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 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
June 28, 2022

“Are we on track for retirement?” The ever-popular Retirement Spitball Analysis is all based on that simple question. Joe and Big Al spitball retirement for listeners planning to retire in just a few years, wondering if they should save to pre-tax or post-tax accounts, and strategizing around long-term capital gains, dividends, and Roth conversions.

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Show Notes

  • (02:06) $2.6M Saved, $183K Education Expenses. Can We Retire in Two Years? (Maddie, California)
  • (14:24) Are We on Track to Retire in Three Years with a Rabbi Trust? (Tim)
  • (20:11) I’m 31, Retiring at 57. Should I Save to Pre-Tax or Roth 401(k)? (Jayme, Pinehurst, NC)
  • (26:45) Retirement Spitball: Long Term Capital Gains, Dividends, and Roth Conversions (Carl Spackler, FL)

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“Are we on track for retirement?” The ever-popular Retirement Spitball Analysis is all based around that simple question. Today on Your Money, Your Wealth® podcast 384, Joe and Big Al spitball retirement for listeners planning to retire in just a few years, wondering if they should save to pre-tax or post-tax accounts, and strategizing around long-term capital gains, dividends, and Roth conversions. Get your own YMYW Retirement Spitball Analysis: visit YourMoneyYourWealth.com, click Ask Joe and Al On Air, and send an email or priority voice message. Tell the fellas when you (and your spouse, if you have one) want to retire, how much you’ll need to spend in retirement, how much you make now, what you have saved, and any other relevant details. Don’t forget to give us a name and where you’re from, where or how you listen to YMYW, your drink of choice, your pet, your car. Tell a good story, because the show wouldn’t be a show without you! I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Joe: Appreciate you finding us on this crazy World Wide Web or Apple podcast or Spotify, or-

Al: -whatever it is.

Joe: – whatever the device you listen to. You know, there’s tens of thousands of these things, these podcasts.

Al: I know, it’s confusing.

Joe: We get, like, 6 downloads a month. So thank you for downloading, once again.

Al: Yes.

Joe: We’re close to 2 million, aren’t we? Something like that? 2 million downloads?

Andi: In terms of downloads, yeah, we are at about 1.9 million. So we’re getting close to the 2 million mark.

Joe: Yeah. We’re gonna have a party.

Andi: It’s fairly exciting.

Joe: Very exciting. It took us 2 million episodes.

Al: We do 7 shows a day.

Joe: We do.

Andi: Oh, our listeners wish we did 7 shows a day.

Joe: Just blast them out there. Wow, you got so many downloads. 2 million shows- by accident though.

Al: I know. Even by mistake. Oh, I didn’t mean that one. How do I stop it?

Retirement Spitball: $2.6M Saved, $183K Education Expenses. Can We Retire in Two Years? (Maddie, California)

Joe: Let’s go to Maddie from California. She writes in, and she goes, “Hi Joe and Big Al, I’m a very new listener. My husband Ted, age 51, and I, 52, listened to 10 hours of YMYW the past two days while on a road trip in our 2014 Acro RDX.” What the hell?

Al: Can you imagine?

Joe: 10 hours.

Al: 10 hours of us?

Joe: Oh, my God. I feel so bad for Ted.

Al: I have a hard enough time doing it, let alone listening to it.

Joe: I can’t imagine- 10 hours just by myself. I have to go to bed. That’s bad enough.

Al: Anyway, I think- you know what, Maddie? If it worked for you, then fantastic.

Joe: God bless you. “I’m so glad I found your show. I am hoping you would be able to give us some suggestions on our finances.” All right, let’s dive in. “We got Ted retired last year while he was laid off, and then he decided he should just retire- “I was teaching a class one time, Mira Costa College, and I was like, yeah anyone kind of recently retired? And this guy raises his hand, right? Yeah, I’m retired. And she’s like, you’re not retired. You got fired.

Al: Leave it to the spouse to set it straight.

Joe: I was thinking, God, that looks like a real lovely, happy married life there. All right, back to Ted and Maddie here. “-mostly for his physical and mental health.” So that’s why he retired. “I’m still working and planning to keep working until 2027, when our kids graduate. My gross salary is $90,000. I contribute $19,000 to the 457. Then the remainder of our salary is just enough for our expenses. But on top of our regular expenses, we will need $210,000 for college expenses for our children in the next 6 years. We have a small 529 plan with $27,000. That leaves $183,000 to source elsewhere. Details. We have two kids, eldest has 3 years to go. The other one will start college this year. We will pay max of $30,000 per kid per year.” Sounds like Big Al.

Al: Well, I don’t know if you’ve checked recently, but everything is expensive.

Joe: Got it. “Our combined 401(k) is $1,800,000. Plus we have $45,000 in my current employer’s 457. There’s no matching with my company, but it’s pre-tax, so I will contribute to it anyway. We have combined $20,000 in the Roth IRA. We have a $280,000 rollover traditional IRA from an old 401(k). Ted has $120,000 rollover traditional IRA, also from old 401(k)s. These rollovers were done several years ago. Unfortunately, we knew nothing about Roth IRA conversions or backdoor Roths. In fact, we haven’t contributed much to Roth IRAs. Our non-retirement account is $430,000. I have many, many questions, but I’ll try to limit them.”

Al: Okay.

Andi: Appreciate that, Maddie.

Joe: Do a Roth IRA. Okay. That’s it. All right, here’s the question. “Do you think it’s realistic for me to retire in 2027 with our nest egg, especially considering that we will pay around $183,000 in education expenses and also considering the current market conditions? If I retire in 2027, our ages will be 57 and 56. Our estimated expenses is $100,000 a year, including health insurance. We are thinking that we would get the $183,000 education expense from our rollover traditional IRA account, since there’s no penalty to withdraw early if we’re qualified education expenses. Doing this helps lessen our RMD impact. At least that’s the idea. But would it be better to draw from our non-retirement accounts instead? Should I continue to contribute to the 457 to get the pre-tax benefits or stop and use the cash to help pay for college instead? Or should I contribute less to the 457 and be able to put $6000 into my Roth? Thanks again. Our ears and minds are open to your collective wisdom. Spitball away.” She’s mapping some stuff out, and she’s got a good handle, right? They saved some money. They’re putting their kids through some higher education that’s costing them a pretty penny.

Al: Yep. And that’s kind of the norm these days.

Joe: So looking at her strategy- so looking at everything that she has saved for retirement or just total liquid assets, it’s kind of the first step that you want to look at, Maddie. And so I’m counting here, what, $2,200,000 in retirement accounts, plus another $400,000 and change in non-qualified.

Al: Yeah, let’s use $2,600,000, roughly-

Joe: – of liquid assets. So $2,600,000 is kind of the number. And then you have to figure out, if that’s just for retirement, you can kind of take a distribution rate from there and say, maybe you don’t want to pull out any more than 3% or 4%, depending on your age. They want to retire fairly young, 57, 56. So our recommendation would be don’t take out any more than, let’s say, 3% out of the portfolio.

Al: Right. Yeah, at that age. And if you retire at 65, 4% is probably okay.
If you retire younger than 60, probably 3% or less. Some people retire in their 40s, and then you really have to be careful then.

Joe: So given the fact that they want to spend $100,000 a year, I mean, they’re pretty close. But then where the wrinkle comes in is that, oh, wait a minute, we have college expense, and that’s going to cost us another $200,000 some-odd thousand dollars. We have some money saved for college, so we’re going to be short about $180,000. So what is the best way to fund that? And what she was thinking is that, hey, well, let’s just take it out of the retirement account because I’m not going to get a 10% penalty.

Al: Right. Missing one key fact there, and that is you have to pay tax on that $180,000 and you’re still working, so you’re in a higher bracket. So to pull out $180,000 net, you might have to pull out $250,000 or whatever the number is. So anyway, you take your $2,600,000- I know you’re saving $19,000 a year, so there’s an extra $60,000 over 3 years, or no, it’s 6 years. Right. So maybe that extra $20,000 for 6 years almost covers the education.

Joe: So you could cash flow per se.

Al: You could almost cash flow. You won’t get a tax deduction, so your taxes would be higher. And you do have non-qualified of about $400,000. So you have some ability to do this a little bit more tax efficiently than just pulling it out of a retirement account, paying tax while you’re working in a higher tax bracket.

Joe: The last place you want to go is the retirement account. You don’t want to do that, so just check that off. So the other two options is that you have the $400,000 in non-qualified accounts. Can you just use that? And the answer is probably yeah, if you wanna.

Al: And cash flow.

Joe: Or you stop saving altogether. Because let’s say at $2,600,000, they want to retire in like, 5 years or 3 years?

Al: I think 6.

Joe: 6 years? All right. So let’s say the market doesn’t grow- I mean her accounts don’t grow with the market over the next 6 years because they go down, they go up, and they stay flat. They still have $2,600,000. They want to spend $100,000. They’re going to cash flow the college. Or maybe they dip in maybe another-

Al: – a little bit-

Joe”- $50,000 over the course of whatever.

Al: Yeah, let’s just say to be conservative, they end up with $2,500,000 at retirement.

Joe: Yeah, they spend $100,000 of non-qualifying. They cash flow the rest for education.

Al: So you take $100,000, divide it by $2,500,000, and you get 4%. And we just said when you’re under 60, you’d like it to be 3%. But we’re skipping a huge point here, which is you will get Social Security and/or pensions. So we don’t know what that is, but it’s okay to have a little bit higher distribution rate for a few years knowing that Social Security will kick in, and then you’ll basically have a better distribution rate that will probably last you. So the way that you know for sure is you kind of run some cash flow forecasting, but just back of the envelope, you’re probably okay. The $100,000, maybe that’s a little bit high. I don’t know. I mean, you might want to spend just a little bit less just to give yourself a little bit more cushion. But I think you’re pretty close.

Joe: Yeah. Without question. It’s just looking at what assumptions that you want to use.

Al: The other thing people do, particularly if they retire in their 50s, is-

Joe/Al: – they work part-time.

Joe: They make $20,000 a year.

Al: Yeah, exactly. Maybe they each make $20,000, or maybe one makes- just an extra $20,000 goes a long way.

Joe: For sure. Because then that’s $20,000 that you’re not pulling from the overall portfolio. And so then that money compounds.

Al: And now your distribution rate is closer to 3%, which is a good number. And that’s even without Social Security.

Joe: I think, Maddie, you’re right on track. Don’t take it from the retirement account, because if you pull out $180,000- the only way that you would want to pull it out of the retirement account is to keep yourself in the 12% tax bracket. I see where she’s saying, hey, we have all this money in a retirement account, and at some point we’re going to get killed in taxes, maybe I can deplete some of the retirement account. So you could pull a little bit out of those. But there’s a limit too, to how much that you can pull from a retirement account to have it qualified for education expenses.

Al: Yeah. Is it $10,000 per year or $10,000 one time? I can’t remember right off.

Joe: I can’t remember. Because that’s usually the last place they would–

Al: Right, exactly. I will say one more thing, Maddie. You have not missed the Roth conversion opportunity. In fact, when you retire, assuming it’s still around, which at the moment it’s supposed to be, assuming it’s still around in 5 or 6 years when you retire, that’s when your income is low. That’s going to be your best time to do these Roth conversions and put yourself in a great position by the time you guys hit age 72, which is the current required minimum distribution date.

Joe: Because they’re so young, they got plenty of time, to-

Al: Yes. I wouldn’t feel bad about that at all.

Joe: They’re not really spending a ton of cash. They’ve done a phenomenal job of saving. $2,500,000+. So retiring at 56, 55, I think is in the cards. Well, 10 hours Maddie, listening to the show on a road trip.

Al: We apologize. You probably didn’t have any trouble falling asleep that night.

Joe: Who was driving?

Al: They had to take turns.

Joe: Yes.

Whatever you do, don’t fall asleep at the wheel: don’t make any major decisions that impact your entire retirement future without first running them by a fee-only fiduciary like one of the experienced financial professionals on Joe and Big Al’s team at Pure Financial Advisors.They don’t sell any investment products, so they will never earn any commissions off of you, and the law requires them to act in the clients’ best interest. They’ll analyze your entire financial picture, not just what you hear Joe and Big Al talk about on the podcast. They can help you determine the proper investments for your portfolio, based on your tolerance for risk and your retirement needs and goals. They can work with you to determine when and how to claim Social Security so you maximize your benefits. They can help you identify ways to lower your taxes, now and in retirement, and much more. Click the get an assessment button in the podcast show notes at YourMoneyYourWealth.com, schedule an appointment either via Zoom or at one of Pure’s 6 offices in Southern California, Seattle, or Chicago, and make sure you’re on track for retirement.

Retirement Spitball: Are We on Track to Retire in Three Years with a Rabbi Trust? (Tim)

Joe: Tim writes in. “Hey, I would like to see if we are on track to retire in 3 years.” Got that Al, 3 years?

Al: Got it. Yeah. Okay. Got it.

Joe: “My salary, $190,000. My wife’s, $100,000.” So call it $300,000 of income.

Al: Okay.

Joe: “I am 62. My wife is 52. Trying to get her to work a few more years, but it’s tough sell.”

Al: Not going to happen.

Joe: It’s not going to happen.

Al: I’ll tell you right now.

Joe: “We have $900,000 in 401(k) IRAs, no Roth savings, $750,000 in a brokerage account, $210,000 in an inherited annuity that I can access anytime with no fees.” Okay, so what’s that- that’s $1,800,000.

Al: Yeah. $1,900,000ish.

Joe: $1,900,000 then. “I have $800,000 in a Rabbi trust. I will not have access to the Rabbi until 5 years after separation. I will then receive a payout over 10 years.” Rabbi trust Al, I haven’t heard that term in quite some time.

Al: No, and we don’t see that much. But that’s a non-qualified deferred comp plan. A few companies have it. It’s not very common, but the non-qualified deferred comp plan, usually it’s for the executives or higher paid employees, and they set up a plan where-

Joe: – smaller businesses-

Al: – where you can sort of defer some of your salary, you don’t pay tax on it, or you get the full salary, but the company makes contributions.
So there’s money that’s set aside and it accumulates. And then when you retire, I guess in this case, 5 years after separation, there’s a 10-year payout. You will get that money as long as the company hasn’t gone bankrupt. Because it’s not a separate account like a pension or 401(k). Which that’s the problem with these non-qualified deferred comp plans. If the company is not stable, you don’t necessarily want to put a lot of money in them.

Joe: “We save $75,000 a year into the Rabbi and $50,000 and $25,000 into the 401(k).” So I’m guessing Tim here is self-employed. So he set up a Rabbi trust for himself. He’s putting $75,000 a year out of his $190,000. And then he’s got the solo 401(k) and kind of the employee match to get the defined contribution plan up to $50,000, is what I’m thinking.

Al: Yeah, I’m thinking so too.

Joe: So he’s saving $100,000 out of his $190,000. So he’s taking home $90,000. Wife is putting in $25,000 into her 401(k). “Would like $120,000 after taxes in retirement. I really enjoy the show.” All right, so he wants to retire in 3 years, he said?

Al: Yep.

Joe: And he’s saving $75,000?

Al: Yeah. So he’s got about $2,600,000, 3 years, $75,000, maybe a little growth. Let’s just call it $3,000,000, just to have a nice round number. So that’s what he’s got.

Joe: And he’s 62, and he’s going to be 65. We don’t know Social Security-

Al: But he’s in an age where he could start taking it so-

Joe: He’s at $190,000 of income. He’s probably, I don’t know, let’s call it $35,000 of Social Security?

Al: Yeah, that’s a good salary at that age. And if you wait till 70, probably be $48,000, $50,000, something like that.

Joe: Can he spend $120,000 after taxes?

Al: Well, we have to figure out the taxes, but let’s just say $150,000. Let’s say it’s $30,000 taxes, and he needs $150,000. So then you take $150,000, and you divide into $3,000,000. So what is that?

Joe: Top of my head there? I don’t know, 5%.

Al: With your calculator?

Joe: Yeah.

Al: Got it. Okay, so 5% on its own would be too high. However, we don’t know about your Social Security. And whether you have another pension.

Joe: But the Rabbi trust- you just have to map this out. I mean, it’s pretty straightforward because your payment- I don’t know what the- is it a split payment on the Rabbi trust? So you have to separate from service for 5 years. Then you got to have an assumed growth rate on the Rabbi trust. If it’s diversified, depending on how that’s set up, then you get a 10-year payment from that as an equal periodic payment on the Rabbi trust. I don’t know the exact rules on the Rabbi off the top of my head.

Al: Plus it’s a non-qualified plan, which basically means each plan is different. Right. We can’t really talk- like it’s the 401(k), there are similar rules.

Joe: Yeah. I think he’s done a hell of a job.

Al: Me too.

Joe: It’s close.

Al: It’s very close. And at 65, again, we don’t know the other fixed income, so we kind of need that to know this for sure.

Joe: Wife’s 52, so she’s young. That money is going to last a little bit longer, so probably 3% distribution rate?

Al: Well, I don’t know because he’s at Social Security age and she- with a lower salary, if he passes, she would take that over. So there’s a lot we don’t know, and even if we did know it, I’m not a computer in my head, so I have to kind of run some numbers. But I agree with you, Joe. It’s close. I think it’s- based upon what we know, it’s a little bit short. However, I’m not factoring Social Security because I don’t know what that is.

Joe: He goes “I really enjoy your show. Thank you. Go out and make a difference.”

Al: Tim, Okay. We’re trying.

Joe: I’m gonna just – every letter I write, I’m going to end it with that.

Andi: I think that might actually be from the movie Deadpool.

Al: That’s pretty good.

Joe: All right. Go out and make a difference.

Al: Okay, I will.

Andi: And also, I was just curious whether or not it was something to do with being a Rabbi. And I looked it up, and apparently, the only reason it’s called that is because the first such trust that was set up was for the benefit of a Rabbi.

Al: That is correct. You don’t have to be a Rabbi to get the trust.

Andi: Nope.

Joe: Answering money questions. Running out of material here, folks. Go to YourMoneyYourWealth.com, start asking us some questions. We’re not getting as popular?

Al: Well, we don’t charge anything.

Joe: This is a free spitball.

Al: Although your finances will be over the airwaves, however, change your name so no one will know who you are.

Andi: Yeah, we’ve had people like The DUKE. I mean people come up with great names. Write in with your best fake name. Get it on the air.

Retirement Spitball: I’m 31, Retiring at 57. Should I Save to Pre-Tax or Roth 401(k)? (Jayme, Pinehurst, NC)

Joe: All right, we got Jayme from Pinehurst, North Carolina. “Hello, Andi, Joe, and Big Al. Enjoy the podcast. Good banter while on the road for Big Brown.”

Al: UPS.

Joe: Yeah, Big Brown. “I drive a 2014 Honda Accord and enjoy a few cold Modelos while hitting the links on the weekends.”

Andi: Drinking my beer and playing your sport.

Joe: Yeah, I could throw down a couple of Modelos. Hit the links. “I’m 31 yo. Wife is 29 yo. We both make around $100,000, $120,000 a year. As of last year, we maxed out the 401(k) pre-tax and Roth IRAs with extra money going into brokerage accounts. If I’m planning on retiring with Big Brown and receive a pension at 47, just about $4000 a month, should I be doing more Roth in my 401(k) or pre-tax, bring down the adjusted gross income with a baby girl that’s one year old? Only debt is 20-year mortgage, $198,000 with 18 years left at 2.65%. 401(k) is already 50/50 Roth and pre-tax. Roth IRA is $40,000. Brokerage is $60,000. Love the pod. Got a lot of guys tuning in every Tuesday.”

Al: All right.

Joe: Boom.

Al: Glad to hear it.

Andi: Excellent. Thank you, Jayme. Thank you for sharing the podcast.
Just like I say every week.

Joe: Big Brown. Okay.

Andi: And by the way, Jayme’s pension was going to be at 57, not 47.

Joe: Oh, 57. All right. So what’s the question? More Roth? What do you think?

Al: So he wants to- should he be doing more Roth in his 401(k) or pre-tax to bring down the adjusted gross income? That’s a pretty easy one. More Roth.

Joe: Yep. I mean, he’s young, 31, 29.

Al: Here’s the reason why, Jayme. It’s because your young, your salary will probably go up over time. Tax rates, tax brackets right now are kind- are near all-time lows, and you’re probably going to be making more money as you go. So get as much in a Roth now. When you’re making higher salaries-

Joe: They’re making $200,000. So it’s not chump change here, Big Al. I know you got a big wallet.

Al: Okay, let me explain-

Joe: – driving the Big Brown. Maybe someday, someday you’ll start making some real money like I do.

Al: I can’t sit on that wall for 8 hours a day. No, let me explain. Man oh man. I don’t care if you’re making $200,000 or whatever. So $200,000 for a married couple-

Joe: You’re in the 24% tax bracket.

Al: Which is a pretty good bracket. And I’m just guesstimating that the salaries for both of them-

Joe: – will probably go up over time.

Al: Not only will the salaries go up, but the tax rates are going up. So I’m thinking now is a great time to do Roth, especially because the market’s down. So you want to get as much in as you can, make your investments and have that growth on the rebound.

Joe: I agree with that 100%. Another thing, Jayme, is this. You’re not going to remember the tax deduction. You just won’t. You know what I mean? It’s like you’re going to save a few bucks a month from your paycheck if you went pre-tax versus Roth, right? So you’re going to have a little bit less take home. But once you do it, after a couple of weeks, you’re going to get used to spending your take-home.
And then 20, 30 years, 15 years, whenever you want to retire, you’re going to have a giant pot of money that’s tax-free. You know what I mean? You’re going to be like, damn, I’m so glad that I wrote in.

Al: Now, on the other hand, if you find out with the new baby girl, it’s a little more expensive than you thought, like, you can only afford one diaper a week, and you need more than that. Then you kind of switch over a little bit.

Joe: Yeah. But you’re going to have a pension. You will have Social Security. You’re going to have a lot of some good fixed income that will already be a floor that could be a fairly decent rate. So then every additional dollar that you’re going to be pulling out of your 401(k)s and IRAs and everything else is going to be taxed at ordinary income. If you start now with Roth to get the compounding effects of tax-free dollars at 30 years old over the next 20, 25 years, it’s going to be significant. And all of that is exempt from tax.

Al: Yeah. And one other key point, I think is, if you’re getting a pension of $4000 a month, and I don’t know what that will be when you’re 57, it’s going to be higher. But just right now, that’s about $50,000 a year. You multiply that by 25, that’s equivalent to having an IRA of a $1,250,000, because that would be a 4% distribution rate. So you’re already going to have $1,200,000ish. Right. I mean, equivalent in a pension plan. So you kind of want to get as much in the Roth as you can.

Joe: Right. To say it another way, for those of us that don’t have a pension, I need to save at least $1,200,000, $1,200,000 saved to create the income that your pension is going to give.

Al: Yes. That’s a good way to say it.

Joe: So if you think about what that pension is really worth, it’s million, right. It’s $1,000,000.

Al: $1,000,000+. Right.

Joe: All right, thanks for the call, and let’s hit the links. I would love to play Pinehurst.

Download Big Al’s Quick Retirement Calculator Guide for a first look at how prepared you are for retirement, Ask Joe and Big Al On Air for your own Retirement Spitball, and schedule an in-depth one-on-one financial assessment with one of the experienced financial professionals on Joe and big Al’s team at Pure Financial Advisors. All three are completely and entirely free, and you can do them all from the podcast show notes at YourMoneyYourWealth.com – just click the link in the description of today’s episode in your podcast app to get started. While you’re there, read the transcript of today’s episode, and do us a favor and click the “share” button to tell your friends and neighbors and family and colleagues and strangers about YMYW. Spread the knowledge and help us grow the show!

Retirement Spitball: Long Term Capital Gains, Dividends, and Roth Conversions (Carl Spackler, FL)

Joe: All right, this is from Carl, Carl Spackler. You know who that is?

Al: Yeah, Caddyshack.

Joe: I like the names. All right, now we’re getting creative folks, this is what we need. He goes, “Hi, guys. Love the show.” Well, I love your movies. Or I love the fact that you’re a groundskeeper.

Al: Right. And a funny one at that.

Joe: Yes, he is. Okay, he’s got a question for you, Big Al. “In 2022, the 12% tax bracket caps out at $83,550. After adding my standard deduction of $25,900, if I have zero income, I can basically do a Roth conversion of $110,000, and none of those dollars will be taxed higher than 12%.” And so how he gets that, folks, is you take $110,000 and add back the standard deduction of $25,900. So you add those two together- or $83,000-

Al: -yes. you subtract-

Joe: You subtract $110,000 from $25,000 or add $83,000 and $25,000. Then you get to $100,000.

Al: And so, in other words, you can have $110,000 income if you’re married, filing joint in 2022, and still be in the 12% bracket.

Joe: Correct. “So now let’s pretend that I have a $10,000 long-term capital gain, another $10,000 of qualified dividends. Even though those types of income are taxed differently than earned income, do they still have the same effect as earned income when it comes to maximizing my Roth conversion within a particular bracket? In other words, can I only convert $90,000 if I wish to stay in the 12% or less. Thanks for spitballing. Drink of choice- number one, for one beer- ” I’m sorry- If he’s only going to have a beer- that’s a little Dos Equis Amber with a little salted glass.

Al: Got it.

Joe: Have you ever had a beer?

Al: Yeah, I have.

Joe: Just one.

Al: It’s seldom, but I have.

Joe: I don’t think I have.

Al: Hasn’t happened?

Joe: If I’m only going to have one, I’m going to have water.

Al: Well, I drink occasionally during the week. I know you don’t. And I might have one beer.

Joe: I suppose. A little Monday nighter.

Al: Watch the football game and crack open my beer.

Joe: You got it. You got it. Okay. So if he’s going more than one beer, he’s going to go Coors Light.

Al: Oh, yeah. Well, Dos Equis Amber is a little bit stronger.

Joe: Is it?

Al: Yeah. Yeah. I know you don’t venture out much.

Joe: I don’t. Stick with what I know. So yeah, if he’s going to have a couple, he’s going Coors Light. “When I go golfing, it’s Coors Light for sure. It’s in the hole. All the best, Carl Spackler, Florida.” All right, cool. Thank you very much for- this is a very popular question.

Al: It is. And it’s also a very confusing question.

Joe: It is.

Al: Because I talk about capital gains sitting on top of ordinary income and blah, blah, blah, which is the basic rule, except when you’re in the 12% bracket going to the next bracket. And let me explain. Maybe the best way to think about this is, what if you already have $20,000 of long-term capital gain and/or qualified dividends, which is taxed at 0% when you’re in the 12% bracket? Let’s say you already have it, right? And so in his example, he could create $110,000 of income. So the Roth conversion would only be $90,000 to stay at the $110,000. And in that case, you’re going to have $20,000 of capital gains and qualified dividends taxed at 0%. And then you’re going to pay 12% on roughly $70,000. Actually, $60,000ish. But then you should stop. Because if you add more Roth conversion on top of that, that dollar Roth conversion will be taxed at 12%, and it’s going to push your capital gains up because you’re not all in the 12%, so you’re going to pay 15% on that extra dollar of capital gains. So your effective rate is actually 27% because you’re being taxed on the Roth conversion that got you over that, and it happened to push your capital gains over that. So you get taxed on that at 15% as well. So when you’re at the 12% bracket with a combination of Roth conversions and capital gains, keep it right at that 12% bracket with all income.

Joe: So let me-

Al: – paraphrase.

Joe: Yeah. To answer his question, can he do a $110,000 Roth conversion and stay in the 12% tax bracket? The answer is yes.

Al: If there’s no other income.

Joe: If there’s other income, that’s fine. His Roth conversion is still taxed at 12%. But then what happens with the dividends is that you’re losing out on a 0% capital gains rate, is Al’s point. So it’s like, well, I’d much rather pay 0% on the dividends and the capital gain than pay 15% plus.
So you would want to stay all income in that 12% to take advantage of the 0% capital gains bracket for your dividends and your capital gains and then you would just convert to keep you at the top of the 12% from there. But if he’s like, you know what, I don’t care. I want to convert to the 12% and I don’t care if I want to pay capital gains tax. We would not probably recommend that.

Al: No, we wouldn’t.

Joe: Just so he understands. Because that helps. When you start getting into the 27% tax bracket, people are like, what the hell is that all about? Because it’s kind of the same with Social Security. When people got to be careful about when they start doing conversions or adding the income when they’re taking Social Security depending on how much of their Social Security is taxed.

Al: Yeah, so I’ll say it maybe this way. So if you did- let’s say you’ve got the $20,000 of that capital gain, you do a $90,000 conversion. So you’re at the $110,000. And I agree that stays in the 12% bracket. Great. So you’re going to pay the 12% on the ordinary income part and nothing on the capital gains. If you add another $20,000 of Roth conversions, you’re going to pay 12% on that $20,000 of Roth conversions and you’re going to pay 15% on that capital gains that got pushed up into the next bracket. So that’s why I-

Joe: So you take 15% and the 12% which is 27%-

Al: – I’m adding the two together, which is like a 27% effective rate. It’s actually easier to see when you look at the tax projection side by side, but that’s what’s happening. So that the simple answer is, if you have Roth conversions, you want to do Roth conversion and you have long term capital gains and you’re in the 12% bracket, stop at the 12% with all income, including capital gains.

Joe: All right, hopefully that helps y’all. It’s hard, though, to forecast some of that because depending on their mutual funds, sometimes it kind of kicks out some qualified dividends there and then it’s like, well-

Al: And a lot of times you don’t get your capital gain dividends till the end of the year anyway. So you might want to wait on your Roth conversion till the end of the year when you know what your capital gain dividends are.

Joe: Or split it up. You probably want to- in my spit ball, I would want to convert at least half of what my projection is in the beginning of the year.

Al: I agree. Just to get it in sooner.

Joe: Just to get it in sooner. Because then you get the compounding effect of tax-free growth in the Roth IRA all year long.

Al: Especially now while the market is down. This is the best time to do it.

Joe: By far. If you screw up in a down market like this, the market is down 20% some odd. So if you convert a little bit too much and you get into that weird tax bracket, it’s not the end of the world. Because all of that rebound of the market is now in the Roth and that will grow tax-free. So a lot of things to consider, especially in a volatile market. Just taking lemons and making them lemonade. How about that for a cheesy little -?

Al: Did you just think of that?

Joe: I just- I made that up. That’s it for us. Have a wonderful life everyone. We’ll see you here again next time. The show’s called Your Money, Your Wealth®.


Driving for Big Brown and living next to Bill Murray in the Derails at the end of the episode, so stick around if you just can’t get enough. 

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