Early retirement, backdoor and mega-backdoor Roth conversions, paying the tax on a Roth conversion, asset location, and more: it’s the most important topics from our most popular podcast episodes and YouTube videos of 2021. Plus, the most “impactful” listener comments of the year, and the funniest Derails of 2021 in real time!
- (00:57) Are We Ready for a Long Early Retirement? (Adam, FL – from episode 341)
- (08:34) Early Retirement Spitball Analysis: Can I use a 5% Growth Rate for Equities? Rules of Thumb? (Diego, Maryland – from episode 327)
- (16:17) Calculating Paying Roth Conversion Tax (Liza, San Diego – from episode 349)
- (25:33) Mega Backdoor Roth: How Long to Wait to Convert After Tax 401k Contributions to Roth to Avoid 6% Excise Penalty? (Eric, Las Vegas, NV – from episode 308)
- (32:50) Asset Location: Should My Kids Contribute All to Roth? (Mike, Texas – from episode 340)
- (39:31) COMMENTS: Less Joe, More Al – Joe is Arrogant (from episode 337)
- (43:22) COMMENTS: Real Life Ninja Says Joe Should Retire (from episode 340)
- (44:51) COMMENTS: Listen, Learn, and Be Entertained (from episode 340)
Free financial resources:
SORRY, THE DIY RETIREMENT GUIDE IS NO LONGER AVAILABLE!
Today on Your Money, Your Wealth® podcast 362, we’re revisiting the highlights of 2021: early retirement, paying tax on Roth conversions, the infamous Backdoor Roth conversion, asset location, and more. These are the most important topics from our most popular podcast episodes and YouTube videos of 2021, plus the most… “impactful” listener comments of the year, shall we say? You’ll also hear the funniest Derails of 2021, but in real time as they happen, rather than at the very end of the episode. Visit YourMoneyYourWealth.com and click Ask Joe and Al On Air to send in your money questions via email or voice message. We’ll kick things off with the topic of 2021’s most downloaded YMYW episode, #341, the Early Retirement Spitball Analysis. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Are We Ready for a Long Early Retirement? (Adam, FL)
Joe: “YMYW team, I really enjoy your show. Thank you for all the information shared. I started listening back in 2019 during my one-hour commute in my 2013 Mazda hatchback. But I’ve been mostly working from home, so now listening to your show helps me mentally separate the work time from home time, since I don’t commute as much.
“I’m 37. My wife is 41. We’ve saved $2.3 million take for early retirement… $941,000 in a taxable brokerage account, $759,000 in my company 401(k) split between Roth and traditional, $383,000 total in the Roth, $95K in the state’s retirement system, and $87,000 sitting in various cash accounts… sinking funds. We’re investing about $100,000 a year in these accounts, about half of which is to the taxable brokerage accounts.
“Our primary residence is about $400,000. I have $125,000 dollars remaining on the mortgage, and we have a rental townhouse worth about $190K with no mortgage with some small, positive cash flow. We’ve been paying more to our mortgage, so it’ll be gone if we retire early, and could have it paid off in 2025 at that rate. If our tenant decides to move, I think we’ll decide to sell the rental.
“We have two kids, 10 and 8 this year. We have $224,000 total saved for their college. I have no idea how much to target here, but I know I want to pay for it in full, so we’re aiming for about $200,000-$400,000 total combined. We are only contributing $4,800 per year at the moment, though.
“Our average spending over the last several years is about $56,000 after taking out all the rental and mortgage expenses, not including health insurance deducted from our paychecks. Our retirement expense will have to add in health care taxes and maybe some increase for growing kids into expenses. Maybe $80,000-$90,000.
“Now, after the last year, it struck me that we’re possibly almost there. And expenses, withdrawal rates, and asset allocation locations have been on my mind. Our investment goals started at $2 million and has steadily grown to a more conservative $3 million over the year. Our investments are diversified stock mutual funds, some value, tilt, and international. I’m starting to think I need to move more into bonds, but what else should we be thinking about now that we’re starting to approach the end game? Do you think our asset allocation locations are generally set up for a long safety, early retirement? How much is enough, anyway? Because I keep wanting to increase our target amount.
“We know we’re very fortunate to be in this position, and we appreciate any thoughts you might share about the final few years before retirement. Thanks.”
All right, Adam from Florida. He’s spending $80,000-$90,000 a year. He is how old, like 37?
Al: Yeah, 37. Wife 41.
Joe: OK, so he’s going to retire at 40? Call it?
Al: Yeah. Financial independence, retire early.
Joe: So, $90,000, I’m going to go .03…he needs about $3 to $4 million.
Al: Yeah, probably least $3 million. So, we got that by taking $90,000 divided by .03, so that would be a 3% distribution rate. You’ve heard us talk about a 4% rate. That’s if you’re in your 60’s. When you’re going to retire early, maybe it’s 2.5 or 3%, something like that, to be a little bit safer.
Joe: Yeah. So $3 million is your, you know, that’s cutting it close.
Al: Yeah, I guess he’s got $2.3 million right now, right?
Joe: I believe in his targets, $3 million. So, if he’s going to work, and saving $100,000 a year…
Al: Yeah, I mean, might have to work four years instead of three, but I mean, you’re pretty close, right?
Joe: So I would say $3-$3.5 million. If you’re spending $90,000, I know he’s not spending that, but then there’s health care, he’s got older children… He’s not working. You’re 40 years old and you’re not working. What do you what are you going to do?
Al: Well, that’s a question, too.
Joe: So yeah, you’re right on track. When should he start going to bonds? I would start moving into bonds shortly. If your retirement date is a couple of years out… five years from retirement, five years out, that’s kind of what some people call, right? And it’s getting really close. So, I would want to be in the allocation that you need. And so here’s a good rule of thumb is that probably you want 10 years of bonds of income. So let’s say you’re spending $100,000, you want at least $500,000 out of your target, $3 million into bonds, because no matter what happens over the 10 years, you’ll still have that $100,000 that you can pull out, even though the rest of the portfolio is extremely volatile if the market crashes over that next 10 years.
Al: Yes, but that’s $100,000 for five years, right? That’s $500,000.
Joe: I mean, at 40? Yeah, I would go for what I say. Yeah, that’s right. So five, it would be $500,000. That’s what I was thinking.
Al: I mean, you can go ten years. That’s even safer.
Joe: Well, then that’s $1 million out of the three. I mean, that’s still pretty good.
Al: It’s still fairly aggressive. But at least at least what you’re spending $90,000, we rounded a $100,000, times five years for, you know, safe money for at least five years of distributions. Yeah, that would be probably a minimum.
Early Retirement Spitball Analysis: Can I use a 5% Growth Rate for Equities? Rules of Thumb? (Diego, Maryland)
Joe: Diego writes in from Maryland. “Cheers to the gang. Long time. First time. I’m a classic do-it-yourselfer trying to get free information from generous and mag-
Andi: – nanimous,
Joe: – magnanimous- what the hell is that?
Andi: It means generous. It’s another word for generous. Magnanimous.
Joe: “- magnanimous folks like you. I have put together our personal net-worth statement and use that to project our growth, to get a general time frame for retirement when retirement is feasible. In addition to being a do-it-yourselfer, I’m also one of those wackos trying to retire early between 45 and 55.”
Al: Nothing wrong with that. Remember my plan, Joe? I was going to retire at 47.
Joe: How’d that work out, Big Al?
Andi: How old are you Al now?
Al: 64. Just turn 64. While in Hawaii, I might add, which is where I’m at right now as we record this show.
Joe: “My wife and I are in our mid-30s; got $65,000 in cash not earmarked for retirement; $650,000 in equities earmarked for retirement; no fixed income. The equities are split evenly between a taxable brokerage account and a Traditional 401(k) and a Roth 401(k); low-cost, globally diversified index funds- “ yada, yada, yada. “My two questions, if you’re generous enough to answer them, are: If I take the nominal growth rate for the equity, say, 7% and subtract the ballpark inflation rate, say 2%, can I use a 5% growth rate for equities to keep figures in today’s dollars? Alan?
Al: I would say, no. That’s not the best way to do it. Use the 7%. But if you think inflation is going to be 2%, then inflate your expenses 2% per year till you retire to get a sense of how this actually works out. I don’t think this math works the same.
Joe: I don’t think so either. So what he’s saying is that take your $650,000 of assets, grow them at 7% for the next- what is he? he’s 30 years old? Wants to retire in, let’s call it 25 years or 15 years? I’m sorry.
Al: Yeah, mid-30s. Call it 15, 20 years.
Joe: So just run that out 15, 20 years and whatever that you’re adding or contributing to those plans, put that into your overall equation and then use your expenses. And so some- I would break down my expenses. If you really want to get to the nitty-gritty on this. Your mortgage is going to be flat because it’s a fixed payment, but you’re going to have other expenses that are going to grow higher than 2%. You’re going to have other expenses that might grow at 2%. So you could use kind of a blended rate there. So that’s how I would look at it and look to see what your shortfalls are or surpluses and then kind of go from there. That’s how I would look at your planning. If you want to do a quick back-of-the-envelope, maybe you can do something like that. “The market has been pretty strong and has been pretty much- been up pretty much the whole time I’ve been investing. So it feels like using $650,000 in equities earmarked for retirement is an artificially high starting point. Do you have any rules of thumb I could use, such as keep the 7% growth rate, but instead of starting my projections at the current value of the equities, start them at 80% of the value, essentially assuming we’re always on the verge of a 20% market decline, but assume that long-term growth rates will still average out to 7%, or is the current value always the best starting point? Thanks for the discussion. Hope you found at least one or two points when reading this to make a joke because Lord knows your listeners tune in more than just financial advice.” I guess we joke a lot, we just make fun of people all day.
Al: We talk in circles. We talk-
Andi: At least you do, Joe.
Joe: I do not make fun of anyone. I’m just reading the questions and I’m just giving my opinion. I don’t know if that’s making fun. We can’t say that in today’s environment.
Al: I would just say I’d start with the real starting point. $650,000. I mean, you don’t- there’s going to be a correction. Sure. But who knows when. And 7% is a fairly conservative number if you’re 100% equities. I mean, the S&P itself has over 100 years, has gone up almost 10%. If you just look at a single asset class and then if you look at small company value companies, that- he’s got some blend here. Those have gone up more over the last 100 years. No guarantee on the future whatsoever. And stocks are volatile. But yeah, that’s what I would do. I would just start with the $650,000 and throw in 7% and see what- And then I would probably use the 3% inflation rate for my expenses and see how they came out. And just compare this two by the time you get the age 45 or 50 or 55, whatever.
Joe: At our firm, we used 3.5%, so we use 6% and 3.5% inflation. So a nominal true rate of return is a couple percent, so we feel that’s fairly conservative. So you could do it- if you want kind of back-of-the-envelope, a little spitballin’. Yeah. Use 5%, because the way we just explained it, that’s a lot more work.
Al: It’s a lot more complicated.
Joe: Yeah, it’s a little bit more complicated, but I like where he’s at because he’s like, you know what man? I got $650,000. I’m in my mid-30s, I’m a whacko. I’m a little FIRE freak and I want to get out of- so but I want to be conservative. Should I bust this thing down 20%? I mean, what he’s looking at is, I think on the right track, he’s being conservative with his numbers. Instead of saying, hey, I got $650,000, I was making 15% over the last 6 years. I’m going to continue to use that because I know what stocks to pick or the funds are going to continue to perform this way. He’s looking at it is like, wow, I’ve had- I got lucky. I’ve got a really good run over the last several years. Every year that I’ve invested, I haven’t lost money because the markets have accumulated to a degree that I don’t know is feasible anymore. So should I just take a look and give myself a 20% haircut right now? So, no-
Al: You don’t have to. It’s conservative. And we like being conservative. You know, use 5% if you want. Do the inflation rate on expenses, start lower. If it works out, you’re in pretty good shape.
Joe: Yeah, appreciate it. Like the questions coming in today.
Al: Yeah, pretty good.
The Special Offer at YourMoneyYourWealth.com right now is our DIY Retirement Guide. While all our other guides and white papers and handbooks are always available in the Financial Resources section of our website, the DIY Retirement Gudie is only available at YourMoneyYourWealth.com for the next few days! This free 48 page guide has steps to understand and plan your retirement income, strategies for choosing a tax-efficient distribution method, tips on preparing for the unexpected, and much more for those of you who are do-it-yourselfers. Click the link in the description of today’s episode in your podcast app, go to the podcast show notes, and download the DIY Retirement Guide. Once it’s gone, it won’t be available again for several months, so download your copy by this Friday January 28, 2022! Next up, the most popular YMYW podcast episode on our YouTube channel was #349, How to Pay the Tax on a Roth conversion.
Calculating Paying Roth Conversion Tax (Liza, San Diego)
Joe: Liza writes in from San Diego, “Hi Joe and Big Al, I’m a new listener to your podcast and I enjoy listening to both of you. I retired in December of 2020 at 61 because I have to take care of my mother. My husband retired in 2015. We’re in the 12% tax bracket. You probably answered a lot of questions regarding Roth IRA.” No, this is the first one.
Al: Have we ever talked about Roth IRA conversions? First one.
Joe: “I would like to do a Roth conversion. Is it possible, please, to give me calculations on how much to pay federal and state taxes on a $60,000 Roth conversion? When I was planning to do a conversion at Vanguard, they were asking me about tax withholding and I don’t know how much. Another question is regarding my 401(k) and Roth 401(k). From my understanding, if I withdraw from my 401(k), I don’t have to pay federal taxes, but I have to pay state taxes. How much is state tax in California? My last concern is my Roth 401(k). Do I still need to roll over it first to a traditional IRA before I roll it into my Roth IRA? I thought federal and state taxes have been paid because it’s a Roth. I hope you’ll be able to answer my questions. Thank you for your time.” OK, we got a lot of stuff to unpack here. Really good questions and I’m glad you caught our show and so we can kind of save your life here.
Al: Because there’s a couple of things that are a little off.
Joe: So Liza wants to do a $60,000 Roth conversion. So she says, “my husband and I are in the 12% tax bracket.” The top of the 12% tax bracket for a married couple is roughly $80,000. And if you take out the standard deduction of $25,000, that gives you $105,000 that you could potentially convert and be in that 12% tax bracket if you have no other income on your tax return.
Al: Yeah, just making it real simple. And we know from experience, many of you use the itemized deductions since it’s generous and they took away the state taxes.
Joe: The standard state taxes on the itemized.
Al: Which is $25,000. In other words, if your total income is $105,000, including the $60,000 Roth conversion, then you’re going to be in that 12% bracket. So it’s not too difficult. 12% of the $60,000 is your number. So that’s $7,200. And then on the state side, it’s graduated, it’s a lot harder to calculate in my head. But let’s just say 7%. That’d be like $4,200. These are rough numbers. If you want to know for sure what you do is you get TurboTax, you plug in your numbers in TurboTax without the Roth conversion and then you do another version with the Roth conversion and see what the difference in tax is. And that’s how much you have to pay, if you want to get more exact on this.
Joe: Her question is, Vanguard’s asking me how much money that I would like to withhold in taxes. We would say 0. You want to pay the tax outside of the retirement account. So you’re $60,000, you want to convert, put 100% of that $60,000 into the Roth. Then you’re going to get a federal tax bill of roughly $7,000 next year, give or take. We don’t know what your other income sources are. It could be less. It could be more on federal plus state. So call it $11,00 total in taxes that you’re going to have to pay to get $60,000 in the Roth. So why would you want to do that? Why would you want to pay $11,000 to get $60,000 into the Roth? Because the $60,000 will forever grow 100% tax free. The $60,000 grows to $70,000, $80,000, $90,000. You pull it out, then you’re not going to pay tax. There’s no way around the tax. You’re going to have to pay that $11,000 in tax at some point in your life. So would you rather pay it now when tax rates are low and don’t have to ever worry about the tax again? Al and I believe that’s probably the right answer. You don’t have to convert all $60,000 either. Let’s say you just want to convert $10,000 and then your tax on that is $1,200. Maybe you want to convert $20,000, $30,000, do some small chunks over the next several years because you’re still pretty young. I believe she’s 61 years of age, so you still have multiple years until Social Security kicks in, depending on when you claim it. You have multiple years until your required minimum distribution. So that’s some ideas that we have for you in regards to converting.
Al: As a follow up to that, it’s better if you have money outside of a retirement account to pay the tax with that $11,000, and then you get the whole $60,000 into the Roth. If you don’t have money outside of retirement, you could do a withholding because you’re over 59.5. So at least there’s no penalty. But now you end up with $49,000 in the Roth instead of $50,000, so it can still make sense as long as you’re over 59.5. But that’s not the preferred method. The preferred method is to use other resources to pay the tax.
Joe: Second, you stated here “from my understanding, if I withdraw my 401(k), I do not have to pay federal taxes.” No, any dollar that you take out of the 401(k) plan, you’ll be subject to federal taxes and state taxes.
Al: That’s because you got a tax deduction when you put the money in, and so when it comes out, it’s fully taxable.
Joe: The Roth 401(k), you would move that directly into a Roth IRA. Don’t put it into an IRA, because that would blow you up. Because then to get it out of the IRA, you have to pay taxes on it and just the mapping on it… you could make a mistake there. So just make sure you put a Roth 401(k) into a Roth IRA.
Al: If you think of the sequence, so a Roth 401(k), if you want to go ahead and transfer that to a Roth IRA, that’s fine. No taxes, no problem, no issue. If you have a regular 401(k) and you want to transfer that to a regular IRA. No problem. You’re basically deferring the taxes in one vehicle or another. The only time where there’s a problem is when you have a regular 401(k) and you put it directly into your Roth IRA. Well, that’s called a conversion. You’ve got to pay federal and state taxes on that.
Joe: Hopefully that answers your question. Do you want to roll the Roth out? I would, depending on your plan. Because let’s say you have a Roth 401(k) plan with a Roth provision and it’s a pre-tax, or standard provision, and you have $50,000 of Roth and $50,000 pre-tax and you want to take $10,000 out of the account. Sometimes you can’t elect if you want to take Roth or pre-tax, they’re going to give you a pro-rata. So $5,000 is going to come out Roth. $5,000 is going to come out taxable. And so the whole idea of tax diversification, of having money into a Roth, having money in pre-tax, having money into a brokerage account, is for you to be able to control your distributions when you pull the money out to create your income to keep yourself in the lowest tax bracket possible. Most individuals have all of their savings in a 401(k) plan. They have very little control over their taxes because it’s all taxed at ordinary income rates. You pull $100,000 out of your 401(k) IRA, you’re going to be taxed federal and state on the $100,000, depending on what tax bracket you’re in. But let’s say I want to pull out $100,000. Well, I might only pull out $60,000 from my 401(k) plan to keep me in the 12% tax bracket. Then I’m going to pull another $40,000 out of my Roth IRA. I’m not going to pay any tax whatsoever. So I’m going to be able to control my taxes long term if I have that diversification. So Liza’s on the right track that she’s got a Roth IRA. She wants to do some conversions and she wants to be able to control her taxes long term. However, you’re getting confused a little bit on the rules. So be careful. Once you make these mistakes with the IRAS or 401(k)s, sometimes it’s irrevocable. You blow yourself up. We’ve seen people take huge distributions out of retirement accounts to purchase homes.
Al: Or to pay off a mortgage.
Joe: They took $400,000 out of their 401(k) plan when they retire to pay off their mortgage.
Al: They’re excited. They come see us and they say, “Look what I did” and we say, “Whoops. How are you going to pay the tax on that $400,000?”
Joe: “What do you mean? How much is it going to be?” Well, it’s going to be like $200,000. So what are they going to do? They’ve got to refinance their house to pull the money out to pay the tax next year. So be very, very careful with these accounts. Once Humpty Dumpty falls off the ledge there, it’s pretty hard to put him back together.
And now, Joe and Al’s best explanation – of 2021, at least – of Roth, Backdoor Roth, and Mega Backdoor Roth conversions:
Mega Backdoor Roth: How Long to Wait to Convert After Tax 401k Contributions to Roth to Avoid 6% Excise Penalty? (Eric, Las Vegas, NV)
Joe: We got Eric from Las Vegas, Nevada. “Hey, guys and Andi, I’m getting mixed signals regarding the mega backdoor Roth conversion strategy. Sorry. Please clarify, how long should I wait to convert the after-tax contributions in my 401(k), to either my Roth 401(k) or my Roth IRA, to avoid the 6% excise tax penalty?” Eh boy, Eric from Las Vegas is reading all sorts of stuff.
Al: You’re mixing and matching things.
Joe: You got mixed signals. Yes. Your signals are all tune in Tokyo. Come on, Eric. All right. Let’s- a couple of things. A backdoor Roth conversion- once again, he’s doing the mega backdoor-
Al: This is the mega. This is where you do it through the 401(k).
Joe: I think people don’t even know what the hell the mega backdoor Roth is. There are not that many plans that allow after-tax contributions. If Eric, you have a 401(k) plan that allows after-tax contributions, so you made after-tax contributions, you take those after-tax contributions from your 401(k), convert those after-tax contributions into a Roth IRA. That is called a conversion. There would be no tax. Why people call this stupid thing the mega backdoor, barn door, doggy door, whatever door, is that it’s more than you can put in as a regular contribution, right?
Al: Yeah, that’s right. A regular contribution is $6000 and a backdoor Roth contribution is you contribute $6000 to an IRA and then you convert that. And that’s all you can do. Now when it comes to 401(k), you have money withheld from your paycheck. You generally get a deduction on your pay. You pay less taxes. But when you fill that thing up, $19,500- some plans, not many, but some plans allow you to put more money in, after-tax money, money that you’ve already paid tax on. So that’s what we’re talking about. If your plan allows that and you put the money in, then you can turn around and take that money and convert it to a Roth. So now all the future growth in that after-tax part is tax-free.
Joe: The 6% excise tax is when you just dump a bunch of money into a Roth-
Al: – that you shouldn’t have. It’s like, wait a minute, I want to do a dump truck Roth. I’m going to take my $200,000 brokerage account. Let’s put that in the Roth. How’d you get that? I don’t know. I just wanted to. You talked about a mega, let’s do a dump truck one.
Joe: So I got $200,000 laying around. I thought I’d just put it into a Roth IRA. I listen to this show called Your Money, Your Wealth®. That’s all they talk about is mega backdoor Roths.
Al: So the thing is, you can only put money into Roth when you are allowed to. There are certain ways.
Joe: There are rules.
Al: There’s a contribution. Or a conversion. Those are- you can’t just do it. And if you put money to Roth that you shouldn’t, then you get the 6% and sometimes this happens to well-meaning people. They put $6000 into a Roth. And lo and behold, by year-end, they make too much money to qualify. So the IRS says till October 15th of the following year, you could pull the money out without paying the excise tax. But if you go past October 15th, you’ve got to pay that 6% tax each and every year that you keep that Roth amount in there that you weren’t allowed to contribute.
Joe: So right now, the- for 2021 Al, the income limitation for Roth IRA contributions is what?
Al: For single it is between $125,000 and $140,000.
Joe: $125,000 to $140,000. All right. So if you make over $140,000, if you’re single Eric, then you don’t qualify for a Roth IRA contribution, which is only $6000, or $7000 if you’re over 50. That’s the max amount you can put into a Roth IRA as a contribution. If you make more than that, then that’s where the backdoor stuff comes into play, because there is no income limitation to put money into a regular IRA. So you put your $6000 or $7000 into an IRA. Because you make $140,000 plus or $200,000 plus as a married person, you can’t take the tax deduction. So now you have after-tax basis in the IRA, then you convert that into a Roth IRA. There’s basis. So there’s no double tax, there’s no tax, you never got a deduction. So there’s no tax on the conversion. So now the money is sitting in the Roth, but you can only do that with $7000. Or if you have a 401(k) plan that we talked about earlier that allows after-tax contributions, those after-tax contributions can be converted. But double-check, because it doesn’t sound like he has an after-tax component. That’s the biggest key to the mega backdoor.
Al: Yeah. You have to have that. Otherwise, forget about it.
Joe: Yes. And most employers don’t allow- don’t have it. So if you’re just throwing cash above $6000 from your brokerage account into a Roth, then that’s where the excise tax comes from.
Al: I happen to know of a larger payroll company that does 401(k) plans that never even heard of after-tax contributions. And they’re in the business, so just be careful of all this.
Joe: So, Eric, hopefully, that helps. Because there’s no 6% excise tax penalty.
Al: That’s only if you put money into something that you shouldn’t have. Another example would be you contribute to an IRA or a Roth IRA and you don’t have any earned income and your spouse has no earned income. Then you didn’t qualify. So you put money in that you shouldn’t have. And so that’s where the 6% excise tax goes- comes into play each and every year you leave it in. So let’s say you do that- $6000 goes into the account and you leave it there for 10 years. And it never grew. 6% over 10 years. That would be, what, $3600, that would be your excise tax. And if it’s 20 years, your penalty is more than your account.
Should you be moving money into that Roth account and getting lifetime tax-free growth on your investments? Click Get an Assessment at YourMoneyYourWealth.com to schedule a no cost, no obligation, one on one, personalized deep dive into your entire financial situation with an experienced financial professional on Joe and Big Al’s team at Pure Financial Advisors. The Roth conversion is an awesome tool, but it isn’t a one size fits all cookie-cutter financial solution. What works best for you and your family is entirely dependent on your current circumstances, your risk tolerance, and your retirement goals. Find out what strategy is going to help you make the most of your retirement dollars – go to YourMoneyYourWealth.com and click Get an Assessment now. Next up, a very useful discussion of asset location, which happens to include the funniest derail of 2021, the snit-bit.
Asset Location: Should My Kids Contribute All to Roth? (Mike, Texas)
Joe: “Hi all! I was listening to your podcast while on my daily 5 mile walk,” Five mile walk? That’s pretty good.
Joe: “Your discussion of asset location made me question whether I’ve given some incorrect guidance to my kids (both in their late 20s). They both have followed my advice to save 20% of their gross incomes for retirement. At this point, their incomes are such that they can put the entire 20% in their Roth 401(k)s and Roth IRAs without hitting the contribution limits, which is what I advised them to do.”
Al: So far, so good Mike.
Joe: All right. Yes. Giving a little advice on the side after walking around. Listening to our podcast and thinking about it for like five miles, I’m going to start talking to my kids and give them some advice. They’re going to think I’m super cool.
Al: I thought I had it until mile number 4. Then I changed my mind.
Joe:Then all of a sudden, I listen to a podcast but alright. “After considering the asset location discussion, I’m now concerned that I should have advised them to put a portion of their retirement savings in a traditional 401(k) or traditional IRA, or even a regular brokerage account, to achieve location diversification. Was I wrong to advise them to put it all in Roths? These savings are entirely for their retirements, as they have other savings in brokerage and savings accounts for their other financial goals. I’m a huge fan of your podcast and have been listening for a number of years. Your show has given me a number of “lightbulb moments.” Light bulb moments?
Al: That’s cool. It’s like Snoopy and, you know, the little cartoon bubbles.
Andi: That needs a sound effect, Bling!
Joe: It’s like, oh, wait a minute. He’s walking and it’s like ok, I’m going all Roths. Then he
listened to another podcast… Oh!
Joe: Lightbulb! Well, maybe we should switch gears here. Mike, no!
Al: You’re right on track.
Joe: Why go taxable or tax-deferred when you could get everything into a tax-free account? If they can grow it tax-free, they qualifying tax-free. Tax diversification is nothing because everything will come out with zero tax. The problem that we see today is people, probably Mikes’s age, right? Which is most of our listeners. Well, I wouldn’t say that anymore because we have such a variety of listeners.
Al: We do!
Joe: A lot of our clients, they come to us and they have, just like that last caller, right? 98% of my money is in a retirement account. 3% is outside. So there’s varied diversification there because they didn’t learn to kind of diversify as they go. They went everything tax-deferred, tax-deferred, tax-deferred. It would be ideal if everything is tax-free. So we do a ton of work for our clients to try to get them diversified from a tax perspective.
Al: Yeah, because they’re not.
Joe: So if everything is in a Roth that is the golden child, that’s ideal.
Al: That’s the standard, you don’t need diversification there.
Joe: Zero because you’re doing diversification to mitigate your taxes when you have everything in Roth, it’s zero taxes.
Al: That’s pretty good. Then you won’t even pay taxes on your Social Security at that point.
Joe: Nothing! Yes.
Al: But Mike, here’s another thing. While your kids are in their 20s they probably have lower salaries. They’ll probably be in higher brackets later. If they want a little more diversification to get a tax deduction later, let them do that when they’re in a higher bracket. Not right now. Now put it everything in Roth, just like what you told them.
Joe: Yep. I think especially in their late 20s.
Al: Yeah. Think of all those years. Decades of tax-free growth compounded.
Joe: Right. Maybe when they’re in… what’s your peak earning years? Not until your 50s,
Al: Yeah, maybe 50s? Yeah, you’re not even there.
Joe: I know I can’t wait. Then I’m going to go tax-deferred. When I start making some money.
Al: Yeah, when you start making some money, right?
Learn more about why asset location matters – download the free guide on the topic from the podcast show notes at YourMoneyYourWealth.com. Just click the link in the description of today’s episode in your podcast app. Wrapping up the best of 2021 here on the Your Money, Your Wealth® podcast, we have the listener comments that have made the biggest mark on YMYW.
COMMENTS: Less Joe, More Al – Joe is Arrogant
Joe: Alan, we got this review. “Joe’s arrogance. Less Joe, more Al.” So I think I’m retiring from the show.
Al: I kind of liked that.
Joe: Yeah. So you’re taking over brother, I’m out.
Al: But I will say she could have just as easily written more Joe, less Al. Joe is interesting. Al is boring.
Joe: “Joe’s arrogance.” I don’t- am I- do I sound arrogant?
Al: On occasion.
Joe: How do you know? I don’t think I’m arrogant at all. I don’t know. I’m- maybe I’m just- I’m having- this my personality. I don’t think I’m arrogant.
Al: It says you talk over me.
Joe: What the hell are you doing talking Al? I’m trying to- “Over talking
Big Al and demeaning comments about people that write in is off-putting.” Well, when you read and answer questions-
Al: – for a living.
Joe: – for a living, and you talk to clients face to- this is my outlet.
Al: This is your chance to let loose, right?
Joe: And to be really honest and say, you know what, I want to help you. I’m just going to help you behind the microphone.
Al: Right. Got it.
Joe: Because when you ask really stupid questions, it’s fun for me to say, wow, that was really stupid. Even though I don’t say it, but I guess I’m super arrogant on saying that.
Al: Well, if you ever want to learn how to be nicer, I’ll take you to my yoga class and you can learn more about Zen.
Joe: I’m fully Zen. “The show provides meaningful information, but it’s just hard to get past Joe’s self-important attitude.”
Andi: Hey you got 4 stars for that. It’s pretty good.
Al: So it got 4. Is the 4 for Al?
Andi: I think so.
Joe: I got the negative one. Well I don’t know.
Al: That’s pretty funny.
Andi: Joe, have you ever done yoga?
Al: That would be interesting to watch.
Andi: You’re too self-important for that.
Joe: I’m very arrogant for yoga.
Al: I do it every Saturday morning. Whenever you’re ready brother. Just come on over.
Joe: I’m on the golf course, drinking Coors Lites.
Al: I know you are.
Joe: Just being self-absorbed, blowing everyone out.
Al: Every time you hit a great shot.
Al: Look at that.
Joe: I am so awesome.
Al: Can you believe that?
Joe: And you are terrible.
Al: And someone else has a good shot, well that was whatever.
Joe: Oh God. Andi, am I arrogant?
Andi: Oh, don’t ask me, Joe. Please don’t ask me.
Joe: So we did- we’re back doing these webinars. And it was a complete and utter disaster.
Joe: Oh I blew up.
Andi: Joe forgot how to do it.
Joe: Out of practice. We were in the TV studio. The heat lamps were on. I’m sweating.
Al: Those are bright lights.
Joe: Oh my gosh. You know, and then all of a sudden some of the slides were a little bit different than I was expecting. And I was like, oh my God, I gotta get outta here.
Andi: Then he just started yelling at the camera.
Joe: And I got arrogant.
Al: Was that live?
Joe: Oh, yeah.
Al: Of course.
Joe: We were live.
Al: Oh boy. We’re going to get some reviews on that one.
Joe: We’re gonna get some reviews. Oh, I don’t know.
Al: You’re not even get to get 4 stars on that.
Joe: I know. That’s- we’ve been doing this for 15 years.
Al: Well, all I know is it doesn’t really matter. Sometimes people love you, sometimes they love me. Sometimes they don’t like you. Sometimes they don’t like me. Usually-
Joe: I don’t think anyone doesn’t like Big Al. We’re gonna have Tax Chat with Big Al.
Al: Well, can you imagine listening to 90 minutes of me? It just wouldn’t be that interesting. Even I would fall asleep on that.
Joe: Well, yeah, I think-
Al: Although maybe, because I have trouble sleeping, maybe that’s a good idea.
COMMENTS: Real Life Ninja Says Joe Should Retire
Joe: So, we got another great one. “One star, in my opinion, Andi and Al are excellent”. “Joe adds little value to the show and often appears bored”. Yes, you nailed that. This show is terrible! “Belittles his callers and really should consider retiring”.
Al: Wow. We just got that one a few days ago that must be from the last podcast. You must have gone off on something. That’s something. The name is real life ninja?
Joe: Yeah, he’s a real life ninja. He’s going to kick my ass. If you don’t retire I’m going to whip a Chinese star in your ass.
Al: I wouldn’t go out at night for awhile, until that podcast becomes old history. This is like you two days ago. You’re in trouble. Yeah, you’re right, those star things look like they hurt.
Joe: He’s got like some magic dust and going to come out of the elevator… Wahhh, and start kicking my ass. I can’t believe you belittled my question.
Al: You better get a bodyguard for a little while.
COMMENTS: Listen, Learn, and Be Entertained
Joe: All right. Well, we got a five star. There we go. “Listen, learn and be entertained. If you care about getting smart about your money, including asset allocation, retirement readiness, Social Security, withdrawal strategies, etc”. “This is a must-listen”. “Plus, these guys are laugh out loud funny”.
Andi: Yes, they do. They do laugh out loud. That is true.
Al: Yeah, we don’t fake that.
Joe: Oh God, I love the the real life ninja. Joe adds little value. He’s bored, he’s a half idiot. You should hear him read a better question. Oh man. Thanks for your comments, your questions, and your reviews. We got to get out of here. We’ll see you again next week. The show’s called Your Money, Your Wealth®.
There you have it, the best of Your Money, Your Wealth podcast in 2021. As you listen in 2022, would you do us two favors? First, when you hear particularly helpful or hilarious discussions, click Ask Joe and Al On air in the podcast show notes at YourMoneyYourWealth.com and tell us that you just head a “Best of 2022” contender. And second, tell your friends, family, and colleagues. Thank you for your contributions, YMYW wouldn’t be a show without you.
Your Money, Your Wealth® is presented by Pure Financial Advisors. Sign up for your free financial assessment.
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.