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 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
November 8, 2022

Following the Fed’s fourth consecutive interest rate hike last week, should you be changing your investing strategy to time this inflationary market, moving from bonds to 3-year annuity CDs? Plus, Joe and Big Al spitball on asset location and Roth Conversions for the in-laws and a net unrealized appreciation (NUA) strategy for company stock in a 401(k). They also discuss whether extra home mortgage payments are part of an investment portfolio, and what real estate expenses are tax deductible. 

Subscribe to the YMYW podcast Subscribe to the YMYW newsletter

LISTEN on Apple Podcasts | Google Podcasts | Stitcher | Player FM

Show Notes

  • (00:48) Inflation Investing Strategy: 3-Year Annuity CD Vs. Bonds
  • (13:24) Net Unrealized Appreciation NUA Strategy for Company Stock in My 401(k)? (Bob, Medina, OH)
  • (20:24) Should In-Laws Change Their Asset Location and Do Roth Conversions? #RetirementSpitball (Tim, NJ)
  • (32:12) Are Extra Home Mortgage Payments Part of an Investment Portfolio? (Lee, Jacksonville)
  • (37:10) Are These Real Estate Expenses Tax Deductible? (Chris, Edina, MN)
  • (41:14) The Derails

Free financial resources:

Your Money, Your Wealth® on YouTube

Pursuing a Better Investment Experience

READ THE BLOG | How to Invest When Inflation is Raging

REGISTER NOW | End of the Year Tax Planning Webinar – Wednesday, November 16, 2022, 12pm Pacific

End of Year Tax Planning webinar

Download the Guide to End of Year Tax Strategies

Free Financial Assessment

Listen to today’s podcast episode on YouTube:


Following the fed’s fourth consecutive interest rate hike last week, should you be changing your investing strategy to time this inflationary market, moving from bonds to 3 year annuity CDs? That’s today on Your Money, Your Wealth® podcast 403. Plus, Joe and Big Al spitball on asset location and Roth Conversions for the in-laws, a net unrealized appreciation strategy for company stock in a 401(k), and they discuss whether extra home mortgage payments are part of an investment portfolio and what real estate expenses are tax deductible. Visit YourMoneyYourWealth.com and click Ask Joe & Al On Air to send in your money questions. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Inflation Investing Strategy: 3-Year Annuity CD Vs. Bonds

Joe: We got Kevin from Maryland. “Greetings, Joe, Al, and Andi. Have been listening to your show for about a year. Found it through a Google search.”

Al: Oh, cool.

Andi: Thank you, Kevin, for telling us how you found the show. I appreciate it. Now, we want to know what you Googled, though. Flippant Retirement?

Al: Yeah, worst podcast.

Joe: Googling. Something big. Big Al showed up. “Wife and I are 73 and retired. I enjoy a Sam Adam Seasonal.” All right. “Wife drives a 2015 Honda CRV, and I drive a 2018 Honda Civic.” Honda family.

Al: Yeah.

Andi: I’m a Honda family.

Al: Hondas are good.

Joe: Yeah. They last long time. “Our pensions and Social Security are sufficient to meet our needs and wants.” Second in a row here.

Al: That’s right.

Joe: “Own our home and have a one-year emergency fund. Currently I manage our investments, with the total $1,300,000, the portfolio is 50/ 50 stock bonds. The portfolio is composed of low-cost index funds of ETFs. In order to keep the portfolio balanced, the IRA portions of the portfolio not only contained bond funds. Recent bond fund ETF losses combined with RMD withdrawals forced me to invest in bond fund in my non-qualified account. Given that any interest earned will be taxed at 22% Fed, 6% state and given the promise of the Fed to continue to raise interest rates until inflation is controlled, causing losses in bond funds, I am spit balling the idea of putting future non-qualified bond money parentheses into a 3 year annuity CD instead of the bond fund. The interest will grow nontaxed until withdrawal and it will avoid any loss of principal due to rising interest rates. At the end of the annuity contract period, I can withdraw the money, pay any tax and invest in the bond fund. Currently there’s a total bond fund ETF with a projected APY of 5%. I’ve seen 3-year annuity CDs advertised between 3.5% and 4%. Would appreciate your spitball option on this idea. Enjoy your show. You keep up the good work.” Okay, let’s unpack a couple of things.

Al: Yes. 3-year annuity CD, what do you think?

Joe: He’s 73, so yeah, that’s possible. Instead of a CD, like a certificate of deposit is that you’re investing. It’s a loan. They’re going to get a guaranteed interest rate. That interest is paid each year. So you could go one year, two year, three year. This is a fixed annuity. It’s basically what it is.

Al: Right. It’s not a CD. I guess you could say it’s like a CD, but it’s an annuity.

Joe: Yeah, it’s a fixed annuity that’s paying whatever, 4% or 5% that’s growing tax-deferred. And then when he takes out the money out of the contract and he just pays all the tax at once. So instead of annually. If he was under 59 and a half, then it’s like, okay, well, it’s not really a 3-year CD because you can’t take any money out of a non-qualified annuity until you turn 59 and a half. Since he’s 73, I think we’re kind of splitting hairs there a little bit, but it’s backed by the insurer versus a bank. So there’s some nuances with this. It’s probably backed by the general ledger of the insurance company versus the coffers of whatever ABC bank.

Al: Yeah. Which are then protected by the federal government, which prints our money. So that’s pretty safe.

Joe: Yes. Can’t really say that though, Al. Well, there’s FDIC insurance for CDs and bank deposit.

Al: Yeah, that’s what I mean.

Joe: Yeah. FDIC insurance. Got it. Okay. So here’s what he’s doing though. Again, I think people get a little bit crazy here to the gnat’s ass or the penny here. So he’s got 50/50, he’s got $1,300,000 and $600,000 roughly, $650,000 to be exact, sorry Kevin, is in IRAs and $650,000 is in a brokerage account. Right. He’s got $1,300,000. The $650,000 in his retirement accounts are in bond funds. The other $650,000 are in equities. Are you reading it that same way or listening to me read it that way?

Al: Well, it says the portfolio is a 50/50 stock and bonds. Where did it say that it’s 50/50 between IRA and-

Joe: Because he goes ‘recent bond fund ETF losses combined with my RMD withdrawal now force me to invest in bond funds in my non-qualified account.’ So there’s actually more money in the non-qualified than there are in the qualified account because you got to add bonds to the non-qual and just kind of maybe doing some back of the envelope math there.

Al: It could be. Anyway, I think the 50/50 refers to the stock/bond mix, but I’m not too sure about the allocation between the dollars in the deferred versus taxable.

Joe: Okay, so if he has to invest bonds in a non-qualified account and he wants a 50/50 split, that would tell me that he’s got more money in the non-qualified account than he does in an IRA.

Al: Got it. Yeah. Okay, I’ll go with that.

Andi: You’re like the Sherlock of investing.

Al: I do see your point.

Joe: If he wants a 50/50 split.

Al: Yeah. Right.

Joe: If he had- and then he’s like, oh, now I got to invest stocks in my IRA. Well, that would tell me that his IRA is larger.

Al: Yeah, okay, I will go with that. I’m starting to see your logic.

Joe: All right. Put the Mai Tai down.

Al: Can’t help it. I already had it. Anyway, I’ll go with that.

Joe: I got a couple of questions for Kevin in Maryland. Now, so he’s taking RMDs from his bond fund. It sounds to me that he’s just transferring shares in the bond fund into the brokerage account, but I don’t know that information. Or is he selling the money to take the RMD and reinvesting in these bond funds?

Al: Yeah, I’m not sure what to reinvest in, but since he wants 50/50, maybe that’s right. Maybe he’s buying into the bond funds.

Joe: But then he’s like, well, I don’t want to keep this bond money. I want to buy this 3-year annuity. So if he’s transferring shares, here’s my answer and then we’ll move on, because I’m not sure Big Al is following me here.

Al: Go for it.

Joe: If Kevin is transferring shares- because we answered this same question a couple of weeks ago with bond funds, bond funds are down. I’m going to sell my bonds, and then I’m going to buy CDs.

Al: Right. We did answer that question.

Joe: So if he transfers in-kind and so what that means is that you have an IRA, you have a brokerage account, and you have XYZ Investment. Instead of selling XYZ Investment and repurchasing XYZ Investment, you can just transfer whatever shares of XYZ Investment into your brokerage account. You don’t have to sell it. Now that is- that qualifies for your required minimum distribution. If he’s doing that, I would tell him to continue to do that because bonds will come back. You’re going to lock in your loss and then buy a guaranteed product at 5%. That’s fine. But then it’s like how big of a loss do you have? Because a bond is a loan. So you’re lending your money for a certain interest rate, and at the end of the term of the loan, the bond matures at par. So depending on what type of investments that you own, if there’s a bunch of bonds in there and as they come to maturity, those are going to be redeemed at par through those managers, and then they’re going to reinvest in other bonds at a higher rate. That’s why you buy an index fund or an ETF. You just have a large bigger basket and you can get them at a cheaper price and you’re more diversified. I get it that you bought a bond, ETF or index fund that maybe had a little bit longer maturity because you’re trying to maybe get a little bit higher yield. And then all of a sudden, interest rates flip on you and you’re down 7%, 10%, whatever percent in your bond funds. I would hate to sell that and then get locked into annuity. And then when interest rates come back, he’s trying to time. Oh, the Fed has already promised us- the Fed says all sorts of stuff, you know, that doesn’t necessarily mean it’s going to happen, right? So I don’t know. He’s trying to time markets, and if he wants to do that, if he feels better and safe at night, then go ahead and do that. But it might not be the best strategy.

Al: Well, I think the other angle is taxation, right? So if he’s buying bonds or bond funds in the non-qualified, he’s paying tax as he goes on the interest payments. So with an annuity, he defers that until in this case, 3 years. So that’s the potential to reduce taxes, at least currently. Or he could go into municipal bonds in his non-qualified. Right? If he’s worried about taxes.

Joe: But if the market is down- he doesn’t need the money. You know what I mean? Why buy CDs? Buy some more stocks. Change your allocation.

Al: Right. But so many people are looking at bonds or bond funds and saying well, this is terrible. What else can- because you know why that happens, Joe, is because people look at investments as a standalone instead of what they’re doing in the total portfolio. Which is a dangerous way to do it. Because when you start looking at each individual asset, you’re always going to say well, stocks outperform bonds. So why should I have any stocks? But then when the market turns like it’s doing right now, it’s like, well, I’m in trouble, right? So you get the allocation that’s right for you. You don’t pay too much attention to each individual return. I mean, you do. I mean, if you got a bond fund or a stock fund that’s not performing as it should be based upon the class of assets that it has. That might be something. But in terms of- forget where I was going. It was the Mai Tai again.

Joe: Yeah. Perfect. I think you make a good point though. Right. You have to understand the risk associated with the investments that you’re in and looking at the portfolio as a whole and what the risk and expected return of the portfolio is to match up your overall goals. Right. And it sounds to me that Kevin doesn’t necessarily need the cash or the money. And he’s saying, hey, I want to make sure that this is exact 50/50. So instead of rebuying these ETFs or bonds at a loss and the Fed is going to continue to increase interest rates and these bonds are going to continue to fall in market value price. Why even go into bonds because it’s a guaranteed that I’m going to lose money instead of going into a CD or an annuity where I’m guaranteed to make money? Right. So if you want that guarantee, yes. Now just realize, okay, there’s risk and expected return. That’s fine. You already bought the risk in the bonds. You’re going to buy that risk, take it out and say, all right, that’s fine. I’m going to accept that loss and then I’m going to take this gain. And it could be a lot less than what the bonds do over time, but as long as you understand that risk, then go for it. Right. But if it was my money- but if it was me, I probably wouldn’t do that because I’ve already bought the risk in the bonds knowing that if interest rates fluctuate, I understand that what the bond characteristic does.

Al: Right. Good point.

Read our blog on How to Invest When Inflation is Raging, download our guide to Pursuing a Better Investment Experience, and read the full transcript of today’s episode: just click the link in the description of today’s episode in your favorite podcast app to go to the show notes, access all these free financial resources, Ask Joe and Big Al On Air, and to share YMYW.  You don’t even have to put down your mai tai first. 

Net Unrealized Appreciation NUA Strategy for Company Stock in My 401(k)? (Bob, Medina, OH)

Joe: We got Bob from Medina, Ohio. All right. “Hello, Joe, Big Al, Andi. Thank you for hosting such a great show and your insights. I’ve been a loyal listener since show 243. What a great show that was.”

Andi: We’re over 400 episodes now, so Bob is a long-term listener.

Al: Long term listener. Like it.

Joe: We have thousands of shows.

Andi: That’s true. But we only have 400 and something that are actually numbered.

Al: I think we started counting at 100.

Andi: And he even says ‘what a show that was’ like you guys always do anytime anybody quotes a podcast episode number.

Joe: It was a great show, just gotta tell ya. 243 was the start- It was the start of something really special- relationship building with Bob.

Al: It really was.

Joe: “We have some questions around the Net Unrealized Appreciation Rule.” NUA.

Al: Oh, boy. Okay, let me put on my thinking cap.

Joe: Here we go. “After working in a Fortune 500 company for several years, I accumulated approximately $2,500,000 of tax-deferred investments in my Fidelity 401(k). Of the $2,500,000 balance, about $200,000 of that is company stock. I left the company for another venture about 4 years ago, but kept the funds in the 401(k) existing at Fidelity. I am 52 years old, married, two kids, about to graduate college. We have $2,500,000 in my tax-deferred 401(k), $200,000 in a brokerage account, $200,000 in Roth IRAs and $400,000 in cash. We have no debt. And I will have a pension of about $30,000 a year when I decide to retire. Expect to retire at about 56 years old. I now work for and invest in a middle market PE backed company and expect my proceeds to be about $5,000,000 to $7,000,000 when we exit the business in the next couple of years.” It’s pretty good.

Al: That’s not bad at all. Like it.

Joe: Look at Big Bob. “I feel that I’m in pretty good place with regards to having enough money to retire.” Oh, you think? Bob? “I got about $10,000,000, but now focused on getting as much over to the Roth in the next several years, especially with the market being down. I’m currently converting tax-deferred dollars up to the 24% tax bracket. But wondering if there’s a different strategy that I can be implementing for the company stock portion of the 401(k), utilizing the NUA rule and how that works. Also, I contribute to my 401(k) stock plan for several years. Will Fidelity be able to provide me with the cost basis for the stock that I currently have in the plan? Thanks again for your insight. I drive a Jeep Grand Cherokee and I enjoy a few Miller lights on the weekends.” All right. Bob from Medina.

Al: Cool.

Andi: No, Medina.

Joe: Medina.

Al: Medina.

Joe: Yeah. I thought it was Medina.

Al: You were right in the first place.

Joe: Yes. Like Medina Country Club. It’s probably spelled differently. Okay, let’s talk about net unrealized appreciation.

Al: Yeah. So that’s where you work for a company, public company, right? I think this would be public, right Joe?

Joe: I believe so, yes.

Al: And you’ve got company stock in the 401(k). There’s a special rule that allows you to distribute the company stock out of your IRA- or 401(k), into your brokerage account. So in this case, $200,000 into the brokerage account. And then you pay tax on your cost basis. Let’s say the cost basis is $20,000 just to make up a number. So cost basis $20,000. You pay tax on $20,000 ordinary income, same kind of income as salary. And then the other $180,000 is what they call net unrealized appreciation. When you actually sell that stock, you’ll pay capital gains on that extra $180,000 of appreciation. But a capital gain rate is a lot less than an ordinary income rate. And so when you’ve got that possibility, then it’s something to always consider because you’ll be basically converting potentially a lot of what would otherwise be ordinary income into capital gain income.

Joe: Yeah. So, Bob, you definitely want to look at that strategy because he’s realizing, all right, well, I got a pretty good balance in my retirement accounts. That’s all going to be taxed ordinary income. I’m going to get a nice little windfall after this little PE deal that I’m working on, just a cool little $5,000,000 to $7,000,000 in a couple of years when I exit, when the sponsor exits, you got to just get all the lingo in there, Bob. So he’s going to have some cash and he’s like, man, I got a lot of money in this retirement account. But is there another way? Because we always talk about conversions, but for those of you that do have company stock, so it’s not any type of stock. So we work for- let’s say he worked for Microsoft. He’s got Microsoft stock inside his 401(k). He could take that Microsoft stock out of the 401(k), pay tax only on the basis, which is a pretty good deal if you have highly appreciated stock. So that’s why the whole technique is called net unrealized appreciation. So that unrealized appreciation that you have is going to be taxed at that cap gains rate versus ordinary income versus every other dollar or every other type of investment that you hold in the retirement account is going to be taxed at. So yes, call Fidelity, find out what your basis is. If you can’t find the basis, which I would highly doubt that Fidelity won’t have that record. What would you suggest as a CPA and you’re helping him with his taxes? Would you say best guess? Or what would you do there?

Al: Yeah, typically the brokerage houses have that but let’s just say they didn’t. Then I would use best efforts to try to figure that out and come up with something that you think would be supportable and why it would be supportable for the IRS if ever questioned. But typically I don’t think that would happen in this case. But it does happen more often in like a brokerage account when you have stocks from years ago before the brokerage firms started keeping track of cost basis. Sometimes people will have bought stocks in 1990 for example. All you can do is best guess on when you bought it. Now with the internet you can look at what stock prices were back then and try to figure out your number of shares. Again, it’s not going to be perfect, but best guess. But generally NUA, the Fidelity should have that information.

Joe: Alright, thanks for the question Bob. Congrats on all your success and good luck with your little middle market PE backed company.

Should In-Laws Change Their Asset Location and Do Roth Conversions? #RetirementSpitball (Tim, NJ)

Joe: Tim, New Jersey he writes and he goes, “Hey, Joe, Al, Andi. Love the show and the great content you produce. I listen to your podcast every week. I drive a Toyota Sienna.” Is that right? Sienna?

Al: Yeah, that’s right.

Joe: Okay. “And my drink of choice is whiskey neat. My father-in-law is retired. Enjoying the extra time working in his new wood shop. He asked if I could look over his situation. I’m hoping your spitball will match my advice. Here’s the situation. He’s 73 years old. Between pension, RMDs and Social Security, his wife takes her Social Security, they bring in about $108,000. They have $500,000 in IRAs, $94,000 in FI-“

Andi: Father-in-law’s Roth-

Joe: FIL Roth-

Andi: Father-in-law.

Joe: Father-in-law Roth. Thank you, Andi.

Al: That’s a new one.

Joe: “- $96,000 in MIL Roth.”

Andi: Mother-in-law-

Joe: How did you know that? Is that common?

Andi: Because I’ve seen- MIL is. I’ve never seen FIL. But I mean, it makes sense. So obviously-

Joe: It’s like $500,000 parentheses IRA. OK, I know what an IRA is. And then all of a sudden-

Andi: It’s context Joe, he says his father-in- law is retired-

Joe: FIL Roth.

Andi: Yeah.

Joe: I thought I was missing something. All right. “$500,000 in IRA. $94,000 in father-in-law Roth, $96,000 in mother-in-law Roth and $350,000 brokerage. They have a mortgage on the house. They’re able to cover all expenses through the pension, Social Security. First question is concerning the allocation. Currently they’re 80% stocks/20% bonds through all their accounts. I know, very aggressive. But they sleep all at night and all their expenses are covered through their income. I have said that they should reallocate their accounts, putting all their bond funds in the IRA and just keeping stock funds in their Roths if they were to keep this allocation. Does this make sense?” And then it gives us some ticker symbols.

Andi: It’s interesting to know that the first one is bitcoin. BSV is bitcoin.

Joe: So that’s the first question. What do you think, Al?

Al: Well, let’s see. So first of all-

Joe: He wants to do some asset location, is the question, right?

Al: Yeah. So you look at the facts and his income- his expenses are provided from his income, which is great, which means he doesn’t necessarily need the investments to live off of, which gives him a lot of flexibility. Do you want to be more aggressive based upon what your goals are? Or do you want to be less aggressive because you don’t need as much? It sounds like he sleeps just fine with this allocation. So as far as asset allocation, let’s see, we’ve got-

Joe: He’s thinking, alright, well, here I’m telling him to put the bonds- all the bonds in the IRA and then put all the stocks in the Roth. I get it. This guy 70 years old. It’s 80%/20%. I mean, do you want to do all that hassle? Sure you’ll get- if it was 50/50 or 60/40, then I could see you would probably want to rearrange the portfolio. But he’s already got 80%, 85% already in stocks in each account.

Al: Yeah, right, exactly. So it may be too much of a hassle, but, I mean, the concept is fine. Like, let’s say we don’t know where the bond funds are, but let’s say they’re spread out equally, which means they’re mostly already in the IRA. So maybe you just have a little bit more to allocate to the other. The bond funds in the brokerage account probably don’t have any gain, maybe even have some losses, potentially. So you tax loss harvest, you can do that. Long term, it will work out well. But, yeah, we’re talking- just roughly added up about $1,200,000. So 20%, let’s call it $200,000 ish of bond funds. And if half of them are already in the IRA, we don’t know, but let’s just say they are. So then you got the other $100,000. You could go into that exercise if you want to, but I’m not sure it moves the needle that much.

Joe: Sure, yeah. It’s $20,000 in each Roth. Right. So you sell whatever there and then you buy more Bitcoin or whatever. I’m cool with that. All right. He’s, like, taking what we say absolutely to the penny here.

Al: Yeah. And you know what? It’s the right strategy. But the other thing, too, is, first of all, it’s your father-in-law. It’s not your father. And he’s probably very comfortable with his investments. So do you really want to go there and tell him, I heard this show on the radio, father-in-law, and they said, you should do this, I’m telling you. Just thinking out loud.

Joe: Yeah, because probably Tim’s father-in-law is like, you’re out of your mind, Tim. Thanks for the advice, Tim.

Al: It’s like you youngster. You don’t know what you’re talking about. Just take care of my daughter. That’s all I need.

Joe: Yeah, right. He’s like, oh, shoot, you know what? I’m going to send it into the boys over at Your Money, Your Wealth®. They’ll agree with me, and then I’ll send them.

Al: They’ll tell him and I’ll say, see, I told you, Pop, Pop-in-law.

Joe: “Second question concerns Roth- concerns a Roth conversion.
Sorry, but you knew this was coming.” Yes, we did. “By having to take RMDs, about $22,000 per year, they are just into the 22% tax bracket. They take the standard deduction. They are currently not spending all the income coming in. I suggest that they should use the next 4 years to do Roth conversions. I think converting all the IRAs is a little extreme, but almost possible. It would be great to reduce the RMDs enough to push into a lower tax bracket. What’s your spitball on this? Thanks for the help.” All right, so if I take $108,000 and you minus $22,000 and then you minus, let’s call it the standard deduction is- I don’t know, call it-

Al: Yeah, call it $30,000- but call it $30,000.

Joe: So if you take the RMD out, his taxable income is $60,000. You add back the RMD of $22,000. I mean, he’s right at the top of the 12%, just touching the 22%.

Al: The way it is right now. So do you want to pay all that much more tax?

Joe: He’s paying like a few bucks in the 22% tax bracket, what it sounds like.

Al: Yeah. It’s not like this is too far out of whack, right?

Joe: If it was half in the 22% tax bracket, then it’s like- because how marginal tax brackets work is that you don’t pay any tax at all until you reach the 10%, and then you pay tax at 10% from- I got the exact numbers here-

Al: That’s good because I don’t.

Joe: Okay. If you’re married, so this individual is married. So zero to $20,000, $500 is the 10% tax bracket. And then from $20,000 to $83,000 is the 12% tax bracket. So the top of the 12% is $83,000. The bottom of the 12% is $20,000. So the first $20,000 of taxable income is taxed at 10%, and then the remaining up to $83,000 is taxed at 12%. And then anything over $83,000 is going to be taxed at 22%. If his taxable income is $85,000, only $2000 of his taxable income is going to be taxed at that 22%.

Al: Right. And so do you want to fast-track a higher tax to avoid a lower tax later? And the answer is probably no. And I guess just to recap, here’s what Joe did. So he took the total income of $108,000, and he subtracted out the standard deduction, we’ll call it $30,000, and he took out the RMD. So without regard to the RMD, and you got, what, about $60,000 ish somewhere- somewhere in there. So now $60,000, maybe a little bit more, but $60,000. Now you add your RMD back to that to figure out what bracket is it taxed in. And when you look at it, almost all of it is taxed in the 12% bracket. So do you really want to be paying tax at 22%? Because most of the RMD is taxed at the 12% bracket. So if you do Roth conversion, all the conversion would be taxed at a higher bracket. So that doesn’t really seem like a great idea.

Joe: Right, because you’re taking everything- because the RMD is not going to grow all that much potentially, unless Tim’s father-in-law dies. Right. And then you have the mother-in-law or vice versa. Then all of a sudden, all these brackets get cut in half, and then you still have the big RMD. I don’t know what the survivor benefit is on the pension. And then she or he will take the higher of the two Social Security. And I would imagine that a lot of that RMD would then be taxed at that 22% tax bracket, which is turning to 25%. So Tim could be planning for himself and being like, you know what, I’d much rather inherit the Roth than the IRA because I’m in a pretty high tax bracket, because I’m astute, I listen to Your Money, Your Wealth®.

Al: That’s right. Father-in-law has this money he doesn’t need. Let’s get it into a Roth.

Joe: Let’s get it into the Roth. So it does make sense to some degree, but Tim, just realize that only a few dollars are taxed at that 22%. So if you go to the top of the 22%, which is $180,000, so you could convert a lot of that money out, but I don’t know, you would have to run a projection to see, okay, in 2026, the 22% is going to turn to 25%, and then the RMD is going to continue to grow. If they’re not using the money, the $500,000 could be a lot more depending on if we have a big bull run. Now, those RMDs are taxed at 25% versus 22%. So could you get a lot of it out of 22%? Yes, that makes sense to me. The market is down 20%, so converting this year is an absolutely no brainer to me. So I would at least have a bite off slowly. Maybe convert this year, pay the tax, see where the run up comes, and then do another calculation to say, okay, well, we converted $100,000 out. Now what is his RMD on $400,000 versus $500,000? And then it’s probably not even going to breach the 22% tax bracket. Or get enough money out of the IRA, where his RMDs in the future will stay in that lower 12% or 15% tax bracket.

Al: Yeah, that’s well said. You brought up two really key points, Joe. One being is one spouse will probably survive the other, and the surviving spouse will be in the single tax brackets, which means they’ll be in higher tax brackets, number one. And number two is we’re in a down market. So when you convert now, when the market turns around, you get that growth in the Roth. So there are a couple of considerations that sort of negate what we just talked about.

Find out how recent tax legislation and proposals impact you, your family and your retirement savings, and understand the strategies that can help you reduce your tax liability as you plan for retirement. Register for our free End of the Year Tax Planning webinar with Pure Financial Advisors’ Tax Planning Manager, Amanda Cook, Equire, CPA, Wednesday, November 16th at noon Pacific time. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, reserve your spot now and download the companion End of Year Tax Strategies guide. It’s all free from Your Money, Your Wealth® and Pure Financial Advisors.

Are Extra Home Mortgage Payments Part of an Investment Portfolio? (Lee, Jacksonville)

Joe: Lee from Jacksonville writes in “Hey JABA.” Someone did this before, right?

Al: I think so.

Andi: It was Will, the gas siphoner, who did this, and this is not Will.

Joe: Oh my God.

Andi: It’s becoming a thing.

Al: It’s so clever though.

Joe: JABA.

Al: Joe. Andi. Big. Al. JABA.

Joe: “Quick question about my home mortgage. When making extra payments to reduce the amount of interest paid, do you consider this to be part of an investment portfolio? Granted, it does not make gains. As time goes on, however, the value of a home generally increases. Do you find this to be logical or is it a pseudo idea? Thanks for always providing great information as it pertains to money so we don’t have to eat from the same bowls as our pets in retirement.” What do you think, Al?

Al: No, it’s not part of your investment portfolio. I’m not saying you don’t- I mean a lot of financial advisers tell you not to do that because generally your investment portfolio is going to earn more than your mortgage. At least that’s how it has been the last decade or two. Things may change, may not, who knows? I’ve done it though. So I mean, I’m not saying don’t do it, but I would make sure that you’re saving enough in your investment portfolio to be able to have extra to be able to do that if in fact you want to do that. That’s how I would say it.

Joe: Yeah. Because what you’re doing is you’re taking a liquid asset and you’re putting it into an illiquid asset. Your home equity. And then all of a sudden we see this, oh, my house is paid for, but I’m broke.

Al: I got no money. Right.

Joe: I got no cash. Then something happens, and guess what? You’re going to refinance your house and pay a bunch of fees to get cash out of it.

Al: Yeah, right. We have seen that many times. And here’s the other thing, too. The house is going to appreciate the same whether you have a mortgage on it or not. So it’s not like you paid this off and got more appreciation. You can’t really look at it that way.

Joe: Yeah, you’re creating more equity faster, but you’re losing liquidity faster.

Al: Yes, you are. But I’m not saying it’s necessarily wrong because, I mean, a lot of people, when they retire, Joe, would prefer not to have a mortgage.

Joe: Without question. I’m not arguing that strategy.

Al: No, I know. Myself included. But the point is, make sure that you have enough saved in your investment portfolios to be able to cover your retirement before you start throwing extra money towards your mortgage.

Joe: But I guess the question Lee asked is, would you consider this an investment?

Al: And I don’t.

Joe: No. It’s not an investment. It’s called debt that you’re paying off. You got to look at interest rates, too. If he’s paying extra on his interest rate, that he, you know, when did he get the interest rate? Right. If it’s 3%, would you be paying that thing off?

Al: Right? Yeah. Now that seems pretty good.

Joe: Look at where home mortgages are today. What interest rate do you have? Now, you could do a full arbitrage on, let’s say, if you had this mortgage for a while, take that money and buy one of these CD annuities that we’re talking about.

Al: Although, you know what? Maybe this kind of question comes up more right now because the market has not done well. So now you’re thinking, well, why should I keep investing in a down market, right? Because I could at least pay off my mortgage and save 3% that way. But the truth is, when the market is down is exactly when you want to increase your investments, because now stock prices are cheaper because you’ll do better in the long run. So don’t get confused about that. You don’t stop investing in a down market. If anything, you actually want to add a little bit more.

Joe: Yeah, I think Lee is doing what a lot of people do, and unfortunately, it’s probably the exact opposite of what you should do, because this is where emotions come into play. Is that I have a mortgage on my house, my investments are down. What should I do with this extra cash flow? I don’t want to throw good money after bad by buying more in my 401(k), because my 401(k) is down 25% and it would sure feel nice if I could pay off my mortgage and I’m going to throw extra payments in there and then I’m just going to tell myself it’s an investment. Well, a) it’s not an investment. And b), you got to pony up a little bit. This is where people really make mistakes. And people that do this right end up winning. And people that do it wrong, unfortunately, don’t necessarily come out as well on the other side because they don’t have a well thought out strategy or plan or have the discipline to keep their strategy alive.

Al: Yep, good point.

Are These Real Estate Expenses Tax Deductible? (Chris, Edina, MN)

Joe: We got Chris from Edina, Minnesota. Edina, Alan. “Big Al, quick real estate question for you. Can’t even believe I’m trying to submit on this website, but here it goes.” Al, We got it.

Al: Yeah, I guess it works, huh?

Joe: Yeah. Website sucks, but thanks to keep trying. Probably took him 4 times.

Al: Probably.

Joe: “Just bought a second home that includes a lease-back for 4 months. Is this considered rental income that must be reported to the IRS? If so, can we deduct any of the closing costs or any other expenses, like buying new furniture for the place? The rent will be received October 22 through February 23. $3000 a month. With your trips to Hawaii and Italy, I figured you were well rested and could give Joe a question off. Much appreciated. Keep up the incredible work.” Thank you, Chris.

Al: All right, well I am well rested. In fact, I’m in Hawaii right now as we speak. Super rested. In fact, if I just, like, nod off, you’ll know, I’m chill. All right? I’ll hang loose and I’m chill. Anyway, Chris-

Joe: The lease-back. I mean, explain that.

Al: Yeah, you buy a property, but the person that sold it’s not quite ready to leave. So they want to lease it back from you for a period of time. In this case, 4 months. So Chris buys the property, it closes escrow. The current owner now becomes a tenant, and it’s going to stay there for 4 months, until they make arrangements for their next home. Totally legit. Happens all the time. That 4-month period, yes, that is rental income. So you have to report that as rental income. And you can report normal rental expenses against it, such as homeowners association, interest expense, maintenance to fix up the property, or at least have it maintainable. Like, let’s say something goes wrong with the stove, you’re going to have to fix it because you’ve got a tenant there. Things like that, all deductible. You actually can depreciate it over that 4-month period of time. So probably with all that you’ll end up with, I’m guessing maybe a net negative anyway, or at least close to it. As far as some of the extras, closing costs, when you buy a rental, you can deduct it over the term of the loan, which presumably is probably 30 years. So maybe you could get 4 months of 30 years as a deduction. Buying furniture, that’s for you, that’s not for the tenant, so I wouldn’t try that one. But yeah, normal rental expenses and maybe a little piece of depreciation and then call it good. Alright, Al’s in Hawaii enjoying his time there. We’re grinding away here in San Diego. Appreciate everyone taking the time to listen once again this week. Please get your questions in. If you like the show that’s great, we love having you. Anything else?

Andi: I think we’re set.

Joe: Alright, thanks again. Your Money, Your Wealth®, we’re signing off.

Andi: But just until next week. Edina, Medina, McAllen’s neat, JABA, and movies in the big ol’ Derails at the end of the episode, so stick around. 

The Derails



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.

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC, a Registered Investment Advisor.

• Pure Financial Advisors LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.

• Opinions expressed are not intended as investment advice or to predict future performance.

• Past performance does not guarantee future results.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.

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.

AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.

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.