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
August 18, 2020

Tax planning for Roth conversions with itemized deductions, dividends, and long term capital gains, the difference between a Roth conversion and investing a 401(k) distribution in your Roth, separating pre-tax and post-tax money for a rollover – and gong baths. Plus, is a 3 year fixed annuity a safe place to earn more than 20 basis points? And what should you do if you’re stuck in an annuity you don’t want?

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Show Notes

  • (01:00) Should I Keep My Annuity or Move to One With Lower Fees?
  • (12:37) Where to Safely Hold Cash and Earn More than 20 Basis Points? 3-Year Fixed Annuity?
  • (16:02) Tax Planning and Roth Conversions: Itemized Deductions, Dividends, and Long Term Capital Gains
  • (24:02) I Retired at 55, Can I Convert From 401(k) to IRA or Roth Without Penalty?
  • (26:38) Investing a 401(k) Distribution in a Roth Vs. Doing a Roth Conversion: What’s the Difference?
  • (31:12) How to Separate Pre and Post Tax Money for a Rollover?
  • (37:42) Can I Start a Roth for My Dual Citizen Grandson Working Part-Time Overseas?
  • (40:19) If I Convert a Million Dollar IRA to Roth All At Once, How Long Would It Take to Make it Worthwhile?

Free resources:

YMYW TAX UPDATE LIVE WEBINAR | Plus open Q&A with Joe & Big Al, especially for YMYW listeners!

Wednesday, August 26, 12pm Pacific / 3pm Eastern. 


READ THE BLOG | Understanding Annuity Retirement Pros and Cons

WATCH | What is the Truth About Variable Annuities?


Listen to today’s podcast episode on YouTube:


What’s the latest with the current tax law? What can you expect with future tax laws? What might the 2020 election mean for your taxes? What might happen to the capital gains tax? Find out at noon Pacific, 3pm Eastern on Wednesday August 26th when we’re doing another YMYW live webinar! Click the link in the description of today’s episode in your podcast app to sign up in the podcast show notes at YourMoneyYourWealth.com! Today on Your Money, Your Wealth®, Joe and Big Al dive into tax planning for Roth Conversions with itemized deductions, dividends, and long term capital gains, the difference between a distribution and a conversion, separating pre- and post-tax money for a rollover, and gong baths. But first, let’s talk annuities. Is a 3 year fixed annuity a safe place to earn more than 20 basis points? What should you do if you’re stuck in an annuity you don’t want? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should I Keep My Annuity or Move to One With Lower Fees?

Joe: Toni writes in. “I have an annuity and have had it for 28 years that’s high fees. I’m two years from retirement, over 60. So should I move to a lower fee-based annuity or just stick with it? Bond is about $500,000. I don’t like annuities but I’m stuck with this vehicle. I don’t like it.”

Al: It’s like Sam I am. I don’t like it. Sam I am. I don’t like green eggs and ham. I don’t like on a bun. I don’t like it on the run.

Joe: That’s pretty good, Al.

Al: Yeah, not bad.

Joe: “So what should I do? Thank you for your help.” So let’s do this. We got a little bit of time.

Al: Yeah we do.

Joe: Break this down a little bit more. First of all, the question I would have is why did she purchase the annuity in the first place? Because there are pros and cons to each investment vehicle. But let me correct myself. I don’t believe an annuity is an investment. So if you’re getting sold an annuity as an investment then I think you should re-think what you’re trying to do with your overall finances. An annuity is insurance, bottom line.

Al: It’s insurance for a long life. Right?

Joe: Sure. It’s either-

Al: If you live a long life then you’re going to be able to stretch your dollars that much further.

Joe: So an annuity- there are a few different types of annuities. There is an immediate annuity. An immediate annuity would be like I have $100,000. I’m going to give it to XYZ insurance company in exchange for retirement- or for an income for life.

Al: So you’re sorta like buying a retirement plan.

Joe: I’m buying income. I’m transferring the risk of a guaranteed income stream to the insurance company. So I don’t want to take this $100,000 and take distributions from it. I don’t want to take $2000 a year. I’d much rather just exchange it for a retirement income stream for life.

Al: And generally that payment goes for the rest of your life. If you die prematurely it stops. If you live a long life it keeps going.

Joe: And you could do a period certain. You could say if I die in the next year I still want this to pay out for 10 years. It could have joint survivor benefits. It could have all sorts of things. But just to keep it really simple, let’s just say it’s on my life. I exchange $100,000 to the insurance company. They’re going to pay me, let’s call it probably $2200, $2300 for the rest of my life, depending on my age. I’m 65 and she’s 60. So it’ll be close to that. All right. That sounds pretty good. Maybe I get $2000 to $3000 guaranteed forever. Or there are deferred annuities, which sounds like what she has, is that I want to give my money to an insurance company and there could be a fixed rate of return. So this is a fixed annuity. So they might guarantee me 2% or 3%. It’s very similar to CD rates. But when I receive income from a CD, that’s taxable. It shows up as interest on your tax return. But if it’s an annuity- in a shell of the annuity it grows tax-deferred, so I don’t have to pay any tax until I pull the income out.

Al: Kind of like the inside a retirement plan.

Joe: Exactly, because annuities are made for retirement. Because if you pull the money out prior to 59 and a half it’s a 10% penalty. Every income that’s derived from it, it’s ordinary income. So at that point, you could take distributions of your liking or you could annuitize it. And then again, that’s exchanging that lump sum to the insurance company for a guaranteed income for the rest of your life. Then there are variable annuities. The variable annuity is still in a chassis of an annuity, but with a fixed annuity you have a guarantee by the coffers of the insurance company; in a variable annuity, you are picking investments such as- that look and feel like mutual funds. I want large companies, small companies, international companies, and things like that and then they grow tax-deferred. So you don’t have to pay taxes on the interest and dividends. You get the compounding tax deferral of it. Those products are fairly expensive because there’s still a death benefit component. Because they’re variable that could go down in value. So if I put my $100,000 and it drops to $75,000 and I die well then my beneficiaries on that account would get the full $100,000 if I didn’t take any money out of the account.

Al: Got it.

Joe: So there was a life insurance component. And then now there’s other bells and whistles of saying would you like a guaranteed income with that? So now there are more riders of saying hey we can give you a variable type feel of this annuity so you can potentially get more growth over the long term than our fixed rate. And then from there, we can give you a guaranteed income for the rest of your life. So some people buy those. Those are again extremely expensive and you have to be very careful with those because your internal rate of return is usually pretty low; a lot lower than what the person believes they’re getting.

Al: So those bells and whistles cost you quite a bit.

Joe: Yeah they’re expensive.

Al: They can.

Joe: Because the insurance company says we’re going to take on the risk. If the insurance company’s taking on the risk they’re making sure they’re going to get paid for it.

Al: You bet.

Joe: There’s no free lunch here. But they’re saying I’m going to pay you Al for the rest of your life and you’re a vegan and you’re looking good.

Al: They don’t say wouldn’t you like some steak?

Joe: I’m on the hook for years. So I’ve got to figure something out. I’ve got to make sure that I protect my investment. Insurance companies are pretty good at that. They have a lot of very smart people on staff that take advantage of the individual investor. Bottom line. It’s business. And so your internal rate of return as a customer is usually anywhere from, what we’ve found 2%, 2.5%, even though they might promote different types of higher guarantees. You just have to run the math. So she’s like I got this annuity. I bought it a long time ago. She’s had it for 28 years. It’s worth $500,000. So 30 years, I guarantee you her initial payment on that thing was probably maybe $100,000. Even with the 3%, 4% fees-

Al: 28 years ago. Yeah right.

Joe: So now it’s worth $500,000. She believes she’s stuck in the product because if she takes the $500,000 out, the majority of that $500,000 it’s going to be subject to ordinary income tax.

Al: And that’s why she feels stuck because whatever surrender period there may have been would have been long gone.

Joe: There’s not going to be any costs of CDSC charge.

Al: Yeah yeah yeah. Because if you have annuities that are outside of retirement accounts which we’re presuming this is, then there are two ways that to get out of it that it could be costly; one is a surrender charge if it’s within the surrender period, and the second is you’ve got to pay taxes on all the gain.

Joe: And then that’s what she’s saying now.

Al: She said she feels stuck.

Joe: So, a couple of options. So be careful- first of all, if she- I’m not giving advice here because it’s like well why did you buy the annuity in the first place? Did you want a guaranteed income and not worry about it? And have- even though you’re taking a lot lower expected rate of return? But you have a guarantee that’s offered by a big insurance company. So there’s something there. There is a little bit of value there. If you’re not really looking for that guarantee and you thought this was more of an investment versus an income play, then you shouldn’t have bought the product to begin with. And I think she realizes that now. And it’s like well how do I get out of this thing?

Because the guarantees that I’m receiving I’m not going to use anyway. I’m wasting money. So two things- you could slowly take money out of this thing like a Roth conversion. So you were looking at what tax bracket that you’re in and maybe you have $20,000 of room in the 12% tax bracket. You could take $20,000 out of this product per year. Pay the 12% tax rate. And kind of slowly bleed it out that way. And then reinvest those dollars into a brokerage account. That could work. Or you could exchange it into another annuity that has a lot lower fees.

Al: It looks like that’s what her other advisors suggest. That’s a 1035 exchange.

Joe: What would you do Al, you’re close to 60, and let’s say you had a non-qualified annuity with $500,000 with let’s say $100,000 basis?

Al: Well obviously there’s a lot more we need to know about this particular annuity but as a general rule I would be inclined to exchange it to a cheaper annuity.

Joe: So you would want to keep it in the annuity. You wouldn’t want to bleed it out?

Al: I might do both, to be honest.

Joe: Put it in a cheaper annuity and then slowly bleed the thing out.

Al: Yeah, yeah, yeah.

Joe: I think that’s exactly what I would do. Because she’s probably paying 3% or 4%. But the guarantees could be good, this was 30 years ago.

Al: See that’s the thing, we don’t know what the guarantees are. Maybe they’re worthwhile. They are expensive, it sounds. But maybe there’s some benefit to them.

Joe: The annuity is 30 years ago. A lot of these annuities are based on the interest rate environment too. Who knows what type of guarantees that they have. Maybe you go back to the insurance carrier to see if they would buy it back. I’ve seen that done too. They’re like these guarantees are too good; they’re too rich. So they don’t necessarily want them out in the public anymore. So they’ll buy them on it a little bit of a premium so they don’t use those guarantees.  But that’s too far between. I would say 95% of this is junk.

Al: So I think the thing about annuity if you just take little bits out then all your gain is taxable first until you get to your tax basis. If you annuitize it to where you get an income stream for life then it’s split between some is taxable and some is return of capital. But I would agree, over 28 years probably there’s a lot of gain in there.

Joe: Good point. So right it’s pro-rata. So let’s say $100,000 is basis, $400,000 is gain.

Al: She’s two years out from retirement so maybe switch to a 1035 exchange into a cheaper annuity and then you annuitize it. So the tax hit isn’t as bad.

Joe: But then I don’t know- the internal rate of return is-

Al: Then you gotta wait forever. I know.

Joe: I would bleed that thing out. But then it looks- so there’s a lot of different things that she has to do. Right? How much money does she have? How much money is she looking to live off of? What is her income need? Then what other income sources do they have?. And what tax bracket are they in? You start formulating some strategy around that and then you look at, does it make sense? Because be careful, if you’re buying annuities that are outside of a retirement account just know that you’re building a tax timebomb. Because your retirement account is now- is going to be taxed at ordinary income. And then this annuity is taxed at ordinary income. So like this might be your only liquid asset that is outside a retirement account. So everything that she has is going to be taxed at the highest of rates.

Al: Good point.

Joe: So we’re not fans of an annuity really at all unless someone just says I want an immediate guaranteed income stream. And then just exchanging cash for an income I think makes sense in a lot of cases for some people. But to these variable deferred guaranteed income benefits and all of that other bells and whistles, I think it’s just that they’re sold versus people truly understanding what they’re actually getting into.

Where to Safely Hold Cash and Earn More than 20 Basis Points? 3-Year Fixed Annuity?

Joe: Cynthia writes in from Texas. “Hi Andi, Big Al and Joe. Love the podcast. I’m a loyal listener from Texas and this is my third question.” Huh. Just keep going to the well.

Al: Keep ‘em comin’, Cynthia.

Joe: Maybe you should hire us.

Al: That would be a thought too.

Joe: Kidding.

Al: I like it when we get these 4-page plans and it’s like, this just a quick question. It’s like man, this is like we all need a full financial plan, not a computer.

Joe: I know. We gotta bring in full staff.

Al: It’s like here, hold on for like 3 or 4 hours. We’ll just come up with some stories while you’re waiting.

Joe: Okay. Well Cynthia, “Where can we put cash safely and earn more than 20 basis points?” Well, she’s sophisticated.

Al: Basis- that’s good.

Joe: Basis points. “We have a CD currently earning 1.75% which we thought was catastrophic. But when it matures in August we are looking at .2% to renew. So why bother right? So we’ve been advised to land our money to an insurance company and place it in a 3-year fixed annuity which is yielding 1.65%. We’re inclined to do it. What do you say? Should we be concerned about safety? The amount invested will be a small percentage of our total portfolio. But more CDs will be coming due in the coming months. Thanks so much. Your very good friend in a large Texas City. I drive a Honda.” Yeah Cynthia.

Al: With a smiley face.

Joe: OK. You know what I would do Cynthia? You know where she needs to go is- Earn More Interest- or what’s…?

Andi/Al/Joe: Max My Interest.

Al: Yeah, that is a good one.

Joe: Try that before you get- you lock up into a fixed annuity at 1.65%. Is there any- you’re buying an insurance product that it’s 3 years. It’s not that big of a deal. The yield is not that great and so I imagine the commission is probably not that huge. The money grows tax-deferred. You can’t pull the money out until you’re 59 and a half. So just I’m not sure how old you are Cynthia. So if you’re under 59 and a half and you want more liquidity than I would not put it into an annuity product.

Al: Also I would say not all banks are the same. I just went to my credit union a couple of months ago and they were paying 1%. So it’s not a great rate but it’s better than .2%.

Joe: You can also look at really short term- I got some cash and Short Term California Muni-Bonds.

Al: Yeah yeah.

Joe: There are all sorts of different alternatives.

Al: There are. I agree with ya. Probably that’s- insurance is not the best way to go.

I’ve posted the link to Max My Interest in the podcast show notes, as well as some other free resources if you want to learn a little bit more about annuities: watch Joe and Big Al break down fixed indexed annuities (back when we could all be in the studio together), read the pros and cons of buying an annuity for retirement income, learn the truth about variable annuities, and more. Got questions? Ask Joe and Big Al On Air is back and functional! Click the link in the description of today’s episode in your podcast app to go to the podcast show notes at YourMoneyYourWealth.com, access all these free resources, sign up for our live webinar next week, and send in those money questions!

Tax Planning and Roth Conversions: Itemized Deductions, Dividends, and Long Term Capital Gains

Joe: We’ve got David. He writes in from NYC. “Greetings from NYC where I listen to the podcast every week while walking around Central Park enjoying the info and the humor. Since I’m wearing a face mask people can’t see me laughing. Probably a good thing.” Huh. People enjoy watching other people laugh.

Al: I think it’s okay to laugh. Of course, I suppose if someone says, what’re ya laughing about? Oh, this financial show. It’s too hard to explain.

Joe: “Back in episode 266 you had a really helpful discussion about tax brackets and my question today relates to that topic and tax planning plus the ever-popular Roth conversion. Sorry. Here goes, I hope I’m providing all the details you need.” Okay, let’s see what David’s got cooking here. “I’m married; file a joint return. I’m retired; age 68 and drawing Social Security and my wife is still employed. Let’s just say hypothetically our AGI is $201,000-”  Hypothetically.

Al: Hypoth- why do you say exactly $201,000?

Joe: $201,474.

Al: But you know- give or take. Even round it down to $200,000. $201,000. So it was a rounding error.

Joe: “- taxable wages and Social Security; some fully taxable Roth conversions; short term and long term gains and dividends; itemized deductions from real estate; tax and contributions to a donor-advised fund are $30,000. So on the face of it, it appears that we’re basically hit the top of the 22% tax bracket which is $171,000. And if I wanted to do any additional Roth conversions they’d be taxed at the 24% rate. But if $30,000 of the $201,000 is from dividends and long term capital gains being taxed at only 15%, should I be thinking that I really could do a $30,000 conversion- an additional $30,000 to max out that 22% bracket?” So let’s stop there Al because this is a really good question. So there’s ordinary income tax. So certain income sources are taxed at ordinary income and certain other income is taxed at cap gains or dividend rate.

Al: That’s right. And so let’s start with his income. I’m going to round it at $200,000. And he’s got $30,000 of itemized deductions so his taxable income is $170,000 which is the top of the 22% bracket. So he’s thinking maybe I shouldn’t do a Roth conversion because then I’ll have to pay 24% tax. But then he thought wait a minute, about $30,000 of my income is capital gains and qualified dividends which gets taxed at 15% regardless of my income level until he gets over about $470,000, something like that. It’s a great question. And the answer David is absolutely yes. You are absolutely correct. It’s a little known trick I guess, if you want to call it that, that when you are in- pushed up into the next bracket and you have a certain amount of capital gains you can actually go into the next bracket because the old-

Joe: They sit on top.

Al: They sit on top. So the overage would be tax the capital gains rate. So in this example, David could do a $30,000 Roth conversion and still stay in the 22% bracket even though his taxable income is $200,000. Because of the $200,000, $30,000 will be taxed at the capital gains rate. And then the $170,000 is taxed at ordinary income rate. But I should mention that works for every single bracket except between the 12% and 22% bracket. And let me explain why. Because when you are in the 12% bracket your capital gains are tax free. And so if you go above, it’s a roughly $80,000 dollars for a married couple, if you go into the next higher bracket to the 22% bracket I think well this makes sense because they get capital gains. Now you’ve taken your capital gain that was taxed at 0%. Now it’s taxed at 15%. And oh by the way, you’ve got to pay tax on the Roth conversion which will probably be the 12% bracket. So now you’re paying a 27% tax in that example. Hard to explain on the radio but if you think about it when you’re going from the 12% bracket to the 22% all the sudden those capital gains which were tax free become taxable. It’s not a good deal at all. But when you’re in other brackets, it’s a fantastic deal.

Joe: Because if you look at it they’re sitting on top. And so let’s say if David’s taxable income and let’s just assume the top of the bracket- we’re going to round here David- is $80,000. And if his taxable income was $70,000. And it was like but $10,000 of that was capital gains. Well that $10,000 capital gains would have been tax free because he stayed in that 12% tax bracket.

Al: That’s right.

Joe: But if he did a $20,000 Roth conversion and got his taxable income up to $80,000. Well now that tax- or that cap gains sits on top of the ordinary income. Now that’s in the 22% tax bracket. It’s taxed at 15% plus state plus whatever.

Al: Great example Joe. So that $10,000- the $20,000 Roth conversion, it gets taxed at 12% because that’s the bracket that you’re in. But $10,000 of the capital gains, now instead of taxed at zero are now taxed at 15%. So you got that on top of the other.

Joe: So in his example, it worked out for him. He’s like I don’t want to get the 24% tax bracket but $30,000 of this is capital gains. Well if I do another $30,000 Roth conversion. Well, guess what? That filled up that 22% tax bracket. The remaining $30,000 sits on top of your ordinary income. That’s not going to be taxed at 24%. That’s going to be taxed at 15%. So in David’s example, it works out pretty good. But if you’re in that lower tax bracket you’re filling up those lower brackets which would be a capital gain tax-free.

Al: Yes. Right. So I’m going to say, David, congrats. You’re a little smarter than I am because I learned this by accident. I didn’t think about it like you. I learned it by accident roughly-

Joe:10,000 tax projections ago.

Al: Yeah yeah. This was probably over a decade ago when I was doing more tax projections and all of a sudden we would do a bigger Roth conversion and I was thinking, gosh it’s only taxed at capital gain rate. Something’s wrong here. And I had to look into it- I go, oh of course. Because it sits on top.

Joe: Hs question goes on “Since I have to make quarterly estimated of tax payments, knowing the answer to this question would help figure out the rest of the year. Plus I really want to convert more money to my Roth since right now we are overweighted on both traditional IRAs and my wife’s 401(k). You talked about the likelihood about higher taxes down the road and I’m willing to bet on that as well. Thanks always. Keep up the great entertaining work. Details not related to the question. No car.” OK. So he just chills in the subway. Subway instead.

Al: New York City of course.

Joe: “No pets. Have I left anything out?”

Al: Do you like golf?

Joe: I don’t know.

Andi: Everybody’s gonna have a long list of questions they have to answer.

Al: We can always-

Joe: What kind of adult beverage do you prefer?

Al: What’s your wife’s name?

Andi: Getting a little personal.

Joe: Cool David. So hopefully that helps out. There’s a couple of nuggets to chew on there.

Al: Let me just add Joe that estimated payments- if you are doing a Roth conversion your income is higher. You may have to make estimated payments and that’s where you look to last year’s tax versus this year’s tax. It’s too complicated to explain right now, but just be aware. Look into it. You may need to make estimated payments.

I Retired at 55, Can I Convert From 401(k) to IRA or Roth Without Penalty?

Joe: Nick writes in. He goes “Hi everyone. I enjoy listening to your show. Learned a lot over the years. My question is, I’m 55, can I convert some of my 401(k) to IRA into Roth without getting a penalty since I’m under 59 and a half? I appreciate your answer. Be safe.” Nick we’ve talked about that earlier. So a couple of things. When it comes to taking money from a 401(k) plan at 55 as long as you separate from service at 55 from your employer there is no 10% penalty by taking distributions from a 401(k) plan. If you separate a 55. The rule is not 59 and a half. That’s for IRAs. It’s 55 for a 401(k).

Al: And what’s weird is you could be 55, separate from service and that 401(k, you can take money out. But your old 401(k) that you never rolled into your new employer one, that’s still 59 and a half, because you didn’t separate from service from that job at 55 or later.

Joe: Correctamundo. So there would be no 10% penalty regardless of what you’re trying to do with that money. For other people out there if- well first of all Nick, don’t put the money into an IRA because you’re 55 and you’re retired. Keep it in the 401(k) plan. Because if he moves it into an IRA, guess what he does?

Al: What’s he do?

Joe: He blows up the exemption. Now he has to wait till 59 and a half to pull the money out.

Al: If he needs access to the money-

Joe: If he needs access to the money.

Al: Correct.

Joe: So if you retire and you’re 55, keep the money in the 401(k). Don’t roll it to the IRA.

Al: Good point Joe. Because I think a lot of people don’t realize that. Now if you’re so- we’ll repeat this because people screw it up all the time, you have to be 55 or older when you retire.

Joe: When you separate from service.

Al: When you separate from service.

Joe: Yep.

Al: If you leave, if you quit at age 54 and wait till 55, you’ve already blown it- you’ve got to wait till 59 and a half.

Joe: Yes. If you put it into an IRA, you’re eligible for the exemption to take the money up with no 10% penalty.

Al: But even if you leave it in the 401(k). You retired 54-

Joe: You’re done. You’re done.

Al: You can’t- You have to you have to wait until 59 and a half to get it back without penalty.

Joe: Correct. I’m sorry.

Al: But if you’re 55 and retired, now you can pull it out. You have to pay tax on it of course, but there’s no penalty.

Joe: There’s no 10%-

Al: Yes. But you can always convert at any age. There’s never a penalty in Roth conversions and I think a lot of people get confused on that too.

Joe: So you’re good to go. But great question. So hopefully we saved a couple of people.

Investing a 401(k) Distribution in a Roth Vs. Doing a Roth Conversion: What’s the Difference?

Joe: So Danny writes in. He goes “What is the difference between taking money out of a 401(k) and investing it into a Roth IRA conversion?

Al: Roth IRA and conversion? I think he’s comparing taking money out of a 401(k) and investing in a Roth or doing a Roth conversion. That’s how I read that.

Joe: Okay. Well if you take money out of the 401(k) it’s a distribution you cannot put it into a Roth IRA.

Al: Yeah. If we’re reading your question right. That’s a correct statement. So a Roth conversion allows you to directly put money from an IRA or 401(k) into a Roth. And yes, you pay taxes on it as though you received it. But now it’s in a Roth IRA and all future growth and income and principle’s tax free. But yeah, you’re right. If you just take money out of the 401(k) you’re not allowed to invest it in a Roth. It’s already money that you have outside of your retirement plan.

Joe: So you think of it as a rollover. Because that’s how the IRS documents a conversion. So there’s confusion is that let’s say I’m under 59 and a half and I do a Roth IRA conversion. So that means I’m taking money out of my retirement account and putting it into another retirement account. But you have to file the paperwork appropriately to do this.

Al: So it’s a direct transfer.

Joe: Correct.

Al: So it goes from your 401(k)- let’s just say that’s at Fidelity, just to make that up. And you happen to have another account at TD Ameritrade. That’s your Roth account. So you transfer from the Fidelity to the TD Ameritrade, the Roth, and you never really receive access to the funds. Now you can actually-

Joe: You will get a check from a 401(k).

Al: From a 401(k) you will-

Joe: But it won’t be in the name of you, it would be in the name of the Roth IRA. So it be-

Al: Correct.

Joe: – Alan Clopine trust- made out to TD Ameritrade for the benefit of Alan Clopine’s Roth, something like that.

Al: Clearer.

Joe: But you would get a check. That’s what- if you try to do a conversion out of a 401(k) to a Roth IRA, you will receive funds.

Al: You’re right. I was thinking of an IRA to a Roth is a direct transfer. You’re right because 401(k)s they make you write a check. And I think when I’ve done that before and our clients too, I think it comes out like it’s in the name of the custodian instead of your own name, for the benefit of, and then your name.

Joe: They’ll write it out to Fidelity for the benefit of Alan Clopine.

Al: Correct.

Joe: And then the account number of whatever account that it’s going in.

Al: Now what about this? If you get it in your name and you still want to put it in a Roth. You still have 60 days-

Joe: 60-day rollover.

Al: – one time in a 365 day year.

Joe: Correct.

Al: Starting at the point where you got that check.

Joe: Correct. But there’s no 10% penalty when you do a Roth IRA conversion under 59 and a half if you do it appropriately. I think there’s confusion there. It’s like well do I have to be over 59 and a half because I’m taking money? Is it a distribution? The IRS classifies it as a rollover. So I wouldn’t necessarily worry too much. But the question’s kind of off. So I’m afraid for Danny, Alan, is what I’m- I’m afraid that he’s going to blow this thing up.

Al: It’s possible.  Well I took the money out of my Roth last year and now I want to put it- I took the money out of my 401(k) last year and now I’m gonna put it in the Roth. What should the investments be?

Joe: What’s the difference? I took a distribution last year, in January. Well it’s July. It’s too late.

Al: You get 60 days once a year.

Joe: So many blow ups. Make sure that you fill out the paperwork appropriately, understanding kind of the rules and regs. And when you file your tax return, understand what you need to do there as well. So good luck with that. There is no difference taking money out of 401(k) and doing a conversion. It’s the same. The money’s coming out of a 401(k) going into a Roth IRA. I think it’s the execution on how you do it is everything.

Al: Correct.

Joe: So you want to make sure that you are up to speed on the rules and regs or work with someone that is.

If you’d like to work with someone who is up to speed on the rules and regs to make sure you don’t blow up your retirement, give us a call at 888-994-6257 or click the Get an Assessment button in the podcast show notes at YourMoneyYourWealth.com – schedule a two meeting analysis of your entire financial situation, via Zoom video call,with a CERTIFIED FINANCIAL PLANNER from Pure Financial Advisors. It’s far more comprehensive than a YMYW spitball analysis, it’ll help you determine whether a Roth conversion might be the best way to optimize your retirement tax planning, and it’s free.

How to Separate Pre and Post Tax Money for a Rollover?

Joe: Let’s go to Chidam. “Hi Joe and Big Al. I’m a regular listener of your podcast every week.” See how he left Andi out?

Al: He did.

Joe: He probably just emailed her directly.

Andi: No, he didn’t. But keep reading.

Joe: Oh, okay. “In fact, I go for a walk and listen your podcast peacefully. And it’s been one of the best podcasts ever.”

Al: Peaceful. It’s like a meditation podcast. You feel like Zen after.

Joe: It’s like taking a gong bath.

Al: A what bath?

Joe: Have you ever had a gong bath?

Al: No. I don’t know what that is.

Joe: Where you sit there and someone’s like banging a gong.

Andi: Wow.

Al: Is that a thing?

Andi: I’ve heard of a sound bath which is actually pretty relaxing. But a gong bath sounds really aggressive.

Joe: No, a gong bath, it’s pretty aggressive.

Al: Where do you have to go to get one of those?

Joe: Oh, you gotta – secret places.

Al: Secret spots? It’s not really legal in California?

Joe: It’s pretty tough to find a good gong bath here.

Al: Got it. Okay. I could just see some big Buddhist…

Andi: Moving on now.

Joe: It’s a gong bath man, it’s good stuff. I encourage most of you to try it out.

Al: Look it up Andi, see if there’s such a thing.

Andi: You got it.

Joe: “I like how Andi keeps you both in check whenever you guys drift the way with your jokes, which is essential.”

Al: Oh that’s what we just did.

Joe: Yes.

Al: “It’s the essential part of the podcast.”

Joe: It is, an essential part of the podcast. “It makes it enjoyable.”

Andi: Wow, it’s real.

Al: It is?

Andi: And there’s no water or nudity involved.

Joe: I told you. It’s a gong bath. Right there. What’s it say? Gong bath.

Al: I’m learning all kinds of stuff today.

Joe: What happens in a gong bath? You don’t want to know.

Al: Find out where we get them. Where do we have to go?

Joe: You gotta experience it on your own folks. I’m tellin’ ya, it’ll change your life. “My wife changed employer recently. She had a 401(k) and after-tax options, not the Roth 401(k). I’d like to roll over the 401(k) funds to a new employer plan. But when I went to request that there was no option to just roll over the pre-tax portion even though I’m able to see total separately between after-tax and pre-tax whenever I log into their site. I call them and I was told I cannot roll over only the pre-tax portion of the 401(k) to my new employer plan. I have to take the check, in my name for the after-tax portion, which is a bummer. This means that they’ll be considered distribution. I’ll have to pay taxes on the earnings portion. Besides once the check is in my name there’s no way I can put it back into the Roth IRAs I have elsewhere. The person on the call did not understand that part. So I did not bother to explain. So here’s the amount, $200,000 in a 401(k); $6000 is after-tax, which is what I want to convert to the Roth IRA. But they don’t have that option. The only other choice I have is to convert the after-tax portion to Roth 401(k) which will lead to taxes on earning portions, about $650. I’m confused about what is the advantage of converting the after-tax contributions to Roth 401(k). Can you please advise? Should I do that as a first step? And then later roll that into a Roth? It’s a two-step approach. But either way, I’ll pay taxes on the $650 earnings. Our AGI is expected to go up significantly this year due to a job change, about $380,000 this year. So we’re already in a high tax bracket. Keep up the good show. Thanks for the advice.” So it’s not that- so he’s got $6000 after tax in his 401(k) plan. And what Chidam is trying to do is say hey, $200,000, I want to roll into the new plan; the $6000 I want to put into a Roth IRA. You can absolutely do that.

Al: Yeah, we’re making this too complicated.

Joe: Yes. You’re talking to the wrong person at the custodian. You just need to talk to a retirement specialist whoever the money is held out. He must be talking to an HR or someone that knows how to do simple distributions. But when you look at let’s say like, net unrealized appreciation- that’s taking company stock out of 401(k) plan and putting it into a brokerage account. You try to do that with a normal rep?

Al: Good luck explaining that to them.

Joe: Forget about it. Exactly. They don’t get it. They don’t understand it. And then same with here, if you’re not getting the right answer, it has nothing to do with the plan per se, it has to do with the law. I guess if the plan document does not allow it. But I don’t see why not.

Al: I don’t either. I think the $6000, you send that right to a Roth IRA.

Joe: Say here, I want to take this $6000, here’s the account number. Move it here.

Andi: I got a question.

Joe: Here’s the $200,000.

Al: Not a Roth 401(k), to a Roth IRA. That’s-

Joe: You’re rolling the money out.

Al: Yeah, you’re rolling it out into a Roth IRA. You cannot roll pre-tax money into another 401(k) and maybe that’s the problem that he’s having.

Joe: He can’t roll post-tax money-

Al: – post-tax. I said it wrong. I said it wrong.

Joe: – into another 401(k).

Al: Post-tax. Correct.

Joe: Because that’s why they’re saying no, we’re going to just write you the check.

Al: That’s right.

Joe: Don’t write me the check, write it to Fidelity. Here’s the account number, put it in this account.

Al: Right. Yeah exactly. And then the rest of it is pre-tax. Then that can be rolled into the new 401(k). No problem.

Joe: And so regardless, if he gets $650 in tax to get $6650 into a Roth, it makes sense to do it.

Al: But there shouldn’t be any tax.

Joe: On the $6000. But he’s worried about the $650 of growth on the $6000. That will be taxed if he moves the full $6650 into Roth.

Al: I agree with that. You might just do the $6000, pay no tax or pay tax on $650, no big deal.

Joe: Who cares?

Andi: He says it’s his wife’s account. Does that matter?

Joe: Yes, put it in his wife’s account, not his account. He’s probably trying to figure out-

Andi: That’s what I was asking.

Joe: – how to put it into his own Roth. It has to go into –

Al: It has to go into her Roth IRA.

Joe: – her Roth IRA. So yes, maybe that’s why. I don’t know. So if anyone’s having a problem, if you hear something on the show and you’re trying to implement it, just call us or email Al or I directly. We can maybe help you, walk you through it, and get on the phone with some of these administrators for you.

Can I Start a Roth for My Dual Citizen Grandson Working Part-Time Overseas?

Joe: Paul writes in from Columbia, Maryland. “Great podcast. Listen every week and always pick up a few nuggets to use.”

Al: Yep. A few. It’s a lot of listening to get a few. He keeps at it. Thanks, Paul.

Joe: You gonna binge. Oh boy. This is going to be interesting. “I have a grandson in Australia that is a dual citizen. He is working part-time there at McDonald’s.”

Al: Nice. Okay.

Joe: I wonder if they are a little shrimp on the barbie at McDonald’s.

Al: Could be.

Joe: “He will not earn enough to even file a tax return. I would like to start a Roth IRA for him that reflects his earned income probably around $1000 Australian. How can I do that? Also how do I deal with the difference in the value of the Australian and the US dollar?” So we got some currency exchange with a McDonalds worker in Australia trying to get $1000 into a Roth for Paul.

Al: We do. This is not a hard question to answer. I can do it in a minute or less.

Joe: All right let’s see it. Timer is on.

Al: Well first of all, you can do a Roth IRA contribution for foreign earned income but you need to file a return. Even though there’s no taxes due. So go ahead Paul and have your grandson file a return, show the income of $1000. The standard deduction would be greater than that, there would be no taxes due. That will establish that you have earned income, so that’s number one. Number two is what amount you put on it. What you do is you take the amount earned over the course of the year in Australian dollars and you just look it up. You look at Historical Currency Exchange and you find out what the average currency rate is from Australian dollars to U.S. dollars. Use that percentage and then multiply it towards the dollar amount to figure out how much it is in U.S. dollars. So let’s just say, I don’t know what the exchange rate is, but let’s just say it’s $1200 U.S. So you put $1200 U.S. even though it’s $1000 Australian. But $1200 on the return it’s going to show $0.

Joe: What is the currency in Australia?

Andi/Al: Australian dollar.

Joe: It is called an Australian dollar?

Andi: AUD.

Joe: AUD?

Al: Yeah.

Joe: Got it.

Al: I just don’t know what the exchange rate is. I have no idea.

Joe: I would say the Australian- well I don’t know- Andi, do you- I don’t know, we have 15 seconds. Paul, there you go. Great grandfather. And there’s another nugget that hopefully you were able to pick up.

If I Convert a Million Dollar IRA to Roth All At Once, How Long Would It Take to Make it Worthwhile?

Joe: We got one last question here from Albert. He goes “If I had $1,000,000 in a traditional IRA and I wanted to roll it to a Roth IRA all at once, how long, how many years will it take it to be worthwhile assuming an 8% rate of return?” It would take a long time. It would take-

Al: It would take a couple lifetimes.

Joe: – a couple lifetimes.

Al: Don’t do that.

Joe: Yeah. Because you’ll lose 40% of the money. So at an 8% rate of return, the money would have to compound. You would have to- I don’t know, it depends on how old that you did it. If you were probably 30, you would-maybe 30 years, you could catch up?

Al: Maybe. But better to do it more slowly, over time, stay in lower tax brackets.

Joe: There’s I guess- we could do a whole show on that.

Al: We could.

Joe: Because there are so many caveats. But if you’re just looking at all I have is $1,000,000. I don’t have any other assets.

Al: I don’t wanna pay tax anymore. I’m just gonna rip the band-aid off.

Joe: I’m gonna convert it and pay 37% federal and 13% state.

Al: If you’re California.

Joe: You’re 40 some odd, 45%. It’s going to take you a long- you got $550,000 to- no, don’t do it.

Al:  Right. Agreed.


Quick Derail for you coming up. For more on Roth conversions, specifically, when you can withdraw money from your Roth IRA, Click the link in the description of today’s episode in your podcast app to go to the podcast show notes at YourMoneyYourWealth.com and download the Guide to Roth Withdrawal Rules.

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