Is indexed universal life insurance good for estate planning, investing or as a tax shelter for high-income earners? Should you pay debt or save if you only have $100K saved for retirement at age 66? Should extra money be invested in your 457 or brokerage account? ETFs or mutual funds? And with the new tax laws scheduled to sunset in 2026, does it make sense to do a giant Roth conversion in 2025?
- (01:00) Are IULs and VULs Good for Estate Planning or Investing?
- (10:32) IUL as a Tax Shelter for High-Income Earners?
- (19:34) I’m 66 and Have $100K. Should I Pay Debt or Save?
- (27:21) Should I Invest Extra Dollars in My 457 or Brokerage Account?
- (29:30) Should I Buy ETFs or Mutual Funds?
- (36:15) Should I Do a Giant Roth Conversion in 2025?
Resources mentioned in this episode:
Free Estate Planning resources: click here for articles, videos, blog posts, episodes of YMYW TV and more, all on wills, trusts and estate planning
FIRE INSPIRATION | click the links to hear:
- Nick Loper shares 250 ways to make more money
- Chris Mamula‘s story of retiring at 41 after a decade of retirement planning mistakes
- Grant Sabatier – how he side-hustled his way to being a millionaire in 5 years
- Jamila Souffrant – how she saved $85K a year
- Karsten “Big Ern” Jeske‘s research on safe withdrawal rates for early retirees
- Tanja Hester wrote the book on making Work Optional
- Fritz Gilbert‘s 10 Commandments for Retirement
- Michael from FinanciallyAlert.com shared his FIRE story
- Travis Shakespeare on directing Playing with FIRE, the first documentary on the FIRE movement
Okay, somebody do us a favor and click Ask Joe and Al On Air at YourMoneyYourWealth.com and let us know why indexed universal life insurance is such a huge topic lately? Is someone selling the heck outta these things or is it just because the fellas keep answering your questions about it? Today on Your Money, Your Wealth®, Joe and Big Al address MORE of those IUL questions: this time, we talk about whether it’s good for estate planning, investing or as a tax shelter for high-income earners? Plus, should you pay debt or save if you only have $100K saved for retirement at age 66? Should extra money reinvested in your 457 or brokerage account? ETFs or mutual funds? And with the new tax laws scheduled to sunset in 2026, does it make sense to do a giant Roth conversion in 2025? I’m producer Andi Last, and here with answers to your IUL questions and, hopefully, the patience of new saints, are Joe Anderson, CFP® and Big Al Clopine, CPA.
01:00 – Are IULs and VULs Good for Estate Planning or Investing?
Al: Where you wanna go?
Joe: I don’t know. Chad from Santa Cruz? “Hi, Joe and Al. I’m 28, happily married and love to golf”. Oh Chad, love you, man. “So I have at least something in common with you both”.
Al: I love golf.
Joe: Okay. So Chad, he goes “my dad introduced me to you guys and absolutely love the show. I truly appreciate all the insight you both provide. You guys are both informative and hysterical which makes it a joy to listen. And of course, thank you, Andi, for keeping the guys on track”. Chad is an insurance agent and registered rep. And “the company I work for offers an IUL and a VUL”. IUL is Indexed Universal Life and VUL is Variable Universal Life. “Personally I’m couldn’t agree more that many insurance agents don’t know what they are selling. I always make sure my clients are maxing their Roths and 401(k)s before we look into these products”. Chad has a few questions for us, Big Al.
Al: Okay good.
Joe: All right. Number one. “In your experience is there ever times when either the IUL or VUL come in handy for estate planning purposes in setting up ILITs, Irrevocable Life Insurance Trusts?”
Al: Yes. And that that can be handy for estate planning and that’s a way that you can buy a life insurance policy where it’s on your life. The beneficiary needs to be the trust that you set up and the trustee of that trust can’t be you and you have to gift money outside of your estate to pay for the premiums. It’s kind of complicated but if you do it correctly then when you pass away that life insurance is not part of your estate and it’s estate tax-free.
Joe: So Chad if you listen to this show it might sound we’re anti-insurance. Is that a fair assumption?
Andi: We have talked about IULs I think 4 times in the last couple of months and every time you’ve said they’re terrible.
Joe: I never said that.
Andi: That’s true. You say that they are sold very badly.
Joe: OK so here’s the point. I am pro-life-insurance.
Al: Yeah I have some myself.
Joe: I am very pro-life-insurance. I think the tax-free death benefit of a life insurance policy is one of the best benefits in the IRS code. With that being said does an ILIT work? Yes of course. So someone has a large estate, someone wants to leave an inheritance or there’s a big family farm that they don’t want their kids to sell because of an estate tax. They want to create liquidity so they put money into a life insurance policy. They die. All this tax-free dough goes to the kids. I think it’s a phenomenal strategy.
Al: And you need a permanent policy. For that strategy.
Joe: Absolutely. I would much rather go IUL or a fixed product. Universal a straight Universal Life part policy, whole life. I guess IUL would be, versus a VUL, Variable Universal Life, is that you’re investing in mutual funds sub-accounts. And I don’t know if I like the volatility. I want the guarantee. That’s why I’m buying the product to begin with. I want the guarantee that it’s going to die. I want to know what my premiums are. I don’t want to mess around with it. I’m going to say something else and I’m glad I caught myself. Andi: So are we.
Joe: “I already max all retirement accounts so I currently have a VUL”, Variable Universal Life, “that I pay the max premium to over-fund. The cash value account is invested in a mutual fund and the capital gains and dividends do get reinvested as opposed to an IUL. Is this better than an IUL for people who are maxing 401(k) and Roth IRAs and have leftover money and they want to invest in something similar?” So this is where I get a little bit squirrely. I do not believe that the insurance products should be used as an accumulation vehicle to fund for any type of goals such as retirement, college funding, or anything else because of the expenses involved.
Al: Yeah but it’s tax-free.
Joe: Yes but you’re paying for the cost of insurance and the cost of insurance is going to be probably a hell of a lot more and the internal fees and costs than the capital gains tax that you’re paying in an exchange-traded fund or an index fund. If you ran how tax-efficient that investments are today because that the ploy is, here, it’s a super Roth. You can max fund it and oh look at this here’s the corridor between insurance and it grows tax-deferred and I can pull it out tax-free. But if I pull too much out the whole thing blows up on me. Yes, can I overfund it? But if you can overfund it, overfund your brokerage account. I just believe that that’s a better way to invest. You get more control and then “could you please explain how the money is taxed when you do a Roth conversion? I’m confused on that part on the deferred money gets taxed”. So when you do a conversion whatever you convert from an IRA to a Roth that dollar amount is going to be taxed at ordinary income rates. So if you’re in the 22% or 24% tax bracket that’s the tax you’re going to pay. Side note, if I’m funding money into an IUL or a VUL, those are after-tax dollars. So if I’m in the 22% or 24%, 35% tax rate, it doesn’t matter, I’m after-tax dollars, I’m putting it into an IUL that’s growing tax-deferred quotes. And then it comes out tax-free. But I have all this cost of insurance. If I need the death benefit, if I need a several million dollar policy because I’ve got a bunch of kids, well that’s something totally different. That’s a death benefit that I’m trying to solve for. Sounds like Chad is solving for growth accumulation. How about if I do a conversion at the 22% tax bracket and my premium into this policy’s $50,000, I do a conversion for $50,000. I pay the 22% on that but now it’s in a Roth tax-free with no BS. It’s the same. You just got to run the numbers a little bit. But when you’re under the umbrella of an insurance company and they’re saying this is the best thing since sliced bread you could be swayed to sell the product.
Al: You always get fired up when you’re taking life insurance, permanent life insurance.
Joe: I told you I’m a big fan of permanent life insurance.
Al: In the right circumstance.
Joe: Right. If it’s for death benefit. So Chad, finishing up with Chad here. So he was like “could you please explain how the money is taxed when you do a Roth conversion?”
Al: It’s taxed just as if you received it as income.
Joe: “I am confused on which part of the deferred money gets taxed. Do only the contributions get taxed as income and growth moves over tax-free? Or do both the contributions and growth get taxed as income as you convert into a Roth”. Well if there’s basis.
Al: But I think he’s talking about his contributions in the into like a 401(k). I’m guessing. So it’s all taxed. It’s all taxed. Now if it was an IRA contribution and you did not get to deduct it, then that’s basis. And so part of your conversion is tax-free.
Joe: He was asking another question here, something about and I want to make sure, he’s in the business and I wanna will help this guy out. He’s talking about something, what’s better than IUL or VUL? What was he saying? Nothing? Maybe I’m making this up.
Andi: I think you are.
Joe: “The cash value account is invested in a mutual fund and the capital gains dividends do get reinvested as opposed to an IUL. Is this better than an IUL for people who are maxing out 401(k)s and Roths?” So I think his question is, IUL-
Andi: vs. VUL.
Joe: I mean you’re not invested in the market even though it’s sold as here it’s an indexed universal life. You have an index that says the S&P 500 that you’re investing in but you don’t get any dividends. And basically the insurance company is buying a zero-coupon bond and buying call options on that index. So you’re not getting any dividends or appreciation there, you’re getting whatever the option is. So VUL, you’re actually invested in the markets.
Al: So even though you don’t like permanent policies for accumulation plays, if you’re convinced you want to do it, probably VUL’s better.
Joe: All right Chad, if you want to do a wealth accumulation play and Chad, you’re married, do a second to die policy on you and your wife. Because the cost of insurance is dirt cheap at age 28. And then max the hell fund out of that thing. And then you use a VUL for a second to die because then your cost of insurance is going to be dirt cheap. And then if you like the whole theory of tax-free income from it and age 28 you’ve got a long way for this thing to go, but you’re trapped, man. You’re kind of stuck with the product. I would much rather see you build up a brokerage account and buy term. But you know that’s just my bias.
Al: And I would agree with that and I say that partly from being in the business for 35 years. I’ve seen very few people that were happy they did that long term. And that’s just been my experience.
Joe: Yeah but I guarantee it that the boys in Chad’s office that are life insurance guys they probably got 40 policies that have worked just fine.
10:32 – IUL as a Tax Shelter for High-Income Earners?
Joe: Nick’s got a story for us. “Joe and Big Al. l really appreciate the podcast. The content you guys are putting out is very helpful.” That was very professional. Instead of like this I don’t love it. He appreciates it. It’s helpful. It’s awesome.
Al: It’s honest.
Joe: So Nick from Temecula. “I have an IUL question for you”. So again folks IUL is Indexed Universal Life. “Don’t freak out Joe”. So Nick.
Andi: Your reputation precedes you, Joe.
Joe: He’s listened to the show before. “I’ve heard the numerous questions you guys have received on this topic over the last few weeks and unfortunately each time I feel like Big All is going over the pros of this product the caller or the emailer hasn’t given enough info. I feel there might be time this product could work and I’m curious to get your thoughts if I can hopefully give you guys enough information. My wife and I are both 30, 2 kids,” started a small construction business when he was 20. “Now gross approximately $1,500,000 per year”. That’s awesome Nick. Good for you, bro.
Al: Yeah that is good.
Joe: “We pull about $400,000 or $500,000 each year via W2 and K1. We currently have the following”. So Nick’s making, let’s just go on the high side, $500,000 year, is 30 years old, couple of kids. He’s got “$150,000 combined and traditional 401(k). We both maxed out, started a little late. $12,000 in Roth IRA, started a little late. $400,000 in brokerage, $400,000 in cash. $20,000 in 529. We have a 1 and 4-year-old”. He’s got a rental property. Cash flow as well and a primary home. “We owe just under $1,000,000.” He also has a “$3,000,000 term life insurance policy. So my advisor has me in an IUL, an Index Universal Life, with a $2,200,000 death benefit. I pay in $50,000 each year and will do so for 10 years. I am 2 years in. I’d like to know your thoughts if this is a good planning strategy given our situation. It was presented to me as a tax shelter due to our high income as well as another vehicle to use as we are maxing out other available options. Thanks in advance guys keep up the good work”. Okay. Is this a tax shelter? Alan.
Al: Well, in a manner of speaking, yeah. Because growth inside of this product is tax-deferred or even tax-free, potentially. And that is a pro.
Joe: Yes. So we got a ton of information from Nick, so Nick’s doing quite well. Young guy, killing the game, construction. Making $500,000 year right. He’s got $400,000 in a brokerage account, $400,000 in cash. He’s got $150,000, so he’s got what, $1,000,000 in liquid assets.
Al: Right. And I understand it because he’s maxing out retirement plans and so what else do you do. And so that’s what you get pitched sometimes from advisors which is, here’s another way to go. I’ve heard it called a private pension plan. I’ve heard it called an accumulation plan, called all kinds of things. But there are some pros because he asked and I gotta tell him…
Joe: But what Nick has to look at, because what the pitch is, is that, “hey, you’re already maxing out your retirement accounts, so here’s another type of retirement account that you can invest in that grows tax-deferred.” Like this tax-deferred is such a big deal. When you look at the tax efficiency of – maybe 10 years ago when mutual funds were kicking out a ton of cap gains and the tax drag. We would have calculators look at the tax-deferred vs. taxable each year and all of this – “it’s getting just killed in taxes.” Well not necessarily. I mean you could buy an individual stock that doesn’t pay a lot of dividends.
Al: Yeah there’s plenty of them.
Joe: That’s probably one of the most tax-efficient investment vehicles that you could possibly own. Because you’re only going to pay the capital gain when you sell it. So this grows tax-deferred for you. you don’t have to pay the taxes. You pull the money out tax-free. Because it’s FIFO tax treatment, first in first out, and then the remaining would come out as loans. So you’re taking a loan from yourself. So you’ve got to look at the fine print. First of all, what’s the cost of insurance? You don’t need the insurance because you already got $3,000,000. Unless you think you need $5,200,000 of insurance. Do you think he needs $5,200,000, 30 years old, making $500,000? I don’t know. You’re in construction first of all. That is boom or bust. I mean locking your money up, you’ve got about a $500,000 in this product because it’s a tax shelter? Bull-loney. It’s not a tax shelter. I mean, it’s a huge commissionable product. It’s going to grow tax-deferred for you, but you’re not going to be able to get all of your assets out of the product. Some of it has to be there you’re going to have to die with this. You are 30 years old you’re going to live for another 70 years. You better love the hell out of this product or get the hell out of it right now. I’m over this IUL crap!
Al: So let me put it my two cents.
Andi: Yeah. He never got to mention the pros.
Al: So there are some pros. The pros, and the way it sold, and this is true, is you put money in and then it grows tax-deferred or even tax-free. Because as you say, Joe, later on down the line you can pull the money out and it’s a loan. So it’s not taxable. So that is a true statement. And there are no limits on how much you put in, except for the Modified Endowment Contract rules, the MEC rules, so you got to be a little careful there.
Joe: Oh, look at Big Al. Like you know what a MEC is.
Al: I do. I had to learn this stuff two years ago, as you recall. You recall that. But more importantly Nick, I would not do this in your situation at all. You already have rental property. I’d buy more property or I would set up a really good non-qualified tax-efficient portfolio, a good retirement portfolio, because that way it’s available when you need it.
Andi: How difficult will it be for him to get out of this product?
Joe: Well he’s already put $100,000 in. I don’t know, he’s lost probably $25,000 I would say. I don’t know what the surrender charges on it but I would say it’s probably going to be quite big. The cost of insurance is pretty expensive upfront because you’ve got overfund the hell out of it to get it to the corridor. So people will minimum fund these things and there’s a cost of insurance and then it pays for a little bit in the accumulation account. So you got to overfund it which sounds like he is at 30 years old, putting $50,000 in a year he’s probably got to that MEC level but it’s not a MEC, he’s max funding it. I don’t know. I would like to see the illustration. Send it to me if you want. You can just contact us at Your Money, Your Wealth® and let me see. I can get an in-force ledger for you and I’ll give you a true opinion on if it’s garbage or if it’s good. I don’t like to bash this stuff because I think life insurance is a very well thought out product. It’s one of the best tax-advantaged products in the world when it comes to death benefits. I just don’t care for the accumulation plays in them because believe me we know all about them.
Whatever the reason you choose to have any kind of life insurance, it’s important that your loved ones know where to find the details about your policy when they need it. Click the link in the description of today’s episode in your podcast app and download our free Estate Plan Organizer from the podcast show notes. Fill it out with all of your account information, beneficiaries, wills, trusts, insurance policies and other relevant information, and store it in a safe, easily accessible place for your loved ones. Don’t forget to keep it up to date and make sure they know where to find it! Click the link in the description of today’s episode in your podcast app to go right to the show notes and download the Estate Plan Organizer, and check out our other estate planning and IUL resources too. Now let’s get to more of your money questions. Click “Ask Joe and Al On Air” in the show notes to send in your question as a voice message or as an email.
19:34 – I’m 66 and Have $100K. Should I Pay Debt or Save?
Joe: Like Steve did. Steve. This thing is giant. “Hi Joe and Al. Your show continues to be great”. Thank you, Steve. “Please keep up the good work”. We will try. “I have a question on debt paydown versus savings. I’ve written to you before but will summarize the situation. Short version,” this is no short version.
Al: This is the summary?
Joe: Wow. “So the short version is that I’m making about $3,000 extra per month on a side gig.” A little side hustle. Side hustle Steve.
Joe: “That I can get to pay down debt, savings or both. I’m trying to decide whether to get one extreme or the other or in the middle, here are the details”. Steve is about to turn 66, full retirement age. “I plan to work past 70 and wait till 70 to take Social Security”. He’s got $100,000 in investments. So he’s got 401(k), IRA, small Roth in a brokerage account. Basic emergency fund $1,000 to $2,000. Checking and savings account, a few thousand bucks. No pensions, no real estate. “I’m single with no kids. I do have a home and still have almost 90% of the mortgage left to pay. Balance is $320,000. My only remaining debts include $36,000 on a credit card, $22,000 on a HELOC. I make $120,000 a year on my regular job and I’ve got a side hustle going that’s currently doing very well, giving me an extra $30,000, $40,000 a year. I figure I have $3,000 a month over and above expenses to apply to debt and savings”. So he started saving aggressively and “I’ve raised 401(k) contributions at work from 5% to 30%.”But I can’t help feeling that I’m shortchanging debt payoff. Two things make me wonder if I should focus more on debt? First, the condition of the market today and all the talk of recession. I wonder if that’s all BS, but you have to think about it. Second, if I pay down the HELOC, that puts me in a better position to refinance the house at a lower interest rate currently at 4.75%. Although I still need to pay down another 10% on the mortgage before I can refinance without mortgage insurance. So what should I do? Put about 10% in the 401(k) and aggressively pay down debt, meaning credit card and HELOC, and then start building a full emergency fund? Throw the extra money in the savings for 401(k) and pay down debt on a regular schedule as before? Or some combination of the two? Thanks so much for your thoughts and again love the show. Tip ‘o the hat to Andi”. Tip o’ the hat Andi.
Al: Tip o’.
Joe: Tip o’. “Who seems to be getting a lot of attention lately.” Wooo. Tell me more about that attention.
Al: Actually we had someone this week come into our office that wanted to meet Andi.
Joe: Really? Were you signing autographs? What’s going on?
Andi: I was shaking hands.
Joe: Wow. Kissing babies?
Al: Yeah, she walked by and I pulled her in.
Andi: I have to say that was pretty weird. It was very nice, but it was really strange. So thank you for that Al.
Al: You’re very welcome.
Joe: Um okay Steve. I got some news for Steve that, not sure if he’s gonna like-
Al: I know what the news is.
Joe: You do huh?
Al: I do.
Joe: So Steve you’re making $120,000 plus another $40,000. That’s $160,000. That’s a lot of cash-ish, if you know what I’m saying.
Al: And you don’t have much except Social Security. You’re going to have to cut expenses now, half, make this work.
Joe: Steve let me give you the hard facts here. Let’s say your Social Security’s, I don’t know you’re making $120,000, call it age 70, $30,000. And you have $100,000 saved. So let’s say if you aggressively pay down debt with only $3,000 so that’s $36,000 so you get, so 2, 3 years you’re gonna get the debt paid off. So the $100,000 is going to be neglected a little bit if you go to that extreme. Or if you say let’s go 50/50 it’s going to take you till you turn 70 to get the debt paid off. Now you’ve got about $125,000 with a little bit of growth and being you know, being kind. So that’s $30,000 plus another $4,500. So there’s $34,500, that’s the paycheck for the rest of your life. You’re making $160,000.
Al: Yeah. With the side hustle.
Joe: Yeah. So you’re making $160,000. And then, now when you retire at age 70 it looks like your income sources are going to be as much as your side hustle, so that side hustle, you better be able to do that in a wheelchair. Because he’s going to have to do the side hustle and the Social Security and all of that if that works out. If he’s sitting on his computer, if he can do that thing until 80, now we’ve got a game plan. But he’s got to cut his expenses.
Al: He does. And I agree. I think half is probably a place to start because the thing Steve, is you need to do all of the above right now A.S.A.P. And you need to get used to living on this lesser amount because that’s what you’re going to be living off up in just a few years. In fact, if you don’t cut right now you’re going to have to cut even more in 5 years from now. Or whatever. Maybe you can work till 75.
Joe: It’s going to hurt. It’s like all right now I’m making this I’m going to retire and then all of a sudden, boom. Right now I’m down to a third of what I was usually spending. So I don’t know what the mortgage up $320,000. I don’t know. What do you think the mortgage payment on that is? Couple of thousand bucks?
Al: Yeah probably.
Joe: All right. So $20,000 of his $36,000 is going to a mortgage payment. So he’s got $1,000 a month, if that, for Coors Light. He’s single, going out with the ladies, maybe do a little dancing.
Al: He referenced Dave Ramsey, so rice and beans, that’s what you’re eating buddy.
Joe: You know so.
Al: So maybe there’s another, maybe there’s more to this because this is the summarized version maybe, Steve you’re getting, you’re planning on getting an inheritance right? Or maybe you’ve got a kid that you’re going to move into their house.
Joe: He’s got no kids. “I’m single with no kids”.
Al: Oh forget that. Maybe have a nephew that likes you. Maybe you got to live in a trailer somewhere. But this plan doesn’t work and-
Joe: You’re making the biggest assets Steve, you own right now is your income.
Al: And you got it. Exactly.
Joe: You’re in the top, at least 10% of wage earners. It probably doesn’t feel that way but you are. I mean you’re making a ton of cash. Good for you. Congratulations. Now it’s time to have a Come to Jesus and say All right what, how do I best utilize this cash flow for the next 5 years so I can manage the debt? I can save for my future.
Al: I would say there are some great resources. Dave Ramsey is one of them, that there’s a lot of people that are part of the FIRE movement, Financial Independence Retire Early. That the talk a lot about-
Joe: But they’re living in their parents’ basement right now.
Al: Andi, where would be a place to go to get some FIRE resources?
Andi: Our website.
Al: There you go.
Joe: There you go. YourMoneyYourWealth.com.
Joe: All right. So sorry for the tough love Steve. But that’s what you get at Your Money, Your Wealth®.
27:21 – Should I Invest Extra Dollars in My 457 or Brokerage Account?
Joe: David. He writes in. “I’m a younger investor of 33 starting a new job. I’m maxing out my 403(b) and also a 457 available to me. The 457 is a non-qualified plan in the event that I leave this job. I have to decide how and when I want to take the distributions. Any considerations regarding investing extra dollars in my 457 versus that after-tax brokerage account?” David the 457, you can roll into an IRA. So don’t be confused there. I understand it’s a non-qualified plan. It sounds like you might be a teacher or you could work in the health field but if you have a 403(b) and a 457, you can invest, max both of those out pre-tax-
Al: So you get to deduct it from your pay. And so that’s $19,000 for each. That’s unusual because most of us that have 401(k) that’s it. $19,000 and a lot of us don’t even have a 401(k). You’ve got a 403(b) and 457. So you can do $38,000.
Joe: So if you can afford to do that, sure go for it. But you’re 33. I would max them out because it’s easier to save that way especially at 33, it’s out of sight out of mind.
Al: Yeah I agree with that.
Joe: If I’m going into a brokerage account sometimes life happens and it’s like well maybe I need this, that and all of a sudden the money doesn’t get the brokerage account.
Al: But what about this? What if he leaves his job in a few years to start a business and he needs some distributions? He can take it out of the 457.
Joe: He can’t take it out of the 457 without a 10% penalty.
Al: Still pays tax on it. So the difference between investing in a non-qualified or non-retirement account now versus later is you pay the tax upfront now, you pay the tax later.
Joe: I would do, let’s say he’s a teacher has a 403(b), most school districts now have a Roth 403(b). I would go Roth 403(b) and then 457 pre-tax. So that could be an option for you as well. So hopefully that helps my friend.
29:30 – Should I Buy ETFs or Mutual Funds?
Joe: We’ve got Todd from Washington. He writes in “Joe, Al, and Andi too. Thank you again for your great work and good humor”. Thank you, Todd. You alright there?
Al: I’m just so pleased someone said something nice about me being a CPA and humor.
Joe: “I listen to your show regularly and I benefit greatly from your wise counsel regarding money and life in general”. Wow Todd, just my heart-
Al: It gets better.
Joe: “I thought Al was 60 or 65”. Trust me. He is 60, 65.
Joe: “But in his picture on your website he appears to be in his early 30s”. That’s Todd kissing ass.
Al: Right? I was thinking about that. I think that picture, trying to think that was probably-
Joe: Dude, you had some botox going on-
Andi: I think that was 2014?
Joe: Yeah. He had a wig.
Al: That was, it was I was in probably my mid-50s, so I’ve aged since then.
Andi: Not much though. You don’t look it.
Al: Well thank you.
Joe: “Must be the California sunshine that keeps Al looking so radiant and youthful.”
Al: Yes. And exercise and diet.
Joe: Yep. All he does is eat-
Al: Grass and-
Andi: Rabbit food.
Joe: Oh boy. So Todd writes on after telling you how beautiful Big Al is. “Outside of my 401(k) I have a Vanguard brokerage account and a Roth IRA at Schwab. I’m just starting to invest in these accounts. My investment philosophy is to buy and hold for the very long term. I will invest in broad-based funds representing diverse asset classes. I’ll be about 50 USA, 50 international. Side note, no bonds in these accounts, only equities, will add bonds in a few years. I’m unsure whether should buy mutual funds or ETFs. Or somehow mix and match. Generally each asset class, I will invest in Vanguard and Schwab as each fund and ETF equivalent. Do you have any guidance or guidelines as to when we should choose an ETF versus mutual fund? One concern I have with ETFs is that they could be more volatile in the downturn compared with mutual funds because ETFs are easier to buy and sell. But I don’t know if you agree with this. See the links on the specific funds and asset classes. I will be buying from Paul Merriman’s website below. Thank you once more”. All right Todd. Yeah. Paulie Merriman has been on the show multiple times.
Al: Yeah. We like Paul.
Joe: Yeah, he’s got a great firm up in Washington. Merriman.
Joe: Which he now is retired from. And yeah. So he comes up with different portfolio asset allocations. So I would highly have everyone look at PaulMerriman.com. But the main question Todd’s got is like ETFs or mutual funds?
Al: Yeah. What do you think?
Joe: It doesn’t matter, to be honest with you.
Al: I totally agree. I’m indifferent.
Joe: Here’s the, and I think Todd’s a smart guy because he gets it. He’s like ETFs might be a little bit more volatile just because a mutual fund or an index fund is I’m sure is what he’s going to buy, is sold at net asset value at the end of the close of the day.
Al: Yeah. So when you buy and sell you get the price at the end of the day not what it was that exact minute.
Joe: So ETFs came along and basically were really constructed to help institutional investors. Either place options or things like that on a broader index. But you can’t do that on a mutual fund, you can only do it with a stock. So an exchange-traded fund trades just like a stock. That is a bid-ask spread and you can buy it real-time on the overall exchange depending on when you’re buying and that’s the price. So when you put your bid in.
Al: Right. Just like if you buy a share of stock you get that price at that moment. If you do a market order it gets filled pretty quickly and you get whatever it is at that moment. If you buy a mutual fund at the same time you don’t really know what the price is until the end of the day.
Joe: Right. So I would just look at if you’re in it, sounds if you’re following Paul Merriman’s advice, it doesn’t necessarily matter. Just look at the expense ratios, ETFs index funds you’re almost identical. The added cost is that if your dollar-cost averaging. Let’s say you’re putting $200 a month, I would go into an index fund just because there could be transaction costs but not anymore, with Schwab, TD, and so forget about that. Free trades!
Al: But I’ll tell you who would benefit more from ETFs, is someone that trades frequently.
Joe: If you want to put options on it, if you want to get a little fancy with it.
Al: But I think for a long term buy and hold. I’m indifferent. It doesn’t matter at all. I don’t think ETFs would be more volatile. I really don’t.
Joe: It depends on the size of the ETF. I think it could.
Al: Well that’s a good point.
Joe: You know what I mean? I think they’re trying to mirror the index as much as they can.
Al: OK. I’ll agree with that.
Joe: So if I got an index fund at Vanguard there are billions of dollars in that index fund. Or if I’m looking at some crazy abstract type of asset class you could have very few assets in there if it’s a brand new fund or things like that. You could see a little bit more volatility.
Al: And the reason is because if there’s not a lot of assets in the fund, if one person does a big investment or sells a big investment, it can go all over the place.
Joe: And then you know the flash crash that affected ETFs. So you know, a little tit for tat there. But Todd thanks for the email. Listen, we got past shows with Paulie Merriman so check those out.
I’ve linked to those past shows with Paul in the show notes at YourMoneyYourWealth.com – click the link in your podcast app to get there and hear Paul’s wisdom on timing the market, turning $3,000 into $50 million, and the possibility that you only need to invest in two funds for life. And actually, we’ve got resources for everyone today: I’ve also I’ve posted all of our financial independence/retire early resources for Steve and anyone else who wants to figure out how to make and save a bunch of money in a hurry. We’ve already discussed taxation of Roth conversions back when we were talking about life insurance, so I’ve also posted our Roth IRA Basics guide to help you figure out if a Roth IRA is right for you. Speaking of Roth conversions…
36:15 – Should I Do a Giant Roth Conversion in 2025?
Joe: I got James from Arizona. “Hey, Gents and Lady. I’m a new podcast listener. Great show”. Thanks, James. “I’m planning to retire in the year 2024…”
Al: OK. Good.
Joe: It’s right around the corner brother.
Al: Yeah, it is, it’s 5 years.
Joe: “…which is the year before the current tax rates expire. I’m expecting to have about $2,000,000 saved for retirement by then. And $500,000 of that should be in tax-free Roth. In the first year of retirement 2025, I plan to have enough cash on hand to support what we need to live on that year. Since I’m convinced that tax rates are going to increase big time after 2025, I’m thinking of converting $315,000, maxing out the 24% tax bracket from my traditional IRA to my Roth IRA that year and pay the 24% tax. My Roth is for long term growth in at a 6% growth rate the tax amount paid on the conversion will be made up in about 4 years. That money will grow tax-free, my Roth for many future years and then come out tax-free. Also, since the $315,000 will be out of my traditional IRA it will minimize my RMD in future years to help keep my taxable income lower. I know that’s a big tax hit in one year but I think the 24% tax rate would be a good deal compared to future years. I’d like to get your thoughts on the idea.”
Al: It’s a great idea. I agree with the concept. I might execute a little differently.
Joe: I agree with that.
Al: And I’ll tell you how I would execute differently. James, I’m assuming you’re married because you reference $315,000, which is the top of the 24% tax bracket. And I’m also going to make an assumption which may or may not be true, but I’m guessing right now your taxable income may be less than $315,000 as it stands right now. So you could actually be doing Roth conversions currently instead of waiting for 5 years. I like the idea of doing maybe a bigger one then. But the reason why you start this sooner rather than later is the sooner you get the money into the Roth the sooner it grows tax-free. So you could do some in 2019, some in 2020, 2021, 22, 23, and then a little bit more and 24, and up with the same thing. And furthermore if you’re in the 22% bracket, some of it would actually be taxed at the lower brackets and I think you’d come out better that way.
Joe: James I would suggest you look at your taxable income to see what bracket that you’re in right now. Maybe he’s already in the 32% or-
Al: Maybe so. And if that’s so, then forget what I just said.
Al: Your plan is perfect.
Joe: Yep. But given that, I don’t want to judge James because I love Jim here from Arizona. “Great show”. He’s spreading really nice things to say about us. But if he was let’s say making $600,000 a year over the last several years. I’m guessing Jim would probably have a little bit more in a couple of million bucks. Then he’s got already $500,000 in Roths. So he’s either had to qualify to make contributions to Roths. Or he’s converted in the past.
Al: It’s why I made the assumption that his taxable income is below $315,000. Based upon what he’s saying. I could be totally wrong. We don’t know.
Joe: James, look at taxable income. That’s line 10 on your tax return and then say what tax bracket am I in and how much room do I have? And then maybe it’s $20,000, $50,000. Just do slowly over the next 4 or 5 years, you could get $300,000 in over a longer period of time. The tax bite is not going to feel as painful. But then that money is growing in the Roth now.
Al: So the concept is right but we would say start earlier if you’ve got room in the 22% and 24% brackets.
Joe: All right, that’s it for us today. Hopefully, you enjoyed the show. We’ll see you next week. The show is called Your Money, Your Wealth®.
Fans of outtakes, stick around at the end of the episode for a couple quick derails about Chad and Al’s golf game. Thank you all for listening and sharing Your Money, Your Wealth – that’s THE way we reach a larger audience, so we appreciate your help in spreading the word about YMYW! Click Ask Joe and Al On Air at YourMoneyYourWealth.com to send in your questions, comments, complaints, compliments, and stories – these fellas will do their best to give you a useful and entertaining answer on the podcast.
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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.
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