Show Notes

• (00:57) Should We Do Roth Conversions to Top of the 24% Bracket to Minimize $240K I-Bond Profits? (David & Terri, Southern California, voice)
• (07:32) Roth Conversion & Qualified Charitable Distribution Strategy Spitball (Kimberly, IA)
• (13:12) Should I Take the Severance Package Now at 59 and a Half or Work Until Age 63? (Blake)
• (18:00) Is My Tax Loss Harvesting Transaction a Wash Sale? (Patrick, Vancouver, WA)
• (24:42) How Important is International Stock in a Diversified Portfolio? (John, Seattle, WA)
• (30:40) At What Marginal Tax Rate Should Roth 401(k) Contributions Stop? (Brian, NC)
• (33:58) What Impact Will Our New Home Have on Our Retirement Spending? (John in the DC)
• (42:32) The Derails

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Transcription

Andi: How is Kimberly’s strategy for reducing her retirement taxes by doing Roth conversions and qualified charitable distributions? Is Patrick’s tax loss harvesting transaction a wash sale? At what marginal tax rate should Brian stop making Roth 401(k) contributions? Joe and Big Al are back to answer these questions, today on Your Money, Your Wealth® podcast number 486. Plus, how important is international stock in John in Seattle’s diversified investment portfolio? What impact will a new home purchase have on John in DC’s retirement spending? Should Blake take his severance package now, or work a few more years? I’m producer Andi Last, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA. Visit YourMoneyYourWealth.com and click Ask Joe and Big Al On Air to ask your money questions via email or priority voice message, like this one on Roth conversions and I bonds:

Should We Do Roth Conversions to Top of the 24% Bracket to Minimize $240K I-Bond Profits? (David & Terri, Southern California, voice)

Caller David: “Hello Joe and Big Al. My name is David, my wife’s name’s Terry, and we’re from sunny southern California. I’m 65 years old, my wife is 67 years old. We’ve both been retired for approximately 15 years. The question is, should I transfer approximately $200,000 a year from our regular IRAs to our Roth IRAs? That would bring us up to the 24% tax bracket.

Here’s the breakdown of what we have. I have a Roth at $70,000. Wife has a Roth at $70,000. I have a stretch IRA at $190,000. I have a regular IRA at $192,000. Wife has a regular IRA at $240,000. I have a SEP IRA of $600,000, and our brokerage account has $6 million in it. My wife currently does take Social Security, which is about $900 a month. I don’t plan on taking Social Security until I’m 70 years old, which would be about $4,100 a month. Our taxable income is $175,000 this year.

Here’s the dilemma. Starting in 2031, we will have to start cashing in the I bonds that we bought in 2001. In 2001, we put $60,000 into I bonds, $30,000 each. So, in 2031, they’ll be worth $300,000, which puts us at a $240,000 profit, obviously. Now this is going to keep happening until 2035, because we bought them for five years in a row. $60,000 in 2002, 2003, 2004, and 2005. Now, due to my health concerns, I will probably only make it to 75, maybe 77. Wife; I plan she’s going to be till 95, her mother’s still alive, she’s in very good health. Household, we have a 5 year old Bernadoodle who still thinks she’s a puppy. My day drink is a Coors Light, but if I’m on vacation I’ll have vodka anything. Wife likes red wine or a Stoli Martini when she’s on vacation. Thanks, and hopefully you can spitball this for me. Thanks again.”

Joe: Vodka anything.

Andi: Vodka anything.

Al: Vodka anything. They drink Coors Light.

Joe: Oh, perfect. You start the morning with a little Coors Light.

Al: I don’t do that.

Joe: Vodka anything.

Al: I don’t do that, but I have been known to have Coors Light on the golf course in the afternoon.

Joe: Oh! He’s been retired for 15 years. So, at 50. Right.

Al: Yeah.

Joe: Congrats.

Al: That’s a great story. He’s got a lot of money to save.

Joe: $175,000 of taxable income.

Al: Yeah. Without working.

Joe: I’m just curious about what that breakdown is. Is it interest and dividends from the $6 million brokerage account? Are there pensions there?

Al: I’m guessing, right? I mean, if you just go at a 2% Dividend rate, which, you know, who knows, because a lot of its interest income could be 4%, who knows, but if we just go with that, that’s $120,000, just right there.

Joe: Alright, so his question is, should he do a conversion of $200,000 this year to get him to the top of the 24? Did you add up how much he has in retirement accounts?

Al: Well, it’s about $1.4 million. Some of that’s Roth. Let’s see, Roth is about $140,000. Let’s just call it $1.2 million, something like that. First of all, he’s going to have a lot of extra income starting in 2031, and that will be while he’s taking his RMDs, which will add to the top of that. We know that at the end of 2025, the tax rates are scheduled to go up. They may be extended. They may not. So he’s saying he could do a couple of $100,000 and stay in the 24% bracket. Maybe that’s not a bad idea. He’s got the funds to pay the tax.

Joe: Let’s say his IRA goes to $2 million by the time he has to take an RMD.

Al: It adds another $80,000 of income.

Joe: Then he’s got social security at that point. ’cause he is not taking that, that’s gonna give another $50,000 of income.

Al: And even without the I Bonds, a couple hundred thousand, he’ll be what is, I mean the future tax bracket will be at least 25%, if not 28. If we revert to the old rates. So converting to 24 seems like a good plan.

Joe: I think with most people, if he didn’t have the giant bag of cash of $6 million, we’d probably say no.

Al: Because it’s $80,000, which is a big number, for RMD, but it’s not like it’s hundreds of thousands.

Joe: But with his added income and then the RMD on top of the Social Security, plus all the interest and dividends coming from the brokerage account. Yeah. I think the 24% tax bracket is probably the right bracket to think about paying tax today. And then if he’s got a shortened life expectancy as well, the RMDs for his wife are not going to change. So now she’s going to be in a single tax bracket. Then you still have a large RMD for her for the next 20 years after that, plus the interest and dividends on a single bracket. They’re gonna pay a lot more taxes down the road, depending on what they really want to do with this money.

Al: I think so too, and then I might even continue that in 2026 if the rates get extended. If not, I’m not sure I would.

Joe: Yeah. All right, David, congratulations.

Andi: Hey, I have a quick question.

Joe: You’re retired. Aren’t you on vacation all the time? You’re kind of quasi-retired, and you’re on vacation all the time.

Al: If you go by me, the answer’s yes. Ha ha ha. But yeah, he’s got all these I bonds too. And that’s, that’s the way I bonds work. With I bonds, you can actually elect to be taxed each year or you can wait till the end, which is what most people do. And that’s what he did. And that’s, it’s great. You get that deferral for quite some time, 30 years, but then you gotta pay the piper.

Andi: So is that the deal with the I bonds that at 30 years you have to start selling them? Because he says he has to.

Al: It’s a 30-year term.

Andi: Got it. Okay.

Al: It happens whether you want it to or not. It’s a loan.

Joe: Basically, then the loan comes due and you get your money back.

Al: Right. Plus interest.

Joe: All right. It’s a good problem to have. You put $60,000 in, you get a couple hundred.

Al: I love it. I mean, a lot of us would love that problem.

Joe: Yeah, I know.

Roth Conversion & Qualified Charitable Distribution Strategy Spitball (Kimberly, IA)

Joe: All right. We got Kimberly from Iowa. She’s got a question on a Roth conversion. “She’s 61 years old, want to do Roth conversions over the next three years before the new tax rates go up in 2026. I was in the 24% tax bracket in 2023 and of 2024 and only doing part-time work, estimated at $12,000 a year. Okay. So she’s got about $400,000 in the taxable brokerage account, $450,000 in an IRA, $200,000 in a 401(k), another $200,000 in a 457, and $200,000 in bank CDs. Her monthly living expenses are $600,000.

Andi: Wow.

Al: I think that’s a typo. I think she meant $6,000.

Joe: $600,000, Kimberly, that would be $600,000 a month?

Al: That would be a record.

Joe: That’s Big Al’s living expenses.

Al: I can’t even spend that much.

Joe: That would be living large.

Al: That would be hard to do, right? Okay, so let’s assume she meant $6,000 a month.
Joe: All right. Question. “Should I max out the 24% tax bracket? Or, what would you recommend?” So she’s 61. Do single, or conversions over several years until my Social Security age at 67. She’s got no kids, paying for the conversions with the bank account. “Can I do all with the brokerage account instead? Also, possible plans to do QCDs at 70½. But this would help lower my RMD in the future. My goal is to convert my 401(k) to a traditional IRA this year and then convert from IRA to Roth IRA.” All right. So let’s see. Again, she’s single, her taxable income is $12,000 a year and she spends $6,000 a month.

Al: $72,000 call it.

Joe: So she needs a little bit of money to live off.

Al: She needs about $60,000 to live off of. And the assets are about $1.5 million, which is right there. That’s even without social security, right? So it seems like it’s okay.

Joe: But converting to the top of the 24% tax bracket, given the amount of money that she has in retirement accounts, seems a little rich to me.

Al: I would say so too. I mean, if you look at the single brackets, the top of the 22% brackets, $100,000 of income. She only has $12,000. She could think about that one.

Joe: Yeah, I would convert over time. She wants to do QCDs as well. I would be really careful about doing giant conversions.

Al: I would too. In fact, based upon the fact that she, assuming she doesn’t need all this money. Usually when you do a QCD, Qualified Charitable Distribution, at 70 ½ and can count for your required minimum distribution at either 73 or 75 depending upon your age. That’s a good way to go if you’re charitably inclined and don’t need the money because you don’t have to pay tax on it. But if you need the money, you need the money.

Joe: From a Roth conversion perspective, there’s a few things people need to think about from a strategy perspective. Is that a lot of times, when we recommend or talk about Roth conversions. It’s to help people get more diversified from a tax perspective in their retirement years. Because most people have a bulk of their savings in their 401(k), IRA’s, 403(b) accounts in all of those dollars are going to be taxed at ordinary income rates. So then they have social security, they might have a small pension, they might have interest in dividends. And then all of a sudden these RMDs might kick them up into a higher tax bracket, or If tax brackets go up, there could be an arbitrage here by taking advantage of lower tax rates today.
With her, unless she does spend $600,000 a year, which I don’t think she does.

Andi/Al: A month.
Joe: Yeah, a month. Well, you want to be strategic to say, all right, well, what is my RMD tax going to be if I don’t necessarily need it? And she’s already telling us, well, hey, I might just give it away to charity anyway. So the tax on your RMD is going to be zero.

Al: Right. If you do that.

Joe: You look at what tax bracket you’re in today, what tax bracket you’re going to be in the future. But she was in the 24% tax bracket while she was working, not necessarily while she was retired.

Al: Good point and we don’t know what her social security is, but here’s what I think I might do based upon the facts in front of us is the 12% bracket goes to $47,000 plus you got the standard deduction of about $15,000. So let’s call it $60,000. $60,000, she makes $12, 000. So she could do a conversion of both. $40,000, $45,000, something like that. Stay in the 12% bracket, get a bunch converted in a lower bracket. Based upon what I know about her, that’s probably what I might do.

Joe: She’s got $800,000 in retirement account, roughly. So over the next four or five years, you get $40,000 out. That’s a few hundred thousand dollars out of the $800,000, you’re going to probably get a third of it out.

Al: And even if the rates change back to what they were, then the 12% bracket goes to 15%. And it’s not that bad. I would still keep doing it.

Joe: Yup. Some people get all rambunctious. This one guy said, “well Joe told me to rip the Band-Aid off. So I’m going to convert like $4 million.” It’s like, wait a minute, hold on.

Al: Let’s be sensible here.

Joe: Yeah. I’d love it. Right. Yeah. Anyway, you’ve got to be sensible. All right, Kimberly, congratulations on your success here.

Al: Fantastic.

Joe: I would slowly kind of bleed this thing out. So, all right.

Should I Take the Severance Package Now at 59 and a Half or Work Until Age 63? (Blake)

Joe: We got Blake writes in. “Hello, I found your videos on YouTube. Appreciate your philosophy and approach to retirement planning.”

Al: Well, thank you, Blake.

Joe: We have a philosophy on retirement planning.

Al: I think.

Joe: Is it a philosophy?

Al: It’s very simple. Spend less, save more.

Joe: I don’t know if it’s a philosophy.

Andi: Convert to Roth.

Al: Convert to Roth.

Joe: It’s just really good planning.

Al: Invest globally in diversified low-cost funds.

Joe: “I’m 59 ½, single, and reside in Florida. My company is downsizing, I might be offered a little severance package, if I’m willing to retire right away. The severance is two weeks pay for every year on the job. I started in the company on February 1st, 1988. Wow.

Al: Wow, I happen to know that was 36 years ago because that’s the year I got married.

Joe: Date of my birth.

Al: And we celebrated our 36th anniversary in April.

Joe: It’s close to the date of my birth.

Andi: Give or take a decade or two.

Joe: Yeah, give or take a couple decades.

Al: A Decade? That’s a stretch.

Joe: Yeah.

Al: Add a little more,

Joe: Oh, hey now. “I had not planned to retire.”

Al: I happen to know you just had a birthday.

Joe: Yes, I did.

Al: I’m not gonna divulge which one.

Joe: “I had not planned to retire until 63 or beyond, but maybe this package should be considered. Okay. I’d like to know your thoughts.” All right. So what’s the number here? He gets two weeks pay for every year on the job. He’s been working for 36 years.

Al: So that would be 72 weeks.

Joe: His base salary is $150,000.

Al: Call it $180,000, $190,000, something like that.

Joe: So he’s making $150,000, average bonus is $40,000, rental property annual income is another $40,000. He gets an interest income of another $30,000. So he spends $50,000 and he’s making plenty of income. Alright, retire. You’re good. Take it.

Al: We think, Blake, you already know the answer.

Joe: Alright, Blake. Good. Take that job.

Al: You are financially independent.

Joe: 1988. You’re like, hey, Blake. It’s time to go, bro. You’ve been here 36 years. He’s got $2 million in a retirement account. He’s got $650,000. Come on Blake. You’re killing the game.

Al: Let’s call it $2.5 million at Fidelity. Got money at PNC. Another $100,000 plus. He’s got pensions and Social Security.

Joe: You got millions!

Al: Which more than covers living expenses.

Joe: Do what you want to do, Blake.

Al: Yeah, have fun. You’re good. Take the severance if you get offered. That’s a great deal. That’s a year and a quarter-ish of pay.

Joe: He wants to spend $50,000? So, that’s like three years of

Al: call it three. Almost four.

Joe: Four years of living expenses with the severance.

Al: Plus you don’t need it. So, yeah. Go ahead. Have some fun. You’ve worked hard for 36 years. That’s probably just about a record in today’s life.

Joe: Do you think Blake knows how to have fun? We gotta get him out there.

Al: Maybe he’s been working so hard.

Joe: He’s been grinding since 1988. When was the last time we got someone who’s been at the same employer for almost 40 years?

Al: Yeah, I don’t recall.

Joe: It’s been years since we’ve seen, met, talked. So, congratulations for your longevity and loyalty to this firm.

Al: That’s a rarity to have someone basically company man the whole, the whole career.

Joe: Feels like I’ve been here for 35 years, but we’re almost going on 20.

Al: Yeah. We’re getting up there, aren’t we?

Joe: I know. So. All right. Congrats, Blake. Yeah. Take the severance.

Al: We’re both young men when we started this company. Especially you.

Joe: I was just right out of high school.

Andi: If you decide to take a new gig after taking that severance, compensation options may be a lot different than they were when you started working 40 years ago. Understanding RSUs, NQSOs, and ESPPs can be like learning a whole new language. Register for our free Equity Compensation Basics Webinar on Wednesday, July 24 at noon Pacific, 3pm Eastern. Ian Barr, CFP®, MBA from Pure Financial Advisors will define the options that may be offered in your new compensation package and explain how they work, so you can negotiate the benefits that will help you maximize your earnings and meet your long term financial goals. Get all your equity compensation questions answered live in this free webinar. Just click the link in the description of today’s episode in your favorite podcast app to sign up to attend.

Is My Tax Loss Harvesting Transaction a Wash Sale? (Patrick, Vancouver, WA)

Joe: “I’m 47 yo. My wife’s 46 yo. No pets. A 17 yo daughter. We both drive Tesla Model Ys. Drink of choice. Me, stout. Wife, lemon drop.

Al: Now that we got that cleared up, is there a question?

Joe: I doubt it. I haven’t read that far. Q.

Al: Oh there’s the question.

Joe: Oh, question. Thank you for that, maybe you should Q, here’s my question.

Andi: Here’s my Q.

Joe: In my brokerage account, while tax loss harvesting and improving my expense ratios, I sold a high expense ratio fund that I could harvest a loss and move into a lower expense ratio fund the last week of the month. A day or two later, the month’s dividend was deposited into my account as a new purchase of the same fund I just sold. I immediately sold it. Is that a wash sale rule? Cancel my lost harvest? Thank you for the podcast. Vancouver, Washington is where Patrick’s from.”

Al: There’s a rule, right? Which is if you have a security at a loss, whether it’s an individual stock or mutual fund or index fund, if you sell it at a loss, which you can do, you can’t buy that same stock or mutual fund within 30 days. Now, when you get a dividend, like most people with their mutual funds, index funds, they reinvest their dividends. And when you do that, that’s counted as a purchase. And the answer, Patrick, is yes, it does affect the wash sale rules, but only to the extent of the dividend that you purchase. So let’s just say you sold a hundred shares and you got a dividend of five shares. Okay. So then 5% of your loss, roughly, if you use the average cost basis is disallowed. Because you violated the rule, but the other 95% would be okay.

Joe: Let’s break this down a little bit more just for my layman purposes here. So tax loss harvesting is a strategy that if you have money in a brokerage account, this doesn’t work for retirement accounts.

Al: We have to be very clear about that because people want to do that in their IRA and it doesn’t make any sense.

Joe: Sometimes when people hear, well, why would I want to sell when it’s down? You know, I thought you’re supposed to buy when the market’s down and sell when the market’s high. And that is very, very true.

Al: Yeah. In a perfect world, that’s what you would do.

Joe: Yes. But there is a tax strategy that you might want to consider. It’s called tax loss harvesting, where you can harvest losses within the overall brokerage account. So then any future gains would be offset from the losses that you harvest. For instance, you have a mutual fund, XYZ Mutual Fund. It is down $10 a share. So you would sell that. XYZ Mutual Fund, but you wouldn’t go into cash. You’re not selling out because the market’s down. You would just buy something similar. It can’t be identical. It has to qualify for a couple of different rules, but you get the gist. You’re still in the market.

Al: So you sell one mutual fund or an index fund or stock and buy another one.

Joe: What Patrick did, he’s like, Hey, I have this mutual fund that I’ve been trying to get rid of and it’s a really expensive fund. Hey, it’s down in value. I’m going to sell it and I’m going to replace it with another fund with a lower expense ratio. There’s some differences that qualify, so now he has a loss on his tax return, but he bought the same day into a different fund. So he’s still in the overall market.

Al: And that’s okay

Joe: So when the market now recovers. Let’s say he sells another fund at a $10 gain. Well, he banked a $10 loss So his gain in his loss would offset dollar for dollar and he would pay no taxes on that overall exchange. So tax loss harvesting is a huge tax benefit for people that have monies in non-retirement accounts. And so he’s doing some really savvy things. I guess that’s the word of the day. Savvy tax planning here. But the IRS says, hey, this is a pretty good deal for you, you can’t buy that same fund back. There’s a 30-day wait period to buy the exact same investment back. But what happened with Patrick is like, oops, A dividend was distributed when he was right in the middle of this transaction, and it bought back the same fund, but it was only a few shares of that fund, is what we’re saying.

Al: Yeah, only a few shares, and so that was a purchase that does violate that wash sale rule, because you bought within 30 days, but only, like I said, to the extent of the shares that you got in the dividend. So most of your tax loss harvest will be okay. It’s just whatever, whatever percentage, right? A number of shares that you got in a dividend versus the number of shares that you sold. So I guess another thought about this is, if you’re really wanting to do this perfectly. Before you did this transaction selling at a loss, you would turn off the dividend reinvestment in your mutual fund or index fund and then sell it and you wouldn’t have this problem. But it is, it is an issue. You know, another thing I think is interesting on tax loss harvesting is, if you can’t buy a substantially identical Fund, or, you know, you can’t buy the same stock. You can’t sell Home Depot and buy Home Depot.

Joe: Buy Home Depot and buy Lowe’s.

Al: Lowe’s. If you sell an S&P 500 index fund, can you buy another S&P 500 index fund? Probably not, because they’re substantially identical.

Joe: They’re identical. You could probably buy a total U. S. stock market fund.

Al: Right. You could probably do that, but what’s interesting to me is the IRS has never really issued clear guidelines on what’s substantially identical, so it’s somewhat up to you, your opinion and thoughts. Just don’t go crazy.

Joe: Yeah, because let’s say if he had a fund, well, let’s say if it was an actively traded mutual fund, which it’s probably because if he has a high expense ratio, that could have a broad. Array of strategy within the fund and he bought maybe the S&P 500. I think that’s all right. But like you said, we see people say well here I’m gonna sell this Vanguard S&P 500 fund and I’m gonna buy the Charles Schwab S&P 500 fund, SPY Or I’m gonna sell the mutual fund and buy the ETF. You gotta be careful there.

Al: Gotta be careful. The other thing in this scenario, which is, it’s just unfortunate, but usually when you violate the wash sale rule, you don’t get your loss, but you get your higher tax basis in the security that you bought. But in this case, you already sold it, so you don’t even own it. So I actually think you’re out of luck on that small percentage of the loss that you didn’t get.

Joe: All right, Patrick, hopefully that helps.

How Important is International Stock in a Diversified Portfolio? (John, Seattle, WA)

Joe: We got Seattle, or John from Seattle. “Hey, Joe, Al and Andi, love the show and your passion for Roth.

Al: There it is, deep passion. Passion for Roth.

Joe: I have such a deep passion for Roth.

Al: You do have passion for Roth.

Joe: I do.

Al: Rip the Band-Aid.

Joe: “I listen to your show every week on my commute, and I’m hoping you can help me with a question. I’m driving a boring SUV, and my wife drives a Tesla, and neither of us drink. We are both 42 years old. I earn $18,000 every two weeks.” Really? You want to give me your bi-weekly income? Oh my god. This is a first. Well, let’s see. I gotta multiply that by…

Al: It’s over $400,000, I’ll put it that way.

Joe: I make $18,000

Al: every two weeks.

Joe: Every two weeks. I make $18,000 every hour.

Al: What do you make every two weeks?

Joe: I have no idea.

Al: Me neither.

Joe: Oh, okay. “And she earns $4,500 twice a month. Oh God. Now we got bi-weekly and bi-monthly.

Al: That I can do. $9,000 a month. Call it $120,000 a year.

Joe: Uh, John. He needs to have a drink. “We spend $53,000 each quarter.” I didn’t bring my calculator. Do you have the math here, brother? Can you help me out? Here’s the rules, folks. You gotta give me annual numbers.

Al: I gotcha. So, he makes $450,000, she makes $110,000. So that’s $560,000. And they spend, let’s call it, $220,000.

Joe: Alright, thank you. Okay. And expect to reduce this by 80% each day for the, no I’m kidding. “We spend 53,000 each quarter and expect to reduce this amount by $80,000 in retirement. I’m adding about $850 per paycheck to my 401(k) plan, weighted a little more towards the Roth than to the traditional. She doesn’t have a Roth option and averages $20,000 per year in the 401(k) savings. We each do backdoor Roths to max out and we do the same with our HSAs. Currently, we have saved around $870,000. 80% of that is pre-tax every three weeks! We make a contribution of $1,000 to our kids college fund. We plan to retire at age 60, if possible. My question is, how important is it to have international stock in our portfolio rather than U.S. stock?

Al: We could have gotten right to that.

Joe: Oh my God, John!

Al: Everything else is not terribly relevant, except how much you have invested.

Joe: I’m just thinking about, oh my God, if a train is going

Al: Did you ever get those questions right?

Joe: Oh my God, at 200 miles an hour, when it leaves Tulsa, every city, oh my God.

Al: Oh yeah, those are ridiculous questions.

Joe: Okay, yes, John, invest in international stock, please.

Al: Yeah, and here’s the reason. The reason is international stocks tend to go up and down at different times than the U. S. market. So it just gives you a little bit more stability. And however, you know, you look at the last decade or more, International stocks have not done that well, and people will say, well, why international? Well, 10 years before that, from 2000 to 2010, international did quite well, and the U. S. market actually for a 10 year period went down. So you want to have some of both just to kind of even out your portfolio returns.

Joe: Yeah, I think a broad rule of thumb, which I don’t think anyone really cares for, But 50/50 of your stock portfolio is probably the right starting point, but I think most people have a home bias.

Al: Yeah, most people do, myself included.

Joe: And so it’s like, all right, well, maybe I want 60% or 70% of my stock allocation towards U.S. stocks. And 40% or 30%. Yeah. So, but yes, you want to make sure that you have a globally diversified portfolio, and then you want emerging market stocks. So like in the international sector, there’s really good companies that are not in the U.S. You can buy value international stocks, you can buy growth international stocks, you can buy small company international stocks, you can buy large company internet. So you still want to be broadly diversified in your international stock selection. And then you can go into emerging markets, you can have small, you can have value, you can have growth. So depending on how detailed that you want to get. But I think from a very high level, you could just say the total international stock market, I want 20% allocation to my stock portfolio allocation. And then from there, you can toggle it back and forth. But yes, I guess that answered this question. And then you want to add it biweekly. But every other quarter, then you do a rebalance.

Al: With your paycheck, bi-weekly. That’s true. Check it four times a year. Make sure you’re in balance. All good.

Joe: Thanks, John. Good sport.

Andi: With the money you have saved right now, will you be able to retire at age 60? 65? 70? Never? How would a market decline affect your plans? Doctors Joe and Big Al are in the house on Your Money, Your Wealth® TV with your Retirement Rescue Plan! Check it out in the podcast show notes, comment on YouTube, and make sure you download the free companion Retirement Rescue Guide. This special offer is only available for a very limited time, you’ve gotta download it by this Friday. Revive your retirement and learn how to go from just barely surviving to thriving! Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, you’ll see the TV show, the guide, and other free financial resources – like the Investing Basics Guide and 10 Steps to Improve Investing Success – right there before the episode transcript.  

At What Marginal Tax Rate Should Roth 401(k) Contributions Stop? (Brian, NC)

Joe: All right. We got Brian from North Carolina. “Hey, Joe. Big Al. Writing from the great state of North Carolina.” Tarheels. Michael Jordan went there, you know?

Al: That’s actually one of the few states I haven’t been to, but I want to.

Joe: That’s on the list.

Al: That’s on the list.

Joe: Okay. “My wife and I don’t drink much alcohol, but, uh, I love kumbacho, kombuchay,”

Al: Kombucha,

Joe: Kombucha, “I drive a Toyota Corolla. I’d like to know your thoughts on what marginal rate to stop doing Roth 401(k) contributions. My wife is 30, I’m 30, just got married in February,” congratulations. “I found that we are fortunate enough to land in a combined state plus federal 28.5% tax bracket. After some recent promotions, I make about $140,000 a year working for the federal government. She makes $155,000 a year working for a tech company, plus she gets some RSUs. Do you think we should do all traditional 401(k)? And how would you approach this decision? I see folks online, regular, recommend traditional 401(k) since people generally land in a lower tax bracket in retirement. We’re out of contact.” He’s going to have a pension. I knew this was coming. “I’ll have a first pension and retirement of about 40% of my salary, which will push up our taxable income. I’ve also been able to stock away a lot of Roth balances before reaching this bracket. Thanks for taking my question.” All right, Brian.

Al: Great question.

Joe: 30 years old. Just got married. So they make a really good income.

Al: Yeah. Call it $300,000.

Joe: 28% tax bracket combined. So $300,000. So they’re in the, what, the 24% tax bracket?

Al: 24% bracket. Yep. So what do you think?

Joe: At 30 years old, at 24% tax bracket? Yep. I would go all Roth.

Al: 100 % Roth. Yeah, and here’s why. The 24% bracket actually goes to $383,000. We’ll call it $380,000. And then you’ve got a standard deduction of $29,000. We’ll add those two together. So roughly $410,000 of income allows you to stay on the 24% bracket at age 30. And when your income or, specifically your wife’s income will probably go up. If you’re working for the government, maybe there’s a certain ceiling, but still your income, joint, will probably go up, go ahead and do all Roth right now. Once you get to the point where you’re broaching the 32% bracket, I might think.

Joe: Well, uh, yeah, I think over the next couple of years, I would go 100 % all Roth.

Al: Yeah, agreed.

Joe: And then see what happens with tax brackets. And then also, you gotta take a look at her RSUs. If she gets giant RSUs, you know, one year the tech company does really well. And then that pushes you up into a higher bracket than the 24%. Then yeah you probably want to switch that up. And say, all right, well, here we have to shelter some income.

Al: and that’s tricky though, because you’re doing your contributions during the year and you may not know till later in the year. So it makes it a little tricky. So you do sort of have to forecast a little bit, but if you think you’re going to go into the 32% bracket, I might take a little pause, but you’re right, Joe, the rates may be totally different in 2026. They’re scheduled to be different. So you just kind of have to watch that.

What Impact Will Our New Home Have on Our Retirement Spending? (John in the DC)

Joe: Yeah. All right, we got John from D. C. “Dear Al and Joe, I’m 57, my wife’s 59. We live in D. C. and drive a 2018 Toyota RAV4 and a 2019 Honda Accord. We are a beer and bourbon couple, but do enjoy a great bottle of red, especially with steaks. All right, we have a combined income of $450,000 a year. My wife plans to retire at age 60, and I would like to join her in 2 to 3 years after that. We have a net worth of $4.6 million today.” Wow. Way to go, John.

Al: Fantastic.

Joe: “We have $500,000 in home equity, $3.3 million in taxable retirement accounts, and $700,000 in Roth accounts. We have $50,000 in our brokerage account. At retirement, my wife will receive a pension of $50,000 a year, and we both plan to take Social Security at 62, which will be $68,000 a year combined. Our retirement income goal is $180,000.” Okay. All right.

Al: They got about $4 million liquid at 60. Yeah.

Joe: All right. We’re pretty close there, bud.

Al: Yeah. I think that works.

Joe: “We will likely have an opportunity to purchase a Delaware waterfront family property in the next 24 months for a total of $1.2 million for our new retirement home. Can you spitball what impact this purchase withdrawal might have on our retirement spending goal of $180, 000 per year? Also, would you structure the withdrawal to minimize the tax liability? We are concerned about the sequence of withdrawals as well. Thanks for all you do.” All right. John, congrats. Little Delaware retirement family property. Are they going to live there full time or is this going to be kind of like a summer gig?

Andi: It says their new retirement home.

Al: Yep. It does say new retirement. So let’s assume they’re going to sell. So they’re going to need $700,000 from the portfolio.

Joe: I would take a note.

Al: Well, and no, I’d take a note, I’m just saying they have $500,000 of home equity. Yeah. I mean, yeah, you’re right. You can take a note. I’m just going to go simple right now because they’re probably going to buy new furniture and things like that. The $4 million could become $3 million after they’re said and done, unless they take a bigger note, which maybe they should. But the trouble with that, Joe, right now is that interest rates are so high on mortgages. So it’s a little tricky. So you got your calculator out, so while you’re doing that, I will continue to talk.

Joe: So, alright, here’s what I did. He’s gonna buy the $1.2 million dollar retirement house. He’s gonna sell his DC home.

Al: So, $500, 000.

Joe: $500,000 and We’re gonna assume that there’s no tax on that home, that they qualify for the 121 exclusion. So, that $500,000 of home equity is gonna come to him tax-free. Take the $500,000, put it down, he’s got a $700,000 note. I ran this at 7%. It’s gonna add another $56,000 a year to his expenses.

Al: Yeah. But you’ve got closing costs on both ends.

Joe: Let’s not get all technical, Al. My God, this is called a spitball. It’s not a retirement analysis.

Al: They’re going to buy new furniture.

Joe; Just because you refurnish every house that you’ve purchased, every two years.

Al: Okay. Let me, let me be quiet. You continue.

Joe: Okay. So he’s going to need like $240,000 a year. So $240,000 a year at 4% is going to be $5 million

Al: And he’s got four.

Joe: He’ll need six. He wants to retire when?

Al: Age 60,

Joe: No, no, no.

Al: Oh, his wife plans to retire, so next year.

Joe: Okay, $240,000. What’s his fixed income?

Al: You gotta take away, let’s see, $50,000 pension. So take that away, even before Social Security.

Joe: Okay, so $50,190, and then what’s Social Security?

Al: $68,000 if they take it, but it’s 62.

Joe: Okay, we’re gonna say $70,000, minus there, 120.04 divided by there, he needs $3 million liquid. You take 4% of $3 million is gonna cover the $120,000, but, oh, you got a closing cost, realtor fees, lawn maintenance.

Al: No, I think it works,

Joe: summer house, lawn furniture.

Al: Alright. Alright, mister. Let me

Joe: swimsuits

Al: You do, it’s going to be on the waterfront, you gotta get a boat.

Joe: Oh my God, the boat insurance.

Al: So, I agree with you. I think this works. Here’s my comment though, I’m not sure I would be taking all my social security at 62.

Joe: Yeah, me neither.

Al: I, at least at a minimum, I would take the higher benefit and stretch it out just because then that’s more of a guaranteed income for life for either one of you; whoever survives the other that’s probably what I would think about but yeah, I think this does work

Joe: I would take a note and then you could always refinance down the road when hopefully interest rates go down I don’t know. They could always go up to. Or if they’re like, you know what? I don’t want to do this. You take the $3.3 million in retirement accounts. You take $700,000 of that. That’s $1 million bucks, just because of the tax that you’re taking from there.

Al: That’s true.

Joe: So then you think about, alright, does it make sense for me to pay interest, or does it make sense for me to pay the IRS by taking a huge lump sum out to be debt-free?

Al: Yeah, when you think of it that way, 100 % agree, because I was, I wasn’t even thinking about the money’s in the retirement account.

Joe: Yeah, most of it’s all there.

Al: Yeah, It’s all there and you don’t want to touch your Roth accounts. You worked very hard to get it in the Roth. You want that for your retirement. So yeah, you would need to finance and that does make sense. Yeah. I agree. I agree with you. You just watch the rates. As soon as you can refinance to a lower rate, hopefully at some point, then you do that.

Joe: Yeah. And I don’t know, $180,000 of living. You know, you probably do that for, I mean, that’s a, it’s a pretty good lifestyle.

Al: It is. Yep.

Joe: Probably do that for 10, 15 years. You probably, your lifestyle’s gonna change things, I don’t know. It’s close, it’s tight, but of course, you gotta worry about those, those ancillary fees.

Al: That, lawn furniture.

Joe: It’s gonna blow you up. It’s gonna totally blow you up.

Al: Oh, you want new pavers. Oh, you want a new patio. Oh, you need, you need.

Joe: Al, I totally agree. I’m sitting in that same boat. I thought if anyone could relate to it.

Joe: I can relate to it a 1000%, it just makes me upset. So that’s why I don’t want to think about it.

Al: Got it.

Joe: All right. That’s it for us. Appreciate everyone hanging out. Al, it’s good to be back. We’ve been on a little hiatus for a couple of weeks.

Al: Yeah. It’s good to be back and, and, and good that you’re back. Welcome back.

Joe: Andi, thanks for holding down the fort.

Andi: Hey, thank you. It was fun. We had a good time with it.

Joe: All right. Okay. Well, man, I’m sweating.

Al: We’re back in the saddle.

Joe: It’s time to go. Yeah. All right. We’ll see you guys next week. Cheers. The show is called Your Money, Your Wealth®.

Andi: Joe and Big Al are back, and so are The Derails. We’re talking about the fellas’ vacations, Brewster’s Millions, and of course, we’re drinking in the Derails at the end of the episode, so stick around.

This is Your Money, Your Wealth, your podcast! If you enjoy YMYW, tell your friends and help us reach more listeners like you. Don’t forget to leave your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, YouTube, and all the other apps that let you do that like Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Podcast Addict, Podchaser, Podknife, and Spotify. We’re on all of ‘em!

Your Money, Your Wealth is presented by Pure Financial Advisors. To really learn how to make the most of your money and your wealth in retirement, you need more than a spitball: schedule a no-cost, no obligation, comprehensive financial assessment with the experienced professionals on Joe and Big Al’s team at Pure. Click the Free Financial Assessment banner in the podcast show notes 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 your couch. No matter where you are, the Pure team will work with you to create a detailed plan tailored to meet your needs and 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.

The Derails

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