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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. As CEO he currently leads Pure Financial Advisors along with our executive team. As CFO he is responsible for the financial operations of the company. Alan joined the firm about one year after it was established. At that time the company had less than [...]

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

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Transcription

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)

“Hi Joe and Big Al. I’m a new listener to your podcast and I enjoy listening to both of you. I retired on Dec, 2020 at 61 years of age bec I have to take care of my mom. My husband retired 2015. We are at 12% tax bracket. You’ve probably answered a lot of questions regarding Roth IRA. I would like to do a Roth Conversion. Is it possible pls to give me calculations on how much to pay federal and state tax 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 401K and Roth 401K. For my understanding, if I withdraw from my 401K I don’t have to pay federal taxes but I have to pay state tax. How much is state tax in California? My last concern is my Roth 401K. Do I still need to rollover it first to traditional IRA before rolling it over to my Roth IRA. I thought federal and state taxes have been paid because it is a Roth. I Hope you can be able to answer my questions. Thank you for your time.”

Paying Roth IRA Conversion Taxes (Tammy)

“I made Roth IRA conversion of $65000 in 2021 because of my low income this year. Should I pay federal and state estimate tax before filing my 2021 tax return so I don’t have to pay interest and penalty on this conversion? Thank you”

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)

“Dear Joe, Al, and Andi, this is my favorite podcast and I look forward to the weekly drop on i-tunes. In 2018 and 2019, we did backdoor Roth contributions for my spouse who at the time, had all of his retirement assets either in a 401(k) or 403(b). In 2020, I rolled over his old employer 403(b) into an IRA. That same year, I mistakenly did a backdoor Roth contribution, and paid taxes on almost the entire amount of $7000 per the pro-rata rule. Since now all of his after-tax IRA contributions are in his Roth IRA, is his traditional IRA after-tax basis $0? Do I need to still file Form 8606 moving forward? The total after-tax Traditional IRA contributions from 2018-2020 was $18,500. The first two years were straight forward backdoor Roth contributions. 2020 was the only year he had pre-tax IRA assets mixed with an after-tax IRA contribution. Thank you, D from Irvine (My favorite drink is a glass of Justin Cabernet)”

Followup: “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, D from Irvine”

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

“Hello! am 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 the different perspectives.  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 401k strategy… Background: As of this year, my husband is currently maxing out his 401k savings into a Roth 401k (at my request because I think accumulating more savings in Roth is better in the long term), but next year, due to all of these one-time payments we expect to receive, he thinks switching back to a traditional 401k beginning in January 2022 would be better so we lessen our 2022 tax liability. I have two questions:

  • Do you agree that with the additional income, 2022 may not the right year to do Roth 401k?
  • At our income level (indicated below), is contributing more (or less) to a Roth 401k 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 am concerned that ~80% of our retirement portfolio is in a traditional plan and, given our ages, I’m not sure if that’s the right asset location mix. Here are our numbers (as of July 2021):

  • 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.

*total cash.

Combined, we will be receiving ~$200,000 gross cash bonus paid in installments beginning Feb.  2022 to Aug. 2022. Again, this is one-time only. A few more facts about us: We live in Philly, have no debt, no kids (yet), no mortgage (we rent). We do hope to buy a house in the next 1-2 years. Our total expenses are ~$9k-10k per month. Thank you so much for taking the time to review my questions! – Jennifer

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)

“What should I do with leftover 529 money?”

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

“Are there any special rules for 401a plans? Do they behave exactly like a 401k or 403b?”

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

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

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

“How should I calculate EMPLOYER contributions to my solo 401k when income varies through the year? Also, working remotely and trying to figure out taxes when providing services to multiple states.”

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

“Could Big Al please explain AMT tax?”

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

“Any new changes to tax laws that impact retirement income strategies and estate plans?”

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

“If I hold a cryptocurrency that I currently stake for rewards (around 4-5% annual return), should I treat that the same as something like additional income from a rental home or not include it at all for now?”

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

“Upon retirement, I’ll have zero income for about 8 years (when ss kicks in). I plan on doing R/C each year and hopefully have everything in Roth before SS. During those 8 years, I’ll be creating some income with my savings through investments. Does that income affect my tax brackets for conversion purposes or is that income added on after the conversion brackets? Thanks.”

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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.