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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 153 out of 715 RIA’s nationwide by total assets under management by [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CFO & Chairman of the Board of Pure Financial Advisors. He has been an executive leader of the Company for over a decade. As CFO he is responsible for the financial operations of the company as well as investor relations. Alan joined the firm in 2008, about one year after it [...]

Andi Last
ABOUT Andi

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

Published On
September 7, 2021

How do you calculate Roth conversions to reduce taxes when you reach required minimum distribution age? What are the rules for RMDs from a Roth 401(k)? How does the 5 year Roth clock factor into a decision to leave money in an old Roth 401(k) or roll it to a new Roth IRA? Do reinvested dividends count as Roth contributions? Do capital gains count towards the capital gains income bracket? Plus, IRA contributions for minors and the unemployed. Finally, how would Joe, Big Al, and Andi spend lottery winnings?

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Show Notes

    • (00:53) How to Calculate Roth Conversion to Reduce Taxes at RMD Age? (Bill, PA)
    • (08:15) Leave Money in Former Employer’s Roth 401(k) or Direct Rollover to New Roth? (Beagle, Cabo)
    • (17:31) How to Start a Roth IRA for a Minor With a Seasonal Job? (Roger, NJ) 
    • (21:59) What are the Required Minimum Distribution Rules for Roth 401(k)? (Saul, VA)
    • (24:10) Do Capital Gains Count Towards the Capital Gains Income Bracket? (Saul, VA)
    • (28:39) Can You Contribute to an IRA While You’re on Unemployment? (Jim, Santa Cruz)
    • (32:05) Do Reinvested Dividends in a Roth IRA Count as Contributions? (John, Abilene, TX)
    • (35:51) What Would Ya’ll Do With Lotto Winnings? (John, Abilene, TX)
    • (38:56) Podcast Survey Winner & Trivia Question

Free resources:

5 Year Rules for Roth IRA Withdrawals

LISTEN | YMYW PODCAST #255: Breaking Down the Confusing 5-Year Roth Clock Rules

LISTEN | YMYW PODCAST #265: Bear Market Investing Strategies and Revisiting the 5-Year Roth IRA Withdrawal Rules


The Ultimate Guide to Roth IRAs

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

Listen to today’s podcast episode on YouTube:

Transcription

Today on Your Money, Your Wealth® podcast #342, the Roth questions are all across the board: how do you calculate your Roth IRA conversion to reduce taxes when you begin taking required minimum distributions? Speaking of RMDs, what are the rules for RMDs from a Roth 401(k)? How do the 5 year Roth withdrawal rules factor into a decision to leave money in an old Roth 401(k) or roll it to a new Roth IRA? Plus, IRA contributions for minors and those on unemployment, and whether reinvested dividends count as Roth contributions. And for a total change of pace, do capital gains count towards the capital gains income bracket? And if Joe, Big Al and I were to win the lottery, what would we do with the money? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

How to Calculate Roth Conversion to Reduce Taxes at RMD Age? (Bill, PA)

Joe: “Hello California BAJA. Big Al, Joe and Andi”. 

Al: BAJA, yeah, that’s a good one. 

Caller: “Love the podcast and the great info you share as for the necessities”. 

Al: Niceties 

Joe: Niceties. Oh damnit, I thought I had that. I thought for sure it was necessities. 

Al: You were really close. The niceties. He’s going to give us all the nice specs about… 

Joe: Who says niceties? 

Andi: Bill from PA. 

Caller: “You’re my favorite podcast to listen to when I walk for exercise”. 

Al: And when he runs he listens to something else. 

Joe: And when he’s on the bike… 

Al: Yeah, forget those guys. If I’m walking it’s ok. 

Joe: “My wife drives a 2019 Toyota Highlander and I drive the 2015 Genesis or the 2020 Toyota Tundra”. 

Al: Oooh 

Joe: OK, just got a collection of interesting automobiles there. “We have a Yorkie, Maya, and a Bishorkie”. 

Al: I can’t help you on that one. 

Joe: Anyone? Bishorkie? Is that what it’s called? 

Andi: That’s a Bishorkie. 

Joe: Oh damn. “A Yorkie and a Bishorkie, Daisy”. Very cool. “My favorite adult beverage is a cabernet. Any craft IPA beer and a little rum and diet.” Not a big rum guy. 

Al: Me neither. Except in mai tais.

Joe: In which I drink one every time.

Al: On the islands all the time. 

Joe: Okay, let’s see. Here’s his question. “How do you go about determining how much of your traditional IRA you should convert to your Roth IRA each year in order to lower your tax burden when you reach RMD age? Right now, I’ve been converting about $65,000 a year above what we need to supplement our income to just max out the 12% tax bracket for married filing jointly. I’m not sure if we should be doing more or not. I’m 64. We live on $100,000 per year and we have $1.2 million in traditional IRAs. $350.000 in a 401(k), $570,000 in a Roth and $350,000 in a brokerage. We’re both retired with no real W-2 income to speak of. Our only income is from our rental properties. By the way, I don’t think Joe is arrogant”. Look all of my people are just coming out. 

Andi: Yeah, but this one’s got a big “but”, though.

Al: They’re supporting you. 

Joe: I’m not done reading this question. “But I reserve the right to change my opinion until after he reads my question. Thanks, and I look forward to hearing your response”. OK, so Bill is 64 years old. All right, he’s got… call it 1.5 million bucks. Bill, what we’re missing here is how much income is coming from, hold on, I can probably figure this out. 

Al: Well, wait a minute. He’s got 1.2 in IRA, 350 in 401(k), 570 in Roth and 350 in brokerage. 

Joe: Yeah, I understand that, but 1.5 million dollars in retirement accounts. So, he says he’s converting $65,000 to max out the top of the 12, which is $80,000. So his taxable income is $12,000 or $15,000? 

Al: Well, plus the standard deduction, so it’s probably…

Joe: Less?

Al: His income’s roughly 105 minus 25, Let’s see, and he’s then taken 65. Joe: 10, give or take.

Al: Yes, I’m like that. 

Joe: Okay, so should he be converting more is the question. Well, we don’t know what his Social Security income is going to look like. That would help us and we also need to know what the taxable portion of your real estate income is because he says he’s making about $100,000 a year, but most of that is passive income through real estate. 

Al: Well, I’m assuming it’s probably real estate. Plus it says brokerage account. Maybe? I don’t know. It doesn’t really say where it comes from. 

Joe: Yeah, it does. It says it comes from real estate, mostly. “Our only income is from rental properties”. 

Al: Yeah, but then he says, “we live on $100,000”. He didn’t say that came from the rentals, did it? 

Joe: I guess you’re right. So we need more information. 

Al: We do, but I’m going to go with what we have. So $1.2 million? The RMD on that at age 72 is about $50,000. Right? 

Joe: It’s probably more than that. He’s got $1.5 million. Al: Oh yeah, 401(k). I forgot. 

Joe: So let’s look 10 years; 6% future value 2.6; 4%, $107,000 is his RMD. 

Al: Yeah, but wait one second. At a $1.5 million, it’s about $60,000 and if he converts $65,000 per year, it’s probably not going to grow that much. So it might stay at 1.5. 

Joe: I’m with you.
Al: So $60,000 plus Social Security, let’s just say it’s 50. So that’s 110, right? Joe: Alright. 

Al: Probably 100. Probably 40 that’s taxable. Just round numbers; 100 minus the $25,000 standard deduction. Seems like he stays in the 12% bracket but what I don’t know is how much of his real estate income is taxable or whether he has any other kind of income, pensions or otherwise. 

Joe: I think the 12% is really safe, so continue to do that. But here’s the exercise that he needs to do, take a look at your real estate income add what your Social Security income is going to be at age 72. What do you think your income is going to be outside of any type of required distribution, outside of interest and dividends and things like that.? Just make it super simple. From there, look at what you believe your IRA is going to be. Maybe it’s the same amount. Maybe it’s still 1.5 because it could be growing at 4 or 5%, but you’re converting 4 or 5% out. So at 1.5 million, you know, 4% of that is going to be your RMD. Is that going to be higher? Is it going to be in the 22% tax bracket or is it going to stay in the 12? If it’s going to stay in the 12, don’t convert more than what you are, if it’s going to be in the next bracket? Well, then maybe you want to consider converting just a little bit more. You could really dial this thing in. But the top of the 12, for sure. Maybe you want to go in the 22 until they change tax rates. 

Al: Yeah, because the 22 is scheduled to be 25 down the road. So just be aware of that. 

Joe: So the 22 is still going to be probably cheaper for you. If you are going to be in a higher bracket, the 22% bracket is pretty large. So you don’t need to go to the top of the 22. You probably need to go somewhere in the middle of it because if he converts to the top of the 22, he’ll probably convert too much. 

Al: Or maybe just the top of the 22 for a couple of years and then stay in the 12 after that. I mean, to do this right, you’ve got to do a little math and tax projections and figure it out. But based upon what you told us, 12% is probably pretty good and you may want to go up a little bit, but with the information we have, it’s hard to say. 

Joe: Cool. Alright, Bill, thanks for the question. 

Leave Money in Former Employer’s Roth 401(k) or Direct Rollover to New Roth? (Beagle, Cab0)

 Let’s see, we got “Hey, Big Al, Joe and Andi. I’ve been listening to your Pod for a year and seems like a lot of your on air questions start with ‘I have 2 or 3 million dollars and get $6000 a month from a pension and $4000 from Social Security’ and they ask… ‘hmm, will I be OK?’ Duh! Give me a break. I think they just want to hear you guys say how much they have and that they did an awesome job. Hee hee hee. I just FF through them. Love the remote”. 

Andi: He fast forwards through them. 

Joe: Oh! “I just fast forward through them. I love the remote”. All right, there you go. Very cool. “Just a quick question. Not about the front or back door Roth, as I know it’s your favorite subject. My wife is being let go from a job. Her business is closing their plan. The company will still exist, so need some input. Should she leave her money in their Roth 401(k) or do a direct rollover to a new Roth? Here’s a reason for the question she is 57 years old, so if she keeps the funds with the company, we could have access to the funds at 59 and a half if needed. If she does a rollover, then the new clock would start on the 5 year Roth and we would not be able to access the gains for 5 years. I do not get why a Roth 401(k) transfer to a Roth IRA isn’t counted as time served. Their companies 401(k) is limited, so I believe a rollover is the best option as I would have many more investment options. Love the show! Al’s witty comments are always welcomed. Joe is Joe and is always a good sidekick”. 

Al: Hee Hee. 

Joe: I’m the sidekick.

Al: How about that? Second billing. 

Joe: Not my month. “Wish AndI would chime in more. I often enjoy her commentary”. 

Al: Yeah. How would you answer this question, Andi? 

Andi: I would say ask Joe or Big Al, and the reason that I don’t chime in more often is because I can’t get a word in edgewise with Joe. 

Joe: Wow! 

Al: Oooh. Do you think Joe is arrogant? 

Joe: Yes. 

Andi: No. I don’t think he’s arrogant. I think he doesn’t like having any kind of space in the discussion. I don’t think he likes there to be pauses. So he just powers through. 

Joe: Because people want the info. They don’t want to hear strangers talking about life.

Al: Talking about whatever.

Andi: And what you drink. 

Joe: Well, they care about that.”a Beagle from Cabo”. OK, so a couple of things here. So when you have a Roth 401(k) or a Roth IRA, when you roll the Roth 401(k) into a Roth IRA what happens to the 5 year clock is what he’s asking. 

Al: Yes, it is. 

Joe: I think he needs to look at this a little differently, then I’ll answer his question. Andi if you have anything, please chime in. 

Andi: You got it. 

Joe: Alright. Why is beagle. Right? Beagle? 

Al: Beagle from from Cabo. 

Joe: Why is he concerned about the 5 year clock? So, he’s got a 401(k) when she separates from service at age 55, she has access to the 401(k) plan. 

Al: And that’s true for Roth provision too. 

Joe: Roth provisions as well. So if you have a Roth 401(k) or your standard 401(k) or whatever the case may be, you have access to the money. 

Al: So you have to be 55 or older and separating from service while you’re that age. And then you have the special rule. You can take money out of the Roth or the regular 401(k) prior to 59 and a half and not pay a penalty. 

Joe: And so he’s saying, that’s fine, but I want to get access to the earnings, so I need to wait until 59 and a half. I’m not sure if he’s saying to us now is that he started the Roth 401(k) 2 years ago, and he wants to fulfill the 5-year clock and that 5-year clock will be at 59 and a half… but that seems so ironic that it’s the same age that you can take money from a retirement account penalty-free. 

Al: I think what Beagle is saying is that he has this feeling that if he moves it to a Roth IRA, the 5-year clock starts over. I think that’s his concern. 

Joe: If he has a Roth IRA already, the Roth 401(k) would go in the Roth IRA and the 5-year clock would apply to the first dollar that went into the first Roth IRA. 

Al: Yeah, and the first dollar that went into the first Roth 401(k) same, same for purposes of the 5-year clock. 

Joe: So they would look at it as one big contribution that year. Al: Right. 

Joe: So let’s say you established a Roth IRA 10 years ago and you just established the Roth 401(k) 2 years ago. So you’re thinking I have a 5-year clock in the Roth 401(k) that I have to have this season for another 3 years for me to get the earnings out tax-free. But if he rolls that money out into another Roth IRA, the IRS will look at it as that’s just a big contribution for that year. It’s all basis, in a sense. So all of it is tax-free. You have access to the money if you already have an existing Roth IRA. So I’m not sure what he’s referring to. 

Al: But what I think he’s saying is that he doesn’t have a Roth IRA, he’s got a Roth 401(k) and he’s afraid that if he rolls it to a Roth 401(k) it rolls the Roth 401(k) to Roth IRA. The 5-year clock starts over. Which is false. 

Andi: A Roth is a Roth, right? 

Al: I want to be real clear on that. A Roth 401(k) and a Roth IRA are the same thing for purposes of the 5 year clock. 

Joe: What is more favorable to you? 

Al: And in other words, you can actually completely drain your Roth 401(k) and that caring period floats into the Roth IRA. You don’t have to start over. It carries over into that Roth IRA. 

Joe: And it’s tiered because how the income comes out of a Roth is that it’s 5 first tax treatment. First in, first down. So all contributions come out first and then all conversions come out second and then earnings of your contributions come out third and then earnings of your conversion come out fourth. 

Al: And chances are Beagle, the money that you want to take out is going to match or will be less than your contributions, which means it’s tax free regardless of what age you pull it out. 

Joe: Why do you want to pull the money out now anyway? The whole purpose of a Roth is to build tax-free growth. You got to let it grow. So if you’re taking the money out now, I mean, I guess who cares? How much growth do you have? Well, if you’re retiring and then draining the Roth first, you might want to look at a different strategy. 

Al: Sure. Unless that’s all the assets they have, I don’t know, it doesn’t say. 

Joe: I suppose, because he gets pretty pissed when he hears all these other people saying they got 2 or 3 million bucks. 

Al: He’s probably got 10 million. Didn’t want to brag about it. 

Andi: And Beagle we do have a white paper on the five year rules for Roth withdrawals that you can check out at purefinancial.com. 

Al: Let me say one thing Beagle… 

Joe: See you just cut Andi off when she’s trying to chime in. 

Andi: No worries. Go for it. 

Al: A 5 year clock rule is incredibly complicated, so I’m not at all surprised that there’s misconceptions and questions about it because it’s not simple. 

Joe: Right. Where it gets complicated even more is that you got rules for the Roth IRA and you got rules for the Roth 401(k) which are different. They’re similar, but they’re different. And so, does one have a similar 5 year clock or a separate because if I do a conversion, I have a separate 5 year clock for each conversion? 

Al: Right and then it’s different if you’re under 59 and a half and over 59 and a half. So yeah, it’s tricky. 

Sharpen your knowledge on those tricky 5 year rules for withdrawing from your Roth in the podcast show notes at YourMoneyYourWealth.com. Listen to YMYW episodes 255 and 265, both on those 5 year clocks, and download our free guide to the 5 Year Rules for Roth IRA withdrawals. Just click the link in the description of today’s episode in your podcast app to go to the show notes, then scroll down to the free resources section and have at it. That said, a lot of preparing for retirement is tricky. One wrong move could really do a number on your financial future. Getting a free assessment from a CERTIFIED FINANCIAL PLANNER™ professional on Joe and Big Al’s team at Pure Financial Advisors can provide a lot of peace of mind. They’ll go over your entire financial situation, confirm if you’re on the right track, and help you find ways to meet your retirement plans and goals. Click the Get an Assessment button in the podcast show notes at YourMoneyYourWealth.com to schedule your free financial assessment now.

How to Start a Roth IRA for a Minor With a Seasonal Job? (Roger, NJ)

Joe: All right, we got Roger writes in from New Jersey. “Hello, Andi, Joe, and Al. No pets and I drive a Volvo XZ90. My daughter, aged 14, got her first summer job. She was only able to work for 3 weeks because of other commitments. Because she worked so little at a seasonal job and we did not submit all of the required employment forms. The employer paid her all cash, a total of about $1100. I would like to start a Roth IRA for her, but am unsure how this should be documented. There are no timesheets, pay stubs, W-2, etc. Do I file a tax return for my daughter or can I just open up a custodial IRA? Thank you”. 

Al: Great question. 

Andi: Is this an under-the-table job? 

Al: Not necessarily. 

Joe: It wasn’t under the table but he wants to go legit. Roger’s from New Jersey, right? He’s like, I’m going legit here. 

Al: So I’m going to tell you the proper way to do it, Roger. And this is true for anybody. If you received money for services, whether or not you get a W-2 or a 1099, you’re required to report  it on your tax return. In this case, it would be $1100 reported as consulting income. Usually you put that on Schedule C, you don’t have to, you could do it under miscellaneous income subject to self-employment tax. If you put it on the Schedule C small business, your daughter might be able to write off a couple expenses against it. But whatever your net profit is on this, let’s call it $1000, you have to pay income tax and self-employment tax on that but then you can do a Roth conversion. 

Joe: Contribution .

Al: Contribution. Thank you. It doesn’t matter if that you didn’t get a W-2 or a 1099, but that’s the right answer. There is an underground economy. Not everyone reports every dollar that they make when they don’t get forms. 

Joe: Underground economy?

Al: That’s the wrong answer.

Joe: You should start a podcast called Underground Economy.

Al: We should, how to work around.

Joe: We would have to give ourselves fake names.

Al: We would.

Andi: Oh yeah, your voices wouldn’t be the least bit recognizable. Come on! 

Al: Recording this in Argentina. Anyway, that’s how you legitimize it. Your daughter files a tax return and either fills out Schedule C or calls it miscellaneous income but she has to pay self- employment tax on it. She probably wouldn’t pay income tax on it because it’s too low, but she would have to pay self-employment tax, which is roughly 15% of the $1100. 

Joe: And then the contribution amount that Roger’s daughter can make is what that profit is. So let’s call it $1100. Call it $100 or $150 in taxes. So $950 is the the profit. She could put $950 into a Roth. That would be the maximum contribution or… 

Al: Close but let’s say there’s no other expenses except the self-employment tax. Joe: She’s a seasonal worker. 

Al: Yeah, she may be able to avoid that, but generally you get to deduct half of the self- employment tax that you pay against the $1100. So you end up with about $1000. So about 15% of $1000. I’m sorry, $1000 is about what you could do roughly in a Roth. That’s what I was trying to say. 

Joe: I said $950 so correct me.

Al: So it’s actually $1025 to be exact.

Joe: But the point was this, she couldn’t put $5000-$6000 into a Roth. Al: No you’re limited to your earned income. 

Joe: Yep, right. So Roger, don’t go overboard. Because his daughter doesn’t have the $1000, he could still put it into the Roth for her in her name. 

Al: Oh, sure, as long as she has earned income. 

Joe: Right but he could not make a full contribution because it’s either the full contribution or earned income which ever is higher. 

Al: And you can’t just make a contribution just because you feel like it. The person, in this case, your daughter has to have earned income on her tax return. 

Andi: So in other words, if she doesn’t work next year, she can’t have a contribution next year. 

Al: Correct. It’s a year by year thing and you can, with her open up a custodial. That’s okay, a Custodial Roth IRA. That works. 

Joe: Alright. Thanks, Roger. Appreciate it. 

What Are the Required Minimum Distribution Rules for Roth 401(k)? (Saul, VA)

Joe: “Good day Andi, Joe and Big Al. I’m Saul from Virginia. I love the show and find it not only entertaining, but also very informative and useful. I have 2 questions for you. One related to Roth 401(k), and the other is with regards to long term capital gains. Regarding the Roth 401(k), I understand these do have required minimum distributions. However, I’m not clear on if this is a separate bucket. So say, for example, my total RMD comes to $50,000 when I reach 72, I’ll be able to remove all $50,000 from the Roth 401(k). Or are each account’s IRA traditional 401(k) Roth 401(k) treated as a unique bucket. And I need to remove the RMD from each bucket based on the formula of the RMD based on my age”?

Before we answer the capital gains, let’s circle back. So if you have a 401(k) and an IRA in another 401(k) you will have to take a required minimum distribution out of each account. Roth 401(k)’s, you have to take an RMD. But there’s no reason for you to take the RMD out of the Roth 401(k) because when you separate, you could even roll the Roth 401(k) into a Roth IRA. Roth IRAs do not have the RMD, so that would avoid the RMD entirely if you wanted to avoid it. So Roth 401(k) you move that into a Roth IRA that avoids your RMD. Now you have a 401(k) and let’s say an IRA, you would have to take 2 RMDs out of the 401(k) in the IRA to satisfy your RMD. If you move the 401(k) into an IRA, then you would only have one RMD. So if you have 401(k)’s, multiple 401(k)’s, you would have to take multiple RMDs. If you have multiple IRAs, you only have to take one RMD. Weird rules, but that’s just how it’s stated. 

Al: That was extremely clear. I’m proud of you. 

Joe: Alright, thank you! Been practicing.  

Do Capital Gains Count Towards the Capital Gains Income Bracket? (Saul, VA)

Joe: “Regarding capital gains tax. My question is, does the amount of capital gains count towards the capital gains income bracket? I understand the brackets for married, filing jointly, couple is 0% up to $80,000. 15% for”… He understands the brackets Al.

Al: Yeah for capital gains.

Joe: Yep, 15% for anything between $80,001-$500,000 and then 20% anything over $500,001- $600,000. But let’s spitball on the following…

Al: Alright, like it?

Joe: Love it! “Say, I set aside one years worth of expenses on a savings account that will barely make me $300 a year in interest and that is my only income for the year. No salary, no

dividends and say, I sell an investment holding or holding that combined gives me $1 million dollars in capital gains”. Wouldn’t that be nice?

Al: That’d be awesome!

Joe: “Would I be paying a 0% tax on the long term capital gain amount of $1 million since I only had $3000 of income from the interest on my savings account? Thanks again for taking the time to answer all of our questions. Keep up with the awesome work and you are welcome for not asking about the Megatron, red barn door 5 car garage”.

Al: That’s a that’s a great question because we talk about capital gains when you’re in the lowest 2 brackets of ordinary income, they’re taxed zero. But unfortunately, solid doesn’t really work like you suggested. It goes only up to the $80,800. So in other words, in your example, in round numbers, the first $80,000 in capital gain is taxed at zero. OK. The next amount of capital gain from $80,000-$500,000 is taxed 15%. And then everything above $500,000 is taxed at 20%. Plus, once your adjusted gross income gets over $250,000 for married, $200,000 single, you have to pay an extra net investment income tax of 3.8% for capital gains and interest and dividends, not passive income.

Joe: I have a follow up question on that. So let’s say if that is true. Saul has zero income. He is $300, and I don’t know if Saul is single or married, but let’s just assume he’s married and has a standard deduction of $25,000.

Al: Well, he says, I understand the brackets for married filing jointly. So we’ll go with that.

Joe: Alright. I’m going to assume Saul is married. I wasn’t at the wedding, so I can’t confirm or deny.

Andi: We need proof, Saul.

Joe: Yes. So the requirement, we need wedding photos.

Al: We need this verified. Can you send over your marriage license with the question please.

Joe: So he’s got a $25,000 standard deduction. So in reality, his taxable income is negative $25,000.

Al: That’s true.

Joe: So does capital gains work on the taxable income or adjusted gross?

Al: Taxable income.

Joe: So there’s another $80,000 plus the negative $25,000 that he would sell that would be tax free?

Al: Yeah. So that’s a really good point. In other words, you could have $105,000 of income with capital gains because you get a $25,000 standard deduction. Your taxable income is $80,000, which is still in the lowest to ordinary income brackets, which means your capital gain is taxed at zero. That’s accurate.

Capital gains tax and how it works with ordinary income tax is a frequent source of confusion for YMYW listeners. If you’re one of them, click the link in the description of today’s episode in your podcast app to go to the show notes and check out “Capital Gains vs. Ordinary Income Tax Explained”, YMYW episode 325, to learn more. The Ultimate Guide to Roth IRAs is also there for your downloading pleasure, to help you make sense of Roth IRAs vs. Roth 401(k)s, how conversions and contributions work, and why the fellas think Roths are such a big deal. The podcast show notes is also where you can Ask Joe and Big Al On Air any money questions, have them to spitball about your financial situation, or tell us what you think of the podcast. And hey, if you feel like you’re getting something of value out of YMYW, do us a favor and hit the share button there at the top of the show notes and tell someone else about it – that’s the best way to say thanks. 

Can You Contribute to an IRA While on Unemployment? (Jim, Santa Cruz)

Joe: “Hello Andi, Al and Joe calling with a couple of questions about the effects of unemployment compensation and IRA contributions. 62 year old (Jack) owned a business that was decimated by COVID. Jack received $15,000 of Unemployment Assistance in 2020-2021,  one of which the first $10,200 is tax exempt. He had no other income during the year. Fortunately for Jack, he is married to the awesome Diane. 

Andi: Jack and Diane.

Al: That is fortunate. 

Joe: “Who is also 60 years old and had earned income of at least $14,000 in 2021. Jack and Diane want to make the maximum IRA contributions for 2021. Is Jack eligible to make the IRA contribution? If so, what is the maximum allowed”? Yes, Jack is eligible. He’s not eligible based on his unemployment compensation. He’s eligible based on Diane’s income. It’s a spousal IRA contribution. So Jack and Diane are married. This is really cute, by the way. 

Andi: Did you just figure that out, Joe? A little ditty about Jack and Diane.

Joe: Yes, I did.

Al: Yeah, a little Mellencamp. Even I knew what that one was.

Andi: Nice! 

Joe: So it’s a spouse, you can make an IRA contribution. If Jack is not working, Diane is working. As long as they have enough income to make contributions for both, which is $14,000. $7000 apiece. 

Al: Yeah, that’s right. If Diane only made $10,000 then you could put in only $10,000 between the two of you. However you want to do it $7000 and $3000, $5000 and $5000, whatever you want to do. 

Joe: Question number two is “Can Diane make a spousal contribution on Jack’s existing IRA? Or is a new IRA required for spousal contributions”? OK. Diane has the income, so Diane is going to make her own contribution based on her own income. Jack is going to make the spousal contribution. The spousal contribution will go into his own IRA. He doesn’t have to set up a spousal IRA. 

Al: Yeah and the check does not have to come from her. She’s got income. It just has to go into your IRA. Any IRA that you have will do if you don’t have an IRA, then set one up.
But you know, Joe, I was thinking one thing… 

Joe: But Diane has to set up her own as well. Individual retirement accounts. There’s no joint accounts. 

Al: Correct. That’s right. Each have their own. But I’m thinking reading between the lines. If Jack didn’t really make any money to speak of and not expecting in 2021, and if Diane only made $14,000. Why not do a Roth contribution. The IRA deduction isn’t going to help you that much. 

Joe: Very good.

Al: You like that?

Joe: I love it. Alright. Thanks, Jim, from Santa Cruz. Is Jim a teacher?

Al: Could be. 

Joe: You know, because of the whole storytelling here. 

Al: Yeah. He’s good at that. Actually, I’m going to be up in Santa Cruz in a couple weekends. 

Joe: Why don’t you guys hang out and have some tea. 

Al: I don’t know. He didn’t say what he drinks, so… 

Andi: That’s right. For as many times as Jim has emailed us, he hasn’t told us what he drinks yet. So Jim, get on that, please. 

Do Reinvested Dividends in a Roth IRA Count as Contributions? (John, Abilene, TX)

Joe: “Hi Joe, Grande Al and Andi. John from Albeline”.

Andi: Abilene.

Joe: I remember Abeline John. “We’ve got a Roth scenario question and one fun question”. Al: Oh, can’t wait for that. 

Joe: Exciting stuff. Alright. We got the wrong scenario question. “If someone is under 59 and a half and has $1000 in monthly dividends from one stock and uses those dividends to buy different stocks within the Roth. Is this considered a contribution or is this just regular dividend distributions from the Roth”? So if I understand John’s question, he has dividend paying stocks inside the Roth and that dividend is kicking out dividends and he’s just repurchasing the stock within those dividends does that count as a contribution inside the Roth. The answer’s no. 

Al: Yeah, it’s just an investment inside the Roth. 

Joe: Capital investments grow. You can have a dividend, you can have interest, you can have capital gains. So all 3 in the Roth is tax free and it doesn’t count as a contribution. It’s cash dollars that you’re putting from your checking account and depositing into your Roth IRA would be considered a contribution. If these dividends are sitting in a brokerage account and you’re using the dividends from an outside brokerage account to go into your Roth IRA to buy shares of stock you have in your Roth.Then yes, that would be treated as a contribution. But if the stock is inside the Roth, then the answer is no.

What Would Ya’ll Do With Lotto Winnings? (John, Abilene, TX)

“Second question is a fun lodo question”.

Andi: Lotto!

Joe: “Fun lotto question”. What’s a fun lotto question?

Al: Well, just read it. See if it’s fun.

Joe: Al, I’ve got a fun lotto… What? I’ve never heard the expression of fun lotto. Al: Let’s see what he asks. We’ll see if it is fun.

Joe: Oh, it’s like a lottery question.

Andi: Yeah, there you go!

Joe: Alright. I should prepare for this more.

Al: Or you could answer the lodo question. It’s loaded. Joe: OK. Currently, the Mega Lotto is $293 million.

Al: Oh, that’s fun.

Andi: That’s fun. See!

Joe: This question is so fun. Well, you guys are having fun. Texas Lotto says the cash value would be $214 million for Texas residents. What would the 3 of all of you do with the Lotto winnings?

Andi: You say, y’all, he’s from Texas.

Al: Of course.

Joe: What? What did I say?

Andi: 3 of all of you.

Joe: Oh, 3 ya’ll. 3 you all.

Al: You’re from Minnesota. You don’t say, y’all.

Joe: “Joe, you’re beer this week to try is Hofbrau.

Andi: Hefeweizen.

Joe: I know what hefeweizen is. Hofbrau?

Al: That’s a brewery in Munich, Germany, which I’ve been to.

Joe: Oh wow. Look at you big…

Al: They also have one in Las Vegas. Next time you’re there.

Joe: Hofbrau. Yeah, in Vegas? I don’t think I’ll be in Germany or Vegas anytime in the next…

Andi: I think you can probably get Hofbrau at the grocery store too.

Al: Maybe, maybe.

Joe: “Andi, do you spell your name with a Y or an I”?

Andi: That is A, n, d, i

Joe: That is a great question, because a lot of people write in Andy, like a boy’s nickname.

Andi: Yep.

Al: Andi with an i.

Andi: Yes, that is it. No e, no y.

Al: So what would you do? What would ya’ll 3 do with the Lotto winnings?

Joe: What would you do Big Al? You already got the biggest wallet out of the 3 of us.

Al: I’d have to get a bigger wallet wouldn’t I?

Joe: Yes, you would.

Andi: For $214 million. Yeah, I think so.

Al: Hmm. Well, I don’t know. I already got what I need.

Joe: I know exactly what I would do.

Al: What would you do?

Joe: Andi, what would you do first?

Andi: I would take care of all of the financial troubles for everybody. All of my loved ones, everybody I care about. I would just take care of them.

Al: Then everyone is going to come after you for the rest of your life.

Andi: Well, no. I’m not going to tell anybody else. I’m just going to be like, here’s the house. I’m going to do the Oprah thing. Here’s a house for you and a house for you. Take care of everybody.

Al: Uh-oh. She’s got a pile of money.

Andi: All the nearest people to me.

Joe: I’ve got to change my answer because now I’m going to sound selfish.

Andi: No, come on. Let’s just hear it.

Joe: I’m going to feed the children.

Al: That’s right, Africa. It’s all going to African kids.

Andi: Just the people closest to me. That’s different.

Joe: Farm Aid or are we going to have Andi Aid?

Al: So you’re buying a super cool Corvette or something?

Joe: No, I would build my own golf course.

Al: Oh, well, that’d be fun.

Joe: Yeah, and I would have a really cool bar that serves Hefeweizen or Hofbrau.

Al: Yeah, that’d be fun.

Joe: A little Jameson. What was that Jameson Camstack?

Andi: Jameson Caskmates Stout.

Joe: Yep. Some Corona. And what was the other one?

Andi: Then you’ve got to have the Swing Lube and the Landshark.

Joe: Swing Lube, Landshark and then we have, depends on if it’s winter. The other guy likes wine in the in the summer or winter?

Al: Oh yeah, that’s right. Well, what would I do? I think I’d buy an ocean view home in Del Mar. That would be my selfish thing. I’ve already got the place that I want for a second home in Hawaii, so I’m good there and the rest of it? Well, first of all, the tax rates, probably in Texas, federal rate’s going to be 37%, so more than a third of it goes away, right?

Andi: Oh, yes, but I should mention, if I won the Texas Lotto, the first thing I’d do is move to California.

Al: Well, after you pay the no state tax?

Andi: Right, exactly.

Al: Got it.

Joe: We’re not making this fun anymore. Big Al is talking about taxes. Andi’s making me feel guilty.

Al: I told you I would buy an ocean view home in Del Mar.

Joe: What’s that 2 million bucks? And then you got $296 million to go.

Al: Well, I’ve got to pay 1/3rd. Or more than 1/3rd for taxes, so I end up with whatever that is, $150 right? And then I buy the 5 or 10 million dollar home? Then I’d have one heck of a life with the income on that. Plus, I would travel more and I’d give a lot more to charity.

Joe: I would like Grove 23. It’s Michael Jordan’s golf course. I would build that.

Al: Okay, right, where at?

Joe: I don’t know yet.

Al: You have to think about it. Want to go to like Scottsdale or somewhere like that? Joe: No, that’s super hot. It would probably be somewhere close to here.

Al: Palm Springs?

Andi: It’s super hot.

Joe: I mean, somewhere in Southern California. And then I would feed all the children.

Andi: Sure, you would Joe.

Podcast Survey Winner & Trivia Question

Joe: Hey, we had a podcast survey. Did you realize this?

Al: I did realize that because you told me.

Joe: We like to survey our listeners just to see, you know…

Al: What they think?

Joe: Yeah, what they think.

Al: Thumbs up? Thumbs down?

Joe: Yeah, are there other topics they would like?

Al: Two thumbs up? Two thumbs down?

Joe: Yes, we’re getting a lot of nice one stars. Those are my favorite.

Al: Well, at least they’re honest.

Joe: Yes, honesty is the best policy, and we have a winner! We bribe people to fill this thing out, so I want to congratulate Miss M. for filling out Andi’s survey.

Andi: We sent her a $100 Amazon gift card.

Joe: $100 Amazon gift card. Yeah, that’s pretty good.

Andi: Straight out of Big Al’s pocket. Big Al’s big Wallet.

Al: Yeah, my wallet felt a little bit smaller last week.

Joe: $100…

Al: What would you do with that?

Joe: Amazon gift card?

Andi: It would go towards his golf course.

Al: Yeah, that’s true. Something golf related.

Joe: Yeah, I’d probably just buy some more golf balls. Maybe? I don’t know. That’s usually what I get on Amazon.

Al: Golf stuff?

Joe: Golf balls.

Al: Just golf balls?

Joe: Yeah, normally that’s usually what I get. Golf clubs, golf balls, maybe golf tees. Are you a big Amazon shopper?

Al: Yes, well, I mean, Annie is.

Joe: You get boxes every day?

Al: Not every day. But I’ll tell you what, during COVID we almost did. That was like, the thing to do. You couldn’t go out so might as well just get boxes.

Joe: Just binge on key purchases.
Al: Every day you’re opening presents. Wonder what this is?

Joe: Alright, Miss M. “Thank you for the amazon.com gift card. I didn’t think I’d win anything given my luck, but wanted to share my thoughts on the survey because I truly enjoy listening to the podcast. Thank you, Miss Andi, Big Al and Little Joe. Keep up with the arrogance. It makes the show more interesting”. I find it’s like a quiet confidence, thank you.

Al: That’s what you call it.

Andi: Quiet, really?

Al: Other people apparently call it arrogance.

Joe: They just need to get to know me just a little bit longer. Gotta let it breathe.

Al: Like a fine wine, that’s what you’re talking about?

Joe: Just gotta let it breathe. Next thing you know, they’ll be like, I’m, getting a fridge. Al: This guy, I wasn’t so sure about him, but he’s got a big heart.

Joe: I love this guy! This guy’s hilarious.

Al: He drinks Coors Light.

Joe: He’s just a regular Joe. No pun intended. “And I appreciate your straight talking honesty. Love the derails too guys. Miss M”. Well, thank you. Miss M. We really appreciate all of our listeners. Andi, wonderful job. Thank you for doing the survey and thank you for keeping us in line here.

Andi: I wanted to mention the fact that at the very end of the survey, there’s the trivia question of how many five star reviews does YMYW have on Apple Podcasts? And nobody got it right. The answer is, there are 51 five star reviews. There are also 3 one star reviews.

Joe: We have more than 50 reviews!

Andi: Reviews, there is a difference between reviews and ratings. So yes, you can actually go in and go through the effort of laboriously counting all of the five star reviews, but nobody bothered.

Al: No one put an answer on that one?

Joe: Don’t we have like 200? What’s the number?

Andi: We have 234 five star ratings. Of those, 51 of them are five star that include reviews. Al: Where they actually said something. Got it! Not just stars.

Andi: That’s correct. And of course, we’ve also got a bunch of 4 star, 3 star, 2 star and then 11 one star ratings.

Al: So, I’m giving you a one star because the host is arrogant. Joe: Yeah, that’s what you do.

Andi: That was the most recent one.

Joe: And they just blow us up.

Al: I’m not listening to you.

Joe: It’s perfectly fine.

Al: It’s good you can change the channel.

Joe: There’s thousands. There’s 500,000 podcasts.

Al: Right, It’s like everyone has a podcast.

Andi: Actually there’s 2 million something.

Al: 2 million?

Andi: Yeah.

Al: It’s amazing. We’re in the top million. We’re actually within the top 200 of financial podcasts in San Diego county.

Joe: In this office.

Al: Yeah, right.

Joe: We have other advisors doing podcasts too.

Al: They’re higher ranked than we are.

Joe: Alright. Thank you. We will see you guys again next week. The show is called Your Money, Your Wealth®.

_______

California BAJA, hand signals, Volvos, and bad drivers in the Derails at the 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.