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 [...]

Published On
October 8, 2019

You’ve sold your primary residence or your rental property. How should you invest real estate proceeds for retirement? When do Joe and Big Al say you shouldn’t do a Roth conversion? What’s the math on federal vs state taxes when doing a Roth conversion if you move to a no income tax state? And how is your pension taxed if you move?

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Show Notes

  • (00:53) How Should I Invest Proceeds from Rental Property Sale? Should I Dollar-Cost Average?
  • (07:16) I Sold My Primary Residence. How Should I Invest the Money for Retirement?
  • (12:06) Comment: Retirement Account Protection From Lawsuits
  • (14:00) What Happens If I Do a Roth Conversion Then Move to a No Income Tax State? And Would I Pay Tax on My CA Pension?
  • (23:06) I Work For USPS. Should I Contribute to a Roth IRA or Max Out My TSP?
  • (26:15) How to Invest an Extra $50K: Roth Conversion or Add to After-Tax Investments? How Aggressively Should I Convert?
  • (30:27) My Deferred Compensation is in a Target Date Fund. Should I Move to TIPS or Bonds?
  • (34:44) Is This a Good Retirement Plan for My Kids?
  • (39:08) How Do I Recover Lost Savings Bonds?

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Today on Your Money, Your Wealth®, Joe and Big Al answer 10 money questions and comments from 6 YMYW listeners who have learned exactly how this podcast works. Elaine sold her condo, Steve sold some rental property, and both want the fellas’ input on how they should invest the proceeds. And it wouldn’t be YMYW without some Roth contribution and conversion conversation – say that ten times fast! Like when do the fellas say you shouldn’t do a Roth conversion? What’s the math on federal vs state taxes when doing a Roth conversion if you move to a no income tax state? And what happens with the taxation of your pension if you move? Plus, the fellas comment on the retirement plan listener Marion has mapped out for her kids. If you’ve got a money question or comment, get it in now – go to YourMoneyYourWealth.com, scroll down and click Ask Joe and Al On Air. I’m producer Andi Last, and here are Joe Anderson, CFP® and Big Al Clopine, CPA.

:53 – How Should I Invest $150K from Rental Property Sale? Should I Dollar-Cost Average?

Joe: Steve writes in, Alan. It’s got no location given. Steve. Follow the rules.

Al: That’s one thing that we request is where are you from.

Joe: We’re giving really good advice at no charge.

Al: Well it could be good. Pretty good. But it’s reasonable advice. It’s free. That’s the main thing.

Joe: All right. So Steve writes in, we don’t know where the hell he’s at, but he “recently sold a rental house and will be left after taxes with $150,000 of profit”.

Al: Good for you.

Joe: All right. Steve’s debt-free. “I have 2 separate retirement savings plan. One is aggressive. The other conservative. I’m 64 years old and have not started my Social Security yet. I am planning to do so when I turn 65. My pension currently is enough to meet all my expenses. I currently have the money from the sale deposited in a bank account earning 2%. My question is this, do you recommend on where I should place this $150,000? I’m concerned with the stock/bond market currently being so high and I don’t want to just dump the entire amount into one or the other. I suppose dollar cost averaging would be a way to go but I’m not sure much I should put into the investments each month. Seems like it would take forever to get the entire $150,000 invested this way. Thanks for your help. Great show by the way”. Stevo.

Al: Good question.

Joe: So he’s got $150,000, doesn’t necessarily need it but he feels the markets are high.

Al: I would start with this very simple question Steve. Do you have an emergency fund? And I would say an emergency fund should be at least 6 months of expenses. And I don’t know what your expenses are because it doesn’t say but let’s just say your expenses are $80,000 a year. Then we would say if you have $40,000 in an emergency fund that’s great. If you don’t, I would take whatever it takes out of this $150,000 to have that $40,000. I’d set that aside for the emergency fund before you do anything else.

Joe: I kind of disagree with that.

Al: Oh good.  Why?

Joe: Because he’s retired. He’s got guaranteed fixed income.

Al: Yeah but things come up. Cars break down, medical expenses, whatever.

Joe: Six months expenses though?

Al: Could be a bad car accident.

Andi: Medical problems are a real pain in the, whatever you’re-

Al: You’re in your 40s, you don’t know such things.

Joe: I think 6 months, 12 months, expenses or income, is for the working class. Not the nice retired class.

Al: No, I disagree with that. What else you got?

Andi:  It’s interesting that we don’t know, he says that he’s got 2 separate retirement savings plans, but we don’t know what kind they are.

Joe: I know. And I don’t know why you would have 2 and one aggressive one conservative instead of just one and then having a well-diversified portfolio. And then I would just add the $150,000 into the well-diversified portfolio.

Al: Well I would ask another question first. My second question is there any, what’s the purpose for the money?

Joe: Yeah. What’s the money for?

Al:  Is there anything you need? Or you’re thinking of currently, like a vacation or like a car or like a boat or like whatever, grandkids?

Joe:  Do you have a short term need? Then keep it in cash.

Al: Exactly. So I think once you determine let’s say you don’t need an emergency fund and there’s nothing you want to do with the money-

Joe: Short term.

Al: Then just put it in your portfolio.

Joe:  And then so I guess the follow up on the question with Steve is, “well, I got $150,000, do I just dump it in? Or do I dollar cost average in?” So let me explain both. If I do a lump sum, I’m just gonna invest $150,000 tomorrow. It’s fully invested right now.

Al: It seems drastic.

Joe: Dollar-cost averaging would be maybe I slowly get the money in over a 12 month period. So I put 1/12 of the $150,000 into the market per month.

Al: So whether the market’s going up or down it’s like-

Joe: You’re kind of taking it, oh this month it’s high. Oh, next month it’s down 20%.

Al: So you don’t make a bad decision.

Joe: I’m just slowly leaking the dollars in. If you look historically statistically speaking, it makes more sense just to invest it. The dollar-cost averaging helps with the emotion. But it’s not necessarily going to give you a better return. It could. But who’s to say that the market is not going to continue to go up another 20% next year.

Andi: While you’ve got the rest of it sitting in a 2% savings account.

Joe: So it’s a market timing, I don’t know I want to hedge my bets here. But who’s to say that the market’s not going to drop 20% as soon as Steve invests it?

Al: I think you go with probabilities and the probabilities state that if you look at any calendar year, the stock market beats safe investments 2 to 1.

Joe: 70% of the time the market’s up 30% it’s down.

Al: Exactly. And so your odds are better just investing. Now we wouldn’t say go 100% in stocks. I mean have a globally diversified portfolio that includes safety like bonds, different kinds of bonds. Probably we would favor higher quality, shorter-term bonds. But make sure you’ve got, we’re not saying put this all into stocks all at one time, we’re saying figure out the right portfolio for you and based upon your goals and I think that’s what people miss. You gotta first ask the question what’s the money for? And if I don’t need it for a long time then I can be more aggressive or is it for grandkids’ college and the grandkids are 3 years old or whatever, so you can go longer term. It just depends on what you need the money for.

Joe: So I would say invest it. I would say invest it right away and I would consolidate the 2 retirement accounts instead of them one aggressive and one conservative. Unless one’s like a CD and one’s in stocks. I don’t know.

Andi: And we don’t know his percentages, whether he’s 60/40 or what he’s doing.

Joe: But I think in general hopefully that helps you out, Steve.

7:16 – I Sold My Primary Residence. How Should I Invest the Money for Retirement?

Joe: So we’ve got Elaine. She writes in now from San Diego. “I just sold my condo and I have $140,000. How should I invest it for retirement? I’m 56 and have some other small retirement plans which add up to about $65,000”. So Elaine’s got $200,000, 56 years old. Looking to see how she should invest that.

Al: So there’s a couple of things we don’t know.

Joe: Lots of things.

Al: Like for example, do you have a pension plan? Or how much is your Social Security?

Joe: How much are you spending?

Al: What are you spending? Are you going to receive an inheritance? When are you going to retire? All these things.

Joe: Would you buy another property?

Al: Yeah all these things you kind of need to know. However, I’m going to give a generic answer with what little information we have it by making a couple of assumptions. Will you go along with that? So Elaine is 56 and full retirement age for someone her age according to Social Security is 67. Which would be 11 years for her? And so I’m going to make that assumption. She’s going to retire at full retirement age at age 67. She’s got a couple hundred thousand dollars designated right now for retirement which currently at a 4% distribution that would be about $8,000 a year. So that’s not a lot of money. So, Elaine, you’re going to need some growth if that’s your circumstance. So I would favor more stock type of investments than bond-type of investments because you’ve got a long term period of time, 11 years. And I would invest in low-cost mutual funds, low-cost index funds, low-cost ETF funds, maybe an S&P 500, maybe an international total market fund, maybe U.S. total market fund, low cost. I would favor that. I probably I wouldn’t necessarily go 100% in. I would probably have a total bond fund something like that. But that’s what I would say based upon that assumption I made.

Joe: I would do this Elaine. Here’s just some simple math that you can do in the back of an envelope. Figure out what you’re spending right now and say do I want to continue that lifestyle in retirement. So in 10 years you need to use a little bit of an inflation factor on it but just for today’s purposes maybe just add, let’s say if you’re spending $40,000 maybe add $10,000. You buy that?

Al: Yeah. In 11 years. Yeah sure.

Joe: I’ve given maybe 2.5% inflation. So then you look at it, then figure out what your Social Security is going to be at 67 and then subtract what you’re spending from your Social Security amount and see what that shortfall is. And then you multiply that shortfall by 20-

Al: 25. You forget the factor?

Joe: No. I was going to say 4%. 25 would be easier. So, for example, let’s say you want to spend $50,000. You’re spending $50,000 today. In 11 years that $50,000 is going to be $60,000. Just with inflation, the cost of goods and services increase $60,000. You look and your Social Security benefit is going to give you $20,000. So you take the $60,000, you minus the $20,000, you have $40,000 that is short that needs to come from your investments. So $40,000. You multiply that by 25 and is $1,000,000.

Al: That’s what you need.

Joe: That’s what you need. So then you have $200,000 right now and you have 11 years to make that $200,000 into $1,000,000. So then you have to figure out OK well what target rate of return do I need to be generating or how much money should I save. Or I’m not on track. I won’t be able to spend my lifestyle given that arithmetic and I know it’s kind of bad news but I have no idea I’m making up everything as I go here. So you could be in really good shape and you just have $140,000 you’re looking at here. But you know buy bitcoin for all I care.

Al: But here’s my rebuttal to that. So when people do that and they get all depressed they don’t do anything. So I would say if you go back to my thought. Let’s get this to grow as much as possible over the 11 years so that you can then figure out what you can spend. It may not be your same lifestyle but it’s a lot better than if you do nothing right now.

How about you, are you on track for retirement? Are your investments set up to last as long as you do? It’s hard to know, especially when you have to navigate market volatility, tax uncertainty, rising healthcare costs, and the future of Social Security as well. Our Retirement Readiness Guide can help you get on track. Click the link in the description of today’s episode in your podcast app to go to the show notes at YourMoneyYourWealth.com and download the Retirement Readiness Guide for free. It’s got 8 plays that will help you prepare for a successful retirement. Got questions? Click Ask Joe and Al On Air to send them in as a voice message or an email.

12:06 – Comment: Retirement Account Protection From Lawsuits

Joe: We get Rob from Santa Clarita.

Andi: Meir Statman.

Joe: Yes. Yes, thank you. Is he? Yes- He’s a big fan.

Andi: He is hardcore. We got three e-mails from Rob.

Al: We did. A page and a half.

Joe: All right Rob. We’re going to start charging you here. So he’s listening to a podcast 239.

Al: Do you remember that one?

Joe: Oh yeah for sure.

Al: What are we on now?

Joe: “You were talking at the top of the show about the pitfalls of transferring a 401(k) to an IRA in that if you get sued they can’t touch your 401(k). I was under the understanding that at least in California if it was transferred from a 401(k) to an IRA it was still protected because it was transferred from a protected plan. Just saying”. Whatever Rob. “You guys are great. Have written you many times. Keep up the good work”. Yes, that’s true and not true Rob. Because it depends.

Al: Depends on what?

Joe: On if it’s like litigation vs.- like OJ Simpson for instance. His retirement account was protected even though in civil court he was found guilty. But if that was in an IRA I don’t know if that would have been protected.

Al: Well here’s the real answer is we’re not attorneys.

Andi: Which is what you said in podcast 239.

Al: Yes which is, we’re not 100% sure but that’s what I’ve heard. I have heard that you get similar protection in an IRA if it comes directly from a 401(k) but there may be circumstances where there’s not-

Joe: An IRA has got up to a couple of million dollars of protection. But I know it’s-

Al: It’s like $1,400,000.

Joe: OK close to a couple million dollars. Again, please consult your attorney.

Al: Give or take. But that’s an IRA on its own. But a 401(k) rollover is supposed to be unlimited. Anyway, we’re not attorneys. Talk to your attorney about this.

14:00 – What Happens If I Do a Roth Conversion Then Move to a No Income Tax State? And Would I Pay Tax on My CA Pension?

Joe: All right. OK. So he’s got another one. “Joe, Big Al, and Andi. I love the show. You guys always have a plethora of good information and making learning fun. I have a couple of questions in regards to California taxes and planning for retirement and this would probably be good info in any high state tax or high taxed state”. That’s my dyslexia coming out again.

Al: Same meaning doesn’t matter.

Joe: Yeah, the same thing. “If I want to take advantage of lower federal tax rates now and convert a portion of my IRA to a Roth would it makes sense because with the current federal tax rate?” Well, California’s high. “After my deductions, I’m in the 22% federal tax bracket but not by much but have some room in the bracket to convert. But I also have to pay California income taxes on the conversion. Now let’s say that when I retire I move to Washington, Tennessee, Nevada, Florida, Texas, or where there’s no state income tax. Do you think in that case it would just be a wash paying lower federal taxes now in California income tax versus a higher Fed rate?” OK, we don’t know how long the Roth IRA is going to last and the conversion is going to last thing we have to compute the time value of money of the dollar sitting in the Roth IRA Rob. So I don’t know when you’re going to retire. So you have a 22% tax bracket. You convert now and all of that growth is going to grow tax-free. So you would have to do the calculation. If it’s going to be next year or two years then just wait. But if it’s in like 10 years I would do the conversion because the time value money in the Roth IRA will supersede the extra tax that you’re paying in California versus Nevada. But do you wanna live in Tennessee, Nevada?

Al: Well that’s what I was going to say. Do you know for sure you’re moving to a tax-free state? It’s just a guess. So go ahead.

Joe: He’s working on a spread.

Al: Go ahead do the conversion.

Joe: All right. So we have Rob from Santa Clarita that’s definitely taking advantage of us. He was talking about doing a conversion if he was going to move to another state with no income taxes. Is it a wash?  So he’s saying this. If the state tax rate is 22% that he wants to convert in.

Al: The fed rate. 22%.

Joe: And then the state rate just to make it easy, it’s less than this but let’s call it 10%.

Al: For California or any high tax state.

Joe: So that’s 32% that he wouldn’t have to pay on the conversion if he was in the 22% tax bracket. So he’s saying hey let’s say if I moved to Nevada and tax rates go up. So now I’m not in the 22% rate anymore, I’m in a higher rate. Well, the math is simple. Are you going to be in a 32% tax bracket? Between the two? If there are no state income taxes. If you’re going to jump up to the 32% level, well then maybe you want to wait. That’s kind of like the simple in a bubble answer.

Al: I would say your answer was right on, which is, when do you want to do this? If this is a for sure thing then that’s a known data point and you can act accordingly. If this is just well I might want to move to Florida or Washington because I don’t want to pay any taxes in retirement. Well, that’s way too speculative to base much of your plan on that. That’s what I would say because a lot of people tell us that. And then when we run their financial plan and in some cases, people have more income than when they worked but in many cases, they have less income than when they worked and they realize oh gosh the state tax because I don’t have a salary anymore is really low. So why was I thinking of moving to Nevada?

Joe: But you look at it the time value of money means a lot too. If you’re going to do this in 10 years you’d do the conversion now.

Al: And the reason why that can work well is you can put your asset classes that have higher expected returns, you could put them in the Roth and then end up with more net after tax.

Joe: Number two. “I work in the entertainment industry”. Oh, interesting. I like Rob all of a sudden.

Al: Do you have aspirations of-

Joe: Maybe he can introduce me to some people.

Al: He wants to audition, don’t you?

Joe: No. I would like a date.

Andi: I was going to say he wants to meet… Charlize Theron? I don’t know.

Joe: Charlize Theron. (laughs)

Andi: Why is that funny Joe?

Joe: I don’t know. That was good. That was witty. That isn’t someone I was thinking about but-

Andi: Until now.

Joe: Now I got Mad Max in my head. He works in the entertainment industry. He’s got a pension with motion picture industry and health that “I have earned in California. Let’s assume again that I decide to move out of state when I retire to one of those aforementioned states”.

Al: Washington, Tennessee, Nevada, Florida, or Texas.

Joe: “Do I have to pay taxes to California on my pension as I’m receiving it because it was earned in California? If so, I heard you pay the taxes wherever you reside when you retire. If that’s the case, can I establish residency in one of those states for one year before I retire? I would do this by moving, freelancing in by the last year. By the way, a motion picture has 2 pensions. A monthly payout, this is the one that I’m referring to in the question. And then there is an IAP which I would just convert to an IRA when it comes time. Thanks again. I seem not to give you enough information when I ask questions so hopefully this time I give you enough”.

Al: That’s pretty clear.

Joe: Very clear Rob. No. If you have a pension that was earned in California, move to Florida, you’re good. He just wants to get the hell away from all the freaks in L.A.

Al: Could be. But he lives in Santa Clarita. That’s kind of the fringe. I mean that’s not too bad.

Joe: But he’s in the motion- Santa Clarita is really known for the movies.

Andi: Yeah, he works with those people-

Al: He works in Hollywood but he lives in Santa Clarita. That’s not bad.

Joe: Yeah I know but he’s working with them and he’s like I’m done. I mean that’s why he’s listening to this podcast. He’s like I had enough with Charlize- What’s her name?

Andi: Charlize Theron.

Joe: Charlize Charlize Charlize.

Al: I actually never knew how to say that either so I learned something. I would say Rob about 15, 20 years ago most of the states got together because California was one that was trying to get their taxes on pension payments earned in California. So the answer is they’ve pretty much all got together and said you know what. Wherever your state of residency is where you’re taxed. So even though you had the salary Californian the pension was essentially earned in California. You moved to Florida, a tax-free state. You don’t have to pay any dollars, any tax dollars, because you’re in the tax-free state. So anyway that’s good news. Now you’re trying to maybe game the system a little bit. Like what if you move a year earlier because you’ve got a lump sum that could come out and that theoretically could work as long as you really do it. As long as you really establish the residency. And it says you say that you’d have to do some freelance work and you can work anywhere. That could potentially work. The key there though is to really move and do everything required to show that you actually move. In other words you have a moving company, move your stuff, you’ve got that invoice, you change your driver’s license, you change a registrar of voters, you can show your grocery bills, your utility bills, your cable bills, on and on, in terms of that you’re really a Florida resident.

Joe: There you go, Rob. So Rob emailed a third time. “Andi, just wrote to you about two questions on California and taxes in retirement. My first question was about converting to a Roth. I sort of answered my own question on that portion of the e-mail to you. Even so with a wash with the principal all the gains would still be tax-free so would still be worth converting now and it would lower my income and help me with my Medicare and there are no RMDs. Sometimes you just kind of think it through”.

Al: So he got it.

Andi: And then he thanks me at the end. I don’t know why.

Joe: “Thank you, Andi”. Whatever, Rob.

Andi: You’re welcome Rob. Thank you for emailing us.

Joe: Pouring my brain out to you, bud.

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23:06 – I Work For USPS. Should I Contribute to a Roth IRA or Max Out My TSP?

Joe: We got Johnny writing in from New York City. “Good morning. Your videos are very informative. I’m employed at the United States Postal Service. Have a thrift savings plan and I contribute about $12,000 on a $65,000 salary. I only have about $125,000 in the TSP because first 10 years contributed only $100 a month. I’ve worked for the United States Postal Service for 21 years. Still have about 15 more to go. I’m afraid I’ll have to work until, to 70 or past 70″. He would prefer 60 or 67. I don’t blame you. ‘Would a Roth IRA maybe be a good idea to have also? Or should I max out $19,000 in the TSP? I do have some gold, about 7 bars. Got silver about 100.”

Al: About 100 coins.

Joe: “and I invest $60,000 in real estate REIT”.

Al: $6,000.

Joe: Oh, $6,000. “Any advice you could give would be greatly appreciated”. All right Johnny. Well, first of all, thank you for delivering the mail because it never stops.

Al: Every day except for Sunday.

Joe: Newman. Johnny, you’re gonna have a pension plan through the United States Postal Service. It doesn’t hurt but do you have the discipline I guess to do it? So he’s putting in $12,000. He’s saying should I go $19,000 in the TSP? What do you think? $65,000 salary. He’s in a low tax bracket.

Al: He is. I would sort of favor the Roth and I’ll tell you why. We don’t know if you’re married or not but you’re probably in a low enough tax bracket. And I’m thinking with your pension you’re already going to have a fair amount of ordinary income. So to have some tax free in the Roth might be a really good plan.

Joe: Get rid of the gold bars probably.

Al: Or the coins? Or the 6,000 and the non-traded REIT. Someone sold him that.

Joe: Fundrise. Never heard of that.

Al: Me neither. Let me just say it this way.

Joe: Give me your calculator real quick.

Al: While you’re doing your calculation. Johnny if you were not with the United States Postal Service and did not have a pension I would say try to max out a deductible pension account because you’re gonna be in such a low bracket. You can use the deduction right now but in your case you’ve got a pension plan that plus required minimum distributions. You know, be nice to have some tax-free income in retirement.

Joe: So Johnny I’m doing a little calculation here for you. And of course this is hypothetical but if you have $125,000 in your thrift savings plan right now and you have another 15 years of savings to go. And if you could save that $19,000 in the Thrift Savings Account, you’re going to have close to $800,000 in the Thrift Savings Account given a 6% or 7% rate of return over the next 15 years. So now you’ve got the $800,000 you take 4% of that. That’s about $32,000 that would be income on top of pension and other income sources. I think the Roth might be a really good option for you. So that $125,000 will continue to grow. You still put some money in. If he can save up to that $19,000 I think you’re really on the right track. Living in New York City, you’ve got to save as much as you can just afford that place.

Al: Yeah and that’s great. You can save that much on your salary because that is not a cheap area.

26:15 – How to Invest an Extra $50K: Roth Conversion or Add to After-Tax Investments? How Aggressively Should I Convert?

Joe: We got Mike from Massachusetts. “Hello, Joe and Al. Awesome podcast”.

Al: Good.

Joe: Thank you, Mike.

Al: That’s a good start, by the way.

Joe: Very good start.

Al: There’s much more likelihood we’ll read your question if you start that way.

Joe: I kind of like the other ones. This podcast sucks. It’s perfect.

Al: But I got a question for you.

Joe: I got a question.

Al: I know you guys don’t know the answer but I’m going to hail mary. Throw it out just in case.

Joe: “Thank you for all the great educational information. I have a question for your awesome podcast about how best to invest an extra $50,000 this year. Specifically, should I use it to pay taxes on a Roth conversion or add it to my after-tax investments to build the balance”? Here’s a little background for you, Big Al. Mid 50s, married 30 years, 4 children, 2 in college, 2 graduated. He’s going to plan to retire 60ish. He’s got a nice little home, zero debt.

Al: Like it.

Joe: Look at Mike. Just killin’ it.  “All my estate planning documents are in order and up to date.” He’s got a separate adequate cash reserve fund. Now Mike’s just bragging. “I have $1,000,000 in retirement accounts. I have about $250,000 in after-tax investments mostly private placement real estate in CDs. I’m on the upper edge of the 32% tax bracket. I have some deferred comp assets that should support me from age 60 to 70. It will put me in the 24% to 32% tax bracket. My real question is how aggressively should I convert my retirement assets to Roth versus investing more in my after-tax accounts? What balance should I target for my after-tax dollars versus my retirement accounts, if any? Thank you.” So he’s got $1,000,000 in retirement accounts.

Al: I guess about half of that is Roth. So he’s already done all sort of, about half of it is traditional.

Joe: So he’s in his mid-50s want to retire not like 55 or 60ish. What is that? That’s like 63? Is that an ish?

Al: I’m 60ish.

Joe: If you’re like 69. That’s not ish.

Al: No, you’re almost 70.

Joe: You can’t use ish if you’re like over 65.

Al: You could do it to about 65. I think that’s your limit.

Joe: So let’s just say he’s got 7 years. He’s gonna be like from 60 to 70, he’s got some deferred comp that’s gonna put him in 24% to 32%. So that’s a pretty big deferred comp plan.

Al: Yeah it is. I’d say he’s going to retire at 60 because he’s got all this deferred comp.

Joe: I agree. He’s got $400,000 in the Roth already, $550,000 in the traditional IRA. He’s got $600,000 in pre-tax dollars. I don’t know how much more aggressive I would do that.

Al: I’m sort of agreeing with you because you’ve already converted a bunch of it already. By the time you get to 70 and a half what’s left? You get the $550,000 in the traditional 401(k). At that point it’s probably worth-

Joe: $700,000?

Al: I was gonna say $1,000,000.

Joe: No he’s 55.

Al: But what by the time he gets 70 and a half-

Joe:  Oh yeah yeah I’m sorry. Yeah yeah for sure. Yeah.

Al: Probably $1,200,000.

Joe: So that’s a $40,000, $50,000 RMD?

Al: Call it $50,000 RMD plus Social Security. Which could be $30,000, $40,000. Call it $40,000. So it’s $90,000. Some of the Social Security is tax-free and you get the standard deduction. I think you’re in the 12% bracket.

Joe: Then you’ve got the Roth IRA that’s now at $800,000. And he’s got after-tax dollars. If you’re in the 32% tax bracket I would not convert.

Al: Yeah I totally agree with that.

Joe:  I would not convert. 24% maybe you could go to the top of it. But I would not go higher than the 24% tax bracket.

Al: And mainly Mike we base this upon what we think we know about you at age 70 and a half with which is the RMD that we calculated – required minimum distribution plus Social Security. I think you’re going to be in a pretty low bracket so you don’t really have to get a lot more aggressive.

Joe: Because he’s already done a really good job planning. Because if $1,000,000 was all in a retirement account then we would probably have a different answer. But half of it’s already in a Roth.

Al: Totally agree.

30:27 – My Deferred Compensation is in a Target Date Fund. Should I Move to TIPS or Bonds?

Joe: Mike from Massachusetts. Email number 2.

Al: Second question.

Joe: All right people are catching on. They’re like you know what, let’s get information, just milk this thing.

Al: Just keep going.

Joe: “Joe and Al. You guys are great”. Very good Mike. That always gets you on the air. “I appreciate the value you add. I participate in a deferred comp plan.”

Al: And we know about.

Joe: “7 years-”  Yes, we just heard all about it, Mike. “until retirement.  Once I retire the plan will pay me the balance in 10 annual installments. This will provide me an income from age 60 to 70 that will pay my expenses and allow me to delay Social Security and delay any needed access to my funds and my retirement accounts. Today I have these funds invested in a low-cost target-date fund. I’m happy with the payout amount. Should I move all these funds into even more conservative investments like TIPS or 100% bonds? How would you view the assets and how risky would you be with the investment? Thank you.” A couple of questions I guess. Is he talking about his 401(k) plans? Or his retirement accounts? Or is he talking about the deferred comp plan?

Andi: I take it to mean he’s talking about the deferred comp. “I have these funds invested”. He says “I’m in a deferred comp plan”-

Joe: “that will provide me-”

Andi: “an income-”

Joe: “so security-” blah blah blah. “Today I have these funds invested in a low target-”

Al: He’s talking about the deferred comp thing because he’s talking about the payout. He’s happy with the payout as is. So why take a lot of risk?

Joe: Oh so, all right. So he’s let’s just say getting $50,000.

Al: Yeah it’s like enough-

Joe: If it was in cash. I’m with you. I like it, Mike. I don’t know. I would probably go 70/30, 70% bonds 30% equities. It’s 10 years.

Al: Great. I would not go 100% safety.

Joe: No I would not go 100%.

Al: I would probably, if I’m just thinking about myself I would be somewhere between 30% and 50% equities and the rest say, if you don’t have to take a lot of risk here.

Joe: It depends on how that deferred comp plan is set up. I guess for our listener’s edification is that some companies allow you to defer compensation. So for highly compensated employees and those smaller companies larger executives things like that, allow them to put money in this deferred comp plan. So let’s say you get a big bonus or you have a very large income you can reduce taxes that year, you could put it in this fund. Sometimes it’s in a general ledger where the company manages. Or if it’s a large enough company you can actually manage it just like a 401(k) plan. You can pick your investments and so on. But the problem is that is not necessarily your money, it’s on the ledger of the company. So you’ve got to be careful on how you use the deferred comp, because if the company goes under those assets then could go with the company. But if the company is solid and then it pays you out and in this case with Mike, he picked a 10-year payout. So he put the money in you have to ask to put the money in prior to the years and it gets a little bit complicated. But yeah I would say this, I would get out of the target date funds Mike. If you’re going to start taking dollars from the account just because you want to pick and choose what would you sell to create that distribution upon retirement. Because the target date fund will sell some stocks, some bonds. It’s going to give you a share of the target date fund versus if I have stock and bonds like two separate asset classes. I can sell my bonds to take that income if stocks are-

Al: down or if stocks are up I’d sell the stocks and keep the bonds.

Joe: It’s a little bit more efficient and when you start creating income and taking distributions, it’s completely different than what you’ve done as you have saved throughout your life. So congratulations, Mike.

It’s important to know how to take the sting out of taxation if you are a highly compensated employee. Big Al has got a number of strategies to help high-income earners reduce their taxes. Read his blog post, watch his video, or check out the entire episode of YMYW TV on this topic – I’ve linked to all of them in the show notes. Just click the link in the description of this episode in your podcast app and it’ll take you right there. We’ve got time for a couple more money questions, then it’s your turn: click “Ask Joe and Al On Air” in the show notes to send in your money questions, comments, compliments, complaints or stories as a voice message or an email and Joe and Big Al will respond on a future episode of the YMYW podcast.

34:44 – Is This a Good Retirement Plan for My Kids?

Joe: Marion. She writes in from Fresno. “Hi guys and lovely lady. I binge-watched your videos and I’m currently listening to your podcast. I think I have a plan for my kids. They do Roth retirement accounts as much as possible so the taxable accounts traditional must withdrawal accounts and pensions are less than $38,700 in AGI each year. So Social Security will not be taxed and the Roth withdrawals will not impact their taxes under current law. Am I missing something?” Okay. Hold on a second. So Marion’s got a plan for her kids. And her kids are taking Social Security?

Al: Well I think her-

Joe: How old is Marion?

Al: Well she’s either 95 or she’s thinking about her kids’ future. I think that’s where she’s getting at. So I think what she’s asking is-

Joe: I have a 5-year old and I’m worried about the taxation of their Social Security.

Al: I’m 107 and my kids are 77 and they’re taking their RMDs. So I think what, here’s what I think she’s asking. I think she’s asking for her kids. How should they set up their retirement plan? Because if they max fund their Roth accounts and if they can keep their taxable income low enough in retirement then they can stay in the lowest bracket and maybe the Social Security income will be tax-free too which is absolutely right. Marion, I don’t know how old your kids are, whether they’re 5 or whether they’re 50 or what age they are. But the truth is, right now $38,700 AGI, that was actually taxable income that was the top of the 12% bracket in 2018. 2019, it’s like $39,600 something like that. But you have-

Joe: For single.

Al: For single. And I assume since she used that number she’s assuming her kids are saying-

Joe: never going to get married.

Al: Fairly. Or they never did get married. But realize with a single taxpayer you have a $12,000 standard deduction so they can actually make about $50,000 and still be in that 12% bracket. But the taxability of Social Security is on a completely different number.

Joe: It’s on provisional income.

Al: Right. Why don’t you explain that?

Joe: You have to take your adjusted gross income and then you gotta add back half the Social Security and so they phase out. I mean if you’re under at single, what is it Al, $22,000?

Al: Yeah. $25,000.

Joe: If their income under $25,000 then their Social Security would be tax-free. Provisional income. So that’s their adjusted gross income adding back half of their Social Security. So it’s what, $25,000 to $33,000 or $25,000 or $34,000?

Al: $25,000 to $34,000.

Joe: $25,000 to $34,000. Then 50% of their Social Security is gonna be subject to income tax and then anything over$34,000 of provisional income, 85% of that benefit is going to be subject to income tax. So if you’re looking at $38,700 of AGI well then a portion of their Social Security is going to be subject to income tax because they’re over the provisional income threshold. So you really need to look at provisional income first to see what is their adjusted gross income going to be with interest, dividends, retirement account distributions, and so on? But you’re right on Marion because Roth IRA accounts will not be included in provisional income. So if you do have a lot of money in Roth IRAs and you take $100,000 out of your Roth, and that’s the only distribution you take out of your retirement account, you have no other income, your Social Security would be tax-free. So even though you took $100,000 distribution. So yeah that’s another added benefit by having monies in Roth IRAs just because it’s not included in that provisional income. So there’s a lot more planning that you want to do it’s not like I want my Social Security income to be tax-free in 40 years. So we’ll call Roth right. Or if they’re currently taking Social Security, then you have to look at all sorts of different things. But you’re on the right path. I can tell you binge-watched our videos because you’re getting it. You just got to watch them again.

Al: And listen to this podcast because we answer directly.

Joe: How many videos we got? 400?

Andi: I think we’re closer to 600.

Joe: 600 videos.

Al: Yeah I think so too.

Andi: They’re not all on Roth contributions but there are quite a few of them on that topic.

39:08 – How Do I Recover Lost Savings Bonds?

Joe: All right. Marion’s got another question. “How can I recover lost savings bonds?”

Al: Apparently our Department of Treasury has form 1048. 1 0 4 8. It’s called Claim for Lost Stolen or Destroyed United States Savings Bonds. So actually just type in IRS Form 1048 and it will pop right up.

Joe: How do you-

Al: How do you lose it?

Joe: Well no, I can see how you can lose it easily. You know what I mean? I mean I knew we had clients that come in-

Al: With like a 30-year-old…

Joe: Yeah. Well with a briefcase full of savings bonds right. It’s like OK I could see how you could easily lose savings bonds.

Al: I can too and I think something unrelated to this but in a way related, I was talking to my dad actually last night and he’s got a safety deposit box and he moved back to San Diego with my mom and so he wanted me to be at have a key to get in case something happen to him. And it’s like what he put in savings deposit boxes and it used to be you put in deeds of trust and very important documents. But nowadays all that stuff is online. And the reason I’m bringing that up is because we actually own a property jointly. And he was saying ‘I think that the deed of trust is in the safety deposit box but it may not. I haven’t looked for a long time’. And I said ‘Dad it’s all online now. You don’t really have to do that stuff. So there are not too many things that you need to put in a safety deposit box in my view anymore because it’s electronic, but a savings bond could be different.

Joe: You know when I was the successor trustee of my grandmother’s estate, she put her stock certificates in the safety deposit box.

Al: That’s probably before they had custodians that held them for you.

Joe: She could have easily deposited in a brokerage account.

Al: No I understand. But-

Joe: Because it was that it was titled in her trust. But it was in the safe- I didn’t have a key.

Al: Oh you didn’t.

Joe: No.

Al: And you weren’t authorized.

Joe: I wasn’t. Talk about a pain. Oh my God. Well, then they said, “what do you think the value is of anything in that safety deposit box? Do you think it’s under $50,000?” And I was like-

Al:  I didn’t even know it’s in there.

Joe: I don’t even know what the hell’s in there.

Al: Just say yes. Way under.

Joe: So I was like I think it’s some trinkets. Maybe a little-

Al: Maybe 100 silver coins?

Joe: Her spoon collection. All right, that’s it for us today. Hopefully, you enjoyed the show. Write – love us, hate us. We’ll see you next week. The show is called Your Money, Your Wealth®.


Update, we actually have over 700 educational videos on our YouTube channel, on everything from asset allocation vs asset location to investing in marijuana stocks, as well as episodes and shorts from the YMYW TV show. Marion, Johnny, and over 11,000 other subscribers know all about it, now it’s your turn! Click the link in the description of today’s episode in your podcast app to go to the show notes, where you can subscribe to our YouTube channel, download our retirement resources, read the transcript of this episode, send in your money questions, and much more. It’s a heckuva deal because it’s all free! Stick around to the very end of the episode today to listen to Derails if you’re into that sort of thing.

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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.