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

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
November 9, 2021

Is there a step up in basis on, and advantage to, a joint-tenants-with-rights-of-survivorship brokerage account? Is a charitable remainder trust a good way to liquidate property, and what would be the rate of return on it over 20 years? Is there a point to Roth conversions when leaving your entire estate to charity? Should you name your trust as the beneficiary on your retirement accounts? How do ex-spouse and survivor Social Security benefits work? When should you draw from the three-legged stool of Social Security, pension, and annuity in retirement? Plus, Roth conversions from a thrift savings plan (TSP).

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Show Notes

  • (01:00) Is There Any Advantage to a JTWROS Brokerage Account? Is There a Step Up in Basis? (Mike, Tucson, AZ)
  • (07:19) My Estate Will Go To Charity. Convert or Wait for RMDs? (Lauren, Traverse City, MI)
  • (12:34) Rate of Return on a Charitable Remainder Trust to Liquidate Property? (Rick)
  • (15:31) Should I Name My Wife or Trust as Roth 401(k) Beneficiary? (Candace)
  • (17:49) 3 Legged Stool of Social Security, Pension, and Annuity. When to Draw Each? (Mary)
  • (20:09) How Do Social Security Survivor Benefits Work (Jim, San Diego)
  • (22:59) Can I Claim Social Security Ex-Spousal Benefits? (Debbie)
  • (26:58) TSP, Pro-Rata Rule, and Backdoor Roth IRA Strategy (Allen, Woodbridge, VA)
  • (33:06) Federal Employee TSP to Roth Conversion Retirement Spitball (Michelle, DC/GA)
  • (42:09) Clarification: Roth Conversions Can’t Be Until 59.5? (Greg, Beautiful Wine Country, Temecula)

Free resources:

Download the Estate Plan Organizer

Download the Social Security Handbook

Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth® podcast #351, is there a step up in basis on a joint tenants with rights of survivorship brokerage account, and is there any advantage to setting the account up that way? Is a charitable remainder trust a good idea to liquidate a property, and what would be the rate of return on that? If your entire estate is going to charity, is there any point in doing Roth conversions? Get ready for an answer you rarely hear on YMYW for that one. Also, should you name your spouse or your trust as the beneficiary of your retirement accounts? When should you draw from Social Security, a pension, and an annuity in retirement? How do Social Security survivor benefits work again? Plus, converting to Roth from a TSP, thrift savings plan. Click Ask Joe and Al On Air at YourMoneyYourWealth.com to send in your money questions as an email or as a voicemail, which gets first priority, like the one coming up from Mike. I’m producer Andi Last, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA, and here’s our first question of the day:

Is There Any Advantage to a JTWROS Brokerage Account? Is There a Step Up in Basis? (Mike, Tucson, AZ)

“Hello, Joe, Al and Andi. This is Mike from Tucson, Arizona. I drive a 2011 Subaru Outback with 100,000 miles on it and am currently enjoying a 60 Minute IPA from Dogfish. My question is regarding a joint tenancy with right of survivorship brokerage account my mom set up after the passing of my grandmother in 2018. The owners are my mom, my sister and myself. A few questions. Besides avoiding probate was there any advantage to setting up this account in this manner? #2, after my mother passes is there a step up in basis in this type of account? And lastly, the account is currently worth around $100,000 with $20,000 of gain. My current plan was to have my mom sell up the fund annually to the top of the zero % capital gains tax bracket and repurchase an artuity brokerage account. As I am currently consolidating and simplifying her portfolio’s asset allocation as she prepares for retirement in a few years. From what I’ve read, it appears that the tax liability for my sister and I can be controlled in this manner, and only my mom will need to then pay tax on this money. Does this sound reasonable? Additional info is my mom will be in the 10 to 12% tax bracket in her retirement or as my sister and I are currently in the 24% marginal tax bracket. Thank you for your outstanding podcast”.

Joe: Oh, Mike!

Andi: Outstanding!

Al: Pretty intelligent.

Andi: Thank you for your outstanding question, Mike.

Al: Mike, do you need a job? We’re looking.

Joe: Al and I were thinking about retiring and we want you to take over our jobs.

Al: Right, exactly. This guy is this tight.

Joe: He’s super tight. So let’s talk about a few different things that he’s thrown out here because a common mistake happens. Everyone hears about probate and then they think there’s going to be an estate tax, there’s going to be everything. It’s going to be really bad so let’s avoid it. One way to avoid that is to put your beneficiaries on title with you. So it’s like, Al, I got this brokerage account of $100,000. You’re my beneficiary so let me just put you as a joint owner on it and if I pass, you will take ownership of the overall account. We avoid any type of courts, any BS, it’s just easy peasy. The problem with that is… there’s a few.

Al: There are several.

Joe: First of all, we can talk about the obvious, is that Big Al is now a joint owner of my account.

Al: Yeah and I can do anything I want with it, regardless of what you want me to do.

Andi: If you take it and go to Hawaii, it’s yours.

Al: I’ll see ya (laughing)

Joe: Hey Big Al, I looked up the account and there was only $50 grand in there.

Al: Yeah, don’t worry about it, I’ll put the rest in as soon as I win big in Vegas.

Joe: Yeah, I had a little party. So there’s an issue there. Another issue is, how about if Big Al’s in Vegas and then you do something stupid, which you would never do. But let’s say you did.

Al: Actually we should do this the other way. You’re in Vegas and I put you on my account.

Joe: Right and then I do something stupid. Let’s say I get sued and they want $100,000 from me. Well, this is Al’s money, but I’m on the account as joint owner. Well, that money’s available for that lawsuit…

Al: It’s completely available.

Joe: So they’re taking Big Al’s money, because I got in a fight with a dealer for, you know, giving me a bad hand.

Al: Or what if you get divorced and then all of a sudden your ex-spouse wants half of my money?

Joe: Yeah, or Annie? She gets divorced and she’s going to take my money.

Al: Then furthermore, there’s potentially a gift tax problem because when you put someone as joint tenancy, you’ve basically given them a gift. Have you filed a gift tax return? Then finally, as far as a step up in basis and this gets confusing whether it’s a community property estate or not but the general rule is that you would only get a half step up in basis because basically you gave her half the account. Unless you can prove this is more your money, which is messy, especially if it’s 20-30 years over time. I don’t like that either so I would rather her set up a trust and do this properly.

Joe: Or at $100,000 you’re fine. So putting kids, grandkids, friends, nieces, nephews as joint is usually never a good idea. It does avoid probate. That’s the only pro. There’s a lot more cons.

Al: Yeah, and it is common. My grandmother did that with my dad. It can work but there are risks.

Joe: Right. So we talked about when your mom passes, is there a step up in basis? No, only half. But I really love his other strategies. Mom, you’re in the 10 or 12% tax bracket, you have a $20,000 gain. Why don’t we just shave this thing off a little bit? Why don’t we rebalance it and then we can sell up to the top of the 12% and pay zero % capital gains tax on it. So you could do that over time and bleed out the gain at a zero % cost and then rebalance it into your TLB account.

Al: Whatever’s more appropriate for the investments. The only negative there is, Arizona may charge a little bit of tax. At least that’s the way it works in California. So it’s tax free federal, but not necessarily tax free in California. So check and see what the Arizona tax is. Maybe it’s minor, maybe it’s still a great strategy.

Joe: It’s still probably pennies on the dollar versus the other hassles.

Al: Especially if you want to rebalance anyway, that’s a great way to do it.

Joe: Then you have three parties on it too. That even, um, exacerbates (mispronounced)…

Al: Wow!

Andi: (laughing) Exacerbates, I think there’s no t in there.

Joe: Okay, whatever.

Al: That was good though. We’re doing the show in the morning. Usually we do it in the afternoon where we’re kind of fresh. We’ve got the cobwebs out. Now, this is just us raw today, right?

Joe: Oh, it’s great.

Andi: Full cobwebs.

Joe: Yeah, I’ve got to do my my voice… I spent an hour doing voice warm up.

Al: You do that as you drive in to work?

Joe: Yes

Al: That’s what I thought.

Joe: Brown cow says how.

Al: That’s why no one can ride with you. You would drive me crazy.

Joe: Alright. Very good Mike. Appreciate the question.

My Estate Will Go To Charity. Convert or Wait for RMDs? (Lauren, Traverse City, MI)

Joe: We got Lauren from Traverse City, Michigan, writes in. “Take a question from a girl”. What does that mean?

Andi: Apparently we get a whole bunch of questions from men and it sounds like Lauren has not heard a question from a girl in awhile. So Lauren, you’re up.

Al; Well, I think we read every question we get. Male or female, so we don’t discriminate.

Joe: Wow. She probably just wants to give us 2 stars.

Andi: I think our listenership is like 80% male or something like that.

Al: Is it really?

Joe: We’ve got to do a better job.

Al: Yeah. Andi you need to talk more.

Joe: “Hi Andi, Joe and Mr. Al. I download every podcast, post and enjoy listening while I ride my bike and run around the neighborhood. I drive a 2008 Saab and I don’t drink. I have special needs dog named Jasper and a cat too. My question is, of course, the dreaded Roth conversion, but with the twist. Of about $5 million in investable assets, all self-made”.

Joe: Way to go Lauren from Traverse City. Cool!

Al: Aright, like it.

Joe: “1.9 million in after tax investments. At $3 million in retirement. In retirement accounts I have $950,000 in Roth money already and the rest is pre-tax. I know the conventional wisdom is to slowly convert 401(k) to a Roth between the time I retire and the time I take the RMDs but all of my estate goes to charity upon my death. I don’t want to prepay taxes on the 401(k) when charities are tax exempt. Should I take my chances and just take the RMDs when required? Or convert each sum each year to stay in the 12% tax bracket? Or part way into the 22% tax bracket? Or, I’m 60 and will retire next year. I’m expecting I’ll only need about $80,000 a year to maintain my standard of living. Any suggestions”?

Joe: Top of the mitt. You know where that is?

Al: I do not.

Andi: Traverse City.

Joe: Right here. Top of the mitt.

Andi: In Michigan.

Al: The Mitt. Okay, got it.

Joe: You use your hand. It’s the state of Michigan.

Al: I got it.

Joe: It’s a mitt. I’ve got some good news for you, Lauren.

Al: What do you got?

Joe: You’re not going to convert anything.

Al: I’m thinking the same.

Joe: Do not convert a dime.

Al: Why do you say that?

Joe: Because she can give her RMDs directly to charity up to $100,000 and you’re good to go.

Al: We’ve got at the moment, about $2 million in a pre-tax retirement account, and she’s 60. So maybe that’s $4 million? Well, maybe let’s call it 3. Just be conservative, $3 million by age 72, maybe a little more. So that would be about $120,000 as income and I don’t know if she’s single or married, but whatever. She could do up to $100,000 of that. Well, it depends. Does it say if she’s single or married?

Joe: No.

Al: I don’t think so. So she could do $100,000. I’m thinking and I’m confusing myself. She can do $100,000 of the RMD. So that means you only pay tax on the $20,000, keeping you in the lowest bracket. Not to worry too much. This is called a qualified charitable distribution and that’s the current law. It was actually a trial, if you will, a few years ago. Then I think it was in 2017-2018 that they made it permanent. So hopefully that sticks. If that’s the case and you’re planning to give the money to charity anyway, you don’t really have to convert because you can just give that RMD directly to charity. Here’s the only caveat to that. Let’s say you live into your 90s, your RMD could be a lot higher, and you can’t give enough to charity where you’ll be in a high enough tax bracket that you would have wished you converted a little bit in low brackets when you were younger. So that would be the only caveat to that.

Joe: Right. If you have room in the 12% maybe do a little bit.

Al: Maybe, just don’t go up high. I mean, if you’re retired and you don’t have a lot of income. Yeah, I agree with that. Do the 12% just to mitigate some of the future taxes in your 80s and beyond.

Joe: Yeah, because the older you get, the RMD is just going to compound and you’re going to be taking $100,000 out per year and the RMDs are going to still supersede that. You’re going to have $200,000-$300000 RMDs is in your 80s and you’re going to be potentially stuck into the highest brackets and you’re really not going to be happy then.

Al: No, not particularly. Although you could potentially take the rest of the RMD and give that to charity.

Joe: Then you have a tax write off, depending upon how the roadblocks work out, how the laws are.

Al: So there’s still a lot of ways to think about this. But I think by and large, Lauren, you don’t really need to do Roth conversions. If you want to do the top of the 12% just to give yourself more flexibility. We’re good with that, but I wouldn’t do any more than that.

Joe: Yes. Congratulations.

Al: Self made. That’s fantastic.

Joe: Way to go. Looking at the amount of wealth that you’ve accumulated, I would sit back and be proud. So, congrats there.

Rate of Return on a Charitable Remainder Trust to Liquidate Property? (Rick)

Joe: Let’s switch to Rick. “I have A+ rentals remaining in my portfolio. Dave”.

Al: I guess that was an email to Dave. Dave Clark, I’m assuming.

Joe: I’ve A+ rentals, emailed Dave. What does this mean? Who’s Dave?

Andi: This was emailed to Dave Clark, and then Dave Clark forwarded it to me and said please have this answered on the podcast.

Joe: Oh, got it! A+ rentals.

Al: Yeah, they’re not. They’re not even A or A-. They’re tough.

Andi: I thought you said 8 but you said A+.

Joe and Al: A+ rentals!

Joe: Who’s the ranking service of rentals?

Al: They’re not just A, they’re A+.

Joe: Oh my god. He’s thinking pretty highly.

Al: It should say I’ve got C- rentals. I think I want to get rid of them.

Joe: Let’s go to Gary from Illinois. I have F rentals.

Al: I want to get rid of all of them. How do I do it?

Joe: “A+ rentals remaining in my portfolio, I was considering doing a charitable remainder trust to liquidate one property due to the capital gains of both. I have low basis and have depreciated the property for many years that would need to be recaptured. The net value is about $3 million. Gross income is $7300 per month. I’m 75 years old therefore, this is the right time to make this move. The one unknown question that I’m really interested in knowing would be the rate of return for 20 years”.

Joe: We got a minute to answer this?

Al: We do.

Joe: A charitable remainder trust or another word for it would be a tax exempt trust. You would put the property in the trust. The trust sells the property. There is no tax due. Then, Rick, you would reallocate those assets. You would have $3 million sitting in your trust. You would sell it. No taxes due. You would invest that any way that you want. So what is the rate of return over 20 years? Well, if you picked CDs, it would probably be 2%. If you had a globally diversified portfolio, could be 6%. The question that you really want to have answered is how much income that you want from the CRUT.

Al: Right. If you’re at 75 years of age, it depends if you’re single or married. I’m going to assume that you’re single just because it’s easier to think about it. So, the way it a charitable trust works is you’re supposed to get 90% of the principal back over your lifetime. So you’re probably going to get 15 or 20% of the principal every year. Year one, 20% of $3 million is $600,000. So that’s more than $100,000 that you’re getting right now. Much, much higher income can be a great way to go. At age 75 you might want to do a 20 year certain instead of lifetime. That way, if you have beneficiaries, they would take over your payment if you pass away.

Should I Name My Wife or Trust as Roth 401(k) Beneficiary? (Candace)

Joe: Candace writes in. “When naming a beneficiary for a Roth 401(k), is it better to name my wife as an individual or name of the living trust? She is the only person that I ever want to receive my Roth 401(k)”.

Joe: Alright, Candice. A really simple answer, is yes. Name the person always.

Al: Yes, the individual. That’s how you want it.

Joe: If people, name a living trust…

Al: Uh-oh here we go.

Joe: It will, in some cases, blow you up.

Al: In some cases. It’s got to be a see through trust, a look through trust.

Joe: You know, it’s going to have delivery requirements.

Al: It’s got to have a non person beneficiary. See, I’ve been listening to you.

Joe: You learn.

Al: Oh yeah, you have to notify somebody.

Joe: Because there’s deliver delivery requirements. You’ve got to have the trust delivered to the 401(k) provider.

Al: Just do the individual. Just to your wife.

Joe: Because of what we’ve seen. The issue with trusts today is completely different because of the stretch IRA as well. Name the individual so I don’t have to go on my trust as a beneficiary rant.

I think we just got a bit of that trust-as-a-beneficiary rant! To make this stuff a lot easier later, get your estate in order now and present your loved ones with your completed Estate Plan Organizer. It’s got everything they need in the event of your passing. It includes a list for you of documents to provide to your family, and a convenient place to record all of the important information they’ll need. Download the blank Estate Plan Organizer from the podcast show notes at YorMoneyYourWealth.com, fill out everything from your financial account details and insurance policies to your contacts and your final wishes, then put it in a safe place and give a copy to your family. Don’t forget to update it regularly. To get your free Estate Plan Organizer, just click the link in the description of today’s episode in your podcast app and you’ll see it right there under “Free Resources”.

3 Legged Stool of Social Security, Pension and Annuity. When to Draw Each? (Mary)

Joe: Mary writes in. “I’m a single person at full retirement age, still working those three legged stools”.

Joe: You got a three legged stool there bud?

Al: Yeah, I’ve got one.

Joe: You working it?

Al: You’re terrible.

Joe: Which includes for Mary, “Social Security benefits, a small pension, and a small annuity”.

Al: That used to be more common term, I got my three legged stool. Got the pension, Social Security and something else. Whatever the other thing is.

Joe: Usually investments.

Joe: “All 3 increase the longer I wait. I had planned to retire at 70, in 3.5 years, but I’m having 2nd thoughts. I’d like to start drawing on just one and waiting on the others. How do I figure out which one would make the most financial sense to draw first”?

Joe: Alright. Social Security. If you wait for Social Security, you get an 8% delayed retirement credit.

Al: Yes, at that age, that’s right.

Joe: She’s full retirement age. She wants to work until 70, so she’s going to receive 8% higher benefit per year as she waits.

Al: So that one’s easy way.

Joe: Yes, push that one out. Do you not take that one first. The 2nd one is a small pension. So what you have to figure out here Mary is where it gets complicated, because a small pension… Is there a lump sum benefit? She’s single, so it’s going to be 100% survivor. We don’t know what the increase is. Is there a cost of living increase? Sometimes the weight on a small pension might not make that big of a difference. Sometimes it makes a huge difference. Or an annuity?

Al: So that one is tougher. I think the small pension you might be able to find from the plan administrator what the benefit is now versus 3.5 years from now and you can look at that. The annuity…

Joe: I guarantee it’s not going to be an 8% increase per year.

Al: Probably not. I would agree with that. I think Social Security is kind of a no brainer. Keep that one going. Between the small pension and a small annuity. Just try as best you can to figure out what the benefit is now versus 70 and then whichever one has a higher increase, you keep that one.

Joe: Yeah, pretty good with the information we got. Thanks for the question, Mary.

How Do Social Security Survivor Benefits Work (Jim, San Diego)

Joe: Jimmy, in San Diego. “Hi Joe, Big Al and Andi. I drive a F-150 pickup. Enjoy Stone Brewery IPA and we adopted a little German short haired pointer”.

Joe: Okay. I wonder if he’s like a hunter? Yeah, he’s got the F-150, gun rack. I could just see Jim. He’s got like a skull hat on.

Al: Not much to hunt in San Diego.

Joe: Oh, there’s plenty.

Al: Rabbits?

Joe: Coyotes.

Joe: “I have a question regarding Social Security benefits. As a hypothetical example, If my wife and I both start taking Social Security retirement benefits this year, I’m 70 years of age and receive $3000 per month in retirement benefits. My wife is 62 years of age and receives her own benefit of about $1000 a month. If I were to pass away shortly thereafter, would my 62 year old wife receive the $3000 higher of the two benefits as a survivor benefit or would it reduce due to age? Thanks for your time. Enjoy the podcast every week”.

Joe: Very good question Jim. If you take your benefit at age 70, as Jim did. He receives an 8% delayed retirement credit each year that he waits after retirement.

Al: That would be the maximum he’ll get. Wait till age 70.

Joe: You got it and his wife was like, you know what? I’m starting, I’m not waiting. I need some walking around money. So she takes hers at 62. Then, Jim’s hunting, he’s drinking a little IPA and the next thing you know, boom. Something happens. Bad news for Jim. But good news for the wife. Yes, she would receive the higher of the two benefits, even though she claimed her benefit early and received a 24% reduction on her own benefit. You would always take the higher of the two, so the strategy usually always is, the one with the higher benefit would wait as long as they possibly can, because then the surviving spouse would then receive that higher benefit for his or her life.

Al: Yeah, and that’s different than the spousal benefit. Because that does get reduced if you take it early, but survivor’s different. You lose your spouse, you get the higher of the two benefits. Simple as that.

Joe: You lose your spouse. That’s that’s the bad news.

Al: The good news is you get his or her Social Security.

Joe: So some people are like, really? Ooh, we’re going to put a little crystal oil on the bathroom floor.

Al: And it gets more interesting than that because you could get your ex spouse’s benefit, too.

Joe: Yes. If you were married for 10 years or more. So a lot of different rules about Social Security.

Can I Claim Social Security Ex-Spousal Benefits? (Debbie)

Joe: “My ex and I were married 35 years”.

Andi: This is Debbie, by the way.

Joe: Hi, Debbie. “He’s retired at 65. I’m still working. I’m currently 65, and hope to retire at 66 and a half. Can I receive spousal benefits on his and then when I retire, I claim my own benefits? We have been divorced for two years”.

Joe: So Debbie wants to claim the spousal benefit. The spousal benefit is half of her ex-husband’s benefit because they were married for more than 10 years. She has the right to claim the spousal benefit at age 65 or 62 doesn’t matter as long as he’s claiming his benefit, she’s good to go. But if she claims that benefit early, then she’s thinking, Hey, you know what? I’m going to let my own benefits continue to grow and so I’ll just take the spousal and then I’ll flip on and take mine.

Al: Yeah, and that’s what people used to do.

Joe: You could do that, but not anymore.

Al: It’s gone. That is gone because there’s the diem rule, which is very complicated. But basically in English, all that means is when you take your spousal benefit, then it’s as if you took your benefit up to a certain dollar amount and then that spousal benefit is just a little extra on top of that. Basically, you already took your benefits. You can’t then switch to a later benefit.

Joe: Correct.

Al: But I have a question. That’s for sure, true before full retirement age. Is that still the same at full retirement age to 70?

Joe: Well, the spousal benefit is half. Her benefit is going to be larger anyway. You know what I mean?

Al: So there’s no benefit.

Joe: There’s no benefit at all because her benefit is going to be larger. She’s been working 35 years and she wants to retire at 66 and a half. Her husband, they split up 2 years ago. The spousal benefit is half of his. So let’s say his benefit is $2000. Her spousal benefit is $1000 but she’s taking it at 65, so it’s going to be probably $980 because she’s taking it a year earlier than her full retirement age. Or, maybe her full retirement age is 66 and a half. That’s why she wants to retire at 66 and a half. So she’s claiming the spousal. I’m guessing her benefit is larger than the spousal benefit.

Al: Yes and I think what people used to do is they got, in essence, free money because they let their benefit grow while they’re getting spousal and the IRS… Or, I should say, our federal government. That’s too good of a deal. We’ve got to shutt that down.

Joe: What she wants to do is this. Let’s say her benefit is $2000. His benefit is $2000. She wants to claim the spousal benefit and get $1000 a month today. Then she’s going to turn her benefit on once she retires to the $2000 benefit.
She wants that $1000 spousal benefit until she turns hers on whenever she retires at 66 and a half. That was a strategy that we would recommend all the time. Unfortunately, probably what now, 4 years ago?

Al: Which probably means 6 years.

Joe: They got rid of that. So unfortunately, Debbie, you are out of luck.

Download the 48 page Social Security Handbook for free from the podcast show notes at YourMoneyYourWealth.com for more on ex-spousal, spousal, survivor benefits, how benefits are calculated, when to collect your Social Security, working while taking Social Security, taxation on your benefits, the works. Make sure you get as much Social Security as you’re legally entitled to receive. For a personalized, in depth analysis of your entire financial plan, and how to maximize Social Security, sign up for an assessment from a CERTIFIED FINANCIAL PLANNER professional on Joe and Big Al’s team at Pure Financial Advisors – it’s free too. Download the Social Security Handbook and sign up for a free assessment in the podcast show notes. Click the link in the description of today’s episode in your favorite podcast app to get there.

TSP, Pro-Rata Rule, and Backdoor Roth IRA Strategy (Allen, Woodbridge, VA)

Joe: Alan from Woodbridge, Virginia. “Andi, Big Al and Mr. Derails”…

Andi: Haha. He knows who starts all the derails.

Al: The derails are mostly you, I guess.

Joe: I just blow myself up. Derails, that’s at the end of the show and I just kind of…

Andi: Yes, that’s where I put all of the stuff where you guys go completely off topic and talk about dance crews, making T-shirts and all that sort of thing.

Al: We need to listen to podcasts all the way through so we know what they’re talking about.

Andi: Every once and awhile.

Joe: We just listen to Andy’s intro. You know, it’s like, good enough.

Al: Yeah, right? I know what this show is.

Joe: “Thanks for a great podcast. It is always informative and occasionally humorous. I’ve never composed a limerick”.

Andi: Now that’s going back.

Joe: Yeah. Wow, he’s a long time listener. “My favorite drink is frozen mug Root Beer”.

Andi: Oh, I am with Alan. I like it.

Joe: I’m a 1919 fan. You know that?

Andi: Nice. I like it. I’m a bit of a root beer connoisseur. So my favorite is Virgil’s.

Al: I just remember A&W as a kid. That was my favorite.

Joe: Because it had an A in it or something? So, my father would take me to this little local pub restaurant every Friday afternoon.

Andi: Okay, Mr. Derails.

Joe: Look, I swear to God because he would drink beer out the tap and they would have root beer on the tap.1919 it was right out of the tap, right in a keg. It was fantastic.

Joe: “So I listened to you in my red 2010 Toyota Corolla every week during my treacherous commute through northern Virginia gridlock traffic. Joe, I don’t think you are too arrogant”.

Joe: Thank you.

Andi: Too arrogant.

Joe: “So don’t let a rare one star review to throw you off stride”.

Al: We don’t get many one star reviews.

Joe: All these one stars just come in. I’d like 20 minutes on a black couch talking to my therapist.

Al: Well, I’ll put it this way we don’t get any for a long time, and then we get 2 of them.

Joe: It’s alright. The ninja…

Andi: The real life ninja. That was his name.

Joe: “I have a question on your least favorite subject that you have successfully avoided until now. I’m a federal government worker and will be retiring at the end of 2021. My wife and I have traditional IRAs that will keep a zero balance so we can use them to give back to our Roths each year. 2022 will be a will be different since in retirement I plan to move funds for my TSP to my traditional IRA. If I do a backdoor Roth in early 2022 and later in the year move my TSP funds to my traditional IRA, will the pro-rata rule apply to my 2022 backdoor Roth? In other words, does the sequencing matter? Or only what happens in the year as a whole”?

Joe: That’s a really good question there, Mr. Allen from Woodbridge, Virginia. What’s the answer Big Al?

Al: The answer is yes. They take the year as a whole, unfortunately, Alan. So they’ll look at your IRA balance at year end and that’s the balance that’s used for this pro-rata rule. So to do what you’re suggesting does not work, unfortunately.

Joe: Keep the money in the TSP until next year.

Al: Yes, if you want to do the backdoor Roth. If you don’t care as much, then just go ahead and roll it, but you’re not able to do that back door Roth.

Joe: I guess if you’re retiring and you’re rolling your TSP into the IRA, maybe you just do a larger conversion. You’ll be in a potentially lower income because you’re retiring at that point.

Al: Right. Maybe get your money into the Roth that way instead of the back door.

Joe: Everyone loves this back door.

Al: Yes, there’s got to be an alternative way to do it. A secret.

Joe: It doesn’t matter. You could just convert. Convert $6000. Let’s say if you don’t do the back door and you got pre-tax money of $6000 or $7000 and you convert it. It’s the same thing because you already pay tax on the $6000, right? Now you put the after tax contribution in the IRA. So you’re in the 24% tax bracket. You paid 24% on that $6000, now it sits in an IRA. Then it has basis in it and you convert it to the Roth and you’re like, guess what? I didn’t pay any tax on my conversion rate, but you pay tax on the money coming out.

Al: Well, unless you paid tax in a earlier year when you’re in a lower bracket.

Joe: Well yeah, that’s the exception. So let’s say you’re in the 24% tax bracket and you have $6000 of pre-tax money that you never pay tax on and you convert that. You paid, what, 24% tax on that money? It’s the same same.

Al: Same same. Yeah, I will buy that. For a person that’s always in the same tax bracket, regardless of the year. That money that you do in the back door Roth, you already paid tax on it. So it’s kind of the same as a Roth conversion.

Joe: Correct.

Al: Okay, I’m with you.

Joe: Everyone loves the back door. I can’t believe they’re getting rid of the back door. The garage door however, and the barn door is something completely different. The Megatron, I mean, that’s going to be a shame if they get rid of that because that’s truly something.

Al: That’s a big one.

Joe: That’s a big one. That’s a really good strategy. So the back door is fine, but…

Al: It’s like $6000.

Joe: You know what I mean? Oh God, I can’t deal.

Al: Your life is over.

Joe: That pro rata will kill me, oh my gosh. The reason why they love it so much is that they don’t have a tax bill they have to pay, right? Because they already paid the taxes. Out of sight, out of mind, no big deal. That’s why I love the Roth 401(k) so much because people don’t care. They don’t give a crap about taxes when they don’t see it, but when they have to write the check?

Al: They care a lot.

Federal Employee TSP to Roth Conversion Retirement Spitball (Michelle, DC/GA)

Joe: I got Michelle writes in from D.C. GA. Did she say that or?

Andi: You’ll see she explains it in her question.

Joe: You Googled it.

Andi: She explains it here.

Joe: “Hi Big Al, Joe and Andi. Love the show and podcast. Thank you so much for all the great information that you and your team provide your viewers and listeners. I’m a 50 year old, single female, federal government employee who is 7 years away from retirement”.

Joe: Remember that guy that wrote in was like, I’m 2 months, 7 days and 8 minutes?

Al: I think that’s common for government employees. They’ve got the calendar on the wall with Xs on each day. Oh boy, it’s another day.

Joe: Just staring at that calendar. I can’t wait to mark this day off.

Al: Can you imagine living your life like that?

Joe: I do when I’m working on this podcast.

Al: When you’re with me. It’s like one more podcast.

Joe: One more segment to go.

Joe: “I just transferred from Atlanta to Washington, D.C., but upon retirement, I plan to return to Georgia. I’m renting an apartment in D.C. and I also own a condo in downtown Decatur Georgia. Currently worth $265,000, which will be paid off in 3 years. I have no other debts. My retirement income will consist of a pension approximately $30,000 a year. Social Security approximately $24,000 a year if that is taken at age 62. And both a traditional and Roth TSP currently about 265 and 200, respectively. I also have a Roth IRA about $140,000, but those funds are earmarked for long term care expenses. I have no other investments or retirement accounts. While I’m currently maxing out my Roth TSP, I earn too much to contribute to my Roth IRA. Once I start taking Social Security at age 62, my pension and Social Security will cover most of my estimated $70,000 a year retirement income. Between age 57 when I plan to retire, at age 62, when I plan to take Social Security, I will supplement my pension with savings that I will begin to accumulate after my condo is paid off in 3 years. To bridge the gap between my estimated retirement income needed in my pension savings or pension Social Security, I will draw from my TSP. My question is this, once I retire and I’m finally able to convert my traditional TSP to a Roth IRA, as I am sure you are aware, the Federal TSP Investment Board does not allow in-plan conversions, will I be able to perform the following steps completely tax free? Step one open a traditional IRA? Step two perform a trustee to trustee transfer of my entire traditional TSP balance into my traditional IRA? Number three, fund a donor advised fund with one half of my traditional IRA balance and convert the other half to a Roth IRA? Thank you. Sincerely, Michelle”.

Al: Okay steps 1 and 2 are good. Kind of went off the rails a little bit on 3 and 4.

Joe: First of all, let’s talk about a few things. Great job. You’re a federal government employee. You’re counting down the minutes and you’re really looking to retire at age 57. Couple of things. When you first said, I have a Roth IRA $140,000 that I don’t want to touch. I’m going to let that grow, and that’s going to be my long term care policy. You don’t want to use Roth money for long term care.

Al: I agree with you. Why do you say that?

Joe: Because you get a tax deduction.

Al: Bingo. So you don’t want tax free income when you get a tax deduction because your long term care stay is a medical deduction. So if you’re going to earmark anything, it would be your other retirement accounts.

Joe: So you have $70,000 a year in long term care stay, well you pay that. It’s a tax deduction and then you pull it from your retirement account and it’s going to offset.

Al: It’s like tax free anyway.

Joe: You just lose a huge deduction if you used your Roth. So hopefully that helps. Now you’re taking Social Security at 62 with your pension. Push your Social Security out because you’re just going to have a lot larger income later. And then why would you want to give half your wealth to a donor advised fund for a tax deduction and then convert the rest?

Al: I think what she’s suggesting is that she takes her IRA and sends half to charity and half to conversion so they’re offsetting, so she pays no tax. I read this a couple of times. I think that’s what she’s saying because she wants to know if she can do this Roth conversion completely tax free and that doesn’t work. First of all, you can’t put IRA money into a donor advised fund. You would have to withdraw it, pay the tax, then put it in a donor advised fund and get the deduction. So those two things are somewhat offsetting, but you still have to pay tax on your conversion. So that doesn’t work and the problem, even when you’re 70 and a half and can do a qualified charitable distribution, which means, you do a contribution directly from your IRA. It avoids paying tax on that withdrawal but you do not get a tax deduction because you never paid tax on that money. So this doesn’t work and you wouldn’t want to do it anyway. You actually want to save your resources to do just what Joe said. Try to push your Social Security out a little bit further so you can live the retirement life that you want to live.

Joe: Andi do I have a couple of minutes here?

Andi: Yep.

Joe: Let me add this up for her. We got $265,000. You got $200,000 and you got $140,000. So that’s $605,000? Does that seem about right?

Al: Yeah, that’s right.

Joe: Okay, she’s going to grind for about 7 more years. So present value, 7 years. Call it 6%, and she’s probably saving… I’m just going to call it $20,000. She’s going to have $1.1 million let’s say at age 57, that’s a combination of Roth and traditional IRA. So she’s like, well, I need to bridge the gap from age 57 to age 62, and then I want to claim my Social Security right away. But she’s got a pension that she can take at age 57 at $30,000. If she’s spending $70,000 a year, there’s a shortfall of $40,000 until she claims her Social Security. So $40,000 in the 1.1 is about 3.5-3.6%, which is a decent distribution rate.

Al: it’s reasonable, particularly considering Social Security will come.

Joe: So what I would do to bridge that gap at age 57 is pull the money from the TSP because you have a no penalty withdrawal at age 55. So, you take your $40,000 from your pre-tax money and your Social Security. Then you take a look at what bracket you’re in. Does it make sense to do conversions at that point? Maybe it does, maybe it doesn’t but you’re bleeding down your retirement accounts over that time period, and it’s still staying in a relatively low tax bracket.

Al: Yeah, that is much more sensible and you save your Roth. You probably will use that later on to supplement your needs. Tax free.

Joe: And then you just push that out until you bleed out your retirement accounts. Now your Roths are growing and you’re going to replace your income with Roth. Now you have your pension, now you have a lot higher Social Security benefit and you got a big chunk of money sitting in Roth IRAs. You’re going to be in the lowest tax bracket from then on until the rest of your life.

Al: That’s the key. If you have enough money in a Roth and you can keep in that lowest bracket.

Joe: Because your Social Security is taxed based on provisional incomes. Roth IRA distributions do not count for provisional income. Your Social Security benefits plus your pension. Who knows what provisional income and what those thresholds will look like, but all your other additional dollars would be 100% Roth by you taking half of your retirement accounts and putting it… If you want to give to charity, by all means give to charity. But why would you want to do half of it at that age when you have no idea what’s going on and your other half of money is for long term care? What are you going to live off of?

Al: I think she was trying to do a tax free Roth conversion and it doesn’t work. Plus you’re going to need the resources to live because you’re retiring young. 57, you might need money for 40 years.

Joe: I would kind of change things there. Hopefully, that helps. A little spitball back in the envelope. Alright, Michelle, thank you. And thank you for doing that federal government service for us.

Al: Yes, thank you.

Clarification: Roth Conversions Can’t Be Until 59.5? (Greg, Beautiful Wine Country, Temecula)

Joe: “Hi Big Al and Little Joe”.

Joe: Oh, I love it.

Al: When people call you Little Joe? It’s so clever.

Joe: I love it. Makes me just want to stick around forever.

Joe: “Podcast 349, did I hear you say that you can’t convert a traditional 401(k) to a Roth IRA until 59 and a half to avoid the 10% penalty”?

Joe: No, I didn’t say that.

Joe: “I’m 50 and was going to wait 60, but now the Build Back Better Plan looks like they are going to remove”… Oh that’s the tax plan.

Al: Yeah, the proposal, which may or may not happen.

Joe: “Looks like they are removing conversions in 10 years. So now I was going to start converting next year, but not if there’s a penalty”. Greg writes in, he’s from a beautiful wine country Temecula.

Joe: No. If you pay the tax in the conversion, so let’s say Greg is having a couple vinos.

Al: Yes, in beautiful wine country.

Joe: And then he’s like, you know what? I’m going to convert. Push the button.

Al: Yeah, I’m just going to pull the trigger. 20%, 30% withholdings.

Joe: So, you do the conversion from your 401(k) and then they ask you. Hey, Greg, you want to withhold taxes on this conversion? And you’re like, yeah, sure, I want to write a check. Just take it out of the account. Well, the tax that you pay from the conversion is subject to the 10% penalty. Not the conversion.

Al: Basically you received it to pay the tax. So that’s an early withdrawal, about 30% in that example. Not the conversion itself.

Joe: The conversion itself, how they look at it is like a rollover. Where if I take an IRA to another IRA and roll it over into another qualifying account, you’re fine. But what you did is you took money out that was disqualified. It wasn’t a qualified distribution. So the money that you took out to pay the tax to the IRS, it didn’t go in the Roth, it went to the IRS. So that would be a distribution and if you’re under 59 and a half, then the distribution only that you took out to pay the tax would be subject to a 10% penalty.

Al: Now, if you’ve got other money outside of your retirement, just sitting in a savings account and use that to pay the tax, no penalty whatsoever.

Joe: So once again, calls me little Joe and he wasn’t even listening. He’s just waiting to write in and say, No, I think he said this. Well gotcha.


Dogfish Head IPA, Saab and a wig in the Derails coming up at the very end of the episode, so stick around if that’s your thing. 

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