Show Notes

• (01:42) Is This the Correct Way to Convert to Roth and Avoid IRS Penalty? (Srinivas, Chicago)
• (06:51) Deposit Withdrawals Above Our Tax Bracket in Taxable Account or Do Roth Conversions? (Jefe, TX)
• (10:12) Should I Change My Asset Allocation? Should I Start a Solo 401(k)? (Doug, Cave Creek, AZ)
• (16:22) Should I Convert $1M IRA to Roth Up to 22% Tax Bracket? (Todd, Flagstaff, AZ)
• (19:39) Market Timing Retirement Withdrawals and Roth Conversions (Robert, Southern Maine)
• (25:28) My Son Says I Should Do Roth Conversions. Is He Right? (Debbie, Rural Wisconsin)
• (32:39) Spitball on Our “Bucketing” Strategy for Early Retirement Withdrawals (JZ, upstate NY)
• (39:50) Roll IRA to 401(k) for Backdoor Roth With No Additional Tax? (JZ, California)
• (43:04) Hawk Tuah Spitball
• (45:39) The Derails

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Transcription

Andi: It’s that time once again, your chance at a $100 Amazon gift card is waiting for you in the podcast show notes at YourMoneyYourWealth.com! Answer 18 questions in the 7th annual YMYW Podcast Survey and you are entered to win! Click the link in the description of today’s episode in your favorite podcast app to go to the show notes and access the survey and the secret password. Legitimate, complete entries, with honest opinions about what would make Your Money, Your Wealth your favorite, funniest, top, best personal finance podcast will be in the running for the hundred bucks. US residents only, no purchase necessary, survey and giveaway close and winner chosen at 12pm Pacific time on August 30th, 2024. 

Is timing the market when you withdraw money from your retirement accounts or do Roth conversions a good idea? Is it an effective strategy for YMYW listener Robert? That’s today on Your Money, Your Wealth® podcast number 488. Plus, should Doug change his 60/40 asset allocation, and should he start a solo 401(k)? Jefe plans to withdraw from his retirement accounts beyond the top of the 24% tax bracket for the first few years of retirement. Is there any reason to put it in a brokerage account rather than converting it to Roth? The fellas also spitball on Roth conversion methods and strategies for Srinivas, Todd, and Debbie, and JZ in California, and they spitball on JZ in New York’s “bucketing” strategy for early retirement withdrawals. Got a money question or want a retirement spitball analysis of your own? Click the link in the description of today’s episode in your favorite podcast app to Ask Joe and Big Al On Air. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA. 

Is This the Correct Way to Convert to Roth and Avoid IRS Penalty? (Srinivas, Chicago)

Joe: All right, Srinivas from Chicago.

Andi: Srinivas.

Joe: Srinivas. All right.

Andi: Srinivas.

Joe: Have you ever heard of that name?  First time?

Andi: I had to look it up.

Joe: Okay.

Al: I, I have never heard that name either.

Joe: No? Cool.

Al: Just for what it’s worth.

Joe: All right. “We are planning on doing Roth conversion of $100,000 in February 2025.  We fall into the 32% tax bracket. We’re still working with W2. In preparation for that Roth conversion, we started additional withholdings at federal and state taxes. They withheld $100,000 at the federal level and another $100,000 at the state level. We split that into 24 payments, 24 paychecks.  Is this the right way to avoid an IRS penalty? Is there a better way to do this $100,000 Roth conversion?  Thanks in advance and best regards.” All right. So if I understand the question, they’re going to do a Roth conversion in 2025 of $100,000.  So they want to withhold taxes from their paycheck in addition to pay the tax to avoid any type of tax penalty.

Al: Right.

Joe: Let’s first talk about the tax penalty and how you fall into that. And if, and then B, is this a good strategy to do?

Al: Yeah. Okay. That’s a good point. Well, first of all, when you do a Roth conversion, basically you’re taking money out of your IRA, you’re converting it to a Roth IRA. But you have to pay tax on the conversion. It’s a one-time tax payment. And then that money sits in the Roth IRA, all future growth income in principle is tax-free, but you have to pay the tax up front. So that’s what she’s talking about, he or she, I don’t know, I’m not sure which one, but that’s what they’re talking about. Let’s put it that way. And so, when you have extra tax, you have to make that payment, and there’s different ways to make the payments. If you don’t make enough payment, the IRS penalizes you for underpayment. And most of us don’t think about it, Joe, because we have a salary, we have withholding, and it covers it generally. In most cases, not always, and so we don’t even think about it. But the truth is, if you have a salary, for example, and normal withholding, and you have a lot of extra income, then there’s two ways to make those payments to avoid penalty. One is to make quarterly estimated payments, right? Starting in April, then June, then September, then January. And that’s ¼, ¼, ¼, ¼, and so on. Or, you could just have more withheld from your paycheck. And that’s a perfectly fine way to do it. When you do the paycheck method, the IRS has no idea when the payments were made. So what some people do is they don’t make estimated payments, but they wait right to year end and do a whole bunch of withholding. And that works as well. But this strategy, there’s nothing wrong with this. It works just fine because they’ll have enough paid in and they won’t be penalized.

Joe: So I do a conversion in February. So what’s the rule of 125% of income or 100% of tax paid the previous year, then-

Al: Every time I explained that rule you roll your eyes, but since you’re asking, I’ll do it.

Joe: Sure.

Al: So to, to actually avoid penalty, you either have to have 100% paid in, in withholdings or estimated payments, right, equaling last year’s tax, or if your income’s-

Joe: So last year’s tax was fine.

Al: Yeah.

Joe: But this year’s tax is going to be higher because of the conversion. So I, can I wait until, so I’m doing the conversion in February. Can I wait until April when I file or when I, my CPA does my taxes to pay the tax or am I going to be penalized?

Al: Assuming that’s true. In other words, like, let’s just say in 2024, no Roth conversion, which is kind of what’s implied. And then in 2025, they do a Roth conversion. They have enough withholding in 2025 to cover their tax liability in 2024. They don’t have to make the payments until April of the following year when they file their tax return or their tax extension. So that is a correct statement. Now, if your income is over $150,000, you have to do 110% of last year, but that’s anyway, that they will likely fall into that. However, if they do it the following year, that’s not going to work, right? Because now their income in 2025 will be much higher because of the Roth conversions. So they’re going to have to do this withholding, assuming that’s true, that they didn’t do any Roth conversions or not planning to do any for 2024. That’s a, that’s a correct statement.  And as a matter of fact, just to kind of add onto that, if they didn’t do any Roth conversions in 2023, they could go ahead and do it right now, do, and they don’t have to have withholding until April, assuming their withholding covers last year’s tax.

Joe: Right, right, right.

Al: So they don’t even, they don’t have to wait until 2025 if they don’t want to.

Joe: Really glad I asked that.

Al: You always say that. It’s really hard to explain it without, like, getting technical.

Joe: Right, or illustrating it.

Al: Yeah, on a whiteboard.

Deposit Withdrawals Above Our Tax Bracket in Taxable Account or Do Roth Conversions? (Jefe, TX)

Joe: Alright, let’s go to Texas here. We got Jeffy. “Howdy Joe, Big Al, Andi. This is Jeffy from Texas. “Joe, it’s [pronounced] Hefe.”

Andi: Jefe.

Joe: Jefe.

Andi: We had this conversation 10 episodes ago.

Joe: Jefe.

Andi: Jefe.

Joe: What, he’s, Jeffy ‘s wrote in before?

Andi: Yes.

Joe: Okay.  “In preparation for retirement for the first few years, my plan is to withdraw from pre-tax retirement accounts more than our spend to the top of the 22% or 24% tax bracket. Is there a reason not to convert the excess to Roth instead deposit in a taxable account?”  No, there’s no reason. Convert.  So what he’s doing, he’s taking, he’s going to maximize his tax bracket. And we talk about this often, is that if you’re taking money from a qualified account, depending on how large that qualified account is, once he hit RMDs, some people will fall into a higher tax bracket. Especially if the tax rates revert back.  So Jefe is thinking, hey, I’m going to take some money out of the account. Let me just maximize the bracket. So he’s asking, does it make sense to put it in a taxable account or to convert to a Roth?

Al: Yeah. And I would agree with you generally, but I can think of at least one situation where you wouldn’t want to do that. And that is if you are under 59 and a half, and you have to have access to the money on the conversion within 5 years, you’d actually want to put that into a brokerage account so you could get at it.

Joe: I do not see any reason to have much outside of tax protected accounts if you do not have to. Yeah, I agree with you.

Al: Yeah, we agree. Yep, “I still enjoy a little rye Old Fashioned. Wife, occasional beer, wine, champagne. Driving the same old 2013 Infiniti, pushing it to the limit.  And wife, the 2022 Forerunner. Appreciate y’all and I always look forward to each podcast release. Sincerely, Jefe.”

Al: Jefe. Very good.

Joe: All right. Yeah. That’s the only reason.

Al: Yeah. I can’t think of another reason. I mean, well, another reason might just be if you, if you need to spend the money right away, it’s just an extra step to put it into a Roth and then a week later, put it into brokerage account. But otherwise, yeah, I can’t think of too many reasons why you wouldn’t just put it right in the Roth.

Joe: Because if you’re, if you’re over 59 and a half, right?

Joe: Roth IRA says FIFO tax treatments, first in first out. So there’s no penalties. If you convert, if you’re over 59 and a half, if you convert the money, you can pull it out the next day and spend it. There’s no taxes. There’s no penalties. Because you paid the tax on the conversion. Only the earnings need a season in there if you’re over 59 and a half and you never had a Roth before for 5 years. So, you know, to really get sophisticated here, we need to find out how many Roths Jefe has, when did he establish the Roths, how much money that he actually needs, and how old Jefe is.

Al: Correct. Yeah. And if he’s younger than 59 and a half, is he going to need the money within 5 years? So a couple things there, but I would say 90% of the cases, 90- Well, actually, if you’re over 59 and a half, it’s hard to imagine a case where you’d want to not go to Roth.

Should I Change My Asset Allocation? Should I Start a Solo 401(k)? (Doug, Cave Creek, AZ)

Joe: We got Douglas from Cave Creek, Arizona. “Hello, Big Al, Joe and Andi. This is Doug from Cave Creek. I recently started listening to the show and loving it. 69 years old. I have about $3,500,000 in a high yield savings account from recently selling my business.”  Congratulations, Doug.  “I have income on land that is renting at about $29,000 a month-” Wow. “-which will continue for the next 4 years. And I also receive about $2800 a month in Social Security. A unique situation is I have no other retirement accounts or savings. I own my home, it’s worth $700,000, paid off, but also have a home in the mountains that’s worth about $1,200,000 with a remaining mortgage of $600,000, at a 3.5% interest rate. My annual spending is about $175,000. Here’s the question.  Other than just investing my savings into a 60/40- Excuse me. Wow. -allocation of my brokerage account, what other considerations should I be thinking in my situation? For example, I still have earned income from the rented land. Should I be looking at a solo 401(k) for the asset protection and tax optimization? Now for the important stuff, cruise around town with my mutt, Pico, in my 2020 Dodge pickup and partake in an occasional whiskey on the rocks.”  All right, a little whiskey on the rocks in a little Cape Creek, Arizona.  Never heard of Cape Creek.

Al: I have. It’s, I think it’s near Phoenix, if I’m thinking of the right place.

Joe: So he sold his business, got $3,500,000 sitting in a savings account. He’s getting $30,000 a month for the next 4 years.

Al: Yeah.  Yeah, that’s pretty good.

Joe: I would say so.

Al: Plus, plus, plus almost $3000 a month on Social Security.

Joe: Yeah. Call it $3300 or $33,000 a month.

Al: That’s right.

Joe: For the next 4 years. Alright, his spending is $175,000, he’s 69 years old. What should he be doing with his situation?  I don’t know.  The $29,000 a month that’s coming in from the land lease, he says it’s ordinary income, but I think that’s earned income.

Al: You are correct, Joe. It’s ordinary income, it is not earned income. It’s passive income. Therefore, there’s no way to do a solo 401(k) on that.  Can’t do it.  So, you know, so, so you’re, so his question is how can I, I guess, optimize the, the money that he has, the $3,500,000. Plus, it sounds like he’s getting extra money from the land, renting the land lease and, and Social Security. 60/40 is, that’s a, it’s a generally considered to be a good allocation for many people. We don’t know enough about his situation to know if that’s the right allocation, but that, you know, that’s a often where people start. So there’s, there’s probably nothing wrong with that.

Joe: 69 years old, he spends $175,000. So the land lease is going to pay him for the next 4 years. And then he’s going to have $3000 or let’s call it with inflation, $40,000. He’s going to need $150,000 from the portfolio, $150 divided by, I don’t know, 5, probably.  He’s got $3,500,000. Yeah. I think the 60/40 actually makes a lot of sense for the guy because he’s got 4 or 5 years until he needs, or maybe even longer until he needs to draw any money from that portfolio.

Al: Yeah. And let it grow and add to it. Right.

Joe: Yeah. Let it grow and add to it. And then the 40% keep it pretty safe, treasuries, cash, CDs, and then put the other 60% in long term equity growth type instruments, because he’s just going to probably- And that, that will continue to grow. I don’t know about his heirs, what he wants to do at end of life. If he wants to spend it all, then increase your spending, buy another, you know, buy a lake home. You got a mountain home.

Al: Yeah. The, the only thing I might think about to looking into is municipal bonds. Maybe he gets, picks up some of those, maybe some Arizona municipal bonds because those would be tax-free on federal and state. So that could be a possibility on a safer money, on a fixed income.

Joe: Yeah, but I think in a non-qualified account, there’s a lot of tax benefits by having that much money there if you tax manage it appropriately. Markets get volatile, you can tax loss harvest, you can do, you can have a lot more tax efficient type of investments in those accounts. So to try to keep a lot of the interest in dividends off the 1040, because he’s going to be in a pretty high tax bracket over the next 4 years. But then after that, he could be in a very low tax bracket or, or pay almost very little in tax, depending on how he manages that $3,500,000.

Al: Right. I agree with all that.

Joe: Cool. All right. Well, congrats on the sale of the business, Doug. Have a whiskey on me.

Andi: Assumptions you make about your finances can make or break your retirement lifestyle – will it be bad or beautiful? Maybe your outdated, tired, set-it-and-forget-it financial plan needs a Complete Money Makeover. On the the Your Money, Your Wealth TV show, Joe and Big Al show you how setting goals, revamping your portfolio, and doing a tax turnaround can give your retirement plan the financial facelift it needs. Watch YMYW TV and download the companion Money Makeover Guide for free from the podcast show notes. Once again, this guide is a limited time special offer, so get yours before this Friday. In the description of today’s episode in your favorite podcast app, you’ll find the links to watch the Complete Money Makeover, and to download the special offer by this Friday.

Should I Convert $1M IRA to Roth Up to 22% Tax Bracket? (Todd, Flagstaff, AZ)

Joe: We got Todd from Flagstaff, Arizona. He’s “got a Roth question. Currently, he’s got $500,000 in a Roth. He’s got $1,000,000 in an IRA.  Am I reading this right? $1,000,000 IRA, taxable, $140,000 cash, $2200 a month in rental income, which is paid off and it’s worth $350,000. He’s got a $100,000 mortgage on his $1,400,000 home that they live in, yearly pension, $65,000.  Wife is retiring this year at 63, I’m 65, her Social Security is $35,000 a year at age 70.  My Social Security is minimal due to the pension.  Question- is this question kind of like, is it me?

Andi: It’s a stream of consciousness?

Joe: Yeah.

Andi: There’s like no punctuation in it.

Joe: It’s like, it’s just words and I’m like, man, am I, did I, did someone put something in my drink here?

Al: It’s a little hard to follow. I’m reading it.

Joe: Wow. Yeah. I’m, I’m, I’m sweating. I got like a little bit of a migraine.

Al: I liked, I liked, I liked you said his wife is retiring year at cause that’s what he wrote. Year at, without a space and you just did it. It’s perfect.

Joe: This year at 63.

Al: This year at. 63.

Joe: Oh, man. All right. Well, I’m with him. Okay. The question is, $1,000,000 IRA to convert it to Roth, a little bit yearly staying in the 22% tax bracket. Thank you.” Oh, man. “I enjoy your show. Keep it up.  Good deal. Helpful. Oh, yeah.”

Al: Oh yeah. Oh yeah. No space there either.

Joe: “Dodge Lammer. Laramie.

Andi: Laramie? I’ve never heard of a Dodge Laramie.

Joe: Port or diesel.  4×4. I like ice cold beer. And late music. Mainly country, but, but all genres. TD.”  Yeah. So he wants to, he’s got $1,000,000 IRA, he wants to convert to a Roth, does he do a little bit and stay in the 22% tax bracket each year?

Yeah. I like it, Todd. I would answer my question as you asked it, but-

Al: From what I understand of the question, I like it too. There’s no reason to do it all at once. You’re 65. You got- at 65, you probably, your RMD is probably at 73. Or is it 75? One of those two, right? So you got, you got 8 to 10 years to do conversions. So, yeah, just do it a little bit over time, stay in the lower brackets.

Joe: Yeah, I mean, the pensions and the Social Security’s covering their living expenses, it sounds like. He’s got rental income, they have pension income, wife’s got Social Security, his is going to be minimal, $1,000,000 retirement account, it’s like, alright, yeah, convert to the top of the 22% tax bracket over the next couple of years, if tax rates change, then, you know, then readjust.

Al: Yeah, I think that’s exactly what I was going to say, because the tax rates are supposed to come back to what they were in 2026, what they were in 2018, so if that’s true, tax rates will go up, so you might want to reevaluate then.

Joe: All right, thanks Todd, have another ice-cold beer.

Market Timing Retirement Withdrawals and Roth Conversions (Robert, Southern Maine)

Joe: Let’s go, Robert from Southern Maine. “Horn bits, no pets, drink of choice is Allagash white.”  Allagash, I don’t know. It’s Belgian style wheat beer brewed in Portland, Maine. Drive 2024 Honda Pilot,  I’m a self-directed investor, 61 years old, finishing years 5 of a 72(t) distribution at the end of this year after retiring in 2019. Since retiring, I’ve been doing Roth conversions to the top of the 24% tax bracket. Will continue converting until I take my Social Security at age 70. My question concerns about withdrawals for living expenses from a taxable retirement account in that investments grow on average every year. Is there anything wrong with the idea of the combined total of living expenses plus annual Roth conversions being converted into a Roth account every year in January, or when the market is down a bit sometime in the first quarter? And then do monthly sales of living expenses withdrawals from the Roth account.  My thought is to keep 3 to 6 months of withdrawals in cash and market time the sales when markets are up.  Obviously this won’t work out in our favor every year, but on average, it should. I have been doing this market timing for the past 6 years with the Roth conversions convert when holdings are down, it has worked out well. What do you think? Thinking in advance, Robert.”  I don’t understand what the- what he’s doing.

Al: So, so here’s what he’s doing. He’s, he’s-

Joe: He’s timing the conversion or he’s timing the whole distributions?

Al: Yeah. So he’s taken his Roth conversion and his distributions for living expenses and throwing them all in the Roth account in January, or waiting until the market’s down in the first quarter. That’s what he’s saying. And apparently that’s worked out for him the last few years. And then, then he just sells stock over time.

Joe: Why would he do that?

Al: Well, because then the growth, right, then stays in the Roth. In other words, if you would have done distributions and invested it outside of the Roth, the growth you’d have to pay capital gains tax on, potentially. I mean, it’s, it’s a lot of work for what he- and plus the market doesn’t always cooperate. I don’t, Robert, at least the way I understand what you just said, I don’t see anything wrong with it. It’s just that sometimes the market’s very high in first quarter.

Joe: Okay, so he’s doing conversions in January or he’s doing the conversion when the market’s down.

Al: Yeah, well, he’s saying he’s doing his conversion plus his living expenses as a conversion in the Roth IRA. And generally his experience is the market’s been down at some point during the first quarter.  So he’s just trying to time the market with his, you know, what most people do is they do a Roth conversion. They, they let it go and then they, they pull out enough for living expenses. He just, he’s just saying, I want to put it in the Roth because then any growth will be tax-free, which is, as I understand the question, I, I don’t see anything wrong with it.

Joe: All right. So he’s doing a 72(t) tax election.

Al: Well, that’s different. That’s not the question.

Joe: I know. So he’s got money coming out of his retirement account because he retired prior to 59 and a half.

Al: Correct.

Joe: And a 72(t) tax election allows you to take separate equal periodic payments out of a retirement account over a time period, depending on if he did annuitization, RMD, or amortization.

Al: Correct.

Joe: So he retired early. Now, those dollars are coming out of the retirement account and those are taxed at ordinary income rates. So he has to pull the money out for 5 years or until he turns 59 and a half, whichever is longer. So he’s in this fifth year of doing the 72(t) tax election. And then now he’s looking to say, hey, I have dollars in my retirement account that I’m going to take out in January. And it’s going to be the top of the 24% tax bracket because that’s going to give me the conversion to that amount plus my living expenses for the entire year. But he’s going to keep his living expenses in the Roth IRA until he needs it. And then he’s going to pull his living expenses out of the Roth IRA over that 12-month period, and he’s going to keep 3 to 6 months money in cash in the Roth, and he’s going to continue to do that year after year.

Al: Right.

Joe: And so, his advantage is, is that he’s going to convert in January, but the problem that I see is that, or sometime in the first quarter, it’s going to be done either January, February, or March.

Al: That’s what he’s saying.

Joe: Okay.

Al: But sometimes, you know, the market’s not down. There’s nothing wrong with the strategy and, you know, two out of 3 years, the market on average, two out of 3 years, the market goes up one out of 3 years, the market goes down. So he’s basically saying, let’s do this at the beginning of the year.

Let’s get a little advantage.

Joe: Yeah. I love the conversion in January. I think everyone should do the conversion in January because you’re going to get the compound tax-free effect for 12 months or, or, you know, 11 and a half, whatever it is. But okay.

Al: Okay. But that’s, that’s what he’s doing.  And I don’t see anything wrong with it. Would I do it? Probably not. Just too much work.  I would just-

Joe: For a couple of buck?

Al: Yeah, right. For me personally, but I get that. The concept, I think it’s fine.

Joe: Yeah, it’s not a big deal. He’s got a cash account in his Roth and then he’s just taking distributions from his Roth to his checking account, I guess, monthly?

Al: Yeah, as he needs it, sure.

Joe: Alright, Robert. Any dollar you can get, just squeeze that lemon.

Al: Squeeze it, yeah right.

Joe: Alright, thanks for the question.

My Son Says I Should Do Roth Conversions. Is He Right? (Debbie, Rural Wisconsin)

Joe: We got Debbie from rural Wisconsin. “Hey kiddos, my name’s Debbie.  And in my mind, I’m still 30 years old, the rest of me is 70. I enjoy spending time with my crazy kids and grandkids every Sunday. And my pig nosed barn mutt of a dog. My choice of drink is mixed drink from McDonald’s and I drive of Ford Bronco.” What’s that? Is that like everything in the fountain?

Andi: I think probably so.

Al: I think it’s Coke, root beer, Sprite.

Andi: Fanta.

Al: My kids used to do that.

Joe: Yeah, just give me the mixed drink from McDonald’s.

Al: I want them all.

Joe: “Well, actually, I don’t drive it because it’s too nice. So I drive my late dad’s 2000 Buick instead.  I’m writing today because my son is trying to convince me to do a Roth conversion and I wanted to see if it’s a good idea.  I unexpectedly lost my husband last year. He has left a tremendous hole in our family, not just because his kindness, his love, and his faith, but because of his technical savvy of financial abilities. He had done Roth conversions, to empty a deferred compensation plan, and my son is telling me it’s a good idea to continue to convert my IRA as well. I haven’t been involved in our finances for a year, but my husband and son talked about it often, so my son has taken over and has been teaching me since he’s passed. Here’s the financial picture. It’s pretty simple. Between the husband’s state pension and my Social Security, I get paid around $140,000 annually, with increases to the account for inflation for the rest of my life. I have $90,000 in a Roth IRA that was my husband’s, about $100,000 in stocks and bonds, and about $250,000 in cash. My IRA is $150,000. I need less than half of what I’m paid to live off of, as I’m a pretty simple farm girl and have no debt. Sons tell me it’s a good idea to convert my entire IRA this year to a Roth IRA.  It’d be in a different company from where my husband is. He tells me that I would have to pay $35,000 more in taxes this year. My Medicare premiums would be higher for one year later.  But he says since I’ll be filing taxes still as married, my taxes and Medicare rates will be lower this year.”  Okay, I see what he’s doing here. “And since my income will never decrease, I will almost certainly be taxed at the same rate or higher for the rest of my life. Essentially, this year alone would be the lowest tax I’d ever get my money out of an IRA.  Can you speak on this?”  Okay. “Is my son thinking of everything?  He’s also explained how Roth accounts are better for an inheritance standpoint, which is important to me.” Well, maybe he has a conflict of interest. He’s your son.

Al: He’s got a little scheming going on.

Joe: I don’t know, kind a conflict of interest here.  “In a tax bill like this is a huge amount of money for me, but I do trust him. After all, he’s my favorite son and the smartest one, too. Thank you, Debbie.”

Andi: Do you think the son wrote this email?

Joe: No.

Al: I don’t either.

Joe: Maybe.  I don’t know. Do you think the son likes the mixed drink at McDonald’s?

Al: I don’t think so.

Joe: I don’t think so either.  Well, first of all, sorry for your loss.

Al: Yes.

Joe: And, yeah, that’s a challenge. If you’re not been involved with your finances for quite some time, it gets a little scary.  But, the son’s right. $140,000, she can still file her taxes as married finally jointly.

Al: Yeah, for this one year.

Joe: For this year. Unless she gets married again next year to someone else.

Al: True.

Joe: Yeah. So, I mean, she can do that, but yeah, but she’s got a hole in her heart for, you know, the love and the kindness and the faith that, you know, her husband gave her. So I, I don’t think that’s going to be the case.

Al: Yeah. So if you look at this year, let’s just take her income of $140,000 and I don’t know what other income she has, but standard deduction, we’ll just round it up to $30,000, right? So taxable income, $110,000, that puts her, basically about the beginning of the 22% bracket. So most of the Roth conversion would be in the 22% bracket this year. Now, next year, when she files single, unless she gets married again, as you said, right, but file single, the income will be still in the 20%- let me think, $140,000 minus, minus $15,000, it’ll be in the 22% bracket, but as the RMDs occur, that will be 25% in 2026 and who knows what it’s going to be later. So I would, I would go ahead and do it as well.

Joe: Yeah. Or you, you do to the top of the 22% and then you convert to the 22% tax bracket next year.

Al: Yeah. You could do that.

Joe: Because some of that conversion’s gonna go in the 24%.

Al: Yeah. Maybe that’s a better approach. Yeah.

Joe: Because she has two years. So the top of the 15% tax bracket as a single filer is what? $40,000?

Al: Top of the 12%? Say it again. Top of the 12% is $47,000.

Joe: So $50,000 as a single taxpayer. And so, and then the top of the 22% is what?

Al: That would be $100,000.

Joe: $100,000 top of the 22%?

Al: Yeah.

Joe: Okay, so she’s in the 24% tax bracket next year.

Al: As I look at this, I said that wrong. She’s, she’s already in the 24% bracket next year. So all the IRA, her IRA will come out at 24%. She does the conversion this year. Most of it or much of it will be in the 22% bracket.

Joe: Yeah, she’s in the 24% tax bracket next year, just for their pension alone. Right. As a single taxpayer. And so any distribution from the IRA is going to be taxed at 24%, which is going to turn to 28%. She starts collecting Social Security, I don’t know if the $140,000 is the, well yeah, she’s 70, so that, that includes that. Yeah, I would convert 100% of it this year.  You have your son pay the taxes because he’s going to get the Roth IRA. So have him pay the $30,000 in tax or you guys split the difference because then he gets it all tax-free to him.

So maybe that’s the conflict. You have him pay the tax.

Al: Yeah. So this is what I would tell Joe’s mom.  Yeah. Go ahead and do it. Even though it doesn’t apply.

Andi: Kiplinger calls investing in a Roth account “one of the smartest money moves a young person can make” for that sweet lifetime tax-free earnings on your investments, but it’s important that you understand Roth accounts thoroughly! Download the Complete Roth Papers Package to understand how Roth accounts work, so you can take full advantage of their tax-saving benefits. This bundle of Roth guides is packed with valuable information about Roth contributions and conversions, the Backdoor Roth strategy for when you make too much money to contribute directly to a Roth, and the rules for taking money out of your Roth IRA. Plus, you’ll learn the differences and pros and cons of saving in a traditional IRA vs. a Roth IRA vs. a Roth 401(k) and much more. Click the link in the description of today’s episode in your favorite podcast app and download the Complete Roth Papers Package for free.

Spitball on Our “Bucketing” Strategy for Early Retirement Withdrawals (JZ, upstate NY)

Joe: All right. “Andi, Joe, Big Al. Love the show. It’s one of the highlights of my week.”  This is JZ from upstate New York. All right. Oh, highlight.

Al: Yeah.

Joe: “I listen- I typically listen on my commute to work with my BMW X3 back at home. I enjoy seasonal appropriate beer. Right now that means Stone Buena Vasa.”

Andi: Well done!

Al: Yeah. That’s pretty good.

Joe: Did I kill that?

Al: You got it.

Joe: All right. A little Stone Buena Vasa. Never heard of it. “Thanks for answering my last question regarding HSA contribution leveraging the last month rule.” All right. Okay.  Okay.  “Based on that, I was able to max out my HSA last year. Now I am ready for a retirement readiness spitball. Here’s our situation. I’m 39 yo. Wife’s 45. We have two kids in grade school. We have $2,100,000 pre-tax in our 401(k)s. We got $500,000 in a Roth, $500,000 in after-tax funds, and $300,000 in a deferred comp plan. Wow. That’s a big ass wallet on JZ.

Al: That’s a big one. Yep.

Joe: “We earn about $600,000.” Wow, we earn a big ass wallet full of cash still.

Al: Correct.

Joe: Oh man. “We earn over $600,000. Of that we saved $300,000.” Oh my God.  Must be rough. He’s just so roughing in upstate New York. And then he was asking about a question on an HSA that saved him like $.07.

Al: You know what, that’s why he’s got so much money.

Joe: No doubt.

Al: He’s following everything he can do.

Joe: No doubt. Look, that little Buena Vasa.  Let’s see, they “saved $70,000 in the 401(k), $14,000 in Roths, $100,000 in deferred comp.

Al: Yeah, $130,000 after tax.”

Joe: Yeah, okay. “We spend roughly $160,000 annually. As spouse has a small pension, benefits going to be roughly $30,000 annually. Deferred comp will be paid out when he separates from service. Ideally, we’d like to retire in 2028, but it does work out- does it work or do we need to work for one more year? 2028.  What’s it? 4 years. He’s 45?

Al: 40, 39. 39. Wife’s 45.

Joe: Okay. He wants to retire at 45.

Al: Actually, he wants to retire at 43.

Joe: 43. Yeah. And then he’s asking me math questions.  The guy’s got like millions.

Al: He wants to know, can he do it in 4 years or 5? “As a whole, the withdrawal percentage is high for a long retirement, correct?” Yeah. You don’t want to pull out at 43 years old, you probably don’t want to pull out more than 2% of the portfolio.

Al: Yeah. So I did the math. So he’s got $3,400,000 right now. He adds $300,000 a year. I’m just using his numbers- for 4 years at 6%. He’ll end up with $5,600,000. And he’s spending $160,000. So $160,000 into $5,600,000 is 2.9% distribution rate.

Joe: That’s a little rich. You have to still pay tax on that.

Al: Yeah, might be. Might be. Might be. But that’s not, that’s not inclusive of any Social Security benefit later. But that’s not going to happen for-

Joe: Yeah, but he’s retiring at 43 and that benefit is going to be minimal because-

Al: – he didn’t work a lot.

Joe: Yeah, he didn’t work a lot.

Al: Yeah, yeah, yeah, yeah. Alright. I don’t know. Well, that seems just a little bit rich for my blood.

Al: So you, you want him to work another year?

Joe: Maybe if he works part time.

Al: So I guess what you’re suggesting is maybe at that age a 2% distribution rate. So maybe so what so what’s-

Joe: Trust me I’ve looked at the math several, every day of my life.

Al: So, so, so about, about a, I got it.  You tried to retire at 43, then 44, then 45.

Joe: I’ve looked, yes. I’ve looked at the math, but I was 43, 44, 45.

Al: So maybe if you go by what Joe just said, which I don’t disagree with, to get to a 2% distribution rate, you probably need about $50,000 a year of income from your part time job. $50,000 or $60,000.

Joe: Yeah.

Al: And then you probably get enough cushion where you’re not going to worry about it.

Joe: All right, so he says “We don’t have access to our 401(k), so we’ll have to live off our after-tax deferred comp plans for 2039. Our 401(k) and Roth accounts will continue to grow until we hit 59 and a half, which is over 10 years. Could compound nicely. Say current $2,100,000 plus 3 more years of contribution plus 10 years of growth equals $5,000,000. Plus Roth and pension could put us at approximately 3% withdrawal rate. Does this bucketing line of thinking work?”  Yeah. I mean, I think we, we just said that, but I don’t like, you can have access to your 401(k) too prior to 59 and a half.

You just have to do a 72(t) tax election, which probably not a great idea either.

Al: No that’d be a little tougher, but you probably, yeah, you focus on the, I guess the, the after-tax funds and the deferred comp coming out. And anyway, so I, I think it’s, it’s, this may possibly work.

Joe: $600,000 a year of income and you’re, it’s like, eh, I’m 43, I’m going to just, I’m going to walk away from it.

Al: I don’t need it.

Joe: I don’t know. I would just, I would keep going and just wait till they fired me. I would, I would just go and, I’d be like, office space. What’s that movie? Office Space? Is that what it’s called?

Andi: Yeah, it’s Office Space.

Joe: Right.

Andi: The guy with the red stapler?

Joe: Yeah. Yeah. Right. I’d be like, yeah.  I wonder how long I can get away with this.

Al: And can, so can you imagine yourself at 43 with two grade school kids at home?  Uh, no. I can imagine myself at 50 with a 3-year-old.

Al: So let me put it this way. Do you want to be at home all the time?

Joe: No, I’m good.  But I like it. I mean, man, fire it up. Yeah, it’s close. He’s done a hell of a job saving. You got a ton of cash. You do a fantastic, you save half of your income, of your gross income, right? You spend within your means.

Al: It is close. All we’re suggesting is-

Joe: As long as you can kind of pivot with your spending. Yeah. If you can spend a little bit less some years, depending on what happens with the market, because he’s gonna still, he will have to have, I don’t know, probably still a lot of growth in the portfolio.

Al: Yeah. Oh yeah.

Joe: Because he’s got to let that thing grow for the next 50-some-odd years.

Al: Right. I mean, he’ll have a lot of safety just because he needs the cashflow. So JZ, all we’re suggesting is, it’s close. It might be a little rich just because you’re retiring so young. Maybe you can work part time. Maybe you can cut your expenses. But maybe more importantly is you might rethink it because at this, at age 43, you may not be ready just to retire for the rest of your life.

Joe: I don’t know. Maybe he hates his job.

Al: Maybe.

Joe: I can relate sometimes. Ha, ha, ha.  Not me personally.

Al: Yeah, yeah.

Joe: You know. I work with people that hate their jobs.

Al: Yes. True. We consult them.

Joe: Yeah. And help them retire.

Roll IRA to 401(k) for Backdoor Roth With No Additional Tax? (JZ, California)

Joe: “Hey Joe, Al, Andi. Love the show.  My wife and I have a combined income of $300,000. Both of us have a couple hundred thousand in traditional IRA accounts due to a rollover of previous companies, and we have 401(k) plans. I have $100,000 in a traditional IRA account. My wife has $400,000 in a traditional IRA.  Because of the prorate rule, we need to pay the current high tax rate when we do our backdoor Roth IRAs. I’m thinking about rolling our traditional IRA into our 401(k), but keeping one IRA open with a minimum balance, $1.  This way, we continue our backdoor ROTH without any additional tax due to the pre-tax portion. I’m 64 years old. My wife is 61. Plan to retire at 67. After retirement, our main source of income will be Social Security and our distributions from the retirement accounts. We have a $1,200,000 in 401(k) pre-tax. My wife has $300,000 in her 401(k).  Once we’re in retirement, we will roll the 401(k) toward traditional IRA account, convert some money into a Roth every year with the consideration of whatever tax rate at that point. I believe that our tax rate in retirement will be much lower than it is today.  We plan to spend $80,000 to $90,000 a year when we are retired. Can you tell us whether this is a good strategy? Looking forward to some spit balling in our scenario. Our drink of choice is a little California red wine, BV.” What’s that?

Andi: I think that’s the brand.

Joe: California red wine BV?

Andi: I think the brand is called BV.

Joe: “We own some little Tesla Model 3 and a Toyota Sienna minivan. We live in LA, our house is paid off and we’ll stay in the same house after retirement. Thank you very much.” Another JZ. One from New York and one from California.

Al: They’re on each coast. How about that?

Joe: All right. Yes, okay, just put everything into the 401(k) plan. Don’t worry about keeping a dollar in the IRA. I don’t know what that’s all about.

Al: Well, they want to keep the account open so they can do it every year.  You can still, they’re not gonna close the account.  They, they, it happened, it happened to me once where they closed it because it had no balance. So it’s possible.  I keep, I keep the dollar.

Joe: I’ve been doing back doors a long time.

Al: What you said, JZ, does work. Because once the money from your IRA is in a 401(k), it doesn’t count for the pro rata rule, right? And aggregation rule. So you can do your backdoor Roths if you want to.

Joe: Yeah.  Put everything into the 401(k) and then when you retire, you can roll it out to an IRA, whatever you want to do with it. And then do conversions along the way.

Al: Oh, only reason you wouldn’t do that is if you don’t really like the investment choices and the fees inside your 401(k), then you’re, now you’re, you’re getting a little bit of tax benefit for poor investments. So, so just be careful. You’re comfortable with the 401(k) investments. That’s what I would say.

Joe: All right.  I would imagine 401(k) is probably all right.

Al: Usually. But, you know, sometimes they’re with companies that have high fees. Right. So just, just be careful. Yeah. That’s all I would say.

Hawk Tuah Spitball

Joe: Hey, I saw something on LinkedIn the other day. You know the Hawk tui girl, or?

Andi: I’ve seen reference to that, but I don’t know what it’s referring to. I don’t know the original source. What is it? Hawk tuah?

Joe: Yeah, it’s a joke, I guess.

Andi: Okay.

Joe: Google it. It’s spitting or something. Hawk tuah or something. I don’t know. But he was talking about a spit- He’s a financial advisor and he’s like, “yeah, I think you need more than a spitball for good advice.” And then so he puts on this lady and she’s like, “hawk tuah!” or whatever – or this girl And I’m like, hey, is he calling us out? And he’s like, “yeah, you need to have a comprehensive financial plan, so call me, George Financial,” or something like that.

Al: He put that in our site?

Joe: No, it was just a post that he had. I was like, I wonder if he’s kind of pulling punches here on us.

Al: Yeah it could be.

Andi: Yeah, send me that, will you?

Joe: I don’t how to send that. It was just, but maybe he was using the term spitball because it was like a joke with this hawk tuah person, or whatever.

Al: Could be.

Joe: So, I don’t know.

Andi: Wow.

Joe: Alright, that’s it for us. We’ll see you guys next week. The show is called Your Money, Your Wealth®.

Andi: The This is History podcast, Joan Jett, and Alanis Morrisette in the Derails at the end of the episode, so stick around. 

If you enjoy YMYW, why not tell your friends? It’ll help us reach more listeners like you. Leave your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and check out the YMYW archives I’m posting daily to our YouTube channel. Subscribe and leave a comment!

Your Money, Your Wealth, the originator of the Retirement Spitball Analysis, is proudly presented by Pure Financial Advisors. And while it is flattering to hear that my words are making the rounds, planning for your financial future is about crafting a personalized strategy based on your unique goals and circumstances, not about chasing viral trends. That’s actually the opposite of good financial planning!

Schedule a free financial assessment with one of the experienced professionals on Joe and Big Al’s team to discover the Pure difference and to gain insights that go beyond the hype. Click the free assessment link in the description of this episode or call 888-994-6257 to book yours. 

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.

The Derails
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