Roger Whitney

Roger Whitney, CFP®, CIMA®, CPWA®, AIF® is on a mission to help change the concept of retirement. He wants to help everyone dream, plan, and live out a life focused on the things he or she cares about most. He has invested his entire 25+ year career as a financial planner helping people make their wealth work for them as [...]


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
June 26, 2018
Your Money, Your Wealth® guest Roger Whitney, CFP®Your Money, Your Wealth® guest Roger Whitney, CFP®

The Retirement Answer Man, Roger Whitney, CFP® talks about his book, Rock Retirement: A Simple Guide to Help You Take Control and be More Optimistic About the Future. Plus, in some states, you may be able to pay your state taxes as a charitable donation and get a tax deduction, but you might want to be careful with that. Also, 5 hidden taxes that could bite you in retirement, the fellas help a listener make the most of her passive losses, and what’s the latest with the deductibility of home equity loans? 

Show Notes


Most people are looking at retirement as if they’re running away from something. They’re running away from the travel, the meetings, the corporate, all of the hustle. So they’re focused at getting away from that pain. And a good planner, I think, mentally helps people really define what they’re running to, which is an attraction. And I think that’s a much healthier way to plan and create that successful transition.” – Roger Whitney, CFP®, The Retirement Answer Man

That’s The Retirement Answer Man, Roger Whitney, CFP®. Today on Your Money, Your Wealth®, he talks about his book, Rock Retirement: A Simple Guide to Help You Take Control and be More Optimistic About the Future. Roger was kind enough to give us 10 copies to give to Your Money, Your Wealth® listeners for free! To get yours, visit YourMoneyYourWealth.com and click “Special Offer.” Learn how to enjoy your journey to retirement to its fullest, your free gift from our guest Roger Whitney and Your Money, Your Wealth®. Also on the show today, in some states you may be able to pay your state taxes as a charitable donation and get a tax deduction, but Joe and Al explain why you might want to be careful with that. Plus, 5 hidden taxes that could bite you in retirement, the fellas help a listener make the most of her passive losses, and what’s the latest with the deductibility of home equity loans? Here to tell us everything we need to know, it’s Joe Anderson, CFP® and Big Al Clopine, CPA.

01:17 – Paying State Tax as a Charitable Donation?

JA: Hey, you found us! (yells, laughs)

AC: Wow, you are excited today, brother!

JA: I am!

AC: I can’t wait for this show.

JA: The show is called Your Money, Your Wealth®. Hey Alan, let’s talk a little bit about some tax law right out of the chute here. We’re just going to get deep into stuff, like, 30 seconds in.

AC: (laughs) This is serious.

JA: Yes, because it’s very interesting to me what’s going on in some of these high income tax states such as New York, Jersey. And it’s slowly, hopefully making its way here out west to California where you and I live.

AC: Yes, so here’s what’s happening, Joe. So as you know, and probably our listeners know, that with this new tax law you can only deduct $10,000 of your state taxes and property taxes, combined. So if you live in California and have a million dollar home, your property taxes are already probably over $10,000 and then your state taxes, you basically don’t get any deduction at all because you’re over that $10,000 limit. And so for certain states like in the middle of our country, the Midwest, that have low tax rates and maybe lower property taxes, no big deal. But for those that live on the East Coast, the West Coast, where property values are higher, so property taxes are higher, state taxes are higher, it’s a gigantic deal. And so some states have been trying to do little work arounds, and New York was the first one that came up with this workaround – this was in April. They said you know what? Before December 31st, you can pay some of your state taxes, we’ll call that a charitable deduction. You have to declare it as a charitable deduction. Of course if you overpay, you’re stuck – it’s a charitable deduction. But that will count towards payment of your income taxes.

JA So if I owe $40,000 in state taxes and I have a million dollar home, hypothetically. So the $10,000 I’m already paying for property taxes…

AC: That’s the most you can take already.

JA: So I also pay another $40,000 or $20,000 or $10,000, it doesn’t matter. Whatever that number is – I can now take that state tax bill and say I’m paying iy to a charity?

AC: Yeah, the state has set up a nonprofit to pay for your state tax obligation, because a government is a non-profit anyway.

JA: So New York state said, “hey, we created a nonprofit organization. Yyou pay us and we’re going to pay your state taxes.”

AC: We’ll count that dollar for dollar as coming off your taxes. And then you get the tax deduction.

JA: Because now it’s a charitable deduction, not a state tax deduction.

AC: Exactly. Yeah. So that’s what New York did. And that was in April. In May it was New Jersey, I think, that said, “OK, we want to do the same thing,” and the governor signed into law the ability to do that. So that seems pretty good. Until now, this month of June that we’re in, the IRS spoke up and said, “hey, wait a minute. You should be pretty careful before you started claiming these deductions, because we don’t agree with this. We’re the ones, the federal government, is the one that decides what is a charity and what’s not. And we very likely will not accept these as charitable deductions.” In other words Joe, if you go ahead and use this strategy, there’s a risk that the IRS could come in and say, “no, this is not a charitable deduction.” They might catch this two or three years after the fact. You have to pay the back taxes, plus interest, plus penalties. So that’s what the warning is all about.

JA: So I don’t understand this. You got a state of New York, which is fairly large. And the governor signs the damn thing. And everyone’s on board. The state legislature. These are smart people. They don’t consult? They’re like, “screw it.”

AC: I think that was the approach. It’s like, “we don’t agree with this federal law, screw it.”

JA: So yeah, we don’t agree with you, Feds.” And then the Feds are going to come back to the states and then we’re going to have this…

AC: Ultimately the Feds have a little more power, I think, than the states, but it’ll be an interesting battle. So now California…

JA: I feel like I’m like living back in the 1800s here. (laughs) Where the states have more power than the Feds and the Feds…

AC: So I was talking to our planners and advisors about this, actually, on Thursday and so here’s what we talked about. What happens if you claim this? Well, it’s just what I said. The IRS can come back after the fact and say, “no, this wasn’t really a deduction. You owe the extra taxes, plus, by the way, we got interest penalties.” Now probably, although I don’t know for sure, probably, the taxpayer will not be assessed a substantial underpayment penalty or gross negligence, because they relied on the advice of the state. Although I don’t know that for sure.

JA: So now people are going to get thrown in jail for fraud, tax evasion.

AC: Right. So then I was explaining, because I used to be a tax preparer myself and did that for two plus decades.

JA: Wow, that’s a big word.

AC: Almost three. (laughs)

JA: You don’t want to say 30 years?

AC: Not really. Two plus. (laughs)  And I can tell you, you get to know your clients. And I can tell you, I could even to this day think about which ones would say, “no way, we’re not going to rock the boat.” And I can tell you which ones would say, “Hell yes, let’s do it. Let’s let them catch me.” And so I think different taxpayers and different accountants are going to take a different view on this. So we’ll see if this happens in California where we live. But it’s already happened in New Jersey, New York. Connecticut is considering it. California is considering it.

JA: We talked a little bit about this back in January when we were hearing some scuttlebutt about this.

AC: Right. And I basically said, “I don’t see this happening, because the IRS controls,” and I still believe that. But anyway, it’s interesting the states, at least a couple of them, have already said, “forget it, screw you, we’re gonna do this and catch us if you can.”

JA: What are you going to do Al, if California signs that? (laughs)

AC: I don’t know. I might be tempted to do it. (laughs) You’re going to do it. I know your accountant already. There’s no way you’re not gonna do it. (laughs)

JA: (laughs) Thank you, Al.

So if your state said “make a charitable contribution and we’ll pay your state taxes,” would you take that gamble against the federal government? There’s some risk tolerance for you! Big Al will keep us apprised on how this all shakes out, so visit YourMoneyYourWealth.com and subscribe to the podcast to stay up to date. If you haven’t checked out our website, there are a ton of great, free resources there for you. This week’s special offer is a copy of Roger Whitney’s book, Rock Retirement – free, just click Special Offer. In the White Papers section of the Learning Center, you can download our 2018 Tax Planning Guide – free. Check out the educational video clips and full episodes of the Your Money, Your Wealth® TV show – free. It’s all free and all yours at YourMoneyYourWealth.com

08:22 – How to Rock Retirement with The Retirement Answer Man, Roger Whitney, CFP®

Roger Whitney on Your Money, Your Wealth®

JA: Hey, we got a fantastic guest Roger Whitney, The Retirement Answer Man. I’ve been a big fan of his podcast for the last couple of years. He’s good friends with a friend of our show, Joe Saul-Sehy from Stacking Benjamin, so I’m really excited to have Roger on. Roger welcome to the show, my friend.

RW: Huzzah! It’s great to be here. That’s my favorite word. Huzzah.

JA: (laughs) Well, first of all, congratulations on your new book, Rock Retirement.

RW: Thank you. It’s awesome that it’s finally done so I don’t have to think about it so much anymore.

JA: So talk about the journey. So how long were you thinking about writing a book? Why did you write the book? And everything else in between.

RW: Well I’m not a writer. That’s why I produce a podcast, first of all.

JA: Exactly.

RW: And so when you’re not a writer and you write a book, and I got help along the way. But it was about a three to four-year process, and it really helped crystallize a lot of things I talk about on The Retirement Answer Man show, and you got to be a lot more logical when you’re putting it in print. It’s not just words passing by in audio form. But I’m really proud of it. I’m really proud of it.

JA: Let’s walk through a couple of these because I read it and it’s very logical of how you organized the book. It’s a great read. It’s fun. When you look at a lot of these financial planning/investment books, it’s like oh my gosh it’s just kind of the same old same old. And after a chapter your eyes kind of glaze and you kind of hear the same things, but I can really feel your personality, and it’s a little bit lighter, it’s a little bit more fun, but I think there’s a lot of really good concrete information in here that people can take down and start implementing right away.

RW: One thing, when I started the process, I bought almost every retirement book I could find. And I felt the same way. It was a lot of tactical things to do. But I couldn’t find anything that was helping people think about the issues that they’re going to be dealing with. I like stoicism. Rather than give me a solution, teach me how to problem solve. And this is sort of how to think and problem solve about your life in retirement.

JA: Right. When you look at a lot of individuals too, where do they go to get financial planning advice? And I think they might listen to a radio show, a podcast, they read a book, or they might go to their parents because they trust them. And the first chapter you have is like, “Hey you know what? You are not your parents. Your retirement might look a little bit different.” What what did you mean by that?

RW: Yeah it’s going to look a lot different. A lot of the planning process is still fighting the retirement battle that our parents had. So if you think about your parents, or my parents or grandparents, for them retirement was a lot about sitting on the park bench of life. Because they were so worn out from a lot more physical work. And typically they had pensions, they had historically normal lifespans, and they looked at retirement is this chance to sit on a park bench. Baby boomers – and that’s all that I work with- they’re looking at retirement very differently. Generally, they don’t have a pension or it’s a lot smaller. They got a lot of assets they have to manage, which is scary. They’re going to live longer than any generation in history, period, but also in retirement. So if you take a 60-year-old today, statistically, they have a chance of living 50/50 up to 90, or past 90. They’re looking at, primarily what I hear, and I don’t know what you hear is, people are looking at retirement is their chance to finally live and go do things, not sit on the park bench. They want to be in the playground. Which creates a lot of different issues that you got to make sure you tackle if you’re trying to retire.

JA: Right. And I think that dives in nicely to the next chapter because if you take a look at retirees today, their retirement years might be longer than their working years, where they don’t necessarily have the fixed income, the pensions, that maybe their parents or grandparents had. They’re living in a heck of a lot longer. They’re a lot healthier. They’re more active. They’re not in the field plowing and their bodies were broken down in previous generations where they just want to sit on a park bench. But today’s generation is like, “I want to do different things. I’ve been locked to my desk for the last 30 years. Now I want to experience life.” And so that brings a lot more challenges, but a lot more opportunities, I think.

RW: A lot more opportunities if we think more creatively because normal financial planning still focuses only on saving and investing and building. The number one question I get always is, “what’s my number? How much do I need at retirement?” Which is basically, if you’re a math geek, that’s a net present value of an annuity at the beginning of retirement is usually how that’s solved for. Well, that worked for our grandparents or our parents, but for us that number is huge. So what ends up happening is, we get discouraged because the solutions are typically offered, “hey you’re gonna have to save more. You’re going to have to work longer, or you’re going to have to settle for less in retirement,” and those all sort of suck.

JA: Yeah right. I don’t like any of that. (laughs)

RW: And there are a lot more things we have control over if we’re thinking creatively.

JA: (laughs) Right. Well, let’s get creative. What is some of the advice that you would give, because you’re right – you take a look at the number, I’m used to spending $100,000 a year, and I want to spend 30 years in retirement, and my Social Security is going to give me 30, so I need 70 plus tax, plus the cost of living, well I need a few million dollars. It’s like damn I only have a half a million, I thought I was pretty wealthy. And now you’re telling me I need three times that four times that? So what are some of the ways that people can get creative? Even though they’re working hard, they’re saving as much as they can, but they still want to enjoy and Rock Retirement – no pun intended there.

RW: (laughs) Pun away! I’ll give you two examples. One is, traditionally we think of retirement like a light switch, right? We’re either working full time and hammering it, or we’re not. It’s binary, we’re either working or we’re not. And I think that is, again, another outdated way of thinking about it. When I survey my listenership, and I look at my client base, my listenership says, when they define retirement, 70% of them say what it means to them is having more time freedom to pursue things that they are interested in. It’s not the absence of work. So one tweak I think is, rather than think of retirement like a light switch, think of it like a dimmer switch. And we use a concept called pre-tirerment, which is that in-between stage where maybe you’re working and earning a lot less than you were getting in your career, but you’re doing something, one, that you enjoy, that might not be what your career is, and two, gives you time freedom to pursue things, but still keeps you in the game from a work perspective, to give you, third, the income to sort of bridge the gap between full-time work and “retirement.” So that’s number one. Number two is, a lot of us think of, when we’re planning for retirement, we think about our spending and we’ll say “$100,000 is my lifestyle,” and most people don’t want to decrease their lifestyle and retirement. What we’ll do is what you said, is we’ll assume we’re spending $100,000. We’ve got to increase that by inflation over the period of our retirement to keep up with lifestyle. And then we plan that way, which is really a horrible way of planning because we don’t spend that way. And that compounding of interest over 30 to 35 years could end up being a number well north of a half million dollars a year in spending. So another tweak you could do to buy you more life when you’re young and healthy is to phase it in between go-go years, with that early retirement when you want to go experience things, and then a mid-level of slow-go years, where you slow your spending down because you’re done traveling. And then, lastly, those no-go years, which is sort of like your grandparents. When you’re ready for the park bench. So I think those are two more creative ways that you can actually help solve this equation.

JA: I think you’re dead on. But with that planning too, there comes a little bit more complications, if you will. What I mean by that is, let’s say then I’m going to retire a little bit earlier, but in my earlier years of retirement, those go-go years is that I want to spend a little bit more money. I want to travel, I want to experience. And you’ve been doing this a long time. And you know very well that if there’s a downturn in the overall market, with sequence of return risk and everything else, now I’m at my peak spending years in retirement in the beginning, and then all of a sudden I get hit with a bear market. So you have to be very careful on how you’re planning this, and where the cash flow is going to come from, and how you’re going to supplement the income, and how that portfolio looks, because that could devastate someone in the sense that they’re spending a lot more, and then they’re slowing their spending down later in life, and they’re not really understanding how markets work or how to create that income.

RW: Yeah, you’re exactly right. You know, there are two solutions to that: one is, the fact that you’re still working in that pre-tirement phase, actually gives you a lot more flexibility, because if life hits you in the face…

JA: (laughs) Which it does. What’s that line by Mike Tyson? Everyone has a plan until you get hit in the face?

RW: (laughs) Exactly. We’ve all been hit in the face – just look at me! That you’re still in the game. You still have skills, you still have a professional network, so you could dial up the income. It also emotionally makes you feel more secure because you’re still generating income. But on the investment management side, that’s a really good point, and this is just my opinion but… We’re used to investing for accumulation, which means, “I’ve got a lot of time, I’m contributing a lot of money, and volatility and compounding is my friend. Most of us have a hard time mentally making the switch to, that’s not the game anymore when you’re near or at retirement. Volatility is not your friend. You’re not contributing a lot of money, you may be taking money out, and you really don’t have near as long of timeframe as you had. Like you said, sequence of returns, that 10 years right around retirement is crucial. So it’s much more about having some income cash flow, which is like a tailwind, and consistency of returns is almost more important than what your average return is.

JA; Yeah, without question, and well said. A few other thoughts too on this topic, as I retire or pre-retire, so maybe there’s still an income there where I can supplement, or maybe I’m not pulling or not pulling as much from the portfolio. But I think what’s more important too, in a lot of sense, is that, hey, I’m slowly transitioning into retirement, I’m not switching that light switch off, because what we find is that if someone had a very active career, and all of a sudden they try to shut that thing off? It blows them up emotionally. It’s like, now I’m bored, now I’m depressed. You still have to find that purpose. And I think by slowing this thing down a little bit, and getting on an off-ramp, versus just shutting that light switch off, also helps people just realize, “hey I can slow this thing down, still have purpose, still have fun, but still have that constructive in my life of being productive.”

RW: You guys have walked this journey multiple times with clients, right? Most people are looking at retirement as if they’re running away from something. They’re running away from the travel, the meetings, the corporate, all of the hustle. So they’re focused at getting away from that pain. And a good planner, I think, mentally helps people really define what they’re running to, which is an attraction. And I think that’s a much healthier way to plan and create that successful transition. So good point.

JA: Dream big about your retirement.

RW: Oh this is a big one. Yeah. This is a big one.

JA: You gotta dream big, right?

RW: Yeah, I think most people dream way too small about their future. Partly because of how traditional planning works, because everything is about sacrifice and these bad choices that we talked about further. Think about it, if you’re going into a negotiation, you want to know what is – everything. If I could just get in here and just get everything through this negotiation, what would that be? So my suggestion is, go into your retirement planning setting it up so it actually won’t work when you do the numbers. I would rather it not work on the first iteration, because then you’ve gotten all these dreams, these needs, wants and wishes on the table, and then by doing that, you can start to prioritize, to hopefully get as much of what the things you actually care about most. And I don’t see that happening enough. What I see happening is, through normal advice and through all the messaging we’re getting about the retirement crisis, people are coming in already sacrificing a lot of their life. And particularly when you’re dealing with, we have a retirement crisis of people who just don’t have money, I get that, and haven’t been able to save because of being hit in the face or whatever. But there’s a different kind of retirement crisis for people that, financially, are pretty independent. And that crisis is that they’re sitting there at 60, even if they’re financially sound, and they’re looking at all of the uncertainties of hyperinflation, deflation, rising interest rates, stock market crashes, and they want to be safe because they’re good stewards, and a lot of these people end up dying with too much money. And that’s different. It’s a nice, elegant crisis to have, but that is still sort of sad.

JA: Yeah, I’ve heard it phrased as “just in case retirement,” where they have these dreams and aspirations of maybe buying the RV and traveling the world, or traveling the U.S. national parks, or maybe going to Europe, or buying a small cabin, or something like that, but they never pulled the trigger, just in case something happens where we need some of that cash flow. So they don’t buy the RV. They don’t buy the nice log cabin or they don’t travel or do whatever, and then you’re right, they die. And then the kids inherit the money and you know what they do with it, right? They spend it! They go to Europe. They buy the RV.

RW: (laughs) Yeah, exactly! At the end of the day, financial planning and advice used to be about, you go to this expert, you give them all this documentation, they take it and they come back with the plan and give you the solutions, right? Modern retirement, in my opinion, is not about getting solutions. It’s about learning how to think and manage change. Which is having lots of little conversations. So whether you get punched in the face or you get pushed forward by a good tailwind, you continually re-evaluate everything and make lots of little changes along the way. So it’s less about solutions, it’s more about a collaboration to make the most of the only life you have.

AC: I think what happens too, in thinking big, which I think is a really important thing in retirement – I think some people, they think so big that they act before really thinking about it. For example, they’ve had this dream of being in an RV for a year. And they’ve never done it. And so they buy this $400,000 RV and they realize after a week, “this really isn’t for me.” But you can actually rent one and try it out. Or they go on vacation to Hawaii and they go, “we got to have a place here.” And they go buy a place and they never go back. So I think you gotta try some of these things out before you even execute.

RW: That’s a great point. Because it’s all about making little decisions. Great by Choice it’s a great book. It’s like you shoot little bullets and test things, and then ultimately shoot the cannonball when you already have all the data. “OK. This is really what I want.” And that’s what a good advisor or a good process can help you work through ideas like that. A great example of that is I have a client that retired about three weeks ago, and she owned some property in another state on the coast, and when we first started working together she was going to build this million dollar home when she retired. And she had been there during the summertime, and it has rough winters. And so the plan was, rather than just go build the house prior to retirement is, now she’s going to go rent there for a year while she goes through the process, and make sure she’s there during the high season and the low season, meet the people, and then after a year of renting start the process of building – just to test it, just in case she doesn’t want to be there.

JA: We’re talking to Roger Whitney he’s the Retirement Answer Man. Go to RogerWhitney.com to get more information. Hey Roger, I know you’re a busy guy, I thank you very much for joining us. Any final words or words of wisdom or thoughts that you can share with us and our audience?

RW: This has been a blast. I think it’s just about managing change and making lots of little smart decisions, not trying to get it right. So I appreciate it, guys.

JA: If you listen to podcasts, Retirement Answer Man is by far one of the best. Roger, I’m a huge fan. It was a real pleasure chatting with you today.

RW: Roger that, it’s been awesome, thanks, guys.

JA: (laughs) Rock Retirement, brother.

Visit YourMoneyYourWealth.com and click Special Offer to get your free copy of Rock Retirement: A Simple Guide to Help You Take Control and be More Optimistic About the Future by Roger Whitney, CFP® and set yourself up for a retirement that does not suck. We only have 10 copies of Rock Retirement, so don’t wait – go to YourMoneyYourWealth.com and click Special Offer.

Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, 5 Hidden Taxes in Retirement.

27:06 – Big Al’s List: 5 Hidden Taxes in Retirement

AC: This came to us from Nerd Wallet, I think it was also in the New York Times. But anyway, so I got five different things that you need to be aware of in terms of your retirement. One relates to Social Security income, because depending upon your income level, more or less, or in some cases none, of your Social Security income is taxable. And it depends on something called provisional income. So you take your normal income plus municipal bond interest, except for Social Security because you only take half of that, whatever that number is, then you go to this chart to see how much is taxable. If you’re single and if it’s less than $25,000, you don’t pay any taxes on Social Security. But if it’s between $25,000 and $34,000, you could pay tax on up to half of your benefits. And over $34,000, you can pay tax on up to 85% of your benefits. So interestingly enough, a lot of people don’t realize that with Social Security, depending upon your other income levels, it may or may not be taxable, and it may be taxable – as much as 85% of it would be taxable. Another way to say that, maybe it’s easier to understand: 15% would be tax-free, or maybe 50% would be tax-free, or all of it would be tax-free depending upon your income level.

JA: And here’s the gist of Social Security planning and tax planning, which all of you need to understand, is that once you get in these weird zones – because sometimes your Social Security is not taxed, and all 50 percent of it, or then an additional 35% of it is taxed, or if you combine the two, it’s 85%. So what can happen is that people can run into, like, a 47% tax bracket.

AC: Yeah, just about. Because now what you’re doing – like, let’s say you’re right at the precipice of the 50% and the 85% tax, which is $32,000. Or $44,000? No, that’s married. (laughs) $34,000. So let’s say you make another $100, and so you make $34,100.

JA: Or you pull $100 out of your retirement account.

AC: Right, exactly. And you’re thinking, I’m in a 12% tax bracket. I’m only going to pay 12%. Well, actually that’s not exactly true, because now you’re going to have that extra $100 that’s going to be taxed at 85% as well. So you actually are going to have probably another 8% tax on that, so about 20% tax, plus the state tax.

JA: So what happens is this: when an additional dollar is added to your income when you’re in the zone, then that means an additional dollar of Social Security tax is going to happen. And depending on where you fall on that grid, then it’s like $1.85 is subject to tax. So you pull a dollar out, and then all of a sudden you’re taxed at $1.85.

AC: Right. Because now more of the Social Security is taxable.

JA: You got it. So let’s just say if you’re at the 25% tax bracket, that’s a 47% tax. So just be careful, because people fall into this trap often. And what you’re trying to do is to limit the amount of tax that you’re paying. Some people, you know if you’re making X amount of dollars, then you’re just kind of stuck with the tax. It is what it is. But if you’ve done some planning along the way… because what’s interesting is that Roth IRAs, they’re not included in provisional income. You could pull $100,000 dollars out of a Roth IRA, it doesn’t show up anywhere. And then you live off your Social Security – let’s say your Social Security is 40 grand, you pull $100,000 from your Roth, you have $140,000 income, zero tax on everything.

AC: Right. Yeah it’s a great thing, and if you have Roth IRAs, and if you’re right near these zones then you want to take a look, should I be pulling from the regular IRA or the Roth, depending upon, are you in this higher tax rate?  The second thing is state taxes could take another bite.

JA: It sure can.

AC: That’s not a mystery. California we know the highest rate is 13.3% and a lot of states have Social Security being tax-free. California being one of them. But there are 13 states Colorado, Connecticut, Kansas, and others, that actually do tax Social Security. So just be aware of that.

JA: California, tax-free, right?

AC: Tax-free in California. Seven states don’t have any income taxes at all. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. And then there’s a couple of states, New Hampshire and Tennessee, that only tax dividends and interest. By the way, Hawaii does not tax government pension plans.

JA: Michigan also. A bunch of different states have different rules.

AC: They have different rules, so just be aware of that. The third thing is that required minimum distributions may trigger higher taxes. So that’s that rule. We talk about this all the time, when you’re 70 and a half years old, you have to start taking money out of your IRAs and your 401(k)s. You have to take out almost 4% – it’s 3.65% to be exact, in that first year. Each year, the amount that you take out increases because your life expectancy decreases. So figure about 4%. So if you’ve got a million dollars in your 401(k)s and IRAs, 4% of that’s $40,000. That’s additional income that you have to take out of your IRA, 401(k), whether you want to or not. So just be aware of that. All of a sudden you can be in a higher tax bracket. You can make more of your Social Security income taxable. You can push yourself into higher brackets for your other income and be paying a lot more taxes.

JA: Yeah. You just have to look at, when you’re looking at Social Security claiming strategies, your retirement distribution strategies, you have to look at all of this because it’s all intertwined. And if you do it properly, you can really save a significant amount of money. If you just say, “hey I’m going to let all this stuff defer and then pulling out later,” we see people just jump into a bracket that they weren’t necessarily anticipating.

AC: Yeah. And I think a big mistake is when people first retire, let’s say 65 just to throw out a date, and they have money outside of retirement accounts, their taxes are very low. They think, “wow, Joe and Al were not right, the tax rate is nothing.”

JA: Yeah, they’re just depleting their cash. They’re not touching their retirement accounts.

AC: And then they get to 70 and a half and then they’ve got a giant tax bill, and what they should have done when they 65 and in a very low tax bracket, is do Roth conversions to avoid as much of a problem later on. Number four Joe is, “home sales can cause unexpected tax bills.” And this is maybe not true for some, maybe some places in the Midwest, but certainly California, the coasts where real estate is higher There is an exclusion, it’s $250,000 per person. Married couple $500,000. But a lot of people have gains of over that amount. And if your gains are over that amount it’s subject to the capital gains rate which is zero, 15, and 20%. Plus the  3.8% Medicare surtax. So just be aware of that. And something that a lot of people miss is, if you did claim Home Office on your home, that’s depreciation. That gets recaptured – you have to pay tax on that depreciation that you took previously. The $500,000 exclusion doesn’t count.

JA: Remember that younger couple that came in? They were like 23, 24, just married. And the gentleman’s mom passed away, and she had a $10 million home in Del Mar?

AC: Yes I do remember.

JA: And that was the only asset that they had. So that’s what they inherited. And it’s like, “well, we gotta pay some estate tax, and then we gotta sell the house to do that.” It was just a nightmare because it was the family home, it’s been in the family for generations.

AC: Sure. And that’s when the state tax limits were lower. So you’re right – there was an estate tax. Now, the estate got to step up in basis so there was no capital gain on the home sale, but they had to sell the home to pay the estate tax. Which was part of the argument for increasing the estate tax to about $11.2 million, almost, per person.

JA: And the other illiquid asset I think was a retirement account. So you either blow out of the retirement account to pay the estate tax, so then you’re paying tax to pay the tax. But the retirement account wasn’t large enough to pay the estate tax, so they would have to sell the family home to pay the estate tax. But I mean, woe is me, right? You’ve got an $11 million home in Del Mar.

AC: Yeah. We all love those problems. (laughs) The fifth thing, related, is beware of state estate and inheritance taxes. So we know that the feds increased it to about $11.2 million per person, but a few states, there are 12 states, Joe, that levy estate taxes, and Hawaii, Maine, and District of Columbia, they use the same $11.2 million. But above that, it’s a 16% tax. That’s on top of the federal estate tax, which is 40%. So in those states, if it’s someone with a lot of money, it would be 56% going to two different governments, state government, and the federal government. Other states like Oregon, that’s kind of gotcha. In Oregon, there are estate taxes when your estate is over a million dollars. Now it starts I think around 4 or 5%, but it ends up at about 16% when you’re over 9 million. We actually had a client in San Diego who was thinking of moving to Oregon, and once they saw that they said, “forget it” because of the estate tax. And your home state, Minnesota, once you get over $2.4 million, 13%.

JA: Yeah, that’s why I can’t go back. (laughs)

AC: Yeah, you can’t move back. Too expensive for your future beneficiaries, whoever they may be. (laughs)

JA: Well, I need to start saving some money.

AC: Yeah, well that too.

“My question is more of a strategy question, I guess.” Now I have a whole bunch of money in my IRA that, when I turn 70 and a half, it’s gonna kill me. How do I know how much money to move into a Roth?” “I’d like to get some information if I can regarding donor-advised funds.”  If you’ve got a money question – doesn’t matter if it’s about retirement, investing, Social Security, or taxes – call (888) 994-6257 to schedule a time to talk to Joe and Big Al on Your Money, Your Wealth® and get answers. That number again is (888) 994-6257, or you can email info@purefinancial.com.

38:02 – Email bag: How to Maximize Passive Losses

This is from Kristin in Massachusetts. She’s got a tax question for you, Big Al. So they got a rental property that they bought in May of 2006, spent $200,000 for it. “We just sold it for $150,000 in May of 2018. Because our income was over $150,000, we had passive losses carry forward for many years. This is approximately how things will add up.” So let’s just pause there, because there’s a lot of meat on the bone here. So she’s already getting into passive loss carry forward rules, Alan. So she bought the place right at the peak of the market in Boston, for a couple hundred thousand dollars in ’06. It is 2018, 12 years later. It’s solling. Solling? Holy buckets. I was going to say “it sold” or “is selling” and I combined the two. It’s solling!

AC: That’s a new word. I’ll know what you mean. It’s sold or it’s selling.

JA: Yes. $150,000 – down $50,000 in 12 years.

AC: OK. But but she had passive losses. So here’s the rule, Joe. I don’t know what she rented it for, but let’s just say couple thousand bucks a month. So let’s just say $20,000 a year. Let’s say the expenses are $18,000, so the profit is $2,000 before depreciation. And depreciation just is, you look at what you bought, you bought a property for $200,000, you allocate land versus building. So the building part is $150,000, the land part is $50,000 – that’s a whole other discussion on how to allocate it. But just say that. So it’s about $5,000 of depreciation per year, so that $2,000 profit actually, on your tax return, looks like negative $3,000: $2,000 profit minus $5,000 of depreciation. So that $3,000 is not deductible, Joe, when your adjusted gross income is above $150,000.

JA: There’s a phase-out there, correct?

AC: There is. If it’s below $100,000, you can deduct up to, if you have it, $25,000 of losses on rental real estate, and then it phases out between those two numbers so that by the time you get to $150,000 you can’t take any.

JA: So if you have any income of or under $100,000, you can write off up to 25 grand. And that’s right on the front page of the 1040. So that’s a huge deduction.

AC: It is, and in this case, my little example, it’s a $3,000 loss that you get to take against ordinary income, or whatever kind of income you have – it’s a deduction.

JA: Right. It’s not offset. If your income is low enough, it’s an offset against ordinary income.

AC: Right. It’s not a tax credit, it’s a deduction which reduces your taxable income, which reduces your tax.

JA: But it’s against, let’s say if I had wages, it could offset against that, versus let’s say if I had a capital loss versus a capital gain, those two would only offset each other up to $3,000 of ordinary income.

AC: Yeah. And some people have property that’s worth a million dollars or more, and so then it gets more interesting. Maybe I’ve got a loss. Maybe I was breakeven on cash flow or made a little bit of money, but on the tax return, it shows that I lost $30,000. And now if my income is below $100,000, I can’t take the whole $30,000, but I can take $25,000 of that as a straight deduction. The other five in that example gets carried forward to the next year.

JA: So in this example, they’ve made over $150,000 for the last several years. So they weren’t able to take that loss off on their tax return, so it suspends on their tax return, right? It continues to carry forward.

AC: Well it doesn’t really say what they made – they sold it for $150,000. So I don’t really know how much they made…

JA: “Our income was over $150,000 every year.”

AC: Where do you see that?

JA: Just read, Al. Just trust me. (laughs)

AC: Oh yeah you’re right. (laughs) That’s in the second part. I got so focused on she bought it for 200 and sold it for 150. OK. All right. Cool. Fair enough.

JA: “So we had passive losses carrying forward for many years. This is approximately how things will add up.” So let me continue. So they’ve got a cost basis of $235,000 because they made some improvements. Depreciation schedule, $91,000. Carried over losses – $135,000. Sale $150,000 minus commission, $9,500, and closing costs of $2,684. “So what I’ve read, we can deduct the losses from our earned income (salaries) and essentially we could end up not paying any taxes on our income. So my thought on this is to work as much overtime as possible this year so that we get back in taxes all the income taxes refunded due to offset losses on the property. Am I thinking this out properly? I am working extra hard now and I don’t want to continue if it is in vain.”

AC: That’s a good point. All right, so let’s go through the math. So the cost basis – I’m gonna do round numbers, Joe. $235,000 and depreciation, we’ll call it $90,000. So after depreciation, it’s what, $145,00, that’s the basis. We’ll call it $150,000. We’re doing quick, easy math. Sold for $150,000, but then there are closing costs, we’ll call it $140,000. So there’s a $10,000 dollar loss on the sale itself. Then there are passive loss carryovers of $135,000. So 145, call it about $150,000 loss is going to show up on your tax return as an ordinary deduction. So in other words, if your salary is $150,000 or less, then you’d pay no tax. Now, we don’t know about your deductions, standard deduction, itemized deductions, but at any rate, single, married – it says “we” so I’m assuming married. So the standard action is $24,000, so just using that simple math, you could probably make about $175,000 and pay zero tax because of this loss. And this loss is fully deductible in the year of sale, and it’s deductible because it was a rental property. Now, if it ever was a residence first and then became a rental, the rules are completely different. I don’t want to confusion at this point, but there are different rules. If it always was a rental, in the year of sale, there’s a gain or loss on sale and any passive losses on that property that have been suspended get deducted in that year.

JA: No matter what your income is?

AC: No matter what your income is.

JA: So it’s not subject to the $150,000 phase out.

AC: Correct.

JA: So if she makes $200,000, there’s $150,000 loss, $200,000 minus 150, $50,000 minus deductions, whatever. So she could make up to $200,000 and still virtually pay no tax.

AC: Yeah, very little tax, in that case, is exactly right.

JA: So last part of this is she’s like, “other things to consider is my husband and I both have 401(k) plans and we could convert those to Roths, right? Shouldn’t we do this when we are in a low tax bracket year like we possibly are this year? I forecast our 2018 combined income or wages to be $150,000, then take the net operating losses from that. We live in Massachusetts, the condo was in Florida. Thank you for your time. I hope I give you enough information.” Kristin you give us quite a bit – very thorough, thank you very much.

AC: I don’t even have any of the questions, you put it all out there. So yes, that’s exactly right. You want to be considering a Roth, and we just went through this example – and if your annual wages are $152,000, and the loss we just went through it, is about $150,000, you could convert about $70,000 and stay in a very, very low bracket. Actually more than that because of the standard deduction. Probably about 100 grand and still stay in the 12% bracket – with what we know. Fine tune that with your accountant, but that’s on the surface. Boy, so you pay what 12% tax on about $70,000 of income. That’s not bad to get…

JA: $100,000 into a Roth. It’s huge.

AC: Exactly. It’s gigantic.

JA: Yeah your effective rate would probably be close to 8%. So maybe $8,000 to get $100,000 bucks into a Roth IRA? I would do that every day and Tuesday. (laughs)

AC: I would too. Yeah. And so here’s a case – and these numbers are just exactly what I would expect in Florida at this time, because May 2006, for better or for worse, it was about the top of the market and Florida got way overvalued and crashed quite significantly Kristin, I don’t have to tell you, you know that. So finally, you waited all this time to almost get your money back, but that’s kind of been the experience. Now you got this loss, take advantage of the loss by not only not paying taxes on your salary, but then turn around and do some Roth conversions. And you might even want to do more than $100,000 in Roth conversions, depending upon how much you have in a 401(k), what your retirement income is going to look like, so you need to do a little analysis on that.

JA: Right. Another thing to add on top of this is that they both have 401(k) plans. So let’s say if they’re fully funding or fully maxing those plans out, I’m not sure how old Kristin is, but let’s say they’re over 50, I’m just rounding here, so $25,000 apiece on those. So that’s driving that income down another $50,000. So that could increase the Roth conversion by another $50,000.

AC: Yeah, so now maybe it’s $150,000 or more.

JA: Or more, and still stay in that 12% tax bracket. But then you look at, “hey, does it make sense for me to even do more than that?” Now it’s looking at, well how much money do you have in a retirement account. I mean if you have a large balance, yeah, then you probably want to get as much of that thing out of there as possible.

AC: Because we got these low 22 and 24% brackets for the next couple years. So for married taxpayers, the 24% bracket goes up to $315,000 of taxable income. And that’s way different than it was last year because of alt-min. Last year at that income range, you were probably in a 35% effective rate. Now it’s 24. So yeah, there’s some pretty interesting things Roth conversion-wise but when you can sort of combine the Roth conversion with these other losses, it’s very significant.

JA: It’s huge.

If you haven’t figured it out by now, Joe and Big Al love Roth conversions – and why wouldn’t they? Tax-free growth forever? To find out more, visit the White Papers section of the Learning Center at YourMoneyYourWealth.com and download the Roth IRA basics white paper for free. Kiplinger calls the Roth IRA one of the smartest money moves you can make. If you haven’t already looked into it, given our current tax brackets, now is the time. Those brackets are due to sunset in seven years, so take advantage of ‘em while you can. Download the Roth IRA basics white paper in the Learning Center at YourMoneyYourWealth.com.

48:39 – Bad News About Home Equity Deductibility

JA: Alan, I guess we’re looking at home equity loans?

AC: Yeah, we haven’t really talked about this much, but there are 13 and a half million individuals that have a home equity loan.

JA: I am one of those.

AC: And it’s about $550 billion outstanding – there’s some bad news with this new tax law, in terms of deductibility on home equity loans.

JA: That’s such a gray area though. It is. Which is why I’m going to explain it over the next few minutes. Because it will be crystal clear afterward.

JA: Yeah but there’s still… All right go ahead.

AC: Yeah. Here’s what I’ve got to tell you first. First, the rule changes. Here are the old rules, which was before December 15th, 2017, you could borrow a million dollars to purchase your home, and you could borrow up to another $100,000 for any purpose. For home equity debt – that could be used to buy a home, it could be used to buy a car, go on vacation, pay off credit card debt, student loans, whatever. So it was $1.1 million. That was the total that you could borrow and take a full interest deduction. If you were over and above that, there was an allocation – some of your interest was deductible, some of it wasn’t. Here’s the new rule. The new rule is that, for loans originated after December 15th, 2017 it’s $750,000. OK, so if you just bought a home, if your mortgage is more than $750,000, you cannot take the full deduction. But here’s what changed substantially is the home equity loans. The ability to borrow on your home and have the first $100,000 be tax deductible in terms of the interest expense, that’s no longer available, and that’s not even grandfathered in. So you can no longer deduct interest on home equity loans, unless. Unless. There’s a big unless. The unless is, if you use it for improvements to your home. And so this is what I want to make clear: when you hear people say home equity loans are not deductible. That’s true, except if you use your home equity loan to improve your home itself.

JA: Or use one to purchase your home.

AC: Yeah, you could use one to purchase your home.

JA: You know how they do the 80 10 10 rule, whatever that thing is the mortgage brokers do.

AC: Yeah usually that’s a second mortgage, but I guess it could be a home equity loan. But still, if you use the money to purchase your home or improve your home, but the total of that needs to be less than $750,000 if you want to take a full deduction. Now again, if you borrow more, that’s ok, you just don’t get the full tax deduction. Now you can also have two homes. You can have your primary home and a second home. You can have mortgages on both. And as long as the total mortgage is used to either purchase or improve the home, combined together are less than $750,000, you can take a full deduction there. Again, if you’re over $750,000, there will be an allocation. Some of it’s deductible, some of it’s not. Now some people will say, “well, what’s a home improvement?” That’s where it gets a little gray. I painted my house. Is that an improvement or was that maintenance? Was that a repair? And actually, it sort of depends on what accountant you go to – a lot of things are pretty clear.

JA: I’ve got a question for you.

AC: Well before you do I want to finish the point. So landscaping, remodeling, re-roofing, that’s an improvement.

JA: Pool?

AC: A pool is an improvement. Fixing a broken light fixture, that’s probably a repair. But then there’s this gray area.

JA: Hot tub?

AC: I suppose it could be, especially if it’s in-ground. If it’s above ground, it probably will depreciate and probably not really add much value. Yeah, that’d probably be a gray area. But what’s your question?

JA: So let’s say an individual gets audited. Maybe they’re a small business owner and they do an S-corp election but they don’t pay themselves a lot of income and they have a huge dividend. So that red flags the IRS. So they take a look at it. That person also has a home equity line and they use that home equity line to tap into it to help pay for the business. But they’re deducting it on their tax return. So when the IRS audits this individual, are they going to audit everything on that return? Or did they just say hey show me the red flag of this business?

AC: Ooh, that’s an excellent question. So first of all, I’d say – I might get the numbers wrong, but let’s say at least 75-80% of current day audits are just mail correspondence.

JA: Of just one triggering event that looked odd.

AC: Yeah it’s like, “we saw you recorded this, we thought it should be this. Pay us X. If you disagree, tell us why.” That’s how most audits are now. But you’re talking about an office audit.

JA: Yeah, when Will Smith comes.

AC: Exactly. Before he comes out you get a letter from the IRS stating what they’re looking at, and you actually only have to have that prepared. So in other words, there are three items.

JA: So the individual’s cheating all over the place, but they only catch them on one thing?

AC: Well, let me continue because. So they’ll look and say those two or three things, whatever they may be, and then as a result of doing the audit, when they come out, they may catch other things and then require additional documentation at that point. So it’s why some people, like for example if they’re taking some semi-aggressive positions on things, you might not want to claim like a really high charitable deduction or a home office or things that could trigger red flags. You certainly want to make sure that you’re reflecting your W-2s, 1099s correctly so you don’t have a mismatch. You kind of want the return to flow through as best as possible.

JA: Just be honest, folks.

AC: Yeah, well that’s the best policy.

JA: I don’t have cable, so I just have Apple TV.

AC: Oh really? You’re really modern. I still have cable. I’m not sure why.

JA: I’m watching Homeland. Ever see that?

AC: No.

JA: Don’t like good TV, do you? What are you watching? What’s your show right now?

AC: We watch basically two shows. Ann likes to watch the monologue of Stephen Colbert and we watch Jeopardy. That’s what we watch.

JA: (laughs)

AC: How many times have you watched Jeopardy?

JA: Where’s Wheel of Fortune, brother?

AC: No, that’s not educational. Jeopardy at least there’s educational value.

JA: So you guys have a little fake buzzer there?

AC: We should.

JA: Have you seen Shawshank Redemption yet?

AC: Yeah I’ve seen that.

JA: OK. You hadn’t seen it, so I’m just giving you some ideas for the weekend.

AC: No I saw that years ago. You’re thinking of another movie.

JA: Have you seen Tombstone yet?

AC: No.

JA: OK. Well, I’m going to make a list for you.

AC: Yeah. Please make a list of things – must-see TV and movies.

JA: You know guys, help me out with this. The guy’s living a sheltered life, Jeopardy and the monologue of Stephen Colbert. Yeah I’d rather shoot myself. (laughs) Have a great weekend everyone. We’ll see you next week. The show is called Your Money, Your Wealth®.


Stephen Colbert and Jeopardy?! I’ll take Good TV for $1, 000, Alex. Special thanks to today’s guest, Roger Whitney – visit RogerWhitney.com to learn more on how you can Rock Retirement.

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If you’ve got a burning money question for Joe and Big Al to answer live on Your Money, Your Wealth, just email info@purefinancial.com, or call and leave it in a voicemail at (888) 994-6257! Listen next time for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

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.