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
September 21, 2021

Joe and Big Al outline the House Ways and Means Committee’s sweeping tax proposal that would impact Roth contributions, Roth conversions, RMDs, the backdoor Roth IRA and mega backdoor Roth (Megatron), marginal and capital gains tax rates, wash sale rules, and more. Plus, they answer your questions on safe retirement income and withdrawal strategies, current wash sale rules, when NOT to do a Roth IRA conversion, and solo 401(k) retirement savings for self-employed small business owners.

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Show Notes

  • (00:51) It Could Be Over for the “Megatron”
  • (15:09) Tax Avoidance Strategies for New Biden Tax Hikes? (Jim, San Diego) 
  • (17:44) Wash Sale Rules for Selling Stock (Jason)
  • (19:55) Roth Conversion Rules When Working or Retired (Wynn) 
  • (21:14) Where to Put Money for Safe Retirement Income? (Marc, 92024)
  • (25:37) Does Roth Make Sense With the American Opportunity Tax Credit? (D, Irvine) 
  • (30:11) Self Employed Solo 401(k) Retirement Savings Strategy? (Bruce, Joisey)
  • (35:10) I’m Very Risk Averse. How Should I Withdraw in Retirement? (Linda, San Diego)
  • (43:07) Is My Roth Conversion Strategy Correct? (Frieda’s Boss, Ft Myers, FL)  

Free resources:

The Ultimate Guide to Roth IRAs

Listen to today’s podcast episode on YouTube:


Last week, the House Ways and Means Committee voted for some sweeping tax law changes. Today on Your Money, Your Wealth® podcast #344, Joe and Big Al outline the impact this proposal, if it were to become law, would have on Roth contributions, conversions, and RMDs, the backdoor and mega backdoor – or Megatron – Roth IRA, as well as marginal and capital gains tax rates, wash sale rules, qualified business income…

Like I said, sweeping changes. Plus, your questions answered on wash sale rules, safe retirement income and withdrawal strategies, ye olde Roth conversions – including when NOT to do a conversion, and solo 401(k) retirement savings for self-employed small business types. I’m producer Andi Last, and here with the latest tax law news are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

It Could Be Over for the “Megatron”

Joe: Hot off the press, Big Al, we’ve got the vote in from the House Ways and Means Committee and looking at some new proposals in regards to tax. And let’s rattle some of this stuff up because, our listeners’ favorite strategy is on the cutting room floor here. I mean, it could be over for the Megatron.

Al: Well, some of the things that we seem to talk about on this show, whether we want to or not, may be axed, but it’s important to say that this is a proposal that the House Ways and Means Committee is putting forward to the House of Representatives and later on the Senate. There will be additional changes likely, but anyway, we want to go over what some of the changes are, at least what the proposal is, so you can be looking out for them.

Joe: All right. Let’s go back and forth. I got 39.6% is going to be the top marginal rate for income pairs of $400,000 and $450,000. So, this is not the Biden plan. This is a different plan that came out trying to get the $3.5 trillion dollars freed up for—

Al: For all the other stuff we to do.

Joe: Exactly, yeah. So this is a little bit different from Biden’s plan, where the 39.6% tax is still the same rate, but the 39.6% would jump in a lot higher than the $400,000 and $450,000 in this proposal.

Al: Right. Another one would be capital gains rate. The Biden proposal was to go to ordinary income rates once the taxable income was above $1 million. This new proposal would be a 25% tax rate, not 39.6%, but a 25% up currently from 20%, so it’s a 5% increase. You still have the net investment income tax of 3.8% when you have incomes over $250,000 married, $200,000 single, but they’ve also added yet one more thing, which is a $3 million surtax on all income over $5 million of income.

Joe: That also—to go back on that 25% cap gains tax—that starts at $400,000 and $450,000.

Al: Correct.

Joe: Instead of the million and ordinary income.

Al: Yeah. Yeah, I should’ve said that.

Joe: A lot of this stuff is based on $400 million of taxable income single, $450 million married.

Andi: $400,000, right?

Joe: Yes, $450,000, yes. This is a huge marriage penalty.

Al: Yeah.

Joe: It’s going to pay to never get married.  (laughter)

Al: Well, unless you have a spouse that doesn’t make any money, right? It does pay to get married.

Joe: Yeah, if you have a spouse that doesn’t make anything, then it makes sense. But if you have a spouse, it’s only a $50,000 difference.

Al: Yeah, right. We’ve spent years trying to get rid of the marriage penalty, and here it comes.

Joe: Here comes roaring back.

Al: Yeah, roaring back is exactly right, and the capital gain, if it changes as written, would be effective September 13th, which was a couple weeks ago.

Joe: Yeah, yeah. Or beginning of last week.

Al: Yeah, yeah. Yeah, right.

Joe: All right, IRAs, let’s get into that. So, a couple of these IRA things are pretty stupid. I think it was one person that got upset because of Peter Thiel had $5 billion in his Roth IRA because he was the founder of PayPal. And he put $2,000…

Al: And the company did well. It made some money.

Joe: He did well is an understatement. Yeah. I mean, he has the largest Roth IRA in the history of mankind. So now they’re going to kind of change the rules here. But for those of you that have large IRA balances of $10 million plus, once you reach $400,000 to $450,000 of income again, you are no longer able to contribute your $6,000 IRA contribution.

Al: Correct.

Joe: So stupid. (laughter)

Al: That’s a big deal. So, but the other part of that is if your Roth or your regular IRA is over $10 million, you have to start taking money out regardless of your age.

Joe: In the RMD, it’s 50% of anything over the $10 million mark.

Al: Yeah, right. So, Mr. PayPal’s going to have a big income event.

Joe: Or he’s going to distribute most of his Roth IRA, it’s basically what they want to do to recycle the money, right? So, if you take the money out of the Roth, it’s not taxable. But what happens is it gets out of the tax shell of the Roth, where it’s not going to compound tax free anymore. So now, you’ll be subject to capital gains on whatever that stock says on an ongoing basis.

Al: On future growth. And I guess they said one other thing, too, is if you have both and you’re over $10 million, you got to start taking the money out of the Roth first. Yeah, yeah.

Joe: Let’s see. How about Roth conversions? So, no more Roth conversions if your income is $400,000 or $450,000 after 2031, so 10 years from now. So, this is interesting because this is where the law was 11 years ago.

Al: Right. In 2010, once you had over $100,000 of income, you couldn’t do the conversions.

Joe: So we were doing a ton of tax planning back then to try to get people’s taxable income below $100,000 for them to do a Roth conversion.

Al: Right. You know, if this rule sticks, that means they’re going to have to bring back recharacterizations. They will have that game again.

Joe: Yes. So, no conversion. So, what’s the idea here? Is that they want the tax money, they get it, but they know it’s a great deal for us. That’s why I’ve been screaming at the top of our— right, to do conversions in the whole Roth game and everything else because it’s so much better for us, the consumer in the long term. And the IRS realizes this, right, but they’re still greedy. They want their tax dollars now, and they’re kicking the can down the road, but they’re realizing, you know, maybe we only let this thing go on for another 10 years and then we shut her down.

Al: Yeah, they almost could have done it for eight years because it’s like two presidential cycles.

Joe: Sure, right?

Al: Because in other words, it’s probably the wrong thing to have so much of Roth conversion long term. But let’s not change it now because we need the money for my budget.

Joe: Exactly.

Al: And I’m not going to get into politics.

Joe: So, here’s the big one. Next year, starting next year, no more barn door, back door, garage door, elevator door, Megatron, whatever you guys want to call this stuff. No more after-tax contributions would be allowed to be converted into a Roth. So, for those of you that are doing the after-tax contributions into an IRA and then directly converting those into a Roth IRA, those are… that’s the famous backdoor Roth IRA contribution…

Al: That could be finally gone.

Joe: That could be gone. I mean, I think when we initially started doing the backdoor Roths, we would wait like six months before we converted it. Remember that? Because we were like, ‘well, is this legal? Is it not?’ Because, you know, we were fairly conservative firm and we’re like, we want it to season because we’re at arm’s length, transactions.

Al: Yeah. Because yeah, the IRS has this thing they call step transaction. If you do two things right next to each other, they can collapse them into a single step, and then it would fail.

Joe: Right. And so we waited six months with all of our clients. We would do the after tax and then we would do the conversion. They might have to pay a little bit of tax on whatever growth that would happen over that six months, but the IRS is telling us now that we never had to do that.

Al: Right, yeah, because it was OK.

Joe: ‘Cause it’s OK. But now they’re saying we want to get rid of it.

Al: But now we’re really saying, you can’t do it. Another one is that net investment income tax. That’s where you have to pay 3.8% extra tax on passive income, interest, dividends, capital gains, rental income, things like that. That’s when your income is over $250,000 married, $200,000 single. Now they’re saying, ‘you know what? We like this and this should be on active business income as well.’ But they would have a higher limitation. $400,000 of income for single and $500,000 is actually what I read. But everything else is $450,000, so maybe that was a typo, but that would be an act of income. In other words, if you’re getting dividends and profits from your company, you’d have to pay that extra 3.8% tax as well.

Joe: And finally, what I have on my list here, Big Al, is crypto. So you crypto monsters out there, you can do a wash sale rule. There’s going to be some wash sale rules. And what is that? It’s when you sell a stock at a loss, and then all of a sudden, you buy it back the same day, it’s called a wash sale because you can’t necessarily take the loss. You have to wait 31 days on that transaction to take the loss on your tax return. So now crypto has that wash sale rule. What I heard, I think that’s a good thing for crypto investors because it will kind of calm down the volatility a little bit because of all the kind of mass trading that goes on in that world. But just FYI, I think a lot of people don’t necessarily claim their taxes with crypto or don’t even understand.

Al: It’s even for people in the know. It’s a hard thing to account for because every time you buy something with cryptocurrency, it’s a gain or loss on your investment. So, who’s going to keep track of that?

Joe: Well, the blockchain.

Al: Yeah, yeah. OK, I got a couple more. So a qualified business income… I was trying to think what it stood for. QBI. So, so right now, it’s available regardless of income level, if it’s like real estate or something like that. And now they’re saying, now we’re going to cut that off at $400,000 single, $500,000 married. A state and gift tax, so that’s— remember the Biden proposal wanted to basically say if you had capital gains when you passed away, your heirs had to pay taxes, essentially that day. In other words, that it became taxable that day. And so now, that’s out of this current proposal, which thank goodness because that that was going to not be a very good one. But what they did do instead is they brought the estate tax exemption down from about $12 million a person to $5 million, plus inflation. And then one more little thing, not a little thing, is corporate tax rate would go up to 26.5 % from current 21%. So there you go.

Joe: All right. Go ahead.

Andi: Question. There’s something that is mentioned about the backdoor Roth IRA curbs for high earners that says that it wouldn’t be effective until December 31st of 2031. What’re the chances that’s a typo?

Joe: No, no, no. What they’re saying there is that they’re changing the conversion rules. So, it’s not the backdoor rules, it’s a conversion of any kind. So, if you’re doing a Roth IRA conversion, moving money from a traditional retirement account to a Roth account, you are not able to do a Roth IRA conversion if your adjusted gross income is over $400,000 or $450,000, that law comes into play in 2031.

Andi: Got it.

Joe: So, they’re reverting back to where the law was back in 2010, when your modified adjusted gross income had to be under $100,000, so they increased the income limits. But it’s not put into play for another 10 years. So, I think their idea is that, yes. We don’t like these conversions, so we’re putting something in play that we’re going to try to easily, you know, slowly get rid of them. So, I think that’s the messaging there, But, yeah, 2031. But next year, starting next year, you cannot do a conversion of after tax dollars.

Al: Yeah. And by the way, this is only a proposal. This is not current law.

Joe: This is not law. Who knows what was going to happen.

Al: Right, we don’t know. But this is what’s currently been approved by the House Ways and Means Committee to go to the House and the Senate.

Joe: So, the sense of urgency is this: if you want to do a backdoor Roth IRA conversion, mega backdoor Megatron, get your game going. Get it done. Start doing this stuff now. If you haven’t done conversions before, I would get more aggressive with your conversion strategy over the next couple of years, especially when we have really low tax rates. Comparatively to history, I think it’s going to play even more important over the next couple of years. So right now, they don’t like big retirement accounts, so trying to get as much as that as you possibly can in the Roth. I’ve been in the business a long—and I hate to say this now—over 20 years.

Al: That’s a long time.

Joe: No doubt. Yeah, it’s terrible.

Al: That means you’re… you’re getting up there.

Joe: Yeah.

Andi: You’re a seasoned veteran now.

Joe: Yeah, I still don’t know.

Al: No longer the boy wonder.

Joe: But the largest retirement accounts… we see fairly large retirement accounts. I mean, a $10 million IRA is so far and few between.

Al: Yeah. Have you ever seen one? You personally?

Joe: Yes.

Al: OK, I don’t think I have.

Joe: It’s probably two, one or two…

Al: Out of thousands.

Joe: Hundreds of thousands over the years. So, I mean, some of this stuff is just—why are they wasting ink? You know what I mean? Just to get to one or two… I mean, whatever.

So, our recurring YMYW inside jokes about the “Megatron” and the backdoor Roth and Roth conversions are becoming pretty urgent now. It would appear that when one of these dramatic proposals to change the tax code becomes law, getting that lifetime tax-free growth on your investments could look very different. Now is the time to schedule a no-cost, no obligation financial assessment with one of the highly trained CERTIFIED FINANCIAL PLANNER™ professionals on Joe and Big Al’s team at Pure Financial Advisors. Make sure you’re taking advantage of every legal tax-reduction strategy available now, before those laws change. Get professional help in crafting a complete, personalized financial plan for you and your family that’s based on your current circumstances, your risk tolerance, and your goals for retirement, and takes into account those impending tax changes. Time is of the essence, and the calendar is filling up fast. Click the link in the description of today’s episode in your podcast app to go to the show notes and click Get an Assessment to schedule your free financial assessment, via Zoom, no matter where you are in the country, at a time and date that’s convenient for you.

Tax Avoidance Strategies for New Biden Tax Hikes? (Jim, San Diego)

Joe: We got Jim in San Diego. He goes, “Hi guys. I was wondering if you have begun devising tax avoidance strategies to cope with what appears to be a tsunami of tax changes from the Biden administration? My concern is that they jam these changes down our throats effective January 1st, 2022, and that we might need to have our counter strategies in place.”

OK… so first of all, all the tax changes that are proposed are going to go into effect retroactive. So, it’s not going to be January 1st. They will already be put in place…

Al: So that for capital gains, that’s true.

Joe: OK. Yeah. Good point.

Al: Most of the stuff will be for 2021— 2022, sorry. Except for the Roth conversion rule, which is 2031.

Joe: Yes.

Al: We have to keep track of that.

Joe: And I think it all really depends on people’s incomes. I mean, if your income is lower than $400,000 if you’re single, $450,000 if you’re married. I don’t think you’re going to be affected too much by any of this.

Al: Yeah, for most people, that’s exactly accurate. Now, a couple of things maybe to consider: the capital gains rate may change if your income is high. We have two different proposals, one in April, one that just came out. Who knows what’s actually going to happen and what the effect of date is. So, maybe the effective date will be next year. I don’t know. Maybe if you have some larger gains, maybe you take those off the table. Now, if you’re a real estate owner and want to sell a property and buy a property, do 1031 exchange. There’s rules there where that might go away next year.

Joe: Or you can only do, what, $500,000?

Al: Actually $1 million to gain. So if you have more than $1 million to again, you might want to fast track that, but it’s hard to make decisions based upon a proposal, because they always change. So, I would say it’s a little premature. Be aware of what’s being proposed, but you don’t want to do anything quite yet, in my view.

Joe: Right, yeah, we have a laundry list of these proposals. So, as long as you understand what the proposals are and how they may or may not affect you if they do come into law, you know, then you can kind of maybe start thinking about what plans you want to do. But I wouldn’t pull the trigger until…

Al: No. But the budget came out from the Biden administration in late April. House and Ways and Means Committee just came out with new proposals on September 13th. So, what’s it going to be in October, November, December? We just don’t know.

Joe: Right. So all right. Hope that helps

Wash Sale Rules for Selling Stock (Jason)

Joe: Go to yourmoneyyourwealth.com, click on Ask Joe and Al on the air. You can write an email or you can leave a message like Jason did:

Jason: “Yeah. Hey, I got a question for Big Al. Let’s say I have some shares of a stock and I only hold it for a few days after buying it. And then I sell all the shares at a loss and never buy back again. Would this be a wash sale? Because I believe you’re supposed to hold the stock for at least 30 days before selling at a loss in order to avoid a wash sale? So, I’m not sure. Again, I have, say on Google on January 1st, I sell all my Google on January 5th, and I never buy it back again, at a loss. Could I do deduct that loss? Thanks a lot, guys.”

Andi: He was in a hurry.

Al: Yeah, yeah, yeah.

Joe: Hurry up, yeah, bye.

Al: Yeah. Answer quickly. The answer is yes, you can deduct it. So, you’re referring to the wash sale rule, which simply states this: if you own stock and you sell it—and this is outside of a retirement plan—you sell it at a loss, and then buy it back within 30 days, then you can’t take that loss. It’s a wash sale rule. Because they want to prevent you from actually creating a loss, and then immediately turning right around and buying those shares. The reason why it says that you have to own the stock 30 days before is if you already own the stock, right? So, I’ll give you a little example. You own 100 shares of Google and then you buy another hundred shares of Google, and then you sell it the next day. Well you’ve really done the same thing, right? In other words, you temporarily had 200 shares when you wanted to sell the 100 shares and buy it back. So that’s why they have this rule. If you buy shares and don’t own them already, and sell them two days later at a loss, never buying back. That’s all good.

Joe: You’re kind of front loading. It’s like, I have this as a loss, but I have this as a market value, so I’m going to sell the one at a loss. But I’m going to keep my portfolio the same amount of Google stock.

Al: Right. So another way to say this is the 30 days before only applies if you already own the stock, right? Because if you think about it, then you would be kind of gaming the system.

Roth Conversion Rules When Working or Retired (Wynn)

Joe: All right. Got a quick question here from Wynn. He went to one of our webinars, he just had a couple of quick questions.

“Can you transfer for 401(k) to a Roth IRA when you’re already retired? Will there be transfer penalties or taxes imposed?”

If you’re already retired, sure, you can move money from a 401(k) to a Roth IRA. Is there taxes and penalties? No penalties, but of course, there will be taxes if you did the conversion.
So, then he has a follow up question.

“What about if you’re still working? Can you still convert to a regular IRA into a Roth without penalties?”

Yes, a conversion is not classified as a distribution. It is looked at as a rollover, so there is no penalties. Of course, there’s taxes. So, if you are working, you would just want to look at what tax bracket that you’re in. If you want to do a Roth conversion, you’re just going to pay the taxes at whatever rate that you’re currently in at this moment in time. So, it doesn’t matter if you’re working or not working at this time. That’s not a stipulation if you can or cannot do it. If you’re trying to convert a qualified plan that you’re an active participant to, and that could be a different story, depending on what that plan does.

Al: Yeah, plan-specific. So, check on your plan for that.

Where to Put Money for Safe Retirement Income? (Marc, 92024)

Joe: Let’s move on. We got Marc. He writes in.

“We just sold one of our houses and cashed out with $1.1 million. Purchased house 20 years ago for $498,000. Where would you put the dollar signs for safe retirement income? Wife has $1 million 401(k) and I have a $550,000 IRA and we own another house, paid for, worth about $2 million. We’re 69 and haven’t touched the money yet.”

Al: Yeah, Social Security, I think, or SS.

Joe: Exclamation, exclamation point.

Al: So, where would you put the safe money, I guess is the question.

Joe: This is a brag email.

Al: I got $1.1 million cash, I sold my house. I’ve got all this other money—

Joe: …And my wife’s got $1 million. We got a $2 million house, no mortgage. We haven’t even, you know, paid it off. No debt. So basically, we are loaded. Where would you put some extra cash? (laughter)

Joe/Al: So it’s safe.

Joe: So let’s say, Marc, congrats, first of all, I think you’ve done a wonderful job. And you know, I think some of our listeners are, you know, you got these guys that write in and all they want to do is kind of like, you know, pump their own tires. I think this is one of them.

Al: Well, yeah, I’m not so sure. This is a legitimate question. OK, I got all this money, what do I do with it?

Joe: You put it in a globally diversified portfolio that’s low cost and tax efficient.

Al: Yeah, but that could go down.

Joe: Sure. Well, yeah, you could be somewhat safe with it. I mean, we’re not product pushers. I have no idea. Well, I mean, you could go into a municipal bond, right? That has tax free income.

Al: Yeah, you could.

Joe: You could go low duration.

Al: I think, Mark, the best answer is, what do you what do you need that money for? What’s the $1.1 million for? Is it to buy another house? And if you’re going to do that soon, then just keep it in a savings account.

Joe: No, he wants to grow to $2 million so he can call another podcast. (laughter)

Al: If you want to do that, then put it in a globally diversified fund. Just like Joe said, take a little risk, but you get a much higher return over time. But the thing is, if you need the money quickly or soon, I’m going to define that as three years or less, maybe in four years or less, go super safe. Just put it in in a CV, maybe a 90-day CV, one year CV, something like that.

Joe: We need a little bit more information, right? So, when people call in or write in, they ask us what they should do with extra cash. It’s really hard for us to give you any type of discussion points.

Al: Yeah, because they’re asking a question kind of in a bubble, right?

Joe: Totally. Here I am, an extra $100,000, $50,000, $20,000, $1 million dollars. What should I do with the this?

Al: At least we have unless we have a sense with Mark. That’s why I’m not taking it as a bragging one because we need that information.

Joe: We don’t know how much money that he’s going to get his fixed income. I have no idea what he’s spending.

Al: We don’t have enough.

Joe: We don’t nearly have enough because you don’t know what to do with the money without certain things. So, if it’s for retirement, which I believe this is his question. Right. He’s got extra cash. What should I do with it? Well, what’s the money for? Is it to create retirement income? If it is that reason, how much retirement income is the demand of the portfolio, how much does it need to produce? Then we could get very specific in the overall recommendation.

Al: Agree with that. And if the money is to buy more real estate for kids grandkids, then keep it safe.

Joe: But right, if we had a little bit more information, what’s the money for? Right. So, a lot of you write in, and we’ll give you details if you can give us, what is your Social Security? How much money are you spending on an annual basis? What is your overall portfolio worth? And how old you are.

Al: You going to say they’re bragging.

Joe: No! If you just give me, ‘hey, I just sold my house for like $2 million and I got the cash and I got another house worth $2 million. Oh, by the way, my wife, she’s a bunch of cash, she’s got $1 million. My kids, they got millions. You know, I mean my neighbors…

Al: Am I okay?

Joe: ‘…they got millions. Everyone’s got millions that I hang out with. What do you think? Am I OK?’ Yeah, that’s a braggy move.

Al: That’s a braggy move.

Joe: By all means, we give you that outlet. So if you guys want it, it’s cool. I love it. You know, congrats. Yeah, well, it’s hard for us to give you any kind of spitball advice on that.

Al: True.

Does Roth Make Sense With the American Opportunity Tax Credit? (D, Irvine)

Joe: We got D from Irvine, California, writing in.

“Dear Joe, Al, and Andi, thank you for answering my question on a recent podcast regarding Roth conversions in higher income tax brackets. I just came across an instance where Roth conversions or 401(k) contributions may not make sense in a particular tax year.

“The American Opportunity Tax Credit of $2,500 is available for families that have college students and meet the Income Requirements. This tax credit can be applied for each eligible college student, To claim the full credit, your modified adjusted gross income must be $80,000 or less, $160,000 if you’re married. An individual interested in converting up to the 22% tax bracket in a given year, for example, may miss out on this credit.

“In addition, some of that opt for the Roth 401(k) contribution instead of the traditional 401(k) and a tax year with qualified college expenses may be missing this significant tax credit. Just thought I would share the strategy for those that meet the income requirements and have qualified college expenses for their kids. Is this thinking correct from a planning perspective? Love the content and humor.”

Al: Well, the thinking is completely correct. And it’s not just this. There’s a lot of reasons why you wouldn’t do a Roth conversion. I just give you a few, just off the top of my head. So, if your income, a gross income is just over $100,000 and you have property that’s, you know, rental property that’s creating a loss, once you get over $100,000, you start phasing out how much you can take in of that loss. And once you’re over $150,000, you can’t take any loss.

Joe: Well, it carries over.

Al: It carries over. And that’s in that circumstance.

Joe: I’d still do the conversion.

Al: Yeah, you would. I would. Another one is if you put your income over $250,000 married, $200,000 single, then you’re going to have to start paying that net investment income tax of 3.8% on passive income. So, you’ve got to be aware of that.

Joe: No biggie. I’d still convert.

Al: You’d convert on that one? Social Security. If you’re doing a Roth conversion to where you’re not paying tax on Social Security, and all of a sudden that becomes taxable, just be aware of that. Or, if you’re in the 12% bracket and you have a bunch of capital gains, you’re paying zero on them, but the Roth conversion pushes the taxable income above the $80,000 for married, $40,000 for single, now you’re going to pay ordinary income tax on that conversion and you’re going to pay capital gains tax on what was previously tax free.

Joe: Yeah. Well, then you could go with the Medicare surtax.

Al: Oh, sure. Then there’s lots of reasons…

Joe: …why your adjusted gross is higher.

Al: And so, the best answer is this, which is do a tax projection with and without the Roth conversion and see what happens. And if you lose the credit, then you know that. And if it’s still the right answer, because the credit isn’t that significant compared to what you’re converting, go ahead and do it. But if it changes the effective rate on the conversion, you may not want to do it.

Joe: Affordable Care Act.

Al: That’s another one. Yep, there’s lots. There’s lots of reasons why you wouldn’t do a Roth conversion.

Joe: QBI.

Al: That’s a good one.

Joe: Yeah, what else? What else we got here? We’ve named like 10.

Andi: Qualified business income deduction, by the way, for people who are like— that’s like self-employed right now.

Al: Yes. Very good, Andi.

Joe: Yeah, I said it. I go, QBI. And then she’s like, well, it’s qualified business. And then she verifies with you, is that right, Al? (laughter)

Andi: Well, he’s usually the tax guy, you know?

Joe: I just wrote letters.

Al: I wonder if QBI applies. You figure, I would say it doesn’t if it didn’t.

Joe: Oh geez, I really see where the source really counts.

Al: Yeah, right?

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Self Employed Solo 401(k) Retirement Savings Strategy? (Bruce, Joisey)

Joe: Let’s go with Bruce from Joisey. We got some oldies, but goodies here now.

Al: We do, don’t we?

Joe: “Hello, Joe, how is Big Al and Andi?”

Al: Oh, it’s to you, only?

Joe: I guess, right? Please don’t forget them. Please don’t forget to let them get some sunshine once in a while from your shadow.

Al: Pretty, pretty big shadow. Yes, it’s it’s hard to see any. All I see is a big black mass?

Joe: “Uh, one thing I don’t hear in detail was solo 401(k) questions for self-employed is the ability to not only put 20% of business income as an employer in the solo 401(k) up to 19.5% under 50 years old of employee money of a solo 401(k) Roth. And the balance of the max $57K in 2020 under 50 in after tax money. Those after tax monies can be rolled over to a Roth IRA. No gains since it’s a non-interest-bearing account, separate from pre-tax and Roth.

“Of course, it has to be in the adoption agreement, but since the person is his/her own custodian administrator, it can be in there. Is it a better secret than the barn door Roth? It’s just that my accountant wasn’t fully aware of this 20 plus years’ experience. Regards, Bruce from Joisey.”

Al: You got choked up on that one.

Joe: I did. I did. Isn’t he explaining kind of the barn door, back door?

Al: Yeah, that is what it is.

Joe: So Bruce, I know you listen to this show. But you got to listen just a little bit harder.

Al: Let me help you out, Bruce. So first of all, when you’re self-employed, you can actually, well, first of all, like, let’s say you’re a sole proprietor, Schedule C, and let’s say you’ve got $50,000 of profits. So it’s based upon profits. So, dollar for dollar, you can put in $195,000. So I’m just going to round that to $20,000. So you put in about $20,000, OK, you got $30,000 left over, potentially. You can also—that’s the employee part—your employer and employee when you’re self-employed, so you can do the employer part, too, which is 25% of $50,000. So 25% of $50,000 is $12,500. So we’ll call it $13,000. So $20,000 and $13,000. So now you’re about $33,000 that you can put in, so that the $19,500 could be either regular 401(k) or Roth 401(k), the $13,000 has to be an employer contribution, fully deductible. Of course, you could later convert it. Then everything else from $33,000 to $57,000, if you have that option in your 401(k), you can put in after tax money. And the advantage there is, then you can turn right around and convert that after tax money right into a Roth IRA and get tax free growth forever. That is what we call the barn door Roth or the mega Roth or the garage door Roth or the dumpster truck Roth.

Joe: Right. Megatron, Roth.

Andi: Megatron Roth, right. Yep.

Joe: So, yeah, so first of all, you have to be self-employed.

Al: Sure. And you have to have profits.

Joe: The rules are that there’s a defined contribution plan, which is a 401(k). So the IRS puts, you know, how much money can you put in a defined contribution plan? And, so most people think that the maximum amount they can put in a to a defined contribution plan is the $19,500 if they’re under 50. That’s not the case. It’s close to $60,000. And if you’re over 50, it’s more than that.

Al: Yeah, it’s like $63,500, maybe.

Joe: That you could put into a defined contribution plan. So, this Megatron backdoor super backdoor barn door, whatever stupid things we’re talking about with these things, is that a lot of large companies have an after tax component that you could max it out to the, let’s just call it $60,000. So, you put in your $19,500 or $25,000 and you could still put a lot more money in, but you don’t get a tax benefit upfront. It’s after tax. And so right away, you convert it. If you’re self-employed, you can set up your own solo 401(k) and put the maximum contribution as the IRS defines it as the $60,000.

Al: Right. Exactly right.

Joe: So, because we’re going to get this question, ‘hey, I heard about the solo for one year. I want to set it up for myself.’

Al: Yeah, yeah.

Joe: Are you self-employed?

Al: No, no, no. I’ve got it. I’ve been working for 20 years with the same company.

Joe: Right. So, forget about it. Yes, you have to be self-employed to set up a solo 401(k).

Al: Or then the second question is, all right, I’ll just set up my own business and you can’t have any profits. No, then it doesn’t work.

Joe: So, I move my money into this…

I’m Very Risk Averse. How Should I Withdraw in Retirement? (Linda, San Diego)

Joe: I got Linda from San Diego writing in. “Hey y’all. I’m retired and need help with identifying the best sequence of withdrawals from my various money sources. First, here’s my situation: I’m happily single, 71 years old, and I have $65,000 a year in pension and Social Security, plus a few other smaller income amounts which cover the basic expenses. Currently in the 22% tax bracket and typically convert to Roth IRA up to the lower of my tax bracket and Medicare Premium Cutoffs.” And look at you, Linda, the smarty pants.

Al: Very clever.

Joe: “However, next year, when RMDs begin, approximately $14,000 in 2022, conversions will be quite limited. I have no debt and own two San Diego County homes, which makes me feel secure in case I run out of money. I have simple needs and I’ve never lived lavishly, but my financial plan has me planning to live adequately and comfortably until I’m 95. After saving and later investing for retirement since I was 8 years old, I’ve finally given myself permission to spend. Yay!

“Unlike many retirees, whose biggest fear is to run out of money before dying, mine is to die before I get to spend my money. In the next year or so, I intend to spend $200,000 to $250,000 and at least $50,000 a year for the next few subsequent years. My $1.8 million nest egg includes the following categories in the details in rounded dollars: Roth IRA now $450K, traditional IRA $120K, 403b $230K, non-qualifying investments $1 million. $815,000 in laddered CDs. I think spending my invested money will make me feel safer and keep me more comfortable than spending my safe money, but I’m open to whatever guidance and expertise you care to provide.

“For what it’s worth, I have a capitalized carry forward of $20,000 from last year, and the potential to write off as a capital loss of additional $6,000 and/or $50k for some bad business debts. It makes tech strategy sense to offset capital gains from selling my non-qualifying investments. I hate emphasis to pay more in taxes than needed, whether income, capital gains, or Medicare premiums.

“I’m a steady, long time San Diego AM 760 Radio Weekend listener and when I’m awake, and remember occasionally, CBS Channel 8 TV, very early Sunday morning, viewer of your shows. Very informative, interesting, and relevant. Kudos to you. Hope you can provide some direction as to which specific withdrawal sources I should use over the next several years, as I happily spend what I’ve sacrificed for during the last 60 years. All guidance you provide will be much appreciated. Thank you so much. Very respectfully, Linda. PS, please do not put me on your mailing list.”

Al: Yeah, that don’t bother me.

Andi: I also want mentioned that at the top of this page, where she says, ‘I am very risk averse’ in red and underlined, that is how she put it in her email. And you skipped over it because you thought I wrote it.

Joe: Yeah, well, that’s…

Al: Yeah cause it was in red. Pick another color next time.

Joe: Yeah. So OK, Linda, we’re going to start sending you some emails, first off.

Al: And we’re going to answer your question.

Joe: Then we’re going to get our biz dev team, probably call you 16 times over the next couple of days.

Al: You might want to change your phone number and email address.

Joe: You might want to move into your other home.

Al: In fact, move out of state…

Joe: Because you’re going to get flooded with mail. So, here’s what you look at in this scenario here. She’s got $1 million dollars of non-qual, right?

Al: Yes.

Joe: And so she wants to spend a couple hundred thousand dollars a year. And I’m just eyeballing this, Joe. She’s not very conservative.

Al: Well, yes, she is, because she’s got it’s about 60% or 70% in CDs, if you add up all these different CDs.

Joe: Oh okay, cool. Yeah. Oh, I didn’t see that.

Al: Yeah, yeah. So let’s just say, for purposes of our discussion, she’s got 40% in the stock market and 60% in cash, roughly. OK.

Joe: So from a tax perspective. I mean, she’s got plenty of cash to do what she wants to do.

Al: Sure. Right.

Joe: What does she have, $1.8 million, $2 million?

Al: $1.8 total.

Joe: OK. And she’s got $70,000 in fixed income or something.

Al: Yeah, she’s got $65,000 in fixed income and the few other extra income items, yeah, so call it $70,000.

Joe: OK. And she’s happily at 71. So she wants to spend a couple of hundred thousand dollars over the next couple of years.

“In the next year or so, I intend to spend $200,000 to $250,000. And at least $50,000 a year for the next few subsequent years.”

Al: So she wants to go all in next year. It’s an after COVID party.

Joe: So, $200,000. No biggie. That’s a 7% burn rate for one year.

Al: For one year.

Joe: She can probably handle that.

Al: Sure, right?

Joe: And then $50,000 on top of that. Let’s just let’s just do this. Here’s what you can probably spend is, I don’t know. I’m going to say 5%?

Al: Yeah, I’d say 5%.

Joe: She could take out about $100,000 out of her portfolio every year until she passed.

Al: And maybe even a little more. But that’s that’s a rough number.

Joe: Yeah.

Al: And you know what? Where you where you take the money, Linda is whatever is performing better. So in other words, if the stock market is doing well—

Joe: …like it has been.

Al: Yeah.

Joe: You would sell stocks.

Al: Sell stocks, right? That basically allows you to kind of rebalance into how you want your— and if the stock market does poorly, don’t touch the stocks. Pull it out of cash. Yeah, that’s how you do it.

Joe: And then with a tax overlay on this, you just want to look at, OK, well, what are you going to sell and what is going to give you the best after tax return, given what your other fixed income sources are? Because you already have some pensions and Social Security, and then you have to take your RMD. And so from there, then you’re going to look at, all right, well, where are you going to come up with the other $200,000? Does it make sense to pull it more from the retirement account? Does it make sense to pull it from your non-qualifying account? Does it make sense to create a capital gain? Does it make sense just to sell some of the CDs? Then you can easily make those decisions, too?

Al: Yeah, agreed.

Joe: Right? So there’s a couple of things. The real easy is, right, well sell what’s up and don’t sell what’s down. If you’re in a bull market, sell your equities. If you’re in a bear market, sell your cash, because then it gives you your equities time to grow. But I think what it gets a little bit more complex is to figure out exactly how you kind of coordinate this. But she’s pretty, I mean, she’s super sharp, actually.

Al: Yeah, I mean, I would just quickly, I would say, if you’re going to pull $200,000 to $250,000 out that you don’t want to bring that, take that out of your IRA because throwing it into the bigger tax bracket, you don’t have that much in there anyway. So, I don’t think you’d want to put your Roth for that. Probably. So, I would probably take it out of your non-qual account. Maybe some of your laddered CDs. It’s that’s a one-time thing. And then thereafter, if you do an extra $50,000 per year, now just start paying attention to your tax brackets and figure out where to pull it from.

Is My Roth Conversion Strategy Correct? (Frieda’s Boss, Ft Myers, FL)

Joe: Freida Boss.

Andi/Al: Frieda’s boss.

Andi: He signs his name as Mr. Poon.

Joe: Oh, OK, I’m confused.

Al: Mr. Poon is Frita’s boss. Mr. Poon from Fort Myers, Florida, I assume.

Joe: OK. “Hey, Al, Joe, and Andi, my wife and I have income of $320,000 after deductions. I would like to do a $10,000 Roth conversion, as to fill up the 24% tax bracket, however, $25,000 of the $320,000 comes from qualified dividends. Does that give me the ability to convert $35,000 instead of $10,000 and still maintain that 24% tax bracket? Love the show. Thanks for help, Mr. Poon.”

Al: Mr. Poon. The answer is yes, you can convert $35,000 because it’s kind of your ordinary income that gets to the top of that 24% bracket, and then your capital gains sit on top of that, so they will be taxed at 15%.

Joe: However, he is at $320,000, so the capital gains are going to be taxed at… you’re going to get that…

Al: And I think actually 18.8% to be exact. It’s 15%, plus the net investment income tax of 3.8%. But yeah, that’s a true statement. You have the ability in this situation with your capital gains to do a bigger conversion, have the ordinary income be taxed at 24%, and still have the capital gains tax that the 15%, plus that 3.8 %?

Joe: Very good. All right, Mr. Poon. Hopefully that helps.


What it’s like when you tell people you work in finance, and “please don’t use my name” in the Derails at the end of the episode, so stick around.

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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.