Show Notes

• (00:58) Should We Fire Our Advisors and Go DIY or Shop for Lower Fees? (Jackson & Elsa, WY)
• (11:51) Can We Retire at Age 50? Best Way to Put Extra $30K to Work? (Bob Wills, TX)
• (19:51) How Much Should We Save for Retirement Pre-Tax vs. Post-Tax? (Matthew, Middle of Nowhere, WI)
• (28:27) Excess 529 Plan College Savings: Leave it or Move it to Roth? (Michelle, MN)
• (35:34) The Derails

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Transcription

Andi: Should Jackson Pollock and Elsa Spear Byron from Wyoming fire their advisors, shop for lower fees, or switch to do-it-yourself financial planning? That’s today on Your Money, Your Wealth® podcast 446. Plus, the fellas spitball on whether 34-year-old Bob Wills in Texas can retire early at 50, and what’s the best way for him to put an extra $30K to work? How much should 35-year-old Matthew in the middle of nowhere Wisconsin be saving for retirement in pre-tax accounts vs. post-tax accounts? And finally, should Michelle in Minnesota leave excess education savings in a 529 plan or move it to a Roth IRA? Yes we do use some fake names here on YMYW, and you can too. To get a retirement spitball analysis of your own or to ask your money questions, go to YourMoneyYourWealth.com and click Ask Joe and Big Al On Air. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should We Fire Our Advisors and Go DIY or Shop for Lower Fees? (Jackson & Elsa, WY)

Joe: “Hello, Geriatric Joe, Big Al, and of course, wonderful Andi. First, I would like to say I’ve enjoyed discovering YMYW. Have made listening to your entertaining interactions a priority on Tuesday mornings. Next, I feel compelled to explain why I referred to Joe as geriatric.”

Al: Yeah, I’m curious about that.

Joe: I don’t know, I’ve been called worse. I’ve been called marble mouth.

Al: That is worse. This is just old.

Joe: Yeah, well, at least they get my name right, Al. For years it was Joel. There’s Joel. Because I had marbles in my mouth.

Al: “I’ve got a question for Big Al and Joel.”

Joe: “Women are classified as an advanced maternal age when they reach 35, and should they bear children after that age, the pregnancy is considered a geriatric pregnancy. Therefore, the same should apply to the father. Congratulations, Joe.” Yeah.

Al: Makes sense.

Joe: Yep. Killing the game. Don’t worry about it. Oh boy. All right, let’s go. Finally. “I hope after all of my quips, you could do a little spitball in how we should view assets under management fees as they relate to both of the accumulation phase as well as they relate to a safe withdrawal rate, or if you could provide a professional opinion on the value of a good financial planner provides, I love to hear that too.” Okay, “I’m really second-guessing the current situation we are in with our financial advisors. That was… I gotta work, we gotta work on some grammar here. “I’m really second-guessing the current situation we are in with our current financial advisors. And contemplating going back to a little DIY approach-”

Al: Do it yourself.

Joe: “- or shopping for a lower fee structure.”

Al: Fair enough.

Joe: So, what the hell? Let’s go to YMYW, get some little free spitball right here.

Al: I think so.

Joe: “Over the long term, it seems like there’s a tremendous opportunity going out of our portfolio in fees.” Going out of our portfolio in fees. Yeah, my eyes are super tired. “I’ve done the math and I theoretically knew the expense at the provided rate structure. Originally, I just justified it by running projections with a discount over the conservative rate of return. However, most recently, it dawned on me that I should consider the effective fee in retirement as part of our safe withdrawal rate. Am I overthinking?” A little bit. “Are financial advisors worth the fee over the course of time?”

Al: Maybe. Maybe not.

Joe: Well, it depends. Depends on who you get. If it’s someone that can barely read, the answer is yes.

Al: Maybe go the other way. Go DIY.

Joe: I can barely read. Yeah, I’m worth at least 2%.

Al: You got to get paid for all the free advice.

Joe: “What are the actual man-hours tied to the management of the portfolio with structures like ours?” They got two 401(k)s, two Roth IRAs, two IRAs, one brokerage account. Okay. “Andi, please-” So we’re changing the names here to keep them innocent.

Al: Apparently.

Andi: She said, “Please make us anonymous or create some fantastic pen names for us.” So this couple is from Wyoming. So I’ve found people who were from Wyoming, and I’ve named them after the artists, Jackson Pollock, the painter, and Elsa Spear Byron, the photographer, both from Wyoming. So Jackson and Elsa.

Al: Okay. Got it.

Joe: Okay. He’s got a little Chevy Silverado.

Al: Yep. Makes sense.

Joe: Definitely Montana.

Al: Yep. Or Wyoming.

Joe: Yep. She’s got a DMC Sierra.

Al: Yeah. Makes sense too.

Joe: Yeah. Drinks of choice, domestic lager beer. And then her, she likes a little whiskey.

Al: This is right on track with their state.

Joe: He’s 49. She’s 40. Got horses. They got dogs. They got cats.

Al: Perfect.

Joe: Man, I gotta go see my boy Jackson-

Al: Jackson and Elsa.

Joe: Yeah, I will have a whiskey and a lager.

Al: I know you will.

Joe: I will have a beer and a little whiskey. A little sidecar.

Al: Maybe a little of each.

Joe: I might have a couple of each. “Current portfolio $1,600,000 and a retirement goal of $5,000,000 to $6,000,000 at her age 55. AUM fee structure. Current effective AUM rate fee is 1.7%. Another firm for comparison will land at 1.12%. Future at $6,000,000 portfolio effective could be 0.94% or 0.76% depending on the firm’s rate structure. Hope I didn’t miss any important details. Thanks for your- Thanks in advance.”

Al: All right. So, are advisors worth it?

Joe: Well, it depends on the advisor and what you’re getting, right?

Al: I think that’s the key.

Joe: There shouldn’t be a- I guess, if they’re providing value, it doesn’t cost you anything. If they’re not providing value, it is, the cost is in infinity.

Al: You’re right. Right. So, by value. And are they keeping you invested? Which is an important thing because we, when left on our own devices want to sell when the market’s down and buy when the market’s high, which is not a good recipe for success.

Joe: Guarantee Jackson’s like, yeah, of course, Al. I don’t, I wouldn’t do that stupid crap.

Al: Right. Secondly your advisor hopefully is giving you some tax tips to help you save. Maybe the investment strategy is better. Maybe not. That depends upon the advisor, but I think there’s a lot of, you know, cash flow planning. Can you retire? Can you buy the second home? All these things are what advisor does. And if you’re getting those services, the fee may be worth it. If you’re not, it may not be.

Joe: I don’t know. I’m, this is, I’m winging this off the top of my head. Vanguard did a study, is the cost of financial advice worth it?

Al: Right. Correct. I know what you’re talking about.

Joe: They broke it down into probably 4 or 5 different things.

Al: Correct.

Joe: And so when you’re looking at this, is that, all right, well, first of all, do you have the appropriately constructed portfolio for your specific goals? So he wants to get to $5,000,000 to $6,000,000. So he’s got $1,000,0000 today and all right how is he going to get to $6,000,000? What does the portfolio look like? How is it constructed? How much money do you have in stocks versus bonds versus international versus domestic? And how much money do you have in small companies versus large company, growth values versus value? So having the appropriate constructed portfolio is worth something.

Secondly, how are you managing the portfolio moving forward? Are you looking at making sure that you’re keeping the risk parameters in place? So that means are you rebalancing and how are you rebalancing? Are you looking at opportunities when markets get volatile, right? So if the market drops, are you making moves? Are you rebalancing and buying more stocks when they’re down and buying and selling, you know, your safe investments to buy more stocks. And like you said Al, most people kind of do the opposite. It’s like, okay, well here, I feel like the market is a little bit overvalued. So I’m going to start making moves based on my gut. Or you’re going to hear something or some market guru. And most of those times, those predictions are wrong. And so they make really- decisions based on emotion. You need to have a disciplined decision. And we are not equipped as investors to manage our own money in a lot of cases, because when you see a train coming down the track and you’re on the track, you want to get the hell out of the way, right?

But if you have someone that’s watching over you, they’re going to tell you when to move because there’s no emotional attachment. It’s all process driven. Third, tax loss harvesting. So if you have money in a brokerage account, how are you harvesting those losses? So when a stock goes down or your mutual fund goes down, do you sell it and you buy something else? And then you take those losses and put it on your tax return that will offset future gains. So how often are you doing that and what are you looking at replacing those different investments? So just as a portfolio construction and how you’re managing that portfolio in a lot of cases is worth a fee. Is it worth 1%? Is it worth 2%? Is it worth 50 basis points? It really depends on the other planning aspects of your overall goals, right? Then that’s where it gets into cash flow planning. Hey, I want to buy a cabin. Hey, I want to set up another structure to give to my grandchildren. I want to create a legacy. I have an estate planning issue, blah, blah, blah, blah, blah. There’s a lot more things involved in an overall comprehensive financial strategy than just the investment portfolio.

Al: Right. Can I retire at 60 or 65, 45, whatever it may be? And what if this happens? How does it look? This is what cashflow planning is all about. If your advisor knows something about taxes, may be able to help you with Roth conversions and other strategies to reduce taxes. So in, in many cases, the advisor is worth it. In many cases, maybe not.

Joe: I think more importantly, then it’s looking at, okay, now you’ve reached your $6,000,000 goal and you’re trying to create $150,000 of income. How are you going to create the income? How are you still going to rebalance the portfolio? How are you still going to tax manage the portfolio? How are you going to look at Roth conversions and other tax strategies as you’re moving through your distribution phase? So there’s a lot of moving variables here.

Al: Right. And do you want to do that yourself?

Joe: And if you want to continue to do it yourself, do it yourself and save a couple of bucks. If you want to hire a professional, just make sure that you get the full gamut. Or you know what, you just call into our show every couple of weeks and we’ll tell you.

Al: Ask a question.

Joe: – just ask a question, get this s**t for free!

Andi: Wow! Easy there tiger! Joe’s a bit fired up, Elsa. Speaking of free… stuff, from the podcast survey last month I know that more than half of YMYW listeners are financial do-it-yourselfers, so if that’s you, you’ll want to download the DIY Retirement Guide – it’s the Special Offer right now at YourMoneyYourWealth.com, but only until this Friday. It’s 40-plus pages of practical, actionable information you can use to plan your retirement income, choose a tax-efficient distribution method, develop an investing strategy that meets your needs, and prepare for the unexpected. All this information is normally only available in our retirement classes or one-on-one meetings. Last time this DIY Retirement Guide was available was back in May, it’ll be several months before it’s available again, so go download it now. Click the link in the description of today’s episode in your podcast app, go to the podcast show notes, and claim the DIY Retirement Guide by this Friday September 15, 2023. 

Can We Retire at Age 50? Best Way to Put Extra $30K to Work? (Bob Wills, TX)

Joe: “Hey fellas, Andi. My name is, insert fake name, Andi’s choice.”

Andi: I chose Bob Wills, because Bob here lives in Texas and Bob Wills was the King of Western Swing. He had huge hits in the 1940s. His group was called Bob Wills and the Texas Playboys.

Al: Ah, I think I’ve heard of them.

Andi: Yep.

Joe: “Live in Texas with my beautiful wife and 3 kids, all under 6. Great show. I’m dedicated, listening for the last two weeks.” Two weeks!

Andi: Thanks, Bob.

Al: Still into it after two weeks.

Joe: Two weeks. Just wait till this week, little one-star, unsubscribe. “I Enjoy a bourbon and a cigar and my wife enjoys anything refreshing with tequila or vodka.” All right.

Al: Where are we?

Joe: I have no idea.

Andi: “After taxes and pre-tax contributions-“

Joe: “- we take home about $150,000 and invest 20% of that. We feed and clothe our kids with what’s left.” Alright, pay themselves first.

Al: I like that.

Joe: And if there’s money left over, hey, you’re gonna get a new pair of shoes.

Al: You want some dinner? Can’t afford it right now.

Joe: Ramen noodles.

Al: We’ve made up 6 pounds of rice.

Joe: “My wife and I are 34. We would like to be able to retire at 50. Here are the numbers: net worth, $750,000. This is made up of Bob’s $300,000 equity in the house. We also owe $300,000 on a 15-year mortgage, $400,000 invested, he’s got $50,000 in a cash reserve. I’m following the basic 3 fund portfolio with 90/10 stock/bonds and 70/30 US/International. When looking at pre-tax versus Roth, we are 70/30 heavier on pre-tax and our annual contributions follow the similar mix of our pre-tax and Roth. Annual contributions for me look like maxed out my 401(k), max myself and my wife’s Roth IRA, $3600 goes into some 529 plans. Kids will get some tuition assistance from my military service, so these don’t need to be fully funded.” Well, thank you for your service. “$2500 going into a brokerage account. We are anticipating another $30,000 a year increase with VA disability benefits being approved. Now for some spit balling. What would be the best way to put that extra $30,000 to work? My employer’s 401(k) plan offers the mega door back Roth, so this could be an option. What is your perception of paying off the mortgage early? I’m sure it’s one of those episodes, but I haven’t heard it yet.” Oh, you’re only two episodes in.

Al: Just stick with us. We’ll get there.

Joe: We’ll get there. “Should we be focusing all future contributions on Roth? We’re sort of trying to hedge our bets on the 50/50 split of Roth versus pre-tax. Do you see any logic in this? Or is 100% Roth always the winner? How does retirement at 50 look? Annual spending would be somewhere between $80,000 to $100,000 depending on travel. Thanks for the spitball. Fake name here.” Bob Wills.

Al: Bob Wills. Okay, well, let me answer the last question, then we’ll go back.

Joe: Alright. Annual spending is going to be $80,000 to $100,000, with a little extra travel. Can he retire?

Al: Yeah. Can he retire at 50? So, $400,000 at this point, not including the cash, $60,000 per year saving, 6% over 16 years. That becomes $2,200,000 at age- how old is he?

Joe: He’s 30-something.

Al: 30, yeah. So I’m just going to say 3% distribution rate, $66,000 plus VA, $30,000. So that’s $96,000. If you take current spending-

Joe: He’s probably got another military pension if he gets the VA. Or do you think 100% is approved on the VA?

Al: He may. I don’t know. I’m going to assume he doesn’t. But let’s go on this and $80,000 to $100,000 today would be like $121,000 to $151,000 in the future. You got $96,000 coming in. So maybe you’re $25,000 to $50,000 short. If you got another military pension, maybe that takes care of it. Or maybe you work part time for that stub period. You don’t say what your Social Security is. So it’s hard to know how to factor that in. I think you’re close, but I think based upon the numbers you gave me, you’re short.

Joe: Yeah, I would agree with that assumption, depending with the numbers here. The biggest thing is the stump from age 50 to 67, 68 with Social Security. Depending on what that benefit is.

Al: Exactly.

Joe: He’s going to retire it at 50.

Al: Yeah, that’s a big period of time. Okay, so let’s see. What’s the best way to put the extra $30,000 to work?

Joe: I like to the mega door back.

Al: Yeah, you already answered the question. 1A. The Mega Backdoor Roth. And so the way that you can’t just put money into that, but you can have that come out of your salary and live off of your brokerage account instead of salary, so that’s how you get that then.

Joe: Yeah, you put the $30,000 in cash because you’re going to put that much more into your overall retirement account to do the Mega Door back Roth, and you’re just going to live off the cash in the account because your income from the salary is not going to be there. Okay What is your perception of paying out the mortgage early? You’ve got 2.9% on a 15 year fixed, that is going to be the cheapest money that we’ll see in probably 15 years.

Al: Don’t do it and it’s going to be paid off when you retire anyway, so just keep going.

Joe: Yep, like, like that, okay. Should we- and sometimes with mortgages, we even tell clients to refinance and have a mortgage throughout retirement.

Al: Sure. If their cash, if their liquid assets are too low.

Joe: Yeah. You want to keep that payment as low as possible with the lowest potential rate. You know, right now we’re not doing that just because rates are so high, but you’re locked in at 2.9%. 2.99%, 3%? That’s a pretty good rate at 15 years. But he’s got $300,000 in equity. Does he plan on selling and doing something else?

Al: Well, I’m assuming no, but that’s always possible to use that too.

Joe: But if he is going to sell, let’s say when he retires, then you definitely don’t want to pay the thing off. Because then that’s leverage, right?

Al: Right. That’s right. Exactly.

Joe: “Should we be focusing all future contributions on Roth?” Well, I like Roth quite a bit. But it depends on his income.

Al: Yeah. And it depends on a lot of things. And by the way, the answer is never 100% Roth because-

Joe: Tax brackets.

Al: Yeah. Here’s why you want to fill up the 12% bracket or future 15% bracket with your 401(k) or IRA required minimum distribution. So you want to have some- because you don’t want to pay higher taxes to eliminate that 12% bracket. So no, you never want 100%.

Joe: Right. Because there’s always going to be lower brackets, right? You know, standard deduction or itemized deduction is going to give you some free income. And then there’s a 10% bracket, 12% or it’s going to be 10%, 15%. Let’s just say they stayed in those ranges. You probably want to utilize at least the 10% tax bracket up because I don’t know what’s his income, $200,000 something thousand. Did he give it to us?

Al: I don’t know.

Joe: But let’s say he’s in the 24% or 22% tax bracket today. He’s still going to have- its marginal bracket. Some of its tax at 0%, some of your investment or income will be taxed at 10% and then so on and so forth. So just understanding those lower brackets is what’s gonna give you a tax benefit today and also potentially pay lower taxes on those dollars later.

Al: Right. Now here’s what could change the whole Roth analysis, and that is if you’re fixed income, let’s say you have a big pension, right? Let’s say you got rental property, that’s already ordinary income. So now it’s like, well, maybe I, I need more in Roth than non-Roth because I’m already in higher brackets, right? So you just have to look at case by case.

How Much Should We Save for Retirement Pre-Tax vs. Post-Tax? (Matthew, Middle of Nowhere, WI)

Joe: “Hello my friends. It’s been a while since I’ve written, but I’ve been listening. And I’m happy you guys are just as nutty as ever. I appreciate you keeping me company moving my lawn and shoveling my snow every week.”

Al: Or mowing.

Joe: Moving. Moving some grass along your lawn.

Al: That’s true. “An update on my favorite drink. I’ve been quite passionate about a weird mix of pouring ginger ale and a splash of vodka over frozen fruit. It’s a slushy delight at the end of a hot day.”

Al: Never tried that.

Joe: I’m going to try that this weekend.

Al: While you’re mowing the lawn?

Joe: Yeah.

Andi: Or moving the lawn.

Joe: I’m going to move some lawn. “I don’t know if it’s a thing. I’m one of the rare ones around here that doesn’t really drink and doesn’t know anything about anything. Don’t tell anyone. Okay?”

Al: Well, we won’t mention it.

Joe: Right? “31 years old. Married. Two kids. Whippet.”

Andi: A Whippet.

Al: It’s a dog.

Joe: A Whippet? “My question is, of course, about Roth in-plan conversions. My 403(b) just started offering the option and I’m pretty jacked about it. Right now we have about $460,000 in pre-tax and $180,000 in the Roth. We max out both of our contributions and are both 100% Roth as soon as our plans offered them. We also have $130,000 in Roth IRAs that we max out every year. Wife has $30,000 in an HSA that is maxed out every year. We have about $150,000 in a brokerage account that we contribute to when we have a little extra. Based on my rough math, even if we continue to contribute the max to a Roth to the 403(b)s, in 25 years, our most pessimistic retirement age, 25 years, we’d have about the same amount in pre-tax as Roth, assuming an 8% return. I’ve heard it’s good to have a mix of different tax treatments in retirement, but this feels like a lot of pre-tax. How do you guys think about- how do you think through what kind of mix makes sense ? In your opinion, is it worth doing some in-plan conversions with every- with some cash every year? I don’t know, we’re in the 24% tax bracket, which likely won’t change until we retire. Bonus question. I had open heart surgery this year. It was to correct a problem.” I’m glad it was corrected.

Al: Yeah, me too.

Joe: “It likely won’t affect my life expectancy, but of course, it’s a gut check. And when–we’ve been talking a lot about working less now and retiring early. We spend about $75,000 a year and won’t spend more than $100,000 in retirement, ignoring inflation. If we continue to max out all the accounts and save about $10,000 into the brokerage, how early do you think we could retire, assuming a 7% ROI? Appreciate all you do. I hope my question provided some value to your listeners. I don’t know. We’ve been doing, I don’t know, we’d be doing as well as we are right now without listening to you guys every week for years now. I raise my glass to you full of frozen fruit and ginger ale, a little bit of vodka. Cheers, Matthew.” All right. Oh yeah. A little middle to middle of nowhere, Wisconsin. Little Sconny.

Al: Yeah, there you go. All right, so I did a little math.

Joe: All right. Thank God you did.

Al: So I just took the $460,000 in pre-tax and went out 25 years at 8%, which were the numbers and years that he told us. That would be about $3,200,000. $3,200,000 is, call it $120,000, $130,000 as a RMD now, well, at least at 50. Now you probably have to double it again or triple just-

Joe: Well, he’s 35 years old.

Al: Yeah. So at age 50, so, so if you take the-

Joe: Well, if he wants to, you said 25 years. That’s 60.

Al: Well, I wanna see- okay. I’m sorry. It was 60.

Joe: Yeah.

Al: Yeah. So, so it’d be $3,200,000 at 60. Call it $6,000,000 or $7,000,000. Right? So that the distribution is pretty high.

Joe: Well, hold on. Let’s say $3,200,000 at age 60. That’s when he wants to retire, right? Yep. Let’s say he takes a 3% distribution at age 60. That’s $96,000. He’s going to be in the 12% tax bracket or the 15% tax bracket if he takes 3%. So let’s say he starts depleting the account is what I’m talking about from 60 to 75. So he’s looking for the proper mix of IRAs versus Roth IRAs. And is he going to have enough money if he retires at age 60? So he said he also is going to have what, $3,200,000 in Roth? So he could take another $96,000 from the Roth and that would be tax-free. So he’s basically living off of $200,000 in future dollars in 25 years. So he wants to spend $100,000 in today’s dollars?

Al: Yeah.

Joe: So in 25 years, that’s probably $250,000.

Al: Probably, yeah, it could be.

Joe: $100,000, that’s, what do you want to use, 3% inflation?
Al: Yeah, use 3%.

Joe: 25, Future value.

Al: Yeah. $209,000. Yeah. Yeah. You’re about right.

Joe: Pretty close.

Al: Yeah. So I think that works. And I think it’s probably fine. Right?

Joe: Yeah. He’s going to be in a pretty low tax bracket. Let’s say if he continues that, goes all Roth, but here’s the problem. He’s in the 24% tax bracket today and he’s probably going to be in a lower tax bracket in retirement because he’s going all Roth right now.

Al: Yeah. Exactly.

Joe: Because then let’s say he pulls, well, the RMDs on that. And 10 years, if he pulls 3%, he gets 6% out.

Al: Yeah. It’d be a little higher.

Joe: It’ll be a little bit higher, maybe $100,000.

Al: But still then he had Social Security. I mean, there’s a lot of variables here. Right. But yeah, no, I think that’s still a good mix. Second question. Can you retire early? So I just ran one point in time. I’m not going to run like all of these in my, it just- on my calculator. But at age- I went out 15 years. So age 50.

Joe: Okay. I like that age.

Al: -just to see what happens. And so using the amount that they have plus what they’re adding, $640,000 now, plus adding about $66,000 a year at 7%, which was his number, I get about $3,400,000. Okay. 3% distribution, maybe at age 50.

Joe: $100,0000.

Al: $100,000. Spending $75,000, 15 year, 3% inflation is $117,000. Close.

Joe: Pretty close.

Al: Not quite there, but-

Joe: At age 50, I mean, you work part-time and make $20,000.

Al: That’s exactly right. You’re only $20,000 short. So, so, yeah, I think that does work.

Joe: He’s really close. He’s doing an awesome job. Right.

Al: Totally agree.

Joe: And so at age 50, just know that, all right, hey, if I can grind for 15 more years, age 50, keep saving what you’re saving, you’re going to be super close.

Al: Yep.

Joe: And then work is optional. And then-

Al: Yeah. Just work part-time for part of that. And you know, when it pleases you, but you probably need a little more, but maybe not because we don’t know what your Social Security is.

Andi: If you want a retirement spitball analysis of your own, you know what to do – just go to YourMoneyYourWealth.com and click Ask Joe & Al On Air. But how easy would it be if you could just plug your income, savings, and expenses into a retirement calculator and see your chance of retirement success in two minutes? With our brand new EASI retirement calculator you can do just that. Go to EASIretirement.com – that’s EASI retirement dot com – to get started. E-A-S-I stands for education, assessment, strategy, implementation: these are the building blocks of a sound retirement plan. You’re already educating yourself by listening to YMYW. Now, go to EASIretirement.com to assess your financial wellness. Create a login and pick either the quick two-minute path, or the comprehensive 8-minute path, and the free calculator will help you map out your next step – your strategy. Maybe your chance of a successful retirement isn’t as high as it should be. At easiretirement.com you can play with the numbers right there in the calculator and see at a glance how much of a difference it makes if you work one year longer or take social security just one year later. You’ll know exactly what you need to do to improve your financial wellness. Then, don’t forget to implement your plan for a better chance at a successful retirement. Start calculating your free retirement plan now at EASIretirement.com. That’s EASI retirement dot com. 

Excess 529 Plan College Savings: Leave it or Move it to Roth? (Michelle, MN)

Joe: “Dear Joe, Big Al, and Andi, thanks for the informative, easy-to-follow podcast. I learn something each time I listen while I go on walks. I have a question I do not think has been covered”. Okay. All right. Something new.

Al: Something new.

Joe: I’m excited.

Al: Me too. That means it’s not about a Roth conversion. Or the 5-year rule.

Joe: Right. And I guarantee I probably don’t know the answer. “My husband and I opened 529 plans for our two children when they were born. When they went to choose their college, we indicated we would pay $100,000 each for their education. Anything above that, they needed to pay, but anything below was theirs to be given at some stage in the future. The thought was that they would not- It wouldn’t be any extra, but it would help keep their college choice reasonable.”

Al: I like that.

Joe: Playing little games.

Al: Yeah, right. Little mind games.

Joe: Yeah, hey, we’re going to pay $100,000 there, kids. So pick a school that’s reasonable.

Al: Yeah, right.

Joe: “When they went to college, each account was fully funded to cover the $100,000 agreement. So a total of $200,000. Both kids selected well-priced state universities and earned scholarships.”

Al: Nice.

Joe: “Additionally, since student loans were 0%, they took out loans and I kept their 529 plans aggressively invested. Both kids have graduated. And are fully launched, congrats, with great careers, with bright futures. Yippee!”

Al: I like that. Emphasis added.

Joe: Yeah. You like that?

Al: Yeah. Yeah. I do. That’s why it’s fun for you to read.

Joe: “Even when I pay off the student loans, when they come to you from the 529 plans that we have left will be $90,000, so for my first question, do I have to leave the money in the 529 plan in case they go back to graduate school or for their future children’s education?” You can keep it in there, yeah, you can change beneficiaries and if they go back to grad school, you can use the 529 plan to purchase that. If they have grandkids you can change beneficiaries.

Al: It’s a fine strategy.

Joe: Yep, so you’re all good there. “With the SECURE 2.0, I know I can move money to a Roth subject to the $6500 per year limit per kid, and this would be easy to do with the 529 plan, which is at Vanguard, and both have already established small Roths with Vanguard to the lifetime $35,000 max.” So she wants to transfer $6500 of this excess $90,000 of the 529 plan. Does she want to fund her own or does she want to fund the kids?

Al: Well, we have to be the kids, I think.

Joe: Well, she could fund her own if she changed the beneficiary of the 529 plan to herself.

Al: Oh, to herself. Well, sure. But I think the agreement was that they would get the excess.

Joe: Got it. Yeah, you could do that as well.

Al: Yeah, nothing wrong with that.

Joe: As long as they have earned income and qualify for this, for the Roth IRA. So you have to qualify just like you’re putting in after-tax dollars in your Roth. But it sounds like-

Al: So that, so to do this, you have to have had the 529 plan for 15 years, which seems to be true.

Joe: Yeah, they graduated.

Al: Yeah, right.

Joe: They were- unless they’re Doogie Howser.

Al: Graduated from college at 14.

Joe: At 12? He’s a doctor.

Al: Good point. Okay. And yeah, you are correct. $35,000 is the maximum amount per kid, $6500 a year. They have to have earned income to at least cover that. So, and you can’t do this with 529 contributions over the past 5 years, which, that doesn’t sound like that happened.

Joe: Nope.

Al: So I, yeah, I think you’re good. Either one’s great. You’ll probably- you probably want to do both, get as much money to the Roth as possible and the rest just leave for your kids, for their kids, future education. I think that’s great.

Joe: Okay, another question. “Do I have to pay a penalty if I take the money out to help them buy a home?” Yes.

Al: Correct.

Joe: Higher education. So, a home is not higher education.

Al: Right.

Joe: “Or some combination, neither kid is requesting the extra funds. Thoughts?” Well, it’s because you played mind games with them.

Al: Because they thought it was only $100,000. That’s all you got.

Joe: We’re going to sit down. We’re going to give you $100,000, but it needs to be a reasonably priced school. And I’m going to give you the definition of what that is.

Al: Well, it doesn’t have to be, but they have to pay for the rest. That’s actually, that’s clever for you, Joe. And in about-

Joe: yeah, 25 years.

Al: Remember this.

Joe: Man. “Most importantly, my husband’s drink of choice is bourbon old fashioneds. And mine is a Cosmo.” Oh, that’s very sophisticated.

Al: It is.

Joe: I’d like to go out to drinks with them.

Al: Right.

Joe: I’d definitely have an old fashioned. “Thanks so much. P. S. Andi. Since you are the only one that will read-“

Al: “-read to the end-“

Joe: “- please respond with what episode this question is.”

Andi: “ And thanks for keeping the guys on track and correcting Joe’s reading.” Sure, Michelle.

Al: Yeah. “Michelle from Minnesota.” That’s your home state.

Joe: Just give me a little digs there. Yeah. Right. So I wonder where they went. They went to University of Minnesota Duluth, I bet.

Al: You think?

Joe: Maybe Mankato.

Al: That’s the- that’d be the cost effective in state?

Joe: Yes.

Al: Got it. Or maybe junior college for two years?

Joe: Maybe Normandale.

Al: I got it. Very cool.

Joe: Alright, is that it?

Andi: That’s it.

Joe: Okay wonderful. Thanks for your questions again folks, the show is called Your Money, Your Wealth®. We’ll see you next time.

Andi: Bourbon and cigars in the Derails in the end of the episode, so stick around. The best way to thank Joe and Al for all the free spitballing is to help new listeners find the show. You can do that by telling your friends and colleagues to listen and follow the Your Money, Your Wealth podcast, and you can leave your honest reviews and ratings for YMYW in Apple Podcasts, and any other podcast app that accepts them.

Your Money, Your Wealth® is presented by Pure Financial Advisors. Click the “Get An Assessment” button in the podcast show notes at YourMoneyYourWealth.com or call 888-994-6257 to schedule your free financial assessment, in person at one of our seven offices around the country or online, a time and date convenient for you, no matter where you are. Chances are, one of the experienced financial professionals on Joe and Big Al’s team at Pure will be able to identify strategies to help you create a more successful retirement.

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.

The Derails

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