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Published On
February 15, 2022

What is a cap rate? What does cash-on-cash return mean? Joe and Big Al spitball on rental real estate investing as an early retirement income source. Plus, the stacking rule, the foreign earned income exclusion, and taxes and working – or not – after retirement. Finally, at what point are you saving too much to pre-tax accounts, and is it a good idea to convert to that post-tax Roth before the tax brackets change?

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Show Notes

  • (00:48) Real Estate Early Retirement Plan Spitball (Susan, Florida)
  • (08:24) Real Estate Investing: Cash On Cash and Cap Rate
  • (17:15) The Stacking Rule and the Foreign Earned Income Exclusion (Jeff)
  • (25:18) How Destroyed Will We Be On Taxes If I Don’t Work After Retirement? (Andre, Bavaria, Germany)
  • (34:18) At What Point Am I Saving Too Much Pre-Tax? (Paul, Cardiff, CA)
  • (37:03) Should I Transfer Funds to Roth IRA Before the Tax Brackets Change? (Edward)

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Transcription

What is a cap rate? What does cash-on-cash return mean? Today on Your Money, Your Wealth® podcast 365, Joe and Big Al take a look at investing in rental real estate as an income source for an early retirement spitball — this time they dive into the weeds a bit. Plus, the stacking rule, the foreign earned income exclusion, and taxes and working – or not – after retirement. Finally, at what point are you saving too much to pre-tax accounts, and is it a good idea to convert to that post-tax Roth before the tax brackets change? Click Ask Joe and Al On Air at YourMoneyYourWealth.com to send in your money questions or comments as an email or a voice message. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe… actually, let’s let Joe do it for you: 

Real Estate Early Retirement Plan Spitball (Susan, Florida)

Joe: My name is Joe Anderson, CFP®, CERTIFIED FINANCIAL PLANNER™, with Alan Clopine, he’s a CPA, appreciate you hanging out. Go to YourMoneyYourWealth.com. Click on Ask Joe & Al on the air.

Al: You want to emphasize that eh? Do people call you the wrong name sometimes?

Joe: Sometimes, Al.

Al: Joel, John…

Joe: Jackass….

Al: Your word not mine.

Joe: Now, Susan writes from Florida. “Dear Andi, Joe and Al. Big Al, I’m sorry.

Al: Yeah, let’s get it right.

Joe: Sorry, Big. “I discovered your podcast the past few months. Don’t change a thing. I prefer to be entertained as I learn.” Who said we’re changing anything?

Al: Well, I think Ninja and others made you question your style.

Joe: I was just going to retire. “If you would indulge me, I’d love to hear a conversation on real estate investments, not a Roth conversion question. Most of our retirement nest egg is tied up in real estate investment properties. Disclosure: I’m a realtor. Going after what I know.” Oh Susan, she’s perfect.

Al: That’s what Warren Buffett says: Invest in what you know.

Joe: “My husband and I are 52 and 53 and plan on retiring fully by age 60, at the latest. We currently have approximately $1.7 million in investment properties that generate monthly income around $5,000 a month, after PITI.” Principal interest, taxes and insurance for you real estate newbies. “We anticipate that will be closer to about $8,000 a month when we’re 60 due to the recent increases in all our mortgages being paid off. We have two children, ages 22 and 24, and would like to retain the three rental properties until we both hit the pearly gates. So they can inherit them and get the step up in basis and not have to incur taxes on the sale of them. This is my version of Roth.

Al: Tax free. Love it.

Joe: “I know what you’re going to say. You’re not going to want to be a landlord when you’re older.” Nope. I wasn’t going to say that.

Al: I might have.

Joe: “We’ll get the kids to manage them or a management company. In the meantime, the money generated from rent, plus our Social Security will allow us not to have to sell the properties or touch our retirement accounts. Our forever home will be paid for, so we will only need $150,000 to live very comfortably. That will come from approximately $96,000 in rental income, $72,000 in Social Security income, which will start collecting at age 67.

Here’s my question for you too spitball; Does the simple scenario I’ve laid out even makes sense? I realize that tax law could change, but in the event that they don’t. How are we looking? If you have any interest, our other assets include pre-tax retirement $350,000, Roth IRA $130,000, HSA $35,000, I Bonds $63,000.” They’ve got the primary residence paid in full $1.5 million also. “Does it make sense to build up a cash account between now and 60 to save taxes to do Roth conversions on the pre-tax accounts? Thank you so much for taking the time to have a chat on this. And Andi, God bless. You must have older brothers.”

Andi: I do. Joe and Big Al.

Al: Is that referring to how we treat her?

Joe: I don’t know. So, Susan, if you like real estate, go with what you know. I don’t know where she’s getting their numbers. Is she increasing the rents by a couple of percent per year? If you lay out your numbers, I don’t really see any issues with it. Besides the fact that you could have vacancies, something could happen to the properties where you would have to put a lot of additional capital into the properties. You might be discounting some of that a little bit.

Al: I think the strategy is fine. I really do. Here’s my concerns. The PITI is not the expenses. It’s some of the expenses, principal, interest, taxes and insurance. As you mentioned, Joe, there’s some vacancies. Typically when there’s vacancies, the house needs or condo needs work that needs new carpet or new paint or whatever. Occasionally you need to get a new roof, new furnace, new water heater, new everything. Those all have to be factored into what the real profit is. Maybe this year and next year and the year after you didn’t have any big repairs, but you should be setting some aside. This isn’t all straight profit because it’s going to come up. We know it’s going to come up. Just be aware of that. Your $5,000 per month may not be quite that much when you factor in some of these other things. The $8,000 per month, probably the same thing; rent increases, mortgage is paid off, so it’s a sound strategy. You’re basically going to have a lot of equity that you’re not really going to be enjoying, but it sounds like that’s OK because you got enough in other income from other sources. It sounds like you don’t mind being a landlord. There’s lots of property managers out there. They will probably not do as good a job as you will, but they will in many cases, do a good enough job. As you get older, you don’t have to worry about it. Your kids.I would say that they may or may not be interested. Just being honest.

Joe: You do have kids, you realize that.

Al: I do. They actually do want me to teach them about real estate. They’re now in their late 20s and early 30s, and it hasn’t been really top of mind for them. But I think it’s a fine strategy. As far as saving cash for Roth conversions. If you’re in a low enough bracket, then go for it, but you’ve got $350,000 in a pre-tax retirement, I’m not too worried about your required minimum distributions so I don’t think that’s your main strategy. If you ever need to grab it for a need, it might be because of long term care, which is deductible anyway. Maybe that’s less important than if it were to add another zero to that.

Joe: I like it. If you could get the debt paid off, that’s a really conservative strategy. What do you want to compare it to? You’re buying what you know and what you love. So why change. If you’re looking to see from a different perspective or a different investment, you just look at what is your cash on cash return? What is the equity of the overall properties that you have is rentals and what is the cash or the net cash flow that you are receiving? And just divide. At that number, you might be surprised at how low it is or you might be surprised that hey, it’s 4 or 5 %. That is a sound investment and a sound investment strategy.

Al: Florida has decent cash flow for rentals compared to California, where we’re from.

Real Estate Investing: Cash On Cash and Cap Rate

Joe: When you look at real estate Al, there’s cash on cash and there’s a cap rate. We haven’t talked about this in a while. Let’s break this down because I think people, like our friend Susan in Florida, buy what you know, I love real estate. Which is perfectly fine. But does she really know anything else in regards to how she would compare that to?

Al: That’s a good point. Let’s start with cap rate. That’s very simple. That’s just going to be your cash flow without regard to any debt that you have. Principal and interest take that off the table. So whatever your cash flow is divided into the value of the property. In San Diego, where we’re from, it’s common to have a cap rate on a single family home rental of about 3%. Maybe 3.5%. Not a great cash flow vehicle, but that’s roughly what you’re getting. Sometimes it’s less. Generally the more expensive the property, the worse the cap rate is.

Joe: Because you’re dividing your cash. Let’s say you’re getting $4,000 a month in rent in this $2 million place or $1 million house or I’m in Florida, I’m getting $3,500 in rent for a $500,000 house. You can look at, what am I really receiving in regards to cash flow? You just divide that into the market value to look at what percentage is that? Is that 1%? 3%? Then you can say, can I invest my capital in an alternative vehicle that I believe could do better than 3 %. That’s how you want to compare any type of investment vehicle. If I’m looking at CDs to municipal bonds, to real estate, to individual stocks, to an ETF, to a mutual fund, you’re looking at the growth potential of the overall investment, the income potential of the overall investment, the tax benefit, If there is any. That’s going to equal your total return. I remember back, Al and I have been doing this show now way too long. But in the credit crisis, people were like, I love my real estate because I can drive by and look at it.

Al: Sure. Then it went way down.

Joe: All right, drive by and look at it now. What’s it worth? It’s worth half.

Al: I watched it go down.

Joe: I just watched it. My house is still there, but it’s worth half. Is that a reason to own it?
Because you could drive by and look at it?

Al: You bring up a good point. Cash flow is not the only rate of return, it’s also appreciation and tax benefits, debt paydown and so forth. Here’s a mistake that some people make when they say, I’m never going to sell my real estate because it’s such a good investment vehicle. Their only benefit, if that’s the case, is the cash flow, which maybe it’s 3 % not saying that’s bad, but that’s what you’re getting. What about all the appreciation? It’s appreciating 4 or 5% per year. That’s pretty good. It is good. But who’s going to get that? Your kids? As long as you understand that. Because you’re not going to get it. If you never sell, your kids are going to get it. You’re doing all this work, building all this equity for your children, and maybe that’s your goal.

Joe: Is the goal really to be; I want to leave a lasting legacy to my overall heirs. That’s a perfectly great strategy.Or is your goal; I want to maximize my overall retirement income. You can still do real estate. It’s not like we’re telling you to sell and go into a stock portfolio. But you look at the equity and then you think I’ve accumulated a lot of equity. Maybe I can upgrade now. Maybe I can 10-31 exchange this into a multi-unit? Where historically you might be able to get a better cash on cash return. Maybe you look at apartments. There’s multiple different vehicles that you can look at. My point is that you have to examine each of your investments. Just understand what your total return is on it. Then you can make better decisions versus emotional decisions. Because she has an emotional attachment towards those properties, because I bought them, I know them. I want to give them to my kids. Guess what, when we hit the pearly gates and when we die, they get a full step up in tax basis. They won’t have to pay tax. They hate real estate. They’ll sell it the next day. Boom, that’s her “Roth strategy” to get tax free dollars to the kids. Perfectly great strategy, because now she’s just leveraging the growth for the kids and not necessarily participating in that growth for her and her husband.

Al: It’s always there if you need it. If something comes up in your life where you need more capital, you can sell the property, you can fall back on it. Joe, I’ll just briefly say cash on cash. That’s just simply your net cash flow after your loan and interest, whatever that is divided by your equity. Properties worth $500,000, the loan is $400,000. You got $100,000 equity and your cash flow is $1,000. Divide that into the $100,000, you have a 1% cash on cash, in that particular example.

Joe: Cap rate is the total market value of the overall property or the asset.

Al: Divided by the cash flow, not including principal and interest.

Joe: Cash on cash is taking cash flow divided into your equity.

Al: Some people add back the principal because they figure they’re paying down debt. There’s different ways to look at it. In Southern California, unless you put a huge down payment down your cash flow is not positive, it’s negative. If it’s negative now what’s going to happen when something goes wrong with the property or the economy changes and it’s hard to get the same rents that you were getting. Just be aware of these things. A lot of people have been hurt, myself included, on this strategy. I actually love real estate. I still have three rentals. I love real estate. Just understand what you’re doing and what the risks are.

Joe: You can make a ton of cash. We get a lot of FIRE questions from people that are looking for passive income. Who was that one? I’m not going to say anything derogatory about him, but I guarantee he’s filing bankruptcy.

Al: I know who you’re talking about.

Andi: I know who you’re talking about as well.

Joe: That blogger. I guarantee you that guy does not have a blog. I don’t even know if he’s still around.

Andi: I’ll see what I can find. I’ll see if he’s still around.

Al: The problem with that approach?

Joe: What the approach was; He was just leveraging, leveraging, leveraging, leveraging and leveraging. It’s like here I bought this one property for $100,000 and I put 10% down and then the market went up so I refinanced. I pulled some dollars out of this rental and I put that as a down payment for another one. I’m leveraging this one and I’m buying this one. I got this great big large portfolio. I’m fully levered to high hell. Then the market turns a smidge. You have a vacancy. Something goes wrong, your house of cards blows up.

Al: It blows up. It’s happened to almost every real estate guru out there. It happened to me to a certain extent. I read the stuff and I thought this wouldn’t happen. I’m in Southern California, properties don’t go down. Then the Great Recession hit and properties went down 25, 30% and were in San Diego, where we’re living. I had some properties in Las Vegas that went down over 50%. All of a sudden your loan to value your equity goes from a nice positive figure to negative.
Your value is less than your debt. You have trouble paying the mortgage because you can’t charge the same rents because no one has money.

Joe: No one has a job.

Al: Just factor all this in.

Hey, if you aren’t subscribed to the YMYW newsletter you may not know that tomorrow, Wednesday February 16th at noon Pacific time, Big Al Clopine will be presenting a free live webinar on Alternative Retirement Income Sources, including real estate, reverse mortgages, potential side hustles, and passive income streams. He’ll share the pros, cons and mistakes to avoid to help you boost your monthly income in retirement. Moderated by yours truly, we’ll make sure free webinar includes time for you to get your retirement income questions answered by Big Al, live. Go to the podcast show notes at YourMoneyYourWealth.com right now to register, and to sign up for the YMYW newsletter so you don’t miss future events. Click the link in the description of today’s episode in your podcast app to go to the show notes and sign up.

The Stacking Rule and the Foreign Earned Income Exclusion (Jeff)

Joe: Jeff says “Joe and Al, greetings from sunny Singapore.” Singapore.

Al: Singapore. Have you ever been?

Joe: International or global? No I’ve never been.

Al: Me neither. My son Rob has been.

Joe: I have a question regarding the stacking rule.

Al: There’s a name for those funny things they say on the planes.

Joe: I suppose. I mean, maybe.

Andi: It’s called a sea plane.

Al: I know. But the attachment that goes on the wheel?

Andi: They have boat-like hulls, also known as flying boats.

Joe: flying boats.

Andi: There you go, Oh, actually those with separate pontoons or floats as float planes. So there you go.

Joe: I know what you’re talking about, it’s called a pontoon.

Al: You party on those things.

Joe: Yes I do.

Al: On those little things that go on the wheels.

Joe: I got an oar and a six pack of Coors Light just sitting on them.

Al: On your lap.

Joe: Yeah. “I have a question regarding the stacking rule in the foreign earned income exclusion.” We got Jeff in Singapore earning some cash in Singapore. “We can use the foreign earned income exclusion to exclude $108,700 of earned income. If this is all of our income, our EGI would be zero. Can we then go into our brokerage account and step up basis $109,000 and be in the 0% tax bracket for long term capital gain? Or does the foreign income exclusion get added back when harvesting gains?” Let’s stop there, and Al can explain what he’s talking about in regards to the foreign income exclusion. We have a big military base here in San Diego. Navy and Marines, Thank you for your service. We have spouses of those armed service individuals that might do some occupation in another country, such as, let’s say, Japan. Then there’s this foreign income exclusion that basically would zero out someone’s income.

Al: Here’s what it is, is if you work in a foreign country you’re going to be taxed in that country’s tax system. That’s just the way it works. What the U.S. has said is you can earn about $108,000 of W-2 earnings, salary, and we’re not even going to count that and you’re U.S.return.

Joe: We’re not going to tax it, U.S.wise. You’re just going to pay, whatever country that you’re in, taxes on their system up to that $108,000.

Al: Here’s the mechanics. You actually do include the $108,000 on your U.S. return. But then you get a deduction. It’s an adjustment to income on your tax return. The net effect is it zeroes out as long as it’s $108,000 or below. If it’s above that then you’ve got to pay tax in the U.S. as well as the other country. Which then leads to foreign tax credit. That’s a whole nother story. In this example, the question is; is this going to be added back for capital gains purposes? Because what he’s saying is he has about $108000 of income that goes away from the exclusion. Can he sell about $100,000 of capital gains and pay no tax, stay in that 12% bracket? The answer is yes. The capital gain rate is based upon taxable income. If your taxable income is in the 12% bracket or lower, you don’t pay any capital gains, long term capital gains, for at least federal income tax purposes. There’s no unusual, strange add back just for the long term capital gain calculation.

Joe: This is another example of the capital gains sitting on top. You’ve zeroed your ordinary income out. Capital gains would go on top of the ordinary income. Because he had zero ordinary income on his U.S. return, he can sell up to the top of the 12% federal tax bracket and pay zero capital gains on those stocks.

Al: That’s a good question. There’s a lot of confusion as to the capital gains tax based upon your income, your adjusted gross income or your taxable income. It’s based upon your taxable income. Your foreign income is already net against the foreign earned income exclusion.

Joe: He’s got another follow up. “If the answer is exclusions are added back in for determining taxes, is it true for the sale of a home as well. That is, I know we can exclude up to $500,000 from a sale of our home. If we were to sell our home, assuming we now live in America and this is our primary residence. And wanted to also sell $25,000 of stock in our brokerage account. Would the $500,000 assuming this was our gain have to be stacked back and put this into a higher long term capital gain bracket. Can you point me to information addressing these concepts? Kind regards Jeff.” Now he wants to sell his home, that’s a 121 exclusion. You automatically get $250 or $500,000 excluded from taxes if you lived in the house 2 out of the last 5 years. If he sold his house and sold the stock, you get the exclusion. He gets the foreign income exclusion plus his taxable income is zero. He could sell up to the top of the 12% tax bracket and pay 0% tax.

Al: It’s the same answer. There’s no weird add back on the exclusion with regards to your sale of your home. There’s no add back on the foreign earned income exclusion. It’s just your taxable income. Start from there. Then if you end up at zero, you can sell to the top of the 12% bracket. For a married couple, it’s a little over $100,000. I’m just using $100,000 as the number. The reason I get that is because there’s a standard deduction so you can have more income than the top of the 12% bracket, which is about $83,000.

Joe: “P.S. I went home this winter to North Dakota. Average temps were in the negative most of the time. I didn’t mind a bit as temps, most days, in Singapore are in the 90s.” He’s from North Dakota.

Al: You probably relate to some of those winters.

Joe: Yeah, I don’t go home in the winter Jeff. What were you thinking?

Al: But you used to live there?

Joe: Yes. I’ve lived here 20 years.

Al: You don’t typically go back.

Joe: I left at 18.

Al: Your mom comes out in the winter.

Joe: She’s coming out next week. Two months, probably. Three months. I just put her in the garage.

Andi: with a beer fridge

Joe: Yes, next to the beer fridge. I just got to go load up on Bud Light. She likes Bud Light. I like the Coors Light.

Al: Put her to work. Just text her when you need a beer.

Joe: I guarantee Jeff in North Dakota. He’s got a refrigerator in his garage. Even in Singapore.

Al: I don’t think you need a refrigerator in the garage in winter.

Joe: in North Dakota, at least not in the winter. The winters are awful. It was terrible, in the negative. Very complex question, Jeff. Nothing too bad for Big Al though. The big brain. We used to do this segment called Stump Big Al. Remember that?

Al: Yeah it never happened. Except when it happened, frequently. All the time.

How Destroyed Will We Be On Taxes If I Don’t Work After Retirement? (Andre, Bavaria, Germany)

Joe: We got Andre from Bavaria, Germany.

Andi: You said it right. Well done.

Joe: Bavaria. Have you ever been?

Al: Not to Bavaria, but I’ve been to Germany. I’ve been to Munich.

Joe: What did you do there?

Al: Go to Hofbrau Haus, drink some beer.

Joe: What, a hopper house?

Al: Hofbrau Haus.

Joe: Half browe.

Al: Hofbrau. That’s like their famous beer garden. There’s others, too.

Joe: What’s that celebration?

Andi and Al: OktoberFest.

Al: I was not there during Oktoberfest, but yes, they would do a big one there.

Joe: Got it. “I’m 37 now and will be able to retire from my current job, U.S. Army, at 45 with $70,000 pre-tax retirement income. My wife and I invest $80,000 a year and are on track to have $2 million in our brokerage account by the time I retire.” Thank you for your service, first of all. What is he? He’s 37. He’s going to retire at 45 and he’s going to have $2 million.

Al: Good job.

Joe: Guys legit. “We also have a rental property worth $700,000 that we’re breaking even on, rent wise. I still plan on working after retirement number one, but want to have your “opinion to do” otherwise?” Using the 4% rule, I can take out $80,000 from my brokerage account annually without depleting my portfolio, resulting in $150,000 annual passive income. My wife will likely still work, making about $100,000 a year. How destroyed will we get on taxes if we decide not to work? Let’s take it a step further. What if we pay off a rental property and add $50,000 in annual income from rent? Thanks.” There’s stuff to unpack here.

Al: Yeah, there’s plenty.

Joe: First of all, congratulations Andre from Bavaria, Germany. I don’t think he’s from Bavaria, Germany, if he’s stationed there. He’s in the U.S. Army, saving a ton of money. He’s 37 and wants to retire at 45. This guy is jamming as much money as possible into his brokerage account. He thinks he’s going to have $2 million in a brokerage account. In a brokerage account, you’re subject to capital gains tax which is 0%, it could be 15%. It could be 20%, really, depending on your taxable income and what tax bracket that you’re in. He’s got a rental property. Not sure what the debt is on that, but he’s breaking even on it. If he pays off the debt, then he gets another $50,000 of income. His wife is making $100,000. He’s thinking, I’m going to take 4% out of $2 million is $80,000. Then he’s got another $80,000 brokerage account without depleting my property, resulting in a $150,000 annual passive income.

Al: Yes, I think that’s $70,000 pension plus the $80,000 pulling from the brokerage. I think that’s where he gets $150,000.

Joe: Got it. Okay. Then if the wife still works.

Al: She’ll make another $100,000. Then they would make $250,000 per his math.

Joe: He’s like, how destroyed will we get on taxes if I decide not to work?

Al: If you work, it’ll be worse. I’ll put it that way. If you’re just simply looking at taxes.

Joe: I don’t think he’s going to get destroyed in taxes at all.

Al: I don’t, either. I think he’s a little mixed up. So the $70,000 of pension, Yes, that’s ordinary income.

Joe: Part of that’s going to be a VA pension and that’s tax free.

Al: That’s true, it too could be.

Joe: Have you ever seen someone that has a pension in the military that doesn’t have a portion of that tax rate?

Al: It’s very common.

Joe: Right? Hey I was injured.

Al: Very common. Yup. The $80,000 a year, which is 4% of $2 million, that’s what you’re thinking of pulling out. That’s pulling it out of your brokerage account. You’ve got a tax basis. Let’s say $1 million is what you originally invested and it grew to $2 million. When you pull it out, just being a simple example, then you pull out $80,000.Only $40,000 is taxable. Given that very simple example and that’s capital gains rate. Not the whole $150,000 is going to be taxable. If the wife is working, and that’s another $100,000, that’s ordinary income. What you have here is $70,000 plus $100,000. That’s $170,000 minus the standard deduction, we’ll call it $25,000. So $140,000, $150,000, something like that, before capital gains. That’s in the 22% bracket.
So you fill up the 12% bracket, you’re in the 22% bracket. If you work, then it’s going to push the extra, your salary, into the 24% bracket.

Joe: I think the biggest issue here is that you’re 45 years old. I would not be taking 4% out of my brokerage account at 45 years old.

Al: I wouldn’t either.

Joe: You’re going to deplete the account. The 4% rule does not apply to a 45 year old. It applies to a 70 year old.

Al: Age 65 is where it was first thought of.

Joe: Now we’re even looking at 3% for someone that’s 65. So you’re 45. You want to take 2% out.

Al: 2, 2.5%. 3% would be the upper limit.

Joe: I guarantee he’s probably fairly aggressive because he’s still young and he can go back to work. If the market turns on him and he’s taking 4% out, it’s going to be very hard for him to get caught up. Just because of the simple math, it’s more complex math. If your account is down 25% and then I earn 25% the next year, I’m not whole. You need to earn like 35% just to get you back to square one. If you’re taking out an additional 4% you’re going to have to have a larger rate of return on the rebound just to get your principal or just to get your basis back. Be careful when you start taking distributions. You know you’ve got a great pension. Your wife is going to continue to work. You’ve saved a couple million bucks. I would run the numbers here.

Al: I would say if Andre is going to have that much money by age 45 they’re probably not spending a lot right now anyway.

Joe: He’s probably saving 100% of his income. He’s in Germany.

Al: So in other words, if you have $70,000 for retirement and your wife’s making $100,000 that’s $170,000 just right there. Do you need more than that? I’m thinking no based upon how much is being saved.

Joe: Wow. Do you need more than that? Look at you. Where are you spending your money, Andre?

Al: I’m just saying I don’t think he’s spending near that much right now.

Andi: Hofbrau.

Al: The Hofbrau Haus? I don’t know where Bavaria is compared to Munich.

Joe: Congratulations. The guy is definitely a saver, and I don’t know if he could probably spend that much. Savers have a difficult time spending. I think he’s just spitballing some stuff in the air. And seeing hey, does this make sense? He’s worried about the tax bill. The tax bill is not going to be all that bad, but if he works, how much is it going to be making? If he adds another $100,000 of income on top of

Al: It’ll probably be in the 24% bracket, mostly.

Joe: If your savings are all in a non-retirement account, you’re very tax efficient. If it was all in a retirement account, especially at 45 that thing would probably double by the time he was taking the money out at 60. Then he’s got

Al: $4 million.

Listen to YMYW episode 345 for more on working or retiring abroad – it’s linked in the podcast show notes at YourMoneyYourWealth.com. Pure Financial has been doing free financial assessments via Zoom throughout the pandemic, so whether you’re in Southern California or sitting in a beer garden in Munich – which is in Bavaria, by the way – it doesn’t matter. You can still have one of the experienced financial professionals on Joe and Big Al’s team at Pure Financial Advisors take a look at your overall financial picture and help you choose a path to retirement that works for you. Pure Financial is a fee-only fiduciary, they don’t sell any investment products or earn any commissions and they’re required by law to act in the best interest of their clients. Click the link in the description of today’s episode in your podcast app to go to the show notes. Then click Get an Assessment to schedule that Zoom meeting at a time and date convenient for you.

At What Point Am I Saving Too Much Pre-Tax? (Paul, Cardiff, CA)

Joe: Let’s go to Paul from Cardiff; “At what point am I saving too much in my pre-tax accounts? I’ve been contributing to my 401(k) since I was 24. I’m 46 now. I’m concerned when it’s time to withdraw from my retirement accounts, it would push me into a higher tax bracket. Should I put more contributions into my Roth 401(k)?” Thanks for the question, Paul. Paul is jamming, all money pre-tax into his 401(k) since he was 24. He’s now 46.

Al: Now realizing, Oh, when I get to 72, this could be a pretty big number.

Joe: Or 65 or whenever he retires. So Alan, you could give the CPA advice of when you should go pre-tax and after-tax, and I’ll give you real-life advice.

Al: I’m going to take it in a little different way. I’m going to say, Paul, I think it’s great you’re saving. Sounds like you’re saving a lot, which is fantastic that you’re already now starting to worry about too much accumulation. Good for you. Now, if you could go back 20 years, when you’re in your 20s, you should have been doing Roth because you were probably in a lower income tax bracket. That could have solved this whole problem. For our listeners that are in their 20s. Switch to Roth right now, if you have that ability with your 401(k). Paul, in your case, you went all deductible, which is fine. I’m glad you have it. I think at this point, the CPA answer is this, that Joe was alluding to, it depends upon your tax bracket today and it and then your tax bracket in retirement. You run projections to figure out what this is going to grow to. What is your Social Security, how much required minimum distribution. Do you have pensions? What does that income look like? What is that bracket versus today? That’s a CPA answer, but that’s not the entire answer which you’re going to explain.

Joe: Paul and I are roughly the same age here, and if I had all of my dollars sitting in pre-tax 401(k) plans, I don’t care what tax bracket Paul’s in. I’m going to Roth. 100 %. Because you still have 20 years of accumulation. I don’t care what you’re paying in tax now. I believe tax rates are only going to go up. If you have money in Roth IRAs, it’s going to give you the diversification that you need long term. That can keep you in lower brackets and it takes the uncertainty of higher taxes off the table, totally. You’re going to pay tax today at whatever rate that you have. Then you’re going to have those dollars compound 100% tax-free for life. Then for your spouse’s life and then the kids’ life. It is one of the best vehicles by far that this crappy retirement system ever came up with. I would take advantage of it before they take it away.

Should I Transfer Funds to Roth IRA Before the Tax Brackets Change? (Edward)

Joe: We got Edward, “With the Tax Cuts Act ending in January 2026 and a combined income of $80,000. Should I transfer some funds for my traditional IRA of $250,000 to a Roth that only has a few hundred? I’ve had the Roth for over five years, age 56, married and considering retirement before age 65.” He’s got a Roth IRA with a couple hundred bucks and an IRA of $250,000. He’s got taxable income, or he’s got a combined income of $80,000 should he transfer. It’s called convert. So you’re not transferring, you’re converting traditional IRA dollars into a Roth at $80,000.

Al: You could do about $30,000 almost and keep that in the 12% bracket.

Joe: We don’t know if that’s taxable, ETI or Roth?

Al: He says combined income. I’m just going to assume that’s what it is. You could have, and these are round numbers. I know how you like the round numbers. So $110,000 is your target income. You get a standard deduction of a little over $25,000. That puts you at 85, which is roughly the top of the 12% bracket.

Joe: I would not go any higher than that dollar amount. $250,000 in the overall account. The RMD is not going to be that much and you’re only 56. You want to retire in 9 years. You could get a ton of that money out. Depending on if he’s saving or if he has a really large 401(k) plan, if he has a pension plan. There’s a lot of information we don’t know.

Al: A lot of things we don’t know.

_______

Big Derails today: Cousin Eddie, International travel, fishing in Canada, pontoons, and more, so stick around to the end of the episode.

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