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 [...]

Andi Last

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

Published On
February 13, 2024

Are there general guidelines on what percentages of your investment portfolio should be in tax-free accounts like your Roth, tax-deferred accounts like your 401(k), and taxable accounts like your brokerage? Joe Anderson, CFP® and Big Al Clopine, CPA spitball on tax diversification today on Your Money, Your Wealth® podcast 468 for Brian in Naperville, IL. William in NH also wants to be tax-diversified. Is his Roth conversion strategy a mistake? Should he be converting much more to Roth? The fellas also do a retirement spitball analysis for Tom in Spokane, WA, and for Claire in CO, who wants to retire next year. Plus, how does Matthew in CT calculate excess Roth contributions, and how should Thomas in IA reallocate assets he over-contributed to his brokerage account? Now that Sean in FL no longer has a traditional IRA, can he use the backdoor Roth strategy? We kick things off with a question from Joe in Dallas on how to account for taxes on the money you’ll be spending in retirement.

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Show Notes

    • (01:06) How to Account for Taxes on What I’ll Spend in Retirement? (Joe, Dallas, TX (voice)
    • (06:13) Now That I Don’t Have a Traditional IRA, Can I Do a Backdoor Roth? (Sean, FL – voice)
    • (11:35) Spitball Our Financial Status and How to Reach Our Retirement Goals (Tom, Spokane, WA)
    • (17:42) Tax Diversification General Guidelines? (Brian, Naperville, IL)
    • (23:23) Goal: Tax Diversification. Is My Roth Conversion Strategy a Mistake? Should I Convert Much More? (William, NH)
    • (30:04) Spitball If I Can Retire in 2025 (Claire, CO)
    • (34:39) How to Calculate Excess Roth Contributions? (Matthew, CT
    • (38:23) Over-contributed to Brokerage. How Should I Reallocate Assets? (Thomas, Iowa)
    • (42:55) The Derails

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Andi: Are there general guidelines on what percentages of your investment portfolio should be in tax-free accounts like your Roth, tax-deferred accounts like your 401(k), and taxable accounts like your brokerage? Joe and Big Al spitball on tax diversification today on Your Money, Your Wealth® podcast 468 for Brian in Naperville, Illinois. William in New Hampshire also wants to be tax-diversified – is his Roth conversion strategy a mistake? Should he be converting much more to Roth? The fellas also do a retirement spitball analysis for Tom in Spokane, Washington, and for Claire in Colorado, who wants to retire next year. Plus, how does Matthew in Connecticut calculate excess Roth contributions, and how should Thomas in Iowa reallocate assets he over-contributed to his brokerage account? But first a couple voice messages. Now that Sean in Florida no longer has a traditional IRA, can he use the backdoor Roth strategy? We’ll kick things off with a question from Joe in Dallas on how to account for taxes on the money you’ll be spending in retirement. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

How to Account for Taxes on What I’ll Spend in Retirement? (Joe, Dallas, TX (voice)

Joe: Answering your money questions.  Give us a ring, give us a voicemail, give us a text message, email.

Al: Send us a letter.

Listener Joe: Send us a letter. Whatever you gotta do, go to YourMoneyYourWealth.com is the easiest place to get your questions answered like Joe did from Dallas, Texas.

Joe: “Hi guys, I’ve got a question for you regarding retirement period. Many of the callers call in and say, for example, I have $2,000,000 in my retirement accounts and I want to pull out 3% a year. Do I have enough to retire? And I’m only going to spend $60,000 a year.  But you need to take into account taxes on that $60,000. So they wouldn’t really have the $60,000 to spend and I’m wondering what I’m missing here because I know y’all have a good feel for this and you understand it. But I don’t understand how the taxes piece works and I was wondering if you could clarify that. I really enjoy the podcast. Thank you.”

Joe: Very good. So, finally, very good question.

Al: Right off the bat, huh?

Joe: Because he’s right on, and he’s getting in the weeds a little bit, which is great.

Al: Right.

Joe: Because I think what we try to preface is that his 4% rule or 3% rule is, it helps you to determine if you’re in the right zip code, if you have enough assets.

Al: Yeah, that’s well said. Sometimes people end up with doing this calculation and they’re a 9% distribution rate. No, it’s not going to work.

Joe: Right. If someone has $2,000,000 and they want to spend $200,000 a year, I think I have enough because I have $2,000,000. So they retire with $2,000,000, you know, spending way too much. So the 3%, 4% rule of what we talk about to see if people are on track is just to see if their nest egg is large enough to have a sustainable withdrawal rate over a 30 year period.

Al: Yeah. Now the truth is we use 3% and 4% and portfolio invested, say 60% in the market, 40% in bonds, for example, should earn a 6% or 7% rate of return over time. So why not just take out 6% or 7% every year? Well, if you do that, you don’t have enough to pay taxes, nor do you have enough for growth to have money for inflation. Right? And for market downturns. So that’s why it’s very confusing sometimes. And some people think, well, stock markets are in 10% a year last 100 years. I’m just going to pull out 10%, but well, you got, there’s inflation, there’s taxes, there’s market downturns. That’s why we use the 3% or 4%. We’re trying to factor in something for taxes. Now, on the other hand, it’s just a, it’s just a guideline. If you’ve got all your money in a retirement account, you may want a slightly lower distribution rate just because you’re going to have to pay more taxes, right? If you got a lot of money outside of retirement account or in Roth, you might even be able to do a higher distribution rate. So we’re just trying to give you a basic guideline, whether you’re sort of on track or not.

Joe: Because where the retirement planning really comes into play is how is that person going to create the $60,000 of income? What accounts is it going to come from?  Because that’s why we’ve been talking about tax diversification for over 20 years. Most people have all of their nest egg, let’s say in this example $2,000,000 in the retirement account. So every last dollar that comes out is going to be taxed at the highest of rates. So we look at hey, does it make sense to do a Roth contribution? Does it make sense to do Roth conversions, pay the tax at potentially at a lower rate. Because then that gives that person control on taking the distributions and paying a lot less tax in retirement. But the distribution rule is just one piece of a 12-piece puzzle. But I think that’s the most important for someone that doesn’t under- like really gets in the weeds. Right, because if I’m going to retire and spend $200,000 on a $2,000,000 portfolio, a lot of people would be like, that’s crazy. But I’ll tell you what, most of the population would- does that. Or they think that, hey, you know, $2,000,000 is a ton of money, and I think I can spend $200,000 because the market’s up or whatever. They don’t really truly understand sequence of return risk. They don’t understand taxes. So if you’re being diversified in your tax strategy, having money in Roth, having money in non-qual, or a brokerage account and having money in a tax-deferred account, and all of those pools of money are taxed differently, your money can stretch that much further because you’re paying a lot less tax, because you have control of the tax bracket as you’re taking the distributions.

Al: Right. And then you can spend more in retirement, or if there’s market downturns, you’ve got more cushion. So, so it’s, when it comes to distributions, actual distributions, it’s probably not going to be exactly 4% each and every year. In fact, it’ll probably never be that, but it gives you a guideline whether you’re on track.

Joe: Very good question, Joe from Dallas. Really appreciate it.

Let’s see who’s on deck here.

Now That I Don’t Have a Traditional IRA, Can I Do a Backdoor Roth? (Sean, FL – voice)

Sean: “Hey, Joe, Big Alan, Andi, this is Sean from Florida. I’m calling you guys again for a follow-up question about the mega backdoor Roth- or was it the garage backdoor Roth? Either way, if you recall I did an in-service distribution and pulled some money out of my 401(k), the after-tax portion pf course. That required me to open up a traditional IRA  where I had to put approximately $96,000. Last time I called, you guys recommended that I put that traditional IRA back into my 401(k) which I’ve done. I did that in January. So now I have no traditional IRA and I’m wondering even though I had some money in a traditional IRA this year in January, now that I don’t have one, can I  institute a backdoor Roth for tax year 2014? Thanks for answering my question guys. I drive a 2013 Toyota Tundra, have about 35 African cichlids. And I’m coming off my water fast of 7 days, so now my drink of choice is Diet Coke.”

Joe: I think he’s saying 2024.

Andi: I think so too.

Joe: Unless he’s a time traveler.

Al: Well, could be. You never know.

Joe: Wow. Back to back, decent questions here.

Al: Yeah, Yeah.

Joe: So, he actually listened to some spitball.  So here’s what he did, he had some after-tax dollars, rolled it out, some dollars had growth on it because I think he just started listening to the podcast and goes, hey, I have after-tax dollars and just 401(k), I can put it into the Roth, but then the growth goes into the IRA. But now, because I have an IRA, dollars in an IRA, I’m stuck with this pro rata rule. If I do a non-deductible IRA contribution, I have another $100,000 here in an IRA, it’s going to screw up the backdoor Roth. So what do I do? And so we talked about potentially, well, just put it back in the 401(k) because the IRS doesn’t care if it’s in a 401(k), but it cares if it’s an IRA. And usually the 401(k) will take those dollars, which he did in the 401(k) took the dollars. Now he doesn’t have any money in an IRA and he wants to do the back door.

Al: Yeah. And he wants to know, can he do it in the same year? Does he have to wait till next year?

Joe: Yeah, because dollars touched the IRA.

Al: Right. Right. Right.

Joe: Tainted it.

Al: Yeah, it’s a great question. I think the answer, Joe, correct me if I’m wrong, it’s the balance you have in the IRA at the end of the tax year determines what you can do during that year.

Joe: December 31st.

Al: Right. So the fact that you had IRA money in January doesn’t matter, because if you have none at December 31st, you could do that back door Roth conversion.

Joe: Yeah, this is where it blows up. The opposite happens. Is that all right, I make too much money. I cannot do the backdoor Roth IRA, or I cannot do a straight Roth IRA contribution.  I do the backdoor Roth in January. For those of you that want to do Roth contributions, do them now early in the year, because then you get the compounding growth tax-free.

Al: Right.

Joe: So, if you do a backdoor Roth,  and then let’s say you retire, or something happens, and then you roll your 401(k) into an IRA in December,  well, I didn’t have any money in an IRA when I did the backdoor Roth IRA. So, but I now have money in a Roth or an IRA in that same calendar year. That will blow up your backdoor Roth, because it’s December 31st. They take a look at the aggregate balance of it. Remember the recharacterization rules?  When we would look at doing double conversions, and then you recharacterize, but when you did the conversion, we would say, oh, well people thought my RMD is going to be lower, but you recharacterize it back in.

Al: That’s right.

Joe: So there- it’s always kind of at the end of the year when the IRS looks at some of the stuff. So, he’s safe. You’re good to go.

Al: Yeah. Agreed.

Andi: My audio studio is littered with multiple copies of one single two-sided sheet of paper, because Joe and Big Al each grab one as they head in to record the podcast every week. Along with their email list, and their HP12C financial calculators, it’s a must-have for them to be able to spitball for you. It’s the 2024 Key Financial Data Guide, and you should download a free copy for yourself from the podcast show notes. It shows the fellas at a glance this year’s tax brackets and capital gains tax rates, retirement plan contribution limits, tax on Social Security, Medicare premiums, and all the current credits, deductions, exemptions, distributions, and exclusions. All the numbers that affect your financial strategies as you plan for retirement. One listener said that, basically, this guide alone is worth the price of admission to YMYW. In other words, it is priceless! To download the 2024 Key Financial Data Guide, to Ask Joe and Big Al your money questions, and to share YMYW with your friends, just click the link in the description of today’s episode in your favorite podcast app, go to the show notes, you’ll see all of that right before the episode transcript.

Spitball Our Financial Status and How to Reach Our Retirement Goals (Tom, Spokane, WA)

Joe: Let’s see what Tom has in store. We got “Big Al, Joe, Andi, finally found the time to write. I’ve been listening for about a year and love it. You 3 are priceless together-”

Andi: Oh, thanks, Tom.

Joe: “- so never split up.”

Al: Okay, we’re in it forever.

Andi: It’s a marriage.

Joe: “Andi is very good at keeping you two focused. I love your expert-“

Andi: Thanks.

Joe: Yeah, look at you. “- I love your expert opinions. Anyways, my name is Tom, and I’m a retired veteran of 22 years.” Thank you for your service. “I still work for the DOD as a survival instructor.” What the hell is that?

Al: Well, that’s, I think, to train people how to survive in tough situations, I’m guessing.

Joe: Or just to survive the job at the DOD.

Al: Well, yeah, that could be too.

Joe: You know that one person’s like, I have 232 days left for my retirement, just counting the minutes.

Al: We’ve seen that sometimes with government employees.

Joe: “I’m 61, wife’s 65, we have two Scottish full cats. We are the owners of two vehicles, 2023 Honda Pilot and 2015 Honda Pilot.” Oh, they like the pilots.

Al: They do.

Joe: Okay. “I enjoy a, uh-“

Andi: Ciroc-

Joe: Is that like a liqueur?

Andi: It’s a French vodka. As is Idol vodka.

Joe: Oh. Not a big vodka guy.

Al: There you go. Me neither.

Joe: Likes it “- on the rocks and occasional single malt scotch.”

Al: That’s it. That’s that one.

Andi: You gonna try this one, Joe?

Joe: Nope.

Andi: It’s Auchentoshan. And it’s from Scotland.

Joe: Auchentoshan.

Al: There’s no way anyone can get that.

Joe: No way. There’s like, there’s like 17 letters in it.

Al: A U C H E N T O S H A N.

Joe: “My wife has her Moscow Mules at times. Enjoy sipping while watching Gonzaga basketball. We reside in Spokane, Washington. We have 5 kids, 10 grandkids. I’ll get right to my question and details of our current situation. My wife is a retired hairstylist. I would like to retire at 65. So requesting a browse of my financial status and please provide us with the best opinion and how we can get to our goal. So here’s the goal. So wants to spend about $100,000 to $110,000 per year. They have income of $96,000. Current pension per month is $3800 and $2300. Future government pension is going to be roughly $1000 a month. Social Security for the wife is another $1000 a month. Social Security for me is going to be $3500 a month.” I think he really hit his goal.

Al: Looking pretty good, yeah.

Joe: Alright, so he’s “Got a home, $700,000, no mortgage, Roth IRA, $250,000, IRA, $250,000, brokerage account, $120,000, IRA, $125,000, TSP, $25,000, savings, $125,000.” Is that $1,000,000?

Al: Yeah, it’s about $900,000.

Joe: Okay, “I contribute 22% of the government income- on my government income to the TSP invested in the CNS funds, pretty aggressive with our investment strategy, $1375 per month to IRA Roth, same investment strategy across all of our investments. We are on the 22% tax bracket. I hope this helps to give a snapshot of our situation to be able to give us a good spitball and opinion on how to get to our goal. Again, we’re pretty conservative with our future spending. We want to spend as much time with our grandkids. We’re both healthy and work out fairly consistently. Look forward to hearing back or hearing my letter podcasts. Thank you.” What’s the total fixed income?

Al: Okay, I’ve already done some math.

Joe: Okay, good.

Al: Let me help you out. So, I figured, let’s go high end. $110,000 a year. And if we just go with his goal of working 4 more years, with inflation that would be about $124,000. Fixed income is $97,000. Not including his Social Security. So that’s out there, right? So shortfall’s $27,000, liquid investments $900,000, but 4 years with what he’s adding 6% would be about $1,300,000, which means it’s a 2.1% distribution rate, which is very good. Which actually means you can retire earlier if you want to. But certainly 4 years, there’s no problem. And that’s not even including Social Security. So to me, there’s plenty of assets to cover their income goals at 65 and likely much earlier too.

Joe: Yeah, the fixed income-

Al: I mean, that covers it right there. I mean, if you just take $110,000 minus $97,000, that’s $13,000. And I mean, it’s still a great distribution rate, right? So you could retire potentially retire now.

Joe: Right. He’s got no debt. The fixed income is there. Yeah, blows through his assets. I mean, he could probably spend $150,000 bucks a year.

Al: Definitely can spend more. Yep. So yeah, so here’s my bigger concern. Which is, with all this fixed income, it’s all ordinary income. There’s money in an IRA, $143,000, another one, $128,000. You know, let’s call it approaching $400,000. So because you have so much fixed income that’s ordinary income, I’d like to get that converted. Maybe even all of it.

Joe: For sure. Yeah, because he’s in the 22% tax bracket. That’s, he’s probably going to be in the 25% tax bracket when he hits retirement.

Al: Yeah, exactly.

Joe: If rates go up in the next couple of years.

Al: That’s right. And if he doesn’t do conversions, just, you know. Yep.

Joe: Get that money out of the IRAs, do conversions throughout, and then most of his income from his investments will be tax-free or cap gains.

Al: Yeah, exactly.

Joe: So, very good, Tom. Congrats.

Tax Diversification General Guidelines? (Brian, Naperville, IL)

Joe: Got Brian from Naperville, Illinois. “I understand that tax diversification is important and that money should be saved in the taxable, tax-deferred, and tax-exempt accounts. However, I haven’t seen a description about the proper proportion to be held in these accounts? I understand that this is a complex idea and it will be somewhat different for each individual circumstance. However, there should be some general guidelines and ideally there should be a calculator or formula that should help investors determine the correct target percentages. So having 80% versus 40% assets in a Roth is a big difference and it will have a huge impact from a tax perspective.” Okay, where’s the- I agree.

Al: Yeah.

Andi: I think the question is, what should be the proportion to be held in each type of account?

Al: And the answer is, it depends.

Joe: You already answered it. How much money do you wanna spend? Do you wanna spend $200,000 a year or do you wanna spend $40,000 a year?

Al: What tax bracket are you in now versus in the future?

Joe: Do you wanna leave a legacy? Or do you want to give it all to charity? You, I mean, there’s so many different factors.

Al: Exactly, exactly. Real life example, you got $100,000 in an IRA and nothing else. Keep it in the IRA. You’re going to be in the lowest bracket. Who cares? You got $5,000,000 in an IRA. You better start converting that because your required minimum distributions are going to be through the roof. But it does depend if- Now, if you’re going to give a lot of it away to charity with the qualified charitable distribution, you can keep a lot more in. If you don’t have kids, and it’s just going to go to whatever, maybe you don’t care about the taxes as much- but I will say one other thing is, a lot of times when people are thinking about this, they think about what’s best for my kids, but it’s like, no, it’s really what’s best for you because people are living into their 90s. So you retire and you may have 30 more years to be in a high tax bracket.

Joe: Let me try to answer this, because I- we get this question often, and everyone wants a really simple answer. Okay, well here, have 30% in a Roth, and 33% in this, and you know, 33% in that, and the rest in cash. Here’s what they have to do. You have to do a little bit of work. There’s no general guideline. There’s no rule of thumb. I wish there was. I mean, for me, 100% Roth. There you go. That’s what you want. You’ll never, ever pay taxes again. But, I don’t know what tax bracket that you’re in. So, you could overpay in tax by getting everything in Roth. So, it’s not that simple. Is it 50/50? Maybe. But you can map this out by looking at how much money that you really want to spend and then you map out what you have in each of these different accounts. So you take your inventory, how much money you have in tax-deferred accounts, such as your IRAs, how much money you have in Roth accounts, how much money you have in a brokerage account. And then you forecast those out, model it out at 6%. Now then you have to look at your fixed income. Do you have a pension? Do you have Social Security? Model that out with inflation. And then you’re going to look at your shortfalls. How much money is going to be demanded from the overall portfolio? Is it $20,000 a year or is it $180,000 a year?

So if you already, if you have enough money, then you can model it a lot more effectively by saying here, I need to pull X amount of dollars from my portfolio and I want to keep myself, let’s say in the 12% tax bracket for life. So I might have to convert to the top of the 22% tax bracket today to keep myself in the 12% tax bracket forever. So, those are the strategies that you want to start modeling out. I wish I could just say, yeah, just put, you know, 33% in each of the different pools and call it good. That’s probably better than not doing anything.

Al: Probably so. I mean, a couple questions ago, we talked about Tom in Spokane, and what I would do is convert 100% of it because he’s got so much pension income and not a ton of IRA, I would convert it all. But that’s- every case is different.

Joe: And the whole purpose of having money in each of these different accounts is having control over your taxes in retirement. Because you’re going to potentially, you know, hey, I’m going to take enough out of my retirement account just to get me to the top of, let’s say, the 12% tax bracket. Or for people that want to spend a lot more money, I’m going to pull out of my retirement account to the top of the 22% tax bracket. But I still need more cash flow. So then that’s when you pull from the Roth. That’s when you pull from your brokerage account, because those are going to be taxed at a lot lower rate.
So you’re controlling your taxes long term. So, ideally, would it be great to have everything in a Roth? Sure, because then you know that you took the uncertainty of higher taxes off the table. But unfortunately, that’s probably not the most effective way because you’re going to leave money on the table because you converted probably too much.

Al: Yeah. And to me, there’s one kind of foolproof way, which is you look at your tax bracket today. What’s your top rate, your marginal rate, the highest rate that you’re in, let’s say it’s 33%, for example. Then you look at your income after you retire, before Social Security, before required minimum distributions. Oh, you’re in 12% bracket. You should be converting like crazy, right? When you look at what your income is going to be after your required minimum distributions and Social Security. So you just have to look at your income at different points. Now, if you’re in a very high bracket and you always will be in a high bracket. It’s, there’s less urgency in a way, but on the other hand, maybe your kids are in high brackets too and you want to convert so that you relieve them from taxes. I mean, it’s so individualized.

Goal: Tax Diversification. Is My Roth Conversion Strategy a Mistake? Should I Convert Much More? (William, NH)

Joe: All right, we got William from New Hampshire. “Hey, Al, Joe and Andi, love your show. Thank you for all the help you provide us as we try to manage our finances. I retired at 62 and I’m 68 now. My question is about Roth conversions and whether my current strategy of staying in the 12% tax bracket is mistaken.” All right, so he’s “Got $1,500,000 in pre-tax retirement accounts, $400,000 in Roths, $275,000 in a brokerage account,  and so a total of about $2,200,000.  Social Security will start at 70, that’s $4000 a month for him. Cash on hand is about $70,000.  My wife is 61, still employed, with a salary of $48,000 a year. She’s got $750,000 in pre-tax retirement accounts. And $60,000 in Roth accounts, so $800,000 there.  She plans to take Social Security when she retires at 65 or perhaps waiting until FRA or even at age 70. Our expenses are $100,000 a year, including taxes. Our goal, not to convert everything to Roth, but rather have tax diversification. We intend to use qualified charitable distributions to share some of our wealth.” Oh, thoughtful.

Al: Very good.

Joe: “We also want to leave money to our nieces and nephews without having a lot of money going to taxes, as some of them have high incomes. While I’m in good health, the actuarial table suggests that my wife will outlive me and will need to move and we will need to move to a retirement community where assisted living is available.” Wow, this guy can tell the future.

Al: He can.

Joe: I wonder what ailments he’s going to have.

Al: Right?

Joe: This is a very detailed strategy he’s got.

Al: And we’re just getting into it.

Joe:  Oh my God. “She will need adequate resources to do this. This is a very important goal for me. We do not have long term care insurance.” So perhaps this could happen, but he’s saying it’s going to happen, so it’s a given, we’re going to plan for it, I’m going to set aside some cash.

Al: Yeah, she’s going to live longer anyway, plus she’s way younger, right? Way, by 7 years, right?

Joe: Is she?

Al: Yeah, she’s 61, he’s 68.

Joe: Okay,  that’s not “way.”

Al: So she-

Joe: Jeez. That’s aggressive.

Al: Well, but actuarially, she’ll outlive him by 11 years.

Joe: “We are currently in the 12% tax bracket. I’ve been doing Roth conversions up to the threshold of the 12% tax bracket, which means I’ve been converting about $50,000 a year since my retirement, age 62. My strategy has been to stay in the 12% tax bracket since we have plenty of opportunities to be in a much higher bracket. I’ve been moving equities into Roth, leaving the guaranteed TIAA traditional in pre-tax accounts. My question, is my Roth conversion strategy mistaken?”  Or is he trying to say, is it a mistake?

Al: No, well, he’s only doing it to the top of the 12% bracket. So I think that’s what he’s asking.

Joe: “Should I be doing much larger conversions in 2024 before I take Social Security?”

Al: Yes.

Joe: Absolutely.

Al: Yep.

Joe: “When I turn 70, Social Security will put us closer to the top of the 12% tax bracket. Should I be filling my brackets with zero capital gains from my brokerage account instead of doing Roth conversions?” He only had like $230,000 in their brokerage account.

Al: Yeah, let’s see $275,000.

Joe: “I have done this before. They aren’t subject to RMD’s. Two, the 15% cap gains tax rate is still lower than the tax rate of ordinary income and 3, unless there’s a big change in the tax code, it would go to the heirs with a step-up basis. “Is my reasoning faulty?” No. Right on.  “I’ve been converting my pre-tax equities to Roth first since the RMDs will start first. And then it conversions to my wife’s equities, am I mistaken in this strategy? Thanks for all your thoughts on this.” He’s right on, man. This guy’s nailing it. So a couple of things- he’s got a ton of money in retirement accounts. He converted to the top of the 12% tax bracket. Should he convert it to the top of the 22% or somewhere in that bracket? I think probably yes.

Al: Yeah. And here’s why. Because his IRAs, by the time he turns 73, which is RMD age for him, at a 6% rate of return 5 years from now, it’s $2,000,000. So that’s $80,000 roughly of an RMD plus Social Security.

Joe: Plus his wife’s income.

Al: Plus his wife’s income. Plus earnings from non-qual accounts. Yeah, you’re going to be in the, what is now the 22% bracket easily. And probably at that point, it could be 25%. It could be 25% or more.  So, yeah, you want to convert probably to the top of the 22% tax bracket this year. Does he want to sell? Because if he sells in the 12% tax bracket, his capital gains, the capital gains rate is 0%. But $230,000, I don’t know what the basis is. Did he say what the basis is?

Al: No.

Joe: I would convert.  And then once you get done converting, then you can sell off some of the non-qual and pay a little bit of capital gains tax. But I would try to get as much out of the IRA as possible.

Al: I would too, unless the equities are highly concentrated and you want to start getting out of these positions with lots of gain in them. But yeah, just based upon these gross numbers, I’m more concerned about the taxes from the IRA than I am the capital gains tax.

Joe: Yeah. And you want to convert yours first because you’re RMDs first.

Al: Correct. Plus you got a lot more anyway.

Joe: Yep.

Andi: Go to the podcast show notes, take our retirement pop quiz, and test your knowledge on how retirement-ready you really are. Then schedule a free financial assessment, because making the most of your retirement requires more than a spitball from Joe and Big Al. Work with one of the experienced professionals on their team at Pure Financial Advisors, and take a deep dive, with the goal of optimizing your entire financial life. Pure Financial is a fiduciary, and a fee-only financial planning firm. Click the Free Financial Assessment banner in the podcast show notes at YourMoneyYourWealth.com, or call 888-994-6257 and book your financial assessment. You can meet in person at of the Pure Financial locations around the country, or online, right from your couch. No matter where you are, the Pure team will work with you to create a detailed plan that’s customized for your retirement needs and goals.

Spitball If I Can Retire in 2025 (Claire, CO)

Joe: Claire writes in, Big Al.

Al: Yep.

Joe: “Hi, Andi.” Starts out with Andi. Top billing.

Al: Yeah.

Joe: “I always learn a lot from your show. Sharing real world scenarios is a great format.” Thank you. “Here’s my situation and my question. I’m 59 years old, currently earn $200,000 a year. I have $1,200,000 in a pre-tax retirement account. At 67, I’ll receive $3300 a month in Social Security in today’s dollars. I have a $230,000 mortgage at 2.65%, which will be paid off when I’m 72. My home is currently worth $1,800,000. I would like to have $80,000 a year to spend post-tax in today’s dollars when I retire. My question that I would love you to spitball is, can I retire in 2025?”

Al: Yeah, couple years.

Joe: Okay, let’s see. “I have 3 grown, financially independent children and no other debt. I drive a 2014 Mercedes SUV, which I aim to keep for another 5 years. I enjoy all sorts of beverages, but my favorite are a rye Old Fashioned in the winter and a-“

Andi: Mezcalrita-

Joe: Mezcalrita. All right. “- or ice cold G and T in the Summer.”
Little gin and tonic.

Al: Got it. Got that one down.

Joe: Yep. “I found your podcast earlier this year by searching for a financial podcast. I love the banter and the straightforward spitball analysis. Andi is your glue. You can refer to me as Claire, but please do not use my last name.”

Al: Well, we don’t have it.

Joe: “I look forward to every episode and hope to hear my question in an upcoming one. Have a great day.” All right. So she wants to retire in a couple of years. She’s going to get $3300 a month in Social Security, $65,000 a year. She wants to spend $80,000 a year. She’s got $1,800,000.

Al: Yeah, now $3300 is at 67, so she wants to retire at about 61.

Joe: She’s gotta bridge the gap.

Al: You gotta bridge the gap. So here’s just a quick analysis.

Joe: She’s so close.

Al: She’s close, but she’s right on the edge. Yep, I would say so. Let’s just say you got $1,200,000 today. Let’s say you work a couple more years, 6%. I don’t know what you’re adding. I just guessed $20,000. Come up with a number. So anyway, so you’d have about $1,400,000 in two years and you would spend based upon inflation, the $80,000 would be $85,000. So your distribution rate would be 6.1%. Now, if you’re retired 61 within one year, you could get your Social Security and your distribution rate will probably be about 4.1%, which is doable. Right? So then it’s just a matter- do you do that? Or do you just keep taking from your portfolio to let the Social Security grow? It sort of- sort of depends. You want to look at either? I would say in my view, Claire, you’re right on the margin. I would actually work a little bit longer if I were you, but you’re very close.

Joe: It’s all going to be dependent on how those dollars are managed.

Al: Well, that’s true too. I mean, we’re assuming, you know-

Joe: A flat growth rate of 6%, 5%, whatever.

Al: Which probably means at least 60% stocks. And depends whether that’s what she’s doing. Maybe even 70%.

Joe: She could have a downturn. That would blow it up.

Al: It would.

Joe: There’s no way because there’s- Because let’s say she takes that and she wants to wait until 67 hypothetically, right? Here’s the pros and cons of Social Security claiming- a lot of people take it at 62. Because they want their paycheck. They want some sort of fixed income and it’s going to reduce the overall need for the portfolio. So that’s a pro but you’re going to have a reduced haircut on that benefit forever. So if she waits until 67, that distribution rate is going to be 6% for a longer period of time.

Al: That’s right.

Joe: And then the distribution rate will be a lot lower at 67 because she’ll have a lot larger benefit.

Al: Yeah, I mean, if it were me, I would model it both ways and see what, based upon whatever rate of return that I would expect and see what it looks like.

Joe: Yeah, I think she can retire at 61 if she works part time.

Al: Well, that’s correct. That’s what I would say. And here’s another comment is she’s making $200,000 a year. I’m guessing she’s spending more than $80,000 now. So can you really spend $80,000 or is this kind of just, I’m done. I want to get out. I can get by on $80,000. And you’re really close. I would still either work a few more years or I would get some part time income to make it safer.

How to Calculate Excess Roth Contributions? (Matthew, CT)

Joe: We got Matthew from Connecticut writes in, he goes, “Hey, Joe and Al, got a question for you.” Imagine that.

Al: Yeah, well, you’re at the right place, depending upon your question.

Joe: Or, you might have a comment. Questions are good. “I’m 27 years old from East Kepford, Connecticut. I had my Roth set to automatically dollar cost average in $500 a month, but I stopped back in March and made $1500 in contributions anticipating of an income spike. Last year I made $125,000 gross in income. So far this year I made $250,000 gross. I know I have to pull out $1500. But how do I know how much gain to pull out? Or what is the best way you all to advise to fix this so Uncle Sam doesn’t come knocking?” So, he was- I stopped back in March and made $1500 worth of contributions into- so it was a $1500- so he’s going $500 a month and then he went to $1500 a month?

Al: No-

Joe: Or he stopped in March saying January, February, March, $1500. He just stopped the contributions altogether.

Al: I think so because he’s all of a sudden he’s making a lot more and he doesn’t, he knows he won’t qualify.

Joe: Got it.

Andi: And this was sent in November. So it’s probably too late for him to do anything about it, isn’t it?

Joe: No. Not necessarily.

Andi: Okay, good.

Joe: He can still recharacterize that because he doesn’t know what his total income is until he gets his W2s and he does his taxes.

Al: Yeah, believe it or not, this can be recharacterized. In fact, should be recharacterized by the filing date of the return, which with extensions can be October 15th. But go ahead and do it now because it’ll get, it will get it out of your return. You don’t have to worry about excise taxes. The quick answer is this. You got to look at the growth in the portfolio from the time you put the contribution in to when you take it out, and that has to be factored in. That’s earnings, right? And so if there’s earnings, if you may have to take out more than your contribution, or maybe it went down, you actually are allowed to take out less if it went down. So you have to do that calculation. It’s a little bit too complicated to tell you what that- if I said it, no one would get it. So, so just look it up.

Joe: The earnings are going to be taxed at ordinary income. Your principal is going to come out tax-free.

Al: Yeah, no, that, that’s exactly right.

Joe: And so $1500 that you put in March, you just assume a 6%, I don’t know, 6%, 6%.

Al: So I tried to find a nice IRS publication that would help you with this calculation. And true to form, IRS is not very good at explaining their own tax system. Here’s what I did. I did a Google search. I put in ‘over contribute Roth IRA earnings calculation’, and you will get all kinds of sites that tell you how to do this computation.

Joe: So this is what I would do if I was Matthew. So I put in $1500. I would just take a look, what did I invest in? Did I invest in the S&P 500? So the S&P 500 from March until, I’d go to Google or I would go to Yahoo Finance and I would say, March 31st, I don’t know how many days are in March, the end of March to December. And look at whatever that rate of return is. So, we’ll just assume, let’s just say it’s 10%. Well, I put $1500 in, it’s $150. Take the $1500 out and then say $1500 was earnings and pay tax on it.

Al: Yeah, and that’s the quick method and it’ll get you probably 95% correct. Good enough.

Joe: Call that good. That’s best efforts. That’s what we call it.

Al: But there are formulas out there if you want to follow it to a T.

Over-contributed to Brokerage. How Should I Reallocate Assets? (Thomas, Iowa)

Joe: Let’s go to Tom from Iowa. We got, “Hey, Joe and Al, this is Thomas from Iowa. I drive a 2020 CX30, my drink of choice is Crown Apple and Sprite.” Ugh, that sounds a little sweet.

Al: It does.

Joe: “26 year old, make $80,000 a year. I currently max out my Roth IRA contributions 20% of my income, $16,500 or $16,000 in my 401(k). I have $35,000 in savings, $26,000 in a Roth, $45,000 in my 401(k) and $60,000 in a brokerage. I contributed excessively into my brokerage account before I knew any better-”

Al: That’s nothing wrong with that.

Joe: Nothing wrong with that, brother. “- whenever I have extra cash in the savings, I know my brokerage account balance is extremely high. So what are, what I should do moving forward to correct over contributing to my brokerage? Should I max out the 401(k) and sell the difference from the taxable account around $7000 a year to fund this change? Would appreciate a spitball.” All right, so the guy’s got a brokerage account. Most people don’t have brokerage accounts.

Al: Yeah, so already, and the amount of savings for a 26-year-old, I wish everyone did this.

Joe: He’s killin it. You want the money in the brokerage account because it’s going to give you flexibility. He’s 26 years old and he saves a ton.

Al: Yes.

Joe: He’s going to retire probably earlier than 60.

Al: I would say so too.

Joe: This will give our boy Thomas here a lot more flexibility when he’s looking at creating income. Let’s say he wants to win. He’s pretty savvy guy. He wants to say, Hey, maybe I want to invest in a business. Maybe I want to start my own business.
Maybe I want to invest in real estate. Maybe there’s some other things that he can do with his cash. That brokerage dollars is going to be the liquidity that he needs. Trust me, Al and I have been doing this for more than I’d like to talk about, I think, nowadays.

Al: How long is that?

Joe: I don’t know.

Al: Decades?

Joe: That’s- I hate that word.

Andi: Collectively, isn’t it like 50 years or something?

Joe: No. It’s, I don’t know.

Al: Probably more than that.

Joe: 20, 20, 25 years.

Al: For you?

Joe: Anyway. Yeah, late 90s.

Al: And once you get to 60, you stop counting.

Joe: Yeah, over 20 years.

Al: For me.

Joe: So, what we find is that most people’s savings are in a retirement account. It’s all in a 401(k) or IRA. So, they got millions in that and they don’t have any other liquid assets. So, 100% of their income has to come from that account and everything is going to be taxed at ordinary income. So, I love what Thomas is doing. I would continue to do what you’re doing. He makes $80,000 a year. He saved $16,000. That’s pre-tax plus that. So that’s going to give him, he’s still in, he’s just on the cusp of the- is he married or single?

Al: Probably single.

Joe: So yeah, 26, probably single. Only took me 47 years to get there.

Andi: Well, he doesn’t mention a partner, so.

Joe: Yeah. So, all right. Well, he’s barely like, he’s in the 22% tax bracket. If he was in a higher tax bracket, then I would say, yeah, you might want to max out that 401(k) plan.

Al: Yeah. But he’s already putting $16,000 in and he’s almost maxing out anyway. So two more quick things. One is Tom, you want to make sure you’ve got a 6-month savings, right? For emergency fund. If you’re spending, I don’t know what you’re spending is. Let’s just say it’s $50,000. So have at least $25,000 set aside in cash accounts. Maybe, or invested in safe investments in your brokerage. And then also you’re probably going to want to buy a house someday. So I love the idea of having extra money in the brokerage account to be able to accomplish that goal.

Joe: All right. Great job, Thomas. We’ll see you next week, folks. That’s it for us.

Andi: Joe’s visit to Seattle, everyone loves Andi, being TP53 positive, mezcalrita, and crown apple sugar belly in The Derails at the end of the episode, so stick around.

It’s Your Money, Your Wealth, your podcast, and this show wouldn’t be a show without you. You can help us reach more listeners like you by telling your friends about YMYW, and by leaving your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and all the other apps that let you do that.

Your Money, Your Wealth is presented by Pure Financial Advisors, a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

The Derails



Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

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