Professor Jamie Hopkins

Jamie Hopkins, Esq., CFP®, MBA, RICP®, is the Director of Retirement Research at Carson Wealth and a former Professor of Taxation at The American College, where he helped co-create the Retirement Income Certified Professional® (RICP®) education program. Hopkins is a Finance Professor of Practice at the Heider School of Business at Creighton University. He strives to increase the retirement [...]


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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 4, 2019
Jamie Hopkins: New Retirement Legislation: Death to the Stretch IRA?

Professor Jamie Hopkins (Carson Wealth & Heider School of Business/Creighton University) talks about impacts the SECURE Act could have on retirement planning – particularly the end of the stretch IRA provision, which allows inherited individual retirement accounts to remain tax-deferred. Plus, how to reduce taxes when you have significant capital gains, when you can take tax-free and penalty-free 457 distributions, whether or not to max out your 401(k), and more.

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Show Notes

  • (00:51) Jamie Hopkins: How the SECURE Act Would Change Retirement
  • (10:25) Jamie Hopkins: Will New Retirement Legislation Mean the Death of the Stretch IRA?
  • (21:20) How Do I Reduce Taxes When I Have Significant Capital Gains? (video)
  • (30:28) How Much State Tax Should I Withhold on a Small Pension?
  • (33:10) When Can I Take Tax-Free and Penalty-Free Distributions From My 457?
  • (34:46) Why Max Out the 401(k)?


The House of Representatives has passed the SECURE Act, Setting Every Community Up for Retirement Enhancement. Today on Your Money, Your Wealth®, Professor Jamie Hopkins returns to  YMYW to discuss what impacts the first major retirement legislation since 2006 could have on your retirement plans. Will we finally see the end of the stretch IRA, which currently allows non-spouse beneficiaries to inherit IRAs and their tax-deferred status? Plus, Joe and Big Al answer your money questions: how do you reduce taxes when you have significant capital gains? When you can take tax-free and penalty-free distributions from a 457 plan? Why in the world would the fellas recommend maxing out a 401(k)? (Plot twist: they don’t, necessarily.) I’m producer Andi Last, and here with our guest, Jamie Hopkins, are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

:51 – Jamie Hopkins: How the SECURE Act Would Change Retirement

Joe: Jamie’s been on the show before – Esquire. Smartest guy we probably ever had on this show. He’s a CFP®, MBA, RICP®. Now he’s the Director of Research over at our buddy Ron Carson’s place, Carson Wealth. He was a former Professor of Taxation at the American College where he helped co-create the Retirement Income Certified Professional, the RICP® educational program, which is extremely popular, it’s a phenomenal program. So Jamie, thank you so much for hanging out with us.

Jamie: Hey, yeah, thanks for having me on. It’s amazing I think it’s probably about a year ago or so I was on last and I was like, “Man a lot of lot’s changed since then.” Actually even since you got that bios something changed recently – I actually just signed up, finance professor at Creighton University’s Heider School of Business. So I’ve got another thing somehow to put after my name. I don’t know. They’re not gonna fit anymore. (laughs)

Al: Yeah. Your business card is off the charts.

Joe: Yeah. I mean it’s got like a poster. (laughs)

Jamie: Yeah I hand out posters. (laughs)

Joe: It’s a nice glossy, I’ve got one in my office. (laughs)

Al: It’s a five-page flyer. “Here’s my bio.” (laughs)

Joe: Well Jamie I want to talk to you a little bit about maybe some changes in the retirement landscape of what’s going on in Capitol Hill.

Jamie: Yeah absolutely. I know you said you talked about it a little bit recently. The Secure Act, you know it sounds great. That’s a nice name to have associated with it. You know it’s the “Setting Every Community Up for Retirement Enhancement Act.” I’m like, “That sounded really solid.” I’m going to have kind of two parts of me here my cynicism part and the other part I guess, the more positive – we passed bipartisan legislation in the House. I mean a 417 to 3 vote, almost everyone on board. And that typically gives me as much pause is when something’s passed entirely by one party. (laughs) So it sounds great, everyone’s on board. And generally, I’d say for most people there’s not anything to be worried about when you hear about this act. It’s generally some common sense changes. There are about 30 almost different changes that they’re putting through here and we’ll go over a handful of those – kind of the ones that are really going to impact you. I now say that you know, it’s not done through the Senate yet, not been signed into law, but everyone in D.C., this is expected to pass this year. I can’t give you the next month, two months, three months, August, September, but very, very high expectation to pass this year, probably with a couple tinkering pieces. But it will pass this year. As certain as we can be about anything about Congress today, this is pretty much in the certain category.

Joe: You know it’s funny the “Setting Every Community Up for Retirement Enhancement.”

Al: It sounds wonderful.

Joe: I’m like, “Man there’s gotta be some awesome stuff going out in this thing.” I’m interested to hear what your take is and if it’s actually going to set every community up for a phenomenal retirement. (laughs)`

Al: We might get your cynical side here.

Jamie. Yeah. I don’t think it does almost anything to enhance retirement security in America. That doesn’t mean I don’t agree with it, I generally agree with everything they’re doing in here, but that is not what this is doing. This is probably better labeled, “Congress Tinkers at the Fringes of Retirement Act.” Most of these things have been around for years as proposals and they finally got it together. The positive thing about this is Congress, they get together, and it looks like both the Senate and the House are going to come to an agreement across party lines to improve some things, even if it’s small things. So if you want to take the really big positive out of it, that’s it. That’s a positive. Now throughout the bill, I would say, there are all kind of small wins you could say, we took a half step forward. Probably the most significant change, I actually say what most people won’t view positively, it’s the stretch IRA. It’s almost done. We are seeing the end of it and I’ve talked about that for years that it’s going to come to an end during Obama’s administration. I think for seven of the eight years it was on his proposed kind of budget to remove the stretch IRA. So we’re there, it’s in front of Congress, it’s through the House, it’s happening. So that one is probably the one that’s going to require the most significant amount of planning. For most Americans, it’s not gonna have a huge impact, but for larger IRAs, 401(k)s, there’s gonna be new planning that needs to happen around that.

Joe: Well let’s come back to that and I guess let’s talk about some of the positives. If you see some huge positives here, and then maybe we come back to the stretch and talk maybe more specifically on who that really is going to affect and what planning opportunities they might want to take advantage of.

Jamie: Yeah so I’ll run through and I think a good resource if somebody listens to this, I wrote an article in Forbes, kind of the 8 major ways the SECURE Act is going to impact retirement planning. There are about 30 provisions in there, but really 8 of them I’d say are kind of major. The very first one opens up access for small employers to run what we call multi-plan employer plans. It’s going to make that process a little bit easier. That’s a small win in the sense that we probably will see a small uptick in small employers accessing multi-employer plans. That means in the next couple of years we could see more people with the ability to save for retirement at their work – that’s a positive. The reality is we know that’s not the major reason why small employers don’t set up plans, but it’ll move the needle a little bit. The next one – which actually people who is both a positive and negative – increasing the ability to essentially provide annuities inside of retirement plans, 401(k)s. I would actually say that’s more been a lobbying effort from the insurance and annuity world. I don’t run into very many Americans that come up and tell me if they only had more access to annuities in their 401(k) they’d be better off for retirement. Again, it’s not a bad thing in of itself. Most people, when they’re leaving their 401(k), defined benefit plans, they’re turning down the annuity options already there today for lump sums. So my assumption is that’s going to continue and more of the annuity decision is going to be made in the IRA world anyway. But it’s in there.

Increase in the required minimum distribution age. I think that most Americans would like this. This is, instead of 70 and a half, moving it up to a nice round number, which I think is beneficial in and of itself. I would rather have it been 70 or 71 from the start, and the House pushed it to 72. Now, the bill in front of Congress in the Senate side, called the RESA Act, that was actually looking at pushing it to 75. So if you’re looking at one of the ones where there’s a slight difference between the two, we could see maybe the RMD age pushed out even further. The benefit for this is really it gives people and their money a little bit more time to grow from 70 to 72 or 70 to 75, depending on what gets passed without having forced distributions out. The general idea behind this is people are living longer so let’s push it back a little bit to account for that – common sense change, I think generally well-liked by people, gives people a little bit more control over their money. Probably what I would say is my second favorite change in the whole thing is the removal of the age limitation to contribute to a traditional IRA. Probably one of the more nonsensical rules that were out there in retirement planning that somehow after 70 and a half you weren’t allowed to contribute to an IRA anymore – but you could contribute to a Roth IRA, you could contribute to a 401(k), defined benefit plan, but for some reason the IRA was carved out. It really made no sense. So they’re removing that. That’s a good thing. So for all those people who continued to work maybe side gigs and things like that, that want to get that deduction for contributing and put some money aside, that’s still going to be there. You know again, I don’t think it’s going to be, most people aren’t working after 70. But I think I saw something that said by 2030 it’s going to be 10% of the population will still be working after 70. So if you’re kind of looking down the road, that looks like a positive change.

Another thing that I really like here, they actually added a new exception for what we typically call the 72-T early withdrawal penalty tax, actually allow people to pull out some money from their retirement accounts to pay for adoption and qualified birth expenditures. So the reason why I’m telling you I love that, I just had a new kid in April. It’s very expensive. Just going to the hospital if that’s the way you kind of go through the process, there are thousands of dollars worth of costs there and then some people, they need to tap into retirement accounts. I know that’s not the best thing in the world, but to penalize somebody for having a kid because they need access to money, I don’t like. So I really like this new feature. I think from a public policy standpoint that one’s really nice – and it’s not going to cost the government a whole lot there, but that’s kind of a feel good, it’s just kind of the right thing to do from a policy standpoint. So that’s a very nice feature.

Congratulations Jamie on the new baby Hopkins! Since only have time to touch on a few of the items in the new bill, we’ve linked to Jamie’s Forbes article, 8 Major Ways the SECURE Act Could Impact Your Retirement Plan, as well as the full SECURE Act bill with all 30-something changes, in the podcast show notes at YourMoneyYourWealth.com, along with the transcript of this interview and Big Al’s Quick Retirement Calculator so you can see if you’re on track for retirement. If you have questions about how new legislation might affect your retirement planning, click Ask Joe and Al On Air at YourMoneyYourWealth.com and send the fellas a voice message or an email. Coming up momentarily, details on how the stretch IRA will be affected by the new proposal.

10:25 – Jamie Hopkins: Will New Retirement Legislation Mean the Death of the Stretch IRA?

Joe: When you look at all of these different things, how much influence do you think our profession has on this? It boggles my mind of how much work or how much money and time and discussions and meetings and everything else. And then they come up with this? It’s like I don’t know what – it’s just like it’s completely ridiculous to me.

Jamie: (laughs) Yeah, as I said, it’s a lot of small tinkering, to imagine all the probably tens of millions if not more dollars that’s been spent to kind of get something like this on the docket is pretty disappointing. Again, the bill itself is not bad, right? I’ve got to keep reminding myself that I don’t really have problems with it, but it’s kind of a lot of nothing when you really boil it down. The thing here is, the profession I would say, it depends on who we’re talking about. The insurance lobbies and monies, they have a bigger impact. They have more money, they’re more coordinated in their efforts. The individual financial advisors, the RIAAs, there are actually less of us and we’re less coordinated when it comes to lobbying efforts. We haven’t been nearly as successful in kind of pushing quality planning measurements through. So a lot of the big stuff that still happens has been very insurance driven, either positively or negatively. Trying to regulate that industry or for them kind of moving things forward – and again it’s not a good or bad thing, it’s just that they were more coordinated, they have more money, they’ve been around longer, they’ve got a little bit more cohesive goals than I would say the traditional fiduciary advisors, which we’ve kind of struggled to move some of our thoughts forward down in D.C..

Joe: So last but not least is I guess the biggest one that maybe Al and I see – the stretch IRA, where a non-spouse beneficiary was able to – or still able to today – stretch out those tax payments of a retirement account over the life expectancy of the non-spouse beneficiary. But in this bill that’s changing a bit.

Jamie: Yeah if you look at it from the tax perspective that’s the big money item in there. That’s actually a huge tax revenue generator for the federal government by making this change. And essentially it’s allowing them to fund a bunch of other stuff that’s in the bill by kind of removing that stretch capability. Now, a number of years ago, I actually started saying, “you know what, this is going to go away because of actually something that the Supreme Court said.” And with the Supreme Court that is an inherited IRA or retirement account is no longer a retirement account when you inherit it. And so if you take that opinion from just a couple of years ago and you look at that as the policy – that these are not retirement accounts – well all of a sudden then, why are we giving people the ability to stretch the tax benefits out for their life and through retirement? Again, we don’t have to decide if the Supreme Court was right, they’re last, they’re final, so they’re right. (laughs) But when we look at that, you say, “OK well Congress applies that same mindset back to IRAs. They’re going to get rid of this stretch.” Because it doesn’t make sense to give people a retirement benefit from an account that’s not supposed to be a retirement account anymore. So kind of public policy-wise I don’t find this to be a shock. The government’s looking for tax revenue, this generates tax revenue. What this will cause though is very big tax burdens for people who inherit large retirement accounts. Because all of a sudden we don’t know what the exact number is going to be yet, whether it’s going to be distribute over 10 years, which is what was inside of the SECURE Act. So if you inherit a million dollar IRA – Mom, Dad passed away a little bit early in retirement, you get a million dollar IRA – you’re going to have to spend down that IRA within 10 years. That’s $100,000 a year. That’s all a sudden moving you into a higher tax bracket, you’re paying higher taxes than you ever have before, You might be paying higher taxes than your parents ever paid when they put the money into the plan. So it in some ways actually undid some of the tax benefits they received by saving in an IRA. So there are some big negatives there. It is something that’s going to drive more planning, I would say. We’ve got to be more careful. There was a lot of post-mortem after death planning available when we had the stretch capability. I think looking at this, I’m actually still kind of hoping that some of the Senate provisions go in instead. But we’ll kind of see – I think that’s probably the one, and the RMD one, are the two that we might see some tinkering with. But the idea that we’re going to have a stretch IRA after this year is pretty much closed and shut. It’s going to go away. Really, to pass this bill they need the revenue from this. So it’s going to have to be part of it.

Joe: You know, there was talk of at least having a certain level that could stretch – let’s say if it was $400,000, $450,000. We saw that a couple of times over the last couple of years and then anything over that maybe had a five year, three year rule or maybe fully distributed. Is that in the Senate bill or is it now 10 years on both sides?

Jamie: Yes. So the Senate bill still has I believe a $450,000, somewhere in that range, where you could be on exclude IRAs underneath of that and still use stretch provisions for those and then maybe some larger amounts paid out a little bit earlier. So that’s where I think there still could be some tinkering here, and I think that would be beneficial to add something here. The other thing I’m a little bit worried about on this one is the lack of a clear grandfathering provision here. Now, this is something that the Department of Labor or Treasury Department could do in a rule-making afterward, actually kind of clarify that, which happens a lot of times with Congress – they pass bills and then we get clarifications from the agency later on. But that would create a good bit of uncertainty if let’s say this passes in September, get signed into law in the fall, and then all of a sudden somebody dies this year. Is the stretch capability gone immediately? What about the ones that are already in stretch? We would assume that they continue, but actually, I think a little bit of clarity there is probably needed. We might not get that in the final bill, we might have to wait for an agency to add some clarity there. But this one, it’s going to increase some tax burdens. That’s the government. That’s their plan here, is actually to raise tax revenue. So that’s as I said probably a downside. Public policy-wise you can see where it fits in based on previous Supreme Court rulings. As I said, people aren’t going to love this one. The good news on this one – it’s impacting your kids, not you. (laughs) So your retirement theoretically won’t be impacted by this one directly, but your estate planning, your legacy planning, strategic Roth conversions are definitely going to become kind of a better tax planning strategy with this in place. We used to try to leave these to kids and they could stretch out the tax implication over a long period of time, but all of a sudden, if they’re going to have kind of an increased RMD and they shorten time periods, it actually might be beneficial to do conversions before the owner passes away to leave them a tax-free Roth. So not to kind of raise the taxes as much for the children or grandchildren.

Joe: Yeah. Taking a look at both the parents’ rate, the kids’ rate, and then figuring out what’s the least amount of tax possible you can pay on these dollars. While the parents are still alive at least they get the compounding tax-free growth for the kids and then hopefully they can still stretch that out for 10 years and there would be all tax-free to the kids.

Jamie: Yep. So I think that’s going to get boosted by this. But again, that’s actually like complex planning. Like you’re gonna have to sit down with somebody – like you as a consumer – and know the kids’ rates and know the parents’ rates and know where we think the kids are going in the next 10 years with their income and jobs, to actually try to project planning for that. That’s not simple. The stretch was kind of simple because it allowed us to make some decisions after somebody died. The other thing there that’s going to create some challenges is a lot of people set up trusts for other people to put these in and help with some of that stretch management, and that’s kind of dead now. If this passes there’s not really much need for that because you’re not going to be able to manage it as simply. It doesn’t mean we’re not going to use trusts. There are going to be arguments for different uses of trusts, but some of those existing setups actually need to be redone if this actually gets passed. So we might be re-titling IRAs again into different accounts – so it could be an interesting setup with that.

Joe: You know I think, what, the stretch came about in 2000 maybe? Then you look 20 years later and they’re like, “wow, look at the trillions of dollars in these retirement accounts.” (laughs)

Al: “Slipping through our fingers.” (laughs)

Joe: “What the hell were we thinking?” (laughs)

Jamie: (laughs) Yeah pretty much, right? You kind of look at it and from a public policy standpoint it’s kind of hard to justify why we’re going to let this money stay tax-deferred for 40-50 years after this retiree passes away. That’s kind of tough. Now do I want a stretch IRA? Yes. Do our clients want stretch IRAs? Yes, if you have the capability. We were given something in the 2000s, do we want to keep it? Yes. That’s the human condition, once we’re given something nice, we don’t want to give it back. (laughs) So this is kind of that moment. We were given something nice for a little bit and now they’re taking it back.

Joe: We’re talking to Jamie Hopkins, you can check him on at HopkinsRetirement.com. His latest book is Rewirement. See that? I needed to practice that too, Jamie.

Jamie: You got it this time, yeah!

Joe: Rewire the way you think about retirement. Check out his book, it’s awesome. Go to HopkinsRetirement.com. Jamie, I know you’re a busy guy. I really appreciate the time.

Jamie: Yeah, absolutely, I appreciate being on here and I think the simple thing for people who are kind of followed along and listening is if this bill passes, if you hear this stuff and it sounds confusing and I didn’t simplify it enough, it means probably go talk to somebody. Reach out, speak to somebody, learn more about it, learn more about your planning. That’s typically what this means – if you feel uncertain about what Congress is doing, you have some uncertainty in your life and planning, work on that. And so I try to encourage people to – like this bill, secure your own retirement, don’t hope that Congress does it for you.

Joe: Yeah, well every mom, child, father, grandparent, in every community, Alan, is going to be secure now because of this bill.

Al: That’s what it applies. (laughs)

In the coming weeks on YMYW we’ll learn about real estate investing – and not your average residential real estate, but raw land, with The Land Geek Mark Podolsky. We’ll find out how to make the most of Medicare and avoid all the possible Medicare mistakes with Medicare expert Danielle Kunkle Roberts, and we’ll learn about the retirement hustle of Rick Durso, who caddies for the Symetra golf tour. Make sure you’re subscribed to the YMYW podcast or the podcast newsletter so you don’t miss anything – find links in the podcast show notes at YourMoneyYourWealth.com. It’s time to answer your money questions. Click Ask Joe & Al On Air at YourMoneyYourWealth.com to send in yours, and if it’s a good one I may post a video of the fellas answer in the podcast show notes, like I did for this next one:

21:20 – How Do I Reduce Taxes When I Have Significant Capital Gains?

Joe: Daniel. Or Danielle.

Andi: It’s Daniel.

Joe: Daniel. Dan. Party foul. No location given. We’re going to stop answering your questions…

Al: …unless you tell us where you’re from.

Andi: Just make something up – or else I will.

Al: Where do you think he’s from. Los Angeles?

Joe: I dunno. Nope. I don’t think so. Little Rock, Arkansas. “I have a significant amount of taxable capital gains in my portfolio. Is there any way to reduce the taxes on my portfolio so I can modify my investments? Thank you for any advice you can provide.” So he’s got a “significant amount of taxable capital gains in my portfolio.”

Al: So there’s a couple ways you could answer that question, I would say. I’ll start with the first way I can think of…

Joe: Well congratulations, you made money. Pay the tax and move on.

Al: (laughs) We can do better than that. So one way we could take this question is, he’s talking about he’s got a lot of taxable dividends – in other words, maybe he got into some high dividend-paying stocks and so – or maybe he’s in actively-traded mutual funds.

Joe: Oh, you think that’s his question?

Al: Well that’s one way to answer it. And then the other is, probably what you’re thinking, which is he’s got gains in his portfolio.

Joe: Okay. Yeah. Both ways. I like your style.

Al: So I’ll start with the first one. The first one is when you have investments outside of retirement, particularly like if it’s a mutual fund or index fund. That particular fund is going to have assets. Stock, for example, stock certificates, and those stock certificates are interest in companies that pay dividends. And those dividends actually come to you and they typically come to you once a quarter and you have to pay taxes on them, and then typically there are some buys and sells inside the mutual fund. Those are called capital gain dividends, and that tends to happen in December. In general, it could be different but that’s most commonly. And so there are certain mutual funds that are tax efficient and certain ones that are not. And the ones that are tax efficient tend to be more like index-type funds like the S&P 500 where it’s just mirroring an index and so there’s not a lot of trading, buys and sells. And then it’s kind of a cross-section of companies, some or higher dividend stocks some are lower dividend-paying stocks. As opposed to, there are mutual funds that have high dividend-paying stock companies. And so all the sudden, it’s like even if you don’t need the money, even if you’re reinvesting that money to buy more shares, you’re paying taxes as you go, which isn’t very tax efficient.

Joe: Yeah, it’s a tax drag.

Al: Right. Yeah. So if that’s the question, then it’s very simple, you just switch some of your investments that are generating a lot of dividends and switch to ones that would generate less dividends, maybe even go to municipal bonds, which is tax-free interest. There are ways to reduce the income that you actually pay.

Joe: Yeah I think you look at the type of fund that you’re in. If it’s an actively-traded fund, if it’s an actively-managed mutual fund, you’re going to see a lot more turnover in those funds, that will kick out more types of interest and dividends, capital gains that you’ll pay tax on even if you’re reinvesting.

Al: Yeah. And worst comes to worst is if you buy into that fund in, let’s say early December and then they have this big capital gain distribution and so you’re basically paying tax on, in essence, everyone else’s gain over the last year.

Joe: And be careful also with those types of investments because we’ve seen where the investment actually went down in value and you still got a tax bill. So just understand what you’re holding outside of retirement accounts to be a little bit more tax sensitive.

Al: Now for those of you that are worried about that, it does work out in the end, because when you pay tax on this it increases your tax basis so that when you sell that investment, there’ll be less gain.

Joe: Yeah. But there are also times too that the mutual fund managers are buying and selling stocks and they have their own cost basis within the stock, within the fund. And let’s say your mutual fund NAV price is at $20 a share and the market tanks and it goes to 10. You still might have to pay tax on a totally different basis within the fund because they could have been trading.

Al: They’re issuing the capital gains dividends based upon their basis inside. Wow, now you got really technical. Look at you.

Joe: (laughs) Yeah. Right. So it wouldn’t work out. It wouldn’t even out. Where I think what you referring to is let’s say if I had a dollar dividend and my stock price went down, it’s the same-same.

Al: Yeah. Yeah. I mean in essence, you’re basically prepaying a tax that you don’t necessarily have to pay to later when you actually sell that investment. So that’s one way to answer the question. The other way, which I think where you went, which is where I went originally too, which is, maybe inside his non-qualified or non-retirement investments there is significant gain. He bought some stock at $10,000, now it’s worth $20,000, or he bought at $50,000, now it’s worth $200,000 – whatever. And it’s like, “gosh, I’d like to take some of these profits but it’s there’s a lot of gain in there.”

Joe: Yeah. It’s like, “I don’t want to sell this.” (laughs) So our advice is always, you want to make sure that you have the appropriate diversified portfolio given what you’re trying to accomplish and if you have to pay a little bit of tax, so be it. There are strategies though long-term to reduce some of that bite. Because if I’m just holding on one security, for those of you that like to buy individual stocks, it’s very, very difficult to do any type of active tax management within it, such as tax loss harvesting. Because if I have a gain in one stock and if I have a loss in another, I could potentially offset that gain with that loss. So you have to look at the portfolio and how many investments that you actually own, how diversified are you, and then there are some active tax strategies that you could do along the way. So if I sold now and had a tax bill, I still have another seven months, let’s say, in the market. And look at how volatile the market’s been. There could be ways to sell a security at a different price and harvest some of those losses to offset some of those gains.

Al: Yeah and those losses, we’re talking capital losses. So let’s say you sold a security or investment and have a big gain and you did it right now. And as you say, you’ve got another seven months in the year. You’ve got other investments, and let’s say in the next seven months some of those go down in value. You can actually sell one of those, and that capital loss nets against the capital gain dollar for dollar. A lot of people don’t realize that. A lot of people think you only get to take $3,000. That $3,000 rule is against ordinary income. But when it’s a capital gain versus a capital loss, those offset dollar for dollar. And in fact, if you’ve got a bunch of capital losses that you haven’t been able to use in the past, they carry forward and you can use those dollar for dollar against the gain. So that’s one strategy, and another one Joe, I think is, we see this when people have a number of positions but they want to diversify better, maybe they have a lot of individual securities. And then what we typically do, we kind of put together a little spreadsheet that shows the amount of the value of each stock versus the amount of the gain. And then we come up with a percentage and then we do the lowest gain percentages to the highest gain percentages, and then we just have a running total, and in many cases, a portfolio – let’s say $500,000 of stock, you might be able to sell $300,000 of it and rebalance and not pay any tax if there’s not a lot of gain. Or maybe there are some losses in some positions, and then maybe that last couple hundred thousand of positions have bigger gain, then maybe you slowly bleed that out over time. So that would be a strategy as well.

Joe: Right. Or you could do the opposite where maybe you have two positions that have large gains and you say, “I’ve ridden this pony long enough.” Where then maybe you sell those, diversify a little bit more. And then the rest of the portfolio you kind of take a look and bleed those out. But here’s the problem is that I think we look so often at buying and selling investments because of fear or greed within the overall marketplace versus looking at a sophisticated tax strategy to make sure that you’re keeping everything that you possibly can and reducing your tax bill as much as you can.

What’s that famous phrase, it’s not what you earn, it’s what you keep? Big Al is an aficionado when it comes to reducing the taxes we pay be every possible legal means. If you like keeping money in your pocket too, check out all the free tax reduction resources I’ve piled into the podcast show notes. Go to YourMoneyYourWealth.com and click on podcast #224. You’ll see it, it’s the one about the new retirement legislation. Then, if you’ve got questions, send them in and Joe and Big Al will answer. Scroll down to Ask Joe & Al On Air at YourMoneyYourWealth.com.

YMYW TV: Take the Sting Out of Taxes For High-Income Earners

BLOG: Tax Reduction Strategies For High-Income Earners

PODCAST: Your 2018 Taxes: 10 Ways to Prepare and Save (relevant until the current tax laws sunset in 2025!)


30:28 – How Much State Tax Should I Withhold on a Small Pension?

Joe: John from Oceanside, he writes in, Alan, “On November 1st 2019, I’ll be getting a small monthly pension of $258. I will be 65 this October and will wait to get my Social Security at age 70. I’m currently working full time. I’m trying to figure out my state tax withholding for my pension. I’ve been claiming zero withholdings for both federal and state wages, but for my pension I’m unsure. I’m married, made $56,000 last year and received a refund. Thank you.” John, it’s $258 a month. Don’t worry about it. (laughs)

Al: That’s the correct answer. It’s not that big a deal. I mean if you want to have withholding, I mean you might just do 20% federal.

Joe: So withhold $200.

Al: Yeah. I mean if you want to, right?

Joe: But what if you received a refund prior, the pension is not going to throw him into some crazy tax break. I mean it’s 56, it’s going to go to $60,000.

Al: Yeah. Maybe John likes his refund. So I don’t know. I mean you can withhold it but it’s not going to move the needle one way or another so I wouldn’t worry about it. I agree with you.

Joe: What do you say to people that like their refunds? You’re a CPA.

Al: I have the CPA answer and then I have my answer. So I’ll start with the CPA answer which is it’s not a very good idea because essentially you’re giving money to our government interest-free. And so they hold your money all year and then you get it back with no interest. So from that stand point it’s not a very good idea. Now real life, I have a completely different answer and this is because there is a certain percentage of the population that just simply cannot save. Every single penny that they make they figure out ways to spend it.

Joe: (laughs) It sounds like you’re scolding me or something.

Al: Yeah I guess I was looking at you. (laughs)

Joe: I save! (laughs)

Al: (laughs) It wasn’t me I swear it wasn’t me!

Joe: (laughs) These damn hooligans! Spending all their damn money!

Al: That’s right, these young guys. So anyway, if that’s you, I’m all for refunds because it’s a forced savings program.

Joe: Then they get the refund what do they do with it? (laughs)

Andi: Big screen TV.

Joe: (laughs) Yeah, right?

Al: Well then they spend it.

Joe: Vacation!

Al: But at least they get a lump sum at some point during the year. (laughs) And they can do something that they wouldn’t have otherwise done.

33:10 – When Can I Take Tax-Free and Penalty-Free Distributions From My 457?

Joe: Daniel, he’s got a question. “Big Al, I’m a 28-year-old qualified public safety employee.” So he’s a police officer.

Al: Municipal.

Joe: What’s the difference? Anyone.

Andi: Well aren’t there state police?

Joe: SuperTroopers versus?

Andi: He’s a city cop.

Joe: Ooh, working the beat. But we don’t know what beat he’s working, because he didn’t give a damn location. So maybe he was working like San Diego city and all of a sudden you get pulled over, Big Al, and then you look at the badge and it says Daniel and you could be like “Daniel, it’s Big Al! Come on! Help me out, brother! Answering your tax question here!” So he’s got a Roth 457. So he’s like, “Once I leave the department, at what age can I take tax-free and penalty-free distributions?” Daniel, when you separate from service with the 457 plan, it’s my understanding that you can take the dollars out tax-free – of course, because it’s a Roth – and penalty-free at any point as long as you’re separated from service because a 457 plan is a deferred comp plan. It’s not under the ERISA rule of 401(k) or 403(b), it’s a totally separate plan. So one of the biggest benefits of a 457 plan, because it’s deferred comp, is that there are no 10% penalties for early withdrawal.

34:46 – Why Max Out the 401(k)?

Joe: So what, Grey, this was on Facebook. You can follow us on Facebook too. I have no idea where they can do that.

Andi: All they have to do is look for Pure Financial Advisors on Facebook.

Al: It’s not hard to find.

Joe: I thought there was like we had a stupid acronym or something.  No, we got that title? I don’t even know how Facebook works.

Andi: I believe it is Facebook.com/PureFinancialAdvisors.

Joe: Okay. You still hot and heavy on Facebook, Al?

Al: Oh yeah.

Andi: We’re friends on Facebook.

Joe: I’m not a Facebook guy.

Al: Yeah, we correspond. You’re left out. She knows all about my Grand Canyon hike.

Joe: I’m sorry I missed that. (laughs)

Al: You haven’t seen the pictures. She knows, she’s seen the pictures. (laughs)

Joe: Man, I gotta get on just to see that just see that stuff. (laughs) Anyway, so we had an “IRA Strategies You Need to Know,” that was the name of our blog post.

Andi: …that we posted on Facebook.

Joe: Yeah, and so then Grey types in and does some correspondence: “Why do you tell people to max out the 401(k)? I no longer understand that logic because of the way it is taxed when taking distributions. I am maxing out the Roth and taxable savings and less to the 401(k).” Well Grey, little smarty pants on Facebook here, if you’ve ever listened to any of our shows or read anything else that we put out there, we would agree with some of your statement.

Al: Yes but it depends on your circumstance. So the average person should be contributing to a 401(k) to get the match. I mean, that’s right off the bat. Let’s make sure that happens. But over and above that, the average person contributing to 401(k) doesn’t have a lot in a 401(k). They’re gonna be in a lower tax bracket in retirement. They’re in a higher tax bracket now. So it makes sense to get the tax deduction today than in the future – that’s the average person. Now, if we take the top 20% of the people that are actually doing the right thing and saving a lot of money, and when they realize that, “oh man, I could be in a higher – similar or higher tax bracket in retirement,” then I would agree with you. Then you might want to look at other strategies besides maxing out the 401(k).

Joe: Yeah and Roth IRAs are a wonderful tool because you pay the tax today and it grows tax-deferred, you get the money 100% tax-free. 401(k) works just the opposite, where you get the tax deduction now. It grows tax deferred, you pay the taxes coming out. So I think our advice is to have a little bit of both. Have a little bit of all. Or a lot of all. 401(k), brokerage accounts, Roths. Have a more balanced approach and I think you’ll be just fine. And that’s a wrap. I want to thank Jamie Hopkins from HopkinsRetirement.com, and that’s it for us. For Big Al Clopine, I’m Joe Anderson, the show is called Your Money, Your Wealth®.


Yes, thank you to Professor Jamie Hopkins, links to his book Rewirement and his website are in the podcast show notes at YourMoneyYourWealth.com. Links to follow us on Facebook, Twitter, YouTube, and LinkedIn are there in the show notes as well. Let us know on social what you want to know or hear on YMYW and we’ll help you out. If you find the information Joe and Big Al provide every week to be useful, you can help us out by sharing the show, subscribing on your favorite podcast app, and signing up for the YMYW podcast newsletter.

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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.