Tanja Hester (OurNextLife.com, award-winning financial independence blog) talks about her new book, Work Optional: Retire Early the Non-Penny-Pinching Way. Joe and Big Al answer questions about whether kids will inherit a Roth IRA tax-free, the rules around a traditional IRA transer, investing in a Vanguard target date fund, and where to safely invest for growth.
- (00:47) Tanja Hester: Making Work Optional
- (13:04) Tanja Hester: Making Work Optional (part 2)
- (20:41) Will My Kids Inherit My Roth IRA Tax-Free? (video)
- (27:47) Did I Mess Up My Traditional IRA Transfer? (video)
- (37:13) Should I Invest in a Vanguard Target Date Fund?
- (40:36) Where Can I Safely Invest Money for Growth? (video)
What does retirement mean to you, and how do you create the life you dream about? Tanja Hester and her husband Mark “retired” at the ages of 38 and 41. Tanja is the creator of the award-winning financial independence blog Our Next Life, and today on Your Money, Your Wealth®, she tells us about her new book, Work Optional: Retire Early the Non-Penny-Pinching Way. Plus, Joe and Big Al answer your money questions about whether your kids will inherit your Roth IRA tax-free, messing up your traditional IRA transfer, whether investing in a Vanguard target date fund is a good idea, and where to safely invest your money for growth. I’m producer Andi Last, and here with our guest, Tanja Hester, are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Joe: The FIRE moment is pretty on fire, Andi.
Andi: That’s absolutely true. It really is.
Joe: And we have another FIRE movement individual on the line. She retired at 38.
Andi: Yep – from traditional formal employment.
Joe: Well, we need to hear from her I suppose.
Andi: Yeah absolutely.
Joe: Husband retired at 41. She has a fabulous blog.
Andi: Our Next Life.
Joe: Yeah. So when you retire at 38, I mean, that’s a long next life. You’ve got to figure some stuff out. So we have Tanja Hester on the line. Tanja, welcome to the show.
Tanja: Thanks so much for having me.
Joe: So you wrote a book, Work Optional. I love that, because I want to retire right now, actually. So let’s walk through this. 38. Well first of all, congratulations. That’s quite the feat of making things happen at such a young age. Can you tell our listeners a little bit about your story
Tanja: Yeah thanks so much for that. My husband Mark and I were working in really high stress consulting jobs, where you’re pretty much expected to be reachable around the clock. And I will say, this is maybe different from some other folks who talk about early retirement. There was a lot about our jobs that we loved. We loved the companies that we worked for and the people we got to work with. We loved most of our clients. It was really just the overall toll that it was taking. And about six years before we were able to quit, we realized that if we just changed our lifestyle a little bit, we could save a lot more money, and more importantly, we could just kind of keep our spending level as our income went up, and we could turn that into a very, very early retirement. And so for us, that was kind of a no-brainer. But I think the goal of what I like to talk about is just really trying to make work optional rather than, “you have to quit,” or “we have to quibble about what early retirement means”. I mean I’m sure that my early retirement doesn’t look like probably a lot of people imagine – I still spend a lot of time working on passion projects, but they are things that I really care about, and that the point is that I don’t have to work if I don’t want to. And I think that’s something that’s really within reach for more people than I think realize it.
Joe: Yeah without question, I love the title, Work Optional. You can retire early the non-penny-pinching way.
Andi: That’s the important part.
Joe: Yes. That’s the catch. That’s the grab, because we’ve had a lot of individuals on the line, or on our show, and it’s like, “okay well, I made $100,000 a year but I spend $5,000. And so I was able to save 95% of my income for five, six years,” and it’s like okay well I don’t know. That doesn’t sound like that much fun to me. (laughs) But I think what you guys did was very right on, but very difficult to do. Which we see is that as people earn a little bit more money, you have that lifestyle creep. And it’s like, “well OK, we got a raise or maybe a bonus,” and things like that, where if we could save it that would be great, but I think most people spend it. As soon as you make a little bit more money, guess what, you spend more. And it sounds like you guys didn’t do that. You had a very solid game plan in place, to say, hey, we can live within these confines and if any additional income comes in, we sock that away?
Tanja: I mean, we were very much human. I don’t want to paint some super-human story here. (laughs) We for sure we spent more as our income went up, and did what I think we’re all taught to do as good consumers, which is, hey, the American dream is to get a better house and get a newer car. We actually didn’t do those things, we’re fortunate. But we went to a lot more restaurants, we traveled a lot more, we bought some gadgets and toys and things. But I think that we realized after a few raises, like, “OK we’re spending more each year – are we actually happier?” And when we really started to ask ourselves that question, we realized, “well no. Yeah, it’s fun to spend some of this money, it’s fun to do some of the things we do, but would we be less happy if we didn’t do them?” And once we started looking at it that way, it became really much easier to say, “OK, we’re not going to try to penny-pinch this, we’re not going to try to, like, clip every coupon” – although I did have a brief couponing period, which was a total failure. But instead, we just said, “can we contain our lifestyles? So our friends are upping their spending each year, we’re just going to keep ours level, at a very comfortable place, and everything new we earn we’re going to bank.” And that was truly the thing that got us all the way to early retirement – which of course, that’s specific to us earning good incomes, we each earned six figures. That’s not going to apply to everyone. But there are more ways than ever to earn more, even if that’s not possible in your main job or your main career. So I don’t think that that’s something that people should see as off the table if you don’t have a high earning career, it just means you might have to get a little more creative in how you do that earning.
Andi: Tanja I got a question, here. You make a point that this is the non-penny-pinching way, and obviously, the things that make you happy is what you’re going towards. And I saw on your website that you’re an audiophile. So how do expensive hobbies like that – if I want to buy an expensive pair of Klipschorn speakers – how does that fit into a work optional life?
Tanja: I mean really, what I think the book is all about is trying to help people figure out what it is that you truly value, whether that’s financial or in life. And something like that, I mean I have an expensive fountain pen and Japanese stationery habit (laughs) and my husband has a problem with skis. So, it’s okay to have a couple of things, or you know, something that you really like to splurge on, but you just have to put that in context. You can’t splurge on everything if you also want to save money, and chances are good that not everything you might buy makes you equally happy. So if those expensive speakers are like “the thing?” Like we know people who really love to drive a nice, fast car, and that’s fine, as long as you then scale back other stuff and you aren’t saying, “Oh, well everything makes me happy, and I’m going to have a big house, that makes me happy. Fast car, big speakers,” you just have to like really get clear with yourself on what your true priorities are.
Joe: You break the book out into three different sections. Can you walk me through those?
Tanja: Absolutely. So I think unlike a lot of money books, Work Optional starts in part one with actually not talking about money. We start out talking about your life, and what it is that your ideal work optional life would look like. And that’s something where, in the financial independence and early retirement community, there’s a lot of discussion about this question of “what’s your why?” Why are you doing this? Which I think is really positive. But when you just say it in those big terms, that can sometimes feel too big, too amorphous to really process. So instead, I help people break down, what do you want a day to look like in your work optional life? Who are the people you want to spend more time with? What’s the best money you’ve ever spent? Questions like that that help you really drill down to, OK, this is my vision, this is what I’m aiming for. Because you need that to know how much it costs. So that’s part one. Part two is really the financial plan. So what is it that you need to know to build a bullet-proof plan that’s going to last you a really long time horizon. You know, early retirees take on potentially a lot more risk than traditional retirees, because you might be looking at 50-60 years of retirement. So what is a conservative withdrawal plan? What are the right investments that are going to take you the distance? Things like that. And then part three is about really living your work optional life. So making the transition out of work, which is worth more thought than I think a lot of folks imagine. I think a lot of people have that vision of leaving work and, like, burning it all down on the way out, never looking back. And that’s understandable because our work culture today pushes people really too hard. But there’s a lot of stuff that you do need to think about in terms of making a life transition, how you’ll define yourself when work is no longer a part of your life, how you’ll get social interaction without an office or a workplace of people surrounding you. And so it’s really about kind of then what are you going to do with that newfound freedom? How are you going to use that power? So it’s really, I think, a logical progression to help people think through all the important questions that are involved, and not just sort of look at, “OK what’s the 4% safe withdrawal rate? What do I need to save?” There’s so much more to it than that.
Joe: Absolutely, you know that you bring up really good points here. So I would like to dissect this just a little bit more because I’ve helped thousands of people retire, but no one at the age of 38, 48 or potentially even 51. So what I’ve done throughout my career is kind of the traditional, someone works for an industry or has a career and retires around 60 to 70. And when you look at it like that, it’s like, OK well, as long as they were diligent savers they have a nest egg and now it’s just coming up with strategies on how do you create income, how do you save money in taxes and how do you pass the wealth to the next generation? But if you’re looking at early retirement such as in your 30s and 40s, there’s a whole slew of different challenges, but there’s also a lot of similarities. Like that first part of just identifying what you want to do in retirement is so key, because I don’t care if you’re going to retire at 40 or 60. I don’t think no one really puts a lot of thought behind it. They’re just looking at, “can I get out of this particular job or this particular career and how much money do I need so I can make work optional?” And then they run into retirement and then they find out that they’re miserable because they’re bored and they didn’t really spend a lot of time thinking about what that life transition is going to look like. What are some of the steps, or what can our listeners learn, to say, “if I’m thinking about retirement” are there some exercises that they can go through to make sure that the transition – just a first thought process? What should people be thinking about?
Tanja: Yeah. There are so many great things, and I think you raise such a good point that it really is true, regardless of whether you retire in your 30s, your 60s or 70s, whatever age, it’s still gonna be a stressful event. We know that from research, that retirement is one of the top 10 most stressful events in life, even when it’s totally by choice and the person feels totally ready. But as you well know, more than 2/3 of people retire before they feel financially ready or before they intend to for a whole slew of reasons. So a ton of people are, on top of that stress, going into it feeling unprepared. So it makes sense to just sort of know that, I think, know that it’s going to be stressful. But some of the things you can try are, if you’re in a position to, for example, take a week off of work and just stay home. Take a nice staycation. Just notice during that time what you end up doing. Do you end up engaging in the projects that you’ve always wanted to do, or do you end up kind of sitting around and watching television? (laughs) How do you naturally structure your day when there are no time constraints? That’s an important question because a lot of people in retirement find that it’s the very first time in their whole life when they have unstructured time. All the rest of our lives we have school, we have work, we have all the different commitments that we’re engaged in that tell us, “here’s where you have to be at this time. Here’s where you have to be at this time,” and it can be really jarring. The research tells us this too, this is the logical research that when you have no structure, it gives you the freedom to do everything, but it also gives you the freedom to do nothing. So that’s one good experiment. The other thing is just to think about, what is it that’s in your life when you take work away? What are the other social circles that you have? What are the hobbies that you have? And think about those hobbies in depth – you know, are they things that you enjoy because they are a counterpoint to work and might they actually feel really boring once you no longer have work stress? Or are they hobbies that you just feel so passionate about, you do them regardless? But look at that stuff of looking at what’s in your life without work, and then think about what would you add to fill that space, not just thinking about subtracting work. That’s a really good way to kind of focus on, “OK not just like what’s the life I want to escape, but what’s the life I actually want to live?”
Joe: That is such good advice.
Download our Retirement Lifestyles Guide for free from the show notes for today’s episode at YourMoneyYourWealth.com for a little help determining what life you actually want to live in retirement. In the show notes you’ll also find the transcript of this interview, links to Tanja Hester’s blog, Our Next Life, her new book, Work Optional: Retire Early the Non-Penny-Pinching Way, and of course, the “Share” button. If you enjoy what you hear, sending this podcast out into the world will help spread the word! See there? Your one week staycation is already filling up with great things to help you plan for the retirement of your dreams!
Joe: One other question I have for you – in part two here, if I am looking to retire, at 45 let’s say, what different types – because the money, like you said earlier, that money needs to last potentially, I don’t know, 50 years. What are some of the tips that you’re giving in your book in regards to the overall financial planning scope that might be a little bit different than what someone might get from just Money Magazine or online?
Tanja: The two main things that I recommend that are different are, one, to use a lower safe withdrawal rate with your investments than is typically recommended for retirement. So I’m sure that your listeners are very familiar with the 4% rule. The idea that you can safely withdraw 4% of your portfolio at the start of your retirement and adjust that upward just a little bit each year, and then your money should last you forever. All those studies that have been done have only been done on 30 year time horizons, and given how many different things early retirees might be facing, like the erosion of Medicare, the erosion of Social Security, the fact that just health care generally is a big question mark, I think, for many of us – going with a lower safer withdrawal rate will give you more insulation against some of those future risks. So I recommend looking at more like 3 1/3 to 3.5% safe withdrawal rate. So that’s one thing. The other thing is considering a two phase early retirement. So actually planning for traditional retirement just as you would if you were going to work forever, and then leave that money alone to the extent you can. And then separately, think about how you’re going to fund your early retirement. It might be semi-retirement, you might still be working a little bit. You might do something like live a little bit leaner, which is what Mark and I are doing – we’re planning to up our spending a bit once we get to our traditional retirement years. There are a lot of different ways you can think about it, but saving that so that you don’t accidentally bankrupt “future you” I think is the best financial gift you can give yourself.
Joe: Yeah I think most people ignore the “future you.” (laughs)
Andi: You even talk about the potential of a career sabbatical – not necessarily retiring or partially retiring, but just taking some time off with the plan of going back.
Tanja: Yeah absolutely, I mean I think that many of us living in cities or expensive areas can relate to the fact that it is expensive to live in the U.S. these days, particularly in the bigger areas, and for a lot of folks, a full early retirement is simply not going to be realistic. And I didn’t want to make this an all-or-nothing book, either you can do it or you can’t. And so absolutely, I think there are plenty of ways that you can think about funding a year off, or maybe a year off every five or 10 years. Whether that’s just to go do something that you’ve always dreamed of doing, like traveling around the world or if it’s to be able to care for a loved one, like a parent is aging and you know they have not much time and you want that time with them. Giving yourself that gift, the ability to say, “I’m going to quit for a year and just go do my thing and then go back.” That’s a really viable option as well, as is semi-retirement, being able to scale back, or maybe if you have a job that you feel like makes you feel morally compromised, you could do a job that speaks to your soul a little more, you could just work 30%, or work six months a year, you know, whatever that looks like. There’s so much flexibility if you really start focusing on saving your money.
Joe: We’re talking with Tanja Hester. You’ve got a podcast. Fairer Cents? Is that what it’s called?
Tanja: That’s what it’s called, yeah.
Joe: That’s interesting. What are you talking about on the podcast?
Tanja: So that’s really a “women and economics” podcast, it’s very different from the early retirement conversation. We’re instead sort of looking at like, what are the systemic things that women in particular, but also people of color, people with disabilities, LGBTQ people, what are they up against? What are we up against, that kind of goes beyond the personal finance advice. Like, I’ll give you one example. So the common refrain that people are telling women, especially young millennial women these days, is, “hey, you need to go negotiate for more money. That’s why there is a gender pay gap.” Well, turns out there’s actually research that says that young women are asking for more money just as often as their male colleagues, but that they are not getting it. So we sort of looked at problems like that and said, “OK well, everyone’s giving women this advice, but does it actually apply when we have this flawed economy?” So we decided to look at some of the bigger questions that surround it, like, how do we actually fix the broader problems and not just give people advice that may or may not actually help them?
Joe: So you’re probably busier now when you’re retired than you were when you were working, it sounds like?
Tanja: (laughs) No, not remotely. When I was working I was flying 150 flights a year and was never home and worked 80 hour weeks all the time. So no, it feels like an incredible privilege to get to work on content that I love, that’s meaningful to me. I can say no to anything I want. And the blog, which you brought up at the beginning. I don’t have any ads on it. I don’t make any money on it. That’s a really beautiful thing. I can make it look pretty. I don’t have to worry about ads slowing it down. Where I think if I was relying on that for a livelihood, I would have to make some compromises. So it’s me feeling like I get to live a life in some sense without any compromise, which makes me feel like pretty much the luckiest person in the world.
Andi: I’m really glad that you said yes to this interview, Tanja, thank you.
Tanja: (laughs) No, I love talking about all this stuff. It’s so fun to talk with fellow money nerds.
Joe: Our Next Life. What’s the blog? What’s the latest blog? What’s going on there?
Tanja: The latest blog I wrote about just behind the scenes of the book Work Optional, because people are always, I think, fascinated by the behind the scenes stuff – but really big picture lately I’ve been sharing more of what we’ve been learning as we go through early retirement and kinda go through the ups and downs of it. Remind people that early retirement is great, but it’s not magical, it doesn’t magically make you healthy if you’re unhealthy, it doesn’t magically make your marriage perfect if you’re married. Stuff like that, just kind of like sharing the real world look at it. And then also I like to keep people updated on health care developments. Right now health care is in big limbo with the Texas judge striking down the ACA. So what does that mean for early retirement? Definitely, I’ll be posting much more on that in the future.
Joe: Awesome. Well, thank you so much for your time Tanja.
Tanja: This was such a pleasure. Thank you.
Joe: You’ve got to check her out on OurNextLife.com.
Andi: And the brand new book.
Joe: The brand new book, Work Optional: Retire Early The Non-Penny-Pinching Way. Where can people find that – anywhere finer books are sold?
Tanja: That’s right. All the book places. It’s also available in e-book and audiobook, read by me.
Joe: Oh really? You have a very nice voice.
Tanja: Thank you!
Joe: Yeah, they’ve asked me to read books before too.
Andi: (laughs) Have they, Joe?
Tanja: You should do it, it’s really fun!
Joe: I’m fully lying. I can barely read a bio let alone a full book.
Andi: Yeah. Tanja, we’re lucky he pronounced your name correctly. (laughs)
Joe: So have you gone to a bookstore and saw your book?
Tanja: No I actually am hoping to do that today. (laughs)
Joe: All right well then you’ve gotta take a picture with your book.
Tanja: I sure will! Follow on Instagram!
Joe: Awesome. All right Tanja, we’re talking to Tanja Hester, check her out at OurNextLife.com.
And of course, since we recorded this interview, Tanja and Work Optional have been featured on Business Insider and CNBC! Check the show notes at YourMoneyYourWealth.com for those links. In the meantime, wow! We’ve been calling for your money questions and you have responded! If you’ve sent Joe and Big Al a question recently, we’re stacking up the answers and even some video responses, so keep listening to the podcast for those and watching your email because I’ll be sending the responses to you directly! To get your money question and maybe even your voice featured in the podcast and possibly in a video, scroll down YourMoneyYourWealth.com until you see “Ask Joe and Al On the Air.” Click that, then fire away with your questions.
Joe: We have a phone message. Let’s see what we got there.
Rob: “Yeah I had a question there. Joe was saying that the Roth is passed on to your kids tax-free. I was told by my tax accountant that no, it is not passed on to your kids tax-free, only to your spouse. See if they can clear that up for me, that’s a big question mark for me, all right? Thanks. This is Rob and I live in Ohio, OK? Thanks.”
Joe: Rob from Ohio. Appreciate your call. Here’s my advice to you: I would fire your tax account, because he doesn’t know what he’s talking about.
Al: Fair enough. (laughs) So it is tax-free to your kids, and if your kids still have a balance when they pass to their kids, it’s tax-free to them as well. Now, what the accountant could be thinking is estate tax, and none of these accounts are estate-tax-free. In other words, if you have more than $11.4 million in assets and you pass away, whether it’s a Roth…
Joe: And Rob if you’re married, if you got $22 million, then the Roth might be taxed. But it’s not income tax, it’s an estate tax. You’re giving the account the benefit of the doubt. You’re trying.
Al: I’m standing up for my accountants.
Joe: You’re standing up for your brethren.
Al: I am. But my guess is that’s where the confusion came.
Joe: No way. I’m telling you right now, this accountant doesn’t know what he’s talking about.
Al: Well I know that. But I’m just trying to figure out why he would have said that, because it’s so clearly a false statement. The Roth, once the once the money goes into a Roth, it’s tax-free.
Joe: I think there are a lot of individuals that really don’t know this stuff. Even accountants, apparently. Right. A lot of accountants don’t even know what Roth IRAs are. No offense, because they’re doing the tax return. No planning. And so if I’m doing a Roth contribution Alan, and you’re my CPA, you look at my tax return, I give you my stuff, are you going to ask me, “did you make a Roth IRA contribution?”
Al: Well, I need to, because if you make too much money it’s disallowed. So I’m supposed to. (laughs)
Joe: OK. But look at my tax return. I’m not even filing a tax return this year, because I make less than $12,000. But let’s assume I made $15,000 because this podcast has taken off. (laughs)
Al: (laughs) You’ve got a 50% raise?
Joe: So if I file my return and you already know, let’s say, I don’t qualify for a Roth – an account is not going to ask.
Al: Yeah. Well if I know your income is well below the limits, then I don’t need to know.
Joe: Right. And then are you going to ask me, “hey, thanks a lot for all your information that you’re giving me, by the way can I get your Roth IRA a statement?”
Al: No, of course not.
Joe: The only way you would do that if you were, like, also an insurance salesman/CPA. (laughs)
Al: (laughs) True. Especially for a Roth, there’s no reason to ever get it.
Joe: Right. Because it’s an after-tax contribution, it grows 100% tax-free. And when you pass away it’s tax free to the heirs. To anyone. So the CPA was probably just – or the tax accounant or whoever it is – is confused on tax law, period. Because it’s like, “no it could go to your spouse but it goes your kids?” I guarantee you this is what happened. “No, I don’t think that’s right.” And so the guy leaves, calls Joe and Big Al, and then the CPA looks it up and was like, “oh shoot! Damn it! I think, oops, I made a mistake!”
Al: He asked his buddy down the hall.
Joe: “Hey Rob! This is Mr. Accountant again.” (laughs) “I might have given you the wrong answer.” Or maybe he just was, “eh, don’t worry about it.” Another story, dude.
Andi: “Dude.” (laughs)
Joe: Sorry, didn’t mean to call you dude. (laughs)
Al: That’s all right, that’s endearing, I think.
Joe: All right. So I was teaching a class at Southwestern College in San Diego, California. It’s in Chula Vista. Awesome, I always love teaching down there. Usually a lively group, they like to have a lot of fun. And so we’re going through tax diversification, here’s what an IRA is, here’s what non-qualified account is, here’s what a Roth is. Here’s how these accounts are taxed. Here’s how you can invest in them. Here’s how they get money into them and so on and so forth. And so one gentleman was like, “wow, I have all my money in a retirement account, maybe a Roth might make some sense for me.” So it’s a two part class. He comes back, he’s like, “yeah man, my accountant shot that one down.” And I was like, “OK well, what do you mean?” And he goes, “yeah, what the account said, it doesn’t make any sense for me.” I said, “oh OK, well you know, that’s fine.” I don’t know anything about this gentleman.
Al: Right, you’re throwing out ideas.
Joe: Yeah. Justhey, well if it doesn’t work, it doesn’t work. All right. Well then, you could try this do this, do this. There’s a thousand other things that you could potentially do. So he ends up coming into the office. Allegedly. And he goes, “hey, I’ve been with my advisor for a long time, and really like my advisor, and she kind of put the kibosh on the on the whole Roth IRA deal.” And I was like, “Oh OK.” So he shows me the email. And he’s like, “hey, I was talking to some people, and maybe it might make sense for me to contribute a little bit of my 401(k) to the Roth 401(k), just to get a little bit more tax diversification. What are your thoughts?” And so the question that he asked her was, maybe I put a couple percent of my 401(k) contributions into the Roth part. I wish I had the email here. She’s like, “well, I don’t want to be sassy here, but you tell your accountant friends to stay in their lane.”
Al: (laughs) Really?
Joe: Yes. And then went on to say all these faults. It was like, “first of all, you don’t qualify to do a Roth.” I’m like, okay 401(k)s, there is no income limitation! You can make a million dollars a year, if you want to put money into a Roth 401(k)? By all means, put money into the Roth 401(k).
Al: Right. So that was first wrong.
Joe: And then “your income is is too high.” His AGI was $68,000. Married.
Al: It’s below the contribution limit as well.
Joe: His taxable income was 40 grand. Because he had just started a small business and all of this kind of carried over, so he had a lot more deductions.
Al: So he’s in the low 12% tax bracket.
Joe: And then it’s like OK well, you stay in your lane!
Al: (laughs) You get in the right lane.
Joe: Get in the right lane or do some studying! I hate bashing other – but I mean, come on. You know, I feel bad for Rob. The tax guy is saying no, the thing doesn’t pass to the… Well good for you Al.
Al: I try to stick up for ’em.
Joe: Your glass half full and I’m half empty. You’re my yin to my yang.
Al: OK… I guess that’s good… (laughs)
Joe: Let’s go to Debra from Missouri. “Al- ” What the? No, we’re not going to Debra from Missouri.
Al: (laughs) She’s asking me a question.
Joe: All right. “I decided after I turned 59 and a half to move some of my money held in a traditional IRA with a fee-based financial planner to Vanguard. I moved $30,000. Then I converted $27,000 of that into a Roth, so I know I have to pay taxes on that. But then I moved another amount, $90,000, from a traditional to Vanguard traditional. On both of those moves I drafted a letter and endorsed it over to Vanguard as trustee to trustee, because we live in the sticks, so could not get the gold medallion transfer unless I opened up another investment account and I was not interested in that.” OK. “I never put money in my personal bank account.” (laughs) Deborah! She’s got gold medallions, she doesn’t want to put money in her bank account, she digs it behind her house… kidding. Why wouldn’t she put money in a bank account?
Al: Because she didn’t want to foil the 60 day rule, maybe?
Andi: Yeah keep reading.
Joe: Okay. “Both transfers were done within-” Oh, she didn’t put the rollover… I though she said, “I don’t believe in bank accounts! I got gold medallions and I got a treasure chest!” (laughs) “Both transfers were done-” See Deborah, you didn’t put my name in this email so this is what you get. “Both transfers were done within days of receipt and well within the 60 day rule.” So here’s the question. “Did I mess up the IRA one rollover per year rule, or am I okay for both under 26 USC section 408(d)(3)? if I deposit 15K into my SEP from my business, will that help reduce the tax?”
Al: (laughs) Okay we gotta unpack a little bit here. So let’s let’s start with, I’ll just kind of go through these things point by point. You moved $30,000 from a fee-based financial planner to Vanguard.
Joe: So that depends on how she did that.
Al: Right. So if it is a trustee to trustee, it’s not a rollover. No problem. You never got the cash, right. You can do as many of those as you want. “Then I converted $27,000 to Roth, so I know I have to pay taxes on that.” So that’s true. So she rolled 30 from one account to another. She transferred. Transfer is a better name.
Joe: Yes. Because you just screwed it all up if she rolled it. (laughs)
Al: Okay, she transferred it. Thank you. She transferred, so that’s cool. And then she converted $27,000, so she will pay tax on that. Agreed. So we’re in sync. “But then I moved another $90,000 from a traditional to Vanguard traditional. Both of these moves, I’ve drafted a letter, endorsed it over to Vanguard as trustee to trustee.” So it sounds like she tried to do a trustee to trustee but maybe it didn’t work because she ended up with a check? I’m guessing – that’s what I’m guessing. So she got two checks, maybe, because she’s talking about two different receipts, and she got them both within the 60 day rule.
Joe: Oh! See, I read this all wrong. I’m sorry Deborah. Because she coudn’t get the gold medallion – I mean, that’s like…
Al: Some kind of thing you get at Vanguard maybe?
Joe: No, it’s like a notary but a super-powered notary.
Al: Oh, so…
Joe: She couldn’t do the…
Andi: Not actual gold medallions.
Joe: No, I thought she was buying gold.
Al: Got it. Yeah.
Joe: So she had to get a notary, she couldn’t do it cause she lives in the sticks.
Al: So it wasn’t the trustee to trustee…
Joe: So she just wrote her own trustee to trustee kind of form and said, “Vanguard, do this, I live in the sticks and I can’t get a gold medallion or else I’m going-” I mean, it’s going to cost her 90 grand probably to travel to get it.
Al: Yeah. But so she probably got two different checks, I guess, that were in her name and she never put it into her account. She probably just put it into a retirement account. Is that how you read that?
Joe: What I’m reading here is that, yeah, so she’s got 90 grand from Vanguard, she said, “as a trustee to trustee transfer.” That’s what she wanted to do.
Al: Or maybe she got one check but she did $30,00, that was one check because she couldn’t do that…
Joe: Well there’s two different places, right? One was $30,000 from a fee-based planner and the other was $90,000 from another account.
Andi: She doesn’t necessarily say it’s another account. It does say, “from traditional to Vanguard traditional.”
Al: Well, let me try to answer the question. And the question is, if you did in fact receive two different checks, you do in fact only get one 60 day rollover per year. So the second one would not qualify for that rollover. That 60 day rollover. I don’t know what Section 408 D3 is off the top my head.
Joe: That’s a 60 day rollover rule. “On both of those moves, I drafted a letter, endorsed it over to Vanguard as trustee to trustee because we live in the sticks, so could not get Gold medallion transfer unless I opened up another investment account, and I was not interested in that. I never put the money in my personal bank account, both transfers were done within days of receipt and well within the 60 day rule. Did I mess up with the IRA one per year rollover rule?” I don’t think she did. I’m going to say that. But we have to figure out who they made the check out to. The rollover is that they’re going to write out the check to you. So if they wrote it out to you Deborah, if the check was made out to Deborah from Missouri who lives in the sticks, then you might have an issue. If they made it out to Vanguard, then you should be fine.
Al: Yeah okay, I agree with that. I agree with that, because that’s normally how you get money out of a 401(k). They write the check to the custodian that you want to move the money to.
Joe: So it’d say “Vanguard for the benefit of Deborah from Missouri.”
Al: Yeah, and that doesn’t count as that 60 day rollover, I agree with that. So if the check came to you, you had two checks and the second ones taxable…
Joe: She never put it in her bank account, and then so she deposited those checks at Vanguard, Vanguard took those checks. The only thing that’s confusing is that she didn’t want to open up another investment account. Well, I don’t know what that has to do with anything.
Andi: You know what the fact that she says, “I never put money in my personal bank account,” makes me think that it was made out to her.
Joe: Yeah, and then they were like, “Well, you open up another investment account, don’t put it in the IRA.” You know, I don’t want an investment account, I just want the IRA and I want the Roth IRA.
Al: Well, I think what she was thinking, just trying to read between the lines, if she had a couple different checks made out to her. She’s thinking, “well maybe if I don’t put it in my bank account and just put it directly into the new account it won’t count for the rollover.”
Joe: So I’m back on, I think she blew it up.
Al: Yeah. I would agree with that – unless it was made out to Vanguard directly.
Joe: Yeah. So Deborah, without actually looking at what paperwork you filled out, and what the checks looked like, to me, just kind of figuring out the pieces here? Even though it took me five minutes to say that you’re not buying gold. (laughs)
Al: (laughs) It’s taken you 9 minutes and 48 seconds. Anyway…
Joe: She blew up the 60 day, I think…
Al: I will say it’s complicated enough, have your accountant take a very close look at this.
Joe: No wonder why she asked Al. (laughs)
Andi: Yeah she said she could not get the gold medallion transfer unless she opened – that makes me think that gold medallion tranfer is a Vanguard-specific thing.
Joe: No, there’s all sorts of different forms. The gold medallion is not on the receiving end, it’s usually on the transfer end. So let’s say that I had money at XYZ Company. They want to keep that money. So they’re gonna put all sorts of different kind of roadblocks, right, to say, “All right well, if you want to move the money to Vanguard, okay, sure no problem, but you’ve got to get a gold medallion stamp and the person needs to be, you know, over 65 years and have 15 years experience… (laughs)
Andi: And you have to open another investment account. Yeah.
Joe: So stupid stuff like that, I’m kidding. But she’s like, “I want to jump through all those hoops, just send me the check. You’re making a difficult on me. I don’t want to be difficult here. I just want my money Vanguard. I want to put money into the Roth IRA. Just send me the money.” And then guess what. I think she might blew it up.
Al: Now if it was the one account, she should have done both amounts on one check, and then that would have worked.
Joe: Yeah I’m guessing that was two different accounts.
Al: I’m guessing that too.
Joe: So, I’m sorry Deborah. I wish… I should have read this email maybe a little bit before we went on the air.
Al: That would have been good.
Joe: Then I would have just been sharp as a tack. But we worked it out.
Al: It makes it more fun.
Andi: It’s part of the excitement of the show.
This just goes to show, there are so many complicated rules and requirements when it comes to your Individual Retirement Accounts – whether it’s taxation of an inherited Roth IRA like Rob was asking about, or the rules around transferring IRA funds like Deborah did – even Joe and Big Al have to work hard to figure this stuff out! Check the show notes at YourMoneyYourWealth.com and download the free guide, 8 Types of IRAs for an overview of various different IRAs, who is eligible for each, and what they’re best for. Again, that’s in the show notes for today’s episode at YourMoneyYourWealth.com
Al: So we get some more emails right?
Joe: Yeah. We got one from, um… amnominus.
Andi: (laughs) Mahna Mahna!
Joe: “What do you think about investing in Vanguard TDF 2045 for a retirement? I’m 39 years old, thanks.”
Andi: Send him to Paul Merriman.
Joe: All right, let’s break this down a little bit. TDF: that’s a target date fund. Target date funds are this: is that companies such as Vanguard, Fidelity, so on and so forth have – this came on the Pension Protection Act of ’06. And now if you look, 2019, they are exploded. They’re very very popular in 401(k) plans. And the purpose behind it is to help the average investor have a diversified portfolio where they don’t have to do anything.
Al: Yeah it’s a single investment, and it gets a little bit more conservative as you get closer to retirement, and they kind of rebalance things for you.
Joe: Yeah. So let’s say you’re 39 years old, 2045, that’s what, 26 years from now.
Al: Yeah. 39, so 65 is what he’s looking at.
Joe: Okay. And so when you look at that, well what’s going to happen with that fund is that it will probably be 80% stocks 20% bonds.
Al: Yeah something like that.
Joe: And then as he gets a little bit older, or she gets a little bit older, then it’s going to start switching. It’s going to get, now 70/30 then 60/40, 50/50 – 50% stocks 50% bonds, and then oh, 60% bonds 40% stocks and so on as they get approaching that 2045 date. So what do I think about investing in those? I’m not a huge fan. And it all really depends on circumstance, I guess a 39 year old, if you’re putting in, I don’t know, a few hundred bucks a month into your overall retirement, I guess I’m fine with that. But here’s the kicker. Stay with that one fund. Most people, I mean I see it, and it’s like you’ve got one person has a 2045 fund and then a 2030 fund then a 2050 fund. And I’m like, what are you doing? When are you retiring?? This is just a redundant strategy that doesn’t make any sense. They are meant to hold 100% of your assets, because there’s going to be stocks and bonds in there and it should be well-diversified between asset classes and sectors.
Al: Yeah, so I’ll take a little different approach. I’m going to say, for a lot of folks, I kind of like that as an investment, mainly because then you don’t have to spend all this time trying to figure out asset allocation and how much should I have in large caps and small caps and international and this and that. It’s kind of an easy way, Vanguard tends to be lower-cost funds. So I think for a lot of folks it’s all right. The downside is, if your circumstance is different than average, they’re going to put you in with every other 39 year old, whether you have lots of money or nothing, and you may have a different set of goals. But at 39, I agree with you Joe, most of the account’s going to be in stocks, and I would say for a lot of folks, that’s not necessarily a bad way to go.
Joe: We got Alan from San Diego, he writes in.
Al: That’s a great name.
Joe: It is. “I’m 72 years old and single. I have a pension and receiving Social Security. I recently inherited some money. I would like to invest that money, but I’m risk-averse. What can I put my money into that’s safe and will grow? I don’t need ongoing income from this investment. And P.S. – the stock market seems too risky for me.” Well Alan, it might be. That’s a good assessment. You don’t need the money, you want the money to grow, but you don’t want to have any investments that will grow. So that’s kind of a… catch 22 is what they say.
Al: Yeah. Well because risk and return are related. So in order to get some growth, you’ve gotta assume a little bit of risk. But if you don’t need the money, you don’t necessarily have to take a lot of risk. And if you want to put your money in CDs or something like that, by all means.
Joe: Yeah. So Alan, I would look at it like this, and say, “okay, I’m 72 years old. I don’t necessarily need the income from the overall money. Maybe it might be there for if I need some sort of health care, long-term care issue in the next 20 years or something like that.” Or maybe you want to just give it to the next generation as a nice inheritance. So it all really got boils back, Al. What’s the money for?
Al: Yeah what’s the goal. I will say Alan, you may not be thinking about this. You’re receiving a pension. And how do you think you’re getting paid in the pension? There are investments in the pension plan that are stocks. That’s how you’re getting paid. So you actually-
Joe: You are invested.
Al: You are invested. You may not know it. You may not feel it. But that’s how you’re getting the pension. And when you think about the stock market, I mean maybe – I would suggest maybe, if even if you’re very risk-averse, still have 20 or 30% in the market, have 70 80% really safe because if you’re 72, you may live to 92 or 102. You’re going to not keep up with inflation by not having any stock market exposure.
Joe: Absolutely. You could do some bonds, short-term bonds, long-term bonds. You could do CDs like you said, but yeah, I would keep it simple. Try to keep it inexpensive and tax-efficient, because this is outside of your retirement account. You’re a single guy. RYou have a pension, you have Social Security, so you’re probably in a decent tax bracket given the fact that you have two income streams. Even if they’re small, I mean, you’re still probably in the 22% tax bracket.
Al: Yeah it could be it as a single taxpayer, you bet.
Joe: Right? So then you buy CD, that CD interest, let’s say you get 2.5, 3% on the CD. Well then you’re losing 22% fed just on that interest, plus 10 – or you know, 6 or 8% from the state. Call it 30% off the top on 2.5%. I mean, is that really worth it to lock it up in it in a CD? So you’re not really outpacing inflation there. You could go into municipal bonds, but there’s risk there. It depends on what type of bond that you want to own, General Obligation, or you want to go revenue? What duration do you want to look at – five years? Or do you buy individual bonds and say, “you know what, I can take on a little bit more maturity risk or term risk because I don’t necessarily need the income, and I would like to get tax-free income, just reinvest it and then at the end of 5-10 years, I get my money back and get a little bit higher yield?”
Al: Yeah. And we say this often, but it always comes back to what else you have going on – you can’t look at a single investment in a bubble. You got to look at the entire situation.
Joe: So hopefully that helps you out, Alan. I appreciate all your e-mails today, and I appreciate all of you for hanging out with us each and every week. For our wonderful and beautiful producer, Andi Last, for Big Al Clopine, my name is Joe Anderson, we’ll see you again next week. You just listened to, what? Your Money, Your Wealth®.
Special thanks to today’s guest, Tanja Hester. Find links to everything you need, from Tanja’s Our Next Life blog to her new book, Work Optional: Retire Early the Non-Penny-Pinching Way in the show notes at YourMoneyYourWealth.com, along with all the links you need to share and subscribe to this podcast on Google Podcasts, Apple Podcasts, Spotify, listen on YouTube, or on your favorite podcast app.
Click to subscribe to the podcast on any of the following apps:
Your Money, Your Wealth® is presented by Pure Financial Advisors. Click here for your free financial assessment.
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.