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Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 153 out of 715 RIA’s nationwide by total assets under management by [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CFO & Chairman of the Board of Pure Financial Advisors. He has been an executive leader of the Company for over a decade. As CFO he is responsible for the financial operations of the company as well as investor relations. Alan joined the firm in 2008, about one year after it [...]

ABOUT Andi

Andi Last brings nearly 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast and radio show, and moderator for the firm's digital events. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with a [...]

Published On
December 6, 2022

We’re hearing more about fixed indexed annuities with these volatile financial markets. Is it time to reconsider? Plus, clarification on required minimum distributions being waived for non-spouse IRA beneficiaries in 2021 and 2022, taxation on trusts, and suggestions for a 40-year-old considering an early mini-retirement. Also, can a 62-year-old immediately withdraw Roth conversion money? Finally, a strategy to claim Social Security early while working and invest the difference in a Roth, and Joe and Big Al attempt to explain family Social Security benefits without phoning it in.

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Show Notes

  • (02:05) Is It Time to Reconsider Fixed Indexed Annuities? (April)
  • (10:52) RMD Penalties Waived for Inherited IRA Non-Spouse Beneficiaries in ’21 & ’22? (Greg, Temecula & David, Tega Cay)
  • (18:26) How is My Trust Taxed? (Elisa)
  • (25:41) Suggestions for 40-Year-Old Considering Mini-Early Retirement? (Ship of fools, Minneapolis)
  • (32:12) I’m 62. Can I Immediately Withdraw Money I Convert to Roth? (Steve)
  • (34:43) Social Security is at Risk. Collect While Working, Invest the Difference in Roth? (Ed, Southeast Iowa)
  • (39:56) Family Social Security Benefits Explained (Steve O. Rino, Central IL)
  • (45:40) The Derails

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Transcription

Today on Your Money, Your Wealth® podcast 407,we’re hearing more about fixed indexed annuities with these volatile financial markets. Is it time to reconsider? Plus, clarification on required minimum distributions being waived for non-spouse IRA beneficiaries in 2021 and 2022, taxation on trusts, and suggestions for a 40-year-old considering an early mini-retirement. Also, can a 62-year-old immediately withdraw Roth conversion money? Finally, a strategy to claim Social Security early while working and invest the difference in a Roth, and Joe and Big Al attempt to explain family Social Security benefits without phoning it in. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Is It Time to Reconsider Fixed Indexed Annuities? (April)

Joe: ‘Tis the season, Alan.

Al: It is. Love this time of year.

Joe: It’s just joyous, isn’t it?

Al: Family time. Love. Puppies.

Joe: Oh, my goodness.

Al: Hallmark movies.

Joe: Yeah. It’s like, I can only stand a couple- I love the holidays and I like it and all, but sometimes it’s just too much.

Al: You’ve always told me you like Thanksgiving better than Christmas.

Joe: I’m like a routine guy. You know what I mean? I like a routine. I get up early, I like to work out, I like to get my stuff. But you get like these real long weekends, and the next thing you know, I’m having a Coors Lite on a Wednesday morning. It’s like, what the hell is going on here?

Al: Got it. Okay.

Joe: But anyway.

Al: You need the structure.

Joe: I do.

Andi: So all the times that you mentioned couch drunks, you’re actually talking about your own potential future?

Joe: Yes, I dream about it every night.

Al: It’s like he can hardly wait to retire. So he can be a couch drunk.

Joe: It’s a dangerous thing out there. I mean, it’s a true thing. People that retire that shouldn’t retire end up probably getting depressed or doing things or getting bored. They don’t have the purpose, and we’ve had shows about that.

Al: Yeah we have.

Joe: But we’re going to move on. All right. I’m going to go with April here. She’s like, “Sorry, but none of my computers like your website, Ask Joe and Al on the Air.”

Al: We’ve heard that before.

Joe: I don’t think anyone likes that website. I don’t even like that website.

Andi: I’m not a fan either.

Joe: It’s terrible. So, once again, going old school. You can always email us folks at info@purefinancial.com. “Color Me sad.”

Al: Don’t be sad. It’s okay to send us an email.

Joe: “Anyway, onto the good stuff. I’ve noticed lately that more and more radio advisors who say they are fiduciaries have been telling the benefits of fixed indexed annuities.” So we got a couple of examples. I don’t need to go any of these examples, do I?

Al: No.

Joe: Okay. “So I’ve been told by my financial advisor and heard on your show that annuities are not cost effective. And I believe the current push on annuities is byproduct of the current market volatility. Has Pure Financial reconsidered placement of annuities in client portfolios? Still Diet Pepsi drinker and still drive my 2008 Civic Honda with 109,000 miles. Thanks for your show. I listen to every Sunday and Tuesdays while I’m getting ready for work.”

Al: Wow.

Andi: So she listens to radio and podcast. Wow.

Joe: Maybe half on Sunday, half on Tuesday.

Al: It could be.

Joe: Okay, so let’s talk about this. It’s been a while. So of course, when the market is volatile, the annuity sales guys come out.

Al: Yeah. Because what’s their pitch?

Joe: It’s like you can get stock market returns with no downside risk.

Al: Sounds pretty good.

Joe: Sounds great. Well, the market is going to recover. You can get into this product and you can get the market returns. But guess what? If the market goes sour again, you’ll never lose your money. Okay. An indexed annuity is basically something to give you CD rates, maybe a little bit better than CD rates. So that’s how they were packaged and created. But you get a salesforce out there and they’re like, hey, we can- because what the annuity company is doing is buying options on a bond.
And the option could be the S&P 500. And then you’ve got a point in time. So you look at the S&P 500 today and let’s say you look at the S&P 500 12 months from now. So that’s a 12 month point to point. And then if the S&P 500 is up, or if the S&P 500 is down, well, if it’s up you get whatever that spread. If it’s down, you don’t lose any money. So it’s an option that they’re buying. So there’s no dividends. It’s a derivative.
You’re not buying into the S&P 500 index fund. There’s no stocks you own. If you look at the S&P 500 Al, I would say, don’t quote me on this- can we just spitball this real quick without any type of compliance issue?

Andi: This is a spit ball.

Al: We can spit ball, it’s just-

Joe: There’s a lot- how do I say this? A very large portion of the total return of the S&P 500 comes from dividends. Do you think that would get through compliance? I think so. Right?

Al: Well, it’s at least a good portion.

Joe: A fair portion.

Al: A smidge.

Joe: A smidge. I’m not sure what the full percentage is, but it’s more than people think.

Al: Yeah, probably.

Joe: Okay.

Al: I mean, the average dividend rate is 2%, give or take?

Joe: You add all those up on the overall total return of the overall market. It’s significant. So, okay, so they package these up to say, all right, well, we want to get a little bit better than CD rates. So let’s create this complex product inside the shell of an annuity, and the annuity grows tax-deferred. And some people use this as a kicker for, like, a guaranteed income stream. So then you have to understand, well, what are you really purchasing here? Are you purchasing this for maybe an added CD rate? If that’s what you want to buy, then that’s fine. Because you’re not going to get anywhere near stock market like returns with no downside risk. But the salespeople out there, let’s say if you go to the steak dinner ones, the chicken sandwich or the chicken dinners.

Al: Yeah, steak dinner, whatever.

Joe: Steak dinners. Yeah. You and I used to do those for TD Ameritrade.

Al: We did.

Joe: Wasn’t that the worst existence of our life?

Al: It was not fun. We stopped it.

Joe: Oh, my God. People would just yell at ya. You could get these invitations. A lot of people get invitations. They go every single night.

Andi: Free dinner.

Joe: It’s a free dinner. And they’re good places, too.

Al: You’d see a lot of the same people.

Joe: Exactly. They did the circuit.

Al: Next month when we did it. Okay. I remember you.

Joe: So, yes, you’re not going to get stock market like returns with no downside risk. What you’re buying is kind of a CD with a little bit juice in there.

Al: Now, she did ask about fixed indexed annuities.

Joe: That’s a fixed indexed annuity.

Al: Oh, that’s what it is?

Joe: Yep. Because you can’t call them equity index annuities anymore.

Al: Got it.

Joe: People would call them equity index annuities because they were saying they were tied to an equity index, which they were, the S&P 500. But they’re not getting S&P 500 returns. They’re buying a call option on the S&P 500.

Al: So fixed annuity is different than a fixed indexed annuity.

Joe: A fixed annuity is still a CD rate type investment. A fixed indexed annuity is a CD rate type annuity. A fixed index annuity might get you a little bit higher than a straight CD rate.

Al: Got it.

Joe: Because you get a little bit of a kicker with the option. But what they’re saying is you look at the illustrations, they’re showing almost market returns.

Al: True.

Joe: How about 7%, 10%? Well, you get a cap, so there’s all sorts of different fine print here. You got caps. The list goes on, on and on. However, you just want to make sure that you do your due diligence. You want to do your homework. These people that are selling these and are making a lot of commission, I don’t know how they can call themselves fiduciaries because I truly believe that they’re not. However, in their minds, if they think that that’s actually in the best interest- Who’s this fiduciary police?

Al: I don’t know. But I did look up the two people indicated here and one of them sells alternative investments which are typically commission type. Not always, but typically. And the other one is it does a rating system on investments. So neither one is what I would call it, necessarily a fiduciary investor.

Joe: But who’s the fiduciary police? So let’s say I’m going to start selling annuities, right? And I’m going to make- because these commissions could be- let’s say you give $100,000. I mean, it could be 10%, 12%, 15%, 18% on that $100,000. So I’m going to make $12,000 when you give me your $100,000.

Al: Could. Right.

Joe: And then I’m going to tell you I’m the fiduciary.

Al: Well, it’s because a lot of firms are hybrid. So they’re fiduciary with this arm and they’re salesman on this arm. And where does it meet in the middle? Hard to know.

Joe: All right, that’s my two cents.

Financial decisions you make today will impact your entire retirement future. The best plan for you and your family depends on where you are now, and what you envision for your retirement. Schedule a free, one-on-one, personalized financial assessment with an experienced professional on Joe and Big Al’s team at Pure Financial Advisors, a true fee-only fiduciary. They will not sell you any investments of any kind. They’re required by law to act in the clients’ best interest, so they will give you the straight story on your investments, whether annuities fit into your retirement plan, and ways to legally pay less tax now and in retirement, just for a start. You only have a few more weeks to put strategies in place to lower your 2022 taxes, so schedule your financial assessment ASAP. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, then click Free Financial Assessment. 

RMD Penalties Waived for Inherited IRA Non-Spouse Beneficiaries in ’21 & ’22? (Greg, Temecula & David, Tega Cay)

Joe: Got a couple RMD questions, Alan.

Al: Do we? Okay.

Joe: Yeah, we got Greg writes in from Temecula and then David from Taga Cay. Tega Cay. Is that right? Tega Cay? I don’t know what the hell that is.

Al: Sounds good. Tega Cay?

Joe: Cool. I want to go. So I guess a couple of weeks ago, we were talking about this 10-year rule, the SECURE Act.

Al: Right.

Joe: And then it was like “You asked for a reference about inherited IRAs by non-spouse having to take an RMD every year in the 10-year window. In Forbes’ IRS notice- Forbes and IRS notice 2022/53 will apply to 2023 distribution year. They are not going to penalize anyone who did not take distributions in ‘21 or ‘22. The IRS proposed a change in 2022 and said it will finalize in 2023. Joe said he didn’t know anything about this. And supply proof. Maybe someone in the office has heard about this and give you a little bit more clarity.” And then David kind of followed up, and he goes, “Hey, I was listening to the most recent episode on my drive home last night. I believe Joe and Al were called out by listener regarding inherited IRAs and the impact of the Safe Act. The caller was likely referring to the recent notice below. Thanks for all your spit balls.”

Andi: I think he meant SECURE Act.

Joe: So let’s clear up all this confusion, Al.

Al: Yeah, let’s clear it up. Well, first of all, what are we talking about?

Joe: We’re talking about a required minimum distribution, and there are no more, basically, RMDs after the SECURE Act. So prior to the SECURE Act that was signed a couple of years ago, if you were a non-spouse beneficiary, and if you inherited an IRA, you could stretch out the tax liability over your life expectancy.

Al: Got it. So you’re 6 years old, and so you have a pretty low RMD at the start.

Joe: 1/80th.

Al: Something like that.

Joe: You’re going to live to 86 years old.

Al: Right. But nevertheless, you got to take a little bit each year. You could stretch it out over your life.

Joe: And there was confusion, and there’s still confusion because people were like, oh, I inherited an IRA. I don’t have to take a distribution until I turned 70 and a half. That’s when the RMD age was 70 and a half. Now it’s age 72. But anytime you inherit a retirement account, there was an RMD, but you were able to stretch it out over your life expectancy. So the tax impact wasn’t awful. And the IRS knew this, and they were just like- they’re just parlaying. Like, people that have very large IRAs were just parlaying wealth left and right, because kids would inherit millions of dollars in retirement accounts, and then they could stretch the tax out over many, many, many years. So they were like, okay, well, let’s close this loophole. And so now when you inherit a retirement account, you have to take the money out within 10 years.

Al: Yeah. If you’re not a spouse.

Joe: If you are a non-designated beneficiary.

Al: Right. And there’s like 5 more, like for example, if you’re disabled or minor child, things like that.

Joe: Yeah. So there’s a few exceptions, but for the most of us non-designated beneficiary, or I believe that’s the term, has to take it out within 10 years. And you don’t have to take it out each year. You have to take it out within the 10th year, with one exception.

Al: Yeah. And it’s a big one.

Joe: If the owner of the IRA died after his required beginning date. And what your required beginning date is April 1st, the year after you turn 72. So let’s say you inherit someone’s retirement account that is 80 years old. So now you inherit the account. You have to take his or her RMD, because let’s say that 80-year-old didn’t take the RMD, right? Passed away, deceased, you’re the beneficiary. As soon as that person dies, you are now the beneficiary owner of that. So you are responsible for the funds out of that account. So if that owner didn’t take an RMD that year, the RMD still has to come out of that account.

Al: Sure.

Joe: And also you will have to follow the RMD schedule of the deceased. And then by the 10th year, everything has to come out. So a little confusing.

Al: It is confusing. And it’s even more confusing than that because there’s different life expectancy tables and all kinds of stuff. However, I will maybe say it very simply. Required beginning date. And you’re right, April 1st of the year after you turned 72. So if the person that you inherited this IRA from was past April 1st, the following year, after age 72, let’s just say 73.

Joe: Yeah. If they were taking required distributions.

Al: Yeah. So you basically have to continue in their footsteps and take at least as much as they did for year 1, 2, 3, 4, 5, 6, 7, 8, 9, and then 10, you have to distribute everything else, whatever is left over.

Joe: But you could take more than the RMD each year.

Al: Always. And that’s true in any case.

Joe: And that’s why it’s a required minimum.

Al: That’s right. Now, on the other hand, if you inherit, like, let’s say you inherit an IRA from somebody that’s 69 years old, 70, whatever, before their required beginning date, that rule doesn’t apply. You can wait till year 10 if you want to and withdraw all the proceeds out at that time. And that was from that notice 2022-53, which was done this year by the IRS, because it wasn’t very clear before then. Because it seemed to most professionals, us included, is that you could wait until the 10th year on everybody basically following the 5-year rule. But it turned out the IRS wasn’t thinking that way or our politicians weren’t thinking that way. So they clarified that. Then when they clarified it, they said well, you should have taken them in 2021 and 2022. So you’re going to be penalized. And there was such an outroar on that, that they came back and said, okay, we’re going to forget the penalties for 2021, 2022. We’re going to start this in 2023. But I want to say one more thing, and that is the regulation 2022-53-

Joe: -it’s not even a regulation.

Al: It’s a notice. It’s a notice. It’s not even law yet. The final is going to come out in 2023, so we don’t even know for sure.

Joe: So then you don’t even have to take the RMD in 2023. It will be waived to 2024.

Al: Who knows?

Joe: And then by 2024, they’re going to have SECURE Act 3.0-

Al: Who knows?

Joe: – that it’s going to change the whole damn system again.

Al: But at the moment we’ll go off this notice, even though it’s not final, and just say if you inherit the IRA before the decedent’s required beginning date, then you can do whatever you want. But you do have to withdraw everything by year 10.

Joe: And again, this is non-spouse beneficiaries.

Al: Yeah, true.

Joe: So if it’s a spouse, you can always roll the spouse’s into your own if you want. You could keep it in the decedent’s, whatever. It’s probably best to combine. But there are other things that you got to consider there too, depending on the age differential of the spouses and so on. But the 10-year rule in the SECURE Act is- I’m just going to keep it simple. It’s a non-spouse beneficiary. There are some exceptions that can still stretch, but for the most part, for the rest of us, those are the rules.

Al: So if I inherit your IRA or vice versa.

Joe: Correct. Because we’re non-spouses.

Al: We’re not married.

Andi: Although some people would say you might seem like you are.

Al: Some people might say that.

How is My Trust Taxed? (Elisa)

Joe: All right, we got Elisa. She goes, “Hey, Joe, Big Al, it’s me again. Please clarify trust taxes for us. If assets are in the trust, let’s say, for example, non-Roth mutual funds, which I believe are usually taxed at 15%, but now are in the trust, are they taxed at a much higher rate? What about bank accounts and home sale proceeds? How much is the trust going to cost in taxes? Did I make the right decision in setting up this trust? I understand there is high estate tax limits, but what are other taxes involved? Thanks for educating us and being so funny.” Well, thank you very much. Great question.

Al: It is a good question.

Joe: Yeah. This is why this whole financial planning business is a little confusing, because there’s two different types of trusts.

Al: Exactly.

Joe: There’s an irrevocable trust and there’s a revocable trust.

Al: Right. So let’s start with revocable, which is what most people have. Most people have a living trust. A living trust is a see-through trust. It’s as if it weren’t there. So in other words, the trust earns interest and dividends because you’re supposed to put your trust name on your bank accounts and your brokerage accounts, but there is no trust return because it’s a see-through. So it’s like it doesn’t exist-

Joe: – for tax purposes.

Al: Right, for tax purposes. And so interest, dividends, capital gains show up on your tax return. That’s the most common case. Okay. Maybe with Elisa, we’ll assume that this is a-

Joe: What this trust does for her is that it avoids probate. So she did the right thing, depending on what state that she lives in. Let’s say she lives in California, where we’re at, is that you set up a living trust. And when Elisa dies, then the successor trustee takes over and distributes the trust to the beneficiary. And it avoids the whole probate process. Probate is lengthy, it’s expensive, it’s public record, there’s a lot of negatives to probate. So people want to avoid that process for their heirs, so they set up this living trust and basically it avoids all of that. So it’s just another entity that you title your belongings to, but for tax purposes, it’s a see-through.

Al: Yeah. There’s a couple of ways you can end up with a revocable trust, which is completely different.

Joe: Irrevocable.

Al: Irrevocable, thank you. The first one is the living trust that used to be common to have an A trust and a B trust. And when the first spouse passed away, half the assets were put in one trust, half the assets were put in the other trust. Typically the B trust then became an irrevocable trust and paid its own taxes. Unless the income was distributed, which can be if the income is distributed, then the trust doesn’t pay the tax, it goes to the beneficiary. So that’s one way to get an irrevocable trust.
Another way is to just simply set one up. And you would do that if you have a lot of assets and you’re afraid about estate taxes. You put assets that have a potential for high appreciation in the irrevocable trust, so you get it out of your estate. But now that trust has to pay its own taxes, and the tax rates for the trust are the exact same as individuals. It’s just that you hit the higher brackets much, much, much sooner. For example, the 37% highest tax bracket for a trust starts a little over $13,000 of income. So it’s not like $500,000 or $600,000 of income, it’s $13,000. And the highest capital gain rate of 20% starts at also a little over $13,000. So if it’s a irrevocable trust and you’re not distributing the income from that trust to the beneficiary, then the trust itself has to pay the same rates as an individual. It just hits those higher rates much sooner.

Joe: And I think where we’ve talked about this in the past is for those of you that named a trust your beneficiary of your retirement account. And the only reason why people would name a trust is to control the assets after you passed. It’s like, hey, junior can’t handle these assets, so I’m going to set up a trust. The assets are going to sit in trust. And then the trust is going to distribute out the money when I decided to before I died. So that’s an irrevocable trust. The kid couldn’t get into the trust and say, give me more cash. The trustee would be like, no, here’s the rules of the trust. It’s irrevocable and it’s set up on XYZ distribution schedule, whatever it is. But if it sits in there, it gets more complicated than this. If it’s discretionary or non-conduit trust or whatever, we are not attorneys. Let me just explain that real quick. But if you have an irrevocable trust, the money sits in that irrevocable trust and it produces income that’s not distributed to the trust, to another entity, then the trust is going to pay those taxes at a higher rate.

Al: That’s right. And typically, Joe, as far as distributions, it would be common to distribute interest and dividends from an irrevocable trust. You don’t have to, but it’s not uncommon. It’s less common to distribute capital gains. So capital gains are often stuck inside the irrevocable trust unless the trust document allows it.

Joe: So that was clear as mud.

Al: She’s going to ask another question next week.

Joe: I think for most everyone that listens to our program is that if you have a living trust, it’s a see-through trust, it’s going to be taxed at your normal rate.

Al: Yeah, don’t worry about it.

Joe: If you have the trust as the beneficiary of your retirement account, I would highly reconsider that and look and change this because the rules have changed. We just talked earlier about the stretch IRA going away. And so because of that, if you want to hold assets in trust- before you could do that, but the RMD would get distributed out. But there is no RMD. So it just sits in trust, and then when it gets distributed out later, then that’s when it’s going to get taxed at huge rates.

Al: Yes, huge rates. And then the income on that is a high rates, too. Although you may still want that. If you don’t trust your children, you think they’re going to spend it all and you want to spread it out over their lifetime.

Joe: Yeah, give half to the IRS and give half to junior.

Al: True.

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Suggestions for 40-Year-Old Considering Mini-Early Retirement? (Ship of fools, Minneapolis)

Joe: We got Ship of Fools.

Al: It’s a good name.

Joe: Sounds intriguing.

Al: Wonder where he’s going with that.

Joe: A little Minneapolis. All right, “Big Al, Joe, Andi. I’m 40 years old who enjoys a glass of brown over ice.” You know what a little glass of brown is, Big Al?

Al: No idea. I would say coffee.

Joe: Oh, my God.

Andi: Is that bourbon or whiskey or something?

Joe: Yeah, whatever’s brown. It comes out of a brown bottle.

Al: Got it.

Joe: I like a glass of brown.

Al: So that’s something you know about because experience?

Joe: Yeah, I like bourbon. Whiskey.

Al: Okay, cool.

Joe: Every now and again. Not too often. I’m trying to be cool lately.

Al: Got it.

Joe: A little scotch.

Al: Okay. You’ve kind of upgraded.

Joe: Yeah, but just burns the hell out of my throat.

Al: And your stomach and esophagus.

Joe: Yeah. “I drive a JGC-“

Andi: Jeep Grand Cherokee.

Joe: Oh, well. Spicy. Jeep Grand Cherokee. How did you know that, Andi? Is that what you say?

Andi: I googled JGC car.

Joe: When you’re at the car show? I’m gonna look for some JGCs. “I’m planning to take 5 to 10 years off of fulltime work and sail to Eastern US, Bahamas, Caribbean, etc. The general consensus is that quitting work in your highest earning years is a terrible idea. But you don’t hear about the potential financial benefits. Specifically, I’m thinking about doing Roth conversions of the roughly $450,000 I have in my 401(k) while I’m living off my cash savings and brokerage accounts could significantly offset my lack of income for these years.” Yeah, that’s not a huge benefit there, Ship of Fools.

Al: But it is a benefit.

Joe: It’s a very small one. You know what? I’m going to quit work.

Al: Right. So I can do conversions.

Joe: So I can do Roth conversions. I’m making a nice high income. And I’m going to say, you know what, there’s a benefit of me not taking this $150,000 salary.

Al: You’re talking yourself into it.

Joe: I’m going to go to the Caribbean. All right, so he bought a sailboat or she bought a sailboat. Ship of Fools bought a sailboat. “I plan to travel and live on the cash.” So $70,000 in cash. “When I leave in the next two to 3 years. I’ll have $200,000 in cash, a brokerage account of about $200,000, HSA of $20,000, Roth IRA of $40,000. I plan to spend between $30,000 to $50,000 during these years.” Alright, so how many years is he going to- Ship of Fools-?

Al: 5 to 10. So let’s call it $40,000. We’ll split the difference. So $200,000 to $400,000 over that period of time.

Joe: All right. “I grew up in a low income household and never increased my standard of living to that of which most people who make 6 figures have done. I know this lifestyle to which I’ve dreamed of living for 10 plus years will require me and my plan to be extremely flexible. And I’m okay with that. I’m working in healthcare. My entire career could fairly easily return to that career full time or part time to offset my cruising kitty. I’ve even embraced working behind a bar part time on the trip, if need be. My question for you all is what other opportunities are there for a youngish person who is thinking about taking a sabbatical or mini-retirement?” I like the idea, Ship of Fools. What the hell? You only live once. You bought the sailboat already. You got the plan.

Al: You’ve had a dream for 10 years.

Joe: You got your brown.

Al: That’s right.

Joe: Put a little ice, listen to this podcast, go to the hospital or wherever you work and say go pound sand.

Al: That’s right. I’m going.

Joe: I’m gone.

Al: You know what? I agree with you, Joe. I think life is short.

Joe: Okay. I’m leaving. I’m quitting.

Al: Yeah, well, that was my line to you. But nevertheless, life is short. If you can pull this off at age 40, you didn’t mention a spouse, so I’m assuming you’re single. But if you can pull this off at age 40 and you got a plan and you’re in a profession that’s fairly easy to leave and come back, right? I mean, you probably have to get retrained on whatever new procedures there are in 5 or 10 years, but you could very easily do that, probably. I would say, why not? It’s easier when you’re single. It’s easier when you don’t have kids.

Joe: Yeah, I would agree with that.

Al: It’s easier when you don’t have a mortgage. And I would say, if you can pull it off, go for it. Why not? I’m going to make a prediction though. I’m going to say Ship of Fools, his first 6 months will be Heaven on Earth. And then between 6 months and two years- it’s not quite what I thought. And in two years, he’s back.

Joe: Could you imagine living on a boat for 5 years?

Al: No. Or 10 years.

Joe: I couldn’t imagine, like, 10 minutes.

Al: There’s only so much Coors Lite?

Joe: Oh, my God. I could hang out if it was docked. I would get seasick. I would be, like, miserable.

Al: Well, plus, neither you or I know how to sail, so that would be a problem too.

Joe: Yeah, it sounds really romantic.

Al: It does.

Joe: I’m going to sail the Caribbean. I’m going to be gone 10 years and-

Al: I going to go to all these ports and meet all these-

Joe: – just exotic people.

Al: -people.

Joe: You know what? I’ll just go behind the bar and tend bar, just like Tom Cruise did in the Bahamas or whatever, in Cocktail.

Al: Right. And maybe if there’s a hospital that needs my help, I’ll do that for a couple of months. I’m good for another couple of years.

Joe: He’s like, get me back to any- Minneapolis- I don’t care. I’ll go to Iowa.

Al: I don’t mind the snow anymore.

Joe: I love the snow. I just need to sit on a couch that doesn’t move.

Al: I need to drink my brown on a couch.

Joe: Yes. I would like interaction with people that don’t smell like fish.

Al: I don’t know, Ship of Fools. I’m just trying to be realistic. Remember when I was going to retire at age 47?

Joe: Yeah, that worked out well for you.

Al: Yeah, it’s like, well, now what? Right?

Joe: All right, well, good luck with that.

I’m 62. Can I Immediately Withdraw Money I Convert to Roth? (Steve)

Joe: Got Steve writes in “I’m 62 years old, opened up my Roth IRA in 2006. I would like to convert money from my 457(b) plan to my Roth IRA. My question is, I’m over 59 and a half, will I be able to withdraw all of the converted money and earnings right away without taxes or penalties? Thanks. Steve.” What say you, Al?

Al: Yes. And the reason is because, Steve, you’re over 59 and a half, and you’ve had a Roth IRA for more than 5 years. So the answer is yes. Now, we wouldn’t recommend it. That defeats the whole purpose of a Roth. But just for peace of mind, you can, if need be, you can withdraw all those funds, principal and earnings, the next day if you want to.

Joe: Because he’s 62. There’s two 5-year clocks, one for conversions. Every conversion, you have a 5-year clock. We would get this question over and over again. It’s like, yes, until you turn 59 and a half.

Al: And then that doesn’t apply any more.

Joe: Right. And he already has a Roth IRA over 5 years.

Al: Now, if he didn’t have a Roth IRA-

Joe: Right, if he didn’t open up that Roth IRA in 2006, the answer is no.

Al: No, is correct.

Joe: Right. He would have to wait until 67 to take the money out because he’s 62.

Al: Yes. 5 years after, that’s right. He could still take the amount converted that becomes principal, but he couldn’t take any growth or income after that.

Joe: So here’s a little tidbit for you all. If you don’t have a Roth IRA, I would establish one. Right. Because then that starts your 5-year clock. You can start one with $100 or $1, depending on the custodian. And if you don’t qualify from earned income, you make too much income. And one of those qualifications right now, $200,000 if you’re married and $130,000 if you’re single.

Al: I think it phases out about $135,000 single for doing a Roth contribution, around $210,000ish for if you’re married.

Joe: So if you make higher income, and we’ve talked about the backdoor, I don’t even know I mentioned this because everyone has a backdoor to listen to this show. Start your Roth IRA to start your 5-year clock, if nothing else.

Al: Yeah. And if you don’t qualify for backdoor or doesn’t make sense, just do a $100 Roth conversion.

Joe: Who cares? Pay the tax.

Al: Pay the tax. You’re in the highest bracket. Who cares? Start your 5-year clock. Furthermore, it doesn’t matter when you started in the year. It goes all the way back to January 1st of that year to start your clock.

Joe: So we’re at the tail end here of 2022. So it would start Jan 1, 2022.

Al: Yeah. So go ahead and do it.

Joe: Go ahead.

Social Security is at Risk. Collect While Working, Invest the Difference in Roth? (Ed, Southeast Iowa)

Go to YourMoneyYourWealth.com. Click on Ask Joe and Al on the Air and you’ll end up getting rejected. And then you’re going to have to type in the info@purefinancial.com.

Al: But try it anyway because we’re working on the website.

Joe: Got it.

Al: You still working on it, Joe?

Joe: No, I’m not.

Joe: We got Ed from Southeast Iowa.

Al: Okay.

Joe: “I’m 66 years old, no debt, net worth about $2,000,000.” Good for you, Ed from Southeast Iowa.

Al: Yeah. That’s great.

Joe: $2,000,000 in Iowa is like $40,000,000.

Al: That’s a good chunk.

Joe: In California. “Official retirement age is January 1, 2023.”
Well, Ed, that’s not an age, that’s a date.

Al: I think he meant his full retirement age, if you read on.

Joe: “I’m still working as an engineer-“ well he’s an engineer, so of course he’s probably right. “With Social Security at risk in long run, pending legislation, I’m considering taking Social Security while working and investing the difference. I’ve heard arguments of why not to do this, but I want to explore the benefits of doing this. Network investing 20% of salary 401(k), 5% of the Roth, maybe route more into that Roth from salary and using Social Security payments instead to live off. Things like that. I should get about $2900 if I would begin taking Social Security in January. Could you speak to this please? Thank you in advance. Really like your show.” Okay, Ed, I like your idea.

Al: Yeah, I don’t have a problem either.

Joe: Zero. If you’re going to invest it, if you’re not going to spend it, if you could put a lot of it into a Roth and have a compound tax-free.

Al: You have to be full retirement age to do this if you’re working. Otherwise you’re going to be limited on how much you get to keep yourself. But it sounds like he’ll be at full retirement age on January 1, 2023 and still working as an engineer. It’s a great strategy if you actually do save and invest, and it’s a great strategy if you’re not so sure about the future of Social Security.

Joe: Right. If you delay Social Security, the rules say that you get an 8% delayed retirement credit. It’s like, okay, well, I delay, and then now I get a lot higher fixed benefit at age 70, and then I’m going to have for the rest of my life. But we don’t know when we’re going to die.

Al: Yeah, that’s the thing.

Joe: If we knew when we were going to die, I’ll tell you exactly what to do to the penny, but we don’t.

Al: And we’re living longer. And the actuarial tables for Social Security, they came up with them in the 1980s, so we’re actually living longer than that. So at least on average, we’re doing better than what the tables would indicate, which would mean on average, you’re better waiting. But average, it’s not the right strategy for everybody.

Joe: So here’s my argument not to do this, but he’s already heard it, but maybe I can give a different spin. He’s got a couple of million dollars in retirement accounts. He’s 66. He lives in Southeast Iowa. He probably doesn’t spend a ton of money. He saved a lot. And so instead of taking the money now and then paying tax, because that’s all income, it’s going to be 85% tax. And then whatever tax rate that he’s in while he’s working, I don’t know what the true net effect is going to be.
Versus delaying. And then he retires, and then he starts converting. Because he has very little income at that point. And then he takes a lot higher benefit at age 70, and then if he can arrange his affairs in such a way from a distribution standpoint to make his Social Security less taxable. Well, then your net effect over a certain life expectancy. He’s an engineer. He can map this stuff out. He could create it. I’m kind of making this stuff up as I go in my head. But if he maps this stuff out and says, okay, well, look at the tax rate, look at provisional income, how is Social Security going to be taxed today if I take it now while I’m working? What’s my true net effect? And how much can I save and where am I going to put it? What rate of return expectation can I get? Because it’s all about the assumptions that you run.

Al: Yeah. So you bring up a good point, is you got to consider taxation in this whole thing. And if you can, instead of getting extra Social Security income, convert into the Roth, which will be tax-free, you defer your Social Security, which, worst case- up to 15% is tax-free- in some cases, more is tax-free, 15% of your Social Security is tax-free. And in many or most states, it’s tax-free, too. So it’s tax-favored income. On the other hand, if you are concerned about the viability of Social Security in the future, then this is a great strategy.

Joe: Then take it, who cares? Because it’s going to go broke anyway. Everything’s going to go to hell in a handbasket, and we’re just going to chill with-

Al: My own personal thought is I’m not going to do something like this because I do believe in the viability only because we’ve had problems before and it’s always been fixed. And I believe we have a vested interest as a country to fix it in the future.

Joe: Vote for Big Al. 2024 election.

Family Social Security Benefits Explained (Steve O. Rino, Central IL)

Joe: We got Steve O.

Andi: Steve O. Rino.

Joe: Steve O. The Rhino.

Andi: Steve O. Rino.

Joe: Steve O. Rino.

Al: Rino. Okay.

Joe: Steve O. Rino from Central Illinois.

Al: I like rhino better, that’s sounds more fun.

Joe: I know, I like the rhino.

Al: That sounds like tougher somehow.

Joe: But Steve O. Rino, I guess, is kind of like catchy.

Al: True.

Joe: We got “Hi Joe, Big Al. My question’s about family benefits for Social Security. I’ve heard this topic addressed in some previous podcasts. But honestly, I felt that you phoned in your answers.”

Al: We phoned it in.

Joe: Just phoned it in.

Al: I was in Hawaii. I just phoned it in.

Joe: I was like I could care less about this. “Well, now with Joe being a proud papa in a relatively advanced age-“

Al: Okay, now we’re getting a little personal.

Joe: Steve O. Rino.

Andi: Shot to the heart.

Joe: Oh, my God. Advanced age.

Al: Are you in advanced age?

Joe: No, not even close. “-perhaps now would be a good time to reexamine this subject. Generally, my financial advisor’s recommendation is to wait as long as you can until age 70 to claim Social Security so that your benefit can grow as much as it is allowed to. I’ll buy that. But in my case, it’s not so clear. I have two girls, 8 and 9. I’m 57.” I’m living Steve O. Rino’s life just 10 years earlier.

Al: You’re pretty close. This is going to be you in 10 years.

Joe: Joe the Rhino.

Al: So you better listen up to your advice to Steve O.

Joe: Oh, Steve O. Rino. Here we go. “My wife is 4 years younger-” Yeah, I got you beat there. “-with a primary insurance amount of $2404 at my full retirement age of 67. If I claim family benefits for my two kids and wife at age 62, I’ll get nearly $50,000 for 5 years or so. Then I can suspend my benefits when I turn 67 until I’m 70 if all goes well. While my retirement benefit will be lower than if I waited to age 70, I’ll get a big chunk of change I normally wouldn’t get when the kids are in middle school and high school just when I need it. Maybe you can make Joe an additional case study for this question.” No thank you. “Now to the important stuff. I live in the least miserable town in Illinois. I have two Hondas and drank more than enough for several lifetimes in college, so I don’t drink any longer. Thanks. Steve O. Rino.”

Al: I got it. Okay. I understand that, Steve O. So what do you think?

Joe: Yeah, for sure. You take it at 62, you take the family benefit. Explain the family benefit a little bit there, Big Al.

Al: So if you have minor children, I think, and all the way up to full retirement age, I think, is that how it goes? In other words, if you’re claiming your benefits-

Joe: You’re phoning it in.

Al: I’m phoning it in. Where’s my lifeline? Where’s my lifeline? So at age 62, which is when you can start claiming your benefits, then if you claim your benefits, you’re entitled for family benefits for your minor children.

Joe: Correct. And spouse.

Al: And spouse.

Joe: Yeah, because she’s that much younger.

Al: Right. Right. Right. So anyway, but then-

Joe: So he’s going to get the family benefit total is $50,000, and so he’s going to be able to get that for several years. For 5 years, until he turns full retirement age, and then the kids are older and so on and so forth. You do the math there. That makes sense all day long.

Al: Yeah, I 100% agree. And so that’s why you have to do the math. So in other words, if you’re getting a whole bunch of cash that you wouldn’t have otherwise got, then that mitigates the lower payment for life. And so you just have to kind of run the numbers and see how it works out. The other part of this, too, is when you’re running the numbers, it’s more important to get money today than in 10 years from now, or whatever it would have become. So think about that, too. Time, value of money. But, yeah, I would say on the surface, Steve O., it seems like a great plan.

Joe: The only thing that he has to run is that if he’s going to continue to work at 62.

Al: True.

Joe: Because if you claim your benefits early and you are still working, there’s going to be an additional reduction of those benefits as you work.

Al: Is that true for family benefits too?

Joe: I have no idea. I wish you weren’t going to ask me that.

Andi: Phoning it in.

Al: That’s why I asked the guru.

Joe: I’ll figure that out in about 20 years.

Al: When it’s important to you.

Joe: When it’s important to me.

Al: Got it.

Joe: All right. Steve O. Rino, thanks for the cool name, and thanks for the question. That’s it for us. We gotta go. The show’s called Your Money, Your Wealth®.

Andi: Color Me Badd, the YMYW catchphrase, Joe meets Hans in Hawaii, and the word from above in the Derails at the end of the episode, so stick around. 

The Derails

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