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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently leads Pure Financial Advisors along with Michael Fenison and Joe Anderson. Alan joined the firm about one year after it was established. At that time the company had less than 100 clients and approximately $50 million of assets under management. As of [...]

Published On
February 23, 2021

Are you eligible for a backdoor Roth IRA conversion? Is it allowed? Is it taxed? How does a Roth 401(k) differ from a Roth IRA? Can you buy Mom’s condo for below market value and rent it back to her? Can you max out Dad’s Roth for him? Can you file your 2020 taxes before receiving IRS form 1098? How should you diversify your portfolio into international investments? Plus, capital gains and ordinary income – again – and a correction on deemed Social Security.

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Show Notes

  • (01:00) Can I Do a Backdoor Roth Conversion? (Nick, Huntington Beach, CA)
  • (09:11) Is a Backdoor Roth Conversion Taxed? (René)
  • (12:56) We Make too Much to Contribute to Roth. Are Backdoor and Mega Backdoor Roth Strategies Allowed? (Jane, Michigan)
  • (19:17) Can I Buy a Family Member’s Home and Rent it Back to Them? Can I Give Dad Roth IRA Money? (Jay, Chicago, IL)
  • (24:23) Roth 401(k) vs Roth IRA: What’s the Difference? (Helen, San Diego)
  • (27:46) OK to File Taxes Before Receiving Form 1098? (Clint)
  • (31:34) How to Diversify Into International Stocks? (Brian, Albany, NY)
  • (33:59) What Does “Capital Gains Ride on Top” Mean? (Jim, Santa Cruz, CA)
  • (36:16) CORRECTION: Social Security Deeming Rules from Episode 310 (Mark, Longmont, CO)

Free resources:

CAPITAL GAINS:

LISTEN | YMYW PODCAST #303: Confirming How Capital Gains are Stacked On Top of Ordinary Income

LISTEN | YMYW PODCAST #295: Capital Gains “Sit On Top” of Income? What About When Doing Roth Conversions?

LISTEN | YMYW PODCAST #292: Dividends and Long Term Capital Gains – Part 3

LISTEN | YMYW PODCAST #287: Tax Planning and Roth Conversions: Itemized Deductions, Dividends, and Long Term Capital Gains

LISTEN | YMYW PODCAST #272: $10K Ordinary Income, $40K Qualified Capital Gains. In What Tax Bracket is the $10K?

LISTEN | YMYW PODCAST #266: Capital Gains Tax vs. Ordinary Income Tax

 

Listen to today’s podcast episode on YouTube:

Transcription

Are you eligible to make a backdoor Roth IRA conversion? Is it allowed? Is it taxed? How is a Roth 401(k) different from a Roth IRA? Joe and Big Al answer these questions from Nick, Rene, Jane, and Helen today on Your Money, Your Wealth® podcast #314. Plus, can Jay in Chicago buy a family member’s condo for below market value then rent it back to them? Can he max out his Dad’s Roth account? Can Clint go ahead and file his 2020 taxes even though he hasn’t received IRS form 1098 yet? How can Brian in All-bany diversify his portfolio into more international investments? And the fellas once again break down how capital gains ride on top, are stacked on top, or sit on top of ordinary income, this time for Jim calling from Santa Cruz. And finally, Mark in Colorado has a correction regarding Social Security deeming rules. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.

Can I Do a Backdoor Roth Conversion?

Joe: “Hi, Andi, Big Al and Joe. My name is Nick and live in Huntington Beach, California, married with 3 kids, 19, 17 and 3.”

Al: So I guarantee you Nick and the 2 older kids are surfers. Huntington Beach is a huge surfing area.

Joe: But the 3-year old, don’t you think?

Al: No, not the 3-year- I said the 2 older kids.

Joe: I think this is like a oops or like a second marriage.

Al: I would say there’s a pretty good shot that that’s an oops.

Joe: “The show is enjoyable. Keep it up.” All right, Nick, I’m not sure how enjoyable it is after we called your kid an oops.

Al: By the way, for the record, that was- came out of Joe’s mouth first.

Joe: “I contributed to a traditional IRA in 2020, but my income passed the threshold to get the tax deduction because I am also covered by my employer 401(k). Can I convert my 2020 contribution amount to my Roth IRA without paying tax? Is there a specific or best method?” Sorry.

Al: So he’s talking about a backdoor Roth.

Joe: Yes he is.

Al: Which I know you’ll love to explain.

Joe: So he’s got basis in the IRA. It’s after-tax, you’re not taking a tax deduction from it. Can you convert it without paying tax? The answer is maybe.

Al: The answer is yes, if you have no other IRAs. You can have a 401(k). That’s OK. You just cannot have another IRA. Because the problem is if you have IRAs where you took a tax deduction or that growed at all- So that grew at all- Did I say growed?

Andi: Did you say growed?

Joe: Growed.

Al: It grew at all. I can’t believe I said that. My mom would just shake me right now. Anyway, so when you have an IRA that has growth in it or you got a tax deduction, now you have some of those dollars that are taxable. So you have to use the pro-rata rule to figure out how much is tax-free on the conversion.

Joe: “Other details, I’m 35.” Oh, well, maybe I stand corrected. Maybe he has a- his wife probably had some children previous to their marriage.

Al: Unless he was fairly young when-

Joe: Yeah, 15 ______ –

Al: It’s possible.

Joe: It could be. “My wife- ”

Andi: – “Eunice- ”

Joe: -“Eunice, also contributes to a traditional IRA, but still gets the full deduction for her ___. Eunice is a full-time student and part-time worker. I am a Navy reservist.” Oh Nick, thank you so much for your service. “Second source of income, we have a rental home in San Diego that adds about $6000 of income. I have a Roth IRA, but I have been contributing to my traditional IRA for the past few years. Thanks for your help.” All right. Yeah.

So he’s- as long as he doesn’t have any other IRAs, he’s good to go. But you know what, Al? I’m so sick of this backdoor Roth IRA BS that I need to ask you a question.

Al: Ok.

Joe: So my boy Dante- last couple-, I mean, the guy’s sent me 400 e-mails. We’re best friends. We’re going to go golfing soon. And so he’s like, oh, I cannot roll my retirement accounts into the IRA because that would just kill my backdoor Roth.

Al: Ok.

Joe: So let’s explain to the listener that the backdoor Roth IRA and doing a conversion is identical to some degree.

Al: Yeah, I would agree with that. It’s different mechanics, but you end up in the same spot.

Joe: And it’s the same tax. Because let’s say you have $7000 that you’re going to contribute to a non-deductible IRA. So let’s say I’m in the 35% tax bracket. That’s where there’s this guy Dante’s at. And he’s all up in arms because I cannot contribute directly into a Roth, Joe. So I need to keep all these 401(k)s and 403(b)s and everything else so I can do the backdoor. And we get all these stupid questions about the backdoor and the mega backdoor and all the super backdoors. But if I make a contribution into a Roth, if it’s backdoor or not, it’s always after-tax. Do you agree with that?

Al: I agree. So in other words, you’ve already paid tax on it.

Joe: I’ve already paid the tax on it. So if I put $7000 into a Roth and I’m in the 35% tax bracket, well, I had to make $110,000 or some odd, whatever that number is, to net out $7000 to contribute to my non-deductible IRA and then convert it.

Al: Yeah, but the only difference is you pay the tax probably in another tax year.

Joe: Ok, fair enough.

Al: Yeah. Whereas Roth conversion you have to pay the tax in this year.

Joe: But you still pay the next year.

Al: Agreed. It’s the same, that same same. Unless you are in a lower bracket when you pay the tax to get the money.

Joe: Exactly. If I’m in the same tax bracket.

Al: Ok, agreed.

Joe: It doesn’t matter.

Al: Right.

Joe: So for these people that love the backdoor Roth because it’s like I’m doing a Roth conversion without actually paying the tax, guess what? You’ve already paid the tax.

Al: You’ve already paid it.

Joe: It’s an after-tax contribution into the IRA, that doesn’t have basis. Then you convert it. It’s the same as a contribution that’s after-tax. Or if you take pre-tax dollars and you convert it into a Roth at the same tax bracket, it’s all the same.

Al: Yeah, if- as long as your tax bracket is the same year after year, I agree with that. You’re basically in the same spot.

Joe: If you do a conversion and then all of a sudden the conversion pops you- some of that money pops you into a different tax bracket, will then no. Right?

Al: But in some people’s minds, it’s like they don’t think about the tax they paid.

Joe: It’s free money.

Al: Well, they don’t think about the tax they paid last year. I’m only thinking about this year. So that’s where you kind of get a little bit messed up.

Joe: But how many backdoor Roth contributions, conversions do we get a week?

Al: Questions? Lots.

Joe: People should be focusing on- I don’t know. If you do a conversion versus the backdoor, it’s almost the same thing. There’s very few benefits. If I do, let’s say, a backdoor Roth, I’ve already made the money. I’m going to put it into an IRA and then convert it. It doesn’t show up on my tax return. It does, but then it credits back. It’s just a formality. It doesn’t show up as additional income. So it’s not going to phase me out of anything else or- but if I do a conversion, then that money shows up on my tax return. So that’s the biggest difference. But if I keep myself in the same tax bracket. It’s same same.

Al: It is. But if you inherited money-

Joe: Ok, very good-

Al: – you didn’t pay any tax on that.

Joe: That’s the only- yes. You know what? Very true. Very true. Ok, if you inherited the money. Any others?

Al: If you are given a gift.

Joe: Ok. Inherit. Gift.

Al: If you found- well, even if you find money, you have to pay tax on it. I caught myself on that.

Joe: Because yeah, if you get a gift or you inherit the money, then you’d never pay tax on it.

Al: Like if you find money in your backyard like a treasure? Like pirate treasure? You’re supposed to put it on your tax return because it’s income.

Joe: The treasure.

Al: Yeah.

Joe: All right.

Andi: Have you ever had anybody who’s come to you and said, we found pirate treasure in our backyard? What should we do with it?

Joe: Well, we’ve had people that think that they’ve found a treasure in regards to, like the business that they’re investing in or that they’re starting.

Andi: Sure, like barbershop or something?

Al: On occasion someone discovers a shipwreck and they pull up some Spanish gold or something. So that would be actually taxable.

Is a Backdoor Roth Conversion Taxed?

Joe: We have René?

Andi: Yep.

Joe: How do you know it’s a male?

Andi: Because we’ve gotten questions from René before.

Joe: I guarantee you have this little FBI spy kit.

Al: She has a-

Andi: I threw my FBI spy kit away a long time ago.

Joe: I don’t think so. I don’t think so. Google Earth, watch out. René writes in, “I had a TSP, and when I retired, my advisor helped me roll over my Roth and IRA to Fidelity about two years ago. When I listened to your talk over the radio, you mentioned that I can convert my regular IRA to a Roth backdoor. However, when I talked to my financial planner, he said that we can do that, but when I take money out from the rollover IRA and put it into my Roth that it would be considered income whatever IRA money I am taking out and it will be taxed. Is the backdoor that you mention will not charge me any tax? Thank you for your help.” Oh.

Al: Here we go again.

Joe: Here we go again, Big Al.

Al: Every other episode we answer this. But the question, the confusion is the difference between a contribution and a conversion.

Joe: And a backdoor Roth versus a garage door.

Al: We won’t even get there yet. So a contribution is when you put in $6000 into a Roth, up to $6000 into a Roth. Or $7000 if you’re over 50. You have to have earned income and your income has to be low enough to qualify. So low enough right now means $125,000 for a single person and $196,000 for a married person. So if it’s below that, you can do a Roth contribution, $6000 dollars a year, OK? And there’s no taxation there because you’ve already paid taxes on those dollars. So that’s one thing. Now, second thing, which is kind of like Roth contribution B, if you will, is if you can’t, if your income is too high, there’s a little work around and you can do a backdoor Roth contribution. Sometimes we use the word conversion. Maybe that’s what messes you up. But you basically put $6000 into an IRA and then you convert that. And since you didn’t get a tax deduction going to the IRA, when you convert it, there is no tax to pay. That’s the backdoor. First of all, René, you have to be working. So you said you’re retired so neither of those things apply, the Roth contribution nor the Roth backdoor contribution.

Joe: You can just him now. Hey, I wanna do that backdoor like Big Al and Joe talk about.

Al: Now you can do a conversion, which I think is what your advisor said. That’s taking money out of your IRA, which you got a tax deduction for originally, presumably, and now you put it in a Roth. And yes, you pay taxes on that because you’ve got a benefit in the first place. Yep. So that’s what’s available to you, René, right now, because you’re retired. Now, if you go back to work and you make $6000 in a part-time job, you can go back to the Roth contribution. And if your income is too high, you could do a backdoor Roth. How’s that?

Joe: I think that was perfect.

Al: And you didn’t have to say anything yourself.

Joe: Wow. Yeah. You know, it’s like you guys don’t know what you’re talking about. I listen to Your Money, Your Wealth®, they said I could do conversions and not pay the tax. They’re probably like, what the hell are those guys talking about?

Al: What are you listening to?

Joe: What are you listening to?

Al: Your Money, Your Wealth®? Oh, well that explains it.

Joe: Oh, those kooks. Yeah, Dr. Roth.

We Make too Much to Contribute to Roth. Are Backdoor and Mega Backdoor Roth Strategies Allowed?

Joe: We got Jane from Michigan. “My husband and I have an individual IRA together from old employers.” That’s interesting.

Al: I think she means they both have ones from old employers.

Andi: It does actually say they have individual IRAs, not have an individual IRA.

Al: Yeah, true.

Joe: Thank you. “We never contributed after the rollover. My husband’s current employer allows him to rollover over our IRA dollars into his current 401(k). We make approximately $375,000 per year together, so not allowed to do the standalone Roth IRA. My thought is to roll his IRA into the 401(k) to allow him to do contribution to a zero balance IRA once a year, then roll into Roth.” You know what that’s called, Al?

Al: Yeah, that’s called a backdoor Roth. I think we just talked about it.

Joe: Ok, just seeing if you were paying attention.

Al: Yep.

Joe: “Is this allowed? If his 401(k) has an in-house Roth 401(k) for conversion within- with after-tax money?” You know what that’s called there, Big Al? We got a question with a backdoor Roth and a mega backdoor Roth.

Al: We do. Mega. Whatever you want to call it.

Joe: We got- or garage door.

Al: Garage door. Dump truck Roth?

Joe: Yep. “He’s 51. He maxes out pre-tax and in-house after-tax. Also has an employer match of 6%. Just looking to clarify between Roth 401(k) and Roth IRA relating to income levels and IRAs. What do I do with my IRA if I want to contribute to a Roth IRA? Do I pay taxes on the balance, zero it out, then contribute yearly and into the standalone Roth? Hope you can follow this. I can barely-

Al: – barely ask it, super confusing.”

Joe: I can barely ask it. Super confusing.  Thanks for any knowledge on this.” Ok, Jane, you’re close. Let me break a few things down. So Jane’s husband has an IRA that he rolled from a 401(k) into a traditional IRA.

Al: Correct.

Joe: They have made zero contribution to the IRA that he rolled from a previous employer. Jane also has an IRA that she rolled from a previous employer’s 401(k). Jane’s husband, Dick-

Andi: – and Jane. Perfect.

Al: Why not?

Joe: Making that up Jane, Sorry if his name’s not Dick- is rolling his IRA into the 401(k) this his current employer has.

Al: He can.

Joe: He can.

Al: Yep.

Joe: So, yes, that’s my first answer to the question, do that. Start there, take the IRA dollar, move it into the existing 401(k) that he’s contributing to. His 401(k) plan also has after-tax components. So my confusion with the question from Jane is that when she says the after-tax, is he fully funding the pre-tax and still has the ability to contribute more? Or she calling the after-tax contributions, you know, going into the Roth provision of the 401(k)?

Al: Yeah, hard to say.

Joe: Hard to say. But let’s just assume he maxed out the 401(k) pre-tax. And then he continues to contribute into the after-tax component of the plan. So he’s eligible for two things, Jane. So you take the IRA, you roll in into the 401(k). Now he has no other IRAs. So the pro-rata rule, aggregation rule, does not apply to Dick for backdoor Roth conver- or contributions.

Al: – contributions. Yeah, I agree with that. Here’s my only caveat to that, and that is it depends upon the investment choices inside the 401(k). So in other words, if it’s a large IRA balance and you’re going to roll it into your existing 401(k) that does not have great investment choices, I think I’d rather keep it in the IRA and invest it properly. And don’t worry about the backdoor Roth. On the other hand, if the 401(k) has decent investment choices go for it. Because if you get the money from the IRA to the 401(k), now your husband, Dick we’ll say, can do the Roth, the backdoor Roth contribution.

Joe: The IRA contribution and convert it directly into a Roth IRA. So it’s not a rollover to a Roth IRA, it’s a conversion to a Roth IRA. If he has money in the Roth 401(k), it makes no difference. It does not affect any type of IRA. Section 401(k) is a totally different section in the IRS code than IRA plans.

Al: Yeah, that’s a good point. If you’ve maxed out your Roth 401(k), can you still do a Roth contribution? The answer’s yes, as long as your income is low enough. And if it’s too high, you can do- you can look at the backdoor Roth.

Joe: And then he can also take the after-tax dollars from the 401(k) and convert those into his Roth IRA.

Al: Right. And that would be tax-free because you didn’t get a tax deduction.

Joe: So the Roth 401(k) would stay in the 401(k). The pre-tax 401(k) would stay in the 401(k). The IRA that you rolled from a previous 401(k) into an IRA would be rolled into the new 401(k). So then you would take the after-tax components, put it into the Roth IRA. Are you following me here?

Al: I’m with ya.

Joe: Are you following me, Jane? Isn’t this confusing?

Al: It is confusing.

Joe: Super confusing, but I think you got it. Just listen to this over and over and over again.

Your other option, besides listening to this multiple times, is to download The Ultimate Guide to Roth IRAs for free from the podcast show notes at YourMoneyYourWealth.com. Learn about Roth IRA contributions and conversions, Backdoor Roth conversions, the differences between a traditional IRA and a Roth IRA, the differences between a Roth IRA and a Roth 401(k), which is a question coming up soon from Helen, the rules for withdrawing money from your Roth, and much more. Click the link in the description of today’s episode in your podcast app to go to the show notes to access all the free resources, and of course, to send in your comments, limericks, songs, stories about your cars and your pets, and your money questions.

Can I Buy a Family Member’s Home and Rent it Back to Them? Can I Give Dad Roth IRA Money?

Joe: Jay writes in from Chicago. He goes, “Hi, Andi, Joe, and Al. I drive a Ford Explorer. And I have two questions for you.” You know what? Maybe we got to do a little disclaimer here sometimes.

Al: And what’s it?

Joe: Because people are- let’s say if you just tuned in to the show. It’s like, well, why the hell do they always talk about their cars?

Al: Why don’t you explain that? Because we haven’t talked about that in a while.

Joe: I kind of forgot. But I think the genesis was I really want to get in the mind of our listener.

Al: I think what you said is I want to know what you’re doing-

Joe: Yes.

Al: – while you’re listening to our podcast and then some people say, well, I was driving in my Ford Explorer. And then-

Joe: No, they said I was driving and I was like, I wonder what they’re driving.

Al: Yeah, right. And then we make up their car and they start telling us. And then some people said, I walked my dog. And so then you said, well, I need to know the name of the dog. And now it’s standard to get the car and the dog’s name.

Andi: You can actually hear all of that in podcast 300.

Al: Oh, ok.

Joe: I get in the mind of our listener when I’m answering-

Al: – to really answer the question.

Joe: You have to understand really what they’re going through. We take a step further Al. You know what I mean?

Al: Well, we also like to know where you live. Then we can imagine if you’re writing us from Chicago in January, it might be a little- a wee bit chilly.

Joe: Yeah, it’s probably a little cold. The Ford Explorer, he has to go outside, scrape the windows.

Al: Yeah, that’s right.

Joe: He’s got to plug the thing in maybe. Let it sit there for 20 minutes. He’s got to get up at like 4:30 in the morning to go to work at 7:00 because he’s got to get that Ford Explorer-

Al: -got to warm it up.

Joe: He’s got to warm it up.

Al: You can’t drive it cold, can you? I guess you can.

Joe: Oh you can, but it’s not fun.

Al: I tried that once in my days- I was- I went to Colorado in the winter. I was doing a- I had a client at Hartsville, which is near Colorado Springs- no- yeah, Colorado Springs, in Breckenridge, up in the mountains. And the guys there told me you have to start your car early. And I thought, that’s the dumbest thing I ever heard. So I got in the car and started driving away. And then 15 minutes later, it’s like, I don’t even know if I’m going to make it. I’m so cold.

Joe: But then the window’s fog up, you can’t see. And then you’ve got to get the heater going and then it fogs and then you can scrape your windows. Some people scrape their windows with the credit card. Some people have an ice scraper.

Al: I couldn’t see a thing and I was freezing. It was a bad combination.

Joe: That’s how people get in car accidents.

Al: Apparently. I was lucky.

Joe: So, Jay from Chicago, let’s get back to him. He’s got two questions for us. “Could I buy a family member’s condo from her at below market value, say more than 25% below? She would be losing the equity she puts in, but I could put down a fat down payment and rent the place to her at a significantly lower price than she’s paying now. Plus, I could deduct the HOA fees as the landlord. We’re assuming she’d live there for the rest of her life. Is there any legal or financial reasons that this would be a bad idea?” So he’s going to go to his family member, just say it’s-

Al: It’s his mom.

Joe: Hey, Mom.

Al: Yeah, I’m guessing, Mom.

Joe: I’m going to buy your place, but I’m going to-

Al: I’m gonna jack your equity.

Joe: You know what? It’s worth. $400,000, I’ll give you $200,000 just so you don’t go out in the cold.

Al: And you can have a place to live forever.

Joe: Yeah. There you go.

Al: And I’ll take care of the expenses. So can you buy a property from a family member at below market? Yes.

Joe: But it’s a gift.

Al: It could be a gift. If it’s too low, like your example- $400,000 property, bought for $200,000- the IRS could say, your mom actually made you gift of $200,000. So just be aware of that possibility. But there’s nothing illegal with it. You might have to file a gift tax return. And then as far as you charging, we’re going to call it mom- call her mom- charging mom rent, that’s fine. You could charge whatever rent you want. And if it’s a reasonable rent, then you can actually deduct expenses against the rent. If it’s below market rent, you can only deduct expenses to end up with zero profit or loss. You can’t create a loss when it’s below market rent to a family member.

Joe: All right. Jay’s dad is eligible for a Roth IRA but will not open one “despite my best efforts. Since he will not open one for himself, is there any reason that I couldn’t give him money to max out his Roth every year if he’s eligible, with the agreement that when he passes, he gives it to me? Jay, I love Jay. He’s in ChiTown, he’s just-

Al: He’s scheming.

Joe: – Mom, I’m buying your house for 25% below market-

Al: And Dad, I’m funding your Roth, but it has to come to me.

Joe: If you like it or not, I’m funding this thing for you and you’re going leave me the beneficiary. Yes. If your dad is eligible, that means he has to have earned income and income within the income thresholds. Of course you can fund it for him. It’s his property, though.

Al: He could change beneficiaries if you’re not nice to him.

Joe: Yes, and he could spend it.

Al: Yes he could.

Joe: So just FYI. Great question, Jay. Really appreciate it.

Roth 401(k) vs Roth IRA: What’s the Difference?

Joe: All right, Helen writes in “Hi JABAAD.”

Al: Joe, Al and Andi. Joe Anderson, Big Al and Andi.

Joe: Was- Andi, you got anything here?

Andi: No, I don’t know what the D stands for.

Joe: Jabaad.

Al: Well, it’s Andi, I think.

Andi: Ok.

Al: I mean, what else would it be?

Andi: Not sure.

Joe: J A B A A D . Joe Anderson. Big Al. AnDi.

Andi: Sounds good.

Al: I’m a BA, which has another meaning for me.

Joe: Got it. “I like your name short as Jabaad. This is Helen from San Diego. It’s very knowledgeable to listen to your podcasts. I have a Vanguard as 401(k) at work. Since last year, Vanguard ____. They said I can contribute as much as I prefer. No limit. $6000 per year.” Ok. There’s no limit, but it’s $6000 per year.

Al: There is a limit and you’re at $6000 per year. I think that’s what you meant to say. I would prefer no limit too. But they do limit it to $6000.

Joe: I have no limit-

Al: – but-

Joe: – but it’s $6000 per year.

Al: If you’re 50, you get to do $7000.

Joe: “Are these considered a Roth 401(k) instead of a Roth IRA? What’s the difference? I would like to know more about the mega backdoor Roth IRA.” Helen. No, you don’t. “Thanks for all your advice. Please refer back to the podcast if you already advice on this issue so I can listen again.” Yes, every podcast, Helen. Just pick one. And I guarantee there’s the mega backdoor Roth. So 2 things I’m going to talk about. We’re going to go Roth IRA versus Roth 401(k). The Roth IRA has AGI limitations. So if Helen is single it’s, for 2021 Al, it’s what, $135,000?

Al: Yeah, I think it’s $125,000 to $135,000 is the limit.

Joe: Something like that. So, Helen, if you’re single, I’m not sure if you’re single or married-

Al: $125,000 to $140,000.

Joe: Oh, $125,000 to $140,000.

Al: That’s the phase-out.

Joe: That’s the phase out.

Al: If you’re below $125,000 you can do the whole $6000. If you’re above that, there’s a phase out to $140,000.

Joe: And if you are married Helen-

Al: – $198,000 to $208,000 is your phase out.

Joe: Ok. So that’s $6000; if you’re over 50 it’s $7000. Roth 401(k) has no AGI limitation, so it doesn’t matter how much money that you make, you can make a Roth 401(k) contribution. The other difference between a Roth 401(k) is that the limitation is not $6000 per year, it is $19,000 per year. If you’re under 50-

Al: – $19,500.

Joe: $19,500 and $26,000, $25,500- $26,000-

Al: Yeah, and $6500 catch-up, $26,000 total.

Joe: There you go. $26,000, that’s what I thought.

Al: And you got 30 seconds.

Joe: $26,000. So that’s your limits. So there’s limits on all Roths. There’s limits on income on a Roth IRA, there’s a limit on contributions in a Roth IRA. Roth 401(k) when there is no limit on income, but there is limits on the amount of money that you can contribute. So hopefully this helps and yeah, we’ll just go by JABAAD.

Al: And for mega backdoor Roth, just listen to prior episodes.

Joe: Yeah. All right.

OK to File Taxes Before Receiving Form 1098?

Joe: Clint writes in. He goes, “Hey, Andi, Joe and Big Al, I was wondering if it’s ok to file our 1040 for 2020 before getting all tax documents in the mail. With the standard deduction for a married couple at $24,000, it’s hard to even come close to writing items off. Can we just plug our W-2 info onto the online service and wait for our return to be processed? Or should we wait for a couple of messy 1098 forms to arrive and finalize the 1040 the old fashioned way?”

Andi: That said measly.

Al: I think he said measly. Measly 1098s.

Joe: What did I say?

Al: Messy.

Joe: Have you ever seen a 1098?

Al: They’re very organized and structured. They’re not messy.

Joe: They are very messy. Messy 1098s.

Al: They’ve got boxes and you’re supposed to get the numbers in the boxes. It’s an accountant’s dream.

Joe: Got it. So, what say you with these measly 1098s?

Al: Well, a 1098 is for mortgage interest. So I assume what Clint is suggesting is he doesn’t have enough mortgage interest and taxes to get over the $24,000 figure. If that’s the case, sure. Go ahead and file. You don’t even need to worry about it. Right?

Joe: Right. He’s going to get all of his doc- here’s my medical expenses, here’s my mortgage, here’s my charity-

Al: It’s gonna come out to $14,000- couldn’t do it again, standard deduction.

Joe: So he mails all that stuff in, no, just take the standard deduction of $24,000. Good to go.

Al: Yeah. Go for it.

Joe: I think a lot of people, that was the whole purpose of the JOBS Act-

Al: So it would make the tax filing simpler because less people would itemize.

Joe: Correct. They doubled it.

Al: Correct.

Joe: So from $12,00 to $24,000.

Al: That’s right. On the other hand, here’s another related question which he could have asked is what if I have a measly 1099- if he’s thinking it’s like $25 of interest, should he wait till that comes in or whatever? And the answer is, well, first of all, you should have already got it. But let’s just say you haven’t. And if you think it’s $25, because you go to your last statement on your bank and it says your to-date interest, $25, yeah just put that in. Or put in $30, just maybe go a little bit higher if you don’t want to wait till it comes in. So that’s not that big a deal. What is a big deal though is if you forget to put it on and it’s like a big amount and then you should go back and amend your return to fix it. And if you don’t do that, you will most definitely get a letter from the IRS saying, we disagree with your filing.

Joe: I think Clint is an overachiever. It’s January. And he’s already- he just wants to get this out of the way.

Al: By the way, the IRS is not even accepting returns until February 12th this year. So it is a little early.

Joe: Come on, Clint, relax.

Al: You can send it, but they’re not gonna do anything. It’ll just be in an online pile.

Joe: I would probably write into a show like this in October.

Al: I haven’t got my documents yet. Really? Have you checked do you have mail? Did you get your mail?

Joe: I’m still working on my return.

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How to Diversify Into International Stocks?

Joe: Brian from Albany. “Hey, Joe, Big Al, Andi, thanks for answering my last question about taking distributions and keeping all my investments at Vanguard. You told me to chill and that was reassuring.”

Al: Awesome.

Joe: All right, thanks B. It’s like chill the ‘F’ out. And the ‘F’ stands for something that you guys probably know. “As I get closer to retirement, I’m diversifying my portfolio, which had been very heavy in U.S. stocks. My most under-invested area is international stocks. My 401(k) has only one fair option, so I’m putting money into international fund in my Roth IRA and brokerage accounts. I’m trying to keep it simple. I have half my international dollars in total international stock index fund and the other half in International Growth Fund. Is this diversified enough? Are there any other international sectors that I should be thinking about in the mix? Or is this overkill to have both? I suspect there are lots of overlap. Thanks, Brian, from Albany.” It’s pronounced All-bany.

Al: All-bany, not Albany.

Andi: Not ‘al’ like Big Al like he says.

Al: Not Big Al.

Andi: Big Albany.

Joe: Al- Albany.

Al: Al- al-

Joe: Al-

Al: Al-

Joe: Albany. Right.

Al: Right.

Joe: Brian. Albany. Yes, it’s way overkill. You probably almost have the same exact investments. How about emerging markets? There you go.

Al: That’s the one you’re missing. I agree with that. And emerging markets has a higher expected return, but it’s a lot more volatile. So maybe just do, I don’t know, 25% if that, in your Roth. No more than that because-

Joe: – or your overall mix. Right?

Al: Yeah. Maybe when you’re- if you look at all of your asset classes, probably no more than 5% or 10% if you want to be really aggressive with emerging markets.

Joe: I would say- let’s say if you want- in your equity mix, I would go 60% U.S., 40% international. I would split up the international. If you want to be a little bit more aggressive, you could go 50% emerging markets, 50% international, or you probably want to go maybe closer to 70/30. 70%, all international stocks. Stay with your total U.S. or total international stock market fund and then you could go 30% into emerging market equity fund.

You could cut this pie a lot of different ways. But if you want to keep it simple, Brian from Albany. Yes, that’s what I would do.

What Does “Capital Gains Ride on Top” Mean?

Joe: “Happy New Year, Andi, Al and  Joe. Jim here from Santa Cruz calling.” Is this the same Jim from Santa Cruz that calls all the time?

Andi: Yes. And he never calls. He always emails. But you always say that people call. So he’s just taken that to go.

Joe: Call.

Andi: He’s running with it.

Joe: “I’ve been listening to your show for the last year or so while running the vicious, heartless, cruel, stairs at Apatos beach.”

Al: Aptos.

Andi: I think that’s Aptos.

Joe: You never ran the stairs. When you run the stairs, you call it Apatos. It’s a pain in the ass. It’s vicious. It’s heartless.

Andi: Nice save.

Joe: Yes. “This often backfires. By the time I’m done, I’m so exhausted that I’ve forgotten everything I’ve learned. But what the heck? Here’s my question for today. Excluding my long-term capital gains, my 2020 AGI will fall just below $80,000, the top of the married 12% tax bracket. Al and Joe frequently mention the 0% rate of capital gains in the first two income tax brackets and that capital gains ‘ride on top’ of their regular earnings. But I’m unclear on exactly what ‘ride on top’ means. It would be awesome if the $41,000 of capital gains I realized last Fall are tax-free. But that seems too good to be true. Or is it? Thanks for the great show you produce each week.”

Al: It’s too good to be true. So here’s how this works, Jim, is you said your AGI is just below $80,000, so let’s say it’s $78,000 just to make up a number. So if you want to sell stocks or whatever and generate $41,000 capital gains, only $2000 is tax-free to the $80,000. Everything else above that or in this example, $39,000 would be taxed at 15%. So when we say ‘to the top’ that just means the portion of your capital gains that keep you in the 0% tax bracket- I’m sorry, the 12% bracket, get taxed at 0%. That’s how this works. By the way, we talked about in episode 303, 295, 292, 287, 272, and 266.

Joe: Well, the guy’s killing it running the stairs.

Al: But he’s forgotten that because he just runs the stairs-

Joe: He hears ‘on top’ and it’s like I knew something good happened there.

Al: Yeah, that’s right.

CORRECTION: Social Security Deeming Rules

Joe: We got Mark from Longmount, Colorado. Longmount, is that correct?

Al: Longmont?

Andi: I think Longmont.

Joe: Longmont.

Al: mont.

Joe: Longmont. “I love the podcast. However, I would like to challenge the answer that you gave to Jeff from San Diego on podcast 310.”

Al: Ok, got another challenge.

Joe: Yes. Mark from Longmont. Here we go. “Regarding his proposed Social Security claiming strategy for him and his wife, you stated that his strategy would not work because of the new deeming rules. I believe you mis-applied the deeming rules to his situation.”

Al: IMHO?

Andi: In my humble opinion.

Al: Oh, is that what it is?

Joe: I was like, I’m ho.

Andi: You’ve never seem IMHO?

Al: That’s what I would have said.

Joe: I’m ho. I’m ho.

Al: I would have said I’m ho deeming only applies-

Joe: I’m ho-

Andi: You guys don’t spend enough time online. Yeah, it’s ‘in my humble opinion’.

Joe: IMHO. OK. Well, if he was truly humble, he would just keep his mouth shut. So I’m ho deeming only applies when the claimant is eligible for multiple benefits at the time of filing and is deemed to have filed for both and the higher benefit is paid. Since Jeff has not filed for his own benefit yet, his wife is not eligible for the spousal benefit at the time she files for her benefit. So the deeming rule does not apply. Once Jeff files, then his wife will be eligible for the excess spousal benefits, which will top her off.” I agree with that, Mark. I don’t even remember Jeff from San Diego on podcast 310. And, you know, maybe I just threw out the word ‘deeming’ because I thought I wanted to sound smart that day.

Al: Yeah, yeah. In my humble opinion, you were trying to sound smart.

Joe: I was.

Al: So I actually- as I read- as I hear you read this comment, I agree that’s a correct statement that Jeff made.

Joe: So if we could go back, I’m sure Andi didn’t do any research for us, what I actually said. But a spouse cannot claim the spousal benefit until the spouse claims their own benefit. And so maybe the spouse had a lower benefit and they were like, hey, we’re going to have her claim and then the benefit will- I have no idea. I’m guessing here.

Al: I don’t remember that one either. But it is true. Like let’s say-

Joe: We’re pretty good at Social Security. I’m surprised I kind of blew that up.

Al: But it is true that let’s say one spouse starts claiming at 62 and then wants to switch over to the spousal benefit. It’ll be a forever reduced benefit. Because that spouse has already received benefits starting at age 62.

Joe: Correct. So let’s say one spouse is going to claim their own benefit at age 62 and then switch to the spousal benefit once the spouse claims their benefit, let’s say, at age 70. So, yes, they would then get- because the spousal benefit is basically two benefits. And Mark is pretty bright because he understands that there are basically two benefits. You have your own benefit. And then the Social Security basically tops you off or shores you up with the spousal benefit to equal half the benefit that you- the claiming spouse is receiving or a reduction of that benefit if you claimed your benefit early. So I bet Mark is in the business.

Al: That- it’s very likely.

Andi: Would you like to hear Jeff’s actual question so you can see whether Mark is right or not?

Joe: Would I like to- I have no idea what you just said. I wasn’t- what?

Andi: I can read to you what Mark’s question was?

Joe: Mark’s question?

Andi: I’m sorry, no, Jeff’s question. Jeff’s question.

Al: No, I don’t want to get into this.

Joe: That’s a 3-part question- it was a loaded-

Andi: No, no, it wasn’t.

Joe: Ok, read it then.

Andi: “I’m nearly 59, plan to retire at 65. My wife is a year younger. Also would like to retire when she reaches 65.” So then he says later on, “in order to maximize the Social Security payout, I will wait to claim until I’m 70. My wife will claim her benefit while she’s 67. Once I turn 70, she will claim the additional spousal offset, since her spousal benefit will likely be larger than her benefit alone.” And you said “sorry to burst your bubble. Can’t do that.”

Joe: Oh. Yeah, I was probably really cocky about it, too.

Al: Probably were. That’s why he wrote us.

Joe: That’s why he wrote us. He was like, these guys are idiots. I have to write them. Mark, from Longmont-

Al: I betcha Mark has his own podcast.

Joe: I guarantee it.

Al: Yeah. And it talks about us all the time.

Joe: He’s a CPA. CFP®, CFA. No, that is correct. So, Mark, thank you for the correction. Very- I’m very humble.

Al: Yeah.

Joe: VMHO. Because that’s right. So for Jeff, we got to call Jeff and tell him, hey, you know what? I think you’re- but he’s only 59. The rules are going to change anyway by the time he turns 70.

Al: Probably. And they just changed about, what, 4 or 5 years ago.

Joe: Yes. So you’re right. So she could claim her own benefit at age 67. And then- that’s her full retirement age. And when he turns his benefit on at age 70, then it would flip to the spousal benefit. Because she can’t claim the spousal benefits until he turns his benefit on. They stopped the whole ‘file and suspend’-  Before you could file- like he would have filed for his benefit, suspended them. Then she could have claimed the spousal benefit at that point, but no longer. So she’s going to claim her own benefit at age 67, then turn the spousal when he turns 70 and she’ll be 69 because the spousal benefit will be larger apparently.

Al: Yeah, that sounds right. It’s because she waited to full retirement age. If she started collecting her Social Security at age 62 or before full retirement age, she could still get a spousal potentially, but it would be a reduced benefit.

Joe: Correct, because she claimed her benefit early.

Al: That’s right.

Joe: Well, thank you very much, Mark. I really appreciate the comment. And teaching me two new things here.

Al: IMHO.

Joe: IMHO. Now I’m gonna use that all day every day.

_______

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