Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
June 15, 2021

Have Social Security payments ever been cut for those already receiving them? Plus, survivor benefits, the Windfall Elimination Provision (WEP), and CalPERS. Also: what retirement accounts should you save into in what order? How should you withdraw from a brokerage account in retirement? And paying the tax on a Roth conversion, overfunding a 529 plan for education, and mortgage refinancing and interest deduction.

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Show Notes

  • (00:49) Has the Government Ever Cut Recipients’ Social Security Payments? (Gary, La Mesa, CA)
  • (03:04) Social Security and CALPERS (Robert, Escondido) 
  • (04:25) Social Security Survivor Benefits (Perry, Jersey)
  • (10:13) Sequence of Savings: Which Retirement Accounts Should I Save to in What Order? (Jon, Ohio)
  • (17:28) How Should I Withdraw from My Brokerage Account in Retirement? (Steve, San Diego)
  • (23:08) Paying Tax on Roth Conversions (David, NYC) 
  • (31:18) Overfunding 529 Plan and Generation-Skipping Tax (Emilia Erhardt, Maryland) 
  • (39:01) Refinancing: What Are the Rules About Interest Deduction on a Mortgage Exceeding the Purchase Price of My Existing Property? (Mike, San Diego)

Free resources:

LISTEN | YMYW PODCAST #208: Spousal Social Security Claiming Strategies You Need to Know (includes WEP and GPO)

Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth® podcast #330, have Social Security payments ever been cut for people who were already receiving them? How does Social Security work with CalPERS, the California Public Employees’ Retirement System, and how do Social Security survivor benefits work? Plus, what retirement accounts should you save into, in what order? Jon the former chickens owner wants to know about sequence of savings — and he tells the backstory those chickens. And, LIFO, FIFO, LILO – how should you withdraw from your brokerage account in retirement? More on paying the tax on a Roth conversion, as well as overfunding a 529 education savings plan and a strategy to refinance your house and deducing interest. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Has the Government Ever Cut Recipients’ Social Security Payments? (Gary, La Mesa, CA)

Joe: Gary from La Mesa. “Hello. I love the show. I’m presently watching the May 16 show on Social Security. I wanted to ask, has the government ever reduced benefits from those already receiving them? The point being is there is a discussion of reduced benefits being a possibility beginning in 2035, a reduction is projected to be 21% to 30% of current planned benefits. With that in mind, would it be better to claim early before 2035 as a strategy to avoid that possible reduction if it were enacted and I had to wait until age 67 or 70 to claim my benefits? Thank you. And I hope this question makes sense.”  So Gary’s watching the old TV show, it looks like.

Al: Yeah.

Joe: And he’s thinking, well, 2035, the trust fund is going to be exhausted.

Al: And it says right on your statement that the benefits, if nothing else happens, will be reduced by 21% to 29%.

Joe: What do you think? Do you think they would reduce existing beneficiaries’ benefit?

Al: Well, I’ll go through his questions, have they ever done this before? No, they’ve never reduced benefits for people that have been promised. Is there a possibility? Yes. In fact, it says right in your statement, which is if nothing changes, this is the projected benefits that you receive. So it could happen. Is that likely to happen? In my opinion, No. The reason it’s not likely to happen is there’s ways to fix Social Security, like raising the percentage to be collected by making it later on a full age retirement benefit; by raising the cap on how much you make to pay for Social Security. There’s lots of ways to fix it. In general, it’s politically unpopular to do. So these things tend to get fixed right towards the end. And we’ve been in front of these situations before. So I don’t think it’s going to happen. I wouldn’t change my claiming strategy just because of that. But that’s my opinion.

Joe: I agree, Al. I agree with everything you said.

Al: There ya go.

Social Security and CalPERS (Robert, Escondido)

Joe: All right. So we got another Social Security question here. Let’s see. “My wife has worked 10-plus years to earn her Social Security benefit. Plus, she is a school teacher that has contributed into CalPERS. Are you allowed to take both benefits when you retire? Robert from Escondido writes in. It said CalPERS or CalSTRS. So there’s two different- and if she’s in CalPERS, is she still contributing to Social Security? Where some CalPERS pensions, you have CalPERS and you’re still putting in the Social Security. So you’re allowed to have both. If it is CalSTRS because she’s a teacher, which I’m guessing, and you’re in Escondido, unless she’s an aide, if it’s CalSTRS, she’s going to get WEP’d, windfall elimination provision. Because she’s not going to receive the full benefit, even though she has 10-plus years in Social Security, if she has CalSTRS, that benefit will be reduced. If it’s CalPERS-

Al: So it depends which one it really is. And most teachers are CalSTRS, right?

Joe: Yes, unless you’re like an aide or some other category of educator.  Hopefully that helps.

Social Security Survivor Benefits (Perry, Jersey)

Joe: We got Perry from Jersey. I don’t know where to even begin with this question, so maybe I skip Jersey. Is that how he wrote the question, Andi?

Andi: Yes, it is, yes. The first part is from the Social Security website.

Al: He’s quoting the Social Security website, and then he is suggesting that it seems like it conflicts. So he’s asking which one is right. It’s actually not bad. Give it a shot.

Joe: This is from the Social Security. It says “SSA form. If you are a survivor/SSA.

Al: OK, that’s the heading. So he went to the Social Security website-

Joe: Cut and paste?

Al: And saw that heading. And then it says ‘these are examples of the benefits that survivors may receive’. Then he gives a couple.

Joe: All right. “Widow or widower full retirement age or older. 100% of the deceased workers benefit amount.” So if I’m a widow or widower at full retirement age or older, I would receive 100% of the deceased worker’s benefit amount. You agree with that?

Al: Yes.

Joe: “Widow or widower, age 60, full retirement age, 71.5% to 99% of the deceased worker’s basic amount. The first bullet seems to say 100% of deceased worker’s benefit amount, which I read as including any delayed credits to perhaps 70 years old. The second bullet seems to say if a survivor is not at their full retirement age, then the survivor gets a reduced percentage of deceased worker’s basic amount. Basic amount is never defined. But it seems to me PIA, with no delayed credits included. Am I reading English correctly? You’re loyal and obedient servant, Perry.” Oh Perry. That’s why he’s writing this thing all weird. He’s got a dog named Heinz 57.

Andi: No, that means that it’s a mutt. Heinz 57 means that it’s all types.

Joe: Al and I are going with it’s a name.

Al: I think it’s the perfect name. That’s what I would call it. Hey, Heinz, 57, that is, come over here.

Joe: He’s got a 2013 SUV. “YouTube makes this subject clears as mud.” I believe this is stating if the person died prior to the widow or widower reaching a benefit age where they could collect- So let’s say you pass.

Al: Let’s say I waited till 70. So I’m collecting my benefits, I pass at 75, does Andi get those benefits? So that includes obviously the delayed retirement credit. And the answer is yes.

Joe: Correct.

Al: Because when one spouse passes, the survivor gets the higher of the two benefits that are currently being paid.

Joe: That is correct. But you can claim a survivor benefit as early as age 60.

Al: Yeah. So let’s say I’m 75 and then let’s say my wife, Anne, is 59. And so she claims that at 60 instead of waiting to her full retirement age, then it’s a reduced benefit for life and I think that’s right. 71.5% I think in that example. But I think it’s 71.5% of my total benefit, not of what I was receiving.

Joe: Correct.

Al: I don’t think basic means you don’t get the-

Joe: They would say a full retirement age amount. The FRA-

Al: That’s what I think. I think that it’s 71.5% of whatever my benefit was when I was 75.

Joe: Because the rules changed quite a bit there as well. Where you would want to- because this happened to my mother, is that she was still working. My dad died at 61 and then she’s like, she could claim the benefit at 60, but it didn’t make any sense because it still had the same reduction if you had earned income. And it’s like take it at full retirement age, so then you don’t get the reduction of income, push yours out until age 70 and flip it that way. Yeah, it’s clear as mud, Perry.

Al: I will say this, Perry, almost nothing about Social Security is very clear. It is one of the most complicated things you can imagine.

Joe: Next time, ask me a question. “Hey, my wife died. What benefit can I receive?” But don’t go to the Social Security website, start cutting and pasting crap and then sending it to me. So I got to decipher what the hell all this means.

Find out more about Social Security benefits, and make sure you get as much Social Security as you’re legally entitled to receive: check out Joe and Big Al’s recent Your Money Your Wealth® TV show episode that Gary mentioned earlier, listen to podcast #208 with Social Security expert Mary Beth Franklin, and download the Social Security Handbook for free. You can do all of that right in the podcast show notes at YourMoneyYourWealth.com. That said, if you need more personalized help, an assessment from a CERTIFIED FINANCIAL PLANNER on Joe and Al’s team at Pure Financial Advisors is free too. Watch the show, download the handbook and sign up for a free assessment in the podcast show notes. Just click the link in the description of today’s episode in your favorite podcast app and you’re on your way. Now let’s find out about those chickens!

Sequence of Savings: Which Retirement Accounts Should I Save to in What Order? (Jon, Ohio)

Joe: “Greetings, Joe, Big Al, and Andi. Jon, former chickens owner here, yo, living in rural Ohio. I also drive a 1965 Lincoln Continental I bought when I was 14 with lawn mowing money.” A 1965 Lincoln Continental, that’s a bad ass car.

Al: That’s a big car.

Joe: “I had free range chickens to eat the ticks on my two acres. I donate them to a local church as I choose to take 6 months off social distancing at my family’s 100 acre summer cabin in Michigan near Traverse City during the Covid lock down and shut down. I took all the eggs with me. I had so many eggs I always gave them away for free. People miss that. I never planned on eating the chickens. Fortunately, I was one of the first to get the two-dose vaccine and have always continued to wear a mask.”

Al: All right, Jon, good for you.

Andi: Thank you, Jon.

Joe: “I am a vested public employee, as I said, with a pension replacing 88% or more of my income with a PLOP- “ I’m guessing that’s kind of like a DROP.

Al: That’s a partiall lump sum option payment.

Joe: “- that I will take and invest for my heirs. Also, as a vested public employee, should I become disabled at any time it acts as a disability pension, paying 100% or more of my income. So my question is, should I fully fund, max out, a Roth IRA, first investing in small cap value fund, ETFs, so first in, last leave-“ I’m confused here, let me do this again. “So my question is, should I fully fund, max out, a Roth IRA, first investing in small cap value funds-?” Al: That’s always a good plan.

Joe:  “- first in, last out leaving for my heirs.”  Follow that?

Al: Yeah, so that’s his first investment, but the last he’s going to take out, he wants to leave it for his heirs.

Joe: OK, so the Roth IRA is his first investment, small cap value. Let it grow. Those are for the heirs. That’s the last thing that he’s going to spend.

Al: That’s what I think.

Joe: All right. Why didn’t you just say that?

Al: More words.

Joe: Got it. “Then fully fund and invest my HSA $7800 a year family plan and small cap value-?” It’s a HSA Jon. Calm down.

Al: Well, he might be young. Well, no, he’s not young because he bought a ’65 Lincoln Continental.

Joe: Well, when he was 14.

Al: Yeah. We don’t know what he is now.

Joe: ” – drawing from this at age 65 as income? But I’d rather it be inherited by my heirs.” He’s such a giving person. It’s chicken eggs, chickens.

Al: First chickens, then Roths, then HSA plans.

Joe: HSAs? It’s like, what else can you give, Jon? Just give, give, give.

Al:  Well, if someone inherits some HSA, isn’t that fully taxable?

Joe: It’s an IRA.

Al: But it’s fully taxable in the first year. It’s not a 10-year payout. I don’t think.

Joe: It depends on when Jon dies. I don’t think he’s going to die for a long time, he’s a giver. But after 65, if he doesn’t use the HSA funds, he could just put it into an IRA. And then if he passes, then do it at a 10 year-

Al: That’s right, then they could do a 10 year.

Joe: Yes, yes, yes.

Al: OK, I’m with ya.

Joe: How does an inherited- ok, we talked about. “Then being in low income $45,000 a year invested in and fund a brokerage account small cap- ?” Dude. He loves these small cap values.

Al: Yeah. That’s for the heirs too?

Joe: “If I do this, heirs will get a step-up in basis and not have to draw down within 10 years, then invest fund a 457 because there is no early withdrawal penalty and then invest and fund the 403(b).”

Al: So it’s like an order. Like you remember how we used to talk about do this first, invest in your 401(k), do the match and then go back to the Roth, to go back to 401(k). I think he’s trying-

Andi: Yeah, he’s asking about the sequence of savings.

Al: Trying to come up with the order.

Joe: OK. But he put like 17 question marks and all I really got out of this is small cap value.

Al: And that he gives eggs.

Joe: And that he gives eggs and he’s got a bad ass car.

Al: Well so I think the question is, is this the right order? Roth first, then HSA, then brokerage account, then 457, then 403(b). So there’s probably matches though, right?

Joe: Well, he’s got $45,000 a year to invest, so I would go 457-

Al: -before the brokerage-

Joe: – then I would go Roth. If I could go 457 Roth, I would probably do that.

Al: Because why? Because there’s a match?

Joe: I don’t think there’s probably a match in the 457. Maybe there’s a match in the 403(b) plan. I doubt it. Maybe he’s got a 401(k)- he works for the city or he’s a city employee. Public employee. So he’s going to have a nice pension that he doesn’t necessarily need the money, it’s all going to go to his heirs. So yeah, I would try to fund the 457 Roth, if they have it. Then go to the Roth IRA, then go to the HSA, if you need health care. But I wouldn’t use that as an inheritance play. I would use the brokerage account as the inheritance play. “I have two healthy beautiful daughters, 17 and 13; I claim head of household. My girlfriend has a 20 year old son who is disabled and gifted with special needs. Should I set up an ABLE account for him? $1400 a year-”

Andi: $14,000.

Joe” – $14,000 a year up to $170,000, so it doesn’t affect his benefits? Do I and/or when will I need a financial advisor? I just don’t want to make any mistakes. Thanks gentlemen. You always make me laugh. Best podcast ever.” I ran out of time because you kept on asking questions, Jon. Yeah. If your girlfriend’s got a disabled child, the ABLE account is a great way to go that can give him some safety net, some cash without hurting his Social Security benefits. If you have the cash flow to do that, I think that’s a really good way to go as well. I think he’s on the right track. I don’t think he’s making any mistakes. He’s going to have the cash flow that he needs from his pension. He’s going to marry -well, he’s got two lovely kids and a beautiful girlfriend. Nice car. He’s got eggs.

Al: He’s got it all.

Joe: He’s got a 100 acre farm that he just goes to and wears a mask by himself.

Al: I think he gave his chickens away though. No more eggs.

Joe: No more chickens.

Al: I think we talked about the sequence of savings and the ABLE plan is a great plan if you have a disabled child. So yeah, I would fund that to the extent you can.

How Should I Withdraw from My Brokerage Account in Retirement? (Steve, San Diego)

Joe: “Hello.” Steve from San Diego writes in. “For years, I’ve been putting money regularly into mutual funds. Now that I’m retired and will be drawing money from them in the near future, I was wondering if there was a way to help decide on what category to pull the money out of to save on taxes.” Hmm, OK. “They give me choices, like first in, first out, average cost, etc.. Is there anything I should consider before I decide on what choice I should make when I pull the money out?” Let me break that down for you, Big Al. I believe Steve is referring to a brokerage account.

Al: Yes, he would have to be, because if you pull money out of the IRA, it doesn’t matter what method you use because it’s all ordinary income. Unless there’s basis.

Joe: Well, there’s the pro-rata.

Al: Let’s not go there please. I suppose.

Joe: Just get the pro-rata aggregation rules-

Al: That’s true.

Joe: – on the backdoor superdoor back Roth IRA.

Al: That’s another discussion.

Joe: It’ll come up, guaranteed.

Al: Yeah, I know.

Joe: So in a brokerage account you have options when you sell stocks to create income or to use some of that asset for whatever that you choose to. And he’s like first in, first out, so what does that mean?

Al: Oh, you want me to answer. Well sure. So-

Joe: I would want some dialogue with you.

Al: OK, so what that means is that so let’s say you’ve been buying some of the mutual fund periodically over time. And so first in, first out means that the first shares that you sell, the cost basis will be the first shares that you purchased, which usually is the lower, which means higher gain because usually, not always, usually the stock market goes up over time. So usually your older shares, your first shares, have a lower cost basis and therefore a higher gain. So that’s usually your worst answer in terms of taxation.

Joe: Unless you’re in a super low tax bracket, because then you want to use first in, first out, because then at capital gains, it’s zero. So you want to utilize those-

Al: That’s right. So if you’re in the 12% bracket, which is about $40,000 taxable income single, about $80,000 taxable income married and you can only have your capital gains go up to that level. If you go over, than of course, they’re taxed at capital gains rate. So that’s right. That might be a way to go. But I think for most of our listeners, that would not be your first choice, I would say.

Joe: Yet you would fill up those brackets probably with IRA dollars first, right?

Al: Right.

Joe: So first in, first out- another example or I guess a real life example is that you bought the XYZ Mutual Fund and you have a cost basis of $1 a share, then it’s $3 a share, then it’s $5 a share. Now today you buy it, it’s $10 a share and you sell first in, first out is whatever you sell, it’s going to be that $1 basis, the very first one that you purchased.

Al: It’s going to use that up first.

Joe: Average cost is just going to be the average of all of the cost of all the basis that you purchased throughout the years.

Al: And I would say on mutual funds, that’s probably what most people do and that’s probably the best answer for most people. Wouldn’t you say?

Joe: Yeah, it really depends on what the basis is on all of this, because if he’s held mutual funds for a long time and has reinvest dividends. The cost of what he purchased it for and his true cost basis is going to be something completely different because those reinvested dividends increase the basis along the way.

Al: That’s a whole other topic, which no one will understand. But it’s- you’re right. The thing is, you have different cost basis all along. So he doesn’t mention the last in, first out. Is that available for the brokerage account? Do you know Joe?

Joe: Last in, first out?

Al: Yeah. Meaning that the-

Joe: No, I understand what last in, first out- I don’t know.

Al: Yeah, I’m not sure if that’s available or not. I’ve never even checked. I think first in, first out and average cost is probably most common. In some cases you can do specific identification. So you can actually say I want these shares that I bought on January 2nd, 2007. I want to sell those first, because those have a high basis before the crash or whatever.

Joe: Right. If there’s FIFO, there’s gotta be LIFO, right?

Al: Yeah. You’d think so. Like annuities is always last in, first out, because they always want the ordinary income to come out first. But I’m not sure in brokerage- they changed the rules.

Al: I know they did. That’s why I don’t know the answer to that. So last in, first out, would just simply mean the last shares that you bought actually are the ones that are sold. I’m not sure if that’s typically an option or not, but anyway, that could be the best option in a rising market.

Joe: Right. Or you could just specify which ones you want to sell.

Al: You could. But most of us, myself included, don’t want to go to all that hassle.

Joe: Yeah, it’s a pain in the ass for sure.

Al: It is. I’d rather just use the average cost and call it good. Because every time you sell you get a new average cost because every time you buy, you get a new average cost.

Joe: And I think, Steve, if as long as you understand what first in, first out, last in, last out, and average cost means, then you could do some analysis to see what makes sense. And you might just want to just say average cost is good because it might save me a couple of bucks each year if I do something different.

Al: That’s what I’m saying. I think most people don’t want to do the analysis, just do average cost, good enough.

Paying Tax on Roth Conversions (David, NYC)

Joe: David, he writes in. He goes, “Hello again from NYC. I think this is my 4th question in two years. Thanks for all your previous answers. There were some radical bits of info in the podcast 326. The suggestions on how to consume, not read of course God forbid, anywhere from 8 to 400 books a day is worth trying. Slightly less radical, but something I never heard before because it’s not typical advice was in this exchange about taxes to pay for Roth conversions. Many thanks to Andi’s mother for the transcript.”

Al: So now you’re going to actually read word for word what you said?

Joe: No, I’m not.

Al: You’re not?

Joe: I think what our exchange was, is that we rarely tell people to pay taxes out of the IRA-

Al: – on a conversion.

Joe: – on a conversion.

Al: That’s right.

Joe: Unless you have a very large retirement account with very little liquidity and large fixed income.

Al: Yeah, like let’s say you get high Social Security and maybe a high pension and a bunch of money in a 401(k) and an IRA and no other money outside of retirement, then you might be a good candidate.

Joe: And we would almost always probably tell people to do a home equity first. Because it’s cheaper money than paying tax to pay tax to pay the tax.

Al: Right. And by doing that you have other money to pay the tax. You get a lot more money into a Roth IRA.

Joe: “So this basically describes my situation-” We’re back to David here. “Because most of my Traditional IRA money came from a 401(k) that was primarily invested in stock funds from the 1980s to 2010 and the market cooperated with great returns. The balance now is slightly more than $3,000,000. I was late to begin converting any of that to Roth and that balance now is $130,000. I don’t have a pension, but I do have a variable annuity worth $157,000. Why an annuity? I invested about $25,000 in 1994 in the tax-deferral since I was maxing out my IRA and 401(k) contributions. I didn’t consider the tax implications 30 some odd years later and there was no YMYW to set me straight. Meanwhile, I’m 69 and I have two plus years before RMDs hit. Other info, I’m married, my wife is still working. She has a stock heavy 401(k) of about $1,000,000, a modest Traditional IRA and a very small Roth. Plus she’ll have a pension when she finally retires, but has no immediate plans to do so. I’ve been paying the Roth conversion taxes via estimated taxes each quarter from cash flow created by Social Security and our taxable brokerage account, which is throwing out dividends, a cap gain distros that aren’t being reinvested.” Do you say distros?

Al: I’ve never said that word. I get what he means though.

Joe: Distros, capital gain distros.

Al: Distros, distributions for all the rest of you.

Joe: It’s a little short for distributions. “- that aren’t being reinvested. And this is why my monthly spending money comes from. There usually some extra cash beyond taxes spending to reallocate. There’s some money in CDs that we started back when interest rates were 2% or more, but are maturing soon. So those funds seem fine to pay the taxes, but otherwise tax money is coming from dividends and cap gains that hypothetically could be reinvested in the brokerage account for better returns. So paying tax from the brokerage account seems to come with an opportunity cost. Both a brokerage account and the Traditional IRA are essentially allocated in a 60/40 stock bond cash split. The Roth is all stock. I’ve learned that lesson. So theoretically the rate of return should be similar unless I change the allocation. So finally, the question.” Thank you. “Is this a case where you think paying for conversions is better from withholding from the IRA? I’ve tried to model things out, assuming a modest 5% annual average return for the next 15 years in both cases, since the asset allocations are similar. But I don’t know if I’ve considered all factors. And of course, there’s no way to know what the future Fed and NYC tax rates on capital gains, dividends, distros from Traditional IRAs, etc., are going to be a year from now, much less 10 or 20 years from now. What else should I try to factor into this decision? Thanks for considering what seems to be a pretty mind-bending situation.”

Al: So what do you think?

Joe: No. I don’t know what he’s modeling. Pay the tax outside of the IRA.

Al: I agree. You got- it sounds- you didn’t tell us how much you have in non-qualified, but you have enough dividends to pay the taxes, do that.

Joe: Right. And it’s a cheaper tax rate.

Al: And if you don’t have enough money for dividends, then just cash out some of the stock, because I’d rather pay capital gains on stock, which would be a lot lower rate than paying ordinary income to pay the tax on a conversion.

Joe: The issue is that he’s- so if I sell some of my brokerage account, he’s like there’s an opportunity cost. Yes, I get that. But let’s just assume you have the exact same investment in the brokerage account, and the exact same investment in the IRA, which essentially he says he does. And if he takes the money from the IRA, the opportunity cost is a lot larger because he has to take the money out to pay tax to pay the additional tax. So it’s tax upon tax and it’s a larger tax than a capital gains tax.

Al: First of all, it’s 100% tax coming out of the IRA. Secondly, it’s ordinary income. When you sell a stock, you’re only paying capital gains, which is a lower tax on the gain part, not the whole thing. So you’re absolutely right. Your opportunity cost is much greater doing it out of the IRA.

Joe: So I don’t know, mind-bending- pretty straightforward, David.

Al: Yeah, I think pretty straightforward too, don’t do it.

Joe: Pay the tax any which way you can, at the last resort then pay it out of the IRA.

Al: See we said pay the tax out of your IRA when you don’t have any non-qualified brokerage money and you have high-

Joe: And he’s got distros-

Al: – and you have high- a lot of money in a 401(k) and high pension. So you don’t quite qualify. David, for our, I guess podcast 326.

Joe: Yes. He just doesn’t want to do it.

Al: I know. Because he likes those investments.

Joe: I know he does. I know he does.

Al: I made so much money here and I just don’t wanna-

Joe: Oh, it just pains me. He likes to see the brokerage account and he’s like, it’d just be easier if I just withhold the taxes on the conversion.

Al: Right. How about this? You just- so you get more money into Roth because you’re not withholding on the conversion and you pick the same investments that you like so much in the Roth. And then you end up better.

Joe: Right. So that’s the issue. He’s got an emotional attachment towards the brokerage account that he doesn’t want to drain down.

Al: I would agree with that.

Joe: Thanks for the question, David.

Now is the time to send in your questions, comments, and stories by clicking Ask Joe and Al On Air in the podcast show notes at YourMoneyYourWealth.com. While you do have the option to either record your question in a voice message or send an email, I’ll give you a little hint: Joe loves the recorded messages, so generally they’ll go to the top of the email list, no matter how long that list is! We know you’ve got money questions, and you know Joe and Big Al have answers – and massive Derails, and questions about your cars, your pets, your livestock – the point is, those messages you send us are the reason YMYW exists, and the source of the info the fellas share and the entertainment they provide. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes to read the episode transcript, access all the free financial resources, and to Ask Joe and Big Al On Air. 

Overfunding 529 Plan and Generation-Skipping Tax (Emilia Erhardt, Maryland)

Joe: Let’s see. OK, we got Emilia Erhardt. Isn’t that the pilot?

Al: Raised from the dead.

Joe: I wonder what she’s got to say.

Al: She’s got to be a little bit older, don’t you think?

Joe: She loves YMYW. “Hi Andi, Joe and Big Al. Thanks for your great show that keeps me educated and entertained while driving kids to crew practice 7 days a week.” Wow. Emilia. “They should rename the sport ‘cruel’ rather than crew.”

Al: I agree with that.

Joe: “A brief background. Happily married, blessed with 3 kids, 17, 15, 12. Live in Maryland. Maxing out qualified retirement accounts. Feel OK about the retirement planning they’re doing. My question is about 529 plans. Given the scary cost of college, ever since our kids were born, we’ve been saving into our state’s 529 plan as much as we can. With help from the kids’ loving grandparents, we’ve amassed approximately $200,000 in the high schoolers’ accounts, a little less than that for the younger kid. The problem is that so much is unknown about college costs, will we get merit aid? I don’t think we’ll qualify for any need-based aid. Will our kids continue to grad school with cost yet another ton of money? Based on family statistics, chances are high.” Ya think” They’re in crew?

Al: I would say-

Joe: They’re gonna be doctors.

Al: I would say it’s highly likely. Doctors, attorneys-

Joe: 7 days a week they’re in crew. No, I think they’re going to be bums.

Al: I guess you could have said we play polo. Then we’d really know.

Joe: Well, between polo practice and crew, they read the encyclopedia every night.

Al: We don’t have a TV. We have books. Or some of my kids list to audio books at triple speed.

Joe: He just cured cancer at 12.

Al: That’s right. OK. I think they are going to grad school.

Joe: Yes, I think so. “Will they have the mercy and go to a state public school?” Let’s see. Dream on, Emilia, etc.. “The full cost of a private college these days is about $80,000 a year times 4 times a year. That’s $320,000. And that’s before grad school. My question is about ramifications of over-saving to the 529. I know we’re allowed to rejigger money between our different kids, but what are the consequences of overdoing it altogether? The prospect of having 529 plan money left over growing that could be gifted to our grandkids later, sounds appealing. But I have read about a generation skipping trust-”

Al: Tax.

Joe: “- generation skipping tax.” Well you could put it into generation skipping trust-

Al: You could.

Joe: – to avoid the tax. “- of 40% for passing this down one generation. There are also strict and hard to follow rules about renaming the beneficiaries of 529 plans. Can you please share your thoughts about ramifications of over-saving in 529 plans with an eye towards helping future grandkids may we be blessed with some? Thanks for discussing my question and I hope you keep your excellent show running forever, or at least until kid number 3 can drive herself to ‘cruel’. If you select my question, please email me so I’m sure not to miss it.”  OK, overfunding 529 plans. So you got ordinary income tax and a 10% penalty on any of the growth.

Al: If you don’t use it for education.

Joe: You always get your basis back.

Al: True.

Joe: But the growth is going to be taxed at ordinary income plus a 10% penalty. So then you gotta to do some planning here. You have 3 kids and they’re all doing crew, 7 days a week. There are probably going to be some scholarships, I’m guessing.

Al: Could be.

Joe: But if there’s grad school and things like that, they already have $200,000 in it. If you don’t feel comfortable, because the true benefit of a 529 plan is tax-free growth and tax-free withdrawals upon using it for qualified educational expenses. If you put the money into a non-qualified account and have a tax efficient strategy, let’s say that you’re making sure that you’re rebalancing and tax loss harvesting and things like that, the cap gain rates are going to be lower than ordinary income and a 10% penalty. So maybe you split it up that way.

Al: Yeah, I think so, although I think there’s still a lot of room.

Joe: Ton of room.

Al: $200,000 with 3 kids that are probably going on to higher education after college. So I think there’s plenty of room, but I think that’s right. I think you kind of split it between the two. You don’t want to overdo it, but on the other hand, you know, maybe you do save it for the grandkids. And I don’t think there’s a generation skipping tax unless you’re over the exemption.

Joe: Of course.

Al: So right now, the exemption limit’s $11,500,000 per person, although that could come down. So that could be a factor later.

Joe: OK, well, I don’t know, maybe Emilia has $22,000,000 net worth.

Al: Maybe. Maybe $50,000,000.

Joe: So I guess, if Emilia, you have a $22,000,000 net worth, that’s also increasing with inflation, don’t worry about the generation skipping tax unless you’ve already gifted and you feel that you will have an estate tax issue. If you have an estate tax issue, then that’s one thing. So I don’t know what your net worth is, but I would imagine it’s probably pretty high because of-

Al: Because of ‘cruel’. Yeah, I think that’s a reasonable guess.

Joe: I think it’s expensive. I think it probably cost $10,000 just to look at that boat.

Al: Here’s the other tip that it’s high. She wouldn’t give her regular name.

Joe: Yes, Emilia. Emilia Earhart. I don’t know. I wouldn’t worry too much about the generation skipping. I would plan on fully funding two kids.

Al: Here’s another thing is even if you overfund it, which doesn’t seem likely with 3 kids that are going to go on and on and on in education, but let’s say they do. And then as you get a little bit older and need something to do, you go back to college, you keep learning. You have a lifetime of learning, and you can use those funds to do that.

Joe: Learn how to fly a plane.

Al: A little better than the first time.

Joe: A little bit better than the first time. New equipment. But the last point I would like to make, though, is to make sure that your retirement is buttoned up. You know what I mean? So if you’re worried about overfunding it because you need those dollars for your own retirement, I’m assuming that’s not the case. But we have seen people overfund college or not fund their own retirement for their kids’ college. That totally blows them up in their overall retirement. Or they’re taking on their kids’ student loans of $200,000 or $300,000 when they only have $150,000 saved for their own retirement and they’re in their ‘60s. So you want to make sure that you take care of you first for your retirement. You can always take loans out for college. You can’t take a loan out for your retirement. So, Emilia, thanks for the question.

Refinancing: What Are the Rules About Interest Deduction on a Mortgage Exceeding the Purchase Price of My Existing Property? (Mike, San Diego)

Joe: Mike writes in from San Diego. “I have about $1,000,000 in equity, around $500 in my owner-occupied house and a little more than that in a rental property. I want to refi both to get a better rate and buy another rental. What are the rules about interest deduction on a mortgage exceeding the purchase price of my existing property?”

Al: Ah. That’s a great question and it’s somewhat complicated, but I’ll try to explain simply as I can. So basically, the IRS says if you borrow money on a property, whether it’s a rental or your home, you can only deduct the interest that you use to buy the property. That’s called purchase money interest. Or improve the property, that’s considered purchase money interest. Now, in this case, what Mike is thinking of doing is basically refi-ing to where he gets cash out. So he’s borrowing more and is going to use it for another rental property. And believe it or not, that’s OK. Because the thing is, to the extent that you took cash out, then the IRS has these rules called interest tracing rules, which just means that you can deduct that interest, but not all of it on the property that you borrowed it on. You have to trace it to where those funds went to and then you deduct it against that new rental property. So it’s a little tricky to report. In other words, like on your home, you report all of it on Schedule A as a deduction. So it matches the form 1098. But then you back out the part that goes to Schedule E on your rental. So you end up with a lower amount on Schedule A, the itemized deductions, and you put the rest on Schedule E, which is your rental property schedule. So that’s the mechanics of how to do it. But the quick and easy answer is you can do this. As long as you’re using the money for another investment, you’ll be able to deduct it. But you’re going to have to trace those rules and deduct the interest on another schedule.

Joe: I guess the next question is, should he do it? I know he’s not asking us.

Al: He is. Yeah, there’s some problems potentially. In a rising market, you’ll never have a problem. Well, I shouldn’t say never. But you’ll rarely have a problem. In a declining market, big problem. I can tell you from experience. And I can’t tell you, Mike, how many books I read that warned about this. And I still tried to, even as an accountant. I said, OK, I’m only going to buy this property because the cash flows and then and then it goes up and I refinance. OK, I’m going to buy another one, the cash flows. No matter what, I’ll be able to cash flow this thing in all kinds of markets. Well, guess what? The Great Recession happened and the properties that I was renting for $1200 a month, I couldn’t even get $700 a month. I mean, no one had money to pay rent. And so therefore I didn’t have money to pay the mortgage. And that’s the problem. So the more homes you buy in a rising market, the quicker you can grow your wealth. But just understand there’s more risk. And pretty much every single real estate guru that I read their books, if they were honest and many of them are, basically went through a story on how they lost everything. And so they did it differently the next time. And in some cases they lost everything twice because it’s a hard lesson to learn. So the fact of the matter is the more properties you buy, the faster you can grow the wealth. But the more risk it is and the more chance in a downturn you could lose your properties.

Joe: So would you take money out of your primary residence to purchase a rental property?

Al: I have, and I don’t recommend it. Because you’re kind of putting your own property at risk in a major downturn and you think, well, properties go down 10%, who cares? But in the Great Recession, I had some properties in Las Vegas and they went down 70%, 7 – 0. So a property that was- I bought for $200,000, was now worth whatever that works out to be- $60,000. No joke. And I couldn’t afford the rent and the mortgage was $120,000,  $140,000. Those are scary times and that could happen again. It happened during the Great Depression. It happened during the Great Recession. It happened in the ‘90s. Now in the ‘90s in California, it only went down where we’re at. And Mike, here in San Diego, it went down about 20%, which isn’t 50% or 70%. But still 20%. If you don’t have other resources to cover your cash flow and let the economy recover, you’re at risk. So just be aware of that.

Joe: So he’s got $1,000,000 in equity. And so I remember the term like debt equity. You have debt equity.

Al: Yeah. Right. So you want to-

Joe: You’ve got to put that to work.

Al: You do. Because you’re not- you don’t have enough, you don’t have the property for that equity for your growth. And that is true. And you remember when you and I first met I had all this equity on paper and then it all slipped away. So Mike, it really does happen. So just be careful on that.

Joe: Big Al. You had a big net worth statement.

Al: Yeah. Until I didn’t. Well, I’ll tell you what, I learned a lot of lessons. And I still own rental property, Mike. I like rental property. I’m just more careful now.

Joe: We don’t know how old Mike is.

Al: No we don’t.

Joe: As long as you have cash flow and time. So if he’s got a really good job that is dependable, but who knows, what’s a dependable job?

Al: I know in a bad economy, you don’t know. And I guess one real estate, one apartment real estate broker who I like and trust, he told me once and I agree with this, he said, ‘for every property you buy, have at least 3 months rental income in reserve just to set aside’. And I think that’s good advice. Maybe you even want more for safety, but at least have that. And did I have that? No, I didn’t.

Joe: Well, you had a lot of doors.

Al: I had a lot of- I kept using my money to buy more doors.

Joe: Well, good luck, Mike. Hopefully that helps.


Listening at high speed, color and context, the Bomb, and crew practice in the Derails. 

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