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 [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
January 19, 2021

Joe and Big Al answer questions from across the personal finance spectrum: late RMDs on inherited IRAs, contributing to non-qualified deferred compensation plans, making Roth contributions for grandkids, how a Roth impacts student loans, taxation on ESPPs and RSUs (and what those are), paying off the mortgage – again – and a retirement plan spitball analysis for a clergyman and his wife, and for a couple with a profitable side hustle.

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Show Notes

  • (00:56) Options for Taking Late RMDs on an Inherited IRA? (Bryan)
  • (06:42) Should I Make Non-Qualified Deferred Compensation Plan Contributions? (Jeff, Dallas, TX)
  • (11:49) Can We Make Roth Contributions for our Granddaughter? (Therese)
  • (14:16) Clergyman Retirement Plan Spitball Analysis (Christine, PA)
  • (23:45) How Does a Roth Impact Student Loans? (Sheryllyn)
  • (28:54) Confirming Capital Gains vs Ordinary Income vs Roth (Richard)
  • (32:46) Retirement Spitball Analysis: Mega Garage Door Roth & SEP IRA (Schmidty, FL)
  • (39:49) Taxation on Previous Employee Employer Stock Purchase Plan and Restricted Stock/Share Units (Priya, Irvine)
  • (44:57) Pay Off Mortgage or Invest? (Craig, Nevada)
  • (46:13) Mortgage Forbearance and Taxes?

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Today on Your Money, Your Wealth® podcast #309, Joe and Big Al are answering questions from across the personal finance spectrum: we’ve got inherited IRAs and late RMDs, contributing to non-qualified deferred compensation plans, making Roth contributions for grandkids and how a Roth impacts student loans, taxation on ESPPs and RSUs – and what those are – more discussion of paying off the mortgage, a retirement plan spitball analysis for Christine and her clergyman husband, and for Schimdty and his bread distribution business. No, not that Smitty, this is a different one. Ask the fellas your money questions – click the link in the description of today’s episode in your podcast app to go to the podcast show notes, then click Ask Joe and Al On Air. But don’t all go changing your names to Smitty now. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Options for Taking Late RMDs on an Inherited IRA?

Joe: So we got Bryan writes in. “Hello, just started listening to your show and you all do a fantastic job. I have a unique question.” So he just started listening to the show. But he’s got a unique question.

Al: Right.

Joe: Did he binge? How does he know it’s unique?

Al: How does he know? Unless he listened to 100 shows.

Joe: How does he know? Guarantee it’s going to be a Roth IRA question. “Thirteen years ago, my wife received a small inherited IRA that the advisor managing at the time explained nothing. The first brokerage firm sold it to Merrill and we paid little attention to it and didn’t take any distributions. I have drastically enhanced my personal financial knowledge during COVID and would value your insight and options. The inherited IRA was around $10,000. And then cratered during the financial… and is now about $1600. We just ignored it.” What is he talking about the financial crisis back in 2008? I don’t know. “The money is insignificant in terms of our financial plan, but I don’t want to poke Uncle Sam. It’s a bit of a mess.” So she inherited an IRA. She’s never taken a required distribution.

Al:13 years ago.

Joe: 13 years ago.

Al: You’re supposed to take one every year.

Joe: Every year.

Andi: This is Bryan. I think it’s Bryan. Right?

Al: Yeah, it’s Bryan.

Andi: Oh, wife’s inherited IRA.

Al: Yeah.

Joe: So of course, he didn’t do it. It’s his wife.

Al: They always say that. Right?

Joe: So we don’t know how old Bryan is, but let’s just assume he’s 55.

Al: That’s a good guess. So 13 years, let’s just say 4%.

Joe: Not even that. I was going to say 1%.

Al: No, it’s not that low because it’s-

Joe: At 50? 55? It’s probably the life expectancy is 40. If you’re 70 and a half, it’s 28.

Al: 70 and a half and 28 on an inherited?

Joe: Well no, on your own.

Al: On your own.

Joe: So we can look up the table to go to-

Al: Well, call it 3%, who cares?

Joe: OK.

Al: Let’s compromise.

Joe: It doesn’t matter.

Al: Actually, the answer is, Bryan, you should move out of the country. Because they’re after you. You’ve got to watch out. But let’s just say 3%. OK, 3%-

Joe: – which is very conservative.

Al: Yeah. $300 a year for 10 years is $3000, then 3 more years. So call it $4000 in RMDs that he should have taken over that time- or she should have taken. So do you know what the penalty is? The penalty is 50%. So that’s a penalty of $2000 right there, out of the $4000. Plus, because you’re so late in paying, you have late payment and interest charges every single year. It’s accruing at 9% per year. So I don’t even know what that’s going to be. But probably $4000. By the time- so-

Joe: So he’s asking one of 3 things, can I just cash it out, pay the taxes and move on? Should we start the lifetime RMDs and leave it? Other. Any other options?” OK, so let’s back up here. If you inherit an IRA and you’re a non-spouse beneficiary, you have to take your required minimum distribution based on your life expectancy. So we don’t know how old the person was that inherited the account. So we don’t know what the required minimum distribution is. We assumed it was 3% of the overall account balance that needed to be taken out each year. So that’s where we come up with $3000 per year. What would be the required distribution that Bryan’s wife would have taken out? Pay tax on that $3000. There’s a 50% tax penalty for any RMD that is not taken. So one year she missed it. $3000 is the RMD. $1500 tax penalty.

Al: Well, no, $300.

Joe: I’m sorry, $300 tax.

Al: $150 penalty year one. Then over 13 years, there would be late payment and interest charges, which would amount to another 9% per year. Cumulative.

Joe: Cumulative. So the question is, what the heck does he do? So-

Al: I have 2 answers. You want to hear them?

Joe: Sure.

Al: I’ll start with the correct answer. The correct answer is you withdraw whatever RMDs you were supposed to have taken. Let’s call it $3000. Let’s call it $4000 because there are 13 years. And then you pay your penalty, which is half of the $4000, which is $2000. And you’ve got to pay- and the IRS will bill you for interest and late payment charges. Then you can go back and write the IRS and ask them to forgive the penalty because you had no idea about this RMD. And they’ll often do that for a year, usually not 13 years. Right. So that’s the correct answer. It’s not a great answer, but it’s the correct answer. What some people do in the situation, this is not the right answer, but they just withdraw the whole thing and hope no one catches it. I’m not recommending that. I’m just saying that’s what some people do.

Joe: So it’s very little- it’s insignificant to his financial plan. You just cash it out, pay the tax and go.

Al: Yeah, I wouldn’t start RMDs now. I would cash it out- either you follow my correct suggestion, which is pay the penalty and ask for forgiveness. Or you follow my second non-recommended strategy, which is just withdraw it and hope no one ever catches up with it.

Joe: Got it. OK, hopefully, that helps.

Should I Make Non-Qualified Deferred Compensation Plan Contributions?

Joe: We got Jeff from Dallas, Texas. He goes “Hey Joe, Big Al, and Andi. I listen to your show while on walks here in Dallas, Texas. For the record, I drive a black 2013 Toyota Prius.” Plug it in, Jeff.  Get that little pun there, Al?

Al: I got it.

Joe: “What are your general thoughts on non-qualified deferred compensation plans? Are maxing out contributions to a backdoor Roth IRA, HSA, 401(k) and doing after-tax mega barn door Roth 401(k) conversions better? What do you think about deferred compensation plans? Or go straight to non-qualified taxable accounts?”

Al: Yeah, so in other words, if he maxes out everything, should he do the deferred comp plan? Or should you just pay the tax and have a brokerage account?

Joe: Ok. “If more content would help, I’m married and about 12 years from retirement. We would end up close to about 40/60 split between pre-tax 401(k) and Roth 401(k)s. We have a smaller taxable non-brokerage account and we’re expecting to fill most of our post-retirement basic income needs with Social Security and a pension. And when an option to use my employer’s non-qualified deferred compensation plan, my last 10 or 12 years working to create a deferred income stream that would bridge us from retirement at 60 for a full retirement age, delaying Social Security for my wife and I until 67. Thanks for all you do.” All right. So deferred comp, a couple of different types of deferred comp plans, but I’m guessing he’s got a deferred comp where he might be highly compensated. Works for a firm that says, you know what Jeff? You can defer 20%, 30% of your income. Maybe you can defer 50% of your bonuses and you could defer quite a bit of income into these plans.

Al: You can. Right.

Joe: And so it’s all pre-tax. So you’re not taxed on it. You’re deferring your compensation to a later date. The problem with it is that you have to- there are a few different issues. The best thing about it is that you get a huge tax deduction. So I’m deferring all of my income this year let’s say, or you have a huge income year, you can defer it. But then you have to elect when you want it to get paid out the year that you deferred. So do you want to have it come out as a lump sum? 5 years, 10 years. So there’s a lot of planning that needs to be done if you’re going to utilize these plans. Also, the biggest thing I think people are nervous about is that it’s an asset of the company.

Al: Right. I would agree with that. And this is- he says it’s the non-qualified deferred plan, which most of them are. So but yeah. So that’s the good news. You get a tax deduction right now and it can be rather large, although usually, you’ve got to set this up in November or December for the following year.

Joe: – for the following year.

Al: So by the time we’re doing this podcast and you’re listening, unfortunately, it’s too late for 2021. Right. But so with that in mind, I like the concept because you’re generally in a higher tax bracket, you defer money into deferred comp and then you get a payment stream later. Here’s the huge caveat, though, as you already mentioned, Joe, which is it’s a liability of the company. It’s not a funded retirement account. So if the company goes belly up, your deferred comp plan is gone. There is no deferred comp plan. This is not like a 401(k) where money is put aside in a separate account. And even if the company goes bankrupt, it’s still there. This is not like that. This is a liability of the company. So if you’re retiring, Jeff, in 10 to 12 years, I would pay very close attention to the strength of the company. And do you think it’s viability for the next decade? And it’s more than that, because if you elect a 10-year payout and you retire in 12 years from now, you’re hoping they’ll have the money for 22 years. That might be a big ask. So just be careful of that.

Joe: Right. I think with our experience with these plans Al, they’re large.

Al: Usually they’re larger companies, but we’ve seen larger companies not do so well. So I’m just saying.

Joe: Yup. So hopefully that helps. A couple of things to look out for there too. Some planning ideas that we’ve done is that we’ve deferred 100% of people’s comp into these deferred comp plans that have- because they also- anyone that has these plans, they also have giant 401(k) plans. And they also have a pension plan. And they also- so they’re going to get killed in taxes long term. So we’ve done Roths, conversion strategies with this to defer a bunch of their income, push it out at a later date and then try to get as much money out of the 401(k) into a Roth as possible. We’ve done that. You’ve got to run a projection just to understand that when that deferred comp payment is paid out, what other income is going to be paid out? How old are you going to be? Social Security, RMDs, everything else. You don’t want to blow yourself up there because you could potentially put yourself in a lot higher tax bracket because of those deferred comp payments. But it sounds like he’s bridging the gap with the deferred comp. So it seems like Jeff is dialed, but hopefully, that helps out.

Al: He’s got a lot in Roths already, so that’s good.

Can We Make Roth Contributions for our Granddaughter? (Therese)

Joe: Therese. “Hello. Our wonderful granddaughter is turning 21. She is attending the University of Oregon, studying to be a physician assistant. We want to give her a special birthday present for all of her hard work and keep her plan for the future retirement taking advantage of compound interest “CI”-

Al: Yeah, I like that. In case you wanted to shorten her-

Joe: ” How can we easily explain CI to her and excite her about committing to a small savings now which will pay off later, something I wish I knew early in life? Would it be best to open a Roth IRA with $1000? I heard Vanguard has low fees and may have such accounts. Maybe we can contribute to a small amount monthly or annually, $500 or so for her birthday. She works on campus making about $2500 a year. Thanks for all your help.” How do you- CI, Al, compound interest?

Al: Well, first of all, yeah, I love the idea and she has to have earned income to do this and she does.

Joe: She’s got $2500. She could put up to $2500- I’d put it into a Roth IRA. She has full access to the money at any time, then it compounds.

Al: How do you explain it? Well-

Joe: You need a calculator.

Al: Here’s a simple way. If it earns a 7% rate of return-

Joe: – it doubles every 10-

Al: – every 10 years it’ll double. So she’s 20 and she retires at 60. So it’ll double at 30. It’ll double again at 40. It’s double again at 50. It’ll double again at 60. So 2, 4- no- 1, 2, 4, 8, 16, if I did that right. Anyway, and that’s only one investment. Right. You know, it’s 16 times as much. So that’s pretty good.

Download The Ultimate Guide to Roth IRAs for free from the podcast show notes at YourMoneyYourWealth.com. It explains in depth what a Roth IRA is and how you can benefit from having one, how a Roth IRA differs from a traditional IRA and from a Roth 401(k), the rules for contributing to a Roth, Roth conversions and backdoor Roth conversions, the rules for taking withdrawals from your Roth account, and more. Click the link in the description of today’s episode in your podcast app to go to the show notes to download your Ultimate Guide to Roth IRAs for free, and of course, if you still have questions, you can click the Ask Joe and Al On Air banner there in the show notes and send them in.

Clergyman Retirement Plan Spitball Analysis (Christine, PA)

Joe: Christine has a novel here and this is long.

Al: I’ll say, my goodness. We should have a word cap.

Joe: Yes. You’ve got to bear with me because I’m zero prepped for this and I don’t read very good aloud. Christine-

Al: But you are getting better.

Joe: Christine from PA. “Dear Andi’s mom, Andi, Al and Joe. I put Andi’s mom first because she deserves great credit for transcribing the podcast.” How the hell does she know that?

Andi: I mentioned it at one point 1,000,000 years ago and people listen really closely. Hi Mom. Thanks.

Joe: I think she’s your friend or something.

Andi: I don’t know Christine at all.

Joe: I guarantee you guys are old college chums. “Andi is next because she keeps Joe and Al on the straight and narrow. Joe needs this help more than Al. Al is next because ‘A’ comes before ‘J’. But to be clear, Y is you’re all awesome-

Al: Y’all-

Joe: Y’all awesome. And I’ve learned so much on the podcast. Thank you.” All right, Christine, thank you. “My husband and I are both age 59 and trying to develop our retirement planning strategy. I am pre-retired and I have finished gainful employment and I plan to work full time again. I have a 401(k) with the current value of $720,000. I also have a Roth IRA of $185,000.” So let’s just call it $1,000,000 for good old Christine. “I plan to collect Social Security at age 70.” She’s 59 now Al, so she’s got some time. “According to the Social Security website, she’ll get $16,000 per year Social Security payments and this is based on having no more income between now and age 70. My husband was a clergyman and opted out of Social Security many years ago. This, as you well know, is an option that clergy can choose. He has done so- he has done some other non-clergy work and so has met the 40 credit requirement for Medicare and will have $4000 per year in Social Security payments at age 70. He has a 403(b) that has $940,000 in it. And I’m sure you’ll know that the 9- the 403(b)9- gosh, I just avoided that- plan means the distributions from the plans are not taxable at the federal level if they are used to provide housing.” Yes, we do know that Christine. Thank you.

Al: Housing exemption for clergy.

Joe: Exactly. Exactly. “He also has a Roth IRA of $275,000. Together we have $100,000 in a brokerage account, bank accounts. My husband also has a small pension that will pay $10,000 a year starting at age 70.” All right, so let’s kind of- we got $30,000 of fixed income at age 70 from Social Security pensions. Rounded. They got about $2,000,000.

Al: Yep, that’s about right. $2,200,000.

Joe: Ok.

Andi: Which is exactly what she says on the next page.

Al: Yeah. That’s what it says there.

Joe: Ok, why don’t- just start there, Christine. “Therefore, all combined assets are $2,200,000 and our Social Security at 70 will be $16,000 per year for me, $8000 for him, assuming he gets the spousal benefit with half my benefit.” No, he will not get the spousal benefit because he opted out of it. There’s the government offset provision, but I don’t know if that actually applies to the clergy.

Al: Yeah, I’m not sure either. And plus, even if he qualifies, it would be half the benefit at age- at full retirement age-

Joe:- at full retirement age-

Al: -which would be 67, not 70. So it’s going to be something less for sure.

Joe: “So for a total of $24,000, this combined with my husband’s (calculations) of –

Al: Let’s just call it $30,000 like you were-

Joe: So $30,000.  $2,000,000. “Using today’s numbers, our annual spending goal is $150,000 per year. This number includes our annual taxes. We can meet this goal from my husband’s current income, but he wants to stop working and will at age 65 which is just 6 years away. Therefore, we’ll need to generate $150,000 a year from our retirement assets and maybe part-time work from age 65 to age 67.” So she’s asking, can they do this, right? It’s $150,000. They’ve got $2,200,000. They’re going to have $30,000 of fixed income. The shortfall is $120,000. $120,000 into $2,200,000 at 65 is pretty close.

Al: It’s close. Well, and I would say in a few years if they’re contributing, with growth- so let’s say it’s worth $3,000,000 at the time they retire. And let’s say their spending is $170,000 at that point because of inflation. Just throwing out a couple of numbers. So $3,000,000 is a 4% distribution rate. That would be $120,000 plus the $30,000 of fixed income, $150,000. Maybe they’re short $20,000? I mean, they’re pretty close.

Joe: Yeah. Because she’s doing some good planning here. This is really long and she kind of goes we’ve got to bridge the gap until Medicare if she wants to retire a little bit early. And then there’s going to be health care premiums and then from there if we’re pushing them out to age 70. Everything has to come from our retirement accounts until the Social Security turns on to- So she’s doing the math here of saying we’re going to have a higher distribution rate and then it’s going to go lower once our fixed income sources come in. But you can do the quick math. You want to retire. Let’s say she’s already retired. Husband’s working, making $150,000, covering the bills, and they’ve got a few million bucks. It’s going to grow over the next 4 or 5 years. Like you said, call it $3,000,000. Fixed income’s $30,000. They want to spend $150,000. I mean, it’s super close.

Al: It’s close, yeah.

Joe: You want to look at it- just divide just to see if you’re in the ballpark-  again, you can use the 4%, 3.5% rule. At least 74% probably is-

Al: You could probably do 4.5%. Maybe it’s 70%. Sure. So it’s how much money do you have?. You have $3,000,000. So 4 times 3 is $120,000. So if you take 4% of the $3,000,000, $120,000 is probably what’s going to- what would be an appropriate distribution rate. You have $30,000 of fixed income, so that gets you to your $150,000. So but then you have to pay tax on that? Or is this included a tax?

Al: She said it’s included.

Joe: Ok, so then it’s looking at, how are you going to take the distributions? You’ve got a Roth IRA of $300,000. The housing allowance that you have is going to come to you tax-free. And I wonder if the $150,000 is included in the mortgage. You don’t want to pay off the mortgage because then the housing allowance will become somewhat-

Al: It’ll be taxable.

Joe: It’ll be less.

Al: Yeah. Yeah. Right. Yeah. So just for your information, so if you are in the clergy, you could get to designate some of your salary’s- the housing allowance, which is not taxable as long as you use it for housing, which is defined as your mortgage payment, property taxes, maintenance, things like that. Interestingly enough, if you have a retirement plan from, let’s say, the church that you’re working at and you withdraw money from your retirement plan after you retire, you can still use those same dollars for that housing allowance, even though you’re no longer actively working. So that’s all a true statement. And to the extent that they have, they’ve got some Roth. But with this 403(b)9, there’s potentially a lot of money in there that could be tax-free. So they could do this fairly tax efficiently. But, yeah, it’s pretty close. I’m going to say, if you really need to spend $150,000 a year, it might be a little tight. You might want to have some kind of part-time income or some other income sources, maybe just the- especially during the stub period between now- between the time they retire and Social Security.

Joe: The 4% rule just kind of seems to be in the ballpark. But once they are retired and start taking money from the accounts, you gotta do things differently. You’re not going to say, oh, I’m going to take 4% out of the account this year.

Al: No.

Joe: You’re going to take a look at what’s up? What’s down? Where’s the money now? How is it going to be taxed? So you want to make sure that you have an income strategy. When we talk about these 4% and 3.5% rules, it just gives you guys a rule of thumb of do you have enough assets to make this thing work? But then when you flip the switch to retirement or probably 3 or 4 years prior to that, you want to make sure that you have a really solid retirement income strategy of, how are you going to create the income? What investments should that look like? What portfolio should it be in? And then it sounds like Christine wants to give another $1,000,000 to her 3 kids. So, now you’re adding on layers of complexity here. Should the allocation change? Well, sure the allocation should change as you get older, depending on how much capital that you still have and what your living expenses are as you get older. Because now the money’s not necessarily for you, it’s for your kids.

Al: And how are your investments performing? And how does your spending change as you age? Yeah, you’re right.

Joe: It’s super dynamic.

Al: The 4% rule is just kind of a- it’s a one time- you kind of lick your thumb, put up in the air- Is this about right?

Joe: Exactly. She also wants to roll over 401(k). She’s got a small IRA with $1000 in it. You could just roll it into that. No big deal, you don’t have to start a new one. “Thanks again for your amazing, helpful podcast. And kudos to Andi’s mom. Christine, Pete, and Tiny.” Well, thank you, Christine, Pete, and Tiny. Hopefully, that helps. Good luck on your retirement.

How Does a Roth Impact Student Loans? (Sheryllyn)

Joe: Sheryllyn. “Hi Joe, I enjoyed your webinar. Here’s my burning question. Does a retirement account adversely impact the ability of an owner to qualify for student loans? I’m thinking about establishing Roth for our children. If you want to know more about this or us, husband retired from his full-time job on 1-2-2020, when he knew that Epstein’s bankruptcy was on the horizon. He’s continuing to work as a courier, maybe $2000 a month. Also started Social Security, $2500 a month. He turned his pension and 401(k) over to a- to an RA. I believe in rolling all possible to Roth, the RA does not.” What- what is an RA? Retirement advisor?

Al: I guess.

Joe: RA.

Al: Could be she forgot the ‘I’, could be IRA.

Joe: Maybe. A retirement account?

Al: Yeah, let’s go with a retirement account.

Joe: Ok. “His concern is you may not earn back the taxes in the Roth. Hub’s advisor accounts lost $60,000 in March and it freaked him out. As of 11-30, he’s earned it back. He has a Roth in an IRA with an RA.”

Andi: I think that’s a retirement advisor.

Joe: “The Roth is $30,000. The IRA is $580,000. Yes, most of his money is tax-deferred. He took $28,000 out of the pension and put it into the IRA he controls. That’s $49,000 now and will be converted to a Roth on 1-4-2021.

This year’s been financially crazy with a massive financial check, $10,000 in taxes, adjusting and making withdrawals, funding our Roth IRAs for 2019 and 2020. I’m trying to project our taxes for the year. Typically we are under $80,000 taxable. This year I’m trying to stay under $171,000. I bought FB on the 2012 IPO- ” Now she’s talking-

Andi: Facebook.

Al: Right, Facebook.

Joe: Got it. “- and still hold it. 600% profit. I’m planning to sell it this month because I don’t know if- ” you know, why do people just write us and brag about- you know, what’s the question? You got RAs and FAs and RIAs and – I mean, I can barely understand a word she’s saying. I feel bad for our listeners.

Al: And we’re in the industry.

Joe: Right. Hubby’s got an RA, but the taxes on RA, what will be on the RA?

Al: And yes, most of the money is TD.

Joe: T-

Al: Tax-deferred.

Andi: That comes from the webinar. She said ‘I enjoyed your webinar’ and she’s taking TD from the webinar. Tax-deferred.

Joe: Got it. Well, I think her question was if her kids or grandkids got to have a Roth IRA, does that affect their student loans?

Al: That’s where I thought she was going.

Joe: But then we went on this tangent of hers and 600% profit on FB.

Al: We did- we sort of got- I didn’t even remember that was the question.

Joe Yeah, that’s the question. “Here’s my burning question. Does a retirement account adversely impact the ability of an owner to qualify for student loans? I’m thinking about establishing a Roth IRA for our children.” For student loans? No. For grants? Yes. Because it’s an asset. So it’s in the kid’s name. The retirement account in the kid’s name would have no effect on the student loans, but if they were trying to get scholarships and Pell grants and things like that, it could have an adverse affect.

Al: Well, we should say we’re not experts on student loans. I think-

Joe: You don’t think because it’s a retirement account they wouldn’t count it?

Al: I don’t know.

Joe: I don’t either. See I said it with authority.

Al: I know you were waiting for me to answer.

Joe: I wanted to take a break. So that was it. And I was gonna get off this stuff.

Al: Let’s say that maybe the truth.

Joe: All right. Thanks, Sheryllyn. Here’s a new rule, if you start bragging about how much money you make on stocks, I’m just cutting you off.

Al: Especially when it’s not related to the question.

Joe: You ask a question and then if you want to know a little bit more- I just made 600% on Facebook- Booya. Sheryllyn.

Sheryllyn attended our free 45 webinar on Taxes in Retirement, and you can too. Learn how to take advantage of tax-saving opportunities available to you in 2021. Find out how recent tax legislation impacts you, your family, and your retirement savings. And understand the strategies that can help you reduce your tax liability as you plan for a successful retirement. Following the presentation, there will be an open Q&A session. If 45 minutes isn’t enough, you can learn retirement from soup to nuts while parked on your own couch in our two day digital retirement classes beginning in February. Learn how to calculate your financial needs in retirement, the different types of retirement accounts, Social Security, taxes, investing, stocks, bonds and other asset classes, insurance, estate planning, and more. Click the link in the description of today’s episode in your podcast app to go to the show notes and click “Retirement Classes” to register for either the 45 minute Taxes in Retirement webinar or the 2 day digital retirement class.

Confirming Capital Gains vs Ordinary Income vs Roth (Richard)

Joe: “Hey Big Al, Little Joe, oh, and the beautiful Andi. Love your show. It is very informative and it shows that you guys know your stuff and can explain it better than most people.”

Al: Not everybody.

Joe: Not everyone.

Al: Most.

Joe: Most. Thanks, Richard. “Here’s my question. I had a large, unexpected capital gain this past year, so my total long term capital gains will be about $233,000. My income from earnings, pension, unemployment will be $62,000. That’ll make my adjusted gross income $285,000, I file my taxes as single. On my schedule A, I have a write-off of $65,000 in cash in charitable contributions and another $10,000 for the state and local taxes for a total deduction of $75,000. So my understanding is that since my deductions are more than my ordinary income of $62,000, I will pay no federal tax on the $62,000, but will have to pay 15% on $200,000 and 18.8% on $23,000. Do I have that correct?”

Al: I think so.

Joe: I think he’s dead-on there.

Al: I think because when you got capital gains, you look at your ordinary income, you subtract out your ordinary deductions. If you get a zero or negative number, you can figure all your capital gains are taxed as capital gains only, which means in the 15% bracket, if there’s no tax to pay and-

Joe: 12%.

Al: Yeah,12%, sorry. 12%.

Joe: 12% ordinary income bracket, there would be no tax to pay. Anything _____ your cap gains of 15%.

Joe: Yeah, you explain it better than most.

Al: Better than me.

Joe: Because he’s got more deductions than ordinary income. He’s in a negative tax bracket on the ordinary income.

Al: Yeah, yeah. Which means the capital gains will be taxed simply as capital gains. So I agree with the statement.

Joe: Ok. “And if I’m not paying any federal tax on my ordinary income because my deductions make my ordinary income is zero, $62,000 minus $75,000 is negative $13,000. Would it makes sense to do a Roth conversion of $13,000 from my traditional IRA since my taxable ordinary income would still be zero.”

Al: The answer’s no. And the reason is because if you do that, you’ll pay not only- you’ll push your capital gains that will otherwise be not taxable, will be taxable. So more 15%.

Joe: So you could run the numbers there.

Al: You could.

Joe: Because it’s just pushing the capital gains up-

Al: Actually-

Joe: But that $13,000 would still be fine. It would be zero.

Al: I take that back. You’re right. You could push your ordinary income up to the top of the 12% bracket and still be ok. If you go past that, you’re in trouble.

Joe: But if he just converts $12,000 or $13,000 because his ordinary income is negative $13,000 from an ordinary income perspective. He adds another $13,000, that uses up the deduction. The capital gains sit on top of ordinary income. So wouldn’t the conversion basically be tax-free?

Al: The conversion is tax-free, but you’d have to pay 15% on capital gains that you pushed up into it.

Joe: 15% on capital gains you pushed into.

Al: So basically, it’s a 15% tax rate, plus state.

Joe: Yep. Very good. I agree with that. I’m sure everyone caught onto that. We’ll get so many questions. Well, what sits on top of what?

Al: I thought – what was that?

Joe: Who’s on first? What?

Retirement Spitball Analysis: Mega Garage Door Roth & SEP IRA (Schmidty, FL)

Joe: We got Schmidty from Florida. “Hello, Big Al and Buff Joe.”

Andi: Note, this is not our normal Smitty.

Al: No, it’s another one.

Joe: No, it is. Smitty moved to Florida.

Andi: It’s a different Schmidty.

Joe: No, it’s not.

Andi: Notice how he spells it.

Joe: I don’t care. He moved to the Villages. Didn’t our boy Schmidty? Smitty.

Al: Yeah, he did.

Andi: Yes. This is a different one.

Joe: Oh. This is Schmidty.

Al: Schmid-

Joe: Schmidty. Not Smitty. The other guy is Schmidty too.

Al: Yeah, we got the-

Andi: The other one is S-M-I-T-T-Y.

Joe:  Smitty.

Al: Schmit- Schmidty. Or it’s Schmid T.

Joe: Got it. Maybe he was having a few cocktails.

Al: Maybe.

Joe: “Hello Big Al and Buff Joe.” I just wanted to read that again. “I know you appreciate the flattery. And Andi, who needs a raise for keeping you two in line so well. I am a 41-year old that is blessed with a high paying W-2 job, $200,000 a year. And a smokin’ hot wife, 35 years old and making around the same amount.”

Al: Did he send a picture, Andi?

Andi: He did not. Sorry.

Joe: Schmidty. He’s got a smokin’ hot wife makin’ bank. “Our company cars-” oh, he’s got company cars- “- are 2019 Travers. And she drives a 2020 Acadia, both equipped with 3rd rows for our 3 young kids. We have a cat named Cat. Sounds like Big Al.

Al: Yeah.

Joe: He’s got a cat named Kitty.

Al: Kitty. That’s right.

Joe: “We both max out our retirement plans annually and each allow after-tax contributions with in-plan conversions, a.k.a. mega garage door Roth.” So Schmidty gets it. He understands you have to have after-tax contributions.  There you go. “There’s just over $1,000,000 in retirement. $500,000 in brokerage. We also started maxing out our HSA option too. In order to diversify our tax write-offs, we bought a couple of investment properties but nets very little income. We also own a- ”

Al: – bread-

Joe: “- a bread distribution route.”?

Andi: I’m so surprised you got stuck on bread.

Joe: I was like, who the hell has a bread distribution route?

Andi: Hey, it nets him $45,000 a year.

Joe: I didn’t know. I was like- I read it. And I’m – well, Schmidty’s got a smokin’ hot wife, there’s no way he’s got a bread-

Al: He’s delivering bread in his spare time.

Joe: Ah, the excitement-

Al: He’s gotta pay for the 2 nice cars.

Joe: Well, those are company cars. He’s gotta pay for his smokin’ hot wife.

Al: And the 3 kids.

Joe: “We also own a bread distribution route that nets us $45,000 a year once we pay our 1099 employee and expenses. It’d be awesome if you guys could spitball any ideas on how we could a) stash more extra income away for retirement to any savvy investments that can make a profit and reduce our taxable income. I look forward to your show each and every week and wish you and yours a very safe and happy holiday season. Schmidty.”

Al: Do you get your bread delivered?

Joe: I’ve never heard of a bread delivery guy.

Al: Me neither.

Andi: Goes to grocery stores and bakeries and stuff like that, I guess.

Al: I’ve heard of a milkman when I was a kid.

Joe: Oh my God. I don’t know, Schmidty. You just gave us a really good idea. I’m going to buy a bread distribution route. That’s $45,000 passive income.

Al: You think he drives it around or his wife does it?

Joe: I don’t know. He’s got an employee, 1099 employee. I don’t know. Does the employee- does he stack the bread? Does he make the bread? I don’t know, does Schmidty make the bread?

Al: Maybe.

Joe: I don’t know.

Andi: See, here’s his car. Then here’s his wife’s car. They could both hold a whole bunch of bread.

Al: Yeah, you put down that 3rd seat you could hold of lots of loaves in there.

Joe: Lots of bread. All right. So he’s making bread, all right. He’s got dough. Can he stash more cash for retirement? All right. So he’s doing a good job. He’s 41 years old. He got $1,000,000 in retirement. $500,000 in a brokerage account. Yeah, I would continue to build the brokerage account, non-qual. There’s no magic bullets here. You make a few hundred thousand dollars a year, your wife makes the same, $400,000 or $500,000 a year. Sounds like you’re frugal. You got a bread distribution company. What else do you want here Schmidty?

Al: Well, you know what? Let’s say he maxed- “we both maxed out our retirement plans”, so you can’t do a 401(k), but you can do a SEP IRA for the bread distribution business. So there’s a little something there.

Joe: Well, he’s also doing the mega backdoor.

Al: That’s fine. The SEP IRA is not limited by that $60,000 number.

Joe: Because it’s employer contribution.

Al: Yep.

Joe: Got it. So yeah. There you go. SEP IRA for the-

Al: – bread distribution business. It’s hard to say.

Joe: Oh my God. I never thought I would read that in my life. And there I go.

Al: Let’s see- any savvy investments to make a profit while you reduce your taxable income?

Joe: Yep: Oil and gas.

Al: Terrible investment. But-

Andi:  Facebook, 600%.

Joe: Oh. There you go.

Al: I like real estate. I think you’re on the right track there.

Joe: But he makes too much money to make any type of tax benefit.

Al: I know. I know, but at least it’s diversification. And, you know, Florida is a growing area. A lot of retirees like to live there. I agree with you. There’s no magic bullets. I think you do SEP IRA for your bread distribution business. And if you want to buy more property, by all means, go for it. Otherwise, just build up that that non-qualified account, non-retirement account.

Joe: I like it. Pay down debt.

Al: Right.

Joe: All right Schmidty, I like the oil and gas, You could do that. Opportunity zones.

Al: Yeah, those are great tax write-offs. Not necessarily great investments.

Joe: What was other-  the low-income housing.

Al: That one’s even worse.

Joe: Yeah. Low-income housing tax credit.

Al: Right.

Joe: So.

Al: Solar? Let’s get solar on that Floridan.

Joe: Get some solar- yeah that would work.

Al: Drive an electric car. Get the electric car credit.

Joe: Yeah. But let’s see-

Al: Hire a disadvantaged person for the bread distribution business.

Joe: That would be alright.

Al: Get a credit there.

Joe: Credit there.

Al: So now we’re spitballing.

Joe: Any other spitballs you got?

Al: That’s all I got. If you come up with a new kind of bread, research and development credit. That’s stretching it a little bit, probably.

Joe: Bread without yeast or something.

Al: Something.

Joe: All right, thanks for the email, Schmidty. This is the new Schmidty. Schmidty #2.

Taxation on Previous Employee Employer Stock Purchase Plan and Restricted Stock/Share Units (Priya, Irvine)

Joe: Got Priya writes in from Irvine. “Hello, Big Al, Joe, and Andi.” She referenced that in order of seniority.

Al: Yes.

Joe: “Or maybe because Big Al is a vegan.”

Al: Yes.

Joe: Vegan. Vegan Al.  “First-

Al: Although, I did- over New Year’s, I had Oggi’s Pizza Triathlon with barbecued chicken and bacon. That was so good. I had the-

Andi: Oh my.

Al: – entire-

Joe: You ran a triathlon? Or the pizza’s called a triathlon.

Al: No, it’s called a triathlon. Best pizza ever, by the way.

Joe: Got it. Oggi’s.

Al: Not on the menu. You have to order it special.

Joe:  Wonder what Dino’s doing?

Al: Dino? Oh yeah. I think he’s- that was a while ago.

Joe: Remember? We would hang out, have some beers with him after our-

Al: Yeah, that’s right.

Joe: – radio show.

Al: Right. Years ago.

Joe: “First things first. Thanks for the amazing podcast, I listened to almost all your episodes available on Apple podcast.” Geez, Priya. What’s wrong with you? “Even after that, I learn something new in every podcast you create. Second, in the recent podcast, Joe is frustrated-”

Andi: That’s all the podcasts, Priya.

Joe: “- but still answers patiently with too many Roth and mega door back Roth questions. I concur as there are several other topics that need similar attention. Having listened to almost all your podcasts, I can see how you have answered the same Roth questions many times.”

Al: We have.

Joe: “But from a new listener’s perspective, who is maybe new to Roth concepts, it sounds exciting and would want to understand more given its tax-free nature.”

Al: It does sound exciting.

Joe: Look at Priya, just making everything calm and beautiful.

Al: Yeah, right? She’s going to help your Zen.

Joe: She’s very thoughtful.

Al: Yeah, right.

Joe: “At least I’m not going to ask you the Roth question this time.”

Al: This time.

Joe: “My question is related to ESPP and RSUs-” Ok.

Al: Employee stock purchase plan and restricted stock units.

Joe: All right. “- from a previous employer. I have approximately $10,000 and $20,000 in these accounts. The stock in these accounts are performing very well and are completely vested. If and when I sell the stocks in these accounts, would they be counted as ordinary income? I have no knowledge on how these accounts operate and their tax consequences. I hope you all have a happy and relaxing holiday and a great new year. I’m dreaming about traveling in 2021.”

Al: Me too, Priya.

Joe: “Regards, Priya.”

Al: I am totally with you.

Joe: I’m dreaming about Priya right now.

Al: I’m dreaming about traveling with Priya, and my wife. Let me throw that in there.

Joe: Real quick. Ok, so an employee stock purchase plan, Alan, that’s just when an employee purchase their own stock at a discount.

Al: Generally you buy employee stock at a 15% discount. And it’s not even necessarily the price of the day you buy it. It’s like the lowest amount during that quarter or the beginning date of the quarter. I can’t remember exactly what. But yes, you buy stock at a discount and then when you sell that stock, it’s capital gain. But there can be an ordinary component. And I sort of forget those rules. I think there might be a small ordinary income component on ESPP stock, but mostly it’ll probably be capital gains. As far as RSU, restricted stock units- well, if they’re already vested, it means that you’ve already paid the ordinary income tax-

Joe: Because it’s compensation.

Al: Yeah, it gets added to your W-2. So if you’ve already paid the tax on it and says you’ve invested, so, yeah, any investment then, is going to be capital gains to the extent the investment is higher than what you originally paid for it. So that’s just like any other investment.

Joe: So with the restricted share unit- let’s say as part of her compensation, they gave her $10,000 worth of XYZ stock. So on the W-2, as she’s filing their tax return- let’s say she makes $90,000 of W2 wages; but her income that year is going to be $100,000 because the other $10,000 is included in her taxable wages.

Al: Yeah, that’s right. And so that’s also her new tax basis. So in other words, now she’s got $10,000 and she buys $10,000 of Amazon, whatever, whatever stock, whatever mutual fund she wants to, and that particular investment goes up to $15,000. So now there’s a $5000 gain. So she’ll pay capital gains on that $5000. And Priya, if you hold that for more than a year, it’s long term capital gain, which is a cheaper tax than ordinary income.

Joe: So not too much tax consequence. They’re performing well. So I don’t know what performing well really is.

Al: 600%?

Joe: Yeah. Is it like FB?

Al: I bought in 2000-

Joe: I bought Netflix, you know, $12 a share. I was in the IPO. I’m friends with a broker. Thanks, Priya.

Pay Off Mortgage or Invest? (Craig, Nevada)

Joe: We got Craig from Nevada. “Is it better to prepay an extra $1500 per month on a new 30-year mortgage, $230,000 at 2.65%? Or invest the $1500 each month making 10% interest?” I’m thinking invest.

Al: I Love 10% interest. How do you get that Craig?

Joe: So Craig, 10% – so the math is 10% versus 2.65%.

Al: Yeah. I think you answered your own question.

Joe: Yes.

Al: In other words, if you truly believe you can earn 10% on this $1500 a month, of course you’re going to be better doing that. But that’s the whole nature of investments. Nothing is guaranteed.

Joe: I would not prepay a $1500, 30-year mortgage at 2.65%. I would take the $1500 and invest it in my retirement.

Al: I would too because that’s a fantastic rate.

Joe: And then now we’re going to get hate mail. Dammit.

Al: I knew you’d say that. It’s arbitrage. All you financial planners always say that.

Joe: When I paid off my mortgage,  my neighbors, they all foreclosed.

Al: On the other hand, if having a mortgage bothers you, yeah, go ahead and pay if off early, we don’t care.

Joe: Oh we’ve got a bunch of these here.

Al: We’re almost out of time.

Mortgage Forbearance and Taxes? (Deanna, Chula Vista)

Joe: “What if your mortgage is in forbearance due to COVID. How does that affect taxes? Because we haven’t been paying interest on the mortgage.” Forbearance in taxes- ok, “what if your mortgage-

Al: “- forbearance due to COVID?” So it sounds like he’s not paying his mortgage. I don’t- what does forbearance mean?

Joe: I don’t even know if there’s- that’s like a student loan, right?

Al: Yeah. I mean, so-

Joe: I’ve never heard of a mortgage in forbearance.

Al: Typically with a mortgage, you stop making your payments and you get nasty letters and then it starts affecting your credit and then the bank starts trying to call you. And if you don’t do anything, they’ll eventually start foreclosure proceedings, which generally takes a year or more after you stop paying. So how does it affect your taxes because we haven’t been paying interest on the mortgage? Well, you don’t get a tax deduction if you haven’t been paying the interest payments.

Joe: So mortgage forbearance is like a student loan. They’re just- they allow you to pause the mortgage.

Al: Yeah, that’s probably- maybe that’s what it is.

Joe: So now, with that-

Al: So, there’s really no impact necessarily. Now, if it does go into foreclosure-

Joe: How does it affect your taxes? There’s no interest- you’re not- he wants to write off the interest. There is no interest, you’re not paying any.

Al: If you catch it up later, you can write it off then. If the house goes in foreclosure, there might be debt relief income. So just be aware of that.


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