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 [...]

Brian Perry

In addition to overseeing Pure’s investment offering and platform, Brian works closely with Pure’s financial advisors, helping provide them with the tools and resources necessary to serve their clients and continue the firm’s mission of providing the highest quality financial education and planning to as many people as possible. He has been actively involved in [...]


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 moderator for the firm's digital events. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm [...]

Published On
October 1, 2019

Your Roth IRA questions answered: when should you do a Roth conversion? Should you wait until you’re in retirement to convert? What kind of income is it? How do you convert slowly so the tax bite doesn’t hurt so much? How long do you have to work before you can contribute to a Roth IRA? Does the 5-year rule apply for Roth withdrawals after age 59 1/2? Plus, answers to non-Roth money questions about estate planning, reverse mortgages, transferring from a variable annuity to a traditional IRA, and using HSA funds to pay Medicare premiums.

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Show Notes

    • (00:49) When Do I Do a Roth Conversion? What Kind of Income Is It? Does the 5 Year Rule Apply for Withdrawals After 59 1/2? Will I Pay Tax if I Use HSA for Medicare Premiums?
    • (10:17) How Much Do I Have to Work to Contribute to Roth IRA?
    • (16:34) Should We Start Converting Our 401(k) to Roth Now or in Retirement?
    • (18:29) How to Convert from 401(k) to Roth Slowly so The Tax Doesn’t Hurt?
    • (21:49) Estate Planning: Inheriting With Others & IRA Beneficiaries
    • (28:20) Can I Transfer From a Variable Annuity to Traditional IRA With No Tax or Penalty?
    • (32:49) What Do You Think of Indexed Universal Life Insurance?
    • (37:34) How Does a Home Equity Conversion Mortgage (HECM) or Reverse Mortgage Work?
    • (42:02) Comment: We Live in Hamden Because of Yale

Resources mentioned in this episode:

VIDEO: What is the Qualified Business Income Deduction (QBI?)

More on QBI: A Comprehensive Guide to Small Business Tax Filing

The SECURE Act New Retirement Legislation: Death to the Stretch IRA?

The SECURE Act Discretionary Vs. Conduit IRA Trusts

Free Estate Planning resources: click here for articles, videos, blog posts, episodes of YMYW TV and more, all on wills, trusts and estate planning issues

Should I Invest in an Indexed Universal Life Insurance Policy?

Indexed Universal Life Insurance to Insure Future Income

Indexed Universal Life Insurance for College Savings

Free Reverse Mortgage resources: click here for articles, videos, blog posts, episodes of YMYW TV and more!


Today on Your Money, Your Wealth®, I’ve collected a slew of your Roth IRA questions, and Joe and Big Al, along with Brian Perry, CFP®, CFA from Pure Financial Advisors, have answers. When should you do a Roth conversion? Should you wait until you’re in retirement or convert now? What kind of income is it? How do you convert slowly so the tax bite doesn’t hurt so much? How long do you have to work before you can contribute to a Roth IRA? Does the 5-year rule apply for Roth withdrawals after age 59 1/2? Plus, the fellas answer a few non-Roth questions about estate planning, reverse mortgages, transferring from a variable annuity to a traditional IRA, and using HSA funds to pay Medicare premiums. I’m Producer Andi Last. Here to get the Roth ball rolling are Joe Anderson, CFP® and Big Al Clopine, CPA.

:49 – When Do I Do a Roth Conversion? What Kind of Income Is It? Does the 5 Year Rule Apply for Withdrawals After 59 1/2? Will I Pay Tax if I Use HSA for Medicare Premiums?

Joe: Let’s go to Jim from Santa Cruz California. “Joe and Al. My wife and I file joint returns and our income is in the 22% tax bracket but we believe tax rates will be higher when we retire in 8 to 10 years. Consequently, I plan to begin transferring money from our tax-deferred accounts into our Roth accounts. Knowing that this will incur tax liabilities, I’m hoping you can clarify a couple of details.” So Jim is doing a little bit of planning. Looking to retire here in 8 to 10 years, he’s in the 22% tax bracket. He’s like, “I got some money in my retirement account. I think tax rates are going to be higher so maybe it might make sense to move my tax-deferred accounts into a Roth account. So then the income that I receive from that will be tax-free.” So question number one, “for tax purposes when must these transfers be made? If I moved money in March 2020 can the income be included on my 2019 return?”

Al: The answer to that is no. It has to be done in the calendar year so December 31st is your last day to do a Roth conversion. People get very confused on this because a Roth contribution which is that $6,000 or $7,000 if you’re 50 and older, that can be done until April 15th of the following year for that last tax year. But a Roth conversion needs to be done between January 1st and December 31st to be counted as income in that year. So that requires you to do a little bit of tax planning close to year-end because you’re not preparing your tax return yet so you have to kind of do a projection or an estimate to figure out how much to convert and what tax bracket to convert it up to.

Joe: So next question is “how exactly is transferred money taxed? Is it considered regular income on the 1040 before personal and/or itemized deductions are taken?”

Al: Yes. It is considered ordinary and regular income.

Joe: Regular income. Shows right up on your 1040 probably, line three now?

Al: No, I think it’s line 4, maybe 5. Four or five. It’s line 4.

Joe: “Does the five-year rule for Roth withdrawals apply after 59 and a half?” Yes and no. Jim let me answer that because the five-year rule is quite confusing. There’s actually two five-year rules, two five-year clocks. Let’s talk about contributions first. So the five-year clock means that the money needs to season in the Roth IRA for 5 years or 59 and a half whichever is longer.

Al: Longer. So that’s the key. Right? So you could do your first Roth contribution in when you’re 60.

Joe: Right. And then you have to wait. So if I’m doing a Roth contribution at age 50, 55 then I want to have access to the principle. But wait a minute I’m under 59 and a half. So that doesn’t work so I had to turn 59 and a half to get access to the money, 5 years or 59 and a half whichever is longer. But on contributions, you have access to the contributions at any time.

Al: And this is where it’s confusing because we’re really only talking about the growth in earnings. The principle the $6,000 that you put in last April 15th you actually have access to that at any age at any time for any reason. You just have to leave the growth and earnings in there.

Joe: Right. And so with the contribution let’s say you made subsequent contributions. You started in let’s say 2018 then you did another one a 2019 and you want to do another one in 2020. So the five-year clock and all those contributions within those 3 years started in 2018 with the first dollar that went to the first Roth IRA. So you just have to wait 2 more years then everything is satisfied for that five-year clock as long as you’re over 59 and a half.

Al: So by everything that’s obviously not only the contribution but the income and the growth all of those are tax-free.

Joe: So five-year clock for contributions 59 and a half or 5 years whichever is longer. Conversions.

Al: Well before you do that… By the way, let’s say you put $6,000 in and it grows to $6,500. If you want to take $6,000 out they count your contribution is coming out first. So you can take the $6,000 out no tax consequence. The $500 you leave in is of course not tax no penalty no taxes no nothing.

Joe: All right. That’s good.

Al: Then say that.

Joe: Very thorough. Conversions have its own separate five-year clock with each conversion that you make until you turn 59 and a half. Let me explain. So let’s say I am 57 years old. I do a conversion. I have access to the conversion dollars because I already paid taxes on them. But again the growth is what it’s kind of-

Al: Not on a conversion?

Joe: No, not on a contribution. I just got myself confused with that stupid comment you made. On a conversion, you have to wait 5 years to have access to the dollars if you’re under 59 and a half.

Al: Yes that’s correct.

Joe: If you’re over 59 and a half you have access to the conversion dollars right away. Here’s the stipulation with this stupid rule. Before what people did is that they converted prior to 59 and a half and then they took the money out the next day and they avoided the 10% penalty. So it’s like I need the cash. Let me just convert the $50,000. And then pay the tax and then I’m going to take it out and I’m going to save $5,000 in penalties.

Al: It’s a work-around and IRS said no you can’t do that. You’ve got to wait 5 years before you have access to it.

Joe: So it’s with a conversion. You have to wait 5 years, 59 and a half whichever is longer. But on a conversion, each conversion has its own five-year clock. So if I do a conversion at age 57 that adds its own five-year clock. 58, own five-year clock, 59, own five-year clock. But now I’m over 59 and a half. You can have access to the conversion dollars but you have to wait the 5 years for the growth to get out of the account.

Al: And it’s the first dollar that you put in a Roth whether it’s a conversion or a contribution that starts your five-year clock. Now if that’s clear then I got a job for you.

Andi: The transcript of this will be in the podcast show notes if you want to go back and read it 800 times so that you get it.

Al: It’s about as complicated as it gets.

Joe: So does the five-year rule for Roth withdrawals apply after 59 and a half? Yes and no.

Al: Are you going to go through it again?

Joe: No. Just I would say- yeah, I would say you’re fine.

Al: In many cases.

Joe: In most cases. But you know hey we got to give him the gnat’s ass on some of the stuff. People are gonna-

Andi:  Never heard that one.

Al: That’s a Midwest. I’ve heard that.

Joe: That’s very detailed.

Andi: That’s very Minnesotan.

Joe: Yeah. There’s a lot of gnats in Minnesota. “And finally I also have an HSA account. My understanding is that HSA withdrawals after 59 and a half are never taxed if used for medical dental purposes but if they are treated for regular purposes they are taxed.” Yes. “How are Medicare premiums, Plan B, D, whatever classified?”

Andi: QQ!

Joe: I never heard of Plan QQ.

Al: Me neither.

Joe: “So will I incur a tax bill if I use HSA funds to pay Medicare Supplement premiums?” What say you, Alan?

Al: I say no. Because health insurance premiums are a qualifying expense out of an HSA plan. You don’t have to be 59 and a half by the way. You can use it for qualifying medical expenses at any age.

Joe: But after 59 and a half it turns into an IRA basically is what he’s saying. So you could keep it in the HSA the health savings account. But then the HSA blows up at 65. You cannot contribute to an HSA anymore.

Al: Yeah but you would keep the HSA because it’s tax-free going forward using it for medical costs.

Joe: But if you want to use it for regular purposes you could roll it into an IRA.

Al: You could. Then you just pay tax-

Joe: But no penalty.

Al: Correct. We’re on the same page. I think.

Joe: Yes, we’re on the same page. I’m just on the top of the page.

Al: I’m in the meat in the middle.

Joe: “Since learning about your podcast a few weeks ago I’ve now listened to roughly a dozen episodes.” Jim, you gotta get a life. “It’s the best financial advice podcast I’ve ever found.”  Look at Jim.

Al: Best ever.

Joe: From Santa Cruz California. “Thanks for everything you do. Thanks for reading my letter.”

Andi: He did specifically say, “for people nearing retirement”.

Al: That’s true.

Joe: He said it’s the best podcast ever. I’m reading this right here. That’s what Jim said.

Andi: That’s because you’re dyslexic.

Al:  He never said ‘ever’.

Joe: Oh. What?

Al: He said, “it’s the best financial podcast that I’ve found for people nearing retirement.”

Joe:  Oh well, that’s like, ever.

Al: All-inclusive.

Andi: Joe’s just kind of bumping it up a little bit.

Al: That’s like in the history of podcasts?

10:17 – How Much Do I Have to Work to Contribute to Roth IRA?

Joe: We got Joe. He writes in from Wisconsin. Wisconny. “Ladies and gentlemen. Awesome podcast.” Thank you Joe. “Only found it a couple of weeks ago.” I would like to ask you a question, Joe from Wisconsin. How did you just find us a couple of weeks ago? I mean how do people find us I guess is the question. So we’re getting a lot of these, “Hey just found you a week ago. Found you a couple weeks ago, found your” blah blah blah. I’m like where you been, Joe? We’ve done hundreds of these.

Al: 239, to be exact.

Joe: 239. We started this show in 2000.

Andi: Yeah but that was radio. You weren’t doing the podcast in 2010, whatever it was.

Al: Well we started in 2008. No, 2007.

Joe: No, it was 2006.

Andi: And Joe in Wisconsin was not listening.

Joe: I know.

Al: Apparently not.

Joe: Apparently. But I would like to know Joe how you found us. So if you want to write us back that would be great and say, “you know what I found you from this or you’re just scrolling through” or all of a sudden we’re getting a little bit of love because someone gave us a review? Is that how people find us? I don’t know. “Ladies and gentlemen. Awesome podcast. Only found you a couple of weeks ago. My question. If I turned 65 in January and I want to invest $14,000 for myself and spouse for Roth IRAs next year. How long do I have to work? Is it until I make $14,000 in income? Is the amount of income gross or net? Spouse is not working. Thanks and keep up the awesome podcast.” Joe, great question. So Joe wants to retire, wants to squeeze in a couple more bucks into the old Roth IRA.

Al: Good idea.

Joe: So what say you? Is it gross or net or what does he gotta do here?

Al: It’s based upon gross income. So the $14,000 gross. And the answer is once you hit $14,000 of gross income, you’re done. It doesn’t matter it takes you one day or all 365 days. Once you get to $14,000 of income you can do $7,000 apiece. $7,000 for you being 50 and older. $7,000 for your wife being 50 and older.

Joe: Question. Joe makes $14,000. Puts $14,000 into a 401(k) plan.

Al: Great question.

Joe: His gross income is $14,000. Can he still contribute to Roth?

Al: No. Because those are interchangeable. So if you want to you can put half of it in a 401(k) and do the other half in a Roth or half of it in a regular IRA a half in a Roth. However you wanna do it.

Joe: But 401(k) rules, let’s say if he makes $100,000. He can put 401(k) and Roth, no problem.

Al: Sure but the earned-

Joe: The $14,000 is basically, so it’s not gross income because his gross income’s $14,000 even though he had- it so is it net? Because that’s what I think maybe what he’s getting at or what?

Al: Well I think he’s getting net of withholdings. That’s what most people think of as net. But it gets even more complicated than that. Since you brought it up and so let’s say the $14,000 is self-employment income for example. Then half of the self-employment tax is a deduction. And so let’s just call that $1,000 to make it easy math. So in that example, you could only put $13,000 into a Roth because you get a deduction of $1,000 for half of the self-employment tax. Furthermore, if you have self-employed health insurance that comes off of that too. So it’s a more complicated answer than gross. But I think what most people think of as gross and net, gross is what I’m making net is what I get as a paycheck. And generally if part of that is a 401(k) already. That has to be subtracted, that is a deduction. And so you’d have to earn more than $14,000.

Joe: See? I knew I could make the simple question lot more complicated. Because you call a normal podcast, you’re just going to say the real simple easy answer – but no question, we got to dive into all the crannies here.

Andi: Yeah, go around in circles…

Al: I reckon that we can go deeper than that because there’s this Qualified Business Income if it’s self-employment.

Joe: QBI.

Al: And so $14,000 in this particular case that self-employment income, it’s net. Because it’s maybe you got $20,000 from your customer. You had $6,000 of expenses, so the rules are completely different if you have a business. So $14,000 was your bottom line profit and so your potential deduction, Qualified Business Income, is 20% of that number. So what would that be? That’d be $2,800. I think if I did the math right.

Joe: Close enough.

Al: Yeah I think it’s exact, to be frank.

Joe: Wow.

Al: $2,800 deduction off the $14,000. But if you put money into a 401(k) or you have self-employed health insurance then that brings that dollar amount where you don’t get any QBI. But if you put the difference in the Roth IRA that still counts against QBI income. So this can get super complicated, actually.

This is definitely not a normal podcast, and there’s a good chance your head is spinning at this point. Read the transcript of this entire episode, learn more about the Qualified Business Income Deduction, download our Roth IRA Basics Guide, and check out all the other free financial resources available to you in the podcast show notes at YourMoneyYourWealth.com. Go straight there simply by clicking the link in the description of today’s episode in your podcast app. If you’d like a deep dive on your financial quandary, or if you just have comments or stories to share, click “Ask Joe and Al On Air” at YourMoneyYourWealth.com and send it on in as a voice message or an email and the fellas will respond right here on YMYW.

16:34 – Should We Start Converting Our 401(k) to Roth Now or in Retirement?

Joe: You want me to read something?

Andi: I was just suggesting that we have that one from the podcast survey that might be a good one for you to answer.

Joe: What, you don’t think we’re gonna get to them all today?

Andi: I really don’t. We have like 3 more pages of emails Joe.

Joe: You want me to do the Green Yoga House?

Andi: Yep.

Joe: Green Yoga House. It’s question 2, did we already answer question 1?

Andi: Al and Brian answered it while you were in Minnesota.

Joe: Oh. That show probably sucked…

Al: it’s our highest-rated show ever. What are you talking about?

Joe: Okay, Green Yoga House. Let me see. Let me take a crack at it. “For a family net worth about $2,500,000 to $3,000,000 and most in 401(k)s, both 58, with 22% and 24% tax rate, and retire at 65.” Well, the 22% and 24% tax rates are- these rates now so wide, those brackets.

Al: Yeah they are.

Joe: “The retirement income is somewhere $150,000 to $190,000 a year. Should we roll over some each year now or wait until we retire to Roth or starting now to Roth 401(k)?” Green Yoga House is asking a question. She’s got $2,500,000 to $3,000,000, most of it’s in (401k)s Al. She’s 58 years old or Green Yoga House is 58 and I’m guessing it’s a she.

Al: You think?

Joe:  I don’t know. I don’t know why but it just seems like a she to me. So the retirement income is going to be a $150,000, $190,000. Should we roll over some each year now? I would do it. Green Yoga House. Got $2,500,000, $3,000,000 in Roths and your retirement income is going to be $150,000 to $200,000. You’re in the 22%, 24% tax bracket. You could be in the 28% or EMT or 32%.

Al: That’s right. You’re gonna be between 25% and 28%, may be subject to alternative minimum tax which could feel like 35%. So 22% to 24% seems like a low rate.

18:29 – How to Convert from 401(k) to Roth Slowly So the Tax Doesn’t Hurt?

Andi: All right this next one is it’s actually anonymous but we’re gonna go with Coco.

Al: How do you get Coco? You just made it up?

Andi: No, that was part of the first half of their e-mail address. Their e-mail address was Cocofarts@ something. So we’re going with Coco.

Al: Got it. I’m sorry I asked.

Andi: So this came from the podcast survey. Coco wants to know “how can I move traditional 401(k) money slowly into a Roth IRA to make the tax not hurt so much all at one time?”

Al:  Good question. What do you got Brian?

Brian: This is like your favorite question. I think the idea is, it’s the bread and butter of what you should be doing when you’re considering your future tax situation. You look at what tax bracket you’re in today, what tax bracket you’re likely to be in the future and then you try to smooth that out across your lifetime. And avoid doing it too much at once because then you’ll get killed on taxes but you systematically move a little bit at a time and in lower-income years you move more.

Al: I think that and I think a lot of people don’t realize when you do a Roth conversion. So that’s simply taking money out of your 401(k), out of your IRA and converting it to a Roth. Once you do that all future growth and income and principle’s tax-free. So that’s the good news. The bad news is whatever you convert is treated just like income just like you received it. Well, you didn’t really receive it because it went into another savings account which another retirement account called a Roth IRA. But you gotta pay the taxes. So you always want to be careful how much you convert. You do not have to convert all of it in one year. You can convert a little this year, a little less next year. There’s no limitations and I think a lot of people don’t realize that. It doesn’t matter how much money you make. It doesn’t matter whether you’re working or not. You can convert as much as you want at any age. You can convert at age 15 if you have IRAs to convert. You could convert at age 95 if you want to. A lot of people get this mixed up with a Roth contribution which has completely different rules. That one you have to have earned income and you have to be under certain income limitations or income levels to be able to do that.

Andi: So do you have any strategies for where you should pull that money from to pay the taxes on a Roth conversion?

Al: It’s a good question. Generally, you want to pay that with non-retirement dollars. So a brokerage account or savings account or CD something like that. You can in certain circumstances pay it right out the IRA. But we don’t like that generally because now you’re paying taxes on taxes. And that’s just not a good. It’s not a good formula. We have seen it makes sense in certain cases where people have so much money in an IRA or 401(k) and they have no other money outside of retirement and they’re going to be at a much higher bracket when it comes to retirement and believe it or not that happens when you combine required minimum distributions along with pensions and Social Security.

Brian: And do keep in mind that if you’re used to contributing directly to a Roth IRA, the April 15th is the deadline there. December 31st would be applicable in this case. So if you’re doing the conversion it’s a different deadline than the contribution and if you don’t get it in by December 31st you’ve lost the opportunity for that year. If you’re a little bit younger may not matter but if you’re getting a little bit older and you’re approaching 70 and a half where the required minimum distributions kick in. As we head into the end of the year here towards the end of 2019, you want to if a conversion is appropriate, do it before the calendar year-end or you’ve lost one of your opportunities to move money before RMDs kick in.

21:49 – Estate Planning: Inheriting With Others & IRA Beneficiaries

Andi: All right. The next one comes from Bill in Reno, Nevada. He says “I’d like to hear more about estate planning and inheritance issues. For example how to handle it when you inherit property with others and also what should my IRA beneficiaries expect?” And this is pretty cool he gave us a great compliment. He said “when Joe and All answer listeners’ questions accurately with the perfect measure of humor the magic of YMYW happens. Keep it up, gentlemen”.

Al: I wonder how often we answer them accurately.

Andi: Well it’s always with humor. So at least you got that side going for ya.

Brian: Less frequently when I’m subbing for Joe undoubtedly.

Al: So great question Bill. So you’re asking about estate planning inheritance issues. How to handle it when you inherit property with others and what should your IRA beneficiaries expect? So there’s a couple things there. Maybe we’ll start with IRA beneficiaries. Let’s say Bill has 4 kids and he wants his 4 kids to inherit his IRA equally. So 25%. So how does that work?

Brian: Well you just add in your beneficiary election, you designate each of your children 25% beneficiary.

Al: Yeah. Easy enough and then when you’ve when you pass then what happens is each kid then we’ll set up their own IRA. So it doesn’t stay together. They get their own individual- it’s called an inherited IRA account. And so then the inherited IRA account and this is true of any beneficiary that’s not a spouse. They have to start taking a required minimum distributions right away at their current age even if their age two like let’s say it’s to a great grandchild let’s say for example. And it’s based upon that individual’s life expectancy. Now with regards to other properties like let’s say your house. That’s a little trickier because now you have- and maybe it’s in your trust or maybe it’s in your will, that each of the four kids are gonna get 25%. What thoughts do you have there?

Brian: I think a lot of times having that conversation if you’re comfortable doing it with people beforehand makes sense. Because I’ve seen and heard of a lot of families that squabble certainly while they’re alive and then let alone from beyond the grave. So I think a lot of it is having that conversation because maybe one of the children actually want to stay in the house, maybe there’s sentimental value. Maybe they want nothing to do with it. So having that conversation and figuring out, is this something that’s just going to be sold upon your passing and the proceeds distributed? Is it something where maybe there are liquid assets as well and maybe one of the kids that lives still in town wants to move into the house and the other three will take cash and securities in lieu of an ownership in the house? And so you know that the tighter you can get on a lot of the inheritance stuff prior to passing on the smoother everything’s going to be.

Al: Something to remember is when you’re trying to figure out your estate plan, you don’t necessarily have to give the same percentages to every kid. In other words for a house maybe one kid wants to live in it and the others don’t. And so maybe you give the other kids other assets that are in equivalent value so it doesn’t have to be all 4 on each property. So that’s something to think about. I will say though if your kids do inherit your property and they each own 25%, now it’s a bit of a burden on them to try to figure out what to do. And oftentimes they all have to sign off on like a sale and it’s just- whenever you have more than one trustee it, it can be a little tricky. Sometimes kids live in different parts of the country so that can be tricky too.

Andi: Well that was another thing I was going to ask is let’s say you set your son as the beneficiary on it and your son is married so you would want it to only be your son is the beneficiary not them as a couple, is that correct?

Al: That’s another thing to consider as well. And in that particular case it could be separate property and it could be put into a separate property trust or maybe the trust that the parent sets up is that is the type of trust that continues after they pass away. Actually a lot of trusts are being set up this way currently. And so if you have more than one kid what happens with your trust is the trust goes into several sub-trusts. It just gets tricky when you’re sharing the same asset in a sub-trust because now you have a tenant in common interest in a property in your own trust but it’s shared with others.

Brian: Well and even at the most basic level, I think real property gets a lot more complicated maybe than say an IRA. But even there the rules are changing right, Al, potentially?

Al: In terms of the-

Brian:  The distributions to the beneficiaries with the stretch IRA a potentially disappearing?

Al: Yes. I was wondering where you were going with that. But yes, absolutely. Because the stretch IRA, this is The SECURE Act that the House has voted on and the Senate is looking at right now.

Andi: Setting Every Community Up for Retirement Enhancement.

Al: Oh very good Andi. You’ve been listening to our podcast. But that is one of the major provisions there is the stretch IRA will go away in most cases, not all, most cases. But that’s one thing and we just talked about that I think in another segment with the stretch IRA. That means when you inherit an IRA as a non-spouse you can stretch that over your lifetime. If this new law passes and it looks like it probably will, then the stretch IRA goes away and your beneficiary would have to pull the money out within 10 years.

Brian: I do find it ironic that Congress was able to agree on something like 367 to 3? And when they finally came to that kind of bipartisan agreement it was that we’re going to take away a major benefit to the American taxpayer.

Al: I know, right?

I’ve linked to info about the SECURE Act and its implications for the stretch IRA, as well as some free estate planning resources, in the podcast show notes at YourMoneyYourWealth.com. Click the link in the description of today’s episode in your podcast app to go right to the show notes. One of those free estate planning resources is our Estate Plan Organizer because the last thing anyone wants to do in the case of death or divorce or becoming disabled is to hassle with paperwork. Save the headache – download and fill out the Estate Plan Organizer now with all of your accounts, beneficiaries, wills, trusts, insurance policies and store it in a safe, easily accessible place for your loved ones. Don’t forget to update it regularly! Download it from the podcast show notes at YourMoneyYourWealth.com. Now let’s get answers to some more of your non-Roth questions. Send your money questions, Roth or otherwise – visit YourMoneyYourWealth.com and click Ask Joe and Al On Air.

28:20 – Can I Transfer From a Variable Annuity to Traditional IRA With No Tax or Penalty?

Joe: Just like Morgan did from Durante-

Andi: Duarte.

Joe: Duarte, California. Where’s Duarte?

Al: No idea. We’ll have to get a research team on it.

Joe: Duarte, California. “Hi Joe and Al. Like your show and podcast.”

Andi: He doesn’t love it.

Joe: I know. I just realized that Morgan.

Al: I’ll help you translate because you haven’t really read this.

Joe: I’m 50 YO-

Al: Years old.

Andi: It’s near Azusa.

Joe: That’s like-

Andi: Covina.

Joe: What?

Andi: Covina.  It’s east of Pasadena.

Joe: Still no idea. But he’s 50 yo and “I have maximized my 403(b) half to Roth half to traditional. Also saved in 2 Roth IRAs. A few years ago I rolled over my 403(b) from previous employer to an annuity which I realized that fees are high. My question is can I transfer from the annuity to a traditional IRA account without any consequence of tax or penalty? Thank you and look forward to hearing back from you”. All right Morgan hopefully after this question that we answer for you you’ll start loving the show.

Al: Not just liking it.

Joe: Yes.

Well are we going to assume that he transferred it to an annuity inside an IRA?

Andi/Al: Or she.

Joe: Yes. That’s what Morgan did. She had a 403(b). She moved it into an IRA which was an annuity. And I’m guessing it depends on the type of annuity. But let’s say it’s a variable annuity because she realized that fees are high or he realized fees are high.

Al: He or she.

Joe: So here’s the quick answer. You can absolutely transfer the money from the annuity IRA into another IRA and you can invest in anything you want. Mutual fund, stocks, bonds, ETFs, index funds, cash, whatever. Will there be taxes? The answer is No. It’s a custodial transfer. So just goes from the annuity company into let’s say Vanguard, T.D. Ameritrade, Schwab, whoever that you choose. So it just goes from one custodian to the next custodian. You don’t see the money, it’s just a quick transfer. There is no taxes due. Is there penalties? There could be a CDSC charge. It’s basically a surrender charge from the annuity company. But there would be no IRS penalty or anything like that. Here’s what I would suggest, you take a look at what fees are you paying in the variable annuity and Al what fees do we usually see? 3%?

Al: You mean ongoing? Yeah, 3%.  I’d say 2.5% to 4%. Say that.

Joe: 2.5% to 4% is what Morgan’s probably paying inside her variable annuity or his variable annuity.

Al: Every year.

Joe: Every single year. So let’s say Morgan it costs you 8% to get out of this thing. So let’s say it’s $100,000. It’s costing Morgan $8,000 to get out of it. That’s the penalty. A lot of people would say, “wow I don’t want to do that. That’s $8,000.” Or you could just continue to pay the annuity company $4,000 in fees every single year until you die. Which is going to be cheaper for you?

Andi: $8,000.

Joe: So sometimes you just gotta lick your wounds and take your medicine.

Al: But you’re also allowed to take 10% out per year.

Joe: But don’t do that, that’s stupid.

Al:  No. There’s no surrender charge on that-

Joe: Yeah but it’s 10% and you got 90% still stuck at those high fees.

Al: I know but in some cases when you do this maybe in a few months that goes down to 6% surrender. So you got to look at all that.

Joe: Yes. Very well said. Morgan, that’s what I would take a look at. Look at what your internal fees are, what the surrender charge is if any. I’m not sure how long you’ve had it. Maybe the surrender charge is over. So maybe it might not be costing anything upfront. But you will save a ton of money in fees long term if you get out of the product. But then the question is why did you buy the product in the first place? What were the benefits that you liked? Do you like guarantees? Are you very risk adverse? Was there something within the product that you thought was intriguing? So you’ve got to I guess put all of that stuff into play too. But if you want to transfer it out go for it. If you want to keep it in there, just know the pros and cons.

32:49 – What Do You Think of Indexed Universal Life Insurance?

Joe: Brooke from San Diego. She writes in. “Hi, you two”. Hello Brooke. “I listen to your podcast and it’s really good. Thank you”. Well, thank you, Brooke. “What do you think about IULs?” Goll-dammit!

Andi: That’s like I think 4 times we’ve had this question.

Al: People like those.

Joe: “I’m 52, already maxed out my 401(k). In addition to that, you think it’s a good idea for me to fund an IUL?”

Andi: Is somebody promoting the heck out of these things right now?

Joe: They have to be.

Andi: That’s gotta be it.

Joe: IUL.  Index Universal Life Insurance policy.  Brooke, you’re 52 years old maxing on a 401(k). Do you have any money in a brokerage account? You have any money in a Roth IRA? How large is your 401(k)? How long do you plan on working? Is your debt on your home pay off? Do you own your home? Do you have rental properties? Those are all the things that I would want to know before you start going into an Index Universal Life insurance policy.

To give our listeners a 30-second tutorial, it’s a life insurance contract. Brooke, I don’t know, do you need life insurance? Do you got kids? If you don’t need it, then don’t buy it. But Universal Life policy where you pay premiums into a life insurance contract. And then it grows deferred and then you can pull it out tax-free depending on how you pull it out.

Al: So, in other words, you put more into this contract each year than the premiums and so the extra gets invested.

Joe: Correct. There’s a corridor within the insurance contract where you can fund to a certain level before it becomes a modified endowment contract?

Al: Yes. So you can’t just do any amount you want. There are limits.

Joe: There are limits that are set by the IRS guidelines because there’s a cost of insurance. So you get the tax deferral and you get the tax free dollars coming out. And why it comes out tax-free is that it’s FIFO tax treatment first in first out and then you take loans from the cash value and a loan is not a taxable event. So there would be tax-free as well you’re just taking a loan from yourself. So should you do it? You know, I hate bashing this product, but I would say no. I mean is that good enough do you think? Do you need life insurance? What does your net worth look like? But these guys sell it like a super Roth.

Al: Well they do. They sell it so that you have tax-free income in retirement.

Joe: Yeah but just convert. If you got a big fat IRA and you’re maxing that thing out, convert to a Roth. It will be so much better for you because what goes into an IUL is after-tax dollars. So if I have a 401(k) plan and if I convert it to a Roth IRA that’s after-tax dollars. I’m paying the tax to get it- and so they say well no you can put a lot more money into an indexed universal policy and it grows tax-deferred and you pull it out tax-free. But you have so many limitations in regards to paying the costs of insurance.

Al: That I may or may not need.

Joe: And if I pull too much money out I could blow the thing up.

Al: If I get tired of paying the high premiums it blows up.

Joe: So it’s just sold so good. It’s like here. How would you like to have something, you already maxed out your 401(k) so of course, you need this. Let’s just jam a bunch of money in here let it grow tax-deferred. And then when you pull it out it grows tax-free. And then to boot, they’ll say well you can get stock market-like returns with no downside risk. I mean it’s just sickening. It’s not that they’re buying call options on the S&P to say that you’re invested in the S&P and that’s based on a zero-coupon bond. So you’re not even giving the dividends which is about 40% of the return of the S&P. And then there’s caps and then there’s participation rates. And then there’s everything else in between.

Al: Is it possible the advisors that are selling this get a commission?

Joe: I doubt it.

Andi: He’s being sarcastic, Brooke.

Joe: I highly doubt it. I’m sure they are fiduciary.

Al: Not.

Joe: I don’t know. I mean I’m not here to judge. I’m just here to help and you’re 52. Give me some more information I can help you out a little bit more. But I would say no, it’s not a good idea to go to IUL. But that’s just from the limited information that I have.

37:34 – How Does a Home Equity Conversion Mortgage (HECM) or Reverse Mortgage Work?

Joe: We got Judi from San Diego. She writes in, “So I get Wade Pfau’s newsletter after learning about it on your podcast. His last was about reverse mortgages, but can you translate this article from finance to English so I can understand?” I clicked on that link when she first sent it and it was like a link to some-

Andi: And I emailed her back and I said ‘Judi that wasn’t the story you were looking for that was about somebody here in San Diego that got into an accident or something’.

Joe: Right. Fell out of a helicopter.

Andi: She replied to me and she said “there must be gremlins in my computer, try this”. So here’s the proper link.

Joe: Well so I can’t read a link on paper.

Andi: That’s why I sent it to you 2 days ago for you to read it Joe.

Al: I have it right here.

Joe: Oh. I don’t prep for the show. I don’t know-

Al:  That’s obvious.

Andi: Al, do you remember I even said you should probably read this in advance?

Al: Yes, you did say that.

Joe: How do I read a link? I don’t know what the hell-

Al: Okay so I will start. This is kind of a complicated-

Joe: Like a Home Equity Conversion Mortgage?

Al: This is Wade Pfau’s article that was originally published in Forbes it’s called ‘How does a line of credit for reverse mortgage work?

Joe: I can explain that in 30 seconds.

Al: Okay. Go for it.

Joe: So what he’s talking about is a HECM, a Home Equity Conversion Mortgage.

Al: He is.

Joe: And so the actual line of credit about Home Equity Conversion Mortgage grows. It’s the most interesting line of credit that you could possibly ever imagine. And I think this is why Judi was very confused because it’s a unique product. So what happens is that you take out a line of credit on a home equity conversion mortgage. So let me explain a reverse mortgage first. You can have a mortgage on your home that you don’t have to pay a payment to, the equity of the home pays the payment. So at the death of the owner of the home that’s when the debt is paid off. So whatever equity is left goes to the heirs and then the note gets paid off at that point. So there is actually no outlay of cash flow to pay a reverse mortgage. A line of credit is very similar to the reverse mortgage in the sense where I’m going to open up a line of credit within the equity. So I don’t have to ever pay the line of credit back. But let’s say I open the line, it’s worth $200,000, and the interest rate on the line of credit is 5%. So what happens if I don’t spend a dime of that line of credit, it’s going to grow by 5% per year. Because it’s the opposite of paying it down. It’s just growing inside the overall equity of the home. That line of credit could almost sometimes actually be larger than the value of the home.

Al: Depending upon how much the home actually appreciated.

Joe: So all it is, is a line of credit Judi that you can use, that you can then take off and live off of that you will never have to pay back. So you can open up the line at I think age 62 and I would encourage everyone to take a look at it. Of course there’s fees involved. But it’s a good safety valve for some individuals to lean on if the market crashes or if you want additional cash flow. The income that you would receive or the cash flow that you’d receive from it is tax-free. So yeah Wade Pfau is all about it.

Al: So let me also add a couple more things quickly. There’s a principle limit which is how much you actually borrow. And then there’s a line of credit. And Joe just as you said they grow at the same rate. So in other words if you borrow $100,000 and you still have another $100,000 on the line of credit and you don’t do anything for the next 10, 12 years and at a 6% rate, in 12 years it would double. So now all of a sudden you owe $200,000 on the loan.

But you have $200,000 on a line of credit. And so another way to think about this is let’s say you borrowed all $200,000 right off the bat. And so now and in 12 years, it’s with the interest is $400,000 and you’re right. You never have to pay it back. It’s non-recourse which is it’s only based upon the home but you’ve used up your line of credit. On the other hand, if you have a $200,000 line of credit don’t do anything and let it go for 12 years at 6%. Then now you can borrow $400,000. So Wade Pfau’s comment is doing this sooner is better than later because this thing grows at a pretty rapid rate, particularly if you’re in an area that has low housing appreciation. If you’re in an area like we are in California which tends to have a higher appreciation rate it may not work quite as well. But in lower appreciation rates this is a great deal to get it as soon as you can.

Joe: So hopefully that was English.

42:02 – Comment: We Live in Hamden Because of Yale

Joe: All right. We got time for one more. Shane. He wrote back in from Hamden. Hamden, Connecticut.

Al: We didn’t know where it was.

Joe: And I was like where the hell is that? Well, you know why? I don’t know where that is. He goes “Joe, Al, and Andi. Thank you for answering my question regarding is too much Roth a bad thing”. I like how it’s like a little show.

Andi: Yes. We have actual committed listeners who love us.

Al: Remember when it used to only be your mom for years and years?

Joe: “Remember the episode of is too much Roth a bad thing?” Yeah. So that was a really good episode. “Loved it. I also enjoyed the outtake around the location of Hamden, Connecticut. We are actually from Southern California ourselves but moved to Hamden 2 years ago as my wife is attending Yale.” No wonder why I don’t know where the hell Hamden, Connecticut is because I’ve never been to Yale. I don’t think I would ever be close to be accepted into Yale.

Al: Yeah. It never came up.

Joe: I mean if I walked near Yale, they’d ask me to leave.

Al: They’d escort you out of town.

Joe: “Well like we don’t like your kind because you are stupid.” Yale. Wow, that’s an awesome school. Good for you, Shane. “Most people who attend Yale with families lived in Hamden since it’s better for kids”. Well congratulations. I would have said “yeah this is Shane from Yale.”

Al: And we would have said, “Okay this guy is smart.”

Andi: He points out that Yale is actually a New Haven, so most people think they’re there.

Joe: I would be like “yeah this Joe from Yale. I’ve got a question.” Or “this is Big Al from Harvard.”

Andi: Finish it, come on.

Joe: Oh. “I just thought I’d share. Keep up the excellent podcast guys”. All right. Thank you very much, everyone, for your nice emails. Keep ’em coming. We’ll keep answering them. The show is called Your Money, Your Wealth®. We’ll see you next week.


Click Ask Joe and Al On Air at YourMoneyYourWealth.com to send in those emails, we love your questions, comments, compliments, complaints, and stories, and all of ‘em will eventually make it into the podcast. The free resources in today’s show notes are off the charts, with more on Indexed Universal Life Insurance, reverse mortgages, self-employed business taxes, estate planning, and the SECURE Act. You can download the Roth IRA Basics Guide and our Estate Planning Organizer for free and read the transcript of the entire show. Click the link in the description of today’s episode in your podcast app to go straight to the show notes at YourMoneyYourWealth.com. Stick around for Derails at the end of the episode if you’re into that sort of thing, we’re talking contracts with Big Al, email questions for me, and drunk yoga.

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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.