Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:12 – Should Investors with $8M Use a 130/30 Long-Short Investing Strategy? (Carl Sandburg and Jane Addams, California)
• 12:42 – We’ll Never Need Our Retirement Accounts. Should We Still Do Roth Conversions? (Tyrone and Tova)
• 27:18 – Roth Conversions vs. Social Security: Which Comes First? What About IRMAA and NIIT? (Mark, California)
• 38:16 – How to Structure Non-Qualified Deferred Compensation Payouts When a Layoff Might Be Coming? (Boat Drinks)
• 50:10 – Outro: Next Week on the YMYW Podcast

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: “Carl and Jane” have eight million bucks and their advisor is suggesting a 130/30 long-short investing strategy. Joe and Big Al spitball on whether this is a smart tax move or unnecessary complexity – and whether they would do it themselves. That’s today on Your Money, Your Wealth® podcast number 572. Plus, Tyrone and Tova think they may never even need their retirement accounts, so do they really need to bother with Roth conversions if the kids are going to inherit the money anyway, or could skipping the conversions mean losing half their retirement income to taxes? Mark in San Diego is juggling Roth conversions and Social Security timing without blowing up his tax bill, or the income related monthly adjustment amount for Medicare, or net investment income tax. And “Boat Drinks” has a big non-qualified deferred compensation plan. How can he structure payouts before it turns into a tax nightmare – and before he potentially gets laid off? If you’re watching us on YouTube right now, please do us a favor: subscribe to the channel and leave a comment below with your thoughts on today’s episode – it really helps us out when you do. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.

Should Investors with $8M Use a 130/30 Long-Short Investing Strategy? (Carl Sandburg and Jane Addams, California)

Joe: Let’s go to, where are we going here? I don’t know where we’re going.

Al: Carl Sandberg, right?

Joe: Oh yeah. You know what? That’s the name of, my, junior high school.

Al: Is that right?

Joe: It is.

Andi: Really? So do you know the whole backstory on who Carl Sandberg was?

Joe: absolutely not. Instead junior high.

Andi: Got it. Okay.

Joe: Was, no, I went to Sandberg and then that was just the name of it. That was the name of my junior high.

Al: Yeah.

Andi: Well, it was named that because he was a Pulitzer Prize winner poet. And he was also – the biography of Abraham Lincoln, he wrote that.

Joe: Oh, he did?

Al: Okay.

Andi: Yeah.

Al: Well, there you go.

Andi: Well, like the definitive one, I guess

Al: now your life is complete.

Joe: It is. No way why you’re It is. It is.

Andi: And Carl Sandberg in this email, his wife’s name is Jane Addams, and she was even a bigger deal. She was the first female public philosopher in the us. She was the first American woman awarded the Nobel Peace Prize. She was the founder of the social work profession in the US and she co-founded the ACL U.

Joe: Wow.

Al: Wow. Aren’t you full of good information, Andi?

Andi: Just call me the librarian.

Al: That is, that’s quite the resume.

Joe: Yeah, it is the vc. Okay.

Andi: So, so these emailers are, are setting you up to know who they are in their souls.

Joe: Very, very, very smart people.

Al: So we are dealing, yeah, we’re dealing with important, smart, very accomplished, accomplished people.

Joe: Yes. Then the first thing that comes out of their mouth is Your show’s my favorite podcast. How could that be?

Andi: That’s a cute question, and it’s the only one he doesn’t speed up and listen to at 1.25.

Joe: It’s really what? What is this guy? What is he drinking? All right. Yeah. It’s the only one. I don’t speed all right. At 1.25,

Al: remember when our buddy used to listen to books at two times?

Joe: Five times.

Al: Yeah, I read five books. I read five books over the weekend. I don’t remember a thing. Put it on. I did in my sleep. I got through an encyclopedia.

Joe: Said it got through. No Britannica.

Al: I’m so smart now, except I can’t remember anything.

Joe: Oh, that’s a true story.

Al: It is a true story. I dunno if it’s 10 x, but it was, it was at least three or four.

some. Someone that we know pretty well.

Joe: Yes. Yes. all right. You all deserve to be able at your natural cadence.

Thank you. I’m trying to understand my c p’s recommendation to moving some of our money, into a one to 30, 30 product. 1 30, 30 product. I like this already.

Al: Yes. This is a different question.

Joe: Yes. We’re currently doing some direct indexing in a separate managed account, and he’s offering this an even more tax favored way of investing.

We have about $8 million in investible assets made up of $2 million in traditional IRAs, a million dollars in Roth IRAs, and a $5 million brokerage account. Damn. Good for you.

Al: It’s, yeah. Well, they’re important.

Joe: Gentlemen. Gentlemen, man. Okay, so. Our Social Security payments and a small pension will be about $90,000 a year at age 70.

Carl and Jane are both 56 and Carl has one foot out the door already and will be retired at age 60.

Al: Yeah.

Joe: Jane likes white wine. Carl likes bourbon. Oh, Carl.

Al: Yeah.

Joe: so can you help me understand the benefits of, or downsizing of doing a 1 30 30? And if you think we’d benefit from using this product.

Thanks for all the great work. Best, Carl Sandberg. We got to include our spending, sorry. we spent about $400,000 annually in 2020 $5.

Al: Okay.

Joe: 400 grid.

Al: All right. Right, right.

Joe: Well you got 8 million.

Al: Yeah.

Joe: Might as well spend it.

Al: Yeah. Might as well, right? Yep. Well, that, that one 30. Dash 30 product. I, I I had to look it up.

I never heard of it. Alright. May, maybe you know what it is, but I didn’t, so I lemme explain it. that means 130% of your portfolio. Hear me out is in long positions and then 30% of your portfolios in short positions, and they cancel each other out. So you get the, basically the same one of a hundred percent portfolio.

So you got extra long, then you have money. Right. That maybe that’s a way to say it. And then you have short positions that. Go the other direction. And the idea is this, is that if, if your MA manager is good at picking the winners, maybe they also are good at picking the losers. And why not benefit?

Because when you short a stock, you make money if it goes down. Right. If it’s a long, which is what it usually is, then you make money when they go up. But, but you short a stock, you make money when it goes down.

Joe: Yeah. So maybe see it a different way. Is that, and this is where it gets a little bit complex.

Al: Yes.

Joe: The long, everyone that’s listening to this program, is long. Yeah. They, you, you invest in a mutual fund, you buy a stock, you buy an ETF, right? You’re, you’re long in that position. When you short a stock, you’re actually, taking a loan.

Al: Right? That’s, that’s a good way to say it,

Joe: right? So I’m taking a loan and I’m buying stock X, y, Z for $50 a share.

Al: Right,

Joe: and then that $50 a share goes to $30 a share. So I lost $20 per share on that, but I didn’t own it. I didn’t buy it. It was just a loan. You lent it to me. Yeah. So I’m just holding it and then guess what? Then I’m gonna buy it. 20 or $30 a share. So I made the money on that spread of what that loss is.

Al: Yeah. And the and the, and the person on the other end of that has to buy it

Joe: Correct.

Al: At that higher price?

Joe: Exactly. They buy it at 50. Yeah. And I get the proceeds at 30.

Al: Yeah. Great deal. If it

Joe: if if it goes down. If it goes down. So that’s called a short sale?

Al: Yes.

Joe: And so what they’re doing is that they’re long one 30 and short 30, because they don’t own the 30 on the short.

So you’d let, it’s kind of like, alright, well here you could still make money in the overall portfolio, but you get these losses.

Al: Yeah.

Joe: I love the strategy for part of the money. Yep. I’ve looked, we just had a question on this too, with the, the guy wants to do the long short fund, But you wanna be careful and do your due diligence on what actually the investment is, how it works, and who and who’s doing it.

Al: What’s their track record?

Joe: Yeah. Who’s managing it, what’s the track record? But from a a, a tax planning perspective, yeah, you will probably get a little bit more losses because they are shorting. Stocks that they believe is gonna go down. No one has a crystal ball. No one can tell what’s going on. But because you’re one 30 on the up, I mean, it still kind of washes some of that stuff out a little bit.

Al: Yeah. So here’s what my crack research told me.

Joe: Okay, good.

Al: It’s, it’s, it’s, this is something that may be appropriate for high net worth individuals.

Joe: 8 million.

Al: I think that, I think it qualified.

Yeah.

Al: Yeah. Check. Someone who’s comfortable with active management. So a lot of investments these days are passive, meaning they, they try to replicate s and p 500 or some, some kind of index.

Active means the fund manager is buying and selling stocks that they think are gonna outperform. So that’s what active management is. Passive is kind of hit the, the industry in, in a big way. I’d say more investments are passive these days. But anyway, so if you, if you’re comfortable with active. And then you’re also comfortable with tracking error means that you’re not necessarily gonna follow the market.

’cause it’s, it, it may be better, it may be worse. It just, it depends how that fund manager did.

Joe: Right? They’re buying and selling stocks. They’re not buying the entire market. Right. So tracking error, is that all right? If I’m trying to track the s and p 500, so I’m mirroring that s and p 500. So I look, hey, the s and p five hundred’s up 12%, but this fund is up four.

That’s tracking here because they’re buying and selling stocks all over the place. That might not be in the s and p 500.

Al: Yeah. Now I, I would say, Joe, it’s probably not super tax efficient because when you have short sale losses, they’re always, always ordinary.

Joe: Even if they, even if you held them short, long term losses,

Al: short sale losses, they are, are ordinary Plus an active fund is gonna have higher turnover.

Joe: They’re very tax efficient though, because of the short, you’re getting losses on it. Well,

Al: if, if it works, if it works.

Joe: If, if you get a really positive return and there’s a lot of trading that there’s short term gains. Yeah, yeah. Ordinary income, short term losses. You’re not paying tax on short-term losses.

Al: No. But if you short it and the market and that stock goes down, that’s actually a gain

Joe: gain.

Al: So it’s, it’s ordinary is what I’m saying. And then, because of that,

Joe: but if you short it, if it goes down, you make money.

Al: Right. But if you, then you sell it, it’s ordinary income, correct. Is what I’m saying.

Joe: Got it.

Al: Yep, yep. If it goes up, you lose money and it’s the ordinary loss. Yeah. Yeah. So because of that, it may be most appropriate for, retirement accounts. ’cause it’s not super tax efficient. But it depends upon the manager.

Joe: I mean, was your crack -?

Al: That was Chat GPT

Joe: Okay. Alright.

Andi: So Carl says it’s something about it being a 1 30, 30 product.

So this isn’t, this is something that’s already prepackaged.

Joe: Yes. It’s a, it’s a manager that’s managing the,

Al: that’s separate managed account in this style.

Andi: Got it. Okay.

Al: Yep. me personally, I wouldn’t do it, but I, I get, I get why there’s an advantage. I get why some people would want to try it. I’m fine with the market returns. That’s just me.

Joe: There you go. I don’t know. I like it.

Al: You like it? Would you do it?

Joe: Yeah.

Al: Yeah,

Joe: I would.

Al: Okay. Soon. As soon as you get hit 8 million, then maybe. Yeah.

Joe: I need a long way to go. I’m Carl Sandberg’s pet money. but he’s, he’s got 8 million. Can he retire?

Al: If he’s spending 400, he’s gonna retire at 60, so I didn’t run the math on this. By the time he retires, I think he’ll have enough to have a 4% distribution plus that doesn’t even include his fixed income. So, yeah, I think so.

Joe: Alright.

Al: I think so.

Andi: Would you do it? Is it worth it? Are you doing enough? Sometimes the hardest part of the plan isn’t the math, it’s the ‘head trash’ that makes us feel like we always need to be doing more. Jumping on a complicated-sounding strategy, chasing hot stocks, panicking during market drops, trying to time the market, following what everyone else is doing: these are all emotional wrong turns that can get really expensive over the course of your financial life.  If you have a love/hate relationship with money, you need to watch this week’s YMYW TV. Joe and Big Al break down all the biases that trip us up, they identify the four Money Personalities that secretly drive our financial decisions, and most importantly, they share the tools for keeping your emotions from costing you any more of your money. Click or tap the links in the episode description to watch YMYW TV, and to download the companion Emotionless Investing Guide. It’ll show you the most common emotional investing traps that derail portfolios and the disciplined strategies that can help you stay invested and focused on long-term results. It’s yours free courtesy of YMYW and Pure Financial Advisors. When you grab that guide, use the drop down on the form to let us know that you heard about it on the podcast.

We’ll Never Need Our Retirement Accounts. Should We Still Do Roth Conversions? (Tyrone and Tova)

Joe: we, so this was an email I came in. There’s no name, no name?

Al: It’s Tova.

Andi: It’s, it’s in the body of the email.

Joe: Tyrone and Tova. All right.

I’ve been a fan of this show for years, and I listen while I exercise. All right. Come on, get one more rep. Let’s go push it.

Al: You can do it.

Joe: You got it. You got this. You’re getting jacked. Who needs upbeat songs when retirement planning gets the heart racing? Thank you for your consideration to my questions.

I have two spitball questions for you. My wife Tova drives a 2022 Toyota RAV4, and I Tyrone. I drive a 2003 Toyota Highlander. I could just see Tyrone right now just at the gym ripping, curls out. He’s gonna go little. Maybe it’s backing. Buys today best and tries tomorrow.

Al: I got that image too, so I’m, I’m right with you.

Joe: All right. We hardly ever drink. Of course not. Tyrone, you’re dad. You’re

the

gym.

You’re at the gym. Listen to this garbage. When we do, we enjoy leurs.

Al: Okay.

Joe: We have two children, 24 19. They’re both in college. 24-year-old will graduate next May, but the 19-year-old, my anchor baby still has three more years to go.

What’s an anchor baby?

Al: I’m guess guessing that means he’s sort of tied to his job until the. Anchor baby gets done with college and self-supporting.

Joe: Okay.

Al: I think that’s what it means.

Joe: Is that what any, any other comment

Andi: That is what it means. There is another meaning that means that they, ha immigrated to the United States and had a child is also a term for an anchor baby, but I don’t think that’s how it’s meant here.

Joe: Got it.

Al: Okay.

Joe: Okay. Still three more years ago, once the 19-year-old finishes, we can finally pull up the anchor there.

Al: Okay.

Joe: There you go. I should just continue to read. and it should be smooth sailing into retirement for Tova and me. According to our Fidelity advisor and their tools, we will not need to use our retirement account money at all. However, I wanted to get your spitball opinion. See Tyrone knows where to go.

Al: Yeah.

Joe: Fidelity advisor?

Al: right?

Joe: Or

Al: wanna double check

Joe: or Your Money, Your Wealth®.

Al: Second opinion.

Joe: no offense to Fidelity advisor.

Al: I’m sure he or she’s great.

Joe: Wonderful, wonderful human being. If we do not need this money, what are our options for the retirement accounts?

Okay. Our Fidelity advisor is pushing Roth conversions, but we have never done them. Are they really necessary if the kids will inherit the money anyway? In addition, we would need to sell shares from our brokerage account to pay for the conversion, which means. We would also owe capital gains tax. That does not make much sense to me. We’re also aware of the widow and widower tax issue that comes with kicking the can down the road, and we are somewhat prepared to deal with those consequences.

Al: Okay.

Joe: Okay. Number two, can we stop making monthly contributions to our 403(b) accounts and instead enjoy our money now by using it for fun things. All right. I feel like we already have plenty. When I’m gone, there’ll still be enough for Tova, maybe even for her to buy a new husband or a boyfriend who could cook. Wow. Tyrone.

Andi: So nice of it to be thinking ahead for her.

Joe: Look at that honey. Oh boy.

Andi: Buy yourself a boyfriend or a husband who can cook. Wow.

Joe: Once again, thank you for your spitball answer. Here’s our information. I am 64, wife is 56. my salary is $150,000 a year. The wife’s is one 20. Retirement is looking at June of 2026. I knew they would have a giant pension. Pension is $154,000 a year, and hers is 71. Must be educators.

Al: Yeah, that’d be a good guess.

Joe: Administrators

Al: 200. 225,000 total.

Joe: $225,000 total.

Al: He’s got a 403(b), so that would seem,

Joe: yep. I bet he is. an administrator.

Al: Mm-hmm.

Joe: At a school.

Al: At a college maybe.

Joe: Yep.

Al: Yep.

Joe: All right. Smart. Very smart individual there.

Al: Yep.

Joe: Social Security, me age. Ooh. Global double dipping too. It’s probably not the school district then.

Hmm?

Al: Maybe

Joe: not. Maybe hospital.

Al: Oh, there you go.

Joe: Hmm. Okay. God, his pension is the same amount of his salary.

Al: I know. It’s actually higher.

Joe: It’s 154,000 for his pension and he makes 151,000.

Al: Yeah,

Joe: maybe this year he’s working a little bit less than he had.

Al: Well, and that’s why he is retiring this year.

Joe: Yes.

Al: Why not?

Joe: Yeah, why not? Let’s get out. My pension didn’t pay more than my, my salary.

Al: Yeah.

Joe: all right, so he is got Social Security as well, $53,000. His wife is gonna be 25. so they got two and two and a half million of pre-tax of 1.2 in Roth brokerage account is 800, savings is 40,529. Account is 85.

Total assets is 4.5. Call it. Yep. You’re spending $150,000 a year. He’s got a 30 year mortgage. He had 2.6 5 25 years remaining. All right. So 150 grand, Tyrone. You make 150 grand.

Al: Yeah,

Joe: you’re good. Way good. Yeah. You’re gonna have the biggest tax problem that you’ll ever see.

Al: So, so I, I concur. And I think he’s not too worried about that.

Joe: He doesn’t care.

Al: Yeah. I’m spending my,

Joe: he’s worried about paying taxes out of his brokerage account.

Al: That’s right.

Joe: Versus jumping up to the 50% tax bracket, which on his 403(b)

account,

Al: which is what is going to happen. So let, let’s, let’s explain why. So right now there’s 2.2 million in deferred, and your, your wife Tova, she’s gonna work a little bit more.

So that’s gonna grow a little bit from her, contributions, but more importantly, by the time you have RMDs, this could be double, this could be 4 million, Joe.

Joe: Four or five or five,

Al: yeah. Even. Let’s just say it’s four, right? So your first year of an RMD, it’s about a 4%, RMD distribution 160,000. So you’re gonna add $160,000 of income to the 300,000 of fixed income.

So now your income is 460,000,

Joe: four 50 to 500 grand.

Al: So you don’t think it would make sense to do some Roth conversions in lower brackets to help avoid some of the bigger brackets? This, this is one of the clearest cases of Roth conversions I’ve seen in a while.

Joe: Yeah. Yeah. If you don’t care about taxes, then don’t do it.

But it sounds like he is sensitive to taxes because he is like, it doesn’t make sense. I’m gonna have to pay taxes on Yeah, on my, my brokerage account. He doesn’t just need a hundred thousand.

Al: Doesn’t wanna pay taxes today.

Joe: Yeah. But when he gets older.

Al: Yeah,

Joe: he’s gonna be, you know, when you get older, you get a little bit more angry.

He’s gonna be really angry.

Al: He is gonna be angry. He’s going to write,

Joe: he’s gonna call, he’s gonna call us back.

Al: He’s gonna write us again and say,

Joe: why don’t you,

Al: you should have been stronger on that recommendation.

Joe: Yeah. Working out here, I’m getting my, I’m getting jacked, but I don’t wanna pay taxes. And then now I find myself just losing half of all of the money that I worked so hard to save.

Al: Yeah. And furthermore, that four or $5 million, you pass away, right? And then that money goes to the kids and they have to withdraw it in 10 years and they’re probably gonna be working and making some decent money at that time. Imagine what that does to their tax brackets. So it’s, it’s not just the kids, it’s you because of your RMDs. When you have this much fixed income and you’ve got a lot in a retirement account and you’ve got the means to pay the taxes in a brokerage account, this is a. Classic case of where you wanna do conversions because of the brackets you’re gonna be in at age 75.

It’s, it’s pretty crystal clear to me.

Joe: Yeah. so,

Andi: and in case it’s not clear, if your kids inherit the Roth IRA, they don’t actually have to pay tax.

Al: Yeah.

Andi: Tax-free forever. For life for you and for your heirs.

Al: Good. Good point, Andi. They still have to withdraw it in 10 years, but they don’t have to pay tax on it.

Joe: Zero tax in the Roth ever. So the pre-tax accounts at 2.2, you know it’s gonna hurt a little bit. It’s gonna be like a little bee sting, you know, then it’s outta sight, outta mind.

Al: Little bee sting. Okay.

Joe: Yeah, it’s just, yeah, maybe a couple bee stings he could be. but this is a gr- I mean, he’s sitting really good and I get it. It’s like, you know, does it really matter? I got great fixed income. We don’t spend that much, but yeah, you’re, you’re 64. Just wait till you turn 74. Yes. And then you got one year facing down that barrel, you’re like, man, I probably should have done something. Take it slow. Yeah. You know, you don’t have to take up, you know, just start slow and you, you’ve never done it before. I get it. Start with. $20,000 conversion. I don’t care.

Al: Just to get a sense of what it feels like.

Joe: Yeah, right. Oh, okay. The tax wasn’t that bad and then you go to 50, then you might go to a hundred, and then you do a little bit more. Then you realize, wow, look at all this money in the Roth. IRA, that’s all mine. This $2.2 million. Here’s another way to think about it. The $2.2 million on your statement, you don’t have $2.2 million. Tyrone. You don’t. You have one and a half. That’s it because half of that, or 40% of it is going to go to Uncle Sam. You’re gonna pay 30 some odd percent to the feds. And where does he live? Where in his town?

Andi: We don’t know. This one was actually sent via email, so he did not give us his location.

Joe: Oh, okay. Then you gotta pay state tax.

Al: Yeah. Whatever that is.

Joe: Yeah. 45%. It’s gonna be a big number. Right? So you take 2.2, take 40% to the IRS on the low side. That’s really what you have. Mm-hmm. And every day that this dollar continues to grove, every dollar that you make 40 cents goes the the IRS. Oh, now you made $2, another 40 cents, another four, you know, another 40%. Another 40%. If you kind of think of it like that, how do I get my partnership back, right? Everything costs you a little bit. So I wanna buy my partnership back from the IRS, so I’m gonna buy it back at 30% versus 40 or 25% versus 40. Look at what tax bracket that you’re in today. You make 150,000. Your wife makes one 20. Give the standard deduction. They’re in the 22, 24.

Al: Yep. Yep.

Joe: Right. So I would, yeah. And if you wanna stop saving, stop saving. Right. Have fun with that money. Yeah. I don’t care. You’re totally fine from an asset and income perspective here, but I would start doing conversions tomorrow.

Al: Yeah. And another way I might say it is this. If you do a tax projection one year at a time, you’ll never do a conversion. Because you have to pay more tax upfront. It doesn’t feel right, doesn’t feel like the right approach. But if you look at tax projections over the next 30 years, you’ll make completely different decisions because when you look at your tax bracket. At RMD age at, at 65, on top of 75, sorry. On top of all your other income, all your pensions and your Social Security, and oh, by the way, interest and dividends from your non-qualified account, that’s a big number. Your income could be, could be close to 500,000.

Joe: Yep.

Al: Yeah. Okay.

Andi: As people start to get closer to RMD age, do custodians or anybody send out anything that says, Hey, by the way, there is going to be required minimum distributions on this account starting at this time, and this is how much it’s going to be?

No. Are people even aware of the fact that RMDs are a thing?

Joe: No. I would say most don’t.

Andi: That’s like crucial.

Joe: We, you know, two CPAs. CFOs of companies

Al: Yeah.

Joe: Came in

Al: and they didn’t do it.

Joe: They, they, they had no idea that they had RMDs coming until like the Oh my God.

Al: Right.

Joe: Our CPA told us that we have to do RMDs this year.

And guess what? They were like $300,000. Yeah. And they were like really smart tax people, but Right. You got the tax code, you got retirement accounts. People think it’s retirement and so, yeah. People are, they, they just don’t know really what’s, but she, Tyrone and Tova, they got an advisor.

Al: Yeah.

Joe: So

Al: Fidelity.

Joe: Yeah, at Fidelity.

Al: So, and, and that’s why he’s saying do Roth conversions or she, because it makes a lot of sense in the case,

Joe: but I don’t know what they’re showing him if he’s not bought in.

Al: Yeah,

Joe: well, he knows about the widow and widow tax, but if you run a, just a, a cash flow or like an Excel spreadsheet of looking at, here’s your income, here’s your expenses, and then run inflation on your expenses and run, I don’t care, 3%, 5%, 6% on the money that’s growing,

Andi: right.

Joe: Then you look n All right, at each 75, here’s my RMD and use 4% of what that RMD is on top of what your other income is, is gonna show you what income you have and then look at the tax tables to determine how much tax that’s going to be. And if that number still doesn’t bother you, then don’t do it, right.

You will pay a lot more in taxes. You could put another hundred. Several hundred thousand dollars into, you know, either your pocket and spend more money or to the, the heirs or to a charity or, or whatever. I get it. No one likes to pay taxes, but I think if you did this correctly, you would pay a lot less taxes over your lifetime.

Al: Yeah. That, that’s the key right Over your life. When, when you think of one year at a time, it’s, it’s a different decision. But when you, when you look at, like, if, I don’t know what Fidelity’s doing either, but did they show you, I’m sure they showed you what your assets are gonna do over the rest of your life and it looks good, so I’m not worried.

But did they show you what the taxes look like over the rest of your life? That’s kind of a different chart. And when you see that you may wanna make slightly different decisions today to avoid some of that in the future.

Joe: You should go in the 130/30.

Al: Yeah.

Joe: Right. I love the 130/30.

Al: Oh, you’re gonna do it the

Joe: first, the first day I’ve ever heard of it. I’m all in.

Al: You’re all in? Okay.

Joe: Yeah. You’re gonna talk to my Fidelity advisor?

Al: Yeah. They may not have heard about it.

Roth Conversions vs. Social Security: Which Comes First? What About IRMAA and NIIT? (Mark, California)

Joe: We got Mark from, our hometown here in San Diego. Hello, Andi, Joe and Al as a longtime listener and fan. I’m excited to reach out for the very first time. All right, mark, you can just stop by too.

Stop by, say hello.

Al: Right local.

Joe: We’re just right down the street. I’m also a strong supporter of your company.

Al: Hmm.

Joe: Oh, alright. Okay. Well, I enjoy managing my investments personally. I’ve recommended several friends to your company. Oh, thank you, mark. And they all express their satisfaction with their advisors.

Al: Okay.

Joe: your commitment to educating clients through various media alongside your financial management services truly sets you apart from many firms in the industry. Thank you for all you do. Wow. That’s a very nice, Andi, you kind of set us up super nice here. Yeah. Not to brag.

Andi: That’s what Mark had to say.

Joe: No,

Andi: I could’ve deleted it, but

Joe: No, we are, yeah. Truly, we just set ourselves apart, Al.

Al: that’s very nice of him to say.

Joe: Yeah.

Al: We try our best. We’ll put it that way.

Joe: And we’re real.

Al: Yeah, we are real.

Joe: We’re very real.

Andi: You are not AI. This is not the AI Joe and Al.

Joe: We don’t take ourselves very seriously. I was at this conference, right? It’s a financial planning conference.

Al: Yeah. The one you spoke at.

Joe: Oh yeah. I was on the I was on a panel.

Al: Yeah, on the panel. Oh, okay. The expert.

Andi: Oh boy.

Al: Did they go to your head?

Joe: No, not at, man. There’s a lot of really. Egos in this?

Al: Oh, in this space there is,

Joe: That’s the first conference I’ve been in in 17 years.

Al: Wow. Okay.

Joe: I think that’s the last one.

Al: It’s not, never been your thing has it?

Joe: No. It’s just like you get, there’s people that just love to go to there and they, they think they’re, you know, like the cat’s meow. I think that’s the first time I’ve ever said the Cat’s Me out too. I don’t know where the hell that came from.

Al: I was trying to think how do I respond to that.

Joe: I was gonna say something that probably wasn’t appropriate, so I thought that was, that was alright. That was the first thing that popped in the head.

Al: That’s pretty- is that something your mom said?

Joe: I don’t know where it came from. I mean, I’m embarrassed that I just said that. My wife is 65 and I’m 64. We’re both retired at 59 and now spend our time traveling and enjoy life. Alright, good.

Al: Okay.

Joe: All right. Let’s see. What do we got? While my wife enjoys her wine, I prefer the occasional IPA.

Al: Okay.

Joe: She drives a 2021 Mercedes GLC, and I found, and I’m fond of my 2009 Infinity Ex 35. I’m writing today about the topic you frequently discuss. Roth conversions and the timing of taking Social Security. This is a very important strategy and I appreciate the challenge of keeping such topics engaging. So here are the moving parts, or here’s the money part total, 4.7 million two and a half in an IRA $500,000 in a Roth 1.4 in a tax loan, $350,000 in cash.

We have a small pension of $4,000 and our tax bill account generates about $40,000 in dividends. In interest we use for our expenses. Interests and dividends are reinvested in both deferred and tax-free accounts. Our annual expenses are around $150,000, including approximately $50,000 set aside for discretionary travel.

Initially we plan to take Social Security at age 70. However, my wife is concerned about the future of. Viability of Social Security and is considering taking it this coming January, which would yield about $38,000 annually versus 50,000 at age 70. I intend to wait until my FRA or ideally age 70 to take mine.

I’m exploring a Roth conversion strategy while keeping in mind both IRMAA and net investment income tax with RMDs 10 years away. It looks like we could convert about $80,000 Ann annually without claiming Social Security. Although obviously the conversion amount would decrease if she opts in to take social Social Security.

My dilemma is how much emphasis to place on conversions. Clearly they are necessary. But I also wonder if I should engage her, or if I should encourage her to delay claiming Social Security to focus on conversions. I don’t want to trigger IRMAA and net investment income tax, but I also don’t want to prioritize avoiding these taxes now only to face them at age 75.

Additionally, my plan is to withdraw living expenses from our taxable account, allowing our deferred accounts to continue growing. However, taking some expenses from my IRA would reduce the RMD, even though I prefer the approach of taking money from the taxable first, allowing both deferred and Roth to grow.

I greatly appreciate your in insights spitball on how to navigate this complex situation. Thanks again for your invaluable work. All right, mark.

Al: Okay. What, say you take it outta the retirement account?

Joe: Money is money. It doesn’t matter if it’s deferred, if it’s in a brokerage account or if it’s in a Roth account.

Right. Money is money. You’re gonna have an RMD issue. You need to do conversions or spend the money out of the retirement account.

Al: Sure.

Joe: I don’t like, I think he’s got a dividend paying stock strategy.

Al: Mm-hmm.

Joe: I don’t know if I, if I’m a big fan of that, right now because I want to control the income that hits my tax return.

Al: Yeah. ’cause he’s getting about a little over 3%. Dividend

Joe: dividends. And once the SMP is probably one,

Al: which is a little high. I mean, it’s, it’s good.

Joe: But yeah, it’s great that you’re getting the income, but the income is taxed. And how is qualified and non-qualified in Correct, in regards to the dividends and how, how, how, what type of tax he’s paid.

Correct. Correct. well first off, congratulations, mark, you’ve done a phenomenal job. I think if I was Mark, yeah, I would. I do conversions and tell my wife to delay Social Security.

Al: How much would he do Top of the 22? Top of the 24? He, he’s, he’s looking at the 12% bracket.

Joe: I know. Because he doesn’t wanna pay IRMAA.

Al: Right.

Joe: Or NetApp has spend income tax.

Al: Correct. I understand.

Joe: I would go to the top of, at least in, somewhere in the 24.

Al: Yeah. I, I would too.

Joe: I don’t know if I’d go to the top of the 24. ’cause that’s a giant bracket that’s $400,000 of, of taxable income.

Al: Yeah. When I, when I kind of think about it with his income and.

If she takes Social Security, they could do, they could do about $350,000 in a, in a conversion, and stay in the 24% bracket. I’m not saying you need to go that far, but here’s how I want you to think about this. Net investment income tax is gonna be 3.8% on your dividends. Interest and capital gains. Okay, so you said you have about $40,000, so we’ll just say 4%.

Make it real easy. Right? So that’s about $1,500 of extra tax. Ouch, right?

Joe: One. You’re tripping over dollars to

Al: No, no one wants to pay that to

Joe: pick up pennies.

Al: But if you converted 350,000, that $1,500 compared to the 350,000 is like a 0.4% tax rate. Again, I’m not saying you should convert that much. I’m saying that’s how you should think about these things.

You gotta pay some extra IRMAA for a year or two. Okay. So that’s just like an extra tax. Does it still makes sense.

Joe: You look at your RMD now you’re in your sixties and it’s got 10 years.

Al: 10 years. And so the the, the, the money could double two, two and a half million could be 5 million. Mm-hmm. RMD could be 200,000.

Plus Social Security plus your non-qualified income, right? So think about, okay, I guess I’m gonna be in what’s now the 24% bracket then. So why am I tripping over these dollars or pennies to save the dollars, as you like to say.

Joe: Tripping over dollars to pick up pennies.

Al: Got it. Oh, that, that makes more sense than what I said.

Joe: It’s like now, like, here, let me get this penny. And you’re Yeah. You’re not looking at the bigger picture thing.

Al: Yeah, good point.

Joe: Yeah, I, either way you’re gonna be fine, but if you maximize this for your life expectancy. You definitely wanna be thinking about several years and even just even out the tax, you’re going to have low tax years, right?

And low IRMAA, no. And, no net investment income tax. And then guess what, when the RMDs happen, your IRMAA’s gonna be the highest for the rest of your life. You’re gonna have net investment income tax for the rest of your life. So it’s like. Choose your battles here, right? Do you wanna pay a little bit of IRMAA and a little bit of net investment income tax upfront to kind of get you out of those higher brackets where you’re going jack up your IRMAA anyway?

Al: Yeah. The only thing I would do differently than you is I would let my wife take Social Security if she wants to.

Joe: Yeah. Because you know,

Al: because you know

Joe: it’s her money.

Al: It’s her money. Why not? Right? So it just means there’s a little bit less conversion.

Joe: Yeah. You’re like, hey. Honey,

Al: come on.

Joe: Hold on, hold on. I know you want that. but we’re gonna hold onto that and I’m gonna take this money and put it into this Roth. And then we gotta pay a bunch of tax

Al: and then, yeah.

Joe: A and then what the hell are you doing? I don’t have my Social Security. And now we have this tax bill.

Al: Our expenses just doubled.

Joe: Mark, stop listening to those jackasses.

Andi: Roth conversions can be incredibly powerful for creating tax-free wealth in retirement. But if you do them wrong, they can create a pretty big tax bill, and possibly a relationship problem. Download our Ultimate Guide to Roth IRAs and learn how contributions and conversions really work to give you tax-free gains for life, even if you’re a high earner who can’t contribute directly to a Roth. You’ll also learn the difference between a traditional IRA, a Roth IRA, and a Roth 401(k), the rules for taking money out of your Roth account, so you don’t accidentally trigger taxes or penalties — and a lot more. Now, if this is way more moving parts than you expected and you don’t want to tackle it on your own, I don’t blame you. Schedule a free financial assessment with Joe and Al’s team at Pure Financial Advisors. Meet in person at one of our nationwide offices, or online from anywhere. They’ll review your entire financial picture and determine whether Roth conversions help or hurt your retirement plan. If you decide to move forward with Pure on your team, they’ll help you stay on track and they’ll handle all those complicated moving parts for you. If you decide not to move forward, that’s fine too. There’s no obligation. So why not let an experienced, credentialed set of eyes give you a second opinion on your DIY plan? Click or tap the free financial assessment link in the episode description or call 888-994-6257 to get started, and tell a friend.

How to Structure Non-Qualified Deferred Compensation Payouts When a Layoff Might Be Coming? (Boat Drinks)

Joe: Boat Drinks.

Al: Boat Drinks.

Andi: Do you get that reference?

Joe: Boat Drinks?

Andi: Yes.

Joe: I drink on a boat.

Al: It’s a Jimmy Buffett song, parrotheads know all about it.

Andi: Yeah.

Joe: Boat Drinks.

Al: Mm-hmm.

Joe: What’s a boat drink? Beer.

Al: Oh. It’s like a little fruit, fruit drink with an umbrella.

Joe: Got it.

Andi: It was apparently also a recurring theme in the Andy Garcia movie Things to Do in Denver when You’re Dead.

Joe: Things to Do.

Andi: Did you ever see that?

Joe: No, I have not.

Andi: Yeah, I hadn’t either.

Joe: No,

Andi: but

Joe: I was gonna say that sounds like a

Andi: 1995

Joe: unusual movie for you, Andi?

Andi: Yeah. No.

Joe: Okay. Hi, Joe Al Andi. You know what I’m rewatching?

Al: What.

Joe: Game of Thrones

Al: are you?

Joe: Yes.

Al: You know, my, we’re gonna go to Croatia, so I need to, I need to watch a few episodes just to get a sense of Dubrovnik and the scenery.

Joe: Yeah, it’s because I watched like the, the Seven Kingdoms. It’s.

Al: Yeah.

Joe: it’s a new one that’s out that’s like centuries before the game of Throne.

Al: Yeah.

Joe: So I was like, you know what? I’m kind of like into, kinda into it. Cool. Let’s,

Al: let’s, let’s redo.

Joe: No, let’s, yeah, we gotta redo. anyway, sorry about that. let’s get back to Boat Drinks.

Al: Yeah.

Joe: I don’t know how Boat Drinks and Game of Thrones.

Al: I know, but,

Joe: that’s where my brain’s at today, man. Thank you for your spitballs. Never miss your great podcast. I drive a 2019 Volvo SUV Drink of Choice Red wine pinot occasional beer. Love a Sam Adams occasional beer love. Okay. Have occasional beer.

Andi: That’s an occasional beer. Love a Sam Adams.

Joe: Ah, thank you for that.

Al: Yeah. I was wondering about what beer love was.

Joe: Oh, beer love. I was like, I kinda like that

Andi: feeling the beer love.

Joe: Oh, I’m feeling the beer love right now.

Al: Yeah.

Joe: Okay. My question is, let’s see. Non-qualified deferred comp related. NQDC, that’s what I’m guessing what NQDC stands for.

Al: Yeah, you are correct.

Joe: Okay, I haven’t planned well in my next year. Election is coming up soon. Have four existing tranches of the NQDC saved four 50 total and currently set up distribute equally over years one, two, and three after separation from my job, I’m 58 with my wife. We have about $700,000 of gross, income. All in. We live in a very high cost of living area, planning as though I will lose my job in the next year or two.

As the industry is under pressure, have about $1.7 million in pre-tax in the 401(k), maybe a hundred thousand dollars in the Roth. Hope to cover significant oh, convert significantly to the Roth. we got a special needs child for legacy and retirement after separation. The NQDC pension may impact conversions obviously.

I’m thinking of going about $250,000 next year in the NQDC. Do you think he likes typing NQDC?

Andi: It’s a lot better than non-qualified deferred comp.

Joe: Yeah.

Al: Yeah, that’s true.

Joe: Okay. To reduce the tax hit, all right. In 2026 in aggressively save in Shoup period before Social Security. All right. We’ll have $11,000 pension when I depart No cola can delay, which would add about $300 a month to the pension benefit each year.

I delay thought about the non-qualified per comp strategies, if so, on distributions options are. Annual lump sum up to five years after separation or split up the tranche over two and 15 years after Separation, also can change existing distribution. Must delay any of these changes distributions funds past five years from the change date.

Okay, and if I’m not employed a year after the change, it does not take effect. Would appreciate your spitball. Thank you. Boat Drinks. Andi may know this from a mildly obscure but great movie.

Andi: See, I had no idea. I figured that was probably something you might know. And he says and PS, I do not own a boat.

Al: I just know the Jimmy Buffett song

Joe: not own a boat.

Al: Good song actually.

Joe: Okay. Alright, so couple things. Let’s just, for our wonderful listeners, let’s explain what an NQDC is.

Al: Yeah. Non-qualified deferred comp plan. So the, this is a plan that some companies offer usually to high income employees or, and or executives. And it’s a plan where you can defer a bunch of your salary into the plan.

And it’s not like a 401(k) where you’re limited to 30,000 or whatever the number is. You can put as much as you want. You could put 50% of your salary, you could put 10% of your salary and 50% of bonuses or whatever you feel like you have to make that election, usually in November of the year before. And then you can go ahead and then have a bunch of your salary deferred and then the company holds that money.

And typically these plans allow Joe for. Payments to be made after you retire and you, you pick when the payments start, and typically they’re for five years or 10 years. I think here he is saying two to 15 years. But, it, and every plan’s a little different. So it’s, it depends upon the plan. But, but the, the thing is, when you, every year when you make the election, you have to decide what your payout period is and if you wanna change it.

You can, but then you have to wait five years from that change date to get your first payment from that plan. And you can have overlapping plans. I mean, you can have six of them and two of them pay within three years after you separate it or whatever. Right. So,

Joe: yeah. So each year you’re electing the year before you actually make the income?

Al: Yeah.

Joe: So in November, alright, I’m gonna guess I’m making 700,000.

Al: Yeah.

Joe: I’m only spending a hundred thousand. I don’t wanna pay tax on 700. Right. So I’m gonna elect to defer half my income. $350,000 goes into the deferred comp plan next year.

Al: Yeah.

Joe: But I have to elect when I wanna get that money back.

Al: Yeah. At that time.

Joe: At that time.

Al: Right.

Joe: And it’s like,

Al: and how? How do you know?

Joe: Yeah. So you gotta do some planning here. And it’s like, all right,

Al: when, when I’ve seen people do this successfully, Joe, they’ve had an Excel spreadsheet Totally. And they, they’ve got like 10 tranches and they’re figuring out, this one pays out this, this, because the goal is, so you don’t have too much income in any one year to push yourself in a higher bracket,

Joe: right?

Because you’re getting the tax deduction today. It’s all pre-tax. It goes in the deferred comp plan, but when it comes out to you, it’s all ordinary income.

Al: Right.

Joe: So, you know, if you take the lump sum, all of that is gonna come as ordinary income. So you might lose half of it, just the tax, just to correct down what the tax rates are.

Al: Yeah. Depending upon your bracket and the state tax and, and all that.

Joe: So if you wanna push this thing out 15 years, that’s probably gonna be the least tax impact because you’re gonna get smaller payments that’s gonna push it out. But here’s the big caveat with deferred comp plans is that they’re not ERISA based plans.

Al: Right. Good point.

Joe: And so he’s saying, Hey, this company. The industry’s not doing well,

Al: and I may be laid off.

Joe: They might be laid off. These are assets of the company.

Al: Yes. And if the company goes bankrupt, it goes, bye-bye.

Joe: Yeah. That deferred comp that you deferred your, your compensation sits in this plan and is.

It’s subject to creditors of the company.

Al: So that’s such an important point. So, so if you think about it then, so a typical 401(k) plan, or 403(b) or whatever it may be, money goes in, you contribute, the company contributes, it’s goes into a separate account on your behalf. If the company goes bankrupt, it doesn’t.

Impact that plan. This is different. This is a deferred comp plan. You’re deciding to defer some of your compensation to a later date, which would be after retirement. And the company holds the money, not in a separate account. They just hold the money. So when you’re doing these plans, when you’re electing these plans, when you’re thinking about payout strategies, you always want to take a look at the strength of the company and wanna make sure it’s gonna be around, right?

Joe: You got Yeah, absolutely. ’cause it, it’s on their balance sheet. And, and that’s why they have all these funky rules.

Al: Yeah.

Joe: Yeah. I wanna change this. Actually. I, I, I don’t want to do it over 15 years. I want to do it over five. Sure, you could do that, but you gotta wait five years to get to start that tranche payment.

Al: Yeah. For the one you changed.

Joe: Yeah. For the one you changed.

Al: Now, now, based upon the fact he says the industry is not doing that well, you might wanna get a quicker payout than you’ve thought before

Joe: Exactly. 15 years. You wanna do three years.

Al: Yeah. Yeah.

Joe: So, yeah, be careful with the plan. I love the strategy in, in regards to, all right, you can defer a lot of your income this year, but you have to map it out.

Al: You do

Joe: of, well, how much is gonna come out where your other income sources are. He’s saying this is gonna be potentially a bridge for him for Social Security.

Al: Yeah.

Joe: So if you don’t have any other income, I like the strategy a lot, but if you have other income or if the tranch is too high,

Al: yeah.

Joe: that’s where you get in trouble.

Al: Yeah. And, and sometimes people don’t really think about it and all of a sudden they, maybe they have 10, five or 10 tranches and they elect. You know, five year payout in each one. And then in, in like any given year, you have five payouts and five different tranches, and so you have really high income. So just be aware of that.

But I, I would say the most important thing is to make sure that you feel the company’s strong enough that you’re gonna get the payments, because it’s not a guaranteed, like a regular ERISA pension plan.

Joe: Yep. And it’s funny. Because the money could be held at a, a custodian that you know of in that you could be picking funds that you know of.

Al: Yeah.

Joe: But those assets sit on the, the company’s balance sheet is the big difference there.

Al: Right.

Joe: Alright.

Al: Yeah. Yep.

Joe: Okay. Cool. Good question. Haven’t Yeah, that was a good NQDC

Al: Yeah.

Joe: Strategy.

Al: It doesn’t come up a lot, but it’s an important one for people that have it.

Joe: Yeah. You know what we’ve done in the past, if he has a lot of non qual or non, or like just brokerage account

Al: Yeah,

Joe: you would do that.

QDC for a pretty large amount, you could live off of the non, non-qualified dollars and do some conversions.

Al: Mm-hmm.

Joe: you know, so people that do have a non-qualified deferred comp plan kind of mixing strategies together.

Al: Right.

Joe: And sometimes works out quite well.

Al: And sometimes there are qualified deferred comp plans, which they’re, they’re less common. But it means then if you get the money, you can actually roll it into an IRA.

Joe: Alright, cool. I think we’re done. That’s great.

Andi: Cool, thank you.

Joe: All right. you’re off to Thailand.

Al: I am. In a couple days.

Joe: all over Thailand,

Al: South Phuket and North Chang Mai, and then we’ll end up in Singapore on the way back,

Joe: where was the big, wasn’t there a movie that had the hurricane or like a tidal wave?

Al: Don’t.

Andi: Good thing to bring up to mention just before he goes to that location. I’m sure he appreciates that

Joe: there wasn’t there movie or something like that?

Al: Well, if, if there was, it probably was Phuket because that’s a bunch of islands.

Joe: It’s very beautiful there.

Al: Yeah. It’s, you know that James Bond movie that has the vertical island?

Joe: Yeah.

Al: That’s Phuket’s down there. In fact, they call it James Bond Island.

Joe: Oh really?

Al: And we’re gonna go see it.

Joe: Okay, cool.

Al: Yeah.

Joe: Alright, well have fun. Be careful. Are you doing a cruise thing?

Al: No, no, this is just all land.

Joe: All land. Are you getting like really nice hotels? AirBnB?

Al: yeah, a couple, a couple really nice hotels. One in Phuket and one in Chang Mai.

Joe: Oh.

Al: And one in Singapore.

Joe: Nice dinners

Al: probably.

Joe: Oh

Al: yeah. Or maybe we’ll do street food. I’ve heard. That’s really good.

Joe: Okay.

Andi: Big Al’s retirement lifestyle.

Joe: Yeah, totally. Yeah. Think Al’s got got that big ass wallet. That’s why. That’s right. You gotta spend some of it.

Al: You got, you gotta spend it while you got it, right,

Joe: while we continue to grind.

All right. we’ll see you guys soon. thanks again for the questions and listening to Your Money, Your Wealth®.

Outro: Next Week on the YMYW Podcast

Andi: Next week on YMYW, how much can Reuben Sailing Shoes in Wyoming spend in retirement without running out of money? Should Leslie and Ben in Ohio continue converting to Roth after they start taking required minimum distributions? How can Mork and Mindy in Delaware balance Roth conversions, RMDs, the widow’s tax, and inheritance goals? And if Juan in Brooklyn quits or gets fired or divorces Mary tomorrow, will they be fine, financially? Join us, won’t you?

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.

_______

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