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
October 26, 2021

Learn the basics of Roth IRA conversions, how to calculate the tax on a Roth conversion, when to pay the tax, and more. Plus, ideas for what to do with unused 529 plan education savings funds, rules for 401(a) accounts, understanding the alternative minimum tax, the latest tax proposals, how to calculate employer solo 401(k) contributions – and that’s just the tip of the iceberg.

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Show Notes

  • (00:56) Calculating Paying Roth Conversion Tax (Liza, San Diego)
  • (10:32) Paying Roth IRA Conversion Taxes (Tammy)
  • (13:10) Backdoor Roth IRA Basis & Paying the Tax on a Roth Conversion (D, Irvine)
  • (22:51) Roth 401(k) Contribution Strategy (Jennifer, Philadelphia, PA)
  • (32:02) What Should I Do With Left Over 529 Money? (podcast survey)
  • (34:05) Are There Special Rules for 401(a) Plans? (podcast survey)
  • (37:03) Can You Have Too Much Money in Ally Bank-Like Accounts? (podcast survey)
  • (38:20) How Should I Calculate Employer Solo 401(k) Contributions When Income Varies? (podcast survey)
  • (39:43) Could Big Al Please Explain Alternative Minimum Tax (AMT)? (podcast survey)
  • (41:19) Any Tax Law Changes That Impact Retirement Income Strategies and Estate Plans? (podcast survey)
  • (42:45) Cryptocurrency Taxation: Treat Like Additional Income or Not Include It at All? (podcast survey)
  • (44:48) Does Income From Investments Affect My Tax Bracket for Roth Conversion Purposes? (podcast survey)

Free resources:

The Ultimate Guide to Roth IRAsDownload more free guides

Power Up the Compound Effect: Tips for Financial Success

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LISTEN | YMYW Podcast #344: It Could Be Over for the Mega Backdoor Roth IRA

Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth® podcast #349, Joe and Big Al answer your questions about paying taxes on your Roth IRA conversions: how to calculate the tax, when to pay, and more. Plus, a couple months ago many of you completed the YMYW podcast survey to help us make this your favorite show. As a part of that, we asked what questions you’d like to have answered on the podcast. Today the fellas start diving into that grab bag, offering ideas for using 529 plan money, explaining 401(a) rules, the alternative minimum tax, and the latest tax proposals, calculating employer solo 401(k) contributions, but that’s just the tip of the iceberg. If you’ve got money questions, visit YourMoneyYourWealth.com and click Ask Joe and Big Al On Air to send them in as a voice message or as an email. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Calculating Paying Roth Conversion Tax (Liza, San Diego)

Joe: Liza writes in from San Diego, “Hi Joe and Big Al, I’m a new listener to your podcast and I enjoy listening to both of you. I retired in December of 2020 at 61 because I have to take care of my mother. My husband retired in 2015. We’re in the 12% tax bracket. You probably answered a lot of questions regarding Roth IRA.” No, this is the first one.

Al: Have we ever talked about Roth IRA conversions? First one.

Joe: “I would like to do a Roth conversion. Is it possible, please, to give me calculations on how much to pay federal and state taxes on a $60,000 Roth conversion? When I was planning to do a conversion at Vanguard, they were asking me about tax withholding and I don’t know how much. Another question is regarding my 401(k) and Roth 401(k). From my understanding, if I withdraw from my 401(k), I don’t have to pay federal taxes, but I have to pay state taxes. How much is state tax in California? My last concern is my Roth 401(k). Do I still need to roll over it first to a traditional IRA before I roll it into my Roth IRA? I thought federal and state taxes have been paid because it’s a Roth. I hope you’ll be able to answer my questions. Thank you for your time.” OK, we got a lot of stuff to unpack here. Really good questions and I’m glad you caught our show and so we can kind of save your life here.

Al: Because there’s a couple of things that are a little off.

Joe: So Liza wants to do a $60,000 Roth conversion. So she says, “my husband and I are in the 12% tax bracket.” The top of the 12% tax bracket for a married couple is roughly $80,000. And if you take out the standard deduction of $25,000, that gives you $105,000 that you could potentially convert and be in that 12% tax bracket if you have no other income on your tax return.

Al: Yeah, just making it real simple. And we know from experience, many of you use the itemized deductions since it’s generous and they took away the state taxes.

Joe: The standard state taxes on the itemized.

Al: Which is $25,000. In other words, if your total income is $105,000, including the $60,000 Roth conversion, then you’re going to be in that 12% bracket. So it’s not too difficult. 12% of the $60,000 is your number. So that’s $7,200. And then on the state side, it’s graduated, it’s a lot harder to calculate in my head. But let’s just say 7%. That’d be like $4,200. These are rough numbers. If you want to know for sure what you do is you get TurboTax, you plug in your numbers in TurboTax without the Roth conversion and then you do another version with the Roth conversion and see what the difference in tax is. And that’s how much you have to pay, if you want to get more exact on this.

Joe: Her question is, Vanguard’s asking me how much money that I would like to withhold in taxes. We would say 0. You want to pay the tax outside of the retirement account. So you’re $60,000, you want to convert, put 100% of that $60,000 into the Roth. Then you’re going to get a federal tax bill of roughly $7,000 next year, give or take. We don’t know what your other income sources are. It could be less. It could be more on federal plus state. So call it $11,00 total in taxes that you’re going to have to pay to get $60,000 in the Roth. So why would you want to do that? Why would you want to pay $11,000 to get $60,000 into the Roth? Because the $60,000 will forever grow 100% tax free. The $60,000 grows to $70,000, $80,000, $90,000. You pull it out, then you’re not going to pay tax. There’s no way around the tax. You’re going to have to pay that $11,000 in tax at some point in your life. So would you rather pay it now when tax rates are low and don’t have to ever worry about the tax again? Al and I believe that’s probably the right answer. You don’t have to convert all $60,000 either. Let’s say you just want to convert $10,000 and then your tax on that is $1,200. Maybe you want to convert $20,000, $30,000, do some small chunks over the next several years because you’re still pretty young. I believe she’s 61 years of age, so you still have multiple years until Social Security kicks in, depending on when you claim it. You have multiple years until your required minimum distribution. So that’s some ideas that we have for you in regards to converting.

Al: As a follow up to that, it’s better if you have money outside of a retirement account to pay the tax with that $11,000, and then you get the whole $60,000 into the Roth. If you don’t have money outside of retirement, you could do a withholding because you’re over 59.5. So at least there’s no penalty. But now you end up with $49,000 in the Roth instead of $50,000, so it can still make sense as long as you’re over 59.5. But that’s not the preferred method. The preferred method is to use other resources to pay the tax.

Joe: Second, you stated here “from my understanding, if I withdraw my 401(k), I do not have to pay federal taxes.” No, any dollar that you take out of the 401(k) plan, you’ll be subject to federal taxes and state taxes.

Al: That’s because you got a tax deduction when you put the money in, and so when it comes out, it’s fully taxable.

Joe: The Roth 401(k), you would move that directly into a Roth IRA. Don’t put it into an IRA, because that would blow you up. Because then to get it out of the IRA, you have to pay taxes on it and just the mapping on it… you could make a mistake there. So just make sure you put a Roth 401(k) into a Roth IRA.

Al: If you think of the sequence, so a Roth 401(k), if you want to go ahead and transfer that to a Roth IRA, that’s fine. No taxes, no problem, no issue. If you have a regular 401(k) and you want to transfer that to a regular IRA. No problem. You’re basically deferring the taxes in one vehicle or another. The only time where there’s a problem is when you have a regular 401(k) and you put it directly into your Roth IRA. Well, that’s called a conversion. You’ve got to pay federal and state taxes on that.

Joe: Hopefully that answers your question. Do you want to roll the Roth out? I would, depending on your plan. Because let’s say you have a Roth 401(k) plan with a Roth provision and it’s a pre-tax, or standard provision, and you have $50,000 of Roth and $50,000 pre-tax and you want to take $10,000 out of the account. Sometimes you can’t elect if you want to take Roth or pre-tax, they’re going to give you a pro-rata. So $5,000 is going to come out Roth. $5,000 is going to come out taxable. And so the whole idea of tax diversification, of having money into a Roth, having money in pre-tax, having money into a brokerage account, is for you to be able to control your distributions when you pull the money out to create your income to keep yourself in the lowest tax bracket possible. Most individuals have all of their savings in a 401(k) plan. They have very little control over their taxes because it’s all taxed at ordinary income rates. You pull $100,000 out of your 401(k) IRA, you’re going to be taxed federal and state on the $100,000, depending on what tax bracket you’re in. But let’s say I want to pull out $100,000. Well, I might only pull out $60,000 from my 401(k) plan to keep me in the 12% tax bracket. Then I’m going to pull another $40,000 out of my Roth IRA. I’m not going to pay any tax whatsoever. So I’m going to be able to control my taxes long term if I have that diversification. So Liza’s on the right track that she’s got a Roth IRA. She wants to do some conversions and she wants to be able to control her taxes long term. However, you’re getting confused a little bit on the rules. So be careful. Once you make these mistakes with the IRAS or 401(k)s, sometimes it’s irrevocable. You blow yourself up. We’ve seen people take huge distributions out of retirement accounts to purchase homes.

Al: Or to pay off a mortgage.

Joe: They took $400,000 out of their 401(k) plan when they retire to pay off their mortgage.

Al: They’re excited. They come see us and they say, “Look what I did” and we say, “Whoops. How are you going to pay the tax on that $400,000?”

Joe: “What do you mean? How much is it going to be?” Well, it’s going to be like $200,000. So what are they going to do? They’ve got to refinance their house to pull the money out to pay the tax next year. So be very, very careful with these accounts. Once Humpty Dumpty falls off the ledge there, it’s pretty hard to put him back together.

Paying Roth IRA Conversion Taxes (Tammy)

So let’s move on to Tammy. Tammy “made a Roth IRA conversion of $65,000 in 2021 because of my low income this year. Should I pay federal and estimated taxes before filing my 2021 tax returns so I don’t have to pay interest and penalties on this conversion? Thank you.”

Al: I would say, Tammy, probably. Which isn’t a great answer, but let me explain. So when you’re thinking about estimated payments, you have a couple of ways to avoid penalties. One is to pay in either 100% of last year’s tax,. A second way is to pay in 90% of this year’s tax. So if you’re telling me that your income is a lot lower this year, I’m assuming you’ve got less withholdings, maybe not enough withholdings to cover last year’s tax. So you probably will have to make estimated payments, and those estimated payments would start in the quarter that you actually did the Roth conversion. So let’s just say you did the Roth conversion in November, for example, then you would have to start making estimated payments on the fourth quarter estimated payment, which would be on January 15th of the following year.

Joe: It gets a little complicated, but $65,000, let’s say she doesn’t pay anything. The penalties wouldn’t be too severe as long as she pays right away.

Al: Let’s talk about that because people get so excited about penalties. And really, the way the IRS computes penalties is based upon an interest charge, and the interest rate is currently 3%, which isn’t a high rate. You might want to avoid it, but it’s not a huge rate.

The best way for you to pay the tax on your Roth IRA conversion might be different than for other listeners, so maybe don’t rely exclusively on an off the cuff YMYW spitball when making decisions that impact your financial future, your taxes, and your retirement. A free financial assessment with a CERTIFIED FINANCIAL PLANNER™ professional on Joe and Big Al’s team at Pure Financial Advisors is much more than a spitball analysis: it’s a deep dive into your current financial situation, your ability to tolerate risk, your retirement needs and goals, and many other factors to develop strategies to reduce your taxes and make the most of your retirement. Click the link in the description of today’s episode in your podcast app to go to the show notes and click Get an Assessment to schedule a no cost, no obligation financial assessment at a time and date that’s convenient for you.

Backdoor Roth IRA Basis & Paying the Tax on a Roth Conversion (D, Irvine)

Joe: Dee from Irvine. “Dear Joe, Al, and Andi. This is my favorite podcast and I look forward to the weekly drop on iTunes.” Oh, thank you, Dee. “2018/2019 we did backdoor Roth contributions for my spouse, who at the time had all his retirement assets either in a 401(k) for 403(b). In 2020, we rolled over his old employer 403(b) into an IRA. That same year, I mistakenly did a backdoor Roth contribution and paid the tax on almost the entire amount of $7,000 per their pro-rata rule. Since now all of his after tax IRA contributions are in his Roth IRA, is this traditional IRA after tax basis 0? Do I need to still file form 8606 moving forward? The total after tax traditional IRA contributions from 2018 to 2020 was $18,500. The first 2 years were straightforward backdoor Roth contributions. 2020 was the only year we had pre-tax IRA assets mixed with the after tax IRA contributions. Thank you, Dee from Irvine. My favorite drink is a glass of Justin Cabernet.” Here’s my question to Dee. She was doing backdoor Roth contributions, so she was making after tax contributions to the IRA and then converting them into a Roth IRA. Because it was an after tax contribution, the basis was the same amount as the contribution. So when they did the conversion, there was no tax. However, what happened was that they moved a 403(b) asset into an IRA, which triggered the pro-rata and aggregation rules in the conversion. So when she made that conversion, Al and this is what is kind of interesting to me, is that she said that they paid tax on the entire amount of $7,000.

Al: I think she said mostly. So presumably the 403(b) that rolled over was a large balance.

Joe: I agree with that. That’s what I was hinting at, too. But that was in 2020. And now she’s saying that all of the 403(b) money is now in a Roth. “I mistakenly did a backdoor Roth contribution and paid taxes on almost the entire amount of $7,000 per the pro-rata rule.” So she did the back door, or she made the contribution, and then she did the conversion and was like, Oops, I rolled that 403(b) into an IRA, so now I have to take a look at all IRAs vs. basis and non basis. And so basically, she said, I paid tax on the entire $7,000 conversion. So I agree with you, Al. And that’s telling me that that 403(b) was a fairly large balance because if it was a small balance, she wouldn’t have paid 100% tax on the back door. It would have been a lot smaller amount just because of how the pro-rata rule works.

Al: And in doing so, there still would be some tax basis left so still have to do the form 8606. And if you use TurboTax or your CPA does it, it’s actually an automatic form done by your computer.
So don’t worry about it, it’s real simple. If you’re doing it by hand, then don’t. Go get TurboTax or get a professional to help you.

Joe: If I read on, she goes, “Since now all of his after tax IRA contributions are in his Roth.”

Al: Yeah, so that’s all of his after tax, not that he did a Roth conversion on the big balance.

Joe: “Is this traditional IRA after tax balance 0?”

Al: It’s mixing two concepts, but I think what she’s saying is… Oh, so she’s thinking she could do the back door, she can’t.

Joe: She can’t, because of the rollover of the 403(b). She goes, “the total after tax traditional IRA contributions from 2018 to 2020 was $18,500.” Well she probably converted all of that already, hopefully. “The first two years were straightforward backdoor Roth contributions. 2020 was the only year we had pre-tax IRA assets mixed with the after tax IRA contributions.” So maybe she’s getting confused, where she’s got two IRAs. She’s got the one IRA where the 403(b) went in and then the other IRA where she was making the contributions and the conversions? So she was making after tax contributions in the other IRA and then converting them. And then they rolled the 403(b) into the other IRA and they were like, “Oops, now I gotta add up all of my IRAs and divide my basis into the total amount to determine what my tax free amount is.” And that’s the pro-rata rule. But if she converted 100% of that IRA, there is no basis in that IRA. You’re done.

Al: Yeah, if that’s what she did. But I’m guessing there’s still a large IRA out there, which means that you have the same problem year after year. So this is a problem with people that have IRAs and they want to do backdoor Roth conversion. It doesn’t work because of those two rules. The pro-rata rule and the aggregation rule. The IRS looks at all your IRAs as if it were a single IRA. You can’t separate it that way. And then they look at how much tax basis you have. So in this example, $7,000 contribution, you divide that into your total IRAs. Let’s just say $400,000. So probably only 2% or so of your Roth conversion would be tax free. The rest would be taxable. So you have to do that calculation. The only way that you get out of this is to roll an IRA back into a company 401(k) or 403(b) if you have a corporate plan that allows that. And something else that we should mention, Joe, a lot of people don’t realize that they do their backdoor Roth and then they pull their money out of their 401(k) or 403(b) before year end and think they’re fine because they did the backdoor Roth first. And the IRS says not so fast. It’s your IRA balances at year end that determined the aggregation and pro-rata rule. So just be careful of that.

Joe: So hopefully that helps. We kind of threw a lot of at you there, Dee. Did she have a follow up?

Andi: “Dear Joe, Al, and Andi. I have a follow up Roth conversion question. I understand the reasoning behind paying the taxes on a Roth conversion from an account outside of the IRA.
But if you wanted to do a conversion and did not have extra cash to pay the taxes, what is the process of paying the taxes on a Roth conversion from the IRA itself? Would you have to pay a 10% penalty as it may look like a distribution? Is there a way around this? Thanks, Dee from Irvine.”

Joe: Depends on your age.

Andi: See, this is what I was wondering in a previous question, she says that they did a backdoor Roth contribution and paid the taxes on almost the entire amount of $7,000. That, to me, just sounds like a Roth contribution. Which would mean that she or her husband are over 50.

Joe: Yeah, I think it was $7,000. But, you’ve gotta be over 59.5. If you’re under 59.5 and you do a Roth conversion and you pay the tax within the IRA, you will pay a 10% penalty plus tax. So, never worth it to pay the tax when you’re under 59.5.

Al: Yeah, let’s just do the quick math in California, Dee is in Irvine. Let’s say 24% federal tax, 10% penalties. Now you’re 34%. 9% state, California. So now you’re 43%. 2.5% state of California penalty. So now you’re about 46% tax. It doesn’t make any sense.

Roth 401(k) Contribution Strategy (Jennifer, Philadelphia, PA)

Joe: We got Jennifer, writes in from Philadelphia. “Hello, I’m obsessed with your podcast. This was the first show on personal finance that is not only beyond entertaining, but you provide such helpful advice. It’s great to hear different perspectives.” Well, thank you, Jennifer.

Andi: Beyond entertaining, what’s beyond entertaining?

Al: I would say that’s a pretty good compliment.

Joe: I’ve got to tell you, I just binge it. I can’t get enough of it.

Andi: What you? Yourself?

Joe: I’m kidding, I’ve never listened to this garbage.

Andi: Have you ever binged any podcast, Joe?

Joe: Yeah, not really binged. I’ve listened to like two episodes in a row.

Andi: I don’t think that counts as binging at all.

Al: And what was that? Was that a financial podcast?

Joe: No. It was called GOLF’s Subpar.

Al: How to make your golf game better?

Andi: How to make it subpar.

Joe: That’s my game. It’s very subpar.

Al: So you could relate to it.

Joe: Yes. “My husband (36) and I (38) will be receiving some cash bonuses in 2022 and I’m wondering if this should make us reconsider our Roth 401(k) strategy. Background: As of this year, my husband is currently maxing out his 401(k) savings into a Roth 401(k) at my request because I think accumulation, more savings, and Roth is better in the long term.” I would agree 100%, Jennifer. “But next year, due to all of these one-time payments we expect to receive, he thinks that switching back to the traditional 401(k) beginning in 2022 would be better so we lessen our 2020 tax liability. I have two questions for you. Do you agree that with the additional income, 2022 may not be the right year to do a Roth 401(k)? At our income level (indicated below), is contributing more or less to a Roth 401(k) a good retirement savings strategy? Note: we continue to max out our Roth IRAs. I understand, yet disagree with where my husband is coming from. I’m concerned that 80% of our retirement portfolios, the traditional plan, and given our ages, I’m not sure if that’s the right asset allocation mix. Here’s our numbers as of July 2021.” You think Jennifer’s like an engineer?

Andi: No, I think she listens to this show. She knows what asset location is. Nobody knows that, except people who listen to YMYW.

Joe: Super tight. Super smart.

Al: Yeah, she’s tight. I think she is an engineer.

Joe: Or she’s a CPA. I mean, this has Alan Clopine written all over it.

Al: CPAs don’t make as much as she does, I don’t think.

Joe: She’s like, “Well, here’s my numbers as of July 27th, 2021 at 2:15 p.m.”

  • Wife annual income* – $270,000
  • Husband annual income* – $210,000
  • Total Retirement Portfolio – $936,000
  • Brokerage Account (Schwab) – $200,000
  • HSA – $26,000
  • Money Market – $120,000
  • Debt (one car lease) – $765/mo.

Got a little car lease. “We are receiving $200,000 cash bonuses paid in installments February 2022 to August 2022. Again, this is only a one time deal. A few more facts about us. We live in Philly. Born and raised in the playground. Have no debt, no kids yet, no mortgage (we rent). We do hope to buy a house in the next 1 or 2 years. Our total expenses are $9,000 to $10,000 a month. Thank you so much for taking the time to review my question, Jennifer.”

Andi: I was totally expecting you to turn that entire thing into the Fresh Prince of Bel-Air.

Joe: I could’ve. So the total retirement portfolio is $936,000 but we don’t know what’s Roth or not. Wife is making $270,000, he’s making… so that’s a pretty healthy income.

Al: So $480,000 plus another $200,000 in bonuses. Let’s call it $680,000. Call it $700,000.

Joe: So they’re going to be paying instead of 35%, 37%. They’re in the 35% at $480,000. You know my answer.

Al: I know your answer. You know mine. The opposite. I would go with your husband, Jennifer. I would switch to the regular 401(k) because you’re in the highest bracket. And by the way, there is a tax proposal right now to increase the highest rate to 39.6% effective 2022. We don’t know if that’s going to pass or not, but I would probably go for the tax deduction just for this one time. And Joe, I think your answer is the opposite.

Joe: Totally. I mean, they’re young. They’re 36 and 38 years old making a mint. They’ve got already $1 million saved. It looks like they want to retire at a normal retirement age. They already have a couple million dollars saved at 35 years old. Are you kidding me? You double that? No, I go Roth all day long. They’re going to be in the 90% tax bracket once they have to pull that stuff out.

Al: So we disagree on that one.

Andi: He’s not even going to argue, he’s just going to say we agree to disagree.

Al: Yeah, that sounds right.

Joe: Jennifer, you and I are a lot closer in age than Big Al. By the time you retire, we’re going to be putting roses on them. So.

Andi: Oh wow.

Al: Jeez.

Joe: It got a little dark.

Al: Yeah, you did. That changed the tone here all of a sudden. You have to fix this in 20 seconds.


Joe: No, because he’ll be retired in Hawaii. What I mean by flowers, it’s a lei.

Andi: Oh, so you’re going to be putting a lei on him.

Al: Oh, OK. That was a good recovery.

Nice save, Joe! Hey, I want to make sure all our dedicated (or obsessed) YMYW listeners are taking advantage of all the other free financial resources we’ve got at YourMoneyYourWealth.com, besides the podcast: are you watching Joe and Big Al in action on the Your Money, Your Wealth® TV show? The latest episodes, like Power Up the Compound Effect: Tips for Financial Success, Money Saving Tips for Funding College, and Financial Planning Must Do’s Before You Retire are packed with great info, and, each episode includes a free downloadable companion guide. And if you enjoy all of this entertaining financial education, the best way to say thanks is by spreading the word: share your favorite YMYW TV episode on social media, forward our email newsletter to your Mom, or tell your friends to subscribe to YMYW in their favorite podcast app.

What Should I Do With Left Over 529 Money? (podcast survey)

Joe: We got podcast survey questions, Alan.

Al: Yeah, so we’ll probably do a little rapid fire.

Joe: I suppose, if you want to.

Al: I will say it’s fun to be here with you, live. Last week I was in a remote location.

Joe: It’s been a couple weeks.

Andi: It sounds so secret.

Al: I know. It was Hawaii for any of those that are wondering.

Joe: You look tan.

Al: That could be, but it’s probably burned.

Joe: No, it actually looks tan. You’re looking sharp.

Al: I used sunscreen every day, so I try to try to preserve my skin as I age.

Joe: Got it. That’s not one of the questions. Let’s dive in. We don’t have any names or anything on this, Andi?

Andi: No, these are questions that people sent in when they filled out the podcast survey where we asked them to tell us how to make the show better. We said, by the way, do you have any questions that you’d like answered on the show? So we’ve been actually sitting on these since the end of August, and I apologize for that. But we’re going to try and get through as many of these as possible now. And no, they did not give us their names because they wanted you to answer them without any influence on who they were.

Joe: Got it. Because we do that, often.

Al: We do. We sometimes make fun of people just because of their name.

Joe: Here we go. “What should I do with leftover 529 money?” 529, let’s define that. That is a savings plan that individuals or couples use for college. You can put money into the plan, that grows tax deferred, and when you use it for college expenses it is tax free. However, if you do not use it for college expenses, you will incur taxes on that and a penalty.

Al: You do. But the cool thing about 529 plans is you can change the beneficiary. So maybe it was for your child or your children and they didn’t need to spend it all. So then it can be for your grandchildren, should they come along. It could be for your brother or sister, for your nephew, niece, for your next door neighbor, or whatever.

Joe: Yeah, but most people don’t want to do that. Unless it stays in the immediate family.

Al: Well, yeah, it stays in the family. Or, a lot of people do this and don’t realize it. So they did it for their kids, but it’s like, Oh, wait a minute, I’m retired. Wouldn’t it be fun to take a few classes? That would qualify. So you can change yourself as the beneficiary.

Joe: Right. And if you just want to just blow out of it, just know that it’s taxes and penalties.

Al: Taxes on the growth only, plus penalty.

Joe: So let’s say you saved $100,000 and it’s worth $110,000. The $100,000 would come back out tax free because it’s after tax. The $10,000 would be subject to taxes and penalty? Or would the penalty occur on the $110,000?

Al: The penalty is on the $10,000.

Joe: And same with taxes?

Al: Correct.

Joe: So you could still get your principal back. So you’re only going to get penalized on… what is she laughing at?

Andi: I’m just about to remind you. Don’t forget, you can also go to a golf academy with this 529 money.

Joe: Well, there you go.

Al: It’s good that we have you, Andi.

Joe: So there you go. That’s what you can do with your 529 money.

Are There Special Rules for 401(a) Plans? (podcast survey)

“Are there any special rules for 401(a) plans? Do they behave exactly like a 401(k) and 403(b)?” Not necessarily. So 401(a) plans are still a retirement account or retirement plans offered by certain employers. The 401(a) plans, in most circumstances, are contributions that are done by the employer and that you have to elect what those contributions are in advance.

Al: In terms of how they’re invested?

Joe: No, in terms of the contribution.

Al: Okay. I thought the 401(a) was more like the 401(k).

Joe: Well, there’s that too. There’s multiple different flavors of the 401(a) plan. So let’s say, for instance, there’s a hospital in town that has a 401(a) plan that they can elect because they have a 403(b) and a 401(k) and a 401(a) plan. The 401(a) plan is an employer plan that they’re contributing to that the employee has to elect how much that they want to put into the overall plan when they start employment. So let’s say it’s 4% and then they can’t necessarily change it.

Al: So that’s different than a 401(k) plan, you can change it all the time.

Joe: A 401(k) plan is a defined contribution plan that is totally discretionary. A 401(a) plan, in other circumstances that I see, is very similar to a 401(k) plan, where it’s a defined contribution plan that you can elect how much money that you put in. But I think each plan is a little bit different. And off the top of my head I don’t know what’s the true difference of the Section A versus Section K in the 401 world.

Al: I did do a little reading, not much, just to get more familiar. And it seems like they’re generally pretty similar in terms of you can direct your own investments and so forth. The 401(a), that’s generally for nonprofits and school districts.

Joe: Hospitals.

Al: Yeah. 401(k) is for private companies. 403(b) is kind of a different animal there.

Joe: 403(b) is usually nonprofit as well, school districts and so on.

Al: But isn’t that more annuity based? I mean, that’s generally what the investments are?

Joe: Well, then there’s the 403(b)(7) where you can elect mutual funds.

Al: Got it. So there are flavors on that.

Joe: So initially, the 403(b) was like the TSA, the Tax Sheltered Annuity, for school teachers. But then it evolved into the 403(b)(7) as you can pick mutual funds.

Al: But I guess the concept is they’re relatively similar, right? You can put the same amount away in each plan?

Joe: Yes. The contribution limits are the same. 401(a) plans are generally offered by governments and nonprofits. So there you go.

Can You Have Too Much Money in Ally Bank-Like Accounts? (podcast survey)

“Can you have too much money in Ally Bank like accounts?”

Al: They’re probably talking about FDIC insured which is $250,000 per individual. But if you’re married, you could each have an individual account for $250,000. And believe it or not, I just looked this up, you could have a joint account for $500,000 on top of your two individual accounts of $250,000 each. And then if you have a partnership or corporation, you could do another $250,000. So it’s $250,000 per person, but there’s ways to get more in based upon different entities.

Joe: And then that’s per institution.

Al: Per institution, right. So let’s say you’re married and you do a $500,000 joint account and two individual accounts. So you’ve got $1 million protected. Then you’ve got bank number two, and do the same thing all over again. And the idea behind that FDIC is if the bank fails, the government steps in and pays it.

Joe: Yeah, but asset allocation is a totally different question.

Al: Yeah, that may not be the right asset allocation.

How Should I Calculate Employer Solo 401(k) Contributions When Income Varies? (podcast survey)

Joe: “How should I calculate employer contributions to my Solo 401(k) when income varies throughout the year? Also working remotely and trying to figure out taxes when providing services to multiple states?” Well, Al, what would you say the employer contribution would be? The match of the 401(k)? The maximum allowable is, you can put $19,500 as the employee contribution. The employer contribution would be a match based on the profitability of the overall organization.

Al: Yes, so let’s start with the $19,500 plus another $6,500 if you’re 50 and older. But you have to have that much income to be able to put that match in. So let’s start there. If you only have $10,000 of income, you’re limited to a $10,000 contribution. But $19,500 If you’re under 50, $26,000, if you’re over 50. So that’s the employee part. That’s relatively easy. The employer part, most times you don’t really know what the profits are until after the year end. And so the IRS allows you to make those employer contributions, and even employee when it’s the Solo 401(k), after the fact, all the way up to the due date of the return, which typically is April 15th. But when you extend your tax return, you can extend it if you’re an individual all the way to October 15 to make that employer and even employee contribution when it’s a solo 401(k).

Could Big Al Please Explain Alternative Minimum Tax (AMT)? (podcast survey)

Joe: Here’s one for you, Big Al. “Could you please explain AMT tax?”

Al: Yeah, how long do you have?

Joe: Let’s do it in 30 seconds or less.

Al: I’ll give you a little history lesson. 1969. There were 155 people that had adjusted gross incomes over $200,000 and paid no tax. So the government got all up in arms about that and said, “Wait a minute, there’s got to be a way to make them pay tax.” And the reason they did is because they loaded up on tax deductions. And so the IRS and government came up with a strategy to make them pay at least a minimum tax, that’s the alternative minimum tax.
And essentially, the rules between the regular tax system and the alternative system are similar. It’s just that not all items are deductible. The main one that’s not deductible is state taxes and property taxes on the alternative minimum tax system. And in the past, when state taxes, property taxes were fully deductible, and they weren’t on the AMT, alternative minimum tax side, then you had a lot of people subject to that. Not so much anymore, Joe, because the state taxes are only deductible to the extent of $10,000, so it doesn’t pop up too much. But there’s some differences. One notable one is if you have an incentive stock option that you exercise, that’s an alternative minimum tax income, but it’s not a regular tax income. So there still are reasons where you could get into it. But the whole point was to have the wealthy pay at least some tax. And unfortunately, now the AMT is being paid by almost everybody, it seems. Or at least it was.

Joe: Yeah, that was before the change a couple of years ago.

Any Tax Law Changes That Impact Retirement Income Strategies and Estate Plans? (podcast survey)

“Any new changes in tax laws that impact retirement income strategies in the state plans?” Yes, we did a whole show on this.

Al: But we can give a little snippet, like if you have a large IRA over $10 million, you would have to start taking required minimum distributions from that regardless of your age. The mega backdoor Roth, which is if you have post-tax money in a 401(k), they don’t want you to be able to put that directly into a Roth IRA. And then the backdoor Roth, that may be gone too starting the beginning of next year. This is the proposal anyway.

Joe: Yeah, and I don’t know if it’s going to pass or not.

Al: I don’t either.

Joe: It’s not looking good, according to this week, anyway. They’re trying to push some big initiatives, and I don’t think the parties are agreeing. So we’ll see what happens.

Al: And when the question is “any new changes to tax laws?” Well, the answer’s no. There’s proposals. Let’s be clear on that. There’s proposals that have not passed yet.

Andi: If you want to hear more about that particular proposal, it’s episode 344 of the podcast. It’s called “It could be over for the mega backdoor Roth IRAs”. You can check that out at yourmoneyyourwealth.com.

Cryptocurrency Taxation: Treat Like Additional Income or Not Include It at All? (podcast survey)

Joe: Cool. “If I hold crypto that I currently stake for rewards, around 4% to 5% annual returns, should I treat that the same as something like additional income from a rental home? Or not include it all for now?”

Al: So I think they’re asking, is that like a fixed income source? We talk about Social Security, pensions, rental income as a fixed income source. I’m guessing.

Joe: You’re totally guessing. We don’t know anything about cryptocurrency.

Al: But the question is what I think it is, the answer is no, because there’s no certainty on a 4% or 5% annual.

Joe: No, I think he’s asking about taxes, Al. He’s staking it for rewards at 4% to 5% annual return. So is he selling? I don’t even know what “stake for rewards” means.

Al: Me neither. So how I read it is that he’s thinking this counts as fixed income. You don’t think that’s the question?

Joe: Not even close.

Al: Well, if I’m right, the answer is no.

Joe: How about this? How would you tax cryptocurrency? It’s tax right now is capital gains.

Al: Yeah, that’s tricky. It’s short term or long term capital gain, depending upon your holding period. And so if you just are buying it and selling it, it’s just like any other stock or mutual fund. But here’s where it gets tricky. If you’re using it to buy things, every single time you buy something now you have a gain or loss on the cryptocurrency that you owned. It gets so complicated.

Joe: So if I’m using it as an investment, then it’s taxed at capital gains. But if I’m using it to purchase something, you think I’m going to be taxed differently than long term or short term?

Al: Same. Same. Long term / short term.

Joe: But then what you’re saying is that you have to keep track of your basis and every time you make a purchase…

Al: Yeah. So you purchase 75 things, you get 75 gain/loss transactions on your return. Don’t do it.

Joe: Note to listener: don’t ask crypto questions.

Andi: At least not on this show.

Al: Because we don’t know the answer.

Joe: Yes.

Does Income From Investments Affect My Tax Bracket for Roth Conversion Purposes? (podcast survey)

“Upon retirement, I’ll have 0 income for about 8 years when Social Security kicks in. I plan on doing Roth conversions each year and hopefully have everything in Roth before Social Security. During those 8 years, I’ll be creating some income from my savings or other investments. Does that affect my income tax brackets for conversion purposes so that income is added on or after the conversion brackets? Thanks.” It really depends. If you have savings and you’re taking it from your savings account, there’s going to be very little tax impact because you’re only getting taxed on the interest. If you have other investments that are in a brokerage account that you’re selling, that could be subject to capital gains, well, yeah. Then you have to calculate how much capital gains is going to be on those transactions each year. And that could affect the amount that you want to do in regards to conversions. We would need just a little bit more information on that, but I think you get the gist.


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