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 [...]

Andi Last

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

Published On
November 19, 2019

Will a Roth IRA conversion impact your Social Security benefit, or will your Social Security have an impact on how much you can convert to Roth? Plus, today we’re talking Social Security spousal and survivor benefits, Roth IRA conversions, earned income, ordinary income, modified adjusted gross income and taxable income. We’re also talking about taking this job, shoving it, and doing Roth conversions all the way to Tennessee!

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Show Notes

  • (00:33) Can I Take Social Security While Working and Put it in My 401(k)?
  • (05:46) Is the Survivor Benefit Affected by Taking Social Security Early?
  • (10:20) How Will Not Working to 70 Affect the Social Security Benefit?
  • (16:01) Will My Roth Conversion Be Affected By My Social Security Benefit?
  • (23:47) Should I Do a Roth IRA Conversion and How Do I Do It?
  • (32:24) Would a Roth Conversion Be Included in AGI?
  • (37:32) Can I Roll Pre-Tax Money Into My IRA and Roth 401(k) Money Into My Roth IRA When I Quit?
  • (40:05) Is it a Good Idea to Do Roth Conversions When We Downsize and Live Off the House Proceeds?

Resources mentioned in this episode:

LISTEN: Spousal Social Security Claiming Strategies You Need to Know with “The Goddess of Social Security” Mary Beth Franklin

LISTEN: Social Security Changes in 2019

FREE DOWNLOAD: Social Security Handbook

LISTEN | YMYW #241: Answers to Your Top Roth Conversion Questions

YMYW made the list of Best Retirement Podcasts for 2020 at FIPhysician.com!


Today on Your Money, Your Wealth®, we’re talking all about Social Security spousal and survivor benefits, Roth IRA conversions, and whether a Roth conversion is impacted by your Social Security benefit or vice versa. We’re talking earned income, ordinary income, modified adjusted gross income and taxable income. And we’re talking about taking this job, shoving it and doing Roth conversions all the way to Tennessee! I’m producer Andi Last, and here are Joseph “Chip” Anderson, CFP® and Big Al Clopine, CPA, who will be vacationing in New Zealand during parts of this episode.

00:33 – Can I Take Social Security While Working and Put it in My 401(k)?

Joe: Flor, from Canoga Park. Canoga.

Al: Canoga.

Joe: Canoga. I knew that. Dude I practiced it.

Al: Not enough.

Andi: Which almost guarantees you’ll get it wrong.

Joe:  Canoga. I don’t even know where the hell Canoga Park is.

Andi: I think it’s L.A. area.

Al: It’s L.A.

Joe: Southern California. All right Flor. He writes. “Hi, Big Al and energetic Joe”.

Al: That’s pretty good.

Joe: Energetic Joe.

Al: Do you like that acronym?

Joe: Not at all.

Al: Describe you? No?

Joe: No

Al: It’s accurate.

Joe: Sure.

Al: Ya think?

Joe: Just passionate.

Al: Passionate. Yeah.

Joe: So Flor, he writes “I just turned 62 and still working. I’m thinking about filing for early retirement benefits while working. I also think about increasing my 401(k) contribution up to about the same amount I would be receiving from my retirement Social Security. I sincerely need your opinion. Thank you.” Sincerely. It was like wow. “Thank you so much. And more power to you all”. Power to the people.

Al: That’s right.

Joe: So I like where Flor’s head’s at but it’s not going to work for Flor.

Al: Let’s see why you say that.

Joe: So what Flor is thinking about doing is that he turned 62, so when you claim Social Security benefits you can claim as early as 62 or as late as age 70 or any month or day in between the two. And so it sounds to me is that I’m going to claim my benefit at 62 while he’s still working is the key component of this whole question. So he wants to take the Social Security benefit that he’s going to receive, he’s going to take it early and receive a reduced benefit. So he’ll receive about 75% of the benefit by claiming early. And he wants to take that benefit in just jam it into his 401(k) plan and so he can boost up his savings a little bit. The problem is that there’s an earnings test when it comes to Social Security benefits. So Flor, if you’re making more than let’s call it $20,000 a year in your quote/unquote “working”, they’ll start taking the Social Security benefit back from you. So every $2 you earned over what is at, $18,700?

Al: It’s $17,000 and change, call $18,000.

Joe: $18,000. So any dollar that you earn over that or it would be $2 you earn over that they take $1 back from your Social Security benefit. So they don’t want exactly what you’re trying to do to happen.

Al: It’s true.

Joe: So this is the Flor rule.

Al: The Flor rule. That’s good. Renamed. And that happens until full retirement age. Let’s see if you’d just turned 62. So did I. We’re the same age. So I happen to know my full retirement age is 66 and 6 months. So that’s what yours is too Flor. So I’m assuming anyway. Give or take. You could be 8 months whatever but at any rate. You have to wait till full retirement age to receive your benefits while having earned income to be able to keep those benefits. And what happens you’ll be rolling right along that first year thinking this is great. And then Social Security finds out you’ve made too much money they’ll want it back. And they won’t give it to you back. They’ll just reduce your future benefits.

Joe: So let’s say Flor works this year at age 62, claims his benefit, so let’s just assume Flor makes $100,000 a year. And his Social Security benefits call it $25,000 because he wants to take that $25,000 and put it into his 401(k) plan. I’m just assuming here. So then Flor is gonna make $125,000 this year. He’s got a $100,000 of wages, $25,000 Social Security benefits. He takes the $25,000 Social Security benefit, throws it in the 401(k) plan and then he’s boosting up his savings. So next year let’s say he retires and then he’s looking for that $25,000 of income from Social Security. But then he files his tax return and the Social Security benefits says you know what Flor, what were you doing? You made too much money. So now that $25,000 Social Security benefit, they’re going to withhold it until they get their money back. So be careful of this strategy. So sincerely, our opinion is if you make more than $20,000 a year do not claim your benefit because they’re going to take it back.

Andi: $17,640.

Al: There you go.

Joe: $17,640. And you can wait till the year of your full retirement age because his full retirement age is going to be 66 and 6 months. So he can make up to about $35,000, give or take. What is it? Once he reaches that full retirement age?

Al:  I believe it’s $42,000. $42,000. I think.

Joe: Nope. It’s $35,000.

Al: $46,290.

Joe: Is it $46,000? OK.

Al: $32,000? Give or take.

Joe: We’re good. So then he can make up the $46,000 that 6 months before he reaches his full retirement age. Then every $3 earned they take $1 back.

Al: So that’s pretty clear Flor, don’t do it. Good thinking, but it doesn’t work.

Joe: Sorry for the bad news Flor.

05:46 – Is the Survivor Benefit Affected by Taking Social Security Early?

Joe: We got Susan from Escondido. She actually writes to you.

Andi: She sent this one directly to me. People have figured out that if they want to get an answer they just got to send them to me.

Joe: Well yeah, so send them to Andi. “Hi, Andi. First I want to say I love the show and the podcast, they are very helpful. I have two generic questions for Joe and Al”. All right Susan. Let’s see what you got here. “Number one. If a wife takes early retirement at 62 and receives a 25% reduction in her Social Security benefit for her lifetime, does that affect the survivor benefit if her husband was to pass away before her? Will she receive a 25% reduction in the survivor benefit as well?” Susan, what do you have in mind here? She wants the cash now it sounds like. She’s like the old man kicks the bucket, am I going to get screwed? Because I want the money now. I don’t want anything to happen to it because I’m telling him to push this thing out because when he dies I want a fat benefit. But if he passes is she going to get a reduction? So first of all here’s how the survivor benefit works. If you’re married when a spouse dies, the surviving spouse takes the higher of the two. So let’s say my benefit is $1500, my wife’s $3000. She dies. My benefit automatically turns to $3000. So what Susan is asking though how about if I take my benefit at 62? So then my husband dies because I received a 25% permanent haircut on my Social Security benefit, is that survivor benefit going to be reduced? The answer is Susan, no it will not. Even though you claim your benefit at age 62 that is your benefit on your record. The survivor benefit is a completely different benefit. So yours would not be reduced. Your benefit is going to be what your husband’s benefit is when he claimed his benefit. If he claims his benefit early at 62 he is going to receive a 25% permanent haircut. If that benefit is larger than yours, your benefit would then turn into that benefit. But if he waits until age 70 let’s say or whatever it is because you took your benefit and you received your benefit on your record early the survivor benefit is not going to be reduced.

Andi: So the survivor benefit will still be based on the full retirement age benefit?

Joe: Yes. No, it’s based on the survivors when he claimed.

Andi: The survivors. OK. What his-

Joe: what his benefit is. So let’s say their benefit is $1000 at full retirement age. She claims her benefit early at 62 so she receives $750. He claims his at age full retirement. So then he dies.

Andi: After he has started claiming his benefit.

Joe: Yes. Or if he doesn’t then she could claim the survivor benefit as early as age 60. But I think for this question, she’s asking “I’m taking my benefit early”. He is going to wait hopefully or maybe he’s not but his benefit is larger. But his benefit is larger than hers. She doesn’t want if he dies for the survivor benefit to also be reduced. So she claims hers at age 62 at a reduced benefit of $750 his benefit is $1000. They’re living happily ever after. Then all of a sudden he dies. Her benefit will now go to $1000. If he waited till age 70 and now his benefit is $1300, she took hers early at 62 and has $750. He dies, her benefit goes to $1300.

Andi: Got it. OK.

Joe: Does that make sense?

Andi: Yep.

Joe: So it’s going to be the higher of the two in a sense. So that’s why the person with the larger benefit, male or female, should extend their benefit as long as they can just to protect the surviving spouse.

Andi: Got it. She’s got a second question.

10:20 – How Will Not Working to 70 Affect the Social Security Benefit?

Joe: OK. “If a person retires at age 68 but does not claim Social Security until age 70, they will receive an 8% increase per year for the two years in the year that they do not claim. However, with that working for those last two years will that be negative for the Social Security calculation as there will be no income for those last two years? Will that reduce the Social Security entitlement? Or would it be better to work until age 70? Or will there be no difference?” Susan I already know what the heck you’re doing here. You’re retiring or you’re claiming your benefit at 62, your husband now is-. She’s like I got some general idea questions here for you. My neighbor came over and we were chatting about-

Andi: I’m asking for a friend.

Joe: Yes, asking about Social Security. So if my neighbor takes it at-right? So the husband now, he’s working till 68 so she’s going to-, I wonder if her husband listens to the show. Because she probably doesn’t want him to listen to the show. Because if he works until 70 or 68 it’s probably not going to affect the benefit. But you can tell him it might. If you want him to continue to work.

Andi: If you want to keep working and stay out of the house.

Joe: Yeah, if you want him out of the house Susan. Because Social Security benefits they run their benefits 30 years, 35 years of work history. So it depends on-

Andi: It’s your highest of 35 years of work history? Is that what it is?

Joe: Well yes and no. Let’s call it 30 years. And so when you look at their highest years-. It’s indexed with inflation. If you only had 20 years then they’re going to put the remaining years as zeros. So I’m guessing if he’s worked at age 68, he’s already-

Andi:  Put in his time.

Joe: Right.

Andi: So he’s doing those extra, if he was to work two more years at say he’s at his highest income level, then those two years would replace any lower-earning years, if there are any.

Joe: Correct. And so it could change it. It’s never gonna be a negative impact. It’s only going to be a positive. Even if let’s say he claimed that 68 and continue to work. He could claim at 68 and if he worked part-time he didn’t make that much money or maybe he-

Andi: Well if he’s 68 and he’s over full retirement age, so he can make as much as he wants.

Joe: So sometimes people say if I continue to work after I claim my Social Security benefits but I make less money than I was, is that going to reduce the benefit? Answer is no. If you make more and it replaces a lower year then the answer is that a will only increase your benefit. It’s 35 years.

Andi: I believe so. I think it’s 35 years. Your highest-earning 35 years.

Joe: Why are you throwing me off there?

Andi: Sorry.

Joe: You said 30. Did I-?

Andi: No, You said 30. I said 35. Maybe you’re right. Anyways, if he’s worked at least 30 years-

Joe: No, it’s driving me nuts. I know for a fact it’s 35 years.

Andi: OK.

Joe: I think. So Susan hopefully that helps you out. So take your benefit at 62. You’re gonna receive-

Andi: Highest 35 years.

Joe: Yes. OK. Thank you. I know 40 had something to do with it.

Andi: It’s 40 quarters.

Joe: But there was like 40 years at some point, this is way back. I don’t know. I was reading the history of Social Security a couple of years ago for some reason that had something to do with it. So Susan there you go. So you claim your benefit at 62. Take the lower benefit. Have your husband work until 70, you get the higher benefit. And then when he passes because you made him work those extra two years, then you’re gonna get the higher benefit.

Susan, thank you for your questions and your patience in getting the answers! If that was clear as mud you know you can always email me back. Before we get to more listener emails, I want to talk about what you get when you visit the YMYW podcast show notes each week. First on the page, you’ll see a video, because you can listen to the entire YMYW podcast on YouTube if you so desire. After that you’ll see links to subscribe to the podcast, the newsletter, the YouTube channel, follow us on Facebook, Twitter or LinkedIn, and you can click Ask Joe and Al On Air to send us your money questions, complaints, compliments or stories via voice message or email. After that you’ll see each of the questions that are answered in that episode. If you click on the time listed next to any of those questions, you’ll go straight to that part of the discussion both in the episode, and in the transcript, so you can read along. That’s especially helpful when the conversation gets confusing, as we all know it often does on YMYW. Next will be all the free financial resources mentioned in the episode. For example, in today’s show notes, you’ll find out how to maximize your lifetime income from Social Security, how to incorporate your Social Security benefit into your overall retirement strategy and more when you download the white paper, 6 Critical Social Security Facts Retirees Must Know. I’ve also posted our previous episodes on Spousal Social Security Claiming Strategies, Social Security Changes in 2019, as well as the Social Security Handbook. After that is the transcript of the entire episode. So now, how do you get to the show notes? Two ways: if you’re on your phone, click the link in the description of today’s episode in your podcast app – that will take you to the show notes. If you’re on a desktop computer, visit YourMoneyYourwealth.com and click “Listen to Podcasts,” then click the episode you’re interested in to get to the show notes.  Now let’s talk about Social Security and Roth conversions.

16:01 – Will My Roth Conversion Be Affected By My Social Security Benefit?

Joe: Diane.

Andi: And she’s living the good life in San Diego.

Joe: She’s living the good life. ” Hey, guys, crazy for your podcast”. Well, I’m crazy about you Diane. “I Just listened to show 241.” 241. 241? Is that what that is?

Andi: Answers to Your Top Roth Conversion Questions.

Joe: Wow. That was a landmark show.

Andi: It was. Tons of people were listening to that one.

Joe: Number 241. “Since I’m looking to convert my traditional IRA to a Roth IRA by year-end.” We caught you just in time, Diane. “But I have a special situation that no one seems to cover regarding IRS limits”. Let’s see if I can answer this. I’m 60, widowed and retired, in the 12% tax bracket and collecting a survivor’s benefit. So that means I cannot earn more than $17,640 annually or I have to start paying back my benefit. I understand that converting triggers a tax event but does it get recorded as ordinary income? The benefit I receive annually totals approximately $13,000. Does that mean I can only convert $4640? Jeez, that stinks. Please help me figure out how much I can convert and keep my survivor benefit. Much appreciated”. A couple of things Diane. You’re collecting a survivor benefit so we just went over survivor benefits with our good friend Susan from Escondido and she is collecting that benefit and she’s 60. So that means she’s in what is called these earned income thresholds. So if you’re under full retirement age there’s a certain amount of money that you can earn without having a reduction in your Social Security benefit. Which she knows. So Diane goes “$17,640 annually.” So what that means is that any dollar earned over or every $2 earned over $17,640 annual like $1 goes back. So she’s like I don’t want to give any of this money back because my benefit is about $13,000 I’m living off of that. But I do want to do some Roth conversions to get money into a tax free environment because I’m in a fairly low tax bracket. Well the good news is Diane is that earnings thresholds for Social Security is based on earned income, not ordinary income. So two different things here. Earned income so that’s wages. It’s self-employment. That’s items that you are earned and putting money into let’s say the easiest way to explain it into Social Security FICA tax. So it sounds like you’re not working, $13,000 is coming in from Social Security and you want to do a conversion. Well, you can convert as much as you want. It’s not going to be included in that calculation to reduce your Social Security benefits.

Andi: That’s cool.

Joe: That is very cool. So if you want to convert $10,000, $20,000, $50,000, whatever, you can do that. But here’s the calculation that you need to be more focused on, not necessarily the triggering event that’s going to hurt your Social Security is but how much do you want to convert? What tax bracket are you in?

Andi: She says she’s in the 12%.

Joe: What tax bracket do you think you’ll be in? So if you want to convert to the top of the 12% tax bracket? Do you want to convert to the top of the 22% tax bracket? So it really depends on kind of what your overall goals are. But let’s say the top of the 12% tax brackets roughly about $40,000. So I think that’s pretty cheap. So if you want to convert to the top of the 12% you’ve got $13,000 of Social Security income, but that’s probably not taxed. So how much money do you need to live off of? Because that conversion is not going to do the triggering event where it’s going to take money away from your Social Security. It’s going to make it taxable. Either 50% or 85% of it is now going to be subject to income tax. So the amount of tax that you pay on the conversion is going to be different because it’s all of a sudden- let’s say you’re paying zero dollars of taxes on your Social Security benefit. Now you’re adding dollars in these thresholds where your Social Security was tax-free and now 50% of it is now going to be subject to tax or 85% of it’s going to be taxed.

Andi: Now explain why that’s different.

Joe: Well it’s just a threshold. Back in the 80s, Reagan came in and was like when they first established Social Security they were no one will ever pay taxes on Social Security again. And then they’re like-

Andi: until you do.

Joe: Yeah. They’re like damn it we need some revenue, so let’s tax 50% of it. And then they said for the top 1 percenters, we’re going to tax you 85%.

Andi: We’re going tax 85% of your Social Security.

Joe: 85% of the benefit is gonna be subject to income tax. So it was a progression. It only affected the top 1% of the population when it comes to wages. And so that threshold is like $44,000 for married people, $34,000 for single people. And I wonder if that thing is going up next year? I don’t know. But married it’s $32,000-$44,000 is 50%, and then $25,000 to $34,000 for single. So that’s what you got to look at here Diane, is that when you start converting all of a sudden that $13,000, which could be tax-free to you, now $1 added of earnings is going to add $1.50 of income on your tax return. So the amount of tax- let’s say you think you’re going to just pay 12% on the conversion, it could be a little bit higher than that. So those are the calculations that you want to make sure that you are aware of. So good news is this:

Andi: You can convert as much as you want.

Joe: You can convert as much as you want. They’re not going to take anything back. No biggie. You’re good.

Andi: But they’re gonna tax your Social Security.

Joe: However, now yes, they’re going to tax the Social Security – if it’s not taxed, because you didn’t tell me any other income sources that you have. But I’m guessing because you already know the $17,640, it’s probably something under that, unless you have pension income or things of that nature. So good news, bad news here, Diane. Good news is that you’re not part of that threshold but it will be subject to income tax, but you already know that. You got to just run the numbers to see if it makes sense and I’m guessing, you know I don’t know. I don’t know anything about you but that you’re living the good life in San Diego. Well so are we, Diane it’s good to have you here. If you have more questions just gets write us back.

23:47 – Should I Do a Roth IRA Conversion and How Do I Do It?

Joe: Mary writes in from Los Angeles. “Good day Al and Joe”. All right. “I really love your show and I watch it over and over on the YouTube channel. I think you guys are funny and make investing and retirement planning fun. I’m 56 years old and stopped working for the company where I have my 401(k) and now just managing our rental income properties. According to my CPA, my husband and I can take out $50,000 from my 401(k) and transfer it to my personal Vanguard Trust Investment Fund since my income tax payment is very little. I’m thinking about doing a Roth IRA conversion instead. What type of form or documents do I need to complete? And what is the tax based on?” Well Mary, I think you’re on track there. So the CPA is taking a look at the tax return and noticing since you’re retired you have some real estate income, some of that might be sheltered through depreciation and you’re in a fairly low tax bracket. So take $50,000 out of the 401(k) plan and you’ll pay very little tax on that $50,000 because you’ll use up maybe your standard deduction the 10% to 12% bracket. I like to utilize those lower brackets and if you don’t need the income might as well get it out of the retirement account now while your tax bracket is low. But I’m with you. I think you should do a conversion if you don’t need the income to live off of. And I guess “what type of forms or documents do I need?” Well the easiest way to do this, is that it sounds like you have a trust account at Vanguard. I would open up a Roth IRA at Vanguard and I would open up an IRA at Vanguard. So then you’re consolidated in your overall investments. Roll your 401(k) from your company into the IRA at Vanguard. And then you just call Vanguard and say I want to move $50,000 from my IRA and move it into my Roth. Very, very easy. You could do it online. It’s very simple to do or you could say I want to move $50,000 from this account into this account. They do it all for you. Out of a 401(k) gets a little bit tricky. It’s because the 401(k) is not going to be able to talk to the Roth IRA. You’re going to say I want to do a $50,000 conversion from a 401(k) plan into a Roth IRA. You absolutely can do that according to the law but the transaction itself is just a little bit more complicated because then it comes directly out of the 401(k) plan. You’re probably gonna have to take possession of the cash. You’re gonna have a check in hand. It’s going to have to be made out correctly to your Roth IRA. So it’s like a rollover into your Roth IRA. If you only want to do $50,000 and you’re going to keep other money in the 401(k) plan. I don’t know. I do this for a living and we manage about $2,500,000,000 and that just seems cumbersome to me that I would hate to do all of that work.

Andi: That’s why you call somebody else and have them do it for you?

Joe: I would be like just put it in one place. If you don’t like Vanguard, go to Fidelity, go to Schwab, go to TD Ameritrade. I don’t know where ever you want to go, but I think consolidation is really key. You’re 56 years old. You’re going to work, or this money is going to grow for a long time. You’re probably going to do conversions for a long time. You probably want to do a few dollars each year. I would consolidate and so then you can just do it real quickly online. If you want to do it from the 401(k), then you’re going to have to fill out their forms from your employer and say I want to move $50,000. You have to open up the Roth IRA first at whatever custodian that you choose from. So let’s say if you do have a Roth already then you’re good. If you don’t, make sure you establish that Roth IRA, get the account number. And then on the paperwork, you’re going to say I want to move $50,000 out, don’t withhold taxes, versus move $50,000 into this.

Andi: OK so first step is to transfer the entire 401(k) into a traditional IRA.

Joe: That’s what I would do if I was Mary. But some people are they’re like no I really like my 401(k). Well if that’s the case we’ll keep it in the 401(k) and then just that the paperwork and everything else is just kind of more of a pain. But I guess whatever Mary wants to do because she doesn’t have to roll it. She could keep it in the 401(k) plan. But then you say I want to move $50,000, let’s say she’s got $500,000 in her 401(k) plan, she’s only moving $50,000 out. So now you’re filling out all this paperwork and then maybe next year she wants to do another $50,000.

Andi: So she’s gotta do the same thing every time.

Joe: Yes and then the money comes to her directly into the account. It’s just- I don’t know. I think there’s more room for error that way than if I roll my 401(k) into an IRA. So I have an IRA at XYZ custodian. I have a Roth IRA at XYZ custodian. My trust account at X- Everything’s there. I’ve put everything online and I see all my accounts and then I say account number XYZ, I’m moving $50,000 into account number LMNOP.

Andi: Now let’s talk about what happens if she does have that check written to her and it takes her a while to get it to do the transfer and everything.

Joe: Well it depends on how they make the check out. The checks need to be made out to the custodian. So it’s got to be made out to “Fidelity for the benefit of Mary from Los Angeles”. If it’s made out to Mary, it blew up. She’s done. It’s a distribution. You cannot take a distribution of $50,000 and put it into a Roth IRA. It’s a taxable event. The thing blew up on her. It’s like Humpty Dumpty fell off the cliff and you can’t put them together again. The egg is broken you can’t put it back. So it’s like putting cream in the coffee and trying to take the cream out. Because this is where errors and mistakes happen when people start messing around with their retirement accounts because they want to utilize strategy, which is phenomenal. So they hear snippets on our radio show or podcast or whatever and then they try to act on it like, how many emails do we get? They’re like I think I screwed this up. So Mary, just be careful with what you’re doing there. It’s fairly easy but still if you make a mistake the $50,000 is now taxable to you. It’s going to be taxable to her regardless but she’s going to pay the tax without getting it in the Roth. I guess is my point. So “what forms or documents do I need to complete and what is the tax based on?” Well, the tax is going to be based on your taxable income. So you have to look at line 10 on your tax return. But your CPA might have already done this for you and they might have run a tax projection. So then you’ll look at what tax bracket am I in and if they gave you that $50,000 number. Make sure you’ve got to find out what that $50,000 is based on. Maybe it’s the top of the 12%  tax bracket. Maybe it’s the top of the 10%. Maybe it’s the top of the 22%. I don’t know. So you have to look at your tax bracket versus the tax tables of the IRS. And so you add your taxable income to the amount of money that you convert. That’s going to tell you what marginal bracket that you’re in. And then that’s going to determine what tax that you’re going to pay. Do not withhold the taxes. Just make sure that you pay the taxes next April. Or you might want to make an estimated payment as well at the end of the year if you’re converting $50,000.

Since everyone’s financial situation is a little different, you can get more personalized help by clicking the Free Assessment button at YourMoneyYourWealth.com, Schedule a no-cost, no obligation two meeting financial assessment with a CERTIFIED FINANCIAL PLANNER™ here at Pure Financial Advisors, that’s the firm that presents the YMYW podcast. We have offices in Southern California for viewers and listeners like Mary, but our advisors can also meet with you online via web meeting no matter where you are in the country. If you just want to send in your Roth conversion questions – or any money questions for that matter – go to the podcast show notes and click Ask Joe and Big Al On Air.

32:24 – Would a Roth Conversion Be Included in AGI?

Joe: Let’s go with Chip.

Al: Chip. That’s a great name.

Joe: I love Chip.

Al: Yeah me too. From Maryland.

Joe: He’s from Maryland. “Hello, gentlemen and Miss Andi. Thanks so much for all the wisdom you have shared. I listen often but I have a question that I may have missed or hasn’t been asked yet”. So Chip asks. “I rolled a 401(k) from my old company last year into a traditional IRA. This year I’m looking at rolling it into a Roth. Would the amount I convert be factored into this year’s AGI? If so, this would push me up to the partial contribution range for the yearly $6000 based on my age contribution? I’ve already contributed the full amount so I don’t want to go forward with the conversion until I’m sure. I do plan on paying the tax bill with outside finances. I am 15, 20 years from retirement and this account would not be my first to draw from. I do expect to be in the same tax bracket that I am currently but expect the brackets and rates to be higher at the time of retirement than they are currently. Other than this taxable IRA, I have a 457 in a brokerage account in addition to the existing Roth account. I will also be receiving a pension. I believe this makes sense but maybe I’m overthinking it. Thanks so much for the entertaining education”. All right Chip. So he rolled his 401(k) from an old company into an IRA. Now he’s thinking about converting some of that or all of it to a Roth.

Al: Which you’re allowed to take your 401(k) money and then roll it to an IRA. There’s no taxation there. So far so good.

Joe: And so the question first was will the Roth conversion, is that going to be included in your income? And the answer is yes, it is, of course, going to be added to your taxable income, you gotta pay the tax. But what you’re missing, it’s MAGI, modified adjusted gross income.

Al: M-A-G-I. So it’s not included in modified adjusted gross income for your Roth contribution limits so you can go ahead and do the conversion. That doesn’t count for that limitation that we just talked about, $193,000 for married, $122,000 for single.

Joe: So let’s say if he’s single and then all of a sudden he does the conversion and pumps them up a past that $122,000, they don’t include the conversion in the modified adjusted gross calculation so it doesn’t affect your IRA contributions.

Al: So to be very clear it’s included in adjusted gross income, you will pay income taxes on it but you can still do your Roth contribution as long as you are under those limits without the conversion.

Joe: So there’s something that’s called modified adjusted gross income. So certain things in income and whatever they modify the adjusted gross for you to participate in certain things it doesn’t include, or-

Al: Because there are various phase-outs and if you Google that you will get more confused than anything. Because there are about 10 different modified adjusted gross incomes, depending upon what they’re talking about and what the limitation’s for.

Joe: Because the IRS basically doesn’t tell us what you can do, it tells us what we cannot do. It doesn’t lay a roadmap. So if you’re looking to do a certain strategy then there’s a modified adjusted gross income for that certain strategy. So then you gotta look back. Oh, that doesn’t apply. So then you can potentially do it or not affected by certain phaseouts.

Al: And like I say it does get tricky. Your modified adjusted gross income, if you own real estate you have to be below $100,000 to be able to deduct up to $25,000 of losses. But that’s a different modified adjusted gross income for what we’re talking about on a Roth contribution.

Joe: So Chip, go ahead, do the conversion, make the contribution. Sounds like you have a pension, a little 457 plan. Keep pumping away brother. I like it. I think you’re on the right track. See I like Chip. He’s younger. He’s my generation.

Al: Yeah more intelligent question.

Joe: His real name is probably like Charles.

Al: I’m sure it is.

Joe: Is that Chip? Is that where you get Chip from?

Al: Yeah. The only Chip I know is Charles. I know one Chip. Now two. Chip from Maryland.

Joe: Right? Is that Charles?

Andi: I’m not actually sure. I don’t know. I know a Chip but I don’t know what his actual name is. I just know him as Chip.

Al: I have a sample size of one.

Andi: Yeah, me too.

Joe: I don’t know. I don’t think-

Al: It doesn’t have to be. It could be anything.

Andi: I wonder what Google says.

Al: I could call you Chip. Why not?

Joe: Well I don’t know. I don’t think anyone has a birth name called Chip.

Al: I don’t think so.

Joe: That would be badass if it does.

Al: I bet somebody does.

Andi: “Chip can be a nickname for Charles, Richard or Christopher.”

Al: How about Joseph? That’d be good.  I think that should be your name. Big Chip.

Andi: Chip Anderson.

Joe: Joseph Anderson. Please call me Chip.

Al: Just Joseph Chip Anderson.

Joe: I love it. All right.

37:32 – Can I Roll Pre-Tax Money Into My IRA and Roth 401(k) Money Into My Roth IRA When I Quit?

Joe: “I’m Darrell from central Ohio. Hey Darrell, this is my brother Darrell.

Andi: My other brother Darrell.

Joe: What was the guy’s first name though?

Andi: Larry.

Joe: Larry. Yeah.

Andi: Larry, Darryl, and Darryl.

Joe: Larry, Darryl, and Darryl. “Great show. Thanks, Joe, Al, and Andi. First question”. That means he’s got several, Andi.

Andi: Luckily it’s a short email though.

Joe: “I have a 401(k) with pre-tax and Roth contributions in it. When I quit-” I like your attitude, Darrell.

Andi: I’m quittin’.

Joe: When I quit. I hate my job. This thing sucks. I’m outta here. “When I quit and roll over the 401(k), can I roll the pre-tax part into my existing traditional IRA and roll the Roth part into a new Roth IRA to keep it separate from the traditional IRA?” Darrell, yes and that’s exactly what you would want to do.

So when you quit and you tell your boss to shove it.

Andi (sings): Take this job and shove it.

Joe: You’re gonna be like now what do I do with this cash because I’m rich now and I don’t need this job? Yes, you would put your Roth into the Roth component and you would do the pre-tax into the IRA, for sure. That’s one of the biggest downfalls, that I don’t know, that’s kind of an over-exaggeration, but when you have Roth dollars and pre-tax dollars in a 401(k) plan and you keep it in the plan, a lot of these plan docs, hopefully, they’ll change the rules on this. And I know that some of them I’ve seen now recently have, but you have to take the dollars pro-rata which is not great.

So what I mean by that is let’s say you have a $100,000 retirement account. $50,000 of it is pre-tax, $50,000 of it is Roth. So instead of saying the $50,000 pre-tax I’m going to move that to my IRA, $50,000 ROTH, I’m going to move that into my Roth IRA. You keep it in the 401(k) plan. You take $1 out of the 401(k) plan well $.50 of that is going to be taxable, $.50 cents is going to be tax-free. Instead of saying I’m in a low tax bracket I want to pull the $1 out of my pre-tax account because I don’t want to pay a lot of tax and I want to keep my Roth money growing. So yes, when you move or when you quit, move the pre-tax into your IRA and then move the Roth component into your Roth IRA.

40:05 – Is it a Good Idea to Do Roth Conversions When We Downsize and Live Off the House Proceeds?

Joe: “Second question. When my wife and I quit in a couple years-” So now your wife is like “I’m following your lead, Darrell.” I’m quittin’ too.

Andi: They’ve got a plan worked out. Check this out.

Joe: “We plan to sell our primary house and downsize to a house we already own in Tennessee and live off the proceeds. During this 8 to 10 year period, we plan to do yearly Roth conversion since the tax will be low. Anything bad about this plan?” Absolutely not,

Darrell. Spot on. So you’re gonna sell your house, live off the proceeds. You’re gonna be in a very low tax bracket because he’s living off of the cash in the proceeds. So you’re going to be in a low bracket, you’re going to convert. The only thing 8 to 10 period, then it’s just looking at what bracket you utilize. How much money can you get out over that 8 to10 year time period and let that thing grow for you? I love it. I love it. There’s nothing bad about that plan whatsoever.

Andi: And it’s interesting. We don’t know how old Darrell is. We don’t know anything else about his situation but it’s a good plan.

Joe: I love the plan. I like the fact that you’re quitting versus retiring.

Andi: Yeah he’s done. He and his wife are like, “we’re going to Tennessee.”

Joe: “I’m going to go to Tennessee. Hear they got some good whiskey there.” All right. Andi thanks for filling in today.

Andi: Thank you, Joe.

Joe: Appreciate you guys listening, of course. And Big Al we’ll be back next week. He’s in Australia, New Zealand or something like that. So we’ll see you next week. The show is called Your Money, Your Wealth®.


We’ve got a quick derail at the end of today’s episode about being voted one of the best retirement podcasts for 2020 – keep listening to hear Joe get a little salty. And if you like the YMYW podcast, you too can write about it on your blog, share it on your Facebook or Twitter or Instagram or LinkedIn page, email it to your friends, play it for your family at Thanksgiving dinner… Every time you spread the word about Your Money, Your Wealth, you help the people around you become a little but more financially wise, and you help keep me and Joe and Big Al employed by Pure Financial Advisors, who presents the Your Money, Your Wealth® podcast.

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