Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
October 9, 2018
4 Roth Conversion Options for Tax-Free Portfolio Growth

Trump tax cuts are slated to sunset in 2025, but the House has passed the GOP bill to make them permanent. Life insurance settlements, or “Death Bonds,” are being offered as a “solution” to senior bankruptcies. Four different Roth conversion options to avoid a tax bracket jump, with a caveat. And answers to your questions: Will the IRS take FICA taxes out of those conversions? What’s the deal with required minimum distributions, qualified charitable distributions, and Roth IRA rollovers?  Plus, Joe and Big Al go off on self-directed IRAs.

Click here to listen to the podcast on YouTube

Show Notes

  • (00:49) The House Passed GOP Bill to Make Tax Cuts Permanent
  • (05:01) Surge in Senior Bankruptcies: Are Life Insurance Settlements a “Solution”?
  • (10:16) Four Ways to Do Roth Conversions – With a Caveat (video)
  • (17:08) Donor-Advised Funds, Qualified Charitable Distributions, RMDs, Roth IRA Rollovers and Paying Advisor Fees (video)
  • (23:03) Retirement Savings Strategies When You Have No Savings
  • (27:15) Does the IRS Collect FICA Taxes from Roth Conversions?
  • (31:18) The Problems with Self-Directed IRAs


Today, on Your Money, Your Wealth®, the Trump tax cuts are slated to sunset in 2025, but the House has passed the GOP bill to make them permanent. And, life insurance settlements, or “Death Bonds,” are being offered as a “solution” to senior bankruptcies. Joe and Big Al also answer a whole slew of your email questions, including but not limited to: what’s the best Roth conversion strategy to avoid a tax bracket jump, given that re-characterizations end forever in, oh, 6 days from the release of this episode? The fellas have four different options for you, with a caveat. Will the IRS take FICA taxes out of those conversions? What’s the deal with required minimum distributions, qualified charitable distributions, and Roth IRA rollovers?  Plus, Joe and Al go off on self-directed IRAs. Here they are now, Joe Anderson, CFP® and Big Al Clopine, CPA.

00:49 – The House Passed GOP Bill to Make Tax Cuts Permanent

JA: Hey, right hot off the press there, bud, what’s going on?

AC: Well this was on Thursday, the House passed the GOP bill to make the new tax cuts permanent. So we know that December 24th of last year we get the Tax Cuts and Jobs Act that lowered tax rates for everybody. Some people ended up paying more taxes because of loss of deductions. But I would say the majority of the people that we have looked at are paying a little bit less in taxes. As you may know, this new law supposed to sunset generally in 2025, and this was an attempt to make it permanent – at least while the Republicans are still in control. I think that’s why they kind of pushed this through quickly. So they passed it from a vote of 220 to 191. Now this is step one. Then it goes to the Senate, and the Senate has 51 Republicans, 49 Democrats. In this type of bill, actually with most types bills these days, it’s along party lines. But we do know that there are a few Republicans that kinda can go a little either direction. So I don’t know whether this will actually go through the Senate or not, but that’s where we’re at right now is making this tax law change from last year permanent.

JA: What is the definition of permanent?

AC: That’s anyone’s guess. The real definition of permanent is it’s forever until they change it again.

JA: Got it. So stay tuned. A couple of other things I think when it comes to retirement plans they’re trying to get through. We talked a little bit about this a couple of weeks ago. They’re coming up with another stupid MYRA or like a savings plan that you get access to just in case something happens. Is that the case with all retirement accounts? (laughs)

AC: Yes. But there are penalties. I think they’re trying to make it so you can get to it without penalty, perhaps, in certain circumstances, which I think is not necessarily a great idea for retirement if that’s really what it’s for. But yeah. So there are a couple companion bills that were also passed, and they are trying to get through something called a universal savings account that just allows – it’s a little bit easier for people to save into an account and a little bit easier to withdraw without penalty from a retirement account. And then they’re trying to help small businesses out so they can write off their startup expenses, which, you and I were talking before the show, most businesses write it off anyway. But there is a rule that startup expenses before you actually start your business are supposed to be capitalized and written off I think over five years.

JA: A few other notes to look into: with stretch IRAs there could be a limitation on the amount of money that you can stretch to the next generation. Around $450,000 is going to be the maximum amount that you can stretch. Everything else is going to be taxable within the five year period.

AC: Yeah that could happen. They’ve been talking for a while.

JA: A couple of years. You know it’s funny because they were talking about getting rid of the stretch, getting rid of the backdoor Roth IRA, getting rid of net unrealized appreciation, and getting rid of – there was a couple of other big ones.

AC: Yeah and both Republicans and Democrats supported that. And then it wasn’t in this new tax cut.

JA: Right. And then just recently they said, “well guess what, the back door Roth is here to stay. It’s fine.

AC: Yeah, we’re not going to challenge that. I mean the IRS told us that.

JA: So I don’t know. Stick around, stay tuned. We will be on the pulse of this. And speaking of retirement accounts and changes in stretch and IRAs and all that other good stuff, the clock is ticking here for people to re-characterize their Roth IRAs.

AC: Yeah it’s very close to being gone.

JA: Yeah, October 15th is the last time ever. (laughs)

AC: Yes and so we’re talking about Roth conversions that you made in 2017, you can still re-characterize up until October 15th of 2018.

JA: A couple of other deadlines on October 15th is what, SEP IRA contributions, you still have time to make that. Profit sharing contributions.

AC: Yeah, so the way that works, if you have a business, you can actually set up a SEP IRA, simplified employer pension plan right now all the way till October 15th if you’re a non-corporate business. In other words, if your tax return with extensions is due on October 15th, you can still fund the SEP – and you can also still fund your profit-sharing plan or the profit-sharing part of your 401(k) plan as long as it was set up prior to year end.

05:01 – Surge in Senior Bankruptcies: Are Life Insurance Settlements a “Solution”?

JA: I ran across this article, Alan, and this is what is called a headline grabber, or a title grabber?

AC: Yeah, headline grabber I guess is as good as any.

JA: “A Surge in Bankruptcy Filings by Seniors”

AC: Really. That sounds sad.

JA: And then look at the picture: there’s a picture of an old person digging in a garbage can. (laughs)

AC: Oh boy. With a shopping cart trying to find some goods in the trash can.

JA: And this is written in wealth management.com. This is more or less geared towards advisors or professionals. And then it says, “for years wealth managers have been on the frontlines of an emerging national problem as it relates to retirement finding for baby boomers.” So you got disappearing corporate pensions, did you hear about that? Insufficient personal savings and then health care costs and so on and so forth. So they go on to start talking about this research that a lot of older Americans are not prepared for retirement. And I get that. But we’ve seen thousands of studies, I think. And this is the first I’ve ever heard of people on the street! (laughs)

AC: Yeah with a picture of a garbage can.

JA: So I go on to read the article. It caught my attention, and then I’m like, well this is kind of all fluff. This doesn’t really tell me anything. And some of the stuff that they’re quoting is fairly common. It wasn’t like, oh my gosh, dire.

AC: Oh, you should have saved more, you should have spent less.

JA: Yes. You know, most retirees are faced with higher healthcare costs.

AC: Oh, newsflash. (laughs)

JA: They are faced with corporate pensions on the demise and a lack of savings is going to put seniors on the street. So I mean it’s all fearful type BS that I can’t stand.  And then that last couple paragraphs, he goes, “where people are finding additional dollars to help fund their retirement is that if they have an old life insurance contract sitting in their drawer.” And I’m like “interesting, who has an old life insurance policy that has been sitting in the drawer for years?”

AC: That has just gone bankrupt and they’ve got a shopping cart.

JA: So I’m on the street. I have a shopping cart. (laughs)

AC: But you got a desk somewhere with an old policy. (laughs) Maybe it’s in your shopping cart.

JA: It’s in my shopping cart, it’s my life insurance policy. And then it goes on to say, “these individuals could sell their life insurance policies.” So this whole thing was based on life settlement. So Darwin Bayston, he’s the writer of this crap, is the President and Chief Executive Officer of the Life Insurance Settlement Association.

AC: Oh my goodness. There you go. So whenever you read anything, check what’s behind the curtain.

JA: Yeah, who’s the source? So for those of you that are not familiar, maybe you are, it’s like a viatical, a life settlement is basically if you have – and I said “basically” like 14 times.

AC: (laughs) It sounds like you’re a rookie today.

JA: It’s awful. I’m sweaty. I’m nervous. (laughs)

AC: Seems like we haven’t done this show in months and we did it last week.

JA: A life settlement is when you can sell a life insurance contract to a third party. Warren Buffett called them “death bonds” at one point.

AC: Yeah right. That name didn’t stick. (laughs)

JA: it didn’t, very well. So I have a life insurance contract, I’m paying premiums, or maybe it’s paid up, and the death benefit is worth $100,000. So I need cash. And so what do I do? Because I’m going to be on the streets digging in the garbage! So I could sell this life insurance contract to a third party – so to Darwin here. He wants to buy it. And so now he’s going to take over that. So even though the death benefit is $100,000, I’m going to receive a cash payment of that for maybe, what do you think, $20,000? $30,000? Depending on my life expectancy, depending on my age, depending on my health status, depending on how the structure of the policy is. So if it’s completely paid up that it’s going to pay out at my death, because it has enough cash value in that policy, well then, these people would like to buy it. Or for it to be at a deeper discount for them to take over some of the premiums.

AC: In other words, so if the death benefit is high enough, I might pay you to take over your policy – then I’m going to be watching your life because when you pass away, I get paid.

JA: Yes. When you die I’m gonna cash in.

AC: So I’d rather have you stay on the streets. (laughs)

JA: Yeah, so life settlements, viaticals.

AC: It’s a little strange.

JA: There are all sorts of different things and I would highly recommend, if someone asks you to buy your life insurance, maybe dive in a little bit deeper. The commissions on these are fairly high. And I would just do some more due diligence. It is an option to keep you off the street, however, according to Darwin Bayston.

AC: Yeah, you’ve got to find your policy – find it in the drawer.

On that predatory and depressing note, up next, we’re busting into the email bag and answering a bunch of your IRA questions. To Learn how to Master your IRA, check out this week’s episode of the Your Money, Your Wealth TV show. Joe and  Big Al cover Advanced IRA Strategies – important stuff like net unrealized appreciation, RMDs, inherited and stretch IRAs and more. Watch it online at YourMoneyYourWealth.com, and be sure to subscribe – new episodes of the Your Money, Your Wealth TV show post every Sunday! Now let’s get to those emails. If you’ve got a money question, send it to Joe and Big Al at info@purefinancial.com

10:16 – Four Ways to Do Roth Conversions – With a Caveat

JA: So this is Tom from Chantilly. Is that how you pronounce that?

AC: Yeah I guess.

JA: Chantilly, VA – Virginia. So, Tommy, he writes in to us, he goes, “Hey, not sure if this is the correct way to submit a podcast question, but here goes nothing. It is my understanding with the new tax law that it does not allow you to perform a conversion over to a Roth IRA and then re-characterize a portion or all of it at a later date. What is the best strategy of maximizing your Roth conversion amount in any given year while not moving yourself into the next higher tax bracket?” Good question, Tom. I’ve got a few different answers for you, but I’m sure, Al, you’ve got the standard.

AC: Yeah, I do have the standard. (laughs) The standard is, first of all, Tom, that’s correct. And this is with this new tax law, you can no longer re-characterize. That’s not true for 2017. So if you had a Roth conversion that you did in 2017, you can re-characterize all the way up to October 15th, 2018, which is right around the corner. So you got a few more days to do that. But going forward, that’s a correct answer. So what’s the best strategy? Generally, we’re going to tell people to wait later in the year, when their income is more certain because that’s right – when you do a Roth conversion it’s what we call irrevocable. You can’t change your mind anymore. So you might want to wait till November and December when you have more certainty on your income, and you can calculate your tax bracket with more clarity and make sure you do the right amount. This also requires that you spend a little time in November or December trying to figure this out. That’s the standard. So what have you got in addition to that?

JA: Well it depends, Tom, on what your income looks like. If it’s W2 type income, you work for an employer, it’s not variable, you get a 1 to 6% increase cost of living or something like that. Take a look at last year’s tax return, and then you just put in your cost of living wages in there, and then if you have interest or dividends or other types of income, it might get a little bit more complex. But if it’s just a straightforward tax return, here’s what I would do. Look at what line 43 says on your tax return for last year. That’s going to be your taxable income. Then I’m going to look at the tax tables, and I’m going to say, “well how much room do I have in that particular tax bracket that I want to convert?” So there are three different strategies I’m going to give you. I’m going to say the best time to convert Alan, and you know this, is the beginning of the year – if you know the amount. So let’s say I had $20,000 worth of room in my tax bracket last year, I might convert $17,000. A little bit lower, but I’m still going to convert in January.

JA: And so explain why is it better at the beginning of the year?

JA: Because I want to have that time for the dollars to grow.

AC: Yeah, tax-free. Why not? You get another year. Do it in January instead of December.

JA: Exactly. Let’s say the market performs 6% in a year. Well if I’m in my Roth IRA January 1, all of that 6% grew in my Roth IRA starting Jan 1. If I waited until December, well that 6% is already happened, per se. So I’m only going to have that little bit of growth within the Roth. The second way to do this is dollar cost average into the Roth IRA. So let’s say you wanted to put $12,000 in the Roth IRA? Put $1,000 per month as a conversion into your Roth IRA. So then you can kind of gauge things throughout the year and adjust as necessary. So as the market is volatile, you’re going to take advantage of better pricing as markets go down, as you dollar cost average into the Roth. Now those Roths are at a lower price. Sometimes you might time it wrong, prices are high. It will all even out, in most cases, in your favor. So you could do it that way, just dollar cost average in. But again, it does take a little bit of work to look at what your line 43 was last year, how much that you want to convert, and then you can kind of do it slowly there. The third way is to barbell it. $20,000 is the number again, I’m going to convert $10,000 in January, and then I’m going to wait until November to see where I fall, check my W2s or my paycheck stubs, and say, OK well, maybe it’s not $20,000 it’s closer to $15,000 and then I would convert the additional $5,000 at that point. I’m trying to take advantage of the time value of money to get the money into the Roth as soon as possible. So there’s a couple of different ways. The most conservative way is to wait until the end of the year to find out exactly what your paycheck is going to be and then convert it, like, December 15th.

AC: All right. So I agree with all three of those strategies with one caveat. And that is, you can’t really look at last year’s line 43, because the tax law is different. So you start there, correct. But then you’ve got to look at what’s going to be different. For example, if you’re married and you got two exemptions last year, that was about $8,000. That’s gone. So right off the bat, you lost $8,000. Itemized deductions, let’s say you got $30,000 of itemized deductions last year. And when you look at the new rule that says you can only deduct $10,000 for state taxes and property taxes, you might be below the standard deduction, which is $24,000 for a couple. So maybe you lost $6,000 there. So add those two together, that’s $14,000 of less deductions. You would add that’s line 43 to get your current year amount, and then you gotta go to the current year tables which are a lot more generous. Like for a married couple, $315,000 of taxable income is the 24% tax bracket. Last year in that income level you were probably in a 35% bracket when you counted alternative minimum tax.

JA: Right. I thought that was pretty good.

AC: That was wonderful.

JA: Wonderful.  And our good producer, Andi Last, she was just at a FinCon conference, Alan, did you know about this?

AC: I did.

JA: And so she wrote a little white paper here, 7 Business Lessons Everyone Can Use from FinCon18. Seven businesses? You couldn’t think of 8?

AL: Actually there is a bonus one in there. (laughs)

JA: There are eight. All right. There you go.

AL: So FinCon is “where money and media meet” – it’s a conference for money, nerds, basically. And so these are great ideas from people like Jean Chatzky of the Today Show, Chris Hogan from Ramsey Solutions, Joe Saul-Sehy from Stacking Benjamins, people like that.

AC: You want to give us a highlight?

AL: Sure, I’ll just go through them real quickly. The first one is, have specific goals. Don’t just get into it without having an exact idea –

JA: You can’t give all 8 away, you can give like three. It’s called a tease.

AL: Right. Exactly. And then, make your business about helping other people. Don’t go into it with the plan of, “I’m going to get rich and famous.” Look at how it is that you’re going to actually serve your customer the best. And fill unmet needs. Find out what your competition is doing. Find out what the holes are in what they’re doing, and make sure that you are filling those needs. So there you go. Those are the first three.

JA: We blew it, Al, when we started this company. (laughs) I wish I had this little white paper

AC: I know. If we would have known 10 years ago.

JA: Right? Where can people find this, Andi?

AL: They can download it from the show notes for this episode, just look for 7 Business Lessons Everyone Can Use from FinCon18, or you can go to PureFinancial.com/FinCon18.

JA: FinCon18.

AC: Great.

17:08 – Donor-Advised Funds, Qualified Charitable Distributions, RMDs, Roth IRA Rollovers and Paying Advisor Fees


JA: This one is from Bill. Bill writes in, “Joe and Al, based on information from your podcasts, I’m planning on allocating a portion of my 2018 RMD to charity so that those dollars will not count as income to me. To this end, I set up a donor-advised fund. However, when I contacted Schwab Charitable, they said a donor-advised fund is not eligible for a direct contribution. Per a law passed in 2016, you must donate directly to the charities themselves. And while on the subject of RMD restrictions, I understand you cannot allocate any part of the RMD as a rollover to a Roth IRA. If you want to roll over funds, you have to do that with monies taken out in addition to the RMD. Is this all correct? I also have a question. I listened to your podcast with Jeff Levine. I believe he said there may be a tax advantage to paying investment advisor fees from funds outside the accounts rather than having the advisor take it directly from the accounts. Did I hear that correctly and can you explain? Your podcasts are great, I always learn something new!!” Thank you, Bill.

AC: All right, love to answer those questions.

JA: All right. First things first Big Al, so he wants to do a QCD.

AC: Yeah, a qualified charitable distribution.

JA: And a QCD allows someone to take the required minimum distribution up to $100,000 and give that directly to charity.

AC: Yeah, and it can be more than your required minimum distribution. You can do up to $100,000 and it can count your RMD. You have to be over 70 and a half. And if you’re married, you and your spouse could potentially do it. The advantage there is the money that comes out of your IRA as a required minimum distribution does not show up on your tax return. So you don’t pay any income taxes on it, and that’s even more beneficial right now, Joe. Because a lot of people are not able to itemize their deductions because there’s a higher standard deduction. So I think a lot of people are going to be using that. Now, can you give directly to a donor-advised fund? Unfortunately, the answer is no. So that’s a correct answer you got from Schwab Charitable.

JA: Right and you wouldn’t want to. In most cases now. Because if you’re giving it directly to let’s say a donor-advised fund, I guess you could take a distribution, pay the tax, and then put it in the donor-advised fund?

AC: Yeah but that’s the same-same as taking it out and giving it to anybody.

JA: Yeah it doesn’t make a lot of sense. So the pro is that you just give it directly to the charity of your choice. You could give any dollar figure up to a maximum of $100,000 that comes from your retirement account.

AC: Right. So let’s say your RMD is $10,000. OK, so you can do $2,000 directly to charity. That’s fine. You could do $10,000. You could do $100,000. But if its $10,000 or over, it counts as your full required minimum distribution.

JA: Going on to the next question you had, Bill, is that you’re asking about Roth IRA conversions. You are absolutely right. You cannot convert a required minimum distribution to a Roth IRA. The RMD always comes out first, so you have to take the RMD out first, then you convert whatever else that you want.

AC: Yeah and I think a lot of people don’t know this rule, they get it backward. So they do a conversion first and then a required minimum distribution second, and you actually can’t do that – it’s a prohibited transaction.

JA: Right. What happens then, if you did do that, it’s like an excess contribution into the Roth IRA and you’re going to penalize 6% per year that that money is in the Roth. Here’s the rationale behind it, it makes sense: if I have $100,000 in my retirement account at December 31st, and then let’s say January 1st – because that’s where they calculate the RMD – and they’re like, “Oh OK, well no, just kidding, I’m going to convert $50,000, and then I’m going to calculate my RMD on $50,000.” Well no, you’ve got to take the distribution first, then you can convert. So you are correctamundo there, Bill, you’re on top of it. And then the last but not least – I think you got that one backward.

AC: Yeah you do have that one backward.

JA: Two out of three ain’t bad, Bill.

AC: It’s pretty good. In the past, you could pay your IRA fees to an advisor out of your trust account. You could pay it directly from your trust account and get a tax deduction. It was a miscellaneous itemized deduction. That’s gone, so you can no longer take that deduction. You want those fees, to the extent there are fees, to be taken directly out of your IRA. You don’t want to pay it personally, there’s no tax benefit. If it’s in your IRA, you’re reducing your IRA balance, which then reduces your RMD. So it’s important that you now have the fees come out directly from the IRA.

JA: Yeah but in essence too, when you take the fees out of the IRA it’s a tax-free event too.

AC: Yeah it’s like you paid the fees but didn’t pay – with pre-tax money.

JA: Right. I have a $2,000 fee in my IRA and I take it out of my IRA to pay the advisor, it’s not a taxable event. So it’s almost same-same as saying, “I’m taking the $2,000 out of the IRA. I’m not paying tax on it,” versus saying, “all right, I’m going to pay you out of my checking account the $2,000 of that money that I have already paid tax on and then I’ll try to take a tax deduction.” The law changed, they won’t allow you to do those tax deductions anymore.

AC: Yeah, so don’t do that anymore. You might have a question, in your IRA can you pay your trust account or non-retirement account fees, and you cannot. So just have the fees come out of the accounts that they belong to.

Roth IRA Basics — White Paper

Learn more about creating charitable tax deductions in the show notes for this episode at YourMoneyYourWealth.com, and download the free Roth IRA Basics white paper. If you’ve got questions – and I know I do – or if you need more guidance on your specific situation, email info@purefinancial.com or call (888) 994-6257.

23:03 – Retirement Savings Strategies When You Have No Savings

JA: Let’s go back to the email bag. We’ve got Debra. She’s got a question for us. “For someone like me who’s 66 and female with no 401(k), no savings, no stocks, nothing but a 2017 vehicle and lives in a room that I rent in someone else’s home.  All I have when I file for Social Security this upcoming year will be all that I have to live on with a small pension of less than $1,000. What is your recommendation? Please take into consideration, Alan, my health is not as good as it used to be. So if I was able to work I would not be able to do so past the age of 68. I know you talk about all the people with stocks, 401(k)s, and savings accounts for the past 40 years, I do not have any of this in my portfolio. How can you help me and people like me? Thank you for any help that you can give – Deborah.” All right. So she’s got a car. She’s looking to file Social Security benefits. She’s 66 years old. She’s got a small pension of a thousand bucks. And, what type of advice are you giving her, Alan?

AC: It’s a good question, I don’t know if the $1,000 is per year or per month. Either way, it sounds like it’s not really enough for her to live off of her lifestyle. And Deborah I would say, unfortunately, this is not an uncommon situation, and what do people do in these situations? Unfortunately, a few things. One is you got to take a really good, hard look at your budget, and you got to probably cut some things out. You’re going to be working… Is she still working? Yes. 66. Couple more years maybe. So I would say this. So look at what you have that you can possibly cut. You’re going to have to cut your lifestyle anyway. So get used to that right now.

JA: Yeah good point.

AC: That’s number one. Number two is, why do you have a 2017 vehicle if you don’t have any other assets? Maybe you’re leasing it, maybe you got stuck into a high lease. If you own it, sell it. Buy something cheaper. You need to build up whatever sort of liquid assets that you can build up, and then I’ll go back to my first comment. If you cut your lifestyle, maybe you actually can save a little bit over these next couple of years so you at least have something to work with. You might look at – well, you can’t downsize, you’re renting a room, but maybe there are other parts of the country that are cheaper, you know for example. Do you have kids? Maybe you’re going to have to get a little help from the kids, maybe live in the same community as them, and they could help out a little bit. Unfortunately, this is somewhat common.

JA: Deborah, here’s my advice. Look at your Social Security statement. Figure out exactly what that benefit is going to pay you at 68 or 70. I would suggest trying to work as long as you possibly can. But then let’s say your Social Security benefit is going to be hypothetically, I dunno, throw out a number. Fifteen hundred bucks a month. Try to live off of $1,500 a month for the next two years. Right now, try to do it.

AC: And you can add your future pension too.

JA: Sure. Yeah. And then everything else that you have as income, save it. Because that’s where it’s going, regardless. In two years, that’s your income. If all you have is Social Security and a 2017 Jaguar…. (laughs) No I’m kidding. But you have to start pretending.  If you’re making $80,000, do not be spending $80,000. Start rehearsing your lifestyle with the amount of income that is going to come in, right now, and then save everything else and your retirement is going to at least be a little bit more palatable.

AC: Yeah, I’ve got one other thing to say, and so you’re suggesting that you may not be able to work past 68, and I’ll take that at face value. But is there anything that you can do from home part-time or something, whether it’s walking dogs or babysitting or something to bring in a little extra income as long as you’re able to? That would be another way to sort to help bridge the gap.

27:15 – Does the IRS Collect FICA Taxes from Roth Conversions?

JA: This email is from Luis. Folks, if you’re going to email us let’s make it a little bit more personal. I want to know where you’re from. Make it up. Let’s have some fun with these emails – or else we’re going to make it up for you.

AC: So where do you think Luis is from?

JA: San Diego I’m guessing. “Hi, Joe. I really enjoy your webinars, am learning a lot from them.” Thank you very much, Luis. “I’m 63, retired, and plan to apply for social security at FRA.  I have about $900k in a traditional IRA and about $250k in taxable accounts.  To balance my investments and reduce my taxes when I have to take the required mandatory withdrawals (I don’t plan on taking any withdrawals before then or age 70), I’m taking your advice and plan to convert at least half of my traditional IRA funds to a Roth IRA.” First of all Luis, we do not give advice on this program whatsoever. We chat about strategy.

AC: True. Our compliance officer made us say that.

JA: And I’m not sure if I’ve ever given anyone the advice to convert half.

AC: No, but we do like Roth conversions and I do agree with the concept.

JA: “I know I have to pay the income taxes on the conversion at my marginal tax rate (which I can pay from my pension),” but here’s a question: “does the IRS also collect Social Security and Medicare taxes from it as well? Appreciate any advice you could share. Best regards Luis.”

AC: So the question is does the IRS collect Social Security and Medicare taxes from the conversion, I guess is that what you read?

JA: That is what I read.

AC: OK. The answer is no. In fact, they only collect Social Security and Medicare taxes on earned income, so that salaries or if you have a business that is profitable, that would be earned income too. So that’s the two cases where that happens. So no, there’s no Social Security and Medicare taxes. But I think the bigger question or the comment that I’ll make is I agree with your strategy in terms of Roth conversions. But it’s not necessarily half. The goal is a little bit more current tax bracket, how much you can convert maybe to that bracket, look at your retirement tax bracket given required minimum distributions. In some cases, we find some people may only need to convert about 25% or less of their of their IRA because they’ll stay in the lowest bracket anyway.

JA: Yeah but it sounds to me that Luis has Social Security and he also has a pension. And so now the question comes into play is how big of a pension, what’s his Social Security benefit, he’s pushing his Social Security benefit out, he’s going to take it out at FRA, full retirement age. I don’t know if he should do that. I think he might want to push that out to age 70. He’s already taking his pension and then it’s looking at how much money should he be converting? So you have to take a look at what tax bracket is he in now, what tax bracket is he going to be when he starts claiming required distributions? Then he also has to take a look at it he’s married or single, if he loses a spouse, what’s the tax bracket there? So it could be a lot less, as Al was saying, of 50% of your money. Or it could be a heck of a lot more. So it’s not like a rule of thumb to say, “oh, I want to half in my IRA, half of my Roth.” It’s not as simple as that. I wish it was. So you probably want to do a little bit more planning, but I agree with Al. I like where your head’s at, tax-free dollars for the long term is a good idea. Especially it sounds like you don’t necessarily need the money because you have pensions and Social Security to live off of, and then that could continue to grow for you tax-free.

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Click Special Offer at YourMoneyYourWealth.com or visit the white papers section of the Learning Center to download our free white paper: 8 Types of IRAs. It covers each of the different types of IRAs, who can contribute, how deductible and non-deductible IRAs are different and which IRA is right for you. One of those 8 is the self-directed IRA. We do get questions about ‘em…

31:18 – The Problems with Self-Directed IRAs

AC: Do you like self-directed IRAs?

JA: No, I don’t really care for self-directed IRAs at all.

AC: I don’t either. That’s where you have non-traditional assets, like real estate. That’s probably the most common one, and I’ll tell you what, as a young CPA interested in investing in real estate, and the capital that I had to invest was inside my retirement account, I got all excited.  I got this book on investing in real estate. I read the book cover to cover, and I put it down, I said, OK, I’m never going to do that, because that’s really not a very good idea on so many levels.

JA: I don’t know why – I can’t think of… Well, here’s the only rationale I can think of where it would make sense to buy a hard asset, real estate, like a single-family residence, inside my retirement account. If I was a master flipper and I had the tools and the materials and I was – you know, my old man was alive, that he could go in there and fix up the houses with really cheap labor, like zero labor cost and very cheap material cost, and we were going to buy a couple of homes and then fix them up and sell them that year. At a profit.

AC: You got two problems with that strategy. One is you’ve got unrelated business income tax because that’s like a business.

JA: Oh yeah, that’s right. Because I’m putting money into the property.

AC: Wel,l because you have a business inside the IRA, which may give rise to the unrelated business income taxes. So that’s number one. Number two is you can’t be involved in the business, otherwise, it blows the whole thing. So anyway. Great idea. (laughs)

JA: Awesome. So no. I don’t see any reason why to do that, Alan.

AC: Let me tell you why not to do it. So first of all, when you have the real estate in the IRA, you put the asset in, and then you’ve got to have a checkbook. Rental income comes in, OK you got the rent, and whoops this month you’ve got a repair. I don’t have enough money in the checkbook. Can’t make the repair. You can’t pay for it yourself, because that’s a prohibited transaction.

JA: It’s like a contribution to your IRA that you can’t make.

AC: Right, so you’re stuck. The second thing is, you can’t borrow money. I mean, I suppose if a bank would lend you money, which is very rare, but I guess if they did, then you have to do this unrelated business income tax. But anyway, you generally can’t borrow against it. And that’s one of the reasons why people like real estate – you don’t have to put all your own money in. You put a 10, 20%, 30% down payment, and you get the bank do the rest. And so you stretch your investment capital. That’s how you make money in real estate. You can’t do that inside an IRA. Then all of the income is tax-deferred. But if you would have had it outside, you would have depreciation. It probably would have been tax-free anyway. If you sell the property inside the IRA, no big deal, but you could sell it outside of the IRA, do a 1031 exchange, no problem. If you pass away and own a piece of real estate, it gets a step up in basis. The next generation gets that asset, sell it, pay no tax. In your IRA, no step up. Your kids, when they get that money out, fully taxable. At 70 and a half, you have to take a required minimum distribution. How do you do that if you have a property? You can’t just like take a board off the wall and say, “OK this is my RMD.” (laughs) It has to be cash. So you’re going to have to sell the property inside… oh there are just so many situations.

JA: There’s gotta be a lot of cash within the IRA to make it work, as well as, you’ve got a million dollar IRA and then maybe you have a $200,000 property and you have $800,000 liquid?

AC: And then there’s problems with – you can’t really do the maintenance yourself because that’s related party issue – prohibited transaction. There’s almost no reason I can imagine why – the only reason someone to want to do it is that they are so distrusting of capital markets, and they would invest either in cash or in real estate, I guess maybe that person.

JA: And we know who you are. (laughs)

AC: (laughs) We do know who you are.

JA: We get a lot of real estate investors that come through.

AC: Well, because we talk real estate. And I think it’s important because real estate is a part of your finances that we should talk about. I just don’t like it inside of an IRA.

JA: No, me neither. I remember ’08, and we were doing these tax workshops and we would get several questions of, “hey, I got an IRA in my real estate…” I got an IRA in my real estate? I am almost on the verge of getting a lobotomy. (laughs)

AC: (laughs) Did you forget your Wheaties this morning?

JA: I did something.

AC: How’s your back? Is it better?

JA: The back is better. Thank you.

AC: Good, because yesterday you were limping.

JA: I know, I pulled a hammy sleeping. I don’t know how that happens. (laughs)

AL: (laughs) How old are you now?

JA: Don’t worry about it, Andi.

AC: What goes on in your bedroom? (laughs)

JA: I don’t know what happened. I was watching a movie, I fell asleep, and then halfway through it was like I couldn’t lift my leg.

AC: That’s the story you tell your mom? (laughs)

JA: Yes. And that is the story I’m telling my audience, here. That is exactly what happened.  All right That’s it for us. I want to thank Andi Last for coming back from FinCon in one piece.

AL: Oh, thank you. Appreciate that.

JA: I know sometimes that’s a big party and people do some crazy things. Looks like she made it back, totally normal, with a big bag of notes and she wrote an article. So Alan, great job today. The show is called Your Money, Your Wealth®, we’ll see you next week.


Yes it was a party, but more importantly, I learned a lot. And you can download those 7 Business Lessons Everyone Can Use from FinCon18 in the show notes for this episode at YourMoneyYourWealth.com, which is also where you can find links to subscribe to the podcast on any and all of your favorite podcast apps. We’re on Google Podcasts,  Apple Podcastswhich is also where you can find our ratings and reviews in iTunesSpotify, Stitcher, Overcast, Player.FM, iHeartRadio, TuneIn, For answers to your money questions, email info@purefinancial.com, or call (888) 994-6257! Listen next time for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.