Joe Anderson
ABOUT Joseph

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

Alan Clopine

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

Published On
March 10, 2020

How much of your money should you keep in cash? Should you buy VBK, the Vanguard Small-Cap Growth ETF? Plus, asset allocation and asset location, the pros and cons of the Roth 401(k), Medicare, spousal and survivor Social Security benefits, tax-saving charitable giving, small business strategies, who qualifies to be called Joe Anderson’s “peer,” and whether you’d rather hang out with a James or a Jimbo.

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Show Notes

  • (00:54) How Much Net Worth Should Be in Cash?
  • (08:36) Should I Buy VBK, Vanguard Small-Cap Growth ETF?
  • (15:01) Advantages & Disadvantages of Roth 401(k)
  • (21:46) Will How We File Our Taxes Affect My Wife’s Medicare Premium?
  • (24:50) Social Security Survivor Benefits: Will They Be Higher?
  • (28:58) Spousal Social Security: 50% of Age 70 or FRA? Who is Right?
  • (32:08) How Does Our Social Security Retirement Strategy Look?
  • (41:05) Can I Move 401(k) to Traditional IRA for a Tax-Free Charitable Strategy?
  • (43:14) Follow Up: S-Corp Deductible IRA Contributions
  • (45:50) Self-Employed Home Business Tax Strategy

Resources mentioned in this episode:

WATCH | Roth IRA vs. Roth 401(k): What Are the Retirement Differences?

LISTEN | YMYW podcast #262: What is the Right Retirement Asset Allocation for You?

FROM MEDICARE.GOV: Taxes and Medicare Part B Premiums

WATCH | 3 Tax-Saving Ways to Donate to Charity

WATCH | What Are Qualified Charitable Distributions?

READ THE BLOG | Small Business Tax Strategies

Listen to today’s podcast episode on YouTube:



Today on Your Money, Your Wealth®, how much of your money should you keep in cash? Should you buy VBK, the Vanguard Small-Cap Growth ETF? In this grab-bag of an episode, we’re talking about asset allocation and asset location, the pros and cons of the Roth 401(k), Medicare, spousal and survivor Social Security benefits, tax-saving charitable giving, small business strategies, who qualifies to be called Joe Anderson’s “peer,” and whether you’d rather hang out with a James or a Jimbo. Ask your money questions and get all of today’s free financial resources and the full episode transcript in the podcast show notes: get there on your phone by clicking the link in the description of today’s episode in your podcast app. On a desktop computer, visit YourMoneyYourwealth.com and click “Listen to Podcasts.” I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

How Much Net Worth Should Be in Cash?

Joe: Maggie from Iowa. She writes in. “Dear Andi.” She’s top billing.

Al: Yeah she is.

Andi: You guys better watch out.

Joe: “Al and Joe.” I’m last billing. Thank you, Maggie. I think I’m going to skip this question.

Andi: She saved the best for last. Come on now.

Joe: We got Michael from Ohio writes in.

Andi: He’s the one that called you ‘Oh Great One’, so no wonder.

Al: Yeah that’s why you wanna do that one.

Joe: So Maggie writes “Hello from Iowa.” Well hello back. “Thank you for the podcasts. I have learned a lot from it. My 17-year-old son listens to it as well. He’s thinking about being a financial planner after college.” Very good. That’s a good career path. “Question. What percentage of total net worth do you recommend to be in cash? Most of our tax-advantaged investments have zero cash. Mostly stocks and a tiny bit of bonds. I’m just wondering if I am cash-heavy or about right. Background if needed, because I’ve listened enough to know you sometimes need more information.” All right well thank you very much, Maggie, for that information.

Al: Yeah, we’ve got like four bullets here.

Joe: “My self-employed husband makes $70,000 a year before self-employment taxes. We contribute $14,000 annually to our Roth IRAs. He has a retirement account through his business. Our expenses are about $55,000. I want to keep at least $30,000 for an emergency fund. His retirement account is $420,000. Roth IRAs are $200,000 and $250,000 for mine. We have college savings of $112,000 in 529 plans. $150,000 in a brokerage account, $10,000 HSA, $120,000 cash and CDs, with high interest checking. High CD is 3.43% and lowest is 2.5%. When I take out college savings and HSA from the equation, I figure we are about 10.7% in cash. We’re 56 and I’m a stay-at-home mom. College savings is enough for my youngest son to make it through college debt-free. I look forward to your answer.” So Maggie is curious about her asset allocation.

Al: How much cash is too much?

Joe: And I’m guessing she’s equating CDs as cash.

Al: I think so.

Joe: So she’s got CDs that are paying 3.5% and 2.5%. That’s pretty good.

Al: That’s really good.

Joe: That’s a good bond.

Al: I would sort of count that as a bond. I mean that’s my first comment, is that’s a great rate. So I wouldn’t even count that as cash.

Joe: Well it is.

Al: I know but I wouldn’t.

Joe: So you’ve got to count it. That’s her question Al.

Al: But I wouldn’t for purposes of this computation. So I’m going to answer it this way and you can chime in Joe. So I think the first thing you want to have is your emergency fund which you want $30,000. We recommend 6 months to a year so that’s below your spending. That’s about maybe 7 months of spending. So that seems fine. The second thing I would do is I would keep in cash any monies that you want to designate for something in the near term. By near term I mean in the next 3 years. You know like vacations, like home improvements, like buying a motor home, car or whatever. So you keep that in cash. I would invest everything else. But when I say invest everything else I actually- your CDs are pretty high earning, so I think I would consider that an investment. That’s how I look at it.

Joe: I would agree with that wholeheartedly. What I would look at though, outside of your cash reserves of $30,000 and whatever ancillary expenses that you have, one of the things people make mistakes on is where they’re keeping their CDs So 56 years of age- So if you’re looking to say 10% in cash but your cash reserves- let’s just say $50,000 or $100,000 keep in cash. So that’s going to cover emergencies, opportunities if you want something.

Al: Stuff you wanna do.

Joe: I think with the amount of assets that they have, put $100,000 in cash, keep it in your high interest-paying CDs that are liquid. Maybe $30,000 in checking or savings and then the rest in the CDs. If you like these CDs that you have 10% in, be careful of where you hold them. You would rather have them in the retirement accounts. So if you have an IRA go to the same brokerage house or you can go to the same bank or something like that and still buy these brokerage CDs that you’re purchasing. But just put it in your retirement account because it’s kicking up high interest that you’re not necessarily spending you’re just reinvesting it and it’s adding to your tax bill. I’d much rather see stocks or asset classes that are a little bit more volatile in the brokerage account. So they might look at it hey I have $400,000 in my retirement account. I have $200,000 in Roths. She’s got another $250,000, so call it $400,000, $500,000, $600,000, $700,000 in retirement accounts, $200,000 and Roth $150,000 in a brokerage. So in your retirement account- so it outside of that she also has these other CDs and things, I would look at it to say put the CDs and bonds and lower I guess, appreciated assets in their retirement accounts and keep your higher appreciated assets outside of the retirement.

Al: I agree with that. And so just to be clear, if the $100,000 is the right number in cash, that’s outside of retirement. That’s separate from what you’re talking about. But everything else should be fully invested and CDs paying this much could be considered like a bond.

Joe: Of course.

Al: I’m fine with that. But they do produce ordinary income. And so you’d rather have your stocks in your non-retirement account because those are subject to capital gains. That’s a much better tax rate and you don’t necessarily want as many stocks in your retirement account because when you withdraw the money it’s all ordinary income anyway. So you’re just being smart on where you put your assets.

Joe: Well here’s what we see, is that Maggie’s got a brokerage account, let’s call it $150,000, but then they start accumulating cash. And so what do they do with that cash accumulation? Is that they buy CDs. They don’t put it in the brokerage account. It’s like well how the heck did you get the brokerage account to begin with? Well, it might have been a stock option plan and or it could’ve been an inheritance. It could have been wherever. We rarely see someone put like a monthly investment, a systematic investment into the brokerage account. So they build up cash and they’re like well what should I do with this cash? Let’s just buy CDs versus investing it like you’re doing in your brokerage account. Another reason why I think people do that is that they might have a brokerage account and they’re just playing with it. They’re trading stupid stocks or this is my trading account. Well, that should be separate as well and only have like $5 in that because you’re probably going to lose it. Does that make sense?

Al: It does. I agree with all that and I think you’re right. Typically we see people do it exactly that way. They’ve got their safest assets that are producing ordinary income in their brokerage account, non-retirement account.

Joe: That’s usually the checking or savings.

Al: And their highest growth stocks in their retirement account which is all- so virtually all of their income is subject to ordinary income in the future based upon where they have their assets located.

Joe: Because if you think about it you have one- let’s say investment. You have $10,000 that’s in stocks and over the next 10 years hopefully that doubles to $20,000. Wouldn’t you rather have that outside of a retirement account where you can have a lower tax rate on that growth?

Al: So it’s all about keeping more what you’re making. Not just the amount you’re making, but what you keep.

Joe: Wow. That was so wise.

Al: That was amazing, wasn’t it? Seems like I’ve heard you say that.

Joe: Did you say that? It’s not what you earn, it’s what you keep?

Al: That’s what I was trying to say, but it came out funny.

Joe: Got it.

Should I Buy VBK, Vanguard Small-Cap Growth ETF?

Joe: We got Darrell from Ohio. “I’m Darrell from podcast 248.” Weren’t we talking about Darrell and my other brother Darrell?

Al: Yeah, They’re Larry and Darrell.

Joe: Larry, Darrell, and Darrell.

Andi: Yes. And he actually references that.

Joe: Hey Darrell. Welcome back. “You’re doing a great job.” Oh, thank you, Darrell. “Thanks, Andi, Joe, and Al. I’m planning to put cash into a taxable account from cashing out life insurance and selling my house. I’ve heard that I should use funds with less taxable events like ETFs and index funds. Someone – your peer Josh from Heritage Wealth Planning – Darrell, I don’t know who Josh is from Heritage Wealth-

Andi: Yes, but he’s one of your peers.

Al: Maybe, maybe not.

Joe: I don’t believe so. What is a peer?

Andi: Somebody that is the same level as you, does the same thing as you.

Joe: Equal? Equal? Oh, come on.

Al: Oh Great One? No one is equal to you.

Joe: There’s a lot of people out there that call themselves financial advisors or financial planners and basically they sell crappy products.

Al: And some are, and some we would say, are not.

Joe: But no I don’t know Josh from Heritage. Hopefully, he’s a good guy. And now I just gave Josh a huge plug. Everyone go check him out. Do business with him.

Al: You want to say his business again?

Joe: Heritage Wealth Planning.

Al: Oh very good.

Joe: “He suggested VBX” or “VBK.”

Al: VBK.

Joe: VBK. Sorry.  I’m a little dyslexic.  “On Morningstar, it had low expense ratio and a good 15-year return. When I look at the distribution it shows zero capital gains but income of a little over $1 per share, per year. Is that good? If not how would you or how would one evaluate a fund for a taxable account? Is the income reported on 1099 DIV? P.S. My wife and I are both 52 and I do have two brothers.”

Al: Oh he did talk about- you’re right Andi.

Joe: Thanks, Darrell. So I don’t know. What you think, Al?

Al: Well let’s see, I don’t know too much- I assume that’s a Vanguard fund?

Joe: VBX?

Al: Yeah. Is that a good guess?

Andi/Al: VBK.

Joe: That’s twice.

Andi: He really wants it to be VBX.

Joe: I know. Well, most funds end in X for some reason.

Al: Anyway, ETFs and index funds tend to be more tax-favored than say actively managed mutual funds. I agree with that. And so but whether it’s an ETF or an index fund they are going to have a capital gain distribution. I mean by definition at year-end so you can’t avoid it altogether. But there’s less of that in those types of funds because the fund manager is not buying and selling and trying to time the market. So I agree with that general premise and the income that comes to you, it is on 1099 DIV. Dividend. And there’s really 3 different categories. There is ordinary income or ordinary dividend I should say, which is the total of dividends. Of that, you have qualified dividends which are taxed at capital gains. And then there is a yet a third kind that stands on its own and that’s a capital gains dividend. Which shows up also in the 1099 DIV. And that is as a result of the fund manager buying and selling positions with inside the fund.

Joe: So VBK is Vanguard Small-Cap Growth ETF. Why is he recommending just one fund? Here, you’ve got non-qualified, you hate dividends? Buy small-cap growth. First of all, small-cap growth is one of the worst-performing asset classes that you can purchase. I would go small-cap value if you wanted to go small-cap. Because you’re paying for added risk that you’re not getting compensated for, per academic studies, not Joe Anderson.

Al: Yeah. Now and let me just clarify, that’s based upon decades of historical research.

Joe: Correct.

Al: That’s not our opinion. That’s just what history has shown us.

Joe: Correct. And then it turned into my opinion.

Al: Which we wanted to clarify.

Joe: After you read something that you agree with, then it turns into your own opinion I believe.

Al: We don’t have opinions on stocks.

Joe: I don’t have a recommendation. We can have an opinion if it’s dog doo doo. But I’m not saying- I love Vanguard. But I don’t know why he would do this. So it depends on how much money that you’re putting in here, Darrell. You want a globally diversified portfolio. You want to have asset classes that are outside of retirement that have a higher expected rate of return. And you want to be tax efficient. So yes you want to go ETFs. You want to go index funds. But you don’t have to get in the weeds here by looking at what dollar they’re distributing per share. If it’s an ETF or an index fund it’s going to be very very low. Unless it’s multi multi-million dollars and then you’re just going to put it into one fund anyway. That doesn’t make any sense.

Al: Well, of course, we don’t know the rest of the story. Maybe there are other investments in other accounts and who knows. Maybe Josh followed your advice and he’s got the more risky asset class in the non-retirement account. He’s got the safer ones in the retirement account.

Joe: Josh is the- my peer, that I don’t know. That I don’t really care for right now.

Al: Yeah but that’s who Darrell is listening to.

Joe: Got it. So but yeah. You’re on the right track. You got- you can’t look at past performance either. So here’s what people do, they pick investments or they collect them. So let me look at this particular fund. Let me look at the track record of this fund. You have to look at the asset class. Do you want small-cap growth or small-cap value? Do you want large-cap growth or large-cap value? Do you want international growth or value emerging markets small, mid, large? I mean, those are the asset classes. That’s the broader steps that you need to take. And then you can narrow it down into what vehicle that you’re going to use to provide you with that diversification given that asset class. And so yeah if you want small-cap growth, then buy VBK. That’s cheap. It’s tax-efficient. But don’t start there. You know if some guy is talking about, “let’s analyze this mutual fund and let’s open up Morningstar and blah blah blah blah. Blah blah blah.” That’s all past performance. It doesn’t mean anything about what’s going to happen in the future. So you’re saying I got a 10% rate of return over the last 15 years. That means nothing. Zero. It could lose 30% over the next 10 years. So hopefully that helps. Thanks a lot, Darrell. Tell Bob Newhart we said hello.

Advantages & Disadvantages of Roth 401(k)

Joe: Anna from Chattanooga, Tennessee. “Can you please talk about Roth 401(k) advantages and disadvantages and who should use them? I have a 401(k) plan with a Roth option but I’m currently contributing to the regular 401(k). My employer matches $50. Yep $50.” Anna, maybe get a better employer. “I don’t know if I should start utilizing the Roth option. I have a Vanguard IRA with roughly $450,000, a Vanguard Roth with about $138,000, $78,000 in a TIAA account, $20,000 in the 401(k) and $750 in a 457 plan that I just found out I could contribute to. I’m 49 years old; earn $60,000 from my job; an additional $20,000 from my sole proprietorship. I’m now able to max out my Vanguard Roth every year; put an additional $750 a month into the 401(k) and 457 and my employer puts 10% of my salary into my TIAA. I expect my taxes to go up in retirement and my financial advisor has said that I should start doing Roth conversions but to also keep contributing to the 401(k) 457 as I am now. My question, if I’m going to do a conversion then shouldn’t I also be putting the 401(k) money into the Roth option? Otherwise aren’t I just moving out tax-deferred money that I’m partially putting right back into another qualified account?” Okay. Thanks for the question, Anna. So she wants to do Roth conversion- the advisor is telling her to do Roth conversions. So but he’s like hey keep putting the money into the 401(k) 457 plan pre-tax and do conversions. So she is like well what’s the difference?

Al: Why don’t I just put it in the Roth and do less of a conversion?

Joe: I guess it all depends on how big of a conversion that the recommendation is. Because there are limits to the amount of money that you can put into the Roth 401(k). But here’s the pros and cons. I think before the JOBS Act, we would recommend the same advice that the advisor is giving. Because you could re-characterize. If you did a Roth conversion before you could say you know what? Never mind let’s put it back into the IRA. But now it’s irrevocable. So do you put $19,000 into the Roth 401(k) or convert $19,000? It’s not going to make a difference at all. It’s the same same.

Al: So theoretically and that’s the- I would say that advice holds true if your income is steady and predictable. But here’s when you still might want to do a Roth conversion over the Roth 401(k) because let’s say your income changes at some point throughout the year and you’re in a higher tax bracket than you thought. If you’ve already put money into the Roth 401(k) you can’t do it. You can’t undo it. It’s in the Roth side. But if you wait till December to do your Roth conversion then you have a full year history to know exactly what tax bracket you’re in. So you have a little bit more certainty.

Joe: The Roth conversion versus- it depends. Let’s say she wants to do a $50,000 conversion. Well, you’re going to put $19,000 into the Roth 401(k) and you’re still going to convert $30,000.

Al: I understand it’s same-same. I agree with that. I’m saying if you want to do $50,000 conversion- whether it’s conversion or part contribution, doesn’t matter. But what if you get a $300,000 bonus? Then you don’t want to do that. You would rather have the deductible 401(k). So that’s all I’m saying is it gives you a little bit more flexibility to do the conversion and you do that towards year-end. But in her case, it sounds like she’s working for the government, probably the income is steady so it probably doesn’t matter Anna, for you. Whatever you want to do.

Joe: It’s easier- I’ll tell you this. It’s easier to do the Roth 401(k) because there’s no transaction. You’re just checking a box and then all your contributions are going on the Roth side of it. A conversion there’s a little bit of work to do.

Al: Plus the other good thing about the Roth 401(k) contribution is you’re having tax withheld as you go.

Joe: Yeah you’re not going to get a tax bill in April from the conversion.

Al: So I kind of like that part.

Joe: So I think it depends. It’s the same outcome regardless. So really if you don’t like the 401(k) plan and you have investments that you like better in an IRA. Well then do the conversion.

Al: But I think the basic answer is it doesn’t matter because you end up in the same spot. But those are some pros and cons of doing one or the other.

Joe: Asset location is another thing as well, Anna. So in Roth accounts, you probably want to have- especially at age 49. You want to have more aggressive type stocks in your Roth or asset classes that will give you a higher expected rate of return. So if your 401(k) plan, I don’t know if you can segregate all the Roth option versus the pre-tax on how those are being managed versus like- let’s say you have $100,000 in your 401(k) plan, $25,000 of it is Roth and $75,000 is regular pre-tax. If your 401(k) will allow you to say ‘I want the Roth portion the 25% of the Roth portion, in this particular asset class and then the 75% and all these different asset classes’ then it doesn’t necessarily matter. But what we’ve seen is that you want to say ‘I want 25% of my 401(k) in this account or this fund. I want 25% in this fund 25% in this-‘ they’re not going to separate the Roth from the pre-tax. So you really can’t get that true asset location. So maybe doing a conversion might be beneficial there too.

Al: Where you have more control over the investments. I agree with that. That’s a good point.

Asset allocation and asset location are related, but they are very different. One is based on how much risk you’re willing and able to take in your portfolio based on your goals and other factors, while asset location – that is, what types of assets you hold in which types of accounts – may help you save a whole bunch of money in taxes. Check the podcast show notes for some resources about both, including episode 262, which was predominantly on the topic of asset allocation. I’ve also thrown in some more Roth 401(k) info as well. And if you have money questions, comments, suggestions or just want to see if you can make Joe cranky talking about his “peers,” click Ask Joe and Al On Air in the podcast show notes and send us your message as a voice recording or as an email – and don’t forget to click the share button and spread this nonsense far and wide. 

Will How We File Our Taxes Affect My Wife’s Medicare Premium?

Joe: All right. We got a letter that came in. Bill from Carlsbad. “If my wife and I file a joint return, will her Medicare payment go up relative to our combined income? If so, will her Medicare payment be relative to only her income if we filed separately?” Interesting question.

Al: That is an interesting question.

Joe: So Medicare premiums are based on modified adjusted gross income. And as you reach certain thresholds your Medicare Part B premium increases. And it starts at-

Al: So for a-

Joe: You need your glasses. Your eyes just bugged out.

Al: I do. I’m just blinking to try to see it. See if I can read without-

Andi: They are right next to you, you know.

Al: I know. It’s too hard to put them on. Because I got these headphones on. You know how that works.

Joe: Got it. Yes.

Al: So for- this is for 2018 so already a year-

Andi: No. That’s 2020.

Al: Oh. What am I doing?

Joe: What’s the Medicare premium?

Al: The Medicare premium- the lowest one’s $144.60.

Joe: And what income threshold is that?

Al: Income from 2018 income $87,000 or less for single; for married filing joint $174,000.

Joe: OK. So they look back a couple of years on your income to determine what your premium is. So they’ll look back to see what your 2020 premium is, is $164. But your income threshold for 2018 needed to be below, what? I’m sorry?

Al: 174,000.

Joe:  $174,000. So Bill’s question is, is that his wife probably has low income; Bill has high income or vice versa. But since he’s worried about her premium, he’s thinking hey is this based if her income- W-2 wages let’s say is $20,000 and mine is $600,000? My premium would be a lot higher than hers. So she would be at a low threshold. Bill would be at a high threshold. How about if we just file separately? Would that give her the lower Medicare premium payment moving forward?

Al: Yeah that’s a great question? What’s the answer?

Joe: I would say no.

Al: I don’t know 100%. And the reason I don’t know 100% is because every table I ever see has single and married filing joint. We don’t have a married filing separate.

Joe: The IRS would look at that and say ‘no way’. It’s just like you know they don’t care for married filing separately for Roth contributions-

Al/Joe: For almost everything.

Al: I would agree with you. It’s just that we don’t know that 100%.

Joe: We need to fact check that.

Al: Yeah we do. So we think probably married filing joint is the best way to go.

Joe: Well I think- unless you get a divorce.

Al: Sure.

Joe: Then they can file single.

Al: Then you can go single.

Joe: But if you file separately- I’m gonna say no, Bill.

Al: I’m going to say no too. But we’re not 100% sure. Andi can check for us.

Joe: Alan’s going to do some research on that and then he’ll give it to Andi. She will send that to you.

Andi: I can do that.

Social Security Survivor Benefits: Will They Be Higher?

Joe: We got Tim writes in once again from San Diego. So I think he had a question on spousal benefits or survivor benefits or something like that?

Andi: Spousal benefits.

Al: OK. And we answered that?

Joe: We answered the question. Andi sends like a long love letter and the response of us.

Al: Yes. Right.

Joe: So all these questions that we answer, you get a nice letter from Andi. With our response. So Tim got his. And then he’s like “Thank you. I appreciate the response.” And then “I now know that my spouse will get 50% of what I would receive if I took it at age 66 even though my amount goes up 8% each year after I turn 66.” So he was thinking ‘if I’m going to wait till age 70 have my wife claim the spousal benefit at her full retirement age, what number does she get? Does she get my increased number because I waited?’ And we said ‘sorry Tim. No, she gets 50% of your full retirement age benefit.’

Al: That is correct and it’s adjusted for inflation. But yeah. That’s essentially right. What your 66 age benefit, your spouse would get half of that. That’s the spousal-

Joe: No matter when Tim claims his benefit. It’s going to matter when his wife claims the benefits. But she has to wait till full retirement age.

Al: Yes she can claim it earlier but then she has a reduced amount.

Joe: You’ve got it. So then he writes in, “I don’t know if this is the correct form to ask but it occurred to me now as I was calculating the estimated amount we would get if something were to happen to me, would her benefit jump up to 50% of the higher amount I was getting? Or stay at the already 50% amount I would receive at my age 66?” So what he’s saying now is that ‘I’m waiting to age 70 to get that 8% delayed retirement credit. And so my wife claims the benefit. She’s getting 50% of my full retirement age benefit she doesn’t get 50% of my increased benefit. So he goes if I die what does she get now? Does she get 50% of the higher amount? And the answer Tim is a lot better than that. She gets the full amount of the higher benefit.

Al: Yeah she gets your benefit.

Andi: Age 70 benefit. Yeah. Cool.

Joe: So it pays to wait. So Tim was like- at first he was probably upset. He’s like you know what, I waited and probably wasn’t upset but- was like ok I waited to age 70 because I thought my wife was gonna get a higher spousal benefit. So now I have a lot higher benefit. I waited to 70. I was thinking my wife would get a higher benefit too but then he’s like okay it is what it is. Maybe he’s calculating some morbid stuff. It was like if I die, maybe then it increases to 50% of the higher amount. And the answer Tim is no. She gets your benefit.

Al: So that’s a different kind of benefit Tim. That’s called a survivor benefit, calculated completely differently. So that’s your benefit that you had or her benefit, whichever is higher. That’s what she gets. But we get this question sometimes, Joe. So let’s say husband or wife is waiting to age 70 so that the survivor gets a higher benefit, but what if they pass away at age 68 before they even take the benefit? Did I stump ya?

Joe: No, because I was reading the next question.

Andi: So, in other words, he wasn’t listening to you, Al.

Joe: I was totally not listening.

Andi: So ask him the question again.

Joe: So 68.  So if he waited to 68 or didn’t take the benefit at 68?

Al:  Correct. He didn’t take it at 66 because he wanted to wait till 70. But he dies at 68.

Joe: So what’s the spousal benefit – or the survivor benefit? It would be his age. They would make it that he claimed at the age that he died.

Al: That’s exactly right. I think people need to know that. So in other words in that example, it’s not the full retirement benefit, it’s the benefit with 8% added for a couple more years. And so they basically assumed that it was basically claimed at time of death.

Joe: You got it. All right.

Whether you want to go to museums or go horseback riding or if you plan to party in retirement, maximizing your Social Security benefit is important – that’s going to help you pay for those retirement plans. The Social Security Handbook walks you through everything you need to know: how benefits are calculated, the difference between collecting early and late, working while taking Social Security, the rules around spousal, survivor and divorced benefits, and the all-important taxation of your Social Security benefits. Click the link in the description of this episode in your podcast app to visit the show notes and download The Social Security Handbook, yours free from Joe and Big Al and Your Money, Your Wealth®. Oh and by the way, for Bill and others wondering, Medicare Part B premiums are indeed different for filing your taxes joint vs. separate, and you can find out more about that in the show notes as well.

Spousal Social Security: 50% of Age 70 or FRA? Who is Right?

Joe: Susan was on YourMoneyYourWealth.com, she wrote in. She’s from North County, San Diego. She goes “My husband 69, and I, 63, have a disagreement on spousal Social Security benefits. He is still working and won’t take Social Security until he’s 70.” So he’s going to hold off till 70, Al. “I don’t have earned income. He says that I could claim 50% of his increased benefit when he starts taking Social Security at 70 and I reach my full retirement age. Well, I’m under the impression that I would get 50% of the benefits he would have received at his full retirement age, not the increased amount he will receive at 70. I have been receiving survivor benefits since age 60. Like most wives, I like to be right. I went to one of your guys’ two-night classes and listened to as many podcasts as I can. You guys are informative and entertaining. Thank you very much.” Well, Susan, you are absolutely correct. You will get 50% benefit of his full retirement age, not his increased benefit. So yes, you are right. Your husband is wrong.

Al: And it’s his full retirement age benefit 50% of that indexed for inflation, so it could be slightly higher amount than he had at 66.

Andi: Question. She’s receiving survivor benefits though. How does that change things?

Joe: Well, he’s alive.

Andi: Yeah, so previous husband.

Joe: Yeah. But when I read that she’s like, “I’m receiving survivor benefits since age 60 like most wives-”

Andi: No, there is a period there, Joe. And you didn’t read it and I was going ‘wait a minute. What?’

Al: Most wives get survivor benefits-

Joe: Yeah, and I was like well who do you hang out with, Susan? I mean there’s like a string of murders up in North County, San Diego of old men just to claim survivor benefits.

Al: It does read differently when you forget the period.

Joe: Or maybe they like to hang out at some older places, find their husbands and they die and they get the survivor benefits. It’s a strategy. She’s taking the deceased spouse survivor benefit. And so this gets a little complicated and I don’t have that much time. But when she turns to her full retirement age she can switch to the spousal benefit which would be 50% of her current husband’s benefit. But I would imagine that the survivor benefit would probably be higher than 50%.

Andi: So she can she stay with that?

Joe: Yeah. But she remarried so she must have remarried after her age 60.

Al: Yeah. That’s what I’m guessing too.

Joe: Because before if you remarried you didn’t get the survivor benefit. But then people didn’t want people living in sin so they said get married. That’s OK. And you can still have the survivor benefit of a deceased spouse. So hopefully that works Susan. Yeah, you’re a lot smarter than your husband because you went to my two-day class and you listened to this podcast just like everyone else is a lot smarter.

How Does Our Social Security Retirement Strategy Look?

Joe: We got James. He writes in from Vegas. Las Vegas. So it’s James for Al. Excuse me, Jimbo for Joe.

Al: That’s cause you know you’re younger.

Joe: So you’re proper and I like to call people Jimbo. I love Jimbo.

Al: Yeah. I should start calling you Joey.

Joe: All right.

Andi: That went over like a lead balloon.

Al: Which means I’ll start doing it.

Joe: But yeah I would party with Jimbo in Vegas. Where you going this weekend? Where do you think? I’m going to hang out Jimbo. In Las Vegas.

Al: And I would party with James.

Andi: You guys would split a beer.

Al: We have to split our time because if we’re together we wouldn’t know what to call him.

Joe: You and James would be going to, like, the Hoover Dam. Jimbo and I would be going to some strip clubs.

Al: I was not even going to ask. But now I know.  We’re gonna go to a museum.

Joe: Yes and I’m going to go to the casino. All right. “Hi Joe, Big Al, and team. Love your podcasts. Found them late last year.” All right, cool. “Thank you for your efforts and your service. I live in Las Vegas, Nevada. I will retire from a local government in 4 years. We, my best half and I, will retire in 2024. We then will draw a pension of $100,000 a year.” Wow, Jimbo.

Al: That’s great.

Joe: “We have saved $950,000 in our 457 pre-tax plan and we have $250,000 each in IRAs. And another $200,000 in a non-qualified or trading account” is what Jimbo calls it. Best half, his wife. Jimbett.

Al: Jimbo?

Joe: Jimbo’s wife is Jimbett.

Al:  I should say James?

Joe: Jill. Or whatever. Ok. “Best half does not have earned income for the last 30 years. We have maxed out all savings for retirement each year. Starting this year I will only make Roth contributions for $26,000 at work and $14,000 total for wife and I. I have $8000 in an HSA. Our before tax income is $138,000. I will get hammered by tax at 72 for RMDs. We will start converting IRAs to Roth in 2019. Plan is to go to the top of the 22% tax bracket each year with $25,000 to $50,000 conversion to Roth. These accounts have been set up at Schwab. Best half will get $200 dollars a month in Social Security benefits at full retirement age 67. I will be earned a benefit of $1400” but he gets the Windfall Elimination because of his big pension and “will get $800 at full retirement age.” OK so I like your plan so far Jimbo. He’s got let’s see, $1,500,000 roughly in retirement accounts. He’s going to have $100,000 a year in pension. He’s got another $200,000 outside. He’s going to still contribute for another couple of years, totally into the Roth. So he doesn’t have to worry about required minimum distributions at age 72. He’s going to have a little bit lower Social Security benefit, about $800 a month at full retirement age; his wife will get half of that, roughly about $400,000 a month-

Andi: $400 a month.

Joe: What’d I say, $400,000?

Andi: Yeah. That’d be a heck of a Social Security benefit.

Joe: No, Jimbo’s got the in at Social Security.

Al: He’s worked for the government for years.

Joe: He wrote a letter and said my wife needs to get $400,000 a year from Social Security. So Social Security plan- here’s his plan, Al. “Best half is now 58 and I’m 56. Best half claims benefit at 62, for $150 per month. This goes to fund to pay taxes on Roth conversion. I file at 65 for a benefit of $700 a month. Fund tax bill. Best half then files at 67 for half my benefit which should be $700 a month, assuming she can get half of the pre windfall cut amount, and I have to file before she can collect on my record. Do not need survivor benefit. She will get $100,000 pension when I cash out.” I like how he says that. I mean he’s from Vegas for sure. Here, lemme color out.

Al: I haven’t heard that. That’s a good way to say it though.

Joe: That means death.

Al: Yes.

Joe: “I think this is the best way to maximize the total payments of both combined. We use the money to fund Roth conversions to complete. What did I miss? Cost of living today is $50,000 per year. No payments now. We’ll move to Wyoming for lower costs and taxes by 15% retirement. Thank you, Jimbo.” Jimbo. I love the plan. I love the fact you’re taking care of Mrs. Jimbo when you cash out. But you’re missing something in your calculation in Social Security. Do you see the problem in his thought process, Alan?

Al: I think so, but you can explain it better than me.

Joe: So what Jim is thinking is that wife is going to claim right away at 62. And then he is going to wait, claim at full retirement age. And then she’s going to switch to the spousal benefit once he claims at full retirement age because you can’t file a spousal benefit unless the spouse is claiming their benefit. And so he’s like she’ll get a little bit and then once I turn my benefit on she’ll switch to the spousal. It doesn’t work that way, Jimbo. My apologies. Is that it’s something that’s called deemed, a deemed benefit. Once your wife claims her benefit, it’s going to be a reduced benefit because she claimed it at age 62. Once you do claim your benefit at age 67 she will receive a spousal benefit but it’s not going to be the full 50% of the benefit. It’s going to be reduced because she’s already taken a reduction in the overall benefit.

Al: So she would have had to wait until full retirement age to not have a reduction.

Joe: You got it. She would have had to wait until- she has to wait until her full retirement age to claim the spousal benefit to get half the benefit. I know you’re not talking about a lot of money here because there’s the Windfall Elimination because it reduces the benefit quite a bit because of your large pension. But you’re saying hey you know what I’m gonna get a couple hundred bucks it’s going to help to pay my taxes. So let’s have her claim as soon as possible, have a couple of extra bucks. You’ll pay some taxes on conversions. I’ll claim mine and we’ll get this tax strategy dialed in with the help of the government to help pay that tax bill. It’s not going to be as slick as you think. So if she does claim at 62, that’s great. You’ll have those couple extra bucks, but she’s not going to get the full spousal benefit because she’s already claiming the benefit.

Al: Now what about this. So she could start claiming at her full retirement age and then when he does start claiming then at that point then-

Joe: Correct.

Al: -then she could switch. In other words, when he gets to his full retirement age, he starts claiming the benefits, then she can switch to the higher amount and then basically she got two years of free payments.

Joe: So just be careful with that. There’s a lot of times, there’s a lot of strategies, that are trying to game the system. I would say over the last 10 years the Social Security Administration has kind of closed a lot of the loopholes and changed things-

Al: They have, haven’t they?

Joe:  So I like the thought process. But in this case, it’s just not going to get you- I guess the biggest bang for your buck, as you thought. So hopefully we can still party in Vegas though, Jimbo.

Al: Well, or Wyoming when they move there.

Joe: I would rather go to Vegas.

Al: Is that right? You can probably go horseback riding.

Joe: Sure.

Andi: You could do that with a James.

Al: Yeah.

Joe: Yeah, well you go horseback riding with James, you go party with Jimbo.

Whether you want to go to museums or go horseback riding or if you plan to party in retirement, maximizing your Social Security benefit is important – that’s going to help you pay for those retirement plans. The Social Security Handbook walks you through everything you need to know: how benefits are calculated, the difference between collecting early and late, working while taking Social Security, the rules around spousal, survivor and divorced benefits, and the all-important taxation of your Social Security benefits. Click the link in the description of this episode in your podcast app to visit the show notes and download The Social Security Handbook, yours free from Joe and Big Al and Your Money, Your Wealth®.

Can I Move 401(k) to Traditional IRA for a Tax-Free Charitable Strategy?

Joe: We got Robert calling from Rhode Island. “Hi. I’m 71 years old. I have a 401(k) from a company that I’m still working for. I’m wondering if I can move some of my 401(k) money to a traditional IRA in order to contribute to my church without being taxed. I used to take my church contributions as a deduction on my taxes but it no longer makes sense.” Well, it no longer makes sense for Robert to itemize because of the new tax law so he’s looking to do a QCD.

Al: A qualified charitable distribution. QCD.

Joe: Robert if you’re 71 years of age…

Al: You have to be 70 and a half. I don’t think they changed that QCD rule, just the RMD rule.

Joe: But two things here though. You take money out of a 401(k) plan into an IRA you’re going to be subject to an RMD. Since you’re 71 years of age you’re gonna be required to take a distribution from the IRA because you are already 71.

Al: Yeah. That’s true.

Joe: Because now 72 is the age.

Al: Unless you own more than 5% of the company.

Joe: Correct. But his money is in a 401(k) plan where he doesn’t have to take an RMD.

Al: Nevertheless if he wants to contribute to his church and-

Joe: He wants to put the money in the IRA and do a QCD.

Al: No I understand.

Joe: But if the money goes into an IRA he’s going to have to take an RMD because he’s over 70 and a half before he can take the QCD. But he can use the QCD as part of his RMD.

Al: Right. So here’s all I’m suggesting is maybe he wants to give $5000 to his church, whatever the number is. So you do a $5000 in-service withdrawal to the IRA. And now you got that in the IRA. Now you can do a QCD on that.

Joe: Got it.

Al: That’s what I would do.

Joe: So you would do it all?

Al: I would not do it all.  Because you’re right. Then you’d have to do a required minimum distribution at age 72.

Joe: No, you’d have to do it at 70 and a half, because he’s 71 years of age.

Al: Oh yeah. He already hit it. Yeah. Look at you.

Joe: He’s already in.

Al:  You’re tight.

Joe: I know.

Follow Up: S-Corp Deductible IRA Contributions

Joe: We got a follow up from Michael from Ohio. Is the blue your writing?

Andi: Yes.

Joe: So we don’t have to read that again or do we?

Andi: It’s there for your reference because he actually asked a question “Oh Great One.”

Joe: Oh is that what he calls me?

Andi: Yes.

Joe: Okay got it.

Al: Only you. So I don’t have to answer this one.

Andi: Except it is a tax question.

Al: I can take a coffee break.

Joe: So Michael goes “Thank you for your answer but in my case if I had a Sub S-Corp which I could create income on paper then I would be able to deduct contributions way past 72. I would pay Social Security and taxes and enjoy a double contribution tax deductible for me and my wife.” So Michael is committing fraud, it sounds like to me. Because in case if I had a Sub-chapter S- so he’s got a little business going on. “Which I could create income.” How do you create income?

Andi: On paper.

Joe: Is he going to be working do you think?

Al: You have your kids pay you?

Joe: He’s creating income on paper.

Al: Yes.

Joe: That means to me there is a little bit of hocus pocus going on.

Al: He may not call you ‘The Great One’ anymore. After this.

Joe: I’m just being honest.  ‘Hey Joe. Oh Great One. I got this great scam. What do you think? I’m gonna just make believe I’m making income. Yeah I’ll pay Social Security tax on that whatever but I can do an IRA contribution. And take that deduction for me and my wife all day long.’  That doesn’t make any sense to do it. Because you’re paying Social Security or you’re paying self-employment tax and then you’re getting the deduction on ordinary income.

Al: So I guess maybe another way to say that, the strategy is fine just make sure the income is real. Don’t make it up. Is that a good better way to say it?

Joe: It’s not as fun.

Al: I have had this exact question before from more than one of our clients. ‘Well I could just have my son pay me. It’ll look like income. I’ll do the Roth contribution’, right?

Joe: Or ‘I got the shell LLC. What do you think, should I put it to work?’ Like how do you put the company to work? No, you work for the company. ‘I got a couple shells. Maybe we can move some stuff around and what do you think, tax-wise that pretty good idea?’ No. That’s stupid.

Self-Employed Home Business Tax Strategy

Joe: Jay from Chicago. “Hi Andi, Joe and Al. Thanks for the very okay show. I sometimes learn something.”

Al: I agree with you. It’s marginal at times.

Joe: Yeah. It’s awful pretty much most of the time.

Al: Could we listen to our own show?

Joe: Absolutely not.

Al: Yeah it’d be tough.

Joe: I’ve listened to a maybe once and I was like wow. Andi’s pretty good. Big Al’s marginal. And I’m just a train wreck. “I own a martial arts school in Chicago. I’m in the process of buying a house and plan to convert the 3-car garage into a gym for private lessons and small group classes. What is the tax play here? What I deduct as home office? Or should I lease the space to my business and pay myself rent or something else?” Interesting there, Jay. He goes “keep on the mediocre work. I kid. It’s a great show. Thanks for everything.”

Al: Oh really. It’s actually better than mediocre?

Joe: Well this is a pretty cool question. He’s kinda sophisticated there. From ChiTown, so he’s got a little martial arts. He’s going to kick your ass. Cobra Kai.

Al: I know. And he’s got a 3-car garage. Good for you. But he wants to convert that into a martial arts school, which is great.

Joe: I wonder what his wife thinks about that. I don’t know if he’s married or not.

Al: Yeah, we don’t know. So what’s the tax play here? So there are I guess there are a couple choices. It depends I guess if you have a sole proprietorship or an S-Corporation. For example, if it’s an S-Corporation then you probably want to lease it to your S-Corporation. And there’s things you can do in terms of increasing the rent or decreasing the rents depending upon what your goals are. But in terms of if it’s a sole proprietorship it doesn’t really matter, you get the home office deduction. Or rent it to and from yourself with income a deduction, cancel each other out. It’s not that big a deal.

Joe: All right Jay thanks. We’ll keep up the mediocre work.


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