Brian Perry

In addition to overseeing Pure’s investment offering and platform, Brian works closely with Pure’s financial advisors, helping provide them with the tools and resources necessary to serve their clients and continue the firm’s mission of providing the highest quality financial education and planning to as many people as possible. He has been actively involved in [...]


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
January 13, 2018

Brian Perry, CFP®, CFA® from Pure Financial Advisors recaps 2017’s global Goldilocks economy. Will the bull run continue in 2018? Should we change our asset allocation to prepare our stock and bond portfolios for a market slow down? Are you properly allocated? What would Jim Cramer do, and should you care?! Plus, tax filing season is approaching, and Big Al’s Big Brain contains a whole bunch of stuff you need to know about the new tax law before you start working on those 1040s.

Show Notes

  • (1:04) New Year’s Resolutions
  • (11:05) Tax Filing Season
  • (18:59) What Will 2018 Hold for the Global Goldilocks Economy?
  • (27:38) Brian Perry: What About Bonds? Should I Change My Asset Allocation?
  • (40:22) 9 Things You Need to Know About the New Tax Law – MarketWatch
  • (51:54) 9 Things You Need to Know About the New Tax Law (and a Few Extras)


A 60/40 balanced portfolio in 2007, if somebody had hopped on a boat and sailed around the world for a couple of years, they would have come back in 2010, opened up their brokerage statement, and thought that nothing happened and it had been a dull market. I think that speaks to a couple things: it speaks to the importance of proper asset allocation. But it also speaks to the importance of time and perspective, is that if you have a portfolio that’s allocated appropriately for your time horizon, market movements are going to come and go, but you’re probably going to be okay.” – Brian Perry, CFP®, CFA®, Pure Financial Advisors

That’s Brian Perry, CFP®, CFA® from Pure Financial Advisors. Today on Your Money, Your Wealth, he recaps 2017’s global Goldilocks economy. Will the bull run continue in 2018? Should we be preparing for a market slow down? Am I properly allocated? What would Jim Cramer do, and should I care?! Plus, tax filing season is approaching, and Big Al’s Big Brain contains a whole bunch of stuff you need to know about the new tax law before you start working on those 1040s. Now, with the New Year’s resolution to attempt to prepare for each episode of Your Money, Your Wealth in 2018 – and likely failing – here are Joe Anderson, CFP® and Big Al Clopine, CPA.

1:04 – New Year’s Resolutions

JA: The show is called, what, Your Money, Your Wealth?

AC: It is, and I’m fairly excited today, Joe, because, this is our first show in 2018. And you know what that means. That means it’s time to think about New Year’s resolutions. Have you got yours? Have you thought about yours? You’ve been working on it over the break?

JA: No. Yes of course. What do you got?

AC: Well, I’ll tell you what I’ll do. I’ll start out with, I’ve got the most common New Year’s resolutions for 2018, according to YouGov.

JA: What’s that all about?

AC: I don’t know what they’re about.

JA: It’s a government site?

AC: I don’t think so. (laughs) Anyway, so here’s what they say. There’s three tied at the top. 37% of the people put this in one of their top resolutions. They are, eat healthier, get more exercise, and save more money. So you could sort of predict those. Then after that, focus on self-care, 24%, such as getting more sleep. 18% want to read more, 15% want to make new friends. Also, 15% want to learn a new skill. 14% want a new job. They’re just sick of their job. And then 13% want to take up a new hobby. And it turns out, 32% don’t plan on making resolutions, so about a third of us don’t make resolutions, about two-thirds of us do. So are you the kind of person that makes them or no?

JA: No, I think about it.

AC: You think about it?

JA: Yeah, but I don’t necessarily get serious about it.

AC: You don’t write them down and chart out in the progress? See if you’re on goal?

JA: No. I’ve seen so many different quadrants of, “I want to focus on health” and then the other one is spirituality. I want to work on career.

AC: We know that the getting fit, exercise, is a common one. We also know that, you and I both have gym memberships, and we know in the first couple of weeks of January it’s packed and then it tapers off, and by the middle of February, it’s back to normal.

JA: The problem is is that people get super excited. I’m going to lose weight, or get in shape, or get a six-pack. And then they overdo it that first week and they blow themselves up. It’s like, they’re sore, they don’t know what they’re doing, and it’s like their bodies are broken. I think that’s true with saving too. “I’m going to max out my 401(k) plan. They never maxed out their 401(k) plan in their life. That first paycheck comes through and they’re like, I don’t have any money. This sucks! (laughs)

AC: I got to use my credit card to pay the bills! (laughs)

JA: Yeah. This is not working out for me.

AC: Yeah, they go in too deep. And I was just reading, I should have printed it. But it was right on point, which was, a psychologist was recommending, come up with resolutions that you can actually follow through on. Because that’s what everyone does. They do something so gigantic, that there’s no way that they’re going to be able to do it.

JA: Like SMART goals. Have you heard of that?

AC: No but sounds cool.

JA: There’s Specific, Measurable, Achievable….

AC: Yeah. Like maybe you want to lose one pound per week.

JA: That’s healthy.

AC: That would be 52 per year, that’d be a lot.

JA: Yeah, that’s good.

AC: So you probably don’t have to do that much. But instead of, “I’m going to lose 10 pounds by Wednesday.” That’s ridiculous.

JA: Well I think sometimes people can lose that much weight, but they’re probably very overweight, to begin with. So that might motivate them. But then after that, then they plateau for two months.

AC: “I only lost one pound this week and I gained a pound the following week.”

JA: Exactly. So I don’t know. I think it’s good to start the year fresh.

AC: Yeah I do too. And I guess, I’m the kind of person, I have done resolutions before, I didn’t really do any specific ones this year. And my reason for that, Joe, is that I’m trying to do things all throughout the year. So it’s not just at the start of the year. For example, at any one period of time, I got several things going on, like right now I’m learning Spanish, which I learned a bit last year and then I put it down, but I’m getting back into it, because I’m going to Chile in February and they speak Spanish down there.

JA: I like your accent there too. (laughs)

AC: Chile. Yes. Been workin’ on it.

JA: Hooked on Phonics.

AC: Soy de San Diego. (laughs) Anyway. And I’m getting back into guitar. Ryan is at home right now, for a year of study. And so he’s really good at guitar. I’ve been playing guitar longer than he was born, but he’s now surpassed me. So I’m taking lessons from my son. So getting back into guitar, and of course, I’ve got fitness goals, but I always have fitness goals. And eating, I want to eat more healthy, which I had a couple weeks before Thanksgiving, where I tried something new. It was pretty much vegetable based, with a few lean meats, proteins, and I really did feel a lot better. And then Thanksgiving hit, and then I got sick, and then Christmas. And so it’s like OK, now it’s time to get back on that thing again.

JA: Vegetables? just greens?

AC: Greens. Yeah. All kinds of vegetables.

JA: You’re just gonna live forever.

AC: Right! I’m supposed to live to 120, they say.

JA: You look like you’re 30, so you’re on your way.

AC: I’ll take that as a compliment. So anyway, I guess that’s how I do it. I always throughout the year have different things going that I’m working on, and I think that’s healthy. But by the same token, Joe, I do think one of the things I like about the New Year’s weekend – I actually don’t necessarily care for the New Year’s parties, that’s not really my deal. I was in bed before 10, myself. But what I do like about it is, unlike Christmas, which is wonderful and fun-filled, family, all kinds of activities. There’s not that much to do over New Year’s, and you can kind of relax and reflect. Reflect on what happened last year, or what you’d like to do differently in the coming year, and I always do my Clopine Financial Summit.

JA: At Chili’s? Or was it Applebee’s this year? (laughs)

AC: (laughs) I prepared some stuff, I haven’t gone over it with Ann yet. But yes, very excited.

JA: So what do you do in your financial summit? Help our listeners out here.

AC: Well, what I do is, I start with a simple spreadsheet. A statement of net worth. And so that’s just simply gathering up your assets and your liabilities. And then you compare that to prior years and see how you’re coming. And some years I have a more detailed spending budget. I didn’t really do that this year, we’re actually doing fine on the spending and saving. But this is more of where we’re at, relative to where we’ve been the last few years, and where we’re going, and what that means. So that’s kind of more what this is, I would say.

JA: So you don’t put any “you can’t spend on this, we can’t do this” It’s more of a pleasant summit? “Oh look. Congratulations to us. We are so successful. Look at the big wallet on Big Al.” (laughs)

AC: Yeah I’m going to need a bigger back pocket for my wallet, it’s so big. (laughs) So that’s what we do, and I’ll probably bring up something which always happens in December. We spend too much. It’s like, ring it in because we max out our 401(k) before the year-end, and we max out on Social Security before year end, so there are a few months where we have higher pay. So you get used to that. Yes, it’s like, “OK, now we’re going back to it’s a little bit different so let’s make sure we’re under control here.” (laughs)

JA: Yeah. Well, it is the new year, and most people do have to get their finances in order. And I think it’s, to put it lightly, it’s extremely important. Because we’ve talked about it on the show, that most people are so ill-prepared for retirement. And it’s looking at starting something and slowly, gradually adding to that specific goal. It’s not trying to lose 50 pounds in a month or get a million dollar net worth overnight. It takes time, it takes patience and it takes discipline. And you have to have a plan in place to make sure that you do that.

If getting your portfolio in shape wasn’t already one of your New Year’s resolutions, make that one now. You’ve probably been with the same stockbroker or financial advisor for years. But friendships aside, when’s the last time you formally reviewed your portfolio? Are they actively managing it? Are you considering or having conversations about Social Security, taxes, health care and Medicare? If not, you’re missing some critical pieces of the retirement puzzle, and these things could make a profound difference in how far your money could go in retirement. We’ll prove it to you with our financial assessment. We don’t just talk about stocks bonds and mutual funds. We get into actionable strategies on how you can pay fewer taxes, how to wring every nickel out of your Social Security benefits. How and when to withdraw money from your retirement accounts, plus inflation, health care, Medicare,  and so much more. We talk about how to make every dollar break a sweat and go further in retirement. Your initial analysis won’t cost you a dime, so you’ve got nothing to lose. Make that financial New Year’s Resolution, and we’ll help you stick to it. Call 888 994 6257. What you learn in our assessment process could change everything. Get yours right now. 888 994 6257. 888 994 6257.

11:05 – Tax Filing Season

AC: The IRS just announced that the tax filing season will begin January 29th. So, Joe, I know you want to file your return this weekend, but you can’t. I know you’re an early bird. (laughs)

JA: (laughs) No, I’m October. All the way. October 15th and a half.

AC: Last year, they started their filing season on January 23rd. This year it’s January 29th.

JA: So what happens if I file my taxes and send it in?

AC: Well, they won’t do anything with it, you can’t electronically file it yet, first of all. And if you mail it to them, they’ll just put it in a bin I guess and wait till they get to it. The reason they do that is, as you can imagine, and even this last tax act changed things, for even 2017 – not a lot, but a few things like, medical deductions are 7.5% of adjusted gross income for 2017, where they were going to be 2010 for everybody, not just over 65. So there’s things that they have to change and update and that kind of thing. So that’s why they don’t accept returns earlier, but yeah, January 29th is your first filing date. And we get a couple extra days this year. April 17th, which is my birthday, that’s the filing date this year.

JA: Because of another emancipation?

AC: Yeah, because April 15th is on Sunday, and April 16th is the Emancipation Holiday for the District of Columbia, on the 16th. So they can’t possibly have tax season on that day.

JA: It’s always been on the 17th, right? It seems like the last 10 years. (laughs)

AC: It’s like, tax season is finally done, so I can finally have a cocktail late in the evening on my birthday. So anyway, so that’s pretty good. But I guess alongside that, Joe, I wanted to talk about a mistake that we see people make. This is a law change, three years or so ago. And it’s one that can be a really big gotcha, and you want to be very careful when you’re rolling over your retirement savings because there’s a couple of ways to do it. There’s a trustee to trustee transfer, that’s the desired way, because then nothing happens, in terms of reporting, you don’t get the money, it just goes from one IRA to another IRA. That type of thing. On the other hand, you can also do what’s called a 60-day rollover, which is the IRA issues a check to you, you have it, and you have 60 days to put it into another IRA. You used to be able to do that with every single IRA. Let’s say of 10 IRA accounts, you could do a 60 rollover with each account, once a year. And now a few years ago, they said, “no, you can only do one per year, on all of your IRAs and Roth IRAs combined.” So if you’re moving money around, and you do a 60-day rollover, let’s say in January, and then in March, you decide to do another one. You do another 60-day rollover. Well, that’s fully taxable. It didn’t used to be that way. Now it’s fully taxable, and if it happens, there’s no recourse. It just is what it is. It’s fully taxable if you’re under 59 and a half, 10% penalty, plus fully taxed, well you cannot put it back into the IRA.

JA: We see this problem often. The term rollover is common. I leave my job, what do you do? Roll it over. You’re going to hear that term. So, let’s say I have an IRA. I need to roll this over into another IRA, because I have my money at XYZ Company, Fidelity, and I want to move it to Schwab, or vice versa. And I’ll just select roll over on the paperwork. And then they get the check, and they’re like “OK well I’ll just deposit it, no big deal. No taxes due, no big deal. Then they find out, “oh, I really liked Fidelity a lot better than I did Schwab, so I’m going to roll it over again, I’m going to move it.” Boom. Get another check, and then just deposit it. Then that would be a blowup, 100% taxable. So it’s a million bucks? Well, you just added a million dollars to your ordinary income.

AC: You’re in the top tax bracket. Plus like I said, 10% penalty if you’re under 59 and a half. Trustee to trustee transfer.

JA: Right, because it’s made out to the custodian. If it was just made out – and if it’s coming from a 401(k) plan. So we were talking about IRA to IRA, but if it comes from a 401(k) plan, and you select rollover versus direct rollover, they automatically withhold 20% taxes. By law, 401(k) plans have to do this.

AC: So that’s where you get a check.

JA: Correct, in your name. But it’s 20% less than what you thought it was.

AC: Right. I have $100,000, I ask, for a rollover. I get a check for $80,000 and $20,000 is withheld.

JA: Correct.

AC: And then I got 60 days to actually roll 100. So I better have another $20,000 from some other source. So make sure you do direct rollover.

JA: Right. And that happens, rollover, direct roll, over OK I’m going to select rollover.

AC: How are we supposed to know this?

JA: Right. It’s so crazy. So you get your check, and you’re like, “hey I thought I had $100,000? The markets went down that much?” Or  “what, they charge me $20,000 to do this?”

AC: 20% fee to get out of this thing?

JA: “What the hell is going on! Oh, they withheld the taxes.” So you got to make it whole, so you put the $80,000 into the IRA, and then you’ve got to come up with the 20 to get it back to the $100,000, in this example, then you get a refund when you file.

AC: Right. Because you had the withholding. But what if you don’t have $20,000? Then you just rolled over 80. And so you have to pay tax on $20,000. There’s no way around that. And if you’re under 59 and a half there’s a 10% penalty.

JA: On the $20,000 that didn’t go into the account So when it comes to retirement accounts when it comes to IRAs, 401(k)s, 403(b)s, there are so many different rules and laws and regulations that you want to make sure that you understand. You’ve got Roth IRAs versus IRAs versus 401(k)s versus 457 plans. They all have a little bit different rules. So a lot of people are retiring, when they’re taking dollars from these accounts, you just want to make sure you know what you’re doing because it could blow up. How many times have we seen people completely destroy their retirements just because of simple mistakes?

AC: Well it happens all the time, and just a simple one, we saw a few months ago, someone withdrew about $300,000 out of their IRA to pay off the mortgage. And they had paid off their mortgage, and they had no money. They basically didn’t realize they’d have to pay tax on $300,000. Now, fortunately, they were able to do a quick refi to get that money back, to put it back into the IRA. But it’s a good thing that they came to us within that 60 day period.

JA: Right, because they were like, “well I’m in the 15% tax bracket, so I’m going to pull my $300,000 out, and I’ll pay 15% tax.” Well no. Now you’re not in the 15% bracket! (laughs)

AC: You’re up near the top, brother! (laughs)

JA: Yes! Plus state and everything else. So you just want to be careful and make sure that you have a thought-out strategy in place.

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18:59 – What Will 2018 Hold for the Global Goldilocks Economy?

Brian Perry, CFP, CFA, Director of Research & Managing Director, Pure Financial, San Diego

JA: It’s the beginning of the year. So we like to talk about the markets, and what happened in 2017, but this year we got Brian Perry on the line. Brian is our Director of Research at Pure Financial, and he’s also the Managing Director of San Diego. Brian, welcome to the show. This is the first time you’ve been on.

BP: It is great to be here. Thanks for having me. Looking forward to a wonderful new year.

JA: Well let’s dive in a little bit. Let’s talk about 2017. Some highlights, some lowlights of the overall markets. We had a really good year again. We’re on this bull run – is it ever going to stop?

BP: (laughs) I wish I knew the answer to that, I’d love to give all the listeners the day and moment that it is going to stop and turn around, I don’t have that. You did mention highlights and lowlights, there honestly weren’t a whole lot of lowlights in the last year, it’s pretty much a straight run higher for most risky assets.

AC: So what were some of the indexes? How did we do in 2017?

BP: U.S. stocks, if you look at the broadest measure, the Russell 3000, we were up about 21%, which sounds good, until you take it in context of the rest of the globe, where there were approximately three dozen other countries that actually had stock markets that outperformed the U.S. So countries as diverse as Austria, Singapore, Poland, and Peru all did twice as well as the US. So a lot of it had to do with just global growth. Back in October, the IMF, the International Monetary Fund, raised the global economic outlook for 2017 and 2018, you had consumer confidence in Europe hitting a 17 year high, you had consumer confidence in the U.S. hitting a 13 year high. So really, synchronized good news around the economy. What in the 1990s people referred to as “the Goldilocks economy” in some ways. So back in the 1990s, we had an economy where you had strong economic growth, but it wasn’t so strong that it prompted inflation. And in a lot of ways we’re in a similar environment now, where we’re seeing synchronized global growth, but relatively muted inflation, and in a backdrop of still relatively accommodative monetary policy, that’s resulted in really strong returns for most stocks.

JA: It’s funny that international stocks outperformed the US, but there’s this home bias that people have, and I think a lot of individuals might have missed out on some even greater returns because they might have just kept their money in the U.S.

BP: That’s true. Study after study shows that the vast majority of people keep most of their portfolios in U.S. based stocks. And it goes even further than that – there are even regional biases, where if you look at the percentage of, for instance, financial stocks held in portfolios, people in the northeast of the United States are way overweight in financials. The same holds true for energy in the southwest and tech on the west coast. We all tend to want to buy what we know the best. But theory and experience prove that that’s not the best idea.

JA: Yeah I’ve seen that too, like in Atlanta a lot of people have Coca-Cola in their portfolios.

AC: And in San Diego it’s Qualcomm.

JA: Well, it was. (laughs) What other tidbits do you got for us?

BP: Yeah, so that was 2017, it was a year where almost everything well, but not everything. if you if you looked at U.S. stocks, if you bought tech, you were up 39%. If you bought energy or telecom, you actually lost money. And so I think that gets back to the story of you want to diversify both globally and then across sectors, and of course, we’re talking about the past, but there’s an old saying in the investment management industry that you can’t eat past performance. And so we’ll see what 2018 holds, because although there aren’t any storm clouds imminently on the horizon, I do think that, potentially, there are a few things out there that could – I don’t want to say upset the apple cart, but could slow down what’s been a ride straight upwards.

JA: What are some of those things?

BP: One is just time. A lot of people have cited the fact that we’re in the middle of the third longest economic expansion since 1900.  I don’t give that too much credence because although it’s been a long expansion, it’s been a little bit weaker than some previous expansions. But two things I do kind of have on my radar: one is just tighter monetary policy. And so a lot of the market gains over the past seven or eight years have been prompted by the zero interest rate policy, not just of the Federal Reserve, but of central banks around the world, including in Europe and Japan. And we’re seeing an end to that. We’re seeing the U.S. Central Bank last year raised rates three times. Forecasts are for another three times next year. We’re seeing central banks in Japan and Europe, although they’ve not started to raise rates, they’ve become less accommodative and are backing off of some other quantitative easing. So I think that tighter monetary policy could come into play, and that shows out in the – not to get too technical, but if you look at the yield curve, which could be a good indicator, and that’s essentially a graph of different Treasury maturities and what their current yields are – when you look at that, when the difference between long-term Treasury yields and shorter-term Treasury yields tends to dissipate. So when that difference shrinks, that usually leads to an economic slowdown. Or at least tends to forecast an economic slowdown, and that differential has shrunk quite a bit over the last year, so that’ll be something to keep an eye out. And then the flip side of that is just higher inflation. And so most market participants think that the Fed and other central banks are going to be able to continue to slowly increase policy rates, and not take away the proverbial punchbowl. but one thing to keep an eye out is that we have seen inflation tick up slightly, both in the US, the UK, and a few other countries. And if inflation with the tight labor market that we have does begin to pick up a little bit more than expected, you could see central banks react more aggressively, and I think that that would be something that would potentially hit stocks and send them to losses.

JA: So, when you’re looking at higher interest rates, or if the Fed increases interest rates over the next year, so what would that potentially do to someone’s bond portfolio and what should they be concerned about?

BP: Yes, I think it’s important to keep in mind that when the Fed raises interest rates, they only control overnight lending rates. And so, most people don’t just own, for instance, a money market. A money market will see a pretty quick response to the Fed raising interest rates, but longer term, five-year ten-year and the like bonds, tend to move independently of the Federal Reserve. And although the Fed will influence those, those are highly susceptible to inflation expectations and growth expectations. And so, for instance, if a 10-year treasury in a rising interest rate environment, if rates go up 1%, a 10 year Treasury would lose about 9.5%. If that happened instantaneously. And that’s a proxy you’ll often see thrown around in the media. But I don’t think it’s a good one, and I think it’s a lot of times turn out there as a scare tactic for individuals that they should abandon bonds.

The reality is that the average bond portfolio people own should be concentrated in short and intermediate term bonds. And so maybe the interest rate exposure of that portfolio is three or four years, as opposed to a 10 year Treasury, which has an interest rate exposure of nine and a half years. And so in that scenario, let’s say interest rates go from 2.5% to 3.5%. You’re probably looking at a flat year in the bond market, or something like that, maybe minimal losses. So it’s important to keep in mind that even if interest rates do move higher, as long as they do so in a controlled manner, bond portfolios properly allocated aren’t going to explode. And they still continue to fulfill that role too of diversifying away from stocks. I always look back at 2008, where stocks fell 37% measured by the S&P 500, and the main bond market indexes were up north of 5%. So that’s that diversification you’re looking for from bonds to diversify away from your stocks.

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27:38 – Brian Perry: What About Bonds? Should I Change My Asset Allocation?

JA: Welcome back to the show, show’s called Your Money, Your Wealth. Joe Anderson, Big Al, hanging out. We got Brian Perry with us today. He’s a Chartered Financial Analyst, a CFA. He’s our Director of Research at Pure Financial Advisors.

AC: So Brian, given the fact stocks have just had a great year, and actually we’re what eight year bull run? So how much more could there be, and then bonds interest rates are near all-time lows, and if interest rates go up, bond prices go down, then it gets really confusing as to what should we be doing now, or should we just be maintaining the course?

BP: That’s a great question, and obviously anybody out there with a crystal ball that has perfect foresight should precisely time the markets and get out right at the high and buy back in right at the low. I’ve been doing this for 20 plus years and I’ve yet to meet that person with perfect foresight. And so when it comes down to what should people do, and one thing that is very successful for most people is a disciplined rebalancing approach. So in other words, if a hypothetical portfolio was, let’s say 50% bonds, 50% stocks. You mentioned the eight-year bull market if you haven’t touched that, at this point, you might be 70% stocks at this point, and 30% bonds. So you’ve taken on a lot more risk at a time when valuations have increased in the stock market. And so going into a portfolio, determining what your target allocation is, and then rebalancing forces you to sell what’s gone up the most, and buy what’s gone down the most, which essentially is – it’s not timing the market, but it’s selling asset classes that may have increased in valuation, and buying asset classes that may have decreased in valuation. And the other thing is just, not completely abandoning asset classes.

So I’ve seen too many people over the years that say, “hey, I’m afraid of interest rates going up. I used to have 40% bonds, I’m going to go to 0% bonds.” And institutional investors and professional investors don’t do that. They may make slight changes. Maybe they go to 35% bonds, maybe they slightly reduce the interest rate exposure of the bonds that they own, but they don’t abandon asset classes or make wholesale changes. They stick with their strategic allocation across time. The proof is in the pudding. When you look at the average investor, they’re abandoning asset classes at just the wrong time and piling into the hot asset class at just the wrong time. And the result is that if you look over 20 years, a variety of asset classes – gold has been up almost 6%. Not that I’m recommending gold. Bonds have been up 5%, a 60/40 portfolio was up 7%. The S&P was up almost 8%, but the average investor across those 20 years barely earned 2%.

So it almost didn’t matter what asset class an individual invested in over the last 20 years. If they just invested in something and stuck with it, they would have done better than their actual experience. So I think staying the course, and implementing a disciplined rebalancing approach is what the average individual at home could do. Obviously, there are more sophisticated approaches, but they become a little bit more difficult to implement.

JA: I think too, to piggyback on that, a lot of people might need to just relook at their overall portfolio, to make sure that they have the appropriate diversification of their goals. If we’re telling them, “hey, just hold the course and rebalance.” But most of their asset classes are not necessarily in tune.

AC: Yeah, make sure you are on the right course.

JA: Yeah right! I’m trying to go to New York, but my portfolio’s bringing me to Guam. It’s not going to work out very well for me, so I think maybe taking it even a step further back to determine, A, what are your financial goals of course, and what target rate of return are you trying to achieve. And then build that portfolio around, and then you can get into more of the sophisticated strategy.

BP: And that’s a great point, and what a good time of year to do that, with the new year and new beginnings, a good excuse to look at, are you rebalancing to the appropriate portfolio. The average person that we see, honestly, coming off the street, generally has too many stocks and not enough bonds for their risk profile. They tend to be concentrated in large-cap U.S. growth stocks, which have done phenomenally over the last five years but historically have not performed as well as smaller companies and more value-oriented companies. And if you look at a year like 2017, small companies underperformed large companies, and value companies underperformed growth companies. But history tells us that’s generally not the case. And so, the average person may not have, not just enough stocks or enough bonds, but within those asset classes, may not have the appropriate allocation either.

JA: Right. And then that’s, going back to your point, is that well if small hasn’t necessarily performed, I’ll abandon that strategy at the wrong time, and then I’ll go into more larger growth that have performed over the last 5, 6, 7 years, that have outperformed. And that doesn’t necessarily mean it’s going to continue to outperform, it’s probably a better time to rebalance, strategically, to get more money in asset classes that have underperformed.

BP: Exactly. And I’m generalizing a little bit here, but if you look at institutions as a whole, versus individuals as a whole, what an institution would do in an environment like this would be that they would sell some rather large U.S. growth companies and buy some of that small U.S. value companies. What individuals, taken as a whole, tend to do, is they tend to buy more large-cap U.S. companies and sell some of the few small companies that they did own. So, the exact opposite of what institutions do. And say what you will, and institutional investors are far from perfect, but they do tend to bring a greater sense of discipline and a more strategic approach to their portfolio management than the average individual.

JA: Well, because there’s no emotion tied to it. It’s based on more science and a process, versus an emotional trigger that’s going to get me in or out of the overall markets.

BP: Yeah absolutely, and we could get in a whole conversation right around behavioral finance, and the ways in which individuals shoot themselves in the foot, or investors, in general, shoot themselves in the foot. But you’re right, when you’re managing somebody else’s money, it’s a little bit easier to remove emotion. And that comes back to having an investment policy statement, and a financial plan. Institutions all have an investment policy statement, which lays out what they’re trying to accomplish, what their goals and constraints are, and how they’re going to get there, so that when markets go nuts, which eventually they will even though we’ve had a smooth ride lately, they know precisely what they’re going to do. “If X happens, I’m going to do Y.” It takes emotion out of it. And that’s one suggestion to give to all the listeners is, get an investment policy statement or a financial plan in place in some way, shape, or form, because it removes emotion from the process, and you put that plan in place when you’re calm and when markets are calm, and then all you do is execute it when markets inevitably become more volatile.

AC: I think that’s a good point, Brian, because when you think about it, the most successful investors are investing for their own goals and their own purpose, and sticking to that path, rebalancing is appropriate. And I think a lot of us, before we come to that conclusion, we assume that the best way to invest is to watch CNBC, or whatever it may be, and find out the hot stocks, or the hot sector, and it becomes very emotional, and we tend to make a lot of poor decisions when that happens.

BP: I often begin presentations, I’ve done them in offices where CNBC is on or whatever in a brokerage office, and I’ll walk in and ceremoniously, to start the presentation, I’ll turn off the TV, and then kind of drop the mic and walk out, pointing out that that’s about the biggest value-add I have, is that if people can tune out the media, the media is not there to help people become better investors. They’re there to sell advertising and sell excitement, and urge investors to do something. And the greatest example of that I have is that, for those that are familiar with Jim Cramer’s show, Mad Money Over on CNBC, the producer of Jim Cramer’s show used to produce the Jerry Springer Show, which, to me, tells you everything that you need to know about exactly what sort of target audience they’re going after.

JA: Yeah but to their point, I think with everything we do, Big Al, he wants to get better at Spanish and playing the guitar, and be more spiritual, and, no- was that part of it?

AC: That’s always part of it. (laughs)

JA: He wants to be Gandhi at some point. (laughs) And you have to practice that. You have to study it, you have to read. You have to understand things. And I think that’s where people go, to be more knowledgeable about the markets, so they’re more knowledgeable about their money. But it’s unfortunate that maybe the information that they are receiving is probably not really geared towards that type of education.

BP: Yeah, and you do have a point. I don’t mean to bang on CNBC too much, I think CNBC, Bloomberg, which I think tends to be a little bit more balanced sometimes, the idea there is sound of giving people financial education. It’s just, what part of the process is that? And the truth of the matter is, CNBC should be the starting point, where, “hey, I saw something discussed on CNBC,” let’s say it’s a company hypothetically. That’s going to be a starting point for me to now go deep and do deep and rigorous research into more about that company, is it truly a good idea. It’s not just, “Hey, I heard this idea discussed, let me go act on it.” It’s “let this be a starting point. It prompted a thought, let me look more deeply, do more systematic research, let me see if this idea actually fits within the context of my plan.” So it’s not that the information itself is bad, it’s how it’s used, and unfortunately, if people used it correctly, it would be great. But I think that most people tend to see an idea flashed up on the TV screen or an idea around a newspaper headline, and then they act on it instantly without taking into context, “is this part of my overall financial plan?” And then what additional research is there to be done in order to see if this idea is sound makes sense.

AC: Yeah, I think a lot of people, they confuse facts with opinions. And some of these experts up there, they sound like they know exactly what they’re talking about, and they’re very bright people. But if you listen long enough, or watch long enough, in the next hour you’ll have just as bright a person with the absolute opposite opinion. And I think that’s part of the problem is people say things that sound like they are facts, and really they’re opinions.

BP: That’s so true. Especially point forecast – so hey my year-end forecast for interest rates is going to be 2.96% on the 10 year Treasury. That’s just picking a number out of thin air. They’ve done so many studies that most prognosticators can’t even get the direction of interest rates right let alone the timing and the magnitude of the move. I think having ideas and general thoughts around the direction of things sometimes makes sense, but trying to match a date and a precise level is essentially a fool’s errand that is designed to draw viewership or readership.

AC: Yes. I think that goes back to your thought, which does have an investment policy statement for yourself. Get educated. Absolutely get educated, but don’t be swayed by opinions or events. An event that happens shouldn’t necessarily change your investment policy statement. if you retire, then that’s something that happened to you. That’s different. But if an event happens in the world that you don’t necessarily change how you go about things.

BP: 100% agree. Most of what people should act upon, to make major strategic changes, are life events like you mentioned. Like retirement, death, the birth of a child or grandchild, those sorts of things. Market movements. Maybe they’re incorporated tactically, but they shouldn’t change your big picture strategy. And the analogy or the example I often use is, take the financial crisis, which I think we can agree, at least in recent decades, is the most turbulent period in the markets. We’ve seen a 60/40 balanced portfolio in 2007, if somebody had hopped on a boat and sailed around the world for a couple of years, they would have come back in 2010, opened up their brokerage statement, and thought that nothing happened and it had been a dull market. I think that speaks to a couple things: it speaks to the importance of proper asset allocation. But it also speaks to the importance of time and perspective, is that if you have a portfolio that’s allocated appropriately for your time horizon, market movements are going to come and go, but you’re probably going to be okay.

JA: Great stuff Brian. I appreciate your time. That’s Brian Perry. He’s a Chartered Financial Analyst, he’s Director of Research at Pure Financial Advisors. I don’t think I could have done that better myself. (laughs)

AC: I’m sure that you and I would have botched it, so thank you, Brian.

JA: That would’ve been like a 7 second: “market’s up!”

AC: “Dow Jones up 25.2!” (laughs)

JA: “OK good! I got this one chart, 295% since ’09. OK, Al, what else do you got?” (laughs)

AC: “I got the Wilshire 5000 plus 18%!” (laughs)

San Diego listeners, if that left you with any financial questions at all, you can meet Brian Perry and ask them in person! Join us for a one-hour lunch n’ learn on Thursday, January 25th. Look back and review 2017’s major headlines and discuss what may be ahead in greater detail. Learn what the data is telling us about the economy’s health, what financial experts predict for 2018, and which details you should pay attention to.Visit purefinancial.com/lunch to register for this free event – lunch is included! Hurry, this Market Update Lunch n’ Learn is coming up fast and seating is limited, so RSVP right away. Visit purefinancial.com/lunch

Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, 9 Things You Need To Know About The New Tax Law

40:22 – 9 Things You Need to Know About the New Tax Law – MarketWatch


AC: So if you haven’t been paying attention, we’ve got a new tax bill that was passed in December by the House and Senate, also signed by the president in December. So we kind of have a new tax system for 2018. So there are a few things you need to know. And also go over this list and we’ll have a little discussion, Joe. But the first thing is there’s new individual tax rates and brackets, because before we had seven brackets, starting at 10% and going to 39.6. Now we have brackets, still seven brackets, starting at 10% but going to 37%. And almost every bracket, Joe, almost, is lower than what it was before. Maybe be one exception, the people – like if you’re married and your taxable income is less than $19,000, that’s a 10% bracket, that’s the same as it was before. But then after that, from %19,000 to about $77,000, that’s a 12% bracket. Prior, that was 15. And then after the 12% bracket, it hits 22%, and then that was actually 25 before, and so on. So almost every bracket is lower. So the idea is that we all get a tax cut. Now, of course, it’s not necessarily going to work out that way, for some, for reasons that I’ll go over in just a second. But let me continue. Number two, and this is important. There’s no change in taxes on long-term capital gains. There’s been a lot of discussion on whether that was going to change or not. A lot of people still don’t even really know this. There are three capital gain rates. The capital gain is when you sell an asset that you’ve owned for a year, that’s outside of your retirement account. You sell it at a gain. Then you get a special capital gains rate, which is a tax to either 0%, 15%, or 20%, depending upon your income level.

JA: So got a question for you on that, and I read a few things. So, the way I understand it, they kept it at the 15% threshold. So how it worked last year is that if I was in the 10 or 15% tax bracket, and as a married couple, that was roughly $75,000. So if I was below that, then my capital gain was zero up to $75,000. And then from $75,000 up to 400 some odd thousand, now I’m at that 15%. If I’m in the highest rate, then I’m at the 20%. And so, my understanding is that they’re not going to use the current rates, they’re going to use the income from last year. Or did they change that?

AC: Yeah, you’re absolutely right. And so to talk specifically, the 0% bracket, in other words, you pay zero tax, 0% tax on capital gains, if you’re a joint taxpayer and your taxable income is below $77,199. That’s different than the top of the 12% bracket, which is $77,401. They’re almost the same. So, for all practical purposes, think about when you’re in the 12% bracket, you don’t pay any capital gains tax. And the way that works, by the way, let’s say you have taxable income of $50,000 before capital gains. So that means you have about $27,000 of room in that bracket. So you can accommodate $27,000 of gain without paying any tax. If you have $28,000 gain, then you’ll pay tax on just $1,000. That’s kind of how that rule works.

JA: So to put this in practice, is what you want to make sure that you look at, because a lot of you that listen to the show are retired, that have assets that you’re living off those assets, you might have retirement assets, you might have non-qualified, or assets outside of retirement accounts. So now it’s really narrowing in, to say, well, given the fact that we have lower ordinary income rates, what makes more sense? What is my drawdown strategy going to look like? How much do I take from my non-qualified versus my retirement accounts versus Roth accounts? Because that ordering sequence may change on you this year than it had in the past.

AC: Well that’s right Joe. And then it gets particularly tricky between the 15 and 20% bracket because again, it used the levels that were going to be in force in 2018 if there had not been a tax change. So the 20% bracket for a single taxpayer, for capital gains, starts at taxable income of about $425,000, married $479,000. That has zero relationship to the current tax brackets because right now the 35% tax bracket starts at $400,000 for married, $200,000 single, and the 37% bracket starts at $600,000 married and $500,000 single. So capital gains, the way they came up with that before was when you hit the maximum bracket, 39.6%, is when you had to pay that 20% capital gains rate.

JA: The maximum capital gains rate. And that’s not the case now. And a lot of you might have larger capital gains, let’s say if you sold of property, or if you had a highly concentrated stock that had a ton of gains in it, and you finally wanted to diversify, or whatever. So you just want to be careful, to know where those thresholds are because they’ve changed.

AC: They have changed. The third one, Joe, is, it got a bit of discussion in December, because about the FIFO, First In First Out stock basis rule. Because in the House plan, there was no such rule. In the Senate plan, what they said is, when you sell stock outside a retirement account, you have to sell your oldest shares first. And so, first in first out. Which means that you couldn’t – because currently, you can pick which shares that you want to sell, and if you’re selling shares to raise capital, and you don’t want to have a lot of gains, you might pick the shares that have the highest cost basis, so you have a lower gain, and keep the ones with the with the lower cost basis for some other time. And so anyway, when the final conference bill came out, they deleted that provision in the Senate bill. So we don’t have to worry about that. So we can still do specific identification. So in other words, if you buy shares of G.E., let’s just say, and you bought them over the years, and you want to sell some, you can pick which lot, which shares you actually want to sell, so you can have more control over your tax return and gain.

JA: Yeah. Because if you have a lower taxable income, then you might want to sell the stock lot that has more gain because then you’re not paying capital gains tax on it.

AC: Yeah. And I think that’s a good point. People don’t realize that strategy. Let’s say you’re in, what is now going to be the 12% bracket. That means you’re not paying any capital gains. So maybe, if you need to raise some funds, maybe you want to sell the stock, the shares with the higher gain, at least to the top of the 12% bracket, because you won’t pay any federal tax. You may pay state tax like in California you’ll still pay state tax. It’s relatively small, compared to federal tax, and most others states. California tax is high relative to other states. Don’t get me wrong, but it’s low relative to the federal tax, potentially. So there is that strategy, and sometimes, even when people don’t need capital, they purposely sell stock, because the gain is taxed at zero, and then they re-buy back that same stock, so it has a higher tax basis, so that when they finally do sell it later, they have a lesser gain. That’s called gain harvesting and that’s actually a pretty clever strategy if you think about it.

JA: Yeah. You just sell it and buy it right back. There’s no 31-day wash sale rule because it’s a gain, not a loss.

AC: Right. Joe, another one is higher standard deduction, but no more personal dependent exemption. So right now, the new standard deduction is $12,000 for singles and $24,000 for joint filers. This is up from about $6,350 for singles, $12,700 for joint filers. What a standard deduction is, is that set free deduction you get for being an American taxpayer. So if you make $100,000, and you’re married, you get to take a $24,000 standard deduction. You’ll be taxed on $76,000. Now, if you itemize, if you can itemize, if you’ve got mortgage interest deductions, and charity, and a certain amount of state and local taxes are allowable, I’ll get to that in a second. If you have more than $24,000, you can take that figure. But if it’s less than that, or none at all, you just take the standard deduction. So what that means is a lot fewer people are going to be itemizing their deductions, and that will actually make tax returns simpler for some.

JA: So here’s what is confusing, is that on your ’17 tax return, you file it in ’18.

AC: Correct.

JA: So I’m filing in ’18 for my ’17 taxes, but let’s say if I didn’t pay enough of my state tax in ’17 then I lose that write off completely, which is B.S. because I’m paying it for ’17.

AC: Right. Well, you don’t lose it completely, but there’s a huge limitation.

JA: Okay well it’s $10,000. In California, your property taxes are $10,000, your state taxes are probably another 20.

AC: Yeah, that’s the problem, and that’s the fifth thing, which is the there is now a limitation on state and local tax deductions, and it’s this: So you add up your state tax, you add up your property taxes, whatever that number is. You cap it at $10,000. Let’s say it’s less than $10,000, then you take that figure. If it’s more than $10,000, a lot of people live in California, it’s quite a bit more than $10,000. You just get $10,000, which is why you probably heard people complaining in high tax states like California, New York, New Jersey, that this is an unfair tax bill. We’ve lost this big tax deduction. So even though the tax rates are lower, many, not all, many Californians, particularly those in middle and high-income brackets, could end up paying more in taxes.

JA: And if there’s any time to do tax planning, it’s absolutely right now, in the beginning of the year. Do not wait until the end of the year like most people do. Get it done in January. Understand what you can and cannot do, what the limitations are, how the tax law is going to affect you. I would encourage you to do it now.

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51:54 – 9 Things You Need to Know About the New Tax Law (and a Few Extras)

JA: Joe Anderson, here Certified Financial Planner, Big Al Clopine right next to me. We’re breaking down Big Al’s list, and of course, it has everything to do with taxes.

AC: That’s because of the tax law change that took effect January 1st. These are the nine things that you need to know about the tax bill. Joe, we left off at number six, which is there’s new limits on the mortgage interest deduction, and it’s simply this: which is nowadays, and going forward, you can borrow up to $750,000 on your home, and that interest paid will be fully deductible. If your loan is greater than $750,000, some of that will be limited. And the way it works, it’s a fairly simple calculation. Let’s say you borrow a million and a half, and you can borrow to deduct is $750,000. So you take $750,000, divided it a million and a half, that’s 50%. Let’s say the interest that you paid was $40,000, just to make up a number, so you get to deduct 50% of $40,000. That’s how they do that calculation. If you have more than one loan like some people have a home equity loan or a second mortgage, you add up both loans together, and you do that ratio with both loans. You can’t pick and choose, you can’t pick the one with the higher interest rate. You have to average it.

JA: So I thought home equity lines were not tax deductible?

AC: That’s the second part of this, which is correct. So home equity lines, if they’re borrowed for improvements, they’re still deductible towards the 750. If they’re borrowed for any other purpose, they’re not deductible. Because the old rule was you could borrow $100,000 on your home, no questions asked, it was fully deductible. So that goes away, that went away, basically, effective January 1st, so that’s gone. So if you have a home equity loan, and it was used for improving your house, then that’s ok. You can add that to your first mortgage. And as long as the total mortgage is less than $750,000, that works. Or if you have a second home, you can add those two loans up, as long as the total of the loans are less than 750, that can still work. Now the old rule was a million dollars. So if you had a million dollar loan before December 15th, you get grandfathered in. You could still deduct all that interest expense.

JA: It’s $1.1 million with a home equity line.

AC: Well, it was, but no longer. So they only grandfathered in the million dollar loan, they didn’t grandfather in the $100,000 home equity loan. So basically, all home equity debt, unless it was borrowed to improve your home, is no longer deductible. Now you can use – I’m going to complicate it – but you could use your home equity loan to buy rental property, and then you would put that interest expense on the rental property statement, and that would be OK as long as you could show those funds were used to purchase that property.

JA: So, you know how sometimes mortgage lenders will, when someone buys a home, they’ll do something creative and do an 80/20 or 90/10 – two loans together, and all of that was for the purchase.

AC: Yeah, they call it acquisition indebtedness, and that still works. So I don’t care if you have one loan, or two loans, or three loans to buy a home, as long as they’re secured on the home.

JA: But it’s only now, let’s say if someone had $1.1 million last year, then you’re going to lose $100,000.

AC: Yeah, you’ll lose $100,000 of that. Correct. And if you get a new loan, going forward, it’s only $750,000 on a new purchase. If you had the loan prior to December 15th, you can still deduct interest on a million dollars. Now one thing that happens, sometimes people get a first, or first and second loan, maybe they get a second or third loan, from Mom and Dad, and they just pay Mom and Dad interest. Well, that’s not deductible, unless it’s actually secured by the property. (laughs) And most people don’t do that. So just be aware of that. Joe, the seventh thing, also related to homes, is there’s no change in the home sale gain exclusion.

JA: 121 exclusion.

AC: Yeah, because there was a lot of discussion about changing that. So the rule has stayed intact, which is simply this: as long as you’ve lived in your residence two out of the last five years, it doesn’t have to be consecutive, it’s any two years out of those last five. Then, if you’re single, you get a $250,000 exclusion. If you’re married, it’s a $500,000 exclusion, and that’s each and every time that you do it. It’s not a once in a lifetime. It’s each and every time you sell your home, as long as you wait two years between each time that you do it. But I will say, because I get asked this all the time, “I’m single. What if I get married the day before I sell it? Do we get the exclusion?”

JA: A ratio of like one day? (laughs)

AC: No, you don’t. You don’t because your spouse has to have lived in the home, and owned the home for two out of the last five years. Now if they lived with you, and co-owned the home, even though you weren’t married, that could still work. But no, not if they just getting married. So in other words, both parties have to own and live in the home for two out of five years. There was a discussion about that changing to five out of the last eight years. That was actually in the Senate proposal. But the final conference bill retained the current two out of five years.

JA: Oh, there’s a lot to digest here.

AC: There is and we got even more after the break. (laughs)

JA: So like I said, I think if there’s any time to start planning, it’s in the beginning of the year. Don’t procrastinate with this. There’s a lot of things that you want to make sure that you understand, in regards to your overall financial situation.

You’ve heard the old saw, “nothing is certain except death and taxes,” right? And you probably believe you don’t have any control over either, right? But that’s not true – at least, not when it comes to taxes. In fact, you have more control over how much you pay in taxes in retirement – more so than at any other time in your life. But your stockbroker, your financial advisor, even your tax preparer may not understand how to lower taxes in retirement because it’s not their area of expertise. The only way to lower your taxes in retirement is by having a forward-looking, tax-efficient strategy. Find out how you can legally pay fewer taxes than ever before with our new, personalized tax reduction analysis. In this analysis, you’ll discover techniques specifically designed just for you, on forward-looking tax strategies keep more of your hard earned money in your pocket. There is no cost and no obligation, so you really have nothing to lose. Get your complimentary personalized tax reduction analysis at 888 994 6257 that’s 888 994 6257.

58:42 – 9 Things You Need To Know About The New Tax Law cont.

JA: So we’re working on the list here.

AC: We are, we’re talking about the nine things that you need to know about the new tax bill. We left off at number eight, and I’ve got a few extra bonus items to throw in.

JA: Oh wow. Perfect.

AC: Just hang on for a second. So number eight, Joe, is expanded medical expense deduction for 2017 and 2018. Because in 2017, we are going to, all taxpayers had to take 10% of their adjusted gross income, they could only deduct medical expenses above that. So meaning, if you have $100,000 of income, 10% of that’s $10,000, let’s say you have $11,000 of medical expenses. You take $11,000 minus 10, you only get to deduct $1,000 of medical expenses. So they made this change retroactive to 2017, which was, it’s 7.5%. So in my example, so it’s now $7,500, $11,000 minus $7,500. So what, that’s like $3,500 is your deduction. So, that will help some people out. So that’s number eight.

Number nine, it’s kind of a big one. And that’s Roth conversions, although they retain the Roth IRA, they retained Roth contribution, they retained Roth conversions, where you convert out of an IRA into a Roth. That’s all still available. But what they took away is, you cannot really characterize a Roth IRA conversion. In the past, you could take, let’s say $50,000 out of your IRA and convert it to a Roth, and then you had all the way till October 15th of the following year, which is the final tax due date on the extension, to undo all or part of it. That was called a re-characterization. And that was pretty handy, because people could do a Roth conversion, just kind of thinking, “well maybe $50,000 is the right amount,” and then the following year they do their return and they realize, “whoa, $50,000, put me in too high of a tax bracket, I really should have only done about $20,000.” And so what you could have done in the past, was you could take $30,000 out of that Roth, put it back into the IRA, and not pay tax on it. Now they took that away, which means that, although the Roth conversion strategy is still a great one, you’re going to have to be a little bit more careful because you can’t undo it.

JA: Right. I think a lot of individuals did Roth conversions. They listen to our show for years, and they’re like, “I like tax free income, I think it makes sense for me to buy back my partnership from the IRA.” Because that’s exactly what you’re doing. If you keep monies in your 401(k), 403(b)s, IRAs. All that money continues to compound tax-deferred, which is great, but then when you pull the money out, now you’re taxed at ordinary income rates. So it made sense for a lot of you to at least take a look. “Hey, does it make sense for me to take a little bit of chips off the table here? My IRA is getting fairly large, I’ve saved a lot of money into this plan. And when I get into retirement with my Social Security and other income, I might be in a higher tax bracket, or might be in the same tax bracket with very little flexibility if I wanna go on a larger vacation, if there’s a medical expense, if the kids need to get bailed out.” Because every last dollar that you take out of those accounts are going to be taxed at ordinary income rates. So what we have been preaching and talking about and educating you for years, is to say, well take a look at it, and maybe it might make some sense to slowly chip away at your big retirement account, and move it into a Roth. You pay a little bit of tax upfront, but then all future dollars will forever grow tax-free. So that is still absolutely one of the best strategies that the IRS has ever given us, is to do a Roth conversion. It’s good for them. They get a little bit of tax money now. I think it’s a lot better for us because then you get compounding tax-free income. But what some people did is, “if I can re-characterize, I’m just going to convert whatever. I’m just going to throw out a number.” And then when they do their taxes the following year, they’re like, “wow I didn’t want to pay this much in tax,” and then they could chisel back how much they converted back into the IRA, with very little planning.

AC: Whatever they want.

JA: Yeah. So now, you’ve got to get tight. You just want to make sure that you run a tax projection. You want to look at, what do you anticipate your income to be? if you’re W-2 wage earner, then it’s going to be fairly easy. But if I have real estate income, if I’m a sole proprietor, if I’m a business owner, of whatever it is, or if I have variable income of any kind, then it’s going to be a little bit more complex. You still want to do conversions, in my opinion, earlier than later, because why we say that let’s say – what did the markets do in 2017? 20% the S&P 500? So if I did a conversion in January of 2017, versus December. And let’s say I wanted to invest in the Standard & Poor’s 500. So if I did it in January, I converted $10,000. Well that $10,000 would have grown 20%, all in my Roth IRA.

AC: So that whole $12,000 now would be tax-free.

JA: It all would be tax-free to me. If I waited until December, I do a Roth conversion of $10,000, well that 20% grew in my IRA, so my IRA got bigger, where my Roth only still got the $10,000, so earlier the better. But you want to make sure that you understand and do the appropriate tax planning because it could hurt you long term, or just pay unnecessary taxes.

AC: Because now you can’t undo it. And I think that’s absolutely right, you would prefer to do it in January. And I think, if your income is steady, I think that is the right answer. I think you still go ahead and do the conversion early, or you may, to be on the safe side, if you think you can convert $50,000, maybe you convert $40,000 in January, and then in December, true it up to another 10 if you want to, if you can accommodate it in your tax bracket, because then you’ll know more about your income. But if you are a business owner with variable income, or you’re a salesperson with commissions that change all the time, you’re probably going to want to be doing your Roth conversion in December, November-December, when you are clearer on your income. And then, there are some cases where it doesn’t matter what your income is, you got so much in the IRA you need to do it anyway. So do it in January. It kind of depends.

So those are the nine things, I got a couple other bonus things here. One is, the alternative minimum tax did not actually go away.

JA: Kind of.

AC: Kind of. The exemption got increased. And the main reason we Californians were subject to alternative minimum tax, was because state taxes were never deductible for alt-min. Well, now we can’t deduct our state taxes anyway. So, I think it’s going to be a moot point for a lot of people. A couple more things is, the maximum child credit increased to $2,000 from $1,000, and up to $4,800 is refundable, meaning that if you don’t even have enough income or tax, then you still get it as a refund. That kind of help makes up for the loss of the exemption. And itemized deductions for miscellaneous itemized deductions, those are gone now. So you can’t miscellaneous itemized deductions, like unreimbursed employee expenses, tax prep fees, and the like are not deductible. And how about this one Joe, starting in 2019, you can no longer deduct alimony payments. If for divorce agreement entered after December 31 of 2018. If you had a divorce agreement before that, you still can deduct those payments.

JA: So let’s say if I was married, and I have to pay an ex. Which I’ve never been married. And I don’t plan to have an ex.

AC: That’s a good plan.

JA: (laughs) Right? That’s my financial plan.

AC: (laughs) You’ll be fine as long as you don’t have an ex.

JA: (laughs) And I gotta pay her a hundred thousand bucks. That would be taxable income to her, and I would get a tax deduction on my end.

AC: That’s correct. That’s how the law was, up until this year.

JA: Is it still taxable income to her?

AC: No.

JA: So it’s tax-free to her, and no deduction for me.

AC: Yes. It’s treated just like child support is currently, which is it’s not deductible, but it’s not taxable to the other side. So hopefully, that will be factored into divorce settlements. I bet the first few that happen in 2018, they may not know that. That would be tough. (laughs) Whoops!

JA:  (laughs) So that’s why you have to plan. Don’t plan on a divorce, but plan on your taxes. All right. That’s it for us for Big Al Clopine, I’m Joe Anderson. The show’s called Your Money, Your Wealth. We’ll see you next week.


So, to recap today’s show: Tax filing season begins on the 29th of January, so make sure you’ve read the entire new tax law before then. Just kidding. But do resolve to talk to a professional before you file.

Special thanks to our guest, Brian Perry, CFP, CFA for our 2017 market recap. The bull run continues, but eventually, there has to be a correction. What should you do? If your assets are properly allocated and you have a strategy in place, you already know the answer to that question. If not, or if you have any financial questions, tax questions, or just need some clarification, call Pure Financial at 888-994-6257. We may even put you on the air with Joe and Big Al to have your question answered live on Your Money, Your Wealth.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. For your free financial assessment, visit PureFinancial.com

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.