Show Notes

• 00:00 – Intro
• 01:13 – I Want to Get Into the Market. Dollar Cost Average or Go All In? (TJ, Louisiana)
• 07:08 – Does This Tax Loss Harvesting Strategy Work? (Margaret, CA)
• 07:45 – When Is It Worth Diversifying Beyond a Basic Three Fund Portfolio? (Brian, Charlotte, NC)
• 13:33 – Factor Investing: What Is It? Should You Be Doing It? – Read the blog, Download the Investing Basics Guide and 10 Steps to Improve Investing Success
• 14:00 – Should I Convert a Variable Annuity to Fixed Index Annuity? (Christine, San Diego)
• 18:21 – How to Invest Inherited Retirement Funds and Where to Save Extra Money? (Dean, Columbus, GA)
• 21:50 – How Should We Fund Our Home Remodel? Are We On Track for Retirement? (Jen and John, California)
• 29:43 – How Your Home Can Create Retirement Income: Watch YMYW TV, Download the Retirement Readiness Guide
• 30:15 – Solo 401(k) to Avoid Unrelated Business Income Tax (UBIT)? (Terry – voice)
• 32:31 – Switching to a Fee Only Advisor: Any Negative Consequences? (Steve, PA)
• 37:19 – Intelligent Charitable Giving Through Qualified Charitable Distributions (Chris)
• 41:05 – Outro

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Transcription

Intro

Andi: TJ in Louisiana has been sitting on the sidelines, but now it’s time to get into the market. Should he dollar cost average, or just go all in? Margaret in California has an idea of selling a stock at a loss and buying a put option on that stock that expires after the 30-day waiting period. Does this work as a tax loss harvesting strategy? When is it worth it for Brian in Charlotte, North Carolina to diversify beyond a basic three-fund portfolio? Should Christine in San Diego convert her variable annuity to a fixed indexed annuity? That’s all today on Your Money, Your Wealth® podcast number 494. Plus, how should Dean in Columbus, Georgia invest inherited retirement money? Are Jen and John on track for retirement, and how should they fund their home remodel? Are there any negative consequences for Steve in Pennsylvania if he finds a new financial advisor just a few months after hiring his current advisor? The fellas also talk through how Chris can give money to charity from his required minimum distributions. And finally, Terry calls in with a follow-up question about whether a solo 401(k) is an option to avoid unrelated business income tax, or UBIT. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

I Want to Get Into the Market. Dollar Cost Average or Go All In? (TJ, Louisiana)

Joe: We got TJ from Louisiana goes. “Hey guys. I’m hoping this will get answered on your podcast, which I love by the way.”  Thank you, TJ. “I need some help with a little bit of a mess, not a bad one, we find ourselves in. Quick rundown of where we sit. We got $800,000 in a 401(k), $270,000 in a Roth, $330,000 in a brokerage and about $1,000,000 in cash. House is worth $1,000,000, with about $600,000 in equity. We do not have debt outside of our mortgage. Most of the money’s in index fund across small, medium, large, tech, value and small portion in international.  45 years old, married, with two boys 17 and 15, will pay for college via cash flow.  Question is, what to do with the cash that is earning roughly 5% right now. I sold a few investments and never put it back in the market with interest rates where they were feeling that the market is a little high and yes, I know timing the market is not possible. I would like to get in the market and I know time in the market is better than time out of the market. So would you DCA?”

Al: Dollar cost average.

Joe: Thank you. “Or just go all in. About 80% of cash now. Also, considering putting a pool in which would run about $100,000. Any issues with that? Thanks for the feedback.”  Invite me to the pool. I’ll tell ya.

Al: I would think a pool in Louisiana would be pretty nice about right now.

Joe: Is the money, what’s the money for? Is it for retirement? So, I’ll take the $100,000 pool. Keep that in cash, right? And then, you know, get your pool.

Al: Yeah, keep your emergency fund.

Joe: Keep your emergency fund and probably another $100,000.

Al: Yep, great.

Joe: And then, so you got, call it $800,000 or $780,000. Do you dollar cost average or do you put it all in? If I were you, TJ, I’d go all in. I don’t care where the market is, because if you need this money and 10 years from now, 20 years from now, do you think the market is going to be higher 10 years from now than it is today? If you believe that the market’s going to be higher 10 years from now when you need the money, then just put it in. Dollar cost averaging is fine. It’s easy. It makes you feel a little bit better because when the markets go up, you’re like, oh, thank God I didn’t put it all in or when the markets go down, you’re like, oh, should I put a little bit more in? Statistics say the markets go up about 70% of the time goes down 30% of the time. And if you need to invest, I would have it fully invested right now in the proper allocation for your goals.

Al: Now, but so many advisors, Joe, say dollar cost averaging is the way to go. And I tend to agree. So, so the thing about it is it feels better, right? Cause you, you’re, you know, you’re not going to make a huge mistake. You’re doing little bits each month, regardless of what the market does. If it goes up a little bit, you’re happy because those shares went up in value. If it goes down, you’re happy because now you’re buying more shares at lower costs. So you’re able to kind of manage your- your emotions. But if you think about it this way, Joe, kind of, as you said, the way I think about it is markets, on average, go up two years and down one year. So in a 3 year period, markets go up twice as much as go down. So if that’s true, wouldn’t you just want to be invested and stay invested? And that’s the argument for going all in. But you will find a lot of financial advisors that advocate dollar cost averaging. And I believe that’s because it’s just easier emotionally to handle.

Joe: I think most people dollar cost average, if you invest in a 401(k), you’re dollar cost averaging.

Al: Of course. I mean, by, nature, right?

Joe: Right. You’re putting money in every paycheck into the overall market. And so the theory is that, okay, well, let’s see, you’re buying a stock and the stock is $2 a share. So you buy it at $2 and then it goes to $3, and then it goes back down to $2. And then so you’re averaging out the cost of the stock as you dollar cost average in. And so, yeah, sometimes the math works really well there. But if I were you, I’m, I wanna get it in a globally diversified portfolio that’s based on my goals and get it in and then, alright, forget about it. What happens is what’s gonna happen to TJ?

Al: He’s gonna put it in, the market’s gonna crash.

Joe: Exactly.

Al: We already know that.

Joe: Exactly. That is exactly what’s gonna happen.

Al: But if he doesn’t put it in, the market’s gonna go way up. So that’s, this is the hard part about the emotion.

Joe: Right. It’s the, it’s impossible. Our brains are not wired to be good investors.

Al: And so, so if it’s easier to dollar cost average, maybe you do something in between. Instead of doing it over two years, you just do like 3 chunks. You do, you know-

Joe: Put $500,000 in today and then dollar cost average the rest of it.

Al: Whatever. Yeah. Whatever feels right to you. But, just, if you think about the nature of the market, it goes up more often than down. Wouldn’t you want to be in the market generally? And the answer is yes.

Joe: Yeah. And I think, let’s say if he takes the DCA route, right, have a disciplined approach and a plan to do that. Because your emotions are always going to get in the way as your dollar cost averaging, so you’re going to put $2000 in a month and then the market’s going to crash. And you’re going to be like, Ooh, I don’t know. Should I buy more? Should I buy less? So let me just wait because I know that the market’s going to go down a little bit more and then when it goes down a little bit more, I’m not going to put $2000 in, I’m going to put $200,000 in and guess what, when you sit on the sidelines again, the market’s going to skyrocket up and you’re like, Oh man. So you gotta get your emotion. You have to have a disciplined investment process. So if you dollar cost averaging or you put in a globally diversified portfolio, make sure that you know what you’re investing in. What is the expected rate of return of the overall portfolio? What is the risk associated with those investments? And if you’re comfortable with that, invest now. So, yeah, get off the sidelines.

Does This Tax Loss Harvesting Strategy Work? (Margaret, CA)

Joe: Alright. We got Margaret, she writes in from California. She goes, “If you sell a stock at a loss and are waiting 30 days to repurchase the stock, can you buy a put option on that stock that expires after the 30 days?”

Al: That one is pretty clear. The answer is no. You can’t even buy the stock in your IRA, even though you’re doing this, you know, tax loss harvesting in your non-qualified brokerage account. So you’re basically controlling the same stock. It’s considered similar, right, as what you sold. So no you can’t do that.

When Is It Worth Diversifying Beyond a Basic Three Fund Portfolio? (Brian, Charlotte, NC)

Joe: All right. We got Brian from Charlotte, North Carolina. He goes “Hey Joe, Big Al, this is Brian. My wife and I drive a Corolla and love iced coffee over alcohol.”

Andi: Does that mean that he prefers iced coffee to alcohol, or he wants iced coffee on top of his alcohol?

Joe: I think it’s the latter.

Andi: Okay.

Joe: I’m just gonna pour myself a big ass jug of booze.  I’m just gonna top it-

Al: -top it off with coffee.

Joe: Top it with a little iced coffee.

Al: That’s how I read that.

Joe: Is that how everyone drinks it?  “I wanted to know if and when you think it’s worth diversifying past a basic 3-fund portfolio.” Alright, the 3-fund portfolio. You got total US stock, total non-US stock, and total bonds. “I’ve read about factor investing and understand the argument about adding small caps, value emerging markets, but is the difference in the long run performance risk worth the added complexity? I think to keep things, I love to keep things simple where I can, but don’t want to leave dollars on the ground.” Dollars on the ground.

Andi: I don’t know that one. I’ve heard dollars on the table.

Joe: I’ve never heard dollars on the ground. I love that.

Al: You don’t want to leave dollars anywhere.

Joe: You are leaving dollars on the ground.

Al: Just pick them up.

Joe; Isn’t there like a song? Something like something on the ground.

Al: Maybe.

Joe: “Thanks for your thoughts.” All right. So, Al, what say you? I’ll let you answer, I’ve been talking a lot. I’m all jacked up on Celsius.

Al: You have been talking a lot.

Joe: I feel like it too.

Al: So I would say,  honestly, probably for the average investor, those 3 funds you mentioned are probably just fine. Total US stock, total non-US stock and bonds. That’s, those are 3 great portfolios. You’d be fully diversified. The reason why a lot of advisors and others go to the next level, right? So small caps, mid-caps, growth versus value, international stocks versus emerging markets is all of those different asset classes have slightly different expected long-term returns. Small-cap and value tend to outperform large cap and growth. However, in the last 10 years, that has not been true. But if you go back 50 years or more, that’s been true. Emerging markets, more risky, outperforms international, other types of international stocks. The last 5 or 10 years, not really so much. So it just depends. But yeah, the reason people do it- a couple of reasons. One is to add a little return in their portfolio long term. And secondly, is if they got stocks outside of retirement account and different asset classes move at different times, they go up and down. If one goes down, you could sell it, tax loss harvest, create a loss, buy something similar, right? Maybe not exactly the same. If you only have 3 funds, it’s harder to do that because everything’s stuck in one fund. But yeah, I would say for the average investor, the 3 funds you recommended, as long as they’re low-cost, index-type funds, ETFs, that’s a great way to go.

Joe: So here’s the theory behind it. I think it really depends on how much money that you have. If you have a few hundred thousand dollars I think 3 funds is great. But as you have more dollars you can have more tilts, if you will, towards different asset classes because if you put $10,000 into a small value fund in a $200,000 portfolio, is it really going to move the needle? Maybe, maybe not. But as you have a larger portfolio, there’s more complexity that you can get into. So let’s say you have a 60/40 portfolio and I want 60% stocks and 40% bonds.  Let’s just call it the total US stock market.  The total US stock market, you’re going to have small companies, you’re going to have large companies, you’re going to have value and growth within that over total stock market index fund, but I have 60% in stocks, 40% in bonds. So as people age, they want to take on less risk, but they still want that high expected rate of return. And so by diversifying into different asset classes, especially let’s say smaller value that is going to be a little bit more volatile and give you a higher expected rate of return over the long term. You could take less risk in the overall portfolio, but in your stock component of the portfolio, you can add that risk to get the same return, but you’re actually minimizing your risk. So what I mean by that is it, let’s say that the total market is going to do 10%. Hypothetically, this is total hypothetical. The total market does 10% on average per year, but small companies over, over the years has done 13%.  They’re going to give you a higher expected return, but you’re going to receive more volatility there. So if I still want to maintain that 10% rate of return on my stock component of it, I could put small caps, but now I don’t have to have 60% of my portfolio in stocks. Maybe now it’s 50% in stocks, but I have a sliver in small companies or I have a sliver in emerging markets and things like that, that are more risky, that will give me a higher return, but I’m overcompensating on the bond side. So I have less risk or market exposure with the same expected rate of return of the total market. That’s kind of the theory and the, I guess, the academics behind it. So yeah, are you leaving dollars on the ground? You could be leaving a lot of dollars on the ground.  So, but if you want to keep things simple, there’s cost to support complexity. So, I mean, if you want to keep it simple, you’re still probably going to get a really good return. But if you don’t want to leave dollars on the ground, get a little bit more complex, it’s going to take you a little bit of time to do it. And it’s probably going to take you a little bit of work throughout the year. So-

Al:  I like things simple sometimes, Joe. So I’m still okay with my answer.

Joe: Oh, you’re a simpleton.

Al: That’s right.

Read the Factor Investing Blog, Download Investing White Papers

Andi: To learn more about factor investing, check out our latest blog post called, funnily enough, Factor Investing: What Is It? Should You Be Doing It? You’’ll find the link in the description of today’s episode in your favorite podcast app to find out the key objectives and the various types of investing factors. Also find links in the episode description to download the Investing Basics Guide and 10 Steps to Improve Investing Success. All yours, all free courtesy of Your Money, Your Wealth. Tell a friend.

Should I Convert a Variable Annuity to Fixed Index Annuity? (Christine, San Diego)

Joe: All right, we got Christine, San Diego. She goes “Hey, my husband will be 73 in December. I am 59. We’re both retired. I have a pension. He’s taking Social Security. We also have rental income. Our living expenses are very small and live way below our means. But his RMD is coming. We have $232,000 in a variable annuity is locked up in the IRA account that was set up many years ago, which passed its surrender charge. Also, he has an IRA of about $315,000 and a $140,000 Roth- and $140,000 in Roth with $130,000 is combined both accounts.”  What does that mean?

Al: I don’t know. I’ve read it before and I still don’t know.

Joe: “Also, he has an IRA about $315,000 and $140,000 in Roth with $130,000 is combined both accounts, which we manage by ourselves since I’m a little worried about the market. Would like to transfer the variable annuity to be either money market or fixed annuity, but not sure if I should, one, roll it over to existing IRA, then take the RMD by ourselves, or two, take the annuity payment option, which would be used to meet most of the RMD requirements.  Our tax might go higher in the future. So I’m not sure if- so I’m not sure if-“

Al: period.

Andi: “- if converting to a fixed index annuity is another good option.”  You have to flip the page here.

Joe: I’m not that smart. “- if I convert it to a fixed annuity is another good option or not, even though I’m very much enticed by the idea of locking the value right now, since we don’t need the annuity income. I know I might have to pay more fees for the new annuity, but not sure if I take the payout option two, will I still be charged for any fees?  What option do you think makes the most sense for us? Love your show. We have learned a lot. Thank you so much.” All right, so a couple things. Thank you, Christine, for the email. So they have the money in a retirement account. So there’s two different things here. You have the retirement account rules, and then you have the investment product rules that are inside the IRA.  So there’s a variable annuity inside the IRA that she could turn on the income from the variable annuity. And so she’s seeing, well, the income from the variable annuity, if I turn it on, would satisfy the RMD.  But then that income stream will continue to go if she annuitized the product, or I’m not really sure what the income benefit is, or how that would work with that particular product. Or should she transfer that money into a fixed annuity and have a high guaranteed fixed rate because she’s afraid of the market. If you don’t want the variable annuity, it’s out of surrender charge, and you don’t want to pay all the internal fees, and you’re not going to use it for the guaranteed income, then just put it in the fixed annuity. You just do a transfer into the fixed annuity. You will pay, potentially, a commission up front to get into the fixed annuity. There’s all sorts of different sizes and flavors. But basically, how the fixed annuity is going to get paid is on the spread. That the annuity company is going to guarantee you a certain rate, 5%. But they’re going to invest that money and try to get 6%. So that 1% is going to be the spread. So there’s not really a lot of internal fees and costs inside of fixed annuity chassis. But there’s going to be a commission up front. You have to hold the product for a certain period of time. If you’re fine with a guaranteed fixed rate, sure, go ahead, buy the fixed annuity. Don’t worry about the variable. Just put it all in one and satisfy the RMD. But just make sure that you’re picking the right investment for your particular, you know, goals, timeframes and so on. And then just follow the RMD rules. So, I think she’s getting confused a little bit on, hey, I have this product that has a certain payout. And then the RMD has another certain payout from the IRS to satisfy the IRS. Just combine them all into one. Pick whatever allocation you want. If you want to buy a fixed annuity, a CD, money market, anything that you would like inside the retirement account. And then just satisfy the RMD from there.

Al: Yeah, I think Joe, you bring up a good point. And I think a lot of people, they look at investments in a vacuum, right? But you got to look at your overall situation to figure out what, what makes the most sense. So fixed annuity, while interest rates are higher as they are right now, might not be a bad way to go.

Joe: All right.

How to Invest Inherited Retirement Funds and Where to Save Extra Money? (Dean, Columbus, GA)

Joe: “Hey, y’all, really appreciate all that you do for financial education. Drink of choice is a classic daiquiri on the rocks. We’d love a spitball for our situation. I’m 42, wife is 41, we have two kids. I make $190,000 a year. Wife is a stay-at-home mom. As far as savings, we have $170,000 in the 401(k). Maxing it out 50% tradish, 50% Roth, $3854 a month.  We just inherited $1,000,000. Currently, the way we broke up the funds is $100,000 is in a brokerage account, VTI, $300,000 is in a two-year CD, $300,000 is in a one year CD, and $300,000 is in a high yield savings account until we figure out what to do. We really just want to have $10,000 to $15,000 a month for retirement. In the meantime, we want to travel and be responsible with the money. Any recommendations on how we divvied up the funds for our retirement goal? What you would recommend to do with the extra $300,000? Thanks again to keep up the great work.”  Alright. It’s 42, 41, he makes $190,000 a year. Wife stays at home. So they inherit $1,000,000 bucks. When does he wanna retire?

Al: He didn’t say that. And we don’t know what the goals are, but he’s fortunate enough to get $1,000,000 and wants to be responsible with it. It sounds like since they just inherited, they wanted, perhaps wanted to be somewhat safe. Hence the, what, $900,000 in cash, right? Now here, here’s the thing. I know CDs are paying pretty well compared to how they have been, but they don’t on the long term, they don’t pay what the stock market does. I mean the stock market, if you go back 100 years, it’s almost 10%. Now I’m not saying, I’m not saying at all, I’m not saying we know what it’s going to be in the next year, 5 years, 10 years, but here’s the point. The point is, if you look at stocks over the long term, they outperform bonds, bonds outperform cash type investments, CDs over the long term. So if this is for retirement, you want to have more stocks. Right? Less cash, right? If this is for money to, for travel and buying a home, yeah, you can keep that in cash, but you want to rest, invest the other.

Joe: Yeah, I totally get what he’s doing here. He’s tiptoeing in, it’s like, oh, well, let’s put $100,000, get that invested. And then the rest, we’re just going to, you know, put in some ladder CDs, which is totally fine. You’re getting a decent rate of return. So it really depends on the goals. And so, when do you want to retire? Do you want to retire next year or do you want to retire at full retirement age? So that’s going to determine how you want to invest these funds. Do you want to spend more? You make it $200,000 a year So you make a really healthy income. But do you want to use some of this money to go on trips and travel and induce certain things with some of the cash and capital today? So you just got to break that up a little bit to see what are your long-term goals? What are your midterm goals? And what are your short-term goals? And then making sure that you’re investing all of your funds appropriately to help you get there. So CD rates are not going to stay at 4% or 5% forever. So as Al was alluding to, is that it probably makes sense to be a little bit more globally diversified if it is, you know, for 5 or 10 years out. If it’s for 5 years or less, probably keep it in cash. All right. Hopefully that helps.

How Should We Fund Our Home Remodel? Are We On Track for Retirement? (Jen and John, California)

Joe: “Hello, Andi, Al, and Joe. From California, I’m Jen.” Hello, Jen. “My husband, John, and I are both 39 years old. I enjoy a nice cold glass of California Chardonnay, and my husband enjoys a Manhattan.” Oh, who doesn’t?  When’s the last time you had a Manhattan?

Andi: I’ve never had one.

Joe: Really?

Andi: Sorry.

Joe: I like bourbon too. I just, I’d much rather have an old fashioned, I think, than a Manhattan.

Al: I will have beer, wine, and occasional Mai Tai.

Joe: Occasional?  Yeah, we have proof that you like Mai Tais when you’re taping in Hawaii.

Al: Oh, sure. Well, that’s different.

Andi: That’s not work, come on.

Joe: “And we drive a Tesla and an old Volvo SUV.  We have high incomes, but also very high expenses with 3 kids under 7 and employ a full-time nanny. We make $525,000 gross, but every dollar is spoken for. But that includes about $125,000 invested each year. I would really like to undergo a home remodel, which will cost $150,000. Got two questions for the spitball. How should we fund our remodel? And are we on track for retirement?” All right, so we got a little remodel and retirement, 39 years old, making half a mill a year.  Saving $125,000. That’s pretty good. “Gross income, $500,000. Savings, in the savings account, they got $50,000. $300,000 in a brokerage account. $500,000 in Roth IRAs maxed out each year to be a backdoor plus HSA, which we treat as Roths.  $750,000 in 401(k)s. We got $550,000 in the 529 plans for the kids.”  Geez. “We went a little overboard on these. Oops.  We’re no longer contributing.” $550,000 in a 529.

Al: Well, they’d have 3 kids, but that’s a lot. Especially if they’re young, that’s gonna keep growing probably.

Joe: Yeah. She realizes a little overboard. Yeah. That’s good for you. Okay. “Home details are home is worth $2,000,000 in high cost of living California City. Mortgage balance is $620,000. Our interest rate is 2.6%. No plans to sell the home. We are approved for a HELOC at 8%.  Can you spitball how we should pay for the $150,000 remodel? Can we afford to do this while our kids are still young and therefore expenses are high? We could get a loan at 8%, pull from the brokerage or ease back on retirement investing for a few years. While you’re at it, are we on track to retire?  We’d like to retire at 55 in 16 years, maybe 60. We’re in stable jobs and expect to continue to earn raises of 5% annually. Calculator show we’ll receive the max Social Security benefit, whatever that will be when the time comes. Currently at $6800 a month. We got no pensions. Mortgage will be paid off in 2050.  And we’ll assume our non-investment expenses will be about where they are now, $250,000 a year.  Kids high school and colleges are covered by the 529, so our expenses might decrease by $75,000 in year 10.  In the 10 years before we retire, if you turn back the clock and we’re, if we’re approaching 40-“ what that’s, she’s talking to you, Al,  turn back that clock a couple of times.

Al: Yeah. A couple of times is right.

Joe: “If there’s anything you do to set yourself up well, are we in good shape? Thank you.”  All right, Al, did you run some numbers?

Al: Yeah. So I’ll start with, well, okay. Since you asked, I’ll start with the, are they on track? So we’ve got $1,600,000.  And they’re adding $125,000 a year. I just said, you know, they want to retire between 16 years, 21 years. I just said 20 years at 7%. What does that work out to be? I get $11,000,000.  It’s a big, big figure, right? You know, if you don’t even consider Social Security or anything like that, 4% of $11,000,000 is $440,000 to go towards expenses, right? But to put that in today’s dollars, you got to go backwards at 3% inflation rate. And so I get about $250,000 in current expenses. They didn’t really say what they’re spending. It’s just going to be less with the kids. When you’re 39 with a bunch of little kids, you probably have almost no idea what you’re going to spend in retirement. But anyone that has $11,000,000, yeah, I feel like this is very workable. You’ll be able to figure this out. You’ll probably be able to retire, you know, maybe at 55, maybe 60, you know, whatever. So yeah, I think the first part probably works, Joe, but it’s, 20 years from now. It’s an awful long time just to say.

Joe: All right. So here’s what I did. So if you take $250,000 of living expenses and you use a 3.5% inflation rate over 16, 20 years, that’s $450,000.

Al: Yep.

Joe: So at $450,000 is what the bogey is, so 0.04% of that is, you need $11,000,000 to create it. So depending on how you want to run the math, if you can continue to save that much money, $125,000 over the next 16 years, and if you want to spend $250,000, I think, yeah, you’re okay. But I think the real question is that, all right, well, here, I want to do this home remodel.  $150,000 home remodel.  Where do I get the funds? Do we take a loan at 8%? Do I cash out some of the brokerage account? Do I do something else? What, in that, or do we just reduce our savings? Right. What do you think there?

Al: I would use my brokerage account and then I’d try to replenish it with my earnings. That’s what I would do. I don’t like an 8% HELOC if I can help it. So that’s what I would do. How about you, Joe?

Joe: I would take on a HELOC.

Al: You would?

Joe: I would.

Al: Okay.

Joe: For probably half of it.  And then I would use the other half from the brokerage account because I like the liquidity. Someone could lose their job. Someone could do this. They got plenty of you know income coming in. There’s a lot of equity within the house, 8%. It’s not going to be forever. Hopefully, you know interest rates could go down. You could refinance along the way. I just like the liquidity and I think over the long term, Yeah, 8% is a heavy debt and trust me,  I know about current interest rates and all too well, but 39, hey,  I’m in the ballpark in that age. It’s not like if I could turn back the clock-

Al: That’s a-

Joe: – that’s just like last year.

Al: That’s at least one turn away for you, Joe.

Joe: That’s a half a turn. They make a ton of money. They got 3- I got two little kids.

Al: True.

Joe: Under the age of 7.

Al: Yeah. Okay. I could. Okay, so, so there are some similarities.

Joe: Yes. I’m right there with them.  Right there with them. So the home remodel? Yes. You guys make a lot of money. You’re good savers. You’re disciplined. You, you have $1,600,000 before you hit the age 40. You could stop saving too and then work until 60, you’re still going to be okay. Or you tone down your savings by a little bit.  I think you’re very disciplined in what you’re doing. For me personally, I would probably do half and half. I just, I hate taking money out of my brokerage account, especially if it’s invested. If it’s cash, well then that’s a different thing, but man, just selling stocks when the market is as volatile as it is.  I would just, I would do a little halfie.

Al: Yeah, and let me, maybe just say, I’ll add this point. If I’m 39, I might take the entire HELOC.

Joe: Oh, now he’s changed his mind. Just look at-

Al: Just for the reason you said, in my 60s, I don’t like that. So I’m, paying with the brokerage.

Watch How Your Home Can Create Retirement Income, Download Retirement Readiness Guide

Andi: Home equity may be the biggest asset you own. Many people prefer not to include their home as part of their cash flow plan in retirement, but we’re living longer and retirement is getting more expensive! From various mortgage options including HELOCs and reverse mortgages to the seven benefits of downsizing, and some creative alternatives, Joe and Big Al discuss How Your Home Can Create Retirement Income, on YMYW TV. You’ll find links to watch the show and download the Retirement Readiness Guide in the description of today’s episode in your favorite podcast app.

Solo 401(k) to Avoid Unrelated Business Income Tax (UBIT)? (Terry – voice)

So for those of you that don’t know, we also do a radio show. And I think this gentleman thought he was calling in to the radio show.

Terry: “You were just talking about a guy that had a investment account, retirement account with a large UBIT. I’m wondering, can he just convert that to a solo 401(k), and 401(k)s aren’t subject to UBIT? Thanks.”

Andi: That was from Terry.

Joe: How did he call in? What number did he call?

Andi: That was on our website. You go to Ask Joe and Big Al on the Air at YourMoneyYourWealth.com and you can actually record your question right there.

Joe: So he clicked on the button.

Al: Yep. And it worked.

Andi: It worked.

Joe: UBIT, Unrelated Business Income Tax, I believe is what that stands for.

Andi: That was for Bobby Joe and Billy Sue or whatever their names were, that had that situation.

Al: Yeah, and we talked about that. You see that I guess with charities and different investments they have, but most commonly for us, you and me, is in a retirement account in a regular retirement account, IRA and a Roth IRA and a solo 401(k) or other types of retirement accounts. So what, here’s what it is. It’s when you have some kind of business inside of your retirement account, the IRS feels like it’s not fair for regular businesses to have profits and pay taxes currently, where someone with a similar investment in a retirement account doesn’t have to pay tax. So that’s why they came up with this concept. And the fact that, you know, those type of investments, real estate could be another one, where you have to pay taxes inside your IRA, inside your Roth IRA. And the question here is, can’t you just convert it to a solo 401(k) to avoid this unrelated business income tax? And the answer is no, it still applies in a solo 401(k). There are some little bit of differences when you own real estate and there’s debt involved, but in either case, you have to have a self-directed IRA or a self-directed solo 401(k) to be able to do this. But. No, that doesn’t solve the problem. The problem still exists. It’s more the investment-related as opposed to the type of retirement account.

Joe: All right. Well, there you have it. I’m not going to say anything more on that. Let’s keep going.

Switching to a Fee-Only Advisor: Any Negative Consequences? (Steve, PA)

Joe: We got Steve from PA. He goes, “Hey, I enjoy the show. Drive a Ford F150.”  We should have asked what’s- what, car do you drive? Because I guaranteed 80%-

Al: We already know the answer.

Joe: – drive a Ford F150. “Don’t drink. They have two goldfish and a cat.” All right, Steve.  “I’ve heard that a fee-only fiduciary advisor is what everyone should use. I was working with Ed Jones for like 13 years and found a fee-only fiduciary. Talked to him and decided to work with him in April- Only to have him tell me in July, like 3 months later that he was switching to an asset under management fee schedule. My question is if I were to leave after this short of time and find someone else, we switched a lot of my holdings to a more aggressive 90/10 according to his risk assessment test, is there any negative consequences?  Should I give it more time? Feel sort of misled. Yes, he was charging $550 a month to manage my $1,300,000 portfolio with some tax planning.  Was this considered cheap?  Is there anything I should consider before I switch advisors? Thanks.”  So.  He was getting charged- What is that? Like $7000 a year?

Al: Yeah, I did the math. It’s a .5%.

Joe: 50 bips?

Al: Yep.

Joe: So, he’s- Okay. Well a fee-only fiduciary doesn’t necessarily have to deal with- if they’re on an AUM model, an hourly model, a monthly model, a subscription model, it’s, you know, all advisors charge, for their services, in, in many different ways. So I would say most of the fee-only fiduciaries out there will charge you a financial planning fee, and then an annual retainer. And most of the time that annual retainer is going to be based on the AUM that, that advisor is managing. On average, you’re looking, as a whole of the industry itself that’s on the AUM model is roughly about 1%. So if you were getting charged half of that, is that a good deal? Yes, a really good deal.  A couple of things to note is, where’s the $1,300,000 held? Because sometimes, as an advisor, and as someone that has been in this field for 20 some odd years, and a firm that manages close to, I don’t know, what do we have, Al, $7 billion, something close to that.

Al: Close to $7 billion.

Joe: So that’s a couple bucks.  You know, it’s easier to do the AUM model because it automatically just comes out of the account. If it’s in a qualified account, it’s not going to be, pulled out with the after-tax dollars. So there’s some tax benefits there potentially.  And we’re not hounding people with invoices to say, hey, pay your bill. Or sometimes people don’t necessarily want an automatic draft out of their checking account. Maybe they would rather have it come out of their investment account. It really is the preference of the client, but I would say most firms have the AUM model.  If you feel misled, I don’t know. It depends on really what the agreement was. Ed Jones probably put you, I’m guessing, in American funds that you probably paid a commission up front and you probably paid internal fees, you know, inside the funds that are probably similar to, I don’t know, 25 basis points, 30, 40 basis points internally. So, I don’t know. I mean, I’m totally guessing.  It could be a lot more expensive or you could have been in a lot cheaper funds. So if there’s value, you don’t really pay for anything because you’re increasing your overall wealth. If there’s no value, then it’s way too expensive. I mean, I think that’s the only thing I can say there.

Al: Yeah. I’ll add a couple of things. A fee-only fiduciary is someone that does not get paid by commission. Right? The fact that either you pay monthly or quarterly or an AUM model or subscription, those are all under that fee-only. So it’s still fee-only. Whether it’s a good deal or not, it, I think completely depends upon the services you’re getting for the fee you’re paying. And that’s what you have to decide is the service you’re getting, services you’re getting commensurate with the fee you’re paying? And if it is, stay with this advisor. If not, you know, you can maybe look for another one. But, 50 basis points or .5%, what you were paying is a generally considered pretty good deal.

Joe: One last thing, by switching advisors, it’s not a big deal.  So you can switch 100 times in 100 days. It’s not, I mean, it’s a pain in the ass, but you could do that. All right.

Intelligent Charitable Giving Through Qualified Charitable Distributions (Chris)

Joe: We got Chris writes in. He goes. “Hey, thanks for your wisdom. I haven’t missed a show in 5 years.”  Yeah, I haven’t caught a show in 5 years.

Al: Well, we did them once through live so why do we- don’t need to hear them again. Do we?

Joe: Not at all. “I have an IRA with $2,500,000 in it and will be turning 73 next July. Therefore I will need to make my first RMD of around $100,000 sometime next year.  I’ve been given- I have been giving a QCD out of my IRA to my church every month since turning 70 and a half, and want to know if I continue making a monthly QCD to my church in January through June next year, will it count as part of my RMD for 2025, even though I have not turned 73 yet, or will I have to make my church wait until July? Also, if I have money out next year before turning 73 to buy a car, will it still count as part of my RMD?  I’m driving a high mileage 2003 Lexus.  I may want to give it out before next July.”

Andi: No, the car may give out before next July.

Joe: “The car may give out.” Oh.  “That’s the most exciting thing in my life- The most exciting thing my wife and I drink is diet A&W Root Beer.”

Al: Cool.

Joe: All right. “So I hope you have some good news for me.”  A&W root beer. I haven’t seen an A&W Root Beer since I was a child in Minnesota.

Al: That was one of my favorite, the root beer float. Remember that?

Joe: Yeah. Yeah. Yeah. Sure do.

Al: Marvelous.

Andi: I am actually a bit of a root beer connoisseur. I actually do a lot of root beer and I actually buy like the craft root beers and I compare them.

Al: Oh.

Andi: That’s like one of my favorite things to do. That’s what I do in my free time.

Al: Yeah. Is A&W good or-?

Andi: I’m not a big fan of the ones that have high fructose corn syrup and unfortunately A&W does. I managed to find a version from Australia that actually had real sugar in it and they wanted $12 a bottle for it, so bought it once.

Al: Oh, wow. Okay.  Got it.

Joe: All right, Al, you got some good news for Chris here?

Al: I think so. I mean, it, in, at least in, in all of my reading, it doesn’t really matter, in terms of, once you turn 73, then any money you take out during that year counts- would count as your RMD. That’s my understanding.  The thing is, if you take out RMD money first and then try to do the QCD, you can’t all of a sudden say the QCD money takes care of the RMD because you already took it out. But the fact that you’re already doing this for the church, I think this all balances out at year end. And I, Joe, I don’t think there’s a problem on that.

Joe: Yeah, I don’t think so either. I don’t know. I would probably wait to be if I was-

Al: I mean, it’s safer. But at least that’s my understanding. It’s actually- I can see why you’re asking the question because it’s not very clear in publications and literature out there. But as far as my understanding that it’s okay to do what you’re suggesting.

Joe: Yeah. No, I’ll just go with that.

Al: Go with that. Okay.

Joe: All right. Are we done? What are we doing?

Andi: We’re done. That’s it. That’s the end of the show.

Al: Yep.

Joe: Awesome thought it was gonna have two heart attacks with all the Celsius I drank here.

Al: You did rather well Joe.

Joe: All right. Thanks a lot for listening. Andi, wonderful job. Big Al, as always. Thank you, kind of half-assed that calculator move.

Al: Well, thank you for calling that out like 3 times.

Joe: All right.  We’ll see you guys next week. Show’s called Your Money, Your Wealth®.

Outro

Andi: We’ve said it before: if you don’t have millions of dollars, we want to hear from you, too. Click the link in the description of today’s episode in your favorite podcast app to request a Retirement Spitball Analysis. Send us your really tough financial challenges and find out what insights Joe and Big Al can offer – because Your Money, Your Wealth is your podcast, and the show wouldn’t be a show without you – all of you.

Help us reach more listeners like you: tell your friends about YMYW, and leave your honest reviews, comments, and ratings for Your Money, Your Wealth in Apple Podcasts, Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Podcast Addict, Podchaser, Podknife, Spotify, and on YouTube.

Your Money, Your Wealth is presented by Pure Financial Advisors. Making the most of your money and your wealth in retirement requires more than just a spitball. Get a comprehensive assessment of your entire financial life from one of the experienced professionals on Joe and Big Al’s team here at Pure. Click the Free Financial Assessment link in the episode description, click Get an Assessment at YourMoneyYourWealth.com, or call 888-994-6257 to book yours. Meet in person at any of our locations around the country, or online, right from home. No matter where you are, the Pure team will work with you to create a detailed retirement plan that’s aligned with your tolerance for risk, your needs, and your goals in retirement.

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