Joe Anderson
ABOUT Joseph

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

Alan Clopine

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

Andi Last

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

Published On
December 19, 2023

Joe and Big Al spitball on investing in index funds, bonds, CDs, treasuries, annuities, net unrealized appreciation on company stock, and where to park cash right now. Plus, how do taxes, Roth conversions or the Mega Backdoor Roth, and donor-advised funds factor into those investing strategies? Will and Debbie in Gettysburg are investing an inheritance, LJ in Philly and Jane want the fellas’ take on the pros and cons of various safe investments, Roger and Jessica in Cowtown Ft. Worth need four different financial spitballs, and should M.E. in Atlanta do a Roth conversion and put money in a donor-advised fund in the same year? But first, Dianna in Spotsylvania needs an investing plan for her 86-year-old Mom. 

Follow the YMYW podcast Subscribe to the YMYW newsletter

Show Notes

  • (00:57) Investment Spitball for 86yo Mom: Index Funds? Roth IRA and Conversions? (Dianna from Spotsylvania, Virginia)
  • (05:57) How Should I Invest My Inheritance? (Will and Debbie, Gettysburg, PA)
  • (14:12) How’s My Laddered CD Investing Strategy? (LJ, Philly)
  • (17:07) Tax on Treasuries vs. CDs vs. Annuity: Where to Park Cash Right Now? (Jane)
  • (22:27) NUA Company Stock, De-Risking With Bonds, & Mega Backdoor Roth (Roger & Jessica, Ft. Worth)
  • (34:13) Donor Advised Fund and Roth Conversion in the Same Year? (M.E., Atlanta)
  • (40:54) The Derails

Free financial resources:

Download this week’s special offer – for a limited time only!

Top 10 Tax Tips - FREE for a limited time!

10 Tax-Cutting Moves to Make Now | Year-End Tax Planning - Your Money, Your Wealth® TV - S9 | E14

Free download: Investing Basics Guide

Free Download: 10 Steps to Improve Investing Success

Free Financial Assessment

Listen to today’s podcast episode on YouTube:



Andi: Joe and Big Al spitball on investing in index funds, bonds, CDs, treasuries, annuities, net unrealized appreciation on company stock, and where to park cash right now, today on Your Money, Your Wealth® podcast 460. Plus, how do taxes, Roth conversions or the Mega Backdoor Roth, and donor advised funds factor into those investing strategies? Will and Debbie in Gettysburg are investing an inheritance, LJ in Philly and Jane want the fellas’ take on the pros and cons of various safe investments, Roger and Jessica in Cowtown Ft. Worth need four different financial spitballs, and should M.E. in Atlanta do a Roth conversion and put money in a donor-advised fund in the same year? But first, Dianna in Spotsylvania needs an investing plan for her 86 year old Mom. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Investment Spitball for 86yo Mom: Index Funds? Roth IRA and Conversions? (Dianna from Spotsylvania, Virginia)

Joe:  We got Dianna from Spotsylvana.

Andi: Spotsylvania pronounced like Pennsylvania.

Joe: Oh, Spotsylvania. All right. “Virginia. I love your show and listen to it on the drive to work. I’ve learned so much from you and you make learning about finances interesting and fun.” Well, thank you very much, Dianna. “I’m requesting some spitballing today for my 86-year-old mother. Her net worth is about $950,000, which includes $230,000 in a traditional IRA with most of the remainders in a brokerage account. Her annual income includes a survivor pension, stock dividend, and Social Security, which totals about $50,000, more than enough to cover her expenses. Prior to my father’s passing last year, he was actively trading stocks. Just before he passed, he sold many of the more volatile stocks because mom and I are not knowledgeable enough to continue this individual stock trading. Currently in the brokerage account, she holds some long-term stocks for the dividends and some CDs with varied maturity dates. The CDs are recent purchases just to earn some interest until we decide how to proceed with the investing. My mom would like to grow her worth for children and grandchildren. So my questions are number one, how aggressive should we be with investing in her situation since she’s set for the remainder of her life? Can we throw all of the cash in the growth type index funds or is this- or is the diversified portfolio still important in this situation? Number two, should she be doing Roth conversions to try to lessen the tax burden for the heirs? She has never had a Roth IRA. Can she have one? Follow up question. If she does a Roth conversion, what happens if she passes away before the 5-year rule?” All right. Very good, Dianna.

Al: Got a lot here.

Joe: Yeah, so she’s got some cash. She doesn’t need the cash. The money’s gonna go to the kids and the grandkids. So, how should she invest?

Al: I would do a globally diversified portfolio, still. And here’s why. Because at 86, you never know, right? Is she going to have to go into a retirement home or assisted living or something like that’s a lot more expensive?

Joe: She could have another 10, 15 years of life.

Al: She could. So, I wouldn’t be thinking about the kids and grandkids just yet. So, I would stick with what works for her and her goals.

Joe: Yeah, I mean, I think that’s well said. But if she’s got enough fixed income that you believe is going to cover any necessity through the next several years and if there’s an event that is going to require cash, is there other cash that you can- because let’s say she- Dianna’s says, should I invest this for myself and my kids? Well, you could. And I have it in more of a growth type portfolio, but I’d still want to be diversified. I would be in low-cost index funds that’s diversified, not Tesla stock.

Al: Well, I would just say- so my mom at age 89, her rent tripled when she moved into a retirement home. That’s what I’m- that’s fresh in my mind.

Joe: You’ve got facts.

Al: That’s very fresh, right? And it’s just like, I wouldn’t necessarily assume that your mom is set for life. She may be, but let’s have a little bit of safety here in case she needs to access it.

Joe: All right. I don’t have that experience. So we’ll just go with you, bud. All right. Roth IRA. Should she do some conversions?

Al: Well, let’s see. So her income’s around $50,000, right?

Joe: It’s going to blow up the Social Security tax.

Al: It is. And plus I wouldn’t do any more than the 12% bracket anyway, which is going to be just a small amount. And probably Social Security income is going to be more of a tax than it was, so it’s not going to be a 12% rate. So I would say no on that one.

Joe: Because the RMD is not that big. It’s $8000. Maybe it’s going to go up a little bit, but if she’s invested conservatively, it’s probably going to stay at that $8000, $10,000. It’s probably going to decline versus going up. Depending on how it’s invested.

Al: And the other thing here too, is if she does need it for some kind of retirement facility-

Joe: -it’s going to have a tax deduction.

Al: Yeah. It’d have a tax deduction for the medical part. And so it’s just fine to have some.

Joe: If she does the conversion- on the other side of me and says, yeah, if I’m investing this for Dianna and her grandkids, I absolutely want to convert the whole damn thing and put it into growth stocks and have it grow, you know, tax-free for the heirs.

Al: Yes. I agree with that comment.

Joe: So, if that’s your strategy and plan, then yes, I would convert the IRA into a Roth IRA and I would have it more of an aggressive, diversified portfolio in the Roth that I would name the grandchildren the beneficiary of it.

Al: Yeah, and I agree with your comment. I’m just suggesting I don’t think that’s the best plan.

Joe: Sure, I mean, because you never know what’s going to happen, right? The 5-year clock, yeah, the 5-year clock still happens at death. So, she converts, God forbid she dies the next year, there still has to be 5 years within that conversion, because she’s never had a Roth before.

Al: Correct.

Joe: So the heirs would have to wait 4 years for the tax redistribution on that earnings.

Al: Yep, agree with that.

How Should I Invest My Inheritance? (Will and Debbie, Gettysburg, PA)

Joe: Got Will and Debbie, they write in from Gettysburg, PA, Gettysburg.

Al: It’s a great town.

Joe: Yeah. They had a little war there.

Al: They did. Way back when.

Joe: They had a little scuffle.

Al: That was an important one.

Joe: It was. “Joe, Al, Andi, I’m a little confused to what to do with an adherence- inheritance I just received. Where and how should I invest it? My dad recently passed away and I received $200,000 from the sale of his home. I also received about 1800 shares of stock that my mom used to work at so there’s some sentimental attachment I would like to leave some for my children to inherit. It is currently valued at $115- $115 a share, also received $50,000 in cash and bought some CDs with that money. There was also some money from an IRA that I’m taking about $3000 a year to use for vacations. My wife is on SSDI and collects $2300 a month and $4000 a month from a structured settlement, which she will collect for life. But if she predeceases me, I will only collect it until I turn 70. Am I wrong for thinking that this structured settlement is like having $1,000,000 saved?” $4000 a month, $48,000 a year, call it $50,000 a year. Look at $1,000,000, 5%.

Al: I see where you get that, but I would say no. First of all, you don’t have access to it like you would $1,000,000 if you need it, number one. Number two, the $4000 a month is probably a fixed number. If you had $1,000,000, presumably you’d take 4%, but it’s growing at 6%, so it’s a growing balance. And number 3 is, it could stop If your wife predeceases you. So no, it’s not quite the same, but I get the comparison.

Joe: Okay. “My wife and I have about $423,000 in a 401(k) IRA. We have $100,000 in a CD separate from the inheritance money. We will receive $1900 a month from a sale of a property for the next 26 years. I’m going to receive a pension of $650 a month at 65. My wife will receive a pension of $900 at 65.” A lot of numbers getting thrown out here, Al, hopefully you’re keeping up.

Al: It is. I got a couple things jotted down.

Joe: All right. “I don’t plan on withdrawing any money from retirement accounts until I’m about 72. Our main home in Gettysburg is about $400,000, is paid for, as is a condo in Florida. I make about $45,000 a year and I’m thinking of retiring after I turn 55. I know I have to pay for insurance, but I’m hopeful ACA credits will help. Is this feasible? Am I in good shape? Where to put that inheritance money? I think we spend about $65,000 a year, but I’ll have to spend more time analyzing this. I’m 54, my wife’s 57. I drive a Ford F150, and my wife a little Jeep Grand Cherokee.”

Al: Got it.

Joe: “We have a German Shepherd that loves to hang out the window. I love to kick back with a little rum and coke.” Tasty.

Al: Well, let me give you a couple of numbers here, Joe.

Joe: All right.

Al: So, well, first of all, I guess they’re inheriting about $450,000 by doing the math, plus an inherited IRA, which they didn’t tell us what it’s worth. So let’s call it $500,000 inheriting. And they’ve got about $1,000,000 liquid, including the inherited money, because of $500,000 otherwise. So let’s say you’ve got $1,000,000 liquid. Wife’s got income of about $76,000 a year between SSDI and her monthly structured settlement, right? And they’re spending, let’s see, what are they- $65,000. So she makes $76,000, they’re spending $65,000, so check. Plus they got $1,000,000 that they’re not even currently using. So yeah, and that’s not even including his pension he’s going to receive later. And we don’t even know about Social Security, do we?

Joe: No.

Al: Yeah. So yeah, this seems like it’s fine. So we’ll start there. It seems very feasible.

Joe: Well, what I would take a look at is that, so Debbie’s on some sort of disability. She’s got a structured settlement. Something probably happened there. And if she predeceases Will, that’s where things get dicey, right? Because a lot of the income that’s coming in is from the structured settlement and the SSDI.

Al: Yeah, so that’s $50,000. However-

Joe: Well, it’s more than that. It’s the whole fixed income source is coming from Debbie.

Al: Oh, well, that’s true. And so the SSDI would go away too, yeah.

Joe: So if she predeceases, then-

Al: You’re right. You’re right.

Joe: -Will is going to live off of the liquid assets. So I would want- and they’re young, 57, 56 years old, and this money’s got to last quite some time. So if you want to spend $65,000 and $1,000,000, you’ve got to bridge a gap. If something happened to Debbie, Debbie lives a normal life expectancy, I think they are in really good shape. The caveat is, is that planning everything doesn’t come out roses. So you have to plan for some, you know, unexpected life events. And so I would want to make sure that they’re managing that liquid assets appropriately to make sure that there’s going to be enough to provide if Will or if Debbie- something happens to either one of them. But more importantly, I think if something happens to Debbie, I mean, that’s $7000 a month is gone.

Al: Yeah, it is gone. And so there’s, I’m sure there’s Social Security, so that’ll help. I guess Will has a pension of $650. So that’s, you know, what $7000, $8000 a year or something like that. So that’s at least something. Plus they’ve got, they’ve got two properties, free and clear. So, could sell one of the properties if need be and generate another $300,000, $400,000. So that, that could add to the total. So I think there’s ways to make this work, but I agree with you. So, so if Debbie lives a good long life expectancy, this looks great. If she dies prematurely, then Will may have to kind of take a step back and say, okay, I’ve got assets. I can make this work, but I’m going to have to maneuver stuff a little bit. Now, next question, where should they invest the inherited money?

Joe: Well, I think they have to invest all of the money collectively to the retirement. It’s not collecting, hey, I have $200,000. Should I invest this different? It’s funny how people look at money. It’s all right. Well, here I inherited a retirement account that was already in stock mutual funds. So I’m going to invest that in stock mutual funds. Oh, I inherited another $200,000 from the sale of the home. So I want to put that in cash. Well, no, you just want to make sure that it’s a globally diversified portfolio based on what your goals are. And it sounds like the goal is retirement that this money needs to last over the next 25, 30 years, because they want to retire in their mid-50s.

Al: Right. Yeah. So that’s exactly right. So let’s, if they’ve got $1,000,000 to work with, roughly, then you got to look at what your total goals are and invest appropriately on the whole amount. Not look at this in compartments, which I think is exactly what you’re saying. And I agree with that. And then let’s see, they will have to pay more health insurance. The ACA credits, will that help? Probably. I mean SSDI is non-taxable. The structured settlement, I’m assuming it’s non- taxable, but I don’t know that for sure. If those two are non-taxable, their income is probably low enough to be able to qualify for the ACA credits.

Joe: All right. Will, Debbie, hopefully that helps.

Andi: Retiring richer requires investing smarter. Discover how to choose the best asset classes for your goals, how to optimize your asset allocation and capital gains, and how to manage your emotions and risk for higher returns in your portfolio. Whether you’re new to investing or want to sharpen your skills, our two investing guides will help you make the most of your money. Click the link in the description of today’s episode in your favorite podcast app, go to the show notes, and download 10 Steps to Improve Investing Success and the Investing Basics Guide for free. During the holiday season, YMYW is the free gift that keeps on giving, so don’t forget to share the show and the financial resources with your friends.

How’s My Laddered CD Investing Strategy? (LJ, Philly)

Joe: We got LJ from Philly. He goes “Hey guys, last time I had a question about capital gains from the sale of a rental that Big Al answered. Thanks. Now I’m looking at about $500,000 in cash that I plan to use on a primary home in a few years with short term I’m looking to maybe ladder some CDs.” Rates are pretty good right now.”

Al: Yeah, 4% or 5%.

Joe: Yeah, so he goes “Do I have this right, the interest on CDs will go up if overall rates decline, but go down if rates increase? So we’re a little short on time So let me just kind of break it out like this. A CD is a certificate of deposit, and I think sometimes people get CDs and bonds confused. So if interest rates of bonds increase, your bond price is going to decrease. And if interest rates go down, bond prices increase and it’s just because of supply and demand. But if you hold that bond to maturity, it doesn’t matter., It’s just only if you’re going to liquidate that bond prior to maturity is when you’re going to either sell it or buy it at a premium or a discount. Because- and how it works is this, if interest rates go up- I have a bond, Alan, a bond is a loan, and so let’s say that bond is paying 5%. And so I’m lending my money to someone or organization, and I’m getting $5000. And let’s say I want to liquidate this bond. But if interest rates go up, so that person has the ability to buy my bond and get a 5% coupon or 5% of interest or income. Or let’s say the market is paying 7%, they don’t really want my bond because they can just go to another issuer and get 7% versus 5%. So for me to entice that buyer that, hey, my bond is worth it. What do I, I have to discount my price for that person to purchase the bond.

Al: Because they could buy a bond at 7%. Why would they pay for years at 5%? Unless you gave him a discount.

Joe: I have to discount. I have to entice him to buy it. So I have to discount. So that’s bonds. So if I hold the bond in maturity, I’m going to sell it back or I’m going to get my money back because it’s just a loan. A CD works differently. You’re going to get a guaranteed rate by the bank. It’s a certificate of deposit. So I’m depositing my money at a bank that’s FDIC insured and saying, hey, here’s $100,000. I’m going to receive 5%. It doesn’t matter what happens to interest rates. I’m going to get that guaranteed 5%. If I liquidate the CD prior to the maturity date of the CD, they probably will take any interest that was accrued in that CD back. So they work a little bit differently than bonds, but I think they’re in the same category as a safe asset, depending on what types of bonds that you use in your overall portfolio.

Al: Yeah. So, so with the CD, yeah, there’s a surrender penalty if you surrender early. And typically, it’s based upon your interest that you received or part of the interest that you received, but you get all your principal back. It’s different than a bond.

Tax on Treasuries vs. CDs vs. Annuity: Where to Park Cash Right Now? (Jane)

Joe: Got Jane, she calls in, writes in. “Hi, Andi, Joe and Al. I love your podcast and all of your personalities.”

Al: Wow.

Andi: Thanks Jane.

Joe: “You’re the only podcast I don’t put on double speed to listen to.” Unbelievable.

Andi: Only one.

Al: Is it because we talk so fast anyway?

Joe: No, because she would not be able to understand me reading these questions because I fumble and fart around them. “I actually slow it down to .75 when Joe spins out the numbers.” Yeah. I should get more prepared and read these things before we go in there. Alright, here’s the question. “What are your thoughts of where to park cash right now? What are the pros and cons of treasuries versus CDs as for taxes? Well, treasuries, estate tax-free.

Al: Correct.

Joe: CDs, 100% ordinary income tax.

Al: Yeah, federal and state.

Joe: “My Fidelity friend slash advisor recommended a 3-year annuity through Fidelity.” So it’s a Fidelity friend.

Al: Got it. That sounds like-

Joe: I wish I had a Fidelity friend.

Al: Yeah, me too.

Joe: Here you go. Here’s a little 3-year annuity jobber. Jam me into that. “He said it was different than other annuities you would go into a bank and purchase that have lots of fees.” Okay. Oh, this is a special Fidelity annuity.

Al: Yeah, the special-

Joe: From the Fidelity friend.

Al: Got it.

Joe: “I could also just leave money in money market but figure taxes and fees are high with all that. All the money decisions I make seem to be a little too late or just off slightly. Joe said the last time I wrote in I show- that I showed up to the party, but everyone else was drunk.”

Al: Do you remember saying that?

Joe: I do not.

Al: I don’t remember hearing it, but-

Joe: Yeah, that’s a good line.

Al: It is.

Andi: I do vaguely remember that.

Joe: Jane comes to the party. She’s sober and everyone else-

Al: We’re already gone and the alcohol is gone.

Joe: Yeah. There’s like a half a bottle of cream de mint, that no one wants to touch, right? Yeah, that’s what we got left, Jane. Want that on the rocks or straight up? “By the way, the amount of extra cash is $400,000. It won’t be needed for at least 5 years. My drink of choice has changed from a pom-“ Um, help me.

Andi: Pomegranate.

Joe: Pomegranate. I knew I could get it. “-pomegranate pair of vodka to a pineapple soda with Tito’s. My husband still loves his red wine. Thank you. Thank you for all the great information you provide each week. Best podcast ever.”

Andi: Boom.

Joe: Boom. Wow. Hashtag Thanks, Jane. Okay, so Jane’s got a little Fidelity friend. Wants to put a little 3-year annuity. How old’s Jane? Do we know who Jane is?

Andi: We don’t have that information, I don’t think.

Al: Doesn’t say.

Joe: Okay. Doesn’t need the money for 5 years. So, it’s a fixed annuity that the Fidelity friend is recommending. The difference between that product and a CD is that the interest is going to grow tax-deferred and you’re not going to pay any of the income until you pull the money out, which is in 3 years. You might get a little bit higher rate. But if she’s under 59 and a half, it’s not going to make any sense. You got to be over 59 and a half to get the deferrals out without a 10% penalty.

Al: That’s right.

Joe: I don’t know. Do I like that? Do I like a treasury?

Al: Yeah. Would you do treasury or CD?

Joe: I would not do a CD. I would not do an annuity. I would probably do treasuries. But if I need the money in 5 years, I would probably do like, part of it would probably be in a tax-free money market account and the rest would be like in a tax-free muni bond fund.

Al: Oh, really?

Joe: Short term. Something like that.

Al: Interesting. I think I would do, I like treasuries from the tax standpoint, and then you can lock in a better rate.

Joe: Yeah, but then you gotta constantly look and buy and, you know, income due.

Al: Yes, that’s the downside and you can lose money on them if you have to sell them early. And I like CDs because they’re easy and the rates are great, but you’re only probably gonna get a good rate for a year, maybe two. You know, you’re not getting higher rates for 5 years.

Joe: When’s the first time you bought a CD, Al?

Al: First time?

Joe: Yeah. Uh, see, now that you-

Andi: Do you remember when you first bought your first CD?

Al: I don’t recall.

Joe: I got my 40s and I’ve, I’ve never purchased a CD.

Al: Well, I have several right now.

Joe: I know because you’re in your 60s now. Is that the turning point?

Al: No.

Joe: Do you think now you’re getting a little bit older, you’re like, man, I really like these CDs and you’re shopping CD rates versus before you probably never did?

Al: Well, I finally have a little cash.

Joe: Oh, Big Al’s got that big wallet.

Al: Got the big wallet? And I’m, I am in my 60s and yes, I like that higher interest rate. I like having the knowledge that I can pull it out at any time. But we don’t know how old Jane is, but I might, without knowing anymore, I might say some in treasuries, maybe a 5-year treasury and maybe some in CDs that you’d have quicker access to the funds if you need some of it.

Joe: Five years. You still stay very safe cash type investment.

Al: Yeah. I mean, that’s right on the border, right? And markets at all-time highs. So just, you got to consider that.

Joe: Are they at all-time highs?

Al: Just about.

Joe: All right. Well, cool. Yeah. Everyone’s not drunk at the party this time.

Al: No, I think plenty of time and the alcohol is still there.

Joe: Still flowing.

NUA Company Stock, De-Risking With Bonds, & Mega Backdoor Roth (Roger & Jessica, Ft. Worth)

Joe: Got an email starts with “Andi, please sub out our names.”

Andi: So I did.

Joe: What that-? And then it says, “Good day, Andi.”

Andi: Yes. So that was just a note to me and then starting the email. So I’ve given these emailers the names Roger and Jessica and you’ll see why in just a second.

Joe: Roger and Jessica. From where?

Andi: Texas. Fort Worth. Cowtown, they say.

Joe: Oh, Cowtown. All right. All right. “Good day. Andi, Joe, Big Al. Absolutely love the podcast. Great information and entertaining, which is hard to pull off, although most of your spitballs deal with fat wallet people.” The big fat wallet. “I don’t think we’re fat wallets. But we’re not in a bad situation either. Kind of normal people, so hopefully, this will help some others. Start with the good stuff. We live in Cowtown, Texas. We drive a red, 2020, Ford F1- oh, Ford F350-“

Al: Oh, that’s a big red truck.

Andi: It’s a dually.

Joe: Well, yeah, diesel probably, huh? “- Dually, we use it to pull a 35-foot 2022 travel trailer.”

Al: Perfect.

Joe: All right. Well, that ain’t cheap.

Al: No.

Joe: You got a big wallet. “Jessica, my hot, red, red-headed wife-picture Jessica Rabbit- is a very ugly box Chihuahua- picture old school Taco Bell mascot.” That’s terrible.

Andi: You got the picture, Joe?

Joe: I got the picture.

Al: Yeah, we got that.

Joe: All right. “We both enjoy a nice Coors Lite on the weekends. We are team long haul truck drivers. We drive for a great company which has led us to one of my questions. Here’s some numbers. 401(k) $370,000, Jessica’s $325,000. We each make $110,000, $220,000 together. And we each contribute 8% with a 3%match. We have a 401- we both have 401(k) loans out and that goes back into the account at a 3% rate. We are 60 and 59 and both accounts are in full equities with about 30% of each in company stock. We don’t have any good bond funds available in the 401(k) selections to make and all the target date funds are high expenses. The company stock has done extremely well. That’s how it’s grown to what it represents now.
When I first started the 401(k) it was $20 a share now it sits at around $400 a share.” Wow. “Our spending is around $10,500 a month. House will be paid off in 7 years, truck in 5 years. That will lower a monthly output by $3000. We want to retire when my wife turns 65 in about 6 years. We don’t plan on selling the house. Social Security for us is about $5500 a month, and I have a pension from an old job that will give about $900 a month. We’d like to spend about the same as we do now in retirement. First spitball, what do you think?” What do I think?

Al: What do you think?

Joe: I think there’s a lot of numbers here. I gotta-

Al: Here, I’ll tell you what I think.

Joe: He’s got $370,000, $325,000. So you got 4, 5, 6, 7-

Al: Call it 7-

Joe: He’s got some- he’s still going to work for 6 years to call it, he’s going to probably have $1,000,000 bucks by the time he retires.

Al: I computed $1,300,000. So here’s how I got it. Starting with $700,000, adding $24,000 a year.

Joe: That’s 8% plus the match?

Al: Yeah. Well, that’s with the match. Yep. Yep. That’s 8% plus 3%. I actually did 7 years. And the reason I did 7 years is because that’s their full retirement age for Social Security, which I was, I kind of use that figure. So it’s about $1,300,000, right? So as Social Security is about $66,000. Spending, I said $10,500 a month, but I’m going to reduce it by $3000 because 7 years the house is paid off. So that’s about $90,000. So they need $90,000. I didn’t worry about inflation at this point. Straight numbers. $90,000. Social Security $66,000.

Joe: You need $30,000 from the portfolio, they’re gonna have $1,300,000, that’s a 7.5% burn rate.

Al: It’s a little over 3%, but yeah, which is probably fine.

Joe: How’s it over 3%, if it’s $1,300,000 and they need $30,000?

Al: Well, I’m saying they need $110,000.

Joe: Oh, okay.

Al: Because I did the, I did inflation, so I kind of did, I didn’t inflate some stuff, but I try to make this as conservative as possible. Spending $110,000, you got $66,000 coming in, right? So you’re about, $40,000 short. Right. Into $1,300,000 is about 3%, 4%. Okay. So I like that. I think if you can- at 65, if you’re a 4% distribution rate, I think this is a, has a high probability of success. So I think that sounds good. So that’s number one. What do you think? I think this works.

Joe: Well, I think here’s why I think they’re on track to have enough assets accumulated at the time they want to retire in 7 years. They want to retire in 6 years, so it’s going to be close. I think where the real issue comes into play is that they’re going to have to create a lot of income from the overall portfolio. And if a lot of this money’s in their company’s stock that has split a couple of times, that is a 10 banger, you gotta be careful there.

Al: Yes. Yeah.

Joe: Because you wanna make sure that you have the appropriate portfolio to give you the income that you need from a tax advantage, from a safety perspective and everything else. So I think from a spitball back of the envelope, if they continue doing what they’re doing, if they get a 6% rate of return over the next 7 years, I think they’re going to be close.

Al: Yeah. I think I actually think they’re going to be fine. But second spitball is going to sort of go into what you were just kind of alluding to.

Joe: So it goes, what to do with company stock and how does NUA work? Well, NUAs, net unrealized appreciation. And so there’s an IRS law that allows you to take company stock out of your 401(k) plan and put it into a brokerage account. Why would you want to do that? Is because anything that comes out of a 401(k) IRA type of account is taxed at ordinary income rates. So you bought the stock for $1, it’s worth $10, and you have 1000 shares, so you have $100,000, or whatever that math is. Everything comes out as ordinary income, you have to pay the highest tax rates. Net unrealized appreciation is that, let’s say you bought it for $1 a share, it’s worth $10 a share, you move those shares out, you only pay ordinary income tax on the basis, which is $1 a share. So all of that appreciation, which is NUA, net unrealized appreciation, then is gonna be taxed at capital gains rate, which is a lot lower in most cases than ordinary income. So it’s a tax play. It allows you to take the stock out of the 401(k) plan, put it into a brokerage account, then sell it at long-term capital gains. It also gives people the tax diversification that they probably need. Because if all of your money’s sitting in a 401(k) plan, everything is gonna be taxed at ordinary income rates, this allows some capital gains tax to be included in your overall distribution strategy.

Al: Yeah. And it’s especially important when you think about Social Security, taxed as ordinary income, most of it, and pension in this case, $900 per month, that’s taxed as ordinary income. So if you get this stock out of the 401(k), then you pay ordinary income tax on that cost basis. And then the capital gain tax on all the gain, you only pay that when you sell the shares. Anyway, so you could do that all at once. You could sell the shares. You could do it slowly over time. But going back to your point, Joe, is you’re going to have to produce a bunch of income from this portfolio. So if this is stock that’s non-dividend, non-dividend stock, it’s not necessarily going to work in terms of creating a cashflow, but then there’s other assets too. So it just depends. This is where the planning sort of comes in play. And that is how to create an income stream tax efficiently with the assets that you have. And in this case, there is a shortfall of, of over $40,000 that needs to come from the portfolio one way or another.

Joe: So his third spit ball is, “How do I de-risk into bonds?” Well, that’s tough. You’re 6 years out, right? So you don’t want to de-risk the year before. So you slowly want to de-risk now, right? Because you don’t necessarily know what the market’s going to do over the next several years. So it’s, I have 100% stock portfolio now, but you need to work towards a glide path, if you will, over the next 6 years to get enough safety in the portfolio.
So the year you’re retired, if the market tanks 20%, you don’t have 100% stocks, right? So you slowly have to do this over time. And depending on the strategy, some people do it with, you know, contributions or when you rebalance, you’re just going to start adding a little bit more towards safety asset classes as you get closer to that retirement date. “That fourth spitball is we each open a Roth account with a couple hundred bucks to start the 5-year clock. Not sure about doing some big barn backdoor Roth conversions. What estimates do you think on our tax bracket for us in retirement? Company plug. Thanks to Andi for telling about it. Company plug.”

Andi: Keep reading.

Joe: “We have used your guy’s EASI calculator and it’s great. Best part of the show, spitballs you guys give and the derails. Thanks everyone.” Well, thank you. I don’t know. I have no idea what to, I mean, so he’s got to do NUA when he retires. So he’s going to have a little bit of tax to get that money into a- but with the, doesn’t he have a large, he’s probably 12%. There’s going to be room in the 12% or 15% tax bracket to do conversions for sure.

Al: I think so too, Joe, because I mean, if you just take Social Security and the little pension that they have, it’s probably going to keep them in the, what is now the 12% bracket soon to become 15% bracket. And so that’s probably your best bet is to convert up to that. But then since you’re in that bracket, you got to be careful with capital gains and NUA. So it’s a little tricky, right? So you’re going to have to do some tax projections to get this just right.

Joe: All right. Thank you for the question there, Jessica and Roger. It’s clever, Andi.

Al: It is.

Joe: Very clever.

Andi: Thank you, thank you very much. There are aspects of your retirement planning that you can’t control, but are you controlling the controllable – like your taxes in retirement? Our collective individual income tax is estimated to add up to $2.3 trillion this year! How much of that will you be paying? If you’re expecting a hefty 2023 tax bill, you can do something about it, but the clock is ticking! Watch YMYW TV to learn from Joe and Big Al 10 tax-cutting moves to make now, before the end of the year, so you can send less of your money to the IRS, and download the companion guide. Click the link in the description of today’s episode in your favorite podcast app to watch the show and download the free guide. One of those moves is to consider a donor advised fund. Let’s learn more:

Donor Advised Fund and Roth Conversion in the Same Year? (M.E., Atlanta)

Joe: “This is M.E. from Atlanta. My drink of choice is a Texas margarita on the rocks with salt or a Leinenkugel Summer shanty beer.” Oh, little Leinenkugel. That’s brewed in Wiscony. “My husband and I have a feisty golden retriever. I have a question about contributing to a donor-advised fund and making a Roth conversion in the same year. My husband and I are consistently donating $25,000 to $30,000 a year in charities. We have a very- we have very little money in Roth. Most of our $2,000,000 in retirement assets are in pre-tax money. I’ll be receiving an inheritance of $100,000 this year and I’m thinking about contributing it to a donor-advised fund. We have other cash, $200,000, while at the same time converting $100,000 of pre-tax money to Roth. Would these two events zero out the tax consequence? We are 3 years out from retirement. We will continue to contribute to our 401(k)s and brokerage, and we will draw down pre-tax money to live off of 3 years before collecting Social Security. Thanks. M.E.” All right, so donor-advised fund. Let’s explain that.

Al: Yeah, we’ll start there. So, yeah, donor-advised fund is an account that you set up. You’re the trustee. It’s for future charity, right? So you put money into a donor-advised fund. You get a tax deduction for the amount that you put in, the year that you put it in. And then over time, you get to decide which charities get which amounts. And there’s no minimum or maximums. You can let it ride for a while. You can start giving money out right away. Distributed one year, two years, 3 years, 5 years, whatever it may be. But it’s a way to take future year contributions and deduct them all in one year. Perhaps when you have a high income year, or in this case when you want to have the deduction to offset a Roth conversion, which adds income.

Joe: Dollar for dollar?

Al: Sort of. Here’s the only limitation. Uh, when you do a contribution, donor-advised fund or any contribution for that matter, you’re limited to 60% of your income. So depending upon what the income is, maybe so, maybe it’s dollar for dollar. Maybe not.

Joe: So she’s going to put $100,000 in this donor-advised fund. She’ll get a charitable deduction on the tax return of $100,000. So then, I’m going to convert $100,000 from my retirement account to a Roth IRA. So, let’s just assume $100,000 conversion in a hypothetical tax bracket, state and federal, called 30%. So she’s going to owe $30,000 in taxes. But she’s in that 30% tax bracket, so she’s going to give a $100,000 to a charity, but it’s not going to go directly to the charity, she’s going to set up her own type of foundation, if you will, but it’s called a donor-advised fund, it’s really cheap to administer, but then that $100,000 is a tax deduction, she’s in the 30% tax bracket, wouldn’t she receive $30,000 of potential tax savings?

Al: Sure, if she had $100,000 of income already. Right, so the $100,000 plus the $100,000 Roth conversion, $200,000, 60% of that’s $120,000. She wants to deduct $100,000, no problem. Let’s say she’s got no income, and she just does a $100,000 Roth conversion. And then 60%of that $100,000, is $60,000, she couldn’t deduct the whole $100,000. And she wouldn’t want to, because she’d be in a low bracket, but that’s the math. But I’ll give you a better idea, ME from Atlanta. If you have appreciated stock outside of retirement funds, donate that to a donor-advised fund because you don’t have to pay capital gains tax on that, but be aware you only get 30% of your adjusted gross income. So maybe you do, you know, the first 30% capital gain, so you don’t have to pay tax on that money and then do the other, you know, 30% from cash. And then you’ll be in a better spot. You save some of that cash, right? And there’s no tax to pay on that.

Joe: Yeah, I guess a better, a different way to say that is if you’re going to fund a donor-advised fund, is that you want to look at what is the best way to fund it. Cash is still fine, but that’s the last thing you want to resort to. If you have highly appreciated assets that you will sell eventually down the road, well, just donate those. Because then the donor-advised fund sells those assets, and there’s no tax to pay. We see a mistake that M.E. is going to have, wants to donate $100,000 hypothetically that she did not receive this inheritance. So let’s say, a $10,000 basis, $100,000 account, they sell it, and then they’re going to give the cash away. Well, that’s $90,000 of gains. Hypothetically, in this example, where M.E. would have to pay tax on the gain to give the cash. Well, no, always give the appreciated stock. So, if you want to put it in a donor-advised fund, you can do that. If you want to give it to a qualifying charity, you can do that. So, just understand, it’s the gifting season. So, if you’re going to give, know the tax rules as you give assets to organizations.

Al: Yeah. And if you put too much into your donor-advised fund, that excess contribution that you can’t deduct currently carries over for another 5 years.

Joe: Alright, show’s called Your Money, Your Wealth®.

Andi: Spitball your own situation in minutes with our free retirement calculator at EASIretirement.com, that’s EASIretirement.com. Joe’s new puppy, Gettysburg, the effects of rum, how you start your emails, Curious George, ME and who the three of us are named after, and Leinenkugel in the Derails so stick around. 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.

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 many 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 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



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.

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC, a Registered Investment Advisor.

• Pure Financial Advisors LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.

• Opinions expressed are not intended as investment advice or to predict future performance.

• Past performance does not guarantee future results.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• 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.

CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.

AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.

CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.