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
May 5, 2020

What types of investments you keep in your taxable, tax-deferred and tax-free accounts can play a big part in how much tax you pay over time. In this episode, Joe and Big Al break down asset location and answer some of your tax planning questions. As always, the fellas also talk strategy when it comes to Roth IRA contributions and Roth conversions.

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Show Notes

  • (00:56) How Should I Invest My Retirement Accounts? Target-Date Fund? Individual Asset Classes?
  • (05:50) Where Should We Locate Our Assets?
  • (13:27) $10K Ordinary Income, $40K Qualified Capital Gains. In What Tax Bracket is the $10K?
  • (18:31) If I Sell Non-IRA Stocks to Pay Roth Conversion Taxes, Where Do I Report It to the IRS?
  • (21:37) How Much Tax Should I Pay on Lump Sum Back Pay with Military and Pension?
  • (25:21) Should I Use My Social Security Payments to Make a Roth Conversion?
  • (29:43) Roth Contribution Modified Adjusted Gross Income
  • (34:02) How Can I Legally Put $50K in My Roth IRA?
  • (38:29) IRA Contributions: Dollar Cost Average or Lump Sum?

Free resources:

YMYW LIVE WEBINAR | The CARES Act: Now What? With live, open Q&A with Joe Anderson, CFP®, especially for YMYW listeners! Wednesday May 13, 12pm Pacific / 3pm Eastern. 





Listen to today’s podcast episode on YouTube:


Get your financial questions answered LIVE by Joe Anderson, CFP® during the Your Money, Your Wealth® webinar Wednesday May 13th at noon Pacific, 3 Eastern. Go to the podcast show notes ASAP to register for The CARES Act: Now What? Followed by an open Q&A with Joe, moderated by yours truly. Click the link in the description of this episode in your podcast app to go to the show notes, download financial resources, and register for the YMYW live webinar on May 13th. Today on Your Money, Your Wealth®, Joe and Big Al talk asset location and answer some of your tax planning questions, because what types of investments you keep in your taxable, tax-deferred and tax-free accounts can play a big part in how much tax you pay over time. And as always, the fellas also talk strategy when it comes to Roth IRA contributions and Roth conversions. I’m producer Andi Last and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

How Should I Invest My Retirement Accounts? Target-Date Fund? Individual Asset Classes?

Joe: Esteban. ESTEbone. EsteBONE. All right cool. “Hey guys. My current employer of two years now offers a 401(k) and Roth 401(k). They match up to 3% and at 5% they match half. I am putting my 3% in the 401(k) and just started putting 2% into the Roth. I have no other investments or retirement plans. What assets should I be choosing in my 401(k)? They have a target date 2050 fund or I can choose other options like mid-cap, small caps, international. I have minimal financial education when it comes to investing and just started listening to your podcast.”  Well, welcome to the family, Esteban. What do you think Al?

Al: Well target date 2050 is what he’s talking about. So I’m going to guess he’s about 40 years away from retiring, 30 years away from retiring. Sorry let me do the math right. And if that’s the case then you certainly Esteban, you can favor the stock market. Some folks would say maybe put 80% in the stock market. Some people might put 100%. Because you’ve got 30 years to ride things out. Some folks would put 60% in just because they don’t want to handle the risk, or even less. It depends on I guess your ability to handle the risk. And will you get bummed out if it goes down? But I would basically favor putting the money into the stocks. I like the idea of splitting it between the regular 401(k) and the Roth 401(k). Get as much as you can. The 5% match- I don’t quite know how to read that, it looks like 3%, maybe you get 3% match for the first 3% you put in and then another 2% more you get another 1% match maybe? I’m not really sure.

Joe: That is absolutely correct. Yes.

Al: But yeah I like the idea of having some balance there and I would focus more on stocks and bonds right now.

Joe: Yep. I agree. Hey Andi look up 2050, Vanguard Target date fund. I’m just curious on what the allocation is on that.

Andi: OK.

Joe: If you have minimal dollars to invest, you’re just starting out, you just started to invest a year or two, I’m a bigger fan of the target date funds for beginner investors like this; just because there’s a glide path that they’ll be rebalancing the overall accounts as you get older. But as those dollars get larger and you get more sophisticated within your strategy as listening to this podcast. So like in another month, it’s the bomb that you dialed. But it depends on how much money you have, how much money that you contribute. I don’t know what he makes for an income but he’s saving 5%. But I agree with you Al that a) you would probably want to weigh more toward stocks or if you don’t want to worry about it than do the target date fund until you get a better handle on it.

Andi: So the Vanguard 2050 target date fund is a total stock market index fund, 53.6%, total international stock market 36%, total bond market 7.5% and international bonds 3%.

Joe: I like that, that’s 80/90/10. We had a full blown out conversation with Mikey Martin about-

Andi: VTSAX.

Joe:  U.S. total stock market index fund. I own that fund, so does Al I believe.

Al: Right.

Joe: I own the total international stock market fund from Vanguard. So those are two funds that I like quite a bit because you’re fully diversified, it’s cheap. So I would go with a 2050 fund to start. You’re 90% stocks, you’re10% bonds. This is not a recommendation by any stretch, it’s just an observation.

Al: I’ll tell you the only other caution that I have if you’re new to investing is- and I’ve seen this happen before Joe, people will invest heavily in stocks, the market goes way down and they just get out of it, They get burned, they go this doesn’t work for me. It’s like gambling and markets do go up and down. That’s why you receive the rates of return that you do receive on stocks and you have to be able to ride out the volatility. And if you can do that and most of us that have been investing a while realize markets come back and we just kind of ride them out. But I have seen folks that invest in stocks or a fund went down and then they decide to get out for good. So if that’s new and you’re just starting out you might want to go a little bit more conservative until you get a little bit more confidence in how the market works.

Where Should We Locate Our Assets?

Joe: Got an email came in from Ken from Philly. “Hi.” Hello.

Al: That’s good. You responded already.

Joe: “I’m interested in getting your help about a debate I’m having with my financial guy.” Let’s see what we got, Big Al. “My wife, 55, planning to retire, 2021.” Oh boy. That’s pretty young. 56 years old. “And I, 65, retired. I have taxable accounts deferred retirement Roth accounts. To make a long story short, the debate is which accounts should be more aggressive versus accounts should be more conservative. Presently our stock bond allocation sorted by least to most aggressive.” So wife’s got a Roth Al, 3% stocks, 95% bonds. I would assume the rest in cash. Wife’s IRA and 403(b) 33% stocks, 65% bonds. Husband IRA 47% stocks, 13% bonds, 40% cash. That math doesn’t work.

Andi: Yeah it does. 47, 87, 90- yeah.

Al: It does. 87 and 13.

Joe: Oh yeah, there it is. Ok, nevermind. My math doesn’t work. Husband’s Roth 52% stocks, 47% bonds. And then joint brokerage account 86% stocks, 5% bonds. “By the way your show is great and I always look forward to listening.” So what’s the debate though Ken?

Andi: Which account should be aggressive versus which account should be conservative? So he’s asking-

Joe: Well I mean I want to know what Ken is saying. And I want to know what the financial guy is saying.

Andi: Oh, I see.

Al: Yeah, me too.

Joe: You know what I mean? So is this the financial guy’s recommendations? And then Ken saying ”hey financial guy, I’ve got a couple of guys in California that probably know more than his financial guy. So I want to really give him the debate. You know I’m saying?

Andi: Got it.

Joe: So I guess in general this is what you got to look at, Ken. You want to have more stock allocation in Roth IRAs and non-retirement accounts. And more cash and bond allocations in your overall retirement accounts. That’s called asset location. Just because you want asset classes that have a higher expected rate of return in your Roth. As those continue to go up over time when you pull them out, you don’t pay any tax. And taxable accounts, if you have more stocks, when stocks go down as they did you could tax lost harvest. And then when things go up you can sell them at a capital gain. Everything inside a retirement account is always going to be taxed at ordinary income rates. So you want to have asset classes that have a lower expected return in those accounts. Anything else to add there Bud?

Al: No, that’s right on. I think the way we kind of look at it is the stocks are obviously more aggressive and have a higher expected return than bonds. But then certain kinds of stock accounts are more aggressive and have a higher expected return over the long term. Like smaller companies, value companies, emerging markets. These are ones that they’re certainly more volatile. But over the long term they tend to perform better. And favor those kind of in your Roth IRA and then you flip around to the IRA or 403(b), you have your safest money there because you don’t want your highest growth there because you just have to pay more tax. And then everything else goes into the brokerage account. Hopefully that’s still a bunch of stocks because you get capital gain treatment there, you’ve got tax lost harvesting. So that’s exactly right. And I think if you don’t consider cash flow needs and I’ll come back to that in a second-

Joe: Yeah that’s what I was gonna-

Al: – cash flow needs, then you would put basically 100% stocks in the Roth and 100% bonds in the IRA brokerage account depending upon your account balances of course, and put the difference in your brokerage account. In other words, you’re basically starting with your Roth, making most aggressive and then you go to your IRA, 403(b), make it most conservative and then everything goes brokerage account. Now on the other hand Ken, you said you’re retired and your wife is going to be retiring here in another year or so. So you probably want to have some cash in all three pools if you will; a tax-free Roth, the retirement accounts and the non-retirement accounts. Because you’re probably going to be drawing money from all three accounts. So just be aware of that. But to the extent that you have monies that you can invest, that you’re not going to draw on the near term, I would do it the way we just suggested.

Joe: Yes. So there’s two different planning types. You’ve got accumulation planning and then you’ve got retirement income planning. So as you’re planning to accumulate then by really leveraging the tax pools, by having more aggressive type assets in the Roth and brokerage account makes all the sense in the world. But now that you’re transitioning into retirement, you’ve got to come up with an income plan. What other income sources are you going to live off of? Are you collecting Social Security? Your wife’s 55, she’ll retire at 56, she’s got 13 years roughly until she collects her benefit, what is that bridge for her to collect her benefit? Where are you going to be pulling from? Do you pull now from the brokerage account? But you got 86% in stocks that are now at a 20%, 30% discount. So you’ve got to be careful as you’re a year, two years into retirement or planning for your retirement. Where are you going to pull the assets from? What other income sources do you have? And then you want to make sure that you understand what tax bracket that you’re going to be in. Because that’s going to determine what accounts that you pull from. So a lot of times people will just blow out of their non-retirement accounts. They’ll pay almost zero in tax and they’ll let their retirement accounts continue to grow and then all of a sudden all they have left to pull is their Social Security and retirement accounts and they’re stuck in potentially a higher tax bracket. You want to make sure that you understand what’s your income need? How much needs to be pulled from the account? And then have a concrete strategy to determine what accounts you’re going to pull from to minimize- to keep yourself in that really low bracket long term.

Strategizing is what it’s all about to make your retirement dollars stretch as far as possible! Download our free guide on Why Asset Location matters from the show notes at YourMoneyYourWealth.com – find out in more detail what asset location is, how it works with portfolio rebalancing, and how your portfolio may benefit. Click the link in the description of today’s episode in your podcast app to get to the show notes. Got questions? You know what to do – click Ask Joe and Al On Air in the podcast show notes and send ‘em on in… 

$10K Ordinary Income, $40K Qualified Capital Gains. In What Tax Bracket is the $10K?

Joe: Just like Mike did from A-kron, Ohio.

Andi: Akron.

Joe: A-kron. What do you call it?

Andi: Akron.

Joe: What did I say?

Andi: A-kron.

Joe: Oh, what’s the difference? I like the A. It sounds better than the ‘ah’.

Andi: Ok.

Al: I can see that.  It’s like Acorn. I mean it’s almost like that.

Joe: Akron? Does that sound better, Akron?

Al: That’s true. That’s what it’s called. I agree with Andi on this one. Which I usually do.

Andi: But yes, it sounds better Joe, so you know go with the aesthetics of it. Who cares what the town’s actually called.

Joe: A-kron. You say tomato, I say tomahto.

Al: OK. Good enough.

Joe: “If I made a $50,000 and $10,000 was ordinary income and $40,000 was qualified income taxed at 15%, I would be in the 12% tax bracket. $40,000 plus $10,000, at what percentage is the $10,000 taxed?” So the capital gains sits on top of your ordinary income Mike. So this is- we had another question a couple of weeks ago. So he’s got $10,000 of ordinary income Al. He has a capital gain of $50,000. So he’s curious, he’s like how’s that 10% of ordinary income, what is that going to be taxed at?

Al: You’re absolutely right. And it’s taxed at the lower brackets. So the way to think about it Joe is exactly what you said. We start with the ordinary income. Forget the capital gain income at this point, qualified income tax at 15%. That’s either going to be a sale of a stock or it could be qualified dividends for example. So you start with that $10,000. The first $10,000 for single taxpayer in round numbers is taxed at 10%. So that $10,000 will be taxed at 10%. Now the other amount of $50,000 so that’s- I’m sorry, another $40,000, to qualify as $50,000 of total income. You take out the standard deduction of about $12,000 and change for a single person. So that basically means that you’re going to be under the- or in the 12% bracket considering all of your income added together which then means all your capital gains tax-free at least for federal purposes. So yeah $10,000 at 10% roughly, so about $1000.

Joe: I would even say this. That $10,000 would probably be wiped out by the standard deduction.

Al: You know what? I’m thinking about that again. And that’s actually right. Because you want to take your ordinary income minus your ordinary deductions, and standard deduction would be considered ordinary, would wipe that out. And so therefore you’re left with-

Joe: Zero tax.

Al: – zero tax. Look at that.

Joe: So I guess let’s recap this. In a sense of, I don’t know Mike is married or single, but he’s got a question just on tax brackets. Just a simple equation of what you’d look at is that if you have a large capital gain. Just ignore that for a second because that will always sit on top of your ordinary income. So you want to look at what ordinary income sources that are coming in. So did you take an IRA distribution? Or do you have employment or wages? So you add that up and then you take off the standard deduction or if you itemize you take your itemized deductions and you subtract that off of the ordinary income. So let’s just say he only had $10,000 of ordinary income. The standard deduction would wipe out that income. So he would be zero taxed at ordinary income rates. And then if he stays in the 10% or 12% federal rates then there is no capital gains. So the capital gains rate in the lowest two brackets is zero. So if he’s married it’s up to about $80,000 of income and single it’s about $40,000 of income. So in this case Mike from A-kron would pay zero tax.

Al: That’s right. So let me put it another way too which is just for clarity. So Mike let’s pretend you had an extra $50,000 of capital gain income or qualified income. So now you’re gonna be over the 12%. So the amount of capital gain or qualified income to get to the top of the 12%, that part’s tax-free. Any amount above that would be taxed at the 15% rate. Because Joe I get that question sometimes it’s like well wait a minute I’m in the 12% bracket, but I got a property with $1,000,000 gain. So are you telling me I can sell that property and pay no tax? And the answer is No. It’s only up to the top of the 12%. All other gain will be taxed at the capital gain rates.

If I Sell Non-IRA Stocks to Pay Roth Conversion Taxes, Where Do I Report It to the IRS?

Joe: All right. Back to the e-mail bag. So Ricky is calling from Alabama. He goes “Ok Jeaux, geaux Gators.” He’s spelling it g-e-a-u-x. So he’s going to be from Louisiana.

Andi: Remember he told us recently that he roots for LSU.

Joe: Oh that’s right. Ricky.

Al: Oh yeah. Ok.  I remember Ricky now.

Joe: Oh yeah. “Ricky. Ricky runs fast.” Ever seen that one? Ricky Henderson? Talking in third person?

Al: Oh, all the time. You’re absolutely right. Drove me crazy. And if it drove ME crazy, you must have been nauseated.

Joe: “Ricky likes to run fast. Ricky steals bases.”

Al: Yes. I do.

Joe: “If I sell non-IRA stocks to generate funds to pay taxes for a Roth conversion and then use the IRS direct Pay to pay the estimated taxes, where on earth do I report it on my 1040?” That’s a good question because he needs to Go Tigers.

Al: It is a good question. So here are a couple of couple of things. You’re selling non-IRA stocks. So that’s considered a capital gain that goes on Schedule D. And if he’s held those stocks or shares or whatever, mutual funds, index funds, for more than a year, it’s a long term capital gain. You get special tax treatment. It’s a cheaper tax. If it’s less than a year, it’s short term capital gains. Either way it goes on Schedule D. So I think maybe the first part of the question. Second part of the question is when you’re using the IRS direct Pay to pay the estimated taxes there is a line on your tax return for estimated taxes. It’s under the Payments Schedule, which Joe I forget which that one is because they just changed the schedule numbers for 2019. But there’s a schedule in the 2019 return that shows all your payments and on the payments, there’s a line that says estimated payments and that’s where you put it.

Joe: “Is there a way for someone to find out how much that they paid in estimated taxes?”

Al: Yes. You can call up the IRS and they will tell you. That’s one way to do it. I know State of California has a way for you to go online and sign up and take a look at your payments there. I just honestly don’t remember if the IRS has instigated that or included the start of that as well. So I’m not sure about that.

Joe: Got it. So there’s actually a schedule to put your estimated taxes on. Because if they didn’t put that on there, it would show that you would owe that.

Al: Right. Yeah exactly. So you have two things to report and your one is the gain on sale of the stocks and then the second one is where to put your tax payment. And it’s basically it’s the same schedule where you have withholding and other things like that.

Joe: Cool.

How Much Tax Should I Pay on Lump Sum Back Pay with Military and Pension?

Joe: So we got Matt somewhere in California. “Thank you in advance. I’m retiring in May from military uniform service over 30 years of active and reserves.” Thank you very much for your service Matt. “I’ll be getting a retirement pension from military, but I also will be getting a smaller retirement from working for the state of California. It is much smaller retirement but they will pay me a monthly pension as well. I’m 56 years old. The state of California is going to pay me a lump sum of money in April, around $11,000 for backpay. However, they are not going to tax it. So we’ll need to figure out how much to pay in federal tax because of this. We don’t want to get penalized as well. How do I find out how much to pay in taxes? I’ve been doing some research but wanted to hear your thoughts on this.” So Al it’s a lump sum of $11,600. So I’ve got two things here. So Matt you’ve got to figure out if that $11,600 lump sum- I’m guessing you could probably roll that into an IRA and you would not be taxed on that at all. If you took it as the income and then you would just want to figure out what other income sources that you have, add it up, and then you can find out what marginal bracket you’re going to be in and kind of do the math that way.

Al: That’s true. If you can roll it that might be the way to go. But otherwise it sounds like it’s tax-free in California but not necessarily tax-free on the federal return. So you just have to look at all your other income. Figure out what bracket you’re in. And I think the way to think about it is when you have extra income then you want to use what’s called a marginal tax rate to figure out how much you can be taxed on that extra income. In other words if you have $50,000 of income each and every year, you’re in a certain bracket. But if you add another $10,000 on top of that- so whatever marginal bracket or that particular bracket that that $10,000 is, that’s what you’re going to be taxed for that extra marginal income. And a lot of times people get confused on an effective rate versus marginal rate. Effective rate is your average rate of all the brackets. The marginal rate is the highest rate you’re in, which is what you use when you have extra income to figure out the tax. And likewise when you have an extra deduction, that’s the rate that is used to figure out how much tax you’re gonna save.

Since you listen to YMYW, you already know that doing Roth conversions is a major strategy to consider when it comes to reducing your taxes in retirement. But, also as a listener to YMYW, you know that this stuff can be pretty complicated. Any strategy you implement has to work together with your overall financial plan. Do you know about the effective rate versus the marginal rate? Do you know what tax bracket you’re in now, and what bracket you’ll be in when you retire? Are you tax loss harvesting and rebalancing your portfolio? Click the link in the description of today’s episode in your podcast app to go to the show notes at YourMoneyYourWealth.com and sign up for a free one hour tax reduction analysis. Nail down the answers to all of these questions and find out if you could be saving money and paying less tax in retirement. Schedule an appointment and get free gifts: our tax planning guide, tax checklist and our new eBook, Retirement Revamp: Financial Planning in Times of Crisis by Pure Financial Advisors’ Director of Research, Brian Perry, CFP®, CFA. Sign up now for your tax reduction analysis in the podcast show notes at YourMoneyYourWealth.com

Should I Use My Social Security Payments to Make a Roth Conversion?

Joe: Some more emails here, Alan. “Hello gentlemen. Allan from Lakeside. I currently have a good advisor. Kings Road Financial on Morehead Drive.”

Al: Okay. So you gave them a plug.

Joe: Sounds good. “Bernard and partner Larry have done very well for me.” That’s awesome. “I’m looking for one term, a small nugget of information. I just signed up for Social Security payments. I turned 66 in July.”

Andi: He will turn 66, I think.

Joe: “I turn 66 July.” I’m just reading what they write. “So with my additional cash I want to plan for Roth conversion.”

Andi: He says conversation.

Joe: “- for a Roth conversation. So of my 401(k) rollover from AT&T, 17% was post-tax. Do you have tutorials I can review?” Sure. Why is this in the email bag here? It’s not really a question. This guy’s just writing into the firm and saying I love my advisors Larry and Bernard, King’s Road Financial. Hey, did we ever hear back from that one guy that we had a scuffle with?

Andi: No. Not a word.

Joe: Uh. Well maybe he’s joining forces with King’s Road Financial.

Andi: Josh, and Bernard and Larry.

Joe: Yeah. So he wants to take his Social Security benefits to do a Roth conversion. Hold off on your Social Security benefits. You have a bunch of after-tax money in your 401(k) plan. Convert those dollars into a Roth IRA. It’s after-tax. Put that into a Roth IRA. Do not buy an annuity. I don’t know Bernard and partner Larry, what they sell, but just put that in a nice cheap diversified portfolio. You have a Roth IRA. It’s not going to cost you any tax and then roll the other pre-tax into an IRA. So I’m not sure why you would want to turn on your Social Security for some additional cash when you wouldn’t have to pay tax on the conversion anyway because it’s post-tax.

Al: I think you do that first Joe. Just like you said because when you have a 401(k), your post-tax dollars you can roll directly to a Roth IRA. Pay no tax whatsoever. And then the other money you can roll to an IRA. That’s no current tax you’re just rolling from one retirement plan to another. But he’s talking about taking his extra income and putting it in IRA. And he wants to do a Roth conversation, which I think means Roth conversion. I think that’s what it means. And he can’t do that. A Roth conversion comes from your retirement accounts, not from the extra money that you have sitting around. Now you could do potentially a Roth contribution if you-

Joe: You gotta have a conversation first though.

Al: You have to have a conversation to see if you qualify, and the way that you qualify- I’m having a chat with you Allan right now. This is Al to Al, talking Roths. So if you have earned income or your spouse, if you’re married, has earned income then you could do a Roth contribution. So maybe that’s what you’re talking about. I think that a conversation sounds more like a conversion. Don’t you?

Joe: So if he’s thinking he turns on his Social Security to have income to do a contribution, that doesn’t work. I guess- do you think this was like auto correct, spell checker or something?

Al: Could be. He said “I turned 65- 66 July” so man of few words. He doesn’t put in the pronouns.

Andi: Now what I want to know is, how come he didn’t ask Bernard and Larry this question?

Joe: Yeah. Come on Bernard, Larry, we’re doing your work for you.

Al: For free.

Joe: That’s alright. Allan, you can call us anytime. But if you want Roth conversations, if you want to do Roth conversions, contributions. I don’t know. Whatever.

Roth Contribution Modified Adjusted Gross Income

Joe: We got Martha from Tieria Santa.

Andi: One of these days you’ll get it.  Tierrasanta.

Joe: Tierra Sietta.

Al: That’s that Minnesota accent you got.

Joe: Oh boy. “Congratulations on a very nice podcast, Andi, Big Al, and Little Joe.” Thank you, Martha.

Al: Are you little? Little Joe? Yeah?

Joe: Yeah.  6’4″, 220″.

Al:  Don’t sound too little to me.

Joe: That’s alright. I like it. I like Little- “Really insightful and fun weekly show. I have a follow up on your podcast number 263. You know, the Roth conversion strategy bonanza. I’m well over 50, still working, married, and my retirement money is tied up in my company’s 401(k) and cash balance both pre-tax contributions, no IRAs. I haven’t done our 2019 taxes yet but our MAGI, modified adjusted gross income, is going to be somewhere around $200,000 and I’d like to get the maximum possible $7000 into my Roth IRA that I established last November.” All right sounds good. “Scenario 1) if our modified adjusted gross income is under $193,000 then I can just make a simple after-tax $7000 contribution for 2019 prior to April 15th, 2020 right? If our modified adjusted gross income was $203,000, then I would first have to open an IRA. Make an after-tax $7000 contribution to it prior to 2015 and then immediately convert it to my Roth.” Both of those are correct because what Martha is stating here is that there’s AGI limitations for Roth IRA contributions. Just as Allan was having Roth conversations about it- you need income to make a contribution, Martha makes too much income potentially to make a Roth IRA contribution for 2019. The deadline to do a Roth IRA contribution is April 15th. But that got extended to July 15th so she still has some time. So she’s right, if you don’t qualify because you’re AGI is too high then you would do an after-tax contribution and then just convert it because she doesn’t have any other IRAs.

Al:  Yeah that’s the key. That if you have other IRAs, then you have to do the aggregation rule, the pro-rata rule. And it’s not all going to be tax-free. But in this case, tailor made for a Backdoor contribution.

Joe: Then she’s got “Scenario 2) Is it too late? Meaning I would have needed to open an IRA in 2019.” No. Because your 2019 IRA contribution can still be made until July. So even though it’s 2020 you have until the tax filing deadline to create that IRA or Roth IRA, depending on what you want to do. “Also Scenario 2) This immediate conversion of $7000 from my IRA into my Roth IRA will not get double tax because I would only have a 401(k) cash balance Roth IRA and IRA, no other IRA. Right?” No. It’s not double taxed because you’re not taking a tax deduction for the $7000 dollar IRA contribution that you’re making into it. So it’s after-tax. And then when you convert it, it’s going to be tax-free. Anything else there Al?

Al: No. That’s right on track. I agree.

Joe: Thank you Martha. Even though you called me Little Joe.

Al: Well it’s because they called me Big Al. So you must be little.

Joe: Got it. Got it. Watch our TV show Martha. But thank you for the congratulations. It’s been in the works for 15 years.

How Can I Legally Put $50K in My Roth IRA?

Joe: We got Bruce from Joisey. This is Joisey again.

Andi: Yes. And actually his previous question is on the other side so that you can remember what he said. But I’m guessing that you didn’t read that before you were about to do his question, right?

Joe: Absolutely not.

Al: No, we like to do it cold.

Joe: That would be called preparation.

Al: We like to be spontaneous Andi.

Joe: I do remember Joisey. Joisey.

Al: Yeah, me too.

Joe: “Hello again folks. As usual top notch podcast. I heard my question and felt senile.” Is that right?

Andi/Al: Yep.

Joe: God, am I good. That was a guess.

Al: You’re on today. I thought you were gonna say seneelay.

Joe: I know. It was close brother. It was close.

Al: Right.

Joe: “I didn’t provide half of the math-

Andi: – equation

Al: Exclamation point.

Joe: Yes. “I meant I’m close to 40, only have $40,000 in SEP and Roth IRA. Have emergency funds and savings of about $50,000. Hence the question of self-directed after-tax and Mega Roth. So how can I legally insert up to $50,000 in retirement funds aside from the yearly $6000 in Roth and whatever solo 401(k) can manage to pull out of the business income to jumpstart the $1,000,000 to start withdrawing prior to collecting Social Security? I’m glad though, that I only need to put a minimum of $4000 a year which is already below the current Roth of $6000. Because even with inflation I’d be able to live half of the future $40,000 plus Social Security and only Medicare, food, tax and some entertainment to spend on and enjoy life in simple terms. Thanks again. Bruce from Joisey.” So what the hell is the question?

Andi: This is why you were supposed to read the previous question.

Joe: Well keep up the good work Bruce.

Al: I remember we did a little bit of math and we told them he needed to put $4000 a year in his accounts to be able to get to the $1,000,000. But in my view there’s a caveat. Because $40,000, 25 years from now it’s not going to cover what it covers today. So you might actually need more than $1,000,000. I think I remember saying that. But that’s one comment to get us started. But I think he’s basically getting at how-

Joe: So how does he legally insert the $50,000 into the retirement funds- with his 401(k) and profit sharing- so he’s got a 401(k) plan plus his SEP, right?

Al: Right.

Joe: So it depends on his income. So he could put in the full amount, he’s 40 years old, so he could what, put $18,000 into the 401(k) plan?

Al: Yep.

Joe: And then he could, depending on his profits in the business he can add around another what, 20% some odd of profits into the SEP or into the profit sharing as the employer contribution?

Al: Right. You can’t have both. Well you can have an old SEP. But you can’t have a current SEP IRA and a 401(k).

Joe: Well yeah, but it’s profit sharing. I guess it’s the same calculation, correct?

Al: Yeah, it’s the same calculation. You have to have enough income to get that full $50,000.

Joe: Right. He could still do it depending on what Bruce’s income is.

Al:  Right. Yeah, you have to have-

Joe: It depends on his profit. So let’s say if his profits are $150,000. He puts in the $18,000 into the 401(k) component, 20% of profits on $150,000; he’s going to get to the maximum allowable defined contribution limit of around $50,000.

Al: So the 20% of the $150,000, so that’d be $30,000 plus the $18,000. So that’s about $50,000 that he wants to get in. Correct.

Joe: Correct. So it depends on his profitability of the business. That’s how you’re going to get the $50,000 into the plan. So I guess Bruce what we’re missing still from you is how much money you make. And then we can determine what is the maximum allowable that you could put into your Solo K, profit sharing type retirement account that you currently have right now. Right?

Al: That is correct.

IRA Contributions: Dollar Cost Average or Lump Sum?

Joe: We got April. She writes back Al, from ChiTown. “Love your show. This is my third e-mail to you.” On a roll. “It is my understanding that like the 2019 federal tax return, the 2019 IRA contribution has been extended to July 15. The question is, is it better to make a lump sum contribution of $7000 or make it in 4 partial payments in case the market goes down some more. Thanks again. You all rock.” She’s going to play a little game here. ‘Should I-

Al: – do a little cost averaging? Or do I just go invest it?’

Joe: April, if it were me, I would take the $7000, cut a check, put in my IRA or Roth IRA and call it good. Don’t worry about it.

Al: Yeah I agree with you, Joe. Because first of all, most of us are so busy we probably would forget it if we had to keep 4 separate payments. Go ahead and invest it. But if you’re that concerned about the market just go ahead and put the whole $7000 in and then invest some of it now and some of it in a month from now, and some of it in another month from now. That would be kind of like dollar cost averaging. But the truth is the market is pretty low compared to how it was let’s say 2 months ago. So we already know we’re buying stocks on sale. We just don’t know, is it going to go lower? And that’s the concern. And it may go lower but if you think about- think of it this way, is the stock market going to be higher in 5 years from now than it is right now? And if you think the answer to that is yes, then go ahead and invest it.

Joe: Yeah. Where’s the money? What’s the money for? When do you need the money? So put the $7000 in and if you don’t need the money for quite some time just let it go. Put it in. But I guess the more important thing is that make sure you get all- if you want to be the 4 equal components, be sure you get the $7000 in now and then just put it in cash or money market I guess. Because if you forget to do an installment, then you didn’t take advantage of getting the full $7000 in the IRA.

Al: I totally agree with that. Because I think it’s too easy with as busy as life is to get a payment or 2.

Joe: Cool.


(Enter outro text here)

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