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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently leads Pure Financial Advisors along with Michael Fenison and Joe Anderson. Alan joined the firm about one year after it was established. At that time the company had less than 100 clients and approximately $50 million of assets under management. As of [...]

Published On
February 11, 2020

As Tax Day approaches, you’ve got taxes on your mind. So when do you have to pay the tax on your Roth IRA conversion? Is converting beyond your current tax bracket ever recommended? Plus, answers to more of your SECURE Act retirement questions on IRA contributions and inherited IRAs and other assets, and Roth conversion and Backdoor Roth strategies for self-employed small business owners with Solo 401(k)s and SIMPLE-IRAs.

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Show Notes

  • (00:40) When Are Taxes on My Roth Conversion Due?
  • (06:35) When Do I Need to Pay the Tax on a Roth Conversion?
  • (10:23) Inheritance Strategy With No Named IRA Beneficiary
  • (17:38) I’m 66 and Taking RMDs from an Inherited Stretch IRA. Under the SECURE Act, Does Anything Change?
  • (18:22) Under the SECURE Act, Are Post-Age 72 Traditional IRA Contributions Tax-Deductible?
  • (21:54) Can I Do a Roth Conversion and Make Solo 401(k) Contributions After Taking My RMD?
  • (23:47) Does the Pro-Rata Rule Apply to a Backdoor SIMPLE IRA to Roth Conversion?
  • (30:02) Brokerage Account and IRA Inheritance Strategy
  • (34:31) Is a Roth IRA Conversion Beyond the Current Tax Bracket Ever Recommended?

Resources mentioned in this episode:

2019 Tax Planning Guide
 

2019 Tax Checklist
 

 

SECURE Act Guide

LISTEN | YMYW podcast #253: The SECURE Act Changes Retirement Savings, Stretch IRAs, RMDs, and More

Shake Your Hips (Hip Shake) – Jason Ricci and the Bad Kind

Listen to today’s podcast episode on YouTube:

 

Transcription

Today on Your Money, Your Wealth, we’re all thinking about paying taxes as April 15th draws near – so when is the tax due on a Roth conversion? Is it ever a good idea to convert beyond your current tax bracket? And the fellas answer more of your SECURE Act questions: like what happens when there’s no named IRA beneficiary, whether anything changes if you’re currently taking RMDs from an inherited stretch IRA, and tax deductible IRA contributions. Plus, Joe and Big Al have some backdoor and Roth conversion strategies for our self-employed friends. I’m producer Andi Last, and we’re in for a hip-shakin’ good time today with Joe Anderson, CFP® and Big Al Clopine, CPA.

When Are Taxes on My Roth Conversion Due?

Joe: We got Jim from Santa Cruz writes in. “Happy New Year to Andi, Joe and Big Al. Your show is consistently awesome.” Thanks, Jim. “I’m 59 years old, W2 employee, my wife is self-employed. We plan to retire in 9 years and are expecting a higher tax rate in retirement. So we did our first Roth conversion in December 2019 and we’ll be making maximum future conversions each year. Maximum equals the largest amount possible while being able to pay the resulting taxes.” That’s an interesting way to look at it. I like it.

Al: Some people think of it that way.

Joe: “Federal taxes are withheld from my paycheck. My wife makes quarterly estimated payments. My question, if I make a $20,000, $30,000 Roth conversion on March 1st, 2020, are the resulting taxes due with my April 2020 Q1 1040 estimated payment? Can they be paid without penalty in Spring of 2021 when I actually know the exact amount of the taxes resulting from the conversion?” So he’s- so what is the best strategy here to pay the taxes? So he’s looking at if I’m doing a conversion here in March- he’s gonna convert $30,000, is that estimated tax payment due on his Q in April for Q1?

Al: Yeah. And the answer is it depends, of course. But I’ll give you a couple the rules to hopefully Jim, help you out a little bit. So first of all if your withholding covers 90% your tax liability which I’m assuming it doesn’t. But let’s just say it does, your withholding plus your normal estimated payments if they cover 90% of your tax liability with the Roth conversion then you’re okay. You don’t need to make any extra. Or if they cover 100% of last year’s tax or if your income was over $150,000 it would have to be 110% of last year’s tax. So that’s the consideration. So for you the fact that you have extra Roth conversion income I’m guessing that you- well you said you did in 2019, so maybe something similar. So I’m gonna make an assumption that your income in 2020 with the Roth conversion is relatively similar to 2019. And if so, your withholding an estimate a payment should have already been calculated to factor that in. So I’m going to say probably not. You probably don’t have to make anymore because I think you may have already have enough estimated payments to make to cover it.

Joe: Here’s how I hear his question, is that he’s going to do a $30,000 conversion in Q1. Does he have to pay the estimated taxes on that conversion in Q1? Or can he wait until next year?

Al: It depends whether by the year-end he’s paid in 90% of this year’s tax or 100% of last year’s tax which he won’t know till year-end. So typically-

Joe: It’s already year-end. So I mean we’re only in Q1. So hear me out. So for the year 2020-

Al: Yes.

Joe: – I’m gonna decide to do a conversion tomorrow. $10,000. I’m in Q1 of 2020. Do I have to make an estimated payment for that conversion in 2020 in Q1 because I added that income? Or can I wait throughout the year to make the estimated payment? Because does IRS know when I made the conversion?

Al: So with that question then it would be paid quarterly. So let’s just say because you did the Roth conversion you have to pay more tax. And then it’s a question of when do you pay it? Do you pay it quarterly? 1st quarter? Or with the tax return?

Joe: Yes. Or can I maybe even maybe make the estimate of payment in December?

Al: So if you ask it that way the answer is you would pay it quarterly. So you’d pay one quarter the tax in April, one quarter the tax in June, and so on. That’s assuming that you needed to make the payment in the first place because that puts you over these limitations.

Joe: You’ve got it. So the questions that come up when someone does a conversion in December.

Al: Yes.

Joe: And then they have to file like a separate kind of exemption BS form because-

Al: So in that particular case- so since you did it right at year-end, then you can use the annualization method because that Roth conversion was in that last quarter. And that’s on the penalty form. I think it’s form 2210. It’s on page 4 of that. That’s where you show what your income was at different points during the year. And then you’re not penalized as long as you make that payment for the 4th quarter estimate which is January 15th of the following year.

Joe: So going back, so Jim is stating ‘I did the conversion’. As long as he’s already- from last year that he withheld over 100%, 90%- this is so confusing.

Al: It’s very confusing. It’s hard to answer actually without going- without showing someone and looking at the actual numbers. But if he doesn’t- I mean if he has enough payments made in to cover either 90% of this year’s tax or 100% last year’s tax he doesn’t need to make any extra payments but he will owe on April 15th probably in the following year. On the other hand, if he doesn’t meet the 90%, 100% he will have to pay more and he’d have to pay that quarterly. So if he did it in March he’d have to pay it in 4 quarters. If he did it midway through the year- well that was midway through the year so he didn’t- he missed the first one and that’s okay because he hadn’t done the conversion then. So he’d just basically have to take that tax and divide it by 3 over the next 3 payments. If it’s the very last quarter that’s okay. You missed the first 3 payments because you did the Roth conversion the last quarter you just make that payment in Q4.

Joe: All right. Clear as mud. Thanks, Al.

Al: You’re very welcome.

When Do I Need to Pay the Tax on a Roth Conversion?

Joe: OK. We got Hong from Riverside, California. “Good afternoon Joe, Al, and Andi. I’m a fan of your podcast. Learn a lot and very much appreciate all the information.” Thank you, Hong. We appreciate you writing in.

Andi: And listening.

Joe: Yeah. Just him hanging out having a cool name.

Al: It’s a great name right?

Joe: I love it.

Al: I was thinking that I would like- that be better than Alan. That’s hard to say. “What’s your name?” “Alan.”

Joe: Alan.

Al: I’d like say Hong.

Joe: Hong.

Andi: Sounds tough.

Al: Yeah. Much better.

Joe: “I wish I’d known about your show early on.”

Al: Better late than never. That’s what I say.

Joe:  Trust me you didn’t miss anything Hong. The show sucked. We’re barely just, we’re 13 years in. Just finding our stride.

Al: Are you kidding? Still sucks.

Joe: “I’m 57 years old and planning to convert my traditional IRA to Roth this year. Can you please advise if I do a conversion this month when would I need to pay the taxes?” Oh all right. One of those again.

Al: Here we go.

Joe: It’s still confusing. Al just answered this question. I don’t even know the answer.

Al: You still didn’t follow.

Joe: “Is it by December this year or April of next year? When I file my income tax I plan to pay for the tax with money from my savings account. Thanks so much for your help.”

Al: Okay so he’s saying I did the conversion this month… Anyway, let me answer the question basically. And that is when you do a Roth conversion you may have to pay taxes at that next estimated payment. If you don’t have enough extra- in some cases, people add to their withholdings so they don’t need to make estimated payments. In other cases, they don’t have enough salary to have extra withholdings so they may have to make an estimate of payment. And to go back to our first caller, our first question, if you make a Roth conversion let’s say in January and it increases your income enough to where you’re required to make estimated payments maybe I’ll say it that way, I’m getting better second time around, then you would need to pay 25% of that tax in April, 25% of that tax in June 25% in September and 25% in January the next year. That’s your 4 quarterly payments. If on the other hand you do a Roth conversion in December and you’re required to make estimated payments because of your income then you would just make that whole estimated payment in the 4th quarter which is January 15th of the following year. If you make a Roth conversion during any time of the year and you don’t need to make estimated payments because you fall under the Safe Harbor rules then you’ll just simply pay the tax on April 15th of the following year. Is that simpler?

Joe: Simpler.

As Jim, and Hong and all the rest of us get ready to file our 2019 taxes, Big Al’s Tax Planning Guide can help with that preparation. Click the link in the description of today’s episode in your podcast app to go to the show notes and download the Tax Planning Guide, with the 2019 brackets, deadlines, tax issues and updates, and strategies and actions you can take before you file. I’ve also posted the Tax Planning Checklist there in the show notes, along with a great episode of the Your Money, Your Wealth TV show, where Joe and Big Al discuss how to Take the Sting Out of Taxes for you High Income Earners, and of course, the full transcript of today’s podcast. If after all that yo still have unanswered money questions, leave them for the fellas as a voice message or an email – just click the Ask Joe and Big Al banner in the show notes.

Inheritance Strategy With No Named IRA Beneficiary

Joe: We got Chris writes in from Oceanside. Okay Chris, it’s usually good to start an email by ‘Joe, Al, Andi. Love the show. Or you know what? ‘The show’s average.’

Al: Yeah you can you could say that or-

Andi: Just some sort of intro.

Joe: Just something. The guy just comes in and attacks us with questions.

Al: He’s right to the point.

Joe: I mean he’s worried about something here, it seems like.

Al: He might be an accountant.

Joe: It could be.

Andi: Is that how you start emails, Al?

Al: Yes, I get right to the point.

Joe: You don’t say hello? So all right Chris. Here’s Chris’s question. “There was no named beneficiary on an IRA. By default, it went to the estate. The will names 2 beneficiaries in the will without specifying anything about the IRA. The executor does not want to hold the estate open for years in order to take incremental distributions, thus minimizing taxes. Can the executor rename the IRA, putting it into 2 IRAs in the name of each estate beneficiary, and maintain the ability to use the stretch method?” It sounds like Chris is the executor and Chris found out that whoever died had this IRA and the IRA did not have a named beneficiary. And he’s like shhhoot.

Al: Shucks. Now what?

Joe: Let’s talk about the rules here, Chris. Because it sounds like Chris is pretty smart. Talks like you’re probably a CPA. Maybe he’s an attorney.

Al: Could be. Maybe he’s got a client, he doesn’t know the answer.

Joe: He’s like I gotta call Joe and Big Al.

Al: You’re trusting us, I don’t know.

Joe: Well I do know the answer to this.

Al: Okay, let’s hear it.

Joe: So there are two things when it comes to IRAs’ beneficiary. There’s a designated beneficiary and a non-designated beneficiary. And they both have different rules. You have a non-designated beneficiary on the retirement account. So it’s named to the estate. So what- there’s a couple of rules here. It depends on when the required beginning date is. How old was the deceased when that person died? Because if they were over 70 and a half when they died that would be past their required beginning date then they would have to take the required distributions based on their life expectancy. Or they could cash the whole thing out and pay the tax. If it was prior to the required beginning date, it is under the 5-year rule so they would have to distribute it out within 5 years. So let’s say it’s $100,000, you have 2 beneficiaries. So then you’re going to say $50,000 goes here, there, they’re going to pay the tax, the estate pays the tax if- but it’s the will- it’s going through probate. So the probate process is going to be like here are all these assets. It’s a non-designated beneficiary, goes through the probate. So it’s a 5-year rule on it, depending on if it was before the required beginning date or after the required beginning date.

Al: So if it was after the required beginning date you go with the life expectancy of the deceased. See, I didn’t even know that. I’m taking your word for it.

Joe: I’m a pretty smart guy there, Al.

Al: I’m trusting you’re correct.

Andi: So then is the answer to his direct question about renaming the IRA  and putting it into two – you can’t do that?

Joe: No, you cannot rename IRAs. Here’s how you can rename an IRA. Because here’s what happens sometimes is that you have a- let’s say I’m going to name on my IRA, I’m going to name Big Al. I’m gonna name Andi. And then I’m gonna name my nephew, Joey. Those are my 3 beneficiaries. And then I’m also gonna give 1% to the great school of University of Florida. Go Gators.

Al: OK.

Joe: So I have 4 beneficiaries on my beneficiary form. The non-designated beneficiary could blow this whole thing up because it doesn’t have a heartbeat. There’s no life expectancy even though there are big hearts in the University of Florida. It is not a designated beneficiary. It’s an entity. But you guys have life expectancy.

Andi: We have hearts.

Joe: Yes. So Joey my namesake nephew is, I don’t even know, is-

Al: He’s about 10?

Joe: Ahh. Dammit. Let’s go with 5. I think he’s older than that.

Al: Somewhere between 5 and 10.

Joe: Somewhere between 5 and 10. So let’s say he’s 5 years old. So his life expectancy let’s say it’s age 85. Like his stretch would be like 1/80 out of the overall account. If this was before the SECURE Act which eliminates the stretch so he would have to take it out within 10 years. But this is assuming like he was asking about the stretch IRA. So this still counts for the SECURE Act. So all of us would have to take it out within 10 years. But not the University of Florida since it was on my beneficiary form then that’s a non-designated beneficiary so that’s 5 years. So they take the oldest to use- they used to use the oldest person to use the stretch IRA. Al is the oldest in the room and oldest out of the beneficiaries, so all of us would either have to file- go off of the non-designated beneficiary which would be the 5-year rule or Al’s age. So the other rule is that you could split IRAs. Instead of saying because you have a non-designated beneficiary, by September 30th you could split up the IRA. So we’re gonna give that 1% to University of Florida. Andi, you’re gonna have your own IRA. Al, you’re gonna have your own IRA.

Andi: Then Joey’s gonna have his.

Joe: Then Joey’s gonna have his own IRA and then they would be able to stretch it based on each individual’s life expectancy so it wouldn’t blow up a really young child with an older person. The SECURE Act kind of blew all that up because the stretch IRA is no longer. But it’s a 10-year time frame versus a five-year time frame. So a non-designated beneficiary to my understanding it’s still the 5-year clock where they would have to deplete the account within 5 years. All of us humans now have 10 years. So there are still some tax ramifications if you don’t do this correctly. What Chris was asking, can he still use the stretch method? And the answer is no. It’s 5 years. It’s going to go through probate and that’s why you got to name a beneficiary on your IRAs, 401(k)s, 403(b)s, TSPs. Make sure that you really take a look at hard hard look at that because it’s easily missed.

Al: So Chris would either have to keep the estate open and distribute over 5 years. Or if he wants to close it out it’s just a full distribution to each of the beneficiaries.

Joe: Correct. That is correct.

Al: OK. Well I learned something.

I’m 66 and Taking RMDs from an Inherited Stretch IRA. Under the SECURE Act, Does Anything Change?

Joe: We’re just cruising along here. We’re on page 3 out of 50.

Al: We made some progress.

Joe: We got Paul from San Diego. Paul writes in “Dear Al and Joe. Love your show. I inherited an IRA from my mother in March 2015 and I take an RMD yearly. This IRA is not in trust. I am 66 years of age, not married. Under the SECURE Act, can I continue to stretch past 10 years or must I liquidate in 10 years?” Paul, since you’ve already taken the RMDs, no, you’re grandfathered under the old rules.

Al: Yeah that’s a good thing. So basically the rules changed on January 1st of 2020. So yep since you’re in 2015 you are under the old rules so you can still do the stretch.

Under the SECURE Act, Are Post-Age 72 Traditional IRA Contributions Tax-Deductible?

Joe: Michael from Ohio. “Oh Great One.”

Al: Is he talking to you or me?

Joe: Wow. I don’t know. I’m gonna guess it’s me.

Al: I’m gonna guess it’s you too actually.  Just the way it was phrased.

Joe: “Here’s my question. The SECURE Act allows myself to contribute past age 72 on a yearly basis. Is that contribution tax-deductible like it is now for my traditional IRA account up to age 72? This would allow me to contribute for me and my wife’s account and deduct it all.” Michael from Ohio. Well.

Al: Oh Great One.

Joe: Oh Great One.

Al: What do you say?

Joe: I think he’s got a couple of things mixed up here first of all. So let’s talk about what I think he’s asking. Age 72- so these ages kind of come into play sometimes. Age 72 means that that is now the new age where you have to take a required minimum distribution. It was 70 and a half. So now they pushed it out to age 72 so you do not have to take a required distribution until you turn age 72 unless you were a 70 and a half prior to 2020.

Al: By the way, if you were 70 and a half in 2019 you have to have taken the RMD, or you have to take it here in the coming year. If you were younger than 70 and a half on January 1st, 2020, now it’s 72.

Joe: 72. Another rule within the SECURE Act is that now there is no age cutoff to do a traditional IRA. So you had to be under 70 and a half to do an IRA contribution. But you needed earned income. So now there is no age limitation. So Michael if you want to continue to work until age 90 and as long as you have earned income you can still make IRA contributions for you and your spouse and deduct both of those IRAs. What do you think? Did I answer it?

Al: Yeah that’s correct. As long as you are not in another retirement plan and- or your spouse is not in another retirement plan and you’re under the income limitations.

Joe: Okay.

Andy: So who gets to be called The Great One then?

Joe: I think that would be Big Al.

Al: That was Joe. That was totally- the way it’s written, it was to Joe.

Joe: Well it kinda sounds- Yeah, because it was all messed up. No offense Michael.

Al: Well you- he knew you’re going to fix it.

Joe: I guess we got you covered. Double teamed it.

So, does the SECURE Act affect you, your family, your retirement, your inheritances or your IRA contributions? Find out: check out Big Al’s SECURE Act recap video, and download our free SECURE Act Guide from the podcast show notes at YourMoneyYourWealth.com. Get there by clicking the link in today’s episode description in your podcast app, and don’t forget to share. Post the episode link on Facebook or Twitter or LinkedIn or email it to your friends, family, and colleagues so they know about this new law too. And realize, the SECURE Act may also open up some retirement planning strategies you haven’t yet considered. Click the Free Assessment button at YourMoneyYourWealth.com to schedule a personalized look at your financial situation.

Can I Do a Roth Conversion and Make Solo 401(k) Contributions After Taking My RMD?

Joe: OK. We got one from Rose from San Diego. “Hi, Al and Joe.” No Andi, huh?

Andi: There’s a lot of them that don’t include me. That’s fine.

Joe: I got it. “I listen to you every weekend. Love, love the show. Got my daughter to listen to it as well.” Rose. Thank you. Flattered. “I’m also a past client.”

Al: I know Rose. I’ve talked to her before.

Joe: Oh, I know who Rose is.

Al: Yeah, you know Rose.

Joe: I definitely know. She’s a past client.

Al: You and I met her early on.

Joe: Oh this was years ago.

Al: Yeah it was.

Joe: “I have a question that I’m hoping you can answer. I’m currently 72.  I’ve been taking my RMDs from my traditional IRA. I also have a solo 401(k) as I am a sole proprietor of a business. My CPA helped me set up a solo 401(k) to help me defer some of the income by deducting my annual contributions to the 401(k). My question is can I do a Roth conversion after I take my annual RMD as well as make my annual contributions to the 401(k) or is it not allowed or frowned upon by the IRS?” Rose, yes you can fully fund the 401(k) plan and do a conversion but you do have to take your required distribution out first before you do the conversion. Not after.

Al: Yeah and that’s a great question because I think a lot of people feel like once they hit required minimum distribution age which now is 72 they can’t do Roth conversions anymore and that’s not true. You certainly can do Roth conversions. You just have to take your required minimum distribution first as you said, Joe.

Joe: If you’re still working Rose and you’re still put money into the old 401(k) plan. You can fully fund that as much as you want up to the IRS limits and do a conversion. IRS does not frown upon that.

Does the Pro-Rata Rule Apply to a Backdoor SIMPLE IRA to Roth Conversion?

Joe: Maggie from Los Angeles. “Dear Joe and Al. I’m a big fan of your podcast. Thank you for your contribution to U.S. retirement world.” Huh.

Al: Well it’s the great comp- Thanks, Maggie. Are we contributing to the U.S. retirement world? Some? Half? Sometimes? Half the time? Quarter of the time maybe?

Andi: I think you’re on the charts in Brazil right now. So yeah literally.

Joe: Thank you for-

Al: Okay. Well, that’s pretty good.

Joe: I would like to thank my mom. And my father.

Al: This is like our best compliment we’ve ever had.

Joe: Or is like U.S. Retirement World a magazine? Or is she saying our contribution to retirement in the world?

Al: Well it’s at least US. We know that.

Joe: Okay. “If half of the financial advisors out there are as knowledgeable as you guys it would be a much better world for people who may- wow-

Al: – need help in their retirement.

Joe: – need in their retirement.” Thank you so much, Maggie.

Al: Marvelous. Let’s go to commercial break.

Joe: That’s it. That’s a wrap.

Al: Yeah.

Joe: “I have a quick question regarding backdoor Roth conversions. I don’t have a traditional nor a Roth IRA currently but I have a SIMPLE IRA which is not 2 years old yet.” Why do you think she’s asking about the 2 years?

Al: There is a 2-year rule about taking money out of your SIMPLE.

Joe: That’s pretty good, Maggie.

Al: Yeah. Knowledgeable.

Joe: “I plan to open a traditional and a Roth IRA at Charles Schwab and then do a back door conversion. However, Charles Schwab website states that if your IRA contains non-deductible after-tax contributions your conversion will consist of partly non-deductible contributions and partly deductible pre-tax contributions and earnings. You’ll be taxed based on the percentage of after-tax-” She’s talking about just a pro-rata rule.

Al: Yes she is.

Joe: So then she gives an example. So then you should refer to 86- Well I guess her question is “I’m wondering does this count? My SIMPLE IRA.” So if you have an IRA…  let’s kind of backtrack here because she’s looking at doing a backdoor Roth IRA contribution.

Al: It’s a really good question.

Joe: Backdoor Roth IRA. What the hell is that? She makes too much money to do a straight contribution into a Roth IRA. There are AGI limitations. I’m not sure if Maggie is single or if she’s married but if she makes more than roughly, I don’t know what is it for 2020? $100- What’s the AGI limitation for Roth for this year?

Al: Oh it’s about $130,000 something-

Joe: $140,000, $137,000, $138,000?

Al: I don’t know that. I don’t have it with me either.

Joe: And then $200,000 if you’re married.

Al: Yep.

Joe: So she makes more than that. So she wants to get money into a Roth. So what some people have done and the advice that we have- not advice- but strategy that we’ve talked about on the show is that anyone can contribute to a traditional IRA as long as you’re under 70 and a half. But now with the SECURE Act guess what? No age limitation there too. So you could contribute to an IRA and any income limits as long as you have earned income. So Maggie wants to put in $7000 into an IRA. So she’ll have basis in that IRA. Because she can’t take the deduction because she makes too much money. She can’t put it directly into a Roth because she makes too much money. So she puts it into a traditional IRA. $7000. It has basis. It’s an after tax contribution. She can then convert that $7000 into a Roth and pay no tax. If she does not have any other IRAs. If there’s other IRAs involved then it’s the pro-rata rule. They take a look at all IRAs. They include them as one and they look at the percentage of what you have in basis, divide it into the total IRAs that you have and then that is going to be the percentage of tax-free conversion that you would do. The question is Al she’s got a SIMPLE, does it count?

Al: It does. Unfortunately. So your SIMPLE IRA would be added to your new IRA and so you’d have to do the pro-rata rule. And if you’ve got a lot of money or even a little bit of money in the SIMPLE IRA this may or may not be a great strategy because when you do your backdoor Roth some of it will be taxable.

Joe: Here’s the fix. What does she do?

Al: Oh she sets up a 401(k).

Joe: You roll it into a solo 401(k) Maggie. Set up a solo 401(k). Move it into the solo 401(k) because a SIMPLE plan is she’s self-employed. She set up a SIMPLE plan but this is the problem, she probably has employees. That’s maybe why she set up the SIMPLE because it’s pretty cheap.

Al: Probably. She could set up a Safe Harbor 401(k). But unfortunately, those are pretty expensive.

Joe: So it depends how much that- I mean- I guess how anxious are you to do a backdoor Roth?

Al: And how much do you have in your SIMPLE? If it’s just a little bit then-

Joe: – who cares?

Al: -don’t worry about it.

Joe: So a couple of options for you, you can set up a Safe Harbor 401(k) for your company. Maybe you switch the SIMPLE plan to a solo 401(k) plan-

Al: If you don’t have employees.

Joe: -if you don’t have employees. Then because the 401(k) is not the same as an IRA. So you can do the back door there. Again this is not advice. This is just a couple of kids-

Andi: Suggestions.

Joe: Couple of kids talking about conversions and saving the world.

Al: Yes.

Joe: Saving the retirement world.

Andi: US retirement world.

Al: Do you think we qualified for that answer? Did we save the world?

Joe: I think we saved a couple of bucks for Maggie in Los Angeles.

Al: Yeah we saved her world.

Joe: We did. Her retirement world. I’ll rock your retirement world, Maggie.

Andi: Man, I wish I had that on video. If you could have seen the hip shake in the chair.

Al: I wish I could put that out of my mind. Already.

Andi: Unsee it?

Al: I’m sitting closer than you, Andi, and I saw the entire body shake. It was not pretty.

Joe: OK, moving on.

Brokerage Account and IRA Inheritance Strategy

Joe: We got Susan from Atlanta, Georgia. Hot-Lanta.

Al: You used to live there.

Joe: I did.

Andi: So did I.

Al: Years ago. Oh, you did too?

Joe: I lived in the Darlington.

Al: I haven’t even visited.

Joe: Right across the street from the Piedmont Hospital. Right on Peachtree Avenue.

Al: Where did you live, Andi?

Andi: Sandy Springs.

Joe: Oh yes. Sandy Springs. Sure.

Al: You familiar with that?

Joe: Yeah.

Andi: Well yeah because it’s just above Buckhead. And that’s probably where you spent all your time partying.

Joe: I did spend a lot of time in Buckhead. More time than I probably should have.

Al: Did you shake your hips?

Joe: I did. I shaked everything. Don’t worry about it. “Dear Andi, Joe, and Al. I’m enjoying the podcast and have increased my financial knowledge.” Thank you. “I have two questions about a future potential inheritance. It’s gonna be a brokerage account and an IRA. So couple of questions here. Number one, my 82-year-old mother has a taxable brokerage account with nice gains. She hopes to leave the account intact so the basis steps up without her- with her debt. She thinks my brother and I should sell everything immediately and take cash. I think we should evaluate each holding and decide which to sell based on potential. We would get the step-up in basis either way. What are your thoughts?” I would sell and reinvest to your specific goals and investment strategy.

Al: I completely agree. I would sell everything just as you had cash. If these are great investments then great. But why limit yourself to what your mom had. I think there’s a whole universe of investments that probably make more sense for you.

Joe: So if the mom’s 82, I don’t know how old you are. So you just want to make sure that it’s based on your goals. What are you trying to accomplish? What’s the money for blah blah blah? “Question 2: she also owns an IRA that is primarily invested in laddered zero-coupon bonds. One bond matures yearly with dates through 2027. My brother and I will inherit equally. Each bond has a $50,000 maturity value assuming she passes before all the bonds have matured. Can the bonds be split? So we each get half. Thanks for the information.” So 2027, she passes away, and she’s asking if the bonds get split so-

Al: Well if she- let’s say she passes in 2024. So there are still three bonds.

Joe: How many bonds does she have?

Al: Several that go through 2027. Let’s just say that yearly date. So let’s just say there are at least three bonds left. And now there’s now there are two beneficiaries. So can the bonds be split?

Joe: Sure. I mean you’d sell the bonds on the market.

Al: But then you’d get a different rate.

Joe: I mean you might sell it at a discount.

Al: You mean forfeit some interest.

Joe: Well you know what a zero-coupon bond is right? So you buy the bond let’s say for $10 and in 2027 it’s gonna be worth $15. So there’s no interest paid. It’s zero-

Al: – zero-coupon. Okay.

Joe: So there’s no interest paid. But there’s phantom income that you have to pay taxes on. That’s probably why she bought it inside the IRAs.

Al: In the IRAs, so yeah. So that part doesn’t matter. So in that case,  you’re not really surrendering it right? You’re splitting it.

Joe: Right. You’re just splitting the IRA. And then you will just kind of take a look to say if you have to split one bond in half you’re probably going to have to sell the bond or hold. Depends on what you want to do. I mean I don’t know. I would just sell the bond. Take it at whatever, there’s a market price for it. If it matures- if you’re selling it one year prior to maturity there’s still a market price. You’re just going to not get the full price for it.

Al: There’s a market price. And if the interest rate’s higher than what it is now you’ll get a premium right?

Joe: Yeah. Probably. Because-

Al: Could be.

Joe: No. Probably not.

Al: Why?

Joe: Well she’ll probably get something.

Al: Because it’s zero-coupon.

Joe: Because it’s a little bit different kind of animal. I’m not a bond trader. As you can see.

Al: I know less than you do. So we didn’t save the world on this one.

Joe: Susan. Love Buckhead. Can you split the bond? Yes. I’m going to say yeah. But you’re gonna have to sell the bond.

Al: I’m going to say check with your broker. Because we’re not entirely sure.

Is a Roth IRA Conversion Beyond the Current Tax Bracket Ever Recommended?

Joe: Well since Alan we gave Susan some really good advice on her zero-coupon bonds, she wrote back in.

Al: Well here’s my response to that. The first question I give us an ‘A’. On the second question, I would say the ‘D minus’.

Andi: Wow.

Joe: That was a ‘C’. I bet I’m right. “Hey, Joe and Al and Andi. This is my second email as I thought of something else I want to ask. I’m in the suburbs of Atlanta since you always want to know.” Thank you, Susan. Yes, I do wanna know.

Al: Yeah we do.

Joe: Because we like to stalk our listeners.

Al: What’s the street?

Joe: Andi’s going to show up at your doorstep and say, ‘here’s what you do with your zero-coupon bond’. We got like door to door service when it comes to answers that we foul up on the show here.

Al: So we got a question, another question from Susan.

Joe: Yes. From Suze. “I found your podcast a couple of months ago. Been binge-listening the last few weeks. Y’all make me laugh while also providing good information. I have a Roth conversion question that I haven’t heard yet. Do you ever recommend people converting beyond their current tax-rate? And I’m self-employed; my income is in the mid to high $40s so I’m currently in the 12% tax bracket; filing head of household. I’ve been partially converting my IRA to a Roth IRA over the last couple of years. I’m wondering if I should potentially exceed the 12% tax bracket. This would allow an extra $30,000 in conversion. I’m 52; $240,000 in my Roths; $450,000 in my rollover IRA, plus $360,000 in non-qualified accounts. I’ve been paying the conversion tax from my emergency fund.” I think you gotta run the numbers, Susan. But yes, I think with rates as low as they are, 12% to 22%, with the amount of money that you currently have, you’re single, head of household, you will be filing single unless you find a spouse and then your tax rates change. But in some cases, yes, I think it does make sense.

Al: I would agree. In some cases yes, but certainly not all cases.

Joe: So you’re just gonna run the numbers a little bit more. Thanks so much for the questions. That’s it for us. For Andi Last, Big Al Clopine, I’m Joe Anderson. Have a wonderful life everyone. The show is called Your Money, Your Wealth®

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If you like the non-financial Derails we have some of those, and a financial Derail as well, so stick around to the very end. If you think they’re annoying, go to the podcast show notes and email us. If you’re a blues and harmonica fan and you remember the 1966 song Shake Your Hips, originally by Slim Harpo and made even more famous by the Rolling Stones in 1973, check the resources in the podcast show notes for one of the most blistering versions of that song ever recorded. Get to the show notes by clicking that link in the description of today’s episode in your podcast app.

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