Joe Anderson
ABOUT Joseph

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

Alan Clopine

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

Published On
November 5, 2019

We tackle Indexed Universal Life Insurance one more time. And you may have heard that millionaires “buy term and invest the rest” to pay estate taxes, but is it a good idea? When you have appreciated company stock, how much should you NUA and when, and how do you deal with the taxes? Plus, can you convert an inherited 401(k) to a Roth? And when is your required beginning date for RMDs? 

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Show Notes

  • (00:48) 403(b) Age 55 Withdrawal Rules
  • (11:54) How Much Company Stock Should I Sell? When Do I Have to Start Doing Quarterly Taxes?
  • (19:09) Indexed Universal Life Insurance Pitch: “If the Market Goes Down During Retirement Your Cash Flow Won’t Be Impacted”
  • (25:58) “Millionaires” Buy Term and Invest the Rest To Pay Estate Taxes. Is This a Good Strategy?
  • (34:58) Can You Convert an Inherited 401(k) to a Roth? Should My Mom Start Converting Now?
  • (39:12) What is My Required Beginning Date? When Do I Have to Take RMDs?

Resources mentioned in this episode:

Selling company stock? Watch this video from Brian Perry, CFP®, CFA for a few different tax-sensible options to diversify your investments:


Joe & Big Al Break Down Indexed Universal Life Insurance:

Should I Invest in an Indexed Universal Life Insurance Policy?

What Do You Think of Indexed Universal Life Insurance?

Indexed Universal Life Insurance to Insure Future Income

Indexed Universal Life Insurance for College Savings

The Truth About Indexed Universal Life Insurance

Read the blog: Incorporating Life Insurance Into Estate Planning


Today on Your Money, Your Wealth®, we tackle Indexed Universal Life Insurance one more time. This will probably be Joe’s final word on the topic. Unless you ask him another question about it, but then you’re just doing it to get him riled up. Not that there’s anything wrong with that! Also on the topic of life insurance, you may have heard that millionaires “buy term and invest the rest” to pay estate taxes, but is it a good idea? And, when you have a bunch of appreciated stock in your portfolio from the company you work for, how much should you sell and when, and how do you deal with the taxes? Plus, can you convert an inherited 401(k) to a Roth? And when is your required beginning date for required minimum distributions? I’m producer Andi Last, before we get to all those questions, let’s see how the fellas do with 403(b) withdrawal rules. Here are Joe Anderson, CFP® and Big Al Clopine, CPA.

00:48 – 403(b) Age 55 Withdrawal Rules

Joe: We got Mark. He wrote in from Colorado. “Joe, Big Al, and Andi. Awesome show and great content”. Oh boy.

Al: Let’s see how you do with this one.

Joe: “And playful-“

Al: “jocularity.”

Joe: “Jocularity.”

Andi: You should have let him go on that one Al.

Al: I was gonna help him.

Joe: Jocularity.

Al: But what does that mean?

Joe: That means it’s joyvial.

Andi: Joyvial?

Al: Joyvial? Is that a new word?

Joe: What the hell is-? Jocularity, like happy.

Al: It means in jest, or in joke.

Joe: Oh. Thank you encyclopedia.

Al: I looked it up.

Andi: I was gonna say. I just looked it up and it was like, “wow, he’s really right on!”

Joe: See, Al studies these questions.

Al: I nailed it.

Joe: This gets hot off the press and then I read it.

Al: I was just waiting for you to say jocularity.

Joe: Jocularity. “I have a Rule of 55 question. I’m currently 53 and won’t turn 55 until June 2021. I have a 403(b) at work with $130,000. I also have a traditional IRA worth $400,000 I could transfer into the 403(b). I have checked with the plan administrator and they will do this. I understand if I leave my work in the year I turn 55, January 2021, I’ll be able to access these funds without a penalty. I understand I will stay have to pay ordinary income tax on the distributions. Please confirm and also provide any other potential glitches. I’m thinking about leaving my job before the year I turn 55, move to Utah to be closer to my elderly mother. At that point, I’ll get another job and transfer my 403(b) into the new company’s retirement plan. Do I follow the same rules as above? Or do I have to wait a certain amount of time to be able to have access to money penalty-free assuming I leave that job? Other potential useful information: married, I have a military pension $4000 a month and health care provided”. Thank you very much, Mark, for your services. “I have $250,000 in a brokerage account and $750,000 in a Roth”. He’s a YMYW faithful. Has to be.

Al: That’s fantastic.

Joe: “I still want to work but not the 9 to 5 grind. I’m looking to be semi-retired and do work I find enjoyable. The ability to access the money $3000 a month at 55 is the bridge to get me there. Please let me know your thoughts. FYI, Joe is spot on about Universal Life Insurance. For the most part, it’s a scam”. Look at that. Mark in Colorado.

Al: Wow. Supporting you all different directions.

Joe: Yes because it’s jocularity.

Al: And he taught you a new word.

Joe: I’m gonna use that this weekend.

Al: I think you should.

Joe: “Hey how you doing?”

Andi: “Are you feeling jocular?”

Joe: “Can I buy you a drink. Are you feeling jocularity?”

Al: You have to use it properly. You can use it any way you want, I don’t care.

Joe: Okay, so we got some stuff to unravel here.

Al: Good question, by the way, Mark.

Joe: Okay Al, I gotta calculator too, but you’ve got a pen here. So let’s kind of add this stuff up. He’s got a 403(b) at work, it’s $130,000, he’s got $400,000 in an IRA, so that’s $530,000 and it’s in a retirement account. He’s got $250,000 non-qual and $750,000 in a Roth. Did I miss anything? No. He’s got $4000 a month coming in and health care is provided. He needs $36,000 to bridge the gap. So he’s 53. He’s not going to turn 55 until 2021. So what he’s thinking, what he wants to do is basically say you know what I got this IRA, I’m gonna put the IRA into my 403(b) account. And then if I put the money in my 403(b) then at 55 I’m going to take distributions from the 403(b) because I separate service from my employer at 55 I can get penalty-free distributions at 55. So I’m gonna take the $3000 a month from the 403b). But then he’s going to move to Utah and then in Utah he’s going to get another job of something that he wants a deal get rid of the 9 to 5 grind. Then he wants the roll the 403(b) into the 401(k) plan. And still potentially take dollars out of that plan penalty-free. That’s the gist.

Al: That’s the gist. He wants to go to Utah before 55, so it makes a little trickier.

Joe: Yes.

Andi: Don’t you actually have to be working the job to be able to take that money out?

Joe: Yeah. You have to separate from service from the employer at age 55 to have access to those dollars penalty-free. So even though the access is at 55, he goes to another job, moves into another 401(k)-

Andi: Before 55.

Joe: Now he’s 56 and he’s there now. He’s done, he blew it up.

Al: So a lot of people think you can retire at 54 and then wait till you’re 55. But that doesn’t work. You have to separate from service at 55 to be able to get this penalty-free. And of course, you have to pay income tax. We’re just talking about avoiding the 10% penalty and early withdrawal.

Andi: So if he leaves this job before for 55, all bets are off.

Joe: Yeah but the problem is it’s a 403(b) plan too. 403(b) plan’s a non-qualified plan. It’s not under section 401(k). So it depends on the 403(b) plan that he’s actually contributing to, to see if it has the 55 tax-free withdrawal.

Al: So he would have to work for a similar type governmental agency that had a 403(b) I think to be able to do that, that would allow the-

Joe: No if he moved that money in. I would have to look at the plan. I don’t know where Mark works. Because 403(b) plans and 401(k) plans are very very similar for the most part. But 403(b)’s not under ARRISA. I mean some plans are but for the majority of them, they’re not.

Al: But couldn’t you- so let’s say he retires at 54 and he’s got the money in the 403(b) and he gets another job that has a 403(b), couldn’t he roll from plan 1 to plan 2?

Joe: Yeah. And then retired at 55? But still, I would much rather, I’m certain if it’s 401(k). What is making me pause is, it’s a 403(b).

Al: That there might be slightly different rules.

Joe: There could be a slightly different rule within the 403(b) from the 55 exemption to take the money out without the 10% penalty. Because all 403(b)s are not necessarily created equal. So for the most part, in generalities, you could say yes. But Mark I would want to take a deeper dive into that. So he needs the bridge the gap is what he’s trying to do from 55 basically to 65, maybe a 10-year time period? But he needs $36,000 a year. Why don’t you punch? That’s your bridge, $3000. Because he’s got a military pension of $4000. He needs another $3000. He wants to live in Utah, take care of mom. Do it. Because he’s got the assets I believe to be able to do all the things that he wants to do. He has access to the Roth. I don’t know if it would be wise to touch it because there’s FIFO tax-free. And he can always get the principal out if he wanted to. He’s got non-qualified funds. If he goes to work and makes $3000 a year, I mean $3000 a month, maybe he gets a job making $1500 a month that like Home Depot.

Al: Looking at this example, he has $250,000 in a brokerage account which would be a non-retirement account and that’s easy to use that money. Very very simple. So you don’t even have to go through all this gyration. However I would say this just to answer your question specifically, and I agree with Joe, 401(k)s are a lot more common, a lot more easy, so I’ll say in the 401k) world, if you were to leave a job at 54 with a 401(k) get another job that had a 401(k), you could roll your old one into the new one and then you could retire at 55 and there is no age limit, time limit as far as I can tell. However, I will say this if you did it like a day before 55 it might look suspicious and the IRS could do the Step Doctrine Rule. Potentially.

Joe: You have to separate from service at age 55 from that employer to be able to have access to the 401(k) or the retirement dollars without penalty.

Al: For that. However if like let’s say he did at age 50 and then he got another job. And right now we’re talking 401(k)s, that had a 401(k), you can roll the old 401(k) to the new 401(k), work 5 more years. Separate from service. It’s just fine. You could even take your IRA dollars and roll them into 401(k) and that works just fine.

Joe: That’s what he was stating in the beginning. He’s like I got about $400,000 in my IRA that I want to roll my 403(b) and then I’m going to retire at 55 and take the money out. But where Mark is messed up is that he’s going to retire, he’s 53, he doesn’t, “I won’t turn 55 until June 2021”. So he’s thinking he might leave prior to that age 55. He has to leave and separate from service at age 55. It’s not like I’m going to retire at 54 and then at age 55 I have access to the money.

Al: I know. But if he rolls into a new plan-

Joe: and he then retires.

Al: That’s what I’m saying. That’s what he’s talking about and that works. I think it even works in the 403(b) world, but that’s where you’d have to check your plan.

Joe: Yeah. I just want to put that caveat out there. CYA it’s called Alan.

Al: OK. The caveat?

Joe: Yeah I want to cover my own behind.

Al: CYA? Got it.

Joe: Yes. You were thinking of the special offers. That’s a CTA. That is a call to action.

Al: I get this confused all the time.

Joe: So first of all Mark congratulations. I think you’re on the right track. I like what you’re doing. I think you might be just laser-focused on let me get money out of my retirement account prior to 59 and a half. But you do have other assets. I would say if you retire, you have the pension. You have a shortfall. You have non-qualified assets that you could potentially live off of. You have some Roth assets $750,000. You know that you could take a little bit from, I wouldn’t want to take huge distributions but you can also then convert the rest of the $400,000 or $500,000 into the Roth over the next several years, turn your Social Security on. And I mean I think the planning is flawed a little bit. I would just want to have a bigger broader look at what he’s thinking.

Al: So he might be thinking I’m going to be in a lower bracket when I stop working so I can pull money out of the IRA 401(k) in a lower bracket. Well once you use your non-qualified non-retirement money and your income will be really low and then do a Roth conversion, that’s actually going to work out better for you anyway.

Joe: All right Mark. Hopefully, that helps. And hey thanks for the universal life insurance support. I believe it is in most part a scam.

11:54 – How Much Company Stock Should I Sell? When Do I Have to Start Doing Quarterly Taxes?

Joe: All right. We got another one here. Dan from Florida. “I will turn 59 this month and I’m retiring in December. I have around $1,700,000 in a 401(k), $30,000 in a Roth, $20,000 in savings. My wife and I owe about $85,000 at 3% on a home in Florida worth around $500,000 and no other debt. We plan on staying in our home for at least another 10 years. There is about $750,000 in company stock in the 401(k) what the cost basis of $46,000. How much of that stock would I be thinking about doing NUA with and why? I have thought about doing all of it but if I had to sell it due to trouble with the company that’s a lot of tax owed. Oh, I believe I will be able to stay in the 12% bracket in retirement. I also want to do a Roth conversion every year while I’m trying to stay in the 12% tax bracket and the 0% long term capital gain bracket. My thought right now is an NUA around half and convert the rest to an IRA. Obviously I would do this in the year 2020 when I have no earned income. Also, Al, when do I have to start doing quarterlies, quarterly taxes? Do I need to have them done by January 15th of 2020? Thanks for putting on such a great show. I listen and watch on YouTube all the time”.

Al: Sweet.

Joe: Dan. The man. You know I went to the University of Florida Dan. Go Gators. LSU. Big match up. All right go ahead.

Al: Let’s first talk about NUA. That’s that stands for Net Unrealized Appreciation. That’s a strategy whereby once you leave your job and if you’re at least 55 years of age you can take your company stock and you can move it to your non-retirement account, trust account, non-qualified account, whatever you wanna call it, and you end up paying ordinary income taxes on your cost basis. And cost basis here is $46,000. That’s pretty low.

Joe: And it’s worth $750,000.

Al: $750,000.

Joe: Dan, do it all.

Al: I would do 100%.

Joe: 100%.

Al: Because when you sell the stock yes, you will pay capital gains tax. But think of it this way, if the stock has trouble you’re going to sell it all whether it’s in the non-retirement account or the retirement account, at least in the non-retirement account you pay capital gains tax. In the retirement account, you will pay ordinary taxes when you take that money out. And by the way, not only that, you’ll pay ordinary income taxes on the future growth of those assets that get invested after the stock is sold. So you’re much better off. Plus you have very little tax diversification. So this right off the bat would give you a whole bunch of non-retirement assets. It would make your retirement much more tax efficient.

Joe: Right now you got $1,000,000 in your retirement account. You got $700,000 outside of your retirement account. Right now you’ve got a little bit more balance. And then, of course, you want to do Roth IRA conversions as well because now you have dollars to live off of. Because you have non-retirement dollars that you can spend down it still stay in those low brackets as you convert.

Al: And you got to start doing that after you retire. So this is a perfect strategy for you to do it all. If you want to do the $46,000 in January, the NUA in January of next year, that’s fine because you’re not going to have any other ordinary income.

Joe: No I would do it this year, $46,000 is nothing.

Al: Depends on his other salary though.

Joe: Bull-oney. I don’t give a rat-. Dan listen to me. Al is getting old. Do the NUA December 1st for sure. Add the $46,000, put the $750,000 in your brokerage account, then sell the stock next year at a 0% rate, he can go to $70,000.

Al: But what if he’s in a 32% bracket this year and he’ll be in a 12% bracket next year, that $46,000 will be taxed a lot lower rate by waiting a month?

Joe: It’s only $46,000 and the NUA’s $750,000.

Al: I know but waiting a month, who cares?

Joe: Well the-. Do it this year.

Al: I say do it next year.  Anyway, it doesn’t really matter. Just do it.

Joe: But-

Andi: How much of a difference are we talking about here? If he does it next year versus this year?

Joe: A couple thousand bucks.

Andi: OK.

Joe: But the market could tank.

Al: It could.

Joe: It’s an election. Oh, January dude. They are going to be like oh my God. Right? And then so now his stock that was worth $750,000, just dropped to $300,000. So get it out, get out right away in January, you start selling that thing off.

Al: So if you recall what I said, I said if he would like to wait till January he can. I probably would do it in December, too. Just because there’s that market risk I’d rather get it out. If I needed to sell it, I could do it quickly and it would already be out.

Joe: Right right right. So I think we agree there Alan.

Al: So as far as when you make the estimated payments. So here’s the way it works is that when you, say 2020 you won’t have any other income. So you’re going to have to base your estimated payments, or withholding if you’re pulling money out of retirement accounts, but estimated payments probably will be what you do and you’ve got to pay those quarterly. April 15th is the first one, then June 15th, then September 15th, then January 15th of the following year. That’s when you make the estimated payments. And I know that doesn’t sound like the right dates quarterly but those are the dates. Just trust me on that. And the way that you do it, is each quarter you can take a look at how much your income is to that point and then you do what’s called annualize. So the first payment is due April 15th. You look at what you made through March, 3 months, and then you multiply that by 4, to get to a 12 month annualization. Then you look at the tax rate and figure out what the tax is, then you divide that by 4, and you figure out what your tax due. You like that?

Joe: What’s this-

Al: Take notes Joe.

Joe: My God. Smartest guy I’ve ever met in my life.

Al: I thought you said I was getting old and senile.

Joe: You are sexy as hell though. 61 years old.

Al: Coming from you I’m not sure that’s a compliment. But I guess I’ll take it.

Joe: Never mind.

If you have a concentrated stock position like Dan does, depending on what kind of account it’s in, there are are a number of ways you can deal with the taxes that you’ll pay when it comes time to sell some of that stock to rebalance your portfolio. Our own Brian Perry, CFP®, CFA has done a video on Strategies for Diversifying Concentrated Stock Positions, and I’ve posted it in the podcast show notes at YourMoneyYourWealth.com. Click the link in the description of today’s episode in your podcast app to go straight there. Speaking of taxes, as we count down to the end of the year, there are a number of tax-saving strategies that are only available before December 31st, so I’ve included a link to the 2019 Tax Planning Guide in the show notes at YourMoneyYourWealth.com as well. While you’re there, click Ask Joe and Al On Air to send in your money questions, compliments, complaints or stories, and Joe and Big Al will answer right here on YMYW.

19:09 – Indexed Universal Life Insurance Pitch: “If the Market Goes Down During Retirement Your Cash Flow Won’t Be Impacted”

Joe: Let’s go to Brooke from San Diego. Brooke writes in “Joe and Al. I know you don’t like IULs”. Oh boy, here we go. Another IULs. Indexed Universal Life Insurance. But Brooke has read two books “that both lay out compelling arguments”. OK. “One advantage of IULs is protection if the market goes down during your retirement your cash flow won’t be impacted whatsoever. What do you say to that?” OK. “The books are What Would the Rockefellers Do? by Garrett Gunderson and Everyone Ends Up Poor by Curtis Ray. Thanks for your patience with-” I don’t want to give these yahoos some plugs.

Al: You already did.

Joe: I know I did. I should read these email questions before we go.

Al: Beforehand.

Andi: And it’s Rockefellers, it’s not Rockerfellers.

Joe: No I know what Rockefellers are. Those fellers. Playing with the rocks.

Al: I thought it was a new way to pronounce it. I kind of liked it. Okay, so that’s pretty direct. What do you say?

Joe: People are just very direct with us. Okay. There are multiple investments that you can go into that will give you protection against the market. CDs for one. So the ploy of this Indexed Universal Life Insurance Contract is stating that you can invest in market-like returns with no downside risk. What do I say about that? I think that would be awesome, if you could actually get it. Brooke. Absolutely. If you can get stock market returns with no downside risk. Who the hell wouldn’t do that? Sign me up. I want a $10 billion policy. You know, I’m going to call Garrett Gunderson right now and ask him – give me underwriting right now. It doesn’t work that way. There are participation rules. There are caps. There are all sorts- You’re not even invested in the market. It’s a zero-coupon bond that they’re buying call options on. You’re not getting dividends. So it’s looking at what am I truly getting out of this product? It is sold that it is protected. Yes, I agree with that 100%. But is that truly a pro?

Al: Well it is a benefit. You’re not gonna lose your money. But you’re saying it’s not the best way to do that.

Joe: So Brooke. I would like to know how old Brooke is. Because if Brooke is young and trying to accumulate wealth, why would she want that type of protection anyway? If you’re already in retirement and you want to buy a life insurance contract, the cost of insurance is going to be prohibitive.

Andi: She’s 52. Remember, she asked a question of us before. So we have that she’s 52 and she’s already maxed out her 401(k). That is all we know about her.

Joe: Look at Andi. She’s a little creepy. She’s like all over this.

Al: She remembers this stuff.

Andi: I keep the podcast like, encyclopedic.

Joe: Oh my gosh. So we’re never going to get another email. “Oh God, Andi’s gonna look me up. She’ll know where I live.”

Al: “I live in University City in San Diego.”

Joe: So 52. Okay. So you’re already maxing out your 401(k). I get the lure of it. It’s like I could save money into this program. This IUL. This bank on yourself. This pension, your own pension plan. It’s so good.

Al: Yeah private pension.

Joe:  Private pension.

Al: Put what you want to in.

Joe: Yes. There are no income limitations. Look at the Roth. Roth sucks. Because if you make too much money you can’t put money into it.

Al: And look at this. We’ve got this illustration that shows all this tax-free income.

Joe: Right All you got to do is place the money in and it grows tax-deferred you pull it out tax-free. That’s how it’s sold. You have to look at the inner workings of the overall contract. What is the true cost of insurance that you’re purchasing? You’ve got to be careful of MEC rules. You have to keep the policy in force for life to get the tax free benefits of the income. So what does that mean? There still needs to be cash in the policy when you die. So you’re not utilizing all of the money. So you gotta put that into account unless you want to die with a life- I mean do you need life insurance? Do you want to die? Do you have a permanent need for life insurance? That is totally separate. Didn’t we go through this?

Andi: We’ve gone through it many times.

Joe: I said if you need life insurance, if you want to die with a life insurance contract, yes, buy the stupid thing. But if you want accumulation, it’s not getting anywhere near anything that’ll do that.

Andi: What can she do that’s gonna give her 8% returns and it’ll never go down? Is there anything that’ll do that?

Joe: Nothing in this world will give you that. So I like protection. But how it’s sold it’s like you get stock market returns with no downside risk. Yes, that sounds good. But you look at what is- How much are you participating in the overall market? Because it’s going to go from one point to another point. Here’s the S&P 500 is at X and then they’re going to look at the S&P 500 a year later, 6 months, 2 years later, whatever the point to point is, and then they’re going to do some math. Is your participation 100%? Is there caps? Do you get capped out? Maybe that S&P did, if it does more than 2% per month, you get capped out and you can only do 1%. I don’t know. There are so many iterations of this product that makes it very very confusing for the average investor. First of all life insurance should never be used as an investment.

Al: Okay. Well, she does say thanks for your patience with this subject. That didn’t pan out very well.

Joe: Brooke, I love ya. Keep writing in. You listen to me, this is what happens. They call in or they write in and then they ask us the question and then they don’t like the answer I give.  So what does she do? She goes and reads two books of insurance salespeople that sell this crap and then it’s like okay let me call him back and say hey-

Al: So my response is, look and see who’s writing these books. And you’ll know how it’s slanted.

Joe: Totally. But yeah. Brooke, I’m telling you, if you want to do it, do it. But I don’t know. I’m not here to give you advice. I’m just here to I guess rant and rave.

Al: Just your opinion.

Joe: Yes. It’s just my opinion.

Al: Contrary to Curtis and Garrett.

Joe: Yes. I’m going to look those yahoos- Those guys are yahoos.

25:58 – “Millionaires” Buy Term and Invest the Rest To Pay Estate Taxes. Is This a Good Strategy?

Joe: We do very much enjoy you guys writin’ us. Like Marcus from Tennessee/Alabama.

Andi: You remember Marcus.

Joe: I do remember Marcus. Your favorites. I don’t know what that means.

Andi: That’s what he’s saying. Roth and insurance questions, your favorites. That’s what he’s got for you.

Joe: Oh.

Andi: Just keep reading Joe. 

Joe: Oh, that was the title of the damn email. “Your favorites, Roth and insurance questions”. Sorry, Marcus, takes me a while. “Hello everyone. Thank you. Thank you. Thank you for all the valuable but funny financial information you provide. This is Marcus from Tennessee Alabama”.

Al: So which is it?

Joe: It’s both. It’s like-

Andi: He splits his time.

Al: Is it contiguous?

Joe: It is contiguous. So, Marcus, he’s got a couple questions here.  “First”, oh boy, “I would like to apologize because I believe my question about using an IUL for college funding started this IUL avalanche. Actually I take back my apology because the IUL segments have been the most hilarious things ever on Your Money, Your Wealth®. But that said, I have another insurance question comment”. All right. Let’s keep on rolling folks. Okay let’s see. “I was recently told that millionaires continue to use life insurance as a way to pass down tax-free money. Here’s the scenario, buy a term policy and invest the rest. But after the term policy, you renew and use your investments to pay the, in my opinion, now extremely high premiums. My thoughts on this is that you are now unplugging your investments to pay anywhere from $10,000 to $20,000 a year in premiums just to pass down X amount of money tax-free. If you die within 10 years of renewal, you may win. Have you heard of this? What are your thoughts?” OK. Couple of comments here. Marcus from Tennessee/Alabama.

Al: Yeah. And thanks for your patience, Joe. What do you got for us?

Joe: So you know with Brooke’s question just before Marcus’, Andi, I and Al, we did a little investigation. Kind of looked up some of these gurus that really like IULs.

Al: They wrote some books.

Joe: And the Rockefellers. The Vanderbilts. What do you think of Bill Gates?  He invested in IULs. Don’t you know that? These individuals that are writing this stuff, “I discovered financial planning 3 years ago when I went bankrupt. And then so I needed to do something to make money because I lost everything. So guess what I’m doing? I’m selling badass commission IUL policies that is making me a millionaire.”

Al: Well he didn’t say that, but we can infer it. And the other one basically had all this advice and then the bottom disclosure, “I’m not an investment advisor.  This is not advice. Please do not do any of this.”

Joe: “Please don’t listen to a word I’m saying.” So back to Marcus Tennessee/Alabama. Yes. Like I’ve said 1,000,000 times, if you want to leave a legacy. So the planning would look like this. You take a look and say I’m retiring at age 65. I want to spend X amount of dollars for the rest of my life. And you’re going to have plenty of money left over. And you’re like maybe I want to leverage that money. Maybe I want to make sure that it goes guaranteed tax free to someone. Maybe I have an estate plan. Maybe I have a special needs child. Maybe I have XYZ, whatever. Yes, life insurance is a huge leverage tool if you use it for a death benefit right. You agree with that?

Al: I agree with that.

Joe: I think in the tax code, it’s one of the best benefits in the tax code. It’s 100% tax free at your death. So you buy a $5,000,000 policy and over your life you might put $2,000,000 into it and it grew to $5,000,000 tax free guaranteed to your heirs. That’s leverage. Then you look at the internal rate of return of the policy at death. So if you died with one premium going in your rate of return, let’s say you put one premium of $50,000 in and if you die the next day and their heirs get $5,000,000, pretty good rate of return.

Al: Yeah, but you lost because you’re dead.

Joe: Marcus, you’re dead.

Al: And if you live a long long long life, it’s a terrible rate of return.

Joe: Right. Because then all of a sudden that cash value now almost equals the same amount as the death benefit.

Al: Because that $2,000,000 of premiums, maybe it’s worth $10,000,000 by the time you, or could’ve been by the time you passed away.

Joe: Could have been if you invested it-

Al: And by the time it goes to the heirs it’s tax free anyway because they get a step up in basis. But then there’s estate taxes and that’s what changes all this.

Joe: So then you look at how big of your estate are you? So when you said millionaires, well they got to be about 20 millionaires.

Al: For a couple. For single, it’s about $11,000,000. Couple, $22,000,000.

Joe: So if you have $11,000,000 or more, then people are doing this to help pay estate taxes.

Al: And just so you understand how this works, let’s say you’ve got $15,000,000 and you’re single. So that means some of your estate is going to be subject to estate tax. If it’s all invested in cash and stocks and bonds, you don’t really need insurance because you got cash. Your heirs will have cash, stocks, and bonds to pay the taxes. But here’s the problem, is in a lot of cases it’s tied up in real estate. Or it’s tied up in your business. Or it’s tied up in your farm. And these are difficult assets maybe to sell within a 9-month period which is when the tax is due. So people get these permanent policies for life insurance because they know that the estate tax is going to be $2,000,000 or whatever it is they get $2,000,000 of life insurance. So the estate has that upon their passing. And so now that the heirs don’t have to sell the farm or the business or the real estate.

Joe: And the insurance contract is actually outside of their taxable estate with an irrevocable trust.

Al: Irrevocable Life Insurance Trust. And so you have to set that up properly. We’ve seen that set up improperly many times.

Joe: Yes. So am I a fan of this? Yes. Does term insurance work for this? No. Absolutely not. Because Marcus, you’re right on point. If you want to pass a legacy using tax free life insurance benefits you cannot use a term policy. Because you’re healthy, you get a term policy, 10, 20 years. You live past the 20 years, you try to renew the policy, you could, A, now have a condition where the premiums will be too expensive or maybe you’re still in preferred health, now you’re 20 years older, the premiums are going to be like you said a lot more expensive. So then it doesn’t- the numbers don’t make sense. Term insurance should be used to cover an income need, a short term. I have a mortgage. I got income. My wife doesn’t work. I got a couple of kids. If I die the family would be devastated so I need to make sure that I cover that need. So you could do it with a life insurance contract of term or permanent. I think term is a better way to go because hopefully in the next 30 years my mortgage is paid off. We’ve saved some money. The kids are out of the house. So you like- I’m painting my life?

Al: Yeah yeah.

Joe: I’m single by the way and I don’t have kids and I’ve never been married.

Al: And you haven’t saved a penny.

Joe: I know, I’m flat broke and I got a Range Rover.

Al: I will vouch, you’re not flat broke. I do know.

Joe: But then you get the yahoos. Andi, you know once you put more money into this life insurance contract, it grows tax deferred and- that’s where it kind of bugs me. Life insurance is a phenomenal tool. It has saved so many hundreds of thousands of families from complete financial despair.

Al: And so to go back, permanent policies which Marcus is talking about do have their place. We tend to see those more commonly in pretty wealthy families that have an estate tax problem. I’ve also seen it in one case where the parents just wanted to leave a legacy. There’s nothing wrong with that. And then you’re just looking at a rate of return. Do what do we think that we’re going to live long enough that this was a bad investment? Or do you think we have-

Joe: He’s just trying to leverage right?

Al: We have impaired life expectancy but somehow a couple of years earlier we were able to get this policy. So now the kids are gonna make out better and so it’s nothing more than an investment really. You look at the investment rate of return. If you do it properly it’s estate tax free.

Joe: Estate tax-free, tax-free, federal tax, state tax, everything.

34:58 – Can You Convert an Inherited 401(k) to a Roth? Should My Mom Start Converting Now?

Joe: Okay. So we got next on the list. So Marcus found out that “one cannot convert an inherited IRA into your Roth IRA. How does that work with the inherited 401(k)? If I wanted to have the ability to convert an inherited non-spouse retirement account into a Roth, is that even possible? Now that I think about it non-spousal Roths have RMDs. So is my best option to have my mom slowly convert to Roth while I pay the taxes on the conversion and then when she passes convert to my taxable account?” Marcus, what the hell are you doing?

Al: You’ve made a couple mistakes here already.

Joe: “This is a small account, less than $100,000. As I type this, this sounds morbid.” Yes, and as I read this, it sounds morbid. “But I would love to know my options years, years, years later down the road”. I’m gonna call your mom Marcus. Watch your back.

Al: And say ‘you know what Marcus is doin?’

Joe: Do you know what Marcus’ financial plan is? If he comes to you and says ‘Mom I think we should start converting.’

Al: No, I would say it this way, there’s several things here. I’ll just start with mom. So mom has an IRA and if mom is in a low tax bracket. And if you and your siblings are eventually going to inherit it and you’re in a higher tax bracket, then that does make a certain amount of sense. But here’s the fallacy in that, is you have to be 100% sure mom is not going to need that money. Because if mom needs the money and she pulls it out she’ll probably need the money because long term care, some medical need, which is tax-deductible anyway. So she could pull out that money tax-free. And you would have had her pay tax when she could have got it out tax-free anyway because it was used for medical. So if you’re going to do that strategy and that’s a good strategy by the way, as long as your mom or your parents for sure have plenty of money regardless of what happens.

Joe: So to answer your first question, you cannot, can not convert an inherited IRA. You can convert an inherited 401(k). So my advice with that $100,000 Marcus, would be, keep Mom’s 401(k). If you want it someday convert it. If you inherit the 401(k) you can convert that into a Roth. If it’s in an inherited IRA you cannot convert it. Is there RMDs in the Roth? Yes. But it’s still tax-free. And it’s based on your life expectancy.

Al: But I would say it this way. Marcus let’s say you inherit this 401(k). Yes. You can convert that into a Roth. But if you have your own IRA you’d rather convert that first because your Roth doesn’t have an RMD but the converted 401(k) inherited does have an RMD. So make sure you convert in the right order.

Joe: Yeah. Morbid. Gonna start calling you Morbid Marcus.

Al: From Tennessee or Alabama or both.

Joe: He’s got multi-personalities.

Andi: He’s contiguous and morbid.

Joe: Yes. All right. Thanks Morbid Marcus. Appreciate ya writin’ into us. He goes “Thanks again for all the information you provide. And thank you for the hilarious but true responses to IUL questions”. I want Marcus from-  Morbid Marcus to leave us a voice recording.

Al: That would be cool wouldn’t it?

Andi:  Alright Marcus, you’re on.

Al: Kind of a thought of what it might sound like. I can’t wait.

Thank you, Brooke and Marcus, for winding Joe up and making this show so entertaining – YMYW wouldn’t be what it is today if it weren’t for listeners like you. Look for the share link in your podcast app or in the show notes. Use that button generously to spread YMYW’s useful hilarity via email or across social media and we will thank you for it! To revisit all of our previous IUL and life insurance discussions, click the link in the description of today’s episode in your podcast app. You’ll find links to all of them in the show notes, transcripts of this episode and previous ones, and the link to Ask Joe and Al On Air, where you can send in your money questions, compliments, complaints, stories via voice message, like Joe just mentioned, or via email.

39:12 – What is My Required Beginning Date? When Do I Have to Take RMDs?

Joe: like Dennis did. But it’s pronounced Denis. Well that’s what? Denis is short for Dennis.

Andi: It’s Denis. It’s French.

Al: So the S is silent?

Joe: How did you…? Did he leave a message?

Andi: No. I have a cousin named Denis.

Joe: My father’s name is Dennis. My middle name is Dennis.

Andi: How is it spelled?

Joe: Denis.

Andi: Really?

Joe: Yes.

Andi: Wow.

Joe: And it’s not Joe Denis.

Al: I think that’s a good name for you. Denis.

Joe: Oh, so bad. We’re gonna find out. He goes “Hi Mr. Anderson”. And he’s talking to me, Al.

Al: Apparently. I don’t have to answer this one.

Joe: Of course it’s Denis.

Al: I’ll just go get a cup of coffee. I’ll let you answer this one.

Joe: “Thank you for the information you have sent me about IRA and RMD and I’ve also been to your courses.” I don’t remember Denis at any of courses by the way. “But I want to be sure not to make a mistake and get penalized by the IRS”. So in September of this year Denis turned 70 and he worked part-time every year. “I have no retirement from my job. What I have is my Social Security income. I have my IRA 401(k) in the bank. My question is when I reach 70 and a half in March 2020 what will be the day or month that I have to do the taxes? And what percentage should I withdraw so the IRS does not penalize me in my taxes? It’s too early but I want to be sure. Thank you for the information and support”. So he’s talking about a required beginning date. So let’s first define what a required beginning date is. So Dennis doesn’t-

Al:  just go back and forth. That way you’re covered.

Joe: Yes. Does not turn 70 and a half until next year, Alan.

Al: Yeah. Until March of 2020.

Joe: All right so he’s got a couple of options. He doesn’t have to take any money out in 2020 if he doesn’t want to.

Al: That’s right. Because the required beginning date is April 1st of the year following you turn 70 and a half.

Joe: So the drop-dead date is April 1st of 2021.

Al: Yes I agree with that.

Joe: But the calculation would be on December 31st of 2019. If he takes a distribution in 2020. So there are two things he can do here. If he wants to take a required distribution in 2020 he can because he turns 70 and a half and he takes one out. You look at the December 31st you take out about 3.75% out of the account. If he does not want to take that he can push it out to the following year. But then he has to take two distributions.

Al: Right. One for 2020, one for 2021.

Joe: You’ve got it. So there’s just a little bit more calculation involved there but he doesn’t necessarily have to create a taxable event in 2020 if he doesn’t want to.

Al: And here’s what you want to think about is sometimes when people are still working or let’s say, I’m going to call you Dennis, let’s say Dennis you’re working in 2020-

Joe: Andi’s pissed.

Andi: I don’t care.

Al: But not 2021. Let’s just say that. So then you might want to push that RMD to 2021 because you don’t have the part-time income. On the other hand, if the part-time income is the same every year you’ve got to look at your tax brackets. Would it hurt you to take two required minimum distributions in one year? And if that’s the case you might want to do one in 2020 and one in 2021.

Joe: But I think how he’s writing this is that he’s pretty conservative. He’s already thinking about I don’t want to get any penalties.

Al: Yeah. He’s got his 401(k) in the bank. Also, investments are conservative. He’s worried about an IRS penalty.

Joe: He’s like well if I push it out, I don’t want to make a mistake there. So I would tell Denis take one out next year. So just look at December 31st balance of the overall account. Take roughly 3.75% out of the account. Or 4% to make it easy. If you’ve got $100,000, make sure you take out $4000.

Al: That’s safer and then you know you get your cover.

Joe: And you have until December 31st to take the distribution out. So it’s no rush. It doesn’t have to be done right on your 70 and a half birthday. It just has to be done in the calendar year.

Al: Now if you do take it out earlier, then all you have to do is calculate your tax bracket to figure out how much to withhold. So for example, we don’t know your income from this description but let’s say you’re in the 12% bracket, federal bracket, so maybe you withhold 12% from the IRA distribution and you’ve got to look at your state bracket too. Maybe you’re in a 5% bracket, so you withhold 5%. You just do that each and every time you take a required minimum distribution. Do that calculation to figure out how much to withhold. And in some cases maybe you have some income that doesn’t have any withholding. So you want to withhold a little bit more. Maybe you withhold 20% instead of 12% because you got some income that doesn’t have any withholding. That’s totally fine too. But just do that at the time you do the distribution. Some people do the required minimum distribution once a year, some do it periodically throughout the year because they need more money monthly. So just every time you take a distribution, figure out what your tax bracket is and withhold that much and if you have other income that you need withholding you may want to increase it.

Joe: The biggest penalty I’m sure he’s concerned about is that if you do not take your required distribution timely there’s a 50% tax penalty. So just be aware of that Dennis or Denis. So make sure that you do it right. You want to withhold- I mean you want to take out enough of the retirement account because whatever- So if you do not take the appropriate RMD or if you do not take the RMD, there’s a 50% tax penalty. 5-0, 50%. You heard it right. So make sure that you get this thing dialed in.

Al: By the way, I’ll say one more thing and that is if you don’t have enough withholding, then it’s an interest charge. They call it a penalty, but it’s an interest charge. And it’s charged annually at 3%. So that’s not a very big penalty but to avoid penalties altogether you just have withholding as you take distributions.

Joe: All right. I hope that helps. Thanks so much for listening, everyone. Thank you, Andi. Great job Al. I’m Joe. We’ll see you next week.

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