Financial planning strategies around Coronavirus-Related Distributions from retirement accounts and required minimum distributions (RMDs). Plus, listener corrections on dependents and the CARES Act stimulus package. Also, two very different market volatility strategies: living off of cash and Social Security only, and leveraging a home equity line of credit (HELOC) to invest.
- (00:59) YMYW CARES Act Webinar Overflow Questions: stimulus payments, unemployment benefits, qualified opportunity zones, capital gains, and dependents
- (06:06) Comment: Satisfaction with CARES Act RMD Process
- (12:35) Should I Take a Coronavirus Related Distribution From My 403(b) and Put It in My IRA or Brokerage Account?
- (16:50) Dependents and CARES Act Stimulus: Corrections and Clarifications
- (26:53) Social Security and CARES Act Stimulus Payments
- (28:27) Can I Convert the RMD From My IRA to Roth IRA?
- (32:16) RMDs, QCDs and the CARES Act
- (34:14) Why Not Just Live Off of Cash and Social Security While Markets Are Volatile?
- (35:43) Downmarket Investing Strategy: Should I Use HELOC Leverage?
Wednesday, May 27, 12pm Pacific, 3pm Eastern
The first YMYW live webinar was so much fun we’ve decided to do it again! Join us Wednesday, May 27 at noon Pacific, 3pm Eastern to get your money questions answered live and on the spot by Joe and Big Al. Visit the podcast show notes at YourMoneyYourWealth.com to sign up – hit that link in the description of today’s episode in your podcast app to get there. Today on the Your Money, Your Wealth® podcast, Joe and Big Al talk about financial planning strategies that come from the CARES Act stimulus package, specifically the provisions on Coronavirus-Related distributions from retirement accounts and required minimum distributions, or RMDs. Plus, the eagle-eared YMYW listeners have plenty of clarifications, corrections and questions about dependents, thanks to episode 271. And the fellas review two very different market volatility strategies. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
YMYW CARES Act Webinar Overflow Questions
Joe: I want to thank everyone for joining us on the webinar this week. First one, thought it was Ok.
Al: It was fun.
Andi: Thought it was great.
Al: I enjoyed it.
Joe: We have a couple of questions and comments that we’ll rifle through here that we weren’t able to answer. Tina writes in. “If a married couple owned for 2019 and received the $2400, does the tax credit increase that they might owe for 2020?”
Andi: If they owed for 2019-
Al: If a married couple owed for 2019. If they owed taxes in ’19 and they received the $2400, does that tax credit increase what they might owe for 2020? So basically I think it’s they’re asking about the clawback.
Joe: Or does it add to earned income? The answer is no.
Al: So essentially if you qualified to receive the $1200 stimulus payment per person or $2400 a married couple in ’19 regardless of what your income is in 2020 you don’t have to pay any of it back. It doesn’t affect your taxes. Joe: Cool. Batman, “Hi guys. Does the $1200 have to be paid back to the gov? And if so how?” No, no clawbacks. So if you’ve got your $1200 and you make more money in 2020- I think a lot of people are going to probably do conversions or something it seems like for this year. They’re seeing the writing on the wall. And then also “my income is going to be higher in 2020. Do I have to pay the thing back?” If my income is higher in 2020 if I received it from a 2018 or ’19 return.” The answer is no clawbacks. Batman, another one. “What about investing your cap gains in qualifying opportunity zones especially if you have no losses against which to offset your gains?” Well you could do that. You got like a 30 second little response for Batman?
Al: Qualified opportunities, that’s investing generally in real estate and in an opportunity zone, that’s considered like lower, disadvantaged areas. I think there’s like around 8000 or 9000 such areas in the United States. So here’s the basic rules is that you can take your capital gain- like let’s say you sell a piece of property for $1,000,000 and have a $400,000 gain. All you have to reinvest is that $400,000 gain. And then you don’t have to pay any tax currently on that gain as long as you invest in a qualified opportunity zone. Now you have- if you hold the investment at least five years you get a 10% reduction on your gain. If you hold it seven years you get another 5% so 15% reduction on your gain. But you do have to pay the tax in full at December 31st, 2026. So it would be coming. So it’s not a permanent deferral, but it is a deferral. But the cool thing about opportunity zones is if there’s any future gain on that investment you don’t have to pay any tax on that. So that’s the basic rule.
Joe: So Tim “If I get laid off from one of two jobs working can you file for unemployment for the job laid off from due to COVID-19?” Yes, absolutely. File for unemployment on the other job that you lost.
Al: You can even file if you still have your job but are working less hours.
Joe: “My college-aged daughter is claimed as a dependent on our tax return. She lost her on-campus job when the campus went viral.”
Joe: Oh viral. Did I say viral?
Joe: Oh Virtual. Sorry, virtual.
Al: That’s good.
Joe: Virtual. “Her earnings paid for some college expenses. So now I am. Since she is part of our economic unit I think her lost income is a virus impact. What say you? I don’t know. I think so.
Al: I think it is for her. I’m not so sure it’s for you Craig.
Joe: Go for it. Christine. She writes. “Who cut Joe’s hair? Looks good.”
Al: You haven’t had a cut for a while. Right?
Joe: You know I got a little- you know I have barbershops, Alan.
Al: I know you own barbershops.
Joe: And so I employ barbers. And then so I had one come to my house.
Al: Got it.
Joe: But this was a while ago. It was about three weeks ago. So now I kind of put a little bit extra stuff in.
Al: Got some nice gel. I’m looking at it right now. It’s amazing.
Joe: Looks great. Nick writes in “Joe’s board looks like my three year old’s artwork.” Thanks a lot, Nick. It’s called the Tax Control Triangle.
Al: I thought it was pretty good.
Joe: I thought it was beautiful. You know people like to take pictures of that.
Al: They do.
Joe: Hopefully you got something out of that.
Al: I actually do that when I meet with clients. I do that on paper and it comes out way messier. And sometimes people want me to sign it and keep it.
Andi: Oh wow. Autograph.
Joe: White paper. There have been multiple times in classes where they take a break. They come up, they take pictures of this stuff. I’m like ‘are you kidding me?’ I’ll take my shirt off. Take a picture of that.
Al: I don’t think that’s appropriate.
Comment: Satisfaction with CARES Act RMD Process
So this is from Perry from South Jersey. “Dear Sirs and Andi. I just want to comment on my satisfaction with the part of the CARES Act, namely suspending RMDs. I should point out that I’m comfortable with investments at Roth, traditional IRA, inherited IRA and non-qualified funds. Fearing significant paperwork, I was reluctant to suspend my inherited RMD distributions that I received from two sources. I did call each and was delighted to find they could do suspension in minutes over the phone and the distribution would resume in January 2021. Tax-wise this means instead of taking $30,000 as a taxable inherited IRA RMD this year I will do a Roth conversion of $30,000 and pay the same taxes mostly in the 22% tax bracket. I am constantly trying to keep taxable income low to avoid Medicare surcharges, loss of senior property tax freeze, tax bracket creep and even got the recent full $1200 in rebate. Just wanted to say how easy this is. Your loyal and obedient financial servant.”
Joe: Wow. Perry. Thank you.
Al: That’s a very nice e-mail. Good start. And yeah I think Perry you’re doing a lot of the right things.
Joe: So I mean I don’t know why he thought it was so it was gonna be a pain in the ass to suspend his RMD.
Al: Turns out it wasn’t.
Joe: Just picking up the phone and say please stop sending me money.
Al: But you never know because you have this image that you got to talk to your custodian and they send you some paperwork. You fill it out you send it to the wrong place. You send it again. The wrong paperwork. I can just imagine that’s what he was thinking.
Joe: But a couple of things Perry is that- he’s got an inherited IRA that he suspended the RMD on and sounds like $30,000. He is also have another IRA that he’s doing the conversion on. So hopefully he didn’t convert the inherited IRA because-
Al: He can’t do that.
Joe: You can’t do that.
Al: That’s right.
Joe: So a couple of high notes here that Perry is talking about in regards to the CARES Act. So they suspended required minimum distribution or the Act did I guess, or the IRS, that you do not have to take a required minimum distribution this year either on an inherited IRA or your own IRA, 401(k), or 403(b). So they suspended them. So you did not have to take it, the reason being is that for seniors I guess that saves you a little bit of money in tax if you don’t pull the money out. But I think what Perry is doing is better planning because we’re at an all-time low tax bracket. What do you think tax rates are going to go after this storm?
Al: Of course we never know. I will qualify it that way. But it does seem we’re adding trillions of dollars to our national debt on top of what we already had. So I don’t know where we’re at right now Joe. It’s probably $24trillion? $25trillion? You know someone’s going to fact check me, it’ll be $27trillion, whatever, but it’s a big number. And so how do we pay for that? I mean there’s a couple ways. You can increase taxes. That’s one way. You can also print more money but that causes inflation and that’s actually is no good. I mean neither alternative is good at all. So usually what happens is it maybe a little combination. But it seems to me that it’s likely that taxes will go up at some point in the future just because we have all this debt that we’ve got to pay off.
Joe: So Perry’s saying well I was already going to pay the tax on the $30,000 distribution from a required distribution. I’m gonna take $30,000 from my IRA and convert mostly in the 22%. Perry I would go back and convert to the top of the 22% because I think you’ll be a blessing that you’ll ever pay 22% in tax as a single tax payer.
Al: If Perry is in the 22% bracket now he’ll be in the 25% bracket in 2026 when the rates come back. And that’s just the old rates coming back and that what we’re suggesting is what we’re kind of wondering is will rates go up from there? And the answer is they sure could because they’ve been a lot higher. In fact we’re kind of- I wouldn’t say we’re at all-time lows, but almost all-time lows in the history of the IRS. And so you think about when do you want to do a conversion? You want to do conversion when your income is lower. When the tax rates are lower. Which is what’s going on right now. The market’s lower.
Joe: When your account balance is lower.
Al: The account balance is lower so you get your recovery in the Roth which is tax free it’s like- hate to say the word perfect storm because it’s so over-used, but I got to say it, I already did say it’s a perfect storm, to do the Roth conversion right now.
Joe: So but he’s also worried about Medicare surcharges. So I forget what law it is, IRMA, or something like that. So you have a little bit of a- depending on your adjusted gross income, the increase your overall Medicare premiums.
Al: Well they do and so at various income thresholds and if you go over by $1 then all of a sudden your Medicare premiums in two years from now are going to be a little bit higher. Like for example let’s just go with a married couple. And this is- it’s always a two year look back. So for 2020 they look at 2018. So for a married couple if their income is below $174,000 modified adjusted gross income then they pay the lowest Medicare monthly rate which is $144. If they go above that it goes to $202. So this just round numbers, it’s about a $60 increase. So 60 times 12 is a little over $7000-
Al: $700, sorry. $700 of extra Medicare. So I would just consider that like an extra tax and calculate what this impact is. And I think you’ll find in the 22% bracket or even the 24% it’s still a pretty good deal.
Joe: Yeah it’s cheap. I mean you just take that Medicare surcharge and then you just call that a tax.
Al: Just add it to what the expected tax is, even though you won’t have to pay it for two years. But it’s coming.
Joe: Right, it’s coming for two years and then if you don’t do a conversion in the next year then your Medicare premiums go down again. So you might want to take a pretty good chunk out one year. You just have that surcharge for the one year. All right Perry, thanks buddy. Appreciate ya chiming in- part of the show here.
Should I Take a Coronavirus Related Distribution From My 403(b) and Put It in My IRA or Brokerage Account?
Joe: We got Mark writing in from San Diego. He goes “Hi Joe, Al and Andi. Hope you’re all doing well. I just finished listening to episode 271.” You remember that one Al? It was pretty good.
Al: It was probably great. It was probably recent, right?
Joe: Is your arm getting sore, Andi, from holding up the clock?
Andi: A little bit. Is the clock backwards for you?
Joe: I’m good.
Joe: I’m good. Good. Yes I’m good. She’s holding the clock up through the zoom thing. I can see it shake.
Al: So you and I can see it together. But Andi is safely in her home.
Joe: We got “Hi Joe, Al and Andi. Hope you’re doing well. I just finished listening to episode 271 and had an idea regarding coronavirus related distribution. My current 403(b) has high custodial service fees and limited investment choices. Since I qualified to take an early withdrawal penalty free, furloughed, what do you think about taking the distribution, placing it instead in my more preferable Vanguard IRA or brokerage account? Better choices and significantly lower fees, and deciding before or at the end of three years whether I want to pay it back or pay the taxes. Either way I will at least save on those annual 403(b) custodian fees up to three years. What do you think? Thanks. And kick ass Sea Bass.
Al: I remember that Seabass. Mark, yeah.
Joe: Kick his ass. Seabass. Sea bass dude. Mark you’re right on track. I would absolutely do that if I were you. If you qualify for a coronavirus related distribution, CRD for short, there Al.
Al: Very good.
Joe: Take it out of the 403(b). The only catch with that strategy is that you want to make sure that the 403(b) is eligible for a distribution. So it’s still up to the plan doc in some cases but employers are putting that language in for these coronavirus related distributions. So I would take the $100,000 out. It doesn’t have to be deposited back in the 403(b). It just said it needs to be if you want to pay it back it needs to be deposited into a qualified plan. So that’s an IRA. So if you want to put it into your IRA at Vanguard. Another strategy there too is that then it’s sitting in the IRA, you might over the next couple of years slowly convert the IRA into a Roth IRA. You know just going back to kind of the same I guess theme as Perry. It’s a lot easier to convert an IRA to a Roth IRA versus 403(b) that you might be stuck in.
Al: I like that. And Joe, just one more quick thing is if he does- Mark if you do put in your brokerage account you do have three years to put it back into the IRA. But you have to pay 1/3 of the tax this year, 1/3 next year, and then 1/3 the following year. So if you put it all back you basically will then get a refund for taxes you paid in year one, and year two. So just be aware that.
Joe: Or it depends on how much money that he has too and how old he is. It might make sense to take the distribution, put it in a brokerage account, pay the tax over three years too.
Al: Yeah maybe.
Joe: Because with individuals that have zero tax diversification and have everything in their retirement account- he’s got a 403(b) so he might have a pension as well. So usually if it’s a schoolteacher or something like that. So if he’s got a pension maybe the spouse has got Social Security, they might have large fixed income and then all your liquid assets are in retirement accounts. Using this CARES Act to kind of maneuver your assets around, is I think a good idea. And also it’s a good safety cushion. Who knows what the hell is gonna happen to us six months from now? But you have to make the distribution in the year 2020.
We do still have a few more questions from last week’s webinar, which we will tackle either in an upcoming podcast, or on the next YMYW live webinar on Wednesday May 27! And keep in mind, these YMYW live webinars are exclusively for you – the folks that listen to the Your Money, Your Wealth® podcast. Visit the podcast show notes at YourMoneyYourWealth.com to sign up for free and join us live. Hit that link in the description of today’s episode in your podcast app to go to the show notes, and get yourself a copy of our free CARES Act Guide while you’re there. Now, you know how Joe always says this podcast is not advice, it’s just a couple kids having a chat and making a few suggestions? That especially applies to episode 271.
Dependents and CARES Act Stimulus: Corrections and Clarifications
Joe: We got David. He writes it from New York City. Hopefully you’re safe and sound in New York City David. He goes “Hi everyone. Been listening to the podcast for a year or so and always enjoy the info and the banter. Great to get some laughs along with solid financial advice. My question is on a topic that came up in episode 271- ”
Joe: Dude, killed it. 271’s a very popular episode. That’s gonna go in the archives. Everyone’s referencing 271. I mean people are walking down the street look like ‘hey, 271. Great episode.’
Al: You know 271? Yeah I know it.
Joe: “- about dependents and the stimulus payments. You answered a question from a college student who wanted to know if she’d get a check if her parents declared her as a dependent. You advised that her parents shouldn’t because there’d be zero benefits since the tax law changed and since that would make her ineligible for the stimulus. That made me wonder if our accountant who filed our taxes a few days before the CARES Act was passed, missed the chance for my son, a 19-year-old full time college student living on campus during the school year; but otherwise home and with no earned income except for modest distributions from an UTMA account to get a $1200 check this year. He was listed as a dependent on our return but appears that there was at least some benefit to us, a $500 tax, credit line 13a on the 1040. Of course, it’s not $1200 in my son’s pocket, but would he even have received that much with only a few hundred dollars of income from those distributions? Also, does the fact that he’s not living independently make him ineligible for the payment? Meanwhile, if my son is not listed as a dependent for 2020 though he’d still not be living independently, would he be eligible for a check then because he didn’t get anything in 2019? He may have some earned income from a summer internship if COVID-19 doesn’t torpedo the internship program. It’s live for now. In addition to those investment distros, but that wouldn’t be huge. Thanks for the info. Stay well.” There’s a lot of meat on the bone here.
Al: Yeah there is.
Joe: I guess in episode 271, there was a college student that her parents were claiming her as a dependent.
Andi: Kelsey, I happen to remember.
Joe: Kelsey. And we were like Kelsey probably shouldn’t have your parents claim you as a dependent because there’s no benefit for the parent to claim a child over the age of what, 17 or something like that to be claimed as a dependent.
Al: Yeah I do- I think that is what we said and that would have been a wrong statement. So let’s clarify. I got called out on it and I’m okay with that. I’m not perfect. So here’s the rule. The rule is that if your child is 16 years or younger by the end of the tax year, you get the child credit of $2000.
Al: When they’re 17 and 18 then you get $500. And if they’re all the way up to age 23, you get $500, as long as they’re a full-time student.
Joe: A $500 tax credit.
Al: $500 tax credit. Right, child credit. That is a correct statement. And you also get $500 for other qualifying dependents like let’s say your parents for example. So let’s talk about a dependent because that’s really pretty confusing in and of itself. When you have a kid 18 and under, they’re a dependent. When you have a kid up to age 23 and they’re full time student at least five months out of the year, they’re a dependent. And when you have a parent where you pay at least half of their support and they make less than about $4000, they’re dependent, so you can get a benefit. Now in this case I will still stand by the- if David had not claimed her as a dependent then she would get $1200, potentially, and he would be out the $500.
Joe: But his kid is only getting a little bit of UTMA. He’s not working. He’s not employed. He’s not living independently, is what David said.
Al: Most kids in their 20s are not.
Joe: You are not living independently at all. So if he’s not filing the tax return, he’s not going to get the Stimulus.
Al: You’d have to file a return.
Joe: You’ve got to file a return, unless you’re claiming Social Security benefits.
Al: But to get back to one of the questions, in 2020 if David’s daughter files in ’20 with enough income, then she would qualify for the stimulus then, even though she didn’t get it in ’19 because it’s really an advance payment for 2020.
Joe: Right. It’s a 2020 tax credit. And so if the child then files a tax return in 2020 then they would receive a- it’s a refundable tax credit based on the 2020 return. So David got the $500 this year. Got his Stimulus. But then next year if he doesn’t claim his child and the child files a tax return, then the child would then receive the $1200 tax credit. It’s a refundable tax credit. So he would receive the cash then after he files the 2020 tax return.
Al: So one other quick caveat and some accountants would interpret it- if you qualify as a dependent you have to be claimed as a dependent; so just check with your accountant to see their interpretation.
Joe: So we’ve got another one from Tyler. He didn’t give a location.
Al: That’s unacceptable.
Joe: I know. It’s totally BS. He’s like “Hello Joe, in a recent podcast, you said that claiming a 17 year old is a $2000 tax credit. It’s my understanding that 17 year olds were $500 and your dependent needed to be 16 or younger to receive $2000. Am I wrong?” Of course you’re not wrong Tyler.
Andi: I’m guessing that was 271 again.
Joe: Well I don’t know why I said 17-
Al: It’s in the heat of the moment it’s easy to-
Joe: 17 and under? Because it’s like when you’re talking about the CARES Act itself they can’t receive the benefit. It’s not 17 years old. You have to be younger than 17.
Al: So it’s easy to think that should be 17 and under, but it’s actually 16 and under. You have to be under 17.
Joe: Under 17, Tyler.
Al: As of December 31st of that tax year.
Joe: So sorry for the confusion there. So yes, you are accurate, it’s $500. It’s $2000 if you are under the age of 17. Then it’s the $2000 tax credit. As long as you qualify under the adjusted gross income limitations which is quite large now. It’s several hundred thousand dollars, they increased that with the Jobs Act. My bad, Tyler. Just a miscommunication of words there.
Al: By the way, that credit, that child credit, phases out at $200,000 of income single; $400,000 married.
Joe: $400,000 married.
Joe: We got Todd from Williamsport, Maryland.
Andi: Same question.
Joe: “Joe, Al, Andi. Love the show. Have binged every episode. I do have a correction for you. In the last two recent shows I’ve listened to you both agreed there is no advantage to claim a dependent over 17 on your taxes. I do have a 23 year old daughter that just graduated college and I ran the numbers both ways. She does get a $500 dependent credit and the credit for the education expenses for both federal and state totaling $2700. If I don’t claim her and she claims herself she is not eligible for any of it. Regardless of the stimulus check we come out ahead by claiming her. I verified my numbers with my tax preparer and they came out the same as mine.” Well Todd-
Al/Joe: We stand corrected.
Joe: Very good.
Al: Fact check. We were called out on this.
Joe: Fact check. We just layed an egg on this one. Geez.
Al: Apparently. Don’t listen to 271. We thought it was a good episode. Not really.
Joe: Like these guys are idiots. But you’d know if you have a 23-year-old daughter. No, Todd because I have a 23-year-old girlfriend.
Al: You claim her?
Joe: I claim her, yeah.
Andi: Oh TMI.
Joe: Is that all the CARES Act? So we got the CARES Act? We’re good?
Andi: There’s Jeremy at the end of that same page asking the same question.
Al: Oh boy. Another one telling us.
Joe: Another one. Oh, Jeremy. “Hello, Joe, Al, Andi. I had seen conflicting information about the stimulus payments with regards to dependents. Is the restriction on whether someone claimed you as independent or is it based on ticking the box of- ” what is ticking?
Andi: ” – ticking the box, can someone claim you as a dependent?”
Al: That’d be like Turbo Tax, you’ve got to tick the box.
Joe: Oh, tick the box. Or I say check the box? You can tick the box.
Al: Yeah, if you wanna.
Andi: Sounds like kick the bucket.
Joe: More boxes. Tick some box. “- can someone claim you as a dependent? Basically, should I amend my taxes to stop claiming my college kids? Or is there no point? There has been no reason for me to claim them for some time other than inertia. Even under the old tax laws, I was over the income limit for potential exemptions let alone the child tax credits. Thanks. Love your podcast.” So I guess it depends on how much money Jeremy makes to claim. And if he makes over $200,000 it probably doesn’t. And if he’s married, $400,000.
Al: Yeah. $200,000 single; $400,000 married. That’s where it starts phasing out. And I think if I’m not mistaken, the phase-out and I’m going to get fact-checked on this, but I think it’s $200,000 to $240,000 for single and maybe it’s double that for married. But at a certain income level, there is no benefit whatsoever.
Social Security and CARES Act Stimulus Payments
Andi: One more Stimulus question. It’s on the very first page, it’s the second question.
Joe: Oh boy.
Andi: I put it as Stimulus instead of CARES Act. I should have known better.
Joe: Got it.
Joe: “I’m 69 and collecting -” This is from Robert. Robert doesn’t tell us where he’s from. “I’m 69 and collecting Social Security benefits. I did my 2019 taxes but did not get a refund. I had to pay, sent the IRS a check. I’ll be getting the Stimulus payment and how-”
Al: ” – will I be-”
Joe: ” Will I be getting a Stimulus payment and how? Love your YouTube videos.”
Joe: Just binging the YouTube.
Al: Nice: So I would say Robert, your question was- I guess we didn’t get to it the last couple of shows- this was asked on April 14th. You probably got it by now is what I’m guessing. Since we’re a little bit late here. We have all of the news some of the time, as expedient as we could possibly do.
Joe: There’s no good news without Gary Gnu.
Andi: Wow, that’s going back.
Joe: Remember that show?
Andi: Oh yeah. Absolutely.
Joe: The Great Space Coaster.
Andi: Yep. Came on some time right after Sesame Street, didn’t it?
Joe: You got it.
Al: I was going to tell Robert that if his income was too high for 2019 then he wouldn’t necessarily get the Stimulus. If it’s lower in 2020, he could get it then. But I’m guessing because of the date of this question he probably already has.
Joe: OK. All right.
Can I Convert the RMD From My IRA to Roth IRA?
Joe: Kind of powering through today. We’re getting caught up.
Al: We got a little behind, didn’t we?
Joe: A little bit. They’re rifling in and we screw up an episode with one thing.
Al: I know. We got-
Joe: I mean you get 14 emails right there.
Al: That’s a good way to get e-mails. Screw it up. Have people disagree with us.
Joe: Yeah. Just blow yourself up. This is- it’s not easy. I mean it’s not hard for us. Where are we at here? John from San Diego.
Al: Yep. And he read a question on my birthday. April 17th.
Joe: He did. Is that like a sick plug for me to say happy birthday to you?
Joe: Got it.
Al: Are ya gonna say it?
Al: Ok. That’s a relief, by the way.
Joe: You got it. “Can I legally convert all or part of my RMD from my IRA to my Roth IRA? Naturally, I would pay the tax on IRA withdrawal, use part of it for the living expenses and reserve the rest for future use in my Roth. I received conflicting information regarding this issue. I appreciate your advice. Feel free to use the question on the show. Thank you for all your consideration.” So can I legally convert all or part of my RMD from my IRA to my Roth IRA? The answer is no, John. The RMD is a distribution. You cannot convert a distribution. However, you can still do a Roth conversion. But you cannot convert a required minimum distribution. Right?
Al: Right. I was gonna say there’s a workaround for 2020. And that is you do not have to take your required minimum distribution. So you could take what that would have been and convert that and you end up with the same thing, or all or part of it. That’s up to you. But that’s only good for 2020.
Joe: So that’s only 2020. There’s talk too that I’m seeing is that they want more RMD relief. I’m interested to see that they’ll probably do something different with RMDs down the road.
Al: Maybe. The interesting thing to me is most people take more than their RMD anyway because they need it.
Joe: Well here’s what they’re going to do Al. This is my theory. If you have an account balance of under $250,000, they’re gonna waive all RMDs. You will not have to take an RMD.
Al: Because you’re going to take more than that-
Joe: Because you’re gonna take what- you’re gonna deplete the $250,000 over your lifetime.
Al: So then it doesn’t even matter.
Joe: If you have let’s say an IRA of $500,000 or $1,000,000 more, the RMD is going to double on ya. They’re gonna force more of those dollars out.
Al: They want their tax money.
Joe: So it’s gonna affect 80% have probably could eliminate the RMD and then the 20%, they’ll get killed.
Al: Well let’s say you’ve got a big pension so you’ve got $200,000 saved in your IRA but you never need it. So then you would basically benefit from that rule. If that’s what happens.
Joe: Okay. So that’s like .4%.
Al: What if you’re really frugal? You can live off your Social Security.
Joe: I suppose. I mean there’s all sorts of different things. But you probably have more than $250,000 in a retirement account if you’re pretty frugal, if you can live off your Social Security.
Al: Not if you made minimum wage.
Joe: Oh OK. All right.
Al: Just sayin’.
Joe: There’s a lot of- I guess we could say a lot of things.
Al: We’re talking about a rule that’s not a rule so don’t go Google it.
Joe: Right. “I listened to show 274 where Anderson’s talking about they got rid of RMDs.”
Al: If it’s $500,000 or more you got to take double. When does that go into effect? This is just a couple of guys talking.
Joe: So if I don’t take double this year do I get- what happens?
RMDs, QCDs and the CARES Act
Joe: Bill from Mission Viejo. So he goes “Big Al, Joe and Andi. Have a couple of questions about RMDs and QCDs for 2020. I read that the CARES Act exempts the requirement to take an RMD for 2020. But if you do withdraw from an IRA in 2020, is some or all of it considered an RMD? If it isn’t, it seems like a good opportunity to do a Roth conversion. What say you all wise ones? If you skip doing an RMD for 2020, can you still do a QCD up to the limit, Correct? Great podcasts. Keep them coming. Thanks, Bill. Up the 5 from San Diego in Mission Viejo.” You got it, Bill. Right on target there buddy. Yes. If you’re not- the RMDs are suspended. And so it’s a good time to do a conversion. Absolutely. Can you still do the QCD? The answer is yes.
Al: The answer is yes. What’s kind of weird to me is the SECURE Act changed the RMD age to 72 but QCD didn’t change. So it’s still 70 and a half for that. So even though theoretically you don’t have an RMD requirement which is true for everybody in 2020 you can still do the QCD up to a $100,000 a person.
Joe: So if you want to give $100,000 of the retirement account to charity you can do so.
Al: So the way that goes is it has to go directly from your IRA to charity. You can’t get the cash and then give it to charity. It doesn’t work that way.
Joe: Cool. Right on target there Bill. Thanks for the question.
I’ll say it, happy very belated birthday, Al, I’m glad you’re here. And hey, thanks to everyone who caught that fumble in episode 271, it is awesome to see how many people listen to YMYW so closely. Click the link in the description of today’s episode in your podcast app, then click “Ask Joe and Al On Air” in the podcast show notes and keep sending us your questions, comments, suggestions, stories and yes, even corrections.
Why Not Just Live Off of Cash and Social Security While Markets Are Volatile?
Joe: Okay let’s move on here. Market volatility. Joseph replied to a prospecting marketing email. So we have a prospecting marketing email. Thanks for that. “Is all this stuff-”
Andi: That’s in blue. That was for you.
Joe: Oh I don’t have any- Okay. “Is all this stuff going on for 2% or 3%, why not just live off your cash in the bank, straight money- ”
Andi/Joe: “-plus Social Security?”
Joe: All right. Well yeah. I don’t know what that means. Is this the one with the voicemail to you?
Al: Well I think that means if you can make 2% or 3% on your cash in your bank, it’s all good.
Joe: Why not? If you can.
Al: Yeah, if you can. And if you got it locked in and if that’s enough income plus your Social Security. Have at it. But the problem- one of the problems with that is that we know it’s- over the long term it’s not going to keep up with inflation. So that’s why we usually have people invest in some other stuff too. But yeah, if someone has plenty of money and they don’t need to take risk for the rest of their life, why do it? I agree with that.
Joe: I said that once and people freaked out.
Al: I do remember. Well you said it differently.
Joe: I know.
Al: You said you go to cash. I’m not saying that. I’m not saying go to cash. I’m just saying if you got plenty of money and you-
Joe: They should have followed that advice to be honest with you. Because I timed it.
Al: Yes. As it turned out, right?
Downmarket Investing Strategy: Should I Use HELOC Leverage?
Joe: We have Zachary from Durham, New Hampshire. Never been there.
Joe: Never really heard of it. “Hey Joe, Al and Andi. Thanks for producing such great content. I really enjoy listening to your podcast on my way to work.” So he’s chilling. I wonder what he’s driving.
Andi: What kind of dog does he have?
Al: He’s only 23 so it’s probably not something-
Joe: Honda Accord? What do you think?
Andi: Keep reading. Wait till you see what he says.
Joe: A little Civic?
Al: I think a Nissan Sentra.
Joe: Oh, a Nissan Sentra.
Al: Yeah, exactly.
Joe: Well now I’m just thinking about New Hampshire and Zachary, just chillin. Just driving to work. Listening to this podcast right now and it’s probably like ‘holy stuff’. These guys are talking about me.
Al: It’s good stuff. Because apparently he wants to become a CFP®. Maybe after listening to our show.
Joe: Oh wow, you skipped ahead here, Al. “I’m 23 years old and I hope to eventually become a CFP®.
Al: CERTIFIED FINANCIAL PLANNER™!
Al: Exclamation point.
Andi: Wants to be just like Joe.
Joe: Just like me. I’m a CERTIFIED FINANCIAL PLANNER™.
Al: How about a CPA?
Joe: That sounds pretty boring.
Al: It’s really fun.
Joe: “Although I completely understand the question I am about to ask is going to make you both go ‘yikes’-” Well first of all Zachary, I don’t think I’ve ever said ‘yikes’-
Al: I wanna see it.
Joe: – in the history of my life.
Al: Let’s see if you say it on this one.
Joe: All right.
Al: Maybe I’ll say it.
Joe: ” I’ve been contributing 20% of my 401(k) for the last two years. Let’s say I want to light a fire in my investments.” Yeah I like that. “But because I’m younger don’t have the income to support contributions outside of my 401(k). Purely hypothetical, with interest rates so low, say I was able to take $100,000 HELOC at 2.75% variable tied to prime for 25 years. Being young and able to take advantage of market volatility, why would it be ill advised to use those funds in a brokerage account invested in large index funds like the S&P 500 or well diversified portfolio? Love to hear your thoughts. Thanks again.” Zachary, best of luck on your career path to becoming a CERTIFIED FINANCIAL PLANNER™.
Al: Are you going to say ‘yikes’?
Joe: Yikes. Zachary.
Al: Very good. I can sleep now. Now you said ‘yikes’.
Andi: So can Zachary.
Joe: Leverage. What he’s talking about is he’s gonna take some money out at 2.75%.
Al: How did Zachary own a home at age 23?
Andi: This is what I’m sayin. He probably drives a Lexus.
Joe: I think in Durham, North New Hampshire, they’re giving them away.
Al: They’re not all that expensive.
Joe: He’s probably cruising around in that little Honda Accord. Chillin. I don’t know. I mean, so here’s the deal. People do that every day. But they don’t necessarily take a HELOC on their home that they open up like a margin account in their brokerage account. So they’re using other people’s money to potentially earn more than the cost of debt which you realize is pretty cheap. The only problem is is that if they’re $100,000 goes down to $50,000, you still have your HELOC payment and let’s say you lose your job. You don’t become the famous CFP® that you want to be. And then all of a sudden now you have this extra $100,000 debt that’s now worth $50,000. So those are the issues. I don’t hate the idea to be honest with you. Because people take $100,000 HELOC on their house every single day and then they buy crap with it. They buy like- let’s buy some jet skis.
Al: At least he’s trying to invest it.
Got a couple Derails at the very end of the episode so stick around!
Your Money, Your Wealth® is presented by Pure Financial Advisors. Sign up for your free financial assessment.
Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.