Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
June 16, 2020

Is it possible to do a Roth IRA conversion with a Coronavirus-Related Distribution from your retirement accounts? Joe and Big Al will explain whether you can and if you should. Plus, more stimulus payment questions, charitable giving strategies from your required minimum distribution (RMD), selling stock for tax-free capital gains, and an analysis of exchange-traded funds vs. mutual funds.

Subscribe to the YMYW podcast

 Subscribe to the YMYW podcast newsletter

FOLLOW US: YouTube | FacebookTwitter | LinkedIn

Free Financial Assessment

Show Notes

  • (00:41) CARES Act: Can You Do a Coronavirus-Related Distribution to Roth Conversion?
  • (10:39) CARES Act: RMDs, QCDs, and Charitable Giving Strategies
  • (18:55) CARES Act: Can I Redo My Roth Conversion Later So I Qualify for a Stimulus Payment?
  • (22:44) CARES Act: Coronavirus-Related Distributions as a “403(b) Escape Hatch”
  • (30:06) How is Our Strategy to Sell Stock for Tax-Free Capital Gains?
  • (35:15) CARES Act: I Received a Stimulus Check for a Married Couple. My Spouse Died. Do I Pay Back Half?
  • (39:17) ETFs vs. Mutual Funds/Index Funds

Free resources:

WATCH | The CARES Act and Retirement Taxes: YMYW Live Webinar and Open Q&A




Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth®, we’ve been getting a lot of questions about whether it’s possible to do a Roth IRA conversion with a Coronavirus-Related Distribution from your retirement accounts, so Joe and Big Al will explain whether you can and if you should. Plus, more stimulus payment questions, charitable giving strategies from your required minimum distribution, selling stock for tax-free capital gains and an analysis of exchange traded funds vs index funds or mutual funds, and Derails about beer and how little the YMYW team knows about Wisconsin geography. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.

CARES Act: Can You Do a Coronavirus-Related Distribution to Roth Conversion?

Joe: We got a lot of emails to go through. We’ll try to get as many as we can. But we got Matthew writes in from “middle of nowhere, so who cares, Wisconsin.”

Al: Does it really matter?

Joe: I’m curious though. Where in Wisconsin?

Al: Yeah, I mean, next-door neighbor.

Joe: I know. I’ve been to Wisconsin.

Al: Me too.

Joe: I lived in Madison.

Al: I’ve been to Madison.

Joe: “Dearest Joe, Al, and what’s her face.

Al: What’s her face.

Joe: Wow. I like Matthew.

Al: Already huh?

Joe: Yeah. “Great job on the show. I’ve been consuming for months now and anyone who doesn’t like what you do is a dang fool.” Thank you. “I appreciate how you tend to come up with things from different perspectives, giving us listeners a broader base to think for ourselves. I just wish you would fight more.

Al: I’m not a fighter. I’ll do banter. I’m from the 60s and 70s. I’m love, peace. No war. No conflict.

Joe: Yeah. And annoying.

Al: Raise your kids with positive feedback.

Joe: You still bathe ’em at 30.

Al: Whatever it takes, Joe.

Joe: Let’s see. “Here’s the rundown. He’s married, 32, bottom of 24% tax bracket. $350,000 in 401(k), 403(b)s, 10% are Roth contributions; $50,000 in Roth IRAs; no other retirement accounts.” So he’s 32 years old, bottom of the 24% tax bracket. Or you could say the top of the 22% tax bracket.

Al: So a couple of things right off the bat. Boy, that’s a great income in your early 30s. And that’s a lot saved in the 401(k), 403(b) in the early 30s.

Joe: He’s got $400,000.

Al: Good job man.

Joe: “My question, I want to get some of the pre-tax 401(k), 403(b) money re-classified or otherwise converted to a Roth account. The problem, neither plan is eligible for after-tax contributions or in-service distributions and we don’t plan on quitting. I caught wind of something in the CARES Act that may allow me to get some moved without penalty. Get some money moved without penalty. Is there anything there? Any other ideas? Can’t stand to wait another 30 years. The tax would be paid out on additional income I’m throwing in a brokerage account. I know it’s nice to have some pre-tax dollars for tax diversification and retirement but I don’t see a better opportunity than now to just do some. I again agree with that. Again love the show and look forward to hear you hopefully fight a little bit about this. Oh and Andi, just kidding. You’re obviously everyone’s favorite. Sincerely, Matthew.”

Andi: Ah, thank you, Matthew.

Joe: Well, okay so-

Andi: What, no comment on that? C’mon.

Joe: Well he’s sucking up.

Al: He wanted to get his question on the air and it has to come through you, so I get it.

Joe: So I got a couple of ideas I guess. He caught wind of the CRD, Alan.

Al: He sure did.

Joe: That is called the Coronavirus Related Distribution and that is under the CARES Act. And you are allowed to take $100,000 out of a retirement account and you can move it into a regular brokerage account. Pay the tax over three years. Or you could pay yourself back over three years and keep it in a retirement account. So as long as the money goes back into a retirement account there would be no taxes due or penalties or anything like that, up to three years. So as long as he has a coronavirus related distribution eligibility I guess or if he’s eligible, I should say that, for this then yeah he could do it. And eligibility would be if Matthew or his spouse was diagnosed with COVID or a dependent; let’s say if he was furloughed, maybe laid off, how about a little reduced pay, something like that, he would qualify. How about if he had to take care of the little ones? He’s 32, he’s got a couple of kids, he had to stay at home, take care of the kids. He would potentially qualify there or any other reason that the IRS deems okay.

Al: Plus if he owned a business and less customers or less income or shut it down.

Joe: Small business guy, shut ya down.

Joe: Maybe he owns a brewery or something.

Al: Those are going strong. I think that some of the breweries in San Diego started- they started making that what do they call that, the hand sanitizer? instead of beer?

Joe: Oh really?

Al: Yeah. So that may affect the taste of the beer for a while.

Joe: It might. So a lot of people are doing this actually. I read something- someone already claimed or said this is like a 403(b) rescue. Some 403(b) plans have some higher fees- what the investments are. A lot of what we see are in annuities. So yes, if you’re eligible, Matthew, take the money out of the 403(b), 401(k) plans and then you can put it into an IRA. And then from the IRA, you could potentially convert over time. I would be careful though because you’re paying it back, you’re not necessarily converting. Because some people are doing this too, Al, they’re taking the money out of a retirement account and then converting it into a Roth IRA. Because you have two options. You can either pay yourself back over three years. So in this case you’re putting it back into a retirement account and avoiding the tax. Or you say I need the money. I’m going to pay the tax over three years. So I’m going to pull $100,000 out, no taxes, no penalties. But I will then pay 1/3 of the tax over the next three years. So some people are interpreting that law of saying I’m going to take the $100,000 out and I’m going to convert it to a Roth IRA. And then I’m going to pay the tax over three years and get the $100,000 in the Roth and ease up my tax burden. There’s nothing in the law that says you cannot do that.

Al: There’s a lot of people that are saying that’s not the spirit of the law. And be careful because the IRS may come back and say you couldn’t do that. But yeah, you’re right. The way it was written- then, of course, we all know it was written very quickly, so they didn’t really think of all the alternatives. But yeah, you can do that.

Joe: It’s basically a loophole. And what happens with loopholes?

Al: They get plugged that they some point.  And sometimes if they’re egregious enough, they go back and penalize the people that did it. Because it wasn’t really what the intention was.

Joe: The intention wasn’t for you to put it into the Roth. The intention was for you to be able to have access cash quickly and not get absolutely murdered in taxes. I’m not sure what the state tax rate is in Wisconsin but here in California it can get up to 13%. Some people have taken money out of retirement accounts and got hit with ordinary income tax, plus the state tax, plus penalties. We’re reaching close to 50% in taxes and penalties just on the distribution.

Al: Yeah, when you have the penalties. That’s one of the nice things about the corona distribution. There’s no penalties first of all, regardless of the age and you pay the tax over three years. So it’s not too bad. I guess I have a thought here, Joe. So if I’m understanding this right, he’s putting 10% of his current contributions into the Roth side of things? Why not do 100% in the Roth instead of 10%? It sort of accomplishes the same thing although maybe it’s not fast enough. I don’t know how much he wants to convert but instead of adding to the deductible 403(b) on a year in/year out basis, just switch it all to Roth and have it go all the Roth and then each year under 50 you can put in $19,500. So that’s one way to go.

Joe: He’s 32. He wants to work 30 years or something like that. 24% tax bracket. That’s still a cheap rate in my opinion because we were converting to the top of the 25% just a couple of years ago.

Al: That’s right. In some cases even 28%. Depending upon the person.

Joe: The AMT. The crossover. The AMT crossover point.

Al: The trough. The AMT trough. Remember that?

Joe: Yes I do.

Al: Yeah. I won’t go into that. But that was a good strategy way back when.

Joe: And so 24%, I believe is cheap money for you Matt. Especially at 32 years old. He’s already got $350,000. If he keeps jamming that much money into a pre-tax account for the next 30 years.

Al: It’s going to be a big number for sure.

Joe: So you still want to have money in a pre-tax account so $350,000 is a good balance. Stop putting money in there and then just continue to contribute to the Roth 401(k). That’s what I would do for sure.

Al: I’ll just do a little math here. Let’s just say you put in $20,000 per year for the next 30 years. What interest rate do you wanna use?

Joe: 7%. I’d say rate of return versus interest rate. Some people think ‘where can you get a 7% interest rate?’

Al: Good point. So. Yeah. Thank you. $20,000 payment per year starting with zero. Just be conservative. So that’s $1,900,000.

Joe: $2,000,000 bucks.

Al: So just do that. Then I think you get where you want to be.

Joe: Chug in the Roth at the 24%. Now when tax brackets go up then you might want to switch, if and when they go up. I believe that they have to go up. So this will give you- I would switch to Roth and if you have a couple of bucks and you want to get money out of the 401(k), 403(b)s. And if you qualify for a CRD you can still take the money out of the CRD, put it into a brokerage account if you want, then that will give you the tax diversification that you need.

Al: That’s true too.

Joe: Thanks a lot for the nice words Matthew ‘in the middle of nowhere.’ Still curious because I’ve probably been there.

Al: Probably have.

Joe: Lake Wannabegosh.

Al: There ya go.

Andi: That’s an actual place?

Joe: No, I just made that up. It’s close.

CARES Act: RMDs, QCDs, and Charitable Giving Strategies

Joe: Chris writes it. He goes “You guys, under Miss Last’s leadership have made us a lot of money. Because your show has steered away from many mistakes truly helping us to turn my money into my wealth.” Oh, just a little play on words there. Chris.

Al: Wow, that’s clever.

Joe: Well it’s called Your Money, Your Wealth®, you know that.

Andi: This is interesting, it says it steered us away, but then it says it’s turned his money into his wealth.

Joe: Yeah, we scare people from mistakes.

Al: We try.

Joe: And then we create people’s- their money into their own wealth. That’s the purpose of the show.

Al: Yeah. That’s what we try to do. No guarantees.

Joe: Zero guarantees.

Al: We’re just having a chat here.

Joe: That’s all we’re doing, a couple of kids. But Chris didn’t give a location. So-

Al: No.

Joe: -apparently he hasn’t listened to us that long.

Al: Right. That’s a faux pas.

Joe: Yes. Here’s another mistake we don’t want to make. So let’s kinda see where he’s at here. “My wife and I retired on pensions and Social Security and give around $2500 a month to charity.”

Al: That’s great.

Joe: Very giving.

Al: $30,000 a year.

Joe: It’s Chris.

Al: Yes.

Joe: Very nice gentleman here.

Al: Yes.

Joe: “Next July we will both turn 72 and we’ll both have to be taking RMDs from a $3,000,000 in IRAs, 401(k)s and a 457(b) plan.” So 4 X 3 is $120,000 that he will have to give as a distribution- or take as a distribution. “Will the $15,000 we give-” so he’s really making a mistake. $2500 a month to charity, “will the $1500 or $15,000-”

Al: Just keep reading it. It makes sense.

Joe: Oh, “-we give January through June next year before we turn 72 in July count as part of our $60,000 RMD for next year? Or will we have to stop giving to this charity this December till we turn 72 in July and then give six months’ worth to get this tax break? We are in the 24% tax bracket. This charity needs our money every month. And we would rather not have to save it up and then give it to them in July. This was not a problem when the RMD and QCD both began the year we turned 70 and a half. Thanks for all your advice.” So he wants to use the QCD. So he wants to take the required minimum distribution up to $100,000 and give that directly to a qualifying charity.

Al: Correct. And he’s talking about $2500 a month. So he’s talking about $30,000.

Joe: So he wants to give $30,000 and he wants to take that $30,000 out of his retirement account. It sounds like.

Al: He does and he wants to know does he have to wait till the middle of a year when he turns 72 or can that count for the stuff that happened in the beginning of the year?

Joe: You know what’s interesting with this is that the QCD rules, you can still do a QCD if you’re 70 and a half.

Al: Right. Exactly. So that’s why this is an interesting question. So I think just to clarify the question for our listeners. So at age 72 you have to start taking your required minimum distributions. And it actually brings up a question that I don’t think anyone’s ever asked us like- do you have to take your RMDs after you turn 72? Or can you take it in the year that you turned 72? Why don’t we start there?

Joe: I guess there’s two sides of that coin. You can wait the following year.

Al: I know you can. But could you, if you wanted-

Joe: Yeah, it’s in the tax year.

Al: That’s right.  So let’s answer that question first. In other words the year that you turned 72 even though that’s in the month of July, let’s just say, you could take your required minimum distribution in January of that year even though you were 71 at that point and still count for an RMD for that year. So it’s within the tax year. So then he’s asking the question well then can the QCD the count for the RMD?

Joe: -and the QCD is the qualified charitable distribution. This is that- it’s just going to go straight to charity, doesn’t even show up on his tax return.

Al: That’s right. And I believe the answer is yes.

Joe: Absolutely it is. So if you want to give to the charity just give the full $30,000 from the retirement account.

Al: Because it’s in the same tax year. So it counts.

Joe: But if he’s got $3,000,000 in IRAs, he’s miscalculated the RMD.

Al: Well yeah. It’s $60,000 RMD for next year. Maybe that’s his and his wife’s the other half. I don’t know. Who knows?

Joe: Because it’s gonna be around 4% of the $3,000,000. 3 X 4 is 12.

Al: I know. But he says-

Joe:  Add a couple of zeroes is $120,000.

Al: He says “next July we both turn 72 and we’ll both be taking their RMDs. So that’s two people.

Andi: $60,000 each?

Al: I don’t know. I don’t know, it doesn’t tell us. But you’re right the RMD in total between the two of them will be closer to $120,000. I agree with that.

Joe: And then so you take the $30,000 from the $120,000 and then give it to the qualifying charity-

Al: And you got $90,000 left. Yeah I totally agree.

Joe: Yep. Or if he wants to do it monthly, he can do that as well.

Al: So maybe what he’s going to do is just do the $2500 per month and then sometime towards the end of the year, do the remaining amount for the RMD. And which is fine too.

Joe: That’s a good point. So you can continue with your $2500. Just pull it from the retirement account. And then when he does his taxes, that’s when he just shores everything up. So you go $2500 to the qualifying charity, hey Fidelity or whatever your money is, give it to this charity, they need the cash. And then he needs to- let’s say he’s already got pensions and things like that, because he hasn’t been taking his required distributions is what he’s saying. And they’re in the what, 24% tax bracket? Is that what he said?

Al: Yeah.

Joe: So what, the top of the 22% tax bracket’s what, $170,000, $180,000?

Al: Top of the 22%. Yeah. It’s like $170,000, $175,000, somewhere in there.

Joe: So he’s got $170,000 in fixed income. Already. Without taking the RMDs. And now you pull another $120,000 on top of that, now you’re at 24% and then when the tax rates revert, he’s back in 28% EMT land. So depending on what he’s looking at doing, you might want to take advantage as well of some of these lower tax rates. There are other charitable strategies too, that you could look at. The QCD is a pretty good one, especially with that large an IRA.

Al: And the reason why people do QCD, one of the main reasons, is because then it’s not counted as income, it’s not counted as a deduction. And for most people they can’t even itemize anyway. So a lot of it’s wasted as a deduction. So that’s a big benefit. In the case where you have high income there’s other reasons you might want to do it this way, so you have lower income, less Medicare surtax on passive income or Medicare tax to pay on your future Medicare benefits. So there are a couple reasons there. I was going to say something else, I just forgot. What was I gonna say Joe?

Joe: Dementia?

Andi: Were you going to mention donor-advised fund at all?

Al: We could. I had something even better. I don’t know.

Joe: Bunch. You want a bunch of deductions. You want a bunch some deductions?

Al: Oh, I was thinking- I was just going to- I was just speculating-do you think he was a professor?

Joe: He could be. He’s got a nice pension.

Al: You think of someone that has saved that much, that has a 457(b), that has lots of fixed income.

Joe: Or it could be like a civil service retirement as well, could be a judge.

Al: Yeah someone really high up. Yeah yeah.

Joe: Big fat pension.

Al: Senator.

Joe: Could be. That’s why no location.

Al: Didn’t wanna say.

Joe: Doesn’t wanna say. I’ll call him The Judge.

Al: Chris you’ll have to tell us what you really did. And your lovely wife. We didn’t really get her name, did we? Yeah.

Joe: They never do.

Al: They just say wife.

Joe: And then they’re like, “it’s my money.”

CARES Act: Can I Redo My Roth Conversion Later So I Qualify for a Stimulus Payment?

Joe: We got one from Cindy, from Colorado Springs, Colorado. She goes “My husband and I received a small COVID-19 2020 tax credit, $200, mostly because I did $100,000 IRA to Roth conversion which puts our income higher. In a recent podcast, you said there is no clawback. And stated it was okay to continue to do Roth conversions. I assume you meant no impact on the tax credit stimulus check. Seems odd to me that since I did a conversion in 2019 and early in 2020 we lose out on a stimulus payment. But if someone received a stimulus check and then does a conversion they have no impact. Is it correct that I can no longer back out of the earlier conversions and then redo it later?” Let me break this thing down because Cindy’s pissed.

Al: Well, first of all, I’ll cut to the chase. It is correct.

Joe: Well I think here’s what she’s saying though, correct me if I’m wrong, Al. She did a Roth IRA conversion in 2019. Or 2018, whatever it was. She filed a tax return, whatever that they looked at. Because of the conversion, it pushed up their adjusted gross income where they phased out of the overall $1200 or $2400 stimulus check.

Al: Correct.

Joe: So she got $200 out of the $2400 that they were eligible for, depending on income.

Al: Because they had their income was too high, so they got phased out.

Joe: Their income got up to roughly $200,000 because that’s when you fully phase-out of the stimulus check.

Al: That’s right.

Joe: So she did the conversion. She filed a tax return. Even though the tax credit is based on your 2020 tax return, they looked and said in 2018 whatever is on file look you qualified for a couple of bucks. But here’s what’s going to happen, let’s say in 2020, they do no longer conversions and their income qualifies for a stimulus check. Does she get it?

Al: Yes she does.

Joe: How much does she get?

Al: She gets $2200.

Joe: So if she does not do a conversion or if she keeps her adjusted gross income under $150,000, you will then receive the tax credit on your 2020 tax return.

Al: I agree with that. So let me just supplement that. So if the conversion was done in 2019 and you filed that return and they based upon ’19 can you then go back and change? Well, 2019 already happened. So there’s no way to undo that. 2020, if you already did a conversion in 2020 not knowing this was going to happen, it’s too late. There are no re-characterizations. If you haven’t already done a Roth conversion in 2020 and you keep your income low enough, below $150,000, you’ll get all the rest of the credit. But you’ll have to wait till you file your next year’s tax return. You won’t get it early.

Joe: You’ll get it in April next year.

Al: Correct. Yep, that’s right.

Joe: I think we covered all our bases.

Al: I think we got it.

We did a webinar last week on the CARES Act and retirement taxes and Joe and Big Al answered listener questions live. If you missed it or want to relive it, check out the replay in the podcast show notes at YourMoneyYourWealth.com. Just click the link in the description of today’s episode in your podcast app to go to the show notes, where you can watch the YMYW webinar, download the CARES Act guide, and read the transcript of this podcast. Then, when you invariably have more questions, just click the Ask Joe and Al On Air banner in the podcast show notes to send them in as a voice message or an email.

CARES Act: Coronavirus-Related Distributions as a “403(b) Escape Hatch”

Joe: David writes in from Allentown, Pennsylvania. Is that right? Allentown? You ever been there Alan? To Allentown?

Al: You’d think I would. But no, I haven’t been there.

Joe: They named it after you.

Al: It’s spelled wrong.

Joe: Got it. “Hi Andi, Joe and Big Al. This is David from Allentown, PA. Great show. Never miss an episode. Just listened to episode 274.”

Al: That’s another one.

Joe: What are these- who are these freaks that know the- ? “A listener mentioned a Coronavirus-related distribution and then indirectly rolled into an IRA. I did some research. Some people are calling it a 403(b) escape hatch.”

Al: Oh, that’s what you were talking about earlier.

Joe: Escape hatch.

Al: I like it.

Joe: Yeah. “It looks like a great strategy to get my funds and options limited to a 403(b) to a more versatile IRA.” Let’s see what David’s got. He’s got a couple of questions but before let’s give you some background. “45 and my income puts me deep into a high tax bracket.” See, he’s very modest. Very modest person here, versus most people. ‘I got $5,000,000 in my IRA’.

Al: ‘And I make way more than the wife’.

Joe: ‘I make $750,000 dollars a year, I max out’. So David’s modest. “I have a 403(b) and 457 that I fully fund every year. I have a deferred compensation plan funded by my employer. My employer offers a Roth 403(b) but because of my income, I didn’t think it was a good idea. I think I should be able to be in a lower tax bracket when I retire. Thanks to your great advice I started doing Backdoor Roth IRA conversions for the last three years since I couldn’t contribute directly to because of my salary. Believe it or not my financial advisor never said a word about it. When I asked him about what I’d learned in your show he just said ‘yes you can do that’. So much for good advice from him. Also have broker accounts that I fund with after-tax monies.” Okay, so I wonder if you’re still with the advisor.

Al: Maybe not.

Andi: Or if the advisor has started listening to this show.

Al: That too.

Joe: Maybe we can help out your advisor. Have him tune in. We got a lot of advisors that listen to the show. So I hear.

Al: That’s what you’re guessing, based upon some questions that are really technical.

Joe: Some-  guaranteed with CPAs that write in.

Al: I know.

Joe: I mean we give CE credits here.

Al: We have Dennis from Coronado that writes in. We know who that is. He is a CPA.

Joe: “Here are my questions, if I do a coronavirus related distribution I do qualify, salary now, hours were cut. And then put the full amount into a traditional IRA, is that going to have an effect on my ability to do a Backdoor Roth conversion in the future? Would it be better to have two separate traditional IRAs to be able to trace those transactions separately for tax purposes?” David, got bad news for you. No. Don’t do that because you will not be able to do a Backdoor Roth any longer because they take a look at IRAs in aggregate. It doesn’t matter if you have 2 or 3 or 4 separate accounts.

Al: But is it better to get the money out of the 403(b) as part of the rescue? Or is it because that will blow up the Backdoor Roth strategy? Or is it better just to not do it?

Joe: I wish David would be a little bit more specific on his big wallet.

Andi: Big wallet on Big David.

Joe: Then I could give him maybe a little bit better advice. He’s like well ‘my income is real high and even I’m deep in a high tax bracket.’

Al: But you just congratulated him on not bragging and now you’re saying he should have said ‘it’s $5,000,000 and I make $2,000,000 a year’.

Joe: I’m not saying that- these guys brag. I’m just saying how they position that in their emails sometimes, it’s like come on all hot. And then him, he’s just kind of like hiding behind his big tax bracket.

Al: So here’s what I’ll say, I think you have to evaluate the positive impact of one over the other. Because if you do it and it’s not a bad idea for a 403(b) rescue potentially but you do blow your Roth- Backdoor Roth contributions.

Joe: Yep. So you would no longer be able to do Backdoors. But then how much money do you have? You’re 45 years old. How much longer do you want to work? What tax bracket are you really in? Maybe a high tax bracket for David is not that high for me. And I would give him some advice by saying here’s how much money that you have. Run some numbers here. Talk to your advisor.

Al: But he’s not that good maybe.

Joe: He was terrible.

Al: So anyways- so what’s the second question?

Joe: “On a different topic, is there any other way I could create tax diversification optimization? My plan does not allow in-service distributions or no hardship withdrawals. So a Mega Roth is not an option for me. Thanks again for the great show and maybe should consider opening an office here in the Northeast.

Andi: So he’s ready to ditch his advisor.

Joe: Need to find the real road to freedom.”

Al: I was thinking maybe we’ll go West to Hawaii. I don’t know if we’ll go East to-

Joe: Allentown?

Al: Yeah.

Joe: Right there. We’re going to set up a little satellite office with Big Al in Allentown.

Al: I’m gonna run it. This is Big Al from Allentown. I like it.

Joe: Could be awesome. You could do a corona- but this is what you do, he qualifies for a CRD so he could take money out of his 403(b) or 457, the 403(b) escape hatch. Who the hell is he listening to that- who’s coming up with that stupid term?

Al: Maybe that was the financial advisor.

Joe: Yes, but he didn’t even know what a Backdoor Roth was, so I doubt it was that guy. Just take the money out and then put it into a brokerage account. Pay the tax over 3 years.

Al: I agree with that.

Joe: That’ll give you $100,000 in a brokerage account-

Al: Because then you get tax diversification and you can manage it pretty cheaply by doing tax lost harvesting and all that kind of good stuff. And even when you do have tax, it’s capital gains tax. It’s a cheap rate. In the meantime, you still do your Backdoor Roth contributions.

Joe: Or you do this too- let’s say one year you take a look, you do a CRD. So coronavirus related distribution you can pull up to $100,000. So he’s got two options. He can pay the tax over three years or he could pay himself back. So let’s say he takes $100,000 out. $50,000 goes into the brokerage account; the other $50,000 goes into- he pays back into an IRA. And so what’s 1/3 of $50,000 Al? $17,000.

Al: Yes. $16,667.

Joe: So he’d pay $17,000 of income would show up on his tax return in one year, $17,000 the next. So that wouldn’t blow up in this huge tax bracket. And then he could use that cash and then he could convert the other $50,000 and then it wouldn’t screw up his Backdoor Roth.

Al: I like that. Very clever.

Joe: You’re using a little bit of both. You got a little bit of liquidity there. And then you’re taking the other and you’re actually paying it back into an IRA. And then from that IRA you do your Backdoors but then you also convert more and get rid of the overall $50,000, plus the Backdoor. You can get that much more into Roth IRAs.

Al: I give that my stamp of approval. That’s the best idea.

Joe: There ya go David.

How is Our Strategy to Sell Stock for Tax-Free Capital Gains?

Joe: Jim from Cedar Falls, Iowa. Every time of Iowa I think of the Amana Colonies.

Al: You do?

Joe: Just an awful, awful vacation I had.

Andi: Jim, you triggered him.

Joe: Yeah, it’s a trigger.

Al: I’ve never been.

Joe: You’re not missing much. “Hey guys. Big fan of the show. I’m 28. My wife is 27. Earn about $50,000 a year and she earns about $40,000.  I have a brokerage account that gained a lot in value. If we put $19,500 in 401(k) each as well as $3500 into an HSA, we can take $21,000 from my brokerage yearly and pay zero tax, federal tax?” Let’s see, so if $90,000 dollars is the income, Al. And let’s say he takes the standard deduction, call that $25,000.

Al: So $65,000 is left.

Joe: Then he’s going to put $19,500 into his 401(k). So another $20,000 is down; another $20,000 from her, that gets his income where?

Al: So that’s probably about $25,000, right? $65,000 minus $40,000. So wouldn’t you want to do a Roth 401(k)?

Joe: Well no, he’s got large brokerage. He’s got some capital gains. Right?

Al: Yeah.

Joe: “I have a brokerage account that gained a lot in value.” I don’t know what a lot is. I wonder if it’s as big as what’s his name’s tax bracket?

Al: David from Allentown? Could be.

Joe: Yeah. “So if we put $19,500 into a 401(k) each-” So that’s $40,000 plus another $3000. So that’s $47,000. That’s pre-tax. On top of $25,000, call it $75,000. They own $90,000. $90,000 minus $75,000 is what?

Al: $15,000.

Joe: $15,000. “Can we take $21,000 from my brokerage yearly and pay zero fees?” Well you could get up to the $80,000 of taxable income is what you want to look at, Jim. So once you get to that $80,000 or $81,000 of taxable income, then that’s where the capital gains come in. So if you’re trying to sell some stock. And if you get your income down to $15,000, $65,000 of gain would be tax-free.

Al: Right. Okay.

Joe: Am I getting the math right? I don’t have a calculator and I’m doing this fast.

Al: Well yeah- I wasn’t listening.

Joe: Give me the stupid calculator.

Al: But the concept is that when you have capital gains and you’re in the in the 12- currently the 12% bracket, which for married couple let’s call it $80,000 taxable income, the capital gains up to that point are tax free. Anyway what’s your- what do you want me to do?

Joe: $90,000 minus $73,000.

Al: So $90,000 minus $73,000. OK. $17,000.

Joe: $17,000. All right. And then $17,000 minus $80,000.

Al: OK. So $63,000.

Joe: So $63,000 is what he could sell in the brokerage account and pay zero tax. If he was going to do all of this.

Al: Now maybe he’s already saying the $50,000 and $40,000 is net of the 401(k) and that’s what he’s taxed on. And if that’s true, we’re $40,000 off. But the concept is to look at what your taxable income is with your income from your job minus the standard deduction and then what is that? To get to the $80,000 number. That’s how much you can sell in capital gains and pay no tax.

Joe: Very good. I wonder where he got that $21,000.

Al: Well I’m thinking maybe the $50,000 and $40,000 is net of the 401(k). But I don’t know. Hard to say.

Joe: So again Jim, just use the standard deduction against $25,000 figure income minus the standard minus what you’re going to put in. Look at your taxable income. Then you can sell anything up to that $80,000 and pay zero, zero tax.

Al: And of course I don’t know about Iowa taxes. California doesn’t have that rule. So they still tax you in California. And California doesn’t have a capital gains rate so they pay- you have to pay ordinary income tax. Most other states are more generous I think on capital gains.

On a Federal level, planning well in advance may enable you to take advantage of opportunities and benefits now available under the new tax rules in the CARES Act, the SECURE Act and the Tax Cuts and Jobs Act. Click the link in the description of today’s episode in your podcast app to go to the show notes and download the brand-new 2020 Tax Planning Guide  and start preparing now. Subscribe to the YMYW newsletter in the podcast show notes as well so you’ll be among the first to know when there are new tax changes, and new strategies, and new podcast episodes.

CARES Act: I Received a Stimulus Check for a Married Couple. My Spouse Died. Do I Pay Back Half?

Joe: Sonja, no location given. “I think I got double the stimulus in error but I’m widowed as of 1-25-18. I filed single 2019. Should I have filed surviving spouse? I have deposited the $2400 check and I’m waiting to see.” So Sonja received $2400 in a stimulus check. Because they looked at 2018 tax returns-

Al: -and saw two taxpayers on there.

Joe: -and saw her and her deceased spouse.

Al: So the first point tax-wise when you’re widowed, you file joint for just that year that your spouse passed. The following year you file single unless you have a minor child then you filed surviving spouse for a couple more years after that. So unless you have a young child, no, you can’t file surviving spouse after that first year.

Joe: Surviving spouse gives you the same tax brackets as married couples?

Al: Right.

Joe: So it’s higher-

Al: It’s lesser taxes.

Joe: Lesser tax than head of household.

Al: But the second question- so she got an extra $1200 and she deposited it. She’s waiting to see what happens. So and I think that’s what we said a few weeks ago. I’ve got new information now.

Joe: Clawbacks?

Al: This is from the IRS. This is actually an article from AARP which is easier to read than the IRS Web site.

Andi: Bigger print?

Al: Bigger print. For us old guys. This is from the IRS Web site. “A stimulus payment made to someone who died before receipt of the payment should be returned to the IRS.”

Andi: Oh wow.

Al: Shall be returned to the IRS according to guidance recently posted an IRS.gov. And it was May 6 and then they updated it May 26. So they want this money back and then they further go- they tell you how to do it. They tell you to- if you haven’t cashed the check then write VOID on it and send the check back to them. Okay. And then with a note stating why you’re returning it.

Joe: So how did these stimulus checks come? Did they write your name?

Al: Well if you didn’t have direct deposit on your refund on your tax return, you just got the check. So that’s if you got a paper check and you haven’t cashed it. Now if you did get a paper check-

Joe: But she’s saying she deposited the money. So she got one named in the deceased husband’s name.

Andi: It would have been named for both of them because it was a single $2400 check. How do you return half of it?

Al: I think it was more likely just a direct deposit because that’s what most people do. They put their bank information so it probably-or maybe not. Maybe it was just already deposited. Who knows? Maybe she endorsed it for him. I mean banks don’t really check that stuff very much anymore. So nevertheless here’s the answer on that one is, if you, you need to write the IRS a personal check to your IRS location and on the check or money order right U.S. Treasury write 2020 EIP. I don’t even know that stands for. 2020 EIP. And the taxpayer ID number, like Social Security. Include a brief explanation of the reason for returning the EIP. Actually go to the AARP Web site and type in stimulus check, this article pops up. So now what if you don’t do it? I doubt if anything’s going to happen. I mean just guessing at that. But it seems like the IRS and government has better things to do like go after PPP loan people. Like Steak Shack.

Joe: Okay. Sorry Sonja. Because I think I responded to her and said there was no clawbacks. And she’s like-

Al: There is no clawbacks if you’re entitled to it. But this keeps changing.

Joe: Got it.

ETFs vs. Mutual Funds/Index Funds

Joe: Tom writes in from Chantilly, Virginia.

Al: Have you been there?

Joe: Chantilly?

Andi: Have you been to Virginia at all?

Joe: I would like to go. That’s kind of a cool name.

Al: I think it sounds cool. I’ve never been either.

Joe: Chantilly. “Joe, Big Al and Andi. I’m a huge fan of the podcast and look forward to it every week.” There’s not a lot to do there in Chantilly, apparently.

Al: You don’t know that.

Joe: He’s looking forward to this piece of garbage.

Al: Good point.

Joe: “I subscribe to your philosophy of purchasing total market funds. These types of investments get you wide market exposures with extremely low fees. I don’t hear you talk specifically about ETFs or Exchange Traded Funds. Exchange Traded Funds have relatively low fees and target specific market sectors. I’d be interested in hearing your thoughts on ETFs versus traditional mutual funds. Please consider the pros and cons both in and out of retirement accounts. Thank you in advance. Tom from gently- Chantilly.”

Al: Chantilly. Yes.

Joe: Real high level, they’re almost identical.

Al: Yeah they’re pretty similar.

Joe: For the average listener of Your Money, Your Wealth®, I don’t think we need to go that much deeper, but for Tom in Chantilly I’ll go a little bit deeper.

Al: Exchange Traded Funds. Start there.

Joe: Yes. ETFs. Because let’s see in our portfolios that we help our clients with, we have $2,500,000,000 of client assets. And we use Exchange Traded Funds. We use index funds and we also use I guess institutional funds. All of them- in the characteristics of what we look at as a good investment is first the all, do you have broad market exposure? We don’t necessarily want to time markets and try to pick individual stocks because it’s very difficult to do that just with all the information and knowledge that everyone has. And Tom agrees with that investment philosophy. Second, we look at is how is the product structured? So you could get broad market exposure in a lot of different ways. You could do- you could have broad market exposure yourself. You could buy individual stocks. Yu could buy the entire market yourself and buy them individually. And that would be pretty expensive because each stock will probably have a bid/ask spread. There’s a spread there of what the market maker is banking on buying and selling stocks. So we’d like to package them up and have the institutions do it for us. So you could do it through a separate managed account. You could do it through an index fund, a regular mutual fund or you could do it through an exchange traded fund. I guess you could do it through a closed end fund. You could do it through strange straight end note. You could do some leverage. There’s all sorts of ways to get market exposure. With an ETF, the major difference there is that you have more transparency in an Exchange Traded Fund. They’re very low in fees like an index fund and you’re buying it as a stock. So you’re buying it at real time versus net asset value that you would purchase a index fund. So you would buy a mutual fund at the end of the close. Where an Exchange Traded Fund, you’re buying and selling the Exchange Traded Fund right on the market depending on the the price is that you’re buying it for. So there’s a lot more I guess complexities of how they actually construct and build exchange traded funds versus index funds. But I’m not going to go there. But we like ETFs. I think maybe that’s what he’s asking for, endorsement.

Al: I think that I guess I would say it’s index fund and ETF are- they’re very similar. I think you hit on the main differences. A index fund, when you buy and sell you get the price at the close of that of the market that day. When you buy and sell an ETF you get the price at that exact second. Because it’s active pricing. So that’s a difference.

Joe:  Let’s say if you’re if putting money in, $500 a month into a brokerage account or $500 a week or whatever. I’d pick an index fund if your dollar cost averaging in. Because it could be cheaper versus- depending on how volatile the markets are. I don’t know, that could be a con. The bid/ask could go up and a little bit more commission.

Al: I think there’s almost no difference so it’s hard to- it to me it’s like we two main grocery stores in San Diego. We have Ralphs and Vons. I guess we have Albertsons. So we’ve got three. Well I’ll say two right now.

Joe: Sprouts. Trader Joe’s.

Al: Yeah.

Andi: Whole Foods.

Al: Jimbo’s. Let’s go with Ralph’s and Vons. So it’s like they sell the same stuff. Just like an ETF or an index fund. They have the same kind of investments, they just have slightly different rules. Maybe different opening and closing hours. So that’s about it. How about that?

Joe: I’m not buying that one. But that right that was a good try.

Al: That was way better than your bid/ask spread-

Joe: But it’s true.

Al: It’s like who cares?

Joe: I’m just trying to- he asked a question, an intelligent question. I’m trying to give him an intelligent answer. I mean, you’re talking about custodians with Ralph’s and Vons. T.D. Ameritrade versus Fidelity.

Al: Same idea. It’s just the kind of a wrapper that holds a bunch of investments.

Joe: OK I’ll buy that. We’ve got to take a break- or that’s it.

Al: We’re done.

Joe: Yeah. That’s it. We’ll see you next week. The show’s called Your Money, Your Wealth®.


Yes, that is it, except for the Derails.

Subscribe to the YMYW podcast

 Subscribe to the YMYW podcast newsletter

FOLLOW US: YouTube | FacebookTwitter | LinkedIn


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.