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
October 13, 2020

Should you wait until retirement to do a backdoor Roth IRA conversion? Plus, the pro-rata rule, self-employed modified adjusted gross income (MAGI) vs. AGI, and how capital gains work with Roth conversions. Also, strategizing for if and when the estate planning step up in basis tax laws change, whether a high yield savings account is good for investing $25K in cash, and listener comments on the show and the FIRE movement.

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Show Notes

  • (00:50) Should We Wait Until Retirement to Do a Backdoor Roth Conversion?
  • (08:31) Capital Gains “Sit On Top” of Income? What About When Doing Roth Conversions?
  • (15:44) The Pro-Rata Rule: Are There Times When a Backdoor Roth Conversion Isn’t Worth It?
  • (22:06) Can You Use Backdoor Roths to Exceed the $7K Contribution Limit?
  • (25:15) Self-Employed MAGI vs. AGI for a Definitely non-Backdoor Roth IRA Question
  • (32:04) Advance Planning for Biden’s Estate Planning Step Up in Basis Tax Changes
  • (38:07) Should I Invest $25K in a High Yield Savings Account?
  • (39:33) YMYW Comments: the Show, East Islip and FIRE (Financial Independence, Retire Early)

Free resources:

WATCH: 2020 Tax Strategies: Planning for Retirement | YMYW Tax Planning Webinar

READ THE BLOG | Backdoor Roth IRA Conversion: Use It While You Still Can

LISTEN | YMYW PODCAST #293: Backdoor Roth Conversions and Investing for Kids

LISTEN | YMYW PODCAST #289: Backdoor Roth IRA Conversions, Stimulus and Self-Employed Retirement

Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth®, whether you call it the barn door, the garage door, or the Roth two-step, you asked for more about the tax saving Backdoor Roth IRA conversion strategy, and Big Al and, reluctantly, Joe, are here to serve. For now at least! They’ll discuss whether you should wait until retirement to do a backdoor Roth conversion, the pro-rata rule, self-employed MAGI, that’s modified adjusted gross income vs. AGI, and how capital gains work with conversions. For a change of pace, the fellas will cap off this episode with how to strategize for if and when the estate planning step up in basis tax laws change, whether a high yield savings account is a good option for investing $25K in cash, and listener comments. Click Ask Joe and Al On Air at YourMoneyYourWealth.com to send in your comments and questions! I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should We Wait Until Retirement to Do a Backdoor Roth Conversion?

“Love the show, Joe and Al, thanks very much. Calling about Roth rollover or Backdoor Roth conversions. My wife and I are 58, planning to work another 5 to 10 years. We are in one of the higher income brackets right now, 24%, and we expect our income to stay high, above $250,000 a year, but 89% to 90% of our retirement assets are in a Traditional IRA, that’s about $850,000. The question is, is there any opportunity for us to do a Backdoor Roth IRA now? Or should we wait until we retire in 5 to 10 years when our income tax bracket will be much lower? And what could we expect as far as longevity of that Roth and the benefits of waiting until that retirement income is much lower. Thank you for taking the question. Keep up the great work. Bye.”

Joe: OK great. Al, l I guess he’s asking a couple of different things here. He’s talking about a Backdoor Roth IRA and then a Roth conversion and maybe he’s combining the two.

Al: That’s what I was thinking too Joe. But we’ll kinda take both.

Joe: So a Backdoor Roth IRA for all of you first-time listeners is that there are income qualifications to put money directly into a Roth as a contribution. So roughly, if you’re single, you make over $130,000, you can’t directly put money into a Roth and if you’re married it’s about $200,000 so he is over the $200,000 mark. So he cannot directly put money into a Roth IRA as a contribution. So he’s thinking, should I do a Backdoor Roth IRA conversion? What a Backdoor Roth IRA does is that you can put money into a Traditional IRA. As long as you have earned income and then you can convert it directly into a Roth IRA with zero taxes because it’s an after-tax contribution that has basis. So if he’s asking that, by all means, do those. But what we don’t know Alan, is that how much money does he have in Traditional IRAs versus 401(k)s? Because people use those terms interchangeably.

Al: Well he actually said ‘about 89%, 90% of our retirement assets are in a Traditional IRA. That’s about $850,000’.

Joe: But I think sometimes people will say ‘I have money in an IRA’. But it’s actually 401(k), it could be a 403(b), it could be a TSP.

Al: True, true. So let’s answer both ways. So if it’s in an IRA, then the pro-rata rules come into being and so you do- let’s just say- 58, so over 50- a $7,000  Backdoor Roth, so you do a $7000 contribution to an IRA. And then you turn around and convert it. Well the IRS says you’ve got to add the $7000 to the $850,000 that you already have. Even though it’s a different IRA. And so now it’s the ratio of $7000 divided by, in this case, $857,000 which will be about 1% or so of that Roth- of that IRA contribution will be tax-free. So that’s not necessarily a great idea although your tax rate 24% which isn’t too bad, we’ll come back to that in a second. Now if it’s all in a 401(k) Joe, then it doesn’t matter. The 401(k) dollars are not computed and not considered for purposes of the pro-rata rule.

Joe: Yes. So it depends on if it’s an IRA versus 401(k), but he states an IRA. So a Backdoor Roth, if he puts $7000 in, so you add $7000 to the $850,000 so $857,000 divided by $7000, 3.7%. So 3.7% of the conversion is going to be tax-free. So I don’t know if that’s the right answer or did I do $387,000 or $3—–

Al: You’re off. It’s about 1%.

Joe: Oh whatever.

Al: Think about 7…

Joe: No I get it.

Al:  7 into $700,000 would be 1%, it’s less than that.

Joe: $7000, $857,000-

Al: Divided by $857,000-

Joe: Yeah, it’s about less than 1%. Like I said.

Al: Yeah that’s what you thought. It didn’t come out of your mouth that way but that’s okay.

Joe: .8%.

Al: Yeah.

Joe: God, it’s so hot in here too. It’s like burning up. Andi, this studio is super hot.

Andi: I haven’t been there in six months Joe, that’s on you.

Joe: All right. 24% bracket. So $250,000. What’s the top of the 24% tax bracket, Alan?

Al: For a married couple? Around $325,000.

Joe: So he wants to stay in that 24% tax bracket- a Backdoor Roth is going to give him $7000, where 80 bips is going to be tax-free. Or convert to the top of the 24% tax bracket which he could convert an additional $100,000. So I’m not sure what question he’s asking. I guess is the point.

Al: Yeah. Let me sort of clarify. One of the questions is, should he do something now or after retirement? Well first of all a contribution, you can only do when you have earned income. So that would be now, not after you retire unless you or your spouse have some earned income. So assuming that you both retire and there’s no earned income you can no longer do a Roth contribution. That’s the $6000 per year, $7000 a year if you’re 50 and older. But a Roth conversion you can do at any time. And that’s basically based upon you can do any amount, at any time, working or not, any age, but you have to consider your tax bracket. 24% tax bracket is actually not bad given where tax rates are going and where they may go. So I think that’s part of the question is was what- what sort of bracket are you going to be in a retirement based upon your fixed income? And you kind of go from there.

Joe: He’s going to work for another 10 years. He’s 58 years old, they only got $1,000,000 roughly, saved in the 401(k) plan. I don’t know. I think tax rates are going to go a lot higher than where they’re at today. The 24%- we- like a few years ago the 25% tax bracket was kind of where we would look. The 15% or 25%, those were really good brackets to convert.  The 24% tax bracket is giant. So he might want to take advantage of that 24% tax bracket. And it’s like- well the longevity. I don’t know he’s 58- let’s say he lives another 60- I mean another 20 to 40 years. Compounding tax-free. There’s a lot of benefits there. So but I don’t know what his fixed income’s going to be in retirement. I don’t know how much money he spends. So there are a lot more questions I guess that you would want to answer. But in a vacuum, the 24% tax bracket isn’t all that bad. I agree with you Al. So you might want to look at converting in the bracket, maybe not to the top of it, but at least to get some chips off the table.

Capital Gains “Sit On Top” of Income? What About When Doing Roth Conversions?

Joe: Al, we got an email in from Stever.

Al: Stever. You know when you hang around surfers- I know a few surfers in San Diego. They like to kind of call each other names like Stever. Or, let’s see-

Joe: Well he lives in Coronado.

Al: Yeah yeah yeah. That’s what I’m thinking. There’s- it’s not the best surfing in San Diego, but there is surfing in Coronado.

Joe: Stever. I don’t know, if I was named Steve, and someone called me Stever, I might slap him in the face.

Andi: It might be a typo, you guys. He might have accidentally put that ‘r’ that on the end.

Joe: I don’t know.

Al: I think I’ve seen a Stever.

Joe: I’ve been to Coronado. I guarantee it, I think I met Stever.

Al: He was on his surfboard right?

Joe: Yeah. Well all right. So here what he writes. “Let’s just say I drive a Mercedes because I know you care.” I guarantee you-

Al: He’s just saying- it’s not a Mercedes.

Joe: Guaranteed. He wrote Stever. And he “wants to do a 2020 Roth conversion using pre-tax IRA account containing a few hunsky-” Look at the vocabulary in Stever.

Al: That’s why I think he’s a surfer. He’s talking surfer lingo.

Joe: A few hunsky.

Al: Hunsky.

Joe: Alrighty. Hunsky, to me… I’m not even going to go there.  “- while planning to leave a significant amount in the same IRA. For 2020, I will have wages of $300,000 plus long term capital gains of around $500,000 for a payout when the company I worked for sold. I believe I’ve heard you say that capital gains rest on top of income but I’m not quite sure what that means. Does that mean capital gains don’t count toward my income moving into a higher tax bracket? My wages are usually around $300,000. In 2019 my marginal tax bracket was 24% but I had very little capital gains. I’m married, filing jointly, and over 60 and starting to think about RMDs and the related tax rates. Although I’m a bit concerned I might end up in the 32% tax bracket if or when I convert portions of the IRA, I’m questioning if it might be worth the tax hit even at the higher tax bracket given the historical stock market average gains around 10%. I’ve never heard you recommend converting at the 32% but I’m pretty convinced tax rates are going up, when I take an RMD they will be significantly higher than the 24% tax bracket I’m in today. I’m interested in your opinions. If you think it might make sense to convert to the 32% rate since the minimum time I expect to have a Roth is going to be over 5 years where I start chipping away at it. Thanks for your thoughts and a very entertaining program.” Stever. Couple hunsky in the old IRA. Cruising around in a Mercedes.

Al: A few hunsky. You think it’s probably like a… I’m gonna guess about a 1998 Mercedes, maybe a diesel.

Joe: Definitely diesel. I like his question here. So let’s first start- explain again Alan- so his is wages are $300,000. He’s got a big capital gain this year of $500,000. So he’s like the capital gains sits on top. Does that mean-? What does that mean?

Al: What does that mean? Right? Let’s start there. So Stever, your $300,000 of income. And if you just do the standard deduction for a married couple, it’s about $25,000, so your taxable income is about $275,000. We just mentioned the top of the 24% bracket is about $325,000. So actually I’m ignoring the capital gains to start Joe. I’m just going to do the ordinary income. So Stever could do a $50,000 Roth conversion roughly and still stay in the 24% bracket. So you figure out the ordinary income rate first before you look at capital gains. That’s why I say they sit on top of. So you go through that calculation, you’ve got about $50,000 of room Stever in the 24% bracket. Crack myself up. Anyway, now- capital gains. Capital gains roughly, once you get over about $500,000 of income, they go from 15% tax rate to 20%. So this Roth conversion, if you did it, the $50,000 would be taxed at 24%, but it would also push you $50,000 more of capital gains into the higher 20% rate. So that’s a 5% delta. So you’d have another 5% tax on the capital gains. So really it’s not 24%, it’s 29% tax rate. When you think of it that way. And then of course you get state tax on top of that, which in California given these amounts probably is 10.3% or even- yeah probably 10.3%. So another 10%, so you’re close to 40%. That’s getting a little expensive, I think, to do a Roth conversion. I might wait until you don’t have the big capital gains, so you don’t have that extra tax, that extra capital gains tax. But that’s how you calculate this. You calculate ordinary income tax first and then you see what the capital gains taxes are. Because you have more ordinary income tax, it means your capital gains got pushed into a higher bracket for the capital gains side.

Joe: But I think the question there too is, how much money does he have in retirement accounts that he wants to convert? We really don’t know what that is. Because if he’s got millions and he’s got a fixed income, let’s say a large pension, he’s chilling in Coronado, so the bracket might be a lot higher in the future for him depending on what is other fixed income sources are. And how much money that he has, and what the RMDs are going to be, and so on. But I agree with you, just with the information we have, 40% seems a little bit rich. But we have recommended converting in the 32% bracket. We’ve recommended converting in the 37% bracket, just because of the amount of money that someone has and where we projected their tax is going to be in the future.

Al: And that’s typically based upon someone that feels tax rates are going up, which we tend to believe as well.

Joe and Big Al did a webinar on taxes last week specifically for clients of Pure Financial Advisors, then decided it was so good that they want everyone else to see it too. Click the link in the description of today’s episode in your podcast app to go to the show notes at YourMoneyYourWealth.com to watch. You’ll find out why the timing might be right for tax changes, and how provisions from the Tax Cuts and Jobs Act of 2017, the CARES Act Coronavirus stimulus package, and the SECURE Act affect your taxes and retirement planning. Most importantly, you’ll learn how strategies like the backdoor Roth IRA, tax loss harvesting and tax gain harvesting, and beyond can help you legally minimize how much you owe in tax. Share the webinar with everyone you know, and click Ask Joe and Al On Air there in the podcast show notes to send in your money questions.

The Pro-Rata Rule: Are There Times When a Backdoor Roth Conversion Isn’t Worth It?

Joe: Let’s go with Jason from St. Paul, Minnesota. Right next to that, Robbinsdale, Minnesota is where I grew up and was born, just for those of you taking score there.

Al: And you go back what, every other year or so? Give or take? Less. Actually-

Joe: I don’t know. It depends. I guess if there’s a funeral or a wedding you know.

Al: I suppose.

Joe: Then I’ll go. But yeah, my mom now lives in Maple Grove.

Al: I don’t know where that is. I assume it’s near.

Joe: I haven’t been to Minnesota- I haven’t been to Robbinsdale lately. Jason’s from St. Paul, which is kind of a rival city for Minneapolis. But it’s the Twin Cities Alan, just to help you out there.

Al: I did know that.

Joe: Got it.

Al: The Minnesota Twins?

Joe: “Hello Andi, Joe, and Big Al. Love the show. Recently found the podcast and avid listener.” Recently, alright, new listener. “I learn something new every time I listen and feel that you are helping me and my wife be in a better financial position when I choose to retire.” Do you think Jason is chillin’ in St. Paul with his wife and this stupid podcast is like on speakerphone or Alexa? They’re just sittin’ there-

Al: I think they’re out running an errand. He’s got the show on and she’s goin’ ‘oh honey, come on.’

Joe: She’s goin’ like’ this is awful’. Or do you think they’re like ‘oh wow. I hope they talk about Roths’.

Al: I think that-

Andi: For the next couple of episodes and then that’s it.

Al: I think he’s buttering us up a little bit so we’ll answer the question.

Joe: Got it. “I have a question about doing Backdoor Roth conversions and the pro-rata rule. My wife and I each have about $40,000 in Traditional IRAs at a financial service company, Equitable, formerly AXA. We both rolled our 403(b) to this IRA when we left our old company many years ago. My wife also recently left her previous employee and left her 401(k) money there under Fidelity’s retirement plan. We are not allowed to contribute to Roth directly because we are over the income limits and considering annual Backdoor Roths of the maximum allowable contribution amount.  I’ve read we need to roll the Traditional IRA to our current 401(k) before doing contribution conversion to avoid pro-rata. What about the RSP? Is that still a 401(k)? And are not calculated in pro-rata calculation? Lastly, is there any time Backdoor Roth is not worth it? We are just barely in the 32% tax bracket and we expect our incomes to continue to grow over the years. We are 38 years old and would love to be FI.” Oh, I guarantee they sit around and listen to this garbage. He uses the FI. That’s financially independent.

Al: Well, financial independence. Oftentimes one spouse is more into it than the other. I’m gonna guess that’s Jason.

Andi: Sounds like it’s Jason.

Joe: I don’t know. ‘Hey honey, can’t wait for FI’.

Al: Now he’s 38. Usually when you start talking FI, you start at say 40. Or 42. 45 at the latest.

Joe: He’s a brand new listener Alan. If he was listening like 10 years ago, he would have been FI-

Al: He’d already be there.

Joe: He’d already be there. “We currently spend less than what we make. In retirement, do not expect to need the same amount of household net income as we make today. We each max out our pre-tax 401(k) contributions. Her hitting federal limit and me highly compensated limit.”  HCE. “We also max HSA and contribute to the 529. Please keep up the great work and energy you bring to each show. Thanks for all you do. P.S. Derails get my belly laughing at times.” Yeah. Belly laughin’.

Andi: Thank you, Jason.

Joe: Belly laughin’. So Fidelity Retirement Savings Plan that-

Andi: That’s what RSP stands for.

Joe: Yes I understand. I got it. It’s not like this-

Andi: I was telling the listeners because you’re just like in the lingo and just jumping right over what RSP is.

Joe: Yeah I’m-

Al: He was just reading it.

Joe: I’m just reading, Fidelity Retirement Savings Plan. I would first talk to the Fidelity Retirement Savings Plan. Talk to the HR and say ‘Hey can I get the paperwork to roll an IRA into my Fidelity Retirement Savings Plan’? The problem though with this Al is that she doesn’t work there anymore. So I don’t know where Jason’s wife lives because she’s hanging out with him, listening to this, talking about FI. You would have to roll the RSP into the 401(k) plan. “We are not allowed to contribute to the Roth directly because of the income. My wife and I each got $40,000 in a Traditional IRA.” I don’t know, maybe the wife’s not working.

Al: If she is working and she does have another 401(k) plan that allows rollovers into it, then she could do that.

Joe: If not, keep it in the RSP because then that would be the same as the 401(k) that would not be included in the pro-rata rules. So roll the- or maybe Jason because you’re young, just blow out her- if she doesn’t have another retirement account to do the Backdoor Roth for her, take the $40,000 and convert it. Bite the bullet, pay the tax. And then if she’s not working or have earned income she could still make a non-deductible IRA contribution and convert that each year as a spousal contribution. So just because one spouse isn’t working doesn’t mean that that spouse still can’t contribute. So I don’t know if I missed something in translation but I didn’t see that she-  but she had a job- but they are both making good money. So I don’t know. If she has another 401(k), move it into that. If not, keep it there and then chip away at the IRA. So all right Jason, thanks a lot for becoming a new listener. You know there’s something that’s called a review. I don’t know if you guys are familiar, but I don’t know anything about it. Compliance doesn’t really let me talk about it. And since I can’t talk about it…

Can You Use Backdoor Roths to Exceed the $7K Contribution Limit?

Joe: Santiago writes in. He is 53 from Columbia City, Indiana. “I’m a new listener to the show and you all have become the show I most look forward to.” Oh. Look at Santiago. Thank you. “Thanks for the awesome content-” All right. So here’s the question. “Can you use a Backdoor Roth-” God, are we the Backdoor Roth IRA Show?

Andi: Yeah you are.

Al: We talk about it I guess a lot. It’s because people ask about it.

Joe: I’m not answering any more Backdoor Roths. Santiago I’m sorry. This is not the show that you’re going to look forward to anymore. OK. “Can you use Backdoor Roths and exceed the $7000 limit if you make less than the married filing jointly cut out for Roth eligibility? Thanks again. I appreciate your time.” So I don’t really understand Santiago’s question here. So let’s see- can you exceed the $7000 limit if you’d make less? What do you think?

Al: Well the answer’s no. You can- $7000 is the most you can put in when you’re 50. But I’ll say it this way. Santiago apparently is married so his spouse could put in $7000 so actually could they- jointly as long as she’s 50 and older. Maybe she’s in her 40s, I don’t know. So if 40s or younger- 49 or younger it’s going to be $6000; 50 and above it’s $7000, so they can do that as a couple. But you can’t double up on a Roth conversion just because you did a Backdoor Roth if that’s what he’s asking.

Joe: I don’t know what he’s asking.

Andi: I think he might be confusing the Roth contribution with what a Backdoor Roth conversion is.

Joe: Well it’s the same thing.

Al: It’s just a way to make a- it’s a way to make a Roth contribution when you’re over the income limits.

Joe: Yeah. It’s a Roth contribution with an extra step.

Al: Yep. That’s really what it is.

Joe: So let’s just start calling it that.

Andi: Roth contribution with an extra step?

Joe: Yeah. I think I like that a lot better than Backdoor Roth.

Andi: Don’t some people call it the Roth 2-Step?

Joe: Well this is- I think you do, Andi.

Al: I like that. That’s even better. The Roth 2-Step. Roth contributions-

Joe: Because he could convert as much as he wants out of an IRA. So I don’t care how much money Santiago has,  he can- the limit for conversion is unlimited. The amount that you can put into any IRA, Roth or Traditional, is $6000; he’s over 50, so it’s $7000. If he wants to make a non-deductible IRA contribution if he’s over the income limits for a Roth IRA he can make $7000. His wife can make $7000. He could convert both of those dollars and any additional retirement dollars that he has. The taxation of the conversion is going to be dependent on the pro-rata basis that he has within the IRAs. So hopefully that helps Santiago. Thank you for your first question, even though it wasn’t that great.

Self-Employed MAGI vs. AGI for a Definitely non-Backdoor Roth IRA Question

Joe: David from San Diego writes in. “Hello to all three. Having the three of you chime in while you’re all answering questions is definitely entertaining. I’ve listened to many financial shows and while I check in on those other shows once in a while, I’m listening every Tuesday when your podcast episodes is released. That said, I figured I would send you a question that was not Backdoor Roth related-” Thank you so much, David. I can’t tell you how much I appreciate this. “- as it seems to be a too frequent topic on your show. And I think your show is the best when you show off your respective knowledge on a variety of topics.” See, we’re not just a one-

Andi: – trick pony?

Joe: Yeah. Thank you. One trick pony. “So hopefully my question stimulates a different discussion.” I guarantee I will have no idea how to answer this question. “Joe and Al, I have-”

Andi: “Joe and Al have helped me understand-”

Joe: Oh thank you very much. “Joe and Al have helped me understand my philosophy – ” so he’s just like talking to a group of people here. Like he’s hosting the show. What the hell do you need me for? Thought he’s asking me a question, but he’s talking like to the group.

Al: I think we get one eventually. May not finish it for the segment though.

Joe: I mean he wrote 4 pages here. “Joe and Al have helped me understand my philosophy on how I wish to retire; namely that I want to pay as little in taxes from tax-deferred retirement accounts. And that my comfort is with paying taxes now and withdrawing from Roth accounts later. 100% agree with Al that I will not miss or feel the tax savings in the future that has already changed my life. Truly. Thank you. I have become self-employed last year and contribute $19,000 max for 2019 in a self-employed Roth 401(k) account I started. Thanks for your show. And I’ll be doing the same for 2020. Because my clients paid me for 2019 work in 2020, and because I recently landed a client that will pay me a greater retainer fee and will pay on time, my income this year 2020 will be about $160,000 after minor deductions for the business. My spouse has a salary, stable employment of $80,000 for the year, be contributing on a pre-tax basis to the 401(k). She’s maxing it out so her income will roughly be $61,000. My understanding is that with a $221,000 combined income as a married finally joint will not allow us to contribute to Roth IRA. I know that my wife could contribute to Roth 401(k) but given the uncertainty of the year we did not expect to cross the threshold for Roth IRA MAGI income levels. I’m having trouble understanding the difference between calculating MAGI and AGI and have looked around a lot, with no luck. I’m hoping you could talk about what obvious deductions exist are allowed to reduce our modified adjusted gross income that would make it possible to contribute to a Roth IRA for 2020. I have very few business expenses that are basic utilities like phone and internet. I worked from home, small 25 square foot place, insurance like errors and omissions and professional liability as I’m a service not selling products. My wife has health care through work so no expenses there. Can I pay for life insurance through my company and deduct it through the modified adjusted gross income? Can I pay for the advertisement and send out Christmas cards and deduct that? Any suggestions or leads to more information would greatly be appreciated. Luckily I have not made those Roth contributions so I do not have to worry about taking the money out. Thank you in advance in considering my question as part of your awesome show.” This guy should do a Backdoor Roth IRA. I swear to God. After all this, he’s like-

Al: I’m not gonna ask about it but maybe that’s what I need to do.

Joe: I know. It’s like I don’t want to ask you about it, the show sucks because it’s the Backdoor Roth IRA Show. I’m all excited because I thought he’s going to ask me something that has- he wants to put money into a Roth. He makes more money than the allowable limit. He’s got a 401(k). His wife’s got a 401(k). He wants to make a Roth contribution. The guy is a prime candidate for a—- Backdoor Roth. I swear. Right?

Al: I’ve got another approach, Joe. Listen to this. So he’s self-employed and he’s only talking about the employee contribution of $19,000. You can also put in about 25% of the profit and it’s not quite that simple but we’ll just go with that number. So 25% of the profit. Let’s just say it’s at $150,000 because you got to deduct the self-employment tax, 1/2 of that on that. So anyway it’d be roughly $37,000 that he could deduct on the employer side. That would be- could be a straight deduction. So just that alone gets them down below the Roth contribution limit. Or if he doesn’t like that idea, he can certainly buy the Christmas cards or prepay anything for that matter in his business, get the deduction this year. Because most businesses are cash basis, so it’s when you pay for something that is deductible. You have to do within reason though. They’ll allow you to deduct maybe one month of rent, but not 2 or 3. You know in terms of supplies, maybe a month or two of supplies, but not a whole year. So just be careful there.

Joe: Now you could buy a bunch of gifts too for his clients right? Deduct that?

Al: Could. But there’s $25 limit on gifts, so people tend to call those promotions instead of gifts to get around that rule. You didn’t hear from me.

Joe: All right. Okay.

Al: Just an observation I’ve seen.

Joe: Got it. We’re just we’re a couple of kids and just talkin’ taxes.

Check the podcast show notes for more free backdoor Roth resources. Read our blog, which dives deeper into the nuts and bolts of the strategy, and listen to previous YMYW episodes that answer even more backdoor Roth questions. Get important tax deadlines, the 2020 tax brackets, issues and updates for the year, tax strategies, actions you can take and more. Click the link in the description of today’s episode in your podcast app to go to the show notes at YourMoneyYourWealth.com to access all these free resources, and don’t forget to hit the share button and send this bad boy out via email or on social media.

Advance Planning for Biden’s Estate Planning Step Up in Basis Tax Changes

Joe: We got Charles in Folsom, California.

Al: That’s where there’s a prison?

Joe: That’s Johnny Cash my friend. Love Johnny Cash.

Andi: That makes two of us.

Joe: Folsom Prison. He shot a man in Reno-

Andi/Joe: – just to watch him die.

Joe: There ya’ go. Oh boy.

Al: That’s tough. Always wore black.

Joe: Yes sir.

Al: Tough guy.

Joe: “Hi Joe, Al and Andi. Thanks for everything that you do. I started to listen to your podcast earlier this year and haven’t missed one since. My question, I’m concerned about potential tax property changes coming if Biden wins especially when it comes to the loss of step-up the basis on an inherited home. My parents’ Bay Area home is worth $1,500,000. They paid $400,000 for it. My parents are in their late 80s and are in good health. Are there any actions my 3 siblings and I can take now to avoid this potential tax burden? Create some sort of trust? Maybe have my parents deed us the house now? And of course continue to let them live there, so we can get the step-up basis before the law changes. There must be something creative and legal we should be considering, right? I don’t want to end up in Folsom Prison for tax avoidance, evasion. So be gentle guys. I can see the prison walls from the corner of our upstairs balcony so it’s a constant reminder to follow the law. Thanks. Charles in Folsom, not inside-”

Andi: “- not inside the prison.”

Al: Okay. Well I’m glad we clarified that.

Joe: Oh that’s awesome. Wouldn’t you like to have that for a view? Get up in the morning, get a little cup of coffee, open up your bedroom window and just look at the prison. It’s like that’s the way to start your day.

Al: ‘Honey I’m doing my taxes. We’re going to stretch on the contributions. Oh wait. Okay. Never mind. We’re going to be honest. In fact, I’m not even gonna count half of them.’

Joe: So a couple of things. So let’s first talk about step-up in basis. So his parents got a 1,500,000 home in the Bay Area, they paid $400,000 for it. So if there is no step-up in basis and let’s say Charles inherits that home, he’s got a $1,100,000- him and his siblings have a $1,100,000 gain in the house. Because they bought it for $400,000, they sell it for $1,500,000, $1,100,000 is the actual capital gain. But however how the law sits today is that if they inherit that house their basis changes from $400,000 to $1,500,000. So at the date of death the benefactors, the inheritors, then take the basis of the deceased. Or did they take their own basis at the date of death of the deceased? So they died, it’s worth $1,500,000. Now that is Charles and his siblings basis. They sell the next day, zero tax due. So Charles is thinking if they get rid of step-up in cost basis, my siblings and I are going to pay a bunch of tax and how do I go about doing the appropriate planning that I can avoid at least some of the tax burden without putting himself inside Folsom Prison?

Al: I think that’s a good summary.

Joe: So can you create some sort of trust? So there is not for the step-up in basis for estate taxes- so there’s two different taxes that are due at death, depending on the size of the state. So if there is an estate tax you could do it like an estate freeze, but that doesn’t really help the basis issue.

Al: No it doesn’t. Yeah. So let’s just start right there. So if you set up a trust or you do any kind of transfer absent a sale, absent a sale then it just goes over at the same basis. It’s a transfer into a trust, transfer to the kids. It goes over as the parents basis. To get a step-up in basis while your parents are living, they’d have to sell it. Which is a possibility, they could sell. They’ve lived in it presumably 2 out of the last 5 years, they get a $500,000 exclusion and they only pay tax on $600,000. But Joe I think the bigger issue is, is there going to be a change in estate taxes because Biden did mention maybe we’ll get rid of estate taxes and get rid of this step-up in basis. That’s why we have step-up in basis because if you have to pay an estate tax you shouldn’t have to pay a capital gain at the same time. Now the estate tax exemption is so high that almost everybody or almost nobody pays estate tax. But we all get a step-up in basis. So yes, Biden did talk about that. Will that possibly go through? Very doubtful. I mean anything’s possible. But this would have to be gone through Congress and the Senate and the president, passed into law. Very, very unlikely. And I’ll tell you why. It’s because it will affect mom and pop and everybody else, not just the wealthy. It affects everybody. So the likelihood of this happening, to me is 1% so I wouldn’t- and I would say this generally about tax proposals from presidential candidates or any other kind of candidates for that matter. They’re just discussion points. Don’t think that they’re going to be lots- it’s hardly anything happens based upon what people say.

Joe: Right. Right right right. Couple of things too, to note. If there’s a gift- so let’s say Mom and Dad gifted the property to Charles. Well the gift you keep Mom and Dad’s basis. So just remember that as well. So sometimes it’s like well let me gift this out or put you on title. You very rarely do you want to do that. So anyway, Charles thanks so much for the question and stay out of jail.

Should I Invest $25K in a High Yield Savings Account?

Joe: Roberto writes in. “Hi there. I have $25,000 in the bank. Would appreciate your advice on how to proceed in investing. Or how I can get the most out of it. I hear of a high yield savings account? Please advise.” What do you think Al? Roberto. Keep the money. I don’t know. Go to a high yield savings account.

Al: There’s a couple more things we need to know. Like what’s the money for, when you’re going to need it. How old are you? What are your other accounts? A whole variety of things to help you figure out how to invest something. But if I just look at this in a bubble you can go probably to your credit union. I don’t know what they’re currently paying, .6%, .8% . It’s better than 0%, but not much more. A high yield savings account, I’m not really quite sure what he’s referring to but I don’t think you’ll find anything more in that savings vehicle any more than about 1%, if that, right now.

Joe: Yeah, we need a little bit more information. We don’t advise on this show, Roberto. Once again thank you all for your questions and comments; really appreciate it. Enjoy the comments we get- the reviews, what are they called?

Andi: Comments.

Joe: Comments, yes comments.

YMYW Comments: the Show, East Islip and FIRE (Financial Independence, Retire Early)

Joe: Jake. Boston, Massachusetts. “YMYW is a great financial podcast. It never grows old. Definitely worthy of 5 stars and more. Andi he does a great job keeping Joe and Big Al on track. This is informative as well as entertaining. And the Derails can’t be missed.  I usually listen while I’m walking and it makes the miles go by quickly. Keep up the great work. A loyal listener from Boston” Thanks Jake from Boston, Massachusetts. I was going to read something here.  Judi from San Diego writes in. She’s like “You were right. It’s pronounced Eye-slip.”

Andi: She was saying that to me.

Joe: Oh. “Named for the canals of Long Island that are shaped like a capital-”

Andi: “-“I”-”

Joe: “Capital “I” with a bar across the top. I grew up there.” Eye-slip.

Andi: Yep.

Joe: I got it.

Al: What did you say?

Andi: Islip.

Joe: “Hello. I’m a big fan.” This is from Phil writes in. “Hello. I’m a big fan of the YMYW podcast. Your host botched the pronunciation of Ice-lip.”

Al: Wait a minute. Only one host botched it. No I didn’t say-

Joe: “Please tell Joe and Big Al- Big All- that it’s pronounced East Ice-lip. Thanks. Keep up the great show.” So is it East? It’s East Ice-lip.

Andi: Eye-slip. Yes.

Joe: East Ice Slip. Ice-lip. Ice-lip. I slip. There ya go.

Andi: Or I slip.

Joe: I slip.

Al: It could be I slip or Ice-lip.

Andi: But it’s not Islip.

Al: Judi said it’s Eye-slip. And Phil said that it’s Ice-lip. So we have a difference of opinion there too.

Joe: Yeah.

Al: No one knows what to say on this one.

Andi: Well Judi said she’s from there so I trust her.

Al: Got it.

Joe: Got it. Well thank you very much for ‘I botched’-

Al: Yeah, Joe and Big All-

Joe: You botched your email Phil.

Al: Oh boy.

Joe: Tom from Texas writes in. He was listening to our FIRE YouTube video. And so Al and I did a TV show on the FIRE movement and went “You mention this movement started with millennials.” I don’t think we ever said it started with the millennials. I think saving money started probably 1000 years ago. But maybe we said it’s-

Al: Well we may have- I may have said something like it sort of caught on with the millennials. I don’t know. I don’t remember what I said.

Joe: You probably said it started with the millennials.

Andi: It’s on tape so it’s probably- Tom’s probably right.

Al: Whenever I said, I said.

Joe: Nope, “this idea, concept, as I’m sure you agree, has been along around much longer than the millennials have been alive.” It’s like Tom is pissed off here.

Al: Really.

Joe: “God, I hate the millennials. I can’t believe you gave them credit for that!”

Al: “It was my idea.”

Joe: It was my idea. “The benefit they have over prior generations is technology.” So they’re the lucky bastards that got technology, that can leverage. “I own 30 year old books-” He’s got books older than these millennials. That are worth more than these millennials will never have.”

Andi: That’s not what it says.

Joe: Tom, calm down. Settle down. Tom’s living a dream. He said he’s “been livin’ FIRE on 30% of gross income for decades.” So Tom needs some credit. Tom. You’re part of the FIRE moment. Thank you for your- He’s on FIRE.

Al: He’s one of the early pioneers I think.

Joe: Cantankerous. He’s in his 50s and he sounds like he’s 70. ‘I’ve got underwear older than these damn millennials.’

Al: It does seem you get more crotchety as you get older.

Joe: And Tom’s in Texas. Texas is a nice place.

Al: They get fired up though, in Texas, don’t they?


Thank you all for your feedback! We love hearing what you think. Jason, Jake and all other fans of the Derails, got a couple shorties waiting for you at the end of today’s episode.

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