Kristin Wong (author, Get Money, columnist, Joint Accounts @ Medium.com) explains how communication, specificity, and gamification can improve your financial life. Joe and Big Al answer money questions: should you increase your Roth 457 contribution when your spouse wants to retire 8 years before you? Does a SEP IRA have the same protections as a 401(k)? Does your company HAVE to allow third-party management of your 401(k)? Plus, Big Al admits he answered a question incorrectly last week – stick around for the right answer. Transcript & show notes:
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- (02:01) My Wife Wants to Retire 8 Years Before Me. Should I Increase the Contribution to My Roth 457?
- (15:43) Kristin Wong on Joint Accounts, Get Money, Communication, Specificity, and Gamification
- (32:21) Big Al Corrects a Mistake (Excess Scholarship Contribution to a Roth IRA and Tax Filing)
- (38:29) Does a SEP IRA Have the Same ERISA Protections as a 401(k)? (video)
- (43:53) Will My Company Be Required to Allow Third-Party Management of My 401(k)?
- (48:31) Where Should I Save Money for a Downpayment on a House?
Newly updated for 2019:
Can you charge your adult child rent? What do you do when you’re a spender and your spouse is a saver? No, these aren’t questions you sent in to Joe and Big Al, these are questions author and journalist Kristin Wong has answered in Joint Accounts, her relationships-and-money column at Medium.com. Today on Your Money, Your Wealth after Joe and Big Al give us an interesting look at their thoughts on money and relationships, Kristin gives hers. Plus, she explains how communication, specificity, and gamification can improve your financial life, as she covered in her book, Get Money: Life the Life You Want, Not Just the Life You Can Afford. And, Joe and Big Al do answer your money questions: should you increase your Roth 457 contribution when your spouse wants to retire 8 years before you? Does a SEP IRA have the same protections as a 401(k)? Does your company HAVE to allow third-party management of your 401(k)? Plus, Big Al admits he answered a question incorrectly last week – stick around for the correct answer. I’m producer Andi Last, with the hosts of Your Money, Your Wealth® Joe Anderson, CFP®, and…
Joe: The birthday boy, Mr. Big Al Clopine, he can now collect Social Security benefits, congratulations.
Al: Thank you.
Andi: Now realize, his birthday was Wednesday.
Al: It’s been a long time coming but here I am. (laughs)
Joe: Are you going to file and suspend? (laughs)
Al: I already did. (Laughs) No, can’t do that anymore.
Joe: Does that make you feel old? Did you ever think you would come to the time where you’re like, “oh my God I’m Social Security eligible?”
Al: No but here’s what I want to do: I want to talk to my parents: “Do you realize you have a son that’s eligible for Social Security?” (Laughs)
Andi: Now that’s just mean.
Al: Yeah that is kinda.
Joe: Do you think it’s gonna be there? (Laughs)
Al: When I get there? Let’s see, it’s still there today, so I guess so. But I’m not planning on taking it until age 70. So I gotta wait 8 years.
Joe: You still have some time. We’ll see, we’ll keep you posted on the trust fund.
2:01 – My Wife Wants to Retire 8 Years Before Me. Should I Increase the Contribution to My Roth 457?
Joe: I don’t know how to pronounce this name, Al.
Andi: I believe it’s Narayan.
Al: Yeah that sounds right. Narayan.
Joe: From New Gardens, New York?
Andi: Kew Gardens.
Joe: Oh, Kew Gardens. All right. “Here is where I am now.” Well, where was he before?
Andi: This is somebody who has emailed you before. So this is a conversation you started having in 2016 and you forwarded it to me.
Al: (laughs) Well let’s just go with where he’s at now.
Joe: Well we’ve got “Joe’s answer in 2016,” so what, we want to go back in time?
Andi: I gave you that information so that you could read all of this beforehand and have an idea of what you were doing before you got on the air.
Al: That would be great if we were prepared. (laughs)
Joe: Got it. That is called prep. (laughs)
Andi: Show prep. yes. (laughs)
Al: It’s not our strong suit. (laughs)
Joe: It’s definitely not our strong suit. (laughs) OK. Here’s where I am now, Nar….rarn. (laughs)
Al: That was close though. Say it five times. (laughs)
Joe: Omay, so his traditional 457, he’s got $47,000, contributes 17% of my income – that’s phenomenal. Awesome. He’s got a Roth 457, $18,000, contributes 3%, so he’s got 20% of his income going in, wife’s 403(b) plan, $61,000, combined Roth IRAs is $81,000. He’s got a whole life cash value of $23,00. All right. “Do you recommend I increase contribution to Roth 457. He makes $97,000 a year. my wife makes $97,000, so a couple hundy, “I will have little more than the standard deduction as I pay about $20,000 in mortgage interest.
Andi: So from the previous emails from 2016, I gathered that Narayan is 46, his wife is 47. That’s today. He plans to work at least 15 more years, she wants to work seven more years. He started the Roth 457 in 2016, he’ll have about a $4,000/month pension and a $2,500/month railroad retirement, and his wife will have $2,600 and Social Security – and he says that people call it social insecurity.
Joe: It’s very insecure. All right.
Al: Well good for you, Andi for getting us up to speed.
Al: So let’s start with, there’s a couple hundred – we’re going to round it. So $200,000 of income between you and your wife, and the standard…
Joe: Well let’s look at this here. We should have started here, because in 2016, just a few short years ago, he emailed me personally, and of course I took it upon myself to give him some really good financial planning advice for free. And he had $11,000 in a 401(k), $3,000 in a 457, and $6,000 in traditional IRAs. So what is that, that’s $20,000 total in 2016. We fast forward to 2019, boom. Look at this guy. He’s got about $200,000!
Andi: And you told him in 2016, “once your pre-tax accounts get larger than I would look at going Roth 457.”
Joe” So he’s looking at it now. They’re getting a little bit large. He’s saving 20% of his income, they’re making great income. What should he be doing? Well first of all, a few things off the bat, here. Your $200,000, I think you probably can save more than 20%, potentially. I would encourage you to try to max out the 457 plan for both you and the spouse because I think at that tax rate – and then still contribute the max to the to the Roth IRAs. I would get rid of the whole life cash value life insurance, I would look at term for the next 20 years because you want to work for the next 15 years. So I’d get rid of that, and I would look at a 20 year term policy because in 20 years if you follow Big Al and Your Money, Your Wealth® advice you’re going to have plenty of financial resources to take care of your spouse if something were to happen to you.
Al: And so here’s what I’m going to add to your comments. So a couple hundred thousand dollars of income. And if you have roughly the standard deduction and put your taxable income about $175,000, that puts you in the 22% tax bracket, which is a pretty low bracket. So the fact that you’ve got a lot of good pension income and Social Security income, you and your spouse, which is generally going to be taxed at ordinary income rates, I would favor the Roth 457 because everything else is going to be ordinary income. And so this is a way to create a little bit more tax diversification. So I think that would be a good idea. And because of the new tax law, you’re in a low enough bracket where I think that makes sense.
Joe: Yeah well I agree. Because he’s going to have big fixed income, and if he continues to save as much as he is, or listening to us by saving more… Look at it like this: you’ve got a 15 year time horizon. Your wife wants to retire a little bit earlier. She wants to retire in five years?
Andi: Seven years.
Joe: Seven years. You’ve got seven years of making $200,000 a year. And then after seven years, it’s over. So think about it. You’ve only got a very short window here to make sure that you’re doing everything you possibly can, because her income’s gone in seven years – seven years goes by so quickly. Then can you live off of just your income? Are you going to continue to save the 20% that you’re saving now? I highly doubt it. The savings are going to stop, in most cases.So learn how to live without her income now by saving it. And if you can save that money over the next seven years, then once she stops working, guess what? You’re going to kill it. But that’s not probably – that’s usually what doesn’t happen.
Andi: Hey, you gave advice to just cram money into his accounts and he did it, so he may do this.
Joe: So I was talking to some people, hypothetically, just a couple days ago. Maybe it was a dream. (laughs)
Joe: And so one person wanted to retire and they made $150,000, and he was a little bit older. The spouse was making $200,000 and she was younger. And I said, “Okay you’re going to retire in two years and you’re going to continue to work.” And they just got married, right? And I said, “this is going to be a disaster.”
Al: That’s what you said?
Joe: Yes. And they looked at me like, “What are you talking about?” I said, “you guys,” – they’re in second marriage later in life, he’s 65, she’s 55. And so I was like, she makes really good income and she’s self-sufficient. Everything is separate. She likes to spend her money how she likes to spend her money. She’s 55 years old. She’s been very successful. He on the other hand, says, “I’m done working.” He’s got a little bit more assets. She’s got a larger pension, but her pension doesn’t come in until she’s 65. She’s 10 years younger, so all of these moving parts are happening. And I said, “OK you just met online. You’re gonna get married. And then he’s going to stop working and he is going to live off of your income.” And I said, “and you’re spending most of your income right now. So you’ve gotta make up $100,000 of his income.” And I said, “OK, can you save $100,000 over the next two years before you retire and live off of her income? How would you feel about that?” She’s like, “oh jeez, I don’t know. I don’t know if I like that.” It’s like of course not! But when you retire that’s exactly what’s going to happen and guess what? You’re going to be on those online dating sites again because you’re gonna get divorced! It’s going to be a nightmare! (laughs)
Al: Wow. Look at you.
Joe: You just gotta call how you see it, Al. But that’s how I was thinking about it. You’ve been married for 40 years.
Joe: 31 years. So it’s a little bit different. Andi, how long have you been married?
Andi: I’ve been married six. Together for 9.
Joe: Six years. OK. I’ve never been married. So let’s say if I go on Bumble. (laughs)
Al: (laughs) Is that the one you like?
Joe: I don’t do online dating.
Andi: Hey I met my husband on OK Cupid. I suggest it.
Joe: OK Cupid. Okay we’re going to OK Cupid.
Al: Yeah that’s better.
Joe: So then maybe I find the girl of my dreams on OK Cupid. That is the stupidest name I’ve ever heard.
Andi: It is. (laughs) I met my first husband online too.
Joe: (laughs) All right. So it worked out. So now it’s like OK she doesn’t work, let’s say. Oh, we love each other. The first few months is so nice. Right. And then we decide to get married. And then so right away when we get married, she quits her job. What am I going to think? I’m going to be like this is not what I signed up for! I want a partner. But probably when we are in our honeymoon phase, “Oh sure, no big deal, I make a decent living, and guess what, we’ll make things work, and you’ve got savings.” Six months in…
Andi: It’s about for better or for worse, Joe.
Al: You do make those promises. That actually happened to me, but I’m still married 31 years later.
Joe: Was it worth it? Annie was like a high powered, like on a track to be a CEO, you get married, she’s like… (laughs)
Al: She’s like, “I’m on easy street.”
Joe: Look at Big Al with his big wallet!
Al: I think it was towards the end of our honeymoon. It was like, “you know, I’m really not enjoying my job that much.” I just started my CPA practice and I thought, “oh, OK, this will be interesting.” So I was thinking, “well OK, I can teach her how to be a bookkeeper.”
Joe: Oh, you were going to work together.
Al: And I don’t recommend that spouses work together. (laughs) We’ve figured that out pretty quickly. And this was the final capper, which is, I’m a CPA. I didn’t have a postage machine. I mean, I just started my practice, office in the home. And so I was mailing out some stuff to clients. And me being a CPA, you put the stamps on really nice and neat. She was all over the place and I just very calmly said, “I would really appreciate if you would…” (put the stamps on straight)… that didn’t go over very well. (laughs) To this day, “And so you’re telling me how to put stamps on an envelope??” Somehow we survived that, 31 years.
Joe: (laughs) Well I can see. I mean, it’s a financial document that you’re sending out. You want it to look somewhat professional.
Al: Professional, that’s what that’s what I tried to say. (laughs)
Andi: If you both can support the other if one of you can’t work, if one of you goes to work while the other one has to stay home for whatever reason, that is what a marriage is about.
Joe: Yes I get that, totally. But you have to plan for it. My whole point to it is I’m not saying that they’re going to blow up. I’m sure they’re going to have 40 years of loving marriage because they’re very fine people and I like…
Andi: As long as they put stamps on straight.
Joe: It’s nothing about their love for each other is what I’m saying. That comes first. Then comes baby, then comes the baby in the baby carriage. Right?
Andi: Except this is their second marriage?
Al: She’s 55?
Joe: You guys don’t know that little nursery rhyme? Okay. But the point that I was trying to make is have you thought about it? Have you had the discussion about it? Have you mapped this thing out? Have you looked at, OK well, if you stop working that means that income is no longer going to be there, and then now both of you are going to live off of one income? And if you’re very comfortable with the incomes that you currently have and then you make up this budget that is nowhere near in the realm of reality… Saying, “we’re going to spend X” when you’re already spending way more than that. I mean, you just sometimes you’ve got to look at it and you have a Come to Jesus and say, “OK well yes I’m fine with that. I realize that this is going to happen,” and all the way through.
Al: So you need to plan.
Joe: Well just conversation too, A plan can be–
Joe: Yeah that’s what Kristin…
Andi: Kristin Wong, yes. So people should email her to get their relationship and money issues figured out. (laughs)
Joe: They were a really nice couple. But I’m just saying, we see that all the time. Especially when you’ve got a little age differential. I mean, probably we see 10 of those a week.
Al: Yeah. We see that. And then we’d see income differential and we see asset differential, and any of those can be – it’s not necessarily a disaster but you need to have a chat about and figure it out.
There you have it, the Your Money, Your Wealth® take on money and relationships. Scroll down YourMoneyYourWealth.com and click Ask Joe and Al On Air to send in your retirement, investing, tax and money questions. You could try Joe and Big Al for your money and relationship questions too, like Narayan did without knowing it, or you could visit the Joint Accounts column at Medium.com, with advice by Kristin Wong. She’s a freelance writer and journalist and the author of, Get Money: Live the Life You Want, Not Just the Life You Can Afford and she’s our guest today on YMYW.
15:43 – Kristin Wong on Joint Accounts, Get Money, Communication, Specificity, and Gamification
So let’s dive in. Kristin, welcome to the show.
Kristin: Thanks. Thanks for having me on the show.
Joe: Hey, I’m a huge fan of your blog Joint Accounts. So before we get to the book I want to talk a little bit about that, because I would say most couples fight about money. And your blog, it’s kind of like almost like a Dear Abby. People are writing in with all of their little money problems and troubles. And then I think how you articulate their issues and give solid advice is phenomenal. I’m just curious what brought you to help people? I mean did you have a very troubling relationship with someone that you’re like, “I figured it out now I’ve got to help the world”?
Al: Wow, you’re getting personal. (laughs)
Joe: Right off the bat, Al. (laughs)
Kristen: Yes, my husband, we had very different money views when we are first dating and we’ve gotten on the same page – and sort of our habits around money have switched. Like, I used to be super-frugal and he was kind of the spender. And then he started understanding how money works and getting into personal finance, and now he’s really great at it, and he’s super-frugal and I’m kind of like, “come on, let’s spend our money!” So it’s interesting, and it’s kind of hard in the column sometimes because we get these anonymous questions that are pretty specific about people’s specific relationship scenarios in which they’re disagreeing on some kind of financial issue. And it’s kind of hard sometimes because the advice really comes down to communication, but you don’t want to repeat that in every answer, like, “well, it just really is about communication.” But it totally is. And there are specifics in each person’s scenario, like we had somebody who was struggling with an inheritance – and it’s not just romantic relationships, it’s also somebody had an issue with their therapist, when they’re like, “I’m very anxious about money and how expensive things are, and therapy is one of those things. So how do I bring that up with my therapist?” And so just things like that that are kind of interesting, but it really comes back to communication a lot of the times, and just people have a hard time talking about money in general, but especially in relationships, I think for some reason it’s even more awkward.
Joe: When you look at the spender/saver dynamic in a relationship, what we find is that you can kind of muster through as you’re accumulating and saving money, because the paychecks basically kind of keep coming in, and you can have conversations, but a lot of the individuals that Al and I work with or talk with, they’re kind of on the other side of that coin, where there are no paychecks coming in anymore. They’re basically trying to create their paycheck from the assets that they’ve saved. And if you’ve got one saver that basically saved most of the money, but they’re a couple, been married for 20-30 years, and now they’re spending the assets and then that spender is spending as they normally have, I think this is where we see this huge divorce rate happening. So if they can read your column before it happens, I think we could save the world here, Kristin.
Kristin: (laughs) I hope so. That would be great. Yeah, it’s hard because people not only have different priorities and different goals but then they have different ways of handling money and their relationship with money is different. So I think the key is just having those conversations well before you get to where problems are going to start. So you know what to expect. And that just comes down to talking about what your future goals are and getting on the same page with your partner, your spouse, about how you plan to do what you want to do at retirement? What does your income even look like at retirement? Knowing what to expect. It’s not going to solve every problem but it certainly helps avoid unpleasant surprises down the road.
Al: So let me ask you, so how do you even start these conversations? Do you say, “You’re kind of an over-spender. We need to talk about this”?
Kristin: (laughs) I would not recommend that.
Al: That wouldn’t be the way?
Kristin: Even though you probably want to. I think the key is really making sure that you approach the conversation in a non-judgmental way, at least at first. It’s hard not to judge when like your partner’s money habits are really stressing you out, but it puts them on the defense immediately. So they’re now looking for ways to make you wrong. So I think if you approach it and say like, “hey I want to sit down and talk about both of our spending habits, both of our financial habits, I want to learn about yours and talk about yours, and then I want to talk about mine.” And then just kind of have the conversation really objectively, and say like, “this is what you’re spending on, these are your priorities, this is what your withdrawal rate for retirement, this is what you think is appropriate. Here’s what I think is appropriate.” And then just kind of talk about those things objectively, and then get into the conversation of like, “OK, how can we find a middle ground, how can we find a compromise? What things are completely inflexible to you and what things are you flexible on? And then what things are inflexible to me what am I flexible on? And what’s the overlapping middle ground there?”
Joe: I got an off the wall question for you, because after reading your blogs and the book here, what is the most impulse buy that you’ve, or the most regrettable purchase you’ve ever made in your life? Do you have one?
Kristin: Oh man I have so many. That’s the problem.
Al: You could ask Joe what his was because he already knows. (laughs)
Kristin: Well let’s start with you then. What is yours?
Joe: See, Al? This is not about me.
Al: You threw it out there.
Joe: I bought a replica Darth Vader helmet that cost more than I probably should have paid for it. (laughs)
Al: But I will say you do love that thing. So maybe it was worth it.
Joe: I do. It’s in my living room.
Kristin: Oh, so you still have it.
Joe: Yes I do. I still have it.
Andi: And the two stormtrooper masks…
Joe: Yes, I have two stormtrooper masks…
Al: So when he has a couple of friends over they get all dressed up. You’re always Darth, right?
Joe: Anyway. Because we’re all, I’m a certified financial planner. Been helping people with their finances for 20 years. Big Al’s a CPA, been helping people for about 55 years. (laughs) We have Kristin Wong on, we all make mistakes. I was just curious if she’s ever had an impulse buy.
Al: Okay Kristin, you had a chance to think about it. What’s yours?
Kristin: Well when you said Darth Vader, the thing that immediately came to mind is I bought these collectible Garfield mugs, like McDonald’s, when I was a kid, used to have these Garfield clear mugs, and…
Andi: Kristin, you’re speaking my language, I did the same thing.
Kristin: Are they the same mugs? And the thing is never ever, like, this is the cardinal rule of personal finance. Do not shop online after you’ve been drinking a little bit. (laughs)
Al: Yeah that’s a good one.
Kristin: You will buy Garfield and collectible mugs from your childhood – and I still have mine too, but I never look at them, so I don’t know. Those are regrettable purchase for me. I mean there are so many.
Andi: And you think that they’re going to go up in value and that kind of stuff, and yeah that generally does not work out. I’m curious about because when you to start talking about finances and relationships, it gets very much into people’s behavior and that sort of thing and that’s kind of where your book goes as well.
Kristin: Yeah, it’s very much about your psychology and your habits. And I think a lot of times people think money is as easy as just making a budget, like, “just make a budget. You’ll be good, you’ll be fine.” But it’s like sticking to the budget part that we have trouble with. I mean, so much of it is psychological, and so much of it comes down to our habits and behavior, and it’s so much easier said than done to say, “oh just stick to a budget.” It sounds well and good. You have every intention to, but something inevitably comes up. So my book is yeah very much. I mean, there’s the financial literacy, the kind of money 101 stuff – how to open an investment account, things like that, but it very much gets into the psychology of how to actually stick to your financial goals.
Al: You’ve got a chapter in your book called budget like you’re building a house. What do you mean by that?
Kristin: So I think basically the idea of that is like, when you’re building a house, you have to have a strong foundation. And I think for a budget, the foundation is really what your financial goal is. Even beyond finances, like just what do you want to do in life? What do you value? Because when you give yourself a reason to be good with money, something that’s actually meaningful to you, you’re much more likely to stick to that budget, to stick to that goal. So if you say something like, I think most people, at least like younger generations, when they want to get good at money it’s just because, “oh, I’m a responsible adult. That’s what responsible adults do.” But that’s a really boring and vague goal. But when you get specific with it, and you say like, “I want to get out of student loan debt because I want to travel more,” that’s a good foundation. And then you start getting really specific with that. “I want to pay off $10,000 worth of student loan debt in two years so I can start saving for a $3,000 trip to South America or something.” When you know what your foundation for your budget or for your financial health is, you give yourself something to say yes to. So that when you’re restricting yourself it doesn’t feel like restricting yourself. It feels like saying yes to something else if that makes sense. And I think it’s really important to just have that solid foundation when you’re building a budget.
Joe: That’s such a good point with everything. Because you’re turning the negative into a positive.
Joe: It’s like, “I feel like I’m just constantly saving, I feel broke even though I have cash flow, but I’m constantly just putting it away.” But if you’re thinking, “hey, I’m putting this money for a larger goal or a larger purpose that I’m going to value a lot more than my Darth Vader mask…”
Al: Maybe that was your larger goal. (laughs)
Joe: Right: Or my giant Rodney Dangerfield golf bag that has a full bar in it. (laughs)
Al: Very cool. (laughs)
Andi: He’s a fun guy to party with, Kristin. (laughs)
Joe: So it’s like, you could give up some of that if you have that focus in the future of something a lot larger. So I think you frame that very, very well. So it’s not like a negative. “Oh well, I’m pinching pennies,” versus, “no, I’m really going to be able to purchase something that has a lot more meaning.”
Kristin: Yeah totally. And I think, of course there are going to be times when you still feel like you’re restricting yourself. You get tired of the goal, you get bored with it. It’s taking too long. And so you just want to go to that concert, or buy that Darth Vader mask and you’re like, “Why should I restrict myself?” But for the most part, I think yeah, give yourself like some light at the end of the tunnel, so you know what you’re working toward, so it doesn’t just feel like restricting yourself for the sake of restricting yourself.
Andi: And talking about that turning a negative into a positive, your book isn’t in chapters, it’s actually in levels, like a game. And so many people market to us by trying to gamify so that we’ll spend more with them, and you’ve actually turned that on its head as well.
Kristin: I love the concept of gamification, because yeah exactly, businesses kind of use that to – so gamification is basically a business marketing tool that companies use to manipulate your behavior to make you feel like you’re empowered and you’re in control. And that makes you feel good, so you want to buy their stuff. And store loyalty cards are a good example of that because you’re like you’re racking up points, so it feels like spending money is a game. And it’s kind of a fun concept. And I was researching a lot about gamification just because it fascinated me. A lot of the psychology behind it is exactly what people need to be good at money – and research backs this up – when you feel more in control and you feel more empowered, you actually make better financial decisions to keep yourself in a place of – like, you save more, because you want to maintain that feeling. And when you spend, you sort of feel like a little bit guilty, you feel like a little less in control. So there’s research to back it up, and so the book is kind of framed in a way of like making the reader feel like they are playing a game, or they are challenging themselves to be good at money. And the core of that is, yeah, having a goal. Having a reason that you want to play the game of money, as cheesy as that sounds, a reason you want to play that game in the first place.
Joe: Question for you, let’s say I’m motivated. I have the goal, I’m saving the money, and then I fall off the ledge and I start spending. And then I go through this spiral of guilt and shame. What are exercises, because this happens all the time. We had a recent listener come in and say, “hey guys, every time I listen to the podcast, I feel motivated, I save a lot more money, I’m more focused on my money, and then I don’t listen to you guys for” – hopefully it’s only a week, but it’s probably a couple of months. And then he comes back and then he’s like, “I’m re-energized.” What are some exercises or some of the things that that you were able to help your listeners and readers to kind of get them back on track when that when they have that relapse?
Kristin: Yeah, I think a lot of times what happens is people blow their budget and then they feel so guilty or so scared or just negative about it that they ignore it completely. And they’re like, “oh well, let’s just pretend that didn’t happen.” And then it makes you want to keep blowing your budget, because you’re like, “well, if I’m gonna blow my budget, I might as well go big.” So then you just keep spending and spending. So I think one thing is, really, I think having people around you who are like-minded and can keep you in check is really important. So I know a lot of people who are on personal finance forums, where it’s kind of a daily habit, where they’re talking about their money because then it’s harder to ignore. Because if you’re just doing it on your own, you’re listening to a podcast, you’re reading a book, you can just put the book down and walk away from it. And then that’s where the trouble happens. But I think if you kind of have a support network of people, then it keeps you in check. And that’s I think why a lot of these personal finance blogs are really popular, because people start them as a way to hold themselves accountable, and they end up being really good with money because it’s a very effective way of holding yourself accountable.
Joe: We’re talking to Kristin Wong, a phenomenal book, congratulations on the success. Where can people find it? I’m guessing where all popular books are sold.
Kristin: Where books are sold, on Amazon, Barnes and Noble, bookstores, independent bookstores, your library, if you want to check it out – if it’s not available at your library you can request it.
Joe: You can go to the website, www.TheGetMoneyBook.com. Well, we really appreciate you taking some time and hanging out with us, this has been a lot of fun.
Kristin: Thank you so much for having me.
Joe: Go to Joint Accounts.
Andi: Joint Accounts at Medium.com, and then you can email your money and relationship questions to Kristin there.
Joe: Yeah. When you’re the over-spender in the relationship, Al, you should read that blog. Here’s another blog for Al. “Should I charge my kids rent when they still live with me in their 40s?” (laughs)
Kristin: Uh oh.
Al: (laughs) I knew you were gonna bring that up.
Check the podcast show notes at YourMoneyYourWealth.com for links to Kristin’s book, Get Money, her Joint Accounts column at Medium.com, and to read the transcript of this interview. Be sure you’re subscribed to the Your Money, Your Wealth podcast – we’ll not only help you stay motivated to stick with your financial goals, but you’ll also get ideas and inspiration. For example, have you thought about how you want to spend your time in retirement? Next week on YMYW, we’ll hear from Gid Pool, who at the age of 61 decided to start a Retirement Hustle as a stand-up comedian – now he’s traveling the world doing comedy on cruise ships! Subscribe at YourMoneYourWealth.com so you don’t miss it. Now it’s time for more money questions, scroll down to the Ask Joe and Al On Air button at YourMoneyYourWealth.com to send the fellas a voice message or an email.
32:21 – Big Al Corrects a Mistake (Excess Scholarship Contribution to a Roth IRA and Tax Filing)
Joe: Tom called in last week, had a question for Al in regards to a 1098T filing. And then has to do with scholarships and then the kid’s getting scholarships, but I guess he was so smart that the scholarship was more than the actual tuition. So there was some monIes left over. And then so Thomas was asking, “hey, can I use those dollars as earned income?” So his son could fund a Roth IRA or IRA?
Al: That is correct.
Joe: That’s the question. You said no.
Al: That’s the question. Then there was a follow up question. And so…
Joe: But let’s let’s talk about how you answered that question.
Al: (laughs) Well, that’s the first mistake I’ve made since I qualified for Social Security. Anywa,y so I did some research on that. And I was wrong.
Joe: And so Tom probably felt something tingling in his body, saying, “I think I stumped the big man.”
Al: So let me explain.
Joe: Well let me ask his follow up question. He goes, “Thanks for answering my question, I’m flattered to be called an engineer.” Tom you are definitely more engineer them “a humble high school English teacher.” After listening, he’s still a bit confused on if his stepson needs the file or not. “Attached is worksheet 8 from publication 501.” So Tom’s really getting in the weeds here with us. I mean, he’s actually sending Big Al tax forms.
Al: I’ve got the copy right here.
Joe: I mean, that’s what we do, folks. That’s what we do for our listeners. Send us tax returns, we go through them. Send us whatever you want. So he’s sent the publication 501 to Big Al, “which I use to calculate his kiddie tax deduction of $3,792, seeing as this is equal to his total income amount. I figured that this would lead to a total tax due of zero. I might be missing something.” Al, what say you?
Al: Great question. So first of all, let me talk about scholarships, because in the normal cases, the college costs supplies and so forth, let’s just say is $20,000 and you get $10,000. So you’ve got to come up with another $10,000 out of pocket. But occasionally it’s the other way around, where the scholarship is greater than the tuition and books. And so I’ve got the – this is actually right from IRS Code Section 117. So it’s talking about amounts, it’s actually paraphrased from that, because there’s it’s hard to read – it’s in legalese. Anyway, I think you’ll understand this. “Amounts received from a qualified scholarship for tuition, fees, books and required supplies are not taxable to the recipient.” We know that. So in other words, as long as it’s used for tuition, fees, books, and required supplies. However, “the portion of the scholarship used to cover room and board expenses is taxable to the recipient.” We got that part right, or I got that part right last week. What I missed though was this: “the taxable portion of a scholarship for room and board expenses is considered earned income for purposes of calculating the standard deduction for a dependent.” So Tom, you are correct. And by sending this form, it’s Table 8, the standard deduction worksheet. you’ve filled this out correctly – because when you have earned income and you’re a dependent, the amount of standard deduction is the lower of, last year, $12,0000 or your earned income plus $350, which it was. So in this particular case, your son does not need to file a return, and you have earned income. So I’m going to change my answer. I think you can do a Roth IRA. He can do a Roth IRA.
Joe: In the amount of $3,792, because that’s the amount of earned income?
Al: $3,442. You can’t include the extra $350 you get for the standard deduction.
Joe: Oh, wow.
Al: Yeah. Since I know we’re getting specific here.
Andi: The $3,442 is his excess scholarship money.
Al: Yes, that’s the earned income.
Joe: So Tom, your stepson can contribute $3,442 into a Roth IRA.
Andi: But now he can’t because it’s after April 15th, right?
Joe: Yeah, way to go, Al. Totally blew him up.
Al: Totally messed that one up. (laughs) Hopefully he already did. Well, for next year.
Joe: (laughs) Now we’re gonna get sued for terrible free advice on the air that we’re only getting partial information for.
Al: All I can say is you get what you pay for. (laughs_
Joe: Well Tom, if you want to talk to our legal department… (laughs) about Al’s liability on some advice there. So yeah, that was last year. He’s done.
Al: Yeah that’s true.
Joe: (laughs) Way to go Andi, way to bring that up.
Al: But, I’ll say, so, age 16. Maybe this will happen many years.
Andi: Yeah, the stepson is 16 years old.
Joe: What’s he getting…?
Al: He’s a prodigy.
Joe: He’s 16 and the guy’s in college? Well I mean, sh– I was gonna say another word! But shoot! Look at Tom, here. I mean Tom is doing calculations like Einstein. The stepson, he wants to be like Tom and he’s like, “hey, what do I gotta do to get the all the affection of my stepdad because he’s so cool?” So I get it. I’m with you. All right. So there you go, Tom. Any more questions, probably send them to a better show that could give you the right answer on time. (laughs)
Al: Yeah please do. (laughs)
38:29 – Does a SEP IRA Have the Same ERISA Protections as a 401(k)?
Al: Are we characters?
Joe: I guess you are.
Andi: He enjoys it, I think that means that it’s a compliment.
Joe: “Does a SEP IRA have the same protection through ERISA as a 401(k)?” Well, Ross, for you even ask that question, that means you’re up to no good.
AL: (laughs) Or you’re concerned about something.
Joe: (laughs) Something must be going on. So what’s he talking about here, Al?
Al: ERISA protection. You’re actually better at explaining ERISA, I’ll take the second part of the question.
Joe: Well, it’s just the protection of looking at if you’re going to get sued. So maybe he has rental properties, maybe he’s going to file bankruptcy or something like that – ERISA is a code that was, what, back in ’74 and it was really to protect retirees because – Studebaker, remember that car?
Al: Yeah I do.
Joe: That kind of caused – they had like the first pension plan or one of the first pension plans that blew up.
Al: Yeah I recall Studebaker because that’s how I learned about stocks from my dad. Because he was rather upset because he had invested in Studebaker stock and it had done so well for a while.
Joe: Yeah like probably Kodak and Blockbuster.
Al: Yeah. And then it didn’t.
Andi: So when did this Studebaker pension fail?
Joe: Like in the 70s. Because ERISA was established in ’74 so it had a been around there. So with this was looking at, “hey, we need to have certain protections within the overall retirement planning system.” And so then that was the birth of the 401(k) plan, because if companies weren’t necessarily responsible enough to fund the overall pension and pay their promised, I guess, liabilities, then the father of the 401(k) kind of came out, I forget his name, but he was like, “Well, let’s come up with defined contribution plans where you can save into the plan.”
Andi: Ted Benna.
Joe: Yeah that’s right. Didn’t – we talked about him before?
Andi: We talked about him and I’m trying to get him on the show.
Joe: Got it. Ted Benna.
Andi: He’s ignoring us at the moment.
Joe: Yeah well, whatever Ted. (laughs)
Al: We are such a quality show.
Joe: And well anyway, so ERISA has these protections in place, just to keep this thing very high level. And those are under section 401(k) plans. So if I keep my money in a 401(k) plan and I get sued because I have a rental property and someone breaks their leg and because of negligence or something like that, well if it’s under a 401(k) plan then it’s protected. OJ Simpson’s pension plan is protected. Because he lost a civil suit with… allegedly killing people. (laughs)
Al: It was allegedly.
Joe: (laughs) And so his NFL pension is protected. But other assets they could seize because they’re not under this type of protection. So what Ross is asking us, he’s like, “I understand that there’s some level of protection in a 401(k) plan. Is there the same level of protection in an IRA? And the answer is… kinda
Al: Yeah. So I’m going to tell you what I know, and I’m also going to tell you what I am less sure about – and check with your attorney. OK, is that fair?
Joe: Yeah that’s a very good CYA.
Al: Every time I give an answer now I’m gonna do that. (laughs)
Joe: Please double check before any filing deadlines.
Al: (laughs) I’m pretty clear that – April 15th. Anyway so you are correct with regards to bankruptcy protection on the ERISA plans 401(k)s. It’s unlimited, fully protected. With regards to IRAs, they actually just increased the amount on April 1st of this year. It’s $1,362,800. That’s the amount of IRA that is protected upon bankruptcy. Now, if you had an IRA that’s a rollover from a 401(k), that still gets unlimited treatment. And what Ed Slott recommends, he’s one of the IRA gurus in the country, he recommends – although it’s not required that you keep those rollover funds in a separate IRA, if you’re concerned about this so, it’s really clear that all of that stuff came from your 401(k) and has unlimited protection.
Joe: But then there is… now, on a civil suit, there are some other limitations there.
Al: Yeah I’m not going to get into civil suits because I’m not an attorney. I don’t know what the rules are.
Joe: And it’s all state by state. So you’ve got the federal law and you’ve got each state has their own laws in regards to some of that protection.
Al: That’s true too. And we’re not going to even try to answer that. And then furthermore, I will say this, according to Ed Slott, this article that I have, he says, “employer-sponsored SEP IRAs and simple IRAs are fully protected – just like 401(k)s. And so what I’m not clear on is what if it’s your own SEP IRA and you’re the employer.
Joe: Right, you’re the employer and employee.
Al: I don’t know the answer to that, maybe one of our attorney friends listening does, but I’m not clear on that.
43:53 – Will My Company Be Required to Allow Third-Party Management of My 401(k)?
Joe: OK, we got one from John from San Diego. “My current employer’s 401(k) plan does not allow for third-party management. Is there an age at which it’s mandatory for the company to allow me to do this? I have a fairly substantial amount of money in the account and I’m not entirely comfortable managing it. I’m using the brokerage link option offered by Fidelity and would like to avail myself of professional service. Thanks.” So John’s got a lot of money accumulated in his 401(k) plan and he’s just not comfortable managing it himself.
Al: Yeah. He’d like some help, professional help.
Joe: Yeah, he’s like, “How the hell can I get some professional help here? I got a brokerage link. Thank you, Fidelity, for offering me that. But now I have a million choices, what do I pick? How do I do it? What’s going on?” And then this is interesting, he’s like, “is there a certain age where it’s mandatory for the company to do it?” So he’s kind of on the other side of the coin, “hey, I got money, I need help, I don’t want to screw this thing up. It should be mandatory for the employer to allow me to do this as a fiduciary.”
Al: That’s what he’s asking.
Joe: And the answer in most cases, John, I would say at 59 and a half, there’s something that you can do, what is called an in-service withdrawal. It’s all dependent on the plan document through your employer. But in most cases, once you reach age 59 and a half, if you wanted to do an in-service, there’s pros and cons, of course, of doing this. You would take money from that 401(k) plan, roll it into your own individual IRA plan. You could hire an advisor at that point to manage the assets within the IRA since the company is not allowing professional management within the 401(k). So that’s one option. So that’s a mandatory – mandatory is kind of a strong word. It’s going to be up to the plan document, but in most cases, you’re going to be able to probably have access to those dollars at 59 and a half.
Al: Yeah I would agree, I have seen plans that have… what are we talking…
Joe: A little bit more restrictive language in the plan doc?
Al: Yeah more restrictive where it may be in your 60s or older, I’ve seen plans where it’s even 50.
Joe: Yeah. I’ve seen plans where you could take the money or you have the company match it’s available now, but your contributions – or if you rolled another plan into this plan from a previous employer, those dollars are usually accessible. So that’s one option. The pro to that is that you can get your professional management that you’re looking for. I you want someone to actually pick the overall investments based on your goals, timeframes, risk tolerance, tax situation, blah blah blah, then they can construct that overall portfolio, pick the appropriate investments, rebalance that, tax manage it, distribute assets to you in regards to income, and all the other things and the pros that are available when you hire a professional manager. The con is that there’s going to be an expense for that type of service, which I’m sure that you’re aware of, that you’re asking for professional management. So it’s not free. So that’s a con. You also want to make sure that the service that you’re getting for that fee that you’re paying is full service. That you’re getting all the things that you want, because I guess all professional managers are not created equal, and you want to truly understand what type of investment philosophy that that manager has, compared to what investment philosophy that you feel is appropriate for your situation. So that’s that way. The other way to do it is that you can still hire a professional manager or CFP® or CFA or an advisor to help you manage your overall accounts right now. Let’s say they don’t have access to your 401(k) plan but you have a brokerage link account, so that is full avail of all the different investments that Fidelity has on their shelf. And so you could hire an advisor either by hourly rate, by a retainer, or depending on what that firm does and how they do it, they could go through and select all the different investments that are appropriate for you and then you can just come back and then they can help you rebalance that overall account on a quarterly basis. It wouldn’t be nearly as efficient to have it a fully non-discretionary account with you with the advisor. But it’s still doable. So even though the professional manager or management or investment manager can’t go in itself, I think they can still give you really good advice.
Al: And that would certainly be the way to go if you’re under 59 and a half, because you may not have the in-service withdrawal option.
48:31 – Where Should I Save Money for a Downpayment on a House?
Joe: “Any suggestions for a good place to save money for a house down payment? Time horizon is two to five years.” Yes. Cash.
Al: Yeah. Keep it safe, CDs. 2-year CD.
Joe: All right guys. Hey, hopefully, you enjoyed the show. Wish Big Al a happy birthday – you can wish him a happy birthday at Ask Joe and Al On the Air, you can just send us a voice recording. That would be very sweet of all of you, just to say, “hey, happy birthday Big Al. Thanks for all the bad advice over the years.” (Laughs) And we will play that on the show next week. All right. The show is called Your Money, Your Wealth®.
Yeah, I know this is getting lengthy, but if you cut out now you’ll miss the Derails at the end of the episode so don’t do that. Special thanks to today’s guest, Kristin Wong. Visit the podcast show notes at YourMoneyYourWealth.com for links to Joint Accounts at Medium.com and Kristin’s book, Get Money: Life the Life You Want, Not Just the Life You Can Afford. While you’re there, if you love this podcast, you can do us a huge favor and share it all over the internet! Tell everyone you know that they can listen and subscribe for free on whatever podcast app they like – or all of ‘em, for that matter. Find links in the podcast show notes at YourMoneyYourWealth.com
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