Show Notes

• (00:00) Intro
• (00:37) Roth Conversion Timing, Order, and 33 Years of Income? (Billy Joe & Bobby Sue, Indiana)
• (12:32) Watch Social Security Basics You Need to Know: Common Social Security Questions Answered on YMYW TV, Download the Social Security Handbook
• (13:17) I Have $1.2M Capital Gains. Pros and Cons of an Exchange Fund? (Bryan, NY)
• (23:28) Download 10 Steps to Improve Investing Success
• (24:15) We’ll Have $7M. Are We Underspending or Overspending in Retirement? (Boston)
• (35:13) Should We Keep Life Insurance Policies for Adult Kids with ADHD? (Andrea, Seattle)
• (41:50) How Does the 5-Year Rule for Roth Withdrawals Apply to Inherited Roth IRAs? (Karen, TX)
• (45:15) Outro
• (46:22) The Derails

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Transcription

Intro

Andi: What is an exchange fund and is it a good thing if you have a lot of capital gains? That’s what Bryan in New York wants to know, today on Your Money, Your Wealth® podcast number 492. Plus, what should be the timing and ordering of Billy Joe and Bobby Sue’s Roth conversion strategy to help them achieve 33 years of retirement income? Is Boston overspending or underspending in retirement? Should Andy keep life insurance policies for her kids with ADHD? How does the 5-Year rule for Roth withdrawals apply to inherited Roth IRAs for Karen? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Roth Conversion Timing, Order, and 33 Years of Income? (Billy Joe & Bobby Sue, Indiana)

Joe: Alright. Billy Joel and Bobby Sue.

Andi: I think that’s Billy Joe, not Billy Joel.

Joe: Billy Joel.  Okay, so we got “Problem. Retired and I’m having more fun than a grown up should in farm country.”

Al: Doesn’t seem like a problem.

Joe: Yeah, sounds like a great little farm country. I like to go to a little farm country. “I, Billy Joe, am 65 and Bobby Sue is 64. Drink of choice is a machaladala-“

Andi: Michelada?

Joe: Michelada, Michelada is what it’s called. A michelada.

Al: I wouldn’t even know how to pronounce that.

Joe: Yeah, that’s like tomato juice and beer, I think. And salt. Maybe a little bit of lime.

Al: So you know what it is, you just don’t know how to pronounce it.

Joe: Michelada. Well, I couldn’t read it. If someone-

Al: Oh, now you need reading glasses.

Joe: Yes, I do.

Andi: I was going to say, that milestone birthday that just passed? Yeah.

Joe: Well, michelada. Yeah. “-and hers is water. We are both Purdue Boilermakers.” All right?  “Bobby Sue drives an Acura RDX and I drive a Chevy Traverse, both providing needed clearance for our driveways, which are mostly made of grass and clay soil and snow, to our Indiana homestead. Hope to have about $140,000 of income annually this year and going forward adjusted for inflation, tax issues on IRA conversions are what this is about.  Current income. Corporate director fees-” Oh, that sounds fancy.

Al: It does, yeah. I like it.

Joe: Yeah, yeah. “-$25,000 annually.”  Corporate director. What does that, what does a corporate director do?

Andi: Do farms have corporate directors?

Al: Yeah, maybe, maybe like a board of directors for a farm or farming corporation, I’m guessing.

Joe: Or maybe he bought the farm after he was a big successful CEO of some type.

Al: Maybe.

Joe: Maybe. All right, “We got partnership business profits of $80,000 annually, both of which will continue until death. No pensions. Then at 70 and a half, Social Security at $60,000 annually.”

Al: It’s actually at 70. 70. Just to clarify.

Joe: All right. “We got $1,400,000 in liquid non-qualified savings, $3,500,000 in IRAs, $420,000 in Roth IRAs. We got $1,000,000 is the value of my share of the partnership.” $1,000,000. “But, part of the IRAs include $750,000 invested in a self-directed LLC we are getting every year with a brutal 37% UBIT tax.” Unrelated business income tax, for those that don’t know what UBIT tax is.

Al: Correct.

Joe: District, so what, is there debt in that? I wonder.

Al: Well, either, it’s either, it’s either real estate owned with debt. That could be one way. Another one is business income would qualify for a UBIT. And that’s, believe it or not. So in other words, you’ve got, you’ve got a partnership that has income or a master limited partnership that has income inside of your IRA. You’ve got to pay taxes on the profits, and the tax rate is the same as the trust rates, Joe. The highest rate starts at about $15,500.

Joe: Yeah, $15,000. “Distributions, they have been enough to cover 37%, but little else. Fortunately, the share value has grown nicely. Should we bite the bullet in one, convert the LLC IRA above to a non-qualified account, which would hold the same security in order to end the 37% UBIT tax? Or, don’t worry about UBIT, convert other IRAs to a Roth that can grow tax-free, and 3, at what pace should we be doing so? $200,000 per year? $300,000 per year? We may have the liquid assets to cover the tax burden. Or should we begin Social Security now and use that along with cash to rip the band aid off and get very aggressive at conversions over the next few years? Other.  Got no debt. Home is worth $1,000,000. Inheritance soon, $200,000. Desire to leave $1,000,000 to the kids. We do not have long term care insurance. Concerned about what happens when one of us dies and tax rates go to the single person household rate. Hope this helps. In summary, the big questions are the pace of conversions. Which to sell, convert first.  What other income needs will be met for the next third of life? 33 years. Love the show. It’s amusing and uber helpful.”  All right. “I’m listening while I’m on the mat doing some yoga and abs.”

Al: Damn.

Joe: Wow. Abs. Abs of steel. 5-minute abs. 30 minute, 30 second abs.

Al: Is that what you do?

Joe: I do 30 second abs. 30 second abs, Al.

Al: Oh, got it.

Joe: Can’t you see it? This body is-

Al: That’s amazing. It’s amazing.

Joe: It’s a temple. “Always learning and have saved several shows to repeat. Great job. Thanks. B. J. And B. S.” All right, let’s start with so he’s got a business interest in self-directed IRA.  The growth on it is great because he doesn’t necessarily had to pay tax along the way. But now I mean a highly appreciated asset should never be in a retirement account. A business like this should never be in a retirement account. So I’m curious because he has so many other assets on why this was done in the first place. Maybe it was done years and years ago where that was the only liquid cash or liquid assets that he had. But now he’s got this big chunk of investment inside a shell of a retirement account. What does he do? bite the bullet just blow it out, pay the tax and call it good?

Al: Yeah, that’s a, that’s a tough one, right? Because so, so I agree with you. You should never have your highest appreciating assets inside of an IRA. And if it’s a business asset subject to UBIT, it’s doubly worse because now you’ve got to pay taxes on income, probably at the highest rate. You got to pay taxes on it, on when it sells on the gains inside the IRA. And then when you pull the money out, guess what? you pay taxes. So yeah, this is a, I mean, talk about a tax time bomb, Joe, this, this is it. So I, if you look at his income of $140,000 and you’d look at over the next two years, he can probably have $420,000ish of income with a standard deduction and still stay in the 24% bracket. Maybe you just blow out a bunch this year and next year, try to try to get it all out. I might, I might just go ahead and put it in a, get it out and put it in my non-qualified brokerage account. You can convert it potentially, but you still have UBIT inside the Roth. So you didn’t really accomplish a ton. Right. So I, I don’t know. I think I might do that, but that’s, this is, this is, there’s not a good answer. And that’s why, probably why you wrote us. Cause none of these are great. I don’t think.

Joe: Right.  I don’t know. Or you just ignore it. It’s $750,000 on top. He’s already got, you know, 3, 4, 5, $6,000,000. And $750,000 of the $6,000,000 is in kind of this weird shell of the, this IRA of, or $750,000 of it, of the million dollar partnership. So $750,000 of the $1,000,000 ownership that he has, $750,000 of it, is in a retirement account.  He’s got plenty of assets to live off of. Does he blow all that out and pay the tax or does he slowly just kind of leak it out and just pay the 37% on the UBIT and it, it just pays the tax itself and he breaks even. But the growth is still growing inside the IRA. I don’t know, if he wants to pass it to the kids. The kids are going to get hammered in tax there. I mean, there’s no way around the tax here. So then you just have to play the tax game is where do you think tax rates are going to go? If they’re going to go up, his RMDs are going to be giant. It’s $3,500,000 there.

Al: Yeah. By the time-

Joe: He’s going to have to take RMDs from this account as well, because you have $750,000 plus a $3,500,000. Or maybe he doesn’t, I mean, the, he could probably satisfy the RMD from the other IRA?

Al: You, you could, because it’s all in an IRA.

Joe: Sure.

Al: But I mean the, so the IRA at, at his age 73, I mean, will probably be $6,000,000 or more. Right. So that RMD will be pretty hefty. $250,000, let’s just say- something like that. Yeah. So that’s-

Joe: And then he is gonna have a total of $100,000 of,  ’cause he is got the corporate, he’s got- He’s got this other fixed income.

Al: Yeah, right.  So, so I think that’s, you, you’ve touched upon another point that is probably equally as good, which is just use the extra $250,000 or so of income that I’ve mentioned. Maybe do Roth conversions, start chipping it away at these IRAs, let the partnership run its course. It’s probably eventually going to liquidate and sell. Lessons learned. It’s not going to be a great deal for you, but at least, you know, you got it. You probably thought it was better than the stock market, which is why you did it. But here’s the problem with that sort of thing. So just be careful on your self-directed investments inside of an IRA. They’re not always what you think they may be.

Joe: Yeah. I think you, you just let that play its course and you convert everything as much as you can out to the top of whatever the highest bracket.

Al: Yeah. And I think you could do either of what we said. I think either of those two would be fine. It’s your choice. So that’s what I’ll say.

Joe: But he, I mean, he’s sitting in a really good spot. It’s just kind of a, he, he needs to figure out a tax strategy to say, especially over the next couple of years, you have this retirement account, either blow it out and put it into a non-qualified account in the self-directed. So you could do that over the next two years. If you think it’s going to continue to have high growth, you get rid of the UBIT. And then now you’re subject to capital gains on any future growth from there. So I like that idea.  If the business is, you know, maybe winding down, maybe you let it keep its course and keep it in the retirement account and don’t touch it. So, you know, we need to know a little bit more about that investment and what the growth expectations are, what, what your assumptions are in regards to growth. But either way, you have $3,500,000 in retirement accounts and you have plenty of income on the farm with your corporate director fees and this other business and, and so on. So. You’re going to have this tax issue like you, like you realized. So I think you convert to the top of the 24% tax bracket at least over the next couple of years, and then from there you reevaluate.

Al: Yeah, here’s one other thought as I think about this. If the current investment inside the self-directed IRA has, doesn’t have that much growth, then maybe you just leave it be, right? Because when it does sell, 37% tax on the gain on sale won’t be that much. On the other hand, if you paid almost nothing for it and it’s all growth and you’re going to pay 37% on it anyway, inside the IRA, that would be a reason maybe to try to blow it out. So anyway, we don’t, we don’t know the answer to that.

Joe: Okay, cool. Billy Joe, Bobby Sue, keep those ab workouts going.

Watch Social Security Basics You Need to Know: Common Social Security Questions Answered on YMYW TV, Download the Social Security Handbook

Andi: One of the most important financial decisions you make could mean thousands more dollars of income in retirement. How and when you claim your Social Security could completely change your retirement lifestyle – but it’s complicated! The Social Security Administration’s Basic Guide to Social Security Programs contains 2,728 rules! On Your Money, Your Wealth TV, Joe Anderson, CFP® and Big Al Clopine, CPA answer the most commonly asked Social Security questions, and they help you avoid the mistakes that could reduce your Social Security benefits. Watch Social Security Basics You Need to Know: Common Social Security Questions Answered, on Your Money, Your Wealth TV, and download our free Social Security Handbook as well. You’ll find links to both in the episode description.

I Have $1.2M Capital Gains. Pros and Cons of an Exchange Fund? (Bryan, NY)

Joe: “Hey, Joe, Big Al, this is Bryan from New York. I’m a new listener. And my first question is why Andi’s photo up on your website?  I don’t know. Andi?

Andi: My photo is up on the website. But they’re asking specifically about the ask your question page. And I think the reason for that is because I’m not the one that answers the questions.

Joe: I think we got to change that. I think, I think we made an executive decision earlier. It’s like, Ask Andi.

Andi: Okay.

Al: That’s right.

Andi: I think we should just make it ask YMYW.

Al: We’ll just critique her answer.

Joe: Yeah.  Ask Andi.

Andi: Oh boy.

Joe: Ask Andi. She gives it to us and then we’ll answer it.

Al: That works too.

Joe: Okay, anyway, “I drive an Audi A5 and a BMW M3.”

Al: Wow, that’s living large.

Joe: “Drink of choice is a tequila, a tequila and seltzers with limes.” All right. “Interested in your spitball on a 1% problem. I live in New York and my wife and I are in the 35% federal tax bracket. Plus we get hit with NY state on top of that. When I retire at 64 in 4 years, we plan to do live in Florida at retirement. And then I plan to do mega backdoor as much of our $4,000,000 combined pre-tax, 401(k)s as possible until age 70.” $4,000,000 in a retirement account. Good for you, Big Bryan.  “My question is about the large unrealized capital gain I have on my employer- that I have from my employer. I’m sitting in a $2,000,000 position with over $1,200,000 in capital gains.  I’m starting to research buying into an exchange fund, sometimes retired to as a swap fund, or referred, where you exchange your securities for shares in a fund which the IRS requires to stay in the fund for 7 years and the fund diversifies your position to a mere index like the NASDAQ 100. After the 7 years, you still have the same cost basis, but now you have diversified portfolio. And assuming I don’t need the money, I will get a step-up basis after my wife and I are gone. Any thoughts of the pros and cons of an exchange fund? Keep up the great work.”  Okay, so a couple things here. He’s got $4,000,000 in a retirement account. Sure. And he’s going to convert a bunch of that money to a Roth IRA, as much as possible, until he’s 70, I believe.  “But then my question is about large unrealized capital gain I have from my employer.”  So is it his employer’s stock that he purchased for $1,200,000 and it’s worth $2,000,000 today? Is that the, is that what-?

Al: Yeah, he purchased it for $800,000 because the gain is $1,200,000. So $2,000,000 position with a $1,200,000 capital gain. So he would like to diversify, but to diversify, 60% of it is going to be capital gains, which can be kind of pricey.

Joe: He doesn’t want to sell it because he’s going to pay the tax.

Al: Yeah. Right.

Joe: And so it’s like, well here, I don’t want to pay the tax at capital gains rate plus the state of New York plus the net investment income tax. So he’s going to lose 30% of the $1,200,000, $300,000 roughly in tax is going to go. So he’s going to net $1,700,000, $1,600,000 out of the $2,000,000 stock position. Then he’s going to reinvest that in a diversified portfolio. But the account is worth a lot less because he had to pay the state of New York and the feds. So he’s like, okay, well here, what are some other strategies that I can do to diversify? Because the market could take 30% in a year. As well. Right? So he’s got $2,000,000 or more. He’s got an individual concentrated security position where that stock could lose 30% in a year or overnight or over several years. So it’s like, I don’t want to pay the tax, but I’m not comfortable with the risk. So is there some ideas or strategies that I should be thinking of and his ideas in exchange fund?

Al: Yeah, Joe. And before I sort of get into that, so things that people do is they come up with a sales strategy. Maybe you can accommodate so much capital gains each year over time, which I think is what most people do because that way they have ultimate control. They don’t have their money locked up for 7 years, as you say. Right? And, and so you can sell, depending upon what capital gain rates are and capital gain rates, they’re the lowest of rates that, you know, there’s a 15%, there’s a 20% rate. You do have the net investment income tax, you gotta look at state taxes. So I think what a lot of people do is they figure out how much capital gain can I accommodate each year? Now you may have some other positions. Can you do some tax loss harvesting, right? And maybe some net, some of that against that, that would be something else to look at. Some people invest in an option strategy, you know, right? So, so then they, they, they are, they kind of lock in the current price, right? They sort of give up some of the upside, but they kind of lock in the current price. So there’s people do that, but you’re talking about an exchange fund. We, we don’t talk about this very much. So I actually want to make sure I get this right. So here’s what it is. Exchange fund, also known as a swap fund. So it’s an arrangement between concentrated stockholders of different companies that pool shares and allows an investor to exchange their large holding of a single stock for units in the entire pools portfolio. So in other words, you give your one stock, highly appreciated stock, into this pool as an exchange, so do other people. And then you end up with a share, so do other people with a fractional interest of all these different stocks, right? So that way you get diversification. So it, and it does work. It’s not terribly common, but it does work. The pros are diversification. The pros are tax diversification. Love it. But there’s cons.  So the cons are first of all, probably the main one is it’s locked up for 7 years, like you said, and so you got to make sure you don’t need that money over 7 years, right? You still have a lot of risk, right? Because it’s still a bunch of highly appreciated stocks, right? That, you know, it’s, it’s not like going to be an S&P 500. You probably have a fractional interest in whatever, 20 stocks or whatever it may be. So just be aware of that. Right. You have to be an accredited investor and most of these require you to have at least $5,000,000 of net worth, which maybe you do based upon what you told us, liquidity. There are fees that go along with this. And in order to get this tax treatment, the IRS mandates that 20% of the fund assets be in illiquid assets like real estate. So maybe that’s good. Maybe it’s not, but just be aware there’s, you know, I, I don’t see a lot of people using it just because of all the cons, but it, it does work.  So that’s what I got to say.

Joe: Yeah.  Investopedia right there. That’s best. A couple of other ideas, on a highly appreciated asset like that, you could also use a tax-exempt trust. You could put it into the trust, the trust sells it, it’s a tax-exempt entity, there is no tax, so you have the full $2,000,000, then you can diversify, but you exchange that for an income stream. And so you can turn that on at any point. So let’s say if you’re retiring in two, 3, 4, 5 years, as you’re creating that income. I think this could be the best strategy because you have $4,000,000 in a retirement account and you’re going to convert that.  So this tax exempt trust will also create a giant tax deduction. So depending on how you set it up, that tax deduction could offset some of the taxes that you’re doing from a Roth conversion perspective.  The caveat is that 10% of the asset, depending on when you die, will go to a qualifying charity.  So, how you look at it, and there’s a lot of pros and cons to this too. So, how you want to look at this is that, is there any of the assets that you currently have, do you want to go to a charity? And if the answer is yes, then I would highly look into this. If the answer is no, then it probably doesn’t make a lot of sense. But, the IRS forgives the tax if you plan a gift. And so this is kind of a, this is a plan giving strategy. So you’re putting this into this tax exempt trust or a charitable remainder trust. And basically that trust sells the asset at no tax. You’re going to get an income stream, but you flip that income on a qualifying event, depending on when you want that income to come to you. And so you could potentially drain 100% of that trust out or a lot of that trust out back to you. And it’s going to be taxed back to you with capital gains, it could be tax-free, it’s going to have the same characteristics as the asset within the trust. But again, you know, you want to talk to a qualifying professional that understands this stuff. But there’s all sorts of different things that you can potentially do to avoid or mitigate some of those taxes that is different than a swap fund. But I really like the swap fund too. You can invest in that. You, you have plenty of other assets where if you want the diversification, it sounds like you hate taxes, so you’d rather to give up the liquidity and kind of go into a unique type of arrangement versus paying the tax. And I get it. I hate paying taxes too. But there there’s other strategies potentially that you could do along the way. But you’re right, it’s a 1% problem you have Bryan.

Al: I’ll just, I’ll just say one more thing. If you want to get-

Joe: Oh, please do. You don’t need notes for this?

Al: No, no, no, of course not. It’s, I’m not going to talk about the exchange.

Joe: Oh, I got it. Okay.

Al: Don’t know that much about. No, I mean, so if you want more information on what Joe just talked about, tax exempt trust, also known as a charitable remainder trust, that’s the more common term. So Google that.  That’s it.

Joe: You want to call Big Al and he can help you out with that.

Al: That one I don’t need notes for.

Joe: Got it.

We’ll Have $7M. Are We Underspending or Overspending in Retirement? (Boston)

Joe: It’s from Boston. He just signs it Boston?

Andi: It’s, yeah, they’re from Boston and their name is Boston.

Al: Love it. Yeah. Yeah.

Joe: Like the band Boston?

Andi: I think it’s probably like the City Boston.

Joe: What, uh, do you know any songs by the band Boston?

Andi: Oh, sure.

Al: I know several, but I can’t remember their names.

Andi: Yeah, I know. They’re, they’re, More Than a Feeling. That’s their big one. (sings) “More than a feeling,” you know.

Al: I just have to hear them. Yeah.

Joe: All right. “Hoping you’ll spit ball this on your podcast.” Well, Boston, you’re in luck. Here we go.  “I’m a new listener and I noticed that people mention their cars and favorite drinks and he’s like, why the hell did they do that?” It’s stupid.

Andi: So that Joe can get into the mindset of the listener.

Joe: Yeah. I don’t know how it started.

Al: I do. Because people used to say, I listened to your podcast while I’m driving. And you said, well, you got to tell me what kind of car you drive. Or some people said, I listened to your podcast while I’m having a beer. What kind of beer?

Andi: Oh, I’m walking my dog.

Al: And then what kind of pet? So that’s how that started.

Joe: Yeah. Because we need to know a little bit more. We want to put a face to the question that comes in.

Al: Right.

Joe: Yeah. I was talking to an individual who was like, yeah, I listened to a couple of your podcasts. Why don’t people talk about that? And I was like, don’t worry about it.  If you’re not part of the family, you don’t know.

Al: Yeah, you have to go back 300 episodes and we’ll explain it.

Joe: Alright, so that’s the reason, Boston. So, we need, I need to get in the mood, I need to understand, you know, hey, if you’re driving, what are you driving? And then sometimes we would just make it up. And I’d be like, oh, I bet this person drives a Subaru.  And lo and behold, he drove a Subaru.

Al: Subaru.

Joe: Or like a Ford F150. That’s the most popular car here on Your Money, Your Wealth®. Ford F 150s. And I think, what’s the most popular drink?

Andi: Old Fashioned!

Al: Old Fashioned.

Joe: Yeah, I love an Old Fashioned.

Al: And beer.

Joe: Yeah, like craft beer. A lot of craft beer people.

Al: Yep.

Joe: A lot of craft beer people. Not a craft beer person.

Al: I know you’re not.

Joe: But I will do an Old Fashioned.  I will do that. You know, if you ever get a drink on the rocks, now everyone just puts it in like one big fancy rock.

Al: Oh yeah, I’ve seen this. Are you like a fancy rock person or do you like to have multiple cubes?

Al: Me personally, I like beer. But when I do, I would like multiple cubes. I don’t want the one.

Joe: Hey, and I saw something on Instagram, I thought about you, Big Al.

Al: You did.

Joe: It’s a, it was a mugged, frosted mugged beer fridge.

Al: That’s what I need.

Joe: I was like, I’m buying that for my garage.  And I’m going to buy that for Big Al’s frosted beer mug.

Al: I need one. So we can actually put frozen food in our freezer instead of mugs. That’d be cool.

Joe: Okay. So let’s get back to Boston here. So let’s see-“My wife drives a 2021 Volvo XC 60.” Oh, that’s sexy. Safe. Very safe. “I drive a 2013 Toyota RAV4. Yes. I need a new car. Planning on getting one next year.” A RAV4? Do they still make those?

Al: Yeah.

Andi: No, this is from 2013.

Joe: I know, but I know, but they don’t still make those today, do they? Aren’t they the, like, kind of the small little hatchback kind of things?

Al: Yeah, they’re smaller. Well, because-

Andi: There is a 2024 Toyota RAV4.

Joe: You need to drive a better car than a RAV4.

Andi: They are still making them.

Al: Well, he’s getting a new one. He’s already qualified for that.

Joe: I think I dated a girl that drove a RAV4. It didn’t last very long.

Al: It didn’t work out?

Joe: No, it didn’t last very long.  Alright, let’s get into his story. “Here’s our story. I’m a 73-year-old semi-retired lawyer. 90% retired. Work is very low stress. I earn about $55,000 a year, but could retire 100% at any time. Best not to include this income in any financial planning. Wife is 71, retired. Our finances, taxable, in the bank, $1,600,000. Long term capital gains and stock funds total $800,000.  My IRA is $1,900,000. RMD starting this year. Roth IRAs, $1,900,000.” Look at the big-

Al: It’s amazing, right?

Joe: Big Boston. $1,900,000 in a Roth?  “Wife has about $700,000 in her-”  Yeah.  Yeah. No wonder why life is stress free for you  “-Inherited IRA, wife’s got about $20,000, HSA $140,000 at a Vanguard Transamerica bearable annuity $530,000 residence $1,200,000. No mortgage. Total $7,000,000+.  No mortgage or other debt. Other, Social Security, mine and wife annualized $75,000.” Thank you. Boston. “I have a very good, long-term care policy. Wife does not have one. Our annual expenses for the last 3 years have averaged $250,000, including taxes. Big part of that, around 20% or $50,000 has been travel. Something we will not last forever in that we have splurged on.”

Andi: I think that’s supposed to be splurged.

Al: I like plurge.

Joe: I like plurge too. Yeah, he’s got $7,000,000. He can say whatever the hell he wants.  “That said, a conservative spending target is $250,000, including taxes of $50,000 a year. We have one daughter, age 30. She’s in a low earning profession and she would like, we would like to leave her $3,000,000, $4,000,000 after Massachusetts estate taxes, a rule of thumb for Massachusetts estate tax is $10,000.”

Al: 10%.

Joe: I’m sorry, 10%. Thank you.  All right, well, man, cool. “As we move further into retirement, my perception of these assets have changed. If our spend from our assets is $175,000, $250,000 minus $75,000 Social Security, our taxable accounts, IRAs and HSA total $3,600,000, which is sufficient for 20 years spending, ignoring inflation. That takes us both to our early 90s. These accounts are worldwide 60/40 Vanguard mutual funds, and with even subpar growth could carry us into our mid-90s.  My working assumption is 5% a year. If we end up selling our house, moving to an assisted living of some sort, that’s another 5 to 6 years of living expenses that leaves our daughter or ourselves if we need it. The Roth IRA, which we can draw from is necessary to hold down our tax rate. I’m hoping to grow this to $3,000,000. The variable annuity, which she can annuitize, we bought this in the mid90s, so the interest rate tables are favorable.  Do you think we’re thinking about this correctly? I swing between thinking that we are underspending to thinking we are overspending. Your thoughts and advice would be appreciated. Boston.”  All right. First of all, we don’t give advice. We give you our thoughts.

Al: Yeah, we can do that. Opinions.

Andi: Spit balls.

Al: Right.

Joe: All right. $7,000,000.

Al: Yep. About $6 liquid.

Joe: $6. He’s 73 years old. He’s going to continue to work at $55,000. He’s got Social Security at $75,000. So that’s $125,000 of income. He wants to spend $250,000. He needs $125,000 for the next couple of years. And then, $150,000 from there at $6,000,000, $150,000 into $6,000,000 is-

Al: That’s pretty low. I mean, if you take a 5% distribution rate, that’s $300,000, which is probably a fine rate at age 70s.

Joe: So, he’s peeling 2.5% from the portfolio.

Al: Yeah. Yeah. So, you, you are-

Joe: He’s got a 60/40 portfolio over the next 30 years. That thing is going to grow probably a 5%. You’re going to pull 2.5% out, so 6% over the 20, 30 years at 2.5% is going to be a lot of money for your daughter.

Al: Yeah, yeah, it’s going to keep growing. Plus the house, we haven’t even included, we haven’t even included the annuity. So, yeah, you can spend more if you want. But I think, Joe, what he’s thinking of is, let’s have the Roth IRAs, maybe the house, that goes to her daughter. We’ll just spend the other money. Which is actually, I think, the right way to think about it. If you don’t need the money, then the Roth is the best asset to pass to your daughter, to your heirs. Why? Because it’s 100% tax-free for them. There’s no stretch IRA rule anymore, meaning that she’ll have to, when she inherits it, she’ll have to distribute it over 10 years. 10 years of a very high regular IRA could be pretty taxing for her or for any beneficiary for that matter. So I like the way you’re thinking. I think you could spend more, you could, you could spend a fair amount more if you want to, but that’s your choice. It’s up to you.

Joe: You’re spending a couple hundred, I mean, it’s still a pretty good number positive.

Al: It, it’s a, it’s a good, it’s a good clip.

Joe: But, but you’re not gonna be spending that forever. But then you have to think about long-term care. You gotta think about that. I would just continue to run the numbers as you’re running it, and then just run different scenarios. Let’s say zero growth, negative growth. Right. But I think what you’re going through is what every retiree goes through. You’re an attorney. You made a lot of money throughout your career. You’re still working at 70. So you’re hard charger, right? You call yourself Boston, right? And so with all of that, that’s why retirement is so hard for a lot of people is that you’re giving up that paycheck, right? And then now you have to create all of the income or a majority of the income on your own accord with the assets that you’ve saved. And you’ve done a hell of a job saving way more than most. And guess what? He’s got $7,000,000+, and he’s still worried about this. He’s still running the numbers, which is very, very normal.  So, yes, I think you continue to do what you’re doing. Just make sure that you’re monitoring it. You have to look at this a little bit on an ongoing basis, not looking at the market every day But I think if you have a 60/40 split low cost Vanguard funds. You like Vanguard, that’s fine. All right, and then but just the distributions, where are you going to be taking the money? Do you want to continue to do Roth conversions? Because you still have how much money in retirement accounts a pretty good amount $1,900,000.

Al: Yeah, almost $2,000,000.

Joe: Right. And so it’s figuring out a distribution strategy. So now you’re pulling from your nonretirement accounts and then you’re converting more and then that’s going to give you more control. But if you want to look at strategies for, you know, healthcare down the road, you probably want to have money in a retirement account because of the tax deduction that you’re going to get from healthcare will offset some of those costs. So, I mean, there’s all sorts of different things that you could button this thing up on, but from a high level spitball. I mean, I think you’re doing great. And thanks for checking us out.

Download 10 Steps to Improve Investing Success, last chance to complete the 7th Annual YMYW Podcast Survey

Andi: Download 10 Steps to Improve Investing Success for free – the link is in the episode description. This guide contains key investing principles that’ll broaden your investment universe and help control your emotions and your risk – which can lead to higher returns in your portfolio, and retiring with more wealth. And it’s your last chance! You’ve got until noon this Friday August 30th to complete the 7th annual YMYW Podcast Survey. Share with us your opinions about the Your Money, Your Wealth podcast for your chance to win a $100 Amazon e-gift card. Click that link in the episode description to go to the show notes, where you can access the survey and its secret password, but only for the next three days! US residents only, no purchase necessary, survey and giveaway close and winner chosen at 12pm Pacific time on August 30th, 2024.

Should We Keep Life Insurance Policies for Adult Kids with ADHD? (Andrea, Seattle)

Joe: I got Andrea. Or Andy, from Seattle. Just like you, Andi. Alright, “Hey Joe, Big Al, Andi, thanks in advance for my spitball.” Alright, “Question is, has to do with life insurance policies, my kids and ADHD.”  Alright, those are 3 topics that we normally don’t put together.

Al: Yeah, okay.

Joe: Let’s go for it. “In 2011, my mom took out $50,000 universal life policies for each of my two kiddos. The thoughtful motivation was that if anything happened to the kids, my spouse and I will not have stress about funeral expenses. Fast forward, the girl is 26, doing great in her corporate job. The boy, 24, and a recent college graduate and currently studying for a graduate school exam.  Both experience ADHD. So we are automating and streamlining all of their finances, but things are frequently missed, which is typical for a low dopamine home life tasks. I recognize financial dealings can also create dopamine, but in this case, not yet.”

Andi: Nice job on the dopamine there, Joe.

Joe: I’m sorry?

Andi: I said, nice job on the dopamine. You got it first try.

Al: You’ve been practicing maybe, I don’t know.

Joe: I have no idea what low or high dopamine really means. But I just, just.

Al: Well, you don’t, you don’t want low.

Joe: I was just gonna go through it.

Al: You want higher.

Joe: And then you guys had to call me out on that. Thank you very much.

Andi: Gotta give you kudos when they’re due.

Al: I didn’t. Andi started it.

Joe: All right.  “Currently the owner of the policies and pay premiums of $15 and $70 monthly, which I’ve been told will not increase significantly over time. Both our accumulation accounts and annual guaranteed accumulation interest rates of 3% in 2024. And then that benefit includes both the $50,000 in accumulation total. Both kids have expressed interest in marriage and family. The girl is in a serious relationship. They both agreed to my asking for a spitball on either keeping the policies active or closing and placing the current accumulation, roughly $1000 in the respective Roth accounts.”  So, let me get this straight here. So the girl’s got a serious boyfriend.  So mom is like, hey, you know, throw a little spitball.  Do you guys mind? They’re all sitting around the kitchen table and they’re like, yeah, I think that’s a great idea.  I’m just trying to reenact, I’m just trying to be there, is that, is that what happened?

Al: I don’t think so.

Andi: Well, if somebody wanted to ask a spitball question about you, wouldn’t you want them to ask you first if you were okay with it?

Joe: There’s no names involved, it says girl, 24, boy-  she’s in a corporate job, oh, I know exactly who that is.

Al: I like that it says the girl and the boy- no, I think, I think this is in her head, I think this is her own thought. What’s the best thing to do?

Joe: All right, let’s go. “The math seems to indicate, keep the accounts.  So the value of $50,000 could be much less in inflation, but my fears of a missed payment, for example, forgetting when changing banks once they own the accounts are not imagined.  My health is an issue, so I could be handing these accounts over some point while they’re still figuring things out. The important details, I drive a 2022 Subaru Outback.” She lives in Seattle, right?

Al: Perfect place for that. Well also Colorado. That’s the place where they drive-

Joe: “-and anything with tequila is a welcome beverage.” Yeah, Andi, I’m down with you. “Hubs drives 2005 Toyota Tundra and prefers craft beers that’s not too hoppy.  My dogs now but-“

Andi: No dogs now-

Joe: “No dog. Oh, I’m sorry. “No dogs now, but Newfoundland’s were our dogs of choice in the past.” Newfoundland’s. I’m not sure what a Newfoundland dog is.

Andi: They’re beautiful. They’re huge. This is what they look like.

Joe: Oh, very cool.

Andi: Big shaggy dogs.

Joe: Yeah. Yeah, okay.

Al: Fluffy.

Andi: Yep.

Joe: Yeah. That’s cool. Newfoundland dogs. All right. “Again, appreciate your thoughts in our situation. Andi, officially, Andrea. My dad wanted an Andrew.”

Al: Okay, you keep the policies or you surrender them and put the money in a Roth?

Joe: I get where the ADHD comes in Al, into play. Because here’s the, here’s the issue with life insurance, is that if you miss a premium, if the policy lapse, if there’s increase in premiums and things like that, you know, then the whole tax benefit kind of, you know, loses, right? Especially if you need some of the cash value or the death, the cash value will get eaten up. And so you don’t want to make sure that you miss any of that. So having streamlined finances is really key here. I don’t know. You got $50,000. They’re 26 years old. You’re really going to be banking. I would take the money out. And I would put the $1000 into a Roth IRA.

Al: I agree with you. I, and part of the reason is there’s not really a need for the $50,000. Maybe, maybe there was at one time as your mom kind of anticipated, but I don’t think there’s much of a need. I think this is more valuable to the kids in a Roth IRA, you know, invested they’re adding to it over time. And then I think it starts a good retirement nest egg in their 20s. Yeah, that’s, that’s what I would do too.

Joe: I don’t know. I’m sure we’re going to get an email from a life insurance agent that we’re way off and you have to do better calculations and the IRR and the inside the policy and the guaranteed rates of whatever mutual company, I don’t know. I think the dollar figures are probably not large enough, they’re 26 and 24 years old and they’re looking to, you know, start a Roth IRA and if there’s some liquid capital there to do so, I don’t know. I think that’s easiest. It’s the simplest. If they don’t make a payment, they’re fine. If the, you know, you, you don’t have to have this mix, and it sounds like you want it now as an investment, not necessarily as a death benefit. If you truly want the $50,000 of death benefit, then keep it for life, right? But it sounds to me now that the objection or the objectives have changed is that you’re not worried about the $50,000 of death benefit. God forbid if any of your child’s, you know, pass before you do. I would take the cash value out again. So I don’t know. Hopefully that helps, Andy.

How Does the 5-Year Rule for Roth Withdrawals Apply to Inherited Roth IRAs? (Karen, TX)

Joe: Karen, Texas, Al.  “Don’t groan, Joe.”

Al: Why’s that, Karen?

Joe: “This question is about the 5-year rule.”  Unbelievable.  I love it.

Al:  Haven’t we discussed that enough already?

Joe: I love the 5-year rule. It is so easy to explain.

Al: Yeah, right.

Joe: All right. “Can you explain it, how the 5-year rule applies to inherited Roth IRAs?” Okay. “The Roth was established in 2020 with a conversion.”  Okay. “The owner had never had a Roth IRA prior to this.  The owner died in 2022, and the Roth IRA was inherited by his wife.  She also never had a Roth IRA until this inheritance in 2022. Does the 5-year clock start again in 2022? In the event of her death, this Roth IRA will be passed down to 5 beneficiaries, 3 of whom are over 59 and a half and two who are younger. Just for argument’s sake, let’s assume she dies in 2024.” Why are we talking about all of this death and destruction? I mean, is this to answer a trivia question?

Al: Well, either it’s her parents and she doesn’t want to say, or she’s an advisor, or it’s an exam question on her test.

Joe: What do you think, Al?

Al: I think there’s one 5-year rule for the account. It starts in 2020, and then once you get to 2025, it’s done, regardless of who inherits it.

Joe: I would 100% agree with that.  It’s a Roth IRA.  So if it was a 401(k) that would get moved into a Roth IRA, you would have to reestablish. But it’s already in a Roth IRA. A Roth IRA is a 5-year clock.  The 5-year clock is satisfied, passes, goes to the heirs. The heir or I mean, the spouse can either take it as their own or they could keep it. And as a, as a beneficiary Roth IRA. So I’m not sure how old the owner is. I’m not sure how old the owner was when the owner passed and then they die right away again. And then the kids get it. Two are over 50 or 3 are over 59 and a half and two are younger. Is there a 5-year clock? I mean, do they need the money? What do they need? What do you guys want?  You just want to argue about the 5-year clock or should we do some planning here? Karen, thanks for the question. But yes, I think you’re good. 5-year clock.  Once it’s, once it’s achieved, it’s achieved. All right. I’ve had enough Celsius. It’s better than the sodium.

Al: I think so. I think it’s a little healthier. I don’t know. Neither one’s healthy, but I like that better than the 1000 milligram sodium one you drank this morning.

Joe: It was electrolytes Alan. Electrolytes are good.

Al: I’ll tell you if you’re going on a 20-mile hike in the, in the sun. Yeah, sure. I get it, but not just sitting there in an office.

Joe: My body feels like I was going on a 20-mile hike when I’m in the office.

Al: That’s my two cents. Right.

Joe: Okay, Andi, wonderful job again. Thanks everyone for listening. We’ll see you again next week. The show’s called Your Money, Your Wealth®.

Outro

Andi: How I got my name in the Derails at the end of the episode, so stick around for that. Or maybe don’t, that’s fine too. Either way, do us a favor and subscribe to our YouTube channel and leave a comment, or share your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts. Both help us grow the show and reach more listeners like you, and we appreciate it!

Your Money, Your Wealth is presented by Pure Financial Advisors. Schedule a free financial assessment with the experienced professionals on Joe and Big Al’s team at Pure to build a financial plan that matches your tolerance for risk and meets your unique needs and goals in retirement. Click the Free Financial Assessment link in the episode description, or call 888-994-6257 to book yours. You can meet at any of our locations around the country, or online from home via Zoom.

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.

The Derails

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