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Published On
March 28, 2023

Generating “tax alpha” to get better returns on your investments: which investments should go in your traditional IRA vs your Roth IRA, and does that asset location depend on your age? Plus, Joe and Big Al spitball whether to roll a TIAA 403(b) to an IRA or take the annuity, and they spitball retirement, Roth conversion, and Roth contribution strategies for an overseas officer with a military pension, and for Americans working abroad who qualify for the foreign earned income exclusion.

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Show Notes

    • (00:51) Best Assets to Hold in Traditional IRA and Roth IRA? (Michael, Colorado – voice)
    • (07:40) Is Investment Asset Location Dependent on Age? (Glen)
    • (11:35) TIAA 403(b): Take the Annuity or Roll to an IRA? (Brad, Northeast TN)
    • (19:34) Military Pension Spitball: Overseas Officer with Fluctuating Income & Taxes (US Grant, Alexandria, VA… usually)
    • (24:29) Foreign Earned Income Exclusion & Roth 401(k) Rules (Jeff, Singapore via North Dakota)
    • (31:32) The Derails

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Why Asset Location Matters Guide

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Transcription

Which investments should go in your traditional IRA vs your Roth IRA, and does that asset location depend on your age? Generating “tax alpha” to get better returns on your investments, that’s today on Your Money, Your Wealth® podcast 422. Plus, the fellas spitball whether to roll a TIAA 403(b) to an IRA or take the annuity, and they spitball retirement and Roth conversion and Roth contribution strategies for an overseas officer with a military pension, and for Americans working abroad who qualify for the foreign earned income exclusion. I’m producer Andi Last, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA. Get your money questions answered: go to YourMoneyYourWealth.com and click Ask Joe and Al on Air to send them in as an email, or a priority voice message, like this one:

Best Assets to Hold in Traditional IRA and Roth IRA? (Michael, Colorado – voice)

“Hi, Joe, Big Al and Andi. This is Michael in Colorado. I enjoy your show, been listening for a while. Could you spend a few moments addressing asset location? Specifically which assets are best for the taxable traditional IRA and Roth IRA buckets? I’m a craft beer drinker. Drive a 2020 Toyota Sienna and am retired. Thank you.”

Joe: Well, thank you Michael.

Al: Great voice.

Joe: He’s got-

Al: Michael, you seem too young to be retired. Good for you.

Joe: I know. Enjoying the show.

Al: Right. He’s got a better voice than we do. Put it that way.

Joe: Craft beers. Toyota Sienna. I dunno what that is. Sounds-

Al: Is that like a- is that a van?

Joe: I don’t know. It sounds expensive.

Andi: It is. It’s a minivan.

Al: Yeah. That’s what I thought.

Joe: Asset location. Alright, let me take a crack, Al.

Al: Okay, cool.

Joe: The whole concept of asset location has to do with taxes.

Al: Yes. Agreed.

Joe: And so, when you are looking at what asset that you wanna hold in which bucket, you wanna kind of take a look at the characteristic of what type of income potentially that that asset class produces, and you wanna match that up with the bucket. For instance, let’s say if you have an asset class that produces a lot of interest. A lot of income. Maybe a lot of dividends or things like that, that could be taxable at ordinary income rates. You might wanna put that in a tax-deferred account because it’s already gonna be taxed at ordinary income. You don’t necessarily wanna put that in a brokerage account because then it’s just gonna spit that stuff out on your tax return, especially if you’re reinvesting. Now you’re paying taxes on income that you potentially don’t need. You also wanna take a look at the growth of the overall asset class. So if you have a stock that has a higher expected rate of return than a bond, because you’re taking on more risk in a stock, well that growth over time should be a lot higher than a bond. So would you rather pay ordinary income rates? Or would you rather pay a smaller capital gains rate, on that larger growth?

Al: Or pay nothing.

Joe: Or pay nothing? Which is- which would be the Roth. So you’re looking at a few different things here, depending on what your tax situation is and what kind of- the amount of money that you have in each of the different buckets. So you have a tax-deferred bucket, which is your IRAs, 41(k), 403(b)s, those grow 100% tax-deferred. And when you pull the money out, you have to pay ordinary income tax. So you wanna damper the growth in those accounts. So if you want a little bit more safer asset classes in your IRAs than you would in your other asset classes, of course, this is all dependent on what your income need is.

Al: Right. And if you have just money in an IRA, then you’re gonna have all asset classes in your IRA. So let’s be clear about that. But let’s just say you have equal amounts in each, which is very hard to do. But let’s just say you do. The way we think about it is you look at your asset classes and some have higher expected returns than others. So the ones that have higher expected returns would be small company, small US companies, value companies in the US, emerging markets internationally, those might be some that have higher expected returns. They’re more volatile-

Joe: They’re more risky.

Al: More risky, for sure. And then the ones that have less growth would be- would be cash, certainly, and/or bonds. And so maybe you wanna favor them in your IRA. Now, there’s a lot of exceptions if you need income, there’s tons of exceptions. We’re just giving you a general rule of thumb. So the way we think about it is, go ahead and fill up your Roth IRA with your highest expected return assets-

Joe:- individual stocks. If you wanna hold individual stocks, you know, concentrated risk there. Anything that you feel that is gonna give you the biggest bang for your buck, you probably wanna put that in the Roth because all of that growth will grow 100% tax-free.

Al: Yeah, and let me back up one second. First, figure out what your allocation should be in your investments. And then when once you do that, put your ones with a high expected return in Roth, put your ones with the lowest expected return in your IRA and everything else goes in your non-retirement account, your brokerage account, your trust account.

Joe: So if, yeah, I think we could really get in the weeds here with this, but I think that’s the premise of it. I think there’s things that you have to consider. IRAs are taxed at ordinary income, so you want to dampen the growth. Roth IRAs you’ll never be taxed on again, so you accentuate the growth. In your taxable account, you wanna be more tax-advantaged here. You wanna be sensible about how you’re investing here. Because if I invest- and you probably wanna have more stocks than bonds because a), if I take a loss in a stock, I can sell that loss and buy something back. I can do tax loss harvesting here. So you want a little bit more volatile asset class in your taxable account. And also I’m gonna pay a capital gains rate on it, but if I have a loss, it’s gonna offset the gains. So potentially I’d pay zero.

Al: Yeah. Yeah, exactly. And if you do need some bonds in your taxable account, then maybe municipal bonds. Because if you need income out of that account, then make sure it’s tax efficient if you’re in a high tax bracket.

Joe: Right. How we look at it is, first off, is what’s the overall allocation, as Al said. So this is the first step, is what target rate of return do you need to have on your investments? And then, then you have to take a look at your tax diversification. How much money do you have in an IRA versus a brokerage account versus Roth account? Most people that we have met with over the last, you know, 20 years have most their money in a retirement account. So that’s why we’ve been big proponents on tax diversification. Get money into a Roth IRA, be diversified from a tax perspective because as you start pulling money out, you could control the amount of taxes long term. And then from there, then that’s when you put the allocation down based on what your pools of money look like. How much money you have in an IRA, Roth IRA, and your taxable account. You know, in simplest forms, your highest expected rate of return goes into your Roth, and then your lowest expected returns go in your retirement account.

Al: Yeah. Now I’ll make one other comment, and that is when people do that and the market tanks, and then they got all this money in a Roth IRA that they paid tax on, and now they see it going down in value, it’s not gonna feel good. I’m just gonna warn you right now, we’re talking long-term strategies. We’re not talking short-term strategies. We’re talking long-term. Because those asset classes, typically when you look backwards 20 years, what are the best asset class, best performers of asset classes and invariably, not always, but usually, it’s emerging markets. It’s small US companies, it’s value US companies, those are tend to be the winners over a long period of time.

Joe: All right, Michael, hopefully that helps.

Is Investment Asset Location Dependent on Age? (Glen)

Joe: I got “Hello Al, Joe and Andi. I recently discovered your podcast and really enjoy it. My question is about asset location.” A little back-to-back there, Big Al.

Al: Yeah, right. How about that?

Joe: “In past episodes, if I understood you correctly, your recommendation is funding one Roth IRA with stocks rather than bonds or interest earning assets because stocks are more likely to produce higher returns over an extended investment period. But doesn’t this location decision depend on one’s age? I’m 69. And the rate of return on bonds and CDs? With a recent rise in interest rates, wouldn’t the Roth account be more tax effective at shielding ordinary income rather than the capital gains from the appreciation of stocks? Thanks, Glen.” Yes, but you would wanna put your CDs and bonds in your retirement account, not your Roth account. Because your- your CDs are gonna be taxed at ordinary income, so your IRAs are gonna be taxed at ordinary income. You wanna match the taxation there. You could put it into a Roth if you want to have 100% in safe investments.

Al: Yeah, you could. And I, and I think the- if you read behind the words here, I think the question, or maybe the thought is, maybe I can make more on CDs and bonds because interest rates are going up and stocks aren’t really doing so well. And that if you look back the last year, year and a half, that’s- that’s a true statement. But long term that does not seem to be the impact. And at age 69, I would argue you’ve got decades, at least two decades. I mean, people are living into their 90s now, so at age 69, it’s not like all of a sudden you have to be 100% safe. You need growth because we get into your late 80s, 90s, or even past given modern advances. Think of your Roth even at age 69, 70, whatever age, you’ve got a lot of years to go. And now if you’re 90 already, and then-

Joe: He’s probably not needing the money at 90.

Al: Probably don’t need it, now it’s probably for the kids. So, so you probably wanted it in all stocks because you don’t really even need it.

Joe: But I understand the logic in, in saying, I wanna buy CDs because I’m getting a decent rate on the CD. And the CDs taxed at ordinary income. So maybe I buy my CDs in the Roth and so then my, you know, tax equivalent yield on the CD’s that much higher because I don’t have to pay taxes on it. Yeah, I totally understand the logic there. But over the long-term, stocks are gonna outperform CDs, even given today’s interest rate environment. So you wanna match the taxation with the tax pool. So if I have an ordinary income producing investment, I wanna have that in my IRA. So if I have REITs that kick out ordinary income, I wanna have that in my IRA. I want to have stocks in my brokerage account, and I want to have stocks in my Roth account. But 69, it all really depends on when he needs the money too.

Al: Well, that’s true. Yeah. That affects everything.

Joe: Thanks for the question though, Glen. Great point.

For a visual representation of what Joe and Big Al have just been discussing, download the free guide on Why Asset Location Matters from the podcast show notes at YourMoneyYourwealth.com to learn how owning assets with higher expected returns in your your Roth accounts, lower-returning assets in your your 401(k)s and IRAs, and NOT holding income-producing assets in your brokerage accounts, for example, can generate “tax alpha,” resulting in better returns on those investments. Also in the show notes, sign up for the live Tax Planning Webinar happening tomorrow at noon Pacific, 3pm Eastern time  for more tax strategies and live answers to your most pressing tax questions. Just click the link in the description of today’s episode in your favorite podcast app, you’ll see the guide and the webinar sign up just before the episode transcript.

TIAA 403(b): Take the Annuity or Roll to an IRA? (Brad, Northeast TN)

Joe: “Dear Joe, Big Al, lovely Andi. Hi guys. Brad here from Tennessee. I drive a 2012 green Ford F150. And my drink of choice is any High Gravity IPA. We now have a mixed mutt and a small Jack Russell puppy. We are down to 5 cats but these belong to my wife. I’ve continued to listen to your podcast faithfully since my last question.” Well thanks Brad. “I’ll turn 72 in a few months and my dear wife will be 71. We are taking Social Security which is about $70,000 per year. I’ve been retired for about 6 years now and have been using these low income gap, years to convert IRA monies to my Roth and fill up that 22% tax bracket per your excellent spitball, boom, and plan to continue this until my RMDs start at age 73 next year. Presently, I have a combined IRA and 403(b) of $1,500,000, and we have Roths of about $800,000 in a taxable account with another $1,000,000.” Look at the big wallet on Brad.

Al: Yeah, he’s got- doing everything right.

Joe: Just Big Bucks Brad from Tennessee. “No debt, 4 kids grown and gone. No mortgage. Wife owns a couple of farms in South Carolina and North Carolina. Really just raw land with minimal cash flow, probably valued around $400,000. And also small inherited IRA from her late father. Our total spending the past 3 years since I retired is about $120,000 per year. My question is, I have $250,000 in a 403(b) with TIAA. I could either roll this into my IRA or annuitize this for an annual $23,000 per year. This would be a life with joint of 2/3 to my spouse if I should pass within a 10 year certain period. TIAA seems to offer a much better payout than I could find on a SPIA on the open market. No COLA. It seems that regardless of the decision, we have ample assets to cover our expenses, but in another stream of income would make life simpler. So, should I roll this to my IRA or take the annuity? Your insight spitball would be appreciated. Love you guys and your delightful banter.” Love you too. Big bucks Brad

Al: Yeah, we haven’t bantered much yet this year. We gotta work on it.

Joe: We just gotta get right to business, Big Al. We got Big Al and Big Bucks Brad. Okay. Couple of things. $250,000, $23,000 a year. He is 72 years of age. So really the math is, you wanna find out what your internal rate of return is on the payout. So this is a tough calculation because we don’t know when Big Bucks Brad is gonna pass.

Al: Or when his wife’s gonna pass.

Joe: Correct.

Al: So it makes it hard. We can just make assumptions on life

Expectancy.

Joe: If he lives past, let’s say, if he lives 20 years. So he is 72, 92 is very, very reasonable.

Al: Yeah. Yeah.

Joe: So he is gonna make $23,000 a year. He could take the lump sum of $250,000. So you kind of have to figure out, well, what’s my rate return if I live 20 years and I get $23,000? And what’s the alternative that I can do? So if I run the calculation at $23,000 per year and if you live 20 years, it’s roughly around 6%. So that’s a guaranteed income stream, make life simpler, 6%’s a good rate, you know, go for it.

Al: Yeah, I completely agree.

Joe: If you think you want more or if you want more flexibility, if you wanna convert it to a Roth and do all this other stuff, then do that. The other thing that’s only the thing that it’s gonna do to you if you want to continue to do Roth conversions, is going to increase your taxable income. You’re gonna have lesser flexibility because he has to take an RMD next year. And he’s got $1,500,000 in his IRA. So his RMD’s gonna be-

Al: Call it $60,000-

Joe: $60,000?

Al: Yep.

Joe: So then he’s got $60,000 there. He’s got another $23,000 if he annuitizes the TIAA plan, which is in a 403(b). So everything’s ordinary income. So we’re at $83,000 and then he is got $70,000 of Social Security. So you’re gonna automatically put that annuitization rate into a higher tax bracket.

Al: Yeah. Which you may not need.

Joe: Which you may not- which you may not spend. Because your RMDs are gonna be pretty sizable because the amount of retirement account. So that’s the math, right?

Al: Yeah. Yeah.

Joe: So, I don’t know. Either way, I mean, you’re splitting hairs I think a little bit.

Al: Yeah. But either way’s fine. Me personally, I take a more simplistic approach. $23,000 to $250,000, that’s 9%. That’s a good payout. I know it’s fixed. In other words, it’s not gonna change, the $23,000’s not gonna change.

Joe: But, $23,000 into $250,000 is 10. Okay. So he’s gotta live 10 years to make a dime on the money.

Al: But he’s got a 10-year certain period, so he’s, he’s gonna do that.

Joe: But for him to make a penny on his money, he’s got to make it past 10 years, him and his wife and the odds of that are probably pretty high. But if him and his wife both die prior to 10 years, they don’t make- they get to $23,000. But let’s say they die on their 10th anniversary of the contract. This is morbid as hell. I’m sorry, Brad. Right. So they get $230,000 on a $250,000- I mean, they’re, they’re just getting their principle back.

Al: Yeah. Agreed. But it- so here’s the current stats though. A couple, age 65, there’s a 50% chance that at least one of you is gonna make it age 92. So I’m going- this is what I would consider to be a longevity play. So in other- if one of the two of you lives a longer life, it’s a great deal. I would do it myself. I think it’s worthwhile.

Joe: Yeah. Big Al thinks he’s gonna live until about 125.

Al: I will- I’ll take the annuity payment. I got plenty of money already in an IRA. So I’m- I’m good with that.

Joe: Yeah, he’s rich. Big Al is so rich.

Al: I’m going on if I were Brad, not myself.

Joe: Oh, I thought you were talking about yourself again. I guarantee I have so much money, but I would still take the-well, I mean, Big Bucks Brad’s got a ton of cash.

Al: That’s what I’m talking about.

Joe: Yeah. But I- so you look at the intro if you want the math- look at the internal rate of return. If you want simplicity, well make you past 10 years. You’ll make a couple of bucks on your money.

Al: I say go simple.

Joe: All right.

Al: Go ahead and take the annuity.

Y’know, considering Joe and Big Al are often seeing your question for the very first time when they sit down to record YMYW, they do an amazing job spitballing on the fly, and it’s a great first look at your situation. But we would highly recommend scheduling an in-depth assessment of your entire financial picture, before you make any big decisions about retirement. The team of experienced financial professionals at Pure Financial Advisors can help you determine how much if any you  should you convert to Roth, how you may be able to pay less tax, whether you can collect more Social Security benefits – and they can ensure your investments align with your risk tolerance and your retirement needs and goals. Schedule a free financial assessment in person at one of Pure’s 7 offices in Southern California, Seattle, Denver, or Chicago, or via Zoom right from your couch. You won’t pay any commissions, because Pure is a fee-only fiduciary. They don’t sell investment products, and the law requires them to act in the clients’ best interest instead of their own. click the link in the description of today’s episode in your favorite podcast app to go to the snow notes, then click the Get an Assessment button and schedule your free financial assessment now.

Military Pension Spitball: Overseas Officer with Fluctuating Income & Taxes (US Grant, Alexandria, VA… usually)

Joe: We’re going here to US Grant. “Joe, Big Al, Andi, love the show. I’m a military officer, currently overseas for a year and I’ve enjoyed using the time to catch up on past episodes after finding you overseas.” Overseas- thanks for your service.

Al: Yeah, for sure. Right?

Joe: “When I’m at home, I drive a little 2018 Volkswagen-“

Andi: – Tiguan-”

Joe: Tiguan.

Al: Your guess as good as mine.

Joe: That’s kind of like a SUV, I believe. “-and enjoy an old fashioned, red wine and as many light beers as fit in that cooler on the golf course or at a football tailgate.”

Al: Wow. Oh, sounds like your kind of guy.

Joe: This guy and I are like two peas in a pod for sure. “My wife and I make roughly $280,000 a year combined of which close to $50,000 is untaxed allowance for housing, etc. Cars are paid off, and I was one of the lucky SOBs to get a good deal on a house while rates were still below 3%. We got two kids under 4. We fund 529 plans for them. We spent the last few years getting our financial house in order, paying off old debt, setting up the kids up for success. So now we wanna start getting ahead and thinking about retirement. I have just under $40,000 in my Roth TSP, and I’m putting 12% of my salary towards that and 35% in a Roth IRA- $35,000 in a Roth IRA. My wife has $32,000 in a traditional IRA. I have also got just under $20,000 in a robo ETF brokerage fund that gets a few hundred bucks a month. Also put $3000 to $5000 a year in a donor-advised fund that gets invested. This year, our taxable income will be substantially lower as my overseas service pay isn’t taxed. So I’m wondering if I should be trying to roll over my wife’s traditional IRA into a Roth in a year that it won’t cause a tax hit. I’m looking to get a retirement tax burden as low as possible, as I’ll have a military pension around $50,000 a year. And then I plan to work for another 15 to 20 years after, in a new career. Long story short, I’m making more money than usual this year, but will be taxed lower than I probably will be for quite some time, and my income and taxes will return to their usual next year. How should I be handling that? Roll my wife’s traditional into a Roth and start my own traditional and start back doors? Thanks for being both informative and entertaining. US Grant, Alexandria, Virginia.”

Andi: Usually.”

Joe: Usually. Is that what ship he’s on?

Andi: No, that’s where he normally lives when he is not overseas.

Al: Not overseas.

Joe: Got it.

Al: Well, the answer is, yes. Do the Roth conversion, because she’s got $32,000. Go ahead and get it over with. You’re in a low bracket. Go ahead and pay that tax. And then from that point- you’ve got a Roth TSP. She’ll have a Roth IRA, that’s fantastic. You’re- you’re gonna be, as you say, maybe in higher brackets in the future as you start to transition out of military and start to make another income plus your military pension. So yeah, I’m- I’m all for that. And the second thing, roll my wife’s traditional- well we did that one. “-start my own traditional and start back doors to the Roth.” Yes. That’s another great idea.

Joe: I don’t think he needs the back-

Al: You may not, we don’t know. It’s based upon AGI, which we don’t really know what that is, but if you’re below the AGI limits, which is a couple hundred thousand dollars for a married couple, I mean I’m rounding, then you can just do a direct Roth contribution if it’s above that. And what I mean by that is taxable, like the non-taxable part of your income doesn’t count. But if your AGI is above that, then you might have to do a- a backdoor Roth to get the money to the Roth.

Joe: Yeah, he is off to a good start. He’s gonna have a nice pension. And he is gonna continue to work with that pension.

So his income could be quite a bit higher.

Al: Sure, you bet.

Joe: And he is still young. And so you got a lot of compounding for that thing to grow. Yeah, I would just look at what your taxable income is. I don’t know if you convert everything this year. But it’s-

Al: It’s only $30,000.

Joe: Well $30,000 is a lot of money for some people, Big Al.

Al: I know. But if you’re in a low enough bracket, is what-

Joe: It’s only $30,000. I spend that-

Al: – and- well-

Andi: It’s that big wallet talking.

Joe: Geez. Chump change.

Al: Oh boy. You can twist up, can’t you? But that’s what I would do. I’d convert the whole $30,000.

Joe: All right. Okay, cool. Sounds good. Thanks again for your service.

Foreign Earned Income Exclusion & Roth 401(k) Rules (Jeff, Singapore via North Dakota)

Joe: “Greetings from Singapore via North Dakota. It’s Jeff. Joe and Big Al-“ Where? What the hell is Singapore via North-“

Al: Well, I guess we’ll find out.

Joe: We’ll just keep reading. “My wife and I work in American International School. About 5 years ago, the school began to offer 401(k) for American employees. Here’s where this gets interesting.” Ooh. The plot thickens.

Al: Yeah. Right. Okay.

Joe: “Many Americans working abroad, including us, qualify for the foreign earned income exclusion. In 2023, this exclusion allows us to deduct $120,000 of earned income each from our taxes for 2023. We have been told by the 401(k) plan sponsor US based, we can contribute excluded income to a Roth 401(k), which is income that has not been nor will ever be taxed. I’m not sure this is allowable, and I hope you and the team parenthesis team can help clarify. I can see parenthesis how we could contribute to a 401(k) non-Roth and then apply the-“

Andi: earned income exclusion-“

Yes, I understand “-for the remaining income to be excluded. But how can we use excluded income, income that is not first taxed, to contribute to a Roth 401(k)? I don’t know if I should celebrate or be concerned. I know IRAs and 401(k)s are different plans, but we are not allowed to contribute to an IRA without having earned income, which is income beyond the foreign income- foreign earned income exclusion.” So what do you think there, Big Al? Is this permissible for an IRA? How is this allowable in a Roth 401(k)?

Al: Yeah, it’s a great question. Here’s my understanding, don’t necessarily take this to the bank. But my understanding is you have to have earned income in the US that’s not subject to the foreign earned income exclusion to be able to do this, to get money into 401(k), to get money into an IRA to get money into a Roth IRA. That’s- that’s what I’ve always heard. I think later on you might ask something about, you want the code section. I don’t have that for you off the top of my head, but yeah, that’s how I’ve always been taught is- in other words, you have to have earned income that’s on your US return to have a US retirement account. Now, if the- if the foreign exclusion is $120,000 and you make $140,000, well great. You got $20,000 extra. Yeah. You could use that, for your 401(k). You could also use- Yeah. Yeah. For your 401(k) and/or Roth IRA.

Joe: How is- how does it, so let’s say I’m in Singapore with Jeff, working. Do I pay Singapore tax and American tax, but then I get the tax credit based on- or, or no, that’s a foreign tax credit, not necessarily the income exclusion.

Al: Well, let me explain. So typically you work in a foreign country, but you’re an American citizen, so you pay taxes in both places. Pay taxes in Singapore, you pay taxes in US. The taxes you pay in Singapore will be a tax credit against US taxes. It’s not always dollar for dollar, but that’s the concept. That’s the normal rule. Now there’s an exception, and that is if you have earned income in a foreign country, the feds, the IRS says, you know what, the first $120,000, we don’t care about it. So you’re not gonna report that here in the US. There is no foreign tax credit because we’re not gonna tax it. It’s only taxed in Singapore. So now what we’re saying is, can we then, if we got less than $120,000 of income, that’s subject- that I don’t pay any tax, can I do the Roth IRA, a regular IRA, 401(k)? The answer I’ve always heard is, no, you can’t. You have to have taxable earned income in the US to do a US retirement plan.

Joe: But he’s saying that, ‘I’m talking to the plan administrator, which is an American administrator. And they’re telling them, go for it. We have been told by the 401(k) plan sponsor US based, we can contribute excluded income to the Roth 401(k) which is income that has not been nor will ever be taxed. I’m not sure this is a allowable-‘ so Jeff is- he’s got a conscience.

Al: Yeah. Yeah, I know. And I’m not sure it’s allowable either. So here’s what I would do. I would go back to the sponsor and ask them the same question. Show me where, show me the IRS code that says we can do this, because I’ve never heard that.

Joe: Do you think the plan sponsor is as smart as plans as you and I are?

Al: Probably smarter.

Joe: Because you and I don’t know jack-

Al: It’s like, hey, we’re just spit balling with what we know. But that’s the real answer. And talk to the plan sponsor and get the code section that you can utilize and you know-

Joe: Here’s the real question. If you’re Jeff, are you putting income into their plan?

Al: I guess I would wanna find that out. And here’s why. Because you could do this for years and then all of a sudden the IRS would catch it and say, you know what? This Roth IRA of $500,000 isn’t really a Roth IRA and all the income and, and gain could be taxable. I don’t know. I would make sure it’s right myself.

Joe: Okay.

Al: But I’m a CPA too.

Joe: Yes.

Al: And I have a conscience.

Joe: I would say the plan sponsor told me I could do it, and then I would call Debra.

Al: Got it.

Joe: All right. Sorry Jeff. Wish we had a better solution for it.

Al: We did our best.

Andi: Al’s back from his travels, the car, drink, pets, and farms of Big Bucks Brad, and top heavy in the Derails at the end of the episode, so stick around. Help new listeners find YMYW by telling your friends about the show, and leaving your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and any other podcast app that accepts them.

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The Derails

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IMPORTANT DISCLOSURES:

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

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

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