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Published On
March 23, 2021

Spitballing firefighters’ retirement: deferred option retirement plans (DROP), HSA (health savings) vs. HYSA (high yield savings), and hear why YMYW always comes back to backdoor Roth IRA. Speaking of Roths, can you do a Roth conversion ladder with inherited IRA money? The fellas also break down required minimum distributions (RMDs) and they talk (or in Joe’s case, rant) about variable annuities and indexed annuities.

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Show Notes

  • (00:49) Firefighter Deferred Retirement Option Plan (DROP) Spitball Analysis (Todd, Williamsport, MD)
  • (10:06) Should I Convert My Thrift Savings Plan (TSP) to an Indexed Annuity? (Ben, Chula Vista, CA)
  • (15:18) Clarification on Capital Gains vs. Ordinary Income (Dr. James, Serra Mesa, CA)
  • (19:35) Firefighter Retirement Spitball Analysis (Johnny, NJ)
  • (32:20) Can You Do a Roth Conversion Ladder With Inherited IRA Funds? (Landshark, Twitter)
  • (35:59) How Can We Reduce the Tax Hit from Required Minimum Distributions (RMDs)? (Tom, Baton Rouge, LA)
  • (41:32) Can I Defer RMDs Until I’m 75? (Trevor)
  • (42:41) Does a Mortgage Refinance Count Toward the Social Security Income Limit? (Frank)

Free resources:

Annuities in Retirement: Pros and Cons

CAPITAL GAINS:

LISTEN | YMYW PODCAST #303: Confirming How Capital Gains are Stacked On Top of Ordinary Income

LISTEN | YMYW PODCAST #295: Capital Gains “Sit On Top” of Income? What About When Doing Roth Conversions?

LISTEN | YMYW PODCAST #292: Dividends and Long Term Capital Gains – Part 3

LISTEN | YMYW PODCAST #287: Tax Planning and Roth Conversions: Itemized Deductions, Dividends, and Long Term Capital Gains

LISTEN | YMYW PODCAST #272: $10K Ordinary Income, $40K Qualified Capital Gains. In What Tax Bracket is the $10K?

LISTEN | YMYW PODCAST #266: Capital Gains Tax vs. Ordinary Income Tax

5 Costly Required Minimum Distribution RMD Mistakes to Avoid
 

Listen to today’s podcast episode on YouTube:

Transcription

Today on Your Money, Your Wealth® podcast #318, Joe and Big Al spitball retirement plans for firefighters Todd in Maryland, and Johnny in New Jersey. Learn along with the fellas about deferred option retirement or DROP plans, and the difference between an HSA and an HYSA. And why it is that YMYW always comes back to the Backdoor Roth IRA? Speaking of Roths, Landshark on Twitter wants to know, can you do a Roth conversion ladder with inherited IRA money? The fellas also break down required minimum distributions for Trevor and for Tom in Baton Rouge, and they talk variable and indexed annuities for Johnny and for Ben in Chula Vista – or rather, Al talks. Joe rants.  I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Firefighter Deferred Retirement Option Plan (DROP) Spitball Analysis

Joe: Todd from Williamsport, MD.

Andi: That’s Maryland.

Joe: Thank you, Andi. I thought it was-

Al: A medical doctor?

Joe: I thought it was-

Al: He’s a doctor from Williamsburg.

Joe: I was about to say Doctor?

Al: Hey Doctor. Doctor Todd.

Joe: “YMYW Thanks so much for hearing me out on Episode 274.” What-

Andi: He corrected us. Then at the bottom is his comment. He corrected us and you guys said, ‘we stand corrected’.

Joe: Yeah, Todd’s a smart guy. He’s a medical doctor.

Al: He asked us questions, he already knows the answer to see if we’d get it wrong. It’s 50/50.

Joe: Oh. “I listen to the show while driving my Nissan Titan-”

Al: It’s a Titan.

Joe: Wow.

Al: I don’t know what that is.

Joe: Kind of sounds like a cool truck. “- across the state to the firehouse.” Oh, he’s a fireman.

Al: Oh, there it is. It’s a pickup.

Joe: Oh, that’s a Titan. That’s a big truck. You got to be putting out fires, to drive that thing.

Al: That’s a strong truck.

Joe: That’s a man’s truck right there. “When Joe said the dog looks like a cat in a recent episode, I almost crashed my truck and peed my pants.”

Al: That must have been episode 274. You don’t remember that?

Joe: What? That someone’s dog looks like a cat?

Andi: I think it might have been his. I’m not sure.

Joe: It probably is Todd’s. I mean, he drives a badass truck. He probably gets- well a little bit- I mean, you know he’s multi-personality here. He puts out fires, saves lives.

Al: He probably told us the breed and then Andi showed it and you probably said that looks like a cat. I’m guessing.

Joe: You got it. “So a new question from me to the fellas that I’ve never heard on the show.” OK, so if you’ve never heard it on the show, it’s probably been edited out because we messed it up.

Al: Or we don’t know the answer, so we don’t normally ask it. But this time we’re going to give it our best shot.

Joe: “After we retire, we’re allowed to stick around for 3 more years in a DROP plan. I hope you’re familiar.” Come on, Todd, seriously. What the hell’s a DROP plan? “We continue to collect the same salary, but the retirement pension plus contributions and 7.5% goes into the account, around $200,000 dollars pre-tax. I have heard 100 different explanations as to when the money can be touched, penalty-free. The most common response is that you have to be 50 to touch it penalty-free. But is that at retirement or at the end of the DROP? We are also told if you are not 50 when you retire, you have to be 59 and a half to touch it penalty-free. I’m sure you can definitely roll it into the 457, but no thanks. I want to pay the taxes up to my tax bracket and put it to you-know-where.” Mmm, wonder where that is.  They also said there were WMDs in Iraq, but I don’t know. Thanks for entertaining this one. And for the Roth White Paper. PS. Thanks for all you guys-

Andi: Oh, thanks to you all-

Joe: “- Thanks to you all, the guys think I’m a genius.

Andi: There you go.

Joe: Hey, I guess I can’t read either. “Thanks to y’all-

Al: – the all-

Joe: “- the guys think I’m a genius.”

Al: Did you used to say y’all in Minnesota?

Joe: No.

Andi: Apparently they say in Maryland.

Al: You said, don’t you know?

Joe: Don’t you know? You betcha. That’s what we said. All right. So DROP. So he’s a firefighter. He’s going to retire. And so what happens is that when they plan on retiring- in San Diego, it’s 5 years for the fire department?

Al: Yeah, that’s what I’ve heard too.

Joe: I guess in MD, they short them little bit with 3 years. And so what happens is that you elect your retirement, say I’m out. I’m going to be done. So they pay their salary. And then they also pay their salary into a separate pension plan called the DROP. And so let’s say that Todd’s making $200,000 a year fighting fires and saving lives and driving around his truck with his cat, that-

Al: – dog that looks like a cat, right.

Joe: – is a quasi-dog. Then that $200,000 dollars goes into this DROP plan. And then so let’s say it’s 3 years, then it would have roughly $600,000.

Al: Got it. Do they receive the retirement? But then their salary goes into a DROP? Or how- what about salary?

Joe: No. They receive their-

Al: They receive their salary-

Joe: They receive their- let’s say- I don’t know how much Todd’s making, I just threw $200,000 because it was a big number and it made it more fun. So they receive their salary. But then they also have this DROP program because he’s still working for the 3 years.

Al: So a similar amount goes into the DROP program?

Joe: Exactly.

Al: Got it.

Joe: And then it gives them a certain interest rate on the DROP program.

Al: Got it.

Joe: And then you can do one of three things with the DROP program. You can roll it into your retirement account. And I’m not 100% sure. So just FYI, their DROP versus San Diego’s, or Southern California-

Al: It depends upon the plan.

Joe: – I suppose, yeah, but it’s- I’m guessing it’s pretty close.

Al: Yeah, right.

Joe: Let’s say if he rolled it into the 457 plan, if the 457 plan allows it. You could do that. There is no 10% penalty to take money out of a 457 plan. So just FYI there. If you roll it into an IRA, then, yes, you would have to wait till 59 and a half. You could annuitize the DROP as well. So I don’t know what the annuitization rate on their DROP is. But let’s say if he rolls it- he wants to convert this money, regardless. He wants to put it to you-know-where.

Al: Yes. I think that means Roth.

Joe: Yes. That’s how sick this show is.

Al: People can’t even say the word.

Joe: You know, I went to this place to put some stuff in you-know-where. Oh, where the hell did you go? I went to see Big Al.

Al: I could just see our friend coming over to me and say, Al, I might have a Roth. Don’t tell Joe.

Joe: Hey, I wanna put some of you-know-what into you-know-where.

Al: You know what I mean.

Joe: You know what I’m talking about, right? Can you do some calculations for me? All right. I’ll meet you in the alley. So we’re looking at- so if he wants to convert it, he can move it. If he wants to live on it, it’s a totally different story. I don’t have the answer. He could roll it into an IRA and then convert it into a Roth IRA because it’s pre-tax dollars.

Al: Then there’s no penalty. Regardless.

Joe:  Right, you’re converting them into a Roth. So do that if you want to convert it. So if you- you’re not going to be taxed on this money is what I’m saying, Todd. If you roll it into a retirement account, there’s no taxation on the roll. So the whole DROP program goes into a retirement account and then you could convert, if you want to do that. I don’t think you could convert directly from the DROP. You’re either going to have to annuitize it depending on what Maryland’s DROP program is.

Al: I suspect you’re right. And just for curiosity, the DROP programs- I’ve only seen those for firefighters. Are there others, like do policemen, some of them, have DROP programs?

Joe: Like city employees.

Al: Certain city employees. OK. I remember in San Diego, this was probably a decade ago, it was that when people found out about the DROP, when non-governmental employees, they thought it was, well, that’s too much. They’re double dipping. And so they kind of- I don’t think they shut it down, but they made it less attractive.

Joe: Yeah, they changed the rules. But it’s still really a great plan.

Al: It’s still good if you qualify for it.

Andi: That stands for Deferred Retirement Option Program, by the way.

Joe: Didn’t I say that earlier?

Andi: No.

Joe: Oh. My bad.

Al: It’s good she checks on us.

Joe:  So it’s a phenomenal plan. It’s a great plan. But I mean the guy’s risking his life every day.

Al: Right. Of course. I’m not saying he shouldn’t have it. I’m just suggesting if you’re not a firefighter or policeman or a certain city employee that has this, this doesn’t apply to you.

Joe: Correct. So, yeah, hopefully that helped. I would have to do a lot more research. And Todd, if you listened to the show once or twice, you know we do zero prep for this. Andi sends me this, I print it out and then I go in the studio and I read.

Andi: I beg him every week, can you please just read this one this one time?

Joe: Absolutely not. I’m busy. I have a full time job here, folks.

Al: We’re spitballing, right? As you say-

Joe: Yes. Why don’t you call or write in to our competitor podcast, whatever the hell- whoever they are. They can spend all their time on this.

Al: And the truth is, on a question like this, it’s going to be specific to your plan. So you kind of have to get your plan document and see what the rules are.

Joe: Yeah. I made the mistake of reaching out to a couple of people. Oh my God.

And then all of a sudden I get bombarded with 40 emails. Can you clarify this? Can you look at this? How about this? And I’m like-

Al: – no.

Joe: So I learned my lesson. But if you’re from Minnesota, then I’ll do a little bit of work.

Andi: Now everybody is going to say that’s where they’re from.

Al: If you’re from another state, just say you’re from Minnesota, Joe will answer your question.

Should I Convert My Thrift Savings Plan (TSP) to an Indexed Annuity?

Joe: Ben writes in from Chula Vista. He has been watching our show, Al, and loves it. “My Q is this-” My Q-

Al: I guess that’s question.

Joe: Question.

Al: Actually says he had been watching your show and he loved it, so that’s past tense.

Joe: Oh, he doesn’t love it anymore.

Al: No, he used to love it.

Joe: So now he’s got a Q. “I’ll be retiring in one year and would like to ask about converting my TSP to annuity, Puritan life, offering guaranteed monthly income, a premium bonus and an income rider. Would like your calculated opinion. I attach the chart from the company. Thank you for considering my question.” I like people just like screenshot takes, takes pictures and sends it to us.

Al: Yeah. What do you think of it?

Joe: Love it.

Al: Yay or nay.

Joe: He takes a picture of like a full illustration from an insurance company, but just shows the bars.

Al: You can’t even read it.

Joe: There’s a lot of fine print, Ben. No-

Al: Well he did tell us what the numbers were on the first and last bar. We can’t read that picture.

Andi: No, that was me. I actually put that to make it easier for you.

Joe: All right. First part $13,000. Disclosure- the value shown above are non-guarantee, it’s likely that non-guarantee elements will change and actually results will be more or less favorable, but will not be less than the minimum guarantees. So he didn’t show us what the minimum guarantees are. He showed us the non-guarantees. And so, what- someone’s selling him an indexed annuity. I see it right here. It’s a market indexed annuity from the TSP plan. Absolutely do not do this, Ben. OK, because it’s all smoke and mirrors in my humble opinion. The thrift savings plan is one of the best 401(k) plans out there, unless you got a ton of money in it where you want to do different things. But for I would say 90%, it’s just fine. It’s very inexpensive. It’s cheap. It has decent, really good funds, low cost. You can be globally diversified. And so this person saying, you know what, Ben, I got something better for you. I can give you some guarantees.

Al: Yeah. Wouldn’t you like guarantees?

Joe: Wouldn’t you like- and how about a big bonus? Why don’t you give up- give me $100,000 and we’ll give you a 18% bonus. So $18,000 just for investing this.

Al: That sounds pretty good.

Joe: It sounds awesome doesn’t it?

Al: Yeah.

Joe: And then there’s going to be this 5% income rider so each year you’re going to be guaranteed 5% on your money no matter what happens to the market. Does that sound pretty good?

Al: It does.

Joe: $18,000 upfront and then 5% guaranteed per year? It all sounds really good, but what is really happening once you start getting the income? You have to do the math to find out what your internal rate of return is going to be. And these numbers are way too small and I don’t know what the initial premium is. What is it, $100,000 or $200,000?

Al: The benefit base starts at $265,000. So probably-

Joe: $265,000. No. Yeah, around $265,000 at 68. Is he 68?

Al: I’m guessing, because that’s year one. So maybe it was like $245,000 with an $18,000 bonus.

Joe: Well all right, let’s say he’s 68 years old and then his income is $13,268. So that’s what he’s getting. So $13,268. Let’s divide that into $265,356. Into- let’s just call it $13,000 divided- so that’s 27 years. Does that makes sense? So let’s say he invested $265,000 and that’s his benefit base year one. I don’t know what his basis is. But let’s say he put that in there at age 68. He’s going to get $13,000 a year. Well at 68 he’s going to die in probably 20 years at 88.

Al: So it takes him 26 years to get his money back.

Joe: Takes him 26 years to get his money back, but he’s going to die in 20. Who wins? The insurance company going to win on that deal. So I need more information, but I think you get the gist, Ben. You have to look at the internal rate of return on these products, not the 5% bonus, what the roll up is, what the guaranteed bonus is up front, all of that is smoke and mirrors.

Al: They’re giving you your money back.

Joe: They’re giving you your money back. They’re going to say, hey, here’s $18,000. It’s not real money, it’s just showing on your statement. And then that $18,000 is used as your benefit base and saying, when you turn 68, we’re going to give you the $13,000. Well take your $13,000 and divide it into whatever your basis is, whatever your initial investment is, then that could help you. I mean it’s more complicated than that to figure out your internal rate of return. But in most cases it’s like 2%, 2.5%. So then do you think your TSP plan over your lifetime can do better than 2.5%? If you think it can, then go with the TSP, but understand you have zero guarantees. If you want a 2.5% guaranteed piece of garbage, then buy this.

Clarification on Capital Gains Vs. Ordinary Income

Joe: I’m reading this- did we already…?

Andi: So Dr. James- is that the one you’re looking at?

Joe: Yep.

Andi: So he’s the one that actually gave you the back advice. He’s the real doctor. So you talked about his back advice, but then you never answered his question.

Joe: Oh, sorry, Dr. James. OK, so “50 years old drives a 9-year-old compact Lexus hybird- hybrid- ”

Al: It’s a hybird car. What are the- ? I’ve not seen a hybird, but I have seen a few hybrid.

Joe: He wrote hybird.

Al: I know. I’m aware of that.

Joe:  “- with 100,000 plus miles on, it still gets 50 miles per gallon.” Geez.

Al: That’s pretty good.

Joe: “My 401(k) has an assortment of 30 different traditional funds, index, large-cap, value growth, domestic, international, global, target date, bonds, whatever. My 401(k) also has a brokerage linked component to a much larger selection of individual stocks, bonds, ETFs, etc. Within the brokerage link, I recently sold some 3.5% 10 year CDs on the secondary market for a nice 20% gain when I purchased in January 2019. The 401(k) fixed income agent who talked me through the fairly confusing online transaction, told me on the phone, ‘There you go. Done. And since you sold them in February, 2021, they’re less than two years old-

Al: – they’re greater than-

Joe: “- they’re greater than two years old, that’s a nice cap gain.’ Is he correct?”

Al: No.

Joe: “Will these profits be treated like capital gains when I begin taking money out of the 401(k) when I retire?”

Al: Nope.

Joe: “Or will everything be- everything that I take out be subject to ordinary income tax?”

Al: Yes.

Joe: “Note: all contributions to my 401(k) have been pre-tax. Thanks, great information, educational and entertaining podcast. I read the transcripts every week and I’ll keep Joe’s back in my prayers.” Well, thanks, Dr. James.

Al: Well that’s nice.

Andi: Just your back though.

Joe: Look at the funnies on Andi.

Andi: The rest of you, not in his prayers.

Al: I suppose that is a correct interpretation or I mean, that’s how it reads. I don’t really care about you, but your back? Now I care about that.

Joe: I got foot-drop. Drop-foot.

Al: Sorry about your foot-drop.

Joe: It’s awful.

Al: All right. So any time you have any kind of gain in a 401(k), it’s not taxable at the point where you do the sale. But when you pull the money out, it’s always ordinary income. That’s the problem with 401(k)s, IRAs. It’s always ordinary income, even though it would otherwise qualify for a capital gain. So the brokerage link broker is incorrect.

Joe: Well, the brokerage link broker might have not understood that it was a 401(k).

Al: Yeah, but he says ‘the 401(k) fixed income agent-‘  It seems like he would know it was a 401(k).

Joe: He would know, right?

Al: You would think so.

Joe: Yeah. There you have it.

Al: He’s not- I wouldn’t take your tax return to him to prepare.

Joe: Probably not. I would have him buy and sell your CDs, make a 20% gain on it.

Al: Yeah, that’s pretty good.

For those of you about to ask for clarification on how capital gains are stacked on top of ordinary income, since I can feel that question about to hit our inbox every time we discuss cap gains and ordinary income, I’ve posted links in the podcast show notes so you can listen to Joe and Big Al’s previous discussions on the topic to refresh your memory. And since there has been some annuity talk today, and more forthcoming, there is a video in the show notes for you as well: Should you buy an annuity for retirement income? Check it out before you make any decisions. If you still need to hear this stuff applied to your own situation, that’s okay, so does everyone else. You can Ask Joe and Al On Air from the podcast show notes as well. To access all these resources, just click the link in the description of today’s episode in your podcast app.

Firefighter Retirement Spitball Analysis

Joe: Johnny writes in, Al. Johnny, it’s not even a write-in, it’s a novel.

Al: This is pretty long. You gonna to read this whole thing?

Joe: I’m going to give it my best.

Al: You are? Ok. It’s only the start of a show when you got energy, right?

Joe: That’s it. I should go in the middle of the show because I’ve already read a couple lines.

Al: Yeah, just kind of get warmed up? Just start easy.

Al: Because I’m not a very good reader.

Andi: Gotta do your calisthenics.

Joe: All right. “Hey, Big Al, Joe and Andi. Thank you all so much for taking the time. Love listening to your show when I’m out walking my dog or doing things around the house. You guys are like the Click and Clack of Car Talk fame-”

Al: That’s a huge compliment.

Joe Thank you, Johnny. “- for financial planning and I love it. I’m about 40 years old in a- oh, he’s turning 40 in a couple of weeks- and was hoping to get a little perspective from the folks over there at YMYW if I could. A little bit of background, I live in a peaceful suburb located in central New Jersey and I’m married to my gorgeous wife, who has just turned 35, or 28 if you ask her.” Johnny’s kinda funny there too.

Al: Yeah, right. He’s got a sense of humor.

Joe: “We’ve been together since college, we have a 5 year old rescue black lab mix, a 3 and a half year old son and a .5 year old daughter. I drive a 1998 Jeep Wrangler and my work truck- as my work truck.” That’s not a work truck. Jeep Wrangler?

Al: It could be.

Joe: I used to have a Jeep Wrangler. I didn’t have a top on it. I thought I was supercool in college, University of Florida, just driving around with a little sound bar blaring Bell Biv Devo.

Al: Yeah, I wouldn’t really call it a work truck, but you can put a lot of stuff in it.

Andi: Showing your age there.

Joe: Wow, that’s ageless. “- 2008 BMW 5 series as my daily family driver and a motorcycle for sunny weekends. Wife has a 2014 Acura MDX SUV.” Oh, that sounds sexy. “My son has a red Radio Flyer tricycle. It’s dependable.” All right. Very good. A nice background, Johnny.

Al: So now we’re ready.

Joe: Employment income – “I work as a career firefighter-” another firefighter. Thank you for your service. He’s probably got a DROP plan. He’s got all sorts of stuff.

Al: Probably.

Joe: “He’s got a base salary of $100,000. He’s a military reservist. It’s about- plus or minus- $6000 plus or minus there; and have side income, and that’s about $10,000. I plan on retiring from military service next year when eligible at my 20 year mark, to free up more time for my kids. My pension will be between 60% to 65% of my base salary when I retire from the fire department. Wife works in marketing for a pharmaceutical company which carries a base of $170,000, plus annual bonuses that range from $40,000 to $70,000 in any given year.” Wow, Johnny-

Andi: Pharmaceutical marketing is the place to be.

Joe: Yeah, hopefully they’re hiring so I can stop reading long ass emails. “Expenses – Both of our kids are in daycare full time, which costs $2500 a month. Our son transitions into public school next year, lowering the cost back down to $1200 a month. We have been in our house for 6 and a half years and are in the process of refinancing from a 30 year VA 3.75% to a conventional 30 year 2.62%, lowering our monthly mortgage from $1600 to $1200.

We use the difference towards the monthly principal, lowering the effective rate. $295,000 left on the mortgage, home value around $450,000, property taxes $1000 a month because, well, New Jersey.” OK-

Andi: Almost done with page one.

Al: Right, I was gonna say the same thing.

Joe: “My wife and I each terminated our whole life insurance policies in favor of term life policies that we felt fit our needs better. Our only other debt is my wife’s Acura, which has $4500 remaining at 2.5%. We pay off credit cards monthly.” Here’s his investments – “We have a joint brokerage account at Vanguard at $268,000, mainly S&P 500 index. I just started contributing to my 457 more seriously over the past couple of years, giving the max $19,500 a pre-tax dollar. The current sits at $56,000. I just found out about the Roth conversion- I know, I know- recently and started contributing to my Roth account, Vanguard, again after a few years after letting lay dormant and now sits at $150,000. Wife maxes out her 401(k) at an 80/20 split between traditional and Roth. She also has a 401(h) plan, a money purchase plan. In total, the accounts have grown pretty quickly and part of the company matched to $275,000. We keep a small index fund bucket around for the kids-” Do you have a small index bucket, Al? You just carry that little sand bucket around for the kids?

Al: Yeah, when they used to be smaller, a little harder now.

Joe: “- and that’s worth about $12,000. And just started funding 529 accounts, you guessed it, at Vanguard, for each of them totaling $8000. We keep $50,000 to $70,000 in a HYSA-” Or maybe just an HSA. I don’t know where the “Y” comes from. “And then our monthly-

Andi: Is that a high yield savings account?

Joe: Oh yeah, I was thinking an HSA, like a-

Andi: Yeah-

Al: I was thinking the same thing. HSA. Every time you type in HSA it changes it to ‘has’.

Joe: Yeah, HS- or HAS?

Al: Yeah.

Joe: OK. “- then our monthly expenses money in a brick and mortar account for easier access. I’m sorry for the length of the email, but just wanted to give you a pretty accurate representation of where we’re at right now.” OK, thanks, Johnny. We got to take a break-

Al: – and we’ll answer the question next week.

Joe: We’ll see you guys next week. That’s the show.

Al: We’ll recap the question next week and then answer the following week.

Joe:  Oh, my gosh. “So number 1) can my wife open a Roth account as well? I’ve heard mixed things, and it’s got me pretty confused. If not, would it be better to have her transition her 401(k) contributions 100% to Roth, forget about the traditional portion? Or would that bump us up to the next tax bracket?” Well, here we are again, Al.

Al: Yes.

Joe: She could do a backdoor Roth.

Al: She could. Can’t do a front door Roth.

Joe: Oh God. Every question, Al. Always comes to backdoor.

Al: It does. We get there a lot.

Joe: So Johnny, if you’ve ever listened to the show, she can do a backdoor because she’s got a 401(k) plan, a 401(h) plan and a money purchase plan all at $275,000. In your lengthy email, you never stated that she has an IRA. Al: So we’re going to assume, no.

Joe: We’re gonna assume, no. So she can contribute to a traditional IRA and then she could convert that traditional IRA directly into a Roth IRA with no tax consequence. So it’s a way for her to contribute to a Roth. But we call it the backdoor Roth.

Al: Yes.

Joe: OK. “Number 2) I’ve heard very recently that the 457 is actually a variable annuity in that the management company tends to have slightly higher fees. Without getting into specifics, I spoke with an old co-worker that works in finance and is told that the advantage of investing my pre-tax dollars likely outweighs the fees. And that I’m probably doing just fine. I have no clue on how to do the math to find the break-even point here.” Should he worry about this variable annuity in the 457 plan that the fire department is giving him, Al?

Al: Well, you answer that one.

Joe: I would say continue to contribute to the 457 plan because it’s a company plan. Unless- 457 is a deferred comp plan. It’s a state sponsored plan. It’s a non-qualified plan.

Al: But could it be in a variable annuity?

Joe: It wouldn’t be like a 403(b). Like let’s say if I’m a teacher. And then you’re a teacher and I open the door to some- or I’m in the cafeteria at some part of the time where this guy or gal is selling me my 403(b) and puts me into a variable annuity. And then you go to lunch a little bit after me and then there’s another person there selling 403(b)s and they put you into some nice, cheap mutual funds. It’s not the same.

Al: Got it.

Joe: OK. With a 457 plan through the fire department, I’m sure it’s a company sponsored- it’s a large plan. The fees are probably a little bit higher, but I wouldn’t worry too much.

Al: OK, so you’re agreeing with the old co-worker who’s in finance?

Joe:  Yeah, the fire department/CFP- the firefighter- when he’s not giving finance advice, he’s putting out fires.

Al: I’ll go with that.

Joe: OK. “Number 3) what do we do now? I have no idea what the hell you do, Johnny? “I’m not sure what else we can do here. New Jersey doesn’t have HSAs as much as the other states do.”

Andi: “Doesn’t like them as much.”

Joe: An HSA’s a health savings account. It’s a pre-tax account that you could put money in, you can open up in each HSA in one of your HYSAs.

Al: However, probably with the- it’s probably a high deductible health insurance policy with the fire department.

Joe: I guarantee that’s it.

Al: So he doesn’t qualify anyway.

Joe: “Should I keep investing in the brokerage?” Yes, keep investing in the brokerage.

Al: Yes. 100%.

Joe: Yep. “Thanks again for all you do. I sincerely love listening to the show.” Well thank you Johnny. Yes. So here’s the advice. You’re doing great. You’re saving a lot of money. You’ll have a nice pension from the fire department. With the wife, should she go- because he’s making $100,000. She’s making $200,000. That’s $300,000. They’re in a fairly high tax bracket. She’s going 80/20. Would you- but she’s 28 years old or 35, whatever. I mean, they’re still super young. Me personally, I would go all Roth, just because he-

Andi: – you really like Roth.

Joe: And I love Roth. I don’t care what tax bracket people are in. A conversion is a little bit different because they’re going to have to come up with the money to pay the tax. But at- the 35 year old, given where we are right now, let’s see, $300,000,  $250,000, they’re in the 22%, almost a 24% tax bracket.

Al: Yeah, they’re in the 24% bracket-

Joe: – and they will stay in the 24% tax bracket.

Al: And I agree with you. However, my caveat is that they’re in the 24% bracket, which is a lower bracket because of this new tax law we got in 2018. So as long as your taxable income is below $330,000, you’re in the 24% bracket. Now if you get up into the next bracket, to 32%, maybe you might think about it a little bit differently. But yeah, at least based upon maybe $300,000 of salary for a married couple, and then the standard deduction, right now at least $25,000, there’s room to do more Roths instead of just the regular 401(k).

Joe: So this is not advice Johnny, but you know, just us kids talking about fires and saving cats out of trees and-

Al: He wanted just to spitball anyway which is –

Joe: – total– yeah this is total spitball here. I would have her go- if she was my 28 year old wife-

Al: Yeah, what would you say?

Joe: – gorgeous wife-

Al: Would you be talking to her about Roths?

Joe: Oh, without question. That’s-

Andi: – all day and all night.

Joe: – all day.

Al: That’s all you’d talk about.

Joe: It’s like Coors Lite and Roth IRAs. That’s it. You ask me a question, we’ll get into finance.

Al: How would you- I could just see her, how was your day, honey, at work? Well, we set up a new Roth today. You wouldn’t believe it.

Joe: Wanna talk about Roth conversions? Wanna do backdoors? Wanna do a garage door?

Al: This guy did this guy did a mega backdoor. Let me explain how that works to ya.

Joe: So, yeah, my life is consumed with Roth. I would have her go 100% Roth. I would keep going with the 457, max that out. I think he’s doing everything good. But yeah. You want to keep jamming money into the brokerage account that’s non-qualified because that’s taxed at capital gains. It’s going to give you diversification long term.

Al: You bet.

Joe: Great job. Thanks for the call or thanks for the email, Johnny. I appreciate you listening.

Can You Do a Roth Conversion Ladder With Inherited IRA Funds?

Joe: We got, what, like a Twitter feed here, Andi? What’s going on with Landshark?

Andi: Yeah. So on Twitter, somebody named Landshark asked “Regarding inherited IRAs with the SECURE Act requiring distributions of all inherited IRA assets within 10 years, I presume this precludes you from doing a Roth conversion ladder with inherited IRA funds. Does anyone know?” And YMYW listener Josh, who is just like a hardcore listener, actually tagged us in his response to Landshark and said, “I think you’re correct because even inherited Roth IRAs are required to be drawn to zero by the end of the 10th year. I think Joe and Big Al would agree. Right, Andi?” So I responded to him with your response because I actually emailed you and said, “what’s the answer here?” And I haven’t heard anything back from them. So what’s your response, Joe?

Joe: You cannot convert inherited IRAs was my response. And I said it with that monotone.

Andi: Yours didn’t even have a period at the end of it.

Al: Well, and I agree with that comment.

Joe: You can convert inherited 401(k)s.

Al: Correct.

Joe: But you can’t convert inherited IRAs. I don’t know what’s a conversion ladder? People just love to put a little taglines on stupid things.

Al: Well, I think that means you convert a little bit this year, a little bit next year, a little bit next year. I think that’s what that means.

Joe: You ever heard of the barbell conversion?

Al: Yeah. You convert a whole bunch and then nothing for 9 years and then a whole bunch.

Joe: No, you convert some in the beginning of the year and then you finish it up at the end.

Al: Oh, Ok.

Joe: That’s the barbell.

Al: Oh, ok.

Joe: Got it?

Al: I suppose. You haven’t heard of the ladder?

Joe: Never heard of the ladder.

Al: Yeah.

Joe: I would imagine each year you’re converting some-

Al: Each year you convert one rung.

Joe: Got it.

Al: By the time you’re done you’re gonna have a ladder.

Andi: By the way-

Joe: Yes?

Andi: I was just going to say we’re ‘YMYWShow’ on Twitter if you wanted to follow and ask questions that Joe can answer sarcastically.

Joe: Got it. I’ve never been on Twitter.

Andi: That’s all right. I’ll be on there for you.

Joe: OK. @YMYWshow. You’re a Twitter guy, Big Al?

Al: No. I don’t think I’ve been on either.

Joe: I don’t even know how to log on.

Al: I can do Facebook. I’ve got an account on Instagram too.

Joe: Ooo, Facebook. I don’t have Facebook either.

Al:  I know. Because by the time you got into it, everyone had gone to Instagram.

Joe: I just post some golf pictures.

Al: I’ve noticed, it’s kind of nauseating. Your swing, week after week.

Joe: I haven’t posted anything in at least two days.

Al: Yeah but Mr. Rogers does. Every time you play with him, he posts your swing.

Joe: It’s pretty good. Why wouldn’t you?

Andi: I had to think about that for a second. I thought you actually meant Mr. Rogers.

Al: I was protecting the name of the Rogers that I know.

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How Can We Reduce the Tax Hit From Required Minimum Distributions (RMDs)?

Joe: “Hi Andi, Joe, and Al, this is Tom from Baton Rouge, Louisiana. I’m a new listener to your podcast and I think your program is most informative of air.” Am I reading that correctly?

Andi: That’s what it says.

Joe: Or is it like the most informative on air?

Andi: I think that’s probably what he meant.

Al: Of air means we’re full of air. We’re nothing but-

Andi: Both are correct.

Joe: “I have a couple of questions regarding RMDs. 69, my wife, 66. I have $450,000 in the traditional IRA; $230,000 in a simple IRA; $240,000 in a Roth; and around $700,000 in a non-qualified account. My wife has a traditional IRA of $845,000; $184,000 in a simple; $246,000 in a Roth.” Tom from Baton Rouge.

Al: That’s pretty good, Tom.

Joe: Right out the gate.

Al: It’s like look what I got.

Joe: I think you guys the most informative on air. By the way-

Al: By the way, I’ve got-

Joe: I have millions-

Al: You won’t believe what I’ve got from Baton Rouge, Louisiana.

Andi: This is why they call you.

Joe: I am super successful.

Al: I’ve got so much money. I’m just going to ask you kind of a generic question, because I don’t really care.

Joe: “My wife has a pension as a schoolteacher of $18,000 a year, which would continue to pay me if she predeceased me. I plan on taking Social Security at 70, which would be about $44,000 a year. If my wife waits to 70, she will receive after WEP-” windfall elimination provision for those of you keeping score- “- about $7500 a year. We also have rental income of $20,000. I plan to work full time one more year at about $120,000 and then two years part-time at $75,000. Sorry for the full explanation. I wanted to give you guys all the facts.” Appreciate that, Tom. “I’m going to take a hit with RMDs and trying to figure out how to reduce it. First question. We give about $18,000 a year to the church. If I use the QCD out of the RMD to pay that at age 72, would I still be able to take the entire $24,000 standard deduction?”

Al: The answer is yes. So what you’re talking about, qualified charitable distribution, actually once you hit age 70 and a half. It’s a little different than the required minimum distribution age. But at age 72 you can give directly to charity up to your full RMD. In fact you can actually give $100,000 per person per year if you want to. That’s like a distribution that never shows up on your tax return anywhere. It’s not income, it’s not a deduction. So yes, Tom, you can take the full $24,000 standard deduction as well. That’s one of the benefits. If you’re charitable of doing a QCD starting at age 70 and a half.

Joe: “Second question is, am I correct in thinking that the RMDs are considered separate? By that, I mean, we will not have to start taking my wife’s RMD until she turns 72. So we have approximately 6 years to convert some of hers into Roth. Thank you.” Yes, absolutely. So it’s separate accounts. It’s her IRA, it’s your IRA, it’s her simple IRA. It’s your simple IRA. So Tom, you have roughly $800,000 in your retirement account. She’s got $1,000,000. I would attack Tom’s first because the RMDs are going to come in 3 years. And then by the time your wife comes, then it’s going to be game over. When she turns 72 and you’re already taking yours, she’ll have to take hers on her $1,000,000 or whatever _____-

Al: Right. Plus full Social Security and everything. This is the tax time bomb that we talk about sometimes.

Joe: Absolutely. Tom is living the tax time bomb.

Al: Yeah. It’s a good problem to have. I’m not saying it’s-

Joe: So Tom, you’re not so cool anymore, are ya? He’s got a lot of Roth though.

Al: Yeah. He does.

Joe: So this is where he really has to dive in and kind of take a look at what tax bracket is he going to be in with him and his wife are both taking required minimum distributions at her age 72. With all the other income, her Social Security, her pension, his Social Security. And then it’s like, OK, then your RMD, Tom, your wife’s RMD. What does all that add up to? What tax bracket is that going to be in? And then I would then go back to today and convert to the top of that bracket.

Al: Yeah, exactly. That is the right way to do it. And it doesn’t have to be that complicated and it doesn’t have to be exact. I mean, just of magnitude. In other words, I’m going to have about $130,000 of income minus the standard deduction. So my taxable income, married, will be little over $100,000. Which currently puts me in the 22% bracket. So if I’m- I would convert now currently if I’m in the 22% bracket or lower up to the top of that 22% bracket. So it’s just a computation of current tax bracket versus future tax bracket to help you figure out how much to convert.

Joe: Very good. Very good. Tom, I’m glad you found us. You should have found us several years ago.

Al: Right, because then you could have done more you-know-what.

Joe: We would take the you-know-what and we would put it you-know-where.

Al: You know what we mean, Tom?

Joe: So that’s how we consult our clients nowadays. So this is what we’re going to do, Mr. and Mrs. Smith, we’re going to take the you-know-what. And we’re gonna put it you-know-where.

Al: Right. And don’t tell you-know-who.

Joe: You might get a letter from- oh boy.

Can I Defer RMDs Until I’m 75?

Joe: OK, we got another one real quick here. Trevor writes in. He goes, “I’ll be 72 in September, 2021. Currently I’m working full-time and participate in an employer-sponsored 401(k) plan. I plan on working and contributing pre-tax to the 401(k) plan, match 50% until I’m 75. Do I have to take an RMD now or can I defer it until I stop working and retire in 3 years?” 401(k) plans, you can defer until you retire, Trevor. But if you do have IRAs outside of the 401(k) plan, you would have to take a required minimum distributions out of those IRAs. So the trick there is just to roll the IRAs or whatever ancillary plans that you have into your current 401(k), then that would avoid any required minimum distributions.

Al: Yeah, and if you have any other old 401(k) plans as well, you’d have to take RMDs out of that. It’s just your active one that you’re currently contributing to, as long as you are no more than a- I forget the percentage owner, 5%? If you’re less than a 5% owner?

Joe: Yeah, yeah. So if you have, like a solo 401(k) or if you’re a small business, or a partner.

Al: You can’t do it that way.

Does a Mortgage Refinance Count Towards the Social Security Income Limit?

Joe: So Frank writes in. He goes “I have a question on mortgage refinances. Does this count on the earnings limit to Social Security benefits?”

Al: The answer is, no.

Joe: No. It’s a loan.

Al: So first of all- first of all, when you refinance and get- even if you pull cash out, it’s a loan, it’s not income. And even if it somehow were income, it wouldn’t be earned income. So it wouldn’t count towards that.

_______

Audio books at double speed – again – and the Undoing in the Derails at the end of today’s episode.

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