Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 00:50 – Should I Keep Working Just to Do Roth Conversions? (George & Louise, Queens, NY)
• 13:50 – Convert to Roth Now or Wait Until We Leave Oregon? (Cher & Sonny, Oregon)
• 30:29 – We Built a Dream House. Can I Still Retire? (Michelle, Vienna, VA)
• 38:38 – Should an Annuity Cover Your Fixed Expenses? (Marion, Fresno, CA)
• 39:56 – Outro: Next Week on the YMYW Podcast
• 41:02 – The Derails: Cher, blue cheese olives, Joe’s Escalade, iPhone, and new lifestyle

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: George and Louise in Queens bring in $600,000 a year. Should they keep working just to do Roth conversions? Cher and Sonny in Oregon wonder if they can retire in a couple years at 59 and 60, and whether the mega backdoor Roth belongs in their plans. Joe and Big Al spitball for them, today on Your Money, Your Wealth® podcast number 603. Plus, Michelle in Vienna, Virginia, is 56 and ready to retire, but what about her brand-new mortgage? Finally, our friend Marion in Fresno asks about Vanguard’s suggestion of an annuity to cover fixed expenses. If you’re watching us right now on YouTube and you’re one of the 45% of people who aren’t subscribed to the channel, why don’t you fix that right now? It’ll help other people help us making fun of finance over here on YMYW. I’m Executive Producer Andi Last and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should I Keep Working Just to Do Roth Conversions? (George & Louise, Queens, NY)

Joe: Andi’s BLUF. What is that?

Andi: Bottom line up front. Bottom line up front. So that’s just a line to tell you what the email is about.

And I think I did it on this one and I don’t think I’ve done it on any of the f- future ones. So use it if you want- I had to- … or just ditch it.

Al: I had to, I had to look up the acronym. I wasn’t- Yeah … familiar with BLUF.

Joe: Andi’s b- l- that’s like a fib or something, right? B- BLUF. You’re, you’re lying. You’re- BLUF, yeah.

Andi: Bottom line up front.

Al: Yeah.

Joe: Bottom line up front, should I stay employed to the front-loaded conversion versus retire now and back-load them later? Front load, back load.

Al: Front load. Okay, let’s get into it.

Joe: no. You keep working. Right? Should we just-

Andi: Hasn’t even seen the whole question yet and he’s already got the answer.

Al: Well, let’s, let’s, let’s look at the question first.

Joe: Let’s get that question off and- Yeah … well, you know, should I, should I retire so I can do a Roth conversion?

Al: Yeah, we do get that question a lot.

Joe: No, probably not.

Al: Well, the answer is if you can afford to retire and you want to, go for it. That’s the answer.

Joe: “Hey, Big Al, Joe, Andi, longtime listener, second-time caller. I tune in every Tuesday morning. I’m George, 61. My wife Louise, 58. our-” Moving on up. Moving on up. in Queens, New York. All right, George and Weezy.

Andi: Exactly. The Jeffersons.

Joe: Yeah. Yes, yes, ma’am. “Louise enjoys tequila and I will have a gin gom- gimlet, only on special occasions.

She loves her 2025 Audi Q5, and I drive 2023 BMW X3.” Wow, those are sexy vehicles.

Al: They are nice, yeah. ”

Joe: Here are the details. Individual brokerage account of 4.5.” George, right, he owned laundromats.

Andi: Yes. That’s true. Right.

Joe: Isn’t that how it went, Spencer?

Andi: Apparently it was a wealthy business.

Al: I think so.

Joe: It’s a really good business.

Little cash business. You can clean that money.

Al: Yeah. You could.

Joe: $4.5 million in the individual brokerage account. We got total pre-tax 401(k)s, IRAs, 5.7 million.

Al: Okay.

Joe: All right, we got the $10 million man just coming in hot here. Yep. Roth IRAs of $330,000. The portfolio generates about $170,000 of qualified dividends and interest income.

Income, 500,000, for me and $100,000 for the wife. Both homes paid off. No debt. Social Security for me is, at full retirement age, is 60. My wife is 45. I realize the mistake of not funding Roths in the past, but all contributions are now going to the Roth account, which started when I started listening to your show.

Look at that, Al. We’re just changing people by the day.

Al: You know? It’s wonderful.

Joe: I don’t need a spitball on any of this. It’s obvious to do the mega backdoor Roth conversions during the gap years after retirement and before RMDs. Also, I know we can retire and spend about $400,000 a year. So what the hell is he writing in for? Just to brag?

Al: I think so.

Joe: our objective is what I’d say.

Al: Yeah, our object. Yeah. Right.

Joe: Our object-

Al: That’s close …

Joe: is to leave as a large legacy for our four childrens. Two are out of college and doing great financially and two are graduating this year. So they will soon be off the payroll. Also, I survived-

Andi:  Not gonna be working at the dry cleaners anymore.

Joe: Yep, no more dry cleaners. Also, I survived a rare stage four cancer eight years ago.

Al: Wow.

Joe: Congratulations.

Andi: Onya, George. Congrats.

Joe: “I’m doing great now, but still worry about the widow’s penalty. I had my advisor run many scenarios, as the engineer, have plenty of my own spreadsheets.” So George is an engineer. Yeah. Ran a thousand spreadsheets.

Al: Yes.

Joe: He survived cancer. Yeah. A rare cancer four years ago.

Andi: Stage four cancer, which is supposed to be incurable. Stage four.

Al: Yes.  That’s impressive.

Joe: How, how many stages?

Andi: Four is the last one.

Joe: That’s it. I mean- That’s it … that was eight years ago. And so he’s worried about the widow’s penalty. Yeah. I’d be worrying about what the hell I’m gonna do the next day.

Al: Or enjoying the day-to-day.

Andi: Yeah, trust me, I know.

Joe: But, yeah.

Al: I wouldn’t worry too much at this point with 10 million.

Joe: With 10 million. “Based on the analysis, my net worth at 90 is almost the same if I retire now or at 62 or if I wait until 64 or 65 because the benefit of doing Roth conversions those extra years almost make up the loss in compensation over 30 years.

The problem is, my wife and I love our work and we’re not ready to retire. Post-COVID had relatively low-stress remote position which also allowed us to travel a lot. Snowflake in Florida, play a lot of pickleball. Okay, now for the question. Is my only logical in- insane-

Andi: Is my following logic insane, genius, or otherwise?

Joe: Thank you, Andi.

Al: Yes.

Joe: It’s been a long day. My eyes are sh- little f- little, little heavy. “If I told you I was going to do a mega backdoor Roth next year of $400,000, you would probably advise me against it. We are in the 35%, so some of the Roth conversion would be in the 37% by this is the way I’m thinking about it.

I’ll do a $400,000 mega backdoor. Combined with our investment income, we will be in the 32% tax bracket. So the mega backdoor is getting taxed in the 22, 24, and 32% tax brackets. On top of that, I can’t decide if I wanna keep working. The decision is, do I wanna work and earn income that is subject to 35 and 37% income tax, or do I not wanna work?

I don’t think the Roth conversion’s getting taxed into the top bracket. I think of my salary in the top bracket. I would look to convert as much as possible of the pr- pre-tax between now and 75 with the goal of leaving $1.5 million in the pre-tax at 75 to self-fund any long-term care needs. Since I can retire now fiscally, what are your thoughts on this logic?”

Interesting logic George and Weezy has Yes All right. So he’s making $500,000 at the dry cleaner. Weezy’s making $100,000, 600,000 bucks. They got $10 million, half in brokerage, half in retirement accounts. Yep. He started listening to the show, I don’t know, a couple years ago, and he started to do Roth conversions.

Sure. That is not the mega backdoor, by the way.

Al: No, it’s not. It- I think you can just insert Roth conversion for mega backdoor.

Joe: Yes. So he wants to do a Roth conversion of 400,000, but I like how he’s- internalizing this.

Al: Yeah, he’s trying to, to rationalize it.

Joe: Yes.

Al: He goes, “I know it’s expensive, but here’s how it’s cheaper.”

Joe: Yeah. Well- … my Roth conversion’s gonna be taxed at the 22, 24.

Al: It’s a deal.

Joe: But-

Al: My salary’s already-

Joe: It’s on top of the Roth conversion.

Al: What do you think? Do you like that logic?

Joe: whatever. It- not really.

Al: Well, I would say it this way. I think, if, if it makes sense to you, go for it. But the, the real way to think about this, and we’ve already kinda talked about this a bunch of times, is your marginal rate.

So without the Roth conversion, what’s your tax rate? And that’s all the income you already have. Your investment income, your salaries, that’s your marginal rate. Whatever that bracket in is, if you add something else to that, like a Roth conversion-

Joe: That goes on top.

Al: … then it’s gonna be taxed at that. If you do, on the other hand, a contribution to lower your income, it saves in that bracket.

That’s called the marginal tax bracket, the highest bracket you’re in. It’s also considered the planning tax bracket because if you add income or you take income away through a contribution, that’s the tax rate you’re gonna save. but he’s just trying to rationalize this as an engineer ’cause he wants to get money in the Roth, and-

Joe: Right and you know what? He can sleep better at night if he thinks- Well- … the Roth is gonna get taxed at 22, 24, 32 versus-

Al: When you got $10 million and you’re in great shape, what- whatever it takes. I, I mean, me personally, I wouldn’t do the Roth conversions till I retired.

Joe: But- So let’s, let’s, let’s map this out a little bit.

So he’s got $500,000 in the Roth, and he’s 60-something years old, right? 61.

Al: 61,

Joe: yeah. So 15 years.

Al: Yeah.

Joe: 5 million’s gonna turn into 12.

Al: Yep.

Joe: So his RMD’s gonna be 600 grand.

Al: Yeah, it’s gonna be high, which is the same as salary. So that’s why after he retires, he would go ahead and then start converting because he’d be in a really high bracket anyway.

He could convert to the top of the 24. He could go even higher, maybe 32%, ’cause there’s so much money in tax deferred, and he’s got a lot of time to get this out.

Joe: He loves his job. Does he stop working?

Al: That’s a personal question. It has, nothing to do with finances. Right. I-

Joe: I- if you love your job at 61, that’s still young.

Al: Keep it. Keep it. Yeah,

Joe: yeah, yeah. Yeah. You’re making a half a million dollars a year. You’re in the top 1% of wage earners.

Al: Right. And, and I would say at this-

Joe: If you’re worried about 37% in tax- Well- … just use the income to pay the tax then …

Al: but what about the other 63% you get to keep?

Joe: Right.

Al: Now, I know there’s state tax. I’m oversimplifying, but yeah, you’re giving a lot to the government, but you’re getting to keep a lot too. So if you, if you wanna work, go for it because it’s a personal… You, you, you don’t have to work, right? That, that-

Joe: But does he have a plan if he retires? I mean, he’s worried about the widow tax, so you know what he does on his free time is run a bunch of spreadsheets on this tax Of course he does.

Al: He already said he has plenty.

Joe: He, he’s stressing about it. And he’s rationalizing his tax in the 22, 24 i- and everything else is gonna be on top of that. If he wants to do the conversion, do the conversion. You can afford the tax. It’s gonna be an expensive tax. If tax rates go up, he’s only gonna pay more. It’s a bet on taxes going a lot higher- Higher … in the higher rates. Yeah. That- That’s, that’s the bet …

Al: that’s the bet. That’s right.

Joe: And you could lose that bet.

Al: Yeah.

Joe: If he waits a few years and retires at 65, he still has-

Al: Has

Joe: 10, 10 years … a 10 years. Yeah, he’s, he’s got a 10-year gap year- Like, like the bird that he can do a, a ton of conversions.

Al: Yeah, and as the tax rates sit right now, if he’s 150… Let’s call it 200,000 of, of qualified dividends at that point, right? He could probably do 250 at that point. Let’s say in the 24, whatever the bracket becomes at that point. Maybe even 300,000. So that’s what I would do.

Yeah. But-

Joe: Yeah, I think I would do the same. I, I, r- right now he’s making all his contributions in a Roth. He’s got a little bucket there. I get, you know, you survi- he’s a cancer survivor, so- Yeah … y- you know, he doesn’t know, what’s gonna happen. And if his wife gets stuck with a $600,000 RMD, you know, now she’s in a p- probably what?

The highest bracket?

Al: she’d be, yeah, she’d be in the highest bracket, for sure. Yeah, so I think that’s his thinking, is, “I’ve had a health scare. I’d like to do this sooner rather than later.” If you wanna do it, go ahead. Just realize it’s very expensive money.

Joe: Right.

Al: but it’s gonna be expensive if you pass away either way, right?

Joe: So, I, I mean, I think here’s our classic spitball, is don’t do the conversion unless the market blows up.

Al: Yeah, I agree with that.

Joe: And then convert a half a million.

Al: Yeah, right.

Joe: Right?

Al: Go for it, ’cause who cares?

Joe: Yeah, then who cares? Just b- and then all the recovery will go into the Roth, and be super aggressive in the Roth when the market’s down.

Al: Yeah, and let me explain why, why that’s important. So here’s how that works. So $500,000. Let’s just say, I don’t know, you got, you got, almost 6 million in a retirement account. You wanna convert 500,000, but the market goes down. Maybe it goes down 15%, right? So you, you know, so 500, or 20%, so 500,000 becomes worth 400,000.

So you convert, at that point, you convert 400,000 at that point and pay the tax on that, and what you’re betting on is the market recovery will happen in the Roth. And effectively, you have a much lower rate when you consider what eventually ends up in the Roth versus what you actually paid tax on.

That’s w- and this is true for anybody. When the market has a big decline, it’s a real opportunity to think about Roth conversions ’cause ultimately you’ll probably pay less tax that way.

Joe: Yeah. I- he’s done great.

Al: Yeah.

Joe: Do what you want, George.

Al: That’s, that’s the answer. Do what you want.

Joe: Yeah.

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Convert to Roth Now or Wait Until We Leave Oregon? (Cher & Sonny, Oregon)

Joe: All right, we got Andi’s BLUF. A tax state arbitrage timing with a relocation constraint.

Al: Okay.

Joe: All right, let’s see what this is all about.

This feels like I’m playing, like, a, a game. Yeah. A little board game or something- … with the kids. All right. Hi, Joe. Yeah.

Andi: Here’s the tease. Here’s the setup.

Joe: Yes. Hi, Joe. Big Al. Andi, as I was trying to think of a name, I came up with Share.

Al: Okay.

Joe: All right? If I could turn back time. If I could find a way. All right, Cher, let’s get back to it.

“Mostly because I wish more than anything I could turn back time.” Oh, look at that.

Al: Yeah, look at that, huh?

Joe: Why would you wanna turn back time?

Andi: And start listening to you years ago, that’s why.

Joe: Oh.

Al: Okay.

Joe: Man, I should just- You know what? I should- Just read it … I should prep- I should do a little prep before, before we go live here.

if I could turn back time just to start listening to your show years ago. That is very sweet.

Al: That is sweet.

Joe: “You can call my husband Sonny. Yeah … we are 57 and 58 and live in Oregon. I discovered your podcast about a month ago, and it’s safe to say I’m obsessed.” “In a totally healthy way, of course.”

Al: Nice.

Joe: “I’ve been bingeing on all the episodes, which means that within the course of about a week, I heard Al’s touching tribute to his sweet mother after her passing, and I heard about Andi’s recent cancer diagnosis. I hope your treatment is going well, Andi, and appreciate the energy you bring to the show.

I really enjoy the personal touch all three of you add. Your Money Your Wealth has replaced all podcasts for me, not just financial ones, and I feel like I’m getting a master’s degree in retirement planning.” “And I’ve also learned to remove go go, slow go, and no go from my vocabulary, thanks to Joe’s absolute disgust of the terms.”

Al: Well, that is, Cher, that is really nice.

Joe: Yeah. We appreciate that. Thank you for writing that- Yes, thank you … in this email, too.

Al: Yeah.

Joe: That-

Al: So yeah, so it gets emphasized.

Joe: Yes. “Here’s the problem. I’ve lived my whole adult life thinking if I put money into my 401(k), I’ll be fine. Then I started listening to you guys and realized almost all my money is trapped inside of the retirement accounts.

I’m trying not to panic. First, the most important stuff, we live in Oregon, and I love to travel. I love a dirty martini with blue cheese olives.” Sonny loves hazy IPAs and occasional old fashioned. we both enjoy wine, crisp white for me, and a bold red that punches you in the mouth for Sonny. Damn.

Andi: That was Sonny. Yeah.

Joe: Okay. “We have three kids. Two are fully launched. the other should be off the payroll in early 2027. I drive a black BMW X3.

Sonny drives a boring company car, and he loves it because it’s free.” “I’m hoping you could give us a spitball and get your thoughts on how to best rev up our retirement planning for the next two to three years. Here are the numbers. Income, Cher $277,000, Sonny 150 to 170 depending on his bonuses. Current spending is about $200,000 per year.

We expect that to dr- to drop about 170 per year or less once the youngest is fully launched. Still crunching the numbers. We’d like to spend about $150,000 a year in retirement, but could bring that down if necessary. Retirement accounts, approximately $2.7 million in total. We got traditional IRAs of 2.2.

We got a 401(k) for Cher of 350. Sonny’s 401(k) is 70. Other assets, got a brokerage account of 22,000, high-yield savings account of 40 grand, HSA of 12, a little crypto of 2000. Got a home worth 750,000 with a $490,000 mortgage at 4%. Retirement savings detail, I currently max out my 401(k) and receive a 4% company match.

My catch-up contributions are Roth for the first time this year. My employer recently added mega backdoor Roth option between my contributions, company match, and after-tax contributions. I can contribute up to the IRS limit of 72,000, immediately convert the after-tax dollars to the Roth. Sonny is considered highly compensated in his plan, and he can only contribute 2% pre-tax, 6% after tax, plus he has a very low ceiling on how much total he’s allowed to contribute each year.”

All righty, so they got some Social Security. Yep. About 5,000 at 70, 4200, 67 to 3000 at, 62. We have no pension. We plan to relocate to a lower tax state when we retire and will likely trade Oregon’s 9.9 income tax for the, 2.5% or less, depending on where we land. Here’s my question. I can hear Joe say, “Finally.”

You know what? She’s a very good writer, though.

Al: Yeah, she is. So, so you just kinda rolled right through it.

Joe: Right. I thought I read that perfectly.

Al: You, you did great.

Joe: I, I didn’t really stumble-

Al: No …

Joe: or trip myself.

Al: Well, sometimes people miss words, or

Joe: they- They miss words, and they- They- … like, they put words where they shouldn’t put words.

Correct. They put, try to put their sense of humor in it. They…

Al: Yeah.

Joe: And it just comes out bad.

Al: They, they didn’t proof it. Yep.

Joe: They, they didn’t proofread it. This, Cher, very well-written email. Yeah. You could tell your personality in there. She had some fun, a little spunk in there.

Al: Yeah, yep. Yep.

Joe: Kudos to you.

So, but yeah, it’s long. It was- It was, it, it was a little long.

Al: It keeps going.

Joe: Okay, let’s see. “Can Sonny retire at 60, and can I retire at 59, or would we be better off if we worked one more year? Should we wait until we move out of Oregon to begin our Roth conversions? Right now we’re putting $1,000 a month into our HSA and $1,000 a month into our brokerage account.”

Andi: HYSA.

Joe: “Should I redirect…” H or high-yield savings account. Yep. “Should I redirect any of that to my mega board, mega backdoor Roth option instead of, or should we be focusing on building taxable assets and cash?” Okay. “Should I contribute, maxing, my pre-tax 401(k), or would it make more sense to contribute only enough to receive the company match and direct the difference into the mega backdoor Roth, even at Oregon’s 9.9% rate?

Thank you again for all you do to educate and entertain your listeners, Sonny and Cher.” Whew. Okay. And then we got a follow-up.

Al: Yes, we do.

Joe: “I wanted to update some of the information I sent before. Before I submitted my question, I called Empire and I asked them about the after-tax contributions, and the representative told me I could do unlimited in-plan Roth conversions with my after-tax dollars.

Turns out, that was not correct. I just received the plan document and it says they are only allowed once per quarter.”

Al: Man.

Joe: “I’m not sure if this information will impact the spitball, but I wanted to share just in case. Sorry to overwhelm your inbox.”

Al: Okay.

Joe: Wow, she read the plan document, Al.

Al: She did. Very good.

Joe: It is hardcore. Which

Andi: is what you always tell people to do, is go read your plan docs. Well- She actually read it in advance …

Joe: does it. No, that’s just, like, something to say, because I know no one will do it.

Al: Right. That’s true. Have you read our plan document?

Joe: No, I’ve not read our plan document.

Al: Me, me neither.

Joe: I just try shit, I mean, stuff, and then if it rejects, it rejects.

Al: Yeah. Remember when we tried to do the mega and we both got rejected?

Joe: Yes.

Al: Yeah. But then our plan changed and we could do

Joe: it. Yeah, and but I still get money back every year.

Al: Well, me too.

Joe: Because I did too much or did stuff-

Al: Yeah, yeah, we all sc- well, we screwed it up.

Joe: Yeah. We have a… Yeah. But she read the plan doc.

I wonder if I could give Cher our plan doc so she could read it for us. She could tell us what to do. Yeah, she could tell us what to do. all right, so couple things. Hell of a job.

Al: Yeah.

Joe: You guys are doing great. Can, All right, so they got c- couple million bucks. $2,500,000, can they retire? Where are they gonna move to, though?

2.5% state tax.

Al: That’s pretty low. There are states that are like that, and some states that are tax-free. Free? Yeah.

Joe: Sure.

Al: Yeah.

Joe: But t- they, they pinpoint 2.5%.

Al: Yeah.

Joe: Or lower.

Al: They must have a state in mind.

Joe: They’re not gonna look- not gonna look anywhere else.

Al: That’s, yeah. Ooh, this, this state’s 2.7.

Joe: Yeah, 2- no.

Al: Can’t do it.

Joe: It’s off the list. All right. S- I’m sure you ran some numbers, Big Al.

Al: I did. I think, I just ran a couple years and 6% adding w- you know, 70 grand a year. They end up with 3.2, 3.3 million.

Now, if you take the Spending Joe at 200,000 for a couple years inflated at 3%, it’s 212,000. So the first thing I did was just, let’s look at that compared to their assets.

212 into 3.2 million, that’s 6.6%. Little bit high as a distribution rate. But- If one of them takes their Social Security at 62, then you c- could subtract out about 35,000. The, the net, th- the need’s 177 into 3.2, that’s about 5.5% without the oth- you know, the, the other person taking-

Joe: And at that 200,000, they think they could go to 150 at retirement.

Al: Yeah. When I run it 150 just to see, right?

Joe: Pretty good?

Al: It’s pretty good. It’s, without Social Security, it’s 5%. With one taking Social Security, it’s 3.9%.

Joe: And when they both claim, it’s what? It’ll- Three and a half, three?

Al: Yeah. So I, I would say yes. I don’t know, Joe, if they could spend 200,000 in a year or two.

that might feel a little bit rich, but, if they could get it down to 150 or 170, as they said, and, I think that could probably work.

Joe: Yeah. I think- What are they? 57, 58, if I- Yeah, yeah … remember that?

Al: Yep, yep.

Joe: So they got a couple more years.

Al: Couple more years to accumulate.

Joe: 57 or 58.

Al: Yep.

Joe: Yeah, I, I think they’re in really good shape with the amount of assets that they have, but they have to monitor this, and they have to have a retirement strategy, you know?

Some- I- if they wanna spend 200,000, you just gotta put some guardrails around it.

Now just understanding what’s going on with the overall markets. Is it up? Is it down? Do you have to- can you reduce your spending the next year if there’s a correction?

Yeah. Depending on how allocated, how are you managing it.

I mean, a- again, it’s not, this is, this is life. It’s not a spreadsheet.

Al: Right.

Joe: so but given her other questions of, of her savings.

Al: Should she do Roth conversions?

Joe: Yeah, well, s- so the mega backdoor b- basically is this, is that you could put after-tax contributions. Because those contributions are already taxed, you could convert those into a Roth.

And it, there’s an inner plan conversion where the, you’re just taking the after-tax dollars that you put in the 401(k) plan, and you’re just moving them into the Roth component of the 401(k) plan, and then that grows tax-free. she’s saying that you can only do that once a quarter. That’s fine. Just do it once a quarter.

You don’t have to do it right away when you make the contribution.

Al: Agreed.

Joe: I do mine, I think I look at it once a year and just make sure that I convert it. d- it depends on what you’re invested in. If you get a lot of growth, you might have to

Al: take- Might, might do it sooner.

Joe: Yeah. Y- yeah, it gets a little bit murky.

Yeah. But once a quarter is totally fine to take a look and do the conversions there. do I wanna… Should she continue to beef up her brokerage account or f- continue to fully fund the 401(k) plans? I like fully funding the 401(k) plans myself, It’s like it’s- … because it’s out of sight, out of mind. It’s out of the employ- y- you know?

Al: Yeah.

Joe: I would continue to do that.

Al: And by the time they retire, they’ll be 59 and a half, if it’s a couple years.

Joe: Right.

Al: Yeah. and especially, Joe, if it’s the backdoor, or the mega Roth, right? Because then it’s Roth, right? And you can pull that money out without paying tax.

Joe: Well, they’re gonna sell their house and buying to something lower.

lower state.

Al: Yep, yep.

Joe: So there’s some concerns-

Andi: The only two states that have 2.5% income tax is Arizona and, and North Dakota, so.

Joe: Okay. Well, they’re going to North Dakota. Oregon, baby.

Al: I’m guessing they’re g- well, they’re Oregon now. I’m guessing they’ll pick Arizona.

Joe: Yeah, I suppose. That’s hot though, man.

Al: It’s really hot. Yeah, they’re gonna wish they lived in Oregon in, at least in the summer. In

Joe: the summer, sure.

Andi: Yeah. Now, can she take advantage of the rule of 55 since she’s over 55 at this point?

Joe: Yes. Both of them can. Yep. So you can take the money out of the 401(k) at 55 without a 10% penalty.

Al: Correct.

Andi: So how are they gonna get from age 59 to 65 with $64,000 of taxable assets? Could they-

Joe: Well, no, they would take it from the retirement account right when they retire. So if they could retire today, they could take it from the retirement accounts, no big deal.

Al: Well, and, and here’s another thing to think about.

It’s they’re gonna need their RMD to live. So the, the fact that you wanna do conversions, it, although important, when you need the money to live off of, it’s a little bit less important ’cause you’re gonna be in that same bracket anyway.

Joe: They don’t have a ton of liquidity. Yeah. But I don’t think saving $1000 a month over the next 12, 13 months is gonna

Like, you’re, you’re gonna get another $15,000 into the account.

Al: Right.

Joe: Do you want it in a non-qualified account, or would, would I wanna put it into an after-tax converted to a Roth? I’d much rather have it in a Roth account.

Al: Then it’s, you know it’s tax-free.

Joe: Yeah, you’re gonna retire in a couple of years.

You know the money’s gonna be tax-free. Yeah. If they put it into a brokerage account, it’s after tax, right? So if you compare a Roth, you compare your after-tax contributions to a after-tax brokerage account- When you’re retiring in two years. If you’re retiring in 10 years, then I would think of something differently.

Yeah, you would wanna build up some liquidity in a brokerage account. But since you’ll have full access to those dollars in a couple of years when you need them, when you retire, think of it like this. After-tax in a brokerage account, all growth is gonna be taxed at a capital gains rate. After-tax in the retirement account that gets converted to a Roth, never taxes ever again, right?

To me, that’s a no-brainer. You would wanna do the after-tax in the retirement account, plus it’s a lot easier to do because it’s just coming straight from your paycheck versus, you know, dr- you know, ACH from your bank account into a brokerage account, then you gotta buy the mutual fund or, or ETF or stock or whatever that you’re currently doing.

Al: Yeah. The, the only reason you would, you would do it the way they’re thinking, building up the non-qual, is if they’re not old enough to access it, but- Sure,

Joe: if they were gonna retire at 50.

Al: Right. But they are, so yeah, so that’s-

Joe: Or if all the money was in an IRA and they wanted to retire at 55.

Al: Yeah.

Joe: So- You know what?

They have 300,000 in the 401(k) and when it- the rest is in IRAs, so they could move the IRAs into the 401(k) until they turn 59 and a half if they needed more money- They could … to take advantage of the rule of 55.

Al: If, if they’re not 59 and a half at the time. But I would open up a, a Roth IRA outside of the 401(k) to start the five-year clock in case they wanna then eventually pull the Roth IRA, Roth IRA component of the 401(k).

And I guess maybe we should explain that rule. You got money into a 401(k) Roth and you, and then you roll it to a, a, a IRA Roth out of the 401(k), you still have to wait five years So you might wanna set up that account now. And, and when you set it up, like you set it up r- right now, it goes back to January 1st of the same year that you do that.

So I, I think I would-

Joe: Does the five-year rule carry from the 401(k) to the IRA?

Al: I don’t think so. I think you have to set up a r- a, a… If you, if you roll the ro- the Roth component into an IRA, a Roth IRA-

Joe: If you keep it in the 401(k), you’re fine …

Al: you k- Correct. That’s right. But if you wanna eventually roll it out to an IRA, you might open up a Roth IRA right now.

Joe: Well, they could do Roth IRAs regardless, and if they don’t qualify, they can do a backdoor Roth. You just do an after-tax contribution to the IRA. Even though you’re fully funding the retirement accounts, you can still do an IRA.

Al: Yeah. Or you just do a $2,000 Roth conversion- Yeah … out of your IRA to, just to start it.

Joe: Right. Sure.

Al: Just to start the clock.

Joe: Yeah. Or l- a $5.

Al: Fi- Yeah.

Joe: A $5 conversion. True. Just put any dollar in the overall account.

Al: Just to get it started.

Joe: Yeah.

Al: Yeah. Yeah.

Andi: Do you think you could spot a millionaire? The nice car, the great watch, the beautiful house… but all those things might be hiding a bundle of debt. This week on a brand-new episode of Your Money, Your Wealth TV, Joe Anderson, CFP® and Big Al Clopine, CPA break down what a true millionaire looks like, and the habits that can help you get there too. Watch “Do You Have These 10 Habits of the Quietly Wealthy?” on YMYW TV. You’ll get a rule-of-thumb formula that uses your age and income to estimate where your net worth should be, a look at how keeping up with the Joneses can cost you six figures over time, and the surprising thing that happens to bankruptcy filings when a neighbor wins the lottery. Plus you’ll learn key habits to develop to automate your savings, find your freedom number, and plan how money comes out of your accounts. Click or tap the link in the episode description to see how many of the 10 habits you’re already practicing and which you can add to help you become quietly wealthy yourself.

We Built a Dream House. Can I Still Retire? (Michelle, Vienna, VA)

Transcript

Should an Annuity Cover Your Fixed Expenses? (Marion, Fresno, CA)

Transcript

Outro: Next Week on the YMYW Podcast

Andi: Next week on YMYW, more making fun of finance and more spitballs. Your Money, Your Wealth is presented by Pure Financial Advisors. Making the most of your money and your wealth in retirement? It really does take a lot more than a spitball. Schedule a free, no pressure, no obligation, comprehensive financial assessment with the experienced professionals on Joe and Big Al’s team at Pure. It’s a two-meeting process, and the Pure team will work with you to create a detailed plan that’s tailored to your needs and goals in retirement. Meet in person at any of our locations from Southern California to the Smoky Mountains, or meet online right from home. Click or tap the free financial assessment link in the episode description, or call 888-994-6257 and book yours now. Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.

The Derails: Cher, blue cheese olives, Joe’s Escalade, iPhone, and new lifestyle

Joe: You guys aren’t big fans of Cher?

Al: I like Cher.

Joe: You don’t know that song?

Andi: I like Sonny and Cher.

Joe: Yeah.

Andi: I Could Turn Back Time, I think that was the first song that ever used, Auto-Tune, wasn’t it?

Al: Oh, it did? I don’t know that. You think so?

Andi: I think that was the first song that ever featured Auto-Tune.

Joe: Okay. Really? I just remember her being on a-

Andi: On the boat

Joe: a ship.

Andi: A ship. Yes, with all the military men and that very, very skimpy outfit.

Joe: Yeah, I don’t think she was wearing any clothes.

Andi: Yeah. Yeah, pretty much.

Al: Y- and I, you know I don’t remember anything. I remember that,

Joe: You remember that. Yeah. There you go. All right. Okay, let’s see. Cher,

Andi: All right, and I’m gonna correct myself right now. If I Could Turn Back Time came out in ’89. It was the song Believe that came out in 1998 that was the first one that used, Auto-Tune.

Joe: Way to go.

Al: Oh, okay.

Joe: All right. Thank you for auto-correcting yourself.

Andi: I do it before it gets into the YouTube comments and they correct me.

Al: And they will, right?

Andi: Absolutely.

Joe: Oh, boy. That’s what got me in trouble and banned from- … vodka.

Al: Really?

Joe: It did.

Andi: Bad for me. I think it might have been the vodka that got you banned from vodka, Joe.

Joe: No, it was those blue… Man, those- The olives? Oh, olives, the blue cheese olives. Man, I loved those. Those dirty martinis, and I had-

Al: Yeah …

Joe: yeah.

Al: You had too many, huh?

Joe: Yeah, we had a nice little dinner- Yeah … and then I blew it up with-

Al: Yeah, yeah …

Joe: with those, mar-

Al: So no, no more, huh?

Joe: Nope. those are off the list.

Al: Okay. Got it …

_______

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