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Published On
November 28, 2023

Your last-minute tax questions answered: should Brad in Wahoo, NE save to his regular 401(k) instead of his Roth 401(k) so he can claim the American Opportunity Tax Credit? Should Jennifer and Zeke in NY set up a Roth IRA and file taxes for their 13-year-old who’s got some earned income? Does Cindy in San Diego have to report her Medicare Advantage over-the-counter medication benefit on her taxes? And should our buddy Carl Spackler wait until the new year to deposit his rollover check? Plus, Em in FL needs ideas for moving her Mom from a low-cost-of-living area to a high-cost-of-living area, Wannabe Landlord wonders about creating an LLC for his real estate, and can CJ in FL and IN report pro-rated real estate expenses on schedule E? Finally, the 5-year rule on Roth withdrawals once again, this time for Brutus Buckeye, and Bruce from Joisey is back, this time he wants to pay cash for a car. 

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Show Notes

  • (01:08) American Opportunity Tax Credit and Other Tax Strategies (Brad, Wahoo, NE)
  • (05:07) Tax Filing for 13-Year-Old With Earned Income (Jennifer & Zeke, NY state)
  • (09:47) HSA: The Last Month Rule for Health Savings Accounts (JZ, New York)
  • (13:01) Income Tax and Sales Tax Explained (Cindy, San Diego – North County)
  • (16:23) Deposit Rollover Check After New Year to Avoid the Pro-Rata Rule? (Carl Spackler, FL)
  • (21:12) Strategies for Mom to Move from LCOL to HCOL Area (Em, FL)
  • (26:28) LLC For Real Estate Investment Properties? (Wannabe Landlord)
  • (28:28) How to Report Pro-Rated Real Estate Expenses on Taxes (CJ, Florida & Indiana)
  • (32:22) 5-Year Roth IRA Withdrawal Rule – Sigh (Brutus Buckeye, Columbus, OH)
  • (37:41) Should I Pay Cash for a Car? (Bruce, Joisey)
  • (43:15) The Derails

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Transcription

Andi: Your last-minute tax questions answered, today on Your Money, Your Wealth® podcast 457. Should Brad in Wahoo, Nebraska save to his regular 401(k) instead of his Roth 401(k) so he can claim the American Opportunity Tax Credit? Should Jennifer and Zeke in New York set up a Roth IRA and file taxes for their 13-year-old who’s got some earned income? Does Cindy in San Diego have to report her Medicare Advantage over-the-counter medication benefit on her taxes? And should our buddy Carl Spackler wait until the new year to deposit his rollover check? Plus, Em in Florida needs ideas for moving her Mom from a low-cost-of-living area to a high-cost-of-living area, Wannabe Landlord wonders about creating an LLC for his real estate, and can CJ in Florida and Indiana report pro-rated real estate expenses on schedule E? Finally, the 5-year rule on Roth withdrawals once again, this time for Brutus Buckeye, and Bruce from Joisey is back, this time he wants to pay cash for a car. I’m producer Andi Last, and hold on to your seats as I do my best to corral ALL the Derails in this wild episode with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

American Opportunity Tax Credit and Other Tax Strategies (Brad, Wahoo, NE)

Joe: “Hey guys. I ride a vintage 1980 Kreidler Florett RS mopped. That must be a…

Al/Andi: Moped.

Joe: Oh my god!

All: Ha ha ha ha ha ha ha ha!

Joe: Alright, “Drink of choice apple ciders.” Oh yeah, you ride a mop.

All: Ha ha ha ha!

Joe: You gotta be careful man!

Al: You can’t risk breaking it.

Joe: You can’t risk breaking that thing. Oh, yes. “Top speed is 55 miles per hour, 80 miles per gallon, $75 tag fees, $100 a year in insurance. I think about $110, 000 a year plus some freelance on the side. My first kid is starting college next year. Is claiming the American opportunity tax credit worth changing my retirement savings from Roth 401(k) to regular 401(k)? I figure with HSA, my 401(k) IRA, I can just get under the $90,000. Additionally, I have 529 plans for the kids. My state allows writing out contributions from tax income. I can only claim my son every other year due to the divorce. So I was thinking, in years, I can claim him, shifting to maintaining regular 401(k) IRA contributions, to drop my adjusted gross income to below $90,000, as I’m a single parent. The years I don’t claim him I’m doing Roth and paying college from his 529 plan. Is this the best long term plan for taxes in retirement? Willing to consider other options. Thanks, Brad from Wahoo.”

Andi: And that is a real place. Wahoo, Nebraska is a real place.

Al: Okay. So what’s the question?

Joe: He’s looking for the American opportunity tax credit.

Al: He wants to know whether he should do regular or Roth 401(k), because if he does Roth, he might not qualify for the tax credit, American Opportunity Tax Credit. Yeah. Which is, by the way, pretty good credit for $2,500, per year for the first four years of college. I think when you’re single, it starts phasing out around $80,000. Once you’re at $90,000, you can’t really take any. If you’re $80,000 or below, you can take the whole thing. So, I guess that’s the question. Should I be doing the Roth, uh, then my income is too high where I don’t get the $2 500? Or should I do the regular 401(k) to get the $2,500?

Joe: I haven’t seen the American Opportunity Tax Credit, remember the Lifetime Learning Credit too. First, let’s explain what a tax credit is versus a deduction because it’s kind of a big deal.

Al: We learned about that today.

Joe: We did. So a tax credit.

Andi: You’re welcome.

Joe: Tax credit is dollar for dollar off the taxes owed. So if I owe $5 000 in taxes, I have a $2,000 tax credit. My bill to the IRS is $3,000.

Al: Dollar for dollar.

Joe: Dollar for dollar. A tax deduction is basically a deduction. You’re just reducing your taxable income. So depending on what tax bracket that you’re in, you have to do a little bit of mathematics to figure out what your tax savings actually are. So if you have a $1,000 tax deduction and you’re in the 22% tax bracket, your tax benefit is $220. So for a $2,500 tax credit. It’s a big deal. Off the dollars owed, so dollar for dollar. So I can see why he’s like, Hey, well, how can I make sure that I can get this tax credit? If you qualify, I would definitely go pre-tax to get your taxable income low enough, but I would be careful if you get it low enough, but not low enough where you don’t get the credit. You just missed that year abroad, so you have to do some math and some projections here. But if he can receive the credit, I would absolutely go for the credit.

Al: 100%. This is too big of a credit to miss, if you can actually qualify.

Tax Filing for 13-Year-Old With Earned Income (Jennifer & Zeke, NY state)

Joe: All right. “Dear Andi, Joe and Al. Hi, it’s Jennifer and Zeke here.

Al: Zeke.

Joe: Yep. “Subarus and Coffee in New York State. You guys gave us a spitball back in May. Really appreciate it. Thank you.” You’re welcome. “I now have a very specific question that I can’t seem to get answers on. Our son, age 13, earned $70,000 in cash from cat-sitting for a neighbor.” Are you out of your mind?

Andi: Joe, it says $70 cash.

Joe: Oh my gosh, am I buzzed?

Andi: What, do you just think in terms of thousands of dollars, you don’t even see $70. Look at the big wallet on Big Joe.

Joe: I was like this 13 year old kid makes $70,000 watching a cat. Was it Garfield?

Al: This cat, Joe, you don’t know what the cats are worth in New York state.

Joe: Is it a tiger? Oh, pretty dangerous cat. All right. $70, Sorry there Jennifer and Zeke.

Al: I’m flying into New York tonight. I want to watch this cat.

Joe: “I have talked up the almighty Roth IRA to him in the past and he wants to get one started, which is great. But I first want to consider whether It may complicate our tax filing if the $70 was his only income I believe we could not report it when filing taxes as it’s under the $400 self employment threshold and go ahead and contribute $70 to a Roth IRA for him, perhaps keeping a private log on how we earned the money in case questioned later. However he will also have unearned income from the UTMA account, let’s guess $3,000. In past years, we have reported this on our own tax return on Form 8814 and thus avoided filing a separate return for him. It is unclear to me whether in this situation, $70 earned, $3,000 unearned, I would have to file a separate return for him. Normally, I wouldn’t bother reporting the small amount of earned cash, but if we were going to contribute to a Roth IRA, I would want to be sure that it was properly following all the rules. If we had to file separately for him, I may decide that the small Roth contribution is not worth the hassle and risk of errors.

Al: Wow. Okay.

Joe: That $70 could grow.

Al: It could double.

Andi: To $70,000!

Joe: It could grow to $70,000!

Andi: And he could buy a mop!

Joe: He could ride a tiger! Have another baby! “I might decide that this small Roth contribution is not worth the hassle. Okay. Thanks in advance for any thoughts. I’ve been investigating this for a while and look forward to perhaps putting it to rest.”

Al: Okay. Let’s put it to rest.

Joe: Let’s do it.

Al: First of all, I wouldn’t bother myself, but I love the concept. I love the concept.

Joe: What do you mean you wouldn’t bother filing the return or you wouldn’t bother putting $70 in a Roth IRA?

Al: Either one. It’s too small. But see, so the thing is, if your son has $70 of earned income, I do believe he has to file his own return, which makes this a lot more complicated. You do have to put the amount on the return. You just don’t have to pay tax on it. It’s under $400. So there’s no self-employment tax. It’s still taxable as income. There’s going to be no tax because it’s only $70 and the $3,000 still gets taxed at the parent’s rate, but you’d have to do a separate return. Then you could legitimately do the Roth IRA. For me, none of that is worth it. I’d wait till your son is 16 and make a couple thousand and do it then. That’s what I would do. You’re trying to do a rule of 72?

Joe: $70

Al: $140,

Joe: I don’t know. He’s 13 years old and then in like 40 years, that will be like $1,200

Al: It will, tax free.

Joe: No, it could be like $10,000. I don’t know!

Al: Anyway, that’s my answer. But I think if you really want to do this great, love it. I think you’d want to file his own separate return to be able to deal legitimately.

Joe: But how long will it take to file that return? Seven seconds?

Al: No, because I mean, it’s a whole separate return.

Joe: How many inputs is it?

Al: Well, if you understand TurboTax, it may not be that difficult, but if you’re not in the profession, this could take a little while to figure out.

Joe: Do you think so?

Al: I do.

Joe: I disagree.

Al: I wouldn’t do it myself.

Joe: If you’re a CPA for how long? How long have you been a CPA?

Al: 1984. So compute that. What is that? 40 years?

Joe: It’s been a couple years.

Al: Yeah. 40.

HSA: The Last Month Rule for Health Savings Accounts (JZ, New York)

Joe: We got JZ from New York. “Hey, Joe, Al, Andi. This is Jay Z.” Do you think it’s the real Jay Z?

Al: I think so.

Joe: Beyonce?

Al: I don’t see why not.

Joe: “This is JZ from New York. First time, long time. I’ve been listening since episode 310.” And what episode are we on now?

Andi: 457.

Joe: Wow.

Al: I don’t think it’s “the” Jay Z then. I don’t think he would listen to 100 episodes. Do you?

Joe: Of course. “And really enjoy, and often, the straightforward answers and personal finance insights. I typically enjoy your show on my ride to and from work in my black BMW X3.”

Al: Ah, nice little SUV.

Joe: “And once I’m home, I typically prefer a few beers or a little G&T

Al: Gin and tonic. I’m getting to learn your lingo after hanging around with ya.

Joe: Yeah, Jay Z, he likes a little gin and tonic. “I need your help understanding last month’s rule for HSAs? My employer has a mid year benefit cycle, and this July, we switched to a high deductible health care plan for my family of four. So we are only HSA eligible for six months in 2023. Can I still contribute the max to my HSA, which is $7,750, using the last month rule, IRS Pub 969, as long as I stay HSA eligible through all of 2024? Are there any other watch outs for using this rule? It doesn’t matter what institution manages the HSA to use that last month’s rule. Thanks, JZ.” Alright, HSA, Health Savings Account. So, with the Health Savings Account, it’s a pre tax contribution that you can invest in. Right? You could go in cash or you could pick stocks, bonds, and it can grow for you. And then when you take the money out, it’s tax free. It’s a triple tax threat.

Al: You get a tax deduction, right? Yep. So that’s awesome. And then you get to invest the money. And then you pull the money out, and it’s tax free, as long as you use it for health.

Joe: If you’re really nerdy in our business, they call it the triple tax threat.

Al: And what’s the triple tax?

Joe: Well, it’s triple, you know, pretax deferred to tax free.

Al: I thought it was federal, state, and I don’t know.

Joe: It’s a triple because you.

Al: Okay. So the last-month rule for HSA simply is, if you, as long as you’ve got the HSA plan as of December 1st for the full month of December, then you can actually put in the full contribution for the whole year. That’s what the last month rule is. See, I bet you didn’t know that.

Joe: No clue.

Al: Yeah. Yeah. And I think that’s right. I think you have to stay HSA eligible for 2024 the following year, but don’t hold me to that. I’m not aware of any other gotchas on that one. Otherwise, let’s just say you had your HSA eligible from January to June, then you can only do a prorated six months, right? If you got it the last month, you had it by December 1st for the full month, then you can do it for the full year.

Joe: It’s got to come from the paycheck though, correct?

Al: Yeah, that’s right. You’d have to load up that paycheck.

Joe: All right. Thanks, JZ. Appreciate the question.

Income Tax and Sales Tax Explained (Cindy, San Diego – North County)

Joe:   We got Cindy writing in from San Diego. “I have an income tax and sales tax question that I don’t think some tax preparers fully understand. So I’m tuning into the experts with your vast and impressive knowledge.

Al: That’s not us.

Joe: Wrong place.

Al: Wrong show. I appreciate the confidence though.

Joe: “My Medicare Advantage plan has an over-the-counter benefit allowance of $105 per quarter for eligible health and wellness products, which can be ordered online and purchased at CVS with the payment card provided by the insurance company. Am I supposed to claim the amount of the benefit I use as income when filing taxes or…Would it be considered a flex spending account, even though I didn’t contribute money to it? Also, I have placed online orders. I’ve once placed an online order in…

Andi: Only placed.

Joe: I’ve only

Al: What is okay too but only is the word she wrote.

Joe: I’m just…oh. Now, where was I?

Al: Only

Andi: You’re on Only.

Al: “I have only placed online orders and no California sales tax was added.”

Joe: Oh, Imagine that. “It’s not shown on the order anyway. Am I supposed to include the amount for online orders that no sales tax was paid when filing my state return?” She’s talking about $105?

Andi: A quarter

Al: Well, that’s for the over the counter benefit. That’s different. Well, I can answer both questions, but go on. You just got some more.

Joe: Okay. I have had an OTC benefit for a few years and haven’t claimed the amount used as income or part of my CA return for sales tax. Don’t know if anyone does. For some reason I started wondering if I’m supposed to be doing this. Probably foolish of me since it may sound like I’m looking for ways to pay more taxes. Thank you. Cindy”. Cindy in San Diego.

Al: Cindy is wondering if she hasn’t paid enough taxes. So here’s the answer. Over the counter benefit of $105 per quarter. That’s an insurance benefit. You’ve been paying insurance, so this is just a benefit you got from insurance. Not taxable. So that’s the first good news. You do not have to move outta the country because you didn’t pay taxes. You’re okay. Number two, yes, if you buy something, like on Amazon, that doesn’t have California sales taxes, you’re supposed to include it on your California sales tax return. I think it’s an extra tax on page three of the return. Now does anyone do it? Maybe not. I’m not going to answer that question, but that’s where you’re supposed to do it.

Joe: Very good.

Andi: There are several actions you can take to lower your 2023 tax bill, but you need to do them before December 31, so the clock is ticking here! Go to the podcast show notes to watch our Year-End Tax Planning webinar on demand, and to download the companion guide for free. Learn from Pure Financial Advisors’ Tax Planning Manager Amanda Cook, Esquire and CPA how Roth conversions, tax loss harvesting, tax gain harvesting, the Backdoor Roth IRA, net unrealized appreciation, and charitable giving strategies such as a donor-advised fund can help you to pay less tax – and which of these strategies fit your specific needs and goals. Click the link in the description of today’s episode in your favorite podcast app, go to the podcast show notes, watch the Year-End Tax Planning webinar, and download the companion End of Year Tax Strategies Guide for free.

Deposit Rollover Check After New Year to Avoid the Pro-Rata Rule? (Carl Spackler, FL)

Joe: We got Carl Spackler back.

Al Again? From the golf course?

Joe: Yes, he is. “Hello, YM YW team. I was hoping to get some guidance.” We’re not giving advice. We’re not giving recommendations. We’re not even doing guidance on this show. We’re spitballing. No endorsement. Instructions.

Al: Not even suggestions.

Joe: Not even, it’s called a spitball. We’re just chatting. What would you do? What would I do? I don’t know. What do you think?

Al: You kind of sit around a bar stool. It’s like, what do you got? What would you do?

Joe: Hey, what’s going on? You know, and then people like to talk sometimes about finance. That’s what we’re doing.

Al: They hear you’re into finance and they want to ask you a question.

Joe: And these are good questions because usually I don’t tell people what I do because they’ll go, Hey, what do you think the market’s going to be?

Al: Oh yeah. That’s the worst, right?

Joe: All right. ”I’ve been making backdoor Roth contributions for many years. I have no traditional IRA, so the pro rata rule doesn’t impact me. I made this year’s backdoor contribution slash conversion in early 2023. I did so without a reeling that my company would be sold later in the year. All of a sudden I’m blessed to be receiving a large rollover check soon. It will be made payable to the IRA custodian of my choice. To keep from screwing up the pro rata rule, I was thinking about putting the check in my desk drawer till January, then depositing it in 2024. I would still be in the 60 day rollover period. If this was your role, would you do the same? Am I overthinking this? Anything else you can think of that I may not consider? Lastly, I’m making decisions on how to invest the rollover period beyond 2024. I was recently reading an article about buffered ETFs with no idea to limit losses, but also gains potentially, just wondering if you would spitball the topic as well. Thank you. Carl.” You made the conversion, you’re gonna pay a couple of bucks in tax because the 1099 is gonna come for this year.

Al: Yeah, 1099 will be 2023 even if you put it in a drawer. It happened in 2023, you had constructive receipt in 2023. It’s part of your assets. It’s part of your IRA in 2023. Unfortunately, when you do this pro rata rule, it’s your IRAs at the end of the year that factors into this. So you’re going to have that. Now, I guess if you just spend it. You pay all the tax on it, right? Then it wouldn’t be part of the pro rata, but you would never do that, of course, because then you’d pay a huge tax bill. So I think you’re overthinking it on that one. I think go ahead and just deposit it because it’s going to come out on the forms, the 1099s anyway, and you’re going to have to do it anyway. So yeah, instead of a backdoor Roth, you’re going to have to pay like a Roth conversion, right? So you’re going to have to pay taxes on the $7,000, you know, it’s not the end of the world.

Joe: Buffered ETFs. We don’t have enough time to go through those. They’re interesting products. Basically. It’s an ETF, they have a little bit of a wrapper around it.

Al: Like an option type wrapper.

Joe: Correct. Derivatives.

Al; So in other words, you can’t have huge gains, but you can’t have huge losses or however those set up is.

Joe: Exactly. So you could buffer the losses. Let’s say you don’t want to lose more than 10%. They’re buying options on the overall index. Basically you can’t lose more than 10%, but there’s a cost to do that. So if the market goes up X%, you’re not going to participate fully in the upside of the overall market, but you can get some downside protection. So more and more of these strategies are coming to Wall Street in a cheaper wrapper because they’ve been around forever like in, you know, structured notes. You have annuities where there are embedded fees and costs and very little transparency. Then a lot of the time people would sell it like you would get stock market returns with no risk. The product landscape is coming full circle. There’s so many different unique things that people can invest in. It’s crazy. Sometimes it’s too much.

Al: If you just look at the market long term, two out of three years, the market goes up. So you’re basically limiting your upside. If you’re looking at this as a long term play, which you probably wouldn’t, if you’re looking at a short term play, maybe it’s okay.

Joe: Part of your portfolio, to protect it, you could use it almost, I mean, there’s all sorts of different types of buffers that you can use, but in essence on very high level as a spitball, you can protect some of the downside. You just give up some of the upside. So depending on what your goals are, Carl, you know, it might make sense for a portion of the overall portfolio. Just know what you’re getting into though.

Al: Yeah. I think that’s key because a lot of times you really don’t know, cause you read the marketing stuff on it and it’s not really that specific on what really happens.

Strategies for Mom to Move from LCOL to HCOL Area (Em, FL)

Joe: “Hi, YM YW team. I’m Em from sunny Florida, still drinking champagne and driving that 2007 Pontiac hardtop convertible that no longer converts.

Al: Oh, that’s too bad.

Joe: Oh, yeah. That is too bad. “It’s just not at the same time. “I’m 42 and married with two small kids. My mother’s 72 wants to move to sunny Florida, to help with the kids. She’s retired on social security.”

Al: Is your mom going to move to sunny San Diego to help you with the kids?

Joe: Uh, no!

Al: No?. That’s not in the plans.

Joe: Uh, no.

Al: Okay. Just wondering.

Joe: You know, when she stays,

Al: I know, well, she kind of already does actually.

Joe: She stays a couple months. It’s like Mom!. Yeah, she’ll be here for the holidays.

Al: There you go.

Joe: All right. “She’s looking for some thoughts on the best financial strategy to help her move to our HCOL area.

Al: High cost of living. I’m guessing.

Joe: Yeah. That’s a good acronym. HCOL.

Al: HCOL.

Joe: “Area from her low cost of living area.

Al: She used to live in LCOL and now she’s going to HCOL.

Joe: I’ve never seen anyone put that in all caps as an acronym.

Al: Me neither, but why not?

Joe: Uh, Andi, anything?

Andi: As soon as I saw it, I recognized what it meant. So I figure I must’ve seen it somewhere.
Joe: Wow.

Al: It’s just clear. Like the month.

Joe: “She doesn’t have much in retirement. I’m considering buying her a house.” Interest rates are bad. Prices are high. My random thoughts. All right, let’s hear what Em has got going on here.

Al: Yeah, what do you got, Em?

Joe: All right, “Could I rent back to her and get rental tax breaks? Could I “gift” her money to offset rent? I could pay her W2 like a nanny without nanny tax, but would that mess up her social security? Is there any real benefit to W2 pay like the Roth IRA option? Not sure even if she needs that also she has five to ten or so years until she needs me to help take care of her. Something to consider. I would keep the house when she passes I guess. Hoping for a home under $400,000. Any better way to borrow than a traditional mortgage, HELOC? Have about $3 million in equity in our current home? Can probably only save about $100,000 for a down payment. Any tax breaks in this scenario? Really looking for a spitball. Thoughts on the best way to help take care of my aging parents at parental cost, as well as children care costs. Thanks. Look forward to your response. Em” Interesting. All right. So she’s trying to get creative here. She’s got mom moving. She’s going to sunny California or sunny Florida.

Al: Yes. Sunny Florida. Get mom a house for under $400,000 and then try to figure out how to get a tax break?

Joe: How do I benefit here? I’m going to give mom a house to live in. And she’s like, man, prices are high. Interest rates are high. What should I do? How can I kind of help myself here?

Al: So can I call it a rental? Well, you could. So here’s the problems with a rental. There’s several. First of all, if you charge her below market rent or no rent, you can’t take any losses because that’s a below market rental. So she’d have to pay you fair market rent. So how does she get it? Well, you’d have to give her the money. Right. And then she’d give it back to you. That seems dumb because that’s income to you. Right, so now you basically have this income that you’d be offsetting perhaps with the mortgage, but you can deduct the mortgage anyway as a second home, although there are the mortgage limitation rules, which you may or may not get any benefit for. Furthermore, even if you were allowed to create a deduction. If your income is over $150,000, you can’t take any deduction. It gets suspended. So I would tell you this, and this has been true since the 1980s. That the ability to deduct losses in real estate is difficult unless you do this in a big way. In other words, you have a lot of rental properties, you’re a real estate professional. So, I would say I love all the thinking, but no, it’s a lot of work and you’re not really going to receive any benefit as far as paying her a W2. Well, now she’s got income and you don’t really have a deduction because you don’t have a business. So you’re creating taxable income for no reason.

Joe: For her to do a Roth, which she doesn’t necessarily need.

Al: I love all the thinking, but no, I think you buy the house for her and it’s your home. She pays you whatever rent that she can to help you pay for it. If you might be able to deduct some property taxes, you might be able to deduct some mortgage interest, but that’s about it really. That’s all I see. Anything else from you?

Joe: No, I like it. You know,

Al: I like the thinking.

Joe: Yeah, I’ve helped my mother out with a home myself.

Al: Yeah, I know you have. It makes you feel warm inside. That’s the big thing.

Al: That’s the benefit. Yeah, I’m with it.

Joe: Okay Em, thanks.

LLC For Real Estate Investment Properties? (Wannabe Landlord)

Joe: The real reason I helped my mom with a home is so she would stay in Minnesota.

Al: I hope she doesn’t hear this episode.

Joe: She stopped listening years ago.

Al: You don’t have to worry about that.

Joe: “Dear Big Al, does it make sense to form a limited liability company to hold investment real estate properties? I’m thinking about purchasing two or three single family homes for investment rental income purposes. Should I simply purchase the properties in my name or form an LLC to hold the properties? What are the pros and cons?

Al: Yeah, great question. This is from Wannabe, Wannabe Landlord.

Joe: Little wannabe landlord. You don’t wanna be a landlord.

Al: It’s a little tougher than you think. However, so LLCs, that’s a great way to hold properties. What’s the benefit? The benefit is, if something goes wrong with the property, then typically the person that is suing you only has recourse for the value of the properties. in the LLC. So if you have three properties and you want maximum protection, then you would have three different LLCs. If something goes wrong with one property, then you may lose that property, but not necessarily the other two. And you may not necessarily lose any of your other personal assets because the liability is limited to that LLC. That’s the whole point. I’m not an attorney. It seems to me there’s ways to pierce that if you’re negligent, things like that. So it’s not foolproof. So that’s one way to do it. The other way to do it is to just load upon liability insurance, which is the easier, simpler way to do it. Probably what most people should do to start, especially if you’ve never had rentals, we don’t even know if you’re going to like them or not, maybe start with one, see if you like it and to get some liability insurance. And if this is like, you know what, this is for me, then yeah. Then start thinking about buying more properties, setting up LLCs. There’s a hassle factor though. It depends upon the state you’re in. In California, you have to file a return each year and pay $800 to the state of California. Depends upon your state. I’m not sure what you have to do or not do, but you also have to set up the entity. So that takes a bit of an effort too.

How to Report Pro-Rated Real Estate Expenses on Taxes (CJ, Florida & Indiana)

Joe: We got CJ from Florida and “I like McUltra from time to time. And I drive a 2015 Tacoma with 219,000. I’m guessing that’s the mileage?

Al: Exactly, yeah.

Joe: “I’m a loyal 4+ year listener. While walking our mixed breed rescue dog, Nora. I believe these are questions for Big Al. That real estate

Andi: Magnate.

Al: Magnet.

Joe: Are you a magnate or a magnet? The real estate magnate?

Al: Magnate. But I mean, when I see it and when you say it fast, it sounds like “magnet”.

Joe: I was going to say magnet. “Thanks in part to you two and Andi.” Am I reading that right?

Al: Yeah,

Joe: Thanks in part to you two and Andi, I retired two years ago at 62.” Is he, like, talking to me?

Al: We had a hand in that.

Joe: So it was like you two and Andi.

Al: Talking to the two of us and Andi. We helped him retire at 62 and Andi. Oh, he did several backdoor Roth conversions. That’s what put him over the top.

Joe: In the craziness of this real estate market in 2022, we purchased a house in Florida. It made more sense for me to take a first mortgage out on my Indiana home for $375,000 plus $275,000 in cash from my brokerage, paying cash of $650 000 for our Florida house. We spent three to four months in the winters, in additional weeks here and there, then had it available to rent. We had rented it for about 14 weeks in 2023. We didn’t offer it for rent in 2022. First question, can I put a prorated interest rate on my Indiana home mortgage on Schedule E?

Al: Okay, the answer is yes. In fact, not only can you, you should, you’re supposed to. In other words, you’re supposed to prorate it because whatever you borrow the money for on your residence, it’s called interest tracing rules. You got to trace what the money was used for and the deducted in the right place. So it goes on schedule E. It still goes on schedule A, because that’s how the IRS is going to match it. But then you back it out of schedule A as a minus to show end up zero on itemized deduction. But then you show it on Schedule E, that’s what you’re supposed to do.

Joe: “Second question, are my ProRata expenses based on the weeks it was available to rent or just the actual days rented out? Thanks.”

Al: Yeah, great question. Available to rent is the right answer. So in other words, if you rented it for 30 days and it was available to rent the rest of the year, even though it wasn’t rented. You can, you know, basically 11 months of rental expenses, but be aware of this. The vacation rental rules, if you use it more than 14 days yourself, can be a little tricky. So make sure you understand what those rules are. So you’re doing this right.

Andi: It’s that time again: the DIY Retirement Guide is the Special Offer right now at YourMoneyYourWealth.com, it’s only available until this Friday, and this is your last chance to download it this year! Nearly all our other white papers and guides and handbooks are always freely available in the Financial Resources section of our website, but the 40 plus pages of this guide are packed with so much practical, do-it-yourself information that we only make it available on a very limited basis. Learn steps to understand and plan for your retirement income, sophisticated strategies for choosing a tax-efficient distribution method, guidance on developing an investing strategy that meets your needs, tips on preparing for the unexpected, and other actionable information that’s normally only available in our retirement classes or one-on-one meetings. Click the link in the description of today’s episode in your favorite podcast app, go to the podcast show notes, and claim the DIY Retirement Guide by this Friday, December 1st, 2023. If you know someone who could benefit from the gift of financial education, share the podcast and the financial resources with them!

5-Year Roth IRA Withdrawal Rule – Sigh (Brutus Buckeye, Columbus, OH)

Joe: Brutus Buckeye. Brutus Buckeye, writes in from Columbus, Ohio. Think he’s an Ohio State Buckeye fan? Just guessing.

Al: I think that’s a good guess.

Joe: “He’s a long time listener. First question asker. Like most people, I have a five year rule question.” Well, if you’re a long time listener.

Al: Just listen to all the episodes.

Joe: I know, you should be dialed. “Most of our retirement savings are in pre tax accounts today. We won’t have to take RMDs until we’re 75. So I’m planning to do Roth conversions once I retire at 65.” So he wants to do conversions from age 66 to 74. “To get most of the pre tax money into the Roth while we’re in the 12% tax bracket. I’ve done a lot of reading. And I’ve gotten more confused on this, since I’ll be older than 59 ½, when we start conversions, can I spend the money I’m converting each year during those nine years without penalty, even though the conversions won’t pass the five year rule, I know I’ll pay taxes. That’s the point, right? But it’s not clear if I get an exemption from the 10% penalty. We went gluten free.” He kind of switched real quick.

Al: It was really like we went over a cliff.

Joe: Yeah, it was just like a sudden gluten free slap in the face. “We went gluten free for our daughter several years ago. Alright, so no more beer for me. We do enjoy a good margarita. Occasional seltzer. Thanks for the spitball.” He’s got a five year clock issue.

Al: No, he doesn’t. Once you’re 59 ½, once you do a conversion, you have access to those conversion funds immediately. That’s the whole point. If you do it when you’re younger than 59 ½, you have to wait five years or 59 ½ to have access to the conversion dollars. Now the income, that’s a different story. To have the income you have to have had a Roth for five years and be over 59 ½ to have access to the income or growth part. But the contributions themselves, once you’re over 59 ½, you do the conversion. You can pull that money out the next day. The reason is because there’s no 10 % penalty because you’re over 59 ½. That’s the whole point here.

Joe: People were avoiding the 10% penalty by converting dollars when they’re younger than 59½ and then taking the money out. So that was just a sidestep way for people to avoid the 10% early distribution penalty. So then they put in the new rule that confuses everyone.

Al: Yes. Everyone, I would say.

Joe: There’s two five year clocks that if you’re under 59 ½, each of your conversions has its own five year clock until you turn 59 ½ . Once you turn 59 ½, you can take distributions from any type of retirement account and not have an early withdrawal penalty. So that five year clock basically goes away. The other five year clock is still in play. So if you don’t have a Roth IRA account established for at least five years, you still don’t have access to the earnings or the growth of that account. No matter how old you are. You could be 80 years old and do your first Roth conversion. You would have to wait until 85 to be able to have access to the earnings of that account because no Roth account was ever established. So as long as a Roth account is established, that will mark your five year clock for earnings once you turn over 59 ½. Maybe explaining that way might help. But I guess with Brutus buttcake here…

Andi: Ha, ha, ha, ha

Al: That’s a good one.

Joe: Well, I am a Florida gator. If you’re going to do conversions, don’t do the conversion if you need the money the next year.

Al: Yeah. Good point too. It’s like, what’s the point, right?

Joe: There’s no point. Just take the distribution and spend it. A conversion, you’re paying tax to get money into a tax free environment. So you want that money to continue to build and grow tax free for you. So if you’re going to do a conversion and then take the money out the next day, I mean, don’t waste your time. The exercise would not bear any fruit.

Al: Yeah. I think people ask the question though, they’re, it’s not like they’re intending on spending it, but what if they need it? Right. What if they have to get at it? And the answer is that once you’re over 59 1/2 , you can always get at your contributions. It’s just the growth and earnings. You have to have had a Roth for five years. And so here’s a little tip for our listeners. So if you don’t have a Roth IRA right now, do a Roth conversion. Even if you’re in the highest tax bracket, $500, $100, whatever, do a Roth conversion today. And your five year clock will start January 1st of 2023. So you almost have a whole year in just by doing a Roth conversion right now.

Joe: All right, Brutus, Buckeye

Should I Pay Cash for a Car? (Bruce, Joisey)

Joe: Andi, what’s up with Joisey, Bruce from Joisey. He just kind of emailed yesterday.

Andi: Yes, we just got that email.

Joe: He was cringing or something. What the hell is that all about?

Andi: Yeah, he said, because you were saying apparently he’s watching old episodes of the TV show while he’s waiting for new episodes of the podcast to come out. And he said, you would say, “this is your show. It’s your money and it’s your wealth.” And he said that made him cringe.

Joe: That makes me cringe. I don’t ever remember saying something that cheesy.

Andi: He figures that’s what you were going to name the show before, so I don’t know if that means it was going to be called It’s Your Money and It’s Your, I’m not sure what he’s referring to as, that was going to be the title, but.

Joe: So I would say It’s Your Money and It’s Your Wealth.

Andi: Yup

Al: Well, I guess.

Joe: Well, it is Your Money, Your Wealth. But I would say it in such a way that I was trying to talk to the audience that it’s their money and it’s their wealth and we’re just here to help them make more of it.

Al: Cheesy.

Joe: So, so bad. So bad. That’s why we’ve never watched any of these episodes.We’d never listen to ourselves.

Al: We would never do another one again. It’s like, Oh my God, that’s what we’re putting out there. It’s like, who would want to see that?

Andi: Did you want to respond to Bruce’s question?

Joe: Yeah, what the hell? What does he have?

Andi: Uh, let me go down to it. It’s like on page 57 or something.

Al: Oh, we don’t have that.

Joe: I got page 7.

Al: I got to page 12.

Andi: Let’s see.

Al: Why don’t you read it?

Andi: Bruce…

Joe: Bruce from Jersey

Andi: Okay, he hasn’t emailed us since August of 2021, by the way. “Hello, YMYW. I started watching your old YouTube episodes while waiting for the weekly podcast. I must say I had to cringe each time Joe said, “This is your show, your money, and it’s your wealth, or this is your show, your money, and it’s your wealth. I only imagine that the show was going to be called that, or he usually uses that phrase with thousands of clients. I’m in season four, listening at two times speed. It’s still understandable, but since some of the info is outdated and some I’m already aware of, I’m just getting ideas and getting information hammered into my memory. I’m glad you

Joe: That’s a good speed. I know a guy who listens to books, like eight times a day.

Al: I’m aware of that same guy.

Andi: This is watching the TV show at 2x the speed. “I’m actually glad you did do some solo 401(k) segments and how powerful it is. It should be your one two punch combo for small businesses, solo 401(k), and Roth IRA. My actual question is this. If we have more than eight months of living expenses, can we buy a $38,333 car with “cash”? $12,000 a year for Roth IRA? My spouse is not likely to put money in the brokerage, CD or T bills are doable, but if they are only earning 4-5%, then math says we shouldn’t borrow 6%+ for a car loan. I’m not sure if cash is king with cars, but we immediately will be resuming saving for living expenses. Thanks for all your great info. I’m starting to get comfortable with light beers, but it’s still not for me. Regards, Bruce from Jersey.”

Al: Okay, so.

Andi: $38,333 for a car. Should he pay for it in cash?

Al: Cash? Or get a 6% loan?

Joe: What’s he getting an Acura? What kind of car, Bruce, from Jersey is getting?

Al: Oh, Acura? Is that what you’re trying to say?

Joe: Acura.

Al: Acura.

Joe: I would just pay cash.

Al: Well, so he’s got eight months of living expenses. I don’t really know what other kind of money he has or what liquidity he has. So it’s a little difficult to answer the question. I would probably, I don’t know, I might borrow.

Joe: At 6%?

Al: Yeah.

Joe: That big wallet you got?

Al: Yeah. Just to give you some more options. It depends on how much liquid assets he got?,

Joe: Pay cash.

Al: I don’t have enough information. I would say if you have plenty of other resources that you can draw on for other things, then pay cash. If you don’t, I would get the loan.

Joe: All right. Thanks, Bruce. Sorry I made you cringe. That made me cringe too. So we’re in the same boat.

Al: True.

Joe: And that’s it for us, folks. Thanks so much for your questions. Again, go to yourmoneyyourwealth.com. You know where to go. Andi, wonderful job. Thank you so much.

Andi: Thank you.

Joe: And Big Al.

Al: Yep. It was fun as always.

Joe: Right?

Al: Yep. Correct.

Joe: Show is called, Your Money, Your Wealth®.

Andi: You’ll hear why that’s funny in the Derails. Plus, once vs. only, North County San Diego, mops in Wahoo, Jay Z and Beyonce, the triple Lindy, and Al the real estate monster pointing hard, so stick around to the end of the episode.

Help new listeners find YMYW by telling your friends about the show, and by leaving your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and any other podcast app that accepts them like Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Pocket Casts, Podcast Addict, Podchaser, Podknife, and Spotify.)

Your Money, Your Wealth® is presented by Pure Financial Advisors. Click the “Get An Assessment” button in the podcast show notes at YourMoneyYourWealth.com or call 888-994-6257 to schedule your free financial assessment, in person at one of our several offices around the country or online, a time and date convenient for you, no matter where you are. Chances are, one of the experienced financial professionals on Joe and Big Al’s team at Pure will be able to identify strategies to help you create a more successful retirement.

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.

The Derails

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IMPORTANT DISCLOSURES:

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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• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.

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