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 23, 2020

This week is a grab-bag: reducing real estate taxes, leveraging new rental income properties, coordinating Social Security benefits with Roth conversions, and bragging about your 401(k) balance. Also, 5-year Roth clocks, converting from your TSP, Roth conversion vs. Backdoor Roth conversion, and paying taxes on conversions. Plus, a chat about Social Security survivor benefits – and freezers.

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Show Notes

  • (00:39) Selling Primary Home, Moving to Rental. How to Reduce Real Estate Taxes?
  • (04:14) Should I Rent Out My Primary Residence Next Year and Leverage New Properties?
  • (07:35) Should I Roll My Old Roth 401(k) to My Current Roth IRA?
  • (08:28) What is a Roth Conversion? What is a Backdoor Roth IRA Conversion?
  • (15:19) Coordinating Claiming Social Security With Roth Conversions
  • (20:16) How Does the 5-Year Clock Work on Roth Conversions?
  • (23:22) If My Husband Dies Before He Takes Social Security, What Happens to My Survivor Benefit?
  • (29:24) Can I Separate My Roth TSP and Traditional TSP Actions to do an Interplan Conversion?
  • (32:55) When Do I Pay Tax on a Roth Conversion?
  • (34:55) Two IRA Contributions & Conversions in a Year: Will This Raise Red Flags?
  • (38:03) Why Not Withhold Taxes From the IRA on a Roth Conversion?

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Welcome to 279, it’s a Your Money, Your Wealth® grab bag. We’re talking about reducing real estate taxes, leveraging new rental income properties, coordinating your Social Security benefits with your Roth conversions, and bragging about your 401(k) balance. The fellas will also get into the ever popular 5-year Roth clocks, converting from your TSP, the difference between a Roth conversion and a Backdoor Roth conversion, and paying taxes on conversions. Plus, a chat about Social Security survivor benefits – and freezers. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA

Selling Primary Home, Moving to Rental. How to Reduce Real Estate Taxes?

Joe: We got Terry writes in from San Diego. “I have a rental inn-” i-n-n, I thought he was- like an inn, like a little hotel or motel or something.

Al: It’s either rental in San Diego or it’s a rental inn in San Diego.

Joe: Yes. He’s got a nice little-

Al: He’s got an extra-

Joe: -an extra room at the inn. He’s got an extra room in the inn.  ” -San Diego. Primary house in Montgomery, Alabama. I’m selling my primary home in Alabama and moving into my rental. Now what is the best way to avoid paying too much taxes?” So he’s got a rental here in San Diego. He’s gonna move into the rental in San Diego because he’s selling his house in Montgomery, Alabama.

Al: Yeah. OK.

Joe: Cool. So now, what say you?

Al: Well first thing I would say, and I just for fun I looked up the median price of a home in Montgomery, Alabama. $120,000.

Joe: Oh all right. What’s it here?

Al: $500,000-ish. Let’s just say. So if you sell a home in Montgomery for $120,000, by definition-

Joe: – you’re not going to pay any tax.

Al: Yeah. Your gain on sale is gonna be less than $250,000. As long as you lived in it two out of the last five years as your principal residence, your gain can be up to $250,000. So let me explain. You bought the home for $50,000 and now it’s worth $120,000. I’m just making up numbers. So in that example you got a $70,000 gain. $70,000 gain is less than $250,000. So you pay zero tax, zero federal tax. I assume Alabama’s like California and state law follows that. I don’t know that for sure. So probably there’s no tax to pay in Montgomery. And Terry, I guess when you move into San Diego, into your house or your inn, whichever it is, let’s say it’s a house. I think that’s what you meant. Then you just have to live there two out of five years and then you get to have a gain exclusion there. But realize the- let’s see- let me think how this works. The gain exclusion-.

Joe: It’s gonna be pro-rata depending on when you put it into service as a rental.

Al: It is because you have to look at the number years it was a rental versus a number of years it was a residence. So you won’t get necessarily the whole exclusion. So it’s a little bit more complicated.

Joe: And then there’s gonna be depreciation recaptured when you sell it. But he can avoid a lot of tax here.

Al: Yeah he can, by living in it two years.

Joe: Right. So you sell- so he’s looking for the best way to avoid paying much tax; so he said much tax. Not eliminate all tax.

Al: So Montgomery, unless it’s a mansion there, I’m okay with- I don’t think you’re gonna pay tax-

Joe: If he’s married you got $500,000 exclusion, if you’re single it’s $250,000. So exclude the gain there. You move here to San Diego. You live in that house two out of the next five years. And then you can sell that. You could take part of the exclusion of $250,000 or $500,000 depending on if Terry is married or single.

Al: Yeah that’s right.

Joe: But then there’s gonna be a pro-rata basis on that exclusion depending on when he put the rental into service.

Al: And depreciation recapture as you say and a lot of people still are stuck in the old rules. You know once in a lifetime, you got $125,000 exclusion on your home. The $250,000 is every two years. That’s not once in a lifetime anymore. Every two years you can sell your residence and get a $250,000 exclusion, $500,000 if you’re married.

Joe: He could also depending on the gain in the San Diego house- I don’t know- we’d need more information but I think those are good, good points.

Al: Yeah. It’s a good start.

Should I Rent Out My Primary Residence Next Year and Leverage New Properties?

Joe: We got Mark, he writes in from Charleston, South Carolina. “I have two questions. I’m a 46 year old divorced father of two teenagers.” Eh.

Al: That could have been you.

Joe: Oh my God. When I read that, I was like oh God. Yeah, I’m a 45 year old single male with no kids. I don’t know which is more lonelier. “I have $400,000 in my 401(k), $75,000 in my Roth, $55,000 in my brokerage account, $30,000 in cash. I also have an investment property, paid $120,000, owe $95,000, brings in about $400 a month positive cash flow. I owe $290,000 on my primary, worth about $415,000. My questions are should I consider keeping my primary and renting it out next year? I’m refinancing from 3.75%, 30 year to 3.12%, 30 year, no points. I could rent my home out for $2100 with a mortgage of $1700 then buy another primary, downgrade, keep it two years and rent that out. And keep that cycle going until I get 5 rentals.” That sounds like there’s a lot of leverage there.

Al: You could do that. A couple thoughts I guess. It sounds like you’re doing this to get a better mortgage. Better mortgage because its owner occupied when he gets the mortgage. And then when you move out it becomes a rental, you don’t have to get a new loan. So that is true. Here’s what I would caution. And you already mentioned one of them Joe, which is to do this too much and there’s another recession, then a lot of leverage is not a great place to be. When markets go down, when properties values go down, when it’s hard to find renters, when renters can’t afford to pay make payments. So just be careful there. But the other thing that I would tell you is that in many cases the house that you want to live in, is not necessarily the best rental. The best- the better rentals are kind of the starter homes, kind of the bread and butter, working class neighborhoods. You’re going to get better cash flow. You got more people that can rent those kinds of homes. So I’m not sure I would go this direction. And then when I look at your current home, you can rent it out for $2100 and the mortgage is $1700, everyone does that. They think I get $400 positive cash flow. It’s like what about maintenance? What about taxes? What about utilities? What about vacancy? What about, oh we’ve got to fix the roof? And on and on and on. So just be careful. I think you probably will find better rentals than homes that you want to live in.

Joe: Yeah. I don’t understand where he’s going to come up with the cash to buy another house.

Al: Well that’s a good point too. He’s got-

Joe: $30,000 in cash.

Al: So what people do is they tend to refinance their mortgages and then keep buying more properties and more leverage. I did that and that worked for a while until the market- that downturn. So just be careful.

Should I Roll My Old Roth 401(k) to My Current Roth IRA?

Joe: “I have a Roth rollover from a former employer sitting in a Fidelity account. Can/should I move that to my current Roth I’m maxing out? Also I’m max out my 401(k) and Roth annually.” So he had a Roth 401(k) from a former employer sitting in a Fidelity account and he’s looking should I just move that into my other Roth IRA that he’s putting in his $6500 per year? Yeah. I don’t see why not.

Al: Yeah probably. We talked about this maybe last week about there are some benefits of having money in an ERISA type of plan in terms of lawsuits protection. But outside of that, yeah I think it’s simpler to have fewer accounts.

Joe: Well since he’s going to be a real estate mogul.

Al: And get sued by his tenants.

Joe: Keep it in the 401(k) plan.

What is a Roth Conversion? What is a Backdoor Roth IRA Conversion?

Joe: “Also you always talk about Roth conversions and Backdoor Roths. I cannot get my head wrapped around of what they are. Please explain.” Explain Roth conversions.

Al: Yep, and Backdoor Roths.

Joe: OK well you have $400,000 in your 401(k) plan. So that 401(k) plan- and he’s got $55,000 in his Roth. But he says “I also max out my 401(k) and Roth annually.” So he puts $6500 into the Roth IRA I’m guessing. And then he’s got a 401(k) that he’s maxing out because he’s got $400,000 in that. But he said he’s got an old employer account at Fidelity that’s a Roth. So sometimes people get confused. Roth is just the after tax component of a 401(k) plan if you have a Roth provision in the plan. And it sounds like he does in some former plan, because he asked “should I just keep it in the Fidelity account or put it into my other Roth that I max out?”

Al: I think I’m reading that differently now. Because maybe it looks like that’s not in the former employer account. That’s just in a- it was a rollover sitting in his own Fidelity account. Maybe he has two different Roths. I don’t know.

Joe: “I have a Roth rollover from a former employer sitting in Fidelity.”

Al: Yeah. Yeah. So I was thinking that was a 401(k).

Andi: He calls it a rollover which sounds like he’s already rolled it over, right?

Al: -already rolled it over so yeah, you might as well just put it in the same account.

Joe: Got it.

Al: But the question on Roth conversions-

Joe: – is just taking pre-tax dollars and making them tax-free.

Al: And you do that by taking money out of your 401(k) and you convert it to a Roth IRA. Now the plan itself- now he’s 46 so he’s not probably eligible for in-service withdrawals so we probably have to do it in-plan. Wouldn’t you think?

Joe: Yeah.

Al: To do a Roth conversion. In other words, if your current 401k) has a Roth component then generally they will allow you to do conversions in-plan. And then of course you just pick how much you want to convert. There’s no limit. You can convert the whole thing. But that would put you in the highest tax bracket so you wouldn’t want to do that. You pick how much you want to convert. You go ahead and convert it and just be aware you’ve got to pay taxes on that when tax season comes around.

Joe: So the $400,000 that he currently has in a 401(k) plan is growing tax-deferred. And at some point he’s going to have to pay taxes on the 401(k) dollars that he pulls out for income.

Al: That’s right.

Joe: And at 46 years old and it’s looking at- he’s a single dad maybe- I don’t know if you file head-of-household or not. I’m not sure what your income is. But you might want to take a look at where do you think tax brackets are going to go in the future? And depending on what your income is, does it make sense to do a conversion? In some cases, it makes sense to say I believe tax rates are going to go up or I’ve already accumulated $400,000, I’m 46, I’m going to work another 20 years and I maxing this thing out. Hey Al, put this in your calculator- $400,000 present value; $25,000 a year for the next 25 years at 7%.

Al: Okay. How many years?

Joe: 25.

Al: 25.  oops. 7%. 25.

Andi: Oops always sounds good on the radio.

Joe: $3,000,000?

Al: $3,700,000.

Joe: Almost $4,000,000. So let’s say if Mark does nothing else and works 25 years. That’s kind of a long time, he’s 46. I don’t know if he wants to work 25 years. That’s 70. But 70’s gonna be like the new 50, in 25 years.

Al: You’ve been saying that for years. You still believe that?

Joe: Yeah. Without question. In 25 years? We’ll be taking pills and I’ll look like I’m 22.

Al: Got it. Anyway so-

Joe: That’s my theory. Ric Edelman thinks we’re gonna live to 140.

Al: 125 he told me. But then I had a beer and he said ‘you know that’s not good.’ I think in moderation, it’s ok.

Joe: I think so too. So he could have a pretty big chunk of money in a 401(k) plan. So I guess the point is this Mark, is that you can take money from a pre-tax account, move it into a Roth account, you pay the taxes, you move the money. But then it’s like you’re making these Roth contributions of $6000 per year. You could take the $400,000 that you have, you can move $6000 from that and move it into a Roth IRA you pay the tax on the $6000. So instead of coming out of cash flow, you could just convert it. A Backdoor Roth is that if you do not qualify for a standard Roth IRA contribution but you’re already maxing out the Roth. So it doesn’t apply to you. So that means you qualify for a straight contribution. If your income is let’s say under what, $130,000?

Al: $124,000.

Joe: OK $125,000. Then you qualify to do a Roth contribution. If it’s over that you start phasing out. So that’s why people are then putting money into a non-deductible IRA and then converting those dollars into a Roth. And conversion just means you’re converting it from pre-tax to Roth money. So all future growth will grow tax-free for you. But you pay the tax on the balance that you convert today or in April. So hope that helps but if you if you need more clarification on any of this just shoot us another e-mail. But yeah, if he doesn’t know what  Roth conversions is, how is he listening to the show?

Al: Well that’s- he keeps listening. Tryin’ to-

Joe: It’s like what the hell are these guys talking about?

Al: They never explain it. They just keep saying ‘do a conversion’.

Andi: The Backdoor Roth is the one that always confuses me. That one I think is the one that requires more explanation.

Al: There’s a lot to it.

Joe: Backdoor? How about the garage door?

Al: I like the Mega.

Andi/Joe: The barn door.

We recently did a live webinar on the stimulus package and retirement taxes, which of course means Joe and Big Al answered many listener questions about Roth conversions, live and on the spot. Check out the webinar replay in the podcast show notes at YourMoneyYourWealth.com by clicking the link in the description of today’s episode in your podcast app. The show notes are a critical part of the podcast – there you’ll find not only the webinar, so you can watch us be awkward on camera, but you’ll the transcript of this podcast, and free financial resources like our guide to the 5 Year Rules for Roth Withdrawals and the Social Security Handbook. Plus, if you have money questions you can just click the Ask Joe and Al On Air banner there in the show notes as well to send them in as a voice message or an email. See? The show notes got everything you need. Speaking of Social Security, let’s address a couple questions on that very topic now.

Coordinating Claiming Social Security With Roth Conversions

Joe: Mark writes in from New York. What does he say here, “I have $2,000,000 in my 401(k).”

Al:  That’s kind of bragging right?

Joe: I know.

Al: When you open with that. You know what I got?

Joe: It’s not ‘hey Joe and Al, Andi, thanks a lot’.

Al: I got $2,000,000-

Joe: It’s like ‘hey, I got a couple million bucks’-

Al: I like that. Either that’s cocky or he’s proud. Right off be proud-

Andi: He’s cutting to the chase.

Al: -of the accomplishment. Which you know what? Anyone that has $2,000,000 in 401(k) I would say, great.

Joe: Good saver. Unless he’s worked for the same company for 50 years and they matched him.

Al: And they put money in. Or he worked for Google or Amazon. He put in nothing and it grew 100 times.

Joe: “My wife and I want to retire at 60. I have earned more than her-”  He is a bragger. Look at this guy.

Al: Oh yeah. Look at that.

Joe: I have earned way more than my wife-

Al: – and I got $2,000,000 in my 401(k). I don’t know about her.

Joe: “I plugged our information into Social Security calculators and they say for her to take Social Security as early as possible, age 62 and for me to take my Social Security as late as possible age 70. I understand why that is. I also want to max out Roth conversions from age 60 to 70 up to the 12% bracket. I understand it may change to the 15% in the future. I’m trying to figure out if it’s better for my wife to take her Social Security at 62 and therefore reduce the amount of conversion until 70 or my wife to take her Social Security at age 70 and therefore increase the amount of conversion until 70. Thank you.” That’s- Mark is grinding the numbers here.

Al: He is. He’s an engineer I bet.

Joe: Guaranteed. Spreadsheets.

Al: Yeah, you bet. He’s got his own Social Security calculator. He probably wrote the code-

Andi: Mark from Spreadsheet City, New York.

Joe: Oh guaranteed.

Al: And not only that- not only does he have the spreadsheet, he understands the results and why they’re so. He really got into it. Well Mark why is that? Tell me.

Joe: Mark, I got a couple of clients-

Al: – that might be in your situation. Help me out here.

Joe: I need a Social Security claiming strategy.

Al: It spits out that answer and I don’t know why.

Joe: I’m curious to know what the numbers are. The guy’s bragging that he’s got $2,000,000 and he makes so much more than his wife, but he doesn’t give us the Social Security numbers. He’s probably maxed out I’m guessing on his Social Security.

Al: Well he makes a lot more-

Joe: -way more.

Al: – so she doesn’t have much Social Security benefits. That’s how I read this.

Joe: Yes. So I wonder, is she eligible for the spousal benefit?

Al: Well that’s what I’m thinking. If she takes it at 62, then it would screw up the spousal.

Joe: How old is he and her? Are they the same age?

Al: Right. Or is she health impaired? That’s why she should take it early? You know I don’t know. There’s still a lot we don’t know.

Joe: Mark, I mean your spreadsheet is one thing, but real life is another.

Al: We need more. He’d probably say my health is a way better than my wife.

Joe: You should see me naked.

Al: I’m like a 45 year old. I look like Joe. Not like Al.

Joe: I am ripped. And my wife, not so much.

Al: What’s the question anyway?

Joe:  When should he take Social Security? Should she? No. The answer is probably not. I think because you’re only converting to the top of the 12% tax bracket, if you get $2,000,000 in your 60s or you’re retiring at 60. We need to know a lot more to give you the right conversion strategy in regards to a) what’s your other income sources going to be? And how much money are you spending? Because you have to have cash or non-qualifying assets or real estate income or things like that, that you can live off of while you’re doing your conversion strategy from 60 to 70.

Al:  I’m assuming and based upon the $2,000,000 in a 401(k), the RMD is going to be huge. You should be probably converting to the 22% or 24%.

Joe: 24% is a giant bracket. But for sure the 22%, at least take a look at. Plug those in your spreadsheet because where do you think – the 12% is going to the 15%. I agree with that.

Al: I got to imagine that he’s going to be in the future 25% bracket at least.

Joe: At least. And if he’s pushing his Social Security out to age 70. And even if the wife takes it at 62- one leg and all.

Al: It sounds like she’s got so low a benefit it doesn’t matter. I could make an extra $46 if she would wait until 70.

Joe: All right Mark. Well good luck with that. We need some clarity.

How Does the 5-Year Clock Work on Roth Conversions?

Joe: We got Lori from Temecula. She writes in. “Al, Joe, Andi. Hello. My name is Lori and I live in Temecula.” This is very well put Lori.

Al: Yeah it is. Temecula is about an hour northeast of San Diego.

Joe: Little wine country.

Al: Exactly.

Joe: “I have two questions, one for Big Al, the Tax Ax.”

Al: Tax Ax. How about that?

Joe: That’s badass.

Al: Nice.

Joe: “And one for Joe.” At least she called me Joe and not Joel.

Al: True.

Joe: The Tax Ax.

Al: I’ve never been called that. That’s- I like that.

Joe: I do. Big Al, the Tax Ax. “First question to Al and I know you have covered this many times so you shouldn’t have to dig deep. I’m currently 59 and a half and have a 401(k) at my work with a balance of $200,000. The plan has a Roth provision within the plan. Earlier this year before I turned 59 and a half and against my husband’s advice- bad wife- I converted $40,000 from my regular 401(k) account into the 401(k) Roth account within the plan. Our tax bracket this year will be lower than most years. And since my plan allows two conversions a year, I plan on converting another $60,000 this year into the Roth 401(k) account. Can you explain how the 5-year clock works on each conversion funds?”

Al: So I would say Lori you’re not a bad wife, you’re actually just fine. So here’s the rule. The rule is when you do a Roth conversion before the age of 59 and a half you’ve got to wait 5 years to access the conversion dollars itself without paying a penalty.

Joe: Until you turn 59 and a half.

Al: I know I was getting there. You’re ahead of me.

Joe: Just trying to keep you honest Al.

Al: That’s the basic rule. Every time you do a conversion you’ve got to wait 5 years, until- that’s what I was about to say about the same time you interrupted me.

Joe: Sorry.

Al: Until you turn 59 and a half. Once you turn 59 and a half, that 5-year rule is gone. And so you can access the conversion amounts any time you want. Now the 5-year rule with regards to earnings, you do have to wait 5 years from your first Roth regardless of any age. If you’ve been doing this for a while or if you’ve done had a Roth of any type before then you’re good to go on that, as long as you had it for 5 years.

Joe: So I guess the questions that I have for Lori is that does she have another IRA or Roth IRA- I mean another Roth IRA outside of the 401(k) Roth? Because then she could- Because a 5-year clock -it sounds like she just started doing the Roth.

Al: Could be.

Joe:  In the 401(k) anyway. But she’s- I guess her real question too- or another question she had here is that she’s got- she wants to do two conversions in the same calendar year. And so it doesn’t matter, the 5-year clock is- each conversion doesn’t have its own 5-year clock because it’s in the same calendar year.

Al: Well that’s true too.

Joe: The IRS doesn’t look at all you did, one conversion here and then you did another conversion there. It’s like what was total conversions for the entire year?

Al: But anyway now you’re over 59 and a half. You can access that $40,000 and then the $60,000 immediately.

If My Husband Dies Before He Takes Social Security, What Happens to My Survivor Benefit?

Joe: Correct. Okay. “I have a Social Security question for Joe.  As I mentioned I will turn 60 later this year. I have worked most of my life and have my own Social Security account. I plan on retiring early at age 63 and it appears my Social Security at the time will be $22,000 dollars per year. My husband will turn 65 this year and is eligible for his Social Security in December 2021. His full Social Security amount is $34,000. My husband is planning on delaying his Social Security until age 70 when the amount should increase to around $42,000. My husband is not in the best health. So if I take my Social Security at age 63 then my husband passes away before age 70 and before claiming his Social Security, what effect does this have on me? At what rate will I assume my husband’s Social Security? Would be better for me to wait and not claim my Social Security until my husband reaches age 70 and or until he passes?” Jesus, Lori, this is depressing.

Al: She’s just being realistic apparently.

Joe: “My husband is delaying his Social Security because I’m in good health and most people in my family live until their 90s. So I don’t want him to delay his Social Security benefit to help me later or to be canceled out.” A very interesting question.

Al: It is a good question actually.

Joe: So her concern is that she’s like I’m gonna take her benefit- she’s going to take her own benefit. Did I read that right, at 63? And so she’s gonna take $22,000 from her own benefit. He is gonna wait until 70 to get $42,000, he’s 65. She’s like, he’s not going to make another 5 years.  If he dies before claiming the benefit, what benefit will she get as a survivor benefit is what she’s asking.

Al: Let’s start with there.

Joe: One of the questions she’s asking or one of her concerns is if she takes her benefit early, is that going to have any effect on the survivor benefit? And the answer is no.

Al: That’s correct. It would on a spousal benefit but not on a survivor.

Joe: So if you claim yours early and he’s waiting to age 70- let’s say he makes it to age 70, claims his benefit, then drops dead. Then you would receive the benefit as a survivor benefit of his age 70. Just because you claim your benefit early would not affect your overall survivor benefit.

Al: So in that particular case if you’re pretty sure that your husband is not going to live that long then you might as well take your benefit as early as you can because his is higher.

Joe: His is gonna be higher.

Al: So you don’t lose out.

Joe: Correct.

Al: Because if you didn’t take any and then he passes you miss those years that you could have been collecting.

Joe: Because you’re going to take the survivor anyway.

Al: The same number either way.

Joe: You’re going to take the higher of the two is this – unless- well, not necessarily here, because she could take the survivor benefit and delay her benefit. But his benefit is gonna be larger anyway so it probably break even. It would be a lot of work and you’d probably get hell out of the Social Security Administration. But he’s still alive. He’s not even dead.

Al: He probably doesn’t listen to the podcast.

Joe: Exactly. I don’t know what the hell she’s plotting. My husband’s pissed at me because I did a conversion so I’m gonna- you know I’ll show him.

Al: I don’t think he’s going to make it to 70. Pretty sure.

Joe: I don’t think he’s gonna make it because he’s so upset. Oh my God.

Al: But I think one question is if he doesn’t make it to age 70 then your benefit as a survivor will be what he would have received on the date of his death. So in other words if he makes it aged 68 and a half and whatever his Social Security benefit would have been on that day, that’s what you get as a survivor.

Joe: Just keep- I like her plan. Let him defer, take hers at 63.

Al: I do too.

Joe: If you really think that his life expectancy is that short-

Al: Keep him alive till he’s 70.

Joe: Or you could- what was that show, Housewives of something or whatever?

Al: Desperate Housewives?

Joe: Desperate Housewives. Yeah. Where they put that the old man- that lady- she put the old man in the freezer- because the pension checks kept coming in?

Al: I forget- I had forgotten that. That sounds right.

Joe: And then all the ladies went around they’re like oh did you hear Mildred killed her husband? She’s like no I didn’t kill my husband, he died watching TV, eating ice cream or some like that. But I put him in the freezer so I could get the Social Security checks.

Al: I missed that episode.

Joe: DVR it or, I think it’s on Netflix now.

Al: Probably.

Joe: There’s been a lot of stories though with things like that happening.

Andi: Putting spouses in freezers?

Joe: Yeah. I think-

Al: What shows have you been watching?

Joe: I read the paper.

Al: I haven’t seen that happen too much.

Joe: Kohler is a pretty big freezer company. They have their own Big Albert.

Al: That’s the big problem with these big freezers? They try to make them where you can’t put a whole body in?

Joe: Oh no. There’s certain companies that specialize now I’m sure.

We don’t have any freezer suggestions for you but the Social Security Handbook will tell you all about applying for Social Security benefits, spousal and survivor benefits, the difference between claiming early and late, taxation of Social Security and much more. It’s yours to download for free from the podcast show notes at YourMoneyYourWealth.com. Also available in the show notes, as mentioned earlier, is our guide to the 5-Year Rules for Roth IRA Withdrawals. When you establish your account and how old you are now matter when it comes to taking money from that account, so make sure you know how the 5 year Roth clocks work before you start pulling money out. To access all these free resources, to ask money questions, and to share the YMYW love, just click the link in the description of today’s episode in your podcast app.

Can I Separate My Roth TSP and Traditional TSP Actions to do an Interplan Conversion?

Joe: Let’s go to Marion from Fresno. She writes in. “Hi Andi. And guys.” Oh look at that. First billing.

Al: Oh boy. Top billing Andi.

Joe: All right.

Andi: Marion and I are good friends.

Joe: “I was listening to 274.”

Al: People like 274, 272.

Joe: That was a good show. That was a really good show.

Andi: 271 was the one that was the problem.

Joe: “Will the TSP administration allow me to separate my actions between my Roth TSP traditional TSP accounts? If so I could do a Roth conversion from my traditional portion of the TSP to my Roth TSP or to my Roth IRA without touching my current Roth TSP. In the past I have to use my TSP to manipulate my taxable income so I could get a lower tax rate on my capital gains.” All right Marion. No, you cannot convert, I think is what Marion is asking, a TSP traditional to a TSP Roth.

Al: So they don’t allow conversions in a TSP?

Joe: Inter-plan.

Al: They don’t allow inter-plan?

Joe: Do not.

Al: Oh well.

Joe: You can’t even convert a TSP directly to a Roth. That’s why you got to hit the IRA first and then convert. And then people are doing these 60-day stupid rollovers and blowing themselves up.

Al: So the best way to do it, is to do a direct rollover- trustee to trustee, is that you call it?

Joe: -IRA.

Al: Trustee to trustee.

Joe: And then from there to a Roth. Because you would do your in-service from the- I would get the money out of the TSP. I know people love the TSP.  People are going to write me emails saying- because it’s free. But there’s a lot of restrictions there too. Depending on the-if you got- it depends on how complex you want to get. If you got a $200,000, you got a nice pension and you don’t spend a lot of money then absolutely keep it in the TSP. But if you’ve got Roths, you’ve got after tax, you’ve got like- remember when we blew up the overall in-service or the people that were in a war zone and then they had all this other after-tax and then we got voice mails explaining all this stuff. And thank you very much all of you for your service. So don’t get me wrong. I love the TSP; however there’s some inflexibility with the TSP that you might want to look at potentially making your life a little bit easier. So you cannot do an inner plan conversion. But however they have changed the rules with the TSPs in regards to distributions. If you kept it in the TSP, you could say I want to take out x amount of dollars from my Roth and X amount of dollars from my pre-tax to control your taxes that way, if you’re taking distributions versus a pro-rata basis like a lot of other 401(k) plans do. So I don’t really know what he’s trying to do or Marion’s trying to do. I don’t know if that’s a male or female.

Andi: Marion’s female.

Joe: Pardon me?

Andi: Marion is female.

Joe: I’ve heard of Marion as a male as well.

Andi: This is Marion that is a regular listener of our show who helped us with the Roth 5-year clock phite paper.

Al: I remember her.

Joe: Oh so you’re BFFs, is what you’re saying.

Andi: That’s what I said at the start. Yeah.

Al: That’s why it’s “Hi Andi. And guys.”

Joe: Oh.

Andi: Gotta listen, Joe.

Joe: I’m wearing headphones that I can’t hear you very well.

Andi: We had this discussion too. You don’t have to wear them.

Joe: I like to hear Alan breathe. Just make sure he’s alive.

Al: To know I’m still here? That way you know I’m not gonna-

Joe: Just fall asleep on me or something, or leave.  Go to the brewery.

Al: I could still be breathing and be asleep.

Joe: Yeah, probably.

When Do I Pay Tax on a Roth Conversion?

Joe: Converting IRA question. Richard from Encinitas. “I’m building up a long position in physical silver and gold in one of my IRAs.” Oh God. Just that first sentence makes me vomit in my mouth.

Al: Which do you like? That first sentence or I have $2,000,000 in my 401(k)?

Joe: I don’t know.

Andi: Or I’m divorced with two kids?

Joe: “I’m building a long position of physical silver and gold in my IRA? Knowing that taxes will probably be going up, I’m thinking of converting this to another Roth even though I’m fully employed so far this year. I figured there’ll be another crash coming and will push down the value of my IRA and at that point at which I would like to convert it so that taxes will be minimized. Is the conversion value when it’s made? Or when the taxes are paid?” Thanks Rich.” Rich. Good question. It is when the conversion is made.

Al: Correct.

Joe: But if you think the market’s going down, why do you have a long position in silver and gold?

Al: You wanna get out.

Joe: Because right, get out. And then go into stocks.

Al: Or put into cash.

Joe: And then wait for the market to tank-

Al: -and then buy it back, cheaper.

Joe: Buy your hedge. Do the Roth after.

Al: That’s called market timing. That’s very hard to do successfully.

Joe: But he wants to build a long position versus a short position.

Al: Got it.

Joe: He’s not gonna short gold.

Al: No I don’t wanna be short gold either.  I want to a long long stack of pieces.

Joe: So I don’t know but- I like the tax play. I just hate the investment play.

Al: I like the idea of doing a conversion while the market’s down. That you can predict the market’s going to crash again? I mean nobody knows that. If we did, then we’d all be multimillionaires. Right?

Joe: Yeah.

Two IRA Contributions & Conversions in a Year: Will This Raise Red Flags?

Joe: We’ve got James from Arizona. “Hello Joe, Al and Andi. I already transferred my 2019 non-deductible IRA contribution to my Roth IRA in January 2020. Backdoor Roth contribution. Boom. I immediately funded my 2020 non-deductible IRA to the maximum. I was originally thinking I would wait until January 2021 to roll that amount into the Roth but since the value is down a bit now, is it okay to transfer this to my Roth now since that will make two transfers in one year and I don’t want to raise any red flags?”

Al: You don’t want any red flags.

Joe: Red flags-you might get audited, go to jail, James. “Thanks for sticking with the show during these trying times. Your dedication to your listeners is greatly appreciated. Be safe. James in Arizona.” Well, thank you James.

Al: That is nice.

Joe: But James. Yes, thank you for making sure that you check with us before you do anything to get your red flags by the IRS.

Al: That’s always good.

Joe: There’s no red flags here.

Al:  I agree with that.

Joe: It’s all green flags, buddy. If you go ahead, you made the IRA contributions. Let’s say, you didn’t make it an IRA contribution for 2019 and it is now June something or whatever.

Al: Yeah. June 3rd I think.

Joe: June 3rd, 4th, 5th, 6th, or something like that.

Al: 3rd.

Joe: When does this thing come out?

Andi: It’s going to be on the radio on June 6th. It’ll be on the podcast probably in a couple of weeks.

Joe: June  6th, 7th, 14th. As long as I make them before July 15th. I can make two IRA contributions, because the IRA deadline’s July 15th this year.

Al: Yes. You can do one for 2019 and one for 2020

Joe: And then I make both of those contributions. They’re both non-deductible. And then I could do one conversion.

Al: Or you could do two conversions.

Joe: But he did it differently. He did one, convert it, and then do the other and convert it.

Al: No, it’s no problem. That’s not even a- that’s a pure green flag. That’s no problem at all.

Joe: I’ve done that in the past too though. Now just make sure when you do your taxes that you’ve got the correct basis. Instead of $5500 or $6500, $7000. I don’t know how old James is, but because the balance is lower. Usually when I do a Backdoor Roth I make the contribution, then I just convert it.

Al: And I think that would be best practice for most people because in most cases the stock market trends up, not down. So you want to get your conversion in before the account appreciates.

Joe: Because then you wouldn’t have to pay tax on the appreciation.

Al: Now, if the market goes down after you do the conversion, then you can convert then. And then the growth is tax-free.

Joe: Yeah there’s no growth. Because it’s down.

Al: It’s down. But future growth-

Joe: Before you could- No I’m not even going to go in there, because he can’t even do it anymore. So that would just be a waste of everyone’s time.

Why Not Withhold Taxes From the IRA on a Roth Conversion?

Joe: Raul from Chula Vista. “I’m a former customer.” Oh, God.

Al: Former.

Joe: When it starts out with “I’m a former customer.”

Al: I gotta tell you, your advice is just awful.

Joe: I’m afraid to read this. Oh boy. Here we go. First of all, we don’t really have customers either. We don’t sell widgets. We have clients. But anyway-

Al: We have relationships.

Joe: Yes we do. Long term- not with Raul. “I want to say thank you for your great guidance your company gave us.” I just don’t know why we’re not giving it anymore. He wants to just get it from the podcast, I guess.

Al: One and done.

Joe: “The question I have for you is about Roth conversions. My wife presently has a six-figure regular IRA. She just turned 62. I’ll be turning 67 in a few months. We would like to convert that IRA to a Roth IRA. The only hitch is we do not have any other outside dollars to pay the tax. What is the issue withholding the taxes from the IRA itself? In one of Joe’s podcasts he mentioned not to do this. If we do RMDs later, we will be taking the distributions and having tax withheld. How is this any different in having the taxes withheld for the conversion? We are presently in the 22% tax bracket. I have calculated that when we have to start taking RMDs we’ll be in the 25% tax bracket. Presently I have a pension and we both receive Social Security. This income covers all of our expenses. My pension also covers my IRMAA costs for Medicare. I’ve done all the tax calculations but I do not see a problem converting a set of annual until all of it is converted before we have to take RMDs. We do not need the income from the IRA and will most likely pass this money to our kids. I would appreciate your help on this.” Well Raul, if you didn’t fire us, probably give you a little bit more detailed information here. In most cases, you do not want to do a conversion and then pay the tax within the IRA. Because you’re paying tax, to pay the tax, to pay the tax, to put it into a tax-free account. So we’re against it in most cases. I think in Raul’s case since he’s run the numbers I’m sure there’s no flaw in his numbers. If he doesn’t need the money and there’s a large balance there and he’s living off it then he’s gonna be in a higher tax bracket, once the RMDs, then I don’t-

Al: I’m okay with this. But I mean the main two things why we don’t like this, one is if you’re under 59 and a half there’s a 10% penalty that you pay for the withholding which seems like a total waste. And the second reason we don’t like this is if you use outside money you get more in the Roth. So that’s a better way to go. But when you don’t have any money and you’re in the right tax brackets, I don’t have a problem with this.

Joe: Well Raul, thank you for being a former customer. Appreciate it.

Al: Hopefully we’ll do better next time.

Joe: Please come back.


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