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
September 29, 2020

Are you screwing up your Backdoor Roth IRA conversion? Find out. Plus, tax on mega-Backdoor Roth conversions, Medicaid spend-down rules and your Roth IRA, and Joe and Big Al take a burning confession about Roth conversions and IRS form 8606. Also, more on Vanguard’s VTSAX and dividend yield, and various options for investing for minor kids including Paul Merriman’s suggestions, UTMA, and brokerage accounts.

Subscribe to the YMYW podcast

 Subscribe to the YMYW newsletter

FOLLOW US: YouTube | FacebookTwitter | LinkedIn

Free Financial Assessment

Show Notes

  • (00:53) Backdoor Roth Conversion Burning Confession: I’ve Never Filled Out Form 8606
  • (07:10) Am I Doing the Backdoor Roth Conversion Wrong? Roth IRA vs Roth 401(k)
  • (10:50) Taxation on Mega Backdoor Roth IRA Conversion?
  • (12:35) Roth IRA Contribution Limit and Selling Investments
  • (13:55) I Had a Free Financial Assessment. I Was Told Not to Do a Roth Conversion?
  • (16:10) Retirement Plan Spitball Analysis: How Does Our Plan Look?
  • (20:21) Roth IRAs and the Medicaid Spend Down (article)
  • (25:51) Should I Put Extra Savings in My Company Retirement Plan or Brokerage Account?
  • (29:54) VTSAX and Dividend Yield
  • (35:51) Uniform Transfers to Minors Act (UTMA) Account or a Brokerage Account for Minors?
  • (36:26) Should I Follow Paul Merriman’s Advice for Investing for a Child?
  • (38:40) Comment: Utah 529 Plan foe Education Uses DFA Funds
  • (39:42) Congratulations David T, Podcast Survey Winner

Free resources:

LISTEN | YMYW PODCAST: Revisit all the episodes on Roth IRA Conversions!

READ | BLOG (new!): Decision 2020: Your Vote and Your Money



Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth®, are you screwing up your Backdoor Roth IRA conversion? Joe and Big Al will help you figure it out. Plus, confirming taxation on a mega-Backdoor Roth conversion, Roth contribution limits and selling investments, and how the Medicaid spend-down rules affect your Roth IRA. We have yet more discussion on Vanguard’s VTSAX and dividend yield, and the fellas will look at various options for saving and investing for minor children and grandchildren. But first Joe and Big Al take a burning confession about Roth conversions. Click Ask Joe and Big Al in the podcast show notes at YourMoneyYourWealth.com to send in your money questions – and don’t forget to tell us all the irrelevant stuff like what you drive and whether a dog or cat listens to YMYW with you! I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.

Backdoor Roth Conversion Burning Confession: I’ve Never Filled Out Form 8606

Joe: We got John from Vancouver, USA. I didn’t know there was a Vancouver in the United States of America.

Andi: Vancouver, Washington.

Joe: I thought that – oh really? I suppose-

Andi: Yeah. As opposed to Vancouver, Canada.

Joe: I was thinking Canada.

Andi: That’s why he specified.

Joe: Well I understand.

Al: So we’d know.

Joe: “Fellas. We, my terrier Finnick and I, enjoy your podcast on our evening walks.” Very cool. In Vancouver, it’s probably getting chilly in Vancouver right now. Cooling down.

Al: Probably so.

Joe: “Good job to all 3 of you. Question, in year 2000 I converted a small non-deductible IRA to a Roth. And every year since I’ve either contributed directly to the Roth with earned wages or converted amounts from a rollover IRA to the Roth. My burning question for you stems from a burning confession.” A lot of burning going on there.

Al: Yeah right?

Joe: “I’ve never filled out a form 8606.” Alan, can you believe it? I mean the first confession-

Al: I mean I would say most people don’t know what that form is and I’d say a lot of tax preparers don’t even know what that form is. So don’t feel bad John.

Joe: He can’t sleep. It’s killin’ him.

Al: That’s why he had to write in.

Joe: He’s like- I guarantee- He’s actually from Canada. He’s trying to get the feds off his back by saying he lives in the USA.

Al: I bet he probably- he almost hit send on this email 100 times but he’s afraid he’d be caught, so he finally chanced it.

Joe: Usually- ‘hey, I have a friend that has never filed an 8606’. “So my question is, how deep is the water on my failure to submit form 8606? In the early days of Turbo Tax and Roth conversion, it seemed the software was suspect and I had to deal with conversions manually. It consequently got me to the practice of not using Turbo Tax for treatment of conversion and hence no form 8606 was filed. I’m confident I paid all tax due on the conversion but I do have a concern about clearing up necessary tax forms. How would you handle this?” Okay well, a couple things. So it seems to me Al, reading this email is that he did a non-deductible IRA contribution in the year 2000 and converted that non-deductible IRA to a Roth IRA. The reason why 8606 is important in that case is that 8606 form shows basis. It shows if I made a non-deductible IRA contribution of $6000 you want to file that form so you’re not double taxed because it’s an after-tax contribution. So when you take the $6000 back out it will not be taxed again. However, the money comes out pro-rata. It seems as John made the non-deductible IRA contribution and then converted it directly into the Roth. As long as he didn’t have any other IRAs, he’s fine in the fact that he did what is called a Backdoor Roth IRA contribution; non-deductible IRA, then immediately converted it into a Roth. So the 8606 form shows I have basis. I converted it. But then he’s using Turbo Tax so he probably kind of jimmied it where- because I’ve had clients, they’re like ‘I don’t know how to do this’. Can we just figure out a way to rig the system so it doesn’t show up anywhere because they don’t understand what a non-deductible IRA conversion is. So I feel John’s pain there with Turbo Tax.

Al: I agree too, because with Turbo Tax you have to answer a bunch of questions and it’s frustrating for professionals even to try to figure out, how do I answer this? I know what I want the result to be, but I don’t know what- how to ask this question. So here’s a couple of things. 8606 is, that’s right, it’s for non-deductible IRAs to keep track of tax basis. It’s also used for Roth conversions on page two. If you didn’t file the form I would not lose any sleep whatsoever, particularly if you think you did it right. However, on a go-forward basis, just start doing it. There’s nothing you have to do to go back and fix anything, just start doing it right on a go-forward basis. The IRS does not have the resources to track people’s missing 8606. I wouldn’t worry too much about it.

Joe: I’m surprised that he wasn’t audited back in 2000 or you know in like 2001 or 2002 to show hey- because that happened to me every single time that I did it- that I do a non-deductible IRA contribution that will show $6000 as a distribution that’s not non-taxable. Then they’re hey well what happened here? You owe tax on this and then it’s like you talked to the CPA, hey did you file that 8606 form correct? Because it’ll lag. Because if you do it on your tax return correctly it will show a distribution from the IRA. But then the 8606 form washes it out. So it shows non-taxable. So maybe he just ignored it. Maybe he just converted it and didn’t even put it on because he knew he didn’t know any taxes anyway. But yeah, I agree with you Al. I would definitely ignore it. He knows what an 8606- he’s probably freaking out- we got one page missing from those tax forms from 10 years- 20 years ago.

Al: Yeah they’re after you. Well first of all the IRS can only audit you for three years after you file. So that’s one thing.

Joe: In the year 1978, I took a $56 deduction-

Al: I suppose if they can- if the IRS could prove fraud, there is no statute of limitations, but not filing 8606 is not fraud. I wouldn’t worry too much about it. Just do it right. Just do it right going forward.

Joe: Well hopefully you can sleep better at night.

Am I Doing the Backdoor Roth Conversion Wrong? Roth IRA vs Roth 401(k)

Joe: Go to YourMoneyYourWealth.com if you’ve got a question like Mike did from Washington D.C. “Hi there. I’m 32 years old, paid off all my student loans, around $80,000 to $90,000, and have just over $300,000 in overall liquid and retirement savings.” Killin’ the game. Mike, 32 Al, he’s saved $300,000 and paid off another $100,000, That’s $400,000.

Al: Yeah. That is amazing Mike.

Joe: That’s what happens when you listen to Your Money, Your Wealth®. I mean stuff like that just happens to people. “I’m contributing about 13% to 14% of my 401(k), Roth 401(k) through work, I have a Roth IRA account. In the last few years, I’ve contributed the maximum amount of $6000. But when I put the information doing my taxes they ask me to withdraw that amount because I made over the limit of $183,000 dollars. I am making this contribution through a Backdoor conversion. So I thought I was doing this correctly. What am I doing wrong? What steps do I need to do for this to work? Also, do you recommend not contributing to a Roth IRA and just my total percent of the 401(k)? Any help would be greatly appreciated.” So Mike makes over $183,000. So he’s 32, so- but he’s doing a Backdoor Roth IRA. So he’s doing a non-deductible IRA then converting it. And he’s probably using Turbo Tax. So we kind of answered this question a little bit earlier. I think he’s doing everything correct but he needs the file the dreaded 8606 form and figure out how to do it on his taxes appropriately.

Al: Yeah. Or just contribute to your Roth 401(k). Much simpler. You get the same impact. That’s what I would do.

Joe:  It makes no difference- here’s the difference between a Roth IRA and a Roth 401(k). A Roth 401(k), the biggest difference is that if you have to take a required distribution at age 72 out of a Roth IRA 401(k). Mike is 32. It makes no difference. He’s gonna move the money out of that plan and put it into a Roth IRA to avoid that anyway. If he likes the investments inside his 401(k) then by all means do the Roth 401(k). Right?

Al: Yeah, no makes sense. It’s just it’s simpler. It’s simple- if you have extra money though if you’re not maxing out. Let’s say you are maxing out and you still want to put more money into the Roth then go for it. But if your income- I think the limits this year are what, $193,000 to $203,000, something like that, I believe for the phase-out, give or take. If you’re income is above that, you’ve got to do Backdoor Roth, which means that you shouldn’t have any other IRAs. If you do, it blows this whole thing up. But assuming you have no other IRAs, you can continue to do the Backdoor Roth at any income level. So that would be a way to do that over and above your 401(k).

Joe: It sounds to me then he’s got everything in a Roth 401(k), then he’s got the Roth IRA account, doesn’t have any other IRAs. You make the $6000 a non-deductible IRA contribution, you convert it directly into the Roth IRA.

What’s blowing him up is just how it’s reported on his taxes and sounds like he might be doing his taxes on his own. You just have to file the 8606 form which we talked about a little bit earlier. But you’re doing everything okay Mike. Congratulations actually. You’re doing a phenomenal job.

Taxation on Mega Backdoor Roth IRA Conversion?

Joe: All right Deborah from California. “When doing a Mega Roth in later year doing you get hit when taking a distribution on tax earnings growth that it makes.” People. You’ve got to read what you write us. “When doing a Mega Roth in later year doing you get hit when taking a distribution on tax for earnings growth that it makes. I heard that normal Ruth does not, but the Backdoor Ruth does.” Oh my-

Al: Roth and Ruth are synonymous.

Andi: Wow. Al is the color of his shirt, which is kind of purple. He was laughing so hard.

Joe: Oh. God.

Al: That was a good one. I like that. I heard that the normal Ruth does not, but the Backdoor Roth does. Is that in reference to your mom?

Joe: Yes. My mom is Ruth. Oh God. So-

Al: So when you do a Mega Backdoor Roth you’re putting after tax money in your 401(k). You’re allowed to put that or convert that to the Roth IRA and pay no tax. But to the extent there’s any growth on that amount you do have to pay tax on that part. I think that’s what she’s talking about.

Joe: But if it’s- as long as it’s in a Roth IRA and it qualifies for a tax-free distribution, you’re fine. So- right?

Al: Well if it’s after tax money. Right. And you’ve put that in, any growth that you put into the Roth, you’ve got to pay tax on that.

Joe: Oh got it. OK. There ya go.

Roth IRA Contribution Limit and Selling Investments

Joe: Rudy writes in “Good morning. Question. Roth IRA limit is $6000 per year. Can I sell my investment at a profit? And what do I do with the profits?” There you go, Al. That’s your question.

Al: I read that- I was hoping you would understand it when you read. I still don’t get it.

Joe: People write us the weirdest things. ‘Good morning, question’- I don’t know what the- should we just skip Rudy? I don’t understand the question.

Al: Well let me take a stab at it, Joe.

Joe: He’s got “IRA is $6000, can I sell my investment at a profit and what do I do with the profits?” I don’t know what the hell he’s talking about.

Al: Well if he’s talking about he’s got profits in his stocks and he wants to sell the stocks to contribute to a Roth, if that’s what he’s saying, you pay taxes on the profits, capital gains if you’ve held them for more than a year, and you take that net amount and you put them into a Roth IRA up to $6000. If that’s what you’re talking about, great. Or maybe he’s talking about gains in a Roth. You don’t pay any taxes in a Roth, it’s tax-free forever. That’s the reason why you get the money in there in the first place. You can buy and sell within the Roth and then you don’t pay taxes. So there are two angles there and unless you can think of a third one.

Joe: Got it. I understand.

I Had a Free Financial Assessment. I Was Told Not to Do a Roth Conversion?

Joe: We got DJP. “I’ve had my free assessment; however you keep talking about Roth conversions. We were told not to convert but keep adding money to our 401(k). I’m 63 years old, plan on working till 70. I have $100,000 in my 401(k). My employer stopped matching due to COVID. I would like to confirm that I received the corrected advice.” Well let’s see you got $100,000 401(k), you’re 63, you’re gonna work another 7 years. There’s not a lot of money to convert. So when you- depending on how much money that they want to pull out you’re probably going to continue in the lowest tax bracket.

Al: I’m thinking the $100,000 in the 401(k) and maybe in 7 years it’s $200,000 with contributions. Let’s just throw out that number. And then we would say your RMD at age 72 is going to be about $8000. It’s not going to blow you up in a high tax bracket. Maybe you’re in a higher tax bracket now than you will be in retirement. So it didn’t make a lot of sense but we don’t- based upon this question we don’t really have enough information. That might be Joe, that might be why you wouldn’t do a Roth conversion is if you’re in a higher bracket now and you’re going to be in a much lower bracket in retirement. Take the tax deduction and if you’re not going to have a big required minimum distribution.

As DJP points out, Joe and Big Al talk about Roth conversions all the time, because a conversion can potentially save you tens of thousands of dollars in taxes, but the fact is, unless you take your entire financial picture into account, it’s hard to know for sure if a Roth conversion is the right move for you. Luckily, a CERTIFIED FINANCIAL PLANNER PROFESSIONAL from Joe and Big Al’s team at Pure Financial Advisors can help guide you, and they’ll do it for free. Schedule your free financial assessment video call ASAP, because the calendar is already getting booked up solid as we approach the end of the year. No matter where you are in the country, Joe and Big Al’s team can help. Click the link in the description of today’s episode in your podcast app to go to the podcast show notes at YourMoneyYourWealth.com, then click the “Get an Assessment” button to schedule yours.

Retirement Plan Spitball Analysis: How Does Our Plan Look?

Joe: We got Chris writes from Austin, Texas. “Hi again Andi.” So this is just a personal email to Andi I guess.

Andi: They know that to get to you guys they’ve got to come through me.

Joe: Got it. Even though we have a button on our website that says ‘Ask Joe and Big Al on the Air’.

Andi: This is more direct.

Joe: Got it. “I’m prefixing my email below because you guys answered the question of mine back in episode 266 so we’re not strangers. Yep. I’m YMYW bingeing, socially savvy Chris that hangs out at the food trucks-” He’s socially savvy alright. “- before they started closing due to COVID in Austin, talking to all of the women.” So what, did I- ? Was I talking about- ?

Andi: That’s the story you came up with about him.

Joe: He was probably doin’ it. “My wife got a kick out of that.” Oh, I bet she did Chris. You were busted. “So I figured this time I’d reveal more of my financial self. Thank you again to any Joe and Big Al for making a tough subject fun to learn. Now you can go to my note below.” All right, so- “Hi Andi. I listen or watch you guys and think I’ve almost binged on all of your YMYW shows. You produce an awesome show.” So he’s kissing ass first two paragraphs, is just all Andi. We should just delete that and just give me the meat, Andi.

Andi: Duly noted for next time.

Joe: Got it. I’m kidding Chris. I love hearing about your life. “Those other two guys aren’t bad either.” Oh, thank you. “You’ve been so beneficial to my understanding where we might stand financially or should be taking action. Let me start by saying this isn’t totally about me. We’re married and live in Austin, Texas. I’m 64, my wife is over 70 and she’s already retired drawing Social Security. I’m retiring at 66 and 4 months or sooner if they get tired of me. But that’ll be okay. Because I’ve already attempted to retire at age 62 to pursue my passion of a pastry chef. Then someone threw a job at my face I couldn’t refuse. So here I am. Using it to pay for Roth conversions and padding our retirement. So he doesn’t plan on drawing Social Security until 67 or 70 depending on how we’re managing our plans and our health. As mentioned before, I’ve been Roth converting for two years now at about $100,000 a shot. I have money in a pre-tax account, two Roth accounts, one stock, one SD IRA Roth for CRE.” Can you come up with that one Big Al?

Al: Uh, no.

Joe: “And we have one joint account which is an after-tax stock account. We’ve accumulated approximately $2,400,000 not including our home that’s paid off. We have no outstanding loans. Is there anything else you could suggest we do to fine-tune our retirement? I’d be honored to hear it.” So I think he’s doing quite well. So he retired at 62. He wants to be a pastry chef. He’s going to draw Social Security 67 to 70. He’s like I’m going to retire at full retirement age. Maybe sooner depending on if someone kind of makes me upset I’m just going to go put on my little hat and apron and make some cookies. I like it. So he is using the cash that he’s getting to convert. So he’s doing $100,000 Roth IRA conversions each year for the last two years. He’s got $2,500,000. He’s got a brokerage account so he’s trying to get some tax diversification. Probably doesn’t spend a lot. And then he hangs out at the food trucks pitching his cooking and cupcake ideas. He’s gonna get a food truck in Austin called Chris’s Cookies and-

Al: And more.

Joe: – and More. I like it. I’ll think of a better name off the cuff there but-

Roth IRAs and the Medicaid Spend Down

Joe: “As I stated this isn’t about me. My question has to do with Medicaid and Roth IRAs. A friend of mine’s father was hospitalized and reached the Medicaid point. They were told that they were lucky that they didn’t have a Roth IRA or they would have to use that before Medicaid would cover them. What’s that all about? He found this article below that I included for your review. I’m sending this to you because you strongly believe in Roth conversions and so do I. But until this, I couldn’t see a downside to Rothing out at least to a point where there’s enough to cover using pre-tax, RMDs to stay in low tax brackets. I want you guys to analyze the subject though it may not fall in your areas of expertise. Thought it would be beneficial to your listeners.” So Al, did you read the article?

Al: I did. And he’s right. The article basically says that an IRA doesn’t count for most states for Medicare, with Medicare/Medicaid to get to a nursing home you have to go through all your assets. An IRA doesn’t count because it’s in payout status; whereas a Roth IRA does not have an RMD and it could be. You might have to bleed it all out.

Joe: We’re in California Alan, and so we call it MediCal. But he’s in Austin, Texas, so Medicaid. And basically for anyone to get on Medicaid or MediCal, you need to be destitute. You need to be broke just about. So there’s something that’s called a MediCal spend-down and there are ways that you can avoid paying for care with your own assets. Because there’s an asset requirement. They look at your assets and then they also look at your income. And so if you have a lot of assets they’re like well no, you have enough assets to pay for your care, so you’re going to pay for your care until you’re flat broke. And if you’re flat broke then the government is gonna take over and we will help pay for your care. It might not be as fancy of care. You might have to go to maybe a different facility or whatever, but that is a benefit by being a US citizen is that we do have health care for the elderly that might not have the resources to pay for it. So far so good?

Al: Yep, you’re right on track Joe.

Joe: OK. And then Chris is saying hey man, my buddy’s dad, they were saying man I’m glad he didn’t have a Roth IRA. Because you would have to spend his own assets to pay for his own care. Imagine that.

Al: Yeah. That’s what the article-

Joe: There are ways you can get around that is by doing some gifting, turning your assets into income, and certain I guess strategies that are kind of on the edge of almost kind of illegal.

Al: That’s right. And what this article – this was written by Ed Slott Group, which is actually probably the foremost authority on IRAs so we tend to trust what they have to say and that is true. To get on to Medicaid, or MediCal in California, you’ve got to spend down your assets. And so what the article says is if you have a Roth IRA you’re going to have to spend it down. If you have an IRA, you don’t necessarily have to spend it down because it’s a payout asset. There’s a required minimum distribution. So that may be true. My experience though Joe, is you don’t really want to go on a Medicaid facility or MediCal facility if you can help it. And so it’s not that they’re horrible. But if you go to a facility that you’re paying for it will be much nicer.

Joe: Because you might get your own room versus a shared room.

Al: Right.

Joe: There are really nice facilities here in Southern California so I don’t want anyone to email Big Al and yell at- well maybe I do. Because in some cases you can’t really tell the difference of a MediCal facility than a standard facility.

Al: I guess I just go from experience with my mother-in-law. And we found a decent one because she had run out of money for her assets but it was not near what she had before when she was on a long-term care policy. And yeah, and shared room, it wasn’t near the facility. So that’s all I’m saying is if you can pay for it if you have the resources to pay for it yourself you probably will. Or at least you’ll be tempted to. But you’re also right Joe, there are strategies to do asset transfers that typically you have to do it what,  because it was 7 years before? Otherwise, claw back or something like that.

Joe: Because then- or they annuitize their overall assets to create income and then those- and then go into like an irrevocable- and then that income could feed another asset in the irrevocable trusts that they don’t have control over then that can get passed to the kids. I mean there’s all sorts of different strategies. I mean there are people that specialize in avoiding the MediCal spend-down by preserving your assets so you don’t give it to the state. But  I guess is what your goals and what you’re trying to accomplish. But if you do have the assets, you pay for your care, so be it, if you need it. But if you want to look at different strategies to protect your Roth, there are certain strategies that you could potentially do.

Should I Put Extra Savings in My Company Retirement Plan or Brokerage Account?

Joe: We got Greg. He writes in. He gave us some attachment Al, of a rough draft of a financial plan. But I don’t think I have that in front of me and I don’t think we need it. If you want to send us your financial plan, it’d take up two hours for us to go through line by line.

Al: It probably doesn’t make for a good podcast. But I’ll just summarize the little financial plan was they’re spending about $3000 a month and it sounds like they’ve got some extra money and want to know how to invest it. So that’s kind of the extent of that one-pager.

Joe: So he writes in- what have we got here? “We’re both going to retire at age 62 in 8 years and seeking help on investing. My Social Security is gonna be $1200 a month at 62. My wife doesn’t know hers.  We’ll be debt-free and RVing full time.” What do ya think Al? You wanna be RVing full time?

Al: No I don’t. I think I’d do it for a week or two.

Joe: “Our monthly expenses now is just under $3000. Beginning in March 2021, I’ll free up 52.65 a week and my wife $500 biweekly. Should I have this put into my company retirement plan or use an outside company to invest? I’m sending a rough draft of what our finances after binge-watching on YouTube all day Saturday and Sunday morning, you and Jazz Wealth.” A little promo there to Jazz Wealth. I don’t know what Jazz Wealth is.

Al: I don’t either.

Joe: You know what Jazz Wealth is?

Andi: I do. He’s a financial planner and he’s super popular.

Joe: What- so he’s looking to save $552; to what, should he put it in his 410(k) plan or should he contribute it outside?

Al: Generally you would use the 401(k) plan for a couple of reasons; one is it’s easy, out of sight out of mind, you know you’re going to do it. Typically a company does a match. So you want to get that. Sometimes your company has a Roth option which is- can be a great way to go. So I think that’s usually where you start. But I don’t know- their little financial plan here just has expenses, it doesn’t really say what they already have in savings, so I don’t really have enough information.

Joe: Well Social Security is going to be $1200 at 62 so that’s going to be what, $1700$1800 full retirement age.

Al: That’s about right.

Joe: So I’m guessing that probably in the 12% tax bracket. I would probably look at Roth IRAs for the money first. And then maybe go to something else because he’s in a fairly low tax bracket; even though he’ll probably be in the low tax bracket in retirement. Because he’s just gonna spend just under $3000 so the easiest way to deal with your 401(k) plan just jam as much as you can in there. And then if they have a Roth option, maybe split it up.

Al: Yeah I agree with that. I think if they have a match, you certainly want to make sure you take advantage of that. And then if they don’t have a Roth option, maybe you stop at the match and go fill up your Roth and then you come back to the 401(k). Maybe something like that.

Get ready, because class is once again in session! You may know that for years, Joe Anderson, CFP® has taught retirement classes in person at colleges and universities across Southern California, but now you can take this two-day retirement course online, from anywhere. Learn how to build wealth and align your money with your values to accomplish your goals in life. Find out how to determine how much money you need to retire, how to properly convert your IRA to Roth, how to transfer the risk of financial loss before or during retirement, and much more. It doesn’t matter if you plan to retire 20 years from now or if you’ve just recently retired, the knowledge you take away from this class can provide financial rewards throughout your lifetime. Click the link in the description of today’s episode in your podcast app to go to the podcast show notes at YourMoneyYourWealth.com, view the class schedule, and sign up. Space is limited, so register for these two-day retirement classes now.

VTSAX and Dividend Yield

Joe: Bruce from Joisey emails us once again. This show is just not a show without Bruce from Joisey. I’m thinking that he’s just-

Al: He’s a regular.

Andi: I love our regulars. They’re great.

Joe: He’s the 4th in the leg of the stool. “Hello, Joe.” And then he’s got a bunch of lines here because he put me really at top billing. I appreciate that Bruce. “And Al and Andi.”

Al: He gives you a lot of credit Joe. And then-

Joe: Yes he does.

Al: And then Andi and I are kind of second billing, which is fine.

Joe: Very much so.

Andi: That’s what Joe thinks we deserve anyway.

Joe: Exactly. “Thanks for the elaborate explanation.” So apparently last week’s show we answered something and the week before that and the week before that. “But I think I’m still at a loss regarding the dividend and yield. While focusing on say VTSAX. So that’s the what, Vanguard total U.S. stock market fund, would yield 1.74% say it’s $100 per share. I think I’m able to sort of replicate the double every 10 years by multiplying the share to 1.0174 every quarter for 10 years. Was I somewhat right?” No, not even close but we’ll continue. “Then you mentioned that paying a dividend actually decreases the price of the share price. In a vacuum, does that mean that the price can just go close to zero for paying out the dividends? Ha. I’m so confused.” OK. He’s talking about a total U.S. stock market index fund that has a dividend yield and the dividend yield is based on the dividends of the stocks that you receive. So the total return of an investment, it’s growth plus the income equals your total return. When you’re buying a total U.S. stock market fund you’re buying every company basically that’s listed on the exchange. Some of them create dividends, some of them do not issue a dividend. So they’re just basically looking at the dividend yield of the particular fund of 1.74%. That’s not saying that that’s the yield per quarter because if you multiply that by 4 that 7%. And he’s saying hey I’m going to get 7% over 10 years. I’m going to double my money. Don’t look at it that way. The yield and the total return are two different things. The yield is what’s kicking out in regards to the income and the total return is going to be the growth of the overall index fund. So you bought it at $100 a share it could kick out of 1.5% yield but it could also grow to $200 a share in a year. So your total return is going to be a lot higher than the 1.74% yield that it’s kicking out depending on what companies issue the dividends. So you have to look at the total return. Going back to the dividend question once again. If a stock issued the dividend, it’s not going to go to zero because, well I guess if it doesn’t grow, you have $100 share price and it never grows in a vacuum and you give it $1 dividend. Now your share price is $99. If it doesn’t continue to grow you give another dividend it’s going to go to $98. So after 100 years could theoretically go to zero? Yes. But they wouldn’t issue dividends if the stock price was that low. They didn’t have the cash to do it.

Al: Typically a dividend comes when the company has profits. If there are no profits usually they wouldn’t issue a dividend. So you can’t really get to zero. And that yield, that’s right Joe, that yield is an annual. It’s not quarterly. It’s an annual yield and that’s only part of the equation. The growth is the other part to get the total return.

Joe: So he’s also asking that “many websites state that VTSAX and the ETF equivalent VTI, despite some differences, should actually perform equally since they both track the same companies. Absolutely correct. Don’t get too caught up in the weeds here Bruce. One’s an exchange-traded fund, one’s an index fund. One is you know traded a little bit differently. One is a little bit better transparency. One can be traded on the stock market while the other one closes, you buy in at the end of the day. I mean they’re almost identical. So I’m not going to get too caught up there. You can buy either one of them. Who cares? Just trying to figure it out, making an apples to apples choice, but the total market index fund versus high yield stocks. OK. Now he’s getting crazy here. “What do you think about these high yield stocks?” I don’t even know what high yield stocks mean Bruce. I don’t know where he’s-

Al: He’s got him earning 6% every quarter. That would be some investment. Just the yield part.

Joe: Bruce, puts the money where the high yield stocks.

Al: I’d like to know what does that.

Joe: That would be one of the best investments of all time if you could get 6% per quarter every quarter for the rest of your life.

Al: And then growth on top of that?

Joe: No it’s perfect.

Al: That’d be cool.

Joe: So Mr. Buffett holds them. So ya got gonna give me a little bit more information there. But just understand that the higher expected return, the more risk that you’re taking. I like your total stock market index or your ETF choice. I think that’s right on, you’re fully diversified, very low cost. The only issue that I potentially see depending on how much money that you have is that you want to diversify out because that’s just the total U.S. markets. The more money that you get, you can get better diversification within the US markets by maybe overweighting or underweighting certain sectors, maybe certain asset classes. You definitely want to make sure that you have international emerging markets in there. As you get older then you want a little bit more fixed income safety in a portfolio.

Uniform Transfers to Minors Act (UTMA) Account or a Brokerage Account for Minors?

“Lastly for a 13-year-old is UTMA, Uniform Transfer to Minors Act, or opening a brokerage account the best thing until they start working and open up their own Roth? Any one of those can affect the financial aid application FAFSA, right? Thanks, guys. Still the best.” I would just go with the brokerage account. You get a little bit more flexibility, it’s in your name. The UTMA account will be in the kid’s name. And then you can transfer- you could gift the brokerage account into the Roth once the kid gets its money. There’s not a huge tax benefit anymore from UTMAs in my opinion.

Should I Follow Paul Merriman’s Advice for Investing for a Child?

Joe: Let’s go to Josh from North Carolina. “Hi Andi, Joe and Big Al. Love listening to the podcast each week while driving to work in my Tacoma here in beautiful North Carolina. I have no dog, but a cat. Maybe a little bit more Big Al’s speed.”

Al: A cat huh?

Joe: Big Al has like 8 cats.

Andi: You’re a cat person Al?

Al: I’ve never owned a cat, no.

Joe: You look like a cat daddy. I was on a webinar earlier today and this lady looked like she probably had 10 cats. “I have a question about some advice Paul Merriman gives on his blog. He says if you put $3000 into a taxable account at your child’s birth and invest the money in a small-cap value index fund; once they have taxable income you contribute this money into their Roth IRA. After 65 years, if you get 12% rate of return, it will be worth $5,000,000. I guess this can be taken out tax-free at this point. However, it only is about $1,000,000 in today’s money after inflation is taken into account. Is this a reasonable way to take a relatively small amount of money and create a reasonable gift for a child at retirement? Or does this math not quite work out? Thanks for all your help.” Josh Yeah. I don’t have a calculator in front of me, maybe Big Al could do the calculation in a couple of minutes.

Al: I already did it, Joe. So the answer is the math does work, with these assumptions. So 65 years, $3000 one time, at 12% at age 65 is $4,700,000. It actually does work. It’s actually a great idea.

Joe: So yeah if you want to give a gift that keeps giving 65 years in the future, who knows?

Al: Now, he’s referencing- let’s see- small-cap funds.

Joe: Just small-cap value, 12%.

Al: Small-cap value. And that’s historically what it’s done over the last century. So will it do that the next century? I don’t know. But that’s what it has done.

Joe: If you’ve got an investment that does 12% that’s- the math works. Give it a shot. Hopefully, you’re alive in 65 years and see if it came true.

Comment: Utah 529 Plan for Education Uses DFA Funds

Joe: A couple of comments, Marion from Fresno wrote in on podcast 290 we referenced 529 plans. “I’ve heard the Utah 529 plan is great because they use DFA Funds.” Well, there ya go. Let’s promote the Utah 529 plan.

Al: So a 529 plan is money that you put in for education. Often you’d like to put it in when your child is young to let it grow. It grows tax-deferred and if the money is used for education it’s actually tax-free. So that’s the advantage. You can pick whatever state that you want to choose. Each state has their own investments. Utah apparently has DFA, Dimensional Fund Advisors, which I agree is- it’s a great fund company. It’s a fund company, Joe, that the typical investor doesn’t have access to because it’s institutional. So here’s a way to invest in DFA funds and not have to go through an investment advisor.

Congratulations David T, Podcast Survey Winner

Joe: Want to congratulate David T. our big winner for our survey this year. Thank you all for participating into the survey, gives us some good feedback and insight on what you want to hear, what we should do, what we should stop doing. Actually we don’t really take anything into account. Andi collects the information and that’s about it. And she tells me that we have to change the show. We’re like no, we’re not going to do it.

Al: This came up many times though in that survey, Joe what kind of car do you drive?

Joe: What kind of car do I drive? Well, we are congratulating David T. here.

Al: Well, we’ll get back to that.

Andi: You don’t wanna talk about the big engine on Big Joe?

Al: And in fact that big giant car that you have- that big black car.

Joe: It’s not a giant car. It’s a very reasonably priced Land Rover. That’s all.

Al: Yeah, a Land Rover. It’s the one that takes two parking places?

Joe: All righty. That’s it for us. Thanks again. We’ll take a break- well I guess we’re done with the show. We’ll see you guys next week. The show’s called Your Money, Your Wealth®.


In the podcast show notes, you’ll find free financial resources on Roth IRA conversions, investing, college savings.  Click the link in the description of today’s episode in your podcast app to get there. Stick around for a few Derails coming up shortly!

Subscribe to the YMYW podcast

 Subscribe to the YMYW podcast newsletter

FOLLOW US: YouTube | FacebookTwitter | LinkedIn


Your Money, Your Wealth® is presented by Pure Financial Advisors. Sign up for your free financial assessment.

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.