:07) Limerick and Music from Paul Lemire

Free resources:



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Today on Your Money, Your Wealth® podcast #313, we’ve got a retirement spitball analysis for David the engineer and his spreadsheets, required minimum distribution questions answered for Karen and Denis, and the fellas discuss when Andy should stop contributing to tax-deferred accounts, when Rich should start Roth conversions, and what the conversion strategy should be for a friend of our supply chain manager friend Jeremy. Plus, Kenny has health advice – or rather, conversation – for Joe, and we’ll wrap it all up with the Derails, after a little entertainment from our new musician friend Paul! If you have money questions, comments or entertainment to share with YMYW, click the link in the description of today’s episode in your podcast app to go to the show notes, then click Ask Joe and Al On Air.  I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Am I Financially Ready for Retirement? Retirement Plan Spitball Analysis

Joe: We’ve got a big one, Al.

Al: We do. It’s a long one, isn’t it?

Joe: Yes we do. We go “Hi Joe and Al. My name is David from Sacramento.” And it’s black. That means it’s, what?

Andi: I just bolded it so that you would actually see where his name is. That’s all.

Joe: Oh. Got it.

Al: That was from Andi. Just to help us.

Joe: “I am single, divorced, 66 years old, turning 67 in September of this year. I am a long time listener, first time caller and enjoy the podcast very much. Very informative and very funny to listen to.” He’s got like columns, Al, so we got 1, 2, 3, 4 and then we got 5, A, B, C, E –

Al: There’s a D too.

Joe: Then we got some D’s. We got a whole bunch of stuff going on here.

Andi: And I will have you know that I did not actually change any of his outline the way that worked. So under C, then there’s a subsection of D, so that’s what he put. So I left it there.

Joe: With current assets, we got A, B, C, D, E, F, G, H, I, J, K, and then subset, A1, 2, 3.

Al: Yeah, there’s-

Joe: Because he’s an electrical engineer with a master’s in electrical engineer, MBA and PMP.

Al: What’s that?

Joe: PMP, I don’t know. I know what PMIP is. So he’s retired and I could tell you, engineer-

Al: Have you ever seen an engineer show us detailed calculations?

Joe: Yes. He is probably upset that he had to do it like an email format vs. an Excel spreadsheet. So I’m going to just start with the questions Al, and then we can kind of-

Al: – go backwards.

Joe: – and backfill with all the-

Al: Ok, I like it.

Joe: – the information. And we’re going probably- and David’s probably freaking out. Because he’s probably like you in some degree Al, because you have to go A, and then B, and then C-

Al: – and 2A, and then C-

Joe: and then if you skip one thing, Al freaks.

Al: I start to get nervous.

Joe: I know.

Al: It’s very unsettling, Joe, for people like me.

Joe: I got it. OK, well, let’s just see. He’s got questions. He wants answers.

Al: So you’re starting with 5A.

Joe: I am.

Andi:/Joe: 5A1.

Al: 5A1, ok.

Joe: “When calculating total net worth, are government pensions and Social Security taken into consideration in the net worth calculation formula?”

Al: That answer is no.

Joe: Well, it depends. What are you trying to do? I mean, in your own personal net worth, if you want to feel like you want to brag to your other engineer buddies when you’re talking about money, I guess you could take the present value of your pension and put it on there. But in most cases, no, it’s an income stream.

Al: I’ve never seen that done. I suppose you could, but I would say no, that’s an income stream. That’s not an asset.

Andi: One other thing that we should mention actually from his current work status to be is that he’s a retired engineer with a government pension of $59,000 a year. Worked as an engineer consultant for a few years, currently working full time for another government agency with an annual salary of $132,000 a year.” So that might-

Joe: I skipped this for a reason. You want to just read the whole damn thing? Andi?

Andi: Nope, go for it.

Al: OK, I would give us A+ on the first thing.

Joe: OK, so no. All right, let’s define net worth for our engineer folks. Total assets minus-

Al: Our engineer folks already know what it is.

Joe: – minus total liabilities equals net worth.

Al: Think of it like your house. Your house is worth a $100,000, your loan is $70,000. Your equity is $30,000. That’s your net worth in the house.

Joe: OK, number 2) “Based on my current net worth and based on a final retirement living expense of $120,000 by age 70, can you give me your opinion as to whether I’m financially ready for retirement? Or should I continue to work 2 or 3 more years to take advantage of the opportunity to continue to maximize my retirement accounts of $52,000 per year?” All right. Well, so he wants to make $120,000-

Al: And what’d you say his pensions were, Andi?

Joe: So he’s got a $51,000 pension. So $120,000 minus- I’m sorry, $60,000 a year. Right. Minus that. And then so let me just quickly scroll down here to see if we can find Social Security. Social Security is going to be $48,000 a year. We’re going to take that, $48,000 minus, so $12,000- .04 divided- so he needs around $300,000 of retirement assets. And I can tell probably by looking at this, let’s see, he’s got an IRA of $260,000, then $100,000, $100,000, then $300,000, yes, you’re good. All right?

Al: I agree with that. Here’s another line that says, “If I retire this year, my pension’s annual income will be $60,000 plus $25,000. So $85,000.

Joe: So here’s what you do real quickly, David, is when you- don’t- look at liquid assets, so you just total all of your assets up, not your real estate, liquid, that you can sell tomorrow and get cash. So that is your IRAs, that’s your 457s, that’s your 401(k)s, that’s your 403(b)s, any brokerage account, anything that you have in cash, you just add all that up, make it really simple. So you want to spend $120,000 a year, you subtract out your fixed income sources. So you already know that you’re going to have a pension of $60,000. You have Social Security of another $40,000. So that’s $100,000. So what are you short? $20,000. So you want to spend $120,000, you have $100,000 coming in, you’re short $20,000.  Take the $20,000 or whatever your shortfall is, and divide it into your liquid assets, not your net worth. Just liquid assets and see what percentage that is. And at age 70, if it’s under 4%, you’re probably really good.

Al: Yep. Totally agree. And that seems like David, you’re fine.

Joe: David, you’re right on track there. I think you have a lot more than that. So even being very, very conservative, you’re good to go.

Al: But I will say by working just 2 or 3 more years, saving more, you can have a more robust retirement if you want to.

Joe: You love working. Tinkering around with stuff. David, you’re an engineer.

Al: Because let’s say you work another couple of years, 3 years, whatever, you save a lot more,  number one.

Joe: He’s going to save $150,000 more.

Al: Your pension benefits may be higher. You haven’t withdrawn from your portfolio, so you got more time to grow. So everything works out better. It’s just that you may want to retire. If you want to retire, go for it. You’ve got plenty of assets to do it and income.

Joe: Next question. “For the last 3 years, I’ve been making Roth conversions from my IRA and 457 pre-tax accounts. The conversion amounts have been such that I have stayed within the 24% tax bracket. If I plan to defer pensions, RMDs and Social Security withdrawals until after age 70, by which time I’ll be living in a tax  _____ state. should I stop making Roth conversions until I move _____ the state?” Well, he’s in Sacramento. He’s going to move, I don’t know maybe where, Tahoe?

Al: He says Florida, Texas or Nevada.

Joe: OK, so Nevada is kind of close. So he’s converting money into the 24% tax bracket and he’s thinking, he’s 66. He’s turning 67 this year. He’s going to work a couple more years. Then he’s converting now in the 24%.

But he’s single, he’s divorced. So he will be in, let’s see at a $60,000 pension and at- plus with a lot of his money in retirement accounts with RMDs, he’s probably going to be in the 24% tax bracket in retirement.

Al: Probably will be- if the newer rate when that comes in, it’ll be 25% or 28%. So 24% seems like a good deal. But I think the bigger question is, should he pay the California tax, which he wouldn’t have to pay if he lives in Nevada, for example. And that really is kind of the question. I would say it’s a bit of a tossup. It’s nice to get more money into a Roth and maybe pay a little extra tax to do it and get that tax-free growth. On the other hand, it doesn’t seem like you’ve got so much money in your 401(k) , 457, that the RMD is going to be that big. So I don’t know. I might kind of pull back on the Roth conversions right now just because of what you just said.

Joe: Yeah, I might go Roth 401(k) and stop the conversions. You’re doing 457 and 403(b)-so he’s, he’s double-he’s jammin’ money in there.

Al: Yeah. Yeah. I guess maybe a way to say that is you don’t have to be too aggressive here. Now if you do retire, and so you’re in a lower tax bracket plus maybe you want to move to the other state and then you jam it.

Joe: But he doesn’t have that much time. Let’s say RMD’s at 72 is going to work until age 70. He’s going to- you got to take your Social Security at 70.

Al: You do.

Joe: You can’t push that out. If your pension’s- you got to do the calculation to see what your increase in benefit is if you push it out past 70 as well. So there’s some calculations that you would want to run.

Al: However, he wanted to know if he’s financially ready for retirement. We said yes. So maybe that will-

Joe: Maybe he retires now.

Al: Then if you retire now, it’s a great time to do conversions, even if you’re in California, because you’ll be in a low California bracket.

Joe: “If I plan to retire this year and move to one of the above states and buy a condo, and considering that I will be keeping my existing condo in California as a rental investment, does it make sense to continue the $2000 principle mortgage payments to my current mortgage? Or should I use that money towards the purchase of my next primary residence, assuming that I can afford monthly payments for both properties? And then I would rent out my California condo.” So he’s adding a little bit more into the- his condo now. Should he continue to pay down the mortgage if he’s going to keep it and rent it out or should read redivert that for a down payment or use that to fund his new house? I would do what you’re thinking, David. If you’re going to keep it and rent it, then I would probably want to have the renters pay my mortgage versus me paying that down. Buy the other place. And then you can split the difference there.

Al: Yeah, I think I agree with that. I mean, if I’m reading this right, he’s got $100,000 in his cash accounts. You want to save a pretty good chunk of that for an emergency cash reserve. So, yeah, I think I would be kind of putting money aside for the down payment. And that’s the thing about rentals. You don’t have to pay off your rental mortgage as long as the tenants are helping you pay for it. That’s the whole idea. You’re using other people’s money to pay off a mortgage so that you basically help your net worth. So, yeah, I would agree with that.

Joe: All right. Last question. “If I will not continue to work past age 70 and based on my projected living expenses, $120,000 a year, and income from the two pensions, Social Security, what should my investment portfolio look like in retirement? What should my pension annual withdrawals should be?” OK, well, first of all, your pension withdrawals is going to be based on what your lump sum versus- or is he calling his retirement accounts pensions like you do sometimes?

Al: I think he is.

Joe: We would have to get a little bit more granular and we’ve already spent about 13 minutes on this. So I would go with probably a globally diversified, low fee, very tax efficient portfolio. I’m not sure what the mix would be in regards to stock bonds because we would of course need to dive in a little bit more. We don’t give advice on this show, so there ya go.

Al: Yeah, fair enough.

No matter which stage you’re in in life, decisions you make will affect your financial security today and for years to come. Crack the Financial Code at Any Age with financial strategies and actions to take in your 20’s, 30’s, 40’s and 50’s that will help you overcome any previous missteps and set you up for a more successful retirement. Download the free guide to Cracking the Financial Code at Any Age and watch Financial Fresh Start, the latest episode of the YMYW TV show in the podcast show notes at YourMoneyYourWealth.com. Click the link in the description of today’ episode in your podcast app to get there.

CRD Repayment and Roth Contribution Withdrawals into SIMPLE IRA

Joe: Got a call from Johnny No Dough.

Al: OK, that sounds exciting.

Joe: Yeah, I’m sure we can help him out.

Al: Let’s see, he kept it to one page. Appreciate it.

Joe: Thank you, Johnny No Dough. We got not a backdoor Roth or Roth conversion question from Denville, New Jersey. Denville, never heard of it.

Al: No, never have.

Joe: Got it.

Al: Have you?

Joe: No, no, Denville.

Al: I’ve heard of New Jersey.

Joe: You have? “Hey Big Al, slightly larger than average Joe and Andi, the last of the great podcast producers.

Andi: Get it? He’s doing a play on my name.

Joe: Got it. I think he is. “I love the show and started listening during the pandemic. I look forward to remaining a regular listener onward.” So the pandemic brought some good news to someone.

Al: Well, it’s like there’s nothing else to do. Let’s listen to podcasts.

Joe: “In 2020, I took out a coronavirus related distribution, CRD, of $11,500 from my Roth IRA. This amount can be considered as withdrawing contributions without penalty. I had that amount exactly in previous years in contributions and I have had my Roth for well over 5 years. However, I would like the opportunity to pay it back over the next 3 years if I can. Do I need to report it as income if it was a Roth contribution that I took out? If I cannot pay this back in 3 years, am I in the clear because the amount was in contributions or will I face a penalty? Lastly, I took the CRD out from my Roth IRA and put it in my Simple IRA for the previous year, 2019, to lower my tax bracket in taxes owed for my 2019 tax return. This event obviously took place in 2020, but it happened well before my 2019 tax returns were due. Was this a legit move? Can I choose to repay or not repay the CRD over the next 3 years?” Interesting strategy, Johnny No Dough.

Al: Yeah, all good questions.

Joe: So let’s kind of break this down. But just a little bit more on Johnny No Dough. “Just by the way. I’m 43, self-employed, happily married to my wife and have a 3-year old boy. I wouldn’t tell you my net worth because it’s embarrassingly low.” Oh, it’s never too embarrassing. That’s why we have the show to increase your net worth.

Al: We do like to do that.

Joe: “And I’m way behind on my retirement savings. I drive a Toyota Rav4 hybrid as our only car and probably only put about 1500 miles a year on it. We moved from NYC and we still try to walk everywhere. Joe, I love golf, but I only broke 100 strokes once.” You could tell he doesn’t play that often. Because he says 100 strokes.

Al: Yeah, right.

Joe: Hey, you broke 100 once. All right, in the 90s. “I mostly go for the beer.” Perfect, Johnny No Dough. You’d be a great team member. Light him up in the foursome.

Al: That’s right.

Joe: “I hope to see you on the course some day.” Well, Johnny, I would like to see you as well. I’ll just be looking out for the guy yakking it up, drinking a lot of beer.

Al: It might make the round go a little longer.

Joe: Happily- you know, happily join Johnny No Dough. OK, let’s break this down. Coronavirus Related Distribution. So last year due to the coronavirus, they came up with the CRD, coronavirus related distribution, that allowed us to take money from a retirement account with no taxes or penalties, up to $100,000 a year if you withdrew the money due to a coronavirus defined-

Al: – incident or something.

Joe: – incident, right. So you had to have Covid, your spouse had to have it. You had to get furloughed, laid off-

Al: – or even made less income for whatever reason.

Joe: Maybe you had to stay home from work to take care of the 3-year old kid.

Al: That’s right.

Joe: So there was a lot- and any other reason deemed appropriate.

Al: Yeah. You could just say to the virus, does this work?

Joe: Yes. Basically, everyone qualified.

Al: Almost.

Joe: So you could take out this $100,000 from a retirement account. So let’s say you took it from a 401(k), they didn’t have a mandatory 20% withholding. You take it from an IRA, you pulled $100,000 out. You have the option to pay it back over 3 years. Or you could pay the tax over 3 years. So pretty cool. So if you needed $100,000 quick to pay some bills, you didn’t get killed in taxes that year. So what Johnny No Dough did, he took $11,500 out. And he took it out of his Roth IRA. And so with Roth IRAs, you can take money from a Roth IRA that is contributions at any age.

Al: Agreed.

Joe: Johnny’s 43, so he’s under 59 and a half, but he has access to the principal amount because it’s FIFO tax-free.

Al: Yeah. And so that was true whether there’s a CRD or not.

Joe: So he could of just took the distribution from the Roth and said, hey I’m not paying tax.

Al: At any time.

Joe: Any time. But he was smart about it.

Al: He was. He gives himself some options.

Joe: He gave himself some options and say, you know what, how about if I paid this back over 3 years? Let me come up with 3 years to get the $11,500 back.

Al: I’ll figure it out somehow.

Joe: Yeah, he’s creative. Because then he took the money and he funded his Simple IRA. Because the max Simple IRA contribution is around $11,500. So he reduces his taxable income. But he didn’t have $11,500 sitting around, he goes I’m going to take it from my Roth. I’m going to classify it as a CRD. I’m going to take the money, fund the Simple, I’m going to pay the Roth back over 3 years. All legal?

Al: Yes, all good.

Joe: All good. Absolutely.

Al: I like that idea because if he does nothing, he’s taking money out of a Roth IRA. Right. It’s not taxable. Even if there wasn’t a CRD, it’s not taxable. So he can pay it back, pay back within 3 years. He can use the money for anything, including funding a Simple IRA. You can fund a Simple IRA as long as you’re the employer. In other words, as long as it’s your company, you can fund that into the following year before the due date of your tax return.

Now, if he’s an employee trying to fund a Simple IRA after year-end, that has to come through salary, that doesn’t work. So I’m assuming it’s his own business and that’s just fine to fund it the next year. So, yeah, I would say legit on everything.

Joe: Yeah. He says ‘self-employed, happily married to my wife’.

Al: Oh, there you go. Yeah, you’re right, he does say that. Very good. So yeah. No, that’s all good. And you can either pay it back over 3 years or not. And you don’t have to report it on your return because it’s a Roth, right?

Joe: Yeah. There’s no taxes anyway.

Al: Yeah, right.

Joe: If it was an IRA, then you would have to report it on your tax return. You would have to pay 1/3, 1/3, 1/3 or pay it all. And if you did- and if you paid it back, then you would file an amended return to get the money back. Al: Yeah, what’s kind of weird, even if you intend on paying the money back within 3 years, you still have to pay 1/3 of the tax in year one, and 1/3 of the tax in year 2 and 1/3 of the tax in year 3, potentially. Chances are obviously, if you pay it back within 3 years, you’re not going to have any taxes in year 3. So you’d have to file an amended return for the taxes that you paid in year 2 and year one to get that money back. So it’s- it’s a little bit of a hassle to do it that way. But you can do it.

Joe: Very cool question, Johnny No Dough. Very creative. So he’s taking from Peter to purchase Paul, is that how that saying goes?

Andi: Stealing from Peter to pay Paul.

Al: Yes, thank you.

Joe: And then he’s repaying Peter back over 3 years, Paul back.

Al: Here’s an even better idea to make it simpler. If you can- try to pay the CRD back by October 15th of 2021, of our current year, because you can extend your return up to that date. And then if as long as you paid it back by that date, there’s no taxes due in either year, 2020 or 2021. So how about that? In other words-

Joe: But there would be no taxes any because it’s a Roth.

Al: That’s true. We were- agreed. But we were on if it were an IRA.

Joe: Got it.

Al: Yeah, no, you’re right. If it is a Roth, it’s a moot point.

Joe: Moot point.

Roth Conversion Strategy with No Income?

Joe: We got our good friend, Jeremy, the supply chain manager from Cookerville, Tennessee.

Al: Did we ever figure out what that is? Supply chain manager?

Joe: Yeah.

Al: Manages supplies. He manages the-

Andi: – manages the chain of supplies. And remember, he’s also got a kayak side hustle.

Al: Oh, that’s right. Yep.

Joe: It’s Cookeville, right? Not Cookerville?

Andi: Correct. It’s only taken half a dozen emails from Jeremy to get that right.

Joe: “Al, Andi and Joe, in alphabetical order. Sorry for the Roth conversion question, but it just came up and I thought it was worth asking.” So this guy, anything that pops into his head, what does he do? He writes us a email.

Al: Yeah, even if it’s his friend.

Joe: It’s like, I don’t know. You know what I’m gonna do? I’m going to ask Joe and Al.

Andi: It makes for good content.

Joe: You’re a supply chain manager, Jeremy. Right? You’re a manager. You could figure some stuff out on your own here.

Al: Yeah, just Google it. It tells you a lot of stuff.

Joe: I was just thinking about something in the middle of the night, I thought I would email Joe and Al.

Al: It was about a Roth. I dreamt about a Roth and I thought, oh my gosh, I got to ask these guys.

Joe: Oh God. “I have a friend who’s not working.” OK, sure, Jeremy. He got fired.

Al: So how many times has I have a- I might know somebody that-

Joe: I’m not asking for me. I’m asking for a friend. “He plans to work- he plans to return to work at some point, but did not work for most of 2020 and may not earn any income at all in 2021.”

Al: I wonder if he was a supply chain manager.

Joe: I think he was. I believe he was. “My question is, if he has no income in 2021, can he do a Roth conversion up to the standard deduction plus the top of the 0% tax bracket and pay no tax? If my info is correct, that’d be $22,000. $12,400 is the standard deduction for a single person plus $9875 is the top to keep in the 10% for someone filing single. Originally I was curious for his situation, but if that’s how it works, then maybe it might be something I would consider.”

Al: Here we go.

Joe: Here we go, Jeremy. He’s not working.

Al: He’s out of work.

Joe: Yep. Supply chain manager got canned.

Al: He might get a job in 2021 and he might not.

Joe: Well, if the answer is true, then maybe I might go back to work, maybe I won’t. See if I can manage some other person’s supply chain. The answer is correct. Yes. You would pay zero tax if you have no income. You can go  up the standard deduction.

Al: Yeah, but his logic is slightly faulty. So he says $12,400 plus $9875. That’s the top of the 10%. So Jeremy, if you want to pay no tax, you only get the standard deduction, which actually I think is $12,550-

Joe: – for 2021?

Al: – yeah, $12,550. So that’s your amount of Roth conversion if you have no other income and you want to pay no tax. Now, we would argue paying a 10% tax rate is a pretty good deal. Right? So if-

Joe: – it’s $1000-

Al: – it’s $1000-

Joe: He could, for $25,000 for $1000.

Al: Yeah, roughly. That’s the amount. So that seems like a good deal. Plus, your state taxes probably in Tennessee, I’m assuming, is probably nothing, at that level.

Joe: 2%.

Al: $40, if that. So anyway, your logic is completely right. It’s just that the numbers you gave us are the top of the 10% bracket. So $9875 is actually taxed at 10%.

Joe: So $10,000 at 10%.

Al: So about $1000 in taxes to convert, call it $22,000.

Joe: So. All right, Jeremy. So now you are called Jeremy, the former supply chain manager.

Al: We’re really good at these- we’re like a detective, right? Figuring these things out? Of course we’re wrong 90% of the time, but we have fun with it.

Required Minimum Distributions: Substantiation of Basis?

Joe: Karen writes in. She goes “Dear Joe, Al, and Andi, will the IRS ever require substantiation of the basis on form 8606 when I start my RMDs? I’m going through my files and I realize that I do not have any of my forms, 5498s or even all the copies of the broker’s letter showing my contributions.” So here’s Karen’s issue. She’s got all these forms dialed Al, the 8606-

Al/Joe: the 5498-

Al: – and RMD. It’s like, wow, you’re talking financial lingo.

Joe: Yes, I like it, Karen.

Al: I do too.

Joe: So she’s got basis in her IRA, I’m guessing.

Al: So in other words, she’s making an IRA contribution, probably done it for many, many years and she did not get a tax deduction. And so when that’s the case, as you start pulling money out, some of that money comes out tax-free because you’ve already- you never got a tax deduction. So that’s the idea. And the IRS has this form 8606, which you capture that amount. You’re supposed to do one each and every year. And last year’s amount gets added, and this year’s amount, which then gets added, and next year’s amount and keep on going. So the question is, what if she didn’t do an 8606? Karen, I would say almost nobody has a complete 8606 library. So just do your best, do your best job to come up with it. The IRS would only ask about it if they audit your return and they suspect there’s something wrong.

Joe: So file an 8606 on this-

Al: – on this year.

Joe: – on this year return with your estimated basis of what you believe it is.

Al: That’s right. And every question and show your calculation to the IRS. That’s all.

Joe and Al will go into more detail on when you have to take required minimum distributions and how much those RMDs need to be in just a little bit. In the meantime, have you attended one of Joe’s free digital workshops on Taxes in Retirement yet? You’ll learn how to take advantage of tax-saving opportunities available to you in 2021 and find out how recent tax legislation impacts you, your family, and your retirement savings. If 45 minutes isn’t enough, park yourself in front of your computer for a two day digital retirement class. Learn how to calculate your financial needs in retirement, the different types of retirement accounts, Social Security, taxes, investing, stocks, bonds and other asset classes, insurance, estate planning, and more. Click the link in the description of today’s episode in your podcast app to go to the show notes and click “Retirement Classes” to register for either the 45 minute Taxes in Retirement webinar or the 2 day digital retirement class.

When to Stop Contributing to Tax-Deferred Accounts?

Joe: I’ve got Andy. He writes in. He goes “Andi, Joe and Big Al, frequent listener, frequent viewer. New twist on saving for retirement. If taxes are going up and 401s are exploding, when does it make sense to stop saving in a tax deferred fund? As always, one should always fund an HSA and invest for their risk tolerance.” As always Al- I mean, that’s-

Al: Don’t you know that? That’s a fact.

Joe: If you don’t invest in an HSA, you are missing the boat.

Al: There’s some- there’s a problem with your thinking. Of course you have to qualify to invest in an HSA.

Joe: As always, of course, ” To me, my 401 expansion-”

Al: Ok, so it’s the tax time bomb.

Joe: Is that what he’s talking about?

Al: I think so.

Joe: Got it. “- my 401 expansion will place me in a higher bracket than now. I still use them as my field is a target for lawyers who-” what the hell? “To me, my 401 expansion will place me in a higher bracket than now. I still use them as my field is a target for lawyers-”

Al:  I think he get interrupted when he was writing this. He started writing-

Andi: Is he saying that his 401(k) might be subject to lawsuits because of the field that he’s in?

Joe: Ok- I still use them – maybe period? as my field of employment is a target for lawyers?

Al: No, I think he’s- no, I think Andi’s right. He’s saying he has a big 401(k). He might get sued, his lawyers would go after it. Let’s go with that.

Joe: Ok. “- and build my 401 Roth.”

Al: The lawyers could go after that too.

Joe: “this risk is larger if my ex-wives-

Andi: It doesn’t say ex-wives.

Joe: Oh well, I don’t know, you got me thinking about lawyers and someone’s targeting this guy, I don’t know.

Al: Yeah, it would be ex-wives.

Joe: “This risk is larger if my wife outlives me, likely.” Ok, I thought he said my ex-wives come after me. “I guess it makes sense to grow my taxable funds now. Would you agree? And continue to grow my Roths by converting to the top of the 24% tax bracket. Does this aggregation rule apply to a couple or to the individual taxpayer? Should I consider continuing non-deductible IRAs and planning to move to a low state tax state? So last question, what matters more, the tax-free state or a state without an estate tax? Of course, both is best. Thanks for the response.”

Al: I always go for both if you can.

Joe: Andy, you’re a frequent listener, frequent viewer. And he’s got the 401(k) expansion. And I don’t know what that is.

Al: That’s a tax time bomb.

Joe: Got it. So it’s going to blow up. His 401(k) is going to explode.

Al: It’s going to put him in such a high tax bracket.

Joe: “- will place me in a higher bracket than now.” Ok. So but Andy, you got to explain this to me. “I still use them as my field is a target for lawyers.”

Andi: I think he’s saying he still uses a 401(k), but his field is a target for lawyers. So he doesn’t want to build his 401(k) because he’s afraid that he’s going to get sued.

Al: I think that’s a reasonable theory and what he’s trying to say.

Joe: So he works in a field that is subject to lawsuits.

Al: And the attorneys are going to go after him because he’s got a exploding 401(k).

Joe: But it’s protected.

Al: Right. That’s true. Well-

Joe: It depends.

Al: In California it is. I don’t know, what state? No location given.

Joe: OK, so I guess this question should he convert to the top of the 24% tax bracket Al? Help Andy out. He’s got a 401 that’s expanding. And he’s got a field that the lawyers are just chomping at the bit at.

Al: Well let’s think about this. So let’s say by the time you retire, you end up with $1,000,000 in a 401(k), just with your explosion, with your expansion- explosion. At age 72, $1,000,000, your required minimum distribution’s about 4%. So that’s $40,000. OK, let’s say you get $30,000 of Social Security between you and your wife. So that’s $70,000 of income. Right? You’re in the 12% bracket. If that’s your situation. Would I convert to the 24%? No, because why? I’m going to be in the 12% bracket. On the other hand, if his IRA is-

Joe: -millions.

Al: – $4,000,000. So now your RMD is going to be about $160,000. Maybe you’ve got other assets that add to your income, maybe your Social Security is high, maybe your pensions are high, yet you just look at what your future tax rates are going to be versus now to help you decide what’s the best strategy. I think that’s a- it’s a key point that a lot of people miss.

Joe: The 24% tax bracket is quite large.

Al: Yeah, it is.

Joe: It can go up to about $300,000 some-odd of income as a married couple.

Al: And if you are going to be above what is now the 12% bracket, the 24% bracket looks pretty good. Because the 12% bracket becomes 22%. That’s what it is now. In 2026 it will become 25%. So you just do a little math to figure out what bracket will I be in and that’ll help me decide what bracket to convert to. So the only reason you wouldn’t necessarily convert to the top of the 24% in his case is if he’s going to be in a much lower bracket. Or he’s got no money to pay the tax. I mean, there’s several reasons why he wouldn’t do it. So we don’t have enough facts here. But that’s kind of the thinking on what you might want to do conversion-wise.

Joe: I don’t know, Andy might be a big shooter here, though, too, because he’s worried about estate taxes and he’s married. So you need an estate over $25,000,000, roughly.

Al: Currently, yeah, that may go down to $10,000,000 but we’ll see.

Joe: Right. So if you have an estate under $25,000,000-

Al: It’s more like $23,000,000. But-

Joe: I’m rounding Al. I’m rounding. If you have an estate under that amount- let’s say $20,000,000- I’ll round on the lower end. You’re good, don’t worry about estate taxes. If you have an estate over $20,000,000, then you got to worry about the estate tax. So then their strategy is to zero out the estate tax. I would much rather live in a 0% tax bracket state. But then you’re choosing some states that maybe I wouldn’t necessarily want to live in.

Al: Well, although some states do still have an inheritance tax, like Oregon, for example.

Joe: Minnesota, I believe too.

Al: Yeah, yeah. So I don’t know. I mean, it’s pretty low in Oregon. I think if your net worth is like $1,500,000 or $2,000,000, they start assessing an estate tax. So, yeah, consider that. Which is better? It depends on your situation. If you have a high amount of assets but a very low income, then favor the state that has no estate tax. If it’s the opposite, then go for the-

Joe: I’m just going to give a tip for our listeners here. There’s the extreme, such as David, that wrote a 15-page synopsis of his overall situation to the details of the ticker, what the hell he’s got.

Al: Yep.

Joe: That’s a lot of reading. No one really wants to hear that type of detail. But Andy, on the other hand, is not giving enough detail.

Al: A couple of missing facts.

Joe: And so when you’re curious about your 401(k) expansion-

Al: – give us some idea.

Joe: – just say, hey, I’ve got a $20,000,000 retirement account that’s going to blow up. Then we’ll be like now you’ve got issues. You could just give us round numbers.

Al: Or tell us you’re 50, you’re going to work for another 15 years and you’re max funding your account.

Joe: And my current balance is $2,000,000.

Al: And it’s $1,000,000. Then we can go so that means you’re probably gonna end up with $3,000,000 or $4,000,000, whatever.

Joe: But we got some people that are like, you know what? They come in, they listen to the radio show. They do whatever, watch one of our little workshops.  They’re like Joe, I got to stop paying this much in tax. And then I look at their tax return and they paid like $1500 in tax.

Al: I mean, we’ve had people that come in and we say, what’d you come in for? To reduce taxes. And we look at the tax return – zero.

Joe: There’s no tax.

Al: There’s no tax. Didn’t even need to file. Let’s see, I’m not sure I can get it below zero. Unless you get the earned income credit.

Joe: You screwed up, you should have done a conversion to the top of the standard deduction-

Al: – and pay no tax-

Joe: – and paid no tax and got money in the tax-free accounts. So sometimes people think that, wow, they’re paying way too much in tax and they’re not even barely scratching the surface in tax. And Andy could be on either extreme. We don’t know. He could be heading for this 401 explosion. And so, yes, conversions are appropriate.

RMDs: When and What Percentage Do I Have to Take from Retirement Accounts?

Joe: Denis C. writes in “Hi, Happy New Year. I’ve been receiving my Social Security benefits since I was 65. In September last year, in 2020, I turned 71. My question is, when and what percentage do I have to withdraw- what percentage do I have to withdrawal part of the money from my IRA 401(k)? Thanks for your time and work.” OK, I swear I’ve not been drinking. And I am reading exactly what they wrote.

Al: Start over.

Joe: “My question is when and what percentage do I have to withdraw part of the money from my IRA 401(k). Thanks.”

Al: So I’ll translate. I think he’s asking when he has to take a required minimum distribution, which by the way is of age 72, then you have to take a certain percentage out of it.

Joe: All he’s talking about, he goes, I’ve been getting my Social Security benefits. Things are great. When I turned 71. What percentage?

Al: Yeah. So the percentage is 0%, because there is no requirement of distribution. That changed. It used to be 70 and a half, now it’s 72. But Joe, at age 72 it’s about 4%.

Joe: 4%.

Al: Roughly. And by the way, just for fun fact, at about age 78, it’s about 5%. So the percentage goes up as you get older.

Should I Start Roth Conversions?

Joe: Rich writes in from Long Island.

Andi: You’re going to love this one.

Joe: “Good day, CPA-”

Al: CPA Al. Oh nice, that’s to me.

Joe: “I would like to know if I should start Roth conversions.” Oh, imagine this.

Al: Here we go.

Joe: All right, way to go Rich. “Below is a list of the facts. I’m 53 and spouse is 52; married; adjusted gross income, $140,000; $1,200,000 in retirement account; wife and I will receive Social Security and 2 pensions, which would be about $30,000 combined. We currently live in the over-taxed state of New York and will be moving to North Carolina when we retire. I drive a 2020 Volkswagen-”

Andi: Tiguan?

Al: Tiguan? T I G U A N.

Joe: What’s that? It’s like an SUV of some sort?

Al: Looks like it, yeah.

Joe: Maybe a family-

Al: Oh- it’s the Jaguar- Oh, “and a Jaguar F type.”

Joe: Oh, an F type.

Al: That was- that was a gift.

Joe: “And a 2017 Jag F. “Hello, Andi and Jim.”

Al: Who’s Jim?

Joe: Rich. You want to drive the Volkswagen- Jag is-

Al: Well, the Jag was a gift.

Joe: Got it. Got it.

Al: Yeah, he wouldn’t have bought the Jag.

Joe: Understand. He’s frugal.

Andi: Ooo, F-type Jag is pretty.

Al: That’s a cool one.

Joe: Oh, my God. Does he race that thing?

Andi: And it was a gift. Who gives a Jag?

Joe: I don’t know. That looks like a race car. I can see Rich cruising around Long Island in that thing. He probably has a mullet.

Al: Well, ok, since he asked me, I’ll answer it. Probably.

Joe: I guarantee Rich has got a mullet.

Andi: Ok, Jim.

Al: Ok, so at any rate, so he’s got $140,000 of adjusted gross income, standard deduction puts him at about $115,000 taxable income, married. So he’s in the 22% bracket. So then you think- then you fast forward. What’s he going to be in when he’s retired? At least we got a few figures here. $1,200,000 at age 53. I don’t know how much longer you’re going to be working, but I’m going to guess you’ll be working at least 10 more years. I mean, just as a guess. That $1,200,000, by the time you have to take required minimum distributions, could be, with funding right now, probably could be $4,000,000? $5,000,000? Oh, you got your calculator out, Joe. I’m going to say $5,000,000, just to put a number in.

Joe: How much do you think he’s saving?

Al: Well, I don’t know. He’s got $1,200,000 at 53. That’s pretty good.

Joe: So he’s probably- probably- 2020? So $40,000.

Al: Yeah. Let’s call it that.

Joe: All right. Yeah, it’s about $3,000,000. That’s 6%.

Al: That’s for 10 years?

Joe: For 10?

Al:  Yeah. But then to age 72 it’s going to be $5,000,000 or $6,000,000. Right?

Joe: Well that’s just 10 years.

Al: Anyway.

Joe: Present value of that. So you want to go 53- another 10 years on top of that- at 6%-  future value $5,300,000.

Al: Yeah, $5,300,000. So let’s say it’s $5,000,000. So your RMD is about 4% of that. $200,000.

Joe: But he’s gonna spend- we don’t know when he’s going to retire.

Al: No, of course not, there’s a lot we don’t know. But I’m just sort of going through the math on how you figure this out. And so then if you’re a couple of hundred thousand of income. Right. Plus Social Security, pensions of $30,000, now you’re at $230,000, standard deduction, you kind of figure out- all right, so my taxable income is going to be about $200,000. What’s $200,000 going to be like in 20 years? Of course, we have no idea. But I’m going to guess probably 25% bracket, if I’m just guessing.

Joe: I would say yeah, I would say- let’s just call it $200,000 future value. Let’s see, that’s 20 years. We- discount- $110,000.

Al: So give or take. So, I do like the idea of converting because I think it’s a low enough tax in the 22% bracket. The only downside is you’re in New York, which is a higher tax. So you just have to factor that into your thinking. We don’t really have enough facts to really to give you the right advice here and we don’t really give advice anyway. But that’s kind of the thinking of how you put this all together.

For a comprehensive, personalized assessment of the specifics of your financial situation, and a plan that takes into account your retirement goals, click the link in the description of today’s episode in your podcast app to go to the show notes and sign up for a financial assessment with one of the CERTIFIED FINANCIAL PLANNERS on Joe and Big Al’s team at Pure Financial Advisors. There is no cost or obligation and they can help you figure out what financial strategies are a good fit for you. Remember, if you have money questions you want answered on the podcast, or if you have comments or suggestions or limericks for us like the ones coming up, click the link in the description of today’s episode in your podcast app to go to the show notes, then click Ask Joe and Al On Air.

Advice for Joe’s Butt

Joe: Had a nice little email from Kenny from Granite City, Illinois. The subject: “Advice for Joe’s Butt”.

Al: Your sciatica?  How to fix it?

Joe: Yeah, I got foot drop, Alan.

Al: Yeah, I had never heard of that.

Joe: Yeah, me neither. I don’t know what the hell it was. Foot drop. He goes “Hello. Andi, wanted to share some information in regards to Joe’s hip sciatica. Hip sciatica is sometimes referred to as wallet syndrome.” Now that’s Big Al.

Al: I still have that fat wallet. I got that.

Joe: Big Al’s got fat wallet syndrome. That’s why we call him Big Al, his big, fat wallet. I didn’t get drop foot though yet.

Joe: You’ll get it sooner or late. It’s foot drop.

Al: What’d I call it?

Joe/Andi: Drop foot.

Andi: It’s something entirely different.

Al :That’s like football.

Joe: Yes. It’s drop foot. “And therefore an appropriate topic for YMYW.” Of course it is. If you’ve got a big, big ass wallet, don’t sit on it.

Al: That’s why you’re calling it.

Joe: So Kenny from Granite City, he had a pretty  bad case of it a few years ago, he goes, “the cause for me, I think, was that I was spending too much time on a stationary bike with the seat too low. It can also be caused just by sitting too long.” So when Kenny wrote this in – so I got a Peloton Alan. Because I used to do spin class all the time at the gym.

(more transcript to follow!)

Limerick and Music from Paul Lemire

Joe: We get interesting emails.

Al: Yeah.

Joe: And we’re getting-

Andi:  We’re on a limerick thing lately.

Joe: – limericks.

Al: We get some creative ones.

Joe: Yes, Paul the Limerick Music Man. Can you play some of his music?

Andi: I can.

(Music plays)

Joe: In Southern California?

Andi: Yes, he’s in Orange County.

Al: Orange County it says.

Joe: Orange County.

Andi: I’m hitting STOP on that because you guys are starting to get a little janky there.

Joe: I wanna know where he’s playing. So, Andi, can you read his little limerick for us?

Andi: Yes. He says “Big Andi, Al and Joe, I’m a singer-songwriter and solo acoustic performer in Orange County. Thought I’d make up a limerick to show my love for the show. Here goes:

There once lived a single with no dependents

Who was saving for retirement with a vengeance

While investing in stocks

He listened to your talks

And never missed being in attendance

Thanks for what you do. Keep up the good work. Paul Lemire Music.”

Joe: Wow.

Andi: Thanks, Paul.

Al: It’s pretty awesome, right?

Andi: You can go to PaulLemireMusic.com and check out his stuff.

Joe: You got to check this guy. He’s awesome.

Al: Yeah. Oh, I’m going to listen to it on my way home tonight.

Andi: And he is actually on Spotify. I looked him up.

Joe: Of course you did. You look everyone up.

Andi: I look up the musicians, come on now.

Joe: Where’s he playing this weekend?

Andi: That’s a good question. You know, he’s probably not, it’s COVID.

Joe: I suppose.

Al: But Joe would go anyway.

Joe: Yeah, I got buddies that are in the music biz. It’s been a tough road. So they do these like Facebook live things. You know, they’re jamming in their backyard. You know what I mean? And then so it’s like here I’m going to give you a couple bucks, for sure.

Al: Oh, we got his schedule.

Andi: Locale 90 in Redondo Beach. Actually, that looks like that’s his regular Sunday gig. So go check him out at Locale 90 in Redondo Beach.

Al: Redondo Beach. There you go.

Joe: How far away is Redondo Beach from here?

Al: That’s about an- it’s over an hour, maybe hour and a half- maybe not quite an hour and a half.

Joe: Uber. Do you think Uber will get me there and back?

Al: Expensive. So you can drink your Coors Latte on the way?

Joe: Oh boy. Well, no, thank you all for all of that. And we have got a couple star ratings. What we have, 5?

Andi: We had four 5-star ratings this week. Yeah, apparently you guys hit some good nerves there.

Al: Are they your cousins?

Joe: They probably were.

Andi: Hey, I got a question. I want to know, can we start asking people, what’s your car that you’re driving, the dog, your location, and like you know, send us music or limericks if you want to? We’ll just start making that a regular feature?

Joe: I think- I don’t know.

Al: I’m starting to get bored of that, maybe it’s like what kind of- what’s your favorite color?

Joe: What are you talking about?

Andi: I think we should just get people to send us their original music and we’ll use it on the show.

Joe: Yeah.

Al: What are your hobbies?

Andi: So, Paul, I hope you don’t mind that we played that on the show. But yeah, that’ll be my call since music is my thing. I would like to hear some original music that people would like to hear on the YMYW podcast.

Al: Oh, Very cool.

Joe: All right. That’s it for us today. We’re wrapping this thing up. Shutting her down. So we’ll be back again next week with more Your Money, Your Wealth®. The show is over. We’ll see you next week.


Hear more of Paul’s music in the podcast show notes at YourMoneyYourWealth.com.

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