Jake Greenberg

Jake Greenberg is a CERTIFIED FINANCIAL PLANNER™ professional specializing in comprehensive financial planning. He is committed to helping his clients develop sound financial strategies in order to get them to and through retirement using the most tax-efficient and cost-efficient methods possible. Prior to joining Pure Financial, Jake was a lead strategist in charge of running [...]

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
July 9, 2024

He’s 56, she’s 32. How does this 24-year age difference impact retirement plans for “Bonnie and Clyde”, and what strategies should they implement now for the most tax-efficient retirement possible in the future? While Joe Anderson, CFP® and Big Al Clopine, CPA are on vacation, Your Money, Your Wealth® podcast producer Andi Last enlists the help of Pure Financial Advisors’ Managing Director Jake Greenberg, CFP®, ChFC® for a video case study (complete with visual aids!) on YMYW Extra number 6. Into which types of accounts should Bonnie and Clyde save for retirement? How much of their savings should they convert to Roth and when?

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Show Notes

  • (01:10) Bonnie & Clyde’s Financial Situation
  • (06:56) Health Savings Accounts Explained
  • (08:16) Real Estate Plans
  • (09:42) Contribute to Brokerage Account or Roth 401(k)?
  • (11:01) Bonnie & Clyde’s Pre-Financial Assessment: A Video Case Study
  • (23:28) Tax Diversification Visualized
  • (30:02) Roth Conversions: When and How Much? Current and Future Tax Brackets Visualized
  • (35:53) Age Difference and Retirement Date Differences
  • (27:15) Bonnie and Clyde’s Cars, Drinks and Pets
  • (39:57) Final Thoughts

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Watch the video spitball (with visual aids!) on YouTube


Andi: Today’s spitball has lots of visual aids, so click the link in the show notes to watch it on YouTube! Clyde is 56 and his fiancée, Bonnie, is 32. How does this 24-year age difference impact their retirement plans, and what strategies should they implement now for the most tax efficient retirement possible in the future? I’m producer Andi Last from the Your Money, Your Wealth® podcast with Joe Anderson, CFP® and Big Al Clopine, CPA presented by Pure Financial Advisors. In this YMYW Extra, Jake Greenberg joins me to provide Bonnie and Clyde with a retirement spitball analysis. Jake is a CFP® professional and a Chartered Financial Consultant, and he’s managing director for multiple Pure Financial Advisors branch offices. Jake, I really appreciate you taking the time out of your very hectic schedule to help me today. You’re managing a lot with Brea and Woodland Hills…

Jake: Yeah, Chicago. Yeah, Sacramento, it’s a growing list, so-

Andi: Incredible. Well, like I said, I really appreciate you carving out some time for this today. This email has been sitting around since March, and we didn’t even realize it until Clyde wrote in again at the beginning of June and said, “hey, there’s an update to my situation.” And I realized we never even got his original email. So I’ve tried to expedite this process so we can finally get an answer for them.

Bonnie & Clyde’s Financial Situation

Andi: So they are from Columbus, Ohio. And the email says, “Greetings, Joe, Al, and Andi. I’m a relatively short time listener, but I’ve been binge listening since I discovered your show a couple of months ago, I have a fairly long work commute. I enjoy the hell out of it and have an interesting spitball for you guys. I’m 56 and my fiancé is 32. We’re both engineers and have solid jobs with Fortune 500 companies. Both maxing out our 401(k)s. That’s $40,000 for him, $30,000 for her with employer matches. HSAs and IRAs including catch-up contributions for me. He says I make around $135,000, she makes around $110,000. We plan to get married in the Fall and have a prenup in the works.” Now they’ve got a 24-year age difference. So is this a very common situation that you end up seeing, Jake?

Jake: I wouldn’t say it’s super common, but I have seen this on multiple occasions, but yeah, 24 years, that’s a good chunk of time there.

Andi: My husband and I are 8 and a half years different, so I’m sure some of this will apply, but those are very different retirement times.

Jake: Yeah, definitely it introduces a few more things you probably need to start thinking about.

Andi: Right. He says, “I have $520,000 in a pre-tax 401(k), $41,000 in a Roth IRA, $42,000 in a traditional IRA, which I think I should be converting to Roth over the next couple of years, right? He also says $47,000 in HSA and $230,000 in a brokerage account.” And so just from the start of this, he’s got this money that he’s got in his traditional IRA, and he’s wondering if he should be converting that over to Roth into the next couple of years. Just without having any other information yet, would you say that that’s probably likely a good idea?

Jake: Yeah, I mean, if you’ve been listening to the show for any length of time, you know we do like Roth conversions, but it has to make sense, and sounds like there’s a lot of changes coming here soon, at least as it relates to how their tax return is going to look if they’re planning on getting married. I think they said the Fall. So, you know, now their income is going to be merged onto a tax return and that that’s going to change the brackets a little bit. So certainly something that should be considered, but got to run the numbers.

Andi: All right. So let’s get a little further into this. He says, “I have a couple of years left on a car loan at 2.99% that the ex-wife and I quote unquote “own”, $74,000 in student loans, but the kids make the payments on those. He got divorced in 2018 and pays around $30,000 a year in pre-tax spousal support until early 2028.” So his AGI was only $76,000 last year. I would imagine this will have a lot of play into his Roth conversion plan as well.

Jake: Yeah, it sounds like his alimony started before the rules changed where they made it no longer tax deductible to the payer. So, you know, he’s got a few more years left of those payments. So, I mean, I’d rather have the extra tax than having to pay the alimony. But the nice benefit of- in his situation, you can at least write it off. So yeah, it all, it’s all going to play in because maybe conversions, you could do a little more until that goes away here in a few years.

Andi: He says he plans to retire in 5 to 7 years. So he’s, what is he? He’s 56 now, he wants to retire in 5 to 7 years. So that puts him at 61 or 63 years old. So he “plans to retire in 5 to 7 years with a minimum of $1,500,000 in liquid assets. And start collecting Social Security at 70 at about $4,500 a month in today’s dollars.” He says, “Based on my family history, there’s a decent chance I’ll live into my mid-90s, so my financial plans are based on that. I don’t have long term care insurance yet, but I’m considering it now. I’m in excellent health, so my premiums should be relatively low. We don’t have any grand plans to change our lifestyle down the line, so my current net, inflation adjusted, for the next 40 years would be fine. Call it $6,000 a month for spitball purposes.” Does that sound reasonable in terms of what- the information that we’ve gotten so far?

Jake: I guess I would have a question for him as to whether or not that $6,000 a month is for both of them or just him, because I would say that that that sounds a little low. Most people, in fact, I think the stats are that about 65 or more percentage of people actually spend more in retirement than they did when they were working. And as we come and say like if you’re spending most of your money on the weekend, when you retire, you’ve got 6 Saturdays and a Sunday on your hands now. So we, we see people tend to spend a little more. I’ve never had anyone tell me they want a lower standard of living in retire- They always want at least the same or better. So that one did stand out to me as, as maybe, that that might be a little bit on the low side. So, right.

Andi: And it could be that that is, he’s just talking about his own expenses since we haven’t even gotten into merging everything together yet.

Jake: Right. So it sounds like they do live in the same house together. So I wasn’t sure if he was looking at that as a, as a whole, but certainly if her expenses are added onto that, then that sounds more reasonable.

Andi: So, okay. Then he says, “Bonnie has $151,000 in a Roth 401(k), $107,000 are pre-tax 401(k), $31,000 in a Roth IRA. And $17,000 in HSA and $105,000 in a brokerage account. She’s 32 years old. She’s done an amazing job so far. My goodness.

Jake: Yeah, I started adding it up, and I was, I was actually pretty impressed, so job well done.

Health Savings Accounts Explained

Andi: He says, “We both treat our HSAs strictly as investment vehicles and pay our medical costs with after-tax dollars.” I want to know a little bit more about that. Because the whole point of the health savings account, the HSA, is to pay for your medical expenses, but that is tax-free money, right?

Jake: Yeah, so there’s a couple of ways of looking at this. So if you’re going to have expenses in the current year that you know of for medical, it’s nice to get that deduction by, let’s say that you know you’re going to have a $5000 medical expense. You put $5000 in the HSA, you get the write off, and then you could immediately use that to cover the medical expense. So that’s one benefit. But the other benefit of the HSA is that all the growth in that account is also tax-free. So a common way of looking at these is, hey, I’m going to just use cash on hand to cover my expenses today, and I’m going to let this account keep growing and growing and growing so that I have these dollars to cover medical expenses in retirement.

Andi: And so it’s got, it’s got like a max contribution right now of I think of like $4,100 a year or something like that. But you can just keep like stacking up that money in the HSA. Right?

Jake: Yeah.

Real Estate Plans

Andi: Right. Okay. So continuing on, let’s see, he says, “We own a home together, built in 1860, very cool. It’s worth $450,000 with a mortgage of $292,000 at 2.65%. She also owns her parents’ home, which is worth $500,000 and has an associated mortgage of about $222,000 at around 3%, which her parents pay. When her parents retire, the plan is for them to get net equity in the house in the most tax efficient way possible. Annual gifts over time, maybe?” So let’s talk about that. She owns their house, but she wants them to get the net equity in it when her parents retire.

Jake: Yeah. So, if they were sitting in front of me, this is one of those things that I would have a lot of questions about is why do you own the house? There are some disadvantages to  transferring a property to your kids while you’re living because when the parents eventually pass that property would not receive a step-up in basis because it’s owned by the child. Now, I don’t know all the circumstances. There are situations I’m sure in which maybe it would make sense. Who knows? But, if their goal- if they’re looking at this property as her parents’ home and they want her parents to benefit from the equity in the property, and they’re thinking of doing of gifting to them over time, you could certainly do that. But yeah, I’d have a whole bunch more questions on that one.

Contribute to Brokerage Account or Roth 401(k)?

Andi: Got it. Okay. “She plans to retire in 25 years, give or take.” So he’s retiring in 5 to 7 years. She’s retiring in about 25 years. So they’ve got some serious planning to do here. “She’s got the potential to be making a gazillion dollars a year by then, but anything could happen. So I based all my projections on about 4% raises per year.” He says, “I assume that her income plus my distributions will move us up at least one, maybe two tax brackets over time. Even if the tax brackets stay where they are, would it make sense for me to contribute less to my 401(k) now, still maxing the company match, and put more into my brokerage account to get the taxes out of the way?” So that was from his March email. In his June 4th email update, he said his radical question about moving 401(k) savings to his brokerage account is basically irrelevant. “When my employer switched 401(k) providers, I didn’t know, or notice that we were offered a Roth 401(k) option. So I’ve switched completely to maxing that, and I think that makes that part of my question moot.” What say you, Jake?

Jake: Yeah, no, I’d agree. You made the switch to the Roth 401(k). And before I got to that part of your email, I was already thinking you got to make the switch here. And so, especially with your comments of “we’re probably going to be in a higher bracket in the future.” So, I think you figured that one out for yourself. And I think it was the right call.

Bonnie & Clyde’s Pre-Financial Assessment: A Video Case Study

Andi: Cool. Next question. “Can she, and should she roll her pre-tax 401(k) over into a Roth IRA? Assuming that that doesn’t change our tax bracket. Any thoughts on regarding our difference in age and target retirement dates?”

Jake: Yeah. Okay. So I took it upon myself to take all this data you sent over to us, and I wanted to treat this like a typical assessment that we would do for anyone that’s coming into our office. So, I did this somewhat for you, but also for me just to organize the data because you gave us a ton of info, which is great. So what I’d like to do now, Andi, if it’s okay with you is maybe just share my screen and walk them through what a client would typically see when coming into the office asking these same types of questions.

Andi: Yeah, let’s get into it. Let’s see it.

Jake: All right. So just the basics here. Clyde 56. Bonnie is 32. They’re getting married in the Fall. There was mentioned in the email about kids, given the fact that they’re paying the student loans. I don’t know how many kids there are.  I also don’t know if maybe they want kids together in the future. Who knows? That’s a point of conversation, but no mention of that. So we won’t spend too much time there. Both engineers, he wants to retire in 5 to 7 years, her in 25 years.  So if we now go to the assets. I broke this down based on asset type and we’re going to start with real estate. So we’ve got their primary home value, $450,000. They owe $292,000. They got a great interest rate on there. There was no mention of the term or the payment, but this is just showing kind of what we got in the email. At the parents’ home on their parents are making the mortgage payments.  All right, now let’s talk about liquid investments. We break this down into 3 categories. There’s tax-deferred, tax-free, and taxable. So I broke this down, again, we don’t know where the accounts are at, so I just kind of labeled them as what they are. So Clyde’s 401(k), $520,000, IRA of $42,000, and HSA of $47,000.  Then she’s got 401(k) $107,000 and an HSA of $17,000.  They’re making their contributions. HSA, if you’re an individual, it’s $4150 a year. We’ll look down at my cheat sheet here. If you’re a family, it’s $8300 a year. So when they get married, that’s the, the maximum is, is essentially going to be the same. But they’re going to need to be careful as they’re contributing not to overcontribute to their, their HSA. So we’ll see that-

Andi: Quick question for you.  If they get married in the Fall, that will change their tax bracket for this year. That’s when everything will change everything for them. Right?

Jake: Correct.

Andi: Yeah. Okay.

Jake: Yep, and it’s going to probably change their health insurance and all of that because maybe they’re on his plan or her plan or they stay on their own plan. So there’s some additional planning that’s needed there.

She’s making 401(k) contributions. I wasn’t 100% positive where those were going if it’s going to pre-tax or Roth. So I just put in pre-tax to be conservative and then he just started making Roth 401(k) contributions. And then their the employer matches are going on too, so I just kind of backed into what the employers are contributing. The employer match typically goes into the pre-tax. Now there was some laws passed recently that says employers can actually start contributing to the Roth 401(k)s for their employees, but it’s new and custodians haven’t quite caught up to the law yet. And so most employers, in fact, I haven’t seen one yet that’s contributing to the Roth. But just know that that may change at some point soon, but they’re getting some employer matches there. But total tax-deferred assets is $733,000. Tax-free accounts are $223,000. It sounds like they’re both maxing out the Roth IRAs. Here’s something to be thinking about here because now that their incomes are going to be combined. And he just switched from making pre-tax 401(k) contributions to Roth 401(k). That deduction is not going to be there. It’s possible that they end up over the contribution limit to continue making traditional Roth IRA contributions. So we’ll need to sit down and kind of figure out what is our total AGI going to be now that we’re combined. And again, we switched pre-tax to Roth contributions. So we’ll need to pay attention to that.

Andi: So how does that work in terms of if they get married and they have to, they find out they’ve made excess contributions, is it possible to pull those out, recharacterize them?

Jake: Yeah. So the rules are that you can, you can recharacterize those excess contributions, and it’s a little bit of a tricky calculation. The custodian can usually help you figure it out in terms of the math on it. But let’s say that you put in $5000 and it grew to $6000. It was just a good year for your account. You would have to pull out what you contributed plus the earnings and those earnings would show as income on your tax return, that would be taxable income to you.

Andi: Got it. Okay.

Jake: Your 1099 at the end of the year will show that so you just have to tell your CPA what happened.

Andi: Okay.

Jake: As it relates to again, they’re now combining their income.  There’s going to be some things that change here. If they are over the limit for making Roth contributions, then backdoor Roth contributions actually might make sense.   Now, it seemed like Bonnie did not have an IRA, but Clyde does. So there’s some rules around if you have IRA money and whether or not you could do a backdoor Roth contribution because they look at all IRAs as one, even if you do this in a separate account. So when you get into backdoor strategies later, but just know that that’s, that’s something that’s probably on the table for you. If you did end up over the contribution limit. Continuing on here, taxable accounts, of course, these, these are called taxable because anything you put into the account during the year, whatever happens with that money, interest, dividends, gain, that’s all taxable to you in the year that that income is created. What you put in the account, there’s no deduction, there’s no tax-free growth, but most of the tax in these accounts are treated a preferential capital gains rate. So they’ve actually done a great job accumulating assets here in these accounts. A lot of folks don’t take advantage of this. They’ve got $335,000 altogether in those brokerage accounts. They didn’t say anything about what their cost basis was there. So I don’t know if there’s a bunch of unrealized capital gains or not. But I think one of his questions before he figured out the Roth 401(k) piece was, should I start putting some of my money into the brokerage account? And the idea of doing that is if I already maxed out my Roth IRAs and I maxed out my HSAs and I maxed out my 401(k)s and I still have extra money left over, well, where should I put that? Brokerage account is a great place to do it because it’s still being invested and there’s still some preferential tax treatment to it.

Andi: Yep.  And there is a purpose for having money in all 3 of those different pools, tax-free, tax-deferred, and taxable, in terms of how that is going to affect your retirement, right?

Jake: Yeah. And in fact, in just a second, I can draw all this out for you too, if you’d like.

Andi: Perfect. Yes.

Jake: A couple of last things here. They didn’t mention anything about cash reserves with as good of a saver as it sounds like they are. I would assume that they’ve got some cash tucked away as well, but, that wasn’t mentioned in the email.  Student loan is the only debt they mentioned outside of the mortgage at $74,000, kids are paying that. So total net worth is about $1,600,000.  So seems pretty decent.  Long term care, there is none. He’s considering it. Now, what I would say to this is because of the large age gap here, there’s a couple ways of looking at this. Does he need long term care or does she? Or maybe both?  Long term care insurance companies will give you better rates if you apply as a couple, but usually we don’t suggest getting long term care insurance until maybe between the age of 55 and 62 on average, and she’s only 32. So-

Andi: I was gonna say he’s right in the in the target range and she is not.

Jake: Yeah, he’s getting there. She’s 23 years away from being there. So, even though there’s couples discounts for applying together, it may make more sense just to maybe  insure him. Now, what I’ve seen with long term care insurance and people needing it over the years is that it’s somewhat unusual that both spouses end up needing care. The first spouse that might need care, the other spouse to the extent of their abilities may be able to care for that spouse. But once the first spouse passes, it’s the surviving spouse where if there’s nobody else around to help out, they’re the one that’s most likely to need either in-home health care or actually go into some sort of elderly facility, like a nursing home or something like that. Certainly for him, it should be considered, but especially for her, once she gets to that point, depending on if there’s family or kids or whatever around, then she especially should, should consider it, given the, the age difference.

Andi: At what point, because, you know, he’s pointed out that she has the potential to make a gazillion dollars in the future, at what point is it reasonable for couples to consider whether or not self-insuring is a possibility?

Jake: If you run what we refer to as a long-term care like gap analysis. In other words, if we needed care, could we fund that ourselves? If your solvency or longevity of your portfolio doesn’t get tremendously interrupted by that expense, then you could probably self-insure. But even if someone says, listen, I think I can afford it, but I, I don’t want my assets going that much to this type of cost. I want to leave as much possible to my heirs. If that’s the case and they can self-insure, they still even mean when I consider insurance. As probably most of our listeners know, we don’t sell insurance here, but it’s something that we do advocate for, but it’s totally case by case.

Andi: Okay. So any more that you want to cover on the on the fact pattern here?

Jake: Last couple things were their total income currently is about $245,000. So again, different bracket than what we’re, at least he’s, been in, and then Clyde maybe $54,000 in Social Security. Expenses again, I don’t know if this was combined or not, but he’s thinking $72,000 and then I’m assuming the alimony was on top of that. So we know that at bare minimum $102,000 is the expense there. Now taxes would have to come out of this but they’re saving together about $70,000, almost $77,000 a year, which is great. Total excess cash flow is like $66,000. Of course, taxes would come off of that $66,000, but it seems like they probably do have some cash flow surplus going on there still. So what do they do with that?

Andi: So does that cash flow amount, does that include the $30,000 for the alimony?

Jake; Uh huh.

Andi: Okay. So, and that’s, we had talked about that a little bit before. He’s going to not have to pay that alimony after 2028, so that is going to significantly change what things look like at that point. And then in 2026, two years prior to that, we’re going to have tax brackets changing, and tax income limits changing. So there’s a lot of moving parts here in terms of determining how they go forward.

Tax Diversification Visualized

Jake: Exactly. So this is a good segue. So what we’re going to do here is an exercise where I actually, I’m going to walk you through- you know, one of the things that we do with folks when they do come into our office and we just finished going through all those details together, is let’s just kind of draw this out and see where you’re at as a whole.

So as Andi mentioned just a moment ago, there’s 3 places that you could really save your money.  And Andi, you should be seeing my drawings pop up there on the screen.  So there’s tax-free accounts. These are those Roth IRAs. So that’s IRA and 401(k)s.  You’ve got about $223,000 here at the moment. Then there are taxable accounts. These are just those brokerage accounts. So another thing to consider as you guys are getting ready to get married here soon. You mentioned doing a prenup. I don’t know if you plan on combining accounts or leaving them separate but the titling of these accounts are important. So you may want to consider adding what we’d refer to as a TOD registration on the account so that you can assign a beneficiary to it or even potentially setting up a trust to get these titled in trust. These are your brokerage accounts and you’ve got about $335,000 there.  And then you’ve got your tax-deferred accounts. These are the IRA and 401(k) pre-tax accounts.

Andi: These are the traditional as opposed to the Roth.

Jake: Exactly. And you’ve got a total of $733,000 here.  So these two accounts are considered after-tax. Anything you put in here, there’s no deduction. But what comes out is treated a little different. So on the Roths, whatever comes out of here, there’s no tax at all, no tax on what you put in and all of the growth is totally tax-free. On the brokerage accounts, there’s also no deduction when you put the money in, but typically it’s long term capital gains that you’re paying taxes on here. And for most folks, that’s 15%. Could be zero, could be up to 20%, just depending on your income. You guys are a ways away from that 20% gains rate. So 15% is pretty safe.  And then the tax-deferred, this is pre-tax.  So anything you put in here, you’re going to get a write off for it in the year that you make that contribution. But when you start taking the money out later, you pay tax at the highest possible personal tax rate, which is your ordinary income tax rate. Now for the two of you at the moment that it seems that, especially for Clyde, that was about 22% last year. Now that you guys are getting married, you’re probably going to be in, let’s see, after write offs and such, I guess, at least for now, maybe the 22% bracket. The top of that bracket’s about $200,000. And I think after your deductions and such, that’s probably what you’ll be. But I think it’s going to be real temporary. Because if Bonnie’s going to make a gazillion dollars soon, but at least she’s got that 4% per year, you guys are already really close to the top of the 22% bracket, probably within the next couple of years, just her income increases alone. You’ll probably jump up into the next one, which is currently 24%. And especially when that alimony deduction goes away, you’re probably going to jump up into the next one. So your big question of should, was it the right move to switch to the Roth 401(k) and do Roth conversions make sense and all of that? I’d say yeah, I mean, right now you’re, you’re probably in the lowest bracket that you’re going to be for the foreseeable future.

On top of that, a couple things to consider as we’re looking out into the future is if you did continue to contribute here, there’s something that happens in these accounts. For some folks, it’s at age 73 and for some it’s at 75. 75 if you were born in 1960 or later, but that’s what’s called your RMD, required minimum distribution, and that’s about 4% of the total account balance.  Now, just to keep math simple at a 7% rate of return, your money would double every 10 years. Okay, so you’re $700,000 today, 10 years out could be $1,500,000. 10 years from there, maybe $3,000,000, right? So, and that’ll put you at least for Clyde right at about 75.  So $3,000,000 in that account, even if you’ve never made another contribution to this. Yeah, that RMD could be around $120,000. Right? Once you’re both required to start taking the RMD so and that would be on top of any Social Security income that you had or rental property income or anything else that you have coming in, brokerage, interest, dividends, gains. That’s all on top of that. So most folks that come into our office to say, Hey, where am I at? A lot of these people are already retired or maybe even already taking RMDs and they’re like, what do I do about this? I’ve got all this income coming in. I thought I, I was told that I was going to be in a lower bracket when I retired and that’s not true at all. So I think the whole idea here is, can we start taking advantage of, of your brackets or even our current rates to one, make contributions into this account, but also start doing conversions. Now the caveat with conversions is that when you do them, you have to pay the tax in the year that you convert.  So it’s really important that you do all the math on this correctly.  There’s a lot of things that people also forget about when they’re trying to do the math on their own. I call them landmines. You don’t know they’re there until you step on one and it blows your whole situation up, right? So you got to be real careful here, but I’m going to draw out the tax brackets now. But Andi, anything you’d add in here before I continue?

Roth Conversions: When and How Much? Current and Future Tax Brackets Visualized

Andi: Well, I was going to ask, just from a spitball standpoint, we’re assuming that they’re probably going to be in the 22% tax bracket, even once they get married. But given the circumstances and how it seems very clear that they’re going to be in a higher tax bracket in retirement. And the fact that the tax rates are going to be going up in 2026, does it make sense for them to potentially convert more than the top of the 22% tax bracket?

Jake: That is a great question. And I would argue, yes, it probably does, as long as they can afford to make the tax payment.  Now they’ve got, there’s a few ways you could pay tax on a conversion, either cash on hand, money in a brokerage account. Or even withholding the tax from the conversion itself. But you need to be at least 59 and a half years old or older if you’re going to withhold tax. And that’s the least advantageous choice anyway.

Andi: And that would also happen – he wouldn’t be 59 and a half until after the tax rates change.

Jake: Correct.

Andi: So yeah-

Jake: So, but they do, I don’t know again about how much cash they’ve got, but they do have about $330,000 in a brokerage account. So that money could easily be used to, to do, to cover tax on these conversions. So these brackets I just drew out, these are our current brackets and I’m going to, and I’m going to use the married filing joint rates here since that’s what they’re going to be most likely this year.  So the top of the 10% bracket is $23,000. The top of the 12% is $94,000. Top of the 22% is $201,000.  Top of the 24%- And I don’t have this memorized. I’m cheating here.

Andi: This is from our Key Financial Data Guide.

Jake: Yeah! I’ve got it right here!

Andi: Which I will link to that in the description of this video, because this is so useful for everybody. It really is.

Jake: Yeah you can draw this out yourself. So the top of the 32% is $487,000, and the top of the 35% is $731,000. And this is of course for, for 2024.

Andi: And these are the married brackets.

Jake: Married. Yeah. Married filing joint.  It’s my assumption that you’re probably going to be near the top of the 22% bracket this year. Once alimony goes away and all that, you’re going to be in the 24% for sure. But, but here’s what Andi was referring to just a moment ago is, does it make sense to go up into that next bracket? Because starting in 2026, the tax rates that we have today are set to sunset or expire. And the reason for that is because when these tax rates were passed back in 2017 as part of the-

Andi: Tax Cuts and Jobs Act.

Jake: Yep, then they they’re only good for 7 years because the rule is if the tax cuts don’t get a super majority vote in the senate, not just a majority vote, but a super majority vote. I don’t even know the last time that that happened. I’d be willing to bet that that may never happen, so that means you’ve got to get a significant amount of votes from the other side of the aisle. And it just doesn’t seem like that’s what happens very much these days. So it’s a 7 year rule. So what happens is 7 years from that going into effect, which was 2018, that will expire. So at the end of 2025, these rates stop and what’s scheduled to take place is they revert back to what the rates were in 2017 and prior, and that would start in 2026. Now, that could change depending on elections and who’s in Congress at the time. Because when these come up for sunset, it’s usually Congress’s opportunity to try to pass some sort of new tax legislation. But just about anybody you ask, I think it’s pretty safe to assume that they’re probably not going to vote to reduce rates even further. They’re probably going to, at minimum, vote to keep this the same, maybe, but the expectation is this was probably going up. So if it does, these would be the rates. 10% stays the same, 12% becomes 15%, 22% is 25%, 24% is 28%, 33%, 35% stays the same. And this one is 39.6%. So-

Andi: And that means that the income ranges for those brackets are also going to not necessarily go back to what they were in 2017, but they’re going to be inflation adjusted upwards.

Jake: Correct.  So what you can see here is that the 22% bracket becomes 25%, which is actually more than the 24% bracket that you may end up being in when your income goes up. Which is less expensive than the 25%, right? So it’s also less than what the 28% bracket will be, which is where I think you will end up here in a couple of years. So if you’re at the top of the 22% now, again, that’s about $200,000 and  you did a conversion and you said, I want to max out to the top of the 24%, you’ve got around like $180,000 a room in that range. Now, again, you’ve got IRA money of about $42,000 and the rest of all of this is in your 401(k)s.  Your 401(k) or your employers may not even allow for what we’d refer to as intra plan Roth conversions, but if they do, that’s something to consider. Can you do a Roth conversion within your 401(k)? Some plans allow it, most plans that I’ve seen don’t, but some do. So, this is, this is kind of where you’re at, just kind of back of the envelope.

Andi: A spitball.

Jake: So, all that to say, yeah, all that to say, I think, I think Roth conversions certainly make sense.  And Roth contributions, IRA, if it’s backdoor, regular or Roth 401(k), all seem to make a ton of sense to me there as well.

Age Difference and Retirement Date Differences

Andi: Do you have any other thoughts regarding their age, difference in age and target retirement dates?

Jake: Yeah. So Clyde has the benefit from a financial perspective in a couple of ways. One, he’s going to retire and Bonnie’s still going to be working. So they’ve got income coming in. Most folks, when they retire, there’s just no income besides Social Security and what they’ve got from their portfolio. But when Bonnie retires, potentially 25 years out, my assumption is given how much she’s saving, and if she’s really going to be making as much as they think they’re going to be making, and if they are only spending as little as they are, and they say they’re driving cars with like a 220,000 miles, they certainly live below their means. I don’t have a lot of concerns for them as it relates to cash flow.  But, what you do with all the excess cashflow is going to be really important to make sure that you’re diversifying, not only how it’s being invested, but where it’s being invested. But Clyde needs to, he’s, he’s not just solving for his life expectancy.

He’s got to add essentially 20 plus years to the financial planning here. So these assets have to last much longer than the traditional, maybe 30 year retirement that we’re planning for.

Bonnie and Clyde’s Cars, Drinks and Pets

Andi: Right.  Okay. He ends the email with, he “drives a gray 2019 Toyota Camry with 110,000 miles on it. She drives a blue 2016 Toyota RAV4 hybrid with 210,000 miles on it, both of which they bought used and they intend to drive both until they die.” So yeah, like you said, they’re, they’re really serious about the saving and about, you know, extending the life of even things like their vehicles. He says “he got 275,000 miles out of his last gray Camry. Yeah.” He’s that guy.

Jake: Yeah.

Andi: He says his “drinks of choice are 19 Crimes red blend, Dos Equis Amber Lager and Spotted Cow, if he can get his hands on it or Doers, which is scotch, on the rocks, depending on mood and occasion. Hers are diet Coke or lime margaritas on the rocks with salt, depending on mood and occasion. He also says we have two cats, sorry.” I guess dogs are more the favorite here on YMYW.

Jake: I’m not a cat guy either, so I won’t hold it against you too much.

Andi: People are usually one or the other. Dog people or cat people.

Jake: Yeah.

Andi: What’s your drink of choice, Jake?

Jake: Well, I drink more socially, I suppose. So it’s not really, I know Old Fashioneds are kind of, it seems like the popular drink here on the show. Yeah, I do enjoy that. But lately I have also been liking a Basil Hayden. I don’t know if anyone drinks Basil Hayden.

Andi: Explain, what is it?

Jake: It’s like a bourbon.

Andi: Oh, okay.

Jake: Yeah, Basil Hayden, Macallan 12 has been coming out of the cabinet recently. You go up too much higher on that Macallan, it starts getting out of my price range. But Macallan 12 is a good, you know, reasonable choice there.

Andi: I wanted to ask you, have you heard of this 19 Crimes red blend that he’s talking about? Do you know what that is?

Jake: I have not ever had one. I’ve heard of it.

Andi: It’s named after the 19 crimes that English people would get, where the punishment was transportation to Australia. So you know how Australia was actually built by convicts. And there were 19 crimes that would get you put in Australia. And they included things like grand larceny, petty larceny. But also impersonating an Egyptian, stealing fish from a pond or river, stealing roots, trees, plants, or destroying them, or assaulting, cutting, or burning clothes. Those were some of the 19 crimes that made it so that you ended up having to go to Australia back in the day. Yeah. So they’ve named their entire winery after that. And apparently Snoop Dogg and Martha Stewart each have signature wines there because they’re “people who beat the odds and overcame adversity to become folk heroes.”

Jake: Huh, okay. Learn something new.

Final Thoughts

Andi: Yeah, exactly.  So, all right, any final thoughts for Bonnie and Clyde here before we wrap things up?

Jake: Yeah, I think they’re on the right track. There’s a lot of room to, to fall into the same mistakes that we see a lot of people doing, which is just saving in the wrong locations and creating a tax problem for yourselves in the future. So it’s important that you’re just getting in front of this and it sounds like you are. So great job there. It sounds like you’re going to probably have a cash flow surplus. So again, you got to really make sure that you’re being smart with kind of where that’s going. We don’t want to just see it stack up in cash, cash, cash. We want that to go to work for you. And then of course your, your tax return is going to be changing a lot here soon. So best to get in front of that and do some tax planning so that you know exactly what to do in advance. Okay. Wishing you did something after you’ve prepared your return.

Andi: Jake, thank you so much for taking the time to give this extensive spitball. This has been fantastic.

Jake: You bet. Thanks for having me.

Andi: And remember to make, really make the most of your money and your wealth, you do need more than just a spitball, even one that’s this comprehensive. So when it’s time to get serious about customizing a plan that is specific to your retirement needs and goals, you can schedule a free financial assessment with the experienced professionals, like Jake here, at Pure Financial Advisors. You’ll find the link to do that in the description of this video. So Bonnie and Clyde, thank you so much for your patience in getting this spitball. Hopefully it was helpful for you. And YMYW listeners and viewers, what did you think? Join the conversation in the comments here on YouTube, because you know that Your Money, Your Wealth®, and YMYW Extra are all about you.

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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.

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