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
April 26, 2022

Does it make sense to do larger “Calvin Johnson” (Megatron, aka mega backdoor) Roth conversions when the financial markets are way down? Should you convert to Roth now, or in retirement? How do you spitball the right amount to have in 529 plans for education savings? And are the rules for doing a backdoor Roth the same if you’re married filing separately?

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Show Notes

    • (00:38) Does It Ever Make Sense to Do Larger Roth Conversions in a Substantially Down Market? (Mike)
    • (16:14) Retirement Spitball: Do We Have Enough in 529 for Our Kids’ College?
    • (24:28) Retirement Spitball: Roth Conversions Now or in Retirement? (Dan, Los Angeles)
    • (33:47) Married Filing Separately Backdoor Roth Contribution Rules (Jim – voice message)
    • (41:58) The Derails – Comment: No Joe = Woe is Us

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WATCH Joe and Big Al answer questions from the YMYW podcast – on video! 

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Today on Your Money, Your Wealth® podcast 375, Joe and Big Al spitball on your Roth conversion, backdoor Roth, and Roth, 529, and retirement planning questions. Does it make sense to do larger “Calvin Johnson” Roth conversions when the financial markets are way down? Should you convert to Roth now, or in retirement? How do you spitball the right amount to have in 529 plans for education savings? And are the rules for doing a backdoor Roth the same if you’re married filing separately? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Does It Ever Make Sense to Do Larger Roth Conversions in a Substantially Down Market? (Mike)

Joe: We got “Hello, Andi, Joe and Al. Most importantly, we drive a pair of 2016 Mazdas, zoom, zoom.” A pair.

Al: Yeah. They each have one.

Andi: His and hers.

Al: Anne and I have two Infinities.

Joe: “We got a box turtle named Hamilton and a cat named Angel. We keep trying to be couch drunks in retirement, like Joe has suggested, but we love exercise, fitness and healthy food too much. However, with all your help, we upgraded from Coors Latte to Michelob Ultra. So we highly recommend Joe consider that upgrade when he becomes, well, a bit more stable.” Wow.

Al: Yeah. In your later years. Less carbs.

Joe: “It seems a good rule of thumb to do Roth conversions when possible to the top of the marginal tax bracket you expect to be during retirement, especially when you are in low income years and with funds available to pay the tax on the conversion outside of the retirement accounts. I would like to hear your spitball analysis on when it might make sense to do even larger Roth conversions, going into even higher tax brackets in a down market. I went back through old podcasts and couldn’t find any detailed discussion on this. In general, my question is, does it ever make sense to pull the trigger on larger Roth conversions in a substantially down market? If so, is there a rule of thumb? How far down in the market to then convert how far up? The question of how much to do on Roth conversions each year to the top of which bracket seemed to be the most uncertain aspect of our detailed financial plan-” Oh, yeah. Okay. Page two.

Al: Page two. Here we go.

Joe: “- which is understandable giving changing conditions. I appreciate both Joe’s shoot from the hip gut instinct approach as well as a CPA map from Big Al to back it up. Between tax brackets, returning to pre-tax cuts and JOBS Act, after 2025, the Congress targeting Roth account options, now through 2025 is clearly a great opportunity to maximize Roth conversions. Feel free to cut this off now.” Is that him?

Andi: That’s him. Yes. He wrote that. Then the rest of this, the next two and a half pages are, “If you have time for more, here’s a whole thing you can spit ball.”

Joe: Okay, well-

Al: Let’s start with this.

Joe: “Feel free to cut this off now.” All right, Mike, I’m going to cut it off now. So he’s saying, is there a different rule of thumb if the markets are down?

Al: Well, his first premise is go ahead and do Roth conversions if you are in the same bracket or lower that you’re going to be in retirement and you’ve got the money to pay the tax. Yes. That’s kind of a no-brainer and it’s even better right now because the tax rates are lower than they will be in 2026. So it’s doubly a good idea.

Joe: Doubly.

Al: Currently.

Joe: Doubly good.

Al: Yes, doubly good. Two times the pleasure.

Joe: Two times the fun.

Andi: You guys are the Wrigley Double Mint twins.

Al: That’s correct.

Joe: God, I can’t believe I remember that.

Al: Me neither.

Joe: So looking at this, so what he is saying is that well, the market’s down. Should we do a bigger Roth conversion? And I don’t think that’s the- I wouldn’t. Because you’re converting more shares when the market’s down. So it’s not, do I convert into a higher tax bracket then I’m going to be in the future? You’re already converting more shares of stock because those shares are worth less. But it’s the timing of it, is the key component of it.

Al: It’s hard to know. Right?

Joe: I mean, so the market drops 20%. So do you convert that? And then it drops another 20%, but you already converted to the top of the bracket. So do you convert more? I mean, and at that point, maybe, does it make sense? This is my gut reaction that he wants. Maybe. I mean, depends on how much money that he has in the overall retirement account. Depends on, you know, if I convert a little bit more, let’s say into the 24% tax bracket, if I’m going to the top of the 22%, does it make sense maybe to convert another tronch? Yeah, maybe. You would have to run the numbers because potentially you’re going to be in the 25% when the tax cuts and JOBS Act comes back in the year 2025. So, but if you’re converting to the top of the 24%, which is a giant tax bracket, I don’t think I would go higher than that.

Al: So I would say it this way. Remember when the market was down during the great recession? And people converted at that point. And we tend to recommend that you put your higher expected earned asset classes in the Roth because all that growth will be tax-free in the future. And so then people converted while the market was lower because the market had gone down. And then back in those days, we had till October 15th of the following year to determine what the account balance is. And if the account balance went up 10% or 15% or whatever in that year, year and a half, whatever it may be, then it was like, well, the tax you paid, when you consider what you got in the Roth was actually pretty low. So I, to me, the CPA math is this, if you believe the market is going to go up 10% in a relatively short period of time, then you might even want to convert past the 24% bracket all the way to the 32%, because that 8% additional tax, it’s going to be recovered when the market recovers. The problem is it’s impossible to market time.

Joe: Absolutely impossible to figure that out. Before, what we would do, the best strategy is that we would, you had the ability to re-characterize. So we had some Roth conversions. We would do like 10 different Roth conversions. One was in small cap. One was in the international, one was in bonds. One was in emerging markets. And then you would just let them all run. And then you would wait until October the following year. And then you would look at what had the highest balance. You would keep those and you would re-characterize everything back into the retirement account. Or if there was still such a thing as- then it didn’t matter what tax bracket that you’re in. Just convert $100,000, who cares. And then you would take a look at, does the math make sense depending on the expected rate of return, because you could re-characterize? You can’t re-characterize any more. So that makes that whole strategy impossible.

Al: It’s tricky.

Joe: It still could work out. Right?

Al: Yes.

Joe: You convert, but then just know that you’re stuck with whatever that you convert and you’re going to pay the tax and hopefully long-term that, you know, the Roth is going to produce for you.

Al: And markets do tend to recover. You just don’t know how quickly and when. So that’s the risk that you’re taking. But the theoretical mathematical answer is yes. I mean, you would rather convert while the markets are down because you’re putting less money into the Roth because the markets are lower and hopefully it grows that much quicker.

Joe: So a couple of different rules- or different thoughts- or different strategies. There’s a barbell Roth conversion strategy that, you wait, you take a look, and if there’s volatility in the market- And let’s say your conversion number is $40,000. So maybe you convert $10,000 or $20,000. So you still have a reserve of another $20,000. So if the market dips again, then you’ll get to your $40,000 later. Some people will do a conversion right in the beginning of the year, because it’s better to do a conversion in the beginning of the year, especially if the market goes up. Because then all of the growth for that year is in the Roth IRA. Some people wait until the end of the year. Well, if you wait until the end of the year and you have a good market year, well, that’s not a really great strategy because you missed all of that growth that’s sitting in your IRA versus your Roth IRA. You might want to do it monthly. Right. Hey, you want to convert $100,000, $10,000 a month. There’s all sorts of different, crazy things that you can do to maximize the effectiveness of conversions. But what Mike is asking us is market timing, which we don’t have a crystal ball, but if the market does go down, that is the best time to convert. But just know that the market could continue to go down, and then if you convert it to the top of whatever bracket that you wanted, does make sense to convert more? It’s going to be on your assumptions of what you think the expected returns going to be in that account.

Al: Yeah, that’s exactly right. When we could do re-characterizations, it was an easy math puzzle, but now it’s more difficult as you said.

Joe: He goes on to say so if he answered, “ – it depends on each specific situation, then perhaps you have time to spitball this more detailed hypothetical situation. So assume an early retired, married, couple with circumstances similar to above can happily spend $150,000 per year while itemizing above $30,000 a year and so that puts them towards the upper end of the 22% tax bracket. They have accomplished many years of Calvin Johnson Roth conversions, as well as plain vanilla Roth conversions. They also have enough conservative brokerage funds as well Rule of 55 401(k) funds to get them to 59 and a half late in 2025, allowing them to continue doing Roth conversions through 2025. Fortunate timing for them, given the current tax laws, huh? Also, in total they have $1,000,000 in Roth, $3,000,000 in tax-deferred and $500,000 in taxable. Let’s say they –“ why doesn’t he just tell me what the hell you got? Well, let’s just say they have this and let’s just say they have this. And just assume we got this. So annoying.

A: It gets very specific.

Joe: It’s just, just tell me what you got. I mean, people want to know, it’s like, we don’t know who you are, so it’s all right. Let’s just assume – let’s say they have $600,000 and he’s talking himself, like in third person here?

Al: Yep, he is.

Joe: So annoying. That’s like one of my, Joe’s pet peeves.

Al: So here’s a better way to do it. Just change your name. If your name is Mike, then call yourself Fred. Right, whatever.

Joe: Johnny. “- $600,000 left on a 30-year fixed mortgage at $2,750,000 in the home equity. They are empty nesters with 5 kiddos, all out on their own and self-sufficient. Hallelujah. Their pensions and Social Security will eventually cover about half of their income needs, but even without those funds, fixed income funds, their retirement savings could be enough to cover all their spending, given a 4% rule. So they plan on delaying taking Social Security as long as possible. All that together with their more conservative IRAs, 403(b)s, they forecast that they may never touch the Roth funds, but they will still want to optimize conversions to provide tax management control. Particularly if one of them were to pass away early in retirement or to otherwise maximize passing down their kiddos with minimal taxes or to buy a Ferrari in 2026. They should be able to convert enough or more so as to avoid excess RMDs. But Congress keeps leaning toward making the RMD rules a bit less om- “

Al: – ominous.

Joe: “- ominous. They’re currently targeting to Roth convert another $600,000 funds between 2023 and the end of 2025 to the top of the 24% tax bracket, figuring that 22% will go to 25% after 2025. And probably only get worse downstream on that. Those targeted funds are invested fairly aggressively in stocks in the Roth converted IRA, which permits in-kind instant conversions. So then please consider spitballing this more specific example of my general question. Let’s say they have already Roth converted early in 2022 to the top of the 24% tax bracket and then a stock in their Roth converted- then the market drops 30%. Given their long-range horizon or Roth funds, is 30 years or, or possibly never, does it make sense to in-kind convert those equities beyond the top of the 24% tax bracket to the top of the 32%? Would that make sense? Hypothetically, of course.” All of that, for that.

Al: You did a great job reading though, except for that one word.

Andi: And he did point out that Calvin Johnson’s nickname, which I’m showing on screen now is Megatron. So that’s why he said the Calvin Johnson Roth.

Joe: Got it. I don’t think he’s got enough money to convert to the 32%. Hypothetically- or the people that he’s talking about. He’s got $1,000,000 in a retirement account, you’re going to convert to the 32%? I would not convert to the 32% because their RMDs are not going to kill you that bad. You’re already retiring and he’s taking a 55 distribution. So that means he’s taking money out of 401(k) at age 55 to live off of? So they got $600,000 in Roth and $1,000,000 in retirement accounts? If I follow that correctly?

Al: No. They’ve got $1,000,000 in Roth, $3,000,000 in a tax-deferred –

Joe: $3,000,000.

Al: $500,000 taxable.

Joe: Got it. And he’s 55.

Al: Yeah. He’s between 55 and 59.

Joe: I would convert to the top 22%. I don’t think- because you still have room there. The 24% is giant. $3,000,000. Here’s what this guy, Mike or Megatron or Calvin Johnson, look at what your RMDs are going to be and figure out what tax bracket that is. And then go back to the present value of that and convert out to make sure that you don’t get into that tax bracket. I mean, it’s simple as that.

Al: Yeah, it is. But let’s just – so $3,000,000 could be $6,000,000, or more at RMD age, right?

Joe: He’s already converting to the 22% and he’s got plenty-

Al: I understand. So without any conversions, right? So that would be $240,000 and then you’d have to do a time value of what the tax brackets are going to be. So it’s a little trickier, but I think I would say 22%- personally, I would say even 24% would it be reasonable. Converting an individual stock, to me, is tricky because now you’re banking everything on that stock rather than the market as a whole. That stock may kill it. And that stock may not. And you may end up paying taxes and never get that recovered. So at least for me, I would rather convert small cap values or emerging markets, which is a-

Joe: -a mutual fund or index fund. Not just one individual stock within that market.

Al: Right. Let’s build up a 500, 1000 stocks. That’s what I would rather do. But as you know, if Facebook recovers and does well, then you’re looking pretty good.

Joe: Yep. I agree. 100%. Thanks a lot, Mike. Appreciate the novel.

Now it’s your turn for a retirement plan spitball analysis: visit YourMoneyYourWealth.com, click Ask Joe and Al On Air, send in your money questions, comments, suggestions or requests, and the fellas will answer them right here on YMYW. Try to keep it to novella length if possible, rather than full novel. And hey, if you want to see your money questions answered, make sure you’re subscribed to the Your Money, Your Wealth® YouTube channel. We post video of the fellas answering podcast questions daily. You can watch the YMYW TV, show too, now in its 8th season! The latest episode is on how to avoid playing retirement lotto, from crypto to ETFs, in volatile markets. Click the link in the description of today’s episode in your favorite podcast app, then just click the link to follow us on YouTube.

Retirement Spitball: Do We Have Enough in 529 for Our Kids’ College?

Joe: Go to YourMoneyYourWealth.com, click on Ask Joe and Al On The Air, type in your question and we’ll answer it no matter how great or bad they are.

Al: That’s our- that’s what we try to do them all that way.

Joe: No, we’ll do them all. No matter if you proofread or not.

Al: Cause then Joe has to try and figure out his way through it.

Joe: And by the way, we don’t rehearse this. This is no, there is no, there is no preparation for the show.

Al: I think our listeners know this well.

Joe: I think it adds value of knowing that we know this stuff. Right. Just shows how smart you are now and how great of a reader I am. The third-grade level.

Al: It does.

Joe: “Hello, Joe and Al. I’ve been listening to your show for quite some time, more than two years.” Wow.

Al: We’ve been on the air for 15, 16, but that’s good. That’s better than one.

Joe: That’s better than a couple episodes. “I appreciate you both very much for bringing all this great information. I’m worried that I don’t save enough for retirement. It is long.” Alright, thanks for the warning. All right, here we go. We’ll bust this out. “I’m 40 years old, married with two kids, 7 and 15. My income is $120,000. My spouse is $100,000. I started my career late in my 30s. My goal is to have enough money in my 529 plan and retirement fund. Right now I currently have a Roth 401(k) of $30,000, a traditional 401(k) of $80,000, a Roth 457 plan of $16,000 and a traditional 457 plan of $51,000. I put $17,000 to both Roth 401(k) and Roth 457 at this 2022 and planning to do it until retirement at age 60.

Andi: Actually, that’s $1700.

Joe: $1708. $1708.

Al: Right.

Andi: Not $17,000.

Joe: Sorry.

Al: It would make a difference in the plan.

Joe: It would. That’s a key assumption. It was very specific $1708.

Andi: Yes.

Al: It’s not $7, it rounds to $8, so we’re going with that.

Joe: Oh boy. “I can retire at 57 per contract, pension plan 10%, dedicated for my check and matching 20% from my employer. So I put in $1200. My employer puts in $2200. My spouse also has a pension plan similar to me. We will have $89,000 annually when I retired until he died.” Did he die?

Al: No. When he dies.

Joe: – until he died.

Al: It’s dies.

Joe: “I will have a fluctuating 3% annual income adjustment during my retirement around $100,000 annual until I die. We have 529 plans for our kids. So they got about $30,000 putting in about $500 a month into those. I’m still undecided, if I should increase the contribution to our 529 plans, the leftover money to buy ETFs or I bonds or put it in an UTMA account. My spouse put into his 401(k) $1000 a month and $500 into the Roth. His current combined 457 and 401(k) is $100,000, he’s 46 years old, and he will work for his job for another 19 years. He could retire at 50 years per his contract. He wants to retire at that age, I want him to work until 60.” Well, of course you do. “He might get his way. We just started to invest in our 401(k) and 457 5 years ago when I started my career as a nurse. I’m not sure, should I roll this 401(k), because I will not earn the vested money if I roll over my contributed portion into 401(k) with the new employer.” Okay. I’m not sure what that means. “My brokerage account is $135,000. We plan to create a brokerage account for my husband to start investing as well. My emergency fund is $70,000. We both have life insurance and estate planning. My mortgage is $2700 and rental property paid by itself to the lender at $2000 a month for me. I just refinanced last year for both properties for 15 years, at 1.75%. We don’t expect to get any inherited fund. We both let our parents know to help our siblings instead of giving us money. I told my husband that we are still behind in our finances, especially for college funding and he needs to work until he’s 60. He will be too young to retire at 50. Do we have enough retirement fund if he retired at 50 and I still work until I’m 60? What should I do with these 529 plans? My 15-year-old is getting close to college or university. He wants to go to UC. I know it’s expensive. I spent school years working and my 1.5 years after graduation to pay off student loan debt, and I don’t want this to happen to him. It is very stressful. I really appreciate your response. Have a successful day.” Okay. With all of that Al, what do we got going on? We got some money and we got pensions and the husband wants to retire at 50 and she wants him to work until 60.

Al: So roughly, she’s got a couple hundred thousand in retirement accounts. So does he. They’ve got $35,000 in 529 plans. It looks like they’ve got, call it $150,000 in a brokerage account, something like that.

Joe: And the mortgage- or they’re going to receive $89,000 in pension payments. What are we missing?

Al: Spending.

Joe: Exactly. So we just spent 8 minutes going through-

Al: Now, if you’re spending $89,000, you’re in good-

Joe: You’re good. He can retire at 50.

Al: If you’re spending $189,000 then you got some work to do.

Joe: You’re got some work to do.

Al: Because 4% rule, if you need an extra a $100,000, you better have $4,000,000. Is that the right number? 4 times 4. No, that’s $160,000. So you need about $2,500,000, I think is the number to get $100,000 of spendable money.

Joe: Yeah, it’s probably $1,700,000. So I guess let’s just go through this. So all of you can do this at home. First things first, is so they’re 45 years old. He wants to retire at 50. She’s going to work until 60. So the first step is you figured out what you have. So that’s a good point. You have roughly $400,000 that is saved in your Roth and your 457s and your 401(k)s and IRAs and so on. So that’s what you have that’s going to produce income down the road, that’s going to supplement Social Security and your pension payments. So here’s your liquid assets. Second step is what are you spending? Are you spending $100,000? Are you spending 50,000? And then let’s say you’re spending $50,000. Well, then you have to inflate that. So you’re going to inflate that to his age 50 or his age 60, depending on when you want to retire. So use a conservative inflation rate of, I don’t know, 3% or 4%, something like that. So you’re looking at future dollars, not today dollars. And then you look at what you have for fixed income. So you have pensions of $89,000. You might have Social Security. I’m not sure if you put it in Social Security, but it sounds like they’re putting into the pension and Social Security.
So you’re going to have a pretty good sized fixed income from your pension and Social Security, but you’ve got to figure out what that number is. So looking at that number compared to what you want to spend, what is your shortfall? So if you’re short $50,000, or if you’re short $150,000, those are two huge differences that you will have to do some math to figure out what your nest egg should be.

Al: Right. A couple more quick things. One is when you start receiving the pensions, if you retired 50 and the pensions start at 62, then you got a bit of a problem. Secondly, I think in many cases, it behooves both husband and wife to work while the kids go through college because that’s expensive.

Joe: Yeah. You could cashflow it then.

Al: You can cashflow it.

Joe: So if you had 529 plan is not enough to cover the UC tuition. All right. Well then you can still cashflow with your incomes, but you might stop saving for retirement. But that’s okay because you have pensions and Social Security that’s going to compensate for the lack of savings that you’re doing to bridge the gap for education. So you need to map some stuff out here really to help understand. But I think you’re on the right track. I mean, you’re not 60 looking to retire in 5 years and putting a couple of kids through school and only have a few hundred thousand dollars. I mean, you have a great pension. You both, you’ve done a good job of saving thus far. You started late, no big deal. Now it’s just really button this stuff up to figure out exactly, you know, what are the next steps?

Retirement Spitball: Roth Conversions Now or in Retirement? (Dan, Los Angeles)

Joe: “Dudes. Your shows are awesome. Offering up top shelf financial retirement information. I want to ask you your opinion on my below financial retirement tax plan.” This is Dan from LA. Dudes.

Al: I like that.

Joe: Right on brah.

Al: That’s Southern California talk.

Joe: Hey brah. “I’m single, 55, living in LA, no children and driving a 1998 Acura Integra GS, 104,000 miles on it.” Killing it. “$200,000 salary. While working, my expenses average $32,000 annually the last 5 years. If I stop working, my retiree healthcare would cost me about $1000 a month. 401(k) pre-tax at current employer is $1,200,000, $800,000 invested in index funds, $450,000 in stable value. He’s got $1,100,000 in a brokerage account, all individual stocks. He’s got cash savings of $300,000, Roth IRA of $150,000, traditional pre-tax IRA of $57,000. And he’s got a pension of $9000 at 55, $20,000 at 65, $25,000 at 70. No COLA. I want to wait until I take it at age 70. Social Security is $36,000 at 67, $40,000 at 70. Want to wait until 70 to take it. Currently renting, rent stabilized apartment, maintaining an umbrella insurance policy of $3,000,000 to protect myself. I don’t need to leave much money behind when I pass. I do have beneficiaries on my accounts and I have a will. Longevity, took a test online and it concluded that I will live to 90.” That’s all you gotta do?

Al: I did that too once that a few years ago. I think I’m going to live to 92.

Joe: I’m just going to take a test online. Boom.

Al: And then you know.

Joe: “My grandmother lived to 106 and 6 months. Other grandparents went in their early to mid-70s. Mom passed at 85, her sister at 86, remaining sister alive at 85, in good shape. My father passed at 78. No long-term life insurance policy, rolling the dice. I won’t need it. I recently changed my 401(k) pre-tax contributions to Roth. I will contribute $20,500 plus to catch up this year, contributing $20,000 to my after-tax accounts to convert to Roth in 2022, once it’s safe that the government won’t make me unwind, current tax bracket, 45%.” I didn’t know there was a 45% tax bracket, Big Al.

Al: That’s federal and state of California, I believe.

Joe: “I did an analysis and it shows the Roth comes out ahead by under $10,000.” I wonder what analysis he did.

Al: He got his spreadsheet out.

Joe: He did an analysis after he asked the computer when he was going to die.

Al: He just went on a little calculator. There ya go.

Joe: ”Why not convert while working, thinking about $80,000 a year? Psychologically feels easier to do conversions while working, gives more time to accumulate while I still have a paycheck. If I retire in the next 3 years and it puts me in the 25% tax bracket or 25%, 28% tax bracket, when the tax laws revert back to 2017 rates. What do you think? Convert $80,000 while working? Spend down the cash? Or wait until I retire to start converting? Tax plan, do you think this is a good tax plan? Convert 401(k) to a Roth IRA before 62, if possible, no stealth taxes, IRMA-” Oh, he knows IRMA- “-and minimize the tax on Social Security. Sell out brokerage stocks and reinvest in ETFs, S&P 500 total markets to capitalize cap gains or dividends. Only income to report will be pension and Social Security unless I sell my investments, but at least I can control my income. I’ll need at least $32,000 plus $13,000 retiree health care, plus $20,000 cushion just in case. So $65,000 annually, that is before 70.” So right now he’s getting about $45,000 in dividends from his brokerage account. And he’s going to gradually sell those off and reinvest in a Roth IRA. At 70 add pension and Social Security. Whatever advice you can give his very, very appreciated. Thanks. PS, let me know what podcasts I should go for the response.” What’s his pension? Pension is $10,000. So he’s going to take it at 70. So that’s $25,000 and then his Social Security is going to be $40,000 at 70 and he’s 55. And he’s going to retire when?

Al: Sort of lost track of that.

Joe: Yeah, me too.

Al: But I will say he’ll have $3,000,000 in, within a couple of years. So let’s use that figure for liquid assets and $3,000,000 if you’re retiring, let’s see- you’re 55 now.

Joe: Let’s just say he retires today. Can I retire today? So he’s got to bridge the gap from 55 until 70, so that’s 15 years. So assuming he’s got $3,000,000 and he wants to spend $65,000 with the cushion of $20,000 or no, $65,000 is with the cushion.

Al: That’s with the cushion.

Joe: So you take $65,000, you divide it into $3,000,000. And that number is-

Al: $2. something

Joe: $2,100,000.

Al: Yeah. So that’s a good distribution rate, I would say at that age.

Joe: So then you got to pay a little bit of tax on that. And you could create the income at 55 and be pretty much in the 0% tax bracket because you have a brokerage account, you have some cash. But what he’s doing is he’s got these dividends that are kicking up of $45,000. So unless he’s -he could do that. But there’s probably a better tax efficient way to create income. Maybe that’s been a great play for him to accumulate wealth, but if the dividends are coming out, you can’t hide those on your tax returns. We’d like to create a, like a synthetic dividend for lack of a better word, is that I’m going to sell a share when I need the income versus having the shares or the dividend distributed out to me, because then I’m stuck with that tax bill. It’s going to hurt your conversion strategy because if I could keep the income to a bare minimum from a taxable standpoint on the return, I can do a lot larger conversion on my retirement dollars. I get why he wants to do the conversions while working, because he’s got cash. He doesn’t spend a lot of money, but he’s like, well, it feels better to me because I have a paycheck that I can pay the tax and doing the conversions. So I guess his main question is yeah, he can retire tomorrow if he wants to. Second, should he do conversions if he’s going to continue to work or should he wait until he retired? And I think the answer is both, in my opinion.

Al: Personally, I would wait. And the reason is you’re in a 35%, 45% bracket now, including state of California. When you retire, as Joe just said, if you are tax efficient on your investments, you’re going to be in a super low bracket and you’re going to be retiring. Let’s just say you were retired 60, you’d have 12 years or maybe 15 years if the SECURE Act 2.0 passes to get the converted amount out. So that’s what- I would wait on the conversions. You are already doing Roth 401(k), which I’m fine with that, but I, I personally wouldn’t do any more conversions right now. I’d wait until you, until I retired. Because you got money in a brokerage account to pay the tax over $1,000,000.

Joe: Well, he’s got $200,000 of income, plus another $45,000, so $250,000 of income. I don’t know where he gets the top of the-

Al: Well he’s single that’s-

Joe: No, I understand.

Al: That’s right.

Joe: $215,000 is 32%. Okay. Well, 35% plus 10% is 45% is what he’s doing. So he’s done a great job.

Al: The answer is it doesn’t really matter. You’re in a great spot. But if you want to be most efficient about this, then I do agree with Joe. You can retire. I wouldn’t convert right now. I would wait till you retire. You’ve got plenty of money to pay the tax on conversion. You’ll be in much lower brackets. You got a lot of years to do this. If you were 69, I might say something differently. But since you’d probably be in your 50s, I would wait.

Joe: He’s 55 though. He’s got the time value of money. And he’s gonna live till 90. By the time he turns 90, he’s going to go back to the computer and –

Al: It’s going to say 105.

Joe: It’s going to say 140.

Al: Yeah. He’s going to beat his Grandma.

Joe: So I dunno, but I would convert.

Could you retire today if you had to, or does your retirement plan need a reality check? Whether you’re squarely in your working years, nearing retirement, or already retired, download the Retirement Reality Checklist from the podcast show notes and learn the strategies that’ll help ensure you’re meeting your retirement saving and investment goals. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, read the transcript of today’s episode, download the Retirement Reality Checklist, and share YMYW to spread the fun and the knowledge. Don’t forget to click Ask Joe and Big Al On Air in the podcast show notes to send in your money questions via email or via voice message, like Jim did.

Married Filing Separately Backdoor Roth Contribution Rules (Jim – voice message)

Jim: “You guys have the best podcast of all. I drive a 2017 Toyota Tacoma and my beverage of choice is a good bourbon. Onto the business. My husband and I have to file taxes separately due to student loan repayments. As a result, we cannot start a Roth IRA. So the question is, if your IRS filing status is married, filing separately, does the same rule applies to the backdoor Roth contributions? Thanks for educating and entertaining. And thanks for your spitball. Jim.”

Joe: All right. Best podcast of all, Alan.

Al: That was very nice.

Andi: Notice Jim didn’t actually say YMYW, so he might’ve sent this to everybody.

Al: Good point, good point.

Joe: Just a blanket voicemail to every single financial podcast. So he wants to do a backdoor. So married, filing separately, the Roth conversion rules and contribution rules are a little bit different than single and married, but can he do the backdoor?

Al: So maybe we should explain right off the bat. So when you’re married, the Roth contribution limits start phasing out at $204,000 of, gosh, now I can’t remember, is that adjusted gross income or taxable? I think it’s adjusted.

Joe: Adjusted gross.

Al: That’s what I thought. Okay. $204,000 to $214,000 –

Joe: Are you in Hawaii?

Al: Yes, I am.

Joe: Can you tell? You got a Mai Tai going there, brother?

Al: Yeah. I already had two. Yeah, single, the phase-out starts at $129,000, and for married, filing separate, the phase-out, starts at zero and completely phases out at $10,000. So most people married, filing separate cannot do a Roth contribution, at least in the normal way. But then the question is backdoor Roth. Backdoor Roth is when you make an IRA contribution, generally non-deductible, but it could be deductible, but generally non-deductible. And then after that, you go ahead and convert that amount and you don’t pay tax because you didn’t get a tax deduction. Those same rules apply to a married, filing separate it’s just that you have to do it at $10,000 of income, or instead of like $214,000 of income.

Joe: What are you saying?

Al: What do you mean?

Joe: You’re saying he cannot qualify to do an IRA contribution, deductible or non-deductible, if he has adjusted gross income over $10,000?

Al: No Roth, Roth contribution.

Joe: Yeah. So he could do an IRA contribution, for sure.

Al: That’s what I’m saying.

Joe: Yeah. Married finally separately. So you make the IRA contribution and then you go ahead and convert the IRA contribution into a Roth. Because there is no adjusted gross income limitations on a conversion. There’s only adjusted gross income limitations on the contributions. The only thing that Jim needs to be worried of is the pro-rata rules and the aggregation rules.

Al: Correct.

Joe: You know, I don’t really think those, I mean, who cares? If you’re only doing $6000, $7000? I mean, the pro-rata aggregation rules, the tax is not going to be that big anyway. Let’s say he doesn’t- it’s a full deductible contribution. And then they’re like, oh, well I can’t do the backdoor because I got the deduction. And if I convert it, I have to pay tax. Well, if you did a straight contribution, you pay tax because it’s an after-tax contribution. It’s the same same.

Al: Yeah. That’s exactly accurate. I think a lot of people sort of lose track of that. If you don’t get an IRA deduction, when you do the conversion, then there’s, there’s no tax. Or if you do get the, if – I already lost track- the Mai Tais are kicking in.

Joe: I got you covered, brother.

Al: You take it.

Joe: But here’s the issue. Everyone loves the word backdoor. You got backdoor, you got the barn door, you got the Megatron, you got the other stupid things that people just love to talk about the backdoor Roth. I mean, we should be called The Backdoor Roth Show.

Al: Yeah we should.

Joe: That’s all we do is talk about the backdoor. I mean, just think about it folks. It’s if you make a Roth IRA contribution, it’s an after-tax contribution. So you already paid tax on those dollars from your paycheck, and then you take those dollars and you put it into a Roth IRA and all of those dollars will grow 100% tax-free. Let’s say, but, oh, well I don’t qualify. The best thing about, you know, If you don’t qualify for the contribution because you make too much money, then that’s when the backdoor makes sense. It’s like, okay. But I don’t care about the pro-rata and aggregation rules in regards if you’re only doing a $7000 conversion. But if you have a lot of basis, let’s say that you you’ve made a ton of after-tax contributions into an IRA over the years, and then you convert those dollars, then the aggregation and pro-rata rules really come into effect because that could blow you up. Because we’ve seen people that have maybe $50,000 of non-deductible contributions over many, many years, and then they try to segregate that IRA and say, well, these are after-tax. I’m going to convert this $50,000 and not pay any tax at all to get the $50,000 into the Roth. Well, no, you have to take the $50,000 of after-tax and add it up to all of your IRAs. So that’s the aggregation rules, right? So you aggregate all of your IRAs, just yours. If you’re married, it’s not you and your spouse. It’s just yours. Individual retirement accounts, IRAs. It’s all individual. So then you look at the pro-rata and then you just divide what your basis is into the total aggregate amount will determine what is your tax-free portion of that overall conversion. But if you’re just converting $5000, $6000, $7000, $10,000, I mean, I think the benefits far outweigh a little bit of the tax that you will pay, depending of course, your overall situation to have compound tax-free growth for life.

Al: Yeah, I agree with that. And, and just to sort of reiterate, I’ll try. So, at any rate, if you do an IRA contribution and you’re not able to deduct it and you don’t have other IRAs, you can then convert that amount and pay no tax. And that’s the concept of the backdoor Roth. If you have other IRAs, it gets more complicated. But what Joe is saying is don’t worry so much about just getting money to a Roth is a good deal for most people.

Joe: Yeah. The only thing that it might be a surprise where you think it’s going to be a full tax-free conversion because you hear backdoor. So you did the backdoor, but you didn’t- you had other IRAs, so you have to follow the aggregation pro-rata roles. So, all right. Wow. That was –

Al: – Easy question that took a long time.

The Derails – Comment: No Joe = Woe is Us (Juan)


In case you were wondering, just before Jim’s question, Big Al teleported to his Hawaii office – he’ll be joining us from there for the next couple episodes. Next week the fellas answer your questions on fixed index annuities, stable value funds, how much cash to keep on hand, real estate investments and inheritances and more. Subscribe to the podcast or the YMYW newsletter in the podcast show notes at YourMoneyYourWealth.com so you don’t miss a thing. No Joe = Woe is Us in the Derails at the end of this episode, so stick around. 

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