Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]


Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
August 8, 2023

Does the math work for Chris’ early retirement plan? What’s a safe retirement withdrawal rate for Luke, who wants to be part of the financial independence / retire early or FIRE movement? Plus, Jake is about to change jobs, can Joe and Big Al uncover any tax planning opportunities for him? The fellas also explain capital gains tax for our buddy Carl Spackler, they spitball on those capital gains when it comes to selling a house for Olga and for LJ, and Jim wonders about the impact of selling a house on Affordable Care Act subsidies.

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Show Notes

  • (00:54) Early Retirement Spitball: Does the Math Work? (Chris, Philadelphia)
  • (04:27) FIRE Withdrawal Rate for Long-Term Capital Preservation? (Luke, Ft. Collins, CO)
  • (14:26) We’re 38 and 33. Any Tax Planning Opportunities Before I Change Jobs? (Jake, VA)
  • (20:48) Capital Gains Tax Explained (Carl Spackler, FL)
  • (23:55) House Sale Tax Strategy (Olga, Chula Vista)
  • (26:32) Do I Need to Worry About Investment Property Sale Proceeds? (LJ, Philadelphia)
  • (30:46) How Will Selling a Home Impact ACA Subsidies? (Jim, Santa Cruz)
  • (35:52) New One Star and Five Star Reviews
  • (38:10) The Derails

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Does the math work for Chris’ early retirement plan? What’s a safe retirement withdrawal rate for Luke, who wants to be part of the financial independence / retire early or FIRE movement – and what does Joe have against FIRE? Find out today on Your Money, Your Wealth® podcast number 441. Plus, Jake is about to change jobs, can Joe and Big Al uncover any tax planning opportunities for him? The fellas also explain capital gains tax for our buddy Carl Spackler, and they spitball on those capital gains when it comes to selling a house for Olga and for LJ, and Jim wonders about the impact of selling a house on Affordable Care Act subsidies. Visit YourMoneyYourWealth.com, send in your money questions as a priority voice message or as an email, and get ‘em answered right here on YMYW. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Early Retirement Spitball: Does the Math Work? (Chris, Philadelphia)

Joe:  Got Chris from Philadelphia. Let’s see. “Are we on track for early retirement? I’m 38 years old. Drink of choice is Diet Dr. Pepper.”

Al: Okay. Okay. Is there a question here?

Joe: Nope. Getting back to Dr. Pepper here. All right. He’s 36. “Loves any IPA. The hoppier, the better. Getting serious about understanding my finances and so happy to have discovered your podcast. We have two cats and an expensive addiction, golf.”

Al: Golf. You can relate.

Joe: I can relate to that. It’d be hard to golf with Chris from Philly.

Al: With the Dr. Pepper?

Joe: Yeah.

Al: Yeah. Let’s pull out a drink. Okay. Joe, I got a couple extra Dr. Peppers.

Joe: I’m parched. You want a little Diet Dr. Pepper? No, I’m going to go with the little Coors Lite. Sorry about that. “I’m a federal employee, salary $112,000, wife is in healthcare, bringing in $200,000. $450,000 in my TSP, have invested 100% of it in the Roth TSP since that option became available in 2012. $45,000 in a brokerage account. I maxed out Roth TSP and put in $1200 a month into our brokerage account. We will receive FERS, federal employee retirement, pension at my minimum retirement age of 57. Just started investing in HSAs $3000 deductible covered and I invest the rest with my goal to hit the max each year moving forward. My wife has a rollover IRA from a previous employer about $90,000 and current employer 401(k) worth $250,000. She contributes 9%, which is the max her employer allows. When a home improvement bill ends in September, she hopes to add another $1000 a month to the brokerage account. $190,000 left on the mortgage, about 3.1%. No other debts. Want to spend $9000 in monthly expenses. Would love for my wife to retire at 55, and myself at 59. Does the math work? Thanks, Chris from Philly.”

Al: Philly. Yep.

Joe: All right. So he’s 38 years old. He’s got $400,000. She’s got two, 4, 5, 6, 7- they got $700,000, $800,000. Roughly. He’s 38. You got-

Al: Yeah, I already did-

Joe: – first pension, you got Social Security. Fine, the math works.

Al: I did- I did some math. Fine. But to fill in the gap, so this one takes a little analysis, which I already did. So let’s start with $800,000 liquid. They’re adding about $65,000 a year. So without any pensions-

Joe: They’re going to have like $5,000,000, $5,500,000.

Al: Yeah. I did 17 years at 7%. They have $4,500,000. So you’re just right there, right? $4,500,000. Their expenses right now are $9000 a month. That’s about $108,000. You do a 3% inflation rate. It gets it to $178,000. So you take the $178,000 of future expenses into the future investments of $4,500,000 to get 3. 9% distribution rate, which if you had zero pensions at age 55, we would say that might be a little tight. But you got all this other money. So yeah, you’re in great shape.

Joe: You’re golden. Yeah. Yeah. Because you’ll have a first pension, which will pay him handsomely and then wife has Social Security, he’ll have Social Security. So yeah, Chris from Philly is sitting pretty nice.

Al: Yeah. Yeah. And I think maybe you can retire at 54.

Joe: Yeah. Cracking down on that Diet Dr. Pepper.

FIRE Withdrawal Rate for Long-Term Capital Preservation? (Luke, Ft. Collins, CO)

Joe: Got Luke from Fort Collins, Colorado. “Hey guys, love the show and appreciate what you do. In short, my question is, what withdrawal rate do you feel appropriate for capital preservation in perpetuity?”

Al: Ooh, I like where this is going.

Joe: Wow. Big words. “My wife and I in our late 30s, have been fortunate enough to work our way into some relatively high-paying jobs. We have a plan to get to FI in our mid-40s.”

Al: FI. I like FI guys.

Joe: Come on, Luke.

Al: I love FI guys. Financial Independence.

Joe: “And then I have the flexibility to decide if we want to do the RE.”

Al: Retire Early.”

Joe: Could you imagine having a cocktail with Luke? Hey Big Al-

Al: Well, he’s, he doesn’t say FIRE. He goes, we’re going to talk about FI first.

Joe: I want to talk about FI.

Al: And then RE.

Joe: And then RE. FIRE. Financial Independence, Retire Early.

Al: Love the concept. Don’t you want-?

Joe: No.

Al: Everyone wants to do that.

Joe: I hate the concept to be honest with ya.

Al: Not me.

Joe: Yeah. I just-

Al: You need more hobbies.

Joe: I don’t think I really- I mean, we’ve- I’ve never met a FIRE guy that I-

Andi: Joe, you haven’t met many of the people that you really like.

Joe: It’s like I’m saving 85% of my income. I’m living in a tent down by the river so I can retire at 45 and I got like $8,000,000.

Al: Well, I’m not saying I want to do it. I’m saying I think it’s cool. Because you know why? Because you have more control and freedom over your life.

Joe: You’re FI.

Al: Yeah.

Joe: But why aren’t you RE?

Al: Because I like the non-RE.

Joe: Got it. Got it.

Al: You’re right. I am FI.

Andi: He couldn’t stay away from you, Joe.

Joe: Yeah. Well you’re not RE, you’re RO.

Al: What’s that?

Joe: Retired Old.

Andi: Retired Old?

Al: Yeah, yeah, yeah. I suppose, or RVO, Retire Very Old.

Joe: “We would like to live off of $120,000 a year per year funded partially by real estate-” Of course, real estate. “-and the remainder from stock market withdrawals. We already own real estate and we’ll be paying off the mortgage prior to this date. Our expectation is that I’ll provide about $5000 a month of cash flow after expenses once paid off. Before listening to your show, I thought the stock market savings of $2,000,000 and a 3% withdrawal rate would be comfortable for our purposes. However, now I’m thinking I would likely be more conservative and accumulate to a point where I can withdraw $60,000 per year while maintaining the overall balance in our stock market accounts. What withdrawal rate would you feel allows for that? And then I can use that calculation- or then I can use that to calculate the amount of stock market savings I need.” Okay, so Luke, he was all pumped up on FIRE.

Al: He was.

Joe: And he bought the real estate. He’s going to get the passive income.

Al: That’s right. He went to some of the FIRE seminars. They told him what to do.

Joe: Grant Sabatini.

Andi: Sabatier.

Al: Mr. Mustache.

Joe: Yeah. Mr. Money Mustache. You got my house in a tent down by the river.

Al: I haven’t seen that one, but that’s what they do say that.

Joe: So yeah, I live in my mom’s, my parents’ basement- still live in a trailer-

Al: – down by the river.

Joe: Yes. And I have a net worth of $4,000,000. And then all of a sudden he listens to our show and he’s like, whoa, wait a minute here.

Al: Questioning- this is different information.

Joe: I gotta figure something out. And he wants $60,000 a year?

Al: Yeah. It depends on what age. At 45?

Joe: Yeah. I don’t know. He probably needs $3,000,000.

Al: So what would you use? 2%? 2.5%? Distribution rate?

Joe: Sure. But if you’re pulling money out for that long, you have no idea how long you’re going to live. Because there’s probably going to be a magic pill that you’re going to live until you’re 140, according to Ric Edelman.

Al: That’s true. Although I asked Rick recently, are you going to live to 120? He goes, no, it’s too late for me.

Andi: Wow. Look at Al name-dropping. He was speaking to Ric Edelman recently.

Al: Yes, I was. Anyway, you remember how he used to always say, yeah, Joe, Al 120.

Joe: 120. Oh, you know, everyone wants to keep their youth.

Al: Yes. Right.

Joe: But if- be careful what you wish for, cause every- all your good friends and everyone else dies around you.

Al: However, here’s the but. Say you retired 45 and then you decide you don’t like it. For a couple of years, 5 years, whatever, go back to work. You know, maybe you’re bored, maybe you want to make some more money. That’s why I like it, Joe, because you’ve got the freedom to do that.

Joe: So, he’s like “We’re saving in the stock market across pre-tax, Roth, and after-tax accounts, the Vanguard index funds. I think the dual real estate and stock market plan is helpful, because I can protect against sequence of return risk in the event of significant stock market losses. I would expect that to be correlated to a time of low-interest rates. Instead of pulling equity out of the market, I could use a home, a little line of credit on the rentals. I don’t love leverage, but I think mathematically this would work well. Drink of choice, really any IPA. Thanks, Luke.” All right, Luke. Smart kid.

Al: Yep, like the plan. Couple things. So, $120,000 today is going to be different when you turn 45. So, factor in inflation. It’s probably, how old is, is Luke? Did he say? Oh, mid-40s. Oh, maybe it’s not going to be that different, actually.

Joe: No, “my wife and I are in our late 30s.”

Andi: They want to retire, or they want to go FI in their mid-40s.

Al: Oh, we plan to FI.

Joe: 6 years.

Al: Okay. Got it. So late 30s. So yeah, call it 6, 7, 8 years. So what’s $120,000, 3.5% inflation, right?

Joe: $150,000, .025.

Al: Okay. So your number is $150,000, not $120,000. So start with that.

Joe: Yeah. Then you take $50,000 from his rentals. So it’s $100,000. He needs-

Al: Well, let’s just say $1,000,000. Let’s not include- well, sure. But let’s not include the rentals to start. Well, actually, you’re right, Joe. You do need to know what you need, and you divide it by 2% or 2.5%, 3% if you just want to go for it. We think that might be a little risky at your young age, but what we’re saying is, it’s not a 4% withdrawal rate at 45. There’s too many things that can go wrong.

Joe: He needs $3,300,000. Because $120,000 is today’s dollars. You fast forward 6 years, you’ve got $150,000 minus $60,000. Let’s just call it $100,000. But we’re not even including taxes here or an additional cost of living. So you take 3%, you divide it in a- The shortfall, you got $3,000,000 is what you’re going to need. $3,300,000 plus tax, plus-

Al: Yeah, yeah.

Joe: So if you want to cushion here, yeah, you’re about $1,500,000 short.

Al: And the reason why we’re a little wishy washy is when you retire that early, there’s a lot of variables.

Joe: There’s so many different variables because when you’re 40-

Al: Wait, what are you gonna say there?

Joe: Nothing. Nothing. I don’t know. I mean, right. I mean, there’s a lot of things- if I retire tomorrow? I mean, I’m gonna spend way more money than if I was working.

Al: You would, I know that.

Joe: Spend your money. You spend your money on the weekends.

Al: And if you retire tomorrow, I will see you in 3 months. Al, can I have my job back?

Andi: Probably three weeks.

Al: I’m with the one- the two-year-old and I just- I can’t do this.

Joe: Oh my God. Yeah. I’m going to say, you know what? One day I’m going to, it’s like, go pound sand. I’m out of here.

Al: So Rosie said, you know what? Since Joe, you’re staying home. I’m going to go back to work. You’re the-

Joe: She’s working.

Al: I know, but she’s going to go- she’s going to go big. Oh, she’s going to go big.

Joe: She’s going huge.

Al: You’re not going to see her much.

Joe: Yeah. She’s going to travel. I’d be miserable. I’d be a couch drunk or something. I don’t know what the hell I’d do.

Al: Well, one good thing, you have a shorter life expectancy, so you wouldn’t run out of money.

Joe: Yeah, exactly. I would be- but at 40- I’m not a FIRE guy. I’m going to retire old.

Al: Or very old.

Joe: I enjoy what I do. So, you know, but if you’re like, man, that’s so many years of all right, well, here, I’m going to travel. I’m going to do this. I’m going to do all of that stuff costs a lot of money.

Al: Yes, it does.

Joe: But I suppose if you’re FIRE, you do the all the coupon stuff too, right? You probably get all the deals-

Al: Well, you do the last minute cruise thing where the $10,000 cruise costs $1800.

Joe: Yep. You go on Spirit Airlines.

Al: That’s right. And you smuggle in a thing of water.

Joe: Yeah. Right. And I don’t travel that often, but there’s- I gotta at least get leg room, you know, I’m a big guy.

Al: Well, what if you’re shorter? You could get away with it.

Joe: I suppose.

Al: You couldn’t. You’d have to get two seats. It would blow the whole thing.

Andi: Love ‘em or hate ‘em, many FIRE proponents have appeared on YMYW in the past, and you can listen to a bunch of those interviews in the podcast show notes. And FIRE or not, no matter which stage you’re in in life, decisions that you make today will affect your financial security for years to come. Download the free guide to Cracking the Financial Code at Any Age. Learn financial strategies and actions to take in your 20’s, 30’s, 40’s and 50’s that will help you overcome any previous missteps, and set you up for a more successful retirement. I’ve also linked to the YMYW podcast episode on Spitballing Retirement Planning in Your 30s, too. Just click the link in the description of today’s episode in your favorite podcast app to go to the show notes and access all these free financial resources.  Then spread the knowledge and share YMYW with your friends, your family, and your colleagues.

We’re 38 and 33. Any Tax Planning Opportunities Before I Change Jobs? (Jake, VA)

Joe: We’re having some fun here today.

Al: Yeah, we are.

Joe: Let’s go to Jake from VA. “Greetings. Big fan of the show. I’ve been listening to your podcast for around a year now. And happily making my way through older podcasts as I await the release of your new episode each week.” He’s just like, I’m pins and needles. Come on Tuesday. Where are you?

Andi: I want to listen to all their episodes just to make up the difference.

Al: I wonder if like something else comes out on Tuesday that he loves. He’s got to really think about it. Which one am I going for first?

Joe: “Here’s my situation. I’ll be changing jobs in the next month and I’m curious about planning opportunities regarding my retirement savings. I’m currently on target to max out my Roth 401(k) for 2023 by end of year. As I understand it, the IRS looks at 401(k) contributions in aggregate, meaning I’m capped at the $22,500 limit for all my 401(k)s, old employer plus new employer. With that said, I’m wondering if there are any planning opportunities ahead of changing jobs.” So he’s switching jobs. He’s looking for other planning opportunities.

Here’s some other facts that Jake has. “I am not vested with my current employer’s 401(k) match. The new company-“I’m not vested with my current employer’s 401(k) match. So that would be a loss. Yep. “The new company will match 3% and does a 12% profit sharing contribution. Annual contribution will be- My annual income will be $180,000 to $200,000 for me. $125,000 for the wife. So $300,000 to $325,000 of total household income. Wife is maxing out her 403(b) contribution. Does not currently contribute to her 457 plan. Last year we started making nondeductible IRA contributions. I converted mine to Roth. Wife did not.” I wonder why the wife did not.

Al: Maybe she doesn’t listen to the show.

Joe: Maybe. But Jake’s like, Hey, I’m going to do this backdoor, honey. You want to do it? Nope. Don’t want to do that.

Al: Makes no sense.

Joe: I don’t want to do any backdoor stuff. “$23,000 in Roth 401(k) Current employer whom will soon be leaving. 80, 000 in wife’s Roth 403(b), $100,000 in wife’s traditional IRA.” Oh, there it is. That’s why, little pro rata rule.

Al: Yeah, there you go.

Joe: “$225,000 in traditional 401(k) past employer, $365,000 in Roth IRAs, $80,000 in cash. We’re trying to keep spending around $125,000. I’m 38 yo. My wife is 33 yo. Daughter’s 2 yo. Yellow Lab is 2 yo. I drive a 2019 Ford F150. My wife drives a 2018 Camry Hybrid. My wife enjoys a nice craft beer or a glass of white wine.” Those are kind of two opposites.

Al: They are, but I like it.

Joe: Yeah. A little craft beer.

Al: Yep.

Joe: The thicker, the better, you know.

Al: You like hoppy.

Joe: “I hung up my drinking cap and mainly just stick to seltzers and coffee these days. Thanks for all you do. And spit balling on my situation would be greatly appreciated. Best, Jake.” So they make really good income and they’re doing a really good job saving for their ages, 38 and 33.

Al: It is true. So if you have two 401(k)s, either because you have two employers or you had one employer and you quit your job and you started with another employer, you’re limited to the cap of $22,500 between all companies, right? So, and here’s how that works is, I mean, your new company would have no idea, so they would just keep withholding, but if you do too much, then it shows up on your tax return. And your tax software will kick that out as ordinary income, the excess, because you shouldn’t have got a tax deduction. And if it was a Roth contribution, you should get at least a note that says, take it out. Cause if you don’t, there’s a 6% excise tax every year you keep it in there. So that is a true statement. In terms of like planning between the two, if you had an opportunity, like let’s just say if both plans have a match, it seems like maybe one doesn’t have a match-

Joe: -or he doesn’t qualify.

Al: – he doesn’t qualify for it, maybe, but if both plans had a match and you’re able to maximize the match in both plans, then you would obviously do that. Another idea or thought is to keep both plans. Do you roll the old plan into the new plan, which is probably what I would do just for simplicity. I’m not sure what other planning techniques you’d have.

Joe: Well, I mean, they make a ton of income now. So I would fully fund her 457, 403(b) plan. That reduces your taxable income. They want to spend $125,000. They make $300,000 some odd thousand, right? Minus taxes. There’s some discretionary income there. I would then look at my taxable income. Does it make sense for her to do some Roth conversions? Maybe at the top of the 24% tax bracket because they’re 30 years old.

Al: Yeah, maybe.

Joe: That 24% is going to go to 28% at some point. You know, so maybe they maximize that 24% tax bracket over the next couple of years while they have excess cash flow, and then they got the time value money in a Roth IRA. I really like that. And then that could free up her IRA for her to do backdoors for quite some time.

Al: Yeah. Exactly right. I mean, you’re going to want to get a lot of this 401(k) money into a Roth IRA over time, you always have to be cognizant of your tax bracket, but being as young as you are, you’ve got a lot of years to do it. So you don’t have to go too aggressive at any one point. Right now, we’ve got low tax rates. The 24% bracket for a married couple goes up to, gosh, I think around $360,000, it’s a big number. And once you pass that, you go to 32%, which is, which is likely too high. The brackets are supposed to go up higher in 2026. So just be aware of that. But yeah, when you’ve got time on your side, Jake, like you guys have, you can be sensible and maybe chip it away at this a little bit each year, or maybe certain years where you’re in too high of a tax bracket, you don’t do Roth conversions or whatever, but that’s, yeah, I think that’s, that’s all I can think of. Maybe.

Joe: I like that.

Capital Gains Tax Explained (Carl Spackler, FL)

Al: Carl Spackler.

Joe: All right. “This question is for Big Al. I noticed that the capital gains rate is 20% if married with income over $517,000. Is investment income included in that $517,000 or only work related income, i.e., wages? Furthermore, are the capital gains rates tiered like income taxes? In other words, the first $83,000 is not taxed and the $434,000 is taxed and 15% and anything above $517,000 is taxed? As always. Thanks, Carl.”

Al: Oh yeah. So that’s the question about how capital gains taxes- So I guess think of it like this. Do your tax return without the capital gains? That’s kinda like your starting point. And where do you end up with as far as your taxable income? Okay. That’s your starting point. If you’re in the 22% bracket. That means you don’t qualify for the 0% capital gains, you’re in the 15% capital gains, right? If you’re in the highest tax bracket, you’re probably in the 37%. Yes, it is tiered, but you start with your ordinary income.

Like here, quick example, like that, like for a married couple, the top of the 12% bracket is about $90,000. Let’s just say that. And if your taxable income without the capital gain is $80,000, then you throw on another $20,000 of capital gain. $10,000 of that gain is taxed at 0% and $10,000 is taxed at 15%. So you do get the tiered, but which tiers you’re in is completely dependent upon where you’re starting from on ordinary income. I think maybe that’s the best way to think about it.

Joe: So let’s say I have $1,000,000 capital gain. And so my ordinary income is $80,000. I have $1,000,000 capital gain. I got $10,000 of the $1,000,000 is going to be tax-free.

Al: That’s right.

Joe: And then from there, now I got $990,000 of capital gain, $500,000 of that is going to be taxed at 15% and the remaining is going to be taxed at 20%.

Al: Yeah, that’s exactly right. And then there’s the net investment income tax of 3.8% that gets thrown in there once your income’s over $250,000, but that’s, yeah, yes, it’s tiered. You could theoretically have all 3 tiers if your income is in the lowest bracket. But it has to be in that lowest bracket to get those three tiers.

Joe: All right, Carl. Thanks for the question.

Andi: Your chance at a $100 Amazon gift card is waiting for you in the podcast show notes at YourMoneyYourWealth.com! Answer 17 questions in the 6th annual YMYW Podcast Survey and you’re entered to win! Click the link in the description of today’s episode in your favorite podcast app to go to the show notes and access the survey and the secret password. Legitimate, complete entries, with honest opinions about what would make Your Money, Your Wealth your favorite, funniest, top, best personal finance podcast will be in the running for the hundred bucks. US residents only, no purchase necessary, survey and giveaway close and winner chosen at 4pm Pacific time on August 31st, 2023. 

House Sale Tax Strategy (Olga, Chula Vista)

Joe: We got Olga. She writes in, she goes, “My daughter, her husband, and I bought a house in Chula Vista. I paid cash, $1,000,000. And my agreement with them was for them to put their house on the market, which they- oh, put their house on the market, which they did.”

Al: Yeah, I think so.

Joe: “They have agreed to pay me back each one third of what I paid. This balance on their house is about $200,000. And they are asking $1,100,000. And they just got an offer for a full price. What is the best way for them to pay me and not be slammed with high taxes on the sale?”

Al: Got it. Okay. You want to try to decipher that?

Joe: That one’s tough. All right. So she bought a house with her daughter and her husband. And so she gave them $1,000,000. She said, sell your house. They said, okay, we’re going to sell our house. They got $200,000 of debt. They sold it for $1,100,000. They’re going to receive $900,000 back from the sale or the proceeds to sell their house. “What’s the best way for them to pay me and not get slammed in taxes?” Well, I mean, if they pay you- the tax doesn’t happen when they pay her. The taxes happen when they sell the house and what we’re missing here is what they paid for the house.

Al: So let’s just make an assumption that they paid $1,000,000 for the house and they’re selling it for $1,100,000. So it’s only $100,000 gain. Okay. Not the $1,000,000, it’s $100,000 gain. And furthermore, section 121 exclusion says that if you own the house and live in the house for at least two out of the last 5 years, you get to exclude as a married couple, $500, 000 of gain. So if my numbers, if my assumptions right here, there is no gain.

So Joe, you’re exactly right. Paying off a debt doesn’t affect taxation at all. It’s the sale. And basically when you’re looking at homes, it’s the difference between what you sell the home for versus what you bought it for. And if you did improvements, well, then it’s like you paid more for your home. So the gain is less. And when you sell it, you’ll have closing costs, which reduces the sales price. So really you sold it for less. So it’s the net sales price minus your basis. Basis is your purchase price plus improvements. Then if you’re married and the gain is less than $500,000, there is no tax. And if you’re single, it’s $250,000 gain exclusion.

Joe: So it depends on what they bought it for. But paying you back the $1,000,000 that you bought the house for, they’re not going to get slammed in taxes.

Al: Correct.

Do I Need to Worry About Investment Property Sale Proceeds? (LJ, Philadelphia)

Joe: What do we got? LJ from Philly, a couple more Philly.

Al: More from Philly.

Joe: Okay. All right. “Hey folks. I’ve been moving money from my non-Roth 401(k) into my Vanguard IRA and then doing conversions into my Roth for a couple of years. I’m 55 and married with a total income of $250,000. This year we sold an investment property that we held for about a decade. And while the numbers aren’t in, our gain will be $400,000- While the numbers aren’t all in, our gain will be about $400,000 to $500,000. I’ve looked on various IRS sites and it seems that this gain is treated not exactly like either a normal capital gain or normal income? I’m also not sure how the return of depreciation is considered. I look to do conversions to the top of the married 24% tax bracket. Do I need to worry about the income from the investment property sale? Or do I just look at my normal W2 and 1099 income when figuring out how much I can convert to not bust that 24% limit? I drive a 2012 Honda Civic with $160,000- or 160,000 miles that’s refusing to die, and I enjoy a good Italian Barolo-”

Al: Barlo? Barlo? I don’t know what that is.

Andi: Barolo. It’s a type of wine.

Al: Okay. Barolo.

Joe: Barolo. I’m gonna try a little Italian Barolo.

Al: Let’s see if we can find some.

Joe: Yep.

Al: Crack it open next show.

Joe: “-with a ribeye steak on the grill. Thanks.” Alright, so he’s got a capital gain. He sold a rental property. He’s got $400,000 or $500,000 of gain on that. So, yeah, you gotta split that up into a couple of different things.

Al: Yeah, so I’ll say it this way. Your thinking is right, but there’s several cautions here I want to tell you about. When you think about capital gains and ordinary income, capital gains sit on top of ordinary income. What I mean by that is calculate your ordinary income first. So all your ordinary income minus your deductions, like standard deduction for example, or itemized deduction, that becomes your ordinary income. Look at that as your- what that figure is, that’s your taxable income for ordinary income. You’re not gonna see that on your tax return. That’s just why I’m telling you what to do for planning. Okay. Then you get that number. You’re in the 24% bracket. Great. In fact, you got $100,000 that you could do a Roth conversion and still stay in the 24% bracket. So all that works. And you stay in the 24% bracket and your capital gains then are still taxed to capital gain rates. But the reason why you probably don’t want to do this is because that extraordinary income is going to push your capital gains into higher brackets. And you’re going to have a higher amount of net investment income tax. So you’re talking of extra 5% tax and extra 3.8% tax. So while you’re thinking you’re being really smart, you probably added almost 10% of extra taxes by doing this. So it’s a good concept and it may partially work. But just have that caution. It’s not going to work exactly like you think it will based upon the numbers you gave us.

Joe: Right. Because he’s going to go to the top of the 24% tax bracket with the Roth conversion. And then this $400,000 or $500,000 is going to sit on top of that. It’s going to- hiss capital gains tax is now 20%.

Al: Yeah. Instead of 15% and more of that capital gain will be taxed at that 3.8% net investment income tax. So it’s- you’re not going to get quite the result. So you may-

Joe: – wait a year.

Al: You may wait a year. I mean, if you don’t want to do any calculations, wait a year. If you want to do some calculations and fine tune it, maybe you can do a little bit this year, but not, not quite what you think.

Joe: And then you got a depreciation recapture-

Al: That’s a higher tax rate.

Joe: – LJ, return of depreciation.

Al: Yeah. So that’s taxed at potentially a 20.5% rate, it’s actually the lower of your ordinary rate or the 25% in your particular case, it sounds like it’d be probably taxed at 24%. So no harm, no foul, but that piece of your gain is not capital gain. So you have to take that out of the equation too. So it’s a little more complicated than you might think. And like I say, if you want to do the calculations, great. If you don’t just wait till next year on your Roth conversion.

How Will Selling a Home Impact ACA Subsidies? (Jim, Santa Cruz)

Joe: We got “Hello YMYW team. Jim from Santa Cruz calling. It’s been several months since my last confession. But I still listen each week as I trudge the stairs at Aptos Beach.”

Al: Maybe Aptos, I’m guessing.

Joe: “My ears perked up during the intro to show 435-” You remember that one?

Al: I do.

Joe: “-when it began with Andi mentioning a little dirty-

Andi: ditty-

Joe: “- about Jack and Diane. My ears perked up even more when Joe began reading and Andi clarified that this wasn’t the Jack and Diane from Jim from Santa Cruz. But my ears became Spock-like when Diane called me last week.”

Andi: – his Diane.

Joe: This gets so confusing. “Diane’s job was recently eliminated in a company downsizing. She planned to work two more years when she reached age 65 and qualified for Medicare. They also plan to sell their home and spend the next few years traveling. Now they may be forced to sell this year. Jack and Diane bought their home 20 years ago, and it has always been their primary residence. They estimate the sell will generate a profit of around $400,000 below the taxable threshold for the IRS. Diane now needs to know how, if at all, the home sale will affect her ability to qualify for Affordable Care Act subsidies. She downloaded FTB Form 3849, but the instructions are nearly impossible for the average civilian to understand. Fortunately, Big Al is not an average civilian. Can you tell us if the State of California considers sale of personal residence where the profit is below $500,000 as income for calculating Covered California subsidies? Thanks as always for the awesome show.”

All right, so Diane- Jack and Diane sell their house, their profit is $400,000. So the 121 exclusion is $500,000. So the $400,000 is not going to be taxable event to them. But is that $400,000 going to show up on the return somewhere to blow up the subsidies for health insurance for Jack and Diane?

Al: Yeah, it’s a great question. The Affordable Care Act, if your income is low enough, you actually get help from the government paying your insurance. That’s the whole concept here. And the answer is no, it does not show up on your return. It does not affect your ability to get the Affordable Care Act. You will record it on your return, potentially. In some cases, you don’t even have to do that. But it’ll show, if it does show up, it’ll be on Schedule D, which is capital gains. It’ll show your sales price, it’ll show your cost basis, it’ll show your gain, and then the next column will be an exception to the gain. It zeros it out, so nothing shows up on page one of the 1040, and that’s what’s important for this calculation.

Joe: If you live in your house two out of the last 5 years as your primary residence, then you qualify for the 121 tax exclusion. So that’s, if you’re single, it’s $250,000 of gain that you can exclude from taxes. If you’re married, it’s $500,000. It’s a pretty big perk, and that’s every two out of the last 5. It’s not like a one-time deal. Every time you live in your primary residence two out- and if you live there two out of 5 years, you get to take advantage of that gain exclusion to avoid capital gains taxes on your primary. Sounds good. Good news. Big Al, not your average civilian.

Al: Apparently I’m a little bit better than the average. I’ll take it.

Joe: Yeah. You’re no average bear.

Joe: “Hi, Joe and Al. My name is Adam. I’m 27 and a bit of a nomad.” I already read this one.

Andi: Yes. You got to cross that off. And by the way, I’ll just- I’ll mention in advance, if you guys are going to be making up names, try and come up with something more creative because now we’ve got two different Jack and Diane’s that we’ve got to keep straight. So give me something a little bit more unusual to work with.

Al: Not too unusual ’cause then Joe won’t be able to pronounce it.

Andi: That’s half the fun.

Joe: But if what I got out of that is that Jack and Diane is Jim from Santa Cruz’s buddies and he referred them to the show and he’s been helping them out with their financial planning needs. Because I think Jim from Santa Cruz’s actually an advisor. Because he has some pretty complex question. And then to his surprise, he’s like wait a minute, Jack and Diane are actually writing in. And so maybe that was the real Jack and Diane.

Al: Maybe.

Andi: From the John Cougar Mellencamp song?

Joe: No. From Jim.

Al: From Jim.

Andi: It’s possible. It’s possible.

Al: My guess is there are a lot of Jack and Diane’s out there that Jim helps.

Joe: Oh, several hundred for sure.

New One Star and Five Star Reviews

Joe: All right, thank you for- we got another one star, just wanted to announce that. Thank you very much. That helps the cause.

Al: What was the comment?

Joe: It’s A1. I don’t know.

Al: That’s the comment?

Joe: Yeah, that’s it. Thanks for the-

Al: That’s not too helpful on how to improve.

Joe: I know. We’re just gonna- Just put on that one star and go, hey, A. Hey, all right.

Al: If you give us 5 stars, just go B2.

Joe: This guy’s playing bingo over here and he’s given us one star, but maybe he thought that was good.

Al: Maybe.

Joe: We did get a 5 star.

Al: We did? Yeah. Your Money, Your Wealth®.

Al: What’d they say?

Joe: It’s like, he’s talking about his favorite podcast. Who’s this guy? Innocent Bystander. Gave us a like.

Andi: Interested.

Al: I like Innocent. That’s a better description.

Joe: I’m an innocent bystander. All right. That’s it for us. We’re out of here. Appreciate everyone’s emails and questions. Andi, wonderful job. Thank you. As always.

Andi: Thank you.

Joe: And Big Al, good to have you back in studio.

Al: It was fun.

Joe: All right. That’s it. We got to take a break. Or we’re out of here. We’ll see you next week. Show’s called Your Money, Your Wealth®.

Andi: We’ve got Dr. Pepper vs. Virgils, Blake Lively and the Age of Adeline, and Aptos Beach and Rocky in the Derails at the very end of the episode, so stick around.

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

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

The Derails



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.

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC, a Registered Investment Advisor.

• Pure Financial Advisors LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.

• Opinions expressed are not intended as investment advice or to predict future performance.

• Past performance does not guarantee future results.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.

CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.

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CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.