Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
May 17, 2022

Required minimum distributions: how do they work, when do you have to take them, and do Roth IRAs have RMDs too? Plus, were the fellas being misleading when they talked about claiming Social Security early vs. late if you save and invest the benefits? Listen for their rebuttal. When you change 401(k) custodians, is it a transfer, or a whole new plan? Can you convert your entire 401(k) to Roth, and should you? Finally, If you’re worried about high tax brackets in retirement, should all your contributions now go to Roth?

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Show Notes

    • (00:53) How to Take RMDs? Required Minimum Distributions Explained (Scott, voice message)
    • (05:46) Is My BF BSing Me on RMDs? (Linda)
    • (09:15) Do Roth IRAs Have Required Minimum Distributions?
    • (13:06) Comment: YMYW Misleading? Claiming Social Security Early vs. Late
    • (20:22) Switching Solo 401(k) Custodians: Transfer or New Plan? (Smitty, The Villages)
    • (25:03) Can I Convert My Whole 401(k) to Roth IRA? (Lester from Tacoma, WA)
    • (30:40) Going All Roth is Painful Now, But I’m Worried About High Tax Brackets Later (Jennifer, CA)

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5 Costly Required Minimum Distribution Mistakes to Avoid:

5 Costly Required Minimum Distribution RMD Mistakes to Avoid

From IRS.gov: IRS Publication 590-B, Distributions from IRAs (See page 65 for the Uniform Lifetime Table)

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You’ve been saving all your life, and now as you approach retirement you find out that whether you want to or not, at a certain age you have to take a certain money out of those accounts each year, or pay hefty fines! Today on Your Money, Your Wealth® podcast 378, Joe and Big Al explain required minimum distributions: how do they work, when do you have to take them, and do Roth IRAs have RMDs too? Plus, were the fellas being misleading when they talked about claiming Social Security early vs. late if you save the benefits? Listen for their rebuttal. When you change 401(k) custodians, is it a transfer or a whole new plan? Can you convert your entire 401(k) to Roth, and should you? Finally, If you’re worried about high tax brackets in retirement, should all your contributions now go to Roth? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Joe: Answering your money questions, go to YourMoneyYourWealth.com, click on Ask Joe and Al On the Air. We’ll answer them right here. Sometimes that button works, sometimes it doesn’t. So if you’ve emailed us lately, we probably didn’t receive it. So try again.

How to Take RMDs? Required Minimum Distributions Explained (Scott, voice message)

Scott: Hey, you guys. I hope you’re doing well. I have a question about MRDs I guess, minimum required distributions. For a 403(b), I know that you have to start taking them at a certain time, 72 and a half, or, or I don’t know if they’ve changed that. But when it comes to the age when you have to take it, do they just automatically start sending you checks? Do you have to fill out an application, blah, blah, blah. What is the process for you to start taking it so that you don’t get penalized? Thanks.”

Joe: All right. A good question. So, required minimum distributions, RMDs, or MRDs as Scott likes to call them.

Al: And a lot of people do call them MRDs. The age right now is 72. So that’s our current age. There’s some legislation that could make that longer, but at the moment it’s 72.

Joe: And if you do not take your required minimum distribution, you are penalized. It’s a 50% penalty. So let’s say Scott has to take $10,000 as a required distribution from the account and he doesn’t take it. He is penalized $5,000, so it’s a pretty hefty penalty if you do not take your required distribution. And you would think would that big of a penalty, they would just send you a check. But they don’t, you have to request the money from the custodians.

Al: Well, you do. And I think it’s partly because the year you turn 72, you don’t have to take your required minimum distribution that year, you can take two the following year. And then some people want to take it at the first of the year. Some people want to wait till the end of the year. The IRS gives you all that choice. The brokerage house doesn’t know what you want to do. So you have to take action on that.

Joe: If you have an IRA, multiple IRAs, you can take one required distribution from one IRA. Let’s say Scott here has a 403(b) and he has an IRA, and let’s say he has a 401(k) plan. He would have to take a required distribution out of each of those plans. So then that’s where it even it gets more complex. If he’s got multiple 403(b)s or multiple 401(k)s, then he has to take an RMD out of each of those. He can’t just satisfy the required distribution. Let’s say the required distribution is $30,000 if you looked at all of his retirement accounts. So we took $30,000 out and he paid the tax on it. But if he had 4 different retirement accounts that had a requirement, he had to take it from all 4 of them. And if he didn’t, then there would be a penalty on the ones that he didn’t take out, up to 50%. So you want to make sure that you do it.

Al: And then when it comes to like a Roth 401(k), you have to take an RMD, but if you have a Roth IRA, you do not have to. So there’s a lot of rules you want to make sure that you understand, because you don’t want to get penalized at 50%. I will say this, Joe, it’s a common mistake. A lot of people make this mistake. The IRS, if you request an abatement of penalty for a first year, they will usually, I’m not going to guarantee it, they will usually abate the penalty because you didn’t really understand the rules. They’re not going to do it a second time or third time.

Joe: And that’s why in addition that you have- like your required beginning date is April 1st, the year that you turn 72. Used to be 70 and a half.7 But let’s say you forget, or you don’t know or whatever.

Al: The year after-

Joe: The year after you turned 72.

Al: Yeah. You said the year of. The year after.

Joe: The year after you turn 72. So you can take it the year you turn 72, or you can take it the following year. So you’ve got that double year, just in case you blow up.

Al: Right.

Andi: So would it be a good idea to actually consolidate accounts before you are required to start taking RMDs to make it so you have less accounts that you have to pull from?

Joe: That would make sense to me.

Andi: So if you’re one of those people that’s got- you’re opening an IRA every time you’re making a contribution and you’ve got 200 accounts, that might be a bad idea.

Joe: Whatever her name was?

Andi: Right, in Atlanta. Helen Wheels.

Al: Oh, that’s right.

Joe: She opened up like 5,000 IRAs or something. Well, they’re IRAs. So she could just take one RMD.

Andi: Oh there ya go.

Al: Yeah. That’s, what’s so hard about this. If it’s IRAs, you can treat it as if it’s one account, even though you get 25 or 500 accounts, but when it comes to 401(k)s, 403(b)s, all of them are separate. Like, let’s say you have 3 or 4 401(k)s from old employers and you kept them with the old employer. You got to take an RMD from each one.

Is My BF BSing Me on RMDs? (Linda)

Joe: We got Linda writes in. “My BF, who has never touched his IRA as of yet, tells me he has to start taking the RMD at age 72. And he thinks that I’m going to have to take out more than my monthly $2,500. What’s the truth of this situation?” How the hell do we know, Linda?

Al: Well, let’s go on what we know. So $2500 a month would be $30,000 for the year. You could take $30,000 and divide by 4%, which is roughly, I guess how much- let’s see- 30 divided by 4-

Joe: About $900,000?

Al: Yeah. $750,000. Linda, if your account is above $750,000, yes, you’re going to have to take out more, because it’s roughly 4%. There’s a Uniform Lifetime Table that you have to look up to figure out your age, every year it changes. But for simplicity, it’s roughly about 4% of your account balance at age 72 is what you have to take out. If your account is lower than $750,000, just keep taking out the $2500. You’re fine.

Joe: Yeah, because at age 72, your BF is correct that you are going to have to take a required minimum distribution out of the overall retirement account. The amount is based on the balance of the retirement account on December 31, the following year.

Al: The prior year.

Joe: The prior year, not the following year, the prior year. So for this year, for 2022, you look at the balance of 12/31/2021. Look at that account balance. And then you use the divisor depending on what your age is. And then that’s going to determine how much money that needs to come out of that account within that calendar year. If the money does not come out of the account within that calendar year, then there’s a penalty. It’s a 50% tax penalty on any distribution that is not taken out. That is a requirement. So what Al is doing is just backing in the math to say we don’t- she didn’t give us any information. She’s just like, tell me the situation.

Al: What’s the truth?

Joe: What’s the truth here? It’s my BF BSing me?

Al: That’s pretty good.

Joe: Yeah. Yeah, I don’t know, but here’s the truth. The truth is that he’s not BSing you to some degree, that you have to take money out. But we don’t know how much money that you have to take out because it’s based on the balance of your retirement account. It’s not a fixed dollar amount. It’s not like you need to take $2500 out when you’re- or $30,000 out when you’re 72 and $50,000 when you’re 73- it’s a percentage based on the account balance. So if you have a $20,000 account balance, it’s just a small percentage. If you have $2,000,000, then of course, then it’s the same percentage, but the dollar figure is going to vary depending on what the balance of the account is.

Al: And I think that just to sort of summarize, so you go to that table, I think at age 72, from memory, I think it’s 25.5. That’s the factor. So you take your IRA balance December 31st, the year before, divide it by 25.5. That’s how much you have to distribute in an RMD. If your $2500 per month, 12 months, $30,000. If your RMD is lower than that, you’re fine. If you RMD is higher than that and you turned 72, then yes, you’re going to have to take more out.

Do Roth IRAs Have Required Minimum Distributions?

Joe: Speaking of RMDs, we got a question here. It goes “My husband will turn 72 this November. He has a traditional IRA of $70,000, a Roth IRA of $27,000, and a SEP IRA of $3300 bucks. What is his RMD for this year? Our Roth IRAs exempt from RMDs. Thank you.” She’s asking us to calculate the RMD?

Al: I just did. It’s $2,977.

Joe: $2977. So he turned 72 at November. His required beginning date is the following year. So if he takes it this year, what balance do they look at?

Al: Well, they look at the balance from the- at the- well, and I don’t even know if this is the right balance to look at.

Joe: That was exactly my point.

Al: Yeah. Good point. So it needs to be December 31st of the year before. You take that balance, you go to the Uniform Lifetime Table. You look at your age 72, and you see a number of 27.4. So you take your IRA balance, you divide it by 27.4 to get your number.

Joe: But it’s December 31st of the year prior.

Al: Correct. It’s not what it is-

Joe: Not kinda like oh, the market is down 30%. So now I’m going to take my required distribution by the lower amount or if the market was higher or whatever. So it’s based on that balance the prior year.

Al: That’s a good point. Yep.

Andi: And what about a Roth IRA?

Joe: The Roth IRA is exempt.

Andi: It is. Okay. Just wanted to confirm that.

Joe: Roth IRA.

Al: Roth 401(k) is not exempt, but Roth IRA is.

Joe: You would just roll the Roth 401(k) into the Roth IRA. Cleans that up.

Al: It sure does. I guess the first question or your question, Andi, yeah, I would roll all my accounts into one, make it simple.

Joe: The only reason why you wouldn’t is that there’s like ARISA protection, let’s say in 401(k) plans. So if you think you’re going to get sued, if you’re worried about that. You know, you have some better liability protection with the 401(k) plan. With an IRA, depending on the state and depending, I guess if it’s civil or criminal, so I guess it’s what your character-

Al: It does depend upon the state. I know we’re in California and California allows you to roll money out of a 401(k) and it still qualifies for that same treatment, but not all states do that.

Joe: Yes. But in most cases you want to consolidate, make your life easy.

Al: So I was just going to say another reason not to consolidate as if you’re 55 and you retire and you need to take the money before 59 and a half, keep it in that 401(k) at that point. You don’t really have to worry about it until age 72 when RMDs start. But if you want to get an access to your funds and you have a 401(k) and you’re retiring at 55 or later, you can pull the funds out, pay tax, but no penalty.

Learn how to avoid 5 costly RMD mistakes before you make them, and download that Uniform Lifetime Table to help you calculate your required minimum distributions. Get both f rom the podcast show notes at YourMoneyYourWealth.com. You can also read the transcript of today’s episode, Ask Joe & Big Al your money questions and watch videos of them answering, and schedule a free one on one financial assessment with an experienced financial professional on Joe and Big Al’s team at Pure Financial Advisors. When it comes to your retirement, don’t leave anything to chance: find out how to reduce your taxes, maximize your retirement income, and head off any potential mistakes. Click the link in the description of today’s episode in your podcast app to go to the show notes and get started.

Comment: YMYW Misleading? Claiming Social Security Early vs. Late

Joe: So we got- let’s see- Misleading by not saying Social Security is being invested. “Hi Joe and Al. A few times in your episode, you mentioned that most people who take Social Security early, and do not need the funds, end up spending the monies and not investing. Therefore, you recommended taking Social Security later, say 67 or 70. My thoughts are the opposite. And a large percentage do in fact save their Social Security.” How the hell does he know that?

Al: He’s done a market study.

Joe: What is he doing? “In fact, a large percentage do save their Social Security?” Well, maybe in your inner circles in La Jolla, you know?

Al: Yeah. Right. All his neighbors are doing it, Joe.

Joe: I guarantee. You know my mom spends a 100% of hers. “Let’s say for instance, one needs $5000 per month to support their needs in retirement. They have a 60/40 portfolio with $2,000,000 invested.” Well, of course. Yeah. He’s talking to his boys at the country club.

Al: Unfortunately, that’s not most people. A few people have that.

Joe: That’s you. That’s not most, it’s a few.

Al: When you look at Fidelity, they come up with average 401(k) balances in the country and it’s like, $99,000. I mean, that’s what it is. That’s what most people have. And that’s the average, right?

Joe: So he goes on. “At age 62, they decide to take Social Security and receive a $2000 per month benefit. This means they need to take out $3000 per month from their portfolio. So essentially they are saving $2000 per month, because if they did not take Social Security, they would need to take out the entire $5000. So they are essentially investing the Social Security proceeds.”

Al: Ok. I guess.

Joe: That’s one way to look at it. “No, we don’t know if this is the correct option because we do not know how long one will live, but I think this is how most people would handle Social Security. I think assuming everyone takes $5000 out of their retirement, because that is their spending needs and then also spending the $2000 Social Security at 62 is a bit far-fetched.” I don’t think we said that. If they’re spending $60,000, they’re going to take the Social Security and then they’re going to supplement that income with their other dollars.

Al: Yes. Right.

Joe: If they’re already- they’re going to take Social Security first, then they will take- in our experience, doing this for 20some odd years, and having thousands of clients and- but, I dunno. Far-fetched, Al.

Al: Well, you know, we try to talk about what we’ve seen most people do. Most people take Social Security at 62 because they need the money and they spend every penny, and they’re still short, right? That that’s what most people do.

Joe: Correct. Or they try to take it or if they delay it, they’re trying to delay because they’re going to continue to work and they’re going to continue to save. But most people feel the need that they need that fixed income when they retire. They feel that comfort that money is coming to them. If I have a few million dollars sitting in my brokerage account, I’m probably not going to feel that anxiety. Maybe I will, maybe I won’t. But if someone doesn’t have the few million dollars sitting in their retirement account, they’re going to look at things maybe a little bit differently. So I think he misunderstood what we were talking about. We’re not saying they’re going to take out $5000 from their portfolio in addition take out the other $2000 from Social Security. Maybe some people would do that. I don’t know if it’s far-fetched. A lot of people are spending. But it sounds like this individual is a saver and savers are so much different than spenders because it’s almost impossible for a saver to spend. They’re like they can’t do it. It’s like, oh, I don’t want to see this balance go down. Oh my gosh. And then there’s certain anxiety levels there. People are messed up when it comes to money. I don’t care how much money they have or how little that you have. We’re all screwed up. All right, I’ll go on here.

Al: Yeah, go ahead.

Joe: “For those that have saved and learn to live within their means for retirement, they most likely will continue the behavior and live on a monthly budget.” Yes, I think I just said that without even reading it. “Therefore, I almost always would rather have someone take it early because the breakeven is far enough in the future given even a modest growth rate, the odds of passing before the breakeven is greater than the odds of not. If this turns out to be incorrect and you live past the breakeven, your $2,000,000 portfolio has had an extra 20 to 25 years of growth and will more than cover the expense for the remaining years. Your thoughts?”

Al: I think when we talked about this, we agreed with this concept. If you’re disciplined and can take the money early and you can invest it at a certain rate of return, you’ll do better. I agree with that. Most people spend their Social Security, which is, I think what we said. Another thing we talk about Joe, is Social Security is tax-favored. So on the federal side, only 85% is taxable, so 15% is tax-free. And on the state side, most states, not all, but most states it’s tax-free. So that’s a great tax favored income source that wouldn’t you want to maximize that?

Joe: Okay. But, his analysis is flawed in a lot of different ways, because let’s say if you are taking $5000 a month, he’s recommending you take it early. I wonder if this guy’s an advisor.

Al: I think he is. Yeah.

Joe: Recommending to his clients to take it early. And then he heard our podcast. He was like, oh, I wonder-

Al: Maybe his clients are listening to our podcasts and blowing him up.

Joe: So $2000, he’s like, all right, well here, $2000, I’m going to take that $2000. And then I’m going to supplement my overall retirement income with $3000 because my total spend is $5000. Okay. All right. So I’m taking the $3000 out of my $2,000,000 portfolio, blah, blah, blah, blah, blah. But what he’s missing is that the sequence of return risk as well. What is the market doing? How much money are you spending from the overall portfolio and what is your withdrawal rate? Because the longer that you can hold that money out, you’re going to have a higher fixed income later in life. That’s when most people need the money, because I’d much rather have a guaranteed large fixed income later in life. Then have a guaranteed lower income earlier in life. Because things happen later in life, right? Where you probably need a little bit more cash. And if you run out of cash, at least you have a higher fixed income to potentially do the things that you want to do.

Switching Solo 401(k) Custodians: Transfer or New Plan? (Smitty, The Villages)

Joe: We got Smitty. Second week in a row. Wow. He must’ve been golfing in The Villages, missed us and probably binge-listened to a few episodes and was like, I gotta get back to my boys.

Al: Maybe he liked our answers. So he’s going to ask another one. Or maybe he didn’t like the answer. He’s going to give us another chance.

Joe: Either/or. He goes, “Hey guys, my tax guy is questioning my solo 401(k). I changed from plan one to plan two when I transferred it from Fidelity to Vanguard. My tax guy thinks it should have stayed as plan number one, because it was only a transfer, not a new plan. What do you guys think? I always appreciate your thoughts. Thanks, Smitty from The Villages.” So I don’t know what the hell that means Smitty, but I’m guessing he had a 401(k) plan, a solo 401(k) plan at Fidelity. And he decides to transfer that solo 401(k) plan from Fidelity to Vanguard.

Al: That’s what I get too.

Joe: So, and his tax, guy’s goin’ Smitty, should have kept it in plan one or plan two. What- I don’t even know what plan one means.

Al: Yeah. Yeah. I think Joe, it has to do, each custodian has their own prototype solo 401(k) plan. So Fidelity had it’s prototype plan. And when he went to Vanguard, they probably want to use their own prototype 401(k) plan. I’m guessing. Yeah, theoretically, it is the same plan. Yeah, I get that. But it’s now at a different custodian that doesn’t necessarily want to use the other custodian’s plan, is my guess.

Joe: Well, I’m guessing he’s just did a transfer. He just said, you know what? I’m just going to transfer it from Fidelity to Vanguard or roll the Fidelity plan into the solo 401(k) at Vanguard.

Al: Agreed. And so the accountant is right. That should not be a new plan. I’m just guessing that Vanguard doesn’t want to have a Fidelity prototype plan that they are responsible for. So they made them change it into Vanguard, unless it just wasn’t very well explained when he opened it up. I don’t know.

Joe: But at the end of the day, there should be no tax. I think that’s his true question.

Al: There’s no tax, correct. I agree with that.

Joe: Something’s going on here because it went from a qualified- unless you screwed up the paperwork, which-

Al: Which could be.

Joe: Depending on what paperwork that he did and how he did the movement of money could blow him up. I’m not sure.

Al: Well, I think you’re right Joe, that the most important thing is it’s not a taxable transaction. You’ve basically just gone from one deferred account to another. And I’m just guessing that Vanguard has a different requirement for its prototype plans, but I don’t know that for sure. We don’t have enough info.

Joe: The only risk is that if Smitty blew up the paperwork. Because that easily could have happened. And if that happens, then yeah, it would be taxable. And that’s why the tax guy’s all of a sudden get these different forms from Fidelity of saying Smitty, what did you do? Because these forms are showing something and you shouldn’t have done it this way. Why would- the tax guy wouldn’t even know unless there was some forms that Smitty gotta gave to his tax guy and says, here do my taxes. And the guy’s like, what the hell did you do, Smitty?

Al: Maybe he took the cash out or got a check in his own name and then put it in Vanguard. So it’s a rollover. As long as he did it within, you know, 30 days or 60 days, whatever the- I forget now.

Joe: Oh, I mean, we’ve seen blow ups all the time with rollovers and transfers and 60-day rollovers, and then they don’t do it, then they withhold taxes. And then, oh- so I hope I hope Smitty’s okay. But I guess we’ll stay tuned.

Al: He’ll be okay. We know he’s got a great golf cart that he’s driving around, so he’s happy.

Hey Smitty you told us once a long while back that all the guys at the Bait Shack thought YMYW was a riot, what do your golf buddies in the Villages think of the podcast? Also, thanks to Jagged1871, Nousernamesleft55, Marcus Fo-Relius, BlueSpace71, Qdog69 and all the other Redditors who have given YMYW a shout out on Reddit, aka the front page of the internet, and thanks to Andy Wang for sharing tons of YMYW videos on Twitter! What about you, who have you told about Your Money, Your Wealth? Click the link in the description of today’s episode in your podcast app, then click Ask Joe and Big Al On Air to send in your money questions, and let us know where you’ve shared YMYW too.

Can I Convert My Whole 401(k) to Roth IRA? (Lester from Tacoma, WA)

Joe: Got Lester writes in from Tacoma, Washington. He goes, “I drive a Ford Bronco and I drink Coors Banquet beer.” Ooh, Coors heavy. Yeah. I have those every now and again, when I’m, you know, kind of, you know, kind of in a mood. You ever have the Banquet? It’s got like the short little glass-

Al: I have had it. Yep. I like it.

Joe: So Lester “recently resigned from my employer and I have $200,000 in my traditional tax-deferred 401(k). I’m struggling to determine if I can directly transfer these dollars into a Roth IRA and pay the tax. The finding the answer is complicated because I also have $750,000 in a traditional tax-deferred IRA, that includes $50,000 of after-tax contributions. If I can simply move the 401(k) to a Roth IRA and not deal with these non-taxable basis in my traditional IRA, it’ll make life simple. I hope this makes sense. If not, Joe can make fun of me. Thank you. Love the show and the humor. Lester.” Oh, come on. Lester. A Coors Banquet beer buddy. Wouldn’t make fun of Lester.

Al: No you wouldn’t do that.

Joe: No. Smitty, on the other hand, probably.

Al: Well, yeah, someone that writes it over and over again. It’s fair game.

Joe: But I don’t understand why- So Lester’s got- he’s worrying about the pro-rata and aggregation rules. So he wants to convert the money, but what is- he just doesn’t want to figure out what the pro-rata and aggregation rules are?

Al: That’s what it sounds like. So let’s first answer his question. You’ve got-

Joe: Yes. The answer is yes.

Al: Yes. You can roll the 401(k) into a Roth IRA. You pay tax on $200,000. End of story. You’re done. You can do that. There’s a smarter way though, which is you roll it into your IRA. Now your IRA has close to $1,000,000, not quite, almost, and you got $50,000 of basis. So everything you convert, roughly 5%, is tax-free, at least, and 95% is taxable. But you can avoid the whole thing by just doing a conversion, right from the 401(k) to a Roth, if you want to.

Joe: But Lester, do you want to convert $200,000 in one given tax year is my question to you. If you want to take that tax bite, then by all means, then you can do it directly from the 401(k) to the Roth IRA. But a $200,000 conversion is a pretty big number when we’re looking at $1,000,000. I mean, he’s converting 20% of his retirement account in one year. So that gives us pause. That gives me a little bit of concern of saying, Hey, I get that you don’t want to deal with the pro-rata rules and figure it out on the tax form because I guarantee you Lester does his taxes by hand via pencil-

Al: Or TurboTax. And I get it because you have to do that form. What is it? 8505 or 8305- 86- It’s one of those, I think you’re right. 8606. It’s not, not that hard a form, but nevertheless, yeah, that is the bigger question. Here was my thought, I guess is if he recently resigned from his employer and if he’s not planning on working anymore during the year, maybe he’s in a low tax bracket. Maybe it does make sense, but we’d have to know a little bit more information. And I think you brought up the key thing, Joe, which is you can do it, but should you? It depends upon your income level and your tax bracket.

Joe: Right. Because as Al said, if you roll it into your own IRA, and let’s say you do conversions of not $200,000, but maybe you want to do a conversion to the top of the 12% tax bracket. So the top of the 12% tax bracket taxable income is roughly $80,000. And so maybe you want to do a $50,000 conversion cause your taxable income is $30,000 or something like that because you resigned from your overall organization and you have other cash that can supply your living needs.  So you do a $50,000 conversion versus a $200,000 conversion. 5% of that $50,000 is going to be tax-free. So what is that? $2,500 is tax-free. The rest is going to be taxable. But it’s $50,000, that’s more reasonable. And then you convert $50,000 over the next several years and get a lot of that out at a 12% tax bracket. Or maybe you want to go to the 22%, but it sounds to me a $200,000 that’s in the 24%, does 24% make sense? But, so, I mean, that’s the rationale, I guess what I want Lester to do, is to take a look at what tax bracket he’s in today. What is the appropriate conversion amount? Is it the top of the 12%? Is it the 22%? Or the 24%? Or whatever it is. And then look at where is he going to be in the future? Is he done working? How much money does he have in other types of income? Look at age 72, forecast this thing out. What tax bracket does he think he’s going to be in when required distributions hit? Is he going to be in the same bracket? lower bracket? higher bracket? Then that’s when you want to start looking at conversions at a higher number, if you’re going to be in a lot larger bracket in the future. But do the math first. Don’t just try to simply say, you know what? I don’t want to figure out the 8606 form. So I’m just going to convert the full $200,000 and pay a ton of tax. I mean, an accountant can do your taxes, Lester. And it’s going to be a lot cheaper than all that additional tax that you might be paying.

Al: That’s a good point. I think that’s well said.

Going All Roth is Painful Now, But I’m Worried About High Tax Brackets Later (Jennifer, CA)

Joe: We got Jennifer writes in from California. She goes, “Hey, Andi, Joe, Big Al. I recently found your podcast and I’ve been thoroughly enjoying it. I listen to you while I’m at the grocery store–” She’s grocery shopping, Al. That’s a first.

Andi: They got a good deal on Coors Lite?

Joe: Making me hungry “- or commuting to work. I’d love to have you spit ball and/or poke holes in our plan” All right, let’s see if we can do that Jennifer from California. “Our current total household income is $280,000. Hubs is 50, will be hanging up the gun belt in two years and we’ll receive a pension equivalent to his current pay with COLA. Hubs is 50, hanging up the gun belt-“ must be a police officer, thank hubs for your service. “- two years, he’s going to receive a pension equivalent to his pay. I am-“ I’m wondering if you know what, if I’m in California, let’s say this guy pulls me over. I say ‘Hey hubs.’ You think he’d let me off?

Al: Well, I think it depends-

Joe: I know Jennifer. I did a little spitball for you, Bud. Come on. Help a brother out.

Al: I think it depends upon how well we answer the question, because if we don’t do a good job, all bets are off.

Joe: Got it. Okay. “Jennifer, 46, plan to continue to work and making $130,000 a year, at least until age 62, when our home is paid off and 3 blessings are off the payroll. We will have medical coverage through hubs’ job in retirement. I have a traditional-“ does Annie call you hubs, hubby?

Al: No, never has called me that.

Joe: She just calls you Big Al. “I have a traditional 403(b) worth $700,000, current contributions, 10%, pre-tax 10% Roth and I contribute the max each year. Hubs has a 457 worth $52,000, pre-tax and a 401(k) worth $200,000. We each have Roths funded through that special door for a total of $58,000. I will receive a lump sum at 62 of $517,000. My question is, should I make all future contributions Roth? Might feel somewhat painful right now, but I’m worried about being in a high tax bracket in retirement. Given the old pension, hubs won’t get Social Security, but I will and would like to take it at 70, estimated about $4000 per month. Or should we make work contributions pre-tax, do back doors as long as they’re legal and then convert after I retire and before I take Social Security? Is this enough money? Sometimes I listen to what other people have saved and feel incredibly intimidated.” You know, Jennifer, don’t you worry about that because some people just BS their numbers. Oh, I got $8,000,000 when I retire, you know, then we talk about it on-air and then they feel very confident in their situation and they have nowhere near that. They got like $80,000. You’re doing great. “Or should we make- ?” So intimidate, don’t be. Hubs’ll take care of you. “Lastly, we do have an emergency fund, but no taxable accounts set up. Would it be wise to start funding that? Everything we have earmarked for retirement goes into the work sponsored plans. Expenses are roughly $130,000 per year. We got 3 pricey teens at home. They all have 529s and will cover two years of university and they will go to a community college for two years first. I would like to predict spending $120,000 per year in retirement to allow for fun and travel. I drive a 2021 Telluride.” I don’t even know what that is.

Andi: That’s a Kia.

Joe: That’s a city. Isn’t it?

Al: It’s a city too.

Joe: Little ski resort?

Al: Yeah. Ski resort, Colorado.

Andi: But it’s also an SUV made by Kia.

Joe: Oh, all right. Telluride. “I was perfectly happy driving my 2011 Sienna minivan until someone rear-ended me and it was totaled and I had to buy a new car in the worst market ever.” It is a kind of a really terrible market for cars.

Al: It’s tough. Yeah. And houses and almost everything. Really.

Joe: Oh boy. “Hubs drives a 1998 Toyota 4Runner and a patrol car that he will have to turn in when the day comes. We have a 3 year golden retriever, Scout. For beverages, I like a crisp sparkling water.” Really. That’s pretty boring. “And hubs, likes little, little, something, little, some IPA.” That’s another little something IPA. “He’ll need to switch to PBR?” Damn right, he should. PBR is damn good beer. We gotta get Jennifer on something here. Little crisp sparkling water. Maybe that’s a little champagne.

Al: That could be, yeah.

Joe: Okay, cool. So let’s- but one thing we don’t know, or maybe we do know-

Al: Expenses? $130,000 a year.

Joe: Okay. But total household income is $280,000 minus $130,000.

Al: So let’s assume hubs is making $150,000 and pension will be the same.

Joe: So yeah, 100% go Roth. Easy as that.

Al: Yeah, it is. That is an easy answer. But let me- I just ran a couple of numbers while you’re reading, Joe. So if Jennifer has $700,000 right now, and I’m assuming it’s pre-tax currently, and if she contributes 10% of her $130,000, that’s $13,000. I just ran it for 15 years at 6%. So it’s going to be worth about $2,000,000. So it gives you an idea what it’s worth. You know, that RMD, no, she’s not going to be anywhere near RMD age, but just pretend she was just to give you a sense of income. It would be about $80,000, 4% of $2,000,000. Her Social Security is maybe $50,000, call it $40,000 taxable, husband’s $150,000 pension, if that’s right. So now we’re to $270,000. Now, in other words, it’s a pretty healthy retirement income, which right now is in the 24%. But in just a few years, 2026, it will be likely 28% subject to alternative minimum tax, which will feel like 35%. So anything that you can do in what is now the 24% bracket, which is probably what they’re in, is a good deal. So I would go all Roth as well.

Joe: So the issue is this Al, which you kinda missed quite a bit of this, is that she’s got $700,000, he’s got $250,000. She’s fully funding the 401(k), 10% Roth, 10% pre-tax, he’s fully funding. They’re also going to get a lump sum of $500,000 that’s pre-tax. So your numbers are right, but they’re going to be even higher, I guess, is my point.

Al: Even higher. Well, I didn’t do the husband’s because he’s only another couple of years working, but yeah, there’s another lump sum,  that’s at age- I was just kind of running this as if they were full retirement age, RMD age, just to get a sense. But you are right Joe, it’s actually going to be quite a bit higher because the assets are going to continue to grow because they’re not even spending. If they’re spending $150,000 and husband makes $150,000, let’s just say that pension’s right. So I agree. It’s going to be higher still.

Joe: So here’s what happens with police officers. They retire at 50. Then they go to the Sheriff’s department. And then they double up there. I mean a lot in where we live in California, that happens quite a bit. And so then it can, all right, they’re collecting their $150,000 pension. They go to the Sheriff’s department or they go to another county or they do this, or they go back to work. He’s 50. He’s a cop. The guy loves adrenaline, he has to. Maybe he wants to take a year off and chill and go to Hawaii and drink some, something, something with Big Al. For the most part, he’s probably wired a little bit different. Just needs something. He’s probably, he’s not going to be a couch drunk. Well, maybe he is. I don’t know. But if he continues to work, she’s going to work for quite some time. They are already savers and they’re going to have huge fixed income. The easy answer Jennifer, is go Roth, go Roth. Because you’re going to be in a higher tax bracket in retirement, most likely with the assets that you currently have. And I know it’s painful, but doing conversions is more painful. Because you might believe, oh, I’m getting more money into the pre-tax 401(k). And because of my paychecks and things like that in the after-tax account and my take home pay is not more or it’s less, but doing conversions after you retire, who knows what the law is going to be? Who knows where tax rates are going to be? I would take advantage of it now and get the compounding of those dollars 100% tax-free. You’re still very young. This money is going to compound for 20, 30, 40 years. And then your 3 expensive kids are going to inherit nice fat Roths versus a taxable account that’s going to be infested with tax.

All right, that’s it for us. Sayonara. The show is called Your Money, Your Wealth®.


If you’re wondering about the weird noises as Joe and Big Al answered Jennifer’s question, stick around to hear about Al’s gardener, and Joe’s body issues, in the Derails at the end of the episode. 

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