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.”
Joe: Well, thank you, Cass. We appreciate the phone call. What do you think Al? She is fully funding the TSP Roth. The Thrift Savings Plan Roth account, that’s similar to a 401(k) or 403(b).
Al: Exactly, and she must be 50 years of age or older because that would be the amount for a 50 year old or older. $26,000. The answer is yes, you can fund a separate Roth IRA. It’s completely different rules. As long as your income is low enough and there’s income limitations when you’re single versus married. When you’re married, once you start making more than $198,000, it starts phasing out. When you’re single, it’s $125,000 then it starts phasing out.
Joe: Phasing out. So $125,000, if you’re over that then it’s adjusted gross income and you can’t make a full contribution. Al: You can’t make it full and when you’re single, once you hit $140,000, you can’t do any. Joe: But then you can do the back door. Al: That’s right. You want to go there, you can. That’s basically making a traditional IRA, which will be non deductible. If you don’t have any other IRAs, you could then turn right around and convert it into a Roth. Pay no tax because you got no tax deduction and that’s a workaround. That’s what a backdoor Roth is.
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.”
Joe: 98% do you think she did the math? Or is she just spitballing?
Al: I would say that revs up to 100%. So pretty much all of it.
“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.”
Joe: That’s sexy.
Al: Yeah, electric.
Joe: Yeah, “93,000 miles and I plan to run it into the ground.” Alright Dee. So they’re going to save for the next 17 years?
Joe: OK, so they’re 50, they’re going to work to 67.
Al: Yeah. So they’ve they’ve already got $3 million and they’re going to add another $238,000 per year for 17 years. That’s a big number. That’s a really big number.
Joe: So what do you think that’s going to be a giant retirement account.
Al: It is, it’s going to be millions. $3 million, $238,000 is the payment. I’m going to do 17 years. I’ll do 7%. That is $16.8 million. OK, so that’s a pretty good RMD. That’s roughly $672,000 RMD.
Joe: So I mean, they’re always going to be in the highest tax bracket. That 37% doesn’t make sense to do Roth versus 39.6 or something completely higher than that type of income in the future. Then all day every day, do Roth, do conversions but this gets a little bit tricky. You would really want to kind of forecast this thing out and then truly believe the assumptions that you’re making within the forecast. Because 37% is a pretty high tax bracket.
Al: It is. So they’re great wage earners and I understand why they have $3 million in the tax-deferred because they make good income and they’re trying to save on taxes.
Joe: I guess if we were sitting around in the wintertime having wine and in in the summertime, having a beer and just chatting about this…
Al: Yeah, what would you say? Joe: Well, I’m in a fairly high tax bracket as a single taxpayer. I go Roth all day long because I know for a fact that I’m going to be a lot happier with compound tax free growth in 20 years versus wondering; oh man, did I did I lose out on a few thousand dollars in tax savings? You’ll forget all about the tax savings once you pay it, because you’re probably not, well, maybe these guys are. They’re saving a ton. I was going to say something else.
Andi: I think you almost did.
Joe: I don’t think so.
Al: Andi could have deleted it if she wanted. Anyway, they’re saving a ton, but they’re not saving anything outside a retirement account. Unless that’s what the 2% is.
Joe: Right. I mean, everything is going into a cash balance plan. A 401(k).
Al: So here’s another way to think about that. If you put more money into a Roth, you’re going to have less tax deduction but you’ll figure out how to spend less. Right? You’re going to ultimately be in a better position but one other question she had was about asset location. Which as we’ve talked about, this puts your highest performing assets in the Roth and second highest in the in the non-qualified, and you’re safest in the IRA. Well, that only works when you’ve got good balance. In this particular case, you’ve got 98% of your assets in a tax-deferred. Just put your high performing assets in the tax-deferred. I mean, you have no other choice.
Joe: Right. Because she has zero tax, 98% in three is not diversified.
Al: Right. But at any rate, as you get more in the Roth, make sure that you have the highest performing assets in the Roth, but still keep them in the tax deferred. You don’t want to not have the right investments. We’re just saying when you’ve got choices, you want to favor the Roth and the non-qualified assets. Non-retirement. Those are the asset classes that have higher expected rate of return.
Joe: Right. So, congratulations on the savings that you did.
Al: Yeah, this is this is the star of the year. Wouldn’t you say?
Joe: Pretty close, we’ll give you a little five star. Since we usually get a 1.5 star review on our podcasts. We’re going to give you a five star on your savings, on how much money that you’ve saved. Congratulations. Usually with people that have this much money and save it, they lead with that. “Hey, Joe and Big All. I’ve got $3 million that we saved $700,000 a year… here’s my question.”
Al: I know, right?
Asset Location: Should My Kids Contribute All to Roth? (Mike, Texas)
Joe: “Hi all! I was listening to your podcast while on my daily 5 mile walk,” Five mile walk? That’s pretty good.
Joe: “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.”
Al: So far, so good Mike.
Joe: All right. Yes. Giving a little advice on the side after walking around. Listening to our podcast and thinking about it for like five miles, I’m going to start talking to my kids and give them some advice. They’re going to think I’m super cool.
Al: I thought I had it until mile number 4. Then I changed my mind.
Joe:Then all of a sudden, I listen to a podcast but alright. “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.” Light bulb moments?
Al: That’s cool. It’s like Snoopy and, you know, the little cartoon bubbles.
Andi: That needs a sound effect, Bling!
Joe: It’s like, oh, wait a minute. He’s walking and it’s like ok, I’m going all Roths. Then he
listened to another podcast… Oh!
Joe: Lightbulb! Well, maybe we should switch gears here. Mike, no!
Al: You’re right on track.
Joe: Why go taxable or tax-deferred when you could get everything into a tax-free account? If they can grow it tax-free, they qualifying tax-free. Tax diversification is nothing because everything will come out with zero tax. The problem that we see today is people, probably Mikes’s age, right? Which is most of our listeners. Well, I wouldn’t say that anymore because we have such a variety of listeners.
Al: We do!
Joe: A lot of our clients, they come to us and they have, just like that last caller, right? 98% of my money is in a retirement account. 3% is outside. So there’s varied diversification there because they didn’t learn to kind of diversify as they go. They went everything tax-deferred, tax-deferred, tax-deferred. It would be ideal if everything is tax-free. So we do a ton of work for our clients to try to get them diversified from a tax perspective.
Al: Yeah, because they’re not.
Joe: So if everything is in a Roth that is the golden child, that’s ideal.
Al: That’s the standard, you don’t need diversification there.
Joe: Zero because you’re doing diversification to mitigate your taxes when you have everything in Roth, it’s zero taxes.
Al: That’s pretty good. Then you won’t even pay taxes on your Social Security at that point.
Joe: Nothing! Yes.
Al: But Mike, here’s another thing. While your kids are in their 20s they probably have lower salaries. They’ll probably be in higher brackets later. If they want a little more diversification to get a tax deduction later, let them do that when they’re in a higher bracket. Not right now. Now put it everything in Roth, just like what you told them.
Joe: Yep. I think especially in their late 20s.
Al: Yeah. Think of all those years. Decades of tax-free growth compounded.
Joe: Right. Maybe when they’re in… what’s your peak earning years? Not until your 50s,
Al: Yeah, maybe 50s? Yeah, you’re not even there.
Joe: I know I can’t wait. Then I’m going to go tax-deferred. When I start making some money.
Al: Yeah, when you start making some money, right?
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)
Joe: “Hello, Andi, Joe and Big Al with the big wallet!”
Al: Well, yeah, my wallet’s getting pretty big.
Joe: Giant! “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.”Ken, your morning walks. It’s got to be boring as… well, get out. He drives a 2011 Toyota minivan. 175,000 miles on it. “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.” Oh, all right.
Andi: You get your first person telling you what they’re drinking.
Al: Now you can visualize that.
Joe: Yes, interesting.
Al: Well, you could drink with them in the summer. How about that?
Joe: There you go. All right. “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”
Joe: All right, Ken, thanks for the question. So, defined benefit plan. Let’s talk about what a defined benefit plan is. It’s the benefit that is defined for you. So if you think of like the big corporations back in the 70s and 80s, they had these big pension plans. You work for the company for 30 years. You retire, get the gold watch and then you get a paycheck for the rest of your life. So you could set those types of plans up as a self-employed individual.
Al: Yeah, you still can.
Joe: Right! So Ken is thinking, should I do a defined benefit plan? What that really means is that the benefit is defined for you. So you’re solving for a future like pension payment date once you retire. A defined contribution plan, the contributions are defined. A 401(k) plan, you can only put X amount in that or a Roth IRA and so on. With a defined benefit plan, there really is no limit. Well, there is, but you could triple the amount that you can put into a defined contribution plan.
Al: Yeah, there are limits on what your benefit can be, but it’s a lot higher than a defined contribution plan. Also, the older you are and the closer you are to retirement, the more you have to put in the plan so that you get that benefit because you don’t have enough time for it to grow. So basically, when you’re in your 50s, I would agree with Joe. I would say you could probably do at least double if not triple maybe more in a defined benefit plan than you could in a 401(k).
Joe: Annual compensation is used to determine for most plans, $285,000. So if I’m looking at this, Ken, here’s what questions that we would have. You and your wife are the sole owners of this company, and there’s $150,000 of net income, right? So defined benefit, the pro to that is that you could shelter hundreds of thousands of dollars into a defined benefit plan. The bad news is, is that you have to consistently fund that plan. You can’t just do it one year and say, you know what? Let’s not do it the next and oh, let’s do it the following year. You have to be consistent with it because the IRS is saying, Well, this is just a tax grab. You know, you set up the plan, you funded it one year and then you don’t want to fund it the next and then you cancel the plan. You know, the IRS doesn’t really care for that. You have to be consistent with your funding. So a lot of people don’t like that upon them because it’s like, Well, I have to be committed to make that type of contribution.
Al: Yeah. The exception there is when people have a lot of assets outside of their business, outside of retirement plans. In other words, they have a lot of non-qualified assets and so they don’t really care if the business does well or not because they got a big pile of money that they can stuff into a defined benefit plan, which can be kind of cool because then you can create a big tax deduction and then go ahead and do a Roth conversion and start getting a whole bunch of money into a Roth. But we don’t know Ken, what your non-qualified balance is.
Joe: Right. We know he’s got a lot of money in retirement.
Al: Yeah, we do.
Joe: So at $150,000 of net income. You could split that up between the two of you. Then you could set up like a solo 401(k) plan and a profit sharing plan. You could get up to $50,000 some odd dollars into those plans, and almost shelter 100% of the income.
Al: There’s another point here and that is, you get the 20% deduction.
Joe: Or the QBI.
Al: Or 199 A. Yeah, so that’s that’s roughly $30,000 deduction at $150,000 a profit. That’s worth considering and because you’ve got so much in the regular for 401(k) IRA, personally I would just do Roth 401(k)’s, which don’t affect your QBI deduction and call it good.
Joe: Then put everything else into a nonqualified account.
Al: That’s what I would do.
Joe: Set up two Roth solo 401(k)’s for you and your wife. Fund those to the max and then any other extra dollar that you have fund a brokerage account.
How to Pay for Son’s Grad School and Minimize Taxes? (Linda, San Diego)
Joe: All right. We have next, Linda writes in. “Dear Andi, etc”. What the heck is that all about?
Andi: I’m sure that was just to piss you off, Joe.
Al: Well, we’re not starting out good here. Right off the bat Andi gets top billing and we’re not even mentioned. Only etc, period.
Joe: “I hope Joe and Big Al read and answer this question on air this time”.
Al: Oh, she’s pissed.
Joe: “I submitted two different questions back in April, a week apart, but didn’t hear those read and yet even though I listen to every weekend show since then”.
Andi: Oh, so weekend shows, Linda is actually a San Diego radio listener.
Joe: Got it. So what, she’s given us questions and…
Al: We don’t answer.
Andi: It’s probably because when she sent them in the form was broken.
Al: Linda, we did have about two weeks where we weren’t getting the questions we were supposed to get.
Andi: It might have been longer than that. I’m not sure.
Joe: Well, when you start out, Dear Andi, etc, We just usually just toss them.
Al: True. That’s because we haven’t read all of our other questions.
Joe: All right. Here she goes. “What would be the most financially beneficial way for me to pay for my 37-year old son’s graduate school?” Well, first of all, he’s 37.
Al: I know what you’re going to say.
Joe: “$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.” I guess Linda loves taxes!
Al: I think she doesn’t want to pay a penny more that she has to.
Joe: “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” Alright, Linda’s doing pretty good. She’s got a nice nest egg. Her pension, Social Security, covers her basic needs and wants to give her 37 year old son a little graduate school cash. $40,000 do you see this is right up Big Al’s alley.
Al: When you have a son or daughter that’s in their 30’s. We all understand what this is all about.
Joe: Got it. $40,000 per year, Alan? It’s $160,000.
Al: Yeah. So let’s talk about gift taxes, because that was part of the question. So I’ll start with that, which is simply this. You’re allowed to give anybody that you want $15,000 a year. If you give them more than that, you’re supposed to report it on a gift tax return. Let’s say, Joe, you decided after this show to give me $100,000.
Joe: OK, sounds good.
Al: You can give me $15,000 but you decide to give me $100,000. So you gave me $85,000 too much for purposes of a gift tax. So you just have to put that on a gift tax return. You don’t actually pay tax on it, even though it seems like you would. All that happens is you reduce your unified credit, which basically means that when you pass away, you don’t have quite as many assets going to your heirs tax-free.
Joe: Estate tax-free.
Al: Estate tax-free. Exactly. And right now, the state tax exemption is $11.7 million. It’s a big number per person. So gift tax is not that big a deal currently. I wouldn’t worry too much about that. But here’s what you need to worry about…
Joe: I guess the answer to that question is Linda wants to give $120,000 away.
Joe: She could give the $120,000 to her son?
Al: Yes, she can, but there’s a better way to do that. If she pays tuition directly, it doesn’t count as a gift. The IRS actually forgives that as a gift. If she gives the money to her son and it’s more than $15,000 a year, then it counts as a gift. But if she pays the tuition directly, it doesn’t count.
Joe: OK. Either way, she’s not in trouble because her estate is ok.
Al: It’s a little bit of extra paperwork, but she can avoid the paperwork by paying the tuition directly to the university.
Joe: Got it. Or she could do a 529 plan as well?
Al: She could.
Joe: All right. 529 plan. Here’s the deal with that. You put in that whatever you want. If you wanted to start with $120,000, you could. I forget how many years to avoid the exclusion in the 529 plan.
Al: You can put in $75,000 all upfront. $15,000 per 5 years. So they let you put $75,000 in. If you put more than that, you can but then you have to file that gift tax return.
Joe: OK, so here’s the benefit of a 529 plan. Any interest or dividends that you earn in the 529 plan grows 100% tax-free. If it’s used for education.
Joe: Or it would be taxable if it’s not used for education.
Joe: So depending on how you want to invest this. Your son needs the money in four years. So the 529 plan doesn’t make a ton of sense to me because of the need for the compounding tax-free to really pay out. You need a lot more years. If he’s going to school next year and the year after. Does it make sense to put that money into a 529 plan, put it at risk in the overall market and get a return that you could probably lose money into it when that money needs to be spent over the next few years.
Al: Yeah, I agree. There’s not a lot of benefit if you’re going to need the money right away. In fact, if you’re going to need it over 4 years, it’s going to be in really safe investments and what are safe investments paying? Almost nothing. So it seems like kind of an exercise for not much benefit. Unless you want to save a couple dollars and she wants to not spend any dollars that
she doesn’t have to. What’s the cost of a 529 plan? There’s no cost, right?
Joe: Well, there’s cost to the investment.
Al: Well, sure but that’s true of anything. I mean, it’s not like you open up a 529 plan with a few thousand bucks. Yeah, it’s free. It’s just an account.
Joe: Right. It’s just like any brokerage account or custodial account.
Al: I think the thing you have to know about those plans is that they’re administered by the state. Every state has a 529 plan and every state has different investments. So take a look at the plans. Take a look at what investments you would like. It doesn’t matter what state you pick.
Joe: Yeah, because California, if she lives in San Diego, there’s no real benefit of a 529 plan.
Al: In California.
Joe: Right. If you’re in a different state, you can write off a state tax deduction, if you’ve contributed. So you get a little bit better tax break because you get a deduction for putting the money in and then it comes out tax-free but it’s different with every state.
Al: Yeah, I think if I’m not mistaken, Pennsylvania has that and other states. California does not. So if you live in California, it doesn’t really matter what state you pick for your 529 plan. But there’s not really a lot of benefit here if you’re going to be using the money right away.
Joe: Right. To put it this way, if you like Vanguard, you don’t want to use California’s plan because California’s plan is administrated by, I believe, TIAA-CREF.
Al: Yeah, I think you’re right.
Joe: And then so Vanguard is, I believe, Utah.
Al: I think that could be. Actually years ago when my kids were in college, I’m not paying for college anymore, I actually picked Nevada for that reason. They had Vanguard.
Joe: So you could just google it.
Al: And see what investments each state has.
Joe: So, I know it’s a little confusing. You’re using a Utah plan or a Nevada plan, but wait a minute, they’re not going to go to school in Nevada. They’re going to go to school in California or I don’t know where they’re going to go to school. It doesn’t matter. It sounds more confusing than it is.
Al: Yes, true.
Joe: Alright, Linda. Hopefully that helps and it’s Andi’s fault that we missed your questions.
Thanks. 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)
Joe: “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.” What the hell is that? Is that a Nissan?
Al: That’s a Nissan.
Joe: Is that like one of those little two-seaters?
Al: That was one of the cool cars years ago.
Joe: It’s like super badass. You going to pull that up for us?
Andi: I’m working on it.
Joe: Are they in the archives?
Andi: I got it, right there.
Al: I think they used to be called a 280 Z, so I don’t know what’s a 350 Z.
Joe: The size of the engine is bigger.
Al: It’s better.
Joe: Look at that! I do you remember those. Those are kind of cool.
Andi: I like it with the purple underneath.
Joe: Let’s answer Scott’s question. So I believe if I’m reading this correctly, his daughter has $180,000 sitting in a special needs trust. I believe that the $180,000 is just a brokerage account?
Al: I would guess so.
Joe: So he is looking at, how do I convert funds for my daughter when he passes?
Al: No, I don’t think so. I think it’s before they pass it so that she has more tax free income. That’s how I read it.
Joe: OK, but she doesn’t have an IRA. So if she had an IRA, we could talk about a strategy for her converting, but she doesn’t. It sounds like she just has the $200,000 sitting in a trust for her. He wants a conversion strategy for his daughter.
Al: I think he wants a conversion strategy for himself so that his daughter will inherit a Roth rather than a regular.
Joe: That’s what I thought.
Al: So in other words, converting while he’s living. That’s what I think. We don’t have the breakdown. It says 4.6 million in taxable IRAs, family trust and inherited IRAs. So we don’t really know how much of that’s IRAs versus non IRA’s. So it’s hard to tell.
Andi: But we do know that they’re taking the forced distribution from the inherited IRA of $44,000.
Joe: How old is Scott?
Al: It doesn’t say.
Joe: He’s going to retire in 5-7 years.
Andi: Their daughter is 21.
Al: 50s, maybe?
Joe: The inherited IRA is probably 1 to 1.5 million maybe a little higher?
Al: That’s probably right. But something else I’ll say. Just looking at this, they have $2.2 million in stock options. Those with his current company, which probably means a lot of the 4.6 million, is non-qualified coming from stock options. So I don’t know how much is an IRA.
Joe: I guess let’s talk about the rules of retirement accounts, gifting and trying to give that to kids. Retirement accounts can only be established by individuals that have earned income. So you can’t necessarily gift a Roth IRA to a special needs child or to a grandchild or to a spouse.
Al: You could gift non-retirement accounts into the daughter’s special trust. That would be OK.
Joe: I think what he’s asking is if there is a conversion strategy for this? Unless you want to convert most of your retirement accounts and then your daughter inherits the Roth IRA. She will have to pull the money out within 10 years. It’s logical to me and you because we do this every day, but I think for some people, they don’t really know. They think hey, I would like to give my daughter a tax free account. How do I set it up for her? It’s not going to affect the special needs trust because it’s going to grow tax deferred. Then if she needs to pull the money out, it’s going to be tax free.
Al: So here’s a thought, and again, I don’t know how much is in the IRA. That would be a good thing to know here, but I think if your daughter is special needs and would potentially qualify for a tax category of disabled, then that means the stretch IRA would actually still continue. It’s not a 10 year withdrawal under the SECURE Act. So maybe the RMD for the daughter, now I’m projecting forward. Scott, when you guys pass away and you’re daughter inherits. She can still do the stretch because she’s disabled. Maybe the RMD isn’t really that big, and you don’t need to worry about it too much. That’s one thought. Second thought is. If you’ve got 2.2 million in options and you’re still working, you’re probably in a pretty high income right now. So don’t go to any Roth conversions until you retire and you live in Texas. So, put a hold on that. Wait until you retire. Your stock options are done with and you live in Texas, then convert to your heart’s desire in lower brackets.
Joe: OK, I don’t know if that helped or not. Probably not.
Al: Well, that’s how I read the question.
Joe: Are Roth conversions high on your list Al?
Al: Sure, I dream about them. I go to sleep thinking about them and as I wake up in the morning. Oh, hallelujah, another day to think about Roth conversions.
Correction: Inherited Roth IRA SECURE Act Stretch IRA Rules (Greg, Temecula, CA)
Joe: “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.” He’s got this all in quotes. It’s like he just listened to every word I say.
Al: Well, it probably came from the show notes, right?
Joe: “You get compounding tax free growth for your entire life, for your wife’s entire life, and for the kids entire life.” That’s false.
Al: Yes, that’s false. Agreed.
Joe: It used to be true and I don’t remember saying that. He must have listened to an older episode.
Al: Before the SECURE Act, which wasn’t that long ago.
Andi: Actually I will say, I think that was in the most recent episode. Sorry Joe.
Joe: The SECURE Act doesn’t allow kids to stretch anymore. They only get the 10 years after the age of majority, which are special stretch rules if a child has a disability. Otherwise, it’s 10 years. That’s true. Thanks, Greg.
Al: Keep Joe honest.
Joe: Remember when we blew up something about the TSP? Battle zone?
Andi: About the military. Yes. We got a whole bunch of corrections on that.
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
Joe: So we appreciate your comments. Got a couple new one stars, which are my favorite. Yeah, this guy goes “cashed out CalPERS pension. Are you guys insane?” So one star, he was very adamant that he thought we were crazy. We’re insane. “Enough said take the pension payment”. “A lifetime monthly annuity for probably another 40 years”. “40K rolled into an IRA is no way you’re going to provide her more to live off for her life.” Yeah, and I agree with that. I think did she have shortened life expectancy?
Al: I don’t know. I don’t remember the call.
Joe: I remember very little of it. But there was a reason why, I think we were saying that because she needed the cash to pay for some nursing home care. If I remember correctly anyway, I don’t know. Sorry about that. Yes. I mean, we’re spitballing in here. We’re not giving advice. Can I throw that caveat again? For all compliant purposes. Alan and I are just here chatting. We’re taking a break from our busy lives and trying to give you guys a little bit of insight into the financial planning world.
Al: Yeah, and the reason why it’s chatting and not advice is because we don’t have near enough information.
Joe: We don’t know any of you.
Al: We’re just going off what little we know from your questions and we don’t want you to write a five page question because it doesn’t work.
Joe: And we’re not going to read it.
Al: So keep your questions coming. The length is good. It’s just that we don’t have enough facts to give you a 100% answer with certainty.
Joe: We are fiduciaries.
Al: Right. So so we’re just trying to do the best we can with the information that we have and it’s just a chat. That’s what it is.
Joe: So, we got another great one. “One star, in my opinion, Andi and Al are excellent”. “Joe adds little value to the show and often appears bored”. Yes, you nailed that. This show is terrible! “Belittles his callers and really should consider retiring”.
Al: Wow. We just got that one a few days ago that must be from the last podcast. You must have gone off on something. That’s something. The name is real life ninja?
Joe: Yeah, he’s a real life ninja. He’s going to kick my ass. If you don’t retire I’m going to whip a Chinese star in your ass.
Al: I wouldn’t go out at night for awhile, until that podcast becomes old history. This is like you two days ago. You’re in trouble. Yeah, you’re right, those stars things look like they hurt.
Joe: He’s got like some magic dust and going to come out of the elevator… Wahhh, and start kicking my ass. I can’t believe you belittled my question.
Al: You better get a bodyguard for a little while.
Joe: All right. Well, we got a five star. There we go. “Listen, learn and be entertained. If you care about getting smart about your money, including asset allocation, retirement readiness, Social Security, withdrawal strategies, etc”. “This is a must-listen”. “Plus, these guys are laugh out loud funny”.
Andi: Yes, they do. They do laugh out loud. That is true.
Al: Yeah, we don’t fake that.
Joe: Oh God, I love the the real life ninja. Joe adds little value. He’s bored, he’s a half idiot. You should hear him read a better question. Oh man.
Andi: Hey, if you want to tell us more about your opinions, you can always fill out the podcast survey
Joe: Yeah. Why don’t you tell them about that.
Andi: Yes, you can go to any of the most recent podcast show notes at yourmoneyyourwealth.com and you can tell us your opinions about the podcast. Let us know if you think that Joe should retire ASAP. Everybody who does enter and gives us their email address will be entered to win a $100 Amazon gift card. So that’s worth it right there. And you know what, we got so many spam submissions because people were trying to get that $100 bucks that I actually had to put a password on the survey. So the password is pure, all
Joe: No one’s going to fill it out.
Andi: We’ve already had quite a number of people who have filled it out.
Joe: Really? Those passwords get me every time.
Al: The ones that are as hard as pure?
Andi: All lower case.
Al: Is that a capital? Is that not a capital?
Joe: We’ve got to get Lastpass or whatever.
Andi: Somebody has already told us in the podcast server that other topics they’d like to hear discussed are Joe’s dating strategies, Al’s favorite fanny pack for his hikes and Andi’s favorite live concerts she’s attended.
Joe: Wow. OK, we can definitely pencil those in.
Al: I love packs. I don’t own a fanny pack.
Joe: I guarantee that you have a fanny pack.
Al: I do not have a fanny pack.
Joe: You have hiking poles.
Al: I do.
Joe: Yep, and a fanny pack.
Al: I don’t have fanny pack.
Joe: You walk on the street with hiking poles.
Al: I walk down the halls with hiking poles and a fanny pack!
Andi: Alan, somebody says they want an offer to join your MLM because they believe in you and want to be their own boss.
Al: Oh, look at that.
Joe: Your MLM?
Andi: His multilevel marketing scheme.
Joe: You’ve got one?
Al: Yeah, apparently. I can teach you how to sell more fanny packs then you can imagine. Then you teach your friends.
Joe: I could see you with short short cargo shorts.
Al: Remember like Tom Selleck in the day.
Joe: Little side pockets…
Al: Yeah, right. Sticking out the bottom.
Joe: OK, thanks all. We’ll see you next week. The show’s called Your Money, Your Wealth®.
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.