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
September 8, 2020

Is timing the market and day trading in your Roth IRA in retirement a good idea? How are you taxed if you collect dividends vs. reinvesting? Plus, tax loss harvesting, asset allocation, investing in bonds, the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) for spousal Social Security, and IRA vs. 529 plan for a newborn. Whew!

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Show Notes

  • (00:55) Roth Conversion and Tax Loss Harvesting Rapid Fire Questions
  • (06:51) Should I Do Market Timing and Day Trading in My Roth IRA?
  • (12:09) What Should Our Asset Allocation Be for Retirement?
  • (18:37) Taxes on Dividends Collected Vs. Dividends Reinvested
  • (24:39) Social Security Survivor Benefits: The Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)
  • (30:42) How Much Should I Own of What Types of Bonds?
  • (39:22) Should I Open a 529 Plan or an IRA for a Newborn?

Free resources:


LISTEN | YMYW PODCAST #286: Dividend-Paying Stocks and Investing Strategies at All Ages

LISTEN | YMYW PODCAST #262: What’s the Right Retirement Asset Allocation For You?

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READ THE BLOG: The Difference Between Stocks Vs. Bonds Vs. Mutual Funds

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Complete the 3rd annual YMYW podcast survey by September 21, 2020, for your chance at a $100 Amazon e-gift card.  Click the link in the description of today’s episode in your podcast app to access the survey right there in the podcast show notes. No purchase necessary US residents only. Sorry to the 368 listeners in Russia that put us at #24 on the Russian investing podcast charts! Today on Your Money, Your Wealth®, the fellas are talking day trading in a Roth, Roth Conversions (of course), tax loss harvesting, retirement asset allocation, tax on dividend-paying stocks, investing in bonds, Social Security’s WEP and GPO, 529 plans and they’ll cover all of that in about 40 minutes – the rest of the show will be about Joe’s fragile ego. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®,  Joe Anderson, CFP® and Big Al Clopine, CPA.

Roth Conversion and Tax Loss Harvesting Rapid Fire Questions

Joe: Tim writes in “Joe and Big Al, big fan of your TV shows.” Not the podcast, just the TV show.

Al: Yeah right. That’s okay.

Joe: “After listening to your shows over time-” so he listens to the TV show but doesn’t watch it.

Al: Because you have to see us and who wants to see that?

Joe: Interesting.

Al: Well you and I have a hard time watching ourselves on TV.

Joe: I’ve never watched one episode.

Al: Yeah you did. You and I, we had to watch the first episode with our producer and she told us everything we were doin’ wrong.

Joe: So after that, scarred for life. So Tim goes “- listening to your shows over time I’ve built up some quick-fire questions that I would greatly appreciate your thoughts and answers on.” So this is the guy that goes what- too many? or something, didn’t he reply to the one?

Andi: Yeah, he emailed us a week later and said “what? was there too many questions, you couldn’t answer them?” So-

Joe: Too soon? Too much? “I’m retired, not taking Social Security yet and most of my assets are in tax-deferred and Roth bubbles on your chart which is the small amount on the taxable bubble. I just recently transferred my full remaining TSP funds to a Charles Schwab traditional IRA account. TSP would only allow me to convert cash and I understand that Schwab will allow me to convert ETF funds etc.. Prior to my transfer of my TSP to Schwab, I’ve started converting an amount from my TSP to my Schwab Roth, just enough to keep me in the top of the 24% tax bracket.” Okay. So now he’s got a bunch of questions. “Am I correct in one of your shows you stated that you can only convert funds from a 401(k) plan to a Roth once a year? And that it has to be a year in time before you can convert more? For example, if I converted funds from my 401(k) to my Roth on say February 15, 2020, do I have to wait until February 16, 2021, a year later, to convert again? Or can I convert on January 2nd?” All right, Tim. You gotta start watching the shows versus listening. No, we-

Al: That’s a good point.

Joe: – never said that. There’s a- you can convert as many times as you want, it doesn’t matter. You could convert daily.

Al: You could.

Joe: You could convert $1 a day for 365 days.

Al: So he’s got that mixed up with, I think the 60-day rollover rule.

Joe: Yes sir. So sometimes what happens and where a lot of mistakes happen, is that people will take possession of the dollar, so they’ll take money from their 401(k)  plan and they’ll do it as almost a 60-day rollover so the check has been made out to them and then from there, they’re putting it in- they’re depositing it-

Al: They’re putting it in their account. They like to look at the balance. ‘Oo, look what I got in my checking account’.

Joe: And then put it into the Roth-

Al: And finally it’s like ok, let me put it into the Roth. That you can only do once a year.

Joe: Right. Because you want to make sure that it’s a direct transfer from the IRA to the Roth. You don’t want to do a 60-day rollover. That’s only once a year.

Al: – the 401(k)s. But the 401(k)s, sometimes they just write you a check. But it needs to be in the name of the custodian.

Joe: The name of the Roth.

Al: So Charles Schwab for the benefit of Tim.

Joe: ” When I convert my 401(k) funds to a Roth, do I have to wait 5 years for it to have been in the Roth to take the funds out tax-free?” 5-year clock. There are two 5-year clocks. One 5-year clock is on contributions and the other 5-year clock is on conversions. And it depends on if you’re over 59 and a half and under 59 and a half.

Al: Well he says he’s retired so let’s assume he’s over.

Joe: – over 59 and a half?

Al: I mean that’s- we don’t know that. I’m just gonna make that assumption.

Joe: So if you convert monies into an existing Roth IRA that you’ve had open for 5 years then there’s no separate 5-year clock.

Al: You have access to that immediately.

Joe: Yeah. The money is fully accessible because you’re over 59 and a half. If you were under 59 and a half you would have to wait 5 years or till you turn 59 and a half, to have access to the converted money. So the answer’s yes or no. Let’s see, we got time for one more here.  “When you discuss tax loss harvesting you mentioned buy something similar- similar-

Al: – similar.”

Joe: – similar. How do you define something similar? For example, if I sell Exxon, do I buy another oil type company like BP?” Yes, that is something similar.

Al: Or what if it’s a fund that has oil stocks. Yes, that’s something similar.

Joe: Right.

Al: You pick. I don’t care.

Joe: You sell Coke, buy Pepsi.

Al: You just can’t buy the same thing over again. That’s the only caveat here.

Joe: Right. And when you look at tax loss harvesting, you want to harvest like ETFs, index funds, mutual funds, versus individual stocks because of course, you can sell Exxon and buy BP. But I mean it’s in the same industry but they’re fundamentally totally different companies.

Al: And you could sell Exxon because you don’t like it anymore and buy Apple because you like it. It doesn’t have to be in the same industry. We’re just saying you can’t buy the same stock. But the reason we say buy something similar is because we assume you’ve got a well thought out portfolio and you’re selling one thing and you want to buy something similar so you’re still balanced in the same diversified portfolio.

Joe: OK. Real quick. “Do you have to do the harvest part of the tax loss harvest, that is if I sell a stock at a loss? Just take the loss and write it off against income separate from the standard $24,000 write off. Would in that case be limited to somewhere around the $3000 write off against income?” I don’t know where the $24,000-

Al: I think that’s- I think that’s standard deduction maybe.

Joe: The $3000 would be in addition to the- because it’s above the line deduction.

Al: Yeah that’s right. That’s all you get, dollar for dollar against other capital gains, $3000 against ordinary income.

Should I Do Market Timing and Day Trading in My Roth IRA?

Joe: Tim has one last question, Alan.

Al: OK.

Joe: Tim goes “Being retired, does it make sense to be sort of a day trader in the Roth account since there is no capital gains? I have the time to check the market daily. In fact several times a day. I have ETFs that somewhat follow the market. If the market drops they will drop and vice versa. As an example, if my ETF hits a high of say $100, sell it and when it drops $3, let’s say $97, buy it back, a $3 per share profit. There doesn’t appear to be a tax penalty as it’s a Roth; nor a penalty to buy and sell in such a short turnaround. In the meantime, I will have made a few bucks on the turnaround. Thank you. Look forward to your next show.” Did you follow that?

Al: Well the premise is correct.

Joe: So if the market drops-

Al: Well hold on. The premise is that because there are no capital gains, short term or long term in a Roth, you can get away with shorter-term trades and not have a tax consequence. So I concur with that part of the question. But the other part of the question is, ‘should I be a day trader in my Roth’ because- and he’s used the example of – let’s see- “if ETF hits a high of $100 and sell it when it drops to $97 and buy it back for $3 share profit.

Joe: This is not- You have a stock for $100 a share and-

Al: – and you sell it for $97. It’s backward.

Joe: So what- so he sells it- but we don’t know what the basis is, I guess it doesn’t matter. He sells it for $100 and then he’s going to buy back in $97. He’s assuming a $3 profit but how about then it goes from $97 to $95? Or $90?

Al: The problem with it, this is market timing, and the problem with market timing and day trading, which is extreme market timing, which is you- let’s just say you bought it at $95 and it goes to $100, and you go OK I’m going to sell it now-

Joe: – at a $5 profit.

Al: – and if I’m going to wait for it to go to $95 and buy it back. And lo and behold now at $100 it goes to $120 and it never gets anywhere near and you missed it. And that’s the whole problem with this is nobody knows what the market’s going to do from moment to moment.

Joe: But his math is still doesn’t make sense to me. Am I missing something?

Al: I think he has it backward. It hits a high at $100 and I sell it.

Joe: I sell it at $100 then buy back in $97.

Al: Oh no that’s right. Well, he’s assuming- he’s basically saying he gained $3 because he bought it back again at $97. Sold at $100, has the cash. Now he bought-

Andi: He even says that, $3 per share profit.

Al: – and he’s got $3 in cash. But see, that presumes you can time the market right.

Joe: But what’s the basis?

Al: It doesn’t matter. He’s just saying regardless of what he paid for it. If he sells at $100-

Joe: – and then buys it back at $97- OK.

Al: – then you’re ahead. I agree with that. If you could figure out when to time the market.

Joe: If he buys at $97 then it goes to $90. And then he’s stuck with it.

Al: Right. Or $60. Or whatever. That’s the problem.

Joe: Well I don’t know. I think Tim should day trade.

Al: Do ya?

Joe: Yeah. Continue to day trade; follow another podcast that does day trading. We can find him one, can’t we?

Al: You know-

Joe: What are you shaking your head at me for? Is that snarky?

Andi: No, I’m just remembering the fact that you’ve said things like this on the podcast before.

Al: And it gets us in trouble?

Andi: Uh-huh.

Joe: Why would it get us in trouble? What did I say that would get us in trouble?

Andi: Go ahead. Day trade.

Joe: Oh, that’s right.

Al: Yeah. So let me be compliance officer, actually, we don’t want you to day trade. We think that’s kind of risky.

Joe: Oh yeah, that’s right. Remember that- so I said that, I was like- right when COVID hit. I called it too. I called the market. I said go into cash. And then all of a sudden everyone was saying, should we go into cash?

Al: I do remember that.

Joe: I was like Oh God no, let’s not do that. That was just something I was saying out loud.

Al: Yeah right. Anyway-

Joe: Andi, we should have just stuck with it.

Al: Day trading works really well in a bull market. And we’ve had a long bull market. And day trading works terribly when it turns. And it will turn. Just be careful.

Joe: Good luck with that. Thank you.

The fellas are already 8 episodes into the 6th season of the Your Money, Your Wealth® TV show – time flies in COVID times! You can binge watch them all at YourMoneyYourWealth.com – or just listen, like Tim does – to learn about investing in volatile markets, bridging the retirement gap at any age, how to avoid the costliest investing mistakes, how to build a dynamic financial plan and plenty more. I’ve linked to the latest episode of YMYW TV in the podcast show notes, and, if like Tim,  you need a refresher on the 5 year rules for taking money out of a Roth IRA, you can download our free guide on that very topic from the podcast show notes too – just click the link in the description of today’s episode in your podcast app.

What Should Our Asset Allocation Be for Retirement?

Joe: “Hello there. I’m a big fan of your show. Keep up the great work. I have a question about our asset allocation.”

Andi: This is CC by the way. It says that at the start.

Al: That’s the name.

Joe: She just put CC, just like that?

Andi: Yep. That’s it.

Joe: In bold?

Andi: No, it wasn’t in bold. That was for your benefit.

Joe: I got it.

Andi: But you skipped over it anyway.

Joe: I thought it was like a cc- like she’s cc’ing the- like the email-

Al: Well she actually sent this to a better show, but she cc’d us just in case we might talk about it.

Joe: She cc’d us so we’d answer the question. “I’m 50, my husband’s 55, looking to retire in 3 to 5 years. Can you make a suggestion on how to change our current asset allocation giving upcoming retirement plans? Do we need to increase our bond holdings and reduce large caps? Any other specific recommendations? Thank you.” First of all CC, we do not give recommendations on this show. We give-

Andi: – suggestions.

Al: We just chat.

Joe: We just have chat. Talk to an advisor to get a recommendation. If you want to hear some I guess banter about-

Al/Joe: – some thoughts-

Al: But see the problem CC, is we don’t know near enough about you to really give you recommendations. And we can’t do that over the radio because we just- we would have to spend hours going over your personal situation-

Joe: Oh, that just sounds exhausting. I don’t want to spend hours. Let’s spend two minutes here. Here we go. You’re gonna get some free thoughts CC.

Al: OK.

Joe: She’s got a paid off home of $600,000; Rental properties $2,200,000 mortgage left $300,000; international bonds $300,000; small cap $700,000; cash and bonds $800,000; large cap $1,400,000; total $6,000,000. That’s all she gives us. Let’s crank out a financial plan.

Al: Okay. Here’s what you need-

Joe: Well first of all, this is where our listeners go wrong. We need to know just- and then you get guys like Kevin that writes 15 pages of nonsense. No offense Kevin. We love you. We need know how much money that you want to spend; how much income that is coming in; and then what liquid assets that you have. Those are the three major components. So CC needs to say we would like to spend $100,000 a year. But our rental properties of 2,200,000 of equity, it’s probably bring in and close to, I don’t know, $100,000. And then we have Social Security that is going to bring us another $50,000, at age 67.

Al: So that won’t be for a while. But–

Joe: What’s the allocation? Well then, we can say you don’t necessarily need to take on that much risk because it looks like your fixed income sources are covering most of your overall expenses. And so when you start looking at asset allocations and what you need to do there, you have to figure out what target rate of return that you’re trying to generate. And our recommendation would be to take the least amount of risk possible to get the target return that you need to accomplish your goals.

Al: Okay. So and I’ll say that again. So the basics- what we need is, how much do you want to spend in retirement? So that’s the first thing. Second thing is, what’s your fixed income? Like rental property? Social Security? Pension? We’ll subtract one from the other. You need $100,000. Let’s say you got $60,000 just trying to make up some numbers right now. You got $60,000 of fixed income. So that means you’re short $40,000. You need $40,000 from your portfolio. We also need to know how much you have in liquid assets or portfolio. And then we can start to give you an idea of maybe how the allocation should be, because once we know if you need $40,000 if you got $1,000,000. Well that’s a 4% distribution rate. That looks pretty good. That might be closer to a 60/40, 60% stocks/ 40% bonds. If you on the other hand, if it’s let’s say have $2,000,000, it’s like oh ok, now we got some wiggle room here. You could actually be more conservative because you don’t need as much income. But you also have assets that you don’t necessarily currently need. So you could even be a little bit more aggressive if you want to at least with some of the money. So that’s kind of how we would take a look at it.

Joe: So right now CC, you’ve got 25% of your money in cash and bonds. You’re looking to retire in the next 3 to 5 years. I would probably increase that exposure at least to- I think she wants some rules of thumb, so I would say this, probably 40% of fixed income. That’s a pretty good number. But again, it’s going to be- to really get specific recommendations what she’s asking. I’ve already told her that we’re not going to do that. But I think to give her some better idea is that well maybe a 40% bond allocation will help. Because we got stocks at basically all-time highs in the middle of a pandemic. She’s got one- she’s almost got half of her liquid assets in large company stocks. Large company stocks have had the biggest bull run in the history of mankind. You look at Apple is at $2,000,000,000.

Al: As of today.

Joe: That’s right. So you have so much money in one asset class that is if you look at the PE ratios the price to earnings- I don’t know when that’s going to correct. And basically what- the S&P 500 itself is down 5% but the Netflix, Apple, Amazon are up 35%. So what’s driving the overall market are like 4 or 5 major companies and you have half of your liquid assets in there. Would I diversify out of that? Absolutely I would. You only have $300,000, so 10% of your overall liquid assets in international stocks. We would probably want to increase that to 40%.

Al: Well, maybe not 40% of overall. Maybe 40% of stocks.

Joe: 40% of stocks. Yeah. And then break that up between emerging markets and international or develop markets. So I think it’s heavily weighted towards an asset class that has produced very, very good returns for quite some time. Would I want to reallocate the overall portfolio based on your goals? Yes absolutely. But if you want just kind of a general rule of thumb, I’d probably have a little bit more fixed income, take some profits off the table and then diversify it a lot more globally and then not have such a heavy weighting on large-cap.

Taxes on Dividends Collected Vs. Dividends Reinvested

Joe: We got Smitty from Roseburg, Oregon. Smitty.

Al: Gotta love that name.

Joe: I love Smitty. “Hello Andi, Joe and Big Al. I listened to your podcast where you guys we’re talking about dividends and it got me curious about two tax scenarios.” All right Al, let’s see if you’re up for the task.

Al: Ok.

Joe: We got “Scenario 1) I own $100 stock, it pays a $10 dividend, which I collect. Scenario 2) I own $100 stock, it pays a $10 dollar dividend, which I do not collect. It is automatically reinvested. Then one day later I sell $10 of it. Would the tax scenario of 1 and 2 be the same? If not, please explain. Great show by the way.”

Al: The answer is no.

Joe: So I guess let’s kind of dive in. You’ve got $100 stock, it pays- let’s just say everything else remains equal. Because for dividend-paying stocks, people just lose their mind. If the stock pays $10 folks, now pay attention here, the $100 stock price goes to $90 per share.

Al: True.

Joe: You get the $10 in hand. The stock price is now worth $90. $10 is a dividend, You’re taxed on $10.

Al: By the way $10 would be a pretty good dividend on a $100- be a 10%. I don’t think I’ve seen that before.

Joe: That’s a $10-bagger.

Al: Pretty good. But let me explain. So whether you collect the dividend or reinvest it, makes no difference on the taxes. You still have to pay tax on the dividend. So that’s number one. So, so far we’re the same. But here’s where this gets skewed is now the next day you sell $10 of stock. So now you’ve sold some stock which now you’ve got to look at your total basis on that $10. Now you’re gonna have gain on sale on that $10. So now you’ve actually made your tax situation worse in that particular case.

Joe: Yes. So I think he’s trying to think of the example that we gave is that- if he said I had a dividend-paying stock that is paying me a $10 dividend versus a non-dividend paying stocks, then I’m creating my own dividend. But if he’s getting the dividend and then he’s then selling it the next day after ex-dividend date, it’s not very tax effective.

Al: No, he’s basically paid a couple of taxes. Now what we’ve tried to say was if you have a stock that doesn’t pay dividends or very low dividends, anytime you want to get access to the capital you just sell a little bit and create your own what we call a synthetic dividend, which is taxed at long term capital gain rates as long as you’ve held it for at least a year.

Joe: Right. And if anyone out there- if you hear the little coffee shops and things like that is that ‘oh I don’t like that, doesn’t pay dividends. I like cash flow’. They don’t really know what the hell they’re talking about.

Al: True.

Joe: I was listening to a podcast, Ricky Barnes. You know that name?

Al: Golfer?

Joe: Yeah. He was kind of a big deal back in the day.

Al: Got it.

Joe: And then he kind of laid an egg.

Al: Yeah. You’re right.

Joe: Total. Total egg.

Al: He used to wear that painter’s cap.

Joe: Yes, you are right. The guy has never won but he wore a painter’s cap and made him famous. No, I’m kidding. It was a good interview. But he’s talking ‘hey, if you were never a professional golfer, what’s the next step?’ And he’s like ‘oh I really like investments’. And then they’re like ‘oh what stocks?’ ‘Well I don’t like that one, it doesn’t pay a dividend. I like cash flow’ and I was like- ahh, idiot. I digress.

Al: He needs more seasoning in the profession.

Joe: Because we get in this kind of debate all the time. It’s like well no, dividend-paying stocks or this because it pays a dividend and blah blah blah-

Al: It gets your cake and eat it too.

Joe: Yeah. Exactly.

Al: What’s wrong with that? I get cash flow plus it appreciates. Why wouldn’t I want that? Because the stock goes down by the amount of the dividend. Not me. Every time there’s a dividend, stock goes up. It’s like well that’s because the market went up that day. You’ve been lucky so far. No, you’re wrong. Am I paraphrasing this right?

Joe: My dividends are different than anyone else’s.

Al: Joe, you do not know what you’re talking about.

Joe: You are crazy.

Al: How many times has this come up in class, that dialogue?

Joe: Millions. Millions. And then finally you just gotta agree with them. You’re right. The dividends that you have-

Al: Let’s agree to disagree. Let’s move on.

Joe: It’s like the movie ‘My Cousin Vinny’. You know the grits on your griddle cook faster than- known to man. Whatever. So yeah Smitty, you gotta be careful. You’re selling the dividend after the ex-dividend date. You’re gonna- you reinvested the dividend. It’s already distributed but you just reinvested it. So you bought more shares, with the dividend that you received.

Al: And now you’re selling shares which would cause potentially a gain on sale.

Joe: Correct. Because it depends on whatever the basis is. But the dividend that you will reinvest increases your basis by the amount of the dividend.

Al: It does. And I think that the key point here is whether you receive the dividend or not, you still get taxed on it in the same manner.

Joe: That’s why we feel that dividend- we love dividend-paying stocks too by the way people. We love them.

Al: We love all stocks.

Joe: We love all stocks. We just don’t- we don’t discriminate. We don’t just want a basket of dividend-paying stocks, we want them all.

Catch the podcast episode Smitty mentioned about dividend paying stocks, along with the episode on choosing the right asset allocation for your retirement portfolio, in the podcast show notes – just click the link in the description of today’s episode in your podcast app. And of course, that trusty Ask Joe and Big Al On Air banner is there in the show notes too, and your money questions are always welcome, because without them YMYW would likely be nothing but Derails about golf, beer and Joe’s pet peeves.

Social Security Survivor Benefits: The Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)

Joe: We got  Kevin from Denver, he’s back Al and he wrote us a novel.

Al: He did. It looks like two pages.

Joe: This guy- he just gets in the weeds. So I’m going to paraphrase but I understand what he’s asking here and I think some people ask us questions to show how smart they are.

Al: And how dumb we are?

Joe: Yes. ‘As a courtesy to your listeners I think they should know’- Kevin’s one of those guys. So he writes “Hi Joe, Al and Andi. I know how important it is for Joe to get top billing.”

Andi: Kevin is a regular listener.

Joe: He’s right on target here.

Al: Is that pretty important to you?

Joe: It is. It’s very important. You have a very low sense of security-

Al: After a show if you’re not top billing, it’s like a week of depression.

Joe: – it’s over. It’s so bad. It’s so bad. “I hope everyone is doing great and making the best of our new world order. As always I really enjoy the show and the entertainment re- entertaining response while driving around Denver in my ’98 Toyota Avalon.

Al: Wow. OK.

Joe: I don’t even know what that looks like.

Al: It’s like a big giant Camry.

Joe: It’s a car.

Al: Yeah it’s a car.

Joe: Avalon. Very nice. Kev gettin’ in the weeds in his Avalon.

Andi: Here’s your Avalon.

Al: Avalon. He’s probably- So he’s saving money by driving a 22 year old car.

Joe: 1998.  “I have 2 questions and I figured you could address the one that’s most applicable to your listeners.” So there’s a couple here. One- Let’s just go with the first one. He’s already answered his own question. But number 1, “Perhaps it’s COVID or just good planning, but I’ve been trying to figure out the SSA.gov website and my wife’s survivor benefits should one of my all too frequent bike crashes result in an untimely demise.”

Al: Wow.

Joe: What the hell’s he thinkin’? So this guy’s grinding numbers on his death?

Al: Because he thinks he’s- I guess he gets in a lot of crashes. And one might actually be his end.

Joe: “Some background, I’m 57, plan to work until age 63; my wife 50, plans to work until age 60. My wife has a government pension and falls under the Windfall Elimination Provision. It appears that not only are her benefits reduced but there is also significant reduction in survivor benefits that she can receive due to her pension.” So a couple of things, works for the federal government; multiple pensions through the federal government. So she’s not either putting in Social Security because she falls into the Windfall Elimination- elimination- Jesus or elim-

Al: Elimination Provision? That one?

Joe: Thank you.

Al: So she probably- she’s got a government pension and she may have Social Security benefits as well, maybe from another job.

Joe: Yes but they reduce those benefits based on the pension.

Al: So basically government  is saying you can’t really double dip.

Joe: So you cannot receive full retirement benefits through the Social Security benefits- through the Social Security Administration. And- this is going to be a really long show, Al. I’m tellin’ ya.

Al: And this is the first segment.

Joe: Oh my God. But there’s also something else for survivor benefits and spousal benefits. It’s called the GPO. The Government Pension Offset.

Al: And it works the same way.

Joe: Same way. So let’s say that I’m married and I have a government pension that’s paying me like $4000 a month and then my spouse has Social Security benefits that’s paying the spouse $3000 a month. And then if the spouse passes then I receive the benefits. So I would get my pension of $3000 or $4000 plus of survivor benefit of $3000 or $4000. That’s a pretty good deal.

Al: Yes. $7000 a month. No, they don’t let you do that.

Joe: They don’t- yes. So if you have a government pension that is under the Windfall- or WEPed, I’ll just say it that way.

Al: WEPed. W E P.

Joe: Correct.

Al: -ed. You’re making it plural. WEPed.

Joe: WEPed out.

Joe: Just understand that there’s calculators that you can go online and to figure out exactly how much that your pension- or your Social Security benefits are going to be reduced. And then that’s what Kevin’s doing. So he’s like  I’m running different scenarios here. And then she only has 11 years of earnings, her Social Security benefit is estimated to be $1000 but it’s not, because it gets WEPed 40%. So it’s $400. So would it be correct to say that she could qualify for the larger of the two benefits? $400 a month is her benefit or $600 a month would be his survivor benefit due to the government offset provision? And the answer’s yes.

Al: Yes. The higher of the two.

Joe: The higher of the two. But they’re both significantly reduced.

Al: Correct.

Joe: So Kevin, love ya, but man, you got some time on your hands. All of this for $200. I guess it’s beer money.

Al: $193 a month. Forever though-

Joe: That’s a ton.

Al: Forever’s a long time.

Joe: There ya go. He also wants to talk about bonds. We got to take a short break. We can kind of get into that but this guy’s got an investment policy statement. He’s got spreadsheets. He knows when to rebalance. He is dialed in.

Al: He is. He’s been listening to our show for years.

Joe: And he’s like well you know I watched your webinar and Al kind of half-assed my question. So let me spend a lot more time-

Al: Let me really give you the details.

Joe: Guess what? We’re gonna half-ass it again here today.

Al: We’ll do our best.

How Much Should I Own of What Types of Bonds?

Joe: So Kevin- we’re still on Kevin’s question. Now we answered the first one; second one is, he was on our webinar, Al.

Al: Right.

Joe: And he had a question on bonds. And so now he’s got an attempt to be succinct. So he said “I have not properly worded my question. I appreciate Al’s comments and absorbed some of the information but it still left me unsure about my understanding of bonds.”

Al: It wasn’t enough.

Joe: It wasn’t enough. “Can you opine-”

Al: OK. Is that like Clopine?

Joe: I think Kevin was like a professor.

Al: When I hear ‘opine’ I just think of ‘Clopine’, it rhymes with it.

Joe: I don’t even know what ‘opine’ means, much less do it.

Andi: Give an opinion.

Al: Means can you like agree with it. You could say that, right?

Joe: Can you opine-

Andi: Just tell him what your opinion is.

Joe: My next date, I’m gonna say ‘can you opine?’

Al: How do you think this-

Joe: I’ve got a certain topic I’m gonna-

Al: – bring up?

Joe: Yes, it’s going to be great.

Al: Right. OK. I can’t wait to hear about that date.

Joe: So I think a lot of people have questions with bonds and I’m gonna keep it very simple and easy because he’s confused. He’s like well what’s the difference between a corporate bond, a government bond, a treasury bond, long term bond, short term bond; should I own them all? Should I have less? What’s the purpose of bonds? Interest rates are very low. What’s what? What’s the deal? So let’s kind of talk high level, is that a bond first of all, is a loan. So Kevin, you’re loaning your money to either a corporation or to the government or the United States Treasury. And so in return for that loan you’re getting a certain coupon payment or an interest rate.

Al: That makes sense.

Joe: And then at the end of the term of the loan, they’re paying you interest to hold their money. And then at the end of the term of the loan, you get your money back.

Al: And it’s a short-term loan or long term loan, can be a couple of years, could be six months, could be 20 years.

Joe: It could be- yeah right? So that’s really what a bond is, you’re lending your money to an organization in return of their capital that- of your capital that that company is using. They gotta pay you for that. You’ve got to get compensated because you’re not using that money to invest yourself or to consume it. You’re lending it to someone else and then for lending it out you’ve got to receive compensation in regards- it comes in a form of interest.

Al: I think that’s a really good way to say it because ‘bond’ sounds like such a foreign word to some people; but ‘loan’ we get that, you borrow money, you pay interest and then you pay it back.

Joe: But we’re just on the other side. I think all of us have taken out a loan. But now you’re acting as the bank.

Al: Because most of us don’t loan money to people.

Joe: Well you do to family members and you don’t get it back.

Al: I’ve done that.

Joe: That’s called a default.

Al: That’s called a gift.

Joe: So it defaulted on you, you just turned it into a gift.

Al: That’s right.

Joe: So with that in mind just understand there’s certain risks associated with it. So if you’re lending your money to an organization, a company, for 30 years let’s say versus 30 days, there’s more risk in lending it to a company for 30 days so you have to demand a higher interest rate for the term of the loan.

Al: So 30 years, you’re figuring that company is going to be around in 30 years to pay off your-

Joe: The note.

Al: – bond.  The note.

Joe: Exactly. So you have to receive a larger payment. You have to be compensated for taking that risk. So if you’re looking at maybe a below average company versus above average company in regards to management and efficiencies on how they run things; well if you have a really terrible company that you’re lending money to for a very long period of time-

Al: For 30 years?

Joe: Right. You just understand that you’re probably going to- you’ll need highly compensation here. And those would be like high yield bonds.

Al: High interest rate to cover the risk.

Joe: Because you’re getting paid a lot more on a high yield bond potentially than you are in a 30-day Treasury.

Al: Remember the Puerto Rico bonds that were paying 29%?

Joe: For like three days.

Al/Joe: And they defaulted.

Joe: So just understand that there’s risks associated with it. So if I’m lending my money to the U.S. Treasury, there’s very little risk there because they continue to print money.

Al: I think that’s an important point. A company doesn’t print money. They make money. Hopefully. The government actually controls the money supply and can print money. So that’s why they call a T-Bill or a government bond, government loan if you will, risk free.

Joe: It’s the risk-free rate. And then so then he gets into what should I own? Well it really depends on what you’re trying to accomplish. Here’s what we believe that bonds should be used for is to taper off the volatility of the stock component of the portfolio. If you have 100% stocks and your portfolio drops 50%, you need 100% rate of return to get back to square one. And as you approach retirement it takes a long time to get 100% on your money. So when you look at you want to reach a certain target rate of return. So maybe you have 50% stocks, 50% bonds; so instead of going down 50% you’re only going down 25%. And then from there you need a 33% rate of return to get your money back. So if you just have to run the math. We look at it as just a damper to the overall volatility of the portfolio. It’s very difficult to build a bond portfolio to have any type of income generated unless you have millions. Because the interest rates are so low.

Al:  Particularly right now and I think that bonds, they’re supposed to be slightly non-correlated with stocks, meaning they may, not always but sometimes, they go in slightly opposite direction.

Joe: I would say short term Treasuries do if the market is going to tank there’s a flight to quality, then they go into very safe investments.

Al: That was going to be my point. So if the market went down 25% and if you own half stocks, you would figure I’m down 25%. If it went down 50%, now I’m down 25%. But the short term bonds might have gone up a little bit so maybe I’m only down 22% because they actually went up in value.

Joe: Right. So looking at what you’re trying to accomplish is just to taper out the volatility, just to make the ride a little bit smoother for you so you stay in your seat. Plus we use it as a buffer to help rebalance. So as stocks go down you have safe money to buy stocks as they’re low. Because if it’s all stock and the market’s down you’re not going to- you’re selling something that’s down to buy something else that’s down. No, you sell asset classes that are up in value to buy asset classes that are low in value.

Al: Now I would say if you’re young and you don’t need the money for a long, long time and you’re okay with the volatility, have very few bonds. Because stocks are going to outperform bonds over the long term. But what I have found talking to a lot of 30 year olds that don’t really understand the stock market that well, they would do better to have some bonds just so they don’t go down as much and get frustrated and get out of the market and say the market doesn’t work for me. We’ve seen people like that for decades that missed out on huge returns.

Joe: Just because of lack of experience or they see an account go down and say I don’t wanna-

Al: This isn’t any good.

Joe: Interest rates are at all-time lows. Are they going to go up? And if they go up, bond prices will go down. So that’s where you got to be careful. Does a long-term bond makes sense? Because the longer the term, you’re going to have more interest rate fluctuations or term risk. Because it’s as if I’m long on a bond and interest rates go up, my bond price is gonna get hammered. Because no one will want to buy it because they’ll buy another bond that is at a higher interest rate. So just understand the risks and return parameters around bonds. We would say stay short, stay high in quality until-

Al: – rates are up again.

Joe: – we’re timing it. So just be diversified. But we feel that being short and in high quality is probably the best way to go.

Our Director of Research, Brian Perry, CFP®, CFA recorded a video late last year called “Should You Buy Bonds in 2020?” Then the pandemic hit the market went sideways. I’ve posted his video in the podcast show notes, check it out and see how his November 2019 thoughts on bonds hold up in September of 2020. I’ve also linked to the single most popular blog on all of PureFinancial.com, the difference between stocks, bonds and mutual funds. Click the link in the description of today’s episode in your podcast app to go to the show notes and check it out.

Should I Open a 529 Plan or an IRA for a Newborn?

Joe: Alexander, he’s got a question. “My niece recently had a baby.” Well, congratulations Uncle Alexander. I guess great uncle.

Al: Yeah, niece had a baby. That’s great uncle.

Joe: “This is their second child. The first child is two years old. Rather than a one-time cash gift, what financial accounts would help this new baby and the two-year-old get started with the financial planning? 529 college fund? Can a newborn have an IRA account? What are the long-term accounts you would suggest that they set up to take advantage of for many years these children have in front of them? I live in Arizona. My niece and her family live in Florida. She and her husband are in their mid-20s. He’s a professor of a local college. Currently, she is a stay-at-home mom. I’m not sure what niece’s husband’s income is.” OK cool. Uncle- great Uncle Alexander is looking out for the great nieces, couple of kids. Well, I guess I can-

Al: What do you think?

Joe: I don’t know. I mean the 529- you can’t do the IRA just because there’s no earned income in a newborn unless they’re like a child, like actor.

Al: Yeah like a model or something, for milk or something, milk bottles.

Joe: Gerber baby food or-

Al: – one of those.

Joe: If there’s a paycheck, so the kids need earned income to start a retirement account. So even though that would be the best solution for you to pop in a few thousand dollars into a Roth IRA for each of them; have it compound tax-free for their life would be great. But you can’t do that. 529 plans you absolutely could do that. That would compound tax-free if they use it for college. The downside there is what, it’s restricted. If they don’t go to school. But I think that’s still a good idea.

Al: Personally I think that’s the best idea because you probably would like your nieces to go to college and sort of-

Joe: College is going to be free Al, by the time they go.

Al: Maybe a community college. But anyway, I think that encourages good behavior on the part of your nieces. I think that’s a great way to go.

Joe: How much is that- they could do an UGMA or UTMA account.

Al: They could, but then they’d have full access to it at age 18 for anything they want to.

Joe: They could set up a brokerage account as well. That would give them the full flexibility, the best tax advantage, but there would be zero control. So I guess it’s up to Alex what he’s looking at- or Alexander, to say I want to control this. I want to make sure that it doesn’t get spent on things that Alexander doesn’t necessarily want them to get spent on, like a new car or something. I agree with you Al, I think the 529 plan is probably the best way to go. You can open up a 529 plan. And what that is folks, is that it’s a college account. Each state has it that you can invest in for a beneficiary, you can have multiple beneficiaries. And it grows tax-free if it’s used for qualified educational expenses. The SECURE Act changed some of that as well but like homeschooling, I think now and tutoring and some other stuff is probably available.

Al: – is allowable. Not all states conformed, so it makes it tricky.

Joe: So you want to look at they live in Florida. Do you want to do a Florida 529 plan? Should I do one in- and he lives in Arizona, so should he use the Arizona one? Does he get a tax benefit? A state tax benefit? Because some states you get a state tax benefit by contributing to a 529 plan.

Al: That is true. We live in California. There’s no benefit. So for us in California, it doesn’t matter what state we pick. You can use it for any college in any state. You’re right though. But some states do offer a tax credit so you might want to check that.

Joe: It’s a really cool thought. I guess like birthday presents each year you throw a couple hundred bucks into the overall account, let it grow tax-deferred. But-

Al: So let’s just go down the path if they use it for college then the original contribution plus the growth is tax-free. If they don’t go to college and they just pull the money out, the original contribution is return-of-basis and then everything else is taxed as ordinary income plus penalty.

Joe: So that would give you the restrictions to control it.

Al: Hopefully.

Joe: But I wonder what happens to 529 plans when college is free? Can I get a refund for how much money that I spent, me personally, I put my myself through college?

Al: It was too long ago.

Joe: I worked three jobs…

Al: There’s a 3 year statutory period.

Joe: Plus my student loans that I grind just to pay off.

Al: It’s a nice idea. It’s probably- I don’t think that’s happening.

Stick around to the end for the Derails!

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