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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. As CEO he currently leads Pure Financial Advisors along with our executive team. As CFO he is responsible for the financial operations of the company. Alan joined the firm about one year after it was established. At that time the company had less than [...]

Published On
August 31, 2021

You’ve had enough of the 9 to 5 and are ready to punch early. Are you financially prepared for a long and early retirement? Joe and Big Al provide a spitball analysis. And of course, the ever-popular Roth IRA conversions: how much to convert to Roth, when and how to pay the tax on a Roth conversion, and why not pay Roth conversion taxes out of the retirement account you’re converting from?

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Show Notes

  • (01:04) Are We Ready for a Long Early Retirement? (Adam, FL) 
  • (08:11) Spitball Analysis: Can We Retire Next Year? (Jason)
  • (16:02) When Do I Pay Roth Conversion Tax? Can I Make One Estimated Payment and Avoid Underpayment? (Laurie, IL) 
  • (20:04) Why Not Pay the Tax on a Roth Conversion From My IRA? (Hong, CA)
  • (23:54) Why Is It a Big Deal If I Pay Roth Conversion Tax From My Retirement Account? (Ellen, MN)
  • (31:00) How Much Can We Convert? (Buckeye Bill, Stow, OH)

Free resources:

Cracking the Financial Code at Any Age

WATCH | YMYW TV FIRE: Financial Indpendence or Fad?

FIRE: Financial Independence or Fad?

LISTEN | YMYW PODCAST #339: Will We Run Out of Cash for Early Retirement If We Pay Roth Conversion Taxes?

LISTEN | YMYW PODCAST #337: Why Not Pay Roth Conversion Tax Out of the IRA?

Listen to today’s podcast episode on YouTube:

Transcription

Today’s the last day! Tell us your opinions about the YMYW podcast by 4pm Pacific time today, August 31, 2021, for your chance to win a $100 Amazon e-gift card. Click the link in the description of today’s episode in your podcast app to go to the show notes and access the survey using the word pure, all lower case. US residents only, no purchase necessary, survey giveaway closes and winner will be chosen today at 4pm Pacific time.

Now, some YMYW listeners have had enough of the 9 to 5 and are ready to punch early. Today on Your Money, Your Wealth® podcast 341, Joe and Big Al spitball on whether they’re financially ready for a long and early retirement. Plus, the ever popular Roth IRA conversions: how much to convert to Roth, when and how to pay the tax on a Roth conversion, and why not pay Roth conversion taxes out of the retirement account you’re converting from? 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)

“YMYW Team, I really enjoy your show! Thank you for all the information you share! I started listening in 2019 during my 1-hour commute (in my 2013 Mazda 3 hatchback), but I have been mostly working from home, so now listening to your show helps me mentally separate the “work” time from the “home” time since I don’t commute as much.

I’m 37 and my wife is 41. We’ve saved $2.265M tagged for our early retirement – $941K taxable brokerage accounts, $759K in my company’s 401k split between Roth and Traditional, $383K total in our Roth IRAs, $95K in the state’s retirement system, and $87K sitting in various cash accounts/sinking funds. We’re investing about $100K to these accounts per year, about half of which is to the taxable brokerage accounts.

Our primary residence (Zillow says $400K value) has $125K remaining on the mortgage and we have a rental townhome (Zillow says $190K value) with no mortgage with some small positive cash flow currently ($5.4K per year). We’ve been paying more to our mortgage so it would be gone if we retire early and could have it paid off in 2025 at this rate. If our tenant decides to move, I think we’ll decide to sell the townhouse.

We have 2 kids (10 and 8 this year), and we have $224K 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 I was aiming for $200-400K total combined. We’re only contributing $4.8K per year at the moment, though, but they also get the occasional gift from family.

Our average spending over the last several years seems to be about $56K after taking out all rental and mortgage expenses and not including health insurance deducted from our paychecks. Our retirement expenses will have to add in healthcare, taxes, and maybe some increase for growing kids and new expenses. Maybe it’s typically $80K-90K at the bottom line?

After the last year, it struck me that we’re possibly “almost there” and expenses, withdrawal rates, and asset location/allocation have been on my mind. Our investment goal started at $2M and has steadily grown to a more conservative $3M over the years. Our investments are diversified stock mutual funds (some value tilt and international). I’m starting to think I need to move more to bonds, but what else should we be thinking about now that we’re starting to approach the end game? Do you think our asset locations are generally set up for a long, safe early retirement? How much is enough, anyway, because I keep wanting to increase our target amount, too! 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 early retirement. Thanks!”

Spitball Analysis: Can We Retire Next Year? (Jason)

“Hi Joe and Al, I love your show and would love to have you “spitball” a question for me. But first, my drink of choice is Coors Light, and I drive a Honda Civic. Thank you Joe for making being a Coors Light drinker cool! 😉 Now if you only drove a Civic…..

My wife and I are both currently 55, and would like to retire next year at 56. Good genes run in our families, so I want to be conservative and plan for a 40 year retirement. We own our home ($500K with no mortgage), have about $1M in a brokerage account, $900K in an IRA, $500K in a 401K, and $100K in a Roth. The investments mirror a growth and income mix of assets, with an emphasis on value equities that pay dividends. Our current combined income is about $275K/year. I believe we will need about $90K (after taxes) per year in retirement. Do you think the numbers add up for retiring in the next year?

I realize we would be looking at about a 4% withdrawal rate for the first 10 years, but at ages 67 our combined social security will be $4,400/month in today’s dollars, which should bring the withdrawal rate down substantially. Thanks again for putting out such a great and fun show! – Jason”

No matter how far along you are on the path to retirement, decisions you make today will affect your financial security for years to come. Download “Cracking the Financial Code at Any Age,” a free guide that will walk you through actions to take in your 20’s, 30’s, 40’s, and 50’s to create a more successful retirement – and to overcome previous financial missteps. Click the link in the description of today’s episode in your podcast app to go to the show notes and download the guide for free. While you’re there, check out FIRE: Financial Independence or Fad? That’s the YYMW TV episode on the financial independence/retire early movement. If you’ve got money questions, comments, suggestions or stories to tell us, click Ask Joe and Big Al On Air in the podcast show notes and leave the fellas a voice message or an email.

When Do I Pay Roth Conversion Tax? Can I Make One Estimated Payment and Avoid Underpayment? (Laurie, IL)

“Hi Joe and Big Al. I love your show. It’s full of great information and fun antics. FYI I don’t find you arrogant, Joe. I love your humor. My current favorite drink is Ginger Ale and Whiskey. Surprise, surprise my question has to do with Roths… however it’s not about conversions but rather tax implications. I understand that the amount converted will be taxed as ordinary income. So my question is…when I convert from a traditional IRA to a Roth IRA and I am using other money from my taxable brokerage account to cover the taxes, when do I have to pay the taxes? Do I have to make an estimated tax payment when I convert the money to avoid underpaying my taxes and thus avoid the underpayment penalty OR can I pay them before April 15th yet after I have done my 1040 tax form when I will know exactly how much I will owe? My goal is to avoid the underpayment tax penalty. Also, if the answer is that I have to make an estimated tax payment, can I just send in ONE of the estimated tax payment vouchers (without sending in one each quarter)? I have 1.3 million in my brokerage account, so that is by far the best option for paying taxes on the conversion. I can easily pay the taxes all at once and wouldn’t need to spread it out by using 4 estimated tax vouchers. Thanks for your help and keep the humor coming!”

Why Not Pay the Tax on a Roth Conversion From My IRA? (Hong, CA)

Thank you for the information you shared during today’s session of ‘Taxes In Retirement’.  Can you please help me with this burning question? I plan to convert $200k from my TRAD IRA to ROTH this year.  This would bring my tax bracket to 24%.   Should I do this ROTH conversion when I do not have the cash to pay for the tax due to the withdrawal?  I would have to request my financial institution to withhold 20% of FED tax and 10% California tax. Thank you. -Hong”

Why Is It a Big Deal If I Pay Roth Conversion Tax From My Retirement Account? (Ellen, MN)

“Hi Joe, Al, and Andi. I have listened to many of your youtube videos but have not heard the answer to my question. Briefly, I have $1.4 million in qualified accounts and will retire, or severely cut back hours next July. I am not worried about running out of money but am very worried about the RMD’s that will begin at age 72 (January 2027). I know we are always told to pay the taxes for Roth conversions from savings, but I don’t have savings to use for that since I want to keep my $50K cash for a down payment on a senior coop.

We always have to pay tax with 401K/IRA withdrawals, so why is it such a big deal if I pay the taxes from the account before I get the funds from the sale of my house in 2023 or 2024? I consider a percentage of my 401K/IRA belongs to Uncle Sam and not to me anyway. I don’t understand why we always hear that we need to make the money paid in taxes back to get to ground zero. The taxes were not money that belonged to me. I do not plan to need the Roth and will leave it to heirs. I will donate a portion of my qualified accounts to charity.

I have a longer version with much more detail but would first like to know if you want to tackle this question. No one really addresses this issue and I have been trying to find the answer. Thanks, Ellen from Minnesota, Reluctant Retiring Nurse”

How Much Can We Convert? (Buckeye Bill, Stow, OH)

“Joe and Al, love the show. A rare balance of great information and many laughs. Thank you! I am 60, married, and recently retiring end of August 2021. My wife was a stay-at-home mom so no income from her. We have $1.7M in an IRA and $200K in 401k with recent employer. We will live off of savings for 2022 so we will have zero taxable income. Too young to take social security and we don’t want to draw on the IRA yet. We file our taxes as married filing jointly. Would love to roll over/convert the 401k into a Roth IRA. My 401k plan does offer a Roth option. If I understand the 2021 tax tables (cannot find any details on 2022 tax tables) the high end of the 12% rate is $81,050 (for 2021). Add the $25,100 standard deduction the total amount we can convert would be $106,150 and pay the 12% tax rate. Is this correct? If so what should I do with the additional $95,000 left in the 401k? Should I convert it all at one time and pay the 22% tax on everything above the $106,150? I am not sure if I can do a Roth conversion from a 401k to Roth IRA in consecutive years or if the conversion is a one-time event. I would be able to not take any taxable income in 2023 as well if that helps. Thanks for your help! – Buckeye Bill, Stow, Ohio”

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Stick around for virtual commuting, beer, blood brothers and recycled jokes in The Derails at the end of the episode.

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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.