Asset location: how to position assets to pay less tax without sacrificing investment growth? Should young folks contribute all of their retirement savings to Roth accounts? Also, conversations (not advice) on a self-employed defined benefit plan vs. pass-through profits, gifting tuition for education, making Roth conversions with a special needs child in mind, a correction on inherited Roth IRAs, and plenty of entertaining listener comments and Derails.
- (01:33) Can I Fund a Roth TSP and a Separate Roth IRA? (Cass, MS)
- (03:21) How to Position Tax-Deferred Assets for Tax Efficiency Without Compromising Growth? (D, Irvine)
- (08:50) Asset Location: Should My Kids Contribute All to Roth? (Mike, Texas)
- (13:32) Should We Open a Defined Benefit Plan or Take Pass-Through Profits? (Ken, San Diego)
- (19:26) How to Pay for Son’s Grad School and Minimize Taxes? (Linda, San Diego)
- (29:55) Roth Conversion and Special Needs Trust (Scott, San Diego)
- (36:18) Correction: Inherited Roth IRA SECURE Act Stretch IRA Rules (Greg, Temecula, CA)
- (37:37) Listener Comments and YMYW Podcast Survey
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LISTEN | YMYW Podcast #337: Does This Asset Location Strategy Lessen RMDs and Taxes While Maintaining Portfolio Growth?
LISTEN | YMYW Podcast #272: Asset Location: Where Should You Hold Retirement Investments?
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How do you position assets to pay less in tax without sacrificing growth of your investments? Should young folks be contributing all of their retirement savings to Roth accounts? Asset location is once again the topic today on Your Money, Your Wealth® podcast 340. Also, conversations, not advice, about opening a defined benefits plan vs. taking pass through profits for self employed folks, gifting tuition for education, making Roth conversions with a special needs child in mind, a correction about something Joe said recently about inherited Roth IRAs, and plenty of entertaining listener comments. Click Ask Joe and Al on Air in the podcast show notes at YourMoneyYourWealth.com to send in your questions or comments. I’m producer Andi Last, with are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA, and since voice messages get first priority, we’ll kick things off with a voice message about Roth contributions.
Can I Fund a Roth TSP and a Separate Roth IRA? (Cass, MS)
“Hello, Joe and Big Al, this is Cass from Mississippi, and I just want to say I love your podcast and I’m learning so much. I’ve got a question. If I maxed out my TSP Roth account, including catch up contributions totaling $26,000, can I also contribute to a separate Roth IRA? Again, I love listening to you guys, and thank you so much.”
How to Position Tax-Deferred Assets for Tax Efficiency Without Compromising Growth? (D, Irvine)
“Dear Joe, Al, and Andi, I discovered your show a few months ago and have been an avid listener. My husband and I have nearly 98% of our retirement savings in pre-tax accounts. We are aged 48 and 51 and currently in the 37% marginal tax bracket. As it is recommended to place our most tax efficient investments in qualified accounts, how does a couple with all of their IRA assets in tax-deferred accounts position for future tax efficiency without compromising growth? I will start contributing this year to my employers’ Roth 401K option to the maximum in order to begin creating some tax diversification. Do Roth conversions at this high tax rate make any sense? We have 3 million dollars in qualified accounts and will contribute an additional $238,000/year for the next 17 years. $150,000 of this will be in a cash balance plan. Thank you, D from Irvine. I forgot to mention I drive a 2013 Chevy Volt with 93,000 miles that I plan to run into the ground!”
Asset Location: Should My Kids Contribute All to Roth? (Mike, Texas)
“Hi all! I was listening to your podcast while on my daily 5 mile walk, and your discussion of asset location made me question whether I’ve given some incorrect guidance to my kids (both in their late 20s). They both have followed my advice to save 20% of their gross incomes for retirement. At this point, their incomes are such that they can put the entire 20% in their Roth 401(k)s and Roth IRAs without hitting the contribution limits, which is what I advised them to do. After considering the asset location discussion, I’m now concerned that I should have advised them to put a portion of their retirement savings in a traditional 401(k) or traditional IRA, or even a regular brokerage account, to achieve location diversification. Was I wrong to advise them to put it all in Roths? These savings are entirely for their retirements, as they have other savings in brokerage and savings accounts for their other financial goals. I’m a huge fan of your podcast and have been listening for a number of years. Your show has given me a number of “lightbulb moments.” Thank you so much. – Mike”
For those of you who are already makin’ some money, properly locating your assets between your taxable, tax-deferred, and tax-free accounts has the potential to improve your returns on your investments by reducing how much tax you pay. Get our free downloadable guide on Why Asset Location Matters, listen to our previous asset location discussions, which Mike in Texas mentioned in his question, and watch a refresher video that explains the difference between asset location and asset allocation – they’re all in the podcast show notes at YourMoneyYourwealth.com. Access and share all these free financial resources, and ask Joe and Big Al your money questions by clicking the description of today’s episode in your podcast app to go to the show notes.
Should We Open a Defined Benefit Plan or Take Pass Through Profits? (Ken, San Diego)
“Hello, Andy, Joe and Big Al with the big wallet! I’m a big fan of your show and am really excited to be able to finally ask you a question as I discovered your show about 2 years ago and have gone through all your past podcasts dating back several years as I go for a morning walk. I drive a 2011 Toyota minivan with 175,000 miles. I’m a seasonal drinker and prefer wine in the winter and beer in the summer as it’s too hot to drink wine in the summer.
Here’s my situation: My wife and I are both 54 YO, self-employed (S-Corp) with only us two on the payroll. We take a modest salary and contribute half of the maximum allowed to a 401k and half to a Roth 401k. 2020 was not a good year for us but 2021 has been better and estimate a $150,000 net income by year’s end.
We plan on retiring in 6 years and are considering opening a Defined Benefit Plan to try and maximize retirement savings during this final push. Currently, we have appx. $3.4m in pre-tax 401k and IRA savings and $100k in Roth. We know you’re a big fan of Roth conversions, but don’t know if we’re going to stay in CA after retirement.
My question is, what makes the most sense for our particular situation: Opening up a defined benefits plan and funding that with the net income for this year or taking the profits as a pass-through with the Subchapter S as there is a 20% tax advantage under current tax law and putting the after-tax income into a brokerage account? Also, I heard somewhere there could be a Defined Benefit Plan with a Roth option? Is that true and would that make any sense for our particular situation? Love the show, never miss it and look forward to hearing from you! – Ken”
How to Pay for Son’s Grad School and Minimize Taxes? (Linda, San Diego)
“Dear Andi, etc., I hope Joe and Big Al read and answer this question on-air this time. I submitted two different questions back in April, a week apart, but didn’t hear those read yet even though I listened to every weekend show since then.
What would be the most financially beneficial way for me to pay for my 37-year old son’s graduate school, $40,000 per year for four years, starting this year or next? Almost all will be for tuition, and a bit for parking, books, a few fees, no room/board. Most of the money will probably come from maturing CDs and RMDs which start next year. Is it worth it to open a 529 for him? If so, I’d appreciate guidance on how to do that and which would be the best version of that to use. What costs should I be aware of if I go that route? I’d love NOT to give the government a penny more in taxes than necessary as earnings in 529s are, I think, not taxable, but not if it’s a big hassle and will cost me more than the trivial non-taxable earnings I would earn over just a few years in very non-risky “investments” in the 529 that I would choose. Do I need to know anything about gift tax? I know nothing about it. It sounds dreadful to pay more tax on money I already paid taxes on just to give my son the education he wants.
Are there other options I could use? In case it matters, I’m single, from San Diego, 70, 22% tax bracket this year, 24% tax bracket thereafter, my non-real estate assets are about $1.7 million including $430K in Roth IRAs, $340K in Traditional IRAs/403(b), $990K in taxable investments/CDs/savings, etc., no debt, currently about $15,000/year earnings from interest/dividends, but that will decrease as I spend down my CDs/investments, and about $65,000/year pension/SS which cover my basic living expenses. Much thanks, Linda”
If you asked Joe and Big Al within the last few months and didn’t get an answer you too might have sent it in while the form was busted. It’s fixed now, so click Ask Joe and Al in the podcast show notes and send it in again. Do it yourselfers, the DIY Retirement Guide is our Special Offer at YourMoneyYourWealth.com right now, but it’s only available for the next few days. This free 48 page guide has steps to understand and plan your retirement income, strategies for choosing a tax-efficient distribution method, tips on preparing for the unexpected, and much more. Click the link in the description of today’s episode in your podcast app to go to the podcast show notes right now and download the DIY Retirement Guide – you’ll only have until Friday to download the guide so get yours now. To get a free, comprehensive, personalized look at your overall financial situation by a CERTIFIED FINANCIAL PLANNER professional on Joe and Big Al’s team at Pure Financial, click the get an Assessment button.
Roth Conversion and Special Needs Trust (Scott, San Diego)
“Dear Joe and Al, I have a little one-off question regarding converting to a Roth for our special needs daughter. We currently live in San Diego but plan to move back to Texas after retirement within the next 5-7 years. We have a 21-year-old special needs daughter that we have been financially planning for since age 3. Currently we have 4.6 million in taxable IRAs, family trust, and inherited IRA, 50K in a Roth and 200K in cash with ~2 million in home equity and another ~2.2 million in stock options with my current company. Our Daughter has 190K in a trust fund that she received at 18. All of our accounts are managed by a personal financial advisor. My question is what can we do towards converting some funds to a Roth for our daughter to reduce her tax burden down the road. We are currently taking the forced distribution from the inherited IRA of about 44K. I often listen to your show and I know Roth conversion are high on you list but I would like to know how this can work within our special needs trust. Because you often take note I drive a slightly modified 2003 350Z. Regards, Scott”
Correction: Inherited Roth IRA SECURE Act Stretch IRA Rules (Greg, Temecula, CA)
“Hey Big Al and Little Joe, Joe said something incorrect when speaking about the Roth for the guy trying to game the ACA. Joe said ” The sooner you get the money in the Roth the better off you are going to be, you get compounding tax free growth for your entire life, for your wife’s entire life, and for the kids entire life.” The Secure Act doesn’t not allow kids to stretch anymore. They only get 10 years after the age of majority. There are special stretch rules if your child has a disability otherwise it’s 10 years from majority.”
Listener Comments and YMYW Podcast Survey
Our transcriber (Andi’s Mom) broke her wrist last weekend, so we won’t have any episode transcripts for a little while until she’s back to being able to type. So far in the podcast survey 54% of you have said you like the Derails the most, so you’ll be happy to hear there are a ton of ‘em at the end of this episode.
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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.