ABOUT THE GUESTS

Sam Ball

ABOUT Sam

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Joseph Anderson

ABOUT Joseph

Alan Clopine

ABOUT Alan

Published On

June 19, 2018

Show Notes

(00:52) Sam Ball: Disrupting Real Estate Investing With a New Blockchain-Based Platform
(09:51) How Not to Screw Up Your Roth Conversion
(21:19) How Not to Screw Up Your Roth Conversion part 2
(29:39) Big Al’s List: 5 Legal Ways to Get Tax-Free Income in Retirement
(37:33) Email Bag: What Are The Tax Advantages of Converting to a Roth?

Transcription

“It’s a bold idea, and I think if they can make it work, I really think there is a use case for it. One problem with crypto at the minute is that you’ve got a lot of tokens that don’t really do anything, and they’ll talk about what they are trying to do, and then if you look at them on a case by case basis, a lot of what they are trying to do can be done without the token itself that they’re trying to sell people.” – Sam Ball, Investor & Twitter Influencer

Cryptocurrencies have taken investing into risky, adventurous new territory over the past few years, and now a new blockchain-based real estate investing platform wants a place in your portfolio. Joe talks to Sam Ball, the young investor and Twitter influencer promoting it, straight out of the gate today on Your Money, Your Wealth®. Now I know some of you are excited about crypto, but remember, what you hear here is not investing advice, the investments you hear about may not be right for you, and you really should do lots of research and talk to not only your friends but also some investing professionals to make sure you’re fully informed before you plunk down your money on any investments. Besides that, Joe and Big Al have some very sophisticated advanced Roth conversion strategies, tips on how not to screw up your Roth conversion, and legal ways to get tax-free retirement income. Now, here are Joe Anderson, CFP® and Big Al Clopine, CPA.

:52 – Sam Ball: Disrupting Real Estate Investing With a New Blockchain-Based Platform

JA: It’s that time of the show, folks. The show is called Your Money, Your Wealth®. We’ve got a fantastic guest here, his name is Sam Ball, very interesting individual, Sam is in the UK, did a great TED talk. And I’m just going to have Sam tell his story. First of all Sam, really appreciate you joining us on the show today.

SB: Thanks for having me.

JA: Tell us a little bit about yourself. You’re doing all sorts of interesting things in the world of investing. Give us a little brief history.

SB: So, I started investing when I was at University and I was studying accounting and finance at the time, and I saved quite a lot of my student loan. I was scrolling on my Facebook one day and I just saw something about GoPro and the stock at the time, I think it was about $11 and I did quite a lot of research into it. But I ended up investing in GoPro initially. I think they were valued at about a billion and they had something like $400 million or $500 million just in cash. So I thought it seemed fairly safe because I couldn’t really lose more than half – that was my logic at the time. And it snowballed a bit from there. I found my degree, because it was an accounting degree, it was very helpful for actually analyzing the companies. So it was a hobby that just continued and grew. And then I ended up doing my TED talk about a year later, and there was a guy who came up to me afterward and he was like, “oh, I didn’t know you were into investing, what are you invested in?” And I was telling him that I liked mainly just stocks and shares. And I was like, “what are you invested in?” And he was like, “oh, I’ve got some crypto.” I just laughed at him. I think it was about March 2017, and my reaction was just “you’re not a real investor.” I just didn’t take it seriously. But he sort of peaked my interest, and I think Bitcoin at the time was about $2,000. So I was watching that, and then I went further and further down that rabbit hole which then led to an ICO approaching me, which is still pre-ICO – Nest, which is a real estate blockchain project. It’s mainly sort of financially based on my Twitter account – it’s got about 300,000 followers on it. Since then I’ve also finished my degree, and I’m now studying to become a chartered accountant. I think that’s covered most things.

JA: There’s a lot of meat on that bone. Let’s start with your TED talk. The title is “Becoming a Better Investor With Friends.” Tell us how does being an investor with friends make me better?

SB: Well, the thinking behind that was when I first started investing, I was talking to my friends about it, and it turned out quite a few friends who were also into it. We talk about it more and more and it did genuinely help, because I think sometimes with your own ideas as an investor, there are a lot of innate psychological biases that you can just fall prey to, even if you do a lot of research. And I think sometimes you don’t realize how stupid an idea is until you try to explain it to someone else. And then it also helps to have someone else play devil’s advocate with your ideas.

JA: But you could run into problems there as well, with groupthink, right? So you probably need to have a good diverse group of friends to keep you out of trouble.

SB: Yeah I completely agree with that – I think if for example we’ve got four friends that you talk about investing with and they’re all morons, you’re actually going to be worse off because they’re just going to make you want to do stupid things. It does help a lot to have people who aren’t like you.

JA: Right now, what is your investment strategy? What are your long-term goals here?

SB: I’m very much happy to just keep putting it in and leaving it. I’ve got no intention to start drawing from it at all, certainly within the next decade or so, I don’t think. It’s something Initially I started with stocks and shares and started with just one investment that went quite well, and then ended up in a few more, and then I ended up getting into crypto as a result of my friend, and then I’ve also bought a couple of pieces of art in between. But at the minute it’s the crypto part of my portfolio that’s growing, rather than the stocks and shares.

JA: Let’s talk about Nest. Let’s break that down a little bit.

SB: So, the very, very basic idea behind it is that if you want to be a landlord and enjoy rental investment income, you need either enough to get a mortgage or buy a property outright, and that’s quite a difficult thing to do for a lot people. So for me, when I was a student, there was just no way I’d be able to do that. But if I had £1,000 or $1,000 that I wanted to enjoy rental profits from, I could put it into a real estate investment trust, but then there’s no actual control. So what Nest is doing is, it’s going to take the ICO proceeds, it’s going to go out and it’s going to buy a load of properties. And in return for investing in the ICO, you’re going to get Nest tokens. And what you can use these tokens for is to stake them on particular properties within their arc, in the ecosystem that you like the look of. It works by smart contracts, which is essentially programmable money. So what happens is, the rent comes in and automatically, if you own say half of one percent of that property, you get your half of one percent paid directly to you. So even if you don’t actually have the money to invest in a full property, you can still enjoy rental income as part of your investment portfolio.

JA: So you’re basically a passive investor. So the ICO, the initial coin offering of Nest is going to gather some cash, and then they’re going to go out and purchase a bunch of properties. What is that offering? How big of a portfolio do they want to build, here?

SB: It’s hard to say because they’ll raise the money with Ethereum, and it depends on the price of Ethereum at the time. But I think they’re hoping to raise at least $40 million, and probably looking to go up to $100 million.

JA: Is it all based in the UK, or is it going to be global, or what areas are they looking at?

SB: It’s actually a U.S. thing. The website is MyNest.io. There’s a white paper on there which basically just says exactly what they’re trying to do and how they’re hoping to do it. It’s a bold idea, and I think if they can make it work, I really think there is a use case for it. One problem with crypto at the minute is that you’ve got a lot of tokens that don’t really do anything, and they’ll talk about what they are trying to do, and then if you look at them on a case by case basis, a lot of what they are trying to do can be done without the token itself that they’re trying to sell people. Whereas with Nest, I think there is a genuine use case, and it’s a really exciting project.

JA: Last question, what is some advice that you can give our listeners in regards to crypto? If someone’s just starting out that doesn’t necessarily understand it, where would you guide them, or what type of advice would you give someone if they’re interested in learning a little bit more about the crypto landscape in general?

SB: My first advice for someone who is literally just starting would be don’t invest straight away, because if you go in and you buy it and you don’t understand why you like it, or why you’re buying it, because it’s such an immature market, it’s so, so volatile. The daily movements are on a scale that if you’ve just been in stocks before, you’re not really used to it. And I think there is that, If you buy it and it goes down 20% the next day, you might just panic and sell it – you don’t really understand it and just think, “I don’t want to lose my money.” So if you’re wanting to learn more about it, I think first if you’ve got Netflix, there’s a really good documentary that explains Bitcoin and what that’s about and the story of how it started, and it’s called Banking on Bitcoin. And then, if you’re interested in reading books, I think the best two I’ve read are Digital Gold – that’s an explanation of Bitcoin from when it was first created and it takes it up to about 2013, 2014, I think. And then there’s also The Age of Cryptocurrencies, which is a bit more general, and it’s not just focusing on Bitcoin. And then The Bad Crypto podcast, if you go to that and you start at episode 1, the two guys who do that, when they started, they didn’t really know anything about it. So they take you through it as they’re learning about it. So they are actually explaining in beginners terms, and as they go on and on, it gets a bit more complicated as you learn more about it. So I think those are some good places to go to.

JA: We’re talking to Sam Ball, that was awesome, my friend. Where can people find more about you? Where can they follow you?

SB: I’m most active on Twitter and my username is @thesamball. And if you want to email me, you can reach me at samrball at googlemail dot com

JA: You got to check out his TED talk too, it’s called Becoming a Better Investor with Friends. Thanks a lot, Sam Ball, it was really great to talk to you.

SB: Thanks a lot.

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. For more from us on cryptocurrencies, blockchain technology, and real estate investing, we’ve got links in the show notes for this episode at YourMoneyYourWealth.com: things like, how to start investing in real estate and what is a REIT? Plus, a Cryptocurrency for Beginners Q&A, our interview with crypto-expert Amanda B. Johnson, and the answer to the question, “Is Cryptocurrency Real Money?” It’s all in the show notes for this episode at YourMoneyYourWealth.com. If you need more help, just email us at info@purefinancial.com

09:51 – How Not to Screw Up Your Roth Conversion

JA: Alan, Roth IRAs, there are some questions in regards to Roth IRAs, and it just so happens I think you pulled up an article that we could talk all about questions on Roth IRAs. (laughs)

AC: Funny you would ask me about that. It’s almost like we prepared, which we never do. But I guess I first want to say, a Roth IRA is a retirement account that grows tax-free which is different than a regular IRA that grows tax-deferred. So typically with an IRA or a 401(k), you get a tax deduction. So you pay less tax up front, but then all that money inside that IRA or 401(k) grows tax-deferred, and you will pay tax on that when you withdraw it in retirement. Roth IRA is kind of like the opposite. You don’t get a tax deduction currently, but you pull the money out in retirement and it’s all tax-free. Couple ways to get money into a Roth: you can do a contribution if you’re working, if you have earned income, $5,500 or $6,500 if you’re 50 and older, there are income limitations to be aware of. You can also do Roth conversions. You can take money out of your 401(k), your IRA, you can convert it to a Roth. There are no income limitations there. But realize, you have to pay tax on what you convert. And of course, that brings up a lot of questions.

JA: You know, we have this event here at the office. You were the keynote speaker for the Women’s Initiative for the Financial Planning Association.

AC: Correct.

JA: And I heard you talking about some Roth IRA as I was walking down the hall.

AC: Yeah, I was getting into it.

JA: Yeah, you were very passionate. (laughs)

AC: I was. (laughs) Because it’s important! And especially right now Joe, because our tax rates are lower, and in fact, a married couple with taxable income of up to $315,000 is still only the 24% bracket, and I know 24% is 24%, but it’s a lot lower than it was last year. And if you’re single, you could have taxable income up to $157,000. So what does this mean? If you’re single and your taxable income is $100,000, you could do a $57,000 Roth IRA conversion and still stay in the 24% bracket.

JA: So yeah, I think with the planning that we’ve done over the years, the 25% tax bracket was still a fairly cheap rate.

AC: Yeah, and we were converting last year and years prior routinely in the 25% bracket. Now it’s 22 and 24% bracket. So it’s even better.

JA: Yeah, it’s a really good opportunity for people at least to take a look at. So what questions you got?

AC: Well this is from MarketWatch. It’s titled How Not to Screw Up Your Roth IRA. The first question is from Frank. It starts with a comment. “It’s been my understanding that if converting from a traditional IRA to a Roth IRA, it was an all or nothing event. In 2017 I had no earned income and the same will happen in 2018. I never see any articles on partial conversions, such as $100,000 converted out of a million dollar account.” And he wants to know, “can someone do this? Can you do any amount? Do you have to do the full amount? How does this work?”

JA: Sure. I don’t know where he’s getting his information, because there’s a lot of information out there about personal conversion. But I think before, I guess if you’ve never heard of a Roth IRA conversion before, there could be a lot of confusion. You and I live in this world and we talk about it daily. It’s awful. (laughs) But no, there is no dollar limit. And we’ve seen this mistake a few times in the past, where you ask someone, hey you have a few hundred thousand dollars in a Roth. That’s a lot of money in a Roth IRA. How did you do that? He goes, “well I did a Roth IRA conversion.” I was like, “well, how much did you convert?” “All of it.” “Well, why did you do all of it?” “Well, I didn’t think there was another choice!” But no, the best way to look at this, without getting too technical, is – I guess at the back of the envelope you want to look at your tax bracket, and then you say, “how much tax am I willing to pay on this retirement account to get it into a tax free environment?” And if you have room in a certain tax bracket – $5,000 $20,000, $50,000 even $2,000. There is no dollar limit. So you could convert a dollar or you could convert the whole thing or anywhere in between. So the correct strategy is a little bit more complex, but I think a good back of the envelope strategy is just to look at maximizing your tax bracket. So like we were just talking about the 22 or 24% marginal tax bracket on the federal side, if you’ve got $10,000 of room to stay in your same tax bracket, well go ahead and convert $10,000, even though maybe the account is worth a million. You don’t have to convert the whole thing.

AC: And each and every year, you can convert whatever you want to. So let’s say, you’ve got 10 more years before retirement. And even in retirement, you can still keep converting. So what you wanna do is, you want to come up with a strategy for each and every year, depending upon what amount makes sense for you in that year. And in this question, Frank was saying he had no earned income in ’17 and then also in 2018, which of course would be a great time to convert because he’s in very low brackets – assuming there’s not a lot of other income.

JA: Right. And I think another reason to look if conversions, and again, what a Roth IRA conversion is is taking money from a traditional retirement account. Because when you pull those dollars out you’re going to be taxed at ordinary income rates. And a lot of you, the bulk of your retirement savings are in 401(k)-like accounts. And so, if you are diligently in your savings throughout the last 20 30 years to work your way up until retirement, as you pull dollars out to create your income, and if you’re trying to replicate your paycheck, well it’s going to be taxed almost identically as your paycheck today without any of the deductions that you’re, getting plus FICA tax. But it’s the same marginal rate and the same state rate, depending on what state you live in. So if I’m pulling out $100,000 to create that income out of my retirement account, well it’s not like, “hey, since I’m in retirement I’m going to be in a lower tax bracket.” Well no, how much dollars that you’re pulling out of these retirement accounts is going to be dependent on what tax bracket that you’re in.

AC: Yeah. And we sometimes see people with pension plans, and of course Social Security, and then they got a bunch of money in their IRA or their 401(k), and then all of a sudden you do the math and you realize, wow, at age 70 and a half, you’re going to be in a higher bracket than while you’re working. And that happens frequently.

JA: It could be because let’s say if you continue to defer your retirement accounts and you spend other dollars, or maybe you don’t even need the money in your retirement accounts because you have a pension, Social Security, maybe some real estate income. Well, those dollars continue in a compound tax-deferred. And as Al just alluded to, at age 70 and a half, you are required by law to take money out of those accounts, and you’re taxed at ordinary income rates. So that could bump you up into a higher bracket. So Roth conversions help eliminate some of that tax bite later in life by slowly chipping away at the retirement account, getting them into a tax-free environment that will grow tax-free, and there are no required distributions in a Roth. So it’s giving you a little bit more flexibility when you start creating income in retirement.

AC: Here’s our next question: “Do I have to wait one full year to convert again? Does the one year rule apply to a Roth conversion?”

JA: (laughs) There is no one year rule. OK, I don’t want to make fun of people.

AC: This one there’s no name on it. I’m going assume it’s still Frank but I don’t know. (laughs)

JA: All right, so here’s another common question. “Can I do multiple conversions in the same year?” Sure. I don’t know why you would want to. I guess today you might want to do two conversions, one in the beginning of the year and one at the end of the year. So it’s kind of a barbell strategy because the rules changed. Prior to 2018, you were able to re-characterize a Roth IRA conversion. So if I’m putting money into a Roth IRA, I had until the following year to say, “do I want to keep it in the Roth or not?” If I didn’t want to keep it in the Roth, I could re-characterize it and put it back into my retirement account, no harm, no foul, no taxes due, like it never happened. But the new tax reform, the new tax law, eliminated the re-characterization. So once you do a conversion it’s stuck. You’re stuck with that tax bite at the next year, which is not a bad thing because why convert if you weren’t going to keep it anyway?

AC: Right. But it’s a good point. So in the beginning of the year, you may not know your income precisely, so you do a little smaller amount. You’d like to get the conversion in sooner to get tax free growth sooner, but you might not do the whole thing – you might wait till year end to have more certainty on your income, and then convert the rest then.

JA: But ideally the best time to convert is in the beginning of the year because then you have all that compounding growth if the market’s up of course, all tax-free. So now there are different strategies. And there’s no one year clock. I don’t know where he came up with that or where he heard of a one year clock.

AC: Here’s what I’m guessing, because there’s a 60-day rollover on IRAs from when you pull the cash out – you can put it back in. And then after that, you can only do one of those per year. I think that’s where it’s coming from.

JA: OK yeah. Way to put the little pieces together there, Big Al. (laughs) I wasn’t even coming close to thinking about that.

AC: (laughs) It was the answer that this person wrote. Wish I could say I was that smart.

JA: Oh! But here’s another way that people are looking at Roth IRA conversions: now their dollar cost averaging their conversions over let’s say a 12 month period. Let’s say if I want to convert $12,000 because I’m looking at my tax bracket, I get my taxes done and say, I have $12,000 of room in my tax bracket for 2018. So that’s what I think I want to convert, but I don’t know for sure, because I could get a bonus, I could lose my job, I could get a new job with higher pay. I don’t know what the next 12 months are going to look like.” So the barbell strategy is this: I’m going to convert maybe $4,000 or $5,000 in January – maybe half of it. And then I’m going to wait until December, and then I’m going to shore everything up. And say you know what, that $12,000 still looks like a pretty good number so I’m going to convert the rest to get it to that $12,000 to keep me in that tax bracket. Another strategy that you could potentially utilize is to dollar cost average your conversion into the Roth. So once a month I’m putting in $1,000. And the reason why you want to do that is that there is no re-characterizations anymore. So the market works up and down. One month it could be up 5%, the next month it could be down 4%. So as I’m dollar cost averaging my dollars into the Roth, I’m going to average the best cost, if you will, into the Roth IRA. So there are multiple strategies that you could utilize. I think it really depends on what your overall goals are, what your strategy really needs to be long-term, and how creative and how much paperwork you want to fill out. (laughs)

Stick around for part two of not screwing up your Roth conversion in just a minute. If you’d like some Roth basics for this all to make a little more sense, visit the White Papers section of the Learning Center at YourMoneyYourWealth.com and download our Roth IRA basics white paper for free. Learn why Kiplinger calls the Roth IRA “one the smartest money moves a young person can make.” Find out what the Roth IRA is, how it’s different than a traditional IRA, whether or not you’re eligible to contribute, how much you can contribute, and learn how your money could be growing and compounding, tax-free, FOREVER. Visit the White Papers section of the Learning Center at YourMoneyYourWealth.com and download our Roth IRA basics white paper, your free gift from Your Money, Your Wealth.

21:19 – How Not to Screw Up Your Roth Conversion part 2

JA: All right we’re talking about Roth IRA or some questions from MarketWatch. Yeah, Frank had some very interesting questions.

AC: Yeah. Here’s this next one. You ready?

JA: Every one, we’ll just call him Frank.

AC: Yeah. Because it just said Frank and the first one, no other names, so I’ll assume they’re all from Frank. (laughs) I don’t know if Frank is a real person or not but next question, is it wise to open a separate Roth IRA account for each conversion, or is one Roth account for conversions ok?

JA: Again, this year moving forward, the same account doesn’t matter, because you cannot re-characterize. If if it was last, year then yes. No, let me take that back because it depends on his age. If he’s under 59 and a half, then yes he might want to consider opening up a couple of different Roth IRA conversions. The reason for that is that you have two different five-year clocks when it comes to Roths. So what a five-year clock means according to the IRS is that the money needs this season inside a Roth IRA to get the tax free treatment on the distribution.

AC: Yeah, on the principal.

JA: Right, principal and earnings. OK so 5 your clock on a contribution, so if I’m putting money as a Roth IRA contribution, the five year clock is this: I have five years of the first dollar that went in the first Roth to have the earnings come out to me tax-free, or 59 and a half, whichever is longer. I always have access to the principal on a Roth IRA contribution.

AC: Yeah, and I think a lot of people don’t know that – you’re 30 years old, you do a Roth contribution, $5,500, next month you need it for an emergency. You can pull that out, no tax, no penalty – the $5,500. Now if the $5,500 has grown to $6,000 you cannot pull out the $400 without tax and penalty. You’ve got to wait till 59 and a half.

JA: $500.

AC: Yeah. What’d I say?

JA: $400. (laughs) Pretty good math.

AC: I am not as sharp as normal today! (laughs) Anyway, but on a conversion is different.

JA: Absolutely. The conversion works like this. You’re 30 years old. You do a Roth IRA conversion this year of $10,000. I cannot touch any of that money for five years. So now I turned 35. So the five-year clock works on that conversion. Now I can take the principal out of that conversion dollar after five years – the conversion dollars only.

AC: Yes. Not the growth.

JA: I have to wait until 59 and a half. And each conversion has its own five-year clock. So the reason why they did it that was that they wanted to avoid people avoiding the 10% early withdrawal penalty.

AC: Yeah because you could convert, next day, pull it out no penalty.

JA: Right. So this is like the rule of impulsive buying. You know what I mean? You see something that you really want to buy, and then you have to count to ten before you buy it, or wait a day. (laughs) What the hell is that rule? And then all of a sudden like after a day or a week, it’s not that important. You don’t impulse buy, I guess. You just buy.

AC: I just buy it. It’s right there in front of me. (laughs) No, that’s actually a good point. I mean actually maybe wait 30 days. Depending upon what it is – the bigger the purchase. If it’s like a head of lettuce, go ahead and buy that. (laughs) You don’t have to wait on that one.

JA: (laughs) I agree, I don’t know if I would ever purchase a head of lettuce, but…

AC: Is that an impulse buy? It could be for you. (laughs)

JA: Yes for me. (laughs) The lettuce that I buy is like already a prepaid salad. I’m not going to like crunch and get the core out. I’m not doing all that work, I’m not washing the head of lettuce. I’m just going to go to the bag of already lettuce with the corn or the carrots in there…

AC: Another question – can you convert to a Roth IRA in the same year you make a contribution or take a distribution from a Roth IRA?

JA: Yes. Absolutely. No big deal. And here’s another thing too, to piggyback on top of that is, let’s say if you have a 401(k) plan through your employer and I contribute to the 401(k) plan. That doesn’t mean I cannot contribute to a Roth IRA plan as well. You could still do both if you qualify for a Roth IRA contribution, income-limit-wise. And I can do a conversion the same year. So if I want to do a 401(k) contribution of my $18,500, and if I want to do a Roth IRA contribution of $5,500, I can do both of those – and wait a minute, maybe I want to do a conversion of another $30,000. I can do all three in one year. Here’s where a lot of CPAs screw up – no offense to you, Big Al – is this:

AC: Wow. Better be good.

JA The Roth IRA contribution limitations is based on modified adjusted gross income, not true adjusted gross – MAGI. And a Roth IRA conversion is not included in that calculation. Because if you’re single, if you have more than, what, $133,000 of income, you are no longer eligible to make a Roth IRA contribution? Is it 133 or 132?

AC: I think it’s $135,000. Gotta find out, hold on, I’ve got the chart here.

JA: It’s $135,000, dammit. Who’s the CPA here, you are. So if I did a Roth conversion, let’s say my adjusted gross income was $99,000. But then I did a conversion of $36,000. So then that put me over – I’m over. But guess what, they take that conversion dollar out. It would not hurt me for me to qualify for a Roth IRA contribution.

AC: So as a CPA I’m going to give you that one. I think a lot of CPAs do miss that, and you’re right. That’s not part of the AGI, modified adjusted gross income for that calculation.

JA: What else you got?

AC: What about an inherited IRA? Can you do a conversion there?

JA: No. You can convert an inherited 401(k).

AC: Now why is there that rule?

JA: (laughs) I don’t know, it’s so stupid.

AC: Wait a minute, so you inherit an IRA from your uncle, can’t convert it. You inherit a 401(k) from your uncle, you can convert it. That’s what you’re telling me.

JA: Yes, that is what I’m telling you If it’s under Section 401(k) in the IRS code, you can convert the 401(k), into a Roth IRA, into an inherited Roth. But not IRAs.

AC: So it would have to go to an inherited Roth IRA, I guess, that conversion because you have to take required minimum distributions. Which a lot of people don’t know. You might be 30 when you inherit this account, you still have to take a required minimum distribution because it’s an inherited IRA. The rules are different.

JA: So if you had an inherited 401(k), you can convert that into an inherited Roth IRA, you would still have to take a required minimum distribution from the inherited Roth IRA, but the distribution would be tax-free, even out of the Roth. So a lot of Roth talk here – you want tax free income? Here’s what you do: you figure out the rules and regulations of everything that you need to do… (laughs) oh that is so stupid.

AC: I’m more confused than ever Joe. What do I do? Tell me again? I learn the rules and regulations? (laughs)

JA: Yes, you need to go to publication 590, spend about, I don’t know, seven years and figure it out. (laughs)

Or you can call us and we can give you a free personalized retirement assessment to see if a Roth IRA conversion is right for you and your overall financial strategy. Call (888) 994-6257 or visit YourMoneyYourWealth.com and click Free Assessment. That’s (888) 994-6257 or visit YourMoneyYourWealth.com for your free two meeting retirement assessment from one of our Certified Financial Planners. Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, 5 Legal Ways to Get Tax-Free Income in Retirement.

29:39 – Big Al’s List: 5 Legal Ways to Get Tax-Free Income in Retirement

AC: I’m glad they say legal because I don’t want five illegal ways. There are lots of illegal ways to get tax-free income, by just not reporting your income.

JA: Steal it.

AC: Right. Any number of ways. But here’s the first one. We already talked about it – Roth IRA. Because when you take money out of a Roth IRA, there’s no tax to pay. Now there are several rules like you have to wait five years…

JA: All you gotta do is just rewind the podcast. (laughs) You get all the rules right there. (laughs)

AC: (laughs) But if they’re listening live I’m just doing a little recap. And of course the thing about a Roth IRA, you never get a tax deduction going in, or you pay taxes to do a conversion. But then all future principal, income, growth is tax-free – tax-free for you, tax-free for your spouse if he or she survives you, tax-free for your kids, tax-free for your grandkids.

JA: So here’s an argument, we hear this often, is that if you’re in a certain tax bracket today and going to be in a certain tax bracket at distribution, it makes no difference if you have a traditional retirement account or a Roth retirement account.

AC: Yeah because in other words you’re gonna pay the same tax now or in the future so what’s it matter?

JA: Yeah, I think that is a not very educated statement.

AC: I think so too and there are several reasons.

JA: They’re looking at it in a bubble. You and I do this every day in real life.

AC: Yeah, there are lots of other factors, such as: what if all of a sudden you need extra capital for whatever? And if you if you only have the IRA, you pull a bunch of extra out of the IRA, now you are in a higher tax bracket. So you’ve prepaid this while you’re in a lower bracket. Right now, by the way, we’ve got the lowest brackets in history. In my career, I’ll put it that way.

JA: 57 years.

AC: (laughs) I’m 100 years old!

JA: How many years, what thirty…?

AC: I started in public accounting in 1984.

JA: So yeah. 33 years. So that’s the lowest it’s been in 33 years. Today.

AC: Yeah. That’s right. Right now. And another thing to Joe, of course, is when you think about a globally diversified portfolio, some asset classes naturally are going to have higher growth rates than others. And if you kind of push those higher growth rate asset classes to the Roth, over the long term you’re going to keep a lot more of what you make.

JA: Such as this: maybe you want some money in stocks and some money in bonds. Well if I have more of my money in stocks in my Roth and more bonds in my retirement account, well if you look over the long term, stocks have a higher expected rate of return than bonds. So if I strategically placed the right asset class in the right tax pool, I can maximize the overall growth.

AC: Also when you’re married, and when the first spouse passes away, the survivor is single, and now you’re in much higher tax brackets because you hit the same tax brackets at lower income levels.

JA: Right. And I think another big one is just to give yourself a lot more flexibility. I think that’s the biggest. If I have some monies in a retirement account, a non-retirement account, and a Roth account, and if I need a certain distribution annually of $50,000, $100,000, $30,000, whatever – I can pick and choose where I’m pulling those dollars from. And I can be a little bit more educated on how my tax is going to look each and every year, because I have opportunity to say, “I’m not going to pull from my retirement account this year because I sold a property, and I’ve got a huge tax gain there, and the more dollars that I throw out of my retirement account could push my capital gains into a higher bracket. I could get subject to the net investment income taxes or whatever, I’m going to pull from my Roth. I’m going to have more flexibility. Or I’m only going to pull enough from my retirement account to max out a certain tax bracket. But I want more income. Well now I’m going to pull for my Roth IRA, so I still have more cash flow, but I don’t have to pay tax on those dollars.” So it just gives you a little bit more freedom and flexibility.

AC: Second tax-free income is related: Roth 401(k) or Roth 403(b).

JA: Yeah I think same, same, same. All good.

AC: And I think not everyone realizes that many of these 401(k) plans have a Roth option.

JA: Absolutely – check with your H.R.

AC: Exactly. Meaning you can still put money in your 401(k) or 403(b), just have it go into a Roth. You don’t get a tax deduction, but it grows tax-free.

JA: Yeah. You can pick and choose. $18,500 is the max if you’re under 50, then you can say, “hey, I want $10,000 to go into the pre-tax and the rest to go into my Roth.” So it’s not all or none on that as well.

AC: Next one is municipal bonds. Municipal bond interest is tax-free.

JA: Yeah, unless they’re from Detroit.

AC: Still tax-free because it’s negative.

JA: In default.

AC: They can default. But like for example, for those listeners in California, if you buy a California municipal bond, it’s tax-free federally, and tax-free in California. If you happen to live in Idaho, you might want to buy Idaho bonds because it would be tax-free in Idaho as well.

JA: Be careful. We’ve seen tax-free bonds in retirement accounts. The rationale behind it wasn’t like, “this is a really good bond.” The rationale is like, “this is a tax-free bond. I bought it inside my IRA, thinking that I was going to get tax free income from the thing.” No, it’s still going to be taxed at ordinary income. It makes almost zero sense to hold a tax-free bond inside a retirement account.

AC: Yeah I think that’s a good point. The fourth one is a health savings account, HSA. We know that if you have a high deductible health insurance plan that qualifies for this, you can set up an HSA account. $3,450 per person, or an extra thousand dollars per person or for a couple. So the numbers are double, $6,900 for a couple, extra thousand dollar catch-up in either case. The money that goes in there Joe, you can then use for medical expenses. First of all, you get a tax deduction. Secondly, that growth can be used for medical expenses and there are no taxes to be paid on them.

JA: It’s a triple threat. (laughs)

AC: (laughs) The last one – and I can tell this is written by somebody that sells insurance…

JA: What, you got life insurance there?

AC: Cash value life insurance.

JA: The death benefit of a life insurance contract is a very good tax-free benefit. Unfortunately, you’ve got to die to get the benefit. We’re not big proponents of putting money into a life insurance contract to let the money grow tax-deferred and pull it out tax-free. I would much rather do a Roth IRA conversion because it’s the same effect, but you’re not buying life insurance with the fees and expenses and all that other garbage that goes along with it. So I would be very careful if someone’s proposing an indexed universal life insurance contract. However, I have seen it work… never. (laughs)

Speaking of life insurance – did you catch last week’s episode with Joe ranting about an insurance thread on Reddit? If you missed it and want to give it a listen or read the transcript, hit up YourMoneyYourWealth.com and you can see if life insurance, annuities and long-term care are right for you. From there you can check out previous interviews on investing with Dr. Wade Pfau, Paul Merriman, Larry Swedroe and tons of others. Might as well subscribe to the podcast while you’re there so you don’t miss any of the good stuff we’ve got coming up – like next week’s show with the Retirement Answer Man, Roger Whitney, author of Rock Retirement. Now it’s time to open up the email bag – if you’ve got a money question, send it to us at info@purefinancial.com or give us a call at (888) 994-6257 and schedule a time to have Joe and Big Al answer your question live during Your Money, Your Wealth. Again that’s info@purefinancial.com or (888) 994-6257.

37:33 – Email Bag: What Are the Tax Advantages to Converting to a Roth?

JA: Check this out. So this gentleman, he’s like, “I enjoy watching your show every Sunday morning.” So he’s referring to our television show. “Joe and Big Al are sharp.” Wow. Look at that!

AC: No wonder you wanted to read that one.

JA: “And as an advanced investor, I’m always learning new tips and techniques from your show. Keep up the good work. But I fail to see the tax advantage of moving my traditional IRA money into a Roth IRA. Yes, there are a few non-tax advantages of moving traditional IRA money into a Roth. No RMDs and your heirs don’t have to worry about a large tax bill because you’ve taken care of it for them. But as far as a Roth tax advantage, help me out.” So he’s got a couple of examples here. So here’s one example that he wrote. He goes, “let’s say I have $100,000 in a traditional IRA, and converting it to a Roth IRA would incur a 30% tax bill – combined federal and state taxes. And let’s say that my tax rate for the last dollar I earned is also 30%.” So he’s got a scenario here. Scenario 1, my $100,000 traditional IRA is invested in bonds that give me a 5% yield” – wow, this guy is deep. “So that’s $5,000 a year. After paying a 30% federal and state tax bill on the interest on those bonds, I keep $3,500 a year. Or I convert my traditional IRA bonds into a Roth IRA and $100,000 I convert, I pay the IRS $30,000 and the remaining $70,000 goes into my Roth account. These $70,000 worth the bonds generate the same 5% rate of return, giving me $3,500 a year, the same amount as the traditional IRA.

AC: Sure. So what’s the difference? Why do it? Lots of reasons. First of all, you’re assuming you’re going to be in the same tax bracket for your whole life, which – maybe that’s true. And you know what? If, in a perfect world, and you spend down a perfect amount of money, there’s never any emergencies, your spouse never passes away so that you’re in different tax brackets when you’re single, and tax rates never go up, yeah, mathematically that’s a true statement. But here’s what we see happening, is some folks – like in particular if they lose their job, or let’s say they retire before they collect Social Security, before they get their required minimum distributions, they’re in an artificially low tax rate. So why not do Roth conversions while you’re in a low tax rate, pay the 0% rate or 10% rate or 12% rate, maybe even 22% rate. It’s all relative to your own circumstances. You have to pay the tax anyway, but by the time you receive your Social Security, maybe your pensions, your required many distributions, if you’re already in the 22 or 24% bracket, wouldn’t have been smarter, those years when you were in lower brackets, prepay that tax had a lower rate? Then the mathematics start to work out better.

JA: So, let’s assume – you’re absolutely right, but I think his argument is saying, “all right well 30 30.” But how about if there’s a way that you can pay tax in the 30% tax bracket but then you have diversification when you start taking distributions to put you in a lower tax bracket in the future? Right? Because now I’m converting dollars. From now until however many years. So if I just keep the money in the retirement account, every dollar that comes out of there is going to be taxed at ordinary income rates. So let’s say, assuming that I want to maintain my same lifestyle, I’ll pull the money out of the IRA. It’s going to be taxed at 10%, it will be taxed at 12%, taxed at 22% – assuming that’s my income threshold. Makes sense? So if now let’s say if I look and say, “maybe I convert to the top of the 22% tax bracket,” and now I’m slowly converting – not everything, but I’m just chipping away at my retirement account to get a good sum of money into a Roth IRA. And then now when it comes time for me to retire, I’m only going to take money from my retirement account to fill up that 10% bracket, to fill up the 12% bracket, but then all additional dollars that I would like to spend, I’m going to pull it from my Roth IRA account. So I would never even touch the 22% in retirement if I did this correctly So you have to look at the diversification of it. You also have to take a look at, how about Social Security? How is your Social Security going to be taxed?

ACA: Yeah because if that’s all required minimum distribution, it adds to your ordinary income, which makes more of your Social Security taxable. Some other things, Joe, is sometimes in retirement, you have a need for additional capital, whether it’s a big vacation, or grandkids in college, or health expense, or whatever it may be. You pull that money out of the retirement account, it puts you in a much higher bracket. So now you’re actually defeating the purpose. And then there’s one more thing that is often overlooked, and that is a well-diversified portfolio is going to have more aggressive positions and more safe positions. And what if you could kind of push your more aggressive positions in the Roth IRA? Yes, they’re more volatile. They’ll go up and down more like a rollercoaster. But over the long term, if you stay in them, you’ll get a better rate of return. If you put those assets in the Roth IRA, you end up with more dollars after tax. There are lots of reasons why this works out in your favor.

JA: You know, then I guess to be morbid, how about if you’re married, how about if one spouse dies?

AC: Yeah, because when you’re single it’s actually the same tax brackets, but you hit the next bracket much sooner. For example, if you’re married right now and your taxable income is about $77,000, as soon as you get to that point, you jump from the 12% to 22%. But if you’re single, it’s about $37,000. So it’s half.

JA: Right. If you just look at it as $80,000 is the top of the 12% tax bracket. Well, $40,000 is the top of the 12% tax bracket if you’re single.

AC: Right. And so maybe you want to be doing this while you’re married. So I mean, there are so, so very many reasons. It gives you a lot more control over your taxes in retirement, and that’s what we’ve seen over time – the people that retire most successfully. Well, first of all, they’ve saved. Let’s get that out of the way. (laughs) But assuming they have money and they’ve saved, if they have that tax diversification, they can manage their tax liability instead of it managing them.

JA: Right. It’s the after-tax rate of return is what you have to focus on. And I think when you look at investing, we’re looking at fees or what’s the hot stock, or Bitcoin to everything else in between. But if you just keep your investment philosophy somewhat simple, but then you have a little bit of a creative mind on the tax side of things and spend some time – because tax is law, right? It’s like this is the law. If I understand what it is, I can now benefit myself using the law. The market is not law. It’s not like, “you’re going to get an 8% rate of return for the next 30 years.” Who knows what the market’s going to do? So you gonna put the probabilities on your side. And the best way to do that, of course, is looking at taxes. And then yeah, fees is another huge component of it. But then you’re disciplined within those three components. All right, that’s it for us, for Big Al Clopine, I’m Joe Anderson. The show’s called Your Money, Your Wealth. Thanks for listening.

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Did you hear how Al’s voice changed there when he started thinking about those highly advanced Roth conversion strategies? I think it’s safe to say he digs this stuff – that would be an understatement! So there you have it, everything you ever wanted to know about Roth IRA conversions, plus a look at the bold new frontier of crypto real estate investing from a self-taught investor and Twitter influencer.

Stay on top of your investing strategy by subscribing to this podcast at YourMoneyYourWealth.com or find us on Player.FM, Spotify, iHeartRadio, Google Play, Stitcher, TuneIn or at Apple Podcasts, which used to be called iTunes, where you can still find our ratings and reviews. If you’ve got a burning money question for Joe and Big Al to answer live on Your Money, Your Wealth, just email info@purefinancial.com, or call and leave it in a voicemail at (888) 994-6257! Listen next time for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

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.