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Published On
January 11, 2022

You’ve saved money for a house downpayment. Should you invest it in the stock market until you’re ready to buy that property? Should a young saver take as much investing risk as possible, or buy a condo? Plus, the tax efficiency of robo-advisor brokerage account withdrawals, backdoor Roth conversions under the Build Back Better Act, using a charitable remainder trust to avoid inherited IRA tax under the SECURE Act, and listener comments on our pension and capital gains compilation episodes. 

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Show Notes

    • (00:49) Are Brokerage Account Withdrawals from Robo-Advisors Tax Efficient? (Sharon, Waukesha, WI)
    • (06:07) Build Back Better Act: Can I Do an Immediate Backdoor Roth Without IRS Penalty? (Ray)
    • (09:55) SECURE ACT: Will My Kids Avoid Tax on an Inherited IRA With a Charitable Remainder Trust? (George, NY)
    • (15:33) Should We Invest Cash We’ve Saved for Down Payment on a House? (Mark, St. George, UT)
    • (20:51) Should I Take As Much Investing Risk As I Can at Age 33, or Buy a Condo? (Bevan, Seattle)
    • (28:02) COMMENT: More to Consider When it Comes to Pension Options (Nancy, CA)
    • (29:44) COMMENT: Thanks for the Capital Gains Compilation Episode (Priya)

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LISTEN | YMYW Podcast #359 – Social Security Benefits for Spouses, Ex-Spouses, and Survivors (compilation)

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LISTEN | YMYW Podcast #325 – Capital Gains Tax Vs. Ordinary Income Tax Explained (compilation)

Transcription

Today on Your Money, Your Wealth® podcast 360, you’ve saved money for a downpayment on a house. Should you invest it in the stock market until you’re ready to buy that property? Should a 30-something saver take as much investing risk as possible, or buy a condo? Plus, Backdoor Roth conversions under the Build Back Better Act, using a charitable remainder trust to avoid tax on an inherited IRA under the SECURE Act, and some listener comments. Visit YourMoneyYourWealth.com and click Ask Joe and Big Al On Air to send in your money questions and comments as an email or a voice message. Voice messages get first priority, so we’ll kick things off today with one about the tax efficiency of withdrawals from a robs-advisor brokerage account. I’m producer Andi Last, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Are Brokerage Account Withdrawals from Robo-Advisors Tax Efficient? (Sharon, Waukesha, WI)

“Hi Joe and Big Al. This is Sharon from Waukesha, Wisconsin. I drive a Honda CRV. I have a kitten named Baby, and I’ve recently discovered salted caramel vodka as my current drink of choice. My question for you today is regarding robo-advisors, specifically Betterment. I guess when I am making a withdrawal out of my brokerage account at Betterment, can I be confident that my withdrawal is being made in the most tax efficient way? I understand there’s other considerations in the broader picture of your overall portfolio and your other types of accounts. But if I was just looking at that brokerage account, are they taking into consideration the most efficient way to draw out those first funds that I may be taking? Appreciate your thoughts. Thanks.”

Joe: I think Sharon’s asking a couple of different questions. When it comes to the brokerage account are they taking a look at the lot level? You know, what is the cost basis, sir? An average cost when they sell the funds? Are they doing first in, first out, last in, first out? So there’s all sorts of different ways that you can take distributions from a brokerage account. Maybe we can probably just start explaining some of that.

Al: I can’t really specifically talk about Betterment, but I know what we do. I’ll talk about that.

Joe: I think in most cases that if, I don’t know what she’s paying Betterment, if it’s just a brokerage house that does not necessarily have an advisor associated with it. You probably, as the client, need to give the brokerage house direction of what you want to do.

Al: Yeah. So to start at the beginning you can do average costs; So that’s all your purchases, including your dividend reinvestments, at the price that went in at that time, all the shares, average cost per share.
That’s one way to do it. Another way is you can do first in, first out. So your first shares that you bought when you sell them are the first ones that are sold, typically in a market that’s going up that would produce more gain. And that’s not optimum. So people generally like average cost better than that. But there’s yet a better way, which is specific identification or on a lot level. In other words, maybe the last few shares that you bought or dividends that were invested, which is like a purchase, maybe those get sold because they have a lower gain.
So that would be on a lot level. That’s what we do. I don’t really know what Betterment does.

Joe: I think if you’re using a brokerage firm as you’re selling stocks or trying to create income from the overall portfolio, I mean, those are key things that you want to make sure that they’re doing or that you’re asking them or that, you know, I would see in most cases, they’re probably just using an average cost. I think that’s the default. You know, if I’m looking at my brokerage account that I’m self-correcting and if I’m selling any shares, they’re going to ask me, would you want to use average cost or is there something specifically different that you would like to use? But if she’s using a robo-advisor paying 20-30 basis points and saying, Hey, distribute the dividends to me or Hey, I need $1,000 a month from my brokerage account, I have no idea I’m guessing. Sharon needs to do a little bit more research, but she knows now what to tell them to do.

Al: That actually is how robo-advisors tend to be more automated, hence the name. It depends what firm you go to. For example, the right answer might be to have the biggest gain if you’re in the 12% bracket because it’s tax-free. It just depends, everyone’s situation is a little bit different. With a robo-advisor, you’re probably getting one flavor that fits all or however they do it.

Joe: Just to piggyback a little bit more on this is that as you’re creating income from your portfolio. You want to look at tax diversification that we talked about quite a bit. If you’re creating income from your brokerage account, are you taking all of the income needed for the coming year from the brokerage account?

Are you going to take some from the Roth account or are you going to take some from your tax deferred account? That’s where you would have to give direction by saying, Hey, I need to generate, let’s call it, you know, $60,000 from my portfolio, so I’m going to be taking some principal and earnings. But from that, do you take all of it from the brokerage account or do you take some of it from the brokerage, some of it from an IRA, some of it from a Roth to keep you in the lowest tax bracket possible?

Al: That’s why we talk about Roth IRAs so much on this program because if you have Roth IRAs, you have more tax diversification and you can keep yourself out of a higher tax bracket. So that’s a good point.

Build Back Better Act: Can I Do an Immediate Backdoor Roth Without IRS Penalty? (Ray)

Joe: What do we got next? We got Ray. “I currently have the following accounts through my job. A pre-tax 457, a pre-tax 403(b) both accounts are fully funded for 2021, and I also have a fully funded Roth IRA. Before 2021 ends I’d like to open a non deductible IRA max it out at $6,000 and immediately do a Roth conversion back to a Roth. Am I able to do such a move without getting penalized by the IRS.”

Well, Ray, unfortunately, you asked us this question on December 5th and I’m sure this podcast is going to air after the first of the year. So two things you already funded a Roth. Of $6,000 you can’t do another IRA of $6,000, it’s one or the other.

Al: I think a lot of people don’t realize that you can do one or the other, not both or any combination.

Joe: You can do $3,000 in an IRA and $3,000 in a Roth. You could do $3,000 in a Roth and then $3,000 in a nondeductible IRA and then convert it to your backdoor Roth.

Al: You could if you felt so inclined. I guess I can do a little update even for 2022.Although as we record this show, 2022 is not there, it’s not happened yet. However, I will say as far as the backdoor Roth and mega backdoor Roth, because it does not appear that it’s going to pass in 2021, you may still be able to do the backdoor Roth and Mega backdoor Roth in 2022, but stay tuned on that one.

Joe: They already took that out of the bill.

Al: But they added it back.

Joe: Then they took it out. We did a whole webinar on it.

Al:I know, but this is an article from Monday, December 20th. So, it was still in there, but Joe Manchin, if that’s that’s how you pronounce it, he doesn’t want to vote for the bill, as is, so it’s probably not going to pass in 2021.

Joe: A couple of things he’s asking the question if I do a backdoor Roth, so I do a non deductible IRA and then I convert it directly into a Roth IRA. Can I do that immediately? The answer’s yes. You put the money into an IRA and then you convert it the next day. Not a big deal.

Al: You can do that in 2021.

Joe: That’s the question he’s asking. So that’s the question we’re answering.

Al: I know. But by the time this is played on the podcast, it’ll be 2022. And at the moment, it seems like you may be able to do this in 2022 as well.

Joe: The question is: Can he convert it right away and the answer is yes. There’s no penalty. Before we would think that it needed a season, but you wanted to wait like 6 months before you converted it because it could have been an arm’s length or sham transaction and all of that BS.

SECURE ACT: Will My Kids Avoid Tax on an Inherited IRA With a Charitable Remainder Trust? (George, NY)

Joe: “Dear Joe, Big Al, and Andi, we love your podcast. I have a question about charitable remainder trusts. I currently have $4 million in my 401(k) and $5 million in a regular brokerage account. I’m 64 years old and my wife is 58 years old. I plan to work another five years. I will start collecting Social Security when I’m 70, and at that time my wife will start collecting her spousal benefit or combined Social Security at that time will be $60,000. We can live off our brokerage accounts, if need to, our yearly expenses are approximately $100,000. I’m concerned about the taxes that my two children will have to pay on the inherited 401(K), which they will have to withdraw within 10 years. Do you think a CRT would solve this problem? Are there any taxes associated with a CRT? After my wife and I pass away, besides the taxes on the income that my kids will pay on income distributed out from the CRT or charitable remainder trust, is there tax on the CRT trust on distributions to and from the 401(k) IRA after our death? Thanks, George from New York.”

Few things, so the stretch IRA was gone after the SECURE Act. What the stretch IRA allowed was non-spouse beneficiary.

Al: So children, anyone but grandchildren, brother, sister, whatever, friend.

Joe: They could stretch the tax out over the beneficiary’s life expectancy. So let’s say if I inherited Big Al’s IRA, I could stretch the tax out over, let’s say, the next 40 some odd years. That was the stretch, so it stretched out the tax liability. So there was not a big tax consequence when you inherited retirement accounts if you didn’t need to pull the money out right away.
The secure act from a few years ago eliminated that, he said no, we can’t let you stretch that tax out over your lifetime. You need to pull the money out. The money needs to be completely distributed out of the retirement account within 10 years.

Al: It can be the same amount each year. It could be a full amount, first year, second year, 10th year or however combination you want to do it. By the end of year 10, it needs to be gone.

Joe: Here’s the problem with George, George has got a lot of cash sitting in a retirement account. He’s got $5 million bucks, right? How old is George? 50? He’s 64 years old. So let’s say he doesn’t need any of the money because he’s got $5 million in a brokerage account, which means he’s only going to live off $100,000 a year and $60,000 is going to come from Social Security. So he needs to pull $40,000 on $5 million, which is less than 1%. So he’s got a 401(k) of $5 million. He’s 64. He lives to 74. That’s going to be $10 million.
And then he has to take RMDs at $10 million. So he’s going to have to take $400,000 out of the overall account roughly. If the account doubles within 10 years as an R&D, and then he’s going to get hammered in tax and then if he passes right, there’s this big, huge retirement account that’s going to go to his kids. Let’s say it’s $10 million at this time. Well, they’re going to have to pull a million dollars out per year. That’s the least

Al: Divided by two because there’s two kids.

Joe: OK, $500,000 out per year or maybe they could do a combination as Al talked about. But adding that much income is going to put you probably in the highest tax bracket, r

Al: There is a solution. You can set up a charitable remainder trust. That’s actually a trust that generally gets set up, in this case, it’s the beneficiary of your IRA. So what happens is when you pass away that the beneficiarys, not your kids, it’s the charitable remainder trust. But your kids are beneficiaries of the charitable remainder trust, and it can be set up so that you have a life payment for each kid so it can still stretch over their lifetime.
There’s some negatives because some of the assets have to go to charity, and if you die prematurely, if the kids die prematurely, then whatever’s in the account goes to charity. Then the grandkids wouldn’t get any. So just be aware there’s pluses and minuses, but you can do that.

Joe: The trust is going to be able to distribute the amount of money over the kid’s life expectancy. So you still get that control if you want, or you can avoid the depletion within 10 years. The negative is that if the kids die prematurely, everything is going to charity.

Al: It’s not necessarily eliminated from your state, you still pay state taxes, and the kids will pay taxes as they receive distributions.

Joe: Hope that helps!

Keep your new year’s resolutions to get your financial house in order, and get more personalized help by booking a free financial assessment. Visit the podcast show notes at YourMoneyYourWealth.com, then click Get An Assessment to schedule a comprehensive dive into your entire financial plan with one of the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors. They’ll show you how to align your investments with your goals and your tolerance for risk. They’ll uncover ways you may be able to save money in taxes and maximize your Social Security benefits. They will also show you how to protect your nest egg in the face of market volatility, inflation, and changing tax laws. Click the link in the description of today’s episode in your podcast app to go to the show notes and schedule a no cost, no obligation financial assessment now.

Should We Invest Cash We’ve Saved for Down Payment on a House? (Mark, St. George, UT)

Joe: Okay, let’s go to Mark from St. George, Utah. “YMYW crew, excellent show, funny and informative. Joe’s not arrogant, just confident.” So he’s got a 2009 Toyota Avalon, he doesn’t have any pets and his drink of choice is crown and coke. “My wife and I recently moved to Utah to be closer to my aging mom. We want to stay in this area so we are renting versus buying a house. Housing market in southern Utah is crazy, expensive. Question: We have $400,000 sitting in cash ready for a down payment on a house. Since we are on the fence about buying a house. What do you think we should do with the money? Appreciate your insights, but not advice.”
He’s got $400,000 sitting in cash. He’s on the fence. Does he want to live in St. George or not? He’s there because mom is getting a little older and probably needs a little bit of TLC from Mark and wifey. What does he do? What does he do? Oh God, I don’t know. I don’t know if you’re on the fence and if you’re not going to stay there. It’s not a great market to buy and sell in a year or two.

Al: I think you’d think of it as longer term. And as much as I would tell you, it’s surprisingly beautiful. I would not want to live there myself because it’s too hot in the summer, too cold in the winter. So there you go.

Joe: Let’s say, even if it’s not St. George, it’s somewhere else. I mean, you need real estate. You need time. Because it’s a big investment. You have $400,000 and you buy a house and then you realize in two years that you don’t like the neighborhood. You don’t like the house.
God forbid something happens to mom and you want to move back to wherever. So what does he do now? He sells and who knows what’s going to happen in the real estate market in two years from now, because the real estate market has done quite well since the crash of 08? So in a two year time frame, I would probably continue to rent until you know what’s going to happen.

Al: That’s what I would do, too. Because even if the housing market stays flat, so you got costs to buy, you got costs to sell. The cost, the cost of buy would be some closing costs and points. You know, let’s call that 1%, just to make up a number, but the cost to sell is probably going to be 6% or 7%. So if your real estate sale stays flat and if you sell at full market value your still going to lose 8% just right there

Joe: And then whatever upkeep.

Al: By the way, And that’s not 8% of your down payment. That’s 8% of the property which eats in and you lose a lot more your down payment. I like to think of real estate in terms of at least a five year hold. Personally,

Joe: I would keep the money in cash. I would rent for the next year to see how you feel about it. And then from there go. If you’re on the fence and you don’t know what you’re doing, I would think of buying a primary residence as long term. It’s not like, Hey, let’s do a quick flip here.

Al: On the other hand, if he’s asking what to do with the $400,000, if you’re thinking you still might want to buy, you’ve got to keep it safe, keep it put in a CD or something like that.

Should I Take As Much Investing Risk As I Can at Age 33, or Buy a Condo? (Bevan, Seattle)

Joe: What do we got here? “I’m excited to listen to you tear this apart.” All right. OK, “my question is probably of no value to anyone other than me. Nevertheless, I hope you can help a man out with spitball in my financial planning. I just won’t hold you to it as I know where you live if things go wrong. Joking aside, I just turned 33 and have been living in the USA for two years now. I have been absorbed into the FI movement, not the RE part.”

Al: Real estate.

Andi: No. Financial independence, retire early. So he’s interested in financial independence, but not the retire early.

Joe: “I’m looking for the best advice that you would have given yourself at my age. What do you think? I have no children, no wife or girlfriend. And I’m saving around $65,000 annually. I’m maxing out my 401(k) Roth IRA HSA. The balance going into my taxable brokerage account, mostly some Vanguard fund VOO.”

Al: That is that’s Vanguard S&P 500 ETF.

Joe: “I have no debt or mortgage. I feel like this is the perfect time to risk as much as I can for the best gains for over the long term. My 401(k) is split 80% large cap, 20 % small cap. My Roth is mostly in REITs due to the tax advantages, and I have not invested my HSA as of yet. I would like to know your opinion on what you suggest as I’m healthy and young. I was thinking about buying a condo, investing less to pay it off as soon as possible.”

He’s saving $65,000 buys a condo instead of saving $65,000, and save a little bit less and then just throw everything against the debt. The housing market is going crazy.

“Anything goes and I look forward to your advice. P.S. I don’t have a car or animals. Only me, myself and your crazy banter every week, which makes me laugh like a crazy person on the bus that rides around Seattle, Washington.”

Joe: Thanks, Bevan from Seattle. We’re going to spitball this thing. He’s saving a ton of money. Does he buy a condo? I mean, he’s saving $65,000. What’s his question, though?

Al: He wants us to tear apart his plan?

Joe: There’s nothing to tear apart – the kid’s saving $65,000 a year, and he’s 33 years old.

Al: Well, let’s start with the 401(k) allocation. He’s got 80 % large cap, 20% small cap. Love it.

Joe: Put some international, maybe emerging markets in there.

Al: At 33, you basically want to be all in if you can handle the volatility.

Joe: It’s a 401(k) and Roth IRA, you can’t touch that money till you’re 60 anyway, you’re 33. You have 30 years to ago?

Al: How about REITs in a Roth?

Joe: No, I don’t like that at all.

Al: I don’t either. I think you’ll probably find that the emerging markets or small cap will do better long term. You want your highest performing asset in the Roth.

Joe: Put your REITs in your 401(k) or IRA. The reason why he’s doing that for the tax advantage is that maybe the interest that kicks out of the RET, he’s deferring that. But if I’m looking at, let’s say, small cap value or emerging markets over the long term probably has a higher expected rate of return than REITs.

Al: Put your REITs in the 401(k), because it’s ordinary income anyway, so you kind of match that up.

Joe: So do you buy a condo in Seattle?

Al: Yes, I would say.

Joe: You’re 33. The market’s always going to be crazy. There’s always going to be something that it’s not going to make it a buying. You’re going to have buyer’s remorse regardless.

Al: Yeah, and at some point there will be a dip in the real estate market. I started investing in real estate in 1985 and there were two major dips. The Great Recession was the biggest one, but now everything is so much higher than what I paid for it. I mean, I think long term, you think virtually almost anywhere in the West Coast, that’s where people are moving to. I think it’s a great location.

Joe: Look, Seattle is a booming market. He’s 33, and let’s say he holds it for ten years. Do you think the value of your condo in ten years from now is going to be higher or lower than what you paid for? You know what I mean? You’re probably going to build equity. You’re going to pay down. Interest rates are pretty low. I would continue to save as much as you can. Now is the time to take the risk and leverage is your friend. As long as you have a good, healthy income and you’re saving $65,000 a year, I would put 20% down, get a decent rate and not necessarily pay any extra and continue to grow your other liquid portfolio. Thanks, Bevan from Seattle.

And yes, Pure Financial Advisors’ Seattle Mercer Island is indeed now open! Visit the podcast show notes at YourMoneyYourWealth.com to learn about the team at the new office, download our brand new Financial New Year’s Resolutions guide for free, Ask Joe and Al your money questions, watch videos of the fellas answering your money questions, and don’t forget to share the YMYW podcast with your friends, family and colleagues on social media or via email. You can do all of that from the podcast show notes, to get there just click the link in the description of today’s episode in your podcast app.

COMMENT: More to Consider When it Comes to Pension Options (Nancy, CA)

Joe: A couple of comments here for you now. Nancy, California she writes in and comments on Episode 354. “You covered a question about how the person’s mother-in-law should take her CalPERS pension since she was going to leave the workplace early to care for her grandchildren. I know they didn’t ask about it, but I think you should highlight that not only is she lowering her future pension by leaving the workplace early, but she’s also lowering her Social Security payments. If they don’t contribute to Social Security for her as their employee. There’s so much more to this decision than getting less expensive childcare.” I agree, Nancy.

Al: That’s spot on, We guess we should have said it, but we try to answer the question.

COMMENT: Thanks for the Capital Gains Compilation Episode (Priya)

Joe: “Hello, Big Al, Joe, and Andi, I would like to thank you for all the great content you provide each week. I’ve been listening to your show for two years. Typically after a few months, most podcast shows feel repetitive, but not yours.” No, because we do this unprepared and on the cuff. There is no practice.

Al: It’s Joe, Al and Andi raw.

Joe: “I love your compilation episode on the question on capital gains. Most books fail to clearly explain the workings of capital gains tax and pro-rata calculations. After listening to your episode, I felt very comfortable and educated with these topics. I have completed 1) After-Tax Basis from IRA to Roth, 2) Backdoor & 3) Mega Back door (for Solo 401K) conversion this year and verified by manually completing Forms 8606, Schedule D. I will know if I did all these transfers correctly when I file my taxes in 2021. No questions this time. Just want to say thanks. Happy holidays and happy New Year in advance. Cheers, Priya”

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Cranky Joe is back with one year contracts, caramel vs carmel, cray-cray, and Al’s Hawaiian golf trip in the Derails at the end of the episode, so stick around. 

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