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Published On

July 30, 2019

Jonathan Clements (founder, HumbleDollar.com, former Wall Street Journal personal finance writer) on portfolio rebalancing, reducing risk and doing a Roth conversion. Plus, Joe and Big Al answer your money questions: when is the best time to get into the market? When is the best time to retire? Can you start a Roth IRA for your Dad? And should you roll your 401(k) into a traditional or Roth IRA? Finally, some YMYW compliments and complaints.

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Show Notes

(01:12) Jonathan Clements: It May Be Time to Rebalance and Reduce Risk in Your Portfolio
(14:26) Jonathan Clements: Consider Converting Your Traditional IRA to Roth
(19:56) When Should You Get Into the Market?
(22:52) We’re 51 and 49 and Have $4.5M Saved – Can We Retire in 5 Years?
(31:51) Can I Start a Roth IRA For My Dad?
(36:49) I’m 60 and Disabled. Should I Roll My 401(k) Into a Traditional IRA or a Roth IRA?
(40:29) YMYW Compliments and Complaints

Transcription

Jonathan Clements from HumbleDollar.com returns to Your Money, Your Wealth® today with some wise suggestions for our portfolios, given the current market conditions and tax laws. Plus, Joe Anderson, CFP® and Big Al Clopine, CPA answer your questions about Roths, rollovers, when to invest and when to retire. But first, Joe, let’s welcome Jonathan Clements – he’s the founder of HumbleDollar.com, former personal finance writer for the Wall Street Journal, and the author of 9 personal finance books, including his latest, From Here to Financial Happiness: Enrich Your Life in Just 77 Days.

01:12 – Jonathan Clements: It May Be Time to Rebalance and Reduce Risk in Your Portfolio

Andi: Jonathan Clements, thank you so much for joining us once again.

Jonathan: Well thanks for having me on Andi and Joe, it’s great to be with you guys.

Joe: It’s been more than 77 days since you’ve been on, and I’ve got to tell you, my life is fully enriched with financial happiness thanks to you. (Laughs)

Jonathan: Anything I can do to make your financial life happier, Joe. (laughs)

Joe: Hey, with the markets, it seems like this bull market is not going to stop anytime soon. And you just wrote a really good article at HumbleDollar. What are some of your thoughts about the last 10 years, markets doing well, people are saying, “markets are at all-time highs. Do I get out, do I take some chips off the table? What should I do? Should I buy more? What are some of your thoughts around giving people the right advice, given kind of this unique market environment that we’ve experienced?

Jonathan: Well I think we all need to start with three crucial words: I don’t know. None of us know what is going to happen next in the financial markets. Just because we’ve had 10 years of generally rising stock prices doesn’t mean we’re going to suddenly have a big drop. Just because valuations are very high doesn’t mean share prices are going to decline. There is no way to forecast what’s going to happen next in the financial markets. So don’t try to predict the markets. Instead what you should do is manage risk. Because managing risk is something we can actually control. And in this particular article you’re referencing Joe, what I talk about is not just rebalancing your portfolio – that’s when you have some allocation to stocks and bonds, you’ve got target weights for each, and you periodically rebalance back to those target weights. Right now, that would cause you to sell some of your stocks and add to your bonds. Instead, what I’m talking about in this article, is rebalancing back to whatever your target amount is for retirement. So let’s say you have a number in your head for how much you need to retire in comfort, and thanks to the last 10 years, you are well on track to hit that target. Well, maybe you say to yourself, “OK, instead of being greedy and trying to have even more, maybe what I should do is change my mix of stocks and bonds to one that’s more likely to get me to that target number.” And after the last 10 years that might mean a target asset allocation that actually has somewhat less in stocks and somewhat more in bonds, which means that if indeed we do get a big market decline, you’re going to be in much better shape.

Joe: So, walk me through that exercise. So let’s say I want to retire in 15 years. And I guess the first step of all of this is really identifying my goals or what my lifestyle is going to look like, and then figuring out, if I want to spend let’s just assume it’s $100,000, just to keep the math simple, I would start there and say, “that’s what I want to spend.” Secondly, I would have to start looking at what my fixed income sources are – maybe Social Security, pensions, maybe real estate income, and subtract that from the goal. So maybe I have $50,000 of fixed income, so I’m short $50,000. So that’s what has to come from my portfolio. How would I start now calculating, here’s where I’m at now. In 15 years, how much should I be saving, or what my portfolio should be looking like to reach that target goal?

Jonathan: So it’s going to be a rough and ready calculation. It always is when you’re dealing with financial projection.

Joe: Oh yeah, for sure.

Jonathan: But you start by saying, “OK I want to get $50,000 out of my portfolio,” in, we’re saying 15 years. So 15 years from now, to generate $50,000, you’re going to need one and a quarter million dollars using a 4% portfolio withdrawal rate. And so the flip side of that or the reverse of that is, you take how much income you want, you multiply it by 25, and that’ll give you the sum you need in today’s dollars – remember we’re ignoring inflation here – that you’ll need to generate that income. So your goal is one and a quarter million dollars. Then you figure out where you are today. Let’s say you’ve got half a million dollars saved currently. Let’s imagine that, over the next 15 years, you’re going to save, in current dollars, say $20,000 a year. So you can go on the web, there are so many these financial calculators out there. You put in your starting sum. You put in how much you save. And then you have to make some return assumptions. And I say to people these days, you could expect something like a 4% real rate of return from a global stock portfolio. And from a bond portfolio that you MIGHT, you might get about 1% a year after inflation. So you figure out what mix of stocks and bonds you’ve got, you allocate 4% to the stocks, 1% to the bonds, you get a blended rate of return. You throw that into the financial calculator and you see, are you going to hit that one and a quarter million dollars? Are you going to be way above it? If you’re way above it, that means that perhaps you want to think about dialing back the risk level a little bit.

Joe: Yeah. That’s awesome advice. With what you’re saying in the article, it’s like I think people rebalance- and you know, it’s really good too, Jonathan – and I know I’m going to go on a bunch of tangents with you here – but it’s really good to read something and it’s like, “maybe tone this thing down. Don’t be so greedy,” versus hearing like, “Oh my God, the financial crisis, everyone is going to retire in the streets on bread lines and everyone’s broke.” It’s like that whole fear-mongering drives me nuts where yours is given really good, practical advice to everyday Joe: let’s not be greedy. Let’s take a look at your portfolio, do a little bit of planning and making sure that that money is there. Because if the market drops half, now you’re not where you want to be, and let’s just be prudent with the dollars that you’ve saved.

Jonathan: And of course, at this point in the market cycle, 10 years into the bull market, this is not what people want to do. It’s actually getting to the point where it’s really driving me nuts. People are saying to me over and over again, “oh, stocks are the only place to be. And not only are stocks the only place to be, but actually, U.S. stocks are the only place to be. And in fact, not only U.S. stocks, but actually this select group of big tech companies—”

Andi: The FAANG stocks.

Jonathan: Yep. The FAANG stocks, Facebook, Apple, Netflix, and so on – are just an obsession. But all good things come to an end, and this is why we diversify. We know what has happened in the past. We don’t know what future we’re going to get. And there are a whole array of possibilities. And one of those possibilities is where the FAANG stocks to really, really badly. And you don’t want your retirement to come unhinged because you made that one big, massive bet. As I say to people all the time, we get just one shot at making the financial journey from here to retirement – and you don’t want to screw it up. You don’t want to bet so heavily on one part of the market that you end up blowing up this beautiful retirement that you were hoping for.

Andi: Yeah, with this 10-year run-up we’ve just had, so many people that are looking at it from a greedy standpoint of, “how much money can I possibly make?” rather than, “how much do I really need?” And take as little risk as possible to get to that point.

Jonathan: One of the concepts that is so alien in America, and yet it’s so crucially important, is the notion of “enough.” We all need to figure out what is enough. What is your number that will make for a comfortable retirement? And once you know that number, you should aim for it. You shouldn’t be constantly aiming for more, more, more, more, because that is likely to end up with you having a whole lot less.

Joe: (chuckles) You know, we can have the best laid out plans, but it just seems like our minds are not wired appropriately to deal with our money.

Jonathan: Absolutely, we all suffer from recency bias. We’re all incredibly influenced by what’s happened in the last couple of years. I mean go back to what you’re talking about, Joe, during the Great Recession – during that collapse in stock prices between 2007 and 2009. People thought the end of the world was coming. And today we are actually talking about going to the moon again! (laughs)

Joe: (laughs) Yeah. I do a lot of public speaking, I was at an event last night and I was talking to the group and it’s like, “All right, you know the market is going to crash, right? It’s going to correct at some point.” And then everyone: “Oh yeah. I agree. We know it’s going to happen.” And I’m like, “well, what are you going to do?” And then of course, what does everyone say? Oh, we’re going to buy, we’re going to hold our course, because we have the right portfolio,” and blah blah blah. And I was like, “you’re just lying to yourselves! (laughs) That’s all you’re doing!” It’s like, 2008 and ’09, it was really scary stuff. We lived it and being in the business and living and breathing it, I mean, that is scary. And then you look, what, 10 years later, and how big of a run that the market has – no one would ever have predicted this. And the greed comes back, or our memories are short, and it’s like, “oh, well now I know how to handle it.” I was like, “baloney! Ten years is a short time but it’s also an eternity.”

Jonathan: If somebody wants a reality check, if they still have the records, if they could go online and find them – see what you actually did in late 2008 and early 2009. Did you buy? Did you just sit tight? Did you sell? Because however you behaved in 2008 and early 2009, that is the best indication of how you’re going to behave next time around. And if you were a seller in late 2008 and early 2009, I can guarantee you that you will be freaked out the next time the market declines, and probably, taking a few chips off the table would not be a bad thing to do.

Joe: You know, I wish there was something that could trigger an emotion with that. For instance, someone sent me a picture of myself aged 40 years. So I looked like I was–

Andi: Oh, they did the FaceApp thing to you.

Joe: Yeah. The FaceApp thing. Have you seen that Jonathan?

Jonathan: Yeah, actually I think it’s a brilliant piece of technology and there have been some interesting studies around that because what they found is if we take people and we age their faces like that, we show people what they’re going to look like in the future, it creates sympathy for our future self. And so by doing that, it actually prompts people to be bigger savers, to eat more healthily, to go to the gym more often. That aging technology is really super-effective.

Andi: So Joe, what did it do for you?

Joe: It worked on me. It’s like what the hell’s going on here? I increase my savings, I’m eating salads 4 times a day.

Andi: (laughs) Gotta take care of this old man!

Joe: I was a very handsome old man, I gotta tell you. I was extremely handsome. So I was like, “Yeah what the hell, just keep drinking beers during the weekend though.” (laughs) But that really had an emotional effect on me. Seeing your older self. You want to take care of the old guy. I wish we could have something that could trigger that emotion when it comes to market volatility. Because we’ve seen the stress test before, and it’s like, “well, this is what would happen if your portfolio dropped 30%, here’s the real number.” And people kind of look at that and they’re like, “Ooh yeah okay.” But they know it’s not real because you can’t see yourself broke, or spending less, or saving more, or feeling that anxiety. Because when I saw the picture of my older self, I felt something. When I see my portfolio down 30% in a fake Monte Carlo or a stress test or something like that, I see it, I feel it a little bit, but I don’t know if it can really help my financial behavior.

Andi: So, like Jonathan said, the thing that really matters is what you did in 2008 and ’09 – that’s the true test of your risk tolerance.

Joe: Exactly, yeah.

So what do you think, is it time to reduce risk in your investment portfolio? We happen to have a calculator for you very much like the one Jonathan Clements mentioned. Check the podcast show notes at YourMoneyYourWealth.com to download Big Al’s Quick Retirement Calculator and find out if you’re on track for retirement. For an even deeper dive on the topic of risk, I’ve included links to additional resources that delve into what risk management is, 8 risks that can derail your retirement, different types of risk management, why it’s important to manage risk in the podcast show notes at YourMoneyYourWealth.com, along with the transcript of this interview and links to our previous conversations with Jonathan Clements.

Resources:

14:26 – Jonathan Clements: Consider Converting Your Traditional IRA to Roth

Joe: Jonathan, are you going to do a conversion this year? What’s the story? You kind of kept me hanging, here.

Jonathan: Yeah. So this was the other article that we wanted to talk about today, about this opportunity to do a big Roth conversion. And this goes back to the 2017 tax law. And what that 2017 tax law did was it really stretched out the tax brackets – and let me explain what I mean by that. If you are a couple married, filing jointly in 2017, before the new tax law was passed, once you had something around $100,000 in total income, you started to get taxed at 25%. Under the current tax law, you could have income of up to $350,000 or thereabouts as a couple married filing jointly, and still be taxed at 24% or less – that’s how much flatter the tax brackets are today than they were just a couple of years ago. But this is potentially a limited time opportunity. The 2017 tax law, at least as it relates to individuals, most of those provisions sunset at the end of 2025 which means that in 2026, we’re going back to 2017’s tax law unless Congress acts. And it’s entirely possible that we may go back earlier, depending on what happens in the next election. So if you’re thinking about doing a big conversion from your traditional IRA to a Roth IRA, there is this window of opportunity right now to do that conversion. Convert a relatively large sum and get taxed at a relatively low rate. And so yeah, this is something that I’ve been thinking about, and a lot of people I’ve been talking to have been thinking about as well. This is really an interesting time to contemplate that conversion – and I think I will do a significant conversion this year and probably next year as well.

Joe: You know, it’s crazy how big those brackets are. The top of the 24 as you mentioned, as a married couple, 300 some odd thousand dollars. Last year or I guess two years ago now in 2017, that would have been in the 28 and most likely in alternative minimum tax where your effective rate is 35%. And we live in the state of California here, so add another 10% on top of that – 45% tax. Where you can get at 24 versus 35. I mean, that is a significant savings for anyone really taking a look at this. I mean, if you’re in the 10, 12, 22, or 24% tax brackets, I think that is the sweet zone for some people to at least maybe glance at it to see if it makes sense for them.

Jonathan: Yes, so I don’t want to scare people off, we already talked about using financial calculators earlier in this discussion, but I’m going to bring it up again. What you should do is look at where you stand today, how much you’re gonna save in the years ahead, and try to get some sense for how much money you might have. Once you get into your 70s, you have to take what are called required minimum distributions from your retirement accounts because that’s when a lot of retirees start to pay taxes at a surprisingly steep rate. So if you do those projections and you’re saying, “heck, when I get into my 70s I could easily be taxed at 25% or more, especially if we go back to the old tax law,” then there is an incentive to do a Roth conversion today. If on the other hand you’re still going to be in a pretty low tax rate, then maybe the Roth conversion doesn’t make any sense because you’ll just end up paying taxes at a higher rate today than you would down the road.

Joe: There are a lot of benefits when it comes to at least looking at this. Tax diversification is a big topic we talk on the show often because as you’ve seen Jonathan, a bulk of the mass affluent’s savings are in retirement accounts. And they’ve done what they were told and maxed out the 401(k) plans as much as they could and now they’re accumulating quite a bit of dollars in here. And then once they retire there’s this notion of that we’ll always be in a lower tax bracket. And I think that’s true for most because most people haven’t necessarily saved enough. But on the other side of the coin, the people that listen to shows like this or read your books, they’ve saved a couple of bucks and it’s like well now everything is coming out of a retirement account taxed at ordinary income rates. They’re kind of shocked actually that they’re in the same bracket or in some cases a higher bracket, just to the fact that they did a lot of savings.

Jonathan: And so one of the reasons to do a Roth conversion, on top of everything else, if you can do it in your 50s or even earlier, one of the things that you can potentially avoid down the road is when you start to drawdown those retirement accounts, they can actually end up raising your Medicare premiums. Because those withdrawals at your income, the higher your income is, the higher your Medicare premiums are going to be. So by converting now you may be able to save yourself that surcharge later on.

Andi: So much great information as always, It’s Mr. Jonathan Clements, the founder of HumbleDollar.com and the author of nine personal finance books, his latest is From Here to Financial Happiness: Enrich Your Life in Just 77 Days. And of course, you can get that at HumbleDollar.com. Jonathan Clements, thank you so much for joining us again today.

Jonathan: It’s my pleasure, Andi, thanks for having me on, Joe.

Joe: That’s Jonathan Clements, everyone, check him out at HumbleDollar.com. What do we got here?

19:56 – When Should You Get Into the Market?

Andi: We’ve got Ed from Iowa. Ed says, “Do you have a Your Money, Your Wealth® show blog or article that addresses how and when to get into the markets?”

Joe: Nope.

Andi: “For instance, right now if one has cash and wants to move into a conservative fund – but the markets are at near all-time highs. What is a common-sense approach?” He’s not asking for advice, just wants to see a discussion around the issue, if you have one. He really enjoys the show.

Joe: We do we actually, we talk to Jonathan Clements. So Ed, what’s the most common-sense approach? Two things to think about here: you can dollar cost average, Ed. But you first figure out what type of portfolio do you need? What is your timeframe? Do you need the money next week, or is it like in 20, 30 years? How old is Ed? I don’t know. So don’t think of it like, “all right, well markets are all-time highs,” In 20 years from now do you think markets are going to be higher than they are today?

Andi: I think probably so.

Joe: Right. So then don’t even sweat it. Invest in the appropriate portfolio that you need for your overall goals. But if you want to go back and listen to Jonathan, he was stating this, “OK well let’s just say that you’re invested in a certain strategy. But maybe changing strategy might be more appropriate because markets are a little peakish, frothy.” Right?So it’s like, maybe I go into a conservative fund, maybe I change because now it’s like, what target rate of return do I need to generate? Is it4%, is it 6%, is it 2%? Build that portfolio based on what your goals are and what target rate of return that you’re looking to anticipate–

Andi: And take as little risk as you need.

Joe: Yeah, and then invest right now. Another way to do it is dollar-cost average. So put in, you know, $1,000– or one-twelfth of the portfolio in, each month for the next 12 months. Studies have found over and over again that that helps people with emotional issues?

Andi: Behavioral finance, not emotional issues. (laughs)

Joe: Yes, that’s an emotional issue. Behavioral finance is very emotional. But if you just invest– just do it.

Read the transcript of our interview with Jonathan Clements and find links to his website HumbleDollar.com, to his latest book, From Here to Financial Happiness, to hear his previous appearances on YMYW, and to share this podcast and subscribe in the podcast show notes at YourMoneyYourWealth.com. You’ll be able to listen to brand new episodes on-demand as soon as they’re released, or if you’re new to YMYW, you can just binge our old episodes to get caught up. Now it’s time for more of your money questions. Click “Ask Joe and Al On Air” at YourMoneyYourWealth.com to send them in as a voice message or an email.

22:52 – We’re 51 and 49 and Have $4.5M Saved – Can We Retire in 5 Years?

Joe: Could you imagine bingeing this?

Andi: We got an email from somebody who did. He said he listened to 40 of our podcast episodes, like, back-to-back.

Al: Yeah, that was Jay from Chicago.

Joe: 40! Jay what is wrong with you?!

Al: He said, “Hi Joe and Big Al, I just discovered your show last week and I blasted through about 40 podcast episodes since.”

Joe: Last week, Jay?! That is awesome. He lives in Chicago? I’m gonna buy that guy a beer.

Al: I would say we don’t recommend that, but if you want to, sure.

Joe: Yeah. Michelle from Illinois. She writes in, “My husband, 51, and I, 49, have 4 and a half million saved for retirement. 401(k), pension, IRA, CD, and savings. We would like to retire in five years with an annual income of $100,000 for the first five years and then around $65,000 thereafter. We’d like to travel abroad once a year for the first five years, with travels in the U.S. afterward.” So that’s probably the difference, between 100 and 65?

Al: That’s what I guess. Yeah.

Joe: “We will have to pay for our own health insurance. Both of us have some medical issues, but we do not have a mortgage or any loans. We have no children and do not plan to leave an inheritance.” All right. “Question number one. Do you feel this is possible?” Yes. (laughs)

Al: (laughs) The answer is yes. And we’ll tell you why Michelle. So if you have four and a half million dollars saved right now, which is great. Congratulations.

Joe: And 51 and 49.

Al: Right. And you have another five years to be saving and having compound interest and that could be worth $5 million, $6 million. Let’s just say five million, we’ll be conservative. So then you use the 4% rule, 4% of $5 million is $200,000 would be roughly what you could draw from that.

Joe: Now 55 let’s just say 2%.

Al: Now you’re younger so maybe it’s 2 or 3. Even 3% would be $150,000, 2% would be $100,000, which is what they want.

Joe: For the first five years and $65,000 thereafter. And then at age 65 Social Security is going to come in. And with the savings that they have, the only thing that I need to know about Michelle and her husband is how much money they have in 401(k)? They say pension. Is that a lump sum pension or is that going to be an income stream pension? Because she’s saying four and a half million. I’m not sure what that is. CDs and savings – is that CD and savings in the retirement account or is it outside? How much is outside, how much is inside.

Andi: I think the four and a half million is combined between the 401(k), the pension and the savings.

Joe: I know I know but what I need to know is how it’s separated.

Al: Yeah. Something else I would consider Michelle is if you retire in five years, your husband will be 56, you will be 54. I don’t know who has the 401(k), maybe both of you. Now if you retire at age 55 and older, then you have access to those dollars. You could pull them out without penalty. This is something that not a lot of people know because they’re thinking 59 and a half, which is the IRA rule. So here’s the rule: If you’re 55 and older when you separate from service, from your existing active 401(k), you can start pulling dollars out. And of course, you pay income taxes, but there’s no penalty. Now if you are 54 when you retire, then you would not have that ability to do that with your f401(k) so you might want to wait till 55 just for that reason, depending upon how much you have in your 401(k), if in fact you’re planning on drawing from that.

Joe: And then, of course, I’ve got to read question number two. Should have probably read the question before I started talking. “We both have Roths that we are contributing to early in our careers until we reach the income cut off. Our savings are pretty balanced between pre- and after-tax. So I guess half of the four and a half is outside of retirement accounts, half is inside. “Do you recommend contributing to a Roth IRA? Thank you very much for your recommendations.” Michelle,l we don’t give recommendations on this program.

Andi: Suggestions.

Joe: We give ideas. Thoughts.

Al: Yes. We’re just two guys chatting.

Joe: Yeah. Just sitting at a bar stool. This is what Al does. Sitting at a barstool talking about taxes, investments, 401(k)s. (laughs)

Al: (laughs) I can’t wait.

Joe: (laughs) with a spritzer.

Al: Is it 5:00 somewhere?

Joe: Me on the other hand…

Al: What are you doing on the barstool?

Joe: I’m not talking about 401(k)s. I’m usually having a Coors Light talking probably about sports.

Al: Sports. That’s your go-to?

Andi: Or asking somebody if they’re a hugger.

Joe: Yeah. “Hey, do you like hugs?” (laughs)

Al: Is that your opening line?

Joe: Yeah that’s pretty good innit?

Al: Is that why you’re still single? (laughs)

Joe: Yeah pretty much. All right. So I’m guessing. I don’t know how much Michelle makes, or her husband makes, but I’m guessing it’s a pretty good amount because they’re over the cut-off. So it’s over $200,000 of AGI. They got four and a half million dollars saved, half is in retirement accounts. So if someone at 50 years old has $2.2 million in retirement accounts, that tells me, just simple math, that they’ve been maxing out there 401(k) plans for probably the last 20 some odd years. And if they have two and a half million outside, they either inherited, saved it, stock options, small business owners. I’m guessing that they probably have options of some sort. They have RSUs. They probably worked in high tech. I don’t know, Chicago…

Al: Yeah there’s high tech there. That would be a good guess.

Joe: I’m guessing – I don’t know Michelle from anything. But that’s the pattern that we see often.

Al: Or sometimes people max-fund their retirement than they inherit a bunch of money. So that could be too.

Joe: So should she go with the Roth? You know, you’ve got a little bit of money in Roth it sounds like. Because you have half your money outside of retirement accounts and you’re going to retire in five years at 55, I would convert. I would wait. I don’t think you need to contribute to the Roth. What’s $6,000? Who cares?

Al: Well how can they contribute if they’re past the income cut-off?

Joe: I’m just saying maybe they could do backdoor IRA contributions. But I would wait five years and then do conversions because your income is going to be so low because they could live off of the non-retirement accounts, and if they structure that properly, they could keep themselves in possibly a 0% tax bracket. And then on to that two and a half million from age 55 to 70 they could slowly convert a lot of that money out and pay very little tax along the way.

Al: Yeah I agree with that, especially because they can live off their non-qualified or non-retirement assets, so keep their income low after retirement. And then they can be converting quite a bit. Now a Roth contribution if you qualify, which, for married, you have to have income below $193,000 joint income, there’s a phase-out between that and $203,000. If you’re below that, then, by all means, go ahead and do two Roth contributions – that’s a no brainer. $7,000 for your husband’s, $6,000 for you because you’re not 50 ,Michelle.

Joe: If they’ve got Roth 401(k) options, I don’t know what their tax bracket is, so it depends.

Al: It depends on that. The fact that they want to retire young and keep their income low. That’s probably the smarter idea is to do conversions. Backdoor Roth, if you have other IRAs, doesn’t work very well. But if one of the two you doesn’t have an IRA then you could do a backdoor Roth. You do an IRA contribution and then you convert that. Or if one of you has a small IRA, you could convert that to open up the backdoor Roth. So there are a few things you can do, but I think the bigger picture way to look at this is just what you said – is upon retirement, live off your non-retirement assets and then do Roth conversions at that point.

Read our blog on the Backdoor Roth IRA strategy in the show notes for today’s episode at YourMoneyYourWealth.com. And hey, did you realize Your Money, Your Wealth® is not only a podcast, it’s also a weekly half-hour TV show? Completely different from the podcast! This week Joe and Big Al discuss Charitable Giving That Gives Back on YMYW TV, and you can watch that for free and on-demand at YourMoneyYourWealth.com too. Now let’s get back to your money questions. If you’ve got one, click Ask Joe and Al On Air at YourMoneyYourWealth.com to send it in as a voice message or an email.

31:51 – Can I Start a Roth IRA For My Dad?

Joe: We’ve got Jay from Chicago – we talked about him earlier in the show but we never really answered his email question. He goes, “Hi Joe and Big Al. I just discovered your show last week and have blasted through about 40 podcast episodes since. Thank you for the great content. My dad is 66 and has not saved adequately at all. He is self-employed and has no retirement accounts. He and his girlfriend though–” Good for him. Look at that. “– together make about a median household income.” OK. I don’t know what that is, but its average. Or it’s less than the average it’s about. (laughs)

Al: It’s about. It’s close. (laughs)

Joe: “He just started collecting Social Security. She is 62. They live in Florida. My question is this: if I were able to get him to start investing, or if I were to loan him some money in an investment account, what type of account would make the most sense? I was thinking about putting $7,000 into a Roth IRA but wasn’t sure what distribution rules would apply, or if a non-taxable advantaged account would make more sense. He’s healthy enough that I think he should build whatever nest egg we can.” Okay. Well Jay, good for you brother. That’s very thoughtful of you. They have a median income so he could put money into a Roth IRA if that median income is earned income.

Al: Yeah I think that’s the key to the question. Jay, your dad has to be working, has to have earned income, has to have a job, has to have a job generating $7,000 of income for you to be able to put $7,000 into a Roth for him – but otherwise, if that’s true, yes you can. And that is the best place to put the money because it’s tax-free.

Joe: Yeah. So if you’re gonna give him some $7,000, you put it into a Roth… Well he’s self-employed it says right here and has no retirement account, so be self-employed and if he makes $7,000, then you could put $7,000 into the Roth IRA.

Andi: And he’s also collecting Social Security, so anything that he’s making hopefully is under that $16,000, $17,000 limit, otherwise he’s giving some back?

Joe: Well I don’t know if he’s full – he’s 66 so he’s full retirement age.

Andi: So yeah, that’s okay.

Al: He’s okay for now, but we have seen lots of self-employed people that don’t make any money.

Joe: Yes. My father was one of them. (laughs)

Al: I’m not saying Jay’s dad is one, but I’m just saying that…

Joe: And if there’s a suitcase of cash somewhere buried in the backyard. (laughs)

Al: Still haven’t found it? That’s why you go back every summer when the snow thaws? (laughs) Big shovel, acre after acre, dig it up. Anyway, I had some great point to say but I forgot.

Joe: Well self-employed, because he could have expenses and things like that, income expenses, and then it might net out, and then his profits might be lower than the $7,000…

Al: Yeah I was I was going to say self-employed income is considered earned income, so that’s why we’re sort of going down this path. So you look at his gross income, call it $20,000, and his expenses of $18,000. In that case, there’s $2,000 of profit. So that’s $2,000 subject to self-employment tax. Which means, Jay, you could put $2,000 into a Roth. So it’s the lower of $7,000 or the earned income – whichever is lower.

Joe: So you’d want to look at his tax return. But yeah, you could definitely contribute to a Roth at any age. The distribution on Roth, there are no distribution rules basically, unless you take the money out prior to five years. That’s the really only kind of quirky rule that they have because it’s tax-free as long as the money seasons for five years or you’re 59 and a half. He’s 66, you put $7,000 into it, he has full access to the $7,000 that you would put in. But let’s say that $7,000 grows to ten. That $3,000 of earnings then would have this season for five years. So each year that you make those contributions, the five-year clock would be satisfied the year that you first make that contribution.

Al: Yeah. And I think that’s a key point and a misunderstood point, which is, when you do a Roth contribution – that’s the $6,000, or $7,000 if you’re 50 and older for 2019. When you put that contribution in, you can take it out anytime, any age, for any reason – next day. You don’t have to wait five years. That’s on the contribution. But if that contribution grows a dollar, because of growth or income or whatever, that dollar has to stay in for five years. If you take the dollar out then it’s still you don’t pay tax on because it’s in a Roth, but you have to pay a penalty – 10% penalty.

Joe: And tax.

Al: And tax?

Joe: Yessir.

Al: Oh okay. I got that wrong. Thanks for correcting me.

Joe: That’s why I’m here, yeah you got it.

Al: It’s the end of the show. (laughs)

36:49 – I’m 60 and Disabled. Should I Roll My 401(k) Into a Traditional IRA or a Roth IRA?

Joe: Julia, San Diego. “Hello. I’m 60 years old with a disability and retiring this year. I was wondering if I should roll my 401(k) into an IRA or Roth IRA. I have about $42,000 in the IRA. I would appreciate your feedback.” Alrighty, Julia…

Al: We might need to get a little more information.

Joe: Just a smidge. We need to know your taxable income, Julia. Are you married? Are you single? How much money did you make this year? That’s going to determine if you put the money into an IRA or Roth IRA. $42,000, you’re 60 years old, you don’t have to take a required distribution till age 70. The required distribution on $42,000, let’s say that thing grows to $80,000 or $100,000 by the time you’re 70. You’re required distribution is $4,000. It’s not going to kill you tax-wise there either. So does it make sense to put it into a Roth or traditional? If we had a little bit more information – either way I don’t think it’s going to hurt you. I would not do the $42,000 all in one year into the Roth. I would probably break it up in 10 years into the Roth. Slowly do it if you don’t need the money. If you need the money, I would just keep it in – from the 401(k) I would definitely roll into an IRA, but I don’t know about the Roth.

Al: Yeah I agree with that. The first step is to roll it to an IRA. And then each year determine like what tax bracket you’re in. I don’t know if you’re married or single, but let’s pretend you’re single. And so the top of the 12% bracket is about $38,000. So let’s say when you look at your tax return, your taxable income is $30,000 just as an example. So that means you could have converted $8,000 and still stayed in that 12% bracket. You probably don’t want to do any more than that, because then you go to the 22% bracket, so your tax is 10% higher. So that’s one example. On the other hand, maybe you’re married and you and your spouse make $500,000 – then it’s completely different advice. It just depends on the circumstance. So basically to answer the question, we kind of need to know if you’re married or single, how much income you’re making, how much other fixed income you’re going to have in retirement, are you working right now, all these kinds of things.

Joe: How much money do you want to live off of. Do you need the $42,000, do you want to give it to another beneficiary down the road?

Al: Yeah. What tax bracket are you now versus retirement? All that sort of stuff.

Joe: So I’m sorry it wasn’t as cut and dry.

Al: Well I think we told her to roll it to an IRA and then slowly start converting it. Possibly, depending upon her circumstances.

Joe: I would not go higher than the 12% tax bracket. But, another thing that could blow her up though, let’s just say that she’s got Social Security disability, and then that Social Security Disability is tax free. Then she does a conversion and all of a sudden the Social Security disability now is taxable.

Al: Yeah, good point.

Joe: Now you’re not at 12%, you could be at, what, 24 and a half or whatever the stupid numbers work out to be. So you probably don’t want to do a thing.

Al: Right, just go to the IRA only.

Joe: I mean it gets tricky because they hear this stuff that we talk about and it’s like, “okay, well this one strategy is probably going to make sense for me because I really like tax-free.” But then they do it and it completely blows them up. And then other people, they listen, “eh, that’s not for me” and it’s absolutely for them. So it’s always a case by case.

40:29 – YMYW Compliments and Complaints

Joe: We got a compliment and a complaint. We got James from San Diego. “Hi Joe. Now following up to my question a couple weeks ago. Actually. As soon as I accept my previous question I then realized I had inadvertently neglected to express my appreciation for your podcast.”

Andi: You remember this? You said to James, “Hey, what? No “love the show”, nothing from you? Come on! What the heck?” So he’s getting back to you here.

Joe: “Each week I look forward to enjoying your humorous and informative show. I appreciate you sharing your time, knowledge, and enthusiasm. Keep up the good work. Love your show. Are we good now, Joe?” James. We are always good. We are always good. I appreciate that, and keep writing in, keep listening. And thank you very much.

This comes from Portia from San Diego. “I would like to suggest that Joe Anderson might want to review his style on TV.”

Andi: I agree, Joe. (laughs)

Joe: “I know he is excited about his subject matter when he is talking. Sometimes he talks a little too fast and loudly and it might turn off viewers. I hope you might suggest this to him in a positive way that you can in order to help viewers understand him more.” Portia, thank you very much for that. I don’t think this is what she had in mind of you coaching me on my TV style. “Hey we got a complaint. Let’s read it on the air.” I don’t know what the heck she’s talking about.

Andi: Well she’s right. You get very excited about your content. And I’ve seen the outtakes of the show, and it’s even worse than what actually makes it to air. So Portia, we actually do dial Joe down for the TV show.

Joe: I don’t know. I find myself very melancholy.

Andi: Really? (laughs)

Joe: Yes. Portia, this stuff is boring as all get out, right? And so I try to spice it up and I’m very passionate about what I do. So if you want me to chill out a little bit, I think that’s what she’s saying. But she wants to say it in a nice way, in a positive way so people understand what the hell I’m talking about.

Andi: Right, exactly.

Joe: Maybe I don’t want people to understand what the hell I’m talking about.

Andi: (laughs) And thus that is the whole crux of Your Money, Your Wealth®.

Joe: Yeah. There it is. So if you got a compliment, if you got a complaint please share it with us, because I would love to talk about it on the air. I already have a self-esteem problem. It really helps when I hear this kind of stuff. (laughs) Thanks for joining us. Thanks for Andi Last for a great job, Alan Clopine did a wonderful job as well. And we’ll see you guys next week. The show is called Your Money, Your Wealth®.

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Special thanks to today’s guest, Jonathan Clements. Find links to his website HumbleDollar.com, to purchase his latest book, From Here to Financial Happiness, to listen to his previous appearances on YMYW, and to share this podcast and subscribe in the podcast show notes at YourMoneyYourWealth.com. While you’re there, be sure to fill out my 2019 podcast survey before August 18th for your chance to win a $100 Amazon gift card.

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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.