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
April 21, 2020

In these volatile markets, pitches for fixed indexed annuities will be on the upswing. Here’s how to analyze them for yourself. Plus, CARES Act stimulus payments for kids, retirement account distributions, and rethinking your retirement savings strategy. Also, SECURE Act stretch IRA rules, evaluating long term care insurance options, and why thrift savings plan (TSP) to Roth conversions are so complicated.

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Show Notes

  • (00:50) Stimulus Payments for Children
  • (02:15) CARES Act Distributions from Retirement Accounts
  • (06:23) With Stimulus, Should I Switch from Roth to Traditional IRA Contributions?
  • (15:00) What Do You Think of My Indexed Annuity?
  • (24:30) Fixed Income: Why Not Invest in Individual Bonds?
  • (32:55) SECURE Act Stretch IRA: Does the 10 Years Apply to My Son After I Pass? Will He Have to Pay Tax?
  • (35:00) TSP to Roth Conversions: Why So Complicated?
  • (41:43) Should We Re-Evaluate Our Long Term Care Options?

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Stimulus Payments for Children

Joe: Jeff writes in. He goes “Hey please clarify the payments for children. I heard they must be younger than 17. Is that true? If so, why? Shouldn’t children 23 or younger and claimed as dependents qualify too? Thanks.” He makes a logical question. But it’s not 17 and under, it’s under the age of 17. So if Jeff’s married it’s $2400, plus any child under the age of 17 gets additional $500. Looks like Jeff has a kid at 23 that he’s claiming as a dependent so he would not get the $500 for the child that he’s claiming the dependent or if the child was earning the income and would not receive any benefit there as well because he is a dependent. So the answer to Jeff is don’t claim your kid as a dependent. Because then the kid would probably get the stimulus check and then just have the kid pay Jeff.

Andi: And then there’s the question of why?

Joe: I don’t know. I have no idea. I have no idea why it’s under the age of 17. I hear we’re getting a lot of these stimulus checks in.

Andi: I got mine.

Joe: You did?

Andi: Yep.

Joe: All Right. There we go. Today?

Andi: Yesterday.

Joe: All right.

CARES Act Distributions from Retirement Accounts

Joe: Here is another one. We got George. He writes in. “Hey, Joe and Big Al. I really enjoy your show. I find your quirky humor is quite entertaining and the knowledge you provide is of great value. My wife thinks I’m an old man, only 35 years old, for listening to you guys.”

Andi: But he’s okay with that.

Joe: I’m glad you’re okay with that George. Well, you got an old man name. That’s probably why his wife thinks he’s an old man. “The information you provide will hopefully help us retire early before age 65. I have a question about the CARES Act concerning the distribution from a retirement account. I have a 401(k) at work that has both pre-tax contributions and Roth contributions. Would I be able to take a distribution of the Roth portion and roll it into my Roth IRA? The 401(k) does not allow in-service distributions and I was hoping this new law would allow me to get those Roth funds out of the 401(k) into my Roth IRA. Thanks so much guys for all you do. I really appreciate the wisdom you provide.” OK. Well, first of all, I’m not sure why he wants to do that. It makes no difference. If it’s in a 401(k) or Roth IRA at this point at age 35, when he retires and separates from service or if he changes jobs he would just take the Roth dollars from the 401(k) move it into his Roth IRA at that point and then roll the pre-tax into a traditional IRA.

Andi: So there’s no benefit to doing it now?

Joe: No. I mean he can. What he’s talking about with the CARES Act is there’s the coronavirus distribution. So if you have or if your spouse has been diagnosed or if you have the Cobra 19 or if you get laid off or if you lose hours or if you’re affected in any way by the virus then there’s a distribution that you can take. So you would take a distribution from a 401(k) plan which he’s looking to do, but he just wants to move it directly into the Roth. It doesn’t seem like he wants to spend it. So what the distribution allows an individual to do is take the money out and pay it back over 3 years or pay the tax on it over 3 years. So it’s not like you’re taking out and put it into another retirement account because he would have to put it back into the 401(k) plan or he would be taxed on those dollars. So if he took $100,000 let’s say of his Roth money from the 401(k) put it into his Roth IRA, he would still either have to put the money back into the 401(k) or pay taxes on the distribution which wouldn’t make any sense at all. But if it was, hold on a second, but if it was a Roth component of it he wouldn’t have to pay tax on it or a 10% penalty. But he wouldn’t be able to put it into the Roth IRA because then that would be an excess contribution because it’s not a rollover or transfer. So George, I’m still a little confused on what you want to do here. The CARES Act distribution wouldn’t apply because it’s either you pay it back over 3 years or pay the tax over 3 years. And you couldn’t take the money out of the overall plan and put it into a Roth to pay the tax. That wouldn’t make any sense either. You won’t be able to take the money out and do a conversion and pay the tax over 3 years either. So not sure why he would want to do that. I don’t know. What do you think Andi? Is there anything I’m reading on this that I’m missing?

Andi: No I think you’re reading it right. That’s why my question was what would be the benefit of doing it now as opposed to when he actually wants to take the money out and it doesn’t seem like there is one.

Joe: No. I mean unless he wants to invest in something different than the Roth IRA. He could have a self-directed Roth IRA where he’s investing in different investments that are not available within his 401(k).

Andi: That’s probably why.

Joe: But I mean most 401(k) plans now you have so many options unless he wants to do like hard assets, real estate or something to that effect. So hopefully that answers your question, George. Sorry that I couldn’t have been more help.

With Stimulus, Should I Switch from Roth to Traditional IRA Contributions?

Andi: I get first.

Joe: That’s right.

Joe: “I truly have gotten more out of your podcast than any other.”

Andi: Now that’s saying a lot.

Joe: That is. He lives in Arkansas but from California. Wonder what brought someone from California to Arkansas.

Andi: Gotta be either family or job. That’d be my guess.

Joe: I was in Arkansas.

Andi: How’d you like it?

Joe: It was fine. It was good.

Andi: I camped in Arkansas once next to a river and it was really loud all night.

Joe: The Arkansas River?

Andi: Yeah.

Joe: I was on a houseboat on the Arkansas River.

Andi: There you go.

Joe: Good times. Played little golf.

Andi: On a houseboat?

Joe: No, no, no. It was over Thanksgiving. Ok, well here’s Ryan’s situation. “I will make $198,000 in 2020. In 2019, my AGI was $220,000, on a base of $245,000. As I understand it from your recent show, the CARES Act goes off of 2020 income. However, I will just have to wait until I do my taxes next year since my latest tax return puts me over the edge.” So what- a pause here, because what Ryan’s referring to is the stimulus checks. $2400 or $1500 and it’s based on adjusted gross income. The phase-outs for a married individual starts at $150,000; phase-outs for the individual starts at $75,000-

Andi: – and it’s $2400 for married and $1200 hundred for single, not $1500.

Joe: What did I say?

Andi: You said $1500.

Joe: Oh, $1200. Sorry, half.

Andi: Yeah.

Joe: So I guess for every $1000 that you have over that you lose $50 bucks. So I think that’s partly where I got $1500 in my head. So he’s looking at my AGI is too high on my 2019 tax returns. The CARES Act takes a look at your 2018, 2019 or 2020 tax return. It’s really a tax credit based on 2020 tax returns. But they’re giving us that cash sooner because we need the cash now. So instead of waiting for a tax credit in 2020 they take a look at whatever tax return is on file, the most recent tax return. And so it looks like Ryan already filed his 2019 tax return and his income was too high. So he’s like I’m going to wait until my 2020 hopefully I get a little bit of a tax credit. “Also as I understand it I’ll be at the bottom end of the phase out except for my 3 $500 child credits I will qualify for.” So the phase out starts at $150,000. So let’s say if you have a $2400 tax credit so every $1000 that you make over that $150,000, you lose up to $50. So if you’re making around $200,000 of adjusted gross you basically phase out entirely of your tax credit. Except he’s got an additional $1500 tax credit because he’s got 3 children under the age of 17 so he writes “If I’m right in the above, then I have a question regarding my 401(k) and HSA contributions this year. This is the first year my company has offered a Roth 401(k) and I immediately switched from traditional to Roth. But now that there will be a stimulus based on AGI, would it be beneficial for me to switch back this year to capitalize on this especially since it seems there will be more stimulus to come and $200,000 for a married tax filer seems to be the magic number? Or will there be much more money to be had in the long run keeping with the Roth 401(k)?”

Andi: He’s strategizing.

Joe: Yes. Here’s how I would look at it, Ryan. Let’s say you go pre-tax and I’m just going to use round numbers because I don’t have a calculator in front of me. So instead of putting money pre-tax- or post-tax, he’s going to go pre-tax so he’s gonna go $20,000 and at $200,000 of income that’s in the 24% tax bracket. So he’s going to save about $5000 in tax plus another $1,500,000 or $1500 in credits.

Andi: $1500.

Joe: $1500. So that’s $6500 roughly.

Andi: Correct.

Joe: Ok, so if he invests the $20,000 into the Roth he’s not going to get any of that benefit. He’ll still probably get the $1500, but let’s just say it wipes him out. Or maybe he would get another $1500 of credit if he went pre-tax because he wouldn’t phase him entirely out. It wouldn’t be that much but you get the gist. So let’s say you got $20,000 in a Roth IRA and you invest that. The markets are low. The markets will continue to be volatile. They could drop even more. And then as you’re continuing to save at lower prices and if you feel that the market’s going to be up let’s say over the next 10 years from now, let’s say your $20,000 grows to $40,000. So if he stays in the 24% tax bracket that’s about a $9600 savings because it’s all tax free to him. If he kept the $20,000 in the 401(k) plan and it grows to $40,000 and he pulls it out at 24% tax that’s going to cost you $9600. So I’m gonna look at what that cost is today versus what the cost is in the future plus also the flexibility that I have. I have no idea how old Ryan is. I have no idea – if he’s got 3 children under the age of 17, I’m guessing he’s probably in his 40s or he could be 40s or younger or maybe older, I don’t know. I don’t know how much money he’s got saved. I know he makes a good income but if he’s in his 40s and he’s making a few hundred thousand dollars a year, I would imagine he’s going to continue to make that and probably save more if he doesn’t have any money into the Roth IRA. I like that better. I know Al would probably do the math a little bit differently. He would really get to the gnat’s ass and say here’s what you’re giving up in regards to credit. And you have to really compute this and blah blah blah blah blah. But I mean that’s just straight numbers.

We have no idea what’s going to happen to tax rates in the future. If we have this much stimulus that is going on right now, where do you think tax rates potentially are going to go? I mean I think they can only go one way and that’s up and especially with people that have assets and monies. I think the bottom tax rates will probably stay the same. I don’t think they’re going to mess with those. But if you’re making $200,000 and you think you’re going to stay in the 24% marginal tax rate I think that’s wishful thinking. So in my opinion if you have the opportunity to save it you’ve got to do the math. There’s probably a little bit more analysis that I could do for you but I’m not going to do it on the fly. But I’m just kind of giving you an idea of how you would want to look at this.

What Do You Think of My Indexed Annuity?

Joe: But this week we got Dudley that actually calls in.

Dudley: “Yes. Good morning. My name is Dudley. My situation starts with a purchase of an indexed annuity. I bought it from Aviva 10 years ago, and it was $100,000, and I took the option of fixed income guaranteed 8% compounded interest with a bonus of $8,000. So $108,000 over a 10 year period grows to about $233,000. And it generates an income stream for a single pay-out of about $15,000 per year, and that’s what I intend to execute. For this guarantee of $15,000 a year for the duration of my life, I have not and will not pay any fees, costs, from purchase to my death or after. 100% of my money invested, and its earnings will not be subject to any detractions. Please confirm or discuss on the basis of provided information. I want to thank David who did a very nice job of explaining to me this service. I think it’s great. Look forward to your response. Take care. Bye bye.”

Joe: OK. That’s a mouthful there. Dudley. We’re probably going to get a lot more of these calls or questions in regards to certain types of products that offer guarantees. There’s two different components to what Dudley’s talking about. It’s a little bit confusing in how it’s positioned and sold and how it actually works are two different things. Because as Dudley explains it, is that I purchased this annuity product for a $100,000. The annuity is going to guarantee me 8% compound interest, are also going to throw in a bonus just because they’re nice. So right off the bat, I got $108,000. And over a 10 year period I’m guaranteed that that money is going to be $233,000. So that in itself is not factual in regards to- Dudley, you cannot take the $233,000. Let me do a caveat. I haven’t seen the contract. I have not read the contract. I’m just going off of what you’re telling me. So I could give myself an out here. But I have seen a lot of these products in the past and the $233,000 is an income base.

The 8% guarantee- they’re not guaranteeing you 8% and all of a sudden 10 years later you got $233,000 and you take the $233,000 and walk. Because ideally who wouldn’t do that? If you could get a guaranteed 8% from an insurance company. I mean of course he would take that you would take that all day long, but that’s just not true. The $233,000 is an income base. So the 8% is a roll up, the $233,000 is a factor that the insurance company uses to determine what your income is. So this is a play to get a guaranteed income for the rest of your life. I have no idea how old Dudley is. So to really understand the internal rate of return on this product you have to figure out how old Dudley is and what his life expectancy is. So what Dudley is telling me though he’s getting $15,000 per year. So if I do the math, you get $100,000 upfront, you deposit that into this annuity, they give you an 8% kicker, so you got $108,000. So that shows up on your statement, you’re pretty happy about that. They’re going to say they’re going to guarantee you 8%. So 10 years later you got $233,000. Like I said you can’t touch that $233,000, that’s an income base. It’s a factor. That’s all it is, it’s a factor. So then the insurance company says we’re going to give you a $15,000 guaranteed income. And then that’s based on the $233,000. If I do the math $15,000 into $233,000, it’s about 6%. So they’re giving him a guaranteed 6% based on the $233,000, which is $15,000.

So when you kind of look at this at first blush, you’re like who wouldn’t do this? But if I explain it like this, to say the insurance companies make money right. Just like banks, how the banks make money? You give them your money and you purchase a CD for 1% or 2%.  What do they do? They loan that out the back door for a home mortgage at 4%, or a boat loan at 8%, or credit cards at 15% or 20%. So that spread is how banks make money. Insurance companies do the exact same thing and they’re very profitable and they’re very good at this. So when you hear an 8% compound interest, a lot of individuals will say I’m going to jump all over that. But you’ve got to be careful. He’s getting $15,000. That’s his guarantee. So let’s go $100,000, 8%, 10 years later, it’s $233,000. So how much money really has Dudley utilized? Zero. So the company or the insurance company has used his $100,000 and try to make more than they’re paying out. Because they haven’t paid out anything. They’re utilizing his capital for the last 10 years, to invest in other ventures to try to increase their overall bottom line. What Dudley is going to receive is his money back, bled out to him over time. So then in year 11 what does Dudley receive? He receives $15,000. So let’s go out 10 years. So $15,000 over 10 years is $150,000. So the insurance company over 20 years has paid him out $50,000. So he started with $100,000. Then they put all these- I was gonna say something else- these numbers in there and it’s like now it’s $108,000. Now it’s $233,000. All you really need to be concerned about is what the guaranteed income is. So it’s $15,000 per year. I’m guessing that Dudley is I don’t know, probably 65. Maybe he’s a little bit older because these numbers are a little bit rich. So let’s just say Dudley’s 60. He starts at 60 with his $100,000, 10 years goes by, he’s 70. He has not received a dime from the insurance company. He turns his income on at age 71, gets his $15,000. You go out 10 years when he turns 80, he’s received $150,000. So on his $100,000 investment, he’s made $50,000 over 20 years. So let’s go on another 10 years. So now he’s 90. That $150,000 or that $15,000 year, it’s another 10 years so he makes another $150,000, plus the $50,000 that he made the previous 10 years. So he’s made $200,000 on his $100,000 investment over a 30 year time period.

So that’s assuming Dudley’s 60. If Dudley’s 65 or older, you can see how this internal rate of return is going to be a lot lower unless Dudley lives to 150. The internal rate of return is a few percent. it’s probably around 3%, 3.5%. Usually what I see is about 2.5%. That’s the true return that the investor’s getting. That’s not adjusted for inflation. And if it’s in an annuity, all the income that’s going to come out to Dudley is going to be at ordinary income tax. So you have to look at what are you giving up? I’m giving up the potential to have a higher expected rate of return than 3%. If you want to say I don’t care, 3% is perfect. It’s not adjusted for inflation. It’s going to be fully taxable. I’m going to lock up my money with this insurance company for the rest of my life, then do it. But I think how these are sold or how these are positioned sometimes might seem a little bit more rosier. Because who wouldn’t want an 8% compound interest especially in today’s environment? Everyone would want to jump on that. How about a bonus of $8000? You put it in this product I’m just going to give you $8000 because I’m a nice person? There’s got to be something on the other side of the equation. When there’s a buyer, there’s a seller. They’re selling these products to you, you’re buying them, someone- they’ve gotta benefit. You just have to understand truly what you’re getting.

If you’re fine with transferring risk because this is a risk transfer tool; you’re transferring your risk to the insurance company and you’re fine with a low expected rate of return from this- it’s a guarantee. It’s a guarantee to give you a low return that’s fully taxable; that’s going to lock you up within this insurance company forever. If that’s what you want, then do it. If you want more flexibility, a lot less cheaper cost- he says no fees. Well it’s a spread. It might not be an investment fee or- but there’s a spread. They’re definitely making money off you Dudley. We can’t be naive here as well. But if you’re like I don’t want to mess with it. I just want a guaranteed income for the duration, for my life. $15,000. It’s all good. Then do it. But you truly need to figure out what the internal rate of return is on all these investments before you make any decision. So I don’t know. I’m not a huge fan, but if you want to transfer risk, get the income. That’s fine. But just know you’re not getting 8%, you’re getting 3%. And I don’t even know- if you’re older than 60, let’s say you’re 70, it’s closer to 2%. So anyway if you’ve got more questions. Shoot me an email. Hopefully this helps. Anything else on that?  I don’t think so.

Fixed Income: Why Not Invest in Individual Bonds?

Andi: Cyd and Ron.

Joe: Yes. That’s what I said.

Andi: No it’s not.

Joe: Cyd and Ron.

Andi: Perfect.

Joe: What did it sound like?

Andi: Cyd Ron.

Joe: Cyd Ron? Cyd and Ron. “Dear Al, Joe and Andi. We, hubby and me, from Tennessee-” That’s kind of cute. “- love, love, love your show. We’d like your opinion and discussion on the following: with the desire of wanting a secure stream of fixed income, why isn’t there more promotion on individual bonds versus annuities? We are not fans and don’t own an annuity for all the known reasons, but prefer holding individual bonds, not bond funds. We don’t understand why this option is not entertained more for fixed income solutions. We currently hold 4 individual corporate bonds, just under $1,000,000 par value, that matures between 2031 and 39. We have owned these for 10 years and they pay annual interest income of approximately $90,000 a year. The qualification consideration is to own investment grade corporate bonds, Triple B rating or higher with the maturity dates out 10 plus years and the yield to maturity equaling 6% held to maturity.” So I’m going to pause there.

Andi: There’s comments.

Joe: There’s a lot of meat on the bone here. So first of all, I agree with the hubby and me from Tennessee is that individual bond ladders are a phenomenal way to create a fixed income stream. It really depends on a) how much money that the individual has, in my opinion. Because the bid ask or the spread on bonds, individual bonds, are pretty expensive for the average individual investor. Because if you think about it like this, what do you think is larger? The bond market or the stock market?

Andi: I would guess the bond market?

Joe: The bond market is significantly larger than the stock market. So if you think of the globe as the bond market.

Andi: Ok.

Joe: Like the city of Santee would be there. It’s not that big of a difference. Because it’s like- companies, I mean countries issue bonds.

Andi: Yeah.

Joe: Trillions in dollars of bonds. There’s not like a USA stock. You’re buying companies. So when you’re looking at bond traders they want big blocks of trades. So that’s why diversifying within other types of products to get those costs really low. So the spread or the income can go to the client more vs. the bond trader is key. So there are some things and there’s research that individuals would need to do, to do this on their own. And it sounds like hubby and me from Tennessee are pretty sophisticated-

Andi: Cyd and Ron.

Joe: I like calling them hubby and me.

Andi: Ok.

Joe: They’ve got over $5,000,000 of liquid assets so you can tell that they’ve been long at investing. It sounds like they’ve accumulated this all on their own with no inheritances, no businesses. They work corporate America and then it’s just like never underestimate the value of compound interest. So they’ve been just grinding and saving for quite some time. And so you know they probably have a little bit of education in regards to bonds. I like individual bonds but for let’s say an average investor that doesn’t have $5,000,000, is that an appropriate solution? Because we would want- she bought 4 corporate bonds. I would want a lot more diversification than 4 corporate bonds so that’s one of the cons. And she even put that down as one of her cons. Is that corporate bonds right now with corporations going on with COVID-19 it’s like oh my-  is there going to be a default? Can I pay these? It has to be paid by the corporation’s profits. So if those corporations go bad well then there’s a risk of default. Also as interest rates go up, bond prices go down.

So right now we’re at relatively low interest rate environment. As those interest rates rise, bond prices will go down and if they have to sell prior to maturity for liquidity purposes, they could potentially sell those bonds at a loss. So those are the two big cons. So they’re going to hold the bond to maturity and there’s no risk of default which is impossible. I mean any company can go under but as long as the company stays in business it’s a great investment. Because she’s absolutely right she goes fixed income until maturity. Yep. Straightforward terms, yeah it’s pretty easy. You buy a bond for $500,000, $1,000,000, or whatever it is and you get a 5% interest rate or coupon. You clip your coupon, get your payment, move on. You could sell, liquidate at any time. Yeah, but you might be selling that bond at a discount. Or you could sell it at a premium depending on where interest rates go. No surrender charges and fees. No, because you’re paying the fees upfront. That’s the big con in my opinion that there’s very, very little transparency in the bond market. And so bond brokers, they make a ton of cash. And I know several.

So that’s why we as a firm, we absolutely have individual bond ladders for our clients. But it depends on how much money that they have. For the average investor, let’s say that has $1,000,000 of investable assets probably individual bonds, what makes sense, we would want to use ETFs or bond funds with a very short maturity because we’re not looking for income within the bonds. We’re looking maybe for a total return approach and those bonds are used for stability within the overall portfolio and a rebalance tool. So it really all depends on what the goals and objective is of the investor and what they’re trying to accomplish and what their overall portfolio looks like. So yeah, I’m a big fan of individual bonds versus an annuity. Because what the insurance companies are doing, they’re buying bonds themselves. They’re just probably more sophisticated than some investors. And the investor would rather have the insurance company take on all the risk and get a guarantee. But you’re paying for that guarantee by a large premium, in most cases. So it’s just understanding what you’re trying to accomplish and understanding the pros and cons. And I think you have a pretty good understanding what the pros are, what the cons are. Another is yes, there’s a chance of being called. What that means is that let’s say the interest rates are paying at 6%; interest rates go down; they can call the bond, reissue the bond and say we’re only going to pay 4%. So lot of different things to consider. But Cyd and Ron from Tennessee, hubby and me, appreciate the email.

SECURE Act Stretch IRA: Does the 10 Years Apply to My Son After I Pass? Will He Have to Pay Tax?

Joe: Got a question on the SECURE Act from Shyan or Shien?

Andi:  I think it’s Shien.

Joe: Shien. Or Shawn.

Andi: I think it’s Shien.

Joe: Shien. “With the SECURE Act, does the 10 years apply to my son after I pass? And will he have to pay tax? My age is 67 and my son’s is 47. Thanks. I enjoy your Sunday shows.” I DVR watch them.” All right cool.” So Alan, so he dies, his kid’s 47, “Does the 10 years apply to my son after I pass.” So he’s talking about the death of the Stretch IRA.

Al: Yeah, and the answer is, it does. And this happened effectively this current year, 2020. January 1st, 2020. So anyone that passes away after that date, which if you’re living now, that’s going to happen. And so that means that anyone other than your spouse is going to be subject to the SECURE Act, which means the most that they can stretch it is 10 years. There’s a couple exceptions, like if you’re within 10 years of the person that passed; which would not that work for a son but that could work for a brother, something like that. But your son would have to pull out the money within 10 years. But interestingly enough it doesn’t have to be an even amount over 10 years. It can be any amount your son wants over that 10 year period. But by 10 years it would all have to come out of the account.

Andi: And the son will have to pay tax. Right?

Al: Yes. If it’s in an IRA. If it’s in a Roth IRA, no tax.

Joe: But it’s going to be based on his life expect- I mean his tax rate.

Al: That’s right. So I’m assuming-

Joe: It’s not gonna be taxed at Shien’s tax rate. It’s going to be taxed that Shien’s kid’s.

Al: Yes exactly. So in other words when the son gets the IRA and pulls money out it just gets added to the son’s tax return and gets taxed at whatever rate that he is in.

TSP to Roth Conversions: Why So Complicated?

Joe: We got Cliff from Wisconsin. Andi, you don’t want me to read this because he’s mad at me?

Andi: He’s not mad at you. He just doesn’t understand why you made something so difficult. Which is kind of your specialty.

Joe: I try to make things easy.

Andi: Read on, Joe.

Joe: Well let’s see what Cliff has to say.

Al: Sometimes we just babble on and on. We do our best.

Joe: Well he’s from Wisconsin. I’m from Minnesota originally so he’s probably just-

Al: Just annoyed with you.

Joe: Well who isn’t? All right so- “Hi.” He started off fine.

Al: Started out great.

Joe: “I just listened your podcast 254 and I’ve been-” oh, 254, thanks, I know-

Andi: That’s the one where you guys talked about TSP Roth conversions and you ended up getting spanked by a bunch of folks in the military. Remember that?

Al: Oh, ok.

Joe: Well no he was talking about people like in a combat zone.

Andi: Right.

Joe: How the hell do Al and I know- we know a lot of things, but I mean not everything. Geez.

Al: Yeah. Well just a little disclaimer, we don’t know everything.

Joe: “I began to think I had bad info regarding converting my TSP to a Roth IRA. You made it sound very cumbersome and at one point at least said that you cannot make a conversion without first moving the TSP funds through the traditional IRA. I disagree and feel you should research this more. It’s extremely easy to do a conversion. On the TSP site, you click the link to make a withdrawal and about two minutes later, your partial withdrawal request is done. For me, this even including changing my address which is an option during the process. Ran it, I’m retired, 60 and single. I’ve just completed this for the year but last year the money was in my bank account in three days I believe. There are no forms to fill out nor any restrictions on how much you can transfer. You can make a withdrawal up to once per month. They do take 20% out for the IRS. You can get around this by selecting that you want a direct transfer which would probably have to be to a regular IRA. I choose to distribute because I wanted some of the cash. Then you have 60 days to convert it.” Oh boy. Al, are you listening to this?

Al: No you don’t.

Joe: Cliff, come on brother. “The rest is even more easily transferred to my Roth IRA. Mine, I held at T.D. Ameritrade. They have a form that takes two minutes to fill out and I choose the box titled Roth conversion. I already had it on my computer from last year. I print it, fill it out and put it in an envelope with a check in less than three minutes. No kidding. The whole process is actually too easy. Next year I’ll transfer the funds directly to my traditional IRA. Convert them and fund the taxes due from outside accounts so then I can get more money into my Roth IRA. I can transfer just over $86,000 without getting above the 24% tax bracket. I’m not far from the top of the 22%. The extra taxes will be more than earned back by the tax-free growth in my Roth IRA which will be filled with Vanguard ETFs with about the same expense ratio as my TSP. Fortunately, I have lots of cash in my Roth that make these purchases at a good time, which is now. Am I missing something? You made it sound more complicated.”

Joe: Yes. You are missing something Cliff. You took a distribution from your TSP and you put it in your checking account and then you deposited into your Roth. That is prohibited. You did it wrong. You cannot do it that way. So it is a little bit more complicated than what you did. Because you have an excess contribution in your Roth IRA because he took a distribution. He paid the tax and then he deposited the money into the Roth. TD Ameritrade doesn’t know where the money is coming from. And on his tax form as he’s claiming it as a conversion. You did a 60-day rollover. A 60-day rollover is taking money from a retirement account and putting that back into a same type of retirement account. A conversion is something different. You’re taking money and you’re converting it and paying tax. It needs to go directly into the Roth. It can’t sit in your hands. You took possession. So yes, you kind of screwed that up. The likelihood of Cliff getting audited is another story, Al. But he’s using a 30- or 60-day rollover to do his conversions.

Al: Yeah, once there’s a distribution to your checking account, to where you hold the funds personally you cannot convert that. Cliff, I will say your next year strategy is fine. Where you say “I’ll transfer the funds directly to my traditional IRA, convert them and then fund the taxes due from outside accounts.” That actually does work. So in other words, you do an in-service withdrawal from the TSP to an IRA and you convert that directly. That does work. But once you take a distribution it’s not only taxable, but you cannot put it in a Roth. If you do, here’s what can happen- you put it in the Roth and you weren’t allowed to. And the IRS catches it 10 years from now and then all this money that you thought was tax-free, it comes out, you have 6% excise penalty, for 10 years that’s 60% of your account gone because of the penalties. Plus it’s all taxable. It’s a complete disaster to do it that way.

Joe: Right. So the TSP- if I’m converting a 401(k) plan or an IRA, the 401(k) dollars I’m saying I’m taking the money out and I’m converting it into a Roth IRA. The money is not in my name. The money is in the name of the custodian. It’s going to say with your Vanguard ETFs, if I did this correctly it’s going to say Vanguard for the benefit of Joe Anderson in my Roth. And then I deposited in the Roth that way. You have money. It’s in your name. It’s in Cliff’s name. And then Cliff writes a check into the Roth for X amount of dollars and then on his tax forms he’s filling them out a little bit differently. That’s what it sounds like to me. If it went from a in-service withdrawal into an IRA then IRA into the Roth, that was done correctly. But he’s taking a distribution it sounds like, putting it in his checking account, because he needed the cash and then he’s writing the check into the custodian. That’s a complete blow-up. So yeah, I made it complicated because it is complicated.

Should We Re-Evaluate Our Long Term Care Options?

Joe: So we got George. No location given. George. George. George.

Al: We’ve had George on before.

Joe: “Dear Andi, Joe Anderson CFP® and Big Al Clopine CPA” What the- George.

Al: And he’s even got the little registered trademark by the CFP®.

Joe: I know. What was he doing?

Al: He must have copied it from something.

Joe: “I hope you are well.” Well, this is very formal George. Not sure if I should try to answer this one.

Al: Well he could have said Joseph Denis Anderson.

Joe: He could have. “Love your newsletter and the show even now after nearly two years.” George, we’ve been doing this for15.

Al: Don’t remind me.

Joe: Two years. Come on. You’re a rookie George. “My wife and I purchased long term care insurance policies 10 years ago from a AARP affiliate while we were in our early 50s. After several price increases and one coverage decrease, I believe it’s time to re-evaluate our long term care options. Do you have a framework or approach to this issue? Seems like the options are to keep the current plan, purchase a hybrid plan, self-insure or just blow the money and force our adult kids to take care of us better.”

Andi: Later.

Joe: -later. Sorry. Sorry. “Curious George.” Alrighty, Curious George. I think you’ve got all your options dialed. You could keep the current policy. You could purchase a hybrid plan. A hybrid plan is- There’s all sorts of them but here’s one for instance. You pay a certain premium and then that premium will buy life insurance. And it will also buy a long term care rider on it. So let’s say you pay $5000 a year for $500,000 of life insurance and you get $200,000 of long term care costs. Most of those have a return of premium so you purchased for 10 years and you put $50,000 into the policy, after 10 years you’re like I don’t want this anymore. You might be able to get your money back. I’m not a long term care expert by any stretch. I don’t have an insurance license. I do not sell insurance. So I’m just kind of winging it here. I didn’t do any research. Imagine that.

Al: You could’ve fooled us.

Joe: So that’s a hybrid plan. Self-insure, you’re paying your own bill. Or just blow the money and force our adult kids to take- yeah, that sounds like a good one too George.

Al: Well even blowing the money. It’s not as bad as it sounds. Because here’s what a lot of people do is they’re living in their home. They got equity in their home. If they need long term care they just sell their home and they use their equity to pay for the long term care. That would be a common strategy. You could still blow your money and still have the equity in the home for long term care.

Joe: We don’t know where he lives. That’s why we ask where the hell you’re at. Because then we know if you live in let’s say Minnesota- like Fargo. That’d be hard.

Al: Are you saying there’s less equity build up?

Joe: No just that the property values are probably a little bit lower. You could probably get maybe one year of care.

Al: Maybe. Maybe long term care’s cheaper in Minnesota.

Joe: I wouldn’t say- not much.

Al: They have cheaper outdoor rooms.

Joe: Yes. Yes. So hang in there, everyone. Things will get better. Things will turn. Stay patient. Keep your spirits up. Stay healthy. Wash your hands. That’s all I got. We’ll see you guys next week. The show is called Your Money, Your Wealth®.


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