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 26, 2023

Coach Dobber and his wife in Edina, Minnesota have a low mortgage interest rate and a decent amount of home equity. Should they put that equity to work and take the risk on buying a higher value home at a reduced price, even if it means a much higher interest rate, and higher monthly payments too? Plus, Joe and Big Al spitball for Adam, in the birthplace of aviation, on the taxation of passive rental income, and capital gains from his portfolio and the sale of his business, prior to his early retirement. They also spitball for Charles in Idaho, on taxes on the sale of his mother-in-law’s house. Should Dan’s wife and business co-owner retire from the business and take Social Security Disability? And will Social Security be reduced for everyone? Steve in Vegas has a cautionary tale to tell.

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Show Notes

    • (00:55) Stay With Low Mortgage Rate or Buy Up at a Reduced Price? (Coach Dobber, Edina, MN)
    • (16:10) Early Retirement Taxes on Rental Income and Capital Gains? (Adam, Dayton, OH)
    • (24:55) How to Figure Taxes on Sale of Mom’s House (Charles, ID)
    • (29:47) Should Spouse and Business Co-Owner with Alzheimer’s Retire and Take Social Security Disability? (Dan, Midwest USA)
    • (36:04) Will Social Security Be Reduced for Everyone? A Cautionary Tale (Steve, Las Vegas)
    • (44:17) The Derails

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Andi: Coach Dobber and his wife in Edina, Minnesota have a low mortgage interest rate and a decent amount of home equity. Should they put that equity to work and take the risk on buying a higher value home at a reduced price, even if it means a much higher interest rate and higher monthly payments too? That’s today on Your Money, Your Wealth® podcast number 448. Plus, Joe and Big Al spitball for Adam, in the birthplace of aviation, on the taxation of passive rental income, and capital gains from his portfolio and the sale of his business, prior to his early retirement. They also spitball for Charles in Idaho, on taxes on the sale of his mother-in-law’s house. And should Dan’s wife and business co-owner retire from the business and take Social Security Disability? And will Social Security be reduced for everyone? Steve in Vegas has a cautionary tale to tell. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Stay With Low Mortgage Rate or Buy Up at a Reduced Price? (Coach Dobber, Edina, MN)

Joe: Coach Dobber.

Al: Coach. All right.

Joe: “We’re in Edina, Minnesota.” I know where Edina is. Used to be my rival in high school.

Al: Yeah. Oh, really? Okay.

Joe: All right.

Al: How about that?

Joe: “Hello, Andi. Big Al. Joe. Thanks for taking a moment to consider our situation. To get you in the mood, I’m 47, former teacher and basketball coach, who now dabbles in learning and development for a financial services company group similar to yours.”

Al: Oh, okay.

Joe: A little learning and development.

Andi: From basketball to finance.

Joe: There you go. “Wife is 43 yo, health care exec., two girls, 11 and 10, a great cat named Sophie and a black and white cabba poo named Leo. Live in Edina, Minnesota but only since moving here in 2019 from SD.” Well, every time I see SD, I always think of San Diego.

Al: I know, me too, but I’m guessing South Dakota.

Joe: South Dakota. “Driving kids way too much in our 2018 Ford Explorer, she drives a 2019 Acura RDX. And we share a new electric golf cart while cruising around Grandview Lodge whenever we can.” 40th birthday Big Al, Grandview Lodge.

Al: Is that right? Yeah, so you know all about it.

Joe: I do.

Al: And I know you want an electric golf cart, don’t you?

Joe: I do own an electric golf cart.

Al: Oh, do you have one already?

Joe: I do.

Al: Okay, there you go.

Joe: I do. “Here’s where I could use some help. Since moving here, our house has increased in value and we find ourselves with a potential $800,000 in equity with a current ARM of 2.75%. Even though it’s an ARM, when the initial 7-year term is up, it’ll only go 1% each year, cap at 7%. We also own a second home up here- up north in Nissawa, Minnesota, which was purchased last year at 5%. Here’s where it gets a little dicey. My wife is on a serious mission to buy a new house to put some of the equity we have to work, and also take advantage of higher priced homes that appear to be stressed by higher interest rates. We’re seeking homes in the $2,000,000 to $3,000,000 range.” $2,000,000 to $3,000,000. That’s a nice home in Edina.

Al: I can imagine it’s super nice.

Joe: Wow. That’s big ballin there. “So it’s coming down a couple hundred thousand dollars a year, which does appear to offer an opportunity of a nice return. FYI, we don’t anticipate retiring here. Am I right, Joe?” I don’t know if I lived in a $2,000,000 to $3,000,000 house in Edina and I have a little-

Al: You might stay there.

Andi: Just never leave the house?

Joe: Got a little golf cart up in Mississauga, Grandview Lodge. That sounds pretty good. “The idea is to buy one more time and then sell when the girls graduate high school.” So the girls are what? 11 and 10? So we got about 8 years or so? Yeah. 7, 8? “At the same time, that opportunity comes with a considerable increase in monthly payment. We could get into a similar valued home and see our payment go up $4000 per month, getting close to $10,000 a month.” So when he says get into a similar valued home, like the one that we’re talking about, this $2,000,000 to $3,000,000 home?

Andi: They’ve got a home with potential $800,000 equity.

Joe: The house at the moment is on the market. So their house is on the market for $1,900,000? Or the house they’re looking for?

Al: The house at the moment.

Joe: Well, the house of the moment.

Al: Oh. So here’s the thing. The expensive homes are now cheap. Cheaper.

Joe: Cheaper. So that means he probably lives in expensive house and his expensive house’s cheaper.

Al: Maybe it didn’t go down as much.

Joe: Of course not. It didn’t.

Al: Only the expensive ones.

Joe: Come on.

Al: Right, right.

Joe: All right. “So the house of the moment, is on the market for $1,900,000 after being initially listed for $2,700,000.”

Al: Oh, there you go. So he’s seeing a- or she’s seeing a deal.

Joe: Oh, look at that.

Al: Yeah. Yeah.

Joe: That’s a huge deal. That’s like $1,000,000.

Al: I know it’s right for us.

Joe: Oh, okay.

Al: She’s going, come on coach. Let’s do it.

Joe: Come on, put me in coach. “Even if we sell at that number we figure 8% comes off the top of the realtor.” So hold on. I missed something here. “We are being told that we could get $1,700,000 for ours.” Okay. So they’re going to sell at $1,700,000. They’re going to do a lateral move, buy something at $1,900,000, but it’s really worth $2,700,000.

Al: So they’re thinking that one they want to buy is actually worth a lot more. It’s just interest rates are higher. So it’s temporarily come down is what she’s thinking.

Joe: So he’s selling $1,700,000, $1,900,000. Okay. It’s $200,000. No biggie, but the biggest thing is that, hey, you know, we got a little higher interest rates-

Al: Much higher.

Joe: – that monthly nut is going to kill us potentially.

Al: So now we’re going to add $4000 per month that we could be saving. Got it. I get the quandary.

Joe: So $900,000. So, but here’s what I’m confused on. Is that he’s thinking, all right, we’re going to get 8% comes off the top in realtor fees which is about $136,000 plus $4000 in moving expenses.

Al: So part of the equity is gone. Makes sense.

Joe: So we’re left with $660,000, but what about taxes here?

Al: Well, yeah.

Joe: Because he can only- I don’t know what they bought the house for, but if they lived there two out of the last 5, they can write off $500,000. But if he’s selling the thing for $1,700,000, I don’t know, do you think he bought it for-

Al: Well, so if he’s selling for $1,700,000, and let’s just say $100,000 to cost, so $1,600,000. So if he bought it for $1,100,000, and, or even less than that, but put in improvements, it could still-

Joe: still be alright?

Al: -be alright, but, so we don’t know that.

Joe: Okay, so he’s got $660,000 to put down on the new place, alright? “If we could buy that place at $1,800,000 and sell it at $2,700,000 someday, we’ll surely make a gain, but is it worth it? I’m trying to be open to the opportunity, but it just doesn’t feel right to sacrifice retirement savings to put into a new home that we will likely have to renovate, purchase a bunch of new furniture over time. We currently have about $950,000 in various retirement assets, but only she is maxing on her 401(k). I’m contributing 10%. She makes $500,000. And then he makes $100,000, $600,000.” That’s a lot of coin.

Al: Yes. Great income.

Joe: Alright. “Our retirement assets were $500,000 back in 2019 for historical perspective. Of note, my wife is currently up for promotion and I don’t think we will buy the new place until she gets at least a $50,000 raise. She’s hoping for $100,000. Regardless, she’s on a good track. So one way to look at this leap of real estate faith is that she will continue to command a high salary for many years to come.”

Al: Okay, got it.

Joe: Healthcare exec. $500,000.

Al: There you go. Right. Minnesota.

Joe: Yeah. “I keep looking, what we could do with that other $4000 a month, not going to the mortgage, including we need to pay off about $80,000 in debt. Two cars, golf cart, and a 401(k) loan used to help purchase the second home last year.”

Al: Ooh, okay.

Joe: Yeah, just splurging. “She admits she may be serial mover, homebuyer. I’m typically up for the adventure and struggling with this one. Maybe a way to sum this up is by asking for a spitball in this real estate environment. Should people stick to lower interest rates or reap the benefits of lower- reap the benefits of lower payments and savings or take a risk on a property that has a reduced price? What circumstances might prompt someone into leaving a lower rate for a much higher rate? Thanks for the gift of spitballs. What you do is incredibly valuable for those of us who still listen.” Ah, that’s a good one.

Al: Yeah, there’s a, maybe a couple.

Joe: So, yeah. Man, we’re-, they’re dropping like flies.

Al: Do we still have any listeners?

Joe: I don’t think so. Yeah, we got Dobber. He’s just waiting for us to go over his question-

Al: – and then he’s done.

Joe: Yeah, and then he’s gone.

Al: Yeah. Podcast. Delete. I’m not gonna listen to that one again.

Joe: One star, delete. “Look forward to my sole-“ That’s the wine thing. What is it called?

Andi: Sommelier.

Joe: Yeah, Somme.

Al: Oh, that’s like a wine expert or something?

Andi: It’s a wine aficionado.

Joe: “She’s sipping on some wine and laughing at my attempt to guess what it smells like while listening to your response.” Somalier. Somalier.

Andi/Al: Sommelier.

Andi: It’s not a person from Somalia, it’s “sommelier.”

Al: Okay. Well, that’s an excellent question. What do you think?

Joe: Well, ironically I was just in the same position last year.

Al: I’m thinking this is your question.

Joe: I know.

Al: Cause this is your life.

Joe: This is. Almost like that.

Al: I know. To the T.

Joe: So, I bought a house a couple of years ago and it appreciated in value. Another- I live in a decent neighborhood. And there’s houses that rarely go up to sale here. And one did. And so it was a lateral move.

Al: Same street.

Joe: Same street. Four houses down.

Al: And so then it’s like, Ooh, look at this, a little bigger-

Joe: – a little bit bigger, single level.

Al: Cause you’re getting so older, you can’t have stairs anywhere?

Joe: I can’t walk up stairs. But it’s- all right. Cause I was locked in on my loan at 2.5%.

Al: Yeah. Okay.

Joe: And then it’s like, okay, well here I have the same loan. Yeah. But at 6.5%. Yeah, it’s a lot larger nut you got to cover.

Al: It’s a bit bigger. Yeah.

Joe: So what do you think I did?

Al: And I think you did it.

Joe: Yeah, I did.

Al: I know you did because I’ve been there.

Joe: I’m with Coach Dobber here because, did I want to do it? Not necessarily.

Al: Financially. Great move?

Joe: Well, I don’t know.

Al: Hard, hard to say.

Joe: Hard to say.

Al: Hard to say.

Joe: Hard to say. Because yes, in my opinion, a couple extra thousand dollars a month to the mortgage. I am. Do I have that much nicer house? It’s nicer, but it’s not-

Al: So did you get a discount because the interest rates maybe?

Joe: Maybe. I don’t think so.

Al: Maybe?

Joe: But you got to put it- You- we had to repaint it.

Al: Oh, yeah.

Joe: New floors. You got to put new furniture and all this stuff. It stresses me out more than make gives me joy.

Al: Sure, I guess. Right. Yep.

Joe: Because I would rather have the $2000 a month going into my brokerage account versus to the mortgage payment. It’s 6.5%. And it like, it makes me uncomfortable with all that over my head. So then I’m like, well, maybe I want to just pay the thing off. So, but my wife absolutely loves it.

Al: Sure. So there you go. That’s the- that’s probably the answer.

Joe: We have a lot larger backyard. Now with the family and blah, blah, blah, blah, blah. So there’s pros and cons to this decision.

Al: Yes. Right.

Joe: So. One thing that I don’t like about Dobber’s situation is that they just bought a house up north. And then they had to take a 401(k) loan to get out.

Al: So it’s already kind of tight.

Joe: It’s tight, right? And then they got the golf cart, and then they have the cars, and everything else, and then it’s like, we’re gonna take this equity from their new or from their existing house and that’s going to be their down payment. Well, how about if they don’t get what they want for their current house? How about if their current house, because it’s one, it’s a nice house too. It’s $1,700,000, $2,000,000, whatever it is.

Al: Yeah. Right.

Joe: That could sit on the market for a while.

Al: Sure. Sure.

Joe: Or it could go right away.

Al: With these interest rates, right? There’s no guarantee.

Joe: Right. So it’s, I think they have the income to support it. I think what my question would be is how big of a house or how much dollars should you be spending on a house given your income? So they want to buy a $2,000,000 house. They have $600,000 of income. That seems reasonable.

Al: I mean, I think the way banks, I’m not a banker, but somewhere around what 30% of your income is what they’re comfortable loaning you? Something like that in terms of a mortgage payment. I could be way off, but I mean, it’s in the vicinity, right? 25% to 35%, whatever. But at any rate, so I agree with you. Now financially, so I’m just going to spit ball me unless you have more to say.

Joe: No, I’m done. I just bared my soul here.

Al: I know you did. I love it. Okay. So, and I’m not in this situation and I’m- I’m kind of enjoying that I’m not in that situation. But so first of all, financially, it’s a little tough. It’s a little tough because it’s almost like a similar price home, lateral move and a much higher interest rate. The only thing that could make it better financially is if this truly is a depressed home compared to yours, kind of held its value more. So you could see that later on when interest rates go down at some point, hopefully. Like, so that’s the thing, it may go down next year, maybe a decade or more. We just don’t know when interest rates might go back down again.

Joe: But you can list your house for anything. I can list my house for $18,000,000.

Al: Sure.

Joe: And then you sell it for $1,000,000, right? And then, well, it’s listed at $18,000,000.

Al: So if you’re going to do it, you put an offer, this contingent of you selling, right? So you have to do it that way. Otherwise you really get stuck. But so, so that financial part. I probably wouldn’t do it for that reason. But the reason you just mentioned, especially because in this case, Coach Dobber’s wife is the one that’s making all the money and you kind of want to keep her happy. I mean, you want to keep your wife happy and it’s whether it’s wife, husband, doesn’t matter sex, is you want to keep your spouse happy, right? And so Coach Dobber’s trying to do that. I would probably be tempted to do this just because of the intangibles, but financially, I’d be having a little bit of a problem.

Joe: If it’s a lot nicer house and you really love the house and you want to be there for a long time because they have the cashflow to maintain for a while. If they had less income. And they wanted to flip it in a couple of years. I would say absolutely not, but they at least want to stay there sounds like for 10 years and then probably sell.

Al: Yeah, but if, but so if my wife were a serial mover homebuyer-

Joe: I guarantee it’s two years for dial-

Al: I know. That’s right. I think it’s the same thing. We just- we, okay. So, okay. So we’re going to buy that vacation home. All right. This is the last time, right? We’re going to borrow from the 401(k)- last time. And then 6 months later. Okay. Now we’re moving.

Joe: We got a $3,000,000. Well, there’s a $5,000,000 house that’s selling for $4,000,000.

Al: Let’s do that. Come on. We got some debt equity here.

Joe: All right. Well, good luck. Let us know how it goes.

Andi: Now it’s your turn to let Joe and Big Al spitball for you! Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, then click Ask Joe & Al On Air. Send a voice message or an email, and include the relevant details like your name, age(s), and location, and the specifics of your financial situation. Your name can be whatever you like, the more creative the better. The ages and location should be real for a more accurate spitball, especially if taxes are involved. For the infamous YMYW retirement spitball, let us know when you (and your spouse, if you have one) want to retire? How much do you think you’ll need to spend each year in retirement? How much do you make and save now? How much do you already have saved, and in what types of accounts (401(k), Roth, brokerage, etc)? Finally, don’t forget to mention where or how you listen to YMYW and what you drink – if you drink. Whether you’re a sommelier or celebrating sobriety, this show wouldn’t be a show without you.

Early Retirement Taxes on Rental Income and Capital Gains? (Adam, Dayton, OH)

Joe: “Hey, Joe, Big Al, Andi, this is Adam from the birthplace of aviation, Dayton, Ohio.”

Al: Oh, okay.

Joe: “I discovered the show about 6 months ago, and I’ve enjoyed catching up with older episodes on my daily runs and during my work commute. You do a great job of spit balling, and I, as a self-admitted finance nerd, have learned some new ways to think about income generation in retirement, specifically the advantage of getting more Roth money in my portfolio. So thanks.” Alright.

Al: Okay, perfect.

Joe: Another little financial nerd. He’s probably an aviation nerd, too.

Al: I would think so. I mean-

Andi: Maybe he’s just a Dayton nerd.

Joe: The birthplace of- “I have a general question that I have not heard discussed yet on the pod. But first, the important stuff. I’m soon to be 46 and drive a Toyota RAV4 hybrid. And my husband, soon to be 49, we share the same birthday-“

Al: Oh, how about that?

Joe: “-zooms around in a little red Honda Fit. I’m proud to say that my hubby’s alcoholism is in remission, and we are celebrating 10 years of him being alcohol free. That doesn’t stop me, however, from enjoying a regular glass of wine with dinner.
My favorites are from France, and I’m including a few if Joe would like to try out his French pronunciation.

Al: No. Skip this part. No, no.

Joe: St. Carine. Chateau. Chateau de Papa.

Andi: Sancerre. Gigondas. Chateauneuf du Pape.

Al: Oh, see, there you go. You were so close.

Joe: Oui. Oui. Oh, boy. See? Why do people got to do that to me?

Andi: Because it’s so fun.

Joe: Yes, it’s great. Thank you. Thank you. I love just sounding like a complete imbecile.

Al: You got the oui, oui right.

Joe: Yes.

Al: See that on cartoons?

Joe: I do. Yeah. “On the weekend I’m known to splurge with a little Jameson on the rocks.” Oh! Oh!

Al: This is another bosom buddy of Joe’s.

Joe: Yeah, Big Al and I were in New York last week.

Al: I’ve seen you on Jameson.

Joe: Yeah, I had a little too many Jamos, I think. “We have 3 rescue pups, a Doberman, a Bulldog, a Shih tzu, and who are the apples of our eyes.” Oh boy, this is touching.

Al: We need a Kleenex?

Joe: Yes. “Now for my question. It concerns retirement planning and taxes. I’m a co-owner of a small business and when I retire in 7 to 10 years, I will receive rental income from the building the business is in. This will total about $85,000 per year. I have an investment portfolio with a mix of brokerage, SEP IRAs, Roth IRAs, each that will have about $1,000,000. Total of $3,000,000 in 7 to 10 years from which we will draw 2.5% to 3% to make up the rest of our annual spend on top of the rental income. There will also be some capital events when shares of the business are sold to the new partners. This will supplement our income and allow periods of time when we won’t have to draw as much from the portfolio. So I think we are set up well-” Yeah, it sounds like you set up well to me too. “-for me to retire early at age 53 or 56 with an inflation adjusted annual spend of about $140,000, $150,000 a year. You have spoken many times about capital gains sitting on top of earned income, but I’m curious about how taxes will work out when the bulk of our income is passive rental income along with the capital gains from both the portfolio and the sale of the business. We don’t plan on having any earned income in retirement unless one of our hobbies becomes a little side hustle. The only earned income I foresee are RMDs at 75 and hopefully many Roth conversions before that. But how would this setup of rental income and capital gains be taxed overall, and specifically, how would this affect my Roth conversions? The 3 of you are the best, and I appreciate any spitball information about the plan you can provide. Best. Adam.” All right. Okay. So we got passive income, capital gains, ordinary income from conversions.

Al: Right, right.

Joe: And then we have a, maybe an installment sale with the same partners, but is that capital gains?

Al: Capital gains. Yeah. Yeah. Yeah. So let’s talk about that. So passive income- so income from real estate, rental real estate, even if you’re actively involved, it’s considered passive income for purposes of IRS rules, right? And basically the reason they separate it is you get to take something called depreciation. In other words, you buy the building, you get to slowly write off the cost of that building. Over time, generally 27 and a half years residential, 39 years commercial. So you get to write that off so it reduces your taxable income. So it’s passive. A lot of times people have passive losses because they have so much depreciation and the IRS says you can only deduct passive losses to the extent you have passive income. So just a little bit background before we get started.

Joe: Thank you for that.

Al: I know you were just-

Joe: – fell asleep.

Al: -writing. Writing notes down.

Joe: Thinking about a Jamo.

Al: I know. So anyway. To the extent you have positive passive income from real estate, that’s considered ordinary income. So that’s part of that ordinary income. Everything else that you mentioned, right, which is capital gains from your portfolio, capital gains from sale of business, which could be all at once up front if you receive a lump sum, or maybe you get a down payment and finance something. So you have a seller’s note. So the down payment is fully taxable right now. The seller’s note is taxable as you receive proceeds. Right. So it could be over several years, for example. Nevertheless, regardless of when you get it, you got passive income, which is ordinary, Roth conversions would be considered ordinary. And then your capital gain from portfolio and from your sale of your business, that’s capital gains. So add up your ordinary income. Minus your standard deduction or itemized deductions if you’re doing that, that’s your starting point, right? That’s your bracket for ordinary income.

Joe: So right now they think $80,000 or $85,000 a year is going to come in as passive income for real estate.

Al: That’s right.

Joe: So $85,000 minus the standard deduction in a few years, I don’t know, call $50,000.

Al: Yeah, or call it $30,000, right? Whatever. I mean-

Joe: Yeah, $30,000 is probably a better number.

Al: Let’s just say taxable income’s $50,000, just to make a nice even number, right? Okay. And the top of the, probably the 12% or 15% bracket, depending upon when you do that, yeah, probably 15% bracket. Call it $100,000, right? So you probably, in that example, you could probably do about a $50,000 Roth conversion and still stay in that 12% bracket. And then any capital gains that you have kind of sit on top of that, right? So there’ll be taxed at that either zero, well, they’ll be taxed actually at 15%, right? And then you’ve got the net investment income tax that kicks in once your total adjusted gross income is about $250,000. Is that right? Yeah, $250,000 for a married couple. So you got, that’s another 3.8%. So call it 4%. So roughly 19% for your capital gains. Some would be 15%, some would be 19%. So you look at your ordinary income first. Right. And then secondly, your capital gains sit on top of that. Right. So just call it 20% for capital gains and ordinary income, maybe 12%. And that’s, it’s no more complicated than that.

Joe: Yeah. So I think that the real root of the question is, all right, I want to do conversions. And I think with a passive income from the real estate, wasn’t sure how that’s taxed, but that’s taxed as ordinary income. So you take that minus out the standard deduction, whatever that is at whatever time that y you’re looking at doing whatever strategy, and then that’s going to tell you how much room that you have in the lowest bracket.
If you want to go higher than that, go higher than that, but just know the capital gains is going to continue to get pushed up on top of that, and more of it’s going to be subject to the net investment income tax.

Al: Yeah, so, now I will tell you one more thing that sort of contradicts what I just said, so be aware of this. And that is when you’re filling up the 12% bracket, your capital gains would have been taxed at zero, right? So in doing the strategy that I just told you, then $50,000 of your capital gains that would have been taxed at zero are now taxed at 15% plus you got to pay the 12% of Roth conversion. So that’s actually a higher rate. So I’m, it’s hard to do this on a podcast, you kind of have to whiteboard it out But just be aware of that, that it’s a little bit strange when you’re trying to fill up the 12% bracket with your Roth conversions. Cause some, you get, you end up paying more tax than you think you might’ve otherwise paid.

Joe: Right. Especially if you have a lot of non-qualified dollars. That’s right.

How to Figure Taxes on Sale of Mom’s House (Charles, ID)

Joe: We got Charles from Idaho. “Hey, Joe and Al. I drive a 1991 Mercedes 420 SEL that refuses to die.” Oh, well, I would say so.

Al: Yeah that’s an old car.

Joe: I wonder how many miles that thing has on it. “My wife has a 1991 Lexus 350 RX, but really wants a Tesla.”

Andi: They both have ‘91 cars. That’s amazing.

Joe: Right. They don’t like to shop. When do you give up the car and say, you know what, honey, let’s get you a Lexus? You’ve had this thing for 31 years.

Al: A Tesla. She wants a Tesla. Yeah.

Joe: Yeah. Wouldn’t you pull the trigger after 31 years with the same car?

Al: Well, I would with my wife, but you know, everyone’s different, right?

Joe: Oh, man. Well, no, why wouldn’t she just go out and get it?

Al: Well, because-

Joe: She’s got a Lexus. That’s nice.

Al: It is nice. It’s just 30, 32 years old.

Joe: “We acquired a 13 year old Heverton.” Heverton.

Andi: I looked it up. I cannot find anything that has to do with the Heverton. So I don’t know if that’s a car, an animal. I have no idea.

Joe: Do you think it’s a little misspell?

Andi: It could be. I tried other things. The only thing I could come up with was Everton, which is a Liverpool football club that actually has a car. So maybe that’s what he’s referring to.

Al: What, the football club?

Joe: “So we acquired -“ Yeah. Okay. “-when my 92-year-old widowed mother in law went into hospice care.”

Al: Okay, so she had it, so they got it, I guess.

Joe: She had the Heverton.

Al: I guess.

Joe: And then gave it to-

Al: Gave it to Charles?

Joe: Yeah, gave it to Chuck. Okay. “We recently sold her house she lived in for 40 plus years, and I’m trying to figure out the taxes. Is there any advantage to waiting the 180 days as if she were reinvesting in a new house? In that case, would the taxes still be based on the year it sold or the latest tax year? Love your show and listen to it every week. Thanks.”

Al: Okay. Taxes on the sale of a home. Okay. So let’s, well, first of all, let’s talk about the 180 days, that’s when you’re selling a rental property. That’s a 1031 exchange. You sell a property, you have 180 days to purchase a replacement property. That does not work for a residence.

Joe: Yeah. Because he’s looking at- or what was the old rules before the 121 exclusion?

Al: Yeah. And that was gosh, back-

Joe: 30 years ago.

Al: Yeah. When- was in the 90s? Yeah. Yeah. Way back when.
Yeah. It was a long time- maybe even ‘80s when that changed. You had like a year and a half to buy a replacement home or something like that, right?

Al: I can’t remember.

Joe: Or maybe it was 180 days.

Al: Maybe so. Anyway, that doesn’t apply anymore in this situation. So, but here’s the thing is- so your mo- your mother’s widowed, and so you live in Idaho. And Idaho is a community property state, so, you know what, when I, when your father passed away, your mother got a full step-up in basis as if whatever it was worth at that on that date is the new cost basis as if it was purchased on that date. So you got to go to when your father passed away, figure out what the value of the property was. That’s your new cost basis. And oh, by the way, if after that point, if there were any improvements put into the property, then that increases your tax basis, right? So that’s one part, is tax basis. The other part is what it was sold for minus closing costs. That’s your net sales proceeds. So the difference between those two is the gain. And then furthermore being widowed, she has a $250,000 exclusion. So the first $250,000 of gain is tax-free. So, that’s how to think about this.

Joe: I would say there’s probably little tax due.

Al: Maybe.

Joe: Unless it’s a multi-million dollar home.

Al: It just depends on the numbers.

Joe: Or if she were passed and then he sold the house, then there would have been no tax because then they would have got another full step-up in tax basis.

Al: Yeah, well, and if he passed in the current year, it’s a qualifying widower’s return and you still get the full $500,000. So we, there’s a few things we don’t know.

Joe: All right. Good luck, Charles. Thanks for the email.

Andi: So many different numbers, rules, and limits affect your financial plans. Wouldn’t it be nice to have them all in one place for easy reference? The 2023 Key Financial Data Guide has all that – in fact, it’s the exact same guide the Joe and Big Al use when they’re spitballing for you. It contains this year’s tax brackets and capital gains tax rates, retirement plan contribution limits, tax on Social Security, Medicare premiums, and all the current credits, deductions, exemptions, distributions, and exclusions. To download your very own copy of the 2023 Key Financial Data Guide, to try out our new EASI retirement calculator, to Ask Joe and Big Al your money questions, and to share YMYW with your friends, just click the link in the description of today’s episode in your favorite podcast app. That’ll take you to the podcast show notes, where you’ll see all of these free financial resources just before the episode transcript.

Should Spouse and Business Co-Owner with Alzheimer’s Retire and Take Social Security Disability? (Dan, Midwest USA)

Joe: This is Dan. “I have a bit of a out of the ordinary question.” Love out of the ordinary questions, Al.

Al: Yeah. Right. Yeah, bring it on.

Joe: “Basically, it’s, should my wife retire and start collecting Social Security disability ASAP or not?” Alright let’s see.

Al: I kind of like it when you know the question even before you start. So you’re trying to figure out, I wonder what they’re going to ask.

Joe: Yeah, interesting. Huh, usually you got to just read through all this BS and then finally they-

Al: And then sometimes we go, what was the question?

Joe: I don’t even remember the question. I was just reading for like a half an hour, just stumbling over every other word. “But there’s a lot of unique detail to this question, I think. I’m 62 and my wife is 60. We have two adult kids and they’re both out of the house, although our youngest does tend to bounce back.
My wife was diagnosed with early onset Alzheimer’s at age 58, and it was confirmed later with-“

Andi: “- a cerebrospinal fluid test.”

Joe: I’m sorry to hear that, Dan. “She’s on meds but is on the continuing downward slope and needs a decent bit of assistance with most things now. Thankfully, our company has been very successful over the years and we’re in a pretty good spot financially. We got a proximate net worth of $32,000,000.”

Al: I think that’s pretty good.

Joe: Jeez. Look at the big wallet on Dan.

Al: That is eye popping.

Joe: “About $9,000,000 of that is in pre-tax accounts. Our $32,0000,000 net worth-“ I like how he, like twice, just popped it in there, just a couple of times.

Al: But at least it wasn’t in the first sentence.

Joe: Yeah, he actually asked the question in the first sentence. It just let us just simmer on this a little bit and then slap us across the face of $32,000,000.

Al: Twice.

Joe: “Our $32,000,000 net worth is currently roughly 60% in equities, 25% cash equivalents like high yield money market accounts and ladder CDs and 50% in real estate. Also the yearly net profits from our company range from $1,000,000 to $1,500,000, all which flows through us.” Struggling.

Al: Love it.

Joe: “That’s with me working part time and her not working at all. Even though she’s still an employee currently. We’re both still employed by our 20 plus year-old company that we co-own. It’s an S Corp, and we’re the only employees, so we can take whatever reasonable, in the eyes of the IRS, salary that we’d like to take, and the remainder as company profits. We’re both maxing out our 401(k)s with profit sharing component each year, and we can continue to do that going forward if we’d like to. So an example, we each contributed a combined of $67,500 in 2022, that’s included catch up provisions, and we used to have a DB plan, but we closed it out some years ago and rolled it into the IRA because the plan was more or less maxed out up to the actuarial ceiling.” No wonder they have $9,000,000 in-

Al: Right. Yeah.

Joe: Just jammed everything in the DB plan.

Al: Big time, year after year.

Joe: “Also my wife hasn’t actually been active employee in our company for probably 20 years, but she’s still an employee on the paper like me and draws a salary. Yes, our estate plans are up to date, which I think is even more important given her diagnosis. And yes, Alzheimer’s disease is now on the SSDI list of approved disabilities. So, should she retire from our company, even though she’s not really working and hasn’t been, and draw SSDI ASAP?”

Al: Okay, this is going to be a life changer. I can tell.

Joe: This is going to change their lives. This question is probably one of the most important questions we’ve answered in years.

Al: I think so too. I’m just, as am I saying on this one.

Joe: I mean, it is going to move the needle huge.

Al: Oh, and we got pros and cons?

Joe: We are just making life changing.

Al: Let’s see. It’s like which brand of rice should I buy?
Does it matter? Anyway, sorry. Let’s continue on.

Joe: Let’s go. “Pros, draw Social Security. Now given her shorter life expectancy, we’d have the option of getting access to Medicare in two years instead of 5 years versus current private insurance through our company. Cons, SSDI money received would be taxable given our high joint income. She could no longer contribute to our pre-tax 401(k) plan with profit sharing so that previously tax-sheltered money would just be taxable at the top marginal bracket. Other, does it really matter? Either we’re plenty rich or we’re plenty rich. I just hate making the wrong financial decisions.” This guy’s made a ton of bad decisions. $32,000,000 net worth.

Al: Yeah.

Joe: Oh gosh.

Al: So, a couple answers. First of all, B, it doesn’t matter. But, here’s the real answer. If I’m being honest, right? You actually say out loud, my wife hasn’t actually been an active employee in our company. Did you say that? I hope you changed your name because then you cannot pay a salary. You cannot do 401(k) for 20 years. You probably don’t qualify for SSDI cause she wasn’t even really working. So yeah, just skip it. You’re good now.

Joe: I think so, too. Congratulations on all your success.

Al: That part is great. And probably that happened because you’re so diligent on all these things. But this one, nah, just let it go.

Joe: Combined- let’s see, what does he drink? Oh, water. Okay. And a little crystal light.

Al: Well, he keeps a clear head. That’s why he is done so well. We would have $32,000,000 each too if we didn’t drink Jameson.

Joe: I would definitely have $32,000,000.

Al: That’s our problem.

Joe: Well, congrats on all your success. Sorry about yeah-

Al: That’s sad. The, that’s sad.

Joe: -the diagnosis with your wife. But, hell of a job. That’s probably the, one of the bigger numbers that we’ve seen in a while.

Al: I think so.

Will Social Security Be Reduced for Everyone? A Cautionary Tale (Steve, Las Vegas)

Joe: We got Steve from Las Vegas. Writes this out like a legal doc.

Al: Are, is it, are we being deposed?

Joe: Oh, boy. “During your September 16, 2023 radio show, you requested a story about someone who does not have a ton of assets. The following story is 100% true, accurate, except the names are changed.” Oh my god, Steve. What is this? Okay. “I offer this to other listeners who can learn from Colton’s mistakes.” This is like a little story from Colton.

Al: Apparently.

Joe: Okay. “When he turned age 62, Colton quit his job and applied for Social Security. Because Colton had worked off the books for many years, Social Security recorded zero for many of his working years. Colton now receives between $800 and $900 a month from Social Security. Other than his Social Security, the only other resources Colton has is a small savings account. Colton is single, in his early 70s, no dependents, no adult children.” This sounds pleasant.

Al: It does.

Joe: “Colton easily could have worked until age 70. Colton had an okay job in a casino. The casino wanted Colton to stay forever because of his unique skill set.” I wonder what that was. “He was a cooler.”

Al: I don’t know. I can imagine a couple of things.

Andi: Really good at dealing cards.

Joe: Oh. “And Colton is incredibly healthy. Colton rent is about $600 a month. Here’s my opinion.” All right. “If he had worked until 70, Colton could have recorded FICA taxes for many quarters, replacing the zeros on his Social Security record. Working those additional years on the books would have raised his Social Security payments to maybe $1500 a month. Longevity insurance. Additionally, he could have banked a nice emergency fund before he turned 70.”

Al: Okay, I agree with that.

Joe: So he’s giving advice-

Al: He’s going to answer.

Joe: This is a story about Colton where Steve is giving advice. He wants to be part of the show.

Al: He does.

Joe: He wants to be a co-host.

Al: He wants to spitball with us.

Joe: He’s like, you know what? I just got this email from a guy named Colton. I’m going to answer it. And will you guys read it for me? What do you think? This is my trial run.

Al: He’s trying to see whether he’s going to do his own podcast. He’s going to see how it works.

Joe: It’s coming out there. “I predict Colton will live to past age 90. He never visits the doctor now, but at age 90, he’ll be visiting the doctor a little bit more often. Oh, so Steve, he’s-

Al: He knows Colton.

Joe: He knows Colton quite well. “Additionally, when Colton reaches age 90, he may no longer be able to work. Doctor and hospital visits cost a lot of money. Even if you’re on Medicare and Colton will have not these dollars because Colton has underestimated the effects of inflation. Rents continue to go up fast in Las Vegas. Much faster than Social Security cost of living adjustments. Soon enough, Colton will discover that he needs all of his Social Security checks just to pay his rent.” This is not a very happy ending here, Big Al.

Al: I can sort of see where it’s going. Keep going.

Joe: “In the near future when there are more elderly drawing Social Security and fewer workers paying in, is it possible that Social Security recipients will receive less generous cost of living adjustments? Is it possible that Social Security payments will be reduced for everyone?” Yes and yes.

Al: Yeah, I think it’s possible.

Joe: It’s possible. Is it probable? I know, I would say if they would probably lock you in once you’re already receiving, I think it will affect the people coming behind.

Al: That’s a lot more likely. Right. So some reduced benefits of those that come later.

Joe: Yep. It’d be pretty hard if people like Colton here, yeah, he’s got to pay his rent.

Al: Yeah, somehow or another.

Joe: Yes. And I would say 20% of the paycheck.

Al: Yeah. Or then do income taxes go up just so we cover more poor people in the country. So Medicare, I mean, yeah, Medicare is bigger, right?

Joe: Yeah. Bigger. Sure. “Your thoughts. Always listening. Steve in Las Vegas. Post script. If I run into Colton at the grocery store, I’ll update you. But otherwise, I’m not going to be visit Colby’s show. Why? I don’t like to hang around with people who plan to fail.” Oh. Oh, wow. Oh boy.

Al: You know how, you read those books that say, hang around, like the 5 people you hang around with are the ones that you become. So maybe he doesn’t want to be like Colton.

Joe: Doesn’t want to be like Colton.

Al: Yeah, apparently not.

Joe: Maybe I’ll run into him at the grocery store.

Al: But I’m not gonna-

Joe: He doesn’t have any cash. How does he do it?

Al: Yeah. Yeah, well, he’s. I don’t know.

Joe: But what’s his unique skill set? I’m still curious. What do you think his skill set is? Working under the table.

Al: Well, so first of all, I’m, yeah, I’m thinking like Andi. So he’s good at blackjack or he’s good at something like that.

Joe: But if I’m working at the casino, I get a paycheck from the casino.

Al: I know. Well, that’s what he’s saying. So you get a paycheck. So you get into the system and you start making more Social Security later.

Joe: But I think he’s something else. I don’t know what it is.

Al: Yeah. I mean, I was also thinking he’s healthy. Maybe he likes, he’s a really good bouncer.

Joe: Yeah, or cooler or something.

Al: Well, I mean, I mean, these are accurate statements. I guess the question or that we’re supposed to comment is could Social Security change? Yes, it could change. Anything’s possible. It’s changed many times in our lifetime, but it’ll likely continue to change. It does seem like because a lot of people are depending upon Social Security. Roughly what, about a third of the retirees out there it’s their sole source of income. So will they significantly reduce it for those third? They could, but then what would they do with those third of the people? They’d have to come up with some kind of plan to cover them one way or another. It seems to me, I mean, if I’m just trying to spitball 10, 20, 30 years down the road, it seems like there’d be some kind of safety net that would be thrown in there.

Joe: Well, isn’t 2035, isn’t that when the trust fund is depleted?

Al: Yeah. But that, as you know, that just means that it’s only the money coming in to cover. So it’s, it would be like 70% or 75%. Yeah. Two thirds ish. So anyway, yeah. Anything’s possible. This is not a good scenario. If in this example, if Colton had gotten a regular job and worked for at least 10 years and gotten enough credits for Social Security, he got a better benefit. Plus, plus he, you know, his Social Security was growing over that time. Right. And saving some money would have been a much better spot.

Joe: You got to take care of your older self.

Al: Yeah. True.

Joe: Because he was like, just taking the cash up front was like, I don’t want to pay taxes. But then now it’s like, Oh man, my younger self kind of took stuff from my older self.

Al: Correct. That is a way to look at it.

Joe: Alright, well, thank you, Andi. Another wonderful job.

Andi: Thank you.

Joe: Big Al, great job, buddy. And yeah, we’ll see you guys next week. Keep your emails coming. We’ll get to them at some point. The show is called Your Money, Your Wealth®.

Andi: Coach Dobber and the TV show Coach, Joe’s knowledge of aviation history, and the Lincoln Lawyer in the Derails, so stick around. Help new listeners find YMYW by telling your friends about the show, and by leaving your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and any other podcast app that accepts them. For example, Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Pocket Casts, Podcast Addict, Podchaser, Podknife, and Spotify.

Your Money, Your Wealth® is presented by Pure Financial Advisors. Click the “Get An Assessment” button in the podcast show notes at YourMoneyYourWealth.com or call us at 888-994-6257 to schedule your free financial assessment, in person at one of our seven offices around the country or online, a time and date convenient for you, no matter where you are. Chances are, one of the experienced financial professionals on Joe and Big Al’s team at Pure will be able to identify strategies to help you create a more successful retirement.

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The Derails



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.

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