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 [...]

Published On
September 22, 2020

How might Joe Biden’s or Donald Trump’s changes to the lifetime estate tax exemption impact your estate plan? Plus, is there any reason to have pre-tax retirement accounts? How long does money have to be in a traditional IRA before a backdoor Roth conversion? Can annuities be converted to Roth? And more on dividends, long term capital gains, Vanguard’s Total Stock Market Index Fund, survivor Social Security benefits, and how to pronounce “speculator.”

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Show Notes

  • (01:23) Sale of Former Rental Property Primary Residence and Capital Gains
  • (04:46) How Will Lifetime Estate Tax Exemption Changes Impact My Estate Planning?
  • (10:49) I’m All In On Roth. Any Reason to Have Pre-Tax Retirement Accounts?
  • (14:17) How Long Does Money Need to Be in a Traditional IRA Before a Backdoor Roth Conversion?
  • (15:25) Can Annuities Be Converted to Roth IRA?
  • (17:01) When Can I Withdraw Money From My Roth IRA?
  • (22:00) My 403(b) Provider Withheld Tax on My Coronavirus Related Distribution. Should I Correct It?
  • (25:10) Should I Invest All of My Roth IRA in the Vanguard Total Stock Market Index Fund?
  • (29:23) Investor Portfolio vs Speculator Portfolio: Which Will Bring Better Returns?
  • (33:05) Dividends and Long Term Capital Gains – Part 3
  • (36:52) Taxes: Any Benefit to Married Filing Jointly vs. Married Filing Separately?
  • (39:02) Does the Spouse or the Ex Receive the Spousal Social Security Survivor Benefit?

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LISTEN | YMYW PODCAST #255: Breaking Down the Confusing 5-Year Roth Clock Rules

LISTEN | YMYW PODCAST #265: Bear Market Investing Strategies and Revisiting the 5-Year Roth IRA Withdrawal Rules

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David T, check your email, you’re the randomly chosen winner of the $100 Amazon e-gift card for completing the 2020 Your Money, Your Wealth® podcast survey! Congratulations! Thanks to all who participated. Your opinions help us make YMYW a better podcast! If you missed the survey, you can still share your thoughts or ask your money questions. Click the link in the description of today’s episode in your podcast app to go to the show notes, then click Ask Joe & Al On Air. Today on Your Money, Your Wealth®, you know how great Roth IRAs are according to the Roth Brothers here, so is there any reason to have pre-tax retirement accounts? How long does money have to be in a traditional IRA before a backdoor Roth conversion? Can annuities be converted to Roth, and when can you pull Roth money out? Plus, more on Vanguard’s total stock market index fund, dividends, and long-term capital gains, an investor’s portfolio vs. a speculator’s portfolio, whether the wife or the ex gets spousal survivor Social Security benefits, and much more. But first, let’s talk real estate – both selling it, and passing it on to heirs. How might Biden or Trump’s changes to the lifetime estate tax exemption impact your estate planning? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®,  Joe Anderson, CFP®, and Big Al Clopine, CPA.

Sale of Former Rental Property Primary Residence and Capital Gains

Joe: Terry from Minnesota writes in. “Hi, Joe and Al. This is Terry from Minnesota. This is a follow-up question to a recent YouTube pertaining to the sale of one-time rental property to now a primary home, primary 2 of the last 5 years. My question is if I own the property before 2009, would I then qualify to sell as primary residence currently, 2 of the last 5 years, and not pay any capital gains? Really enjoy your show. Joe, winters come, I’m out there, down to Florida.” What the hell does that mean? Winter’s coming. I’m outta here-

Andi: “Winter’s coming. I’m outta here, down to Florida, 10/1.”

Joe: Oh that’s awesome.

Al: Because of Minnesota.

Joe: Ok? I’m having trouble reading.

Andi: For the last 20 years.

Joe: Yeah well go Gators. Like Terry, Minnesota. He’s my brother from Minnesota, headin’ down to Florida. That’s cool. So Terry then replied to Andi. Thank you Andi for this. “Hi, Andi, my apologies. I should have first said hello to you. You keep the show rolling with those two kids.”

Andi: Aww.

Al: Those two knuckleheads? He could have said that.

Al: I’ll take that one, Joe. So –

Joe: OK. I’m still confused on when he’s going to Florida.

Al: So what Terry is referring to is called a 121 exclusion, which simply means if you lived in a home 2 out of the last 5 years, you get a $250,000 exclusion for each person, $500,000 for married, so $250,000 each. And that comes off your gain. So if you buy the property for $300,000 and you sell it for $700,000. That’s a $400,000 gain, you’re married, you pay zero tax because that gain is below $500,000. It gets way more complicated when it’s a rental property first and a residence second. You can still do that rule, there’s an allocation is what happens. And the way that it works is you take the number of years as rental versus the number of years as a residence and you do an allocation that way. But the rule only came into being I think in 2009 which basically means that anything before 2009 is considered a residence even though it was a rental. So that probably just completely confused you. But now, let’s say you bought the property in 1990. So you basically had 20 years of it being a rental but that’s considered residence because they didn’t have this rule. Then maybe you have it for 9 or 10 years as a rental after 2009 and then 2 years as a residence. So in that example the 20 years originally as a rental is counted as a residence. So now you take the 10 years rental divided by 32, which is the total years owned, and that’s how much of the exclusion that you’re not able to take. So that probably completely confused you. My advice is to talk to your accountant because it’s not that simple. The quick answer is if you bought a rental before 2009, it’s tricky. You’re going to need to get a little help. You got it, Joe? You been writing all that down?

Joe: That was awful. That was hard listening right there bro.

Al: Well that’s tax law for ya sometimes.

Joe: There you go.

How Will Lifetime Estate Tax Exemption Changes Impact My Estate Planning?

Joe: Ann she writes in “Dear Al, Joe and Andi. I enjoy your podcast tremendously and I’ve learned a lot from it. I have a question about the lifetime tax- estate tax exemption. I know that the current estate tax exemption of approximately $11,700,000 per person will be reduced to approximately $5,400,000 per person when the Trump tax law expires at the end of 2025. And maybe even lower if Biden has his way. If I gift my daughter a property with a market value of $500,000, will it reduce my lifetime estate tax exemption by the amount of the estate tax exemption is changed? Or does my lifetime estate tax exemption resets to the new amount and starts fresh unaffected by the previous gift given before the change of the exemption amount?” Well, that’s a very sophisticated question by Ann.

Al: It is Joe and Ann, I got an answer for you. So I guess let me do a little background. So when you pass away, $11,700,000 goes to your beneficiaries tax-free. If you’re married you double up on that. And so what some people do is say well I’m going to get around this by giving while I’m living and I still get that $11,700,000 exemption and the answer is no, you cannot do that. I mean you can give, it just gets subtracted off your exemption. So $11,700,000 minus $500,000 becomes $11,200,000. That’s what’s leftover. Now the truth is the IRS uses something called a Unified Credit. I don’t need to go into that but for practical purposes, that’s kind of how this works. Now if the estate tax exemption comes back down to $5,400,000 and then you’re out of luck. In other words, it doesn’t get reset. It’s $5,400,000 minus the $500,000- or it becomes $1,000,000. Like it was in the 1990s-

Joe: Or $600,000

Al: – or $600,000 in the ’80s. It’s $600,000 minus the $500,000. That’s the way it works. The only benefit currently is if you give away let’s say, most people will-

Joe: $15,000,000-

Al: Let’s say give away $10,000,000 for example. And now when you pass away it’s $5,400,000. There’s no claw back. So you’ve basically got the $10,000,000 to the next generation without a tax. But it’s actually called a Unified Credit.  That Unified Credit stays with you as long as you’re living and then gets subtracted off of the estate tax exemption when you pass.

Joe: It’s called an Estate Freeze. So if Ann is worried that the estate tax exemption is going to go down the amount that she can go to the heirs without tax, you can freeze the estate by gifting up to that exemption amount. So then let’s say if she gifted $11,700,000- well she could give more because she got the annual exclusion too, per target. So depending on how many beneficiaries that she has, you can gift a little bit more. What is the annual now?

Al: It’s $15,000.

Joe: $15,000?

Al: Per person, yep.

Joe: $15,000 per person, so a couple more. But you could set up an irrevocable trust, gift all that, now it goes- the estate tax exemption goes down to let’s say $1,000,000. She gifted $12,000,000 out, that $12,000,000 would avoid the estate tax because it’s already out of her taxable estate. But there would be a capital gains tax to the beneficiaries depending on how much that asset grew.

Al: Well, there could be depending upon Biden’s suggestion, which is to get rid of the step-up in basis. Or under current law, the heirs get the step-up in basis if it’s given outside of their estate.

Joe: But if it’s an irrevocable trust, you’re not going to be- because she’s freezing the estate.

Al: Oh yeah, sorry sorry. Sorry, Joe, you’re right. If she gives it to an irrevocable trust it is what it is. There’s no step-up. If she- if she gives it- or if she just-

Joe: If she keeps it in the estate and she dies, then let’s say the estate tax exemption is $1,000,000, she’s got a $12,000,000 estate, $1,000,000 goes estate tax-free. Then $11,000,000 is going to be subject to the estate tax. And if there’s no step-up in basis, then they’re really going to be screwed. Because there’s going to be capital gains, plus the estate tax. So they’re going to have to sell the assets, pay the capital gains tax, to pay the estate tax. You’re going to see like this huge estate just crumble into something a lot smaller.

Al: And I think that the point of the perhaps no step-up in basis which is being discussed right now, that goes alongside the fact that there is no estate tax. So anyway it kind of is one and the same. But the proposal- it’s not a proposal- the discussion points by Biden and the Democrats actually is that there is no step-up and the heirs have to pay the tax on the appreciation at the date of death. So we’ll see.

Joe: So there’s a lot of planning that you probably want to take a look at in regards to your estate, what your goals are. So thanks a lot for the question. I’m glad we can help teach you tremendously.

No matter where you are in the country now is the time to schedule a video call with Joe and Big Al’s team at Pure Financial Advisors to make sure your financial and estate plans are nimble, tax efficient, and properly aligned with your goals, no matter who is president. Click the link in the description of today’s episode in your podcast app to go to the podcast show notes at YourMoneyYourWealth.co. Click the “Get an Assessment” button to schedule yours – do it now before the calendar gets all booked up as we approach the election and the end of the year. And ICYMI, Joe, Big Al and I presented a free live webinar especially for the YMYW audience all about how a Joe Biden presidential win might impact your taxes. Watch that in the podcast show notes as well.

I’m All In On Roth. Any Reason to Have Pre-Tax Retirement Accounts?

Joe: Ken from New Hampshire. “Hi, Andi.” Well, I guess this is just a little love letter to Andi. “Thanks again for help in getting my last question answered by Joe and Al earlier this Summer. I have another unrelated question which I hope might be useful for other listeners. I’ve gone all-in on Roth. I have Roth IRAs and contribute the max to Roth 401(k) through my employer. I heard Al talking about tax diversification when it comes to retirement savings. But is there any reason someone like me would want to add a pre-tax component to my retirement portfolio when I could almost entirely be tax-free upon retirement? I know my employer matches pre-tax but it is all a relatively small percentage of my overall retirement savings. Thanks again for the great show.” Ken. I’m all in Roth. Roth Ken. I know what Al’s answer is going to be. But-

Al: I know you do. What’s your answer? We’ll start with that.

Joe: I’m going to say just, who cares? Keep rolling with it. I mean there’s probably a more sophisticated strategy. But at the end of the day, he’s not going to miss the couple bucks he saved in tax. Everything’s going to be tax-free. Just plow away.

Al: I’m going to answer his comment, or his question ‘is there any reason someone like me would want to add a pre-tax component’ when he’s all in Roth?’ And the answer is it depends on your tax bracket. Because if 100% of your income is tax-free in retirement. Great. But if you had a little bit of taxable income it’ll be taxed in the lowest bracket, 10% or maybe 12%. If you’re currently in the 24% bracket, in other words, if you’re not getting a deduction and saving at the 24% bracket so that you don’t have to pay a 10%, 12% tax later, that’s why you wouldn’t want to necessarily do the whole thing. But I think I’ve said that Joe, in reference to people that have a bunch of money in tax-deferred and they asked the question, should I convert it all? And the answer is no, not necessarily. But in this particular case Ken, if you already got Roth and I agree with Joe, stick with it. But the reason why you have tax diversification is, why pay a higher tax now in exchange for a lower tax in retirement? That would be the reason.

Joe: And that’s the right answer. If Ken’s in a high tax bracket, if a lot of his assets are in a Roth IRAs now, compounding tax-free, and if he can get a tax deduction, grow some tax-deferred assets, and when he’s in retirement pull those down at those lower rates, then it makes all the sense in the world. That’s why we’re big proponents of tax diversification. But what we’ve never done is gone the other way. I think we’re so prone to helping people get more diversified from a tax-free perspective than the other way around. Because everyone has all their money in a tax-deferred account not necessarily overweighted in a tax-free account.

Al: And another way to think about this is in retirement, if 100% of your income is tax-free, so you’ve got zero income and you get a standard deduction, which for a married couple right now is $25,000, so your taxable income would be negative $25,000. In other words, you could have $25,000 of income and still pay zero tax and to get that zero income you had to pay tax at higher rates to get the money into the Roth. So that would be the consideration. That’s why we talk about tax diversification.

How Long Does Money Need to Be in a Traditional IRA Before a Backdoor Roth Conversion?

Joe: We’ve got Paul writes from Cardiff by the Sea. He goes “For a Backdoor Roth, how long does my contribution need to stay in my Traditional IRA before I convert?” You can convert it immediately Paul. So you put the money in a non-deductible IRA. I don’t know, we use to season it for like a year but that was because we’re super conservative. Now the law- something came out a couple years ago, didn’t it Al?

Al: Yeah, it wasn’t really a law, but-

Joe: It was like a private letter ruling or something like that?

Al: It was, believe it or not, it was an IRS agent pretty high up, being interviewed on a radio show and they asked about this and he said ‘you know what, we’re OK with the Backdoor Roth’. And he said right on the air that doesn’t-you could do it immediately, it doesn’t need to be seasoned. So anyway that’s what we’re going with right now. But in the past we used to tell people to wait 3 months, 6 months, maybe a second tax year, maybe a year, to be conservative. But I don’t believe you need to do that anymore. You can convert immediately.

Joe: All right Paul from Cardiff by the Sea, I appreciate your question.

Can Annuities Be Converted to Roth IRA?

Joe: Phil from Cardiff writes in “IRAs are tax-deferred and can be converted to Roth. Annuities are also tax-deferred. Can they be converted to Roth?” Shows great. Thanks.” No. Depends I guess, right?

Al: Yeah.

Joe: If the annuity is in the shell of an IRA then it can.

Al: Yeah, that’s the key. If it’s inside an IRA, yes. If it’s not inside an IRA, the answer’s no.

Joe: Right. So a non-qualified annuity grows tax-deferred and then it has LIFO tax treatment, last in first out, so all the earnings come out as ordinary income. So that will be taxed at ordinary income. So some of the things that we do is we look at- because people screw up when they’re looking at- I don’t want to- I shouldn’t say screw up- but sometimes people will have an annuity that’s outside of a retirement account and then they have their retirement account, and then they start trying to make income. And it’s like I’m going to take a little bit from my annuity or annuitize it, and then most of that income is going to be subject to ordinary income. The IRA is going to be subject to ordinary income and then they blow themselves up from a tax perspective. So there are annuity rescues if you have an old, let’s say non-qualified annuity, you would want to treat that as a conversion by taking some of that money out if you choose to. If you don’t want the guarantees of the annuity. If you bought the annuity or someone sold it to you as an investment versus a guaranteed income source, well then you might want to get rid of it and then deplete it out by utilizing the tax brackets there. So it’s a similar strategy to a conversion but a little different.

When Can I Withdraw Money From My Roth IRA?

Joe: Ed writes in. “Hi, Joe and Big Al. Love your show and generally listen while running.” Look at Ed. Getting in shape. He’s 73 and he runs.

Al: Yeah I like that.

Joe: It’s pretty impressive. That just shows the caliber of listeners we have.

Al: That’s what I’ll be doing at 73.

Joe: I can see that. Running’ up and down the beach.

Al: Absolutely.

Joe: “I have a Roth at Schwab for many years. I opened a second Roth at Vanguard so I could roll over IRA distributions to it since I don’t have to take the RMD this year. I thought I heard on one of your shows that if I’m over 70 and a half, I can take withdrawals at any time and the 5-year rule doesn’t apply. I can’t find info that says that. It seems to say I can withdraw and avoid penalties but I will have to pay taxes on the growth. What’s the truth? Will I have to pay taxes on the newer Roth? I guess I could always take money out of my older Roth but that wasn’t why I opened the Vanguard Roth. Thanks in advance for your answer.” So Ed’s kind of scrambled eggs here. He’s got a lot of different things kind of going on. He’s hearing tidbits of things and then a lot of times people put the buzzwords together and they get them confused. Let’s break this down. RMD, that is a required minimum distribution. Required minimum distributions need to be taken at age 72, it was at 70 and a half. At 72 due to the SECURE Act, they pushed it out. You’ll have to take a certain percentage out of your IRA, pay the tax on the RMD; you can spend it or reinvest it in a brokerage account. This year because of the CARES Act, they waived required minimum distributions. So he does not have to take the RMD. He also says that he’s converted one of his IRAs into a Roth. So then he’s talking about 5-year clocks. There’s a 5-year clock with a Roth IRA if you have not started a Roth IRA before. He says he established a Roth IRA many years ago. So I’m assuming many years ago is more than 5.

Al: I would make the same assumption Joe. And of course, there are completely different rules if you’re under 59 and a half or over 59 and a half to make this more complicated. I could see why it’s confusing.

Joe: So with him, he’s 73, so let’s answer Ed’s question. Since he’s over 59 and a half, he had a Roth IRA at Schwab for many years, I’m going to assume that’s more than 5, he opens up an additional Roth IRA at Vanguard. He converts money, puts it into Vanguard. His Roth IRA at Vanguard is already satisfied because the IRS doesn’t care if you opened up multiple Roths at multiple custodians. They just care what year that you established the Roth.

Al: Furthermore if you open the Roth at one custodian and move it to another one, it’s that original date from that first custodian that counts.

Joe: So the second Roth IRA is satisfied. If you do a conversion, it sounds like he did a conversion and that’s the reason why he opened it up at Vanguard. It sounds like he had an IRA at Vanguard, opens up a Roth IRA at Vanguard. And just moved money from the IRA to the Roth IRA. Did you get the gist of that?

Al: I think that’s what he’s saying and I get the confusion. Because if you’re under 59 and a half and you do the same thing, you do have to wait 5 years to have access to that conversion amount. And you have to wait till 59 and a half or 5 years, whichever is longer, to get the growth out without taxes and penalty.

YMYW episodes #255 and 265 have lengthy discussions of the 5 year Roth clock rules, so I’ve linked to them in the podcast show notes for more of a refresher. Now I realize trying to keep track of Joe and Big Al when they talk in circles is challenging at best, so if you’d prefer to see this all laid out on paper (or your computer screen as the case may be) we also have a handy cheat sheet on these 5 year Roth withdrawal rules that lays everything out based on your age, when you established your Roth, and whether we’re talking contributions or conversions. That guide is free, and it’s in the podcast show notes as well. Click the link in the description of today’s episode in your podcast app to go to the show notes and read the transcript of the podcast, listen to those earlier episodes, and download the Guide to the 5 Year Rules to Roth IRA Withdrawals. Still confused? Click Ask Joe and Al On Air in the podcast show notes and the fellas will do their best to help you out.

My 403(b) Provider Withheld Tax on My Coronavirus Related Distribution. Should I Correct It?

Joe: OK. Mark writes in, Chula Vista. “Hi, Andi, Joe, and Al. I was listening to podcast 289 about the coronavirus related distribution and I heard that you could take a distribution up to $100,000 without withholding taxes. I just completed my distribution with my 403(b) provider and they withheld 20% taxes. I wanted all of it without withholdings. Should I call them and have them correct it?. Thanks for all your great advice. I mean conversations.” Thanks, Mark. That’s right. We do not give advice on this program folks. Not even a little bit. They are just thoughts of ours and opinions of conversation. So ok,  he did a coronavirus related distribution, took $100,000 from his 403(b). He wanted to take the full $100,000. I’m guessing he was going to put it into an IRA because he didn’t like the funds in his 403(b). They were too expensive. Whatever he wanted to do, he wanted to get it out. But then the 403(b) provider withheld 20%. What does he do Al?

Al: That’s a great question. I would try first is go back to the H.R. department and see if it can be undone. But if it’s already been done through payroll they may be unwilling to do it because now you’re doing amended forms and all kinds of stuff. But that would be what you should try. And it’s a correct statement with the coronavirus distribution, you don’t have to have withholding. But I can imagine not all companies are savvy to that rule. So I can imagine there would be a lot of confusion.

Joe: You’ve got to be really clear with these people, do not withhold taxes. We have problems just doing simple transactions sometimes. And with 403(b)s, it might be with an annuity company too.

Al: It might.

Joe: So Mark. Yeah. Start there and then-

Al: Try to get it done, and if you can’t get it done, then you will get the money back. It’ll just be a big giant-

Joe: I would just put the full $100,000 – if he’s moving it into an IRA, put the $100,000- he’s gonna get the money back anyway. There are ways that you could do this to get the full money in there. We just need a little more time and thought here.

Al: Assuming he’s got another $20,000.

Joe: Yeah, he would need the $20,000 in cash. It’s probably very similar to let’s say, a rollover where they do it wrong or they botched the paperwork. Let’s say you’re under 59 and a half and they withhold taxes from it. Well, that’s a distribution that you would have to pay a 10% penalty on. So you would have to repay the IRA the amount of withholding and then you’d just get the money back as a refund that went to the IRS. So let’s say Mark took $100,000 out of the 403(b), $20,000 of it was withheld. He puts $80,000 back into an IRA, put another $20,000 if he had it sitting in cash, to make the IRA whole at $100,000. Then when he files his return, he gets a refund of $20,000.

Al: You end up in the same spot that way, you’re just out $20,000 and for a while till you file your tax return. But if you don’t- you may not have the $20,000 or you may not want to be out the $20,000, so try to get your employer to undo it.

Joe: All right. Next question.

Should I Invest All of My Roth IRA in the Vanguard Total Stock Market Index Fund?

Joe: “Hi everyone, love your podcast. This is Gail from Western New York.” Hi Gail. “As I write this email today my husband and I were supposed to be on a plane to San Diego for a week vacation to celebrate our daughter’s birthday but COVID19 changed our plans. We do love San Diego though. My question is, what are your thoughts on where to invest Roth IRA funds? Our plan is to retire in the next three years. We plan to live off our taxable IRAs at the low tax rates and possibly do some Roth conversions and take our Social Security at 70 and of course spend more time in beautiful sunny San Diego. We really do not see any future need in our retirement plans for the $300,000 we have in our Vanguard Roth IRA account. Should we just invest all of it in the total stock market index fund and let it ride? Or do you think we should divide it between other funds? Many thanks to you and your thoughts and suggestions.” Gail doesn’t need the money, she wants to let it ride. Should she just go total U.S. stock market?

Al: Yeah, my thought is I like the thinking. In other words, it’s not necessarily for her, it might be for her daughter or her other kids. But you never know if your life changes. So I wouldn’t do- I would not do 100% in a total stock market fund, but I might go 70%, maybe even 80% if I wanted to push it. Just- but I would like some security just in case I might need those funds.

Joe: I would go- Yeah I would go all World. So the Vanguard Total Stock Market Index Fund VTSMX. I believe that’s just the US.

Al: I think you’re right. I think that’s just US.

Joe: I would want to go total world.

Al: Or maybe you want two funds. One that’s international and one that’s domestic. I would still-

Joe: But if she just wants to buy one fund- I forget what the ticker symbol is – but that’d be dangerously close to us giving advice. But she could just do a total global fund that would take in account U.S. and international.

Al: But what do you think about my thoughts on- would you go ahead 100%? or would you back off a little bit?

Joe: I don’t know. I think, what the hell? It sounds like Gail’s- she’s savvy, she gets it, she doesn’t need the money. But you’re right, things happen. I would want to look a little bit- why would you want to spend some of the Roth? Because she’s not utilizing the Roth appropriately I guess. Where’s the income coming from? Is it all coming from 401(k) dollars? Is it all coming from brokerage accounts? Does she have real estate? The kid lives in Southern- I don’t know. The whole reason why you want to have money in a Roth in my opinion is it grows tax-free, but when it comes time to take distributions, she wants to retire in a couple of years, that she has the flexibility of using those dollars to keep her on a higher bracket. For instance, let’s say the lifestyle that they want to live is $100,000 but maybe they want to spend an additional $20,000 this year to go down to San Diego and spend a month down here. Well instead of taking the additional $20,000 from the IRA that would pop them into a higher bracket, you have the Roth IRA that you could spend that would keep you in the same bracket. There’s no more stretch IRA so stretching the Roth out over the kid’s life expectancy is not going to do any good because they’re going to have to take the money out as well. So I would want to look at the planning on how they’re taking the distributions long term and then come up with a better strategy. But if she’s like ‘I don’t want this money’- or not want it- ‘I don’t need it’. I want to grow it. Yeah. I don’t know if you got a 20, 30-year timeframe. Then why not? Yeah, I’m not going to fight anyone anymore, Alan. If they want to blow themselves up, it’s their money.

Al: And the truth is we’re just having a conversation.

Joe: That’s all we’re doing. We’re just a couple of kids here, hanging out.

Investor Portfolio vs Speculator Portfolio: Which Will Bring Better Returns?

Joe: Steve from San Diego. “Joe, Big Al, Andi.”

Andi: Steve’s question is a little bit long.

Joe: Watch this. I got skills.

Andi: You got it. Go for it.

Joe: “The show continues to be great every week. Thank you so much for all the great answers. I wonder if you could compare two portfolios for me. Each has $50,000 to invest. I call them the investor’s portfolio and the speculator’s portfolio. You can probably see where I’m going.” Yes. “The investor’s portfolio is the financial advisor’s dream, a conservative, balanced, diversified portfolio consisting of a blend of stocks funds, bond funds, cash and maybe some alternatives, like gold and others. The stock portion consists of low-cost index funds across small, medium, and large growth income in value; domestic, international, emerging markets. The bond portion consists of low-cost bond index funds, maybe a mix of short term and long term. The cash position consists of Treasuries, maybe a mixture of short, medium and long term. The investor’s portfolio has sensible percentages for each portion and uses asset allocation for tax efficiency.” Oh I’m sorry- “asset location”. Geez, Steve, you must be an advisor. Now for the speculator’s portfolio. With the $50,000 in this fund, I invest $1000 in each of the 50 hottest stocks of today, the real high flyers, the go-getters. I leave this portfolio alone for 20 to 30 years, except for reinvesting dividends. I might rebalance once a year, but only among the stocks in the portfolio. Everything I read suggests that the investors portfolio is a better choice. But I can’t help thinking that the speculator’s portfolio will bring a better return. What do you think? Thanks so much and please keep up the good work.” Of course, the speculator’s –

Andi/Al: That’s speculator’s-

Joe: Speculator’s. Spec(garbled)

Al: Speculator’s.

Joe: Whatever. It’s gonna make a higher rate of return. Of course it is. If those companies stay in business, you will kill the investor’s portfolio. Without question.

Al: But one thing – you’re 100% in stocks. So that’s one thing right there.

Joe: You have concentration risk. So if they- as long as they stay in business- even if one company turns out to be pretty good, because he’s got the top 50 fliers, it’s got 1001 of them. One of them over the next 30 years could be the next Apple, Netflix, Amazon, Google, Alphabet, whatever. So yes, but the problem is, is what’s the goal of the money? Is it to get the highest rate of return? Because the next year, some of those companies could go under. And then all of that return could drop significantly once you need the money. So yes, it will give you a higher return. Is it the right choice? Probably not.

YMYW isn’t just a podcast, it’s also a TV show in its sixth season! Hey speculators, Joe and Big Al covered the costliest investing mistakes, like investing without a plan, failing to diversify, emotional investing mistakes, and more on the Your Money, Your Wealth® TV show this season, as well as investing in volatile markets, bridging the retirement gap at any age, how to build a dynamic financial plan and plenty more. Click the link in the description of today’s episode in your podcast app to go to the show notes to watch Your Money, Your Wealth® TV, and access all the other free financial resources. Make sure you’re subscribed to both the TV show and the podcast, and then, don’t you think more people should know about YMYW? Do us a favor and share the podcast and TV show with your friends and family and coworkers, your Aunt Edna, whoever, via email or on social media. Let’s spread this financial fun everywhere.

Dividends and Long Term Capital Gains – Part 3

Joe: Smitty’s back from Roseburg Oregon. “Hello Andi, Joe, Big Al. A few weeks ago you guys answered a long-term capital gains tax question for me. Thanks. Have a couple more long term capital gains tax questions for you guys. Is an automatic dividend pay-out tax the same as manually withdrawing out the same amount on any random day that is not near the dividend pay-out day?” So Smitty is still hung up on this Big Al.

Al: Yeah I know. Let’s try to go through it again.

Joe: This is the same question, Smitty. It’s just worded differently.

Al: It’s carefully worded differently.

Andi: Maybe that’s an indication that you guys didn’t answer the question well enough for Smitty to understand.

Al: Apparently that’s the truth. ‘You answered my question, thank you. But let me ask it again, because-‘

Joe: ‘You guys are the best. Thank you so much for answering my question. I’m still confused as hell.

Al: Do you wanna take a stab at it?

Joe:  Okay. Well Smitty, let’s say if you get a dividend on a stock that has an ex-dividend date that gives- you have a $10 stock that gives you $1. The company’s issuing the dividend, you get $1, you reinvest it, you pay the tax on $1. What Al and I were talking about is that we create what is called a synthetic dividend. So let’s say that the stock price is worth $10 a share. You sell it. You sell $1 a share and then you could either spend it or reinvest it. If a stock is at $10 a share and offers a $1 dividend, the stock price will go to $9 a share. If you reinvest it, now you’ve got the other $1. Now it’s- you’re whole, but you have to pay tax on the dividend. So no matter when you’re taking a distribution, if it’s the same exact amount of the dividend, you will be taxed on what is distributed from the stock. If the company distributed the dividend or if you sell the stock with a synthetic dividend, you’re still going to be taxed.

Al: The only difference though, if it’s a company dividend, you’re taxed on the whole dividend. If you sell some shares of stock then it’s a capital gain and some of that’s return of basis. So you’re not going to be taxed on the whole thing. So it’s actually- it’s more tax-favored; just create your own dividend in essence by selling a little bit yourself. You buy that?

Joe: Yeah, I buy that for sure. Love that return of basis. That was pretty good Al.

Al: Yeah. That’s an accountant.

Joe: Also, “Let’s say that I’m at the very top of the 22% tax bracket, then withdrew $300,000 of long term capital gains from my taxable account. Would this push me into the 35% tax bracket? Great show as always. Smitty.” Oh, AKA- he’s our RP writer- 6 stars. I love Smitty. Al, stop yawning, answer the question.

Al: OK. $300,000 capital gains. No, you still are in the 22% bracket. But the capital gains, they sit on top of it. So now you’re gonna be subject to probably the 3.8% Medicare surtax to the extent your adjusted gross income is over $250,000. And if your taxable income gets over, a married couple, about $475,000ish, then it’s going to be taxed at 20%. So it doesn’t change the ordinary income but it could be a higher capital gains tax.

Joe: Sits on top Smitty. So if you create a dividend or if the company creates a dividend, you’re still going to be taxed. Long term capital gain sits on top of ordinary income. So that’s the lesson once again.

Taxes: Any Benefit to Married Filing Jointly vs. Married Filing Separately?

Joe: We’ve got Clint writes in, another letter to Andi. “Hi, Andi. I’m married to my dreamboat from episode 169.” What the hell is that?

Andi: May of 2018 Clint actually emailed the show and asked “Are there financial benefits to getting married before the end of the year?” And so now he’s letting us know that he and his dreamboat finally actually got married. Congratulations Clint and dreamboat.

Al: So he must have waited until 2020, I guess. Based upon our advice maybe?

Andi: Possibly.

Joe: Yeah. Well, episode 169- that’s just the love boat of all episodes.

Al: Yeah right.

Joe: “We were married February 29 at Lighthouse in Florida.” Oh cool. “We honeymooned on an 11-night cruise to the Eastern Caribbean in March and we made it back to Florida just in time for the cruise shut down. My question is about filing taxes while married. Is there any benefit to filing jointly or separately? I make $80,000 per year; my wife makes $60,000 per year. Thanks for the great information- or informative show.” My apologies. So what do you think Al? Separately or married here for Clint and-?

Al: Probably married filing joint because the- in general if your salary is somewhat comparable to each other, if you add yourselves together, married filing joint, it’s slightly lower taxes than each separately, married filing separate. That’s the general rule. If your income is quite a bit different, then sometimes it makes sense to file separately, married filing separately. We’re in California and that’s a community property state. And the answer is there’s no benefit generally of filing separate because of the community property rules. I’m not sure about Florida, whether that’s community property or not. I’m thinking maybe it’s not, but I don’t- I don’t know that a 100%. So I would say based upon these numbers, probably file joint.

Does the Spouse or the Ex Receive the Spousal Social Security Survivor Benefit?

Joe: You give me the voice recording Parvin did and then got mad and said that Parvin’s been leaving us messages. So let’s see what Parvin has to say:

Parvin: Hi my name is Parvin. I have left messages for Joe and Al and I’ve been listening every day and I haven’t got any answer. I am married and he’s been married before for 10 years, then he got divorced. Then 5 years later we got married and now it’s been 29 years. So let’s say God forbid if he passed, he’s right now 64 years old, and I am 57; if he passed, does his ex-spouse get his income, Social Security? Or does that go between his ex and me? How does that work? I am just curious, because we’ve been married almost 30 years. He is still working, I am unemployed, and he is thinking to retire next year at 65. Thank you so much, have a good day. Bye-bye.

Joe: What do ya think Alan? Uh-oh, they’re gonna- Parvin’s splitting. She better get to that Social Security office a lot quicker than the ex.

Al: Well, I’ve got- Parvin I’ve got some good news for you because the Social Security Administration doesn’t look at it that way. If you’re entitled, you get your full benefit, your full survivor. If his ex-wife is entitled, she gets the full benefit as well. So it can actually be a double benefit. So you don’t get any reduction of benefits.

Joe: We’ve got that question before.

Al: We have.

Andi: Several times I think.

Al: And it’s partly because you get the statement that says-

Joe: Is the ex gonna get my benefit?

Al:  Yeah, we do get that.  And I think Joe that partly comes from the statement that says the family benefit is X and it’s like, is this part of the family benefit? And it’s not actually. It’s a whole separate benefit. It doesn’t really impact you.

Joe: Hopefully that helps. Thanks for the voice recording. I don’t know what she’s talking about leaving me messages. She listens every day. It’s a podcast once a week, so is she listening to the same podcast every day?

Andi: She’s listening to the old ones I think.

Joe: She’s listening to the old ones. ‘I’m listening every day, there’s no answer yet’.

Al: That’s the problem. We need to do – apparently we need to do this every day Joe.

Joe: Absolutely not.


If you’re in the 43% of YMYW listeners who dig the Derails, or the 18% of listeners who want the show to be even longer, this is the episode for you because I’ve got over 10 minutes of ridiculousness lined up for you here momentarily.

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