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 [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
July 5, 2022

Inflation is high, interest rates are high, and the financial markets are volatile. Are bonds and series I bonds good investments or bad investments right now? How do bonds fit into your overall retirement portfolio? Plus, variable annuities, evaluating the long-term value of Roth contributions vs. Roth conversions, what if anything can be done about losses in an after-tax 401(k), helping adult kids buy a home – and drinks in the Derails. 

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Show Notes

  • (00:48) Individual Bonds vs. Bond Funds, RMDs on a Variable Annuity in an IRA (BC, NJ voice)
  • (09:11) Are Series I Bonds a Good Investment Right Now? (Susan)
  • (11:43) Are Bonds a Bad Investment in a High Inflation, High-Interest Rate Environment? How Do I Bonds Fit in an Investment Portfolio? (Brian, Los Angeles)
  • (18:16) How to Evaluate the Long-Term Value of Roth Contributions vs. Roth Conversions? (Diana, WI)
  • (23:35) Is There Anything I Can Do About a Loss in My After Tax 401(k)? (Jane, MI)
  • (25:55) How to Invest Without Exceeding the Medicare Savings Program Income Limit? (David, Forsyth, MO)
  • (32:07) The Best Way to Help Our Adult Kids Buy a House? (Chris, Atlanta suburbs)

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Today on Your Money, Your Wealth® podcast 385, inflation is high, interest rates are high, and the financial markets are volatile. Are bonds and series I bonds good investments or bad investments right now? How do bonds fit into your overall retirement portfolio? Plus, variable annuities, evaluating the long-term value of Roth contributions vs. Roth conversions, what if anything can be done about losses in an after-tax 401(k), helping adult kids buy a home, and drinks in the Derails. Go to YourMoneyYourWealth.com and click ask Joe and Al on Air to send in your question as an email or a priority voice message like the one coming up.  I’m producer Andi Last, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Individual Bonds vs. Bond Funds, RMDs on a Variable Annuity in an IRA (BC, NJ voice)

BC: “Hi, this is BC from New Jersey. I’m actually retired because of disability. I’m almost 65. I have considerable assets, over $1,000,000 in taxable and over $1,000,000 in a traditional IRA. I love your podcast and I often hear you talk about asset allocation, as I do hear others. I’ve recently taken over the management of my assets because I didn’t like the way they were being managed. And when you talk about asset allocations and you talk about bonds, I’m doing the managing of my portfolio using indexed funds. So, for example, I may have the Total Bond Market Index Fund from Vanguard. Do you guys recommend individual bonds of a certain period to help meet money needs? That’s the first question. The second question is, I have a variable annuity in my traditional IRA and I’m wondering how that’s going to be treated when it comes time for me to take RMDs. I would love to try and do a Roth conversion, but like I said, I’m near 65 and I think it would be too difficult given the tax burden. Thank you.”

Joe: All right, BC, thanks for the question. A couple of different ideas here. So he’s almost 65. He’s got a lot of cash. $1,000,000 in taxable, over $1,000,000 in retirement account.

Al: Good job. That’s fantastic.

Joe: He’s like, you know what, I’m going to manage my stuff.

Al: Yeah. Because those-

Joe: I don’t like how the other guys manage it. That’s a good reason to manage it.

Al: And you know what, if you enjoy it and you feel comfortable doing it, go for it.

Joe: ,All right, so question first one was index funds versus individual bonds. We use both. But I like how he asked, are we trying to solve an income need, like almost like a pension would. No, we don’t use individual bonds in that manner. If someone has a large amount of money in a non-qualified account, we would probably ladder a municipal bond portfolio just to get a good stream of income tax-free.
But we’re not solving for, hey, this individual needs $70,000 of income and let’s produce a bond ladder to create that $70,000 of income. Given interest rates- well, interest rates are on the rise, but bond prices are getting just hammered. So you got to be careful with bonds because I don’t think people really understand kind of the risk associated with bonds. They look at it as a safe investment looking for income needs. But what we look at it as is probably like a buffer against your stocks. It’s just like you’re safety net. It’s something that we want to be somewhat or very conservative with. So we use index funds and ETFs just like you. We use short-term duration, high quality, but in certain circumstances, for certain clients, we would also build individual bond portfolios.

Al: Yeah, that’s right. Bond ladder is just buying bonds of different maturities. So you might have one mature in a year, two years, 3 years, 10 years, whatever it may be. That way you’re not stuck with one particular term. And the thing about longer term bonds is as interest rates go up, the value of that bond declines. Now if you hold it to maturity, you’ll get the whole amount. And bond funds, it holds the bonds, it’s simpler, it’s easier. Right, because you just buy the bond fund and you liquidate it as you need to.

Joe: And it’s way cheaper.

Al: Yeah, right. And so that’s what I prefer personally, just because it’s so much easier.

Joe: But the only thing that we would look at is to say, what are you trying to accomplish? It seems to me that he’s just looking at using bonds as potential diversifiers. Bond funds are totally fine.

Al: Yeah, they’re fine. A bond ladder is fine too. But for simplicity, I would go with the bond funds.

Joe: So he’s got a variable annuity in his traditional IRA. So first question I would ask is, why do you have a variable annuity inside your IRA?

Al: That is a good question.

Joe: Are you looking to annuitize the annuity? Is there a guaranteed benefit on it that you’re looking to use? Or are you just holding it for whatever reason- someone sold it to-? If it’s just a deferred annuity and you’re taking distributions from the annuity, it’s going to be treated as such. Whatever you take out could be the RMD. But if you’re using some benefits, then it gets a little bit more complex. So I have no idea what the contract is, what he’s using, what he has.

Al: And as you say, whether it’s annuitized or not, which basically means you turn on the income stream. That’s what annuitize means. So yeah, deferred annuity, you’re not receiving any payments. Typically it’s whatever the value of the contract is at December 31st, you just add it to your other IRA balances. And that’s your RMD. And the thing about IRAs is you can combine IRAs, 5 different IRAs and call them one, take an RMD out of one account. Now, that doesn’t work for 401(k)s and 403(b)s and things like that. So it makes it simpler. But once you start receiving payments and if there’s benefits, it does get more complicated and a lot of insurance companies actually compute that for you.

Joe: But that’s a good point, Al. Let’s say he’s got a separate IRA with his variable annuity. He’s got over $1,000,000 in IRAs, it sounds like. And so you can take the RMD from the other IRA and don’t even worry about the annuity if you’re worried about the complexity of the RMD. I don’t think he spends a lot of money either so with the Roth conversion question is like, okay, well, you’re 65. You got $1,000,000 plus in a retirement account, and if you’re not necessarily taking any distributions from that, he could run into a huge tax issue.

Al: He could.

Joe: So you need to run the calculations, BC to say, all right, well, are you willing to kick the can down the road? And if you’re not taking distributions from the retirement account, what type of rate of return do you think you’re going to receive on that retirement account over the next 7 years? So let’s say it’s now worth $1,500,000. Maybe it’s $2,000,000. You take the RMD off that, well, that’s $80,000 on top of your income. Does it make sense to maybe bleed some of that out now. Pay the tax, or do you want to kick it down the road while tax rates are higher and get hurt even more?

Al: Yes. And of course, we don’t know how much is in the annuity, and I’m assuming you have other assets besides the annuity in your IRAs, so you can convert that easily. When you have an annuity, you kind of have to go back to the insurance company to see if it can be converted. In some cases, it can-

Joe: Well just get out of the annuity.

Al: – or get out of it. Yeah, unless you want to keep it.

Joe: It depends on what he bought it for. Is he buying it for guaranteed income? If you don’t need the guaranteed income, get out of it.

Al: But what I was going to say was, I don’t think any insurance company that I know will allow you to do a partial conversion on an annuity.

Joe: Yeah, you can, depends on the contract. If you buy into the same contract.

Al: Got it. Okay. Well, what I had heard is, it’s all or nothing, on the conversion, it depends upon the contract though. That’s almost always the answer.

Joe: They’re more complex than they probably need to be. But again, I think for people that are out there, especially now with volatile stock market, you’re going to get more pitches for contracts because, hey, you lost money in your stock and mutual fund accounts. Why don’t you buy this guaranteed annuity contract? What are you trying to accomplish? Are you looking for a guaranteed income stream? That’s what an annuity is. It’s insurance. You’re buying an income. Is that what you want? Then you have to take a look at what is your internal rate of return, and if that is satisfactory, then go for it. But most people don’t know that.

Al: Right.

Are Series I Bonds a Good Investment Right Now? (Susan)

Joe: All right. What have we got here? Susan. “Hi Joe and Al. I was wondering if I Bonds are a good investment, as they’re currently offering 9.62%. What are the negatives for this type of investment? And upon redemption, what are the tax ramifications? I Bonds.

Al: I Bonds.

Joe: Yeah. What the hell? Put some money in I Bonds. They’re paying out of their wazoo. I don’t know. Depends on what you use the money for. It could be tax-free if you use it for education. The downsides, you can only put $10,000 in.

Al: You’re limited.

Joe: Yeah. You’re limited to what you can put in. There’s some liquidity issues. You got to hold it for at least 12 months or something. But yeah, if you have $10,000 that you want to invest in I Bonds, 9.62% sounds pretty darn good to me.

Al: So the I Bonds, the yield is based upon inflation. So that’s why they’re so high now.

Joe: Yes.

Al: And if you buy it right now, it’s locked in, for whatever the term is. And what are the terms?

Joe: I don’t know.

Al: Anyway, whatever the term is-

Joe: 12 months?

Al: I mean, you have to hold it for that.

Joe: I think they’re almost like a zero coupon bond because we never bought I Bonds before because inflation was so low. It wasn’t even worth it. But now, if you have $10,000, by all means. It’s probably locked up for 12 months, I believe. And then if you take it out prior to that, you’re not going to receive the interest. You’re going to lose the interest.

Al: So there’s stipulations and there’s limits on how much you can invest.

Joe: If you need the money within a year or two, I wouldn’t do it. But if you can let it ride for a year or so, by all means.

Al: Right. Okay.

Andi: Well, I was going to say just actually, the official term on the I Bonds, it says “they earn interest for 30 years unless you cash them first. You can cash them after one year, but if you cash them before 5 years, you lose the previous 3 months of interest. So if you cash it, for example, at 18 months, you get the first 15 months of interest.”

Joe: There you go. I know it was some stipulation there.

Al: So it’s a long term and it’s a good rate. So why not? If you don’t need the money right now. But on the other hand, it’s only $10,000, and for some people that’s a lot of money. For other people it’s like not worth the hassle. It just depends.

Joe: It’s worth the hassle for 9.62%.

Al: Not if you’re a multimillionaire.

Joe: Like you, Big Al?

Al: No, I’m just saying. Like if you’re Bill Gates.

Joe: If you’re Big Al Clopine. I’m not going to mess with that garbage.

Al: It’s just not worth the trouble.

Are Bonds a Bad Investment in a High Inflation, High Interest Rate Environment? How Do I Bonds Fit in an Investment Portfolio? (Brian, Los Angeles)

Joe: “Are bonds a bad investment in high inflation, high interest rate environment? How do I Bonds fit in the investment portfolio? Brian.” Alright, why did I read that?

Andi: That’s the title.

Joe: Did you write that title or do they do it?

Andi: Yes. Anything that’s in red is- or did you even print it in color?

Joe: No.

Andi: Well that’s the problem. Those are the titles. That’s so that I’m telling you just a basic idea of-

Joe: Oh, this is your-
Andi: That’s me telling you what it’s about, yes.

Joe: We don’t need the Cliff notes.

Al: You’re finally learning that?

Joe: I would say get rid of the Cliff notes. They confuse me.

Al: I like them.

Andi: That’s what I thought. So between the two of you, figure it out and let me know what you want.

Al: I would like them.

Joe: “Joe and Big Al, I love listening to your show.” Thank you. “You are one of my favorite podcasts and I’ve been recommending to all my friends and family.” Well, thank you very much.

Andi: Thanks, Brian.

Joe: Yeah. “Had a few questions about Series I savings bonds and bonds in general.”

Al: Okay.

Joe: Well, you came to the wrong place. “I hear that in general, rising interest rates make bonds a bad investment. So you have bonds in your portfolio and high inflation or high interest rate environment?” Yeah. You have bonds in your portfolio.

Al: In all environments.

Joe: Right. But the type of bond that you choose is going to determine the variability or the volatility of the overall bond. So a bond is a loan, it’s a note, it’s an IOU. So people look at bonds almost like their stocks. They’re not. It’s credit. It’s like, all right Al, I’m going to lend you $100,000. Al is going to do whatever he wants with my $100,000, but I’m going to get money from it.

Al: I’ll pay 3% a year and then I’ll pay $100,000 at the end of the term.

Joe: So I get $3000 a year and then at the end of our agreement I get my $100,000 back. That’s a bond. If interest rates go up and I want to get my bond back prior to maturity, that’s when bond prices fluctuate.

Al: Because if they’re 5%, who’s going to buy your 3% bond for $100,000? So you got to discount it to $90,000- whatever the number is.

Joe: Because I could take my other $100,000 and get $5000 versus $3000. But if I wait to maturity I get my $100,000 back. So the longer the term of the bond you’re going to have more variation of volatility in the bond price if you sell the bond prior to maturity. Makes sense?

Al: Agreed.

Joe: So if I’m going long-term, you’re going to see a lot of volatility.
If I go short term, you’re still going to see some movement, but it’s not nearly going to be as severe.

Al: Agreed.

Joe: So what are you holding the bonds for? We hold bonds in our portfolios to cushion the blow of the stocks. We’re kind of in a weird environment just because we’re getting really high inflation that we haven’t really experienced in quite some time. And so the Fed is raising interest rates to kind of combat inflation or slow the economy. It’s kind of a double whammy here where you’re seeing bond prices go down as inflation goes up. But if you’re buying more bonds or you’re reinvesting or the mutual fund that you’re in that is reinvesting in more bonds, guess what? They’re not buying the bond at 3%, you’re going to get 5% interest or 6% or 7% or whatever interest rates end up.

Al: Right. Yeah. Hold on.

Joe: It’s okay. It’s a short-term little shock to the system.

Al: Yep. Yep.

Joe: Alright. “Do you have an opinion on savings bonds?” Yeah. Buy savings bonds. You can only buy $10,000. Right?

Al: I Bonds.

Joe: Yeah, I Bonds. Saving bonds, same same.

Al: Yep.

Joe: You get 9.5%. Why not? If you got $10,000 buy them. They’re illiquid-

Al: You have to hold them for at least a year.

Joe: Or 30.

Al: Yeah, or 30. You hold them at least a year, you get your interest. But if you sell it within 5 years, you lose 3 months interest and they are variable. So there’s a base rate and the base rate currently is 0%. So if there’s no inflation, guess what? Your bond is 0% and it resets every 6 months. So just be aware of that. The 9% that you’re getting right now is not necessarily what you’re going to get in 3, 5, 10, 30 years from now.

Joe: “Number 3, my thought is after the one-year hold, if inflation goes back to 0%-“ hopefully that happens.

Al: Yeah. Actually, that’s not healthy either.

Joe: Deflation.

Al: We need some inflation.

Joe: “- or low, like 1% or 2%. Basically, the penalty for selling the bonds early is also pretty negligible.” See Brian, you’re right there. You’re answering your own questions. As you’re writing this stuff down, you’re kind of figuring it out.

Al: You hold it for a year, you lose 3 months interest, but you got some good interest for a while.

Joe: “Not much of a liquor or beer person. My drink of choice is Orange Julius.”

Al: I used to love that as a kid.

Joe: Little Orange Julius. That’s a little blast.

Andi: I was going to say I haven’t thought about that stuff since I was going to the mall in high school.

Joe: Right, mall in high school. I only thought they have Orange Julius in Minnesota.

Al: Yeah, they used to have them out here. I don’t think they do anymore, but I don’t know.

Joe: I think we’re getting a lot of questions about the kind of the same things, which is great. People are concerned. We got inflation, we got interest rates going up, we got bond prices going down, we got the stock market going down. Oh, my gosh, what are we going to do? Right? So you have to be confident in your strategy. You’re just going to want to reiterate this. You have to look at your planning first, not the investment, not the markets, not the economy, your planning. Because all of this is going to happen again at some point, probably in different variations. This time it’s different. It’s never different. It’s just kind of a different circumstance.

How is your investment mix, and why is it like that? Learn ways to grow your investments in all market environments, learn how to avoid poor investment decisions, and how to protect yourself from risk. Download 8 Timeless Principles of Investing for free from the podcast show notes, just before the transcript of today’s episode. This guide will help you feel more confident in your portfolio, even during times like this. Click the link in the description of today’s episode in your podcast app to go to the show notes and download 8 Timeless Principles of Investing, share the podcast, and to Ask Joe and Big Al your money questions on air.

How to Evaluate the Long-Term Value of Roth Contributions vs. Roth Conversions? (Diana, WI)

Joe: Let’s go to Wisconsin, back to ‘Sconi. “Hi, Joe, Big Al and Andi. Really enjoy the show. Thanks for all the laughs and the wisdom, aka not financial advice.” We’re just a couple of kids shooting the breeze. “Assuming all is good with meeting income requirements and yada yada yada, instead of putting some of the $7000 I’m eligible to put into my Roth IRA for 2022, should I consider using those funds towards my tax liability for executing a full or partial conversion from a traditional IRA into an existing Roth IRA? How can I evaluate the long-term value of making a contribution versus a conversion? My husband and I are both 54 with plans to work until 65. Our AGI for 2022 should be down due to having another dependent to claim. No, not a baby at our ages. Second kiddo returning to college full time. The sum total of our deductions will be worth itemizing in 2022, plus the account balances are down. We drive our Hondas to the ground. We got a 2013 Odyssey, 2013 CRV and a 2012 Civic. Our rescue pups, a poodle and a maltipoo- matipo-

Andi: Maltipoo.

Joe: Maltipoo. MaltiPoo. There’s a Maltese poodle mix. They get pretty anxious on their car rides. Maybe I share a little smooth brandy old fashioned-“ hmmm, brandy old fashioned.

Al: Maybe, maybe if you did.

Joe: Sweet. “- with them to enjoy the ride home. “I like an old fashioned.

Al: Like a little brandy?

Joe: I have- probably more of a whiskey old fashioned than brandy. All right, so here’s the deal. It depends on a couple of things. Diana, like Princess Diana. So let’s say $7000. If she’s in the 12% tax bracket, it’s a $60,000 conversion, roughly.

Al: Right. The $7000 would cover.

Joe: So you convert $58,000, and then your tax bill is going to be $7000. So I guess, Diana, what would you rather have, $58,000 in the Roth or $7000 in the Roth?

Al: Right. And if you’re in the call it the 24% bracket, it’s going to be roughly $30,000ish, is what you could convert. So that $7000 would allow you to convert $30,000. Or if you’re in the lowest bracket, it would allow you to convert $60,000ish.

Joe: And that’s federal.

Al: That’s federal. You got to factor in state.

Joe: State of Wisconsin.

Al: Yeah, yeah, yeah, yeah. But I would say this, that works for a lot of people that we talk to because they have high balances in IRAs, 401(k)s, because they’re trying to reduce their required minimum distribution-

Joe: Or get tax diversification. Or have a better income withdrawal strategy. There’s multiple reasons.

Al: Now, if you really don’t have that much in an IRA or 401(k), the required minimum distribution isn’t going to amount to much. It doesn’t matter as much.

Joe: Well, it’s the same.

Al: It’s the same math.

Joe: It’s the same math either way.

Al: But the reason you do that is to get a lot more money in the Roth tax-free. And if your RMD isn’t really going to move the needle that’s what I’m saying. Doesn’t really matter as much.

Joe: I don’t think it has anything to do with the RMD. I think it has everything to do with what the retirement income strategy is going to be. Because maybe she doesn’t have a lot of money in a retirement account, but she has Social Security. And then so the RMD or the distribution from that could make her Social Security be subject to tax up to 50% or 85%.

Al: It could.

Joe: So even though the balances could be low or moderate, I’m still looking at this as leverage. That’s all it is, is that can I use that money as leverage to get a lot more money into a Roth IRA? To compound for me tax-free? She’s got 10 more years to work, right? So it’s like, okay, well, yeah, I think we would want you to do both. But if you can only afford $7000, it’s going to depend, I guess, truly, on what is your overall picture look like to really dial this thing in. But just from a spitball high level, it’s like, all right, well, $7000 if you give that to the IRS, if you’re in the 12% tax bracket, it’s roughly $50,000. If you’re in the 24% tax bracket, it’s roughly $30,000. So would you rather have a lot higher number going into the Roth, convert it, then you have the cash to pay the tax and forget about it?

Al: Yeah, I agree with everything you said. Here’s what I’m thinking, though. Sometimes we see real estate investors that have very little in their deferred accounts, so it doesn’t matter so much. That’s more what I’m thinking.

Joe: But if she’s got heirs, then that’s going to go to the heirs, tax-free. Don’t give me started- I think everyone knows we’re pretty high on-

Al: Are we pro Roth? Is this the Roth show?

Joe: That’s what we got kind of, labeled.

Al: Got labeled as that.

Joe: That’s why I was like, stop asking us Roth questions. Because we want to be a little bit more well-rounded.

Al: We’re not just a one trick pony.

Joe: Yes, we’re two tricks.

Is There Anything I Can Do About a Loss in My After Tax 401(k)? (Jane, MI)

Joe: We got a question here from Jane from Michigan. She goes, “Hey, guys, thank you for taking my question. Every two weeks, I contribute money to my 401(k) after-tax account. After a few days, I call to transfer that money into my Roth 401(k). I have not transferred money in a while, and the stocks are down. From a tax standpoint, is it smarter to wait or take the loss and just move it? Can I do anything about the loss? Thank you for all the great content. I look forward to listening every week. Jane.” So this is what Jane’s doing. She’s got little after-tax contributions going into her 401(k) plan, Because those dollars were never taxed, she’s converting those to a Roth IRA and avoiding any tax. Put in $10,000 after-tax, you convert $10,000 into the Roth, no tax due, you got $10,000 in the Roth and bada boom.

Al: Yeah. And so your $10,000 went down to $8000.

Joe: And so she’s like should I convert? Is there a way to take the loss- that $2000 loss? The answer, in my humble opinion– I know there’s a way that you can write off IRA losses. I forget what form. And then it’s an itemized deduction, and then it’s-

Al: Which most people don’t itemize. Or a lot of people.

Joe: Not anymore.

Al: I’m not even sure that’s still available.

Joe: I don’t think so either.

Al: Because that was a miscellaneous itemized deduction, I think?

Joe: It was. It was.

Al: There’s tricky way that- the quick answer is-

Joe: – just convert.

Al: – just convert. It doesn’t matter whether it’s up or down. You’re converting the same dollars and there’s no tax cost.

Joe: Exactly. You want to convert while it’s down because then you have all of those shares converted. You bought for $10,000. Now they’re worth $8000. But you still have the same amount of shares. So you convert. You’re still not paying any tax. But then now that $8000, when it recovers to $10,000, that $2000 recovery goes into the Roth. And then- she could wait and still convert at $10,000. She’s not going to pay any tax because that’s the basis.

Al: Right. I guess if it goes above that, then you have a potential issue.

Joe: But I would just get into the Roth right away.

Al: I would do it as soon as possible because there’s no tax benefit. Just do it.

How to Invest Without Exceeding the Medicare Savings Program Income Limit? (David, Forsyth, MO)

Joe: Got an email from David, lives in Forsyth. Is that right? Missouri?

Andi: I think, Forsyth is correct, yeah.

Al: That’s what I would say too.

Joe: You were a little stumped, Big Al.

Al: I was thinking I wonder how he’s gonna say it, well, sounds right.

Andi: We could all be wrong.

Al: We could.

Joe: “Hello, Andi, Big Al and Joe. I drive a 2004 Hyundai Accent. I drink Milwaukee Light.” Old Mud. You ever have Milwaukee Light?

Al: I don’t think so.

Joe: I had that back in the day. Steal that from my dad.

Al: Got it.

Joe: That’s what he would keep in the garage. Called it Old Mud.

Al: And does it taste like mud?

Joe: Yeah, it just didn’t do too well on the stomach.

Al: Oh, got it.

Joe: Just kind of made it gargle a little bit there.

Al: Got it. Okay.

Joe: “But I aspire to upgrade to Busch Light and then ultimately, God willing, Coors Light.” He’s got goals.

Al: Got it. Very good.

Joe: “I feed a mean tempered, feral cat. I am a minimalist, living on $12,000 a year. I live-“ man, $12,000 a year. That’s Big Al’s beer budget.

Al: I’m not sure that covers it.

Joe: “I live in Forsyth, Missouri, but plan to relocate to New Mexico soon. Could you tell me a good way to invest $80,000 long term without going over $234 in income? If I go over this limit, I become ineligible for my Medicare savings program and will have to pay $170 a month in Part B premiums. I’m considering buying Berkshire, but this would give me a concentrated position of about 12%.” So he wants to avoid $234 of income, Al, on an $80,000- is that a month?

Al: That’s what I’m wondering.

Joe: Or is that a year?

Al: It is monthly or annual? If it’s monthly, that’d be kind of hard to do. Unless you put it in a checking account with no income. If it’s per month, then that would be almost $3000. $3000 into $80,000, I think that’s about 3.5%, maybe?

Joe: Yes, I think you’re right. Yes, 3.7%.

Al: And I think if you look at, like, total stock market funds, at least the last time I looked, they were paying under 2% dividend yield.

Joe: Well, I mean, anything in the market now, you’re getting a negative.

Al: True. It’s not very much. But just generally. So if it’s per month, maybe you look at the total stock market fund. If it’s long term and we don’t know if this makes sense for your plan. Is this the right investment? I don’t know. But if you’re just strictly talking about keeping it under $234 of- if it’s monthly income, you could invest probably in the total stock fund or something like that. If it’s annual, that’s hard to keep that-

Joe: Is David tripping over dollars to pick up pennies here?

Al: Well, I don’t think so, because he would forego- he’d have to pay $170 a month.

Joe: Okay, so that’s $2000 a year. So how about if his investment does $3000 a year?

Al: Good point.

Joe: You’re still net ahead, trying to figure- you could be very tax efficient with the investments out there. Look at exchange traded funds. Look at index funds that have very little turnover. If you want to go with Berkshire, they don’t have- Warren Buffett is a big believer in not giving out large dividends. He would much rather reinvest in the overall organization. So that might be a really good option.

Al: That could be great, except for the concentration. But we don’t know enough about your portfolio to know what to say.

Joe: But Berkshire is still fairly diversified.

Al: It is, yes.

Joe: If we were just sitting around having an Old Mud-

Al: What would you do?

Joe: He’s like, well, what do you think about Warren Buffett? I’d be like, Yeah, he’s a good guy. I don’t know. What the hell? It’s $80,000. Figure it out. I have no problem with that. But if you creep up and you get a little bit of income and then you lose your subsidy well, 12%. Let’s see.

Al: Well, also, if you creep up enough right before year end, make sure you have enough stock losses to create some capital loss over and above your gains, because you can take up to $3000. So that would be a way to do that.

Joe: But let’s say if he doesn’t have it- he’s got about- if that’s 12%, if that $80,000 is 12% of his total portfolio, I don’t know- he’s got about, what, $700,000?

Al: Yeah, that’s about right.

Joe: What is the other $600,000 doing? That’s not creating that, or he’s already up to a certain level. When does the Medicare premiums go to $170? Because this is IRMA he’s talking about.

Al: If he’s single, it’s $91,000 of modified adjusted gross income.

Joe: $91,000 or less.

Al: If it’s married, it’s $182,000. Usually most- wouldn’t you say most minimalist are single?

Joe: Yeah, he’s spending $12,000 a year, and he drinks Old Mud. So I love it. I’ll have an Old Mud with you, David. Good luck with that. Just look at the dividend yields and try your best. Hell of a spitball there, man.

Al: Yeah, we killed it.

Luckily we’ve got plenty of free financial resources you can access in the podcast show notes, like 8 Timeless Principles of Investing, the 2022 Key Financial Data Guide, new blog posts on the importance of staying invested despite market volatility, and a Q2 marker review, plus you can register for the free Q3 financial markets outlook webinar on July 20th, hosted by Pure Financial Advisors’ Chief Investment Officer and Executive Vice President, Brian Perry, CFP®, CFA. Just click the link in the description of today’s episode in your favorite podcast app to go to the show notes and get started.

The Best Way to Help Our Adult Kids Buy a House? (Chris, Atlanta suburbs)

Joe: We go. “Hello, YMYW team. I’m wondering about the best way to help our young adult kids when they’re ready to buy a house.” Is this from you, Al?

Al: Yeah. I want you and I to spitball my situation.

Joe: “The kids are working and making good income and are very reasonable- or responsible. We are blessed to be able to help them in this process, and I’m wondering what our options are that makes the most sense. A friend of mine told me that they purchased the house with their kids and then rented it back to them for 3 years.” Well, what kind of- where are they living? Hey, my best friend- all these people are buying their kids homes.

Al: Well, it says Atlanta.

Joe: Oh, Hotlanta. Okay.

Al: I don’t know much about the housing market there.

Al: That’s a nice place. Probably pretty expensive.

Al: Probably.

Joe: “At the end of the 3 years, the kids bought it back from their parents for a reasonable value. This allowed the kids to live in a slightly nicer house than they could have bought originally while increase their earnings and savings. I assume that the parents treated this as a rental property for tax purposes. Is this a better option than gifting the kids a down payment? What are the pluses and minuses? We would not cosign or co-own a house with our adult kids, as this seems to create potential legal and estate issues. I love your thoughts. I drive a 2021 Corolla. I have no pets, and enjoy a glass of cabernet with my amazing husband every night.” Wow. “Thanks for what you do, Chris, in Atlanta, Georgia.”

Al: Awesome.

Joe: Okay, Al. We can get a little creative here, I suppose.

Al: Sure. Well, I mean, let’s go over the choices, right? So you could give your kids a down payment, let them buy the house. You could loan your kids a down payment, let them buy the house. You could cosign, which they don’t want to do. Cosign means you cosign on the loan, if your kids don’t pay, you’re responsible for the payment. You could buy the house, as is indicated here, and then you own it. Maybe you own 50%, maybe you own 100%, maybe – or whatever. In this particular case, he’s talking about owning it outright and then selling it to the kids. Seems like a lot of work to do this. I don’t know. Can you think of anything else?

Joe: No. I mean, I think what she’s asking is there some tax moves? Is there something savvy that Chris can do? So it’s like, okay, well, here maybe we buy the house, we rent it to the kids. We’ve seen that before. Because then with gift tax and depending on estate sizes and things like that, you can kind of avoid some issues there. Or you could gift back the payment to the kid, right? We’ve seen that. So let’s say if the payment is under $20,000, what’s the gift exemption?

Al: I think it’s- is it $16,000 this year?

Joe: $16,000, $18,000?

Al: I think it’s $16,000.

Joe: $16,000. So you buy the house, and then they could pay you rent, or you could gift the payment, or you could give them the down payment. But I guess I don’t understand what their friend did. So they rented it back for 3 years. So they’re saying, Okay, well, here’s a $500,000 house. We’re going to buy the house, and you’re going to rent it from us. And then in 3 years, we’re going to sell it to you for maybe a discounted rate?

Al: Yeah, I think that’s what she’s implying.

Joe: So then they could buy a little bit nicer house and the parents are- the gift to the kids would be what the discounted rate on the house. So they could get into maybe a $500,000 house where maybe they could really only afford a $400,000 house. So the parents are gifting them maybe that $100,000 differential. I like that idea. Depending on how you want to finance this, if you’re going to pay cash or are you going to hold a note, are you going to transfer the note to the kids?

Andi: Yeah, they could have done a rent to own type thing, right? Where the amount that they were paying towards the rent actually went towards them purchasing the house?

Joe: They could do something like that.

Al: You could. You could.

Joe: I guess the tax advantages is so you have a Schedule E, but then when you sell the house to the kids, you’re going to have to recapture a lot of that stuff back.

Al: And depending upon their income level, they may not get the deduction anyway, so it just gets suspended and used against the sale-

Joe: – and you’re going to sell it at a discount. So there’s probably not going to be a gain on the house. So I don’t know how big of a tax advantage that would be.

Al: Yeah, I would say I agree with you. I think there’s not too many tax advantages here. I think it’s more what’s the best way to get some equity home to your kids without spoiling them? That’s the way I think of this question. So I’ll just run through a couple of things quickly. So you could give them the money, or you could loan them the money for the down payment and they get the loan. I kind of like those because now it’s their home, their purchase. I don’t really want to buy a home and sell it back to them in 3 years, because what if they don’t want it and then I got a home I don’t want. So I wouldn’t really like that one. If you give the kids the money, then that’s a perfectly fine way to go. It’s $16,000 per person per year gifting. And so let’s say if you’re married and if your kid is married- so that’s $16,000 times 4, which is $64,000, I believe.

Joe: Yeah, we’ll call it $70,000.

Al: Yeah, close to $70,000. $60,000, $70,000 you can give to them without a tax consequence. So that seems like a good way to go. You could loan it to them if you want them to have a little bit more skin in the game. The lender is going to make you sign a form that says it’s not a loan. So you just have to be willing to kind of fudge that a little bit.
It happens all the time, but just understand that’s the consequence. Yeah, the lease to own, the buying the property. I’m not crazy about that personally. Just because I may end up with a property I really don’t want. I sort of like the kids- I’ll help them out to get their first home, but I want them to build equity on their own so it’s more real to them. Instead of saying, well, I got this home I can’t afford because my parents- that’s me. So I would actually personally just give them the money for the down payment. That’s what I would do.

Joe: Yes. I think that’s probably the best. If you could give more than $16,000 times 4-

Al: You can.

Joe: You could give them several hundred thousand dollars. It doesn’t necessarily matter. You’re just going to have to file a gift tax return. It just reduces your lifetime credit.

Al: Yeah, exactly. So $64,000 comes off the $200,000 that you gave them. So basically you reduce your credit by the difference between those two. Roughly $140,000ish. That’s what I would do. And if you want them to get it into a nicer home, just give them more money so they can afford the mortgage and you just have a bigger down payment. If you can afford it. So we don’t know about your finances.

Joe: Right. And what’s your net worth? Because if you want to give a lot more- big estate tax is probably not going to come into play unless you have a $20,000,000 or $40,000,000 net worth. We’re assuming that it’s probably underneath that. So you can give all you want. It’s just another form that you would have to file with your taxes.

Al: Yeah, they call it a gift tax return, but there’s no current tax. It just reduces your estate tax exemption later, which is roughly $12,500,000 per person. So it’s around $25,000,000ish per couple is your exemptions. In other words, if your assets are less than that when you pass away, it goes to the heirs without an estate tax.

Joe: All right, Chris, good luck with that. Let us know what you do.


From Orange Julius to Old Fashioneds and Mai Thais, we’re drinking in The Derails at the end of the episode, so stick around. 

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