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
June 2, 2020

Should market volatility and the economic downturn due to the COVID-19 pandemic change where you save for retirement? Should contributions go to pre-tax accounts or to post-tax Roth accounts? Plus, Coronavirus related distributions, how to use a PPP loan to pay your self-employed self, backdoor Roth IRA conversions, and strategies for funding a Roth IRA for children.

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Show Notes

  • (00:54) SoloK Comment
  • (04:44) How Are Disbursements from a Revocable Trust Taxed?
  • (07:29) Should I Make Pre-Tax or Roth Retirement Contributions Post COVID-Crash?
  • (13:06) Where Should I Save for Retirement During COVID-19 Unemployment?
  • (15:29) Should I Contribute to My Pre-Tax 457, Roth 457, or a 529 Plan?
  • (25:02) Self-Employed with a Solo 401(k). Should I Do A Backdoor Roth Conversion?
  • (29:14) How Can I Open a Roth IRA for a Child?
  • (34:23) CARES Act: Should I Take a Coronavirus Related Distribution and Convert It?
  • (40:53) CARES Act: I’m Self-Employed. How Do I Use a PPP Loan to Pay Myself?

Free resources:

YMYW LIVE WEBINAR | With live, open Q&A with Joe Anderson, CFP®, especially for YMYW listeners! Wednesday, June 10, 12pm Pacific / 3pm Eastern. 

LISTEN | YMYW Podcast #251: Should You Convert to Roth IRA All At Once or Over Time?

LISTEN | YMYW Podcast #255: Breaking Down the Confusing Roth 5-Year Clock Rules

LISTEN | YMYW Podcast #249: What’s the Break-Even on a Retirement Roth IRA Conversion?

Listen to today’s podcast episode on YouTube:


We’re doing it again! Get your money questions answered on the spot by Joe and Big Al in the live Your Money, Your Wealth® webinar, exclusively for YMYW podcast listeners, on Wednesday June 10th at noon Pacific, 3pm Eastern. Click the link in the description of today’s episode in your podcast app to go to the show notes and sign up now. Today on the Your Money, Your Wealth® podcast: should market volatility and the economic downturn due to the COVID-19 pandemic change where you save for retirement? Should your contributions go to your pre-tax accounts or to your post-tax Roth accounts? Plus, more on Coronavirus related distributions, how to use a PPP loan to pay yourself if you’re self-employed, backdoor Roth IRA conversions, strategies for funding a Roth IRA for children, and a Derail or two. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

SoloK Comment

Joe: Got a call from David. No location. He read podcast 271 transcript. Is this the famous 271?

Al: Yeah, my cousin who listens to this podcast all the way in Boston. So she texted me last night and said “You guys killed it on show 271.” Which you’ll recall is the show where we couldn’t-

Joe: Where we laid an egg?

Al: Couldn’t get anything right. But I responded to her late last night and I was like half asleep. I just said, ‘I don’t know what we talked about.’ And then she goes ‘oh my gosh, I feel so bad. That’s the show where you screwed up.’

Joe: What, about the kids and dependents?

Al: Yeah I think that we got that thing wrong. But anyway, that’s the first mistake we made in years, right?

Joe: Hey, we’re human, Al. We’re living under difficult times.

Al: Trying times. Right?

Joe: We’re still getting questions so I guess people don’t care if the answer they get is…

Al: I notice we get a little bit less questions this week, so maybe they’re giving up on us.

Joe: “Read your discussion about Solo 401(k). This is not just for Schedule C self-employed but employed individuals of their own entity, but based on the W-2 compensation.”

Al: OK I agree with that. So Solo K, that just means an individual one-participant plan. It means you don’t have any other employees besides yourself. It could be a sole proprietorship which is Schedule C. It could be an LLC. It could be a limited partnership. It could be a general partnership. It could be an S corporation. It could even be a C corporation.

Andi: I think I remember this is the one. Do you remember somebody wrote in asking about, what is it? Because they were sold some idea at a dinner workshop or something like that about SoloK that you could set one up and that it was self-directed?

Joe: I think how the guy talked about the SoloK – it was like how he described it I think it sounded like there was a lot of added fluff and BS around it. But what’s this guy doing? He’s trying to prove- it’s like-

Andi: Just trying to be more specific.

Al: He’s calling us out that we didn’t explain it well enough.

Joe: Jesus.

Al: So let me tell you. Besides the entity, the most important thing to know about a Solo K is-

Joe: It’s one person.

Al: – is it’s one person. That’s it. That’s the key here. So if you have an employee that works more than 1000 hours, you do not qualify for a Solo 401(k).

Joe: Unless it’s your spouse.

Al: Yes, correct, unless it’s your spouse. So it’s just basically when it’s you as the employee only, there’s no other employees. I’ll clarify that again. Just because people-

Joe: But he’s saying “this is not just for Schedule C self-employed but employed individuals of their own entity based on their W-2 compensation.” Yeah. It’s your own entity.

Al: That’s right.

Joe: You’re still self-employed.

Al: So yeah. And what he’s talking about there, the only entities you get a W-2 in would be S corp or a C corporation, so you could get- and if you’re the only person that got a W-2, then you would qualify with your entity to get a Solo 401(k). I agree.  So maybe we weren’t clear enough. I don’t know.

Joe: I don’t know. Ban this guy. Unsubscribe that dude.

Andi: That’s your new punishment for people? You just unsubscribe them.

Joe: Yeah.

Al: Usually when you call us out, maybe you can give us a compliment beforehand.

Joe: Right. He’s like ‘hey jackasses. Read your transcript. Just FYI.’

How Are Disbursements from a Revocable Trust Taxed?

Joe: All right, this is Wayne from Naples, Florida. “Hi, Joe and Big Al. Enjoy the show.”  See David, that’s how you start an email.

Al: Great start.

Joe: Great start. “My 86 year old widowed mom lives in an assisted living facility. All her expenses are funded by monthly disbursements, $100,000 annually, from a revocable trust in her name, composed of 80% bonds, 20% cash. Is this taxed as ordinary income and therefore added to her $40,000 Social Security benefit? At what rate would this income be taxed? Also, would there be any potential taxable capital gains events created by the investments within the trust? Thanking you in advance.” This is a revocable, not irrevocable.

Al: Revocable, which means living trust.

Joe: So if it was an irrevocable trust we would have a different answer for you.

Al: Correct.

Joe: Because an irrevocable trust has its own trust tax rates. But as a revocable living trust, he’s probably acting as the trustee or successor trustee- he’s the trustee of the overall account. He’s got power of attorney, financial power of attorney I’m guessing, and helping to pay mom’s bills. Ma has $40,000 Social Security benefits and then the interest that is distributed- I don’t know how big the trust is-

Al: I think there’s a misunderstanding that income, interest, and dividends, is taxable to Wayne’s mom. Distributions, just pulling money out is no tax consequence unless there’s a gain or loss on sale.

Joe: Right. If he’s taken bases out-

Al: If he’s just taking money out of an account it’s not taxable. It’s when you sell something to take money out and there’s a gain. Yeah, you pay tax on that gain part and that would be capital gains. So that’s one thing to know. And the second thing to know is if it’s assisted living there’s probably some of that cost that’s gonna be tax-deductible as a medical expense. And by the time you get the full services long term care, it’s typically a 100% deductible so you usually don’t have much tax because the money that you pull out, if it’s taxable you get a big tax deduction to boot.

Joe: So it’s mostly in bonds and cash. Bonds aren’t really paying a lot of interest. Cash is not paying a lot of interest. So the interest coming off of the portfolio is going to be taxed at- it’s interest, but I wouldn’t assume it’s a ton. But the distributions as you said Al, let’s say you put in $1,000,000 and it grows from interest $1000. And you’re pulling $100,000 out, you pay tax on $1000.

Al: That’s correct. You got it.

Joe: Thanks a lot Wayne. Appreciate the telephone- or the email.

Should I Make Pre-Tax or Roth Retirement Contributions Post COVID-Crash?

Joe: We got Frank. He writes in from San Diego. He goes “Joe and Big Al. Howdy and hope you’re all having a winning day.” Not sure if I’ve ever said that before my life.

Al: I like it. I’m going to start saying that. Joe-

Andi: Not doing the Charlie Sheen thing? Winning?

Al: First thing when I see you: “Joe, are you having a winning day or losing day?”

Joe: Yes. “Hey, we’ll see you later.” “OK. Have a winning day.”

Al: Like it.

Joe: “I have the option-” I wish David is having a losing day.

Al: He just needs to understand little etiquette.

Joe: I think so. This is free.

Al: Yeah, free advice.

Joe: Well, it’s not advice, it’s free conversation.

Al: Free comments. Free discussion.

Andi: Suggestions.

Joe: Yes. “I have the option to make pre-tax standard 401(k) contributions or post-tax Roth 401(k) contributions. Up until the COVID crash, I was contributing 22% of my salary. All of the funds to Roth 401(k) and then continue to contribute post-tax dollars after maxing out. Now I’m contributing 8% to my 401(k) Roth, 7% to pre-tax 401(k), and 5% on an online savings account.” Okay, let’s see. Okay, so he just kind of split it up. Trying to get a little bit more diversified, same 22%. If I add that up correctly?

Al: Well, no just 20%.

Joe: 20%. 14% and 5% is-

Al: He saved 2% for the grocery budget or something.

Joe: “The 401(k) investments are primarily in 2020 and 2025 target-date funds. Should I continue to split my pre-tax and post-tax 401(k) cash savings contributions? Or should I return 100% of my contributions to 401(k) Roth? My concern is not only the possibility of a continued cratered economy but also the real possibility of major tax increases in the future. What’s the best path to mitigate? I’m 66 and wife is 63, at the 22% tax rate, in hopes to retire in the next few years. In addition to 401(k) which has a modest balance, we also have a brokerage account, IRAs, and Roth IRAs with Pure and have been making-” oh, with Pure? With us?

Al: Oh, he’s a client.

Joe: Oh wow. “- with Pure and have been making annual Backdoor Roth after-tax Roth IRA contributions. Thanks again in advance for your insight and guidance. For entertainment value, can’t wait to hear how Joe will butcher reading my question.” Wow.

Andi: And you did.

Joe: I totally did. Totally blew that thing up.

Andi: Didn’t even realize who our company was.

Joe: Oh. Thanks, Frank. Yeah. That was a total butcher job. Straight out of the butcher shop. I need some clarification. He said he was doing 401(k), 22% of his salary to fund 401(k), and then continue to contribute post-tax dollars after maxing out. Is he converting the post-tax dollars after the Roth 401(k)? And I would go back to that Frank, all day long. Because the post-tax dollars that you’re putting into your 401(k) can immediately be converted to a Roth IRA. And yes, if you believe that tax rates are going to go higher then you are doing everything right by putting everything into a 401(k) via Roth. Because you’ll never be taxed on those dollars again.

Al: Makes sense although he does say that he’s got a modest balance in the 401(k). But I guess he’s got IRAs- we don’t know how much he has in IRAs and Roth IRAs with Pure. So I’m assuming he’s got enough in IRAs to go along with this 401(k) that his required minimum distribution is a meaningful number. I guess we’ll make that. And so if that’s the case then getting more into the Roth would absolutely make sense.

Joe: He’s in the 22% tax bracket. So I’d go Roth for sure. 22% is gonna be cheap.

Al: Again though it all depends on future income and spending needs and all that which we don’t have here in this paragraph.

Joe: Got it. Because he probably said it but I butchered it and I couldn’t understand it.

Al: I didn’t hear it. Although, I usually tune out about halfway.

Joe: I mean these are long ones.

Al: Yeah they are.

Joe: I mean if they’re long, then you know it’s total S-show.

Andi: A dog’s breakfast, as we say in Australia.

Joe: Dog breakfast.

Al: The best answer if you have an advisor and Frank, you do, it sounds like it’s us.

Joe: Apparently we’re not giving him good advice. Our advisor sucks. He’s just going straight to the podcast.

Al: What do you think? I’m not sure about what our advisor’s saying. But the best answer is to look at your overall situation. Look at your income now versus in the future to figure out how much to put in Roth and how much to put in pre-tax.

Joe: I mean just because of COVID, I don’t know why you went pre-tax Roth and then brokerage. Because I think you’re right on the right track.

Al: I think he was thinking maybe keep more dollars so there’s more pre-tax. I pay less in tax. I got more in my pocket. Plus he’s putting 5% in a savings account. He’s just doing a cushion to his emergency cash I’m guessing.

Joe: He freaked out and tried to hedge.

Al: Which not all bad, because you never know.

Joe: And knowing is half the battle.

Where Should I Save for Retirement During COVID-19 Unemployment?

Joe: OK. Cindy from Massachusetts. “Hi. Love your show.” Well, thank you, Cindy. “Question here about retirement account contributions when don’t have earned income for a gap year. I’m confident I’ll have earned income later of the year when this COVID stuff settles down. But at the moment I don’t have any for this tax year. Given I still have 10 15 years till retirement, I have some cash on the side, I can make contributions to retirement. What are the accounts to use for this? Can I contribute to Roth IRA now without earned income? Also, any strategies to consider when having a gap month, year, less than normal income?” Yes. Well, you could make a Roth IRA or an IRA contribution if you believe that you will have earned income before the year-end.

Al: Yeah I think that’s the key. It’s your earned income by December 31st. So if you have none now you could still do the contribution. Now for some reason, you never get the earned income you’re going to have to undo it or re-characterize it.

Joe: Which is not that big of a deal.

Al: Not a big deal.

Joe: So if you want to do that, the biggest strategy for a gap year, when you have lower income year than normal, is a conversion. It’s taking money from a retirement account and converting it to a Roth because you’re in a lower tax bracket.

Al: Exactly right. But that’s mitigated by the fact that if you have no income. You might be running through your cash and you don’t know when you get going to become employed again. So you have to be a little careful there in terms of how much you convert. Because you don’t want to convert so much to pay tax on money that you’re going to need for living expenses. So that’s the balancing act there.

Joe: Hopefully that helps. So Roth conversions, Roth contributions, you can do on a low-income tax year. You’ve just got to make sure that you have- and that the income limit for the conversion is just- how old is she? Did she say? 15 years from retirement. I don’t know. So that’s in her 40s or 50s probably. Let’s say you’re over 50, Cindy. Not to say that I know you and you probably look a hell of a lot younger than that. You can put $7000 into a Roth IRA. As long as you have $7000 of income by the end of the year, you can keep the money in the retirement account.

Should I Contribute to My Pre-Tax 457, Roth 457, or a 529 Plan?

Joe: Brian writes in from Queens, New York. “Hello, Joe, Al, Andi. LOVE the podcast.” Capital LOVE.

Al: Capital LOVE. That’s a lot. That’s of love there.

Joe: So much love. “You’ve educated me tremendously with Your Money, Your Wealth® and the podcast. And of course, make it fun and hysterical.” Yes. So much fun. It’s just-

Al: Love it. Lovin’ it.

Joe: “I’m a 44-year-old New York City public school teacher with 20 plus years of service. My retirement account consists of the following-” Got a lot of New Yorkers, you know that?

Al: We do.

Andi: You’ve got that New York attitude.

Joe: What?

Andi: I said you’ve got that New York attitude.

Joe: I do not have a New York- I’m from Minneapolis, Minnesota.

Andi: Yeah, I realize that, but you’ve got the attitude of a New Yorker.

Joe: What, loving?

Andi: No, calling everybody jackasses.

Joe: Oh. Some people are jackasses. So “We have a 403(b) that’s got a balance of about $325,000, all invested in a guaranteed 7% fixed interest rate. He’s maxing that out at $19,500. Recently started 457 with a balance of $24,000, also contributing the max $19,500. The investment is 60% S&P 500/40% mid-cap fund. Then he’s got a traditional IRA, zero balance. He’s got a Roth IRA of $155,000, does the maximum $6000 Backdoor Traditional in a Roth every year. Married, filing jointly, over the income limit to direct contribution. Roth IRA is invested 90% Total Market Index Fund/ 10% Total International Fund. Joe, Al, gotta tell you I’m not feeling the international fund, but I listen to you guys.” Are you kidding me, Brian from Queens? It’s 10%. I mean it’s a couple of bucks.

Andi: Is he a jackass?

Joe: Yeah and he’s busting my balls on it.

Al: Let me just respond to that quickly. I’m not feeling it either. But- which is exactly when you should invest, when you’re not feeling it. Because it means it’s lower.

Joe: Great comeback Al. “He’s got a 529 plan, $13,000 for his 2-year-old son.” Oh my God. Whoa. Usually, this is when the wheels come off.

Al: By the 3rd or 4th segment and it’s a 2-page question- we thought it was a short question.

Joe: I was like- I was ready to go. And the next thing I know I got a whole ‘nother page. “I hopefully plan to do the maximum contributions to all three retirement accounts for the next 11 years until I retire including the 50-year-old catch-up contributions taking the FIRE approach,” Financial Independence, Retire Early “-with the goal of retire at 55. Should I change my future contributions to Roth 457 rather than the 457 pre-tax and discontinue the future contributions to the 529? My rationale is that it’s hard to know what future holds for my son and don’t want to deal with income taxes and 10% penalties on the 529 plan earnings if he is not going to go to college. On the other hand, I get a bigger upfront tax deduction with the 457 pre-tax when my son turns college age, I’ll be 59 years old. It will have not the 10% penalty issues if I end up withdrawing funds from retirement accounts to pay for his college funding. Other things to consider, I live in New York City and Roth 457 contributions are New York State or New York or New York’s state and city tax, age 55, plan to retire from teaching with approximately $80,000 per year annual pension. Move to a less expensive state, such as Florida where there is no state income tax. At that point, I would like to do a direct rollover 457 pre-tax fund to a traditional IRA and gradually convert to Roth IRA avoiding state income taxes and RMD requirements. I will not roll over the 403(b) funds to an IRA as the 7% is guaranteed even in retirement. OK so to sum it up, 457 pre-tax or 457 Roth? Invest in 529? Or not invest in 529? Thanks so much. To Whom It May Concern, please email me back as to the podcast this might be read on.”

Andi: It’ll be read over 3, given how long it is.

Joe: Oh my God. Well, first of all, he’s doing a hell of a job saving money.

Al: Yeah, I’ll say.

Joe: Maxing out 457, maxing out 403(b). He could do a Backdoor Roth for his wife too.

Al: So he’s got all that savings, plus the pension on top of that. He’ll be someone that makes more retired than working, which is awesome.

Joe: Without question. So he’s in the 22% tax bracket, he’s 44, is going to retire in 11, 12 years, at 55, he’s 44, so that’s 11 years.

Al: And then son’s gonna go to college when he’s 59, which should be like 14, 15 years from now?

Joe: Probably15, because he has got a 2-year old son. He’s got $322,000, 7% guaranteed and then he’s just started the 457. So does he go pre-tax or after-tax? Because he’s goin’ pre-tax balance with the guaranteed 7%. He’s maxin’ that bad boy out. He’s got the 457. He’s putting $19,500 pre-tax and then so his question is, is that 457 pre-tax or Roth 457? I would go Roth. If I do the math and Alan, I don’t think you have your calculator with you.

Al: No, I don’t today.

Joe: So he’s gonna have over let’s just say in the 403(b) account, $1,500,000, right?

Al: With the contributions and growth? Yeah.

Joe: At 7%. I mean it’s in 10 years it’s going to be 6%. I mean $600,000 and some odd thousand; he’s adding another $20,000 a year, that’s another $200,000 of growth.

Al: He’s gonna have at least $1,000,000.

Joe: Right? At 7%?

Al: $1,000,000 at least. Yeah. Yeah.

Joe: So that that’s $1,000,000 plus his $80,000 pension. He’s only going to be 55. He might do some side hustles. He’s in the FIRE movement. All these FIRE guys like the hustle on the side.

Al: Because they save all this money, then they don’t want to burn through it. So they want to get something else.

Joe: And they’re bored as hell because they pinched every penny possible living in mom’s basement. Saving 90% of their salary.

Al: Well that’s the extreme ones. Then they retire at like 35 instead of 55.

Joe: He’s got Roth balance of- so he’s got $300,000, $450,000 right now? Right?

Al: Yep.

Joe: So let’s call it $500,000 at 44. So he’s going to have $2,000,000 plus a big fat pension. And then Social Security for his wife. Potentially. I’m not sure if she’s working or not, but she’s got a 2-year old, maybe stays at home. I would go Roth. And the 529 plan-

Al: And to actually put a little bit more to that, I do want to know what your tax bracket is right now, what your income is. I’m assuming you’re-

Joe: He’s a schoolteacher.

Al: I know but we don’t know if his- does his wife work or not?

Joe: And he saves $40,000 a year pre-tax.

Al: I know. But-

Joe: He’s in the 12% tax bracket.

Al: OK. Could be. I don’t know what his wife does. So I would say if you’re in the 22% bracket or lower, I would definitely stay Roth. I agree with Joe on that; which you probably are. 529 plans. I like those especially- you only get $13,000 in it. That’s almost like another way to do a Roth.

Joe: But he is like man, I don’t know if the kid’s going to go to school.

Al: Yeah, but he’s 2.

Joe: He’s probably- the kids running into walls and he’s like nope.

Al: What were you like at 2?

Joe: What do you talking about- doin’ mathematical equations, future value contribution, or calculations.

Al: That’s not what your mom said.

Joe: No, I don’t know. I was like suckin’ on gasoline.

Andi: That explains a lot.

Al: Yeah. You have an older brother. Right?

Joe: I do.

Al: So he probably had a cap gun and you were probably chewin’ on the cap gun ammo. Gunpowder.

Joe: You got it. Yes, a little gunpowder pop.

Al: That was fun.

Joe: So I hope that helps. Thanks a lot for the email question.

We’re facing a lot of uncertainty right now, as the emails from Frank and Cindy and Brian all show. Between the pandemic, the ups and downs in the market, and whatever the future holds for Social Security and taxes, it’s hard to know if you’re on the right track with your retirement savings and planning. Click the link in the description of today’s episode in your podcast app to go to the show notes at YourMoneyYourWealth.com and download our Retirement Readiness Guide for free. You’ll learn how to control your taxes in retirement, how to create income to last a lifetime, and 7 plays to help you get retirement ready, despite all the uncertainties – and The Retirement Readiness Guide won’t even cost you a thing. If you have more money questions, fill up our inbox! Click the Ask Joe and Al On Air banner in the show notes and shoot us a voice message or an email.

Self-Employed with a Solo 401(k). Should I Do A Backdoor Roth Conversion?

Joe: So we got Smitty.

Al: Smitty.

Joe: Smitty. I love that name. Smitty.

Al: I like that name too.

Joe: Roseburg, Oregon. “Hi, guys and gal. Love your show. I’m a longtime listener, first-time emailer.” Well, welcome to the program. Welcome to the family, Smitty. “I have a couple of questions about Roth IRA contributions and rollovers. My AGI for tax year 2019 was too high to qualify for a Roth contribution so instead, I did a Backdoor Roth contributing in 2020. Looking ahead for tax year 2020 my AGI might be too high again to qualify for Roth contribution. So instead of waiting till the end of the year to see if I qualify or not, could I just go ahead and do another Backdoor Roth? This way at least I can get my 2020 contributions in the market now. Also, I’m self-employed and have a solo 401(k). I’d like to do a partial Roth conversion for tax year 2020 from my Solo 401(k). I’m told that the funds first need to go to my traditional IRA account then to my Roth IRA account. Does this create any problems having multiple funds pass through traditional IRA multiple times in calendar year 2020? 2019 Backdoor Roth funded in 2020 completed; 2020 Backdoor Roth funded in 2020 not completed; 2020 Roth rollover or conversion funded 2020, not completed. FYI, I only have one traditional IRA account that always has a zero balance, I use it as a pass-through account. Thanks.” Smitty, you can convert your 401(k) to a Roth IRA. So you don’t have to touch it to an IRA. Those are rules that were changed a long time ago so I’m not sure who’s giving you that advice. You can go directly from a Solo 401(k) to IRA, no problem there. And yes I would just go ahead and do the Backdoor Roth right now. If you don’t think you’re going to- even if you qualify for a regular Roth at the end of the year, you can still do a non-deductible and convert it and still has the same issue.

Al: I like that strategy because it doesn’t matter what your income- don’t worry about it. Because if you just do a Roth contribution and later you don’t qualify, then you’ve got to undo it and pull out the earnings and pay tax on the earnings. I’d rather just do the Backdoor now and then it doesn’t matter what your income is. It could be half what it is normally and you’re well below the limit, but you can still do a Backdoor. It’s no big deal.

Joe: I mean there are no income limits to do a Backdoor.

Al: That’s right. Exactly. Because anyone can do the IRA now. Go ahead and do it. And I like your thinking which is to do it while the market’s lower.

Joe: And let’s say though that you don’t have a Solo 401(k). You had- well no, you could still, you could convert- the Pension Protection Act allowed 401(k) plans to be converted to Roths. Prior to that, you would have to go from 401(k) to IRA, IRA to Roth IRA. But that just is not the case.

Al: But aren’t some plans not up to speed on these new rules?

Joe: I suppose. But it’s a Solo 401(k). Solo 401(k)s are pretty new.

Al: There should be a prototype plan but nobody has it. I would think.

Joe: But let’s just say for just talking to Smitty here, that he needs to put it into an IRA. As long as it’s converted out by the end of the year because the pro-rata rules- and I think we’ve talked a little bit about this last week- they take a look at the balance of 12/31, so if everything is cleaned out. So you put money into the conduit IRA that you’re using as a pass-through for your non-deductible IRA contributions and converting and you’re also putting your 401(k) transfer in there and then converting, you’re still fine doing it that way as long as everything is cleaned up by the end of the year.

Al: Makes sense.

How Can I Open a Roth IRA for a Child?

Joe: Dave from Palm Beach Gardens, Florida. Kind of sounds like a nice place, doesn’t it?

Al: It does. Palm Beach and gardens.

Joe: Gardens. Not just Palm Beach but Palm Beach Gardens.

Al: All things I like. I like palms. I like beaches and I like gardens. I mean that’s my kinda-

Andi: That sounds like your retirement spot there, Al.

Al: I think so. Dave is there a little-

Joe: A little pullout? Maybe a pullout bed?

Al: Maybe a bedroom? I’ll sleep in the attic, I don’t care.

Joe: “I love your show. You two are hysterical. You make a dry subject fun to listen to. My wife and I have two young children who are 3 and 5 years old. I’m a W-2 employee. My wife stays home to take care of the kids.” Very cool. “Trying to figure out a way to open up a Roth IRA for my children. I have a decent income and we’re meeting our savings and retirement goals. If my parents (my children’s grandparents)-” Thanks Dave, for putting that in parentheses.

Andi: I was going to edit that out. But I thought it was pretty funny.

Joe: You know, my parents, they just so happen to be my children’s grandparents.

Al: It is amazing.

Joe: Is that-? What the hell?

Al: Maybe it’s not very common in Palm Beach Gardens.

Joe: Palm Beach Gardens. They’ve got a whole different type of family tree goin’ on there.

Al: I wonder how the cousin structure works there.

Joe: I had no idea that your parents would be your children’s grandparents, but we clarified that. “- leave their house to my children when they pass away, can my children rent out the house and then use the income to contribute to a Roth IRA? I only ask because this came up in conversation the other day and my parents-” I wonder if those are the same people as your kids’ grandparents.

Al: I’m guessing they’re-

Joe: I’m guessing they’re probably the same. ” -asked how I wanted their will worded. Thanks gentlemen and go Gators.” Yeah, baby. Thanks, Dave. That’s an interesting little COVID-19 chat around the dining room table.

Al: That is, isn’t it? 6 feet apart? Of course. With masks?

Joe: And then they’re talking about hey, we’re writing our will, just curious.

Al: Here’s what I want in it, Mom, Dad-

Joe: Here, it’s an open slate. Just write whatever you want, Dave, because I guess we are your kids’ grandparents. We didn’t know that until you wrote that.

Al: In fact, I didn’t know you had kids. How old are they? 3 and 5? That’s pretty good.

Joe: Where the hell they been hidin’? Could they leave the house to the children and then the kids rent out the house- wow 3 and 5? I mean that’s- they need to have- I guess if they go there and pick some weeds or something like that.

Al: Here’s the answer. The kids have to have earned income. 3 and 5 years old. So what do you-

Joe: They would have to be models.

Al: What do you do? What do you pay a 5-year-old for? Would they be able to sweep the floor? Here ya go, here’s $.50. And I guess if you employ them for some reason, it has to be at market compensation, so they have to have earned income. Let’s say they have $100 of earned income. I don’t know how, but let’s just say they could get it. Then you could do $100 Roth.

Joe: So the 2 and 5-year-old need- or 3 and 5 year old, need earned income.

Al: I think you’re right. Models. Hopefully, they’re really good looking.

Joe: They could pay them. Because- I wonder how that-, that probably wouldn’t fly, but let’s say if a 3 and 5 year old own the house, they’re the owner.

Al: And it says that they’re gonna get the house when the grandparents die. I don’t think they’re going to die-

Joe: Well, they’re sitting around COVID-19 dinner discussions.

Al: They might be worried about it.

Joe: They could be. Here, not feeling so good. What should I put in my will?

Joe: Yes. And so now the kids own the house and now they’re landlords at 3 and 5.

Al: Yeah, but still not earned income.

Joe: Well they could pay themselves to do something with the house. But I don’t know what that would be.

Al: Like manager.

Joe: Now we’re talking about tax evasion.

Al: Yeah that’s- don’t do that.

Joe: Hopefully that helps. Go Gators. Thanks a lot for the email, Dave.

Kiplinger does say a Roth IRA might be one of the smartest money moves a young person can make, but maybe not that young! Sorry, Dave. Meanwhile, the podcast show notes are crammed with some really useful Roth information, like the differences between a traditional IRA and a Roth IRA, the basics of the Roth IRA, and listen to previous YMYW podcast episodes that explain the Roth 5 Year clock withdrawal rules, the break-even on doing a Roth conversion, and whether to convert all at once or over time. Sign up for the podcast newsletter from the show notes too, and you’ll be notified of new podcast episodes and exclusive webinars for YMYW listeners, like the one coming up on June 10th! Just click that link in today’s episode description in your podcast app.


CARES Act: Should I Take a Coronavirus Related Distribution and Convert It?

Joe: John from L.A. writes in.


Joe: Let’s see. So John- “My question, I’m 70 and retired along with my wife. My only income at this point is $38,000 in Social Security and $135,000 in a business buy-out, which is long term capital gain. I have $250,000 in a traditional IRA, $125,000 in cash, $125,000 in stock, and want to convert it all to a Roth eventually. Should I take the $100,000 Corona withdrawal from a traditional IRA and convert it since I can break up the tax payments into three years? It seems like a no brainer which makes me think the government has a trap. Also if I converted the $100,000, should it be the existing stocks or cash? What do you think?” So a lot of questions on CRDs and taking a CRD which- you have to qualify first. And the qualifications are basically this, that you have to be diagnosed with COVID, your wife or dependent needs to be diagnosed with COVID. Let’s say you’ve been furloughed, if you’re laid off, if you have any type of financial disruption in your overall financial life, let’s say you’re a small business owner. So the business closes, you maybe have to take care of kids or grandkids or any type of dependents. Those are kind of the very specific ones. But the last one on the list from the IRS is like any other thing that the IRS deems OK. So that’s a pretty broad statement. And I would imagine that a lot of different things would qualify for a CRD but it’s still not fully clear what is something that the IRS deems OK.

Al: They just kind of left a catch-all in case someone else thought of a creative answer that they think is OK.

Joe: And here’s the deal with this, is that it’s basically self-regulated. I mean the custodians are not going to ask for proof. If you’re gonna go to Fidelity, or your 401(k) provider, or T.D. Ameritrade, you’re going to say ‘hey give me the $100,000’ and you’re going to file it on your tax return and say it’s a COVID related distribution. The custodians don’t care. They’re not going to be like here, can I see your test?

Al: Yeah right.

Joe: Don’t breathe on me or don’t cough, but let me make sure- they’re not going to care. They’re going to give you the cash and then you’re just going to do it on your tax return. So it is a pretty wide definition and I would imagine the case of audit about it on this is probably going to be fairly low as well.

Al: Probably low.  We should also say what it is. You can take up to $100,000 from your IRA, if you qualify, and then you can pay it back within 3 years. And this is all the way from January 1st of this year to December 31st of this year. You can pay it back within 3 years, no harm no foul. Or you can pay the taxes over 3 years. So if you take out just say $90,000 because the math is easier, you pay tax on $30,000 of income this year, $30,000 next year, $30,000 the year after that. And if you do fall in that situation and you do pay it back, then you have to amend your tax returns to get that tax money back or you can elect to pay it all this year as far as tax. So that’s what it is. And no penalty. No 10% penalty if you’re under 59 and a half.

Joe: And no mandatory withholdings.

Al: Exactly. So it’s a gift for you to avoid penalty and to defer taxes over time if you actually need the money. Now people are asking well, can I take the money and put it into a Roth IRA?

Joe: Right. And this is what John’s asking. So I have two answers for John. I think the first answer is that if you take a look at the Code, it doesn’t tell you that you can’t do this.

Al: Agreed.

Joe: But is that in the spirit of the law?

Al: Probably not.

Joe: No. So are we advising our clients at Pure to take money out of this, use the CRD election, and convert? The answer is no. But I don’t think John’s a client. He might be.

Al: He might be.

Joe: But if he wants to kind of follow that gray line, who knows? Because here’s what- here’s the worst thing that can happen to John. At some point, the IRS says ‘hey you know what? People were converting these. So we’re just going to tax it.” So he’s got $38,000 of taxable income. The capital gains are going to sit on that. If he converts $100,000, that still keeps some under $250,000. So the capital gains are still going to be at 15%. He’s not going to run into the- I believe he’s married- he’s not going to run into the 3.8 surtax. And so instead he’s just going to pay a little bit more tax on the conversion but he’s got a $100,000 in the conversion. So you’re either going to- if you do this and you convert, just know that- there’s no letter of the law saying that you cannot do it. But they could reverse it very quickly.

Al: Yeah. To me, it’s a little bit like the PPP loan in the sense that they gave us all this opportunity for small business owners to get the loan, and then after many people got the loan they changed the rules as to who would qualify and they could do that on this. So I personally would not do this and I’m not going to recommend that you do it. But I can’t find a place where it says you cannot do it.

Joe: Right. Neither can I. I’m actually doing it. I’m kidding, I’m kidding. So there you have it, John. So which one do you convert, the cash or the stocks? Well, you convert stocks, if that’s what you were going to do. In any type of conversion, you want to asset classes that have a higher expected rate of return in your Roth IRA. Because then it grows 100% tax-free. You’re not going to be taxed on those dollars. So you would much rather have a compounding higher growth in the Roth than you would in your retirement account.

Al: And I know that gets tricky sometimes because if you convert and the market is high and then it gets a correction you feel like I made the wrong choice. But that’s temporary. Stocks do outperform cash over the long term and that’s how we look at it.

Joe: Right. Let’s say you have 125 shares of XYZ stock, so you convert the $125,000. You have 125 shares. If the market goes down, now let’s say it’s worth $100,000 but you still have 125 shares. So just kind of think of it that way, if the market does kind of collapse on you a little bit just right after you convert. Because hopefully you have that many shares and as dividends come out, you reinvest, you buy more shares at a lower cost. And then when the market recovers that share price recovers with it. Hopefully that helps John.

CARES Act: I’m Self-Employed. How Do I Use a PPP Loan to Pay Myself?

Joe: Let’s do another one here from Cindy from California. She goes “Hi Andi, Joe and Big Al. My question is regarding the PPP loan. I’m a sole prop and have received funds for the PPP loan. How would I distribute the money to myself since the payroll cost wage is to myself?” Would I just withdraw the money from the biz bank account to my personal account and document that is on the forgiveness application? Thanks.” I don’t know, that seems reasonable to me.

Al: It’s a great question and I think that it’s not entirely clear as a lot of the stuff on the PPP. Here’s what I would say, Cindy, is when it comes to a sole proprietorship or LLC or partnership, the owners do not pay themselves salaries so their profit is considered earned income, like salary. So I think to pay yourself it doesn’t hurt. But I don’t think it’s required. I think what’s required is for you to do an accounting of your profitability from the point you took the PPP loan to 8 months later, whatever that profitability is. Basically same as your salary and that’s the part that could potentially be forgiven.

Joe: So is there ever a case where a sole proprietor hires PayChex?

Al:  For this reason, it’s-

Joe: No, I mean even this reason- before that had a payroll provider. Do you see them or not really? Or they just used it as a prop?

Al: I haven’t seen it, to be honest, Joe. And the reason is because it’s considered earned income as a sole proprietorship anyway. So there’s no reason to pay yourself, same as an LLC, same as a partnership.

Joe: Everything’s a flow-through.

Al: Everything’s a flow-through. Everything is earned income. So you don’t need to do payroll. I might go so far to say you’re probably not even supposed to do it, but I guess I don’t know that for sure.

Joe: So let’s say Cindy makes $100,000 a year, so she got a PPP loan. Let’s just call $120,000 here. So she probably got a PPP loan for what, $25,000?

Al: Yeah yeah. Right.

Joe: And what a PPP is the Payroll Protection Plan. So it’s 2 and a half times your average monthly payroll, with $100,000 max or $10,000,000. So a lot of these larger corporations were able to get a lot more. So small props get a lot less. So let’s say she got $20,000 some odd. Just have a good accounting with it. But at $25,000, there’s no way- there’s not going to be any type of huge audit here. I think what I read is what anything under- anything over $2,000,000?

Al: -will be audited. And maybe a little bit lower, but probably not for most sole proprietorships.

Joe: And if you’re honest, then it’s like-

Al: To me, the takeaway is instead of waiting till year-end to do your bookkeeping; you need to do it like right now for this 8-week period to figure out what your profitability is.

Joe: That’s it for us, we’ll see you next week. The show is called Your Money, Your Wealth®.


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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.