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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. As CEO he currently leads Pure Financial Advisors along with our executive team. As CFO he is responsible for the financial operations of the company. Alan joined the firm about one year after it was established. At that time the company had less than [...]

Published On
November 23, 2021

What do Joe and Big Al think of the “Buy, Borrow, Die” strategy of the uber-wealthy, and how could it work on a smaller scale? Plus, stacking capital gains vs. Roth conversions, contributing to a non-deductible IRA vs. a brokerage account given ordinary income tax vs. capital gains tax, and minimizing the tax when a trust is the beneficiary on a thrift savings plan (TSP). Also, how to estimate Social Security benefits with a future salary of $0, and why delay Social Security to age 70 if you don’t need the money? Finally, is it bad etiquette to “ghost” an advisor? Should you hire a financial advisor near you?

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Show Notes

  • (00:54) Spitballing the “Buy, Borrow, Die” Strategy (Em from sunny Florida)
  • (06:12) Stacking Capital Gains and Roth Conversions in the Same Year: What Happens? (Jerry)
  • (10:35) Contribute to Non-Deductible IRA or Post-Tax Brokerage? (Allen, New Braunfels, TX)
  • (16:54) Trust as TSP Beneficiary: How to Minimize the Tax? (Jim)
  • (22:56) Tip: Social Security Estimator for Future Salary of $0 (Kyu)
  • (26:36) Social Security Break-Even: Why Wait to Age 70 to Collect? (Sunny D, Florida )
  • (33:46) Can I Ghost Mom’s Financial Advisor? How to Move Money Between Custodians? (Mike from Tucson, AZ)
  • (38:26) Should I Hire a Financial Advisor Near Me? (Marlion, NoVA)

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LISTEN | YMYW Podcast # 325: Capital Gains Tax Vs. Ordinary Income Tax Explained

Capital Gains Tax Vs. Ordinary Income Tax Explained: How Are Long Term Capital Gains "Stacked On Top" of Ordinary Income? YMYW podcast #325

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Transcription

Today on Your Money, Your Wealth® podcast 353, what do Joe and Big Al think of the “Buy, Borrow, Die” strategy of the uber-wealthy, and how could it work on a smaller scale? What happens to the income stacking for capital gains if Roth conversions are done in the same year? Does contributing to a non-deductible IRA make more sense than post-tax contributions to a brokerage account, given ordinary income tax vs. capital gains tax? Also, how to minimize the tax when a trust is the beneficiary of your TSP, estimating Social Security for a future salary of zero, and why delay Social Security to age 70 if you don’t need the money? Finally, is it bad etiquette to “ghost” a financial advisor, and should you hire an advisor near you? Click Ask Joe & Al On Air at YourMoneyYourWealth.com to send in your money questions and comments. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Spitballing the “Buy, Borrow, Die” Strategy (Em from sunny Florida)


“Hi again, Pure Financial crew. It’s Em from sunny Florida. Recently read an article discussing “buy, borrow, die” strategy of uber-wealthy and would love to hear a spitball discussion. Essentially, one amasses a lot of capital, takes a comparatively small securities-based line of credit against the capital with very low interest rate rather than sell the capital/stocks and paying the taxes. At death, the asset gets a step up in basis when inherited by heirs.

Wondering about how this strategy works on a smaller scale. I was thinking maybe $10 million in brokerage account and borrowing $250,000 a year. Goal is low interest (near 1%) assuming return on investment will be at least 4%. You are numbers guys. When do the numbers make sense? Can you borrow as much as 3%? Is $5 million enough to borrow $100k/year? Downsides? Thanks! Em”

Stacking Capital Gains and Roth Conversions in the Same Year: What Happens? (Jerry)


“This is a question for your weekly podcast. Hi Andi, Joe and Big Al. I’ve been listening to your informative and entertaining podcasts for the past year. I’m not sure that I’ve heard this exact question, so I thought I would give it a shot at getting this question and its answer on the air. Let’s assume a married couple has retired and their only income is from their brokerage account consisting of 35K in qualified dividends and 25K in interest and nonqualified dividends. Additionally, they have 50K in long-term capital gains from their brokerage account that can be managed annually. The math is pretty straightforward to determine the amount of taxes owed and how much of the long-term capital gains (LTCG) are taxed at 0% versus 15%.

What happens to the income stacking for capital gains if Roth Conversions are also done in the same year? Can I assume that the Roth conversions are added to the 60K for qualified dividends, interest and non-qualified dividends prior to LTCG’s and therefore if I do a Roth Conversion of ~$100K that I will not be able to take advantage of any LTCG’s being taxed at 0% given the numbers above? Thanks in advance for your help and thanks for YMYW podcasts.”

Contribute to Non-Deductible IRA or Post-Tax Brokerage? (Allen, New Braunfels, TX)


“Greetings YMYW team. Long-time listener, first time with a question. I find your podcast both informative and funny. I live in sunny New Braunfels, TX., a semi-retired chemical engineer (58 years young), and drive a 2013 Mazda 3, with a white cat named Yeti. I have a life in girlfriend, named Kim, who drinks Crown Royal, while I am a craft beer junkie, although I typically start the night with a domestic light beer, such as Coors Light, to get things going 🙂 Don’t worry, it’s NOT a Roth Conversion question, and I will try to be brief and concise.

In the past, while working, I typically made too much salary to contribute to a Roth IRA, or get a deduction for a regular IRA contribution. Therefore, I made annual contributions to a non-deductible IRA, and I have been keeping track of the basis, so that I don’t pay taxes on the non-deductible contributions when I decide to start taking withdrawals.

MY QUESTION – In general, does contributing to a non-deductible IRA make sense vs. post tax contribution to a brokerage account, given that the non-basis portion of the IRA will be taxed as income, when I take a distribution, vs. only paying long term capital gains on any money invested in a brokerage account? Seems like my income tax rate will be lower than the capital gains rate, when I start withdrawing money from the IRA, but who knows where tax rates will be, in 15 years!!!!! I understand that our friends in DC are looking to increase capital gains rates to equal the income tax rates, which would make this a moot question. Keep up the great work. P.S. I hope you are paying Andi well, for producing and organizing the podcast, and putting up with you guys, LOL.”

How much money do you need in retirement, and how does your retirement account balance stack up right now? What’s your contribution rate? How much of your portfolio should be in cash? Are your assets properly allocated? Learn how to answer these questions find out how to manage your assets at any age with our new Portfolio Tracker guide, available for free download from the podcast show notes at YourMoneyYourWealth.com. Or, click Get an Assessment, also there in the podcast show notes, to schedule a comprehensive, one-on-one assessment of your financial plan with one of the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors. There is no cost and no obligation, and it’s a video call, so you can get your free financial assessment from the comfort of your own home, no matter where that might be. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, download the Portfolio Tracker guide and schedule your free financial assessment.

Trust as TSP Beneficiary: How to Minimize the Tax? (Jim)


“Hello YMYW crew, my parents (77) have an irrevocable trust which is the beneficiary of my dad’s TSP account. This is a pretax TSP, as the Roth was not available to him when he was working. The trust has been set-up for the 8 grandchildren ranging in age from 1 to 16. The trust is set-up to pay at predetermined ages. My understanding is this is a discretionary trust? Additionally, my understanding is that this money will be taxed at the highest marginal trust tax rate after roughly $13,000 in income? If this is all true, besides converting the TSP to a Roth what else can be done to minimize the taxes? Thank you, Jim”

Tip: Social Security Estimator for Future Salary of $0 (Kyu)


“Hi Joe and Al, I love your show and recommend it to anyone that will listen to me. I recall some questions recently on your podcast asking how to project future SS earnings. I assume this is to estimate future expenses for retirement calculations. I stumbled on this calculator on SSA.gov that may help. Here is the screenshot assuming future annual salary:
Kyu's first SSA screenshot
You can change the future annual salary to $0. This would be a conservative way to calculate what you would earn if you wanted to retire prior to retirement age.
Kyu's second SSA screenshot
This may be conservative but gives a pretty good idea what you can plan for. Keep up the great work!

• Drive: 2009 Prius
• Drink: Rainier in bottles
• Pet: Wife has a cat

Full transparency – This is how I am projecting my SS and hope it is accurate! Hopefully, you can confirm or deny! Thanks, Kyu (Pronounced Coo as in Coo Coo Clock)

Social Security Break-Even: Why Wait to Age 70 to Collect? (Sunny D, Florida )


“Dear DJ (Dynamite Joe), BA (Big Al), and AA (Awesome Andi), a big THANK YOU for Spitballing my $10M question in Episode 347. I thoroughly enjoyed your analysis maybe because it reinforced my own assessment… just kidding. the analysis was thoughtful and covered all variables. If you will indulge me, I would like to answer Big Al’s question – “how did you respond during the recession in 2008?” I did not liquidate any positions, monthly savings were invested in cash and not stocks (bad move) and added a few positions that were attractive (good move). You also had a valid point about Spouse’s risk level. In my case, she is not interested and leaves all investing to me and knows if $9M becomes $4.5M, we will still have enough.

My Question: Financial advisors recommend delaying Social Security (SS) payments to 70 if you can afford it. However, based on my analysis I find that:
Assuming 0% return the breakeven between taking SS at FRA or 70 years is approximately 84 years. However, if one invests these payments at 4% per year, the breakeven is 92 years. Getting a rate of return greater than 4% pushes the breakeven even further out. Intuitively, it makes sense – the sooner you take SS, compounding increases the value exponentially thus extending the breakeven period.

So, WHY do financial planners recommend delaying Social Security if the funds are not needed for day to day living? I would agree with their delay to 70 years recommendation if one lived to be 98 or more but why take that chance?

FYI – I did not consider survivor benefits in my calculations…hopefully, one spouse follows the other to the pearly gates within a few years of the departed. Your thoughts (not advice) will be greatly appreciated.
FYI – I have recommended the YMYW podcast to my WhatsApp group…they love the information, dialog, analysis, and your in-depth knowledge. Keep up the good work…
An Avid listener and Admirer, Sunny D (very much a male…when you were spitballing my $10M question, there seemed to be a doubt) 😊”

With over 2700 rules around claiming Social Security, reading our Social Security Handbook before you claim would be a good idea. It’ll walk you through who is eligible, how benefits are calculated, the difference between collecting benefits early vs. late, working while taking Social Security, the rules around spousal, ex-spousal, and survivor benefits, and how your Social Security is taxed. Click the link in the description of this episode in your podcast app to visit the show notes and download The Social Security Handbook, yours free from Pure Financial Advisors and Your Money, Your Wealth®. You can repay us simply by spreading the love around: share the YMYW podcast and the resources with your friends and colleagues via email, or on LinkedIn, Facebook, or Twitter.

Can I Ghost Mom’s Financial Advisor? How to Move Money Between Custodians? (Mike from Tucson, AZ)

“Hello Joe, Al, and Andi. This is Mike from Tucson, AZ. My question is on finance professional etiquette. My mom has been with an advisor for about 5 years and is paying an AUM of 1.5% on a Traditional IRA and Roth IRA that he “manages.” She has not made any changes to her portfolio in years and will not begin drawing from this account until retirement.
I have agreed to help my mom manage her finances in retirement and for simplicity, have started to consolidate all of her accounts to Vanguard, with the exception of the two mentioned above that are “managed” by the advisor. My question: Is it professional courtesy to let the advisor know that I plan to move the money, or, do I just move it? Is the finance version of ghosting common in this space or am I just being rude?
2) Another procedural question is that her Roth IRA funds, which are various Russell equity mutual funds, will not transfer to the new brokerage firm. Do you typically recommend your clients to move into cash so that it can transfer or would it be better to buy a total stock market index so as to not be out of the market for the few weeks it may take to transfer? Thank you for your outstanding podcast and I look forward to your response!”

Should I Hire a Financial Advisor Near Me? (Marlion, NoVA)

“Hi. I have listened to your podcast, YMYW, for a couple years now. It is both informative and entertaining. Thanks for hosting the show. I am 56 y.o. and desire to retire at the end of 2025, when I will be 60 and my wife will be 56. I think I am in a good position (while noting that 85% of our $2.9 million in retirement assets are in tax-deferred accounts) but need detailed guidance on that decision as well as tax-reducing withdrawal strategies and traditional to ROTH conversions. My question: Would it be wise to partner with a firm so far away from my current home in NoVA (i.e. PURE F.A.) or should I use a firm closer to home? A consideration: I may not be in the NoVA area after retirement, but will probably be staying on the East Coast. Thanks in advance for your response.”

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Crown Royal drinking habits, Florida and Joe’s golf game vs back surgery, and Joe thinks Andi is HER in the Derails at the very end of the episode, so stick around. 

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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.