Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
November 26, 2019

How do you figure out the break-even point on a Roth IRA conversion? Joe and Big Al discuss whether to convert, how much to convert, and when. Plus, the step-up in basis on a primary residence, self-employed small business retirement plan options, the difference between a financial advisor and financial planner, and defining a registered investment advisor and broker-dealer.

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Show Notes

  • (00:39) I’ve Maxed Out My 401(k). Can I Contribute to a Roth IRA or Roth 401(k)?
  • (04:25) Should I Make a Roth Conversion at the End of the Year or Contribute to a Roth 401(k)?
  • (11:14) What’s the Break-Even Point for a Roth IRA Conversion?
  • (20:58) I’m a Widow. How Do I Apply For Step Up in Basis on a Primary Residence?
  • (24:38) How Can We Contribute to Our Roth IRAs?
  • (27:55) Self-Employed Small Business Retirement Plan Options
  • (37:51) What’s the Difference Between a Financial Advisor and Financial Planner? What are Registered Investment Advisors (RIA) and Broker-Dealers?

Resources mentioned in this episode:

WATCH | podcast video: Solo 401(k) & Solo Roth 401(k): How Self-Employed Small Business Owners Can Save Big for Retirement

WATCH | YMYW TV: Retiring in a Gig Economy (Self-Employment and Small Business Retirement Plans)

READ | BLOG: Small Business Tax Filing: A Helpful Guide

WATCH | Ask Pure video: The Best Self Employed Retirement Plans


They’re some of the most common questions we get: how do you decide whether to do a Roth IRA conversion, how much to convert, and when? Today on Your Money, Your Wealth®, Joe and Big Al hammer out the answers. Plus, how to get a step up in basis on your primary residence, retirement plan options for self-employed small business entrepreneurs, and the fellas explain financial advisors, financial planners, RIAs, and broker-dealers in their own unique way for the infamous Marcus of Tennessee/Alabama. I’m producer Andi Last, and contrary to what Joe thinks, I do not know where you live. Now, here are Joe Anderson, CFP® and Big Al Clopine, CPA.

00:39 – I’ve Maxed Out My 401(k). Can I Contribute to a Roth IRA or Roth 401(k)?

Joe: We got Andrew from San Diego, he writes in. “I have maxed out on my 2019 401(k) contributions at work, $25,000. Can I still make a $7000, 2019 contribution to a Roth IRA or 401(k)?” Well if you’ve already maxed out the 401(k) Andrew, then the answer to putting more dollars in a 401(k) is no, unless they provide an after-tax component within the 401(k).

Al: But the quick answer is a regular 401(k) and Roth 401(k) get added together to the maximum of $25,000 when you’re 50 and older. So you can’t double up on that but you could still do a Roth contribution if you’re single and your income is below $122,000 or married and $193,000. And there is a phase-out period where you can do a little bit but not fully and fully phases out, single $137,000 married $203,000 to where you can’t make any more contributions.

Joe: So look- this is a question that we get a lot in regards to I can’t put money into an IRA because I’ve already maxed out my 401(k).

Al: Yeah that’s false. You can.

Joe: You can do both. If you make more income then the limits that Alan just mentioned you can still do a non-deductible IRA contribution.

Al: Yes you can.

Joe: So you could still contribute to an IRA regardless. As long as you’re under 70.

Al: That’s true. There’s a caveat.

Joe: So that’s the only caveat. So yeah. Put your $7000 either in a Roth IRA if you qualify from an AGI standpoint or do a non-deductible IRA.

Al: And I’ve got one more wrinkle here that’s kind of interesting. You have to have enough earned income to be able to put money into 401(k) and a Roth. Let’s say you have $25,000 of earned income. And you put $25,000 into your regular 401(k). You cannot do a Roth contribution because you’ve already used up your earned income. However, I don’t think this is widely known. You could put $25,000 into a Roth 401(k). It doesn’t affect your taxable wages and you can still put money into a Roth IRA. $7000 if you’re 50 or older so you can actually double count income for that purpose.

Joe: If you’re only making $25,000. Got it. So, Andrew, that’s a good question. So for all of you out there listening, we get, “oh no I can’t do it.” No, you can. So you can fully fund your 401(k) plan and a Roth IRA. If you’re married, both you and your spouse can fully fund 401(k)s and Roth IRAs as long as you qualify from an AGI standpoint.

Al: But where you were going Joe, is there are these limits, $19,000 under 50, $25,000 above 50, currently for a 401(k). Some plans have the ability to put after-tax money in and then you could potentially put a lot more in. Now you don’t get a tax deduction but it’s in the plan. And then those dollars can ultimately be converted to a Roth IRA.

Joe: So double-check your plan. All of you listening if you’re really trying to max out your retirement savings, if you have additional cash flow to save, double-check with your plan administrator to see if you can put after-tax dollars within the 401(k) plan. Because let’s say you’re already maxing out $25,000 pre-tax, you can put up to about $50,000 into a defined contribution plan via the IRS limits. But it’s up to the plan doc. But if you’re plan document allows then you could put potentially another, let’s say $25,000 after-tax and then the next day you convert to $25,000 into a Roth IRA. It’s a pretty cool deal. They call it a mega Backdoor Roth or something stupid?

Al: Yes, that’s what they do call it.

04:25 – Should I Make a Roth Conversion at the End of the Year or Contribute to a Roth 401(k)?

Joe: All right we got Jim from Santa Cruz, California. You know who’s from Santa Cruz?

Al: Nope.

Joe: Santa Clarita.

Andi: Yeah. Meir.

Al: Close. Not exactly.

Joe: Very close.

Joe: Jim writes “Hello Joe, Big Al and Andie, Andee? Or Andy?”

Andi: It’s A-N-D-I folks.

Joe: A-N-D-I.

Al: Oh none of them were right.

Andi: Yep.

Joe: So Jim. Fail.

Andi: I like that, I think it’s funny that both of you act like you didn’t know how my name is spelled.

Al: How would we?

Joe: How would we? I don’t, like, write letters.

Al: It’s like, “Andi, I’ve tried to write you a postcard. I couldn’t figure out how to spell your name, so I didn’t do it.”

Joe: “Your show rocks. Thank you for the on-air answer to my Roth conversion question last month. I’m hoping you can help with one more. Believing that the Tax Cuts and Jobs Act will not be permanent, I expect to be in a higher tax bracket in retirement than the 22% bracket. I have around $400,000 in qualified accounts with Schwab and Vanguard. And about $50,000 in Roths. My employer now offers the Roth 401(k). But since both brokerages make it very easy to do Roth conversions I’m inclined to continue to contribute to the regular qualified 401(k). I can decide in December if I want to execute a Roth conversion at Schwab or Vanguard. This keeps the option of deductible contributions open until I am certain that I want to make a conversion and know that I have the cash to pay the resulting taxes. I cannot see any downside to waiting till the yearend to make this decision. Am I missing something? Thanks to you and your team for everything you do.”  What do you got Al? I got an answer here.

Al: I like it. And let’s see, we got mixed up on the pages.

Andi: Page 6.

Al: Okay. 6, 7. Okay here’s why I like it, Joe. It’s because if you, and it comes out same-same, if you end up converting the same amount that you were going to put in a Roth side of a 401(k), so it’s same-same, so I don’t really care in a sense. But in another sense, if you do the Roth 401(k) you can’t change your mind later on. Whereas if you do at the regular 401(k) creating a tax deduction and then in December, that’s when you actually decide how much you want to convert based upon your known income at that time. It just gives you a little bit more flexibility. The only problem there is don’t forget to do it in December because then you would miss that opportunity. So I like it.

Joe: Jim, I would do the opposite. I know and I know why you’re going to say that. Because- why?

Al: Because you get the money and sooner and get the tax-free growth. I like the flexibility more than I like your answer but go ahead.

Joe: But real life happens though. You’re a CPA. I know you would like that answer, the flexibility.

Al: I’d have my spreadsheet. I’d have an alert. December 2nd. Click it. Spreadsheet. I would. I would be flashing lights.

Joe: Your watch is beeping. What’s that? Oh yeah. I gotta look at my Roth conversion numbers.

Al: I’d be in a client meeting, excuse me for one second. I gotta-

Joe: Yeah I got to execute my own conversion.

So here’s the deal. It’s easier to execute. Yeah, I get that. Doing a conversion at Schwab, Vanguard, Fidelity, anywhere. It’s really easy to do a Roth conversion. However, the likelihood of you doing the conversion or getting the money into a tax-free account is more probable if you just set it and forget it.

Al: Yeah I do agree with that.

Joe: Right now you’ve got the $25,000- I don’t know how old Jim, is but let’s just assume he’s got $25,000, he’s over 50. Well, most of our listeners are kind of under 50.

Al: Lately it seems.

Joe: Do we know what the demographic is of our listeners? Don’t you ask that in our survey?

Andi: How old are you?

Joe: Yes.

Andi: I ask them how close they are to retirement.

Al: Yeah. We had three participants.

Andi (whispering) That’s not true.

Joe: That’s what my mom was. It wasn’t a big enough sample. I think we got to ask that. We gotta-

Andi: We actually want to know how old people are? Okay.

Joe: What’s your age? We could give a range, 20 to 25, 25 to 30, 30-40 whatever.

Andi: So we had 35% that were already retired, 33% that were more than 10 years from retirement, and 30% that were 5 to 10 years away.

Joe: Oh, well just 1/3, 1/3, 1/3.

Andi: Yep.

Joe: So. Okay. For those of you that have a Roth provision in your 401(k), so Jim is saying should I just do the Roth 401(k), get it in there, have the tax free growth and then I’m good. I’m done. Or he wants to be a little bit more strategic and say I’m gonna go pre-tax and then I’m gonna convert at the end of the year. If this was two years ago I would like that strategy a lot more because that’s what we would advise you to because you- back then you could re-characterize the conversion.

Al: And we would tell you to do it in January. You got a full year tax-free growth and then you can re-characterize what you need to next year. Can’t do that anymore with the new Tax Cuts and Jobs Act.

Joe: So it’s like I’m gonna convert and then now I gotta write a bigger check in April and that’s kind of a pain in the ass and then I’m gonna be upset because I hate paying taxes and then now I’m gonna write this check. But if you want to just get it in the Roth IRA right now. It’s done.

Al: Because your withholdings change and everything.

Joe: It’s done. Yeah. It’s done.

Al: So maybe I’ll say it this way, if you’re an accountant or an engineer, do it your way. Everyone else…

Joe: Yes. And if you’re like me, if you’re just like a schlub-

Al: If you will set your alarm on December 2nd, beeping and if you will not be too bummed out when you owe taxes in April.

Joe: And yet understand the tax consequence and all that other stuff. There could be penalties.

Al: Could be.

Whether you do a Roth conversion at the end of the year or not, given that December 31 is approaching fast, you’ll want to check out our Tax Planning Checklist in the podcast show notes. It’s got the list of all the documents and information you’ll need to file your taxes, information about Roth conversions, the 20% qualified business income deduction, and charitable gifts, and most importantly, it lists some tax-saving strategies to implement before December 31. Click the link in the episode description in your podcast app to go to the show notes and download the 2019 Tax Planning Checklist for free. You’ll also see the link to Ask Joe and Big Al – click that and send in your money questions via voice message or email.

11:14 – What’s the Break-Even Point for a Roth IRA Conversion?

Joe: Teri from Denver, Colorado.

Al:  I’m glad you know where that is, what state that’s in.

Joe: Thank you very much. Good thing I have a map handy here. “Hi all.  I didn’t want to prioritize.  Love, love the show”. All right. Very good. “Pretty sure I’m good for retirement but wanted to run the numbers by you. I’m 60 and retired last month. And my husband is 59 and plans to retire within the year. We have $1,800,000 in tax-deferred 401(k) and IRA, $1,000,000 in taxable and $72,000 in Roth. Oh and I guess a little bit in an HSA. The tax hit is huge this year so no Roth conversions. In retirement, I have a $60,000 annual pension and my husband will kick in between 62, will kick in between 62 and 65 with pensions income ultimately totaling $92,000. We plan to delay Social Security till 70 and that kicks in for a total income of $168,000. Annual expenses are $60,000 and budgeting about $20,000 for medical. So that’s about $80,000 combined. House is paid for, no debts, and kids are launched. My question has to do with Roth conversions during the gap years. A couple of the years will be in the 12% tax bracket. Should I up the Roth conversion to the 22% bracket for those years? Is it worth it? Even doing that, it only converts less than half of the tax-deferred assets. That’s a lot of tax to be paid in the near term in forgoing the growth. Doing the straight analysis between the Roth conversion and not, it takes till 90 before the Roth conversion seems to pay off. What am I missing? I assumed a 3% growth modest yet conservative. And of course, I have a massive spreadsheet for this. Thanks again”. We get this question often. It’s been a while.

Al: We do.

Joe: What’s the breakeven of a Roth conversion?

Al: Yeah I think you’re going to say day one.

Joe: Day one Teri.

Al: And explain that Joe.

Joe: Her search spreadsheet is flawed first off. Because she’s comparing apples and oranges. And what I mean by that Teri and no offense, is that you’re looking at if you do the Roth conversion and you pay tax, we keep using this simple example but I think it brings the point home. Let’s say you do $100,000 conversion and you’re in the 25% tax bracket. So you have to pay $25,000 in tax. So now you have $100,000 in the Roth. $25,000 is owed to the IRS. So now you have to cut a check to the IRS for $25,000. So Al, she’s out $25,000. So she’s saying well this doesn’t make any sense. I’m gonna be over 90 for this thing to add up because I did have $125,000 that was growing modestly for me but now after doing the conversion I’m paying a lot of tax, L-O-T. What Teri wrote.

Al: Yes.

Joe: Is now that $25,000 is gone, is out of my portfolio, it’s not growing anymore. What gives? What she’s missing is this $100,000 now is 100% completely tax free forever. And so in your spreadsheet Teri you gotta take the net tax effect. What’s the purchasing power of your dollars? You have $1,800,000 in a retirement account. It’s not worth $1,800,000 because you have to pay tax on that at some point. So that $1,800,000 let’s say you don’t do the conversion. It continues to grow to $4,000,000. Well that $4,000,000 is 100% taxable. If you converted some money out of it, now that money is all yours. Whatever you see on your Roth account is 100% percent yours. So whatever you see in your IRA is not all yours. So you have to do the net tax effect for your spreadsheet to actually work.

Al: And that’s true. Day one. It’s true day two, year one, year two, year 10. You always have to subtract the tax effect out of the IRA to compare this properly and you’re right. That’s what people miss. And so from that standpoint $100,000 IRA you can’t spend it if there’s a 25% tax bracket like you said you can only spend $75,000. So that’s really what your IRA is worth. That’s all it’s worth because that’s all you can spend. So now you’re comparing apples to apples. And that’s what I would say the whole industry misses this fact because you see articles all the time the breakeven is 11 years or 15 years it’s like, no it isn’t.

Joe: It’s like well Roth IRA conversions only work better for younger people because they have more time for their compounded tax-free growth to work. Because Teri, hear me out. Let me explain the example this way. You have the $100,000 in the IRA. You have $25,000 that’s sitting there in a brokerage account and it’s invested modestly. And let’s say that grows, your IRA grows you don’t do the conversion because you did your spreadsheet you’re like this sucks. I’m 90 years old, I’m going to be old and who cares. So now you say I’m not going to do the conversion. The $100,000 grows, let’s say it doubles. Now you have $200,000 in the retirement account. You have $50,000 or $25,000 in your brokerage account, that grows to $50,000. So now you have $250,000 that is sitting on your statement but the $200,000 is not all yours again. Because it’s still in the shell of the IRA. So you have to pull that out. You have to pay tax. Let’s just assume the same 25% rate. You pull it out. You pay 25% on $200,000 you have $150,000. The $25,000 grew to $50,000. You sell that out to spend that. You have a capital gains rate there though. So let’s say you had a tax free capital gains rate. Now that $50,000, $200,000, now you’re purchasing power’s worth $200,000. Even though-

Al: After the taxes.

Joe: After-tax, not including the capital gains rate. If she did the conversion, she’s got $100,000, converts it to a Roth. She loses the $25,000 but now she’s got $100,000 in the Roth that grows at the same rate. Now she’s got $200,000 in the Roth. She takes out the Roth. She pays zero tax. The purchasing power is the same. But what we’re not telling you is that, try to pull $200,000 out of a retirement account and pay 25% in tax. It’s going to be all a hell of a lot higher and we didn’t even put the capital gains rate in there.

Al: That’s right. And Teri, I will also tell you this. First of all your retirement looks fine. We’re not worried about cash flow. You’re in great shape. Your fixed income, even before Social Security covers your living expenses. But here’s your problem, it’s a tax problem. So with Social Security of $168,000 by the time you withdraw money out of your IRAs at age 70, it could be close to $4,000,000. So we’ll just use that figure just because it’s easy math.

Joe: We’re using a $1,800,000 in a retirement account and just doubling in over 10 years.

Al: doubling in 10, 11 years, something like that. So that means the required minimum distribution will be about $160,000. So now we’re going to add $160,000 to $168,000. So your income is about $320,000 in retirement. Now there’ll be some kind of probably standard deduction or itemized deduction, you’ll probably pay taxes on $300,000 under the old tax system which comes back in 2026, you are subject to alternative minimum tax and you will likely be in a 35% bracket. I would actually do conversions to the top of the 24%. Because this is the lowest rate we’ve seen in our lifetime for these sorts of things. So this is a huge opportunity. You would certainly- it’s an absolute no brainer to do it to the top of the 22%. But I would actually do it to the 24%. You have plenty of money outside of retirement to pay the taxes. You will end up in such a better position. And if you run your spreadsheets properly net a tax on everything you’ll see how much better you end up.

Joe: You have to look at it- kind of think of it like this Teri, is that when you pay off a mortgage, your net worth doesn’t change. Day one. You know what I mean?

Al: Yeah. That’s right.

Joe: You have a big fat mortgage in your retirement account. By doing a conversion you’re just kind of paying the mortgage off.

Al: Get rid of that.

Joe: Getting rid of it and then you stop paying the interest payments forever. And then your house is going to continue to grow. Or you have a partner within your IRA that you’re just buying your partnership back so that you can have all of the growth and wealth for yourself. The retirement accounts are great, we’re not saying that they’re not. But in your specific situation, if you ran your spreadsheets a little bit differently to show apples to apples of the net after-tax wealth, you would find that doing the conversions would be a huge, huge benefit. So hope this helps Teri. Hope it helps. Good luck. Congrats on building a wonderful retirement nest egg.

20:58 – I’m a Widow. How Do I Apply For Step Up in Basis on a Primary Residence?

Joe: Mike. He writes in from San Diego. He goes “Hello Big Al”.

Al: Hello Mike.

Joe: “My story and how do I apply for step-up in basis?” So this is just for you, Bud. “First-” I love how Mike writes here. “the wife and I-“

Al: The wife. “The wife and I bought the house.”

Joe: “First the wife and I bought the home here in San Diego-” love it- “for $240,000 in October 2011. My wife passed away.” Sorry to hear that Mike.

Al: That’s too bad.

Joe: “Unknown home value at that time. In August 2012, I refi’d the home, the appraisal value was $550,000. So that said now in November 2019, is it too late to file for a step-up in basis? If it’s not too late what fed tax forms do I use? Finally, what is that stepped-up value if we used a $500,000 number?”

Al: $500,000 or $240K / 2 = $120K plus $500K / 2 = $250K $120K + $250K = $370K. I know what he’s trying to do so I can answer this question.

Andi: That’s why it was asked to you.

Al: First of all, there’s nothing that you have to apply to for a step-up in basis. You just get the step-up in basis and for those that have pretty large estates in excess of $11,000,000 you probably want to file a Form 706 upon your spouse passing just to kind of justify that. But I’m assuming Mike I don’t know this for sure, but I’m assuming the total estate’s probably below that so you don’t really need to file any forms. It’s the value at your wife’s passing you get a step-up in basis. And because you live in a community property state being California you get a full step-up in basis on the entire property not half so I think that’s what the math was going through. Because if you live in a not community property state you only get half a step-up basis and your portion stays the same because you’re still living. So, Mike, you get a full step-up in basis, you don’t have to file anything and. now it’s just a matter of figuring out what the number is. The fact that you refinanced within I don’t know 10 months or so of her passing you could probably use that number $550,000 that’s probably what I’d do. If you want to be even safer you can actually go to an appraiser. They’ll appraise it way back then you can do an appraisal after the fact to get what it was worth at the date of your wife’s passing but that’s your new tax basis going forward. So you get a 100% step-up you don’t really have to inform the IRS about that.

Joe: I guess the only time that that would come into play would be upon audit. He sells his primary residence and then let’s say he claims the 121 exclusion, doesn’t pay any tax and then they’re like- How did you get this how did you get $500,000 basis? Then you have proof and said my wife passed away and then I got the refinance. Here was the appraisal at that point. I used this as my basis when I sold the property.

Al: That’s right. That’s correct. That’s the only time you’d have to show that. So either you could use that the appraisal at the time of the refinance which is probably pretty good not perfect but pretty good. If you want to get an even better answer you get a current appraisal way back to October 2011 on your property and appraisers can do that.

Joe: Hopefully that helps Mike. Sorry about your wife’s passing and best luck with selling the home it sounds like.

24:38 – How Can We Contribute to Our Roth IRAs?

Joe: We got another Mike. Mike and Sue. They write in from San Diego. Same Mike as above. Oh, same one. Hey Mike. “Hello, Joe and Big Al”. Now I’m in the mix.

Al: Finally. This might be a question for you then.

Joe: “I know I have heard you say several times but need it spelled out. Say Sue will make $70,000 gross this year. Mike will make $135,000 gross this here. Sue paid $4000-” didn’t pay, Mike, she contributed.

Al: Yes.

Joe: It’s like paying a bill like- who wrote in and was like when I quit and my wife quits-

Andi: Yes, that was last week.

Joe: We’re gonna tap into my 401(k) plan and I’m like, “man, that’s a new name for retirement.”

Andi: That was Darryl.

Al: Right.

Joe: Yeah. And his other brother Darryl.

Al: Larry and Darryl.

Joe: “So Sue paid $4000 into her 401(k)”. Mike paid $25,000 to his TSP. Sue and Mike married in February this year. Oh okay.

Al: So Mike got remarried. Good for you.

Joe: Good for you. Okay. So Mike paid $25,000 into his TSP. Sue and Mike married in February this year. Sue and Mike are both over 60. “You have mentioned the max income we can make. And you even said what line of the 1040 IRS form to use. What is the max we can make? and what line should we be looking at so we can both send $7000 to our Roth IRAs? I know I must be missing some facts here but if you can figure out what I’m asking and answer that would be great. Thanks. Mike and Sue”. It’s modified adjusted gross income, Mike. You’re married, so you can qualify. You can get it. You can pay another $7000 to that Roth bill.

Al: So here’s the math. So let’s see, Sue makes $70,000. You make $135,000. So that’s $205,000. But you’re putting, I’m going to round it, you’re putting about $30,000 into a retirement account, so you can subtract that from the $205,000. So now you’re at what $175,000. Anyway, you’re below the Roth IRA a threshold. You have to be below $193,000 and so you’ve made it. So, in other words, your gross salary, minus your deductible contributions to 401(k) or TSP will get to your income.

Joe: Look at adjusted gross income, as long as that number is under about $195,000 you qualify.

Real quick, back on Mike’s question about the step-up in basis on his primary residence, I wanted to mention that one of our advisors here at Pure Financial, Pete Keller, just did an educational video explaining the concept of stepped-up cost basis and taxation for beneficiaries, spouses in a joint tenants with rights of survivorship situation, and spouses with community property. Check it out in the podcast show notes at YourMoneyYourWealth.com – just click the link in the description of today’s episode in your podcast app, and subscribe to our YouTube channel to catch new videos as soon as they’re released.

27:55 – Self-Employed Small Business Retirement Plan Options

Joe: Dalia from YouTube land. Huh. Where the hell is YouTube land?

Al: It’s on your computer. Or your phone.

Joe: She doesn’t want to disclose where she’s from. “Hi, Al and Joe. I came upon your channel on YT-“

Al: YouTube.

Andi: YMYW on YT.

Joe: “and thought I would ask some questions. I formed my own business as an S Corp this May”. All right, you following me Al?

Al: I’m with ya.

Joe: She’s in the 35% tax bracket. “I am my own employee. I am setting up my own payroll and looking into 401(k) options. I’m single, no dependents. I have one property which I don’t live in and bought for my parents. Here are some questions. Number one”.

Al: Good start.

Joe: “I was looking to do a Roth 401(k) and getting confused on how to set this up. Do you have a company that you would recommend? Currently, most of my investments are with Schwab and they say they don’t have 401(k) with Roth features”. Number one. You could set up a solo 401(k) at Schwab but they they’re planned out for solo 401(k)- I guess we should explain what a solo 401(k) is?

Al: Let’s start there.

Joe: So Dalia is self-employed, the only employee, wants to set up a retirement account. A solo 401(k) allows Dalia to set up a retirement account for her business to just shelter more money in a retirement account than probably any other plan.

Al: Well yeah. Then a SEP, SEP IRA.

Joe: Or a standard IRA. Or a simple.

Al: Not as much as a defined benefit

Joe: I knew you were gonna go there as soon as I said that.

Al: I just laid it out there. It’s like middle. But it’s a really good plan for self-employed business owners that don’t have employees. Because you basically can set up a 401(k) with employee and employer profit sharing parts, components and so you can actually put quite a bit away.

Joe: But to set up a solo 401(k) you have to be the small business owner.

Al: You do. Correct.

Joe: You can’t set up a solo 401(k) if I’m an employee at XYZ company.

Al: That’s accurate.

Joe: So I am an employee at Pure Financial Advisors and Pure Financial Advisors has a 401(k) plan. I cannot choose to say I’m not going to participate in that plan. I’m gonna set up a solo 401(k) plan over at Schwab. That doesn’t fly. You have to be self-employed to set up a solo 401(k) plan. Do we have any recommendations? You could go to TD Ameritrade. It’s the plan doc. So like Fidelity I know doesn’t do the Roth. And Schwab doesn’t do the Roth plan component of it. But TD Ameritrade does.

Al: Actually I’m not 100% sure that Schwab doesn’t do it. But here’s the way that you do it. You open up a solo 401(k) and then you see if there’s a Roth option. There’s no such thing as opening up a Roth 401(k). You open up a regular solo 401(k) with a Roth option, a provision that allows you to do either. So that’s the starting point.

Joe: But I think he already went to Schwab or she went to Schwab.

Al: I’m pretty sure Schwab has the Roth option.

Joe: I don’t think so.

Al: Well we’ll have to we’ll just have to agree to disagree.

Joe: Because well I know for a fact because we have money at Schwab.

Al: Not much.

Joe: I know you’ve got more money in your bank account than we do at Schwab as a company. We have money at T.D. Ameritrade.

Al: Yes. Quite a bit.

Joe: And then we have client dollars at Fidelity. So we use all three custodians, mainly Fidelity and T.D. Ameritrade.

Al: Correct.

Joe: And anytime I’ve set up a Roth 401(k) for a client I have to use T.D. Ameritrade because Fidelity does not-

Al: Fidelity does not have one-

Joe: and so I’m assuming that if Fidelity doesn’t and she’s already asked Schwab and they said no. I would just maybe ask again.

Al: I would ask again too. I would ask again. What you’re looking for is a solo 401(k) with a Roth option. That would be the way to ask it and get someone else. Just make sure. And you are right Joe, we know for sure T.D. Ameritrade has one.

Joe: “Number two. If I did the Roth 401(k) the $19,000 employee contribution would be a deduction not a benefit for me as an employee so I would be paying this in post-tax dollars. Is that right?”  Well the $19 is not a deduction.

Al: Well it’s a deduction, it’s a post-tax.

Joe: It’s a post-tax. That’s an oxymoron, isn’t it?

Andi: And it’s $19,000, not $19.

Joe: Post-tax, it’s not a deduction.

Al: Well it’s deducted from your net pay. So you could call it-

Joe: It’s a contribution.

Al: All right. Post-tax contribution.

Joe: OK. Perfect.

Al: I’ll agree with that. So your thinking is right. It’s not a tax deduction if you’re trying to say it that way. It’s post-tax which means that the $19,000 goes into the Roth side of the 401(k). You do not get a tax deduction so you’re still paying tax on that $19,000.

Joe: So but the $19,000 now is in the Roth they will grow 100% tax-free. So any dollar that that grows, you pull it out you don’t pay any tax on whatsoever.

Al: Correct.

Joe: Now Dahlia is thinking about doing the profit-sharing feature within the solo 401(k). “So why would the profit-sharing feature be pre-tax only?” Because there are two different plans. You’re just combining them. You have a 401(k) plan and you have a profit-sharing plan. So the profit-sharing plan is contributed by the employer and the employer contributes that profit-sharing based on profits of the overall organization and the company then takes the tax deduction by doing that. That’s why it’s pre-tax.

Al: Yes. So I would say it’s the same plan.

Joe: It’s a 401(k) and profit-sharing.

Al: Yeah. It’s the same plan. It’s the same. It’s a 401(k) that has a profit-sharing component. Let’s get right here.

Andi: There are so many components.

Al: It’s not a separate plan. You don’t have two plan documents. It’s a single plan. But I’ll answer this maybe a little bit more accurately.

Joe: I guarantee you there- alright, go ahead.

Al: It’s not a separate plan. At any rate, when an employer makes a match or a profit-sharing contribution on your behalf, it’s not their Roth IRA, it’s your Roth IRA, an employer takes a deduction, always takes the deduction. So that’s why- and it seems kind of confusing because she’s the employee and the employer. So why don’t I get the Roth on both? And the answer is because there are an employee and an employer.

Joe: And she just happens to be both.

Al: Correct.

Joe: And so the company is taking the deduction that’s why it’s pre-tax. Which I said. I know- well why would you say that that was a better answer?

Al: Because mine was more accurate.

Joe: I guarantee you can have a 401(k) plan without the profit-sharing. Right?

Al: You can, but the profit sharing is a component of the 401(k). You can have a profit-sharing plan and 401(k). But there’s no reason to do that.

Joe: ” Would I be able to also make after-tax contributions with an in-service distribution to take advantage of the mega Roth IRA rollover?” She wants to continue to put after-tax dollars in a solo 401(k). The answer’s no.

Al: I think in most of the solo (k) plans, prototype plans, they don’t allow post-tax money going in.

Joe: Because the defined contribution plan limit is, what, $54,000. So for some employees that work for larger companies, you can put up to $54,000 into a 401(k) plan. $19,000 or $25,000 if you’re over 50 would be pre-tax or, if you went the Roth it would be after-tax. But you could continue to add money into the after-tax component of the plan and then convert it. But you would not be able to do that in a solo 401(k). “Lastly since I was employed at the beginning of the year W-2, 1099 payments, I also had a 401(k) with my previous employer. How would I factor that into my contribution limits?” I guess if she contributed to the old plan and then- it’s $19,000 per year.

Al: Per the year, no matter how many 401(k) plans you have. And she also asked, “would I also be able to contribute to a traditional IRA with me as an employee”? The answer is yes.

Joe: So you can do the 401(k) plan, profit-sharing plan, and a traditional IRA or Roth if you choose to if you qualify for the income limits on the Roth. Or if you want to take an after-tax contribution to the IRA and then you can automatically convert that. That would be a Backdoor Roth IRA.

Al: Potentially if you don’t have a lot of other IRA dollars.

Joe: If you do, you just put them into the new 401(k) plan that you established.

I’ve posted a bunch of retirement plan resources for self-employed small business owners in the podcast show notes at YourMoneyYourWealth.com including a podcast video of Joe and Big Al discussing the benefits of the Solo 401(k) and Solo Roth 401(k), the YMYW TV show episode on retiring as a self-employed person in the new gig economy, a giant blog post on small business tax filing, and a video from Pure Financial Advisors’ Allison Alley outlining the best self-employed retirement plans. Click the link in your podcast app to go to the show notes and don’t forget to share these free resources with all the self-employed small business owners you know. Click Ask Joe and Big Al to send in your questions via email or voice message…

37:51 – What’s the Difference Between a Financial Advisor and Financial Planner? What are Registered Investment Advisors (RIA) and Broker-Dealers?

Joe: Our good buddy Marcus from Tennessee/Alabama, wherever the hell he is. He actually gave us a voice recording.

Andi: You guys asked and Marcus provided.

Joe: Let’s see what Marcus’ got to say to us.

Marcus: Hey hello, how ya’ll doin’, this is Marcus from Tennessee Alabama, roll tide. No, actually that’s not my voice. But yeah, this is Marcus from Alabama/Tennessee, Tennessee/Alabama.

I wanted to call in and give you a brief history of the whole Tennessee Alabama thing. So here we go – but before we get started man, keep up the good work on the show. I thoroughly enjoy the show.

So I don’t quite remember when it was, but one time when I emailed in, I had a question, I think was about the estate tax, I don’t remember. Joe said, “hey, we got Marcus from Alabama.” I was like, “Wait a minute. I don’t remember putting in my location on the email.” I was like, “where in the world did they get that from?” So I went back and I looked over the email, looked over the email and I was like, “No, I didn’t say I was from Alabama.” Then I realized what happened – I scrolled down and I left my phone number. And it was at that moment I realized how important and valuable Sherlock Holmes was – I mean Andi was – to YMYW, because she looked at my phone number said, “hey, this Marcus from Alabama.”

So, the next time I emailed in, I was going to be a little petty, right? I was gonna be a little petty and say, “all right, technically, yes, I’m from Alabama, but I’m emailing from Tennessee.” And so, since I got a big reaction out of that, I said, “Well you know what? I’m gonna keep doing it just to mess with ‘em.” So that’s the story of Tennessee/Alabama.

Hey, keep up the good work, thoroughly enjoy the show, and I’ve got a couple suggestions, recommendations and a question: I can’t speak for all of your listeners, but I strongly believe they would prefer a two-episodes-a-week podcast from YMYW. I don’t know. I mean I know y’all are busy, but just marinate on that for a little second. I think ya’ll can make that happen. I appreciate that.

And so now to the question: could you go over the differences between a financial planner and a financial advisor? Do they do two different roles? And then after that, what’s the difference between a registered investment advisor, a broker/dealer, and all that jazz? Thank you very much. You know, I probably could’ve Googled this answer, in fact, I probably already did in the past, but why Google when you have YMYW? Anyway, thank you for all your hard work and thank you for answering the question. Bye.

Joe: Wow.

Al: That’s fantastic Marcus.

Joe: Marcus. Tennessee/Alabama. I really wish he talked like that.

Al: Next question he’s got to talk that way the whole question.

Andi: Man, they are challenging you, Marcus.

Joe: “What is the difference between-“

Al: Oh you got it. You could do it. Answer the question with that voice.

Andi: Oh gosh, please don’t.

Joe: Oh boy. Let’s talk about his comment. Marcus, I can barely deal with 30 minutes with Big Al, let alone two episodes per week. Oh, we’ll marinate on that though.

Al: We’ll marinate on it.

Joe: I like that.

Al: Yeah, that’s a great way to say it.

Joe: I’m gonna start using some of that. I could use that for all sorts of different-

Al: We’d have to be together for how many hours a week?

Joe: It’s a lot. I don’t know. But we’ll marinate on that. So what’s the difference between a financial planner or financial advisor. Nothing really. I think what you really want to look for is the designations behind whatever title they give themselves. Because I call myself a financial advisor. I call myself a financial planner. Some people ask me what I do. I usually say I’m in finance. Because I don’t want to go through the whole B.S. It’s like what line of work are you in? Well I’m in finance and that usually just shuts them up and they don’t really ask me anything else.

Andi: Because it sounds so boring.

Joe: Versus if I say I’m a financial advisor, then they’re either going to ask me, “so what do you think about the market?” Or they’re going to think that I sell insurance. One or the other.

Al: I feel differently. People say “what do you do?” “CPA.” “Oh.”

Joe: Now you say, “I’m Big Al. I’m a radio, television celebrity.”

Al: So now I say I’m a financial planner. “Oh, you help people with money.” And we have a conversation.

Joe: I don’t want to have a conversation, that’s my problem.

Al: You don’t wanna talk to people.

Joe: So what do you do for a living? “I’m in finance.”

Al: Finance.

Joe: Go pound sand. Exactly what I say. No, I don’t know-

Al: You could say you’re president.

Joe: I’m not going to say I’m president. “Yeah, I’m president of Pure Financial Advisors? 78 employees? I’m on TV. I have a podcast.” I don’t even-

Al: You don’t go there?

Joe: Not even a little bit. Only if I have had a couple of bars and she’s cute. I’m kidding.

Andi: You’ve had a couple bars?

Joe: Couple beers at a bar and she’s cute.  See I’m already-

Al: I know. By bar he meant beer-

Andi: He drinks everything in the bar. He moves on to the next one.

Al: Cleans it out.

Joe: So I would look at designations. Big Al’s a CPA. I’m a CERTIFIED FINANCIAL PLANNER™. So I would look more on the designations. Then I like your second question or comment here is that what’s the difference between like a registered investment advisor or a broker/dealer? An RIAA can be both though. I mean they can be a registered investment advisor that’s under a broker/dealer. So they’re wearing two hats.

Al: That’s called hybrid. And it gets a little confusing.

Joe: A straight RIA is just fee-only. You, Marcus, would be the boss. You’re paying that advisor. And there’s no other compensation. If I’m with a broker-dealer, you could be charged a fee but then you’re also paying commissions within the products that you’re going into. So there are conflicts of interest there.

Al: Could be.

Joe: Could be.

Al: And the registered investment advisors generally are under a fiduciary standard, meaning that they are required to give the advice that’s in your best interest. Where broker/dealers a suitability standard which basically means as long as the product is suitable they can sell it to you whether or not it’s the best one. So we feel like that’s a pretty big distinction. That’s why we would encourage almost anyone to use a fee-only fiduciary.

Joe: Fee-only fiduciary registered investment advisor, CERTIFIED FINANCIAL PLANNER™, CPA.

Andi: ChFC, that’s another good one.

Joe: ChFC.

Andi: CFA.

Al: CFA’s a good one. Chartered Financial Analyst.

Joe: ChFC, that’s a Chartered Financial Consultant. Those are like little old school, before the CFP®. Well, Marcus that was a lot of fun. I really appreciate ya leaving a voice message. See all you, you can do this. So I guess another thing too is if you do want us to do a couple of episodes per week just write us in. We need more feedback from you guys to see if Marcus is the lone wolf which I think he is.

Andi: And realize that if you don’t tell us where you’re from we’re either gonna make it up or I’m gonna figure it out from your phone number and it might be wrong.

Joe: Andi spends most of her day just like searching our listeners out.

Andi: I know everything about everybody.

Joe: Like Stewart from San Diego, I know exactly where he lives.

Andi: That’s not true.

Joe: You drive this…

Andi: But I will say Marcus J is a very cool guy. I really like him. So thank you, Marcus.

Joe: Very much so. So if you do want us to do a couple of podcasts a week then you would have to write in, go to YourMoneyYourWealth.com. Jot it down. Subscribe to our podcast, reach out to us let us know. I’m guessing Marcus is the only one. And probably Andi would want to do it.

Andi: What makes you think that?

Joe: Because you like to find out where these people live and Google them.  Google Map’em.  I mean Marcus trust me,  I’ve got a picture of your house right here.

Andi: He’s lying.

Joe: Where do you live? Oh yeah.

Al: You need a new paint job.

Joe: You’ve got a couple dogs in the backyard. Oh, wait a minute. You got someone sneaking around that back shed!

Andi: Just call me Sherlock.

Joe: Thanks a lot for listening to folks. Send us your email questions at YourMoneyYourWealth.com. We’ll see you next week.


You can leave a voice message like Marcus did, or send us an email. Just click the “Ask Joe and Al On Air” banner in the show notes. Click the link in the description of today’s episode in your podcast app to get there. If you’re a fan of the derails like Andi is, stick around to the very end of today’s episode.

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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.