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
December 1, 2020

If you’re thinking of paying off your mortgage, Joe and Big Al can help you walk through your investing and tax strategy first. Plus, after maxing out your retirement accounts and health savings account (HSA) and owning rental real estate, how else should you save for retirement? (Hint: brokerage account.) As a self-employed small business owner, should you contribute to a Solo 401(k) or a Traditional IRA? Should you contribute to a Solo Roth 401(k) or do a solo 401(k) to Roth conversion? And finally, the fellas answer questions about contributing to an HSA after going on Medicare, and whether capital gains will mess up MAGI and increase Medicare premiums.

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Show Notes

  • (00:53) Investment and Tax Considerations Before Paying Off the Mortgage
  • (13:51) Rental Real Estate, Maxed Retirement Accounts, and HSA: How Else to Save?
  • (20:29) Self Employed: Solo 401(k) or Traditional IRA? Schedule C and Deductions?
  • (25:48) Small Business: Contribute to a Solo Roth 401(k) or Do a Solo 401(k) to Roth Conversion?
  • (34:23) Can My Wife Still Contribute to HSA When I Go on Medicare?
  • (38:39) Will Capital Gains Mess Up MAGI and Increase Medicare Premiums?

Free resources:

WATCH | YMYW TV: Get Real About Real Estate in Retirement

LISTEN | YMYW Podcast #168: 3 Ways a Reverse Morgage Can Supercharge Your Retirement (with Dr. Wade Pfau) 


Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth® the overall theme is should you do this or that? Pay off the mortgage or not, given investment and tax considerations? Should self employed small business owners contribute to a solo 401(k) or a Traditional IRA? Should they contribute to a solo Roth 401(k), or contribute to a Solo 401(k) and then do a Roth conversion? And Smitty is about to go on Medicare – can his wife still contribute to a health savings account or HSA? Will capital gains mess up his modified adjusted gross income and jack up his Medicare premiums? Click the link in the description of today’s episode in your podcast app to go to the show notes to read the transcript, access all the free financial resources I’ve got on deck for you, and to send in your money questions. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Investment and Tax Considerations Before Paying Off the Mortgage

Joe: We’ve got an email question here from Sandy from Charlotte, North Carolina. “Hi Joe, Big Al, and Andi. This is Sandy from North Carolina. No dog and I drive a 2010 Honda- Hyundai Elantra. I began listening to your podcasts about 6 months ago and been listening ever since.” Well, sorry to hear that Sandy. “They’re extremely informative and very entertaining to say the least. Due to today’s low-interest rate environment, I have a mortgage payoff question for you. I’m close to age 62, recently retired. I’m fortunate enough to have a pension of $65,000 that covers about 80% of my current annual living expenses, will the remaining 20% come from my $2,000,000 investment portfolio consisting- with the remaining 20% coming from my $2,000,000 investment portfolio consisting of my rollover IRA about $875,000; Roth IRA of $675,000; and a taxable brokerage account of $450,000.” Wow.

Al: That’s a lot of Roth money.

Joe: She’s diversified. She just started listening to us, what 6 months ago?

Al: Yes. She already knew the right thing to do there somehow.

Joe: This is- when you look at tax diversification- this is a thing of beauty, Al.

Al: This is a model, right?

Joe: This is the model of tax diversification. She’s got an asset allocation of 65% in stocks, 35% in bonds, invested primarily in the Vanguard equity and bond index funds.

Al: So Joe, we could just stop right there and say, you know what Sandy? All good. You’re good. Just keep doing the same thing.

Joe: Not sure what she’s going to ask us here. “Then whenever I decide to file for Social Security, I should be able to more than adequately cover my required living expenses with my pension and Social Security. Now that my W-2 income has significantly dropped with the current low-interest rate environment that is predicted from the foreseeable future I’m thinking about paying off my primary home mortgage. My primary home mortgage is a 30-year fixed 3.25%, matures in 23 years, has a balance of $220,000, with a principal interest amount of $1100 a month. I’m considering selling some company stock I have accumulated that resides in the above taxable account to pay off the mortgage. My original plan was to gradually sell the company stock to pay for Roth conversions over the next several years in a tax-efficient manner; as well as lessen the company’s stock exposure before I eventually file for Social Security at age 67. The stock value is approximately $300,000; $100,000 in basis; $200,000 unrealized gains, with a 1.7% average annual dividend yield. I use the standard tax deduction, $25,000, and can now after retiring also deduct my vacation rental property passive losses of $25,000 that I’ve accumulated for the past several years I couldn’t previously deduct because of my high income. The significant change in the Fed’s future interest rate inflation intentions give me reason to reconsider my original plan.” Whew, okay.

Al: Got it?

Joe: I do. “With that as a high-level overview, here are my questions. What are the pros and cons of doing this? What are the investment and tax considerations I should evaluate to determine whether I should pay off my mortgage? Also, we are considering selling or downsizing our primary home in the next 2 to 3 years, how should that impact our pay-off decision, if at all? Lastly, I’ve heard a lot about senior citizens, 62 plus, open a reverse mortgage line of credit to help fund their retirement. What are the pros and cons of a reverse mortgage line of credit strategy to fund retirement? Apologies for being long-winded. Thanks.” Yes, that was very long-winded. So let’s break this thing down. I think the biggest thing- and we could talk about like the home equity conversion mortgage, the HECM, she’s talking about. She wants to pay off the mortgage, it’s 3%. Does it matter if she’s going to plan on leaving the house or selling or downsizing in the next couple of years? The biggest thing is that she’s giving up liquidity. So she’s gonna be losing $300,000 or $400,000- $300,000 or maybe a little bit more depending on the taxes that she pays. What’s the mortgage? $250,000? I’m just going to-

Al: $220,000.

Joe: I’m sorry, $220,000. So she’s going to lose some liquidity. Because a lot of the money that she has is in Roth and IRA money, which is good, but she’s only got $450,000 in a brokerage account. So she’s going to take half of that money and pay off the mortgage.

Al: And pay taxes in doing that.

Joe: So is that a good deal or bad deal? Or should she continue to convert her IRA into a Roth and use some of that money for taxes? Should she keep it liquid to provide income so she can draw from a taxable pool, a tax-deferred pool, and a tax-free pool? When should she claim her Social Security benefits? She’s thinking 67 but then that’s going to cover most of her living expenses so she won’t have to draw anything from this. So what should Sandy do? This is interesting Al. There’s a lot of different angles that we can take this question.

Al: Yeah, this is a great question.

Joe: So there’s the mathematical I guess maybe the CPA or the accountant in you can, look at and say this makes sense or doesn’t make sense given the numbers.

Al: Right.

Joe: But then there’s also the emotional aspect of making this decision. I think a lot of people feel less burden if you don’t have a mortgage. It feels good not to have a mortgage and not to have that payment over your head or have any type of debt. But financially does it make sense? Maybe, maybe not. So how do you want to tackle this thing?

Al: Well I’ve got a lot of thoughts, Joe, so let me start. You can chime in when you want to. So the first kind of just a throw-in sentence at the very end that they may downsize and sell their home in the next 2 to 3 years, if you’re gonna do that, then you don’t need to pay off the mortgage, it’s going to get paid off when you sell it. And if you’re going to downsize, by definition that means you’re going to use your equity to buy another home. You may not even have another mortgage. So maybe it’s a moot point. But let’s just say you don’t sell. Let’s go down that path for a second. I really in this case don’t like the idea of paying off the mortgage. Mainly because of a loss of liquidity just as you mentioned right before the break, Joe. Because she’s got $450,000 brokerage accounts, so right off the bat you go through half of that to pay off the mortgage. But then to get at that money you got to sell stocks and pay capital gains taxes. So you’re going to end up with less than half of that and you still want to do Roth conversions. How are you going to pay the tax on the Roth conversions while you’ve got no mortgage? I know you’ll have more income because you don’t have the mortgage payment of $1200. Here’s how I would look at it if it were me and I- this is kind of a complicated one- so I kind of gave this some thought, Joe. See what you think. My thought is if she gets her pension for $65,000, she is going to get that. And I want her to delay Social Security, we’ll come back to that a minute. So if you just look at her liquid assets, it’s about $2,000,000. So 4% of that is $80,000 just at a normal draw rate. So that means she could generate about $145,000 of income from her portfolio and her pension. And of course, she’s going to have to pay taxes to do that, maybe $20,000 taxes. I just said, what if the taxes were $25,000? So what if she netted $120,000 and she’s spending $85,000? So she’s got an extra $30,000, $35,000 to work with. I would just say, you know what? Divide that by 12 months, add that to the mortgage payments. Now instead of paying $1200 a month, you pay $4000 a month. And I ran the math. The whole loan is paid off in 61 months. You keep your liquidity. You can still do Roth conversions. To me, that’s a lot more sensible way to do this. And again, if you’re going to sell your house anyway in 2, 3 years, it doesn’t even matter. You don’t really need to do this.

Joe: But here’s what she’s saying though, I think initially she’s like, the interest rate environment sucks. I’m not getting any yield. My dividend yield on my stock is 1.75%. I totally lost her question, so I don’t have any details in front of me. I don’t know what the hell I’m talking about.

Al: Well yeah that’s all, right. That was part of her comment.

Joe: But she’s saying my mortgage payment is 3%. I’m not getting 3% on cash. I’m not getting 3% on my fixed income and my dividend yield’s 1.75%. So it makes sense for me to pay it off. So I think she’s missing the broader picture as well. So if you’re looking at rate of return- because she’s going to guarantee herself a rate of return of 3% if she pays off the mortgage. Because if her mortgage is 3%, she’s not going to be paying interest of 3%. She’s taking the cash and saying I’m only getting 1.75% on the dividend yield so I’m going to pay it off and I’m gonna make more money that way because I’m going to guarantee myself 3%. So I think in some ways that’s how she’s looking at this. I don’t- you’ve got to look at the broader picture. Because as you said Al, she’s got $2,000,000. People-

Al: compartmentalize?

Joe: Yes, thank you. It’s like this money is for this and this money is for that. This money is for this, that, the other guy, was doing that. Well I’m just going to look at my rollover 401(k) of $1,000,000. Even though he had like $1,800,000 in total retirement accounts. Look at your total balance. You have $2,000,000. Your fixed income is going to be paying your living expenses. You have $800,000 roughly in retirement accounts. So when you look at creating income- you don’t need a lot of income from the overall portfolio. So does it make sense to say, I’m not getting 3%, in her mind, on the portfolio, so maybe just pay off the mortgage to guarantee the rate? But I think you and I both agree that if you- if I look at a total return of the portfolio- if she’s what, 60/40 or 70/30, the total return of the portfolio is going to be a lot more than 3% over the long term.

Al: Yes, she’s 65% stocks. Over the long term you might expect that to be 6%?

Joe: Yeah. Call it 6%. So you’re ahead of the game by 3%. So you’re using the bank’s money to make money. But then you’re looking at no, wait a minute, my bonds in the portfolio are only paying 1%, cash is not paying me anything, my dividend yield on this stock is paying me 1.75%. But you’ve got to look at the total return. So if I’m looking at this pure arbitrage no, don’t pay off the mortgage. Because I don’t know where you’ll ever find a mortgage at 3% or something equivalent to that; 20 years from now people will probably be paying 12% again. So a 3%- that’s a pretty good rate. So keep the liquidity. Because then you’re paying a capital gains rate. If you can start selling some of that stock or diversifying from the stock at a 0% capital gains so if you can keep yourself in that 10% to 20% tax bracket once you do retire, you can diversify out, not paying a capital gains tax there. You can take a look at a long term conversion strategy. You’ve already done a great job of having so much money in the Roth. But slowly keep chipping away at this thing and then still have- cause she can pay off the mortgage at any time. She’s got the cash to do it. So if she freaks out or gets upset or the world’s coming to an end or whoever, cut the check and pay off the mortgage. But for right now, keep that liquidity. Just understand that over the long term I think you’ll be way off financially just by keeping your options open.

Al: Yeah I agree with that Joe. And I would say if you do this for a while, if you want to pay extra on your mortgage and then in a few years the mortgage balance is under $100,000, go for it. Just pay it off then.

So that’s what Joe and Big Al think about Sandy’s situation, but what about yours? Your financial needs and goals are probably completely different. Click the link in the description of today’s episode in your podcast app to go to the show notes and Ask Joe and Al On Air to get the fellas to spitball about your retirement plans, or sign up for a free one on one financial assessment with a CERTIFIED FINANCIAL PLANNER on Joe and Big Al’s team at Pure Financial Advisors. And if your curiosity was piqued, I’ve also included some free resources on real estate investing and reverse mortgages in the podcast show notes as well. Why not pay it forward and share the show and the resources with someone who might appreciate it?

Rental Real Estate, Maxed Retirement Accounts, and HSA: How Else to Save?

Joe: So what- you mean you want me to answer that question? David.

Andi: That was my suggestion.

Joe: Who else to save?

Andi: That should have been ‘Where else to save.’

Joe: What does that mean?

Andi: No, actually it’s says, ‘how else-

Joe: ‘How else to save?’

Al: Yeah, that makes sense, Joe- to most of us.

Andi: You trying to throw me under the bus here?

Joe: What I don’t understand what- was that like in the header of an email and he just signed it ‘David’.

Andi: No. I added that so that you would know what the topic was since you’re going ‘these stupid Roth questions, I don’t want to do them anymore.’

Al: How else to save? So it didn’t make any sense to you, that little heading?

Joe: But no, is that the heading? Or is that the total question?

Al: That’s what she wrote.

Andi: What I put as the question for you so that you would have a shorthand version of it.

Joe: Oh, this- “Yo Joe and Andi-” That’s the question.

Andi: Yes.

Al: That’s where we start.

Andi: And that’s how he wrote it. He spaced it so that you’re at the top. You get top billing.

Joe: Got it. Got it. Got it. All right. I’m the idiot here. I apologize, Andi.

Andi: Thank you.

Joe: You do such a great job and confusing me is not very difficult to do.

Andi: The listeners to do their part and then I just make it worse.

Joe: Well I was like well why is there a big space here. I thought that was like another question. So. OK. All right. So David writes in “Yo Joe. Yo.” What up, David? “And Al and Andi.” Got it.

Al: That was an afterthought and with a couple of spaces- lines in between.

Joe: Understand. David, you’re the man. So let’s get on to David here. “Thank you for all your great advice. Quick recap: I’m married, 35 years old-” Oh I remember David. Yo, 35 yo. Right? Wasn’t that him? That’s why he said ‘Yo Joe.’

Andi: This might be somebody else.

Joe: “- filing jointly, MAGI $210,000, live in Missouri, no kids and I drive a very impressive 2012 Kia Optima Hybrid. It’s white.” So he’s chillin’ in Missouri with that little Kia. “My question is what to do next? I have 2 investment properties that are returning 7% and 9% respectively.” Big Al. That’s pretty good numbers there, huh?

Al: That’s not too bad.

Joe: “We are contributing the max to our 401(k) plans, $19,500. We are of course doing Backdoor Roth IRAs of $6000 each because I listened to the Backdoor Roth IRA podcast formerly known as YMYW-” That’s pretty funny. “We’re on an HSA qualified health plan so we are stashing away the $7100 for retirement and making extra payments on our primary home mortgage. What’s the next tactic I need to learn? My wife works in a major computer company that starts with a D and rhymes with Dell. Not sure if they offer the barn door thingy. We have no other IRAs and interfere with the barn door conversions. Thanks again for your help.” Very cool. All right David, thanks for the question. So what should he do? OK. So he’s 35 years old, he’s maxed out 401(k) plans, he’s doing the Backdoor Roths, wife works with Dell. You’ve got to start saving in a brokerage account brother. That’s what the big boys do. Al and I look at thousands of different cases and so many people come in and a lot of our clients have millions. But guess where the millions are. It’s all in 401(k) plans because it’s pretty easy to save there. You check a box and then the money comes directly from your paycheck and it goes into your 401(k) and then you’re doing a good job of saving into the Roth. But where you need to start now is start building up non-qualified assets; open up a brokerage account; go to Vanguard, TD Ameritrade, Charles Schwab, I don’t know, Robinhood. I don’t care where you go. And then just start putting it in depending on what your discretionary income is on top of all that savings. Start building up the non-qual because then that will give you a lot more flexibility long term. It’s going to be taxed capital gains rate when you sell it. You can keep yourself in lower brackets. It’s going to be very tax efficient. If you start learning how to like tax loss harvest, then you can really make that account very tax efficient. We don’t- you know what? I’m going to start calling this the non-qual zone. I’m so sick of Roth. But there are other things people could save in. There’s an account. So it first starts with a brokerage firm. So it could be Vanguard, it could be TD Ameritrade, Charles Schwab, Robinhood, E-Trade, whatever. That’s the brokerage account. You start there. The second thing is then you look at what account you want to open up. Is it an IRA? Is it a Roth IRA? Or is it just a brokerage account? All 3 are good. It’s not just Roth. It’s not just Roth people. Then you look at I can invest in the same mutual funds. All you Vanguard freaks out there, go to- buy them in the brokerage account. Same with your IRA. Same with your Roth. You can have 3 different pools of money. That’s where they should go. What do you think, Al?

Al: I like that. David, you’re doing a lot of stuff right. I mean you’ve already got- looks like a couple of properties that are earning 7% and 9%. That’s fantastic. You could buy some more properties. The thing about a brokerage account that I like is you have complete flexibility, especially at age 35. So David is doing quite well, David and his wife. And maybe they want to retire early and let’s say they want to retire at 45 or 50 or whatever the age is. If all the money’s in a retirement account then you’re stuck a little bit. So if you have the money in a brokerage account, you’ve got that flexibility. Plus if you want to save in the brokerage account, buy another property later or upgrade your home or whatever, you’ve got that flexibility. So I like that too. But I’d also check with David’s wife’s company, which sounds like it’s Dell based upon his description, and do they allow post-tax money into the 401(k)? And then they could do the Mega Backdoor Roth.

Joe: Every question. Next question. We’re not talking about Roths.

Al: But it’s about actually is a good plan. So that’s why we have to bring it up when appropriate.

Self Employed: Solo 401(k) or Traditional IRA? Schedule C and Deductions?

Joe: Andi, did you get new glasses?

Andi: No. Same ones as forever.

Joe: Really?

Andi: When are you gonna get glasses, Joe?

Joe: I don’t know. I might need to get them sooner.

Andi: I was going to mention if you wanted Jenny on page 9 has a question about CRDs and Roths.

Joe: I’m gonna go with my boy Jason here from St. Paul, Minnesota.

Andi: All right.

Joe: “Hey Joe, Big Al, love the show.” Yep, kicked Andi out.

Al: Poor Andi.

Joe: “I usually listen when I’m out walking in the balmy 30 degrees that Minnesota has to offer for this time of year.”  Oh boy.

Al: You miss that, right?

Joe: Like Alan Clopine right now, it’s 70 degrees here in beautiful Southern California.

Al: I got my long sleeve shirt and my vest.

Joe: Do you have a parka on because the heater’s out in your house?

Al: It’s a vest. See, it’s not all the way. Yeah. We don’t have a heater so it’s in the 60s, Joe. It’s pretty rough. I just got back from Hawaii, I don’t get this weather.

Joe: It’s 68 degrees in his kitchen so he’s got a parka.

Al: I need to turn on the stove with the heater not working.

Joe: Oh my God. All right. So let’s see here- I usually listen- so he’s out there- “My wife will make about $5000 working for friend’s business this year and will receive 1099 income.” So Jason’s got a couple of questions. “Would it be better to open a Solo 401(k) and offset the income? Or just put it into a regular IRA? IWOWAY- I’m getting-

Al: Must be the end of the show.

Joe: Vodka’s kicking in. “We only have $6000 to contribute to the Solo 401(k) or regular IRA. Which would be better for taxes? To clarify, I’m not asking about Solo 401(k) vs SEP IRA. I’m asking about a Solo 401(k) vs a regular IRA.”

Al: Ok, we got it.

Joe: Thank you, Jason. Thanks for the clarification there brother. “We are in the 12% tax bracket. I have a regular W-2 job and contribute to a 401(k) for a match.”

Al: So the answer is, neither. Do a Roth IRA because you’re in the 12% bracket.

Joe: OK. So yeah, you open up a Roth IRA, put the $6000, $7000 of income- oh, he’s probably-

Al: $6000. Yeah.

Joe: $6000. Okay. “Should we be filing a Schedule C? She goes to the business and is using all of the business stuff, can she deduct mileage or anything else? Once she learns more of the business, the plan is next year for her to work from home, then the home office deduction will kick in.”

Al: So yes Jason, your wife should file a Schedule C, whether she has a business license or not. That’s where it goes. And yes, she can take deductions;  mileage, certainly. If her office is in her home, anytime she leaves the home to go out on business, it’s considered business mileage and deductible. I forget what the business rate is but something around $.50 a mile, at this point, give or take. And the home office, you can take deductions there. That works well as long as you have a business. It does not work at well at all if you are if you’re an employee, so don’t even try it. But if you have your own business and you have an office in the home and it’s regularly and exclusively used for the business, go ahead take that. Maybe you can find some other deductions, a little bit of cell phone, a little bit of computer expense, little bit of Internet, some other things, business magazines, that sort of thing. You can take all that as a deduction. And Joe, I’ll just say the reason why I said Roth is because they’re in the 12% bracket. Let’s say income picks up in their higher bracket and then they want to- then we go back to the original question of Solo K vs. IRA.

Joe: Regular IRA.

Al: I’d do the IRA. As long as you don’t want to give more than $6000, contribute more than $6000, because it’s simpler. But once you want to contribute more than $6000, go Solo K. You can put up to $19,500 plus the business profit share as well. But if you only have $6000, just keep it simple, just do the regular IRA.

Joe: You know he wasn’t talking SEP. You got that.

Al: I did get that. That was very clear. And by the way, it’s the same tax deduction. I don’t care whether it was an IRA or a Solo K or a SEP. It’s the same tax deduction.

Joe: But the contribution limit would probably be a little bit different in a SEP because she couldn’t put the full $6000 into a SEP.

Al: True. She can put 25% in. So 25% of $5000 is about what, $1250, something like that.

Joe: Oh boy. Then he goes “Skol! Well maybe next year, the Vikings aren’t doing well this year. Thanks.”

Joe and Big Al at this point go off on a Derail all about football, which you can hear at the very end of this episode if you so desire, along with a few other Derails. In the meantime, how about some stuff that’s more relevant to this discussion about self-employed small business owners and saving for retirement? You can learn 5 mistakes small business owners make and how to avoid them, and read our guide to small business tax filing. Both are in the podcast show notes and you can access them by clicking the link in the description of today’s episode in your podcast app to get there.

Small Business: Contribute to a Solo Roth 401(k) or Do a Solo 401(k) to Roth Conversion?

Joe: We got our regular, Bruce from Joisey, writes in once again, Al.

Al: Seems like what, every show? Every other show? Something like that?

Joe: Yep. He goes “Hey Joe. How are you doin’? Maserati Quattroporte in blue, something like 2008 maybe? Tan interior. That is, once I finally get one. For now, I mostly listen at home. Oh, hello there Big Al and Andi. It’s me again, one of your regulars as you called it. Of course, others may simply say cheapskate for getting free information instead of paying for your services.” At least you said that Bruce. You know we do like to answer questions. But once a week is kind of getting a little rich.

Al: We probably should have a limit. Like once you ask like 3 or 4 questions-

Joe: Once we know your name, like oh yeah, Bruce. So he writes on. He goes “You’ve heard it before, the more you learn, the more you know. The more you know, the more you don’t know. Well, I thought I was at that point where I thought I got it all figured out. But since I love your show, I listen to more and more. Then scenarios from that intertwine and confuses the original plan. We live beyond our means-” So does that mean he lives more than he is bringing in?

Al: That’s what it implies. I think he meant it the other way.

Joe: I think so too.

Al: I think he meant we live below our means.

Joe: Yes. We don’t live beyond our means.

Al: I think that’s what he meant.

Joe: Got it. “We live beyond our means but still enjoy some traveling. We’re okay not earning a lot, less than $100,000 if it means not needing to work full time. You might think we’re old or rich, but we’re only in our 40s with a little savings. We plan to pay off our house, our only debt, in 5 – 8 years or sooner. We will both contribute $6000 each to the Roth IRA. I’ll contribute up to 20% pre-tax on my business income to my Solo 401(k), probably around $10,000 a year as an employer; around $19,000 to my Solo Roth 401(k) as an employee. I was originally doing the SEP IRA and Roth IRA only. Have converted some Traditional and probably still have around $20,000 in Traditional that I will leave alone to grow and convert later or since there are advantages per YMYW, when we have less income. So wait. Gosh, darn it. I believe you, Joe. Re-reading my email just confused the heck outta me.” See, I’m not the only one. He’s reading his own stuff and it’s still confusing as all get out. People just rambled on and they call us ramblers.

Al: I think a lot of people don’t proofread what they wrote, so we’re just doing our best here.

Joe: I can’t believe I actually got through that.

Andi: That was pretty good. I’m impressed.

Al: Yeah. At the beginning of the show too. I mean this is going to be some show, I can tell already.

Joe: Wow, I’m super tight today.

Andi: Oh boy.

Joe: “I had thought to do the Mega Backdoor, well the barn door is it, where I usually volunteer- or I- where I use voluntary after-tax money to fund the Solo 401(k), then immediately convert it to the regular Roth IRA or rollover to a Roth 401(k). What is factored in the max of $57,000-” He’s just rambling all over the place here. “I read some information and also from time to time catch you guys using terms interchangeably but usually catch you to make corrections. It’s probably why many listeners keep asking the same questions. Because it’s just darn confusing. I think it would help gratefully to find out for self-employed people the difference between contributing to a Solo Roth 401(k) and contributing to a Solo 401(k) after-tax; as opposed to a Solo 401(k) pre-tax then converting to a regular Roth IRA or rollover to a Solo Roth 401(k). And whenever we can still contribute directly to the regular Roth IRA of $6000.” Alan?

Al: I’m with ya. I think.

Joe: It makes no difference Bruce. It’s the same. Just go to the Solo Roth 401(k) because if you’re going pre-tax and then just converting, then it’s the same tax implications.

Al: Correct, Joe. And so if that’s the core question here, then that’s right. You put the money into Solo Roth 401(k) if you have that ability. That’s easy. If you want Roth IRAs, that’s easy. So end of story. Start there. Start there.

Joe: That’s $19,000 for you.

Al: Yeah but if you’d rather- some people like to contribute to a Traditional 401(k) during the year and then do a Roth conversion at the end of the year. And there is a reason why people might want to do that. Because they want to get the tax deduction just in case they have a big tax year. And then they wait to do the conversion when they have a better sense of what the year’s going to look like. So for self-employed people with irregular income, I would do the regular 401(k) and then do a conversion at near year-ends when you know what your- as long as your income hasn’t shot up. I think that’s- but you’re creating an extra step and I hate to say stuff like that, Joe because when you create an extra step things get forgotten.

Joe: Or mistakes happen. So no, I agree with that. That’s a good point. So let’s say, Bruce, he’s self-employed. He’s going to go pre-tax $19,000 in the 401(k). And then he’s also going to do the company match because he’s the employee and the employer, he set up another $10,000. So let’s say $30,000 goes into the 401(k) plan and profit-sharing if you will or into his retirement plan as a self-employed individual for the year pre-tax. Then he waits until all right this time of year, end of year, December, kind of takes a look and says, you know what? I didn’t make as much money as I thought. So I’m going to convert some of this into a Roth IRA depending on what tax bracket that he’s in.

Al: Yeah. Because at year-end you should have a better idea where your finances are. You can make a more informed decision. Joe, if you just start with the Roth 401(k) you can’t undo that. It’s just- it is what it is.

Joe: There’s more optionality if you went pre-tax and then converted, because if you didn’t want to do the conversion, you didn’t have to.

Al: That was a big word, Joe.

Andi: Optionality? Is that even word?

Joe: I don’t know. Isn’t it?

Andi: I think you just made that one up.

Joe: You have more options. How about that? Better?

Al: I know you watch a lot of sports as I do and people used to- people just- like football players used to play tough and now they call it physicality. And so every word has an ‘ality’ on it. So I think you just added that optionality. Which I like.

Joe: All right. OK.

Andi: YMYW’s coming up with it’s own language now.

Joe: I love it. All right. “We’re okay putting as much earned income to a Roth since we’ll be using our savings, around $100,000, to pay expenses.” So he’s just jammin’ all of his income into retirement accounts because he’s got other cash to pay his expenses. “The very least we plan to have $1,000,000, not including the house, at full retirement age plus draw Social Security for expenses. Of course, there’s the argument that paying off a 3% interest home loan is cheap compared to investing in the money and putting it in index funds that can grow faster. It had been true for other people but there’ll always be the gray cloud that comes up every day. Maybe after paying off the house and getting that stress off our minds we’ll actually start saving some and really doing-” something else- I’m not. “- Otherwise it’s moot. I’m sorry this turned out to be such a novel. I had to have the first part visualization for Joe and stroking his ego.” Thank you, Bruce. “Some banter, some backstory and of course make a Roth question. I realize there are not many questions, but maybe some sage comments to our scenario.”

Al: Yes.

Joe: Well thank you very much for that Bruce. Hopefully, we answered your questions; opened up some optionality for everyone in regards to how they should be saving if they’re self-employed.

Can My Wife Still Contribute to HSA When I Go on Medicare?

Joe: Let’s see. Shall we go with a little HSA, buddy? Wanna talk HSAs?

Al: Sure.

Joe: Or maybe excessive contributions?

Al: Up to you Bud.

Joe: All right. Smitty, our buddy writes in, formerly from Roseburg, Oregon. So he moved, Andi?

Andi: He did. He moved to The Villages, Florida, which is in his next email, because there’s two from him.

Joe: Oh, the Villages.  How old is Smitty? I thought Smitty was- man, he must be- so he retired and he’s playing golf in the Villages.

Andi: Apparently so.

Al: It says he’s turning 65.

Joe: My picture of Smitty was like a guy with like a handlebar mustache.

Al: You’re thinking of Mike Smith, aren’t ya?

Joe: Slight beer belly with like- but very wavy, good looking hair.

Andi: In the last email we got from him he said something about the bait shack. So he was fishing too.

Joe: He’s- Smitty’s- he’s a beast. So he goes “Hi Andi, Joe and Big Al. As always, I really appreciate the time you give me.” Yes. “I’ve read that when I turn 65 and join Medicare-” he’s joining Medicare. It’s a club, like Club Med, Club Medicare. “- that I will no longer be able to contribute to an HSA. Well, I’m turning 65 in January and have already signed up for Medicare so my HSA contribution days are over. Well, what about my wife? I’m still going to have self-employment income and so I’m wondering if my non-working wife would be eligible to contribute to our current HSA or maybe open up her own HSA account because of my income. My wife is well under the age of 65.” See I told you. Smitty- just still killing the game. He’s moving down to the Villages. How old is Smitty’s wife? 40. Yes.

Al: Yeah. And she wanted to go to Florida too.

Joe: She likes the sun. “My wife is well under the age of 65 and would be choosing an HSA eligible health insurance plan if possible. Our taxes are married, filing jointly. Love the show as always.” I don’t know, what do you think, Al? So can Smitty’s wife do an HSA plan?

Al: Yes, she can. Actually, you don’t really- you don’t have to have earned income to do an HSA plan. So contrary to popular belief- so anyone can do an HSA plan that is not part of Medicare, number one. And number two, has a high deductible health insurance plan. Those are the two main requirements to have an HSA. And so she could open up her own. Individual for 2020 is about $3500 that you can put in a plan. So I think that would be a good idea as long as she qualifies having the right kind of health insurance plan.

Joe: It’s just she needs a high deductible health insurance plan.

Al: And I looked that up Joe because we don’t get this question a lot but you have to have a minimum deductible of $1400. So you need to be at least $1400 out-of-pocket before the benefits kick in; and you have to have a maximum out-of-pocket, $6900 or more. So that’s the definition right now in 2020 of an HSA type plan.

Joe: The high deductible insurance plan? Got it. Well, hopefully that helps Smitty. I don’t know. You’ve got to take a look now at with health care, just what is the appropriate plan, is an HSA really worth it? Is that the right plan that you want to go? How often do you go to the doctor? So just make sure that you do your due diligence as you’re shopping for your insurance. Just because it’s a high deductible plan that you can put money pre-tax into a savings plan. Not always does that make the right sense depending on the person.

Al: I agree with that. But if it does make sense for you, it’s a great option because not only do you get a tax deduction for putting the money in; but you pull the money out tax-free as long as it’s used for medical purposes. So it’s actually even a little bit better than a Roth because you’re getting a tax deduction and tax-free benefit.

Joe: It’s a triple stacker.

Al: Triple threat.

Joe: Got it.

Will Capital Gains Mess Up MAGI and Increase Medicare Premiums?

“Could a large amount of capital gains from investments mess up my modified adjusted gross income in turn increase my monthly Medicare premiums? As always, love the show. Smitty, now living in the Villages.” Living the dream. So Smitty’s MAGI- because he’s talking about IRMAA is what he’s referring to. So it depends on what your modified adjusted gross income is, is going to increase your overall Medicare premiums. But he’s saying I got a large capital gains. What’s the effect?

Al: And the answer is yes. In other words, when you have larger income, regardless of the source, it increases your modified adjusted gross income, which in turn creates higher Medicare premiums 2 years from now. So that’s kind of- that’s how this works. There’s always a 2-year look back in the year that you’re in.

Joe: So he’s turning 65 in January. So his Medicare premiums are not going to go up because they’re not going to- let’s say in 2020 is when he had the large capital gains. It’s gonna be 2022 is when the Medicare premiums are going to increase because it’s a 2-year look back.

Al: That’s right. Yep. And it’s just a one year- they do that test every year depending upon what your modified adjusted gross income, so maybe you got one year where it’s kind of high. But then after that, you don’t have as many capital gains, it goes back to normal.

Joe: So there are a few exceptions to the rule here, Alan. I don’t want to throw you on the spot here but there are things that people can do to say this was a one-time event. Please don’t increase my Medicare premiums. So he could potentially try to do that depending on what the capital gain was, but you might be hard-pressed to do that.

Al: Yeah and you’re right, Joe. And it’s been a while since I looked at those rules so I forget exactly what things qualify and what don’t. But I think that’s a good point. Just realize that if you have an income situation that’s high in one year and not normal, you might be able to get that reversed for purposes of Medicare premiums 2 years from now.

Joe: All right Smitty, congrats on the Villages.


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