Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:05 – How Do I Maximize My 72(t) Early Retirement Withdrawals? (Rowan, GA – voice)
• 10:24 – Watch 10 Big Retirement Regrets to Avoid (Before It’s Too Late) on YMYW TV, Calculate your free Financial Blueprint
• 11:23 – I’m Not Interested in International Investments. Does My Asset Allocation of Tech Stocks Make Long-Term Sense? (Michael, VA)
• 14:18 – Should I Backdoor Roth My Solo 401(k) Income Instead of Having an Emergency Fund? What Should I Do With My Annuity? (Will the Gas Siphoner)
• 24:44 – Schedule a Free Financial Assessment With Pure Financial Advisors
• 25:53 – ESOP and NUA Explained (Tess & Finn, TX)
• 31:53 – Tribute to Betsey Clopine, 1933 – 2025
• 33:17 – YMYW Podcast Outro

LISTEN | The origins of Will the Gas Siphoner (audio only)

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: Before she retires next month at age 52, Rowan in Georgia wants to maximize growth in her IRA, which will be funded with 72(t) early retirement withdrawals. What do Joe and Big Al think of her substantially equal periodic payment plan? And how should she allocate it? Michael in Virginia isn’t interested in any international investments and is instead invested in stocks like Google, Amazon, Microsoft, Meta, and Berkshire. What adjustments would the fellas make to his portfolio for long-term growth? That’s today on Your Money, Your Wealth podcast 533. Plus, our friend Will, who is not a gas siphoner, wants Joe and Big Al’s opinion on “backdoor Rothing” his solo 401(k) instead of having an emergency fund, and on what he should do with his annuity. Also, the fellas explain ESOP and NUA – that is, employee stock ownership plans and net unrealized (appreciation) – for Tess and Finn in Texas. I’m Executive Producer on Andi Last, with the hosts of Your Money, Your Wealth, Joe Anderson CFP®, and Big Al Clopine, CPA. To get a retirement spitball analysis of your own, click or tap Ask Joe and Big Al in the episode description to send us an email or a voice message, like this one.

How Do I Maximize My 72(t) Early Retirement Withdrawals? (Rowan, GA – voice)

Rowan: Hi Joe, Big Al and Andi. My name is Rowan, and I live in Georgia, though I grew up in St. Paul, Minnesota and consider myself a distant cousin to Joe. I’ve been listening to y’all’s show for over two glorious years now, and it’s my favorite podcast of all time. I like to listen in bed early in the morning before I have to get up to go to work for the man. I’m 52 years old with two children, two dogs, two cats, and zero husbands. I drive a 2013 Audi Q seven that I plan to drive into the ground. Then my dream is to buy a used Ford Lightning to go electric. My favorite beer is Negro Modelo. That’s the dark one. But I’ve had to switch to Blue Moon light to reverse an oncoming love handle situation. They’ve got a citrus wheat with a touch of orange that is delicious and refreshing. I tried switching to the Coors latte on Joe’s recommendation, but it just doesn’t do it for me. I will never say no to a margarita on the rocks with Tahin, and I keep meaning to order a Mai Thai in Al’s honor. I am going to retire this summer after a 25 year career at the same company. I’m ready to downshift and de-stress from the corporate life. Take some time off to smell the roses and also to prepare for a second career as a part-time interpreter so that I have a $56,000 annual cash flow cushion while I transition to my new career. I’m planning on rolling over $1 million of my tax deferred, $1.2 million 401(k). Into a separate IRA from which I will start the 72(t) SEPP withdrawals. This year, I’ve used a handy 72(t) online calculator using the 5% fixed amortization uniform lifetime table to calculate this $56,000 annual withdrawal amount. So here’s my really specific question for y’all to spitball. How should I allocate the $1 million IRA for the 72(t) to maximize growth over the seven years I’m required to take the 72(t). Also, how many years of the $56,000 annual withdrawals should I allocate to cash or bonds or CDs to hedge against sequence of return risk? Thank you so much for your hilarious and informative show. All three of you are making a difference in thousands of lives, and for that you have our undying appreciation and gratitude. PS I’d like to retire in July and do the rollover shortly thereafter. So I’m leaving this voice recording to hopefully cut to the head of the spitball line. I’ll be listening for you. Take care, and bye.

Al: All right. That’s a nice message.

Joe: Yeah, I like that. What, interpreter? I wonder what she’s gonna interpret.

AL: Good question I assume from one language to another, but,

Andi: interpretive dance maybe.

Al: I don’t know.

Joe: That’s, what I think of 25 years. She’s 52.

Al: She’s, yeah, pretty young.

Joe: Very young. I don’t know if I like, if I love the strategy.

Al: Well, and we don’t know enough about everything else to know. But yes. I mean, a 72(t) election, you don’t do lightly, right? Particularly when you’re retiring at seven, at 52 and you’re, taking a million dollars of your 1.2, I hope you have a lot of other assets. Joe, this seems like a lot of money to be pulled out. And, what if she, what, you know, what, if you, find another career quickly, and then you still have to keep pulling this money out. Right. So I’d love to know how much money you have outside of retirement plans. Maybe you start with that before you go to a 52(t) or maybe you do a smaller one. Right. But I get-

Joe: Yeah the 72(t). So this is how it works. It’s a separate equal periodic payment, SEPP. So basically. If you retire or she’s separated from service at 52 years old, so you can’t necessarily have access to an IRA until you’re 59 and a half. You have access to the 401(k) at age 55. So if she wanted to just to pull it out just a couple more years and wait till age 55, then she wouldn’t necessarily have to do the 72(t) tax election. But what it does is it allows. Individuals to avoid that 10% penalty. So she’s gonna retire at 52 in July and say, Hey, I need access to this cash. I got $1.2 million in my 401(k). I already recognize that I’m gonna have a $56,000 shortfall, so I need to pull 56,000 from my retirement account, but I don’t want to pay the additional 10% penalty. I know that I have to pay the tax on it. So as long as you take the separate, equal periodic payment, so you have to take the same amount of money out of the account.

Al: Yeah.

Joe: Every single year for five years or till you turn 59 and a half. So in her situation, that’s seven years? So $56,000 coming out over seven years.

Al: Yeah, it’s about 400,000.

Joe: $400,000 plus tax. You know, you’re looking at maybe half of the million dollars could be distributed out, assuming zero growth. So then the question is, alright, you’re pulling five point a half percent out of the account. How much money should be in cash to, to cushion against sequence of return risk? Because if this market, if the market tanks and we’re in volatile markets, that million dollars goes to 800,000. She’s still pulling out right. $56,000 a year. So now that five and a half or 5.6% distribution rate just went to 7%.

Al: Yeah. Yeah. So I, to answer the question, so I’ll put it this way. So if, assuming this is a good strategy, I would, which I’m not sure it is, but let’s say it is. I’m gonna answer your question, is I personally would probably want to have five years at least of fixed, of safe investments. That would be cash or bonds or things like that, that, that don’t go down generally or don’t go down much in a market decline. So that to me, Joe, that would be 250 to maybe even all 400,000 of the money needed in, in, in safety, just to be safe. And, like, like let’s say it’s 40. $400,000. And, it’s, you know, it’s a total of 1.2 million. That’s less than 40%.

Joe: Yeah. I mean, so the million dollars in the IRA would be a 60 40 split. 60% equities, 40% fixed income. In the fixed income. I would just go really short-term bonds. Cash CDs. Yeah. you know, I wouldn’t go long on your bonds. You probably will get a lot higher rate of return there, but you would wanna stay safe because, you know, bonds can fluctuate just as we saw.

Al: The stocks can, yeah. A few years ago. But yeah, me personally, I’d rather look at other alternatives. Maybe there’s some other capital sources somehow. I, know it sounds like you wanna take a break and, more power, to you. I think that’s great and you’ve got maybe some resources to be able to do that. Just be aware. You kind of get yourself locked in and it may not be a great strategy for seven years. It may be a great, strategy for two years. For two. Yeah. And, but you’re locked in and, just think twice before you do this, I would say.

Joe: Well, she’s done a great job of saving. Oh, she’s got a couple of kids, right? $1.2 million in retirement accounts at 52?

Al: It’s amazing.

Joe: Right, right. So I, think she can be diligent. She’s, if, she has to reduce spending, she’s gotta save a little bit more. If she has to go back to work, I think she’s the type of person that could probably do so.

Al: Right. Yeah, and that’s a good point because she’s extremely successful individual here, 25 years at the same company too.

JoeI mean, I would want to get the hell out.

Al: We’re, almost approaching that here. I know.

Joe: That’s, it’s like, oh boy. That’s why you said that, honey. I’m right with you. Well Negro Modelo’s on ice. The other point, celebrate with some margaritas on the side.

Al: Speaking of a Negro Modelo, that was my dad’s favorite beer when we went to Mexican restaurants. And so when I go to a Mexican restaurant, that’s what I get in honor of him. Okay. Alright.

Andi: I’m a big fan of the Negra Modelo myself. I upgraded from  Modelo Especial to the dark beer.

Joe: Yeah. Yeah. Got it. Yeah. Well, good luck. thanks for listening. Love the voicemail. Good luck with your new career as a, I wanna know what she’s interpreting.

Andi: Yeah, I bet she’s working for the United Nations or something.

Joe: I mean, is it-

Al: Maybe, that’d be cool.

Joe: Like as soon as she said that, I thought about, like, I just envisioned Rowan as like Nicole Kidman

Al: Really?

Joe: In the, movie The Interpreter think,

Al: Okay. Got it.

Joe: Sean Penn, I believe was in it. Or maybe I forget. What the hell the movie was called Sean Penn and Nicole Kidman. Right. She was an interpreter for the UN.

Al: Okay, well, that, that could be-

Andi: It’s called the Interpreters from 2005. Yeah. Yeah.

Joe: She was listening to, you know, she heard something, she forgot her like violin in her little booth. So she goes back there and she heard, hears something that she probably shouldn’t have heard.

Al: Got it. Okay.

Joe: And then it’s off to the races. All right. So, yeah. Okay. Well good luck. Let us know what that next career looks like.

Watch 10 Big Retirement Regrets to Avoid (Before It’s Too Late) on YMYW TV, Calculate your free Financial Blueprint

Andi: Have you ever heard the term “no regrets”? It’s a good way to live your life. Unfortunately, plenty of retirees have plenty of regrets. This week on a brand-new episode of Your Money, Your Wealth TV, learn from their mistakes! Joe and Big Al show you how to avoid the 10 biggest retirement regrets and to set yourself up to retire happy and secure. They also share retirees’ recollections on everything from lending money to boredom, to give you wisdom of the ages without having to learn it the hard way. Then, calculate whether you’re on track for retirement, for free. Input your current cash flow, assets, and projected spending for retirement into our Financial Blueprint tool. It’ll calculate a detailed report with three scenarios to help you determine your probability of retirement success, with actionable steps you can take now to achieve your financial goals. Watch 10 Big Retirement Regrets to Avoid and calculate your free Financial Blueprint – you’ll find the links to both in the episode description.

I’m Not Interested in International Investments. Does My Asset Allocation of Tech Stocks Make Long-Term Sense? (Michael, VA)

Joe: Alright, we got Michael from Virginia. He writes. He goes, yeah, I’m currently planning to invest $4,500 biweekly across VOO, QQQ, Google, Amazon, Microsoft Meta. Berkshire, A SML. What’s-

Al: I don’t know that one. You got me.

Joe: I’m not interested in international.

Andi: It’s a semiconductor company in San Diego.

Al: Okay.

Joe: I’m not interested in international stocks or bonds, but this allocation makes sense for long-term growth given my goals. If not, what adjustments would you recommend?

I would recommend that you invest in international stocks

Al: and bonds. I agree with that. And you, pick some really good companies, but all these companies have done great and so maybe they’ll keep going. Right? But it’s a little tricky when you’re buying stuff that’s gone up so far. You buy high and hope it goes higher.

Sometimes that works. Sometimes you don’t get as much growth as you think. So. Personally, I would rather have a more globally diversified portfolio, including foreign investments.

Joe: Why doesn’t he like international stocks?

Al: He’s pro-American.

Joe: Lot of good companies internationally.

Al: Yeah, there are. Yep.

Joe: No bonds, doesn’t like safety.

Al: No. No.

Joe: Okay.

Al: Yeah. And I would say we don’t know how old he is, Joe, but I mean, the younger you are, the more aggressive you can be. So the more stocks you wanna buy, whether it’s in, in A ETF or index fund or mutual fund or individual securities or, there’s nothing wrong with individual securities. It’s just a little bit more work.

Joe: But there’s been studies, if you look at, let’s say a hundred percent stock portfolio. In an 80 20 portfolio.

Al: Yeah.

Joe: The efficient frontier goes like that.

Al: Yeah.

Joe: The level of risk that you’re taking, you’re not achieving any more reward for that amount of risk.

Al: Yeah. And, so, so the point of this then is when you look at risk versus return, the risk is higher for a hundred percent stocks, but the rate of return is pretty similar, 80 20 versus a hundred percent.

Joe: And you have to think about, alright, how do you manage the risk from a rebalance perspective, if I have a hundred percent stock portfolio and stocks get, you know, they crater.

Al: Yeah. You wanna buy low, you wanna buy more.

Joe: Usually if you have a little bit of safety there, bonds, that could be a good cushion just to buy more stocks when markets go down, because usually. Bonds go up when stocks go down because there’s a flight to safety, depending on what type of bonds, of course, that you own. And there’s no guarantee of that. But if I have a little bit of cash or some safe investments when stocks go down, I can buy more stocks with those. But if everything is in stocks, I’m just waiting. I can’t buy more stocks. Yeah. I’m just, waiting for it to recover or having the dividend reinvestment go back into the stock, so. Yep. but hey, I like the companies. Go for it. It’s got some big hitters there. Big Al.

Al: Big hitters is right.

Should I Backdoor Roth My Solo 401(k) Income Instead of Having an Emergency Fund? What Should I Do With My Annuity? (Will the Gas Siphoner)

Joe: What do we got up next here? Oh, we got Will the gas siphoner. Oh boy. Wow. It’s been, a minute since we’ve had Will on.

Andi: He wants to defend his honor here.

Joe: Okay. Well, hello again guys. I’m replying to try to defend my virtual honor. I know it’s all fun about siphoning gas. But somewhere along the line, you may have dismissed my question as coming from somebody out there. So I submitted proofs to Andi.

Andi: He actually sent me copies of his receipts that show that he saved $80 per gas fill up and a video showing the gas pump as he gets gas.

Joe: Okay. This guy’s out of, he’s drinking too much gas. So he is out there, is what you’re saying. So let’s kind of tell the story here. So this was years ago that he comes in, right? He write, he wrote, in, he’s got a question. Then he was like, yeah, and by the way, I get free gas. We’re like, well, what the hell is he doing to get free gas, like

Andi: And then it became pretty much one of the funniest segments we ever had on the show. I’ll link it in the episode description so that you can go back and listen and laugh.

Al: I recall a follow up email from him where he really enjoyed the humor, so yeah.

Joe: But it was like, I couldn’t even read it.

Andi: He worked part-time, full-time double time.

Joe: There was no, I mean, there was no beginning, middle, end to any of these sentences.

Al: Well, it’s a lot better now. It just kinda ran off in, there’s periods and capital letters at the start, so you’re, good now.

Joe: Well, part of the charm of your podcast is about thinking of creative in legal ways to pay less taxes. Sometimes you urge us to think of ways to bridge the gap. Well, points couponing and cash backing nets us thousands each year to pay bills and expenses. Cash backing. What the hell’s cash backing

Al: On your credit card. You get cash back.

Joe: Oh, cash back, huh?

Al: Yeah. Yeah. You don’t do that apparently.

Andi: I totally do that. And now they make it so that you can just spend the points right at the retailer themselves. It makes it so much easier than having to go and redeem them in your credit card.

Al: Yeah. we just do the points for travel ’cause since we travel so much,

Joe: do you have a spec? Is there.

Al: Well, we have a client that is like a master at this.

Joe: yeah. And has their own website on how to do all this.

Al: And, she wouldn’t tell us what it is. Remember we kept asking her what’s what? And she just said, that’s, you know, that’s private. That’s private.

Joe: That’s but yeah, she was able to.

Al: I mean, they would go to Europe. Yeah. Five star hotels and $30 a night.

Joe: See, there maybe Will’s got a thing going here. Couponing and cash backing. All right.

Al: Yeah. I remember that particular client. Every month they’re applying for a new credit card ’cause they got so many more points.

Joe: Yep. Well, a dollar saved is worth more than a dollar earned. We save at least $3,000 a year. Which means pre-tax at 22% is about $3,820 an hour salary means not working for 190 hours. That’s a month.

Al: Alright, well, well that’s worth it then.

Joe: Anyway, the math works to the question I had regarding backdooring all solo 401(k)  net income to Roth IRA below the maximum $70,000 to start earning tax free without having to save three to six months of living expenses. Okay, now he’s getting brittle Roth kilter here.

Al: Yeah.

Joe: I think did not understand.

Al: I think what he’s asking is can, can’t I just have the money in a Roth and have that be the emergency fund? I think that’s what he’s trying to say.

Joe: Anyway. The math works to the question I had regarding backdooring. First of all, backdooring, it’s like cash backing.

Andi: It’s all a verb. These are all action items for money. Funny.

Joe: He’s Backdooring.

Al: Yeah. Eh man, that  just, means he’s currently doing, he didn’t backdoored, he’s backdooring.

Joe: You know what? My mind’s gone.

Al: So you went somewhere else, didn’t you?

Joe: All solo 401(k) net income to Roth below the maximum $70,000 to start earning tax free without having to save three to six months of living expenses. It doesn’t have to buy anything yet, but it’s already in a Roth account. How often does one need thousands in cash right away? My spouse, part-time income would pay for immediate living expenses.

Andi: Yeah, so that’s the first question.

Al: Okay. Okay. So what if your spouse gets, loses their job and you need some money?

Yeah. You can get your contributions from a Roth. Once you’re over 59 and a half and you’ve had the account five years, you can get all monies out. But if you’re not 59 and a half, it can be a little tricky.

Andi: And as for how often does one need thousands of cash right away? What happens if your roof falls in?

Al: Yeah, I answered the question that I thought I heard.

Joe: Got it.

Al: Which was why not just have a Roth instead of a emergency fund? Okay. and if you have access to the funds through contributions over your, or over 59 and a half, that can work fine.

Joe: Got it. Okay, cool. Yeah. I know you hate annuities and I don’t usually pay much attention because I don’t think I had them. I had one

Al: you didn’t think.

Joe: All right. Well, I do have VALIC. Okay. The five year surrender term ended on 2014 and has been earning 3% since. I’m not sure whether it has live income part, but it looks like a CD. Is there supposed to be another lifetime payment? Since I’m under 59 and a half, I’m planning on doing a 10 35 transfer due a deferred fixed annuity, so there’s no penalty or fee. 10 years fixed with 10 year surrender is about 5.5%. Almost double what it is. What are your guys’ thoughts? Or should I take it out? 85,000? Pay the 10% fee and put it into a brokerage account. Keep on spit, keep up the spitting of the wet balls.

Andi: What a way to say it.

Joe: Oh my God.

Andi: Spitting and backdooring.

Joe: All righty. We’re keep on spitting up those wet balls. Real examples.

Al: Did your mind go somewhere else on that?

Joe: It keeps it up. Well regards will. Thanks. Well, it’s always a pleasure to read your emails. okay. So your email, annuity, so he’s got a valid, the five year surrender term ended in 2014 and it’s been earning 3%. So it’s a fixed annuity earning 3%.

Al: Yep.

Joe: I’m not sure if it has a lifetime income. No. It’s just probably a straight fixed annuity at 3%. There’s supposed to be another lifetime payment. You could annuitize the contract at some point. I wouldn’t do that. Since I’m 159 and a half, I’m planning on doing 10 35 transfer to another deferred annuity, so there’s no penalty or fee. So he wants to do a 1035 exchange. Okay. And that’s, okay. So if you’re in annuity, you can’t take the dollars down until you turn 59 point a half without a 10% penalty. It just works just like a, similar to a retirement account.

Al: And the 10% penalty is on the increase in value. Not the whole thing.

Joe: Right. And we’re assuming that this is a non-qualified annuity.

Al: Yeah.

Joe: So a non-qualified annuity is that, let’s say Will here it’s worth $85,000. Maybe you put $50,000 in and now it’s at $85,000. Right. So there’s $35,000 of gain or growth. That 35,000 would be subject to the 10% penalty and taxes if he took everything out.

Al: Correct. That’s right.

Joe: Ordinary income tax.

Al: That’s right. Yep.

Joe: So he could do an exchange. So if you have an annuity that you don’t necessarily care for, or like, you could do a 10 35 exchange. So what that does is put it into another annuity product so there’s no taxes due, there’s no 10%, you’re not taking it out of the annuity, you’re just putting it into an another annuity, so that could be good or that could be bad, but it sounds like he’s putting it into a fixed annuity at five and a half percent. Almost double, but it’s a 10 year surrender, so you have to keep it in there for 10 years. Without a surrender charge. Yeah. And I’m guessing if it’s a 10 year surrender charge, the commission on that is 10%. I think I know.

Al: If you wanna go down that path about what’s wrong with those.

Joe: I dunno, you could go into another annuity that doesn’t necessarily have a long surrender period.

Al: Yeah.

Joe: It’s what are you trying to accomplish with the money that you have.

Al: that, yeah, the, well this probably general rule, those that have a long surrender period probably had a big commission and probably there’s reasons why you shouldn’t necessarily do it. So just. Just be aware of that. I’m not all of them, but just be, careful there. Yeah. There, there are annuities show that have no costs, no fees, no surrender at all. So why not look at one of those? That’s, what I would saying.

Joe: Sure. like an, a fixed annuity works similar to a cd, it’s, so they’re going to give him 5.5%.

Al: Right.

Joe: Guaranteed. Right. That’s a pretty big guarantee.

Al: It is.

Joe: And so for 10 years. Right. And so they’re gonna take that money and they’re gonna try to earn more than 5.5%. So that’s why you gotta keep it in the product for 10 years. Because over a 10 year time period, they’re thinking, Hey, we’re gonna make more than 5.5%, and that spread is how they’re going to make their money. If you take the money out prior to that 10 year, there’s gonna be a pretty big surrender charge because they had to pay the insurance agent to sell you the annuity. They had to pay you the five per 5% interest rate on the money. So, yeah, but yeah, I like five and a half percent. If it’s real, it’s guaranteed.

Al: Sometimes it’s factors and it’s not really real. Yeah.

Joe: Who knows what it is. I mean, it could be saying, alright, well it’s a fixed index annuity and it’s average 5.5%

Al: and it, but that’s not really your money. That’s what your in earnings are. Yeah. It’s, it can be tricky. It really can.

Joe: So yeah, I would, I, would wanna understand the annuity that you want to get into a little bit more, but if it’s a straight fix by five and a half percent guaranteed every single year for 10 years, then I don’t know. That sounds okay to me.

Al: Yeah. If that’s what it is, that’s great.

Joe: All right, Will the thrill sucking on gas.

Schedule a Free Financial Assessment With Pure Financial Advisors

Andi: Pure Financial Advisors now has 12 nationwide locations. We’re in Mercer Island and Redmond in the Seattle area, Northbrook and Wheaton in the Chicago area, Greenwood Village in the Denver area, Prescott, AZ, Lehi near Salt Lake City, Utah, and in 5 California locations: Davis, Brea, Woodland Hills, Irvine, and our original San Diego headquarters. Pure is still growing, which means more experienced professionals on Joe and Big Al’s team, able to provide you with more conflict-free one-on-one financial guidance, from more locations, without selling you any investment products. But here’s the thing: you can schedule a financial assessment with Pure no matter where you are – that’s literally what Zoom is for. So even if you’re right next door to one of our offices but you’d rather get a professional, free, in-depth review of your finances while you’re at home in your jammies on your couch, you totally can. Just click or tap the Free Financial Assessment link in the episode description to book yours. Or if you’d rather do it the old fashioned way, just call 888-994-6257 and schedule your assessment now. And if you’re still not sure, check out YourMoneyYourWealth.com to learn more about us, then hit the green Get an Assessment button at the top of the page.

ESOP and NUA Explained (Tess & Finn, TX)

Joe: Let’s go to, hi. I love your show informative and funny. I have an ESOP and NUA question. We are Tess and Finn. 45 and 48. We have three teenage kids and one dog, and we live in Texas, man, a lot of Texas Texans here today. We do love the great state of Texas. We enjoy a little Tito’s with cranberry or soda. Finn works for a private company. Has substantial amount in this retirement ESOP plan. After 25 years and hopefully 12 more to go in all the company match for strong appreciation. We are concerned about RMD since this is all pre-tax dollars. On a previous episode, you briefly explained how upon retirement the ESOP can be re-rolled into an NUA, please correct my understanding. The amount Finn and the company contribute is taxed as ordinary income and the appreciation is taxed at long-term capital gain. From what I read, I think I understood that the contributions will be taxed in the year of the retirement rollover, but the new. The appreciation portion won’t be taxed until sold. Since the company is private, cannot a brokerage account hold a publicly traded stock.

Al: Non-publicly?

Joe: Let me go again. Since the company’s private cannot a brokerage account hold, not a publicly traded stock, I don’t think Finn’s company allows him to get the company stock after retirement. It seems that we would have to sell the shares of the stock when we do the rollover to the brokerage account. And does that mean everything I get taxed in that year? When I first heard about the NUA, it sounded too good to be true, but if we have to pay all the taxes in one year, that’s a scary thought. And I’m aware of the rule of 55, but I think the NUA, you have to wait until 59 and a half to use. Is that correct? General question. Why don’t more companies use ESOPs? okay. So there’s two different kind of things here.

Al: Yep.

Joe: There’s an employee stock ownership plan, right, that companies do to kind of share the ownership with their individual employees.

Al: Correct.

Joe: To get them equity within the overall firm. Most private companies have ESOPs. They’re not publicly traded. So if you’re thinking about, Hey, can I do a net unrealized depreciation on a non-publicly traded company stock, that is pretty challenging and difficult to do.

Al: It’s challenging. you can, it’s allowed. But the employer typically doesn’t allow you to keep the stock once you retire. Right? So you, would have to sell it. So your understanding is, right. and you could do a NUA, which basically means you take the stock and generally you put it in your brokerage account if it were a publicly traded company.

Joe: Right. So let’s do, let’s use an example of a publicly traded company. Okay.

Al: All right.

Joe: So I work at Sherman Williams.

Al: Okay. Good company.

Joe: Yeah.

Al: Very shrunk. Stock you like, paint?

Joe: I do love paint. I like it a lot better than Behr. So I worked at Sherman Williams and I got $400,000, $500,000 in company stock inside my 401(k) plan. Got it. And I have a cost basis of a hundred thousand.

Al: So you, invested a hundred thousand dollars into this stock and now it’s worth 500,000. Correct. Okay.

Joe: And so what an NUA or net unrealized appreciation is? Because it’s publicly traded, I could say, all right, well, here I want to take my Sherman Williams stock onto my 401(k) plan, right? So you pay ordinary income tax on the basis,

Al: so a hundred thousand.

Joe: The year you do it, throw it in the brokerage account, a hundred thousand dollars is added as ordinary income on my tax return, now I have Sherman Williams stock sitting in my brokerage account, right? So if I want to keep Sherman Williams stock, I can keep Sherman Williams stock. If I wanna sell it, now I’m subject to capital gains tax on the appreciation.

Al: But you sell it when you want to?

Joe: Yes.

Al: Yeah. And so you don’t pay the taxes, that’s how you sell?

Joe: Yeah, I can. You can sell a little bit this year, a little bit next year. All good. A little bit in20 years, whatever, privately held companies. CEO of that company, the owner of the company’s like, Hey, you can’t just carry my stock.

Al: Yeah. It’s the whole point that the reason why there, there is stock ownership in a company is, a privately held company. Is the company, the management of the company, the investors of the company want employees to have stock ownership. So they’ll act more like owners. They’ll do a better job. Right. But once they retire, it’s like, okay, you’ve done your thing. And now it’s, we want the, we wanna cash out your stock for what it’s worth at that point. So even though it’s technically possible to take an ESOP, stock shares and go ahead and do the NUA. In almost all cases, the company would not allow you to keep the stock, which basically negates the whole thing, Joe, because you pay the ordinary income tax on your example of a hundred thousand and you pay capital gains tax on 400,000 all in the same year.

Joe: Yeah, I wouldn’t wanna do that. You just roll the ESOP into IRA?

Al:Yeah. Yeah,  exactly.

Joe: Just cash it out within the ESOP. Get cash in the ESOP, you roll it into an IRA, no taxes due. Then you just pay ordinary income tax on the distributions.

Al: Yeah. You know, by the way, if you have publicly traded stock, and generally this is more common in a 401(k) than an ESOP, but, so I’ll give you three things have to happen. First of all, you have to be either 59 and a half, or there needs to be a triggering event like you retire. So that allows you to do it. Secondly, it’s all or nothing. You have to do a lump sum on the entire thing, so you don’t, you’re not in the plan anymore. Right. And the third thing is. The stock shares have to be transferred out. They, you, can’t cash it out. You have to actually have the shares, which is why a non-publicly traded company, it’s very difficult. Yep. All right.

Tribute to Betsey Clopine, 1933 – 2025

Joe: You had a tough week, huh?

Al: I did have a little bit of a tough week and, my, my mom passed away, last week and so, she was 91 and a half, which was great. She lived a long, fruitful life. She was a very kind person, very caring person, kinda a service oriented person, you know, wanted to help people always, and, all of her kids were there when she passed, which was great, and seven of her nine grandchildren saw her that same day. And that was probably the main thing she told me over the last couple months or few months, is like when I do pass away. I want you kids to be holding my hands.

Joe: Oh, wow.

Al: So that’s what we did. Yeah. So I, had a friend Joe that said, I think you hit the mom lottery with the mom that you got, which I tend to agree. and so that was amazing. I’m gonna miss you, mom. but thank you.

Joe: Wow. Making me cry Big Al.

Al: Well, yes.

Andi: Al, what’s your mom’s first name?

Al: Betsey. Betsey Clopine.

Joe: Yeah. Alright, well.

Al: Amazing lady.

Joe: Perfect.

Al: Yeah.

Joe: Alright, well that’s it for us today. Thanks for listening. God bless Big Al.

Al: Thank you.

Joe: Alright, we’ll see you next time.

YMYW Podcast Outro

Andi: Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.

_______

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