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
May 12, 2020

A mixed bag of questions on everything from spousal solo 401(k) contributions and renaming inherited IRAs to real estate buying strategies (should you cash out the 401(k) to buy a house?) and a perennial fan-favorite, ripping on annuities. Plus a healthy dose of Roth conversion planning thrown in the middle.

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Show Notes

  • (00:51) Do Solo 401(k) Contributions Include Spouse Contributions?
  • (04:32) I’m Taking RMDs From an Inherited IRA. Can I Put the IRA In My Name?
  • (09:07) We Live in Our Kids’ Rental House. Should We Buy It for Estate Planning Purposes?
  • (13:00) Should I Cash Out My 401(k) to Buy a House?
  • (16:19) We’re in the 37% Bracket. Most of Our Savings Is Pre-Tax. Should We Do Roth Conversions?
  • (21:51) Should I Contribute to Pre-tax Retirement Accounts or to Roth?
  • (24:51) Roth Conversions and Affordable Care Act Subsidies
  • (28:18) Extended Roth Contributions for 2019, Backdoor Roth Conversions for 2020?
  • (31:13) Fixed Indexed Annuities Only Make Money for the Insurance Agent, Right?
  • (38:21) Annuities vs. Bonds: Insurance vs. Investments

Free resources:

YMYW LIVE WEBINAR TOMORROW! | The CARES Act: Now What? With live, open Q&A with Joe and Big Al, especially for YMYW listeners! Wednesday May 13, 12pm Pacific / 3pm Eastern



10 Tips for Real Estate Investors


Listen to today’s podcast episode on YouTube:



It’s Tuesday and that means the Your Money, Your Wealth® webinar with Joe and Big Al answering your questions live on camera is tomorrow, Wednesday, May 13, at noon Pacific, 3pm Eastern time, and you still have time to register to attend for free! Just go to the podcast show notes by clicking the link in the description of today’s episode in your podcast app and sign up. Today on the Your Money, Your Wealth® podcast, it’s a mixed bag of questions on everything from solo 401(k) contributions and inherited IRAs to house-buying strategies, to the fan favorite, ripping on annuities, with a healthy dose of Roth conversion planning thrown in the middle. I’m producer Andi Last and here with 12 “I don’t know”s, 4 “don’t do it”s, 3 good ideas and a little TMI are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Do Solo 401(k) Contributions Include Spouse Contributions?

Joe: We got Dan. He writes in from San Diego. “On the maximum Solo 401(k) contributions of $63,500, would that include spouse’s contributions in any other IRA such SEP or Simples? In other words, should an aggregate check be done?” Solo 401(k) is basically a 401(k) plan for self-employed individuals. Looks like Dan is self-employed. And he probably has his wife on the payroll and so the $63,500 Al, can you break that down?

Al: Sure. First of all, an employee can put in $19,500 into a 401(k) plan. And if the employee is 50 and older, there’s a $6500 catch up so that gets to $26,000. Now when you’re self-employed you can put the profit-sharing portion in Joe, which is up to 25% of your profits without regard to the 401(k). So that’s how you get to this, $63,500. Because the maximum for self-employed- now we’re talking employee and employer because remember you’re both when you’re self-employed. So it’s $57,000 for 2020 and then $6500 for the catch-up, so $63,500. So that’s where that number comes from in the first place. You have to have a lot of income Joe to be able to put that much in. But assuming that you do, let’s say because you reference $63,500, Dan did- let’s say we’ll assume he’s over 50. So that would mean he could put it at $26,000 of his own and then he’d have to have quite a bit 25% of the difference, close to $40,000. So you’d have to be a lot of profit to be able to do that. But I will say the good news is it’s separate from IRAs, SEPs and Simples. However there is a whole bunch of caveats. So one of which is first of all spouses don’t count in this. So that’s a whole different calculation with spouse and let’s just say Dan, your spouse works for you then she could put in her own contribution of $19,500 or $26,000 total if over 50. Plus you could do a profit-sharing component for her as well. If she has her own business then she can do her own thing. So she can then set up the plan that has nothing to do with your plan in that particular case. But if it’s an individual business you can only have a SEP or a Simple IRA or a 401(k). You can’t mix and match those. But you can Joe, you can have a regular IRA in any of those cases and still get to put money into that as well.

Joe: So if the wife works for him, the $63,500 is the maximum contribution for Dan. But if the wife works, she can do roughly the same. If there are enough profits within the overall business.

Al: Yes. She would have to have- a couple ways to do that, one is you would- Dan would have to pay her a really large salary to be able to do that. Or the second way I’ve seen this happen before sometimes as a sole proprietorship- they set it up as a joint sole proprietorship, so the self-employment income is split 50/50. So that’s a possibility too.

Joe: But at least she could put in $26,000 just as the 401(k) contribution for hers and the catch up if she’s over 50.

Al: Yeah exactly. Assuming she has that much income.

Joe: Right right right. So pay her $26,000, probably pay her $28,000. And then she could fund almost 100% of her paycheck, dollar for dollar, within the overall 401(k) plan.

Al: Yeah. And the reason why Joe you have to pay- let’s say in this case, your spouse a little bit more than the $26,000 is because you have to have money withheld from her pay for Social Security and Medicare tax.

Joe: Payroll tax.

Al: Yep.

Joe: Good question Dan.

I’m Taking RMDs From an Inherited IRA. Can I Put the IRA In My Name?

Joe: We got Helen writes in. “Hi Joe, Al and Andi. My name is Helen.” Hello Helen. “Thank you for your service during the pandemic. I love listening to your show.” Well hopefully that puts a little smile on your face Helen. “I find the information very valuable. My question is that my husband passed and he had an IRA account but I have to make a minimum withdrawal every year. How can I switch his account to my IRA account? Thank you and hope you stay safe and healthy.” Well, Helen, a couple of things here is that with the new CARES Act there are no required distributions for 2020. So if it’s an inherited IRA you would have to take the distribution based on your life expectancy. You could waive that. In the future, if you want to waive future RMDs from your husband’s account, you could roll his account into yours. So that’s just a custodial transfer. You would just take his account and just transfer it to your account. So you would consolidate those two accounts just under your name. So if you’re under 72, you would then avoid the required minimum distribution. If you’re under 59 and a half, then you would not want to do that potentially, because you would have zero access to the money until you turned over 59 and a half without that 10% penalty. So sometimes when a spouse dies they keep it in the deceased spouse’s name so they would have full access to the money without a 10% penalty no matter how old they are. But if you’re over 59 and a half and under 72 where you don’t want to take the distribution which sounds like this is the case, you can just then take his IRA and roll it into your IRA or transfer it into your IRA. So very, very easy to do. Very simple. You can just consolidate the accounts there. But this year, if you don’t want to do it right away or anything like that, there is no required distribution on an inherited IRA or your own IRA. So you’re good to go. You wouldn’t have to do it right away. But in the future, if you want to make it easier, just consolidate.

Al: Yeah I think Joe, what about the situation where Helen’s older? Let’s say her husband was 75 and she’s 80, so then what would you suggest?

Joe: Then it would be if she rolls it, then the RMDs going to be bigger because the RMD is based on her life expectancy. So she would still have to take two RMDs, one on her life expectancy depending on what her balance is. And then she would still have to take the one for the deceased husband based on his life expectancy. So if he kept it in heirs, she still follows his RMD through his life expectancy if it keeps it in her name. But it’s a spousal-  only spouses can roll their money together. So non-spouses cannot move their money together. So let me restate that now that I’m thinking about- so she kept it in his name as an inherited IRA. But she is- well it depends on when he died. So if he died prior to his required beginning date you could reset the RMD based on her life expectancy. But if she’s older she could keep his- that’s a good question, Al. But it doesn’t really matter. We’re splitting hairs here. I think you’re just trying to quiz me.

Al: I am.

Joe: Secret shopper or something.

Al: You’re assuming that Helen married an older guy. Maybe she was- maybe she married a younger guy.

Joe: Well Helen does sound sexy.

Al: It’s a great name.

Joe: I don’t know.

Al: Anyway, the point is you can- when you’re married and your spouse passes you can either keep it in your spouse’s name or put it in your account. And the rules are going to be a little bit different depending upon what you decide to do. She also asked how does she do it. That’s just going to the brokerage house or bank and just putting in your own name. Right?

Joe: Yeah basically. Or just- if she has an IRA she could just put it in her own. I think that’s what she has. “How can I switch his IRA to my IRA account?” You would just do a transfer. Just say ‘please consolidate the two accounts.’ Or if one’s at Fidelity and the other one’s at Schwab, you would just get paperwork from the one with the deceased spouse and say ‘I’m moving this into this account number.’ If you need help Helen you know where to find us. I can walk you through it. No big deal.

We Live in Our Kids’ Rental House. Should We Buy It for Estate Planning Purposes?

Joe: We got Francine. “My husband and I have been living in our daughter’s rental house for about six years. Originally the plan was to buy but never did. We are in our 60s. Should we buy? Or what direction for estate planning should we go in?” So, I’m not really- understanding what the question is. Should you buy it? I don’t know.

Al: Depends on if you want to or not. But let’s go to the reasons why people buy homes. They like pride of ownership. They feel like when they fix it up it’s their home. Maybe if it’s your daughter’s home, maybe you feel the same. I don’t know. Another big reason why people buy is because of inflation. So you buy a home at a fixed cost and you have a fixed mortgage. And inflation doesn’t really change that except for property taxes and of course maintenance on the property. But the mortgage payment stays the same. And yet you talk to anyone that’s lived in say California or a state that has high appreciation that bought 20 years ago, 25 years ago, they’re pretty happy they did because the mortgage payment is way lower than what the rent payment would be. On the other hand maybe they got a great relationship with their daughter and their daughter is willing to rent it to them for rest of their life which could be another 30 years. I guess if I’m them-

Joe: We don’t even know if they’re paying rent.

Al: We don’t know that either.

Joe: They’re just freeloading on the daughter’s rental house. I mean what’s kind of throwing me off is ‘what direction for estate planning should we go?’ So if they were to pass- let’s say in the next 30 years. So it’s the daughter’s house, ‘should we buy it from the daughter?’ Maybe? Would that help with the estate planning?

Al: Well not really estate planning. But what it could do- like let’s say Francine lives in a highly appreciating area and they own the home for 25 years let’s just say. And maybe the daughter is going to inherit it afterwards.

Joe: Exactly.

Al: So if the parents own it, then when they pass the daughter gets a step-up in basis so there wouldn’t be any taxation on sale. So that could be an advantage. As far as estate planning, it’s over an $11,000,000 exemption per person so that doesn’t really apply to most people. I think- that’s the only thing I could think of is step-up in basis issues. And I think a lot of people don’t really understand that which is when you pass away your spouse in California because it’s a community property state, gets a full step-up in basis. Or if the both of you pass away, your kids get a full step-up in basis. And what that means is like let’s say you bought the home for $200,000 and then husband or wife pass away and the home’s now worth $1,000,000, let’s just throw out an example. So now when the kids get it their new tax basis is $1,000,000. It’s as if they paid $1,000,000 for this property. And so if they sold it for $1,000,000 there’s no gain or loss on sale. That’s what a step-up in basis is. And I will say one thing to realize is when there is a husband and wife step-up in basis if you’re in a non-community property state which is in most states by the way, I think there’s like 11 or 12 that are community property most in the West although not completely. If you’re in a non-community property state and the first spouse passes the surviving spouse only gets a 50% step-up. In other words, for half of the property gets stepped up to the new value and the other half is whatever the old value was. So that’s- maybe that’s what she’s talking about. But estate planning- a lot of times we think about that in terms of state taxes and I don’t think that’s going to be an issue here.

Joe: I don’t think so either. So I don’t know if the daughter doesn’t charge her rent to live in it-

Al: That’s a good deal.

Joe: Right? Go for it.

Al: But then you have to be nice to your daughter for the next 25 years or so.

Joe: Exactly.

Should I Cash Out My 401(k) to Buy a House?

Joe: We got Frank. He writes him from- doesn’t say. “$50,000 pension, two rental income $35,000, just married, want to withdraw all $160,000 of 401(k) to buy a home. I know I’ll pay the tax, told 20%. What’s a better strategy?” Who the hell is Frank? Who is this guy?

Al: A better strategy is to not do it.

Joe: Don’t do it Frank.

Al: This is what happens. People think I get this money out of the 401(k), I buy a house. I heard the house is a tax deduction so it’ll offset the money from the 401(k). No problem. Big problem is the money coming out of the 401(k) is fully taxable and if you’re under 59 and a half there’s a penalty to boot. And if you live in California, you’ve got a California penalty as well. So when you add the penalties and the taxes to the states and the feds it’s- at least in California, it’s usually at least a 50% tax. So you pull out $160,000, put that into the house, and then you got a bill for $80,000 on April 15th. Not a good idea.

Joe: He’s in the 22% federal tax bracket because he just got married. I don’t know what his wife makes, if he pulls a $160,000 out. So you’ve got $50,000 pension, plus the rental income, plus the $160,000, so you add all that up. You got 22% federal tax plus another 10% state tax. If he’s under 59 and a half it’s another 10%. So now you’re at 40%. So he’s going to owe $80,000 or $60,000 next year. What’s he going to do? Where is he going to come up with the cash to pay the tax?

Al: He’s gonna go back to the 401(k).

Joe: But he doesn’t have anymore. He’s going to blow out of the thing. And guess what, his wife that just married him is going to divorce his ass and take half the house. So he’s totally screwed. That’s what happens when you blow out of your retirement account.

Andi: So what’s a better strategy?

Joe: What’s a better-  Don’t do it.

Al: A better strategy is to buy the home with whatever money you have for a downpayment, finance the rest, and get really low interest rates. Just do it that way.

Joe: He’s got two rental income, $35,000. Maybe you take some leverage out and then have the renters pay- take a loan out at low interest rates. If he’s got rental income, then that rental income can pay for the debt service. He could put a downpayment down. I don’t know. I mean there are all sorts of ways. But he’s kind of a- ‘what’s a better strategy?’ Throwin’ it at me like I’m some kind of jackass.

Andi: He does listen to this show.

In the podcast show notes, I’ve shared our Estate Plan Organizer for Francine, and 10 Tips for Real Estate Investors for Frank, and for you too. Click that link in the description of today’s episode in your podcast app to access the full transcript and all of the free financial resources waiting for you. If you have money questions, click the Ask Joe and Al On Air banner in the podcast show notes and send ‘em on in. Or better yet, register for tomorrow’s YMYW webinar there in the podcast show notes and Joe and Big Al will answer your questions in real time, live on camera. If you’re listening to this after noon Pacific on Wednesday May 13, the webinar already happened. But unless it was an unmitigated disaster we will probably do it again, so be sure you’re subscribed to the podcast so you don’t miss the next live YMYW webinar.

We’re in the 37% Bracket. Most of Our Savings Is Pre-Tax. Should We Do Roth Conversions?

Joe: “Hi Joe and Al. I recently started listening to your podcast and I really enjoy it.” Thank you, Monica. “I know that Roth conversions are a hot topic and for the most part recommended on your show.” What do you mean for the most part? That’s all we recommend.

Andi: I think I do recall there was one time where you actually said don’t do a Roth conversion in this case.

Joe: There have been multiple times where I said Roth conversions would make zero sense.

Al: I told you, Joe, someone from my church calls me Dr. Roth. So I guess we do talk about it a lot.

Joe: Well they keep asking us questions on it.

Al: I know, right?

Joe: “I have a question. Our household income falls into the 37% tax bracket and we are about 10 years from retirement. We have some Roth money but the bulk, 65% of our savings, is pre-tax.” 65%, that’s not that bad. We usually see like 90% in pre-tax.

Al: Exactly.

Joe: “One would assume that we will be in a much, much lower tax bracket but we are convinced that taxes will slide up. We are unable to contribute directly to a Roth IRA. So this past year we started to fully fund our Roth 401(k)s to avoid commingling pre-tax and post-tax, non-deductible IRA money. However, there is a small amount of non-deductible IRA money sitting in an IRA already. Would you suggest that someone falling in the 37% tax bracket convert now since the market is down significantly and our portfolio’s down 22%? I guess it seemed to make sense to convert now and pay taxes on a lower value. What are your thoughts? Thanks so much.”

Andi: Even I know the answer to this one.

Joe: What is the-

Andi: Yes.

Al: What is the answer?

Andi: Do it do it do it do it. Right?

Joe: I don’t know. 37%. I need more information. How much money does Monica have? Right? I don’t know. How does she know that she’s gonna be in the 22% tax bracket? What type of tax projections?

Andi: No, no, no.  She said her portfolio is down 22%.

Joe: Oh, her portfolio is down 22%.

Al: She’s in the 37%.  I think- I mean it depends. The real answer is it depends on how much-

Joe: How much is in the retirement account? Then you can kind of look at- is she going to even sniff the 37% tax bracket in retirement.

Al: But I guess in a case like this when I guess they’re in a 37% tax bracket that’s as high as it can go, plus state. So you definitely want to be careful. This is an example of when you’re careful on doing conversions. Now another hand let’s just say-

Joe: If you’re in the 37% tax bracket, they’re making over $500,000 and for individuals making over $500,000, hopefully, they have monies saved in 401(k) accounts. So I’m not sure how old she is but let’s say if there’s significant- they’re 10 years from retirement, if there was like a couple of million dollars in the overall retirement account and they want to retire in 10 years then I might consider-

Andi: You’re running away from your microphone Joe.

Joe: My shirt’s itching my back. Sorry. That was probably too much information there. I haven’t showered in like two weeks.

Andi: No that was TMI.

Al: And I was I was watching this whole thing on video and it’s like man, what are you doing?

Joe: I forgot we’re on video. I was going to take my pants off.

Al: It’s a good thing this is radio only, a podcast. Geez.

Andi: It’s only you and I who have to be offended Al.

Al: I guess. I would say- like let’s say most of the pre-tax is in 401(k) and if the IRA is small and there’s some pre-tax, go ahead and convert it, get it over with. Then you can do some Backdoor Roths which would be cool. But generally the premise Joe is right, which is even in a high bracket if you convert down while the market’s down and the recovery happens in the Roth then that tax rate doesn’t seem nearly as bad. So that’s one way you can look at it.

Joe: And then you can also journal shares too. If you got an IRA, let’s say that you have other asset classes in your IRA so the entire portfolio is down 22%. But maybe Monica has other positions that’s down more than 22%. Because as an aggregate if the portfolio was down 22%, I would imagine some are down less than 22% and some are down more than 22%. So maybe you journal the shares of the stocks or mutual funds or whatever that you’re holding that’s down more, you can just journal those shares into the overall Roth IRA. If it’s IRA to Roth IRA. So there are multiple different kinds of planning opportunities that you have here but this is a little dicey. You’re in the 37% tax bracket. The portfolio is down 22% but you give us no other information. We’ve met people that are in the 37% tax bracket too Al, and they have $50,000 saved and they’re 60. And they don’t live lavishly.

Al: That’s what they tell us. So, in that case, do not convert because you’re gonna be in a really low bracket in a few years.

Joe: There’s a little bit more planning involved. And so I’m going to say no. I’m gonna say no. See?

Andi: Wow.

Joe: Right there.

Al: Look at that. Very cool.

Joe: Until I get more information then I’d probably say yes.

Andi: Right.

Should I Contribute to Pre-tax Retirement Accounts or to Roth?

Joe: We got Jackson again from NYC. So taking advantage of us are ya Jackson? He goes “Thanks for the very informative show and for answering my last question about pulling Roth contributions from my Roth 403(b) that were rolled into a Roth IRA. My next follow up question is if you can go over how one would decide if they should be contributing to a pre-tax versus Roth in their workplace retirement accounts. My wife and I are in the 22% tax bracket and we have access to two 403(b)s and one 457. All of which could be either pre-tax, Roth, or a mix of both, which with doing a mix of Roth and pre-tax, I think we can stay in the 22% tax bracket for quite some time. At retirement, my wife will have a pension that is projected to be around $40,000 or $50,000 in today’s dollars. However, that is still about 20 years away. Thanks again.” Ok. Jackson, so a lot of things that we’re missing here. I would want to know, if you’re fully funding two 403(b)s and a 457 and you have 20 years left to retirement and how long were you funding those, you’re gonna have a ton of money in retirement accounts.

Al: We’re talking millions.

Joe: So I want to know how much money you have in retirement accounts right now to determine what is the appropriate mix. Because I would probably max out more Roths if I had a ton of money in a retirement account. He’s in the 22% tax bracket, there’s gonna be a pension, Social Security and a big chunk of money that’s coming out. I don’t know. I like Roth with the very limited information we know.

Al: So here’s what we know- that Jackson’s wife’s pension will be $40,000 to $50,000, let’s say it’s $50,000. And let’s say between the two of them their Social Security will be $50,000 just to make up a number.

Joe: If she has Social Security because there are 403(b)s.

Al: Oh that’s true. She may not have it, so let’s call it $30,000. So $30,000 plus $50,000, that’s $80,000. Not all that Social Security is taxable. So now you’re in the- call it $75,000. We don’t know in RMDs already or what’s in the accounts right now for future RMDs, so that would be nice to know. Basically, the answer is you’d look at tax brackets today versus in the future and we need a lot more information to know that.

Joe: So I think if he’s saving that much-

Al: Chances are if he’s saving that much and it’s in pre-tax it’s going to be a large required minimum distribution. So you might like to get more in the Roth, but we’d have to know more information.

Joe: And he probably gave us that information his previous email and-

Al: We forgot.

Joe: Yeah totally forgot. Sorry, Jackson. But yeah if that’s what you want to- your thought process is right on. It’s kind of figuring out how much money do I have right now? And what’s my mix? What percentage do I have in pre-tax versus Roth right now? If it’s heavily weighted for pre-tax you probably want to heavily weight- then you got the time, value, money, compounding tax-free, tax rates probably going to go up and I don’t know. I think that’s what I would look at.

Roth Conversions and Affordable Care Act Subsidies

Joe: So we got David from Girard, Ohio?

Andi: Correct.

Joe: Thank you. “Hi, Joe and Big Al. My favorite episode from your YouTube channel is Joe’s 40th birthday episode.”

Al: Oh that was a long, long-

Joe: That was just last week.

Al: – long time ago. I was in my 50s back then.

Joe: “Cars, cakes, and financial wisdom. Does not get much better than that. My question is what are your thoughts on Roth conversions when someone is getting the Affordable Care Act subsidies?” Oh boy, gonna go there David. “Is it better to wait until you’re 65 to start converting in order to get the maximum subsidy? Or is getting the money out of the tax-deferred into a tax-free more important long term assuming subsidy does not end until 2024? And I realize the tax laws sunset in 2025.”

Andi: Choosing your words carefully?

Al: I’ll give the correct answer and then you can refute it. So the way you think about this David is you look at- like if you did a Roth conversion and you look at the reduction in your subsidy then you just consider that an extra tax. And I’ll give you a super simple example- like let’s say your tax is $10,000. And if you do a Roth conversion your extra tax is $10,000 and you lose a $6000 subsidy. So now you’ve got to treat it as if your tax was $16,000 instead of $10,000. You compare that to your Roth conversion amount to figure out the effective rate. And of course, that’s federal, only you got to look at the state as well. In my experience if you’re losing your subsidy particularly if you go off the cliff where you lose roughly half to go to zero, it doesn’t make sense to do Roth conversions until you’re 65 unless you go big; unless you do a gigantic Roth conversion perhaps to the top of the 24% bracket to where that extra- that lost subsidy isn’t that much tax relative to your total conversion. What do you think?

Joe: That’s one way to look at it.

Al: That’s the correct answer. That’s the non-political answer. That’s the answer where you try to put your affairs in the best possible situation to save taxes.

Joe: But I think tax rates are going to go a lot higher. I think that you have to take a look at how much money that you have in these retirement accounts to determine what that number is going to be. And I guarantee you David’s got a ton of money in retirement accounts. He’s asking the question. He’s run the numbers. The guy’s an engineer. Guaranteed.

Al: But I have seen folks do a little Roth conversion and their subsidy goes from $6000 to zero. And their Roth tax is $1000 maybe on a $10,000 conversion. And then they lost a $6000 subsidy so they paid $7000 tax for a $10,000 conversion.

Joe: Well then they shouldn’t do a conversion.

Al: That’s what I’m saying.

Joe: I’m with you.

Al: I’ve run the math.

Joe: But you and I have met with over the years, people with millions and millions of dollars-

Al: – that are trying to game the system.

Joe: – with doing the subsidies and this and that.

Al: But that’s how it was set up, right?

Joe: I guess. Follow the rules.

Al: Yep.

Joe: I’m with ya.

Extended Roth Contributions for 2019, Backdoor Roth Conversions for 2020?

Joe: We’ve got David. Kansas City, Missouri. All righty. “Yo.”

Andi: Remember he emailed us once before and signed it PV. So this is PV, now known as David.

Joe: What the hell are you talking about?

Andi: Do you remember we had an email from somebody a few weeks back named PV?

Joe: No.

Andi: Well, that was David.

Al: He makes up names; every question, different name.

Andi: Yes.

Joe: Oh, so you’re doing your spy stuff right? You’re doing your investigative reporting here.

Andi: No. He says here, read on. He actually refers to it.

Joe: “Yo, Andi and the boys. Thank you for answering my previous question. I died laughing at your interpreted 35 yo because it’s years old.” I remember that. Yes, I do remember this email now. “I’m 35 yo-”

Al: -” 35 yo-”

Joe:  “-as this slang, relaxed personality. I live in Kansas City, Missouri and I have yet another question for you. I was told there is an extension for IRA contributions but not conversions. I’m still designating contributions as 2019 contributions since they have not contributed $12,000 yet. I am contributing after-tax dollars to my traditional IRA, then Backdoor Roth-ing it. The contribution is a 2019 contribution but the conversion is 2020. Is that bad yo?” Love it.

Al: Yo.

Joe: No. You’re all good. Yo.

Al: It works fine.

Joe: It’s all good.

Al: The contribution limit dates got extended to July 15th along with the tax return filing date. So you can still do in 2019 contribution.

Joe: You could do a 2019 and a 2020 contribution, all non-deductible and do the conversion, yo.

Al: Yeah that’s right. It doesn’t matter when you do the conversion whether was ’19 or ’20 because it’s got basis in it. There’s no tax. I don’t care when you do it.

Joe: It doesn’t matter, yo.

Al: So if you do the contribution right now it can be for 2019, the conversion will be in 2020. But it won’t cost you any money because you’ve got tax basis. There ya go.

Joe: The only thing that- it’s just the contribution screw a little bit. A couple of bucks.

Al: Yeah a low tax there.

Joe: There’d just be a few bucks. All right David, appreciate it, yo. Appreciate the question.

Once you’ve figured out your Roth contribution and conversion strategies you need to know how and when you can take the money out with the least amount of financial pain. If you haven’t yet downloaded our Guide to the Five Year Rules for Roth IRA Withdrawals, do it now. It lays out the confusing 5-year Roth clocks and tells you what you can and can’t do in an easy-to-read format based on your age and circumstances. Then pass it on to someone else and tell ‘em you got this great information from Joe and Big Al and that they really should subscribe to the Your Money, Your Wealth® podcast. Maybe don’t tell ‘em that Joe doesn’t shower for weeks at a time, though. Let ‘em find that out for themselves.

Fixed Indexed Annuities Only Make Money for the Insurance Agent, Right?

Joe: Got a question from Perry in Jersey. He goes “My silly salutation.” OK.

Al: Good start.

Joe: It’s a great start. “Dear Sirs. The sales pitches for annuities are always you cannot lose money on down years and that on up years you get X percent of the index gains. Dividends are perhaps 20% of stock ownership benefits and it seems the insurance man always gets those dividends. Am I all wet? Or am I correct? Why are we never told this by anyone, even yous guys? Your loyal and obedient servant, looking for another reason to hate the insurance man. Perry in Jersey.”

Andi: Notice he actually said “youse guys”.

Joe: Youse guys.

Al: I like that.

Andi: And actually it’s funny he mentions this because we actually just talked about this subject.

Joe: Was it Perry that called in?

Andi: No, that was  Dudley.

Joe: Dudley. Dudley, Perry. Who was the guy that says Joisey, that writes it out- ?

Andi: Bruce in Joisey.

Joe: Bruce. Yeah. Got it.

Andi: We’re national.

Joe: Do we want to go through this whole thing again?

Al: Well I think we have to. It was asked.  It sounds like a good topic for you Joe. I’m just going to sit back and listen.

Joe: I think a lot of people are getting this, when the markets are volatile I think this is when these become very popular. You might hear a lot of advertisements, a lot of pitches in regards to fixed indexed annuities or equity-indexed annuities or whatever that they’re called nowadays. Basically, the sales pitch is just as Perry is discussing and he’s like you can get stock market-like returns with no downside risk. That is not even close to true. Because they’re trying to basically get you a little bit higher rate than a standard fixed annuity. And the fixed annuity rates are based on the general ledger of the overall insurance company. So you’re looking at like CD rates maybe a little bit more than a CD rate. What an equity index or fixed index annuity- they can’t even call them equity-indexed annuities. I think that’s what they used to call them because they had the term equity in there. It was misleading. So now they call it fixed indexed annuities. And so yes, the growth is tied to an index of some sort. But it’s not like you’re buying into stocks. You don’t even own any stocks at all. It’s a derivative. You’re buying a bond. And it has call and put options on the bond. So if the market does go up you participate in some of whatever call option that they’re purchasing. So it’s based on participation rates. It’s based on spreads. It’s based on all sorts of different things that you have to make sure that you take a look at. And Perry’s right, you’re not getting that dividend because you don’t even own the stock. You own an option. That’s all it is. So markets go up you can participate a little bit in the upside of the overall market. So there’s also let’s say when it comes to participation rates- so if the market goes up 10% you might only participate let’s say in 50% of that. So you get 5%. But then there are also caps on top of that where you cannot make more than I don’t know 3%, 4%, 5%, a month. So there are so many different rules and regulations in regards to these overall products. And it’s all based on what the insurance company really wants to do. They control the contracts. They can change the rules at any time. But the salespeople are out there pitching that you can get market returns with no downside risk. There’s no loss involved here. You can participate and get a nice great return and you’ll never lose your money. I mean it’s just pure BS. So be very careful with that. You’re not investing in any type of- this is not an investment too, by the way. That’s another thing. If someone is pitching this to you as an investment. It’s not. It’s insurance. It’s a risk-free asset because the insurance company’s guaranteeing it. So if it’s risk-free in regards to that can you anticipate equity-type returns? The answer is no. If you want a bond alternative that is fixed in regards to- yes you can’t lose money because it’s guaranteed by the insurance company, then sure purchase it. But just know that you’re going to pay a ton of commission and that you’re locked up and it’s inflexible for many, many years. So you just have to pick your battles or understand what you’re getting at. So Perry’s point is that it’s the sales pitches are more or less it’s an equity. It’s not and not even close. It’s a fixed product. It’s an insurance product. You’re transferring your risk to the insurance company and they’re going to pay you a rate of return. They’re going to pay you the least amount of return that they possibly can because that’s how capitalism works. I want to buy something. I want to buy it at the lowest possible. If I’m selling some I want to sell it at the highest possible. So if I’m an insurance company would I ever offer anyone equity returns with no risk? I mean they’d be out of business.  I mean that wouldn’t make any sense. Here, we’ll take on all the risk. We’ll give you- if the market does 12%, I’ll give you 12%, but if the market loses 20%, you don’t lose a dime. I mean- so just be careful out there.

Al: I think that’s right. And however the income comes to you, which actually it’s more in the nature of interest income, it doesn’t matter it’s inside the annuity. And once it comes out to you, it’s depending upon how you take it out whether it’s annuitized or not. It’s either 100% ordinary income or it’s a ratio between ordinary income and return of capital. So I would say to two quick benefits. One is you don’t lose money unless the insurance company goes broke. So that’s true. And the second thing is it’s like insurance. You’re insuring against a super long life. If you live a super long life, you’ll kind of be glad you have something like this. But for the most of the people, these are kind of rigged to benefit the insurance companies, if you look at a whole collection of people all at once.

Joe: Right. That’s exactly what it is. But this is an equity index annuity so it’s a little bit different than let’s say like immediate annuity where it’s pooled money where they’re going to automatically give you an income stream for the rest of your life. This is a deferred annuity where they’re pitching that you’re going to receive stock market returns with no downside risk. And then that potentially there could be an income benefit rider on it. I don’t know. But just be careful there. Understand what you’re getting into. I appreciate the question, Perry.

Annuities vs. Bonds: Insurance vs. Investments

Joe: We got Martin from Canyon Lake, California. He writes in. “Dear YMYW team. Love your podcast but-

Al: Uhoh, a question mark. How many question marks?

Joe: That’s 1000.

Al: 30?

Joe: That’s a lot of question marks.  “I just finished listening to your podcast where a listener was comparing a bond ladder to an annuity.”

Al: Oh boy.

Joe: “While I agree with what you say most of the time, comparing a risk transfer asset to a bond ladder seems wrong. Maybe this is as much a comment as it is a question. I hate most annuities with the possible exception of a SPIA-” Single Premium Immediate Annuity is what Martin is referring to. “- to help cover an income floor. But comparing these two things seemed wrong. One is an investment tool, one is insurance. Maybe on a future episode, you could break down how someone could breakdown where to position your assets to cover needed expenses versus wants, at least from a 20,000 foot level. Thanks again for a great podcast. Martin from Canyon Lake, California, near Temecula, in case you care.” Course we care, Martin.

Al: Big time, we care.

Joe: Martin, I agree with you 100% and maybe that person wanted me to compare an annuity to a bond ladder and you’re right, I probably missed the biggest component of that is that the annuity is not an investment at all. And so by comparing an annuity to an investment it was wrong in regards for me not to disclose it upfront that an annuity should never be considered an investment even though most insurance agents will consider it an investment. It’s insurance. An annuity is insurance. So you’re absolutely right. When you’re talking about a single premium immediate annuity, that means that you’re going to give the insurance company a lump sum in response to a guaranteed income for the rest of your life. I like those as well. That’s probably the only annuity that Al and I would agree with, in certain circumstances. So it really depends. You know what? I’ll bust this out for you. But we’ll do a show. We’ll talk about it a little bit more because we are running out of time today. Al, Andi, thank you very much. Stay safe.

Andi: Thank you, Joe.

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


As if there weren’t enough in the episode itself, stick around to the very end for some Derails.

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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.