Joe Anderson
ABOUT Joseph

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

Alan Clopine

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

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
January 31, 2023

Joe and Big Al attempt to clearly and succinctly explain modified adjusted income for Medicare and IRMAA, and the pro-rata and aggregation rules for Roth conversions. Will a combat zone TSP transfer be subject to those rules? Plus, joint tenants with rights of survivorship vs. transfer on death for a brokerage account, reducing taxes on the sale of a timeshare, how much to spend on home improvements, and using a reverse mortgage instead of long-term care insurance. And wait ’til you hear the fellas’ thoughts on the best way to pay the least amount of tax when you cash out your retirement savings to buy gold and silver.

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Show Notes

    • (00:56) Medicare MAGI and IRMAA Explained… Clearly (Patrick)
    • (07:22) Pro-Rata & Aggregation Rules Clarified for Roth Conversions (Richard, Santa Clarita, CA)
    • (11:48) Combat Zone TSP Funds Transfer: Will I Get Hit With the Pro-Rata Rule? (Eric, Western Nebraska)
    • (18:17) Best Way to Cash Out Retirement Savings, Buy Precious Metals, and Pay the Least Amount of Tax? (Paul, PA)
    • (24:25) Brokerage Account Joint Tenants With Rights of Survivorship vs. Transfer on Death (Jimmy)
    • (27:53) Is There a Rule of Thumb for How Much to Spend on Home Improvements? (Island Gal)
    • (38:05) How to Reduce Taxes on Sale of a Timeshare? (Chris, MA)
    • (39:38) Can I Use a Reverse Mortgage Instead of Long-Term Care Insurance? (JW, San Diego)

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Today on Your Money, Your Wealth® podcast 414, Joe and Big Al attempt to clearly and succinctly explain modified adjusted income for Medicare and IRMAA, and the pro-rata and aggregation rules for Roth conversions. Will a combat zone TSP transfer be subject to those rules? Plus, joint tenants with rights of survivorship vs. transfer on death for a brokerage account, reducing taxes on the sale of a timeshare, how much to spend on home improvements, and using a reverse mortgage instead of long term care insurance. And wait ’til you hear the fellas’ thoughts on the best way to  pay the least amount of tax when you cash out your retirement savings to buy gold and silver. If you’ve got money questions, click the link in the description of today’s episode in your podcast app to go to the show notes and hit the Ask Joe and Big Al On Air banner to send ‘em on in. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Medicare MAGI and IRMAA Explained… Clearly (Patrick)

Joe: Where are we going, Patrick?

Andi: Sure.

Al: Yeah.

Joe: Sounds good. How’s Hawaii, Al? Is it good?

Al: Loving it. Yeah. We’ve had nothing but sunshine. Today is actually a little hazy, although the sun keeps popping out, but yeah, almost all sun here.

Joe: Got it. Lot of rain here.

Al: None of the rain that you had in California. I missed most of that.

Joe: Yes. It’s killing my golf game.

Al: I know.

Joe: All right, let’s go. Patrick “For the show.” For the show.
He wrote that- for the show, or is that you, Andi?

Andi: Yeah, no, he wrote that because he sent it to ‘contact us’ instead of ‘Ask Joe and Big Al’.

Joe: Got it.

Andi: So he wanted to clarify what it was actually for ‘Ask Joe and Big Al.

Joe: Got it. Got it. Okay. I remember. Because he’s afraid that we’re just going to bombard him with a bunch of solicitations. So Patrick, he’s got a retirement question. “We have retirement income- I’m sorry- from several sources, pensions, 403(b), Social Security, annuities, etc. Can you explain “clearly”- in quotes Al, clearly.

Al: Okay, we’ll try.

Joe: Clearly, we don’t answer questions clearly.

Al: We do our best though.

Joe: “-what is included or excluded for the purposes of establishing MAGI, or modified adjusted gross income, used to determine IRMAA. Given the two year look back rule, what is the best way to plan to avoid being put in a higher bracket for IRMAA? Thanks, Pat.” All right, IRMAA. So that’s, man, what does IRMAA stand for again?

Andi: Income related monthly adjustment amount. It’s actually in red at the top of this question.

Al: Oh yeah, you’re right.

Joe: Income related monthly income adjustment. Yes, okay.

Al: But we know- we know what it is. It’s your Medicare. It’s how much you have to pay for Medicare. So there’s your adjusted gross income, which on your tax return, you have all these items of income, and then you have a few different adjustments like self-employed health insurance and things like that. You end up with adjusted gross income, that’s your starting point. And all you have to do is add back municipal bond interests to get your modified adjusted gross income for Medicare purposes. Now, we’re right now in 2023. So you got to look back to 2021. Look at your adjusted gross income in 2021, which by the way, I looked up. It’s on line 11 of your tax return. And then you add back municipal bond interest, which is line 2a. So that becomes your modified adjusted gross income in 2021. Then you go forward to 2023, the year we’re in right now, and you look at the chart. And as long as your income for a single person is below $97,000 or for a married person is below- can’t even read that- $194,000-

Joe: $194,000.

Al: Yeah, thank you. I’ve got older eyes than you, Joe. So your premium is a $166.90. That’s the lowest you can pay. If it’s more than that, then you may have to obviously pay more premium. So hopefully- hopefully that was clear.

Joe: Yeah, no, crystal. I think because what happens is that once you get a dollar over these thresholds, then your Medicare premium goes up. Medicare part B premium, not part A, part B.

Al: That’s right.

Joe: And then you also have part D. So if you have prescription drugs, depending on your income, you’re going to pay more premiums for your Medicare package. And so it could start anywhere from, I’m going to round here, Alan, $170,000 and it could go as high as about $600 a month. So really, depending on your income. But it’s not the income of that year. It’s your income two years ago. And so when you look at certain type of tax strategies in tax planning, some of the things that you want to be careful with, and a lot of our listeners are big Roth conversion people. I don’t know what we created here. We created a Roth cult.

Al: Apparently.

Joe: But that’s all right. I love all of you. And he might be asking, is like, hey, does a Roth conversion potentially, would that get added back or is that subtracted? How does that potentially work? And yes, that would be part of your adjusted gross income. You know, it’s funny because Roth conversions do not count for your eligibility to do a Roth IRA contribution. So Roth IRA contributions have MAGI limits, modified adjusted gross income limits, for you to put money into a Roth IRA as a contribution. But if you do a big conversion, they take that out. So there’s all sorts of different types of modifications to your adjusted gross income. And this one is, he’s curious that we have to answer very clearly and hopefully this is as clear as we possibly can get.

Andi: For Joe and Big Al, I’d say this is pretty darn clear.

Al: Yeah, for us, huh?

Andi: Yeah.

Al: Well, I would say if you Google MAGI, modified adjusted gross income, you’ll get confused. Because there are several of them depending upon what it’s for. So that’s why- partly why this is confusing. I want to say one more thing though, and that is, let’s say- let’s say your income in 2023 is a lot different than 2021 because marriage or divorce or loss of job or something like that. You actually can call up Medicare and ask them for a special modification because your income is no longer as high as it used to be two years ago. So just be aware of that- that’s a possibility.

Joe: Yeah, I think that came out a couple of years ago too, that they added some stuff to that. I think there’s several different types of exemptions that you could go in and challenge your IRMAA premium.

Al: Yeah. You’re right. I actually have the list if you’re interested, marriage, divorce, death of a spouse, loss of job or reduction of hours worked, loss of income generating property, reduction in or loss of pension and settlement from an employer.

Joe: Wow, did you do some research there, Big Al? Or you just had that stuff at your fingertips?

Al: I just know it. You can see this paper that I’m reading from. No, that’s not one I could call out of the old noggin.

Joe: Got it. All right. Well, hopefully that was clear enough. Thanks for the question.

Pro-Rata & Aggregation Rules Clarified for Roth Conversions (Richard, Santa Clarita, CA)

Joe: We got Richard from Santa Clarita, California. “Hey, Joe, Al. Can you get into this in more detail? Got this from Investopedia regarding non-deductible IRA conversions to a Roth IRA based on the information below. What if I only want to convert the non-deductible portion $20,000 to a Roth IRA, not the combined amount of a $100,000 to IRA?” So this guy goes to Investopedia. He’s doing a little research.

Al: Sure. Get the strategy.

Joe: I’m not getting the information I need. So let’s go to YMYW.

Al: Right, right.

Joe: “If you have both types of traditional IRAs, make a conversion it’s is more complicated.” So he’s saying if he has non-deductible and deductible IRAs- “Unfortunately, you can’t simply convert your non-deductible IRA. Instead you have to treat all your IRAs of both types as if they were one big IRA. Then you must pro rat -pro rate- pro rat. That is kind of a rat. You must pro rate the amount of money you convert based on the proportion of the non-deductible versus deductible funds in the total IRA. IRS form 86O6, which is used to report the transaction will walk you through the steps. There are also calculators online that are available. As an example, suppose Sam Smith has an IRA totaling $200,000 and wants to convert a $100,000 of that into a Roth IRA. His basis, the amount he has already paid taxes on through his non-deductible IRA contribution over the years is $20,000. Sam’s basis of $20,000 represents 10% of his total IRA balance of $200,000. So 10% of the $100,000 he’s converting into a Roth would be tax-free. While the remaining $90,000 would be taxable. If Sam is in the 24% tax bracket, the conversion would cost him $21,600. Actually, it would cost him at least that amount, depending on Sam’s other income. And how close he is to the top of the 24% tax bracket. So might fall into the next highest bracket, be taxed at 32%. That is why anyone who’s thinking of converting a significant sum should consider their current tax bracket and possibly spread the conversion out over several years to minimize the tax hit.” Where’s the question? Is this it?

Andi: The question- No, his question was-

Joe: Am I missing a page?

Andi: “What if I only want to convert the non-deductible portion, $20,000 to a Roth IRA, not the combined amount of a $100,000 of the IRAs?”

Joe: He just answered his own question.

Al: Yeah, we agree with Investopedia. There’s the aggregation rule and the pro rata rule. But there is a workaround, Joe. And that is if Richard has a 401(k) plan at his work that allows money to be contributed from an IRA. He could actually contribute the pre-tax part of, let’s call it $80,000, and get that in the plan. He’s left with an IRA of $20,000 with basis, and he could convert that and pay no tax. Because 401(k) plans do not allow you to contribute from IRAs anything that already has tax basis in it.

Joe: Okay. So he said he had $200,000. So in that case, you would roll the full $200,000, they would look at it and say, well, wait a minute, you got $20,000 of after-tax or basis. That would isolate the basis. And so then you can take the $20,000 and convert it and not pay any tax. Yeah. We’ve talked about the pro rata aggregation rules on the show for many, many times. Maybe this is Richard’s first go around.

Al: Yeah, yeah, maybe so.

Joe: And he wants to kind of brag and say, hey, look at how smart I am.

Al: Well, we do agree with Investopedia in this case. Everything that was said is correct. I said $100,000 because that’s what he said. He’s got $100,000. The example in the Investopedia is $200,000.

Joe: So yeah. All right. Well, very good.

We have a bunch of new free financial resources in the podcast show notes today. Go get the new Key Financial Data Guide for 2023 – one YMYW listener said recently that, basically, that one guide alone is worth the price of admission! Which is free, but hey… You can also grab the Medicare Checkup Guide, watch the latest episode of YMYW TV – How to Avoid Wealth Busters, and  download the companion guide for that as well. But wait, there’s more. Head over to the show notes and see. Just click that link in the description of today’s episode in your favorite podcast app.

Combat Zone TSP Funds Transfer: Will I Get Hit With the Pro-Rata Rule? (Eric, Western Nebraska)

Joe: We got Eric writes in all the way from Nebraska, Western Nebraska. Western Nebraska.

Al: Yeah, I’m glad he clarified that.

Joe: Yes. Like Southern California and Western Nebraska.

Al: Yeah, right, right. I was just going to say not that eastern side. This is the western side. Not to be confused.

Joe: Not to be confused, yes. “Hello, Joe, Big Al and Andi. Thank you for answering my question about TSP and rollovers. I have been a longtime listener and enjoy the show very much. I find it to be appealing- an appealing combination of expertise and some entertainment. Please continue your dialog, which some find offensive as it targets-“

Andi: – idiocy.”

Al: Idiocy.

Joe: That’s me.

Al: Wow. Yeah, Eric’s being pretty honest with us, right? There’s some entertainment and it’s idiocy.

Andi: Which targets idiocy. Yes.

Joe: It’s just targets idiocy. So other people-

Andi: He’s saying you guys make fun of people and that’s a good thing.

Joe: Got it.

Al: Well, he likes it, I guess.

Joe: “If my letter triggers a targeting of idiocy, fire away, I can handle it.” Yeah, ’cause he’s from Nebraska. Bad ass. Pardon me-

Al: Yeah. Western. Western stuff. Yeah. Let’s get it right.

Joe: Pardon me, western, western. “My wife and I and our early 50s live in rural Nebraska with our two kids, 13 and 15. We have a combined income of a $130,000, but it’s close to $170,000 from Roth conversions. We have about $750,000 in a taxable account, about $600,000 in IRAs, about $100,000 in Roths, $7000 in an HSA.” So all totaling he’s doing pretty well. So we got $1,500,000, roughly in liquid assets.

Al: Yeah. I’d say that too.

Joe: Okay. “Now, one of our long-term goals is to annually convert enough out of the IRA into the Roth so in 20 years, the IRA has a balance of about $1,500,000 and the Roth has a $1,500,000 balance. So we figure our RMDs will start at about $60,000. We understand inflation. So 20 years means that that will be about $35,000 in today’s money. But we figure we can make up the difference with our taxable savings and eventually the Roth if need be.” So he’s doing some projections there-

Al: Yeah, he is.

Joe: -in Western Nebraska.

Al: Very clever.

Joe: And he’s going, all right, well, we want to do some conversions and certain inflation rate is going to be X and a certain growth rate is going to be Y. And so he’s doing some calculations. And if I do this correctly, my Roth balance is going to be $1,500,000 as my traditional IRA balance will be $1,500,000, given the growth of overall markets.

Al: Got it. He wants to balance that scale, right? 50/50 on each. Yep.

Joe: “We are aggressive investors since more than half of our income will come from pensions, which will continue until I die. Life insurance will take over after that. I recently found a TSP account that I started and funded while I was in Baghdad in the Army.” Oh, thank you for your service there, Eric. “I forgot about it. Perhaps due to the focus on more pressing matters.” Yes. Like not getting blown up.

Al: Yeah, that is way more pressing. I agree.

Joe: Well, I mean, you know. Save it in the TSP or not getting blown up? It’s close.

Al: Toss up?

Joe: It’s a toss up.

Al: Got it.

Joe: “I reconnected with that money after two decades. It has about $3000 in it, which is not a fortune, but it is welcome back to my life. The $3000 account has a $1000 non-taxable balance within it. The non-taxable balance comes from the money I earned in the combat zone and will never be taxed. And should never be taxed according to the TSP materials I have been reading. The TSP does not allow me to bifurcate the IRA and take a $1000 out and create a Roth. So I’ll have to leave it in the TSP like that. I plan to transfer my money into my Fidelity accounts. The technician I spoke with at Fidelity explained the TSP will split the funds when they come into the account. I plan to take the $2000 transfer to my IRA and the other $1000 non-taxable balance will transfer to my Roth. My question is to you, do you think I’ll get hit with the pro rata rule when I deposit a $1000 into my Roth even though it’s called non-taxable? As I understand it, it would be 2/3 of the $1000 going into the Roth taxable. This is not big money, but I would like to know how it will go down. What do you think about just converting all $3000 to the Roth and just biting the bullet on the pro rata and paying taxes on $2000? And then the money is forever taken care of. I plan to do more Roth conversions this year. Thanks for your spitball, Eric.” All right, so good question. Thank you for your service. And no, if it’s after-tax, it’s never going to be taxed. So when you get the two checks, you deposit one check into the IRA and the other check into the Roth. The IRS is not going to hit you with the pro rata rule. This is, of course, a spitball. This is not advice. I am not a tax adviser, or a CPA. But I guess if it was my money, I would just convert the whole damn thing.

Al: I would too. And I think you’re right, Joe. I think probably only $2000 would be taxed. But even if we’re wrong, I would still, it’s too small to deal with. Just convert it, get it in, call it good, and add to your Roth. That’s what I would do.

Joe: Because he wants $1,500,000 in the Roth anyway.

Al: Yeah. Yeah.

Joe: He’s gonna continue to convert. So just convert the whole thing, now it’s in a Roth IRA. You pay taxes on $2000. You got $1000 in there. If you’re worried about the IRS coming to get you on the pro rata rule- but no, it was a combat zone, and if they did, I would go and kick their-

Andi: Blow them up.

Al: Something.

Joe: It’s like, come on, I was fighting for our country. He gets a little bit of a break.

Al: Yeah, well, plus I think you’re right, Joe, and plus IRS is not going to care for a $3000 conversion. I can tell you that.

Joe: Yep. All right, Eric, thanks for your service. Thanks for the email. Western Nebraska.

Andi: And no idiocy there.

Joe: No idiocy. It was very- thank you. Besides myself. I didn’t even know what the hell idiocy- I couldn’t even pronounce it. So there you go.

Al: But you know you know what it meant.

Joe: Oh yeah, of course yeah.

Best Way to Cash Out Retirement Savings, Buy Precious Metals, and Pay the Least Amount of Tax? (Paul, PA)

Joe: Got Paul from PA writes in. He goes, “I’m 72 this year. I receive Social Security. No pension. Did work as an independent contractor for 13 years. All work has come to an end in 2022 due to the economy. Approximately gross income for 2022 is $6000 to $7000 gross on 1099. My expenses are higher for said year. No issues here.” For said year. You kind of talk like that, Big Al?

Al: Not normally.

Joe: “-income with $7000. No expenses for said year.”

Al: For said year. But that’s what he- I mean, that’s accurate. That’s what he said, that year.

Joe: That’s right. I got it. “I have an IRA. And want to cash out all or most of it and buy gold silver coins for the future. I have a carryover from capital losses of $13,000. What is the best way to handle paying least amount of taxes being I’m required this year to take money out of the IRA being that I’m 72 in June. My wife has been doing volunteer work from home daily using our equipment and all utilities with no computation at all.” With no computation- do you think that’s no compensation? or computation? I don’t know.

Andi: I think what he’s saying that he’s not able to write it off?

Joe: Okay. “I have a two-room office for my work also in my home. I also have a regular annuity paying higher interest for 30 some years. My wife has an IRA, also is required to start taking RMDs this year. The insurance people said they will send a 1099 on any withdrawals for 2023 that we take. Please best advice way to handle. Just trying to save money on taxes. I do not want to place gold and silver in an IRA account. I want possession of the metal.” He wants to lock it up in a safe, Al. In a locker.

Al: Yeah, in the safe at his home, I think.

Joe: He just wants to look at that gold and silver bullion coins.

Al: Yeah. Well, you’re right. So let’s see, did he say how much is in his IRA?

Joe: No, he didn’t. That’s probably not a really key component here.

Al: Or how much he wants to pull out.

Joe: He wants it all.

Al: So let’s see.

Joe: He wants to just put it all into the safe.

Al: Probably.

Andi: “Cash out all or most of the money to purchase gold and silver.” Yep.

Joe: Yep.

Al: So anyway, so his income basically is negative after expenses. Let’s see. I don’t know-

Joe: He could pull out, I don’t know, call it $90,000 and be in the 15%- or 12% tax bracket.

Al: Yeah, I agree with that. Plus you can add the standard deduction. Call it a $115,000, $120,000, something like that. Yeah, that’s how much you can pull out and stay in that 12% bracket, which if this is what you want to do, that’s probably- based upon what we know based upon the facts here. That’s probably what I would do.

Joe: So if you want to pull it- so we don’t know what the balance is. So we’re in a marginal tax system. So you pull out X like we talked about. So the top of the 12% tax bracket is what, roughly 12- or I mean, $70,000? Because of the inflation jumped these brackets pretty high.

Al: Yeah, it’s actually almost $90,000, Joe.

Joe: All right, so $90,000 top of 12%, and then the top of the 22% is what? Call it $160,000?

Al: It is $190,000.

Joe: $190,000, wow.

Al: Yeah, jumped a lot- top of the 24% is $364,000 for a married couple.

Joe: So it depends. Depends on how much this guy pulls out, right? Yeah. So some of it’s going to be taxed at 12%. Or some of it’s going to be taxed at 0% because he’s got negative income because he has these expenses. He has the standard deduction that he can take out, right? But then some of it’s going to be taxed at 12%. Some of it could be taxed at 22%. Some of it could be taxed at 24%, really, depending on how much money that he has in the IRA. And he doesn’t want to buy this stuff in an IRA.

Al: He wants to hold it.

Joe: Wants a pirate chest.

Al: Wants it in the house. Wants to be able to run away with it.
And so anyway, another point, capital loss-

Joe: Do you think he’s got a gun? Do you think he’s got like a safe?

Al: Yes.

Joe: A couple guns in there?

Al: Oh, yeah, more than two. Don’t you think?

Joe: Without question. He’s got two, he’s probably got two guns per room.

Al: Probably.

Joe: You never know who’s coming in.

Al: You never know, right? Cameras everywhere. Triple locks on the door.

Joe: You think he’s got a generator?

Al: Yes, for sure. Anyway, I was going to say the capital loss carryover of $13,000, you can’t use that for this. That’s a capital loss. You can use $3000 only against ordinary income, which is what an IRA distribution is. You can really only use that whole $13,000 in one year against a capital gain. So that’s not going to help you too much. But if you just do the math, go back to my original statement. You start at $90,000 as the top of the 12% bracket. Add a standard deduction of roughly $25,000, right?
So now we’re, what’s that? $115,000, $120,000. I forget. $115,000. Let’s call it $115,000. And you add the capital loss carryover of $3000. Call it about $120,000 based upon- as long as you have no other income. You could kind of distribute about a $120,000, stay in that very low bracket 12% bracket, buy your gold and then do the same thing next year. That’s what I might do. Although I actually wouldn’t do this, investment wise, but anyway, but some people feel safer with that and more power to them.

Joe: All right, there you go. Good luck with that. Hopefully that helps. It’s hard to talk about taxes if we don’t know that the account balance of what you want to cash out. So just FYI. I’m giving like email pointers as we go here, Al.

Al: Yeah, that’s good.

Brokerage Account Joint Tenants With Rights of Survivorship vs. Transfer on Death (Jimmy)

Joe: We got Jimmy writes in. “Joe, Big Al, Andi. I have a joint account 1099 question. My widowed mother has a brokerage account registered only in her name. She wants to add me to the account as a joint tenant with rights of survivorship, so that when she passes, the account would just go to me without probate. I tried to convince her to instead do the transfer on death registration. But she refused.” No, Jimmy. We are not doing this.

Al: I want you on the account.

Joe: You are on the account, dammit.

Al: Whether you like it or not.

Joe: Or you get nothing. She refused. It’s like, mom, put this on so I can help you. No, we’re not doing that.

Al: She said, I never heard of it. It can’t be right.

Joe: No, Jimmy, no, that’s nonsense. “She lives in Florida. And is in a lower federal tax bracket. I live in California. It’s high tax bracket. If both of us are titled around the account as joint tenants with right to survivorship, who will receive the 1099? and who is responsible for the tax on the interest and dividend distributions from the account each year? Does it make a difference whose name comes first on the account on the registration? Thanks for all your good work. Your show is truly great, Jimmy.” Well, thank you, Jimmy.

Al: Yeah, that’s nice.

Joe: Yes. Alan? I have no idea what the answer is.

Al: Well, I think most banks will ask the joint tenant people who- what social security number do you use? They don’t split them. So in this particular case, you just have your mom’s number, and then you don’t pay any tax on it. I think that’s what most of them do. That’s what I’ve seen. And then I just had the experience where my dad’s account number was on everything. And then he passed, and so then, it was through their trust. I got made co-trustee, and then they just asked me, what social security number? And I said, my mom’s. So I think that’s kind of what they do. There are issues sometimes with joint tenancy in terms of if your name gets put on the account, all of a sudden you have access to the assets, or at least half the assets, and that’s a gift tax potential situation. You might have to file a gift tax return. So yeah, so there’s that. And then also, when it’s joint tenancy in a bank account, maybe it doesn’t matter so much. But in a brokerage account, you don’t necessarily get the step-up in basis. Maybe you get a half step-up in basis. So just there’s things like that that to consider, but no, I think you’re fine. I think you just tell the bank or brokerage firm or whatever who you want the 1099 to go to. Yeah, I think that’s easy enough.

How is inflation like Star Wars, and why do financial markets do better when people feel bad? (Hint: it’s because the markets don’t care!) Pure Financial Advisors’ EVP and Chief Investment Officer Brian Perry, CFP, CFA answers these questions and many more in his Q1 2023 Market Outlook and Review, waiting for you in the podcast show notes. Find out what happened to stocks and bonds in 2022, and get Brian’s thoughts on whether the classic 60/40 asset allocation model is broken. We really had fun with this one, so don’t skip it. Just click that link in the description of today’s episode in your favorite podcast app.

Is There a Rule of Thumb for How Much to Spend on Home Improvements? (Island Gal)

Joe: We got one all the way from St. Croix from Island Gal. “Greetings from sunny St. Croix, where my drink of choice is Cruzan.” Cruzan? Punch?

Andi: Cruzan? Yeah.

Joe: Cruzan.

Al: Cruzan, I guess, Yeah.

Joe: Never heard of it.

Al: Me neither.

Joe: A little rum punch. “Or a local Mutiny Island vodka with a splash of Ginger beer. You ever have Ginger beer and vodka, Al?

Al: I don’t think so. I don’t recall that combo.

Joe: Yeah. I don’t think I have either. I have had Ginger beer with bourbon, but-

Al: I’ve had a Moscow Mule. What’s in that?

Joe: Yeah, that’s Ginger beer.

Al: I know, but what’s the other alcohol?

Joe: I have no idea.

Al: We don’t know.

Joe: Maybe it’s a vodka?

Al: Maybe. Maybe that’s it.

Joe: You’d probably prefer a cold one at our local brewery, Leatherback. I’m planning to officially FIRE with my husband next year at 41 and 45. Yay.” You know what FIRE is, right Big Al?

Al: I love FIRE. I like the way they say it. Financial Independence Retire Early.

Joe: Wow. 45 and 41, they’re going to FIRE. They’re going to FIRE all the way back to St. Croix. “We are locally based in ATL-” Little Hotlanta. “-but have always dreamed of island life. We scored a deal on a dreamy little ocean front house in our beloved St. Croix. The house is livable as is, but needs work to fit our vision. The primary bath is outdated, the windows aren’t hurricane grade. They don’t stand up. We want to add a pool. The renovations will probably cost anywhere from $120,000 to $150,000. The island house has an attractive rental unit that covers 70% of the total mortgage. We also have income from 4 Atlanta rentals and my husband’s military pension to sustain us post W2 work. We’ll be using cash savings to fund renovations and shouldn’t need to touch our brokerage or retirement accounts for many, many years. This is a good rule of- is there a good rule of thumb regarding how much to spend on home improvements? Are we crazy to spend so much cash right now as we’re walking away from full-time employment? I want to make this house our own, but I’m nervous about overspending while the market is down.” Here’s the property stats, Al.

Al: Okay, let’s see. Yeah, what are they?

Joe: If you’re keeping score here. I got a little “purchase price of $675,000. The current appraised value of $735,000. And then we got an ARV-.”

Al: Yeah, you don’t see that often, but that’s after repair value. That’s what that is.

Andi: So is that an estimate based on how much she’s going to spend to repair it?

Al: No- so this brings up a good point. So she wants to spend $120,000 to $150,000. And the house is not going to go up that amount because repairs don’t- renovations are not generally dollar per dollar, especially a pool. That’s like the worst one in terms of adding value to your home.

Joe: So ARV is $825,000. That’s the estimate of what she’s thinking.

Al: She’s added $90,000 to her home value based upon spending $120,000, $150,000. That could be.

Joe: All right. “Here’s our other stats. Got a 401(k) $300,000, taxable brokerage account $400,000, cash $200,000, little $10,000 in crypto, $30,000 in brokerage account. Real estate $1,800,000, military pension of $60,000 to $80,000 a year. Estimated net worth, no pension, $1,900,000. Estimated net worth with pension, $3,900,000.”

Al: I know what she’s doing. She’s taking the $80,000 times 25 to add another $2,000,000, to figure out kind of what the equivalent, I guess, of net worth is when you kind of factor in the pension.

Joe: Yeah, so she’s taking a net present value and using a certain discount rate?

Al: I don’t think we’re going that far, but- only because $80,000 times 25 equals $2,000,000. That’s the difference in her two numbers. So I think that’s what she’s done.

Joe: Got it. You know, why do you think she’s doing- when’s the last time you’ve seen someone do that?

Al: Not very often. I don’t think- I don’t think it’s terribly relevant. Although we sometimes do it when we try to tell people they say, well, I don’t need to convert because I only got $300,000 or only have $150,000 in my IRA and we say, well, when you look at your pension, you kind of have an equivalent of $2,000,000, $3 million in an IRA. So you probably should convert. So that’s when we use it, but not really in this case probably.

Joe: I think she’s pumping her tires a little bit. She’s gaining some confidence for her to do a little island girl life. But by saying, hey, we got a $3,900,000 net worth.

Al: Well, sure. Yeah. It does look good.

Joe: Yeah, it probably feels good too.

Al: Especially at 41 and 45.

Joe: What do you think, bud? What- is $150,000? Is that a lot?
Given a $4,000,000 net worth? or a really $2,000,000 net worth?

Al: Well, I would go with the $2,000,000 net worth and figure the pension, I guess she’s saying that it covers their spending, right? Is that what you got out of this? Because she doesn’t say her spending, but she said she wouldn’t have to touch anything for a while.

Joe: Correct.

Al: So assuming the pension covers everything, then yeah, I mean, theoretically, she’s okay. I’ll tell you what I would do though differently, Joe, me personally, is if I want to spend $120,000 to $150,0000, I would probably at least cut that in half and say, okay, what are the most critical things? Let me do that first. I got the money for it. And then let this settle in. Let retirement settle in and see how it’s going and see, whether you’re spending more than you thought or what? And if you still have plenty of money after a couple of years, do some more renovations. That’s probably what I would do.

Andi: So you’d hold off on the pool.

Al: Yeah, probably. Yeah. I would go with whatever is going to be the most bang for the buck. How about that?

Joe: So I guess- is this going to be their permanent residence? They’re going to move there. Or are they gonna stay in Atlanta? But they found this dreamy little house in St. Croix. We want to be islanders. And if they’re not living on the island now, and they go there for a vacation and then they spend two to 3 weeks and then they come home. I think it’s going to be different if you live on an island.

Al: I totally agree. I mean, I can’t tell you how many people come to Hawaii for a couple of weeks and say I’m going to live here. And then they buy something and go, well, it wasn’t quite what I thought. Now I, on other hand, made it past that hump. I’m fine being here. But that’s a really good point. It’s another reason not to overspend up front.

Joe: Right. Unless there are currently living there, they lived there for a couple of years, and this is their I guess, forever home at 42 and 45 or 41 and 45. But if they want to stay in the house for 10, 20 years, I don’t see anything wrong with putting the money in and making it your own and being comfortable and you’re retired, and this is where you want to hang out, and this is where you’re going to spend a lot of your time. Because if you don’t necessarily need to touch the assets, you have other assets and they’re still really young. I would imagine they might want to go back to work or do something to have some income. But I do like your thought, Al. You’re more responsible, I guess. But for me, it would be like, man, I want the pool. I want this place to look nice. I want it my own. And so I’m going to- I’m going to get it done. I’m going to pimp it out and call it good.

Al: Yeah, yeah. I would- I don’t know. I’d get a little plastic pool. Call that good for a while.

Andi: So is there an actual rule of thumb? I mean, you know, can you nail it down to a percentage or is it really, it depends, when it comes to improvement?

Al: No, there’s no rule of thumb. It’s just whether- if it puts a dent in your retirement spending, it’s too much, right? If it doesn’t really affect it- all I’m saying is, they haven’t retired yet. It sounds like they’re planning to officially retire. That’s what it said at the start. So I would rather have them spend some, see how it goes, and then if it seems like, okay, this is our place, then yeah, go for it. And they can feel like they can afford it, go for the rest. That’s what I would do.

Joe: When’s the last time you’ve done renovations at any of your places?

Al: You know, the first condo I bought in Hawaii, I bought in 2004. I think I did a renovation about 4 years, 3 years later.

Joe: But you were AirBnb’ing that place.

Al: Oh yeah, the whole time, right?

Joe: Yeah. Right, yeah.

Andi: Through the construction.

Joe: Have you ever lived through construction?

Al: No, I have not.

Joe: Yes, exactly. Because you’re Big Al. You have multiple properties. You don’t have to go through that BS. But I lived through construction and it sucks. And I’m not going to do it every 6 months. I want to bust this thing out. I want to get it done. I don’t want, you know, Larry in my backyard, looking in my stuff, right? Oh, good to see you again, Frank. Yeah, good morning, Larry.

Al: Good point.

Joe: They like live in your house for 6 months and then the project never goes as planned. It’s always longer than you expect. It’s going to cost more. It’s a pain in the ass. I would want to do that once.

Al: Yeah. Okay, got it. Yeah, but well, okay. I did do a kitchen remodel. So I do have a sense of what this is like. It was, I remember washing dishes in the bathroom. And I always had a contractor and one afternoon contractor called me up and said, we got a big problem. It’s like, what’s that? And he said, we didn’t know the one beam was load bearing. That they had pulled down.

Andi: Oh.

Al: So they could tell before it came all the way down. So they put in another thing. And anyway, it was- it turned out okay.
That was quite a while ago. And the house is still standing. So I guess that whatever they did worked. Yeah, I don’t particularly like that either, but that’s what I would do. I would try to be sensible.

How to Reduce Taxes on Sale of a Timeshare? (Chris, MA)

Joe: Okay, we got, “Hey, YMYW team. Thanks for all the information and spitballs you throw our way. A tax question for you. My mother owns two portions of a timeshare. She’s looking to sell one. When she sells, are there any tax strategies she could- she could employee to reduce her taxes on the sale.
She pays a yearly maintenance fee and of course paid to purchase the timeshare. I’m not sure if a timeshare purchases and sales are treated in the same manner as more standard real estate transactions? Thanks for non-advisory ideas you are able to offer for someone in this general situation. Best, Chris.” First of all, here’s my spitball. I guarantee it’s at a loss. I don’t think there’s any gain here in the timeshare.

Al: Yeah, I’ve never seen a gain out of timeshare. It’s possible. So this is- Chris, this is considered a personal asset. And a personal asset, no, there’s no tax deduction. Think about anything. You buy a car for $60,000. You sell it for $30,000. It’s a loss, yeah. Is it taxable? No, it’s a personal asset. You don’t get- you never get tax breaks on personal assets. And a timeshare is most definitely a personal asset. I suppose, unless you’re in the business, you got tons of timeshares, you rent them out for a profit, that would be very rare. So the answer is no. You can’t take any deductions. Sorry about that.

Joe: And if there’s a gain, it would be a capital gain, which would be a miracle.

Al: Yes. And yeah, IRS wants it- their cake and eat it too. You pay tax on the gain, but you don’t get a loss on personal asset if it loses money.

Joe: All right. Thanks, Chris.

Can I Use a Reverse Mortgage Instead of Long-Term Care Insurance? (JW, San Diego)

Joe: All right. Let’s go to- we got JW in San Diego. “Enjoy the podcast. If you’re able, could you discuss the merits or not of long-term care insurance and reverse mortgages? If they could play a role in retirement planning, could I use a reverse mortgage instead of long-term care as a funding source for assisted or home care? Thanks in advance.” All right. Pros and cons here or the merits or not. Well Al, you’re close to long-term care.

Andi: Oh my God.

Al: Wow, that’s the way to throw it over to me. Yeah, I think- well, here’s my opinion. Long-term care insurance is fantastic, but it’s expensive, right? And if you wait too long to get it, it’s quite expensive and understand long-term care is not necessarily unlimited. Most policies are- you pay X number of dollars in, and that entitles you to a pool of money, not unlimited amount, a pool of money, and that can obviously just like any insurance policy, a great way to go if you actually need it. If you don’t need it, just like any other insurance, you kind of lose it. Reverse mortgages, obviously, you got to be 62 years of age. You can get this thing called a reverse mortgage. You can take money out of your home as a lump sum or an income stream, income payments. And not have to pay it back because there’s enough equity in your home. They can be somewhat expensive, although they’re better now than they used to be. I do think a third alternative, which a lot of people do is when they get to the point where they need long-term care is they just sell their home and they use those proceeds. So any are fine, but it sort of depends on your situation.

Joe: Yeah, here’s a couple of things JW. I don’t know if you’re married or single. A lot of times, the long-term care insurance is really vital for the surviving spouse or the healthy spouse. You know, let’s say JW has a long-term illness and needs long-term care. And JW’s spouse is fully healthy, you know? And so now you’re selling the house to help pay for care and what the quality of life for the surviving spouse is blown up, right? Because of all of the cash and cash flow and all the needs is going to someone that needs the long-term care. So yeah, long-term care is dirt cheap if you need it. It’s very, very expensive, of course, if you don’t need it. Using a reverse mortgage in place of that, as Al said, that’s another source of capital. But I would look at long-term care, it doesn’t necessarily- look at a plan, right? A long-term care plan doesn’t necessarily mean to be insurance. So it’s like if something were to happen to me, if someone were to happen to my spouse, what does that really mean for both of us in regards to cash and capital and our lifestyle? Because you don’t want to put the other surviving spouse into the poorhouse as your care could be quite expensive. So that’s my two cents, even though- many, many years.

Al: Yeah, you don’t even have to worry about it. Yeah, I mean, I think in practical purposes, the majority of people do not get long-term care insurance. And married couple, first person that needs help generally the other spouse takes care of it. It’s not ideal, but that’s common. And then maybe the first spouse passes, the second spouse then needs it, and they sell their home. That’s sort of a common sequence of a lot of people. I’m not saying that’s the best thing in all situations. It’s just common.

Joe: All right. Thank you very much for your questions, folks. Appreciate you hanging out with us once again this week. We’ll be back again next week. Andi, wonderful job. Thank you very much.

Andi: Thank you.

Joe: Big Al. Have fun in Hawaii. Hopefully we’ll see you back here in the wet lands of Southern California.

Al: Yeah, I’ll be back next week.

Joe: All right, I’m looking forward to it. It’s been about a month.

Al: It’s been- yeah about 3 weeks.

Joe: All right, that’s it for us. We’ll see you next time. The show is called Your Money, Your Wealth®.



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