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 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 moderator for the firm's digital events. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm [...]

Published On
October 19, 2021

How to calculate your modified adjusted gross income (MAGI) for Medicare IRMAA, calculating your Social Security benefit when you’re planning to FIRE (that is, reach Financial Independence and Retire Early), calculating family Social Security benefits when you have minor children, and devising a strategy to qualify for the Obamacare Affordable Care Act subsidy. Plus, doing Roth conversions prior to early retirement, and untangling stock options, long-term incentives, and restricted stock units.


Wednesday, October 20, 12 pm PDT (free online event!)

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Show Notes

  • (00:52) How is MAGI Calculated for IRMAA – the Medicare Income-Related Monthly Adjustment Amount? (Robert, MN) 
  • (08:56) Family Social Security Benefits and the Affordable Care Act Subsidy (Edward, VA)
  • (15:51) Calculating Social Security When Planning FIRE: Financial Independence, Retire Early (Marcos, Kansas City) 
  • (22:28) Roth Conversion Strategy Before Early Retirement (Annie, TX) 
  • (33:01) Long-Term Incentives (LCIs), Stock Options, and Restricted Share Units (RSUs) (Tim, PA) 

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Listen to today’s podcast episode on YouTube:


It’s all calculations and acronyms today on Your Money, Your Wealth® podcast 348. PDQ here, Joe and Big Al will explain how to calculate your MAGI for IRMAA, that is, your modified adjusted gross income for the Medicare Income-Related Monthly Adjustment Amount, how to calculate your Social Security benefit when you’re planning to FIRE, that is, reach Financial Independence and Retire Early, and calculating your family Social Security benefit and a strategy for the Obamacare subsidy. Plus, doing Roth conversions prior to early retirement, and untangling stock options, LTIs and RSUs, those are long-term incentives and restricted stock units. Let’s get into it ASAP. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

How is MAGI Calculated for IRMAA – the Medicare Income-Related Monthly Adjustment Amount? (Robert, MN)

Joe: Robert writes in from Minneapolis, Minnesota. I just got back from Minneapolis, Minnesota, Big Al.

Al: I know you did, you had some family time? Some, a little bit sad, but some happier.

Joe: Yeah. Funeral and a wedding.

Al: Yeah.

Andi: Sounds like a movie.

Joe: I know, it does. Trust me, it was definitely a movie. But yeah, it was nice to see some family. I didn’t see Robert, though. I want to answer this question.

Al: Oh. Sure.

Joe: “Regarding IRMA, I would like to know the process on making an appeal. To make it easier to understand my question, let’s say my modified adjusted gross income of $200,000 in 2019 and again in 2020 and again in 2021. Then, I retire at the end of 2021 and my modified adjusted gross income goes down to $40,000 in 2022 before making any Roth conversions.”

So, you following this, Big Al? You following Robert’s logic?

Al: I am, yeah.

Joe: So he’s got about $200,000 of income in 2019, 2020, and 2021. He’s going to retire at the end of 2021. He’s going to make $40,000 in the year 2022 before any Roth conversions.

Al: Right.

Joe: All right. So he’s 65 at the end of 2021, so coming up here. And he will start Medicare in January of 2022.

“For my part B and Part D premium, Medicare looks back to my modified adjusted gross income in which year? I think the answer is 2019 since I am told they would figure the premium in December of 2021. So first, is this correct?

Al: The answer is no. It’s actually a two year look back, so it would be 2020.

Joe: So if he starts in 2022, you look back one year, 2021. The other year is two, 2020. So they were looking at 2020, and his modified adjusted gross income in 2020 was $200,000.

Al: Correct.

Joe: OK. All right, then let’s see.

“I get the premium bill the end of December this year, and they base it off of 2019. And I want to file an IRMA appeal since I anticipate $40,000 of modified adjusted gross income in 2022. What is the time window to file this appeal? 60 days or what? Let’s say they approve the appeal for my processed $40,000 modified adjusted gross income, but I end up doing some Roth conversions of $100,000 during 2022. Does Medicare catch up with me in 2024 and say I owe them money for underreporting? Or do they have some way to do it sooner?”

You following that so far, bud?

Al: Yeah. The first thing is after you get your assessment, which I think is typically in December of the year before you have the Medicare payment, you have 120 days to appeal. So there’s a process you have to go through with the Social Security Administration, which I’ll come back to in a minute. But yeah, 120 days. And I guess if he does a Roth conversion in 2022, that does change his modified adjusted gross income, but it changes it on a go-forward basis for two years in the future.

Joe: Got it. OK.

“Let’s say in 2023, I have another $140,000 in modified adjusted gross income, and I’m still operating off the first appeal that they granted me until 2025 when they look back another two years. On the other hand, if I overestimate my modified adjusted gross income on the first appeal, and I overpaid premiums, is there any way to recapture what I overpaid? Some Medicare broker told me you can never get any money back. True? In summary, does the appeal I make in late December 2021 or early 2022—and if approved—give me two years of paying the appeal premium until they catch up with me two years later?”

So, this is what Robert is thinking about doing. The guy’s making a couple hundred thousand dollars a year, and just for everyone’s edification, IRMA is basically your Medicare premiums. And so it’s a sliding scale, depending on how much money that you make is going to be dependent on how much your Medicare Part B and D premiums are. So, he’s making $200,000, and Al, do you know off the top of your head or do you have anything close to you that will tell me what the premium is for Medicare at $200,000 of income?
Al: I don’t have that at my fingertips. I think you do. I see it on your desk there.

Joe: Oh, okay, I do have that. So is he single?

Andi: He says he’s single in the follow up?

Joe: OK. From $165,000 to $500,000, he is going to pay $475 in the Part B premium and $70,000 in Part D premiums. If he has $40,000 of income, his premium goes from $475 to $148.50. So he’s saving a few hundred dollars a month here by doing this. So, he wants to get his Medicare premium down to the lowest amount and saying, ‘Hey, I have $40,000 in modified adjusted gross income.’ So he’s going to have an appeal because they’re looking at his income two years from now, and he’s like, I don’t make that. I retired. I had a triggering event. Now I make $40,000. They say, yeah, well, prove it. However, Roth conversions, that’s also going to be calculated in the modified adjusted gross income to determine what his Medicare premiums are. So he wants to do some Roth conversion, some sneaky Roth conversions over two years, so he got the appeal to get his Medicare premiums to $145, then he’s going to do Roth conversions to get his modified adjusted gross income to $140,000. That would put his Medicare premiums to $386, but they’re like, well, will they find out? Will they catch me? Do I have two years to do this? If I overpay, will they give the money back? Because I know certainly if I underpay, they’re going to get the money from me. So, I think that’s his strategy, give or take.

Al: Yeah, I think that’s right, Joe. And I think, and I’m not 100% sure on this point, but I do think that if you under pay, they will catch up with you. If you overpay, you will not get it back. I do think that’s the case. But I do want to say how to do this because this impacts a lot of people. In other words, they’re making a higher income, then they retire, start Medicare, and then they have a much lower income, so it’s a pretty common issue. So, what the Social Security Administration says is that what you do is you file a Medicare IRMA life changing event form, which is also SSA-44. And generally, you can get a reduced payment amount if there’s things such as a change in life event, like a death of a spouse, change in marriage, divorce, your spouse stopped working, or you stop working—that’s the one we’re talking about here. You have some kind of income or loss of pension, or you had some kind of like one-time receipt from a payment from some kind of settlement that’s not ongoing. Those are reasons that they would grant the appeal… I’ve not really been too much involved with this process, but I think the way it works is that if you get the appeal, they are going to check it. And if you’re underpaid, I think they’re going to catch up with it.

Joe: I would agree 100%.

If you or someone you know or love is approaching Medicare age, we are hosting a live Medicare Made Clear webinar tomorrow, Wednesday October 20 at noon Pacific time. Get all your Medicare coverage questions answered live, in real time, for free, by Jeffrey Riego and Diane Gaswirth from United Healthcare Medicare Solutions. You’ll learn the As, Bs, Cs and Ds of Medicare coverage and costs, coverage options in addition to original Medicare, enrollment times and delayed enrollment penalties, cost saving tips and resources. Just click the link in the description of today’s episode in your podcast app to go to the show notes and sign up, and don’t forget to share the link with anyone who is getting ready to make decisions about Medicare. Do it ASAP! This free webinar is tomorrow at noon Pacific. 

Family Social Security Benefits and the Affordable Care Act Subsidy (Edward, VA)

Joe: All right, we got Edward from VA.

“I’m an avid listener of the financial podcast and don’t think I’ve ever heard anyone talk about this subject. So here it goes.”

See, avid listener of all financial podcasts? Or our financial podcast?

Andi: He says financial podcasts, so probably many.

Al: That would imply all I would say.

Joe: OK. I guarantee he’s going to ask a question that we’ve talked about a million times. I’m curious about a backdoor Roth.


Al: Right?

Joe: All right. Let’s see what Edward has for us.

“I’m 53 years old and my wife is 40. We have a one-year-old son. I recently read that there are Social Security benefits for children of retired persons, along with benefits for spouses of retired persons who is caring for a child. When I turn 62, my wife will be 49 and our child will be 10. It seems like a no brainer to take Social Security benefits early since my child, who will be then 10 years old, can collect 50% Social Security benefit based on my full retirement benefit until he is 18, and my wife can collect 50% Social Security benefit based on my full retirement benefit until our son turns 16. This will more than double our family’s Social Security benefits for year 62 to 68 and still provide a nice little bump for two additional years until my son turns 18. Am I missing anything here? I realize this section of the Social Security Code doesn’t affect too many people, but anyone who has a child in their late 40s or early 50s could benefit from this knowledge.”

Al: OK. What do you think?

Joe: Just thinking about something, that’s all. I’m going to be right there with Edward someday.

Al: I wasn’t going to say anything.

Andi: First you have to get married and stuff, Joe. You know, there’s steps to this.

Joe: And then I’ll be like 62 with a five year old.

Al: Yeah, I will say I know at least, Joe, two other people that are older dads than you.

Joe: How about Donald Trump? We talked about this before. Little, what’s his name?

Andi: Little, what’s his name?

Joe: So, Edward, OK, so yes, he’s right. He’s done his research. And yeah, but there’s a family maximum. So, I don’t know exactly how to calculate what the family maximum is. I know that it’s kind of a unique calculation, but he could exceed the family maximum here. I’m not sure.

Al: You could, and I think I would agree with you, Joe. I think on the surface it’s a no brainer, just like Edward says. But you know what? There still would be a break even point. You know, maybe it’s 85 or 90. Maybe Edward or his spouse, they’re going to live forever. So there’s still a break even point, but probably it’s a much later break even point than most people.

Joe: Yeah, without question, because I think people are getting married later in life and having kids later in life, and so, looking at all these different Social Security benefits is key. So, yes, as long as you collect your overall benefits, you’re going to take yours early, you’re going to take a haircut at 62 because you’re full retirement at age of 67. So you’re going to receive a 30% haircut on your full retirement benefit; however, you’re going to receive a benefit for the family. But it is subject to a family maximum, so Edward, I would kind of double check what that family maximum is given your situation.

Another question Edward had in retirement. “I’ll be collecting a public school pension of $70,000 a year, plus my age 62 Social Security, along with getting health insurance through my school system until 65 for myself. My wife and son will be on their own for health insurance since my wife will not be working. Her only income will be 50% Social Security benefits she receives until her son turns 16. She receives that for six years. Should we file our taxes separately so she can qualify for Obamacare subsidies?” It’s called the Affordable Care Act. “Thank you for all your information, expertise and humor.”

All right, so he wants to kind of split his little pie here. What do you think, Al, should he file separately so she can get subsidies?

Al: Well, it might work, Joe. I do know in California it would not work because California’s a community property state, and all income is split 50-50, regardless of who earns it. But I don’t think Virginia is a community property state, so I’m not sure what kind of special rules they might have on income splitting, so to me, that would be a question for an in-state CPA that understands how the married filing separate works in your state I would say.

Joe: Yep, I would agree with that. He’s also collecting a public school pension, so I would just double check on that because, again, we’re not experts in Virginia, but here in California, the CalSTRS system, teachers in our public school systems do not receive Social Security because they don’t put any money into the Social Security system. Even if they have put money into the Social Security system, they are subject to WEP, which is windfall elimination provision. So just a couple of things else to look out for, Edward. Appreciate the question.

Calculating Social Security When Planning FIRE: Financial Independence, Retire Early (Marcos, Kansas City)

We got Marcos writing in from Kansas City. “Dear Andi, Big Al, and Joe, I’m 47, looking to fire at 57.”

Al: I like it.

Andi: I love the fact that that’s become a verb. I’m going to fire.

Joe: Financial independence, retire early. I don’t think 57’s fire.

Al: Barely. I don’t know if that qualifies.

Joe: It does not qualify at all!

Al: I think of 30s, maybe even early 40s.

Joe: Yeah, I mean, I can’t even fire anymore. And I’m 45.

“I’m trying to figure out a realistic estimate of my monthly Social Security benefit at full retirement age 67. I know that my current estimate from SSA.gov will not be accurate since I plan on stopping to work full time at 57. I was able to plug in my Social Security earnings from SSA.gov and estimated a few years to get me to the top of 35-year earnings. I was able to calculate my AIME—that’s my indexed monthly income—in PIA. You know what that is? Primary insurance amount.

Andi: And AIME is actually average indexed monthly earnings.

Joe: Yeah yeah, whatever.

Al: I knew it wasn’t income because it was an E, but I didn’t know what it was.

Joe: No one else knew.

Al: I wasn’t going to correct you.

Joe: Whatever. Average income monthly earnings.

Andi: Average indexed monthly earnings.

Joe: That’s right, they index your earnings monthly with a low inflation calculator.

Al: Just call it Amy.

Joe: Just call it Amy.

“My question is, would this be the best number I would give my financial advisor when evaluating monthly income in retirement? Thanks. PS, I drive an expedition and have a wiener mix.

Wiener mix? Oof.

Andi: I think he means a dachshund mixed with other dogs because wiener mix just sounds strange.

Al: I think I think that’s what he means.

Joe: Sorry to hear that.

Andi: And he has German Shepherd rescue dogs.

Joe: That’s cool.

Al: Yeah, that is cool.

Joe: All right. So, OK, why is he doing… first of all, Marcus, if you’re grinding these numbers and then giving them to your financial adviser, you might want to find a new financial adviser. No offense.

Al: Yeah, one that has a Social Security analyzing, which most advisors have. And they’ll plug it in for you because that’s part of what you’re paying them for.

Joe: Yes, they could say, All right, here’s your top thirty five years, OK, sounds good. You’re going to stop at 57.

Al: And I will say, Joe, the one thing about this Social Security calculator, you can find some online, but if you’ve got a special situation like this where you’re retiring early, they’re not terribly accurate, so you might check with your advisor to have them run it properly so you know what’s coming up.

Joe: Because what you see on SSA.gov is going to be discounted, right?

Al: Right.

Joe: But not by much. I mean, it’s 10 years, but he’s already got 35 years. So what Social Security does is they kind of take a look at—well, I shouldn’t say kind—they do look at what your income is…
Al: They can kind of do that.

Joe: Yeah, they kind of do that. Sometimes they do. Sometimes they don’t, you know, depending on who you are.

Al: Yeah, right. I was going to say the only problem is his income started at age 22, unless you had a pretty good job at that age… it’s probably lower than what it would be on a go-forward basis, that’s why we say that your benefit may not be the same as the benefit on the statement if you don’t keep working to full retirement age.

Joe: Correct, yes, because what they’re assuming is that you will work until retirement age and they are indexing your income that year to your full retirement age. So when you retire, when Marcos fires at 57, I would imagine his adjusted indexed monthly earnings at age 57 is a lot higher than what it was at age 22. Right?

Al: That’s the thought.

Joe: They’re calculating those lower years when he was working in his 20s versus when he was potentially in his peak earning years in his 50s.

Al: Yeah, but a lot of people don’t realize the early years get indexed for inflation. So it’s not quite as bad as you thought. Although, most people are not at peak earning years in their early 20s. Myself included.

Joe: That’s why I said my average indexed monthly

Al: It’s scattered.

Joe: Got it.

Al: And I’m talking in English.

Joe: Got it. All right. So hopefully that helps. Congratulations and good luck. How old is he? 47. So he’s got 10 years.

Al: 10 years to get this fire in order.

Joe: Yeah, get your fire in order. All right. Sorry about the incident.

Al: Are you going to fire, 57 Joe?

Joe: I’m going to fire tomorrow. As soon as this show is over. That’s what Ninja dude wants anyway. What was his name?

Andi: It’s interesting that you make a point of remember—I don’t remember his name—but somebody left a negative review that said that Joe’s degrading to the callers and that he should retire.

Joe: But his name was ninja!

Andi: Was it?

Joe: How do you not forget about Ninja?

Al: I think it was ninja.

Joe: So, yeah, because he’s going to come and find me.

Al: Yeah, it was a little threatening.

Joe: It was. I was scared.

Make sure you get as much Social Security as you’re legally entitled to receive: download the Social Security Handbook for free from the podcast show notes at YourMoneyYourWealth.com. This 48 page guide is packed with information on recent changes to the Social Security system, how benefits are calculated, figuring out the best time to collect your benefits, working while taking Social Security, spousal, survivor and ex-spouse benefits, taxation on your Social Security and more. That said, if you need more personalized help, an assessment from a CERTIFIED FINANCIAL PLANNER professional on Joe and Al’s team at Pure Financial Advisors is free too. Download the Social Security Handbook and sign up for a free assessment in the podcast show notes. Just click the link in the description of today’s episode in your favorite podcast app to get there.

Roth Conversion Strategy Before Early Retirement (Annie, TX)

Joe: We got Annie from Texas, writes in.

“Hello, Pure Financial Crew. You guys have the best financial podcast. I’ve been a loyal listener for six months.”

Andi: I want to say I just think that’s the first time anybody has ever called us pure financial crew.

Al: I like it.

Joe: Yeah, me too. Yeah. And we don’t have to work in like a 90s like dance crew.

Al: Yeah. And I was thinking, we don’t have to worry about who went first and second or third. It’s just we’re all the same.

Andi: I mean, usually that would be YMYW or your money, your wealth crew or something like that? But yeah, calling it by the actual company name. And if that was a dance crew, Joe, that would be like the most boring name for a dance crew in history.

Joe: I don’t think so. I love it. I think we should do a little video. The three of us, dressed in 90s gear.

Andi: Oh, wow, OK.

Joe: Do the Humpty Dance and…

Andi: OK.

Al: Are you? Are you going to do that?

Andi: He totally will.

Joe: Yes. The Roger Rabbit.

Andi: I don’t even know that one.

Joe: You don’t know what the Roger Rabbit is?

Andi: I know what it is. I’m not familiar with how to actually do the dance. I’ll give some dance lessons.

Al: We could watch the movie.

Joe: What are you talking about? Movie?

Al: Huh? Roger Rabbit, that’s a movie.

Andi: He’s right you know.

Joe: Who framed Roger Rabbit? But there’s a theme that was going on.

Al: OK, well, I figured it came from the movie.

Joe: I don’t know. I didn’t watch it. Of course you watch that movie.

Al: Of course, because I have kids. Now you’re going to be watching all these movies, too.

Joe: I don’t think so.

Al: You will, I guarantee it.

Joe: Well, I get Annie from Texas writes in she goes, “Hello, pure financial crew. You guys have the best financial podcast.”

Loyalist for six months. Just wait until seven months, she will not be a loyal listener.

“My husband and I are 44 and 45. We got a late start to our retirement planning, but are trying to catch up. We have no debt, including in our home. We drive a Ford Focus 2016 and Honda Civic 2013. We have kids 18, 17, and 11 and three dogs. I need help coming up with a retirement plan. I want to go part time at age 50 and retirement at age 60. Hubby wants to work full time until 60 and then retire as well. We currently net $120,000. We have an IRA of $86,000, Roth IRA $72,000, 401(k) $160,000, brokerage account of $15,000. Until I reach 50, we contribute $12,000 to the Roths, $19,500 to the 401(k), $5,000 to the Roth for 401(k), ane about $6,000 to a brokerage account. At age 50, we will stop all contributions, except for the $4,800 to my husband’s Roth 401(k). At age 50, I want to start conversions. Our income will be $80,000. How much do you recommend to convert? I want to convert over 10 years until age 60.”

OK, let’s see here. Do we have incomes?

Andi: They said they currently net $120,000.

Joe: Net, OK.

Al: But it’s not split. We’ll just talk concept, Joe.

Joe: Got it. “Do you recommend I change my 401(k) contributions now to Roth 401(k) contributions? Do you recommend I change my allocations now and add more monies into the brokerage? We are in 100% stocks and probably invest in the couple ticker symbols here.
We currently live on $4,000 a month and are saving the rest. We are comfortable with the amount and believe we can live on that during retirement as well. Can you help us fine tune our plan? God bless and thank you and advance. Your loyal listener, Texas listener, Annie.”

All right. First of all, Annie, we do not give advice here. So, we will not recommend anything, but we will chat about some ideas.

Al: Yeah, we will spitball.

Joe: Yeah, we’ll spitball, throw a couple wads around.

Andi: That sounds disgusting.

Al: It does.

Andi: Line ‘em all up. They love it.

Joe: So she thinks they can live off of $48,000 a year. She wants to retire at age 50, he wants to retire at age 60. So they’re going to stop all savings, so they can still lump up that $40,000. He’s 45. “Husband and I are 44 and 45,” so that’s 15 years. Present value is 15 years, so let’s say we get 3.5% inflation, so that’s $80,000 0.04%. So they need two million bucks. No, they don’t. Not even close to that.

Al: But don’t forget, it’s Social Security.

Joe: That’s exactly what I did. I think at $48,000, I mean, she’s looking pretty good.

Al: Yeah, I would agree, but I think she’s concerned about a tax problem, which I agree. Annie, if you and your husband can live on $48,000 a year, which is what you’re saying, you’re going to be in the lowest of tax brackets. And of course, if this just keeps compounding and compounding and compounding and you’re adding to it, you’re going to end up with a lot of money in a 401(k) and/or regular IRA. So, yeah, you want to be converting. How much you convert, though that’s a tricky question to answer without getting more information because we know your income between the two of you, we don’t really know how much is split between you and your husband. I think you said you are going to work part time or half time when you’re 50. So we kind of have to have that split. And here’s the reason. It’s because you gotta look at tax brackets. The lowest two tax brackets go up to $80,000, roughly. So that’s the 10% bracket and 12% bracket. That’s kind of a no brainer to do Roth conversions up to that level. But when you’re above that, then you get to the 22% bracket. So your taxes go up by 10% once you get above $80,000, so then you got to be a little bit more careful. What bracket are you in today versus what bracket are you going to be in in the future if you don’t do any Roth conversions? And then you can start to make an intelligent decision on how much to convert year in, year out?

Joe: Yeah, but I think, Al, let’s look at it like this. I think they’re probably in the 22% tax bracket and they’re saving a ton of money, right? So they got $19,500 going into the 401(k), $4,8000 into the Roth 401(k), $12,000 in the Roth IRAs, and $6,000 into the brokerage account. If I’m in the 22% tax bracket at 44 and 45, and the husband’s going to work until age 60, and they already have about $400,000 saved, and they’re plugging quite a bit into the overall programs, at 22%, I think all day long I would want to go into the Roth IRA. 12% and 22% to me, seems like not necessarily, a guarantee, of course, you would want to look at what her income is and what he is because she is going to retire or stop working, and then that could put him in the 12% bracket. I’d much rather convert or contribute in the 12% than the 22%, but I feel that depending on what happens over the next year or two, the law’s already stating that, you know, tax brackets the 22% is going to go to the 25%, the 12% is going to go to the 15%. I like the 12% and 22% tax bracket a lot.

Al: Yeah. Here’s a little counterargument to that, though, and that is they’ve got only about $15,000 in a brokerage account, so they’re going to have to figure out some way to pay the taxes.

Joe: I’m not saying conversion. I’m saying just mat out the Roth 401(k).

Al: Yeah, well, it’s kind of… it can be same, same. In other words, you don’t get a tax deduction, so you have less net. Well, I guess what I don’t understand, Joe, is if they’re only spending $48,000 per year and they’re making a net of $120,000, wouldn’t they have more money in their brokerage account?

Joe: Without question.

Al: So I’m not sure they’re actually spending as little as they think.

Joe: But, maybe something changed.

Al: Maybe.

Joe: Well, they’re saving $43,000 a year.

Al: Yeah, I understand.

Joe: Because everything is going in the retirement accounts.

Al: I understand, so let’s say their net’s $120,000. I don’t know, does that mean that after retirement accounts? Or before? I don’t really know. But let’s say it’s before retirement accounts just to be conservative. And so $40,000 from that is $80,000. And then, of course, you got to pay tax on the $80,000, but that would be pretty low. Although, some of this is Roth, actually. So some yeah, some it would be the 22%, but it’s still be relatively low, probably no more than $20,000 tax. So $60,000, maybe $65,000 if I’m thinking about this right. And they’re spending $48,000. So it just seems like they would have a little bit more in their brokerage account, unless, as you say, Joe, maybe this is new. Maybe they just got raises. Maybe she wasn’t working and now is working hard. Hard to say.

Joe: But yeah, I like Roth. I would switch to Roth at 22% tax bracket. I wouldn’t do any conversions right now. I would just switch to 401(k) that you have at $4,800, I would switch that to $19,500 all Roth, and then turn the $4,800 into pre-tax. That’s what I would do if I were you, because you’re not going to miss the tax, and all that money’s growing tax free, and you don’t have to come up with the cash to pay the tax.

Al: So yeah. I’m going to agree with that, Joe, because if you are really only spending $48,000, I go back to that now, and you’ve got the discipline to be able to not spend everything, this is a great way to to jumpstart that Roth and have that grow compounded for years and years.

Joe: Yeah, I would absolutely do that. And good luck. All right. Thanks for the email.

Long-Term Incentives (LCIs), Stock Options, and Restricted Share Units (RSUs) (Tim, PA)

Joe: Go to yourmoneyyourwealth.com. Click on Ask Joe and Al on the air and we’ll answer your money questions right here. We got Tim from P.A. He goes, “Hello, Andy, Al, and Joe. I love your show. I think you put out great content, spitballing people’s financial situations. I’ve learned a lot about these Real-World questions. I started watching your YouTube channel and now switch to the podcast so I can listen while driving in the car or exercising.”

He’s getting yoked.

Andi: What does that mean?

Joe: Getting jacked!

Andi: OK.

Al: Yeah, thanks for clarifying.

Joe: “I have a question about employee long-term incentives. My wife is a highly compensated employee, making a base salary of around $250,000 a year. She receives an additional yearly cash bonus and long-term incentives. The LTIs is roughly 25 to 40% of her base salary. She has the option of RSUs, so restricted share units, vested 100% over three years or restricted stock options. 10 year option for the long term incentive. When she started receiving long-term incentives, we opted for stock options, but we have since chosen to receive RSUs for the last five years. We have changed for the guarantee and simplicity of RSUs. Can you spitball whether RSUs are the right choice? What things should you or we consider when selecting RSUs versus stock options? Is there anything we can do to lessen our tax hit when the long-term incentives vest? Little bit of background. We are 43 and 41 years old. We max out wife’s 401(k), both Roth IRAs, and family HSA. Currently have $1.2 million in the 401(k).”

At 43? That’s pretty good.

Andi: The next one is they’re talking about their Roth IRAs. One’s got $200,000. One’s got $150,000.

Joe: Oh wow. These guys are…

Al: Yeah, they’re into it.

Joe: Wow!

Al: They’ve been listening to our show, right?

Joe: They had to have. It’s got to be. This type of wealth.

Al: Yeah, right?

Joe: “$1.2 million in 401(k), $200,000 and $150,000 in Roth IRAs, $15,000 in the HSA, and about $400,000 in cash and brokerage. I drive a Volvo XC90 and no pets.”

Is that that SUV again?

Andi: Might be.

Joe: I think so.

Andi: XC90.

Joe: It’s a very safe, very safe automobile.

Andi: Yes, it is the SUV. Got it. OK. Susan Brandeis’ car, right?

Joe: Yeah, right. She’s very safe in it because she’s not a very good driver. Self-proclaimed.

Al: Yeah. I never drove with her, but I asked her, I don’t know what, how it came up, but I asked her, Are you pretty good driver? She said, No.

Joe: No, I’m terrible. I bet Tim in PA is a really good driver. He’s safe, he’s a planner. He’s buckled up.

Al: You bet.

Joe: All right. Let’s talk about long term incentives. So RSUs, restricted share units. I’ll tackle that and then Al, you’ll talk about the stock option.

Al: OK, we should say the long-term incentive… sounds like it’s… I guess that’s our RSU stock option, right? She gets the cash bonus and an LTI and she gets the pick.

Joe: Yes. So in her situation, she gets to pick. All right. Do I want an RSU? And people are like, What the hell is an RSU? A restricted square unit is basically they’re giving you shares of stock of the company. Let’s say she’s got $250,000, and $80,000, she could then receive as shares of stock. And it’s vested over three years, so when it vests, she is taxed as ordinary income, so she receives the stock and then she’s taxed when it is vested. So then they have the stock and they can do whatever they want with it. They could sell the stock and just get cash, or they could hold the stock and, you know, build up a nest egg that way. So that is one way. The other way is the stock option, and the stock option works a little bit differently.

Al: Yeah. So that’s where you’re granted an option to buy company stock at a certain price. Like, let’s say, $10 a share. That would be your price, your stock option grant price. And then if the stock itself goes up to 20 or 40 or 100, whatever the number is, then you can still buy that stock at $10 a share. But whatever it’s worth at the time of your exercise, that becomes the spread. So $100 is the value, minus $10, your exercise price, $90 that gets added to your compensation. So $90 times the number of shares gets added to your compensation when you exercise. And now you own the stock. Just like a restricted stock unit, at the point of exercise, or in this restricted stock unit vesting, you can sell the shares generally, and a lot of people do because they don’t have the money to pay for the option or to pay for the tax in either the restricted stock unit or the stock option. Which is better? Well, restricted stock unit, you generally just receive the stock, right, so it doesn’t cost you anything. So that’s the guarantee.

Joe: Well, you know, the only thing in cost is the tax on the compensation.

Al: Right. But there’s no grab price. Like, unlike a stock option, there’s a grab price. So it’s going to cost you something. So which is better? Well, it depends upon what they’re offering you. If they’re offering you 10 restricted stock units and 1000 stock options, even though it’s going to cost you some money, I would take that one. So it just depends. It depends what the offer is, but that’s generally how it works. Restricted stock unit, you don’t pay for anything upfront, but when it vests, whatever it’s worth, it gets added to your W-2. Stock options, on the other hand, you don’t pay anything up front. When you do exercise them after they vest, you pay the company, the stock option price, the spread, that gain at that point, is added to your compensation and then you can either just like a restricted stock unit, you can keep the share or you can sell it. And like I say, a lot of people do sell because they don’t have the funds to pay for all these taxes and and or option cost.

Joe: So everything held equal. If you got one restricted share unit or one stock option, you pick the restricted share unit because you have the stock already, you don’t have to pay for the stock.

Al: It doesn’t cost anything. Yeah. And one more thing I’ll say on restricted stock. If you get restricted stock outright, you can do an 83(b) election, which allows you to pay the tax upfront instead of waiting three years. Generally, restricted stock unit, you don’t have that option, although all plans are different. So check your plan.


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