Show Notes

• (00:56) I Have $1.8M and I’m 59 and a Half. Can I Afford to Retire Now? (William)
• (07:29) Using Roth Money to Fund Investment Real Estate and the BRRR Strategy (Marcus, Alabama)
• (12:50) Unique Way to Fund a Roth 401(k): Backdoor Roth (Mark, Morgantown, WV)
• (18:42) Should I Contribute to Roth IRA or Traditional IRA? (Grant, AL)
• (25:14) Is a Roth IRA a Good Way to Get Kids Interested in Investing? (Esteban)
• (27:55) Capital Gains Vs. Ordinary Income: A Case Study (Richard)
• (33:47) Do Restricted Stock Units Impact Social Security? Are RSUs Earned Income or Ordinary Income? (Tom, Chicago)
• (42:36) When Can My Spouse Take Spousal Social Security Benefits? (Thomas)

Free resources:

WATCH | YMYW TV S. 7 Ep 4 – Early Retirement: How to Pivot Financially

LISTEN | YMYW PODCAST: The Backdoor and Mega Backdoor (Megatron) Roth IRA Strategy

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Transcription

Today on Your Money, Your Wealth® podcast number 320, William has investing experience, money in the bank, and a plan for retirement – so do Joe and Big Al think he’s ready for early retirement now, at age 59 and a half? Plus, BRRR real estate investing and Roth, Backdoor Roth and Megatron Roth conversions! Also, a capital gains and ordinary income case study, and RSUs or restricted stock units: are they ordinary income, and how do they impact Social Security? Speaking of which, when exactly can a spouse begin collecting spousal Social Security benefits? Click Ask Joe and Al On Air at YourMoneyYourWealth.com to send in your money questions to be answered on the YMYW podcast. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

I Have $1.8M and I’m 59 and a Half. Can I Afford to Retire Now?

Joe: William writes in, “Hi Joe and Big Al. Looking for a second opinion. If I can retire at age 59 and a half right now. We got $1,800,000 in investments; $1,100,000 in a 403(b); $250,000 in a brokerage account; $450,000 in a Roth IRAs. I am an accountant. I have an MBA in finance and been investing 30 years and am very experienced in the market. I’m a DYI investor; annual income of $130,000.” What the hell are you writing in to us for, Bill?

Al: Because he just wants a second opinion.

Joe: Dude, the guy- I’m an MBA. I am an accountant. You kneel down to me.

Al: I am a very experienced investor.

Joe: I want to see what you jack- have to say.

Al: Well, where does he go with it?

Joe: OK. “In retirement, I plan to spread my money over mutual funds, ETFs and closed-end funds, CEFs-” I love how they always put that in there.

Al: Acronyms.

Joe:  “- invested in stocks for growth, balance funds for growth  and income and some CEFs, closed-end funds, for income.” Gives us a few ticker symbols. “No individual stocks. House of $200,000 paid for and not including investments, no other debt. One car, only two years old. I will generate $5000 per month in income, distributions from income investments. Wife, two years younger, and I will need to take out a gross of $8000 per month pre-tax in health care, total $1000 per month for both of us until Medicare, age 65. Thus, I will take out $3000 per month in principle until age 70 when we start Social Security. We have low expenses and could live on our after-tax of $3500 per month if needed. I’ve worked long and hard, really want to retire now. I’ve been a manager since 22.” Man, he’s been a manager-

Al: That’s a long time.

Joe: He’s got a MBA, he’s an accountant-

Al: That’s almost 40 years.

Joe: He’s a DIY- this guy’s-

Al: yeah, got it all.

Joe: I love- this guy’s awesome. “Do you think generally someone in this situation could retire 59 and a half and be OK? Please let me know if you have any questions. Thanks.” All right. So I don’t like your strategy at all.

Al: I don’t either.

Joe: But let’s see if William can retire because he’s been a manager since 22. And it sounds like he hates his job.

Al: He’s done. I don’t blame you, William.

Joe:  So he’s got $1,800,000. What does he say, $8000-12 times-

Al: So just round it to $2,000,000, just to make it easy.

Joe: And he needs $100,000 a year. $8000 a month, around that?

Al: That’s right.

Joe: If you take $100,000 and you divide that into $2,000,000.So that’s 5%.

Al: Yep. That’s a little rich. But you know what, it’s not counting his future Social Security.

Joe: So you look at it like that. You want to look at a distribution rate. So right now, William, you’d be pulling out 5% of your total portfolio per year from 59 and a half till age 70.

Al: Yeah. And by the way, we don’t really care about your income. We care about your total return. That’s what this computation is.

Joe: Right. Because what you’re going to do, is you’re going to buy in these closed-end funds for income and they’re going to be levered. I didn’t even look at what these ticker symbols are. But since you’re a DIY, MBA, and accountant, you probably have. Understand the risks, because people make this mistake all the time, is loading up on certain funds and investments that have been kicking out high yield. We saw it with MLPs in the past that blew up. Or they buy annuities or they buy high dividend-paying stocks, high yield bonds. They focus a lot of their portfolio on this particular sector of the overall market and it’s overweighted to that area because they’re looking only strictly at the income.

Al: Not looking at the risk.

Joe: Yes. And the income feels really good right now.

Al: Of course.

Joe: And so they’re looking at this and say, yeah, this is good. You know what? I think I can retire because I’m going to be getting $5000 a month.

That’s what it’s been averaging per month, you know. $60,000 of income. I’m not going to touch any principal at all, but I want to retire. We’re spending $8000. So I got a dip in a little bit to the principal of $3000. What do you think? Can I do it? The answer’s yes. You can retire because you’re only taking 5% out of the portfolio for the next 10 years. And then from there, your Social Security- the guy makes $100,000 some odd thousand a year. So he’s probably maxed out on Social Security.

Al: Probably so.

Joe: And if he’s married, let’s say she didn’t work because we didn’t hear anything about her or if he’s single. If he’s single, let’s say he has-

Al: He’s got a wife, two years younger.

Joe: Oh, yeah, two years younger. So I don’t know what his and hers, if she’s going to work or not. But let’s just say Social Security benefits is going to pay probably $50,000. So then his distribution rate is probably going to go to 2.5%.

Al: Yeah. So the thing is we like distribution rates to be 4% or lower. But William, in your case, you’ll be a little bit higher for a few years. But you’ll make it back up when you start collecting Social Security. So we’re OK with it. So I would say, you know what? You worked hard and long. Go ahead, retire.

Joe: Right. You deserve it. You’re an MBA. An accountant.

Al: You know how to do this.

Joe: Yeah. Do a spreadsheet, William. Make a spreadsheet. Create- here’s what you’re spending with inflation. Use a high inflation rate, 3.5%.

Al: Use a low earnings rate on your investments just to be conservative. Maybe 5% or 6%. Like that.

Joe: And then you look at, here’s what my burn rate is. This is what I need. Here’s what my expenses are. This is what my income needs to be or how much money in my pulling out of the overall portfolio. Do that math.

Al: I think what you’re going to see is you’re going to dip a little bit for a few years, but then you’ll make it up when Social Security kicks in.

Joe: Correct. And if I were you, I’d plan- I would stop worrying so much about the income and more about a tax strategy because all of his money is jammed up. You retire now, you live off the non-qualified account and then you do conversions throughout the next 10 years and then get all that money into a tax-free account. Then you got something.

Al: Now you’re talking.

Joe: Now you’re talking.

Using Roth Money to Fund Investment Real Estate and the BRRR Strategy

Joe: All right. We got Marcus. He writes in from Alabama. Is this our buddy Marcus?

Andi: Yes.

Al: Gotta be.

Joe: How do you know?

Al: Well, how many Marcuses live in Alabama?

Andi: Because he e-mailed, I have his email address. I recognize his email address. Plus, we’re buddies.

Joe: Hmm.

Al: Does he say it’s Marcus? Or you just know from his email address?

Joe: Isn’t Marcus like from Alabama/Tennessee Marcus?

Al: Yeah. There was confusion there for a while.

Andi: Yes. In this particular email, actually listed his location as Alabama.

Joe: Got it. Okay.

Al: OK cool.

Joe: “Hello Joe, Al, and Andi. As always, great podcast. Keep up the excellent work. I have downloaded the Ultimate Guide to Roth IRAs from your website. But I need clarity on this- ”

Al: Megatron-

Joe: “- Megatron Roth conversion I vaguely remember you mentioned.”

Al: Is that the new name for the backdoor or garage door?

Joe: Oh geez.  These guys with these words. The Megatron.

Al: I like that. I think I like that better than garage door.

Joe: The Megatron?

Al: Megatron.

Joe: All right.

Al: I think we’ll go with that.

Andi: Isn’t that a Transformer?

Joe: It is now.

Al: Works for me. “Joe, when investing in a taxable brokerage account, can you pull the contributed principal amount out without incurring any cap gain taxes like a Roth IRA? Let’s say a person wanted to invest $6000 a year for 5 years, then chooses to pull this $30,000 out, assuming portfolio’s greater than $30,000, to invest in real estate. Is this allowed with a taxable account or Roth only? As you have noticed, I lied. I don’t have a backdoor Roth conversion question.

Al: Oh, he was tricking us.

Andi: That’s how you know it’s Marcus.

Al: Got it. Got it. Marcus. So, no, that doesn’t work with a non-qualified, non-retirement account. So when you take money out it’s pro-rata, so you have a pro-rata gain. You take principle out, you also have that percentage of the gain. It’s different than the Roth.

Joe: He was asking me, but that’s okay. “Al-”

Al: Oh yeah, he was. You can answer my question.

Joe: “Al, have you heard of the BRR?” BRR? Or is it the BRRRR?

Al: BRRR.

Joe: “The BRRR real estate strategy?”

Al: Yeah, that is the buying, flipping distressed properties- find out what the BRR-

Joe: Yeah, it’s Buy, Rehab, Rent, Refinance, Repeat.

Al: There you go. Oh, you’re right. Right on top. Buy, Rehab – you’re sitting closer to the screen than I am.

Joe: Wow. I’m doing the BRR strategy. What are you talking about?

Al: Because I took your question, you can answer this one.

Joe: So Buy, Rehab, Rent, Refinance, Repeat.

Al: Like it.

Joe: Ok.

Al: I like it.

Joe: Sounds like a lot of leverage.

Al: I like it.

Joe: A disaster waiting to happen.

Al: I like it in good markets. I’ve tried it. I got burned by it. Just be careful, Marcus.

Joe: “If so, what are your thoughts? Also, what’s the number one thing you would say to someone that’s interested in real estate investing? Any books you can suggest?”

Al: Well, so here’s the problem. When you do the strategy, basically, you keep taking your profits and reinvesting it into more and more properties. And so now you got more and more properties. You’ve levered them up, high debt. Now you’ve got 10 properties instead of one, which is great if the market goes up. But the market doesn’t always go up. So for me personally, I had a big problem in 1992, when the savings and loans crashed and real estate went down 25%. But I did OK in that one, I was able to sell one property and keep one property. Then what happened during the Great Recession when properties went down between 50% and 80%, depending upon what market you were, I did not do OK in that. All of a sudden, my properties- just to use an example, $100,000 property with $80,000 loan now that property’s worth $20,000 and oh by the way, I can’t cash flow it because no one wants to pay the rents anymore. That was a big problem. And if you look at almost any real estate guru book that’s being honest, they’ve been through this cycle at least a couple of times where they’ve lost everything. So just be careful. It works when real estate goes up and it feels- you feel like a genius. And then when it turns, you’ll be very sorry you did this. So I like the- I like it. But I would go slower than what probably this BRRR book is telling you to do.

Joe: Yes. He’s getting nosey on us. “Joe and Al, what percentage of your own personal portfolio does real estate make up?”

Al: Hmm, let me think about that, I can answer that. I’d say about 20%.

Joe: Yeah, I think I’m right there. I got my primary. I have a home in Minnesota. And then I have a house in the Palm Springs area.

Al: I got my primary. I’ve got two rentals in Phoenix and two vacation homes in Hawaii. It could be 25%, but somewhere in that range.

Joe: Yeah, I bought my Mom a house.

Al: You did?

Joe: Yes.

Al: Good for you.

Joe: When she passes…

Al: And it’s in your name.

Joe: It’s not cash flowing, she’s not paying rent.

Al: It’s a horrible investment. Are you going to live there when you retire? Is that the idea?

Joe: It’s in a 55+ community.

Al: Perfect.

Joe: No, I’m not moving to Minnesota.

Al: You sure?

Joe: Yeah, I’m positive.

Al: I mean, that’s where you’re comfortable. That’s where you grew up.

Joe: I’m not comfortable there. Or else I would be living there.

Unique Way to Fund a Roth 401(k): Back Door Roth

Joe: We got Mark from Morgantown, West Virginia. “Hey Joe Al and Andi, I stumbled upon your show on YouTube, really enjoyed the format and the info. 67 and retired. I had a somewhat unique way of funding my Roth 401(k) and I thought I’d like to share it.”

Al: OK, good.

Joe: So Mark-

Al: He’s got some advice for us.

Joe: Yes, he does, probably got a big brain.

Al: Yeah, probably.

Joe: Morgantown.

Al: Yeah, I think so.

Joe: “I was over 59 and a half when I started this.”

Al: OK.

Joe: OK. He’s 67. “My employer started offering a Roth 401(k) option about 5 years before I retired. I’d been in the traditional 401(k) for 30 years and had maybe $600,000 in it. They also always had a post-tax option in the 401(k) that I never used.” Oh boy. You know where this is going?

Al: I know exactly where it’s going. Can you say garage door?

Joe” “With my limited time frame, I decided to max out the Roth 401(k) and contribute heavily to the post-tax option so I could quote “backdoor” it into the Roth. This unique part is I contributed more than I could afford- 50% of pay- and then relied on making withdrawals from my pre-tax account if needed. I had to make two or three small withdrawals per year. Net effect- I reduced my pre-tax balance and my Roth 401(k) plus, the pre-tax withdrawals were less than I estimated.” All right, Mark. So he just started listening to the show, I take it.

Al: Yeah. So Mark, we agree with you. This is a great strategy.

Joe: It’s called the garage door.

Al: And we’ve talked about it, how many times? But I love it. It’s great- and it doesn’t work for everybody. You have to have a 401(k) that allows after-tax money to go into it.

Joe: Right. So he finally found out and we give this advice quite a bit to a lot of our clients is that they cannot afford- most clients cannot afford to do the mega garage door backdoor.

Al: There’s just not enough money.

Joe: There’s just not enough money going around. Half their paycheck is going in these stupid retirement accounts.

Al: They still got mortgage and food and utilities. The Christmas for the kids.

Joe: Yes. And so it’s like, well, what do you do? And so what Mark did, he tapped into the pre-tax accounts-

Al: Yeah, love it.

Joe: – and was like I’m going to do that. Or if you have cash or if you have a line of credit or you have non-qualified accounts, things like that, is what we would recommend. Just look for other sources for a short-term bridge, because it’s so hard to get money into a Roth IRA regardless. Because the contributions are limited. The conversions cost you a ton of money. But this is after-tax money that you can automatically convert into a Roth up to $50,000 some odd. Absolutely. You would want to take advantage of it, and try to max it out as much as you can each year, and then just try to find another way to fund the living expenses.

Al: Yeah, well, that’s right, because if you’re over 50, the IRS lets you put in $26,000 into a traditional 401(k) or a Roth 401(k) if your employer has one or you can split it however you want to. So that’s $26,000. Then in many cases or even most cases, your employer probably has some kind of match. Let’s say- let’s just say the match is $4000 just to make easy math. So $26,000, plus $4000, now there’s $30,000. I think the amount that you can put into 401(k) in total is about $56,000, $57,000, somewhere around there. So that means in that example you could put another $26,000 or $27,000 of after-tax money from your paycheck. So now it’s like, well wait a minute, I need that to live off of. Well if you have another source to live off of, which is what Mark has, then you could supplement your spending from that other source, have more money go into the after-tax, and then you convert that right away to a Roth. And then it’s like a huge Roth contribution. It’s a great idea.

Joe: Right. And with contributions, it’s FIFO tax treatment, first in, first out. So even if- you probably wouldn’t want to do that if you’re going to take the money out right away- but if you can find other sources, yeah, it’s a great idea.

Al: Yeah. Yeah.

Joe: Thanks, Mark. Appreciate it.

Al: Good one. We agree with you.

Joe: Yeah. Mega Backdoor, the first time I think we’ve ever talked about that.

Al: Go back to what episodes, Andi?

Andi: All of them.

Okay not all of ‘em, but in the podcast show notes at YourMoneyYourWealth.com, I have linked to the most recent episodes that cover the Backdoor and Megatron Roth strategy, the Ultimate Guide to Roth IRAs, and the latest episode of YMYW TV on How to Financially Pivot to Early Retirement. Click the link in the description of today’s episode in your podcast app to get started hoovering up all these free financial resources that are just pouring outta YMYW. Honestly though, if you want to know if you can retire early, like William, or if you want an effective real estate investing strategy, like Marcus, or if you want a great way to reduce your taxes in retirement, like Mark, maybe it’s time to schedule a free financial assessment video call with one of the CERTIFIED FINANCIAL PLANNER professionals on Joe and Big Al’s team at Pure Financial Advisors. YMYW is great, but if you haven’t noticed, this podcast involves some fairly general spitballing, suggestions and ideas, with pretty much no preparation from anyone but me, and trust me, you do not want me giving you financial advice. A CFP at Pure will be able to make recommendations based on the SPECIFICS of YOUR financial situation, YOUR level of risk tolerance, and YOUR retirement goals. Go to the podcast show notes at YourMoneyYourWealth.com right now, click “Get an Assessment”, and schedule a time and date that’s convenient for you.

Should I Contribute to Roth IRA or Traditional IRA?

Joe: Grant writes in, Alan. “Love the show from Alabama and absolutely love the humor from all three of you.”

Al: Well, Grant, that’s very nice. Thank you.

Andi: Thank you, Grant.

Joe: Roll Tide. “Situation- 60 yo, going on 39 yo, LOL.”

Al: Because yo-

Joe: – yo- he’s 60- it’s like he’s-

Al: – he’s feeling young though.

Joe: He is.  “Run 5K, 10K, and trail races.”

Al: Wow, that’s impressive.

Joe: It is. “Got an early out from a lot of years of government service and an annual pension of about $105,000; TSP value approximately $400,000; and traditional IRAs of about $130,000. Have limited amounts in Roth, $10,000. Back in the day, I had to find every tax deduction possible to cover extensive medical expenses.” I’m sorry to hear that, Grant.

Al: That’s too bad.

Joe: “My wife passed away a few years ago. 2020 and 2021, making more than ever. Total comp, including pension, approximately $240,000. Big tax bill for 2020, $8000 more than the big amounts I paid in. I want to build up Roth, but find myself needing, again, to increase tax deduction to reduce my tax bill. Right now, I’m 50/50 in my current company’s 401(k) between Roth and traditional. The current benefit analysis suggests I should go 100% in traditional for current tax deduction benefit. However, I also know what will happen when I turn 72. What would you do? Can’t wait to hear the discussion. Keep up the drop-mic humor- “ what’s drop the mic humor?

Al: Yeah.

Joe: That’s just like Chris Rock.

Al: Right.

Andi: That might be the best compliment you guys have ever gotten.

Al: Yeah, I think so.

Joe: “- and the great financial thoughts you give. I will say my name is Grant. My specifics are a little too specific, but there are other listeners from my circle.

Al: Ah. What do you bet it’s a fake name too?

Joe: What do you think- Grant? You got some- your circles? You guys sit around and talk about this God-awful show? Did you hear last week’s episode?

Al: Yeah. Do you believe it?

Joe: Grant? Was that you? Was that you? Man, that sounds really familiar.

Al: No, Peter? Is that you? Calling yourself Grant? Sounded like you.

Joe: Yeah. Ok, what do you do here? The guy is 60, going on 39, he’s running 5Ks, 10Ks, trail races-

Al: Gonna be around a long time.

Joe: He’s probably got a 6-pack. Great abs.

Al: Yeah for sure.

Joe: Oh. He’s just-

Al: Trail running is tough.  Trail hiking is hard enough.

Joe: I like trail mix.

Al: That’s a little easier. On the couch watching football-

Joe: I know- in my golf cart.

Al: In the golf cart- Ok.

Joe: So what do you do here? So he’s going 50/50; knows what’ll happen at 72. He’s 60 years old. He’s got another 12 years for RMDs. So we can do the math here. What- his 401(k) traditional is what, $600,000? No, $430,000. Al: Yeah.

Joe: So he’s probably maxin the thing, Al. Call it $25,000. So if I look at-

Al: Well his TSP is $400,000; IRAs are $130,000. So call it little over $500,000.

Joe: Oh yeah. OK, $500,000. And then he’s got 12 years- say he gets 7% on his money and he puts $25,000 in. So that’s $1,500,000. Let’s say if that’s all pre-tax. 4% of that is $62,000, $63,000 on top of $105,000.

Al: Right.

Joe: So that gives him $170,000 as income? As a single taxpayer?

Al: Yeah, which currently would just barely be in the 32%.

Joe: And then he is at $240,000 single is what?

Al: Single? That would be potentially the 35%. 35% taxable income starts at $209,000.

Joe: $209,000.

Al: I think the tax bracket might even be higher now than the future. So go for the tax deduction. That’s what I would do.

Joe: I don’t know.

Al: You’re always Roth, right?

Joe: Well, yeah. When you’re making $240,000, he’s got $100,000 pension. Grant is not- I don’t think he spends a lot. He had a lot of medical expenses. So he doesn’t have the medical expenses anymore. I don’t know.

Al: I’d say go traditional for the write-off and then get married when you hit 72 and a half, then you’re in better tax brackets. How about that?

Joe: I don’t know.  So here’s the math that you’ve got to do. You have to look at what tax bracket he’s in now, at $240,000 minus the deductions. So $25,000 plus another $25,000. He’s at $200,000. If he went all pre-tax, that’s at the top of the 32% tax bracket, right?

Al: Yeah. He’s single, that’s not $25,000 but-

Joe: Oh you’re right.

Joe: But he’s in that area. He’s around $210,000, he’s around the top of the 32%. So he’s basically in the 35% if he has any more income.

Joe: Yes.

Al: And what’s he going to be at 72 and a half based upon the calculation you just did? He’ll probably be in the 35% bracket subject to ____ if we go back to our old rates. So it’s kind of same/same.

Joe: So he’s going to be in the same tax bracket- roughly. This is totally hypothetical, Grant.

Al: Yeah. Because we don’t know in 12 years what the tax rates are going to be.

Joe: We don’t. Exactly. We- if the tax rates don’t change or if they revert back, you’re going to be in the same tax bracket. So then I don’t know, I would much rather not get the deduction today and have that money grow 100% tax-free because then it takes the uncertainty of taxes totally off the table. I’m making a bet, though. I’m making a bet that tax rates will stay the same or go up in my certain income range. If tax rates or my tax bracket goes down, I lost the bet. But it’s still not a bad bet to lose. You still get parting prizes.

Al: I think it’s about a push. And if tax rates stay the same, he’ll actually be in a lower bracket at 72. I would personally sleep better getting the tax deduction, but that’s just me.

Joe: I would sleep better not getting the tax deduction because you don’t miss the money anyway, Grant. You’re making more money than-

Al: Anyway, so you got a split decision, Grant. So-

Joe: There you go.

Al: Take it what you want.

Is a Roth IRA a Good Way to Get Kids Interested in Investing?

Joe: “Hi, guys. It’s Esteban again. You said my name perfect last time.” I probably totally blew it up today. Right? Esteban?

Al: Esteban?

Joe: Esteban.

Al: Probably. I don’t know.

Joe: Ooo. Esteban.

Al: Esteban seems like that’d be right.

Joe: Esteban. “Question for my 18 year old and 15 year old kids. The 18 year old has a job right now, has $3000 saved. I suggest she open up a Roth IRA and invest some in an ETF, then she can start pulling more money- ” Al: – putting-

Joe: ” – putting more money into it, each one- every paycheck. Is this a good idea to get her into investing?” Yeah.

Al: Great, if she goes for it.

Joe: Great idea.

Al: She may want to keep the money to buy whatever.

Joe: She’s 18 years old. She’s got a job. She’s got $3000 saved. Pop that baby into a Roth IRA. She has full access to the $3000 if she wants it.

Al: She does.

Joe: Don’t tell her that though.

Al: Yeah, yeah. Please don’t tell her that.

Joe: By law, she’s got access. But, you know-

Al: You tell her it’s for her retirement.

Joe: Yeah. Just leave a couple of the-

Al: Which it’s for.

Joe: – minor details. So what’s a good investment firm, Alan?

Al: Investment firm?

Joe:  Yeah.

Al: Well, there’s lots of good firms. I think the better question is what’s a good investment vehicle- like an index fund, like a total market index fund. You know that’d be good. Vanguard has one. Fidelity has one. Schwab has one. I mean, they all have good ones.

Joe: “Also, how can my 15 year old start investing? He has $500 in a savings account that was money gifted to him. Thank you all so much.” The 15 year old, I’m guessing, doesn’t have a job.

Al: Probably not because Estevan didn’t say that. So if that’s true, then he could not open a Roth IRA, but he could invest in a non-retirement account.

Joe: Yeah, you can open up just an account in his own name. And invest the same as your daughter.

Al: Yeah. Total stock market fund.

Joe: And then he would be taxed at capital gains, but he doesn’t have a tax bracket so it’d be tax-free until he gets older.

Al: Probably, that’s right.

Joe: So yeah. So yeah. There you go. Some of the funds probably have a little bit larger minimum- but $500-

Al: Some do. And some of the ETFs- you can also get ETFs for total stock market. So when you’re looking at a fund, you’re looking for a fund that has lots of different stocks, like a total stock market would be kind of representative of the US market. And then make sure that the annual charges, internal charges are low. Usually they’re, what, 5 basis points, which is .05%.

Joe: Pretty low.

Capital Gains Vs. Ordinary Income: A Case Study

Joe: OK, we got Richard. We already talked to Richard.

Al: Maybe it’s a new one.

Joe: No. “Hey Big Al, Little Joe and Awesome Andi.”

Andi: He says that all the time.

Joe: Is this the same Richard?

Andi: Yes, he’s emailed multiple times.

Al: A new question, I guess.

Joe: Richard. “You guys are always so good at explaining things clearly. That’s why I love your show so much. So I need some clarification. If I made $60,000 in wages, interest, dividends, pensions, etc., which I think you call ordinary income-” no, we don’t call that ordinary income.

Al: I would.

Joe: Interest? Yes. Dividends?

Al: Well, some dividends are capital, but go on.

Joe: OK, “-  and then I had capital gains of $217,000. That would make my AGI $277,000. If I write off my schedule A $60,000 to charity plus $10,000 in state taxes, then that would reduce my ordinary income to $0 and $40,000 of that $217,000 capital gains would be taxed at 0% and the other $177,000 would be taxed at 15% plus the 3% surcharge. Do I have that right?” Dick, it sounds like you got that right.

Al: I think so.

Joe: Let’s kind of break this down for our listeners here Al though. So this is the whole ‘capital gains sits on top’ discussion that we’ve had multiple times that most of you do not understand, to be honest.

Andi: We need a white paper on this.

Al: Because we keep trying to explain it again and again. Take a stab at it Joe, because clearly I’m not getting it there.

Joe: Got it. All right. So ordinary income- Richard, was let’s say you have wages-

Al: -that’s ordinary-

Joe: – that we call that ordinary. If you take out money from a 401(k) plan, that’s ordinary income.

Al: That’s right.

Joe: If you have interest from a CD-

Al: – ordinary-

Joe: – that’s ordinary income. Real estate income.

Al: Yeah. Ordinary-

Joe: – ordinary income.

Al: You got it.

Joe: Capital gain is a capital asset that let’s say you have a stock for $1. You sell it at $2. You would pay a capital gains tax on the $1 increase in value.

Al: You’d probably pay $5 for the charge to sell it. But-

Joe: I’m just making it simple because-

Al:  – probably lose $4 –

Joe: – they don’t understand your explanation. They’ll probably understand mine.

Al: OK.

Joe: So you got ordinary income. But ordinary income, you could write off certain things like a standard deduction or a itemized deduction.

Al: You got it. That’s right.

Joe: So you got the schedule A is itemized deductions and Richard here has about $70,000 of itemized deductions. Is that right? $60,000 to charity plus $10,000 to state.

Al: That’s what he’s saying.

Joe: So his schedule A of itemized deductions is $70,000. So the itemized deduction or the standard deduction would offset any ordinary income first.

Al: Correct.

Joe: So that’s what people need to focus on. What is your ordinary income? And then you would subtract your standard deduction or itemized deduction to get that number.

Al: That’s very clear.

Joe: Son-of-a-bitch. What he is telling us is that the $70,000- or he’s got $60,000 of wages, he’s got $70,000 of deductions. So that makes his taxable income negative $10,000 from an ordinary income. So then we have to add on $217,000 of capital gains. So that sits on top of that.

Al: That’s right.

Joe: So at $217,000 of capital gains, I think we still have a $10,000 negative.

Al: I agree.

Joe: So that would give $216,000. That would be- or I’m sorry, $207,000 that is subject to tax.

Al: That’s correct.

Joe: But with capital gains, you go up to the top of the 12% tax bracket in capital gains, there is no tax.

Al: That’s right. And if he’s single, so that would be about $40,000.

Joe: $40,000.

Al: Tax-free.

Joe: So $40,000 of the $207,000 is tax-free. The rest would be taxed at a capital gains rate of 15%. But he’s also subject to net investment income tax of another 3.5%, over $200,000 and- or $200,000 because he’s single.

Al: That’s right. So his adjusted gross income is $277,000, so only $77,000 is above the $200,000. So that’s what you have to pay the 3%- 3.8% surcharge. And here’s another- here’s a maybe a simple way to think about it, is if you do your tax return and if your long term capital gains are greater than your taxable income, bingo, you’re all capital gains. How about that?

Joe: Crystal clear. I think everyone got it this time.

Learn from the comfort of your own couch about the many ways to save for retirement, the advantages and disadvantages of each, how to pay less in taxes, how to manage your investment risk, and most importantly, learn how to assess your own financial situation and develop a personalized plan to achieve your retirement goals. You’ll get all of that when you attend a 2-Day digital retirement class with Pure Financial Advisors, starting on April 10. If two 2-hour sessions is too much commitment for you but you really need a deeper dive on the mechanics of Roth conversions, sign up for a free 45 minute Taxes in Retirement webinar, starting on April 13. Click the link in the description of today’s episode in your podcast app to go to the show notes and sign up for any of our digital events: 2-day digital retirement classes or 45 minute Taxes in Retirement webinars.

Do Restricted Stock Units Impact Social Security? Are RSUs Earned Income or Ordinary Income?

Joe: Got Tom from Chicago writes in, “Good morning, Joe, Big Al, Andi and Andi’s mom. Tom here again from Chicago, still have my 2014 Honda Civic. Still no dog; still running through the old Chicago winter as long as it’s above 15 degrees. I’ve now lost 65 pounds from listening to YMYW.”

Al: Wow. We should market that as a weight loss tool.

Joe: “I owe it all to you guys, on my daily one hour early morning runs.

Al: Nice.

Joe: 65 pounds.

Al: That’s pretty good.

Joe: Man. That’s like- that’s impressive, Tom.

Al: Yeah. Have you ever lost that much? Just askin’.

Joe: Hilarious. Kid’s on fire today.

Al: I haven’t.

Joe: Yeah. Oh boy. ” I have questions related RSUs, restricted stock units, and Social Security that I was not able to find the answers to during my internet search. My RSUs vest 1/3 each year and there’s no change in vesting after retirement. My understanding is that RSUs count as earned income for Social Security. The year after I retire at age 63, I expect to have about $60,000 in total RSUs vest. If these RSUs count as earned income, that sounds-” I lost my place here-

Al: Third paragraph.

Joe: I’m getting tired of this. All of a sudden the whole page can turn into one word.

Al: You’re thinking about how many pounds you lost?

Joe: Yes, exactly.

Al: That’s what I thought.

Joe: “If these RSUs count as earned income, that sounds like that would exceed the Social Security limit. My first two years would then lower my Social Security benefit if I had claimed Social Security early, by a sizable amount as I not have reached for retirement age. Is that the case for RSUs?” So what he’s saying, if you have earned income- so earned income and ordinary income are two totally different things. So ordinary income is wages.

You pay Social Security tax on it, self-employment, income, things like that. So, yes, that would affect your Social Security benefit in regards to reducing the benefit $2 for $1 over a certain amount of money that you would make as ordinary income, earned income, that is ordinary income taxed.

Al: I agree with that. It’s interesting. Usually RSUs expire after you retire maybe three months later. So I haven’t really seen one that keeps going, so that’s interesting.And they probably- I don’t know whether your old employer would put on a W-2 or they might send you a 1099 of other income, which would still be subject to self-employment tax, which still means earned income. So I agree with you, Joe.

Joe: So they would be taxed, right? Your Social Security benefits would be subject to income tax-

Al: That’s right.

Joe: – by up to 85%.

Al: That’s right.

Joe:  But it wouldn’t be reduced, in my opinion.

Al: Well, no, he’d lose his benefit because his income would be too high. Right?

Joe: No, I don’t think it’s calculated as ordinary income- I mean, earned income.

Al: I think it is. That’s what I’m saying. I think it’s either going to be on a W-2 or 1099. Because I guess it’s up to his tax preparer whether they-

Joe: But if he’s getting restricted shared units after he retires, that is ordinary income.

Al: Yeah, but I think-

Joe: – that’s compensation.

Al: Right.

Joe: RSUs is comp.

Al: Yeah, that’s why I’m saying- that’s why I think it’ll either be on a W-2, which is earned income or would be on a 1099, which should be under other income, would probably the self-employment income the same numbers.

What I’m guessing- it’s unusual. You don’t usually see this.

Joe: That’s why I’m just making stuff up as I go here.

Al: I thought you had the answer right. And then you changed yourself.

Joe: Well, yeah-

Andi: He’s thinking his way through it.

Joe: If RSUs count as earned income, with those RSUs earnings, then- you know what? Tom- he’s thinking about retiring early and he’s got this. And he- this is like total hypothetical BS. If I do this and I do that, I guarantee Tom’s like 45 years old. And when I’m 65- you know?

Al: Here’s what I’m going to do.

Joe: We get these questions all the time. If it’s actually happening, just tell us that. If you’re thinking about doing something, then tell us that. Because now we’re all confused. This is weird. Usually we’ll never do that.

Al: Or Tom could be an advisor in Chicago with a client that has this question.

Joe: Yes. Oh boy.

Andi: Actually, the very last thing he says is, “In retirement, I expect $70,000 yearly in pension; have $2,000,000 in savings; have-

Joe: I’m not done- I’ve got to finish this.

Andi: All right.

Joe: “If RSUs count is earned income, will those RSU earnings then replace one of my lower-earning part-time minimum wage high school burger-flipping years from long ago?” Oh-

Al: The answer is yes, as far as we know.

Joe: Yes. “I will have more than 35 years of earnings when calculating my future benefit if I have not yet claimed Social Security.” He sits around and listens to these podcasts and reads books. “If that’s the case, after my second year of RSU vesting about $40,000 in February, can I apply for Social Security benefits in March and have that second year of RSU earned income count as only- as one of my 35-year earnings too or do I have to wait for the next calendar year to apply to have that count for earning year?”

Al: I got a little lost on that one.

Joe: He’s trying to-

Al: He’s trying to game the system.

Joe: Well not really. He wants to know if he has those RSUs that he’s taking in a given year, will that count for his 35 total years of income? Because he’s got some burger-flipping years, but he doesn’t realize potentially those burger-flipping years, adjusted for inflation, might be the same dollar figure as the $40,000 RSU in this year that he’s trying to figure out when to claim Social Security.

Al: I was thinking the same thing. 35 years of inflation, maybe it’s greater.

Joe: You know what? It doesn’t matter. It’s like $.07, Tom.

Al: But what Tom might do is get another hobby than listening to financial podcasts.

Joe: Yes, do that. “How about if I made $15,000 25 years ago adjusted for inflation, it’s $39,000? Then I make $40,000 of RSUs, would that replace the $39,000? And if so, how much more money will I make on my Social Security?”

Al: $.46-

Joe: – a year. “A question for Joe: when I retire I’m thinking of getting a golf cart.”

Al: Like it.

Joe: “Not for golfing but for general getting around, where allowed. Any recommendations? Like electric or gas?

Al: What’s your opinion? I haven’t been in the market for them yet.

Joe: Yeah, I bought one.

Al: You did?  Oh, I didn’t know that.

Joe: Yeah. I have an electric one.

Al: Like it?

Joe: Yeah, something’s wrong with it though. I don’t know where to-

Andi: Already?

Al: Forgot to plug it in?

Joe:  No. Well, I plugged it in. Works fine. But there’s something else. I got- I don’t know- anyone know a good golf cart mechanic?  Maybe Smitty come up from The Villages.

Al: You know how when you rent the golf carts at the course, if you go to the parking lot and where you’re not supposed to, they stop? Maybe yours as some kind of program in it where you leave the house, it stops working. Joe: My golf cart goes about 28 miles an hour. But right now it tops out at 17 miles an hour. Like I got a governor on it or something. I don’t know what the hell’s going on.

Al: Maybe you need to lose 65 pounds-

Joe: Maybe if I lose 65 pounds that thing will ______ up. “Any essential features I should look for?” Yeah. Try to get it- you know, some music, some speakers probably. That’s what I got.

Al: Nice. Do you have a TV in the car?

Joe:  No, I don’t have to keep up with Smitty in the gardens- I think it’s the Village.

Andi: The Villages.

Al: I think so. I think you’re right.

Joe: “But I don’t want to look like a rookie golf cart owner. Thanks to Andi and her mom for making this all easily accessible each week.” I don’t really have-

Al: Yeah, you answered the question.

Joe: Yeah. GARIA is the type of golf cart.

Al: GARIA. What color?

Joe: It’s gray. Black interior.

Al: Gray. Got it. Sounds pretty sweet.

Joe: It is. It’s very nice.

Al: Take that to the golf course?

Joe: Yes, I do. I take it there, up to the club, grab some food.

Al: Everyone else is going 29 and you’re going 17.

Joe: It’s crazy.

When Can My Spouse Take Spousal Social Security Benefits?

Joe: Thomas writes in, “Assuming spousal benefits will be higher, can the spouse take their own early or FRA than later, when I take mine? Can they claim spousal benefits and receive the higher spousal versus their own? If so, is there a penalty to the spouse benefits if they take their own at 62?” That could have been better written, but-

Al: It is. This is your area of expertise.

Joe: Oh God. I got to get a new job. I am so tired of talking about Roths, Social Security, stock market, taxes –

Al: Do you want to get into the deeming rules?

Joe: – deemed-

Al: This is a-

Andi: You got to talk about restricted stock units? That was different.

Joe: Well, yeah.

Al: That was fun.

Joe: Yeah, that was a great time.

Al: It was for me, it was different.

Joe: “Assume spousal benefits will be higher”. So he’s saying, OK, for him?

Al: Higher than his own. Higher than his own benefits, I think is what he’s saying.

Joe: OK.

Andi: I believe that’s true.

Joe: All right. “Can the spouse take their own early or FRA then later when I take mine?” So the spousal benefit works like this Tom, is that you need to be claiming your own benefit before your spouse can claim spousal benefit if it’s higher than their own. So if the spouse claims their own benefit first and takes their own benefit and then you claim your benefit and then it goes to the spousal benefit, that’s exactly what would happen. However, if your spouse takes a benefit at age 62, the spousal benefit would also be reduced by that percentage. So hopefully that makes sense. I think I answered the question. He just kind of wrote-

Al: I think so. I think and I tell you, this got a lot more complicated about 5 years ago when the rules changed. So bummer Thomas, that’s the way it is.

Joe: But to repeat myself, you need to claim your benefit first before the spouse can claim the spousal benefit.

Al: That’s correct.

Joe: So he’s like let my wife take her benefit, is what he’s thinking.

Al: So she takes it early.

Joe: Takes it early at 62. And then I’m going to claim my benefit and then she’s going to claim the spousal benefit which is half my benefit. It’s true, but it’s not going to be half your benefit. It’s going to be reduced because she took her own benefit early.

Al: Yeah, it’s going to be reduced by somewhere between 25% and 30% depending upon when your full retirement age is.

Joe: Yes, because let’s say the spousal benefit is 50%. It’s going to be roughly 30% of your benefit, not 50% of your benefit. So that’s the calculation that you need to make.

_______

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