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Joe Anderson
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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
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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
ABOUT Andi

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
June 27, 2023

A little ditty about Jack and Diane, who will eventually inherit about $4.5M from Diane’s parents. How do they manage the required minimum distributions? Which of three options should Matt take with his inherited IRA? Making the most of your inheritance today on YMYW 435. Plus, Clay wants to know if it’s a good idea to take money off the table and rebalance to safer or more aggressive investments, depending on your risk tolerance? Can Elizabeth offset pre-tax IRA losses with the gains from the sale of rental real estate? Is it true that you can make one time contributions from your IRA to your HSA that is, your health savings account? And finally, can Cory gift stock to his daughters and avoid paying the kiddie tax as a way to pay for college? And can Rich supercharge a 529 college savings plan with himself as beneficiary?

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Show Notes

  • (00:58) How Do We Manage RMDs on a Pending Inheritance? (Jack & Diane)
  • (11:31) Which of 3 Options Should I Take With This Inherited IRA? (Matt, San Diego)
  • (18:57) Should I Take Money Off the Table and Rebalance to Safety? (Clay, Westerville (Columbus), OH)
  • (23:50) Can I Offset Pre-Tax IRA Losses With Gains from the Sale of Rental Real Estate? (Elizabeth, Lake Forest)
  • (26:43) Is It True We Can Make One Time Contributions From IRA to HSA? (Scott, NC)
  • (32:06) How to Pay for College: Gifting Stock and Avoiding the Kiddie Tax? (Cory, Bethesda, MD)
  • (36:16) Should I Supercharge a 529 Plan With Myself as Beneficiary? (Rich, NY)
  • (41:17) The Derails

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Transcription

A little ditty about Jack and Diane, who will eventually inherit about $4.5M from Diane’s parents. How do they manage the required minimum distributions? Which of three options should Matt take with his inherited IRA? Making the most of your inheritance, that’s today on Your Money, Your Wealth® podcast 435. Plus, Clay wants to know if it’s a good idea to take money off the table and rebalance to safer or more aggressive investments, depending on your risk tolerance? Can Elizabeth offset pre-tax IRA losses with the gains from the sale of rental real estate? Is it true that you can make one time contributions from your IRA to your HSA that is, your health savings account? And finally, can Cory gift stock to his daughters and avoid paying the kiddie tax as a way to pay for college? And can Rich supercharge a 529 college savings plan with himself as beneficiary? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Cliff and Norm! I mean, Joe Anderson, CFP® and Big Al Clopine, CPA.

How Do We Manage RMDs on a Pending Inheritance? (Jack & Diane)

Joe: Got new listener here. “Hey YMYW team. I’m a new listener and I thoroughly enjoy the podcast. I feel like I have found my tribe.”

Al: Wow, I like that.

Joee: Welcome.

Al: We’re part of this tribe.

Joe: Welcome to the tribe.  Okay we got a couple people. We got Jack and Diane.

Andi: And I’ll say this is not Jim from Santa Cruz’s Jack and Diane. This is a completely new Jack and Diane.

Al: Oh, okay.

Joe: Okay.

Al: Got it.

Joe: “Jack’s 58, gainfully employed, makes about a $100,000 a year. Guinness is the drink of choice.”

Al: Yeah. Right. I like Guinness.

Joe: “Diane, 52, an RN who cares for elderly parents, earns $15,000 to $20,000 per year in royalties.” Ah, ooh. She’s a writer. Maybe actor. Painter?

Al: Musician?

Joe: Ooh.

Andi: An RN who also has royalties or- not sure how that works.

Joe: She probably did some-

Al: Something on the side.

Joe: Something, a little side hustle.

Andi: Yeah.

Joe: Make her some cash. “Loves a good Margarita. We live in Texas and are 100% debt free. I drive a Honda Civic. She drives a Honda SUV.” Oh, well, Honda Family.

Al: Yeah. She’s got the big car.

Joe: Well, she’s got the royalties.

Al: Yeah, she does. That’s worth a lot. They’re not gonna stop when she, when Jack retires. That’s it.

Joe: I guarantee something really cool. “We got annual expenses at $70,000 a year. AGI is $93,000. 2023 projected AGI is $122,000. $360,000 in an IRA. Got $90,000 in a 401(k), $56,000 in a Roth. Currently adding $1500 a month to a 457 Roth and max annual contributions for each of us in a normal Roth IRA. Got another $164,000 in a brokerage account, $50,000 cash emergency fund, $200,000 in cash from a recent sale of a real estate. These funds are pending reinvestment.” All right, Al, you with me? Keeping square? You good?

Al: Oh yeah. And another $350,000 in two different government pensions. Gotta add that too. $1,300,000.

Joe: “Got another $350,000 in two different government pensions.”

Al: Sorry, Jack and Diane. That was on page two. Missed it.

Joe: Got it. “Pension one. Eligible to draw now $22,000 per year will grow at 7% per year if I continue to delay the start of the payments. Pension two. Eligible at age 62 at $24,000 per year. Stops growing when I stop working. So not starting payments the day after I retire would be leaving money on the table.” Oh, thanks. Thanks for that.

Al: Okay. Did that clarify it for you?

Joe: Appreciate that.

Al: Nice.

Joe: “Pending inheritance- parents are in early 90s, somewhat mobile-“

Al: Somewhat mobile- mobility impaired. I guess that’s somewhat mobile. Somewhat.

Joe: “They got about $1,500,000 in real estate. $500,000 in a brokerage account. $2,500,000 in a 401(k).”

Al: Oh boy. So that looks like $4,500,000.

Joe: Okay. “Questions- I have two main concerns. What my par-“ I was gonna say something bad. “My in-laws’ RMD is significantly higher than their expenses. They would like to give us pre-inheritance gifts so we can max out our retirement savings and invest in more real estate. We have been told that since my wife is their sole heir, this can be done without involving the gift tax, but I can’t find anything verifying this on the IRS website. I’d love your input on this one. Trying to plan for the increased taxable income from the 10-year distribution of the inherited IRA so we have all the money in the right buckets when the inevitable occurs. My plan is to have no other taxable income during this 10-year period except for royalties-” There’s that royalty again.

Al: Yeah. Yeah.

Joe: “-and pension number two. My thought is to convert all or most of the IRAs into a Roth while we have plenty of room in the 22% tax bracket. Does this make sense to you? Is there anything else we should consider? Jack and Diane.” All right. So there’s a couple of different things we gotta unpack here. So he wants to retire soon here. So this was a fairly long- he’s 58 and she’s 52.

Al: I’m not sure he said when he wants to retire.

Joe: Yeah, I didn’t see that.

Al: Yeah, I think the they might be waiting for the inevitable? I’m just guessing.

Joe: That’s a triggering event.

Al: Well, I’ll take the first question, Joe, while you think about the second one. So, here’s the way inheritance and gifting works. So you’re allowed to give $17,000 a year in 2023 to anybody you want to, family, friends, homeless person, it doesn’t matter. $17,000 per year. And if you’re married, your spouse can give $17,000 a year. So that means, Jack and Diane, Diane’s parents can give each of you, I mean the total $34,000, cuz there’s two of them. So what’s that? $68,000 is what they can give to you without any consequence at all. If they give you more than that, you just have to file a gift tax return. You don’t pay any current tax. If you file a gift tax return, all that does is it reduces the final estate tax credit that you would get passing assets to the next generation. And right now that credit and accounts are gonna say, I’m saying this wrong, but I’m keeping it simple. It’s a unified credit. I get that. But let’s just say that the credit that you can pass to the next generation is roughly $12,000,000, $13,000,000 each. So I think it’s $12,500,000. I think it’s $25,000,000 a couple can pass to the next generation. So like, let’s say they give you $200,000, well, the first $68,000, no problem. But the extra $132,000 has gotta go on that gift tax return. It gets subtracted from the $25,000,000.

Joe: From the unified-

Al: – unified credit. And simple as that, right? It’s- in practice, it’s more complicated. But that’s the concept.

Joe: So the parents’ net worth is $3,000,000, $4,000,000.

Al: $4,500,000. And so it’s well below the limit.

Joe: But I don’t know what state they live in. So if they live in, let’s say Washington.

Al: Oh, good point. Right, because that’s-

Joe: There could be a estate-

Al: True.

Joe: -tax for the state.

Al: Good point.

Joe: But so since she’s the sole heir, that doesn’t necessarily mean anything. Because he is like, well, she’s a sole heir, so there’s no- there’s no tax.

A: Yeah, no. There’s a state tax and here’s the risk, which is right now it’s I think around $25,000,000 that would pass to the next generation for a couple. But that could come down, that could come back down to, there’s talk of that coming back down to $5,000,000, which would be $10,000,000 for a couple or lower.

Joe: It was $600,000.

Al: I know for most of my career.

Joe: Yeah, they went $650,000 when I started.

Al: It actually got to $1,000,000 in the year 2000, I remember that because that’s when George W. Bush came into office and basically tried to eliminate it.

Joe: Yep.

Al: And he did for a year. 2011.

Joe: He did. Mm-hmm. Alright. So, okay. So you can, they can gift quite a bit to you.

Al: No, no problem. $1,000,000, whatever, whatever they wanna gift to you. That’s the mechanics. And there’s no current tax to be paid.

Joe: So let’s say they got $1,500,000 of real estate that they give this to Jack and Diane. And Jack and Diane wants to sell it. The only problem with the gift is that if they sell that asset, then they’re going to have to pay the capital gains. The basis carries over.

Al: That’s right.

Joe: So if they inherit that property or inherit the assets, they get a step-up in basis, they could sell it and then there would be no tax due.

Al: Yeah, that’s true.

Joe: The biggest issue that they have is this $2,500,0000. This $2,500,000 is probably kicking out-what do you think?

Al: Well, they’re, they’re in their 90s-

Joe: So $200,000 of income?

Al: $2,500,000. I’m gonna say 6%- 7% distribution rate.

Joe: Yeah, that’s probably something like that.

Al: $175,000, you’re about right. $200,000.

Al: So $200,000 of income that’s forced outta the retirement account. So, and they’re not spending any of it. So they could give you whatever distribution outta the retirement account and that would be tax-free to you. They would again, just have to file that gift tax return. Then you could buy your real estate and everything else. But where he’s thinking he is like, okay, well when they pass, they’re gonna get this $2,500,000 or whatever the dollar figure is in this 401(k) plan. And since the death of the stretch IRA, they’re going to have to take this money out over a 10-year time period. So then they’re like, okay, well here I wanna avoid or negate any type of other income because it’s going to eat up my tax bracket as I take this $2,500,000 out. So from now he wants to do Roth conversions and things like that to try to mitigate this. But he’s 52 years old, right? He’s 58 years old.

Al: 58, yep.

Joe: His RMDs are not gonna start until 75. So he’s got 20 years about.

Al: And the 401(k), when you inherit that, you can’t do conversions on any kind of inherited IRA or 401(k).

Joe: Right. He’s gonna have to kick that out over 10 years.

Al: That’s right. So the parents could start doing Roth conversions if they’re in a low enough tax bracket.

Joe: Right. But, the RMD’S killing them, so maybe they convert to the top of the 24%.

Al: Maybe.

Joe: That would be a nice gift.

Al: Yeah. Right.

Joe: Because then all of a sudden you’ve got Roth money versus tax-deferred money.

Al: Yeah. That makes sense. And by the way, when you’re talking gifts, you can never gift your retirement account, only like real estate, brokerage account- can’t gift an IRA, 401(k), Roth, whatever.

Which of 3 Options Should I Take With This Inherited IRA? (Matt, San Diego)

Joe: We got Matt from San Diego. He goes, “Hey Joe, Big Al, Andi. I’m 31 years old and a lawyer at a large law firm, expect to make about $500,000 a year. My fiancé was recently laid off from her job in marketing, and assuming she doesn’t go back to work this year, will make around $40,000. We’ll be married this year and expect to file taxes jointly for 2023 and into the future.” Well, congratulations on your nuptials.

Al: Yes.

Joe: “My grandmother passed away a few months ago-“ Sorry to hear that. “-and I recently learned I was named the beneficiary on her IRA accounts. I stand to inherit about $150,000 from the IRA. There are at least a few options for which to do about the inherited IRA, and I’d like to get your thoughts on what to do.” I wonder whatever happened to that kid that said he was gonna like, inherit like $200,000,000?

Al: Yeah, that’s right.

Joe: Right? Wasn’t that- Andi?

Al: It was a big-

Andi: That sounds familiar, but yeah, it’s been a while. We haven’t heard anything about it. Maybe the kid’s still waiting.

Joe: It’s like, I’ve got a weird question for you.

Al: I remember that. And then I’m getting $200,000,000 in a couple months-

Joe: I’m gonna inherit $200,000,000.

Al: What should I do with it?

Joe: Yeah. This is more reasonable here. All right. So he’s got some options. “I can leave the money in an inherited IRA account up to 10 years. This seems to be conventional wisdom, but I worry it could be worse for us, especially if our incomes increase during that time and if tax rates increase. And for what it’s worth, I’m expecting both those things to happen, though it’s possible we’ll have a down or sabbatical year at some point.” A little sabbatical year. Regardless-“ how do I get a sabbatical year?

Andi: Do not be president and CEO of the company.

Joe: I think I’m gonna put in for that.

Al: Rejected. As the Chairman.

Joe: I think I know someone at this company. Maybe I’ll put that in. “Regardless, there would probably be the best bet if there’s meaningful stock market growth in the 10 years. But that seems far from guaranteed.” True. Okay. “Number two-“ So he, he could say, Hey, you want, I just wanna leave this in the overall account for 10 years. I’ll pull it out in 10 years. I don’t like that idea too much because hey, we’re gonna be in- my wife and I are not gonna be working. He’s a badass attorney. He’s gonna have a lot more income. She’s gonna have a lot more income. And then when they take the money out in the 10th year, it’s gonna get killed in tax.

Al: Yeah. Plus you don’t wanna do that anyway because if the stock market, if you kill it in the market, you want it outside of the retirement account. So it’s capital gains instead of ordinary income.

Joe: “Number two, I can trickle the money out over the 10 years, but this faces pretty much the same issues as option one. We’re squarely in the 35% federal, 11% California tax brackets, and those rates may only increase in the future. Number three, I can withdraw all the money now and pay the tax. That would suck and would sacrifice potential tax-free growth, but provide certainty as to the price of withdrawal and could wind up better in the long run than the other options. Can you please spitball this? I’m thinking- am I thinking about this correctly? Also related, would having an inherited IRA affect my ability to use a back door Roth? I don’t think so because I read online that inherited IRAs don’t count for the pro rata rule, but I would appreciate it if you can confirm. Thanks so much in advance for your thoughts. I’m a long time listener and love the show, but I’m writing in for the first time.” Lot of first time writer-ins.

Al: Yeah, I like it. Keep ’em coming.

Joe: Yeah. We got like 100 questions here this week. “I drive a little 2012 Toyota Camry. 2012.” Dude, this guy’s like a badass attorney. He’s driving a little Camry.

Al: $500,000.

Joe: God, he’s very, like cautious.

Andi: Isn’t that how rich people stay rich is by living within- well within their means?

Joe: Yes. Well- yeah, that’s why Alan has two places in Hawaii, drives a Tesla-

Al: And I go to Fiji and-

Joe: Yes, he goes to Fiji.

Al: I went to New Zealand in February. Last Fall I went to Italy.

Joe: “I don’t drink much, but when I do, I prefer a good IPA.”

Al: Okay, like it.

Joe: Well, “Fiancé is in a little 2022 Mazda CX5, likes a glass of red wine at the end of every single day.”

Al: Like it.

Joe: All right.

Al: Well Matt, I think you can upgrade your car if you want.

Joe: I wonder if it’s one glass, if it’s two glasses of wine.

Al: Well, she’s-

Joe: – unemployed. She might be-

Al: Well, before he gets home, we don’t know.

Joe: Yeah. Thursdays the wife likes to have a couple glasses there at the old Anderson household.

Al: Only Thursday?

Joe: Yeah, it seems like Thursday.

Al: That’s today.

Joe: Yeah. And that’s why I work really late on Thursdays.

Al: I was always- I was wondering why that was.

Joe: Yeah. If I’m not having a cocktail, cuz I don’t drink on the week.

Al: No, I know you don’t.

Joe: If I’m having a few cocktails, then I can kind of tolerate the someone else having cocktails.

Al: No, I get that.

Joe: If she has one glass, I don’t really- I don’t see it.

Al: Yeah, right.

Joe: But I think that’s second or third glass-

Al: That you start seeing.

Joe: Oh, then you can-

Al: It’s like-

Joe: Okay, this is annoying.

Andi: Wow. The tables are turned. Interesting.

Joe: Yeah, it’s sometimes it happens there, Andi. What does he do? Just blow the thing out, just pay the tax? Or does he trickle it out because he is squarely in the 35% tax bracket?

Al: Me personally, I would trickle it out. Because if there’s any chance of a sabbatical year, blow the rest out then. That’s what I would do.

Joe: I would do the same. And then if we have another down year, let’s say, because this year the stock market’s doing quite well. So maybe next year the market’s down 20%, then I would blow the whole thing out.

Al: That’s another reason, right? Because you want the money out and let the recovery happen when it’s outside of retirement because now it’s capital gain, not ordinary income.

Joe: Yep. So you could kind of play both ways. You dollar cost average out, you take a little bit out each year. But then if the market goes then- you know.

Al: Yeah. And one thing, Matt, when you say, and ‘number 3, this, that would suck and I would sacrifice potential tax-free growth’, what you mean is tax-deferred.

Joe: Tax-deferred growth.

Al: That’s a whole lot different. Tax-free is a Roth IRA, you never pay tax. Tax-deferred means you will pay the tax later and it accumulates over time.

Al: All right. Matt, appreciate the phone call. I mean, appreciate the question. Thanks for listening and thanks for the first time email.

When its time for your beneficiaries to inherit your assets, they will love it if everything was as easy and straightforward as possible. So help ‘em out! Give ‘em a document that contains everything they need to know about your life, your accounts, and your estate before you pass. Download our Estate Plan Organizer from the podcast show notes at YourMoneyYourWealth.com. It’s organized into helpful blank sections so you can simply fill out everything from your financial account details and insurance policies to your contacts and your final wishes. Then go ahead and put it in a safe place, and give a copy to your family and your loved ones – and don’t forget to update it regularly. To get your free Estate Plan Organizer, just click the link in the description of today’s episode in your favorite podcast app, you’ll see it right there under “Free Resources,” just before the episode transcript.

Should I Take Money Off the Table and Rebalance to Safety? (Clay, Westerville (Columbus), OH)

Joe: I got Clay from Westerville, Ohio.

Al: Yeah. Part of Columbus, I guess.

Joe: You’ve never heard of Westerville?

Al: No. You’ve been there, right?

Joe: Oh, yeah. “I will try to keep this spitball question brief and in complete sentences.” Well, thank you Clay.

Al: That’s very nice.

Joe: Very nice of you. “In my case, I’m still a minimum of 12 years away from retirement. I’m 43 years old. I know my estimate income need at various retirement ages and the amount needed to achieve that income.”

Al: Wow. Clay’s on top of it.

Joe: Look at the big brain on Clay.

Al: And he writes in complete sentences. This is like a dream.

Joe: Oh. Clay’s like one of the smartest listeners we’ve ever had. “Here’s the spitball question. I’ve calculated my estimated portfolio balances by year based on my projected rate of return and contributions.” Could you imagine this guy’s spreadsheet?

Al; Oh yeah. It’s, it’s a-

Joe: He’s legit.

Al: It’s got tabs all over the place for different assumptions.

Joe: Oh, you think he’s an engineer? “If the portfolio balance at the end of the year exceeds the amount projected in my retirement projections for that year, would it makes sense to take that little extra and park it into something more safe or more aggressive, depending on your risk tolerance. For example, at the end of 2023, my retirement portfolio projections indicate my balance should be $1,000,000 to achieve my retirement goal. But let’s say the portfolio is $1,100,000. Does it make sense to take that $100 and park it in a stable value fund or something really aggressive depending on your risk tolerance?”

Al: Interesting question.

Joe: Interesting question, Clay. I love it.

Al: Me too. I’ll give you my answer. Uh, no.

Joe: No.

Al: Same as yours. And here’s why, Clay. It’s because, yeah, so this year, $100,000 over, next year, $100,000 behind.

Joe; $100,000 behind.

Al: Just keep the right investment strategy going for a long period of time, and it will all balance out.

Joe: Yeah, I love the idea though. So, because this guy is super smart.

Al: Oh, I know.

Joe: He’s got things so dialed in. I mean, I think if it was anyone else, the answer’s no, but I think from Clay, from Westerville here. I’m gonna give him a little bit of leeway.

Al: And it’s probably- he’s probably like gamblers thinking about, this is how house money. Yeah. I’m just gonna-

Joe: Exactly.

Al: I can do what I want with it.

Joe: There’s ______on that.

Al: Yeah. Right, right, right.

Joe: You know, if you win, here I’m gonna put my chips that I had, that I put out, I’m gonna put those in my pocket. And I’m gonna bet with house money and if I blow this thing up, who gives a you-know-what?

Al: No, don’t do that.

Joe: So, yeah. So he wants to bet with the house money. He either wants to put it in his wife’s purse. Or he wants to put it on black.

Al: Well, maybe not his wife’s purse.

Joe: Or his pocket or whatever.

Al: Maybe under the mattress.

Joe: Yeah. I dunno. When I gamble, like if I’m with my wife-

Al: Does it go to Rosie?

Joe: Yeah. She takes it, she puts it in her purse.

Al: I can totally see that.

Joe: She’s like, all right, you’re, this is, you’re done with this.

Andi: You’re not allowed to spend this on alcohol.

Joe: Yeah. I mean, That’s why I don’t gamble. I’m not a good gambler. And then it’s like, okay, if I got house money, I’m going black. Every time. I’m going to, you know, triple down, I’m gonna put everything on, you know- whatever. But I like the idea. I would say, all right, well, I got $100,000. Let’s go- let’s do something. Depending on his risk tolerances, he could be on the other side of it and go into a stable fund and you park and bank that money. I like that too. But for everyone else, I think the answer is that everything kind of-

Al: I works its way out.

Joe: -ebbs and flows. The market doesn’t work in a straight line.

Al: So next year when you’re $100,000 short, do you pull it outta your purse and put it back in?

Joe: Yeah. It’s like, oh, my per projection, I should be at $1,300,000, $1,200,000.

Al: Oh, wait a minute. I spent the purse money.

Joe: Yes. Or I blew up. Or I blew it out. Right. So the, the objective Clay, I think is what you wanna look at. And I think what he’s doing is then, all right, well, here I want to have a target rate of return of 6%. And if you ever look at the overall markets, let’s say if it’s 6% or 8%, what’s the market average over the last 80 years? Like 12% or 11%?

Al: Yeah. Well, the, yeah, the broader market is just under 10%, S&P500.

Joe: Okay. So 10%. Well, how often do you think the market is done 10%?

Al: We already know the answer. Zero.

Joe: Zero.

Al: It’s never happened. It’s never actually done the average.

Joe: Because you’re going to get 20%, negative 10%, up 5%, down 4%, up 30%, down 10%. And so you’re gonna average everything out to your target expected rate of return over your time period. So that’s why taking some chips off the table and- not a great idea.

Al: Nope.

Joe: Awesome question. That was a lot of fun. Thank you, sir.

Can I Offset Pre-Tax IRA Losses With Gains from the Sale of Rental Real Estate? (Elizabeth, Lake Forest)

Joe: Elizabeth writes in from Lake Forest, Al. He goes, “Hi Joe, Al, Annie. Longtime listener, looking every week to hear your show. You guys are funny.”

Andi:  And this one actually says, Annie, which is the first time I’ve ever actually been mistaken for Al’s wife. I’m Andi. Al’s wife is Annie.

Joe: Ooh.

Al: I think we should get Annie in here.

Andi: There you go.

Joe: “My question is, if I sell losing stocks in a pre-tax IRA, can I offset those losses against gains from sale of a real estate property? Those are long-term losses and property is in my possession for 12 years. Thank you very kindly for all the information you provide each week.” All right, well, thanks Elizabeth. Good question. So she’s got some losses in her retirement account. She’s sold a property and she’s got some gains and she’s like, well, can I offset those losses with those gains?

Al: Yeah. And she’s thinking it’s pre-tax, so there’s basis in there. And unfortunately the answer’s no. And the reason it’s no is because everything inside an IRA, to the extent it’s gain, is gonna be ordinary income. When you withdraw it, it has nothing to do with your assets outside of retirement. I wish it did. So let’s kind of review that. So if you’ve got some stock gains or real estate gains or whatever, stock or real estate, you can offset your stock losses against those gains as long as it’s outside of retirement accounts. So that’s kind of the way that works. So you sold a property, you have $150,000 gain. You sold some stocks at losses of $50,000. So those, that $50,000 nets against the $150,000, you end up paying capital gains on $100,000. That’s how that works. If you don’t have any gains, you had a $50,000 stock loss, then you get to deduct $3000 against ordinary income. And the rest, $47,000, carries forward to the next year, and you do the same computation, that $47,000 can net against any stock gains, any real estate gains. If you don’t have any, you got another $3000 and now you’ve got what, $44,000 available for the following year. But yeah, when you’ve got losses in an IRA, in a Roth, IRA, pre-tax or post-tax, doesn’t matter.

Joe: Remember that little miscellaneous deduction you could take?

Al: Yeah. That’s when we used to be able to itemize stuff.

Joe: So complicated.

Al: It was.

Joe: You could only probably take a couple of bucks.

Al: Yeah. Yeah. That there used to be a rule. It’s not no longer anymore, but there used to be a rule where if you had- if you did a IRA contribution and went down, you could withdraw it and actually take a loss on your, on your tax return. But it was a itemized deduction. It wasn’t a good loss and a lot of people couldn’t use it. So anyway, that’s not available.

Joe: All right. Well, thanks Elizabeth.

Is It True We Can Make One-Time Contributions From IRA to HSA? (Scott, NC)

Joe: Let’s go to Scott from North Carolina. “Hey, Joe, Big Al, recently retired at 60, along with my better half of 35 years.”

Well, congratulations there. “Tar Heel transplant-“

Al: Same as me, 35 years.

Joe: 35 years, Big Al?

Al: Married in 1988.

Joe: Wow. That’s- that’s impressive.

Andi: I wanna see the hairstyles for that 1988 wedding.

Al: Oh, I like to-

Andi: Sorry. Anyway-

Joe: Identical. “Tar Heel transplants, driving a 2023 Honda P Passport and share the home with 8 4-legged fur babies, 3 dogs, two cats, two horses.”

Al: Wow. That’s, that’s even more than you.

Joe: Wow. Should have been a vet. I got a dog, two kids, and- “I enjoy a cold Rolling Rock from time to time and a lifetime member of Bills Mafia.” All right.

Al: Yeah, a little Bills fan.

Joe: Yep. “My question concerns HSA accounts. Both my wife and I have an HSA.“ That’s a health savings account. “Although we no longer work, we continue to participate in our employers’ respective high deductible health insurance plans, and expect to do so until Medicare kicks in at 65. We would both like to continue maxing our contributions to the HSA accounts, but wonder how best to do so since we are no longer working. I’ve also heard that you can make one-time contributions from your IRA to your HSAs. Is this true? We have about $35,000 in HSA funds and would like to grow those as much as possible before hitting 65. Any advice is greatly appreciated. PS, having only heard your voices on the podcast, I was surprised how far apart my mental images of your faces differ from your website’s glamor shots.”

Al: Well, Scott-

Andi: He doesn’t say if that’s good or bad.

Al: You have to tell us what you mean by that.

Joe: If he’s gonna be like a toupee boy in the-

Al: He’s thinking, I thought you guys had a face for radio and you’re gorgeous.

Joe: Handsome.

Al: Or maybe the other way. I’m glad you’re only on radio.

Joe: You are a very handsome man, Big Al.

Al: Yeah. With my toupee? My supposed toupee?

Joe: Yep. What are- No, I’m not even gonna go there. Let’s- why don’t we answer this question?

Al: Okay. Well, we’ll start with HAS. Yes. You can still contribute to an HSA plan even though you’re not employed as long as you have a high – help me out.

Joe: A high deductible health insurance plan.

Al: Thank you. High deductible health insurance plan. Which basically is the kind of plan where there’s high deductible, so you have to pay in a lot before it sort of kicks in. But if you have a plan like that, and you will know because it will say right on it that it’s a HSA type plan, then you can contribute. You can, for 2023, you can contribute $3,850 per person or a family membership of $7,750. And there’s $1000 catch up when you are 55 and older, but you gotta stop when you’re Medicare age, which is 65.

Joe: So the benefit of having an HSA is that you get little tax-free withdrawals. It’s a triple tax threat.

Al: Yeah. You know what? It’s better than a Roth in a sense. Right? Because you get a tax deduction, unlike a Roth. The difference is you have to spend it on something medical related, but if you do that, it’s tax-free. So think of a Roth, you don’t get a tax deduction, and you can spend it for whatever you want to. In this case, as long as you spend it for medical, you got a tax deduction, and then you never pay tax on it. So it’s actually a great deal if you qualify.

Joe: Right. All right. Hopefully that helps Scott. And, I wonder what he was thinking about with our the mental images.

Al: Well, I don’t know, but one more thing.

Joe: Mike Schmidt for you.

Al: I don’t know. Mike’s getting older now. I dunno if you’ve seen him recently. Anyway, one more- one more thing was you can make a contribution or whatever you call it, from IRA to an HSA. It’s one time, once in a lifetime, and it’s for the contribution amount you have to be eligible with a high deductible health insurance plan. And you’re limited to the contribution limits. So it’s, it’s not much.

Joe: Right. It’s few thousand bucks, $7000.

Al: Yeah. Yeah. Yeah.

Joe: So you just transfer it so there’s no tax and then it grows tax-deferred and then when you pull it out for medical purposes, it is tax-free.

Alright, thanks for the question, Scott.

When you are investing, do you feel like you are on an emotional rollercoaster, careening from feelings of euphoria to feelings of depression? Most people admit they know they shouldn’t let their emotions drive their investment decisions, but when we see those highs and lows of the market, it can be difficult not to let our emotions and investing biases override our logic. We are our own worst enemy! Go to the podcast show notes to watch Emotional Investing, it’s the latest episode of the Your Money, Your Wealth TV show, and learn more from Joe and Big Al about behavioral finance. Download the companion Emotionless Investing Guide, and calm those nerves. Learn how keeping a level head can help improve your investing returns. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, watch YMYW TV, and download the Emotionless Investing Guide. 

How to Pay for College: Gifting Stock and Avoiding the Kiddie Tax? (Cory, Bethesda, MD)

Joe: Let’s jump right in. We got “Hey Joe and Al, I have a question about paying for college. I have two college aged daughters. One with two years left at $80,000 a year.” What’s that, CU?

Al: That’s- Yeah, it’s one of those. Sure.

Joe: It’s not University of Florida, I don’t think.

Al: No. And it’s not San Diego State.

Joe: “I got another one 4 years left, $50,000 a year.” Wow. He’s got some smart kids.

Al: Yeah. Yeah. And, and a big wallet. Hopefully.

Joe: “He’s got about $125,000 remaining in his 529 plan balance after using up the 529, I have highly appreciated RSUs.” Those are restricted stock units. “A $300,000 balance with $100,000 basis earmarked for the remaining college costs. I was looking at gifting the stock to each child to limit some of the capital gains tax and having them file taxes as non-dependents, but I’m fearful of getting caught up in the Kiddie Tax.”

Al: Yes.

Joe: Sounds like a great strategy.

Al: It does.

Joe: “And then having to pay the taxes on the capital gains at the highest marginal rate versus capital gains rate of 15%. Both kids have W2 income from summer jobs and then the gifts add $34,000, $17,000 from me and my wife to each child. Can you talk about the Kiddie Tax strategies on the scenario and tax avoidance? Our AGI is currently $350,000. Love the show. My rides, he rides a 2019 Toyota RAV4 hybrid.” Oh, little conscious of the-

Al: Yeah, I like it.

Joe: “-environment.

Al: Yeah, like it.

Joe: “2020 Pilot Trail 429.” Pivot. Is that a Pivot?

Andi: Pivot Trail. Yeah.

Joe: Pivot Trail.

Al: Pivot.

Joe: Never heard of a Pivot Trail.

Al: Me neither.

Joe: It’s probably electric. I dunno. Sounds cool.

Andi: Oh, it’s a bicycle.

Joe: Oh, there you go.

Al: Oh. That’s why we hadn’t heard of it.

Joe: It’s like a what? A bicycle.

Andi: Human powered.

Joe: Wow. A little Pivot Trail 2020. Alright, let’s talk about Kiddie Tax.

Al: So the way Kiddie Tax works is, If your child is not yet 18, or if they’re not yet age 24 and they’re a full-time college student, then the Kiddie Tax applies. Which basically means that once the child has investment income of more than $2300, it’s at the parents’ rate. And so in this particular case, virtually, almost all of this would be above that $2300. So I mean, if you transfer it to the kids, yeah, the kids could sell it. They’re not gonna pay the top rate. It’s not like trust taxes, but they’re gonna pay the parents’ rate, which would be 15%. And you can elect to have that rate paid right on the parents’ tax return. You can do that. But yeah, Kiddie Tax will apply. It’s a 15% tax plus a state of Maryland, whatever tax rate that is. Seems like a lot of work to save a couple bucks, but maybe you got the $2300.

Joe: But here’s what Cory was thinking is that, you know what, I’m gonna have the kids file their own tax return, non-dependent. And so they’ll have a standard deduction. They got $5000 of income, so there’s gonna be room here in the capital gain room where they’re going to sell it, and then they’re going to save a lot of money in taxes. But it’s a gift from the parents to a child where then the IRS looks at this and says, hey, I get it that if they’re filing their own tax returns and they have a standard deduction, and anything in the 15% tax bracket, capital gains would be taxed at zero, and so on and so forth. You can’t.

Al: No, because the standard deduction doesn’t apply when it’s- when it’s under an income- interest, dividends, capital gains. So you- you get almost nothing in standard deduction. So basically there could be a couple dollars saved, but essentially the basis, in other words, the gain that the parent would’ve paid, the kid pays, and most of it, the majority of it will be at the parents’ rate.

Joe: Right. But let’s say he’s got $350,000 of income. So he could be stuck with that investment income tax on the capital gain.

Al: Could be. And maybe he has other capital gains as well.

Al: But again, the kids pay at the parents’ rate, so they would be stuck with that.

Joe: Right. So he’s trying to avoid all of that by putting it on the kids’ tax return.

Al: That’s what he is- And actually it was a decent strategy before these rules came into effect, I don’t know, 20, 30 years ago.

Joe: So- a little bit behind Cory.

Al: It’s a- it’s a good idea though.

Should I Supercharge a 529 Plan With Myself as Beneficiary? (Rich, NY)

Joe: Let’s go to Rich in New York. “Joe and Alan, 57. $1,700,000, in combined Roth 401(k) and brokerage accounts, with rental properties worth $4,000,000. Own my own business.”

Al: Wow.

Joe: It’s worth $40,000,000.

Al: And a Jeep.

Joe: “And I got a Jeep Cherokee worth $15,000.” So what the hell’s going on? He’s got $1,700,000 in combined Roth.

Al: Yeah. Bunch of rental properties.

Joe: He’s got 401(k) and brokerage accounts with rental properties worth $4,000,000.

Al: Yeah.

Andi: No, no, no. The $1,700,000 is combined Roth 401(k) and brokerage. Then he’s got rental properties worth $4,000,000.

Al: Yes.

Andi: And he’s got his own business.

Joe: What’s the business worth?

Al: I would agree. He didn’t say.

Andi: But you claim it’s $40,000,000.

Joe: I know he’s coming off hot though. You just-

Al: When you put your million dollar amount at the very first sentence.

Joe: I mean, it’s not even- before ‘Hey Joe and Al’, it’s like I have $70,000,000.

Al: Let’s see. I’m 57 with about $1,700,000, 1, 2, 3, 4, 5, the fifth word in- $1,700,000.

Joe: I love it.

Al: Did you notice that? That I got $1,700,000?

Joe: I love it. This guy’s-

Al: I don’t want you to miss it.

Joe: Yep. “I drive a 2015 Jeep. My question is this. I’m max everything, including a mega backdoor, an additional DB plan. I was thinking of supercharging a 529 plan with myself as beneficiary. The penalty for taking non-qualified expenses is 10%. Thoughts on this as an additional way to add tax-deferred growth. I could change beneficiaries so that the penalty goes away or to my grandkids.” Okay. I don’t like it at all.

Al: So, well, 529 plan is like a college plan. In other words, you put money in, you pick a beneficiary, typically son, daughter, grandchild. Typically. Could be yourself. Spouse. Doesn’t really matter. But you put the money in. There’s no tax deduction going in, but all that growth is tax-free as long as you spend it for qualified education expenses.

Joe: So he wants to use the tax deferral, but it’s gonna be ordinary income plus a 10% penalty if he uses it for non-educational expenses.

Al: I mean, it’s a great idea. I don’t know if he is married, whether he’s got kids, grandkids. If you think you’re gonna have a lot of beneficiaries later on. Sure. Maybe that’s a good, good thing to do.

Joe: But I think he’s using it as a tax-deferred vehicle. And it’s the worst idea I’ve ever heard.

Al: That’s what it sounds like. Yeah.

Joe: So no, use a brokerage account to get capital gains tax versus deferral with ordinary income and a 10% penalty.

Al: 100% agree. Yeah. You’re really trying to overthink this a little bit, I would say.

Andi: What would be the benefit of it? Why is he thinking that this is a possibility? That this might be a good idea?

Al: If you’re gonna use it for education, it’s a great idea. If you’re gonna use it for something other than education, don’t do it.

Joe: Right. Well, now that you can- SECURE Act- you can put a couple of bucks into a Roth.

Al: That’s a lot of work and hard.

Joe: So if he’s looking to fund his own education- he’s 57, he’s gonna going to school. The guy’s what? He’s got $1,700,000 Al, and he’s got a business. He’s got $4,000,000 in real estate. He’s got everything.

Al: Go back to college.

Joe: So what? He’s like what’s his name? Going back to school? Rodney Dangerfield.

Al: Oh, yeah. Yeah. Okay.

Joe: What’s that movie called?

Al: Back To School.

Joe: Back To School. Yeah.

Al: Yeah.

Joe: This is Rodney.

Al: Yeah, Rodney.

Joe: He’s going back to school. He’s getting a giant fund of 529 plan. He’s gonna join his kid at school.

Al: So if it’s for kids-

Joe: A little swim class or the swim team.

Al: If it was for kids or grandkids, I’m okay with the idea. If you think it’s a great idea to get more tax-deferred growth, you’re just kidding yourself. You’re gonna pay ordinary income plus penalty.

Joe: Yeah, you’re gonna get killed. Alright.

Al: Okay we’re done.

Joe: What are you waving at?

Andi: I’m saying goodbye, that’s the end.

Joe: Alright, hey that’s it. We gotta go. Show’s called Your Money, Your Wealth®, thanks all, we’ll see you next week.

Andi: Your lovely host, NPR’s Car Talk, Cheers, and sports fashion in the lovely Derails at the end of the episode, so stick around.

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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 us at 888-994-6257 to schedule your free financial assessment, in person at one of our seven 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.

• 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.

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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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