Show Notes

• (00:42) Which State is the Best for Retirement? (Cindy & Mark)
• (05:13) I’m Moving to Another State. Should We Invest a Mortgage Loan? (Bill, CT) 
• (10:37) Should We Do a Roth Conversion Now or After We Move to Another State? (Greg, Beautiful Wine Country Temecula, CA) 
• (15:04) Should I Convert ETFs or Mutual Funds to Roth? (Nancy, Santee, CA) 
• (16:54) Should I Get a Roth IRA? (Laura, Los Angeles)
• (19:19) Is 0% Long Term Capital Gains a Hoax? (Kaihoku, Kailua-Kona, HI) 
• (25:19) I Have $900K in Annuities and Cash, Unemployed Due to COVID. Suggestions for Financial Direction? (Sean, Carlsbad) 
• (32:11) Custodial Accounts for Disability Payments and QYLD ETF (John)
• (36:08) Healthcare Costs, Health Savings Account and High Deductible Health Plan (Kevin, Forney, TX)

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Transcription

Today on Your Money, Your Wealth® podcast #335, which states are the best for retirement in terms of taxes? When you’re moving to another state with a lower cost of living, is it wise to take on mortgage debt to invest in the market? Does it make a difference if you do a Roth conversion before or after moving to another state? Plus, is it better to do a Roth conversion with ETFs or mutual funds? Is zero percent long term capital gains a hoax? Also, ABLE accounts for individuals with disabilities, and figuring out healthcare costs and taxes.  I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Which State is the Best for Retirement? (Cindy & Mark)

Joe: Here’s one here. “My husband and I are regular viewers.” So this is the TV show.

Al: TV or YouTube.

Joe: Just watching our picture, listening to the podcast?

Andi: Watching the front of the building.

Joe: “Leaving the state after retirement is mentioned as a way to maximize potential income. Has your program ever considered discussing the benefits, negatives of different states? I believe the sources of retirement income and expenses are fluid. For example, some state property taxes are higher than California and taxing Social Security income varies between states. Thank you for your show.” So this is not really a question and I’m not sure why this is in the old e-mail bag.

Al: Well, because they well, I guess it’s a question, they want to know what states are the best to retire in.

Joe: They want us to build a whole show.

Al: Well, so I’ll give you-

Joe: Because it makes sense, because it’s like- remember we had a client- we have clients in multiple states. But Michigan, they don’t tax their retirement benefits. To answer this question, to go through all 50 states, we would need to have-

Al: I did a little pre-planning.

Joe: Oh, you did some prep work there?

Al: I did. Because what I normally tell people when they ask the question, the answer is usually Wyoming. Because Wyoming has no state tax and it’s got very low other taxes. But I thought, well, let me get another source besides that.

Joe: Wyoming.

Al: Yeah. And it’s on this list. So these are these are the top 5 states. Fifth to first, according to GoBankingRates.com. So they said the fifth best one is Florida.

Joe: Because no state tax.

Al: No state tax and sales taxes is about 7% and property taxes under1%. And they don’t tax Social Security. That’s pretty good.

Joe: Good place to move to avoid taxes and then probably go to jail because you’re going to move back to the original state.

Al: And be careful about that.

Al: Number 4 is Nevada. Also no state income tax. The sales tax is about 8.25%. They don’t tax Social Security and the property tax rate is 0.67%. So about 2/3 of a percent.

Joe: I would say Hawaii is going to be in the list.

Al: No, Hawaii is expensive.

Joe: Not for pension income, it’s tax-free.

Al: Oh, sure. You’re right. But this is just general. Third is Delaware.

Joe: Yeah, but I think we have to look at- because there’s so many nuances like pension income, IRA income, distributions from retirement accounts, some of these states, don’t they have different tax rates on those types of distributions?

Al: They do, yeah. It’s actually way more complicated than what I’m saying.

Joe: I got it.

Al: But I’m giving you a little-

Joe: I thought you did some really good research.

Al:  Well, I’m not going to go to a chart with 50 rows and 25 columns.

Joe: That’s what I’m saying.

Al: I know you’d want me to, but-

Joe: That’s what I’m saying.

Andi: Al just wanted to get back to his list, so he’s doing his top 5.

Joe: I know.

Al: You missed it. Delaware. State income tax is 5.5%, but sales tax is 0% and property tax is only about .5%. They don’t tax Social Security. Number two is Wyoming, I thought would be number one. So here’s why. Sales tax is 5.3%. Income tax rate is 0%. Property tax is .55%. And number one is Alaska because there’s no income tax. The sales tax is 1.7% and the property tax is only about 1%. So there you go.

Joe: I don’t know if that’s really- that’s kind of half the answer.

Andi: Well, then you’ll have to do a whole TV show on it.

Al: That’s a great answer. Do you want to know the sixth and seventh?

Joe: No, thank you. No, thank you.

Al: I got those.

Joe: No, I think what would be interesting to me is the states that have favorable pension income taxes.

Al: Yes. So we know for sure that Hawaii does not tax pensions. They do tax IRA, but they don’t tax pensions. And so if you got a big pension, that might be a pretty good state to go to.

Joe: Yeah, you move to Hawaii and get- we’ve seen a lot of big pensions, $100,000 pensions.

Andi: That was sent from Cindy and Mark, by the way. You had asked me to leave it with them actually saying who they were and I did, and you skipped their names.

Joe: “Thank you for the show. Cindy and Mark.” Love Cindy and Mark.

I’m Moving to Another State. Should We Invest a Mortgage Loan? (Bill, CT)

Joe: “Hi, team. I have listened to your podcasts while walking during and after the pandemic. Really good info and I’m learning a lot. Some info on us, my wife and I are both 65 and retired; good health and active; $150,000 a year in pension and Social Security; $3,500,000 in Traditional IRAs; and about $800,000 in brokerage accounts. We own our house; no mortgage; value $900,000. We’ve been with a wealth advisor for 25 plus years.” Well, if you got a wealth advisor Bill, what are you calling us for?

Al: A second opinion.

Joe: Got it.

Al: Not opinion. A second, what do we call it? Spitballing?

Joe: Yeah.

Andi: A second spitball.

Al: Yep.

Joe: “We just sold our home in Con-

Andi: Connecticut-

Al: Yep.

Joe: Con-Connecticut-

Al: Right.

Joe: Connecticut. KT.

Andi/Al: CT.

Joe: I am just dyslexic today. All right. “We just sold our home in Connecticut at $865,000 and are building a new home in Delaware. Price of the new home will be the same as our prior home. But we will have a much lower cost of living, given significantly lower real estate taxes, no sales tax, no Social Security tax and reduced taxes on pensions, et cetera. We have been approved for $600,000 mortgage at 2.5%. I wonder if I should give $500,000 to the financial advisor to invest with a return of 5% or 6%? It also provides a tax write-off on the mortgage interest. In fact, I’m not getting any pressure from the advisor to do this, given my plan has always been to have no mortgage into retirement. What do you think, given this very low cost of money? Bill.” You have $150,000 of fixed income. So that’s the first thing I think, Alan, I take a look at for people with debt in retirement or wanting to add debt in retirement that didn’t have any debt. Is that you have the cash flow to cover the debt service.

Al: And the answer appears to be yes.

Joe: Yes. The only thing that he didn’t let us know is what he’s spending.

Al: Correct.

Joe: It’s just 3 things. That’s all we ask.

Al: What you’ve got, what you’re spending and what your fixed income is. That’s what we need.

Joe: That’s 3 things.

Al: Helps to have your age, too. And if you’re married, that helps as well.

Joe: It’s just, they write paragraphs and paragraphs and like pages-

Al: Well, Bill was pretty concise. We’re just missing the spending.

Joe: Because, if he spends $100,000- he receives $150,000 a year, but he spends $400,000, then we’d can say no. But if he spends, you know, $100,000 dollars a year and he has $150,000 of fixed income-

Al: –  so we’ve got extra.

Joe: Right. And then so you take a $500,000 mortgage-

Al: 2.5%  over 30 years-

Joe: 2.5% over 30 years- what’s that? That’s $23,000. So that’s $2,000 a month. Right?

Al: Yeah.

Joe:  So if he’s spending $100,000, his fixed income is $150,000, so you add another $24,000 dollars on his fixed income. I mean, on his living expenses, he still has enough without even drawing a penny down from the overall portfolio. So I would look at it like that. Not an arbitrage. Don’t think of it, is that my mortgage is 2%. And then can I invest in the market and get 5% or 6%? Because I think that’s where the greed factor comes in and that’s what blows people up.

Al: Yeah. And the answer is maybe.

Joe: Maybe.

Al: Right.

Joe: Yes. There’s no guarantee.

AL: That’s what a lot of financial planners will tell you.

Joe: I think that’s what- when you think of it, it’s like, well, if I’m paying the cost of debt of 2% and I could get 6%. Well, that’s good arbitrage. But be careful with that line of thinking because you could blow yourself up. And he’s saying this advisor is a good guy. He’s not telling to- no pressure. And so he’s just kind of- he didn’t want to talk to his advisor about it either.

Al: Right. Because he wasn’t sure.

Joe: And he’s like, well if I mention it, he’s going to be like, yeah, let’s get that $500,000. So let me get like a third party opinion to see what these guys think. And then maybe I might bring it up. I don’t think you need to take on the additional risk. You already got $3,500,000,000 that you’re not necessarily spending.

Al: Plus all that fixed income. Plus you got all the money in the brokerage account.

Joe: You got $800– the only thing that I would do with that $500,000 would create liquidity for me to convert some of these $3,400,000 out because the time he reaches 70 or 72 with $150,000 of fixed income plus another $120,000, $130,000, maybe $150,000 of RMD on top of the $120,000, I mean, he could blow his tax wide open. That extra liquidity could have helped pay for some of the taxes by doing conversions. That’s the only reason that I would do it. Otherwise I’d be debt free.

Al: That’s a really good idea because 7 years of doing that and then by the time he’s 72, his RMDs will be so high he can basically get that mortgage paid off pretty quickly.

Joe: Right, Because the RMDs going to kick up the money anyway. And then when it kicks out the money, you’re either going to put it into a brokerage account or your savings account, why don’t you just take the excess income from the RMD and just pay off your mortgage then?

Al: Yeah, I like that too. That’s a better way to look at it than arbitrage, which is never guaranteed. And by the way, it’s also personal. It’s depends upon what you’re feeling about mortgages and debt and retirement. If you don’t want a mortgage, then don’t have one.

Should We Do a Roth Conversion Now or After We Move to Another State? (Greg, Beautiful Wine Country Temecula, CA)

Joe: Greg writes in from beautiful wine country Temecula, California. “Big Al and Little Joe. My wife and I have $900,000 in our 401(k) and $200,000 in our Roths.” I love it how they call me Little Joe. I just think it’s so funny.

Al: It is pretty funny.

Joe: “I’m 50 and plan on retiring at 60 and we’ll be moving out of California to a state with no income tax.” Oh, great. Al’s got a list for you.

Al:  Let’s see what- Alaska where you need to go.

Joe: Wyoming.

Al: Or Wyoming.

Joe: “We will continue to max out our 401(k) and backdoor the Roth until I retire. Is it better for us to start to convert the 401(k)s to Roth now or wait until we move out of California where the 24% federal tax bracket, 9% state bracket? I’ll be using the money for my brokerage account for the conversion. Thanks.” So what do you think? He’s moving to a no state income tax state. Does he wait 10 years to do the conversions or does he convert now?

Al: Yeah, because it converts now, he’s got to pay an extra 9%, 9.3%, to be exact, to California.

Joe: So let’s call it you pay 35% today. State and federal. Or do you think when he leaves the state, what tax bracket is it going to be? Is it going to be less than 35%? I would imagine probably.

Al: Probably so.

Joe:  But then what the only- So that’s the simple math, right? Because roughly 35% today. Where are you going to be in the future? But he has to consider the time value of money of the conversion. And really what’s that worth?

Al: Yeah. And he says he’s got $900,000, he’s going to work for 10 more years. Even without contributing, that’s going to be worth $1,800,000-  it doubles. Contributing, I don’t know, $2,500,000.

Joe: Is his wife and him both maxing out? “We will continue to max out the 401(k)s-”

Al: So put in $50,000, add $50,000 to per year. $900,000 for 10 years. He’s probably going to end up with $3,000,000, I’m guessing.

Joe: 7%. What the hell. $50,000 savings per year. 2.5%.

Al: 2.5%. So 2.5%, the RMD on that would be roughly 4% we’ll call that-

Joe: – $100,000.

Al: – $100,000.  So that’s your income then. We don’t know what your income is now other than you’re in the 24% bracket. And as a married couple that would imply that your income is over $172,000, actually over $200,000 when you take into account the standard deduction. $100,000 let’s just say. And then plus Social Security, part of it taxable, you know, whatever. Let’s just say the income is, after standard deduction. I don’t know. $120,000- will probably be in what will be the 25% bracket, I’m guessing.

Joe: With no state taxes?

Al: With no state taxes. Today you’re 24% plus let’s call it 10%. So 34%. So, from just straight numbers, you would wait. But-

Joe: –  there could be strategy that might make sense to some degree.

Al: Particularly if you’re charitably inclined, maybe at times some charitable donations to a donor advised fund along with Roth conversions so it doesn’t cost anything because they’re offsetting.

Joe: Yeah, I think we would have to run some more numbers. But at first blush, that’s where we got.

Al: Yep.

Deciding where to retire, when, whether to get a mortgage, whether to do a Roth conversion – these are all major retirement decisions that definitely require running some numbers, but just as importantly, do you know what you’re gonna do with your time once you’re retired? In 2016, a Fidelity Investments survey found that 60% of men said having time to spend time with their spouse was a strong factor in their decision to retire, while only 43% of women said the same. Download the Retirement Lifestyles Guide from the podcast show notes at YourMoneyYourWealth.com to get some insight, suggestions, and ideas to make the most of your lifestyle, growth, health, and relationships in retirement. This is what Joe likes to call “the softer side of retirement.” Click the link in the description of today’s episode in your podcast app to download the Retirement Lifestyles Guide for free.

Should I Convert ETFs or Mutual Funds to Roth? (Nancy, Santee, CA)

Joe: We got Nancy from Santee, writes in. “When doing a Roth conversion from an IRA account, is it more beneficial to convert ETFs vs mutual funds? Or does it not make a difference one way or the other?” Nancy, it doesn’t make a difference one way or another. So if you have ETFs and mutual funds inside an IRA account, you can convert those ETF shares or mutual funds into the Roth IRA, and then just pay tax on whatever the dollar figure is the following year. So you can directly kind of convert those shares. So we use- we like ETFs, we like mutual funds. So you probably want to have the ETF or mutual fund that is maybe a little bit more aggressive or volatile in the Roth just to take advantage of the tax-free rate over the long-term, that you’ll probably get a little bit more growth out of those types of funds. But I don’t think it makes a difference. Do you, Al?

Al: No, doesn’t make a difference at all. And you are right, I think people don’t necessarily realize this because they put similar investments in all of their accounts. But if you think about it, you’d want your highest expected return in the Roth because you get rewarded for that. You pay no tax on that. So what’s the highest return asset? Well, stocks over bonds. Stocks will generally earn, not every year, but in general, they’ll earn more than bonds. And certain kinds of stocks over the long-term tend to earn more than others, like smaller companies and value.

Joe: Riskier companies.

Al: Riskier. Which is why you were saying they’re more volatile and they are. They’re more volatile, but they tend to go up more over the long-term. So that’s what you want to kind of load into the Roth.

Joe: Yeah. You’re compensated for the risk that you’re taking. So it’s a kind of a double whammy. If you have the time frame and you’re doing conversions and you have some time for those investments to do their thing, then, yeah, you would want more stock-like investments in the Roth.

Should I Get a Roth IRA? (Laura, Los Angeles)

Joe: Laura from Los Angeles. “I’m 40 yo, single, no kids, own a condo worth $450,000, have no debt aside from the $210,000 mortgage and make $150,000 a year. I’m worried about retirement. Only have a 401(k). My question is, should I get a Roth even though I get highly taxed right now? Or just stick with the Traditional?” She’s 40. Makes $150,000 a  year.

Al: Yep, single.

Joe: 401(k).

Al: She’s probably in a 24% bracket.

Joe:  I don’t know if she even qualifies.

Al: For a Roth?

Joe: What’s the-  $133,000?

Al: Yeah. It’s like $125,000 to $135,000, somewhere in that range.

Joe: She makes $150,000.

Al: Yeah, let’s see $125,000 to $140,000. So once you make over $125,000, you start being phased out on doing a Roth IRA, but maybe she’s asking- because she’s got a 401(k)-

Joe: Well, it says in parentheses, IRA.

Al: I know. But I think that means the Traditional 401(k). Maybe there’s a Roth option in the 401(k). So let’s answer that question first. Because if she’s just trying to do a regular Roth IRA, she would probably not qualify because her income is too high or at least couldn’t be a full one. But if she has a Roth option in her 401(k), she can do that. Is that a good idea?

Joe: Sure, but it depends on how much money she has. She’s concerned for retirement. She’s got $150,000. She’s 40 years old. So I don’t know what- if she has no savings then go Traditional for sure. Because.

Al: Because why not?

Joe: Why not?

Al: And with that income-

Joe: – would save some money in tax. And you can-

Al: And as long as you’re not going to have too high of a required minimum distribution age 72-

Joe:  But if she’s already saved a bunch of money in a 401(k) and has very little tax diversification, then you might say Roth.

Al: Because she’s only in the 24% bracket.

Joe: And she’s 40 and she’s got a lot of time for that tax-free money to grow.

Al: Yeah, that’s true too. And as you have observed before, and I agree with you, you tend to when you go ahead and do the Traditional 401(k) or Traditional IRA and get the tax deduction, you don’t tend to save the money. You tend to spend it. So it’s kind of a forced savings. And plus you’re going to be happy later.

Joe: Yeah, the tax benefits.

Al: Yep.

Is 0% Long Term Capital Gains a Hoax? (Kaihoku, Kailua-Kona, HI)

“Dear Joe, Al and Andi. I drive a 2017 Nissan Versa. I don’t have any pets, but my upstairs landlord has an outdoor cat that I play with sometimes.”

Al: Well, you do want to know what their pets are. I think that’s in reference to you walking your dog while listening to our program.

Joe: This thing’s gotten out of control. “And my neighbor-” I thought he was going to see something else. “I’ve been listening to and watching your show for about 3 years and enjoy your energetic dynamic and do not have a Roth conversion question.”

Thank you. “Three years and enjoy your energetic dynamic” comma, kind of interesting-

Al: Missing a noun or something. I think he meant energetic, dynamic banter. I’ll throw in that word.

Joe: Great, thanks. “I’m questioning if I got the 0% long-term capital gains rate or is it a hoax or I didn’t qualify. I’ve been filing my own taxes since high school because I think it’s been simple enough to do on my own. And hopefully I’ve been doing them correctly for decades. Three years ago was the first time when I used an online site that had me fill in the fields, but not the 1040 form or schedules. And I used the same tax website this year. Last year was the first time I sold some stocks in a taxable account and received the corresponding 1099 forms. Upon looking at the 1099s I freaked out because I didn’t know what all the pages meant and I didn’t want to go to prison for tax evasion. So I went to a tax preparer for the first time. The tax preparer filled my federal and state tax returns and answered my questions about the forms and collected her service fee. She told me she’d left breadcrumbs for me and to go home and do the taxes on my own to compare her results with my results. We got the same results, but I’m questioning why we had to enter long-term capital gain amounts from the Scheduled D to line 7 on the form 1040. I’m doing that. Wouldn’t I be taxed even if I qualified for a 0%, if I was under $40,000 of taxable income?” Oh boy-

Al: We can skip that rest part. The answer is not necessarily, because here’s how that works, and he does say that his taxable income is $39,000, somewhere at the bottom. OK, so and he’s single. So that’s in the 12% tax bracket, which goes to about $40,000, which means if you have capital gains and that taxable income, they’re taxed 0%. But if you have $39,000 and you have another capital gain of $1000, then you’re still OK. But if you have a capital gain of $10,000, then only the first $1000 of that capital gain is taxed at 0%. The other $9000 that put you over in the next bracket is taxed at 15%, because that’s the way this works. So that’s one thing to remember. The second thing to remember is when you get a 1099 statement, it usually just it often shows just the proceeds, you have to put in your cost basis. Now they are getting better now. A lot of them are putting in the cost basis, but not always. So you have to put in your sales proceeds and your cost basis, and then you see what the gain is. You put the gain in your other income. If with the gain, you’re under $40,000, you’re fine. But if it’s over $40,000, some of that will be taxed that at that 15% rate. So you have to go through all of that to figure that out. I would say- I would recommend getting TurboTax. Because once you got 1099s, it’s too complicated to do it manually like this.

Joe: Filling out with pencil.

Al: Yeah. I mean, you’re going to regret it at some point when there’s mistakes and IRS comes after you. Just get TurboTax or something similar.

Joe: “Was I in the under $40,000 income tax bracket and was I taxed for my long-term capital gains? I think it should be able to do taxes correctly on my own to save myself money that can go towards my retirement accounts and pay down my house. Thank you. Kawaoka- ”

Al/Joe: Kaihoku.

Al:  He says “And I’m not Hawaiian.”

Joe: “And I’m not Hawaiian. Although he’s from-

Andi: Kailua-Kona.

Al: Kona, Kailua-Kona.

Joe: That’s not stated anywhere in this email.

Al: True. Well, it’s at the front.

Joe: Well, no, he didn’t write that. That’s our stalker, right?

Al: That’s probably right. Oh, that’s in the form?

Andi: Yeah.

Joe/Andi: That’s in the form.

Joe: The form that Andi uses to figure out exactly who –

Andi: The form that people fill out with their information in it.

Al: So Kaihoku,  It was not a hoax. You paid 0% on your capital gains because your taxable income was below roughly $40,000. But you have to go through that exercise to figure it out.

Wanna know a secret? Joe and Big Al do not know all all these ranges and limits and rules off the top of their heads, and you don’t have to either. Get yourself a copy of the 2021 Key Financial Data Guide from the podcast show notes at YourMoneyYourWealth.com and use the exact same guide the fellas use. See at a glance the 2021 brackets and capital gains tax rates, retirement plan contribution limits, taxation on Social Security, Medicare premiums, and more credits, deductions, exemptions, distributions, exclusions than you can shake a stick at. Click the link in the description of today’s episode in your favorite podcast app to download the 2021 Key Financial Data Guide for free and have it ready any time you want to impress your friends with your encyclopedically nerdy financial knowledge!

I Have $900K in Annuities and Cash, Unemployed Due to COVID. Suggestions for Financial Direction? (Sean, Carlsbad)

Joe: “Hello. In a nutshell, I have two 401(k)s I rolled into annuities. One at $52,000, 4 years ago, and the other $73,000 about a year ago. $100,000 in B of A checking; $750,000 in cash. I have no debt worth mentioning and a healthy hate for it. Credit cards paid monthly; stuck in rental till market changes with average cost of living at $3000 or $4000 a month. No children that I know of.”

Andi: And he even has that icon.

Al: I know. Very good.

Joe: Yep, I was doing that little emoji.

Al: Yeah, yeah.

Joe: “53 years old since May, in good health. Job vanished a year ago due to Covid and usually in the $100,000 to $125,000 income range. I have state insurance, but nothing toward long-term care insurance. Jobs are being tight on income offering and anticipate lesser earnings when I go back to work. Not that I really want to for a couple of years. I could really use some direction at this point. And most that I speak with tend to be rather vague in direction. What do you think? I look forward to hearing from you.”

Al: Tell him what to do.

Joe: What the- ? Are you kidding me? You’re really looking forward to- and most people are vague. Well, if this is how you’re asking for financial advice-

Al: What’s the question?

Joe: There’s no question.

Al: Other than what should I do?

Joe: Got no kids. 53, chillin’. He’s got, I don’t know, $750,000, $100,000, $850,000-

Al: – and he’s 53.

Joe: He’s got, what, $900,000. He spends $4000 a month, $50,000 a year. So $50,000 into $900,000 is roughly what, 5% and 5.5%. So he’s taking 5.5% out of his money, out of his nest egg. $750,000 of it’s in cash. That’s not growing. So if you’re taking 5.5% out of your nest egg at age 53 and your nest egg is not growing-

Al: – at all if it’s in cash-

Joe: – at all, you’re going to deplete your overall nest egg in 20, 15 years.

Al: So I’m going to tell you what to do. Actually get on the job search right away.

Joe: He’s like well everyone’s just giving me vague information.

Al: No one is helping. So I would say- I don’t know what you do- I guess this is Sean in Carlsbad. Sean, I don’t really know what you do, but if you have to take a little bit less to rebuild back up, go for it.

Joe: Here’s my advice. Don’t buy any more annuities, right?

Al: Invest the cash.

Joe: Invest the cash in a globally diversified portfolio that’s low in cost. Make sure that you have the right allocation, given your appetite for risk, but I would say at age 53, it’s probably at least 60% in the stock market. I would then say if you’re spending $48,000 and you’re used to spending $100,000, who cares? Find a job that you enjoy making $50,000 so you don’t touch your nest egg. So let the nest egg then grow over the next 10 years. So now that $900,000 is worth $1,800,000. And at that point you’re 62 years old.

Al: And you’re used to spending $50,000 so you can trust you can gravitate to retirement.

Joe: Yeah. And then you quit your job and then you start living off your investments, claim your Social Security whenever, you’re in good health, maybe you push that out to age 70. Now your $50,000 spending today in 10 years is probably going to be about $70,000. But you have $1,800,000. $70,000 into $1,800,000 is-

Al: Call it less than 3%.

Joe: Yeah, well, 3.8%. OK, but at 62, then you’ve got to bridge the gap to Social Security at age 67 to age 70, I think, if you’re making $100,000, $125,000, your Social Security is probably at least, what, $25,000, $30,000? So now your shortfall is $30,000 that you have to pull from.

Al: And you’re in great shape. So I think we both said a similar thing, which is you need to get a job.

Joe: Get a job. Don’t take $4000 a month at 53 from your overall portfolio. Make $50,000, $40,000. Then you’re covering your nut without dipping into the nest egg. Invest the nest egg, don’t buy product. You bought two annuities already. They’re probably fixed indexed annuities given the brand. So you’re going to these- you’re asking for advice from the wrong people. You’re only giving them snippets of what you’re thinking and then you’re getting sold product. That is the whole issue. The problem, right? What do you want to do? I mean, it’s simple. You’ve done a good job, so I don’t know. But is he renting, because he sold a house? That’s where the $750,000 cash came. So is he going to buy another house in Carlsbad? Then that’s going to blow up the $750,000.

Al: So the other thing I would say is don’t necessarily expect the market, the real estate market to crash like it did in 2007, 2008, 2009. I can tell you in my lifetime and Sean, I’m a little older than you. This is only happened once in my lifetime where property has actually gone down in value in Southern California to any great degree.

Joe: Was he trying to time the market? Did he say that?

Al: Well, he’s “renting until the-

Andi: – market changes with the average cost of living at $3000 to $4000 monthly.”

Joe: ” – stuck in rental till market changes”.

Al: Which indicates he’s waiting for a crash. And I wouldn’t count on that in Southern California, particularly Carlsbad.

Joe: “stuck in rental” Is that his own rental?

Al: No, I think he’s renting.

Andi: Since he sold his house.

Joe: So then that $750,000, he’s going to buy another house, he’s going to wait for it to crash and it’s going to crash in 15 years. But the crash, it’s going to be a 20% crash of a value that’s 100% higher than today.

Al: Three times higher than today. But it will go down at some point. Plus, if you buy a house with that or a big part of it, then you’re not going to have enough nest egg. Then then you got to make more than the $50,000.

Joe: Yeah. Then you’re going back to work full time making $125,000, spending your $40,000 paying $20,000 to tax and saving everything else.

Al: And if you can only find a job for $75,000 take it and then over time work back up to $100,000, $125,000.

Joe: Is that good enough?

Al: Yeah.

Custodial Accounts for Disability Payments and QYLD ETF (John)

Joe: “Hi, Andi. Joe and Grande Al. Two questions: Number one, my wife is the guardian of her adult sister with mental issues. The sister receives a check from the state every month. Neither the sister nor us need the money right now. Is there a way for my wife to set up a custodial account for her sister, invest the disability money for her sister’s use in the future?”

Al: What do you think?

Joe: Sure.

Al: Sure, why not? Well, I think that there’s a few choices. Can you do a custodial account for someone over 21?

Joe: I don’t know how old the sister is. She’s the guardian.

Al: She says adult sister. I guess I’m not sure the answer to that. I know you could set up a special needs trust. That would be something you could do.

Joe: What’s- it’s on the tip of my tongue.

Al: The ABLE?

Joe: Yeah.

Al: You could set up an ABLE account. That would be the simplest, wouldn’t it?

Joe: Yeah. You just set up an ABLE account, which is a custodial account.

Al: Because it’s for the benefit of someone that-

Joe: – that has special needs or has a disability.

Al: – has special needs. And I think as I understand it, the ABLE account, the adult sister with special needs has access to that, but wouldn’t necessarily have access to a special needs trust because you’d have a trustee. So whether that’s a consideration.

Joe: The ABLE account has the same benefits as a special needs trust. And the reason why people set up a special needs trust is, is just the fact here that John wants to do. John wants to put money cash aside for an individual that will need care. But there’s limits on how much Social Security that someone can receive depending on assets and income that that individual has. If the individual has too much income or assets, then they’re going to reduce the overall Social Security benefits, the disability benefits. So they put it in a special needs trust to allow them to continue to get their Social Security benefits. And I’m sure there’s a lot more to this. I’ve never really- I’m not an attorney and I don’t draft these. I’m just giving you a very high level. The ABLE account is the same thing, but a lot cheaper.

Al: It is.

Joe: You can put the money in the ABLE account. It avoids the testing for Social Security benefits.

Al: But then there’s upper limits on those. if you’re getting Social Security disability. I think it’s $100,000, if I’m not mistaken.

Joe: “I drive a 2016 blue Nissan Altima and she drives a 2012 silver Toyota Camry. We have two dogs, a yellow lab and a black and white mutt.” Look at the picture of Cookie and Mae. Very cute.

Al: Under the table.

Joe: Very cute. “Number two, a YouTube video about the ETF, QYLD, showed up in my feed that I knew nothing about. Short story- is this ETF acts like a covered call and I get part of the proceeds? The narrator said you can have big gains and horrible losses and the taxes on the gains can be high as 60%. Al, would a tax bomb would happen to me if I put this in my Roth? I know you cannot give personal advice, but maybe a scenario.”

Al: I think what he’s talking about is if you just own it outside of your retirement account, then 60% is taxed at short-term capital gains and 40% is taxed at long-term capital gains. I think that’s how it works. Whether you can put that investment in a Roth or not- I think generally you can, but covered call is an option and some options are tied in with margin loans and you can’t have a margin loan inside a retirement account. So I don’t know enough about this fund, but that would be my only caution on that one.

Joe: Very well answered, Big Al.

Al: Yeah. Thought out.

Healthcare Costs, Health Savings Account and High Deductible Health Plan (Kevin, Forney, TX)

Joe: Kevin. From Forney-

Al: Forney, Texas.

Joe: Forney, Texas. Been to Forney?

Al: Nope. Never been to Forney.

Andi: Ever heard of Forney?

Al/Joe: Nope.

Joe: “Howdy guys.”

Al: That sounds Texan, doesn’t it?

Joe: Howdy right back at ya Kevin from Forney> “I know you are tired of Roth IRA questions. So my 3 questions are about HSAs.” This is going to be interesting.

Al: That’s even more interesting than Roths.

Joe: This is gonna be just riveting.

Al: Health savings accounts, by the way.

Joe: Oh boy. “We have accumulated over $30,000 in medical debt during this year.” Sorry to hear about that. “The only silver lining is, number one, we are in a strong financial situation. And number two, we will be able to itemize our deductions this year because of the medical debt, mortgage interest, property taxes and up to well over- added up to well over the standard deduction. Here are my HSA questions:”  I probably should have read this question before we went on the air. I’m not really up on my HSA, but we’ll see what I can do.

Al: I think I can help you out.

Joe: “Let’s say my AGI is $100,000. I know the rule is that I can deduct my medical debt over 7.5% over my AGI, which brings my deduction to $22,500, $30,000 minus $7500.”

Al: That’s a correct statement.

Joe: “However, I’m still negotiating with the hospital. Let’s say they agree to reduce my debt to $20,000, which number do I use to calculate my medical debt tax deduction, the original amount or the reduced amount?”

Al: Kevin, that’s real easy, it’s what you pay.

Joe: What you pay.

Al: What you pay, not what you should have paid.

Joe: How about if I tell them to put something on a piece of paper that’s a lot more than what I spent?

Al: “Mr. IRS, I got an invoice here and I must have paid it.”

Joe: Well, what did you actually pay Kevin? A lot less than that.

Al: Yeah, Kevin, it’s what you pay. So it’s the lower amount. “In the scenario above, it is my understanding that I wouldn’t be able to pay with my HSA funds because I can only deduct unreimbursed medical care expenses. Paying with a tax-deductible HSA would be double-dipping.”

Al: That is true.

Joe: “But if I decide to reimburse myself 10 or 15 years from now using my HSA, how does the IRS know that I’m already itemized those medical bills 10 years ago?”

Al: Kevin, they don’t. You’re on the honor system here. Please do it right.

Joe: Oh my God, Kevin. It’s like I’m going to call Your Money, Your Wealth® to see-

Al: – to find out how to cheat.

Joe: – “how to cheat. I love tax fraud. I want to test these boys.”

Al: That’s right. Let’s see what they come up with. So, yeah, don’t do it. And if you want to do it, it would come up under audit or maybe you’ll hit a little older age. You’ll feel guilty. You’ll call them up. “I just haven’t been able to sleep for 10 years, Mr. IRS.”

Joe: So there’s tax avoidance and then there’s tax evasion.

Al: Yes. The second one we don’t particularly like to encourage because that will get ya, what, three square meals and a bed to sleep in. But you may not like it there.

Joe: Oh yeah. They got a really nice gym. It’s called The Yard.

Al: You can only go out certain hours. You might have to get a job of picking up trash like on the freeway.

Joe: Yes, it’s a strict protocol at that gym. “Finally, my current HSA is an individual plan. On September 1st, I am switching to a family HSA plan because I’m adding my family to my health insurance. My school district offers them highly deductible health plan.

So I’m HSA eligible whether I include my family or not. Since I will have the highly deductible health plan on December 1st, 2021, under the full contribution rule, I will be able to contribute the full $7200, which is my preferred option instead of the prorated contribution. I’m aware that I am subject to testing period and I must keep HSA eligibility for the entire following year. However, the language is vague. Let’s say-”  I’ve just got to do whatever I want and we’ll see what happens. Why are you even asking these questions? “Let’s say that next year my health care plan becomes too expensive for my whole family and I decide to switch back to the individual plan. Does the 10% penalty apply? I will still be HSA eligible because my plan is still highly deductible health plan, but it didn’t keep my family in the insurance plan for the whole entire year. The IRS doesn’t specify whether I must keep the same thing or-

Al: – health plan or another one-

Joe: “- I had when I used the full contribution rule or whether I can switch from a family to an individual plan and stay HSA eligible-”

Al: Kevin, if you switch, then you’d still have the 10% penalty on the difference between the individual plan and the family plan. So there you go.

Joe: “Thanks so much for all you do to help your audience.” Well, if you’ve been listening for a while, I don’t know if this is going to help you or not. This will keep you on- it’s like confession here.

Al: Here’s- I might do this.

Joe: At least- I love this guy because he’s like, this is what I do. What do you think? versus you know, my cousin’s friend’s neighbor-

Al: I need to know how to advise them.

Joe: Yes. You know, and I thought it was kind of fishy.

Al: They said, I’m doing this. I said, ooooh, I’m not sure that’s a good idea.

Joe: Well I know who to call. Let’s call Big Al and Joe.

_______

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