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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
September 15, 2020

Answering questions across the financial and retirement spectrum, with topics like when your traditional IRA is growing faster than you can convert to Roth, consolidating retirement savings, annuities, the SECURE Act and inherited IRAs, undoing SEP-IRA contributions, Roth conversions after age 72, offsetting conversion gains against tax-harvested losses, tax diversification beyond conversions, and what to do if you think you blew up your Roth IRA.

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Show Notes

  • (00:52) Can I Undo My SEP IRA Contribution and Amend My 2019 Tax Return?
  • (05:01) How to Convert Your Entire Traditional IRA to Roth When It Grows Faster Than You Can Convert?
  • (08:39) Can You Do Roth Conversions After Age 72? Should I Consolidate My Retirement Accounts?
  • (10:49) If You Do a Roth Conversion, Can You Offset the Gains Against Tax-Harvested Losses?
  • (13:56) Tax Diversification Beyond Roth Conversions?
  • (17:24) I Think I Blew Up My Roth IRA. What Can I Do?
  • (21:05) What Do You Think of The Structured Capital Strategy Fund Annuity?
  • (22:59) Inheriting an Inherited IRA: Rules and RMDs
  • (27:27) Should I Withdraw Roth Contributions to Pay for College?
  • (31:42) SECURE Act Stretch IRA Trust Beneficiary: What About Minors?
  • (36:04) I’m 75. Is Getting a Home Mortgage and Giving Home Equity to the Kids a Good Idea?

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Transcription

Today on Your Money, Your Wealth®, Joe and Big Al answer questions across the financial and retirement spectrum, with topics like converting your entire traditional IRA to Roth when it’s growing faster than you can convert, consolidating retirement savings, annuities, inherited IRAs, undoing SEP-IRA contributions, converting to Roth after age 72, tax loss harvesting and Roth conversions, tax diversification beyond Roth conversions, and what to do if you think you blew up your Roth. Click the link in the description of today’s episode in your podcast app to go to the show notes where you can access free financial resources, the episode transcript, and to click the Ask Joe and Big Al On Air banner to send in your money questions and maybe the fellas can answer without blowing them up. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®,  Joe Anderson, CFP®, and Big Al Clopine, CPA.

Can I Undo My SEP IRA Contribution and Amend My 2019 Tax Return?

Joe: So let’s dive in.

Al: Ok. Just like that, huh?

Joe: Yep.

Al: Why waste any precious time?

Joe: Why waste any time?

Al: You don’t really care about my weekend. And I don’t care about yours.

Joe: No, I don’t.

Al: So, here we go.

Joe: Done that, been there. No thank you.

Al: Like let’s move on.

Joe: Let’s get to the meat. All right Frank. He writes in from San Diego. “Joe and Al. Great program. Can I amend my tax return, 2019, and remove my SEP IRA contribution penalty-free? I filed my – ” why does he go TY 2019 return?

Al: Tax year. Tax year 2019 return. That’s what it means.

Joe: Got it. Tax year. I thought it was tax return but that would not be TY.

Al: That would be TR.

Joe: That would be TR. Got it.

Al: So he filed this TY 2019 returns.

Joe: Okay. “- tax year 2019 return in May 2020.” All right let’s start over here. So Frank writes in from San Diego.

Al: Okay.

Joe: “Can I amend my 2019 return and remove my SEP IRA contribution penalty-free?” So he filed his 2019 return in May of 2020 so-

Al: And he probably put that he was going to make a SEP contribution but he didn’t.

Joe: “I’ve now decided I don’t want to make the SEP-IRA contribution for tax year 2019.

Al: Yeah, forget about it.

Joe: “Can I file an amend the return and take the SEP-IRA contributions out of the account and pay the additional state and federal taxes without penalty? Thank you.”

Al: Well I’ll take this one, Joe. So Frank you can, yes you can amend your return. You have up to 3 years after you file, so that’s no problem. When you filed your return which normally is due April 15th, this year was due July 15th, so you could have actually amended the return without penalty to that date. But now since we’re in August as we do this podcast then when you amend their return you should have paid more tax by July 15th. So there will be a penalty from that date to the date that you amend the return. The penalty, I wouldn’t lose too much sleep over it. It’s only a 3% interest rate. So let’s say you owe an extra $1000 just to give you a simple example. And if it were over the course of an entire year it would be a $30 penalty. But let’s just say it’s a few weeks it’s not going to be very much. But there’s another kind of penalty too, Joe, and that is if the SEP-IRA contribution- oh well no never mind because he didn’t make it. I was going to say if he made it and pulled ____ –

Joe: No, he did.

Al: No I don’t think he did.

Joe: “Can I take the SEP-IRA contribution out of the account -?”

Al: Oh OK. Well I was going to the right place then.

Joe: Yeah. Because if he made money on it-

Al: That’s what I was going to say.

Joe: It would be ordinary income.

Al: Right. So he put in $15,000 and now it’s worth $16,000, let’s just say you pull it out and you got to pay ordinary income on that $15,000.

Joe: Well if he puts in $15,000, and it’s worth $16,000 and he takes the $16,000 out, he’s gonna owe taxes on the $1000 because he’s amending his return and not taking the deduction on the $15,000.

Al: That’s correct. So let me say that a little different way. So he’ll owe taxes on the $15,000 that he already deducted. So that comes out and he’ll owe taxes on the $1000 because that’s what he made in the account.

Joe: Correct. We’re saying the same thing differently.

Al: I think so.

Joe: So hopefully that helps. But yeah I guess without taxes and penalty additional-

Al: The answer’s no.

Joe: Unless- I’m curious why he wants to take it out but maybe he needs the cash.

Al: Well it’s Coronavirus. Maybe he wants to have more emergency fund or whatever. Maybe he needs –

Joe: I know what he could do. He could take a CRD, a Coronavirus related distribution-

Al: And pay it off over 3 years. Now you’re talking.

Joe: Or pay the account back 3 years later.

Al: That’s very clever. Look at you.

Joe: All right Frank. We’re here to help. Hopefully, that helps.

How to Convert Your Entire Traditional IRA to Roth When It Grows Faster Than You Can Convert?

Joe: We got Michael from- Mississippi?

Al: Yeah.

Joe: Or is that Missouri? Mississippi. MO is Missouri.

Al: Correct.

Joe: I don’t know if we’ve had a-

Al: This could be a first. Have you been to Mississippi?

Joe: No.

Al: Me neither.

Joe: I have not.

Al: I’ve only been to Texas in the Dallas airport, which hardly counts.

Joe: You got it. You gotta live life.

Andi: Texas definitely does not count as Mississippi.

Joe: “Hello Joe and Al. We love your show. Listen every day on YouTube.”

Al/Joe: Every day.

Joe: Let’s get our dose of Your Money, Your Wealth®.

Al: It’s like honey, this morning, you get the coffee, I’ll turn on YouTube.

Joe: Oh boy. Michael. Gotta get a life. “We are 63 and 62 and we will work until our 70s. We have real estate income of about-” does that say $10,000 a month?

Al: It does.

Andi: Yes.

Joe: Wow that’s impressive.

Al: That is. ” – $10,000 a month and $1000 a month pension, $5000 combined monthly Social Security, which will be claimed at age 70. We pay ourselves $2000 monthly from our business. We have been converting Traditional IRA to Roth IRA over the last few years. But it seems to grow faster than we convert. We convert at $100,000 a year. We now have about $650,000 left to convert to Roth IRA. We are 100% in stocks at Vanguard. We want to convert all of them before 2025. Our question is, how much a year do you recommend us to convert a year to finish?” So he’s got a finish line, all of it.

Al: He does. I like it. Let’s get it all out.

Joe: Let’s blow it all out. “What would be the best way to convert? What would be our tax situation at age 70? We’re thinking about Medicare premiums that will be increasing by converting. We want to leave Vanguard Roth IRA for our children. We’ll be listening to your show. Thank you. Always keep up the good work. We love you guys and the show.” Well, we love you too. What do you think Al? He’s got $650,000, he’s 62 years old. He wants to convert it all by- or 63 and 62. So let’s call it 7 years. He’s got $650,000. He’s all in stocks. He’s like he’s converting but I can’t convert enough because-

Al: It keeps growing.

Joe: – the market keeps goin’ up on me.

Al: It gets away from me. I think you look at income, $10,000 a month real estate. So that’s $120,000- there’ll be some depreciation. Who knows how much? Let’s just say $20,000. Keep the math easy. So $100,000 of income there. Monthly pension of $1000, $12,000. I’m going to round it to $10,000 so-

Joe: I would convert to the top of the 22%.

Al: Well hold on.

Joe: No?

Al: I agree. But let’s get there before you-

Joe: Well we’re out of time.

Al: Oh yeah. Okay. Nevermind.

Joe: So convert to the top of the 22% tax bracket. The top of 22% tax bracket’s $160,000 of taxable income.

Al: Yeah I think it’s about $170,000.

Joe: OK. So $170,000. So you’re still going to convert roughly about $100,000 now; push out Social Security to age 70. Keep converting there because at the top of the 22%, you’re still going to have money into a 401(k) IRA. But we talked about it before, those dollars will come out and will- but you’ll use up your standard deduction in the 10% bracket.

Can You Do Roth Conversions After Age 72? Should I Consolidate My Retirement Accounts?

Joe: We got Dale from Colorado Springs, Colorado. Very cool place. “I just retired this August.” Well congratulations Dale from Colorado Springs. “I have a Traditional IRA with Vanguard, the Wesley Income Fund, with around $150,000 in it. And I have a Traditional 401(k) with Fidelity from my past job with around $175,000. My question is _______ roll the 401(k) to the IRA, would it be a good thing or not? Some more information about me- I’m single, 66. I can live on Social Security, about $22,000 a year. He pulls out $12,000 from the retirement accounts which will put me in a 0% tax bracket. And I can live comfortably on that. Also have around $30,000 plus in cash to help out. Thanks for your help. I’m a longtime listener to your podcast and also watching your TV show.” Very cool. Thanks, Dale. I think he’s right on. I wouldn’t move the money from the 401(k) to the IRA for simplicity or move the IRA into the 401(k) for simplicity. It just doesn’t necessarily matter what you want to do there. If you like Fidelity, move it in the 401(k); if you like Vanguard, move it there. The 401(k)s, you get a little bit more, I don’t know, protection if he does some criminal activity.

Al: True.

Joe: But Dale seems like a nice guy. I’m sure nothing’s-

Al: Seems like it. Colorado Springs. Good guy.

Joe: – gonna happen there.

Al: I agree with you. And you generally have more investment choices in an IRA as opposed to a 401(k). Sometimes you have brokerage accounts and 401(k), so not necessarily, but that would be a general thing. But I think the most important thing is as you said Joe, is just- it’s simpler to have one account instead of two.

Joe: And then he’s taking less than 4% out of the overall account. So the distribution rate is OK.

Al: I’m good with that too.

Joe: So I like his plan. So he’s single, 66, living off of Social Security, pull another $1000 a month, got $30,000 sitting in cash; hanging out, watching a little Your Money, Your Wealth®. Yeah, I like it. All good.

If You Do a Roth Conversion, Can You Offset the Gains Against Tax-Harvested Losses?

Joe: Andy writes in. I don’t know where Andy’s from. He goes “Dear Andi, Al, and Joe. Hope you are all well, and yours.” I guess you two are the only ones that have “yours.”

Al: Not you.

Andi: “Hope you and yours are well.”

Joe: Yeah, I don’t have a “yours.”

Al: You have a _____ –

Andi: You have family.

Joe: Yeah, my mother’s my “yours?”

Andi: Yeah.

Joe: No. “My goal is to strengthen my tax-free portion of assets. I have two questions.” Imagine this Al, another conversion question. “If you convert a non-deductible IRA to a Roth IRA, can you offset the gains against tax harvested losses?” No.

Al: No. That’s a capital loss against ordinary income. You can do $3000 if you don’t have any other capital gains. But no, you can’t.

Joe: “When do you have to stop converting 401(k) dollars to Roth IRA. Presuming it’s ok before 72, but can you do it after 72?” Oh God willing.

Al: If you make it. Yeah. There’s no limit. You know what? And if you live to 120 you can still be doing Roth conversions if you want.

Joe: I’m gonna be doing it after 72.

Al: I know you are.

Joe: Just killing it.

Al: You will have already converted everything though right? At that point. You’ll have to get some earned income so you can do a regular IRA so you can convert it.

Joe: Yes. That went over his head there, Andi.

Andi: Yeah.

Joe: Okay. Don’t blow up your tax brackets can peak. So the answer Andy’s question is that no, you cannot take your losses from a brokerage account and offset those losses against a conversion. And then as long as you have dollars in a 401(k) account it could continue to convert. The only thing is when you reach RMD age or your required beginning date, which is now age 72 or April 1st the following year, you have to take the RMD. You cannot convert your RMD, so the RMD has to come out first then you can do the conversion. So if you convert your required minimum distribution then that’s called an excess contribution and then you have an excise tax of 6% per year. Those dollars are in the Roth. So just be careful with that. You have to take the RMD out first and then you can do the conversion after you take your required distribution. So you don’t want to blow up your brackets. What that means is basically look at your tax bracket and don’t go into a higher bracket than you need to and then pay the funds from outside the conversion. Yes, you absolutely want to pay the money from cash or brokerage account or outside monies from the 401(k). “Appreciate your shows and podcasts. Keep up the good work. Andy.” Thanks, Andy. Cruisin’.

Al: Movin’ along.

Joe: Your eyes are getting a little red Al.

Al: I’m getting tired. It’s been a busy day.

Tax Diversification Beyond Roth Conversion?

Joe: We got Allan from Texas writes in. “Howdy Andi, Big Al, and Joe. Appreciate the podcast and like how you bring some levity to the numbers. Keep it up. I have a question about tax diversification over time. I’m an avid listener to your podcasts and hear you discuss how important tax diversification is, but it seems to be mostly focused on rolling funds from tax-deferred accounts to post-tax ones, e.g. the trusty Roth conversion. Presently I live in Texas, make $57,000 a year, and contribute the maximum to both Roth 401(k) and Roth IRA. My annual withholdings just about cover my tax burden so I’d rather my money grow tax-free in the Roth accounts as I will likely be working for another 30, 35 years. My company includes an annual cost of living of 3% and my plan is to divert that amount from my 401(k) to a Traditional 401k) to cover the increase in federal income tax. The goal is to contribute the maximum to my Roth accounts while keeping my tax burden close to zero. Is this a sound strategy? Am I missing something by contributing the majority of my investments to Roth accounts apart from the present-day tax relief? I drive a Honda Fit and have spent time in Juarez.”

Al: Juarez.

Joe: Yeah. No. I think we talk about tax diversification because everyone has their money in a retirement account, not a Roth account. So I think you’re doing a hell of a job. Keep pounding money into the Roth and it’s gonna be tax-free. And then if you want to put money into the tax-deferred to help you a little bit with the tax burden because most of your money is gonna be tax-free anyway. And you’re going to be a low bracket so you still have a deduction. So yeah I like it.

Al: I agree with that because I think sometimes people think that we want you to put 100% of your money into Roth and not necessarily. Because let’s fast forward to retirement age. If all your money is in a Roth you have no income there. You’ve got your Social Security which won’t be taxable. So you got basically- have no income to be taxed on, which, who doesn’t want no income? But you were probably in higher tax brackets to achieve 0% tax. Why not take advantage of the 10% and 12% bracket in retirement? And so you actually want to have some money in Traditional IRAs or Traditional 401(k)s so you can use that money for the lower brackets in retirement.

Joe: And it also depends- you want to look at the taxation on Social Security.

Al: And that makes it more complicated.

Joe: Because then of some portion of the income will then make other income taxable in regards to Social Security, Medicare, and all that.

Al: It’s never as simple as we say.

Joe: Exactly. But no I agree with you. I think it makes sense to get a tax deduction today. To help with the tax burden.

Al: At least some of it.

Joe: Some of it right. Some of it’s going to come out tax-free anyway. Just because you get a standard deduction of $25,000.

Al: And he’s saying by doing this strategy it keeps his tax burden close to zero. I think what he’s talking about his withholdings are covering his tax. It’s not that he’s not paying any tax. And a lot of people sort of think about things that way which is, if I don’t have to pay any tax on April 15th that I must be doing pretty good. And you did pay it. You just said it withheld. So just be mindful of that.

I Think I Blew Up My Roth IRA. What Can I Do?

Joe: John writes in from Los Angeles. “Hello guys. Love your show. Should have been watching it longer because I did something stupid after only listening to a few podcasts so I’m hoping you can figure out what I should do now. I’m 70, wife is 60, I retired at the end of 2019. She retired a few years ago. After hearing you guys describe the benefits of Roth IRAs, I got excited and opened up one for each of us in December 2019. In January of this year having some cash lying around, I decided to put $7000 into our new Roth accounts from our checking account and promptly invested the money in stocks. Fast forward to March 13th and both accounts dropped to around $5000 each and I rashly sold the stocks thinking this was the end of the world as we know it. Of course things turned around and I reinvested the money in May, purchasing only Apple stock since it had done well for me in the past. I quickly realized that I had screwed up from the beginning since we need earned income to deposit money into Roths. I only earned $2500 from a little consulting in 2020 and my wife will make no income. Now both Roths have blown up with Apple stock and are worth $9000 each. So my questions are, should I transfer the stock from both Roth accounts into our cash investment account, both with T.D. Ameritrade, before the end of the year? Or what? Can I take the loss from March and-” oh because he sold it at a loss and invested and it blew up.

Al: -inside the Roth.

Joe: “Will there be any penalties or is there anything else that I must do to keep the man off my back? Keep up the great work.” I got a very, very simple easy solution for John.

Al: I do too. Let’s see if it’s the same one.

Joe: John, you retired in 2019. You had earned income in 2019. You made the contributions in January of 2020. You have until April 15th of 2020 to make a 2019 Roth IRA contribution-

Al: And this year was actually July 15th.

Joe:  Label the Roth IRA contributions that you made as a 2019 Roth IRA contribution and don’t do anything _______.

Al: Yeah, totally agree. That’s all you gotta do. Instead of calling at 2020 contribution, call it 2019. And that’s allowed up to the tax filing date which was July 17th.

Joe: So there you go. I bet he’s already blown this thing out. He sold it, went to cash trying to take _____ before this comes out. I guarantee he did something different and he was not patient.

Al: We’ll get his follow-up question with what he did.

Joe: He was not patient. John. Hopefully you were patient and you just waited for your question to be answered. Because that’s a big one.

If like John you think you might have blown something up, or if you’re about to make a big financial decision, or if you just want a second opinion about your retirement plan, click the Get an Assessment Button at YourMoneyYourWealth.com and sign up for a financial assessment with Joe and Big Al’s team at Pure Financial Advisors. It doesn’t matter where you are in the country, and it’ll be far more in-depth than the spitball analysis you get on the YMYW podcast, but like the podcast, the financial  assessment is free. Seriously, no cost, no obligation. It’s free. Safe too, because it’ll be via video conference call so you can talk about your finances with a CERTIFIED FINANCIAL PLANNER™ while on the couch in your jammies if you want. Click Get an Assessment at YourMoneyYourWealth.com, or call 888-994-6257.

What Do You Think of The Structured Capital Strategy Fund Annuity?

Joe: Steve from San Diego writes in. “Do you have an opinion on structured capital strategy funds, as an adviser is trying to talk my 55 year old sister into one. She’s a first time investor. The fund is recommending only invest in the S&P and Russell 2000 and an international fund. No bonds. It doesn’t sound like a wise investment to me. It supposedly covers you against losses of up to 10%.”

Al: It’s a variable annuity.

Joe: It’s a variable annuity is what it is. Because what they’re doing is- it’s funny. Why doesn’t this sound good to Steve though? Hey, we’re recommending that you could get in the S&P 500, Russell 2000 and an international bond fund. And guess what? If you lose 10% of that- you’re all stocks, because the reason why you hold bonds is to protect you from the downside. But they’re going to do it another way because you get full upside participation with the Russell 2000. You get the international S&P and if the market goes down 10%, we’ll cover it for you. No biggie. That’s why you don’t need bonds in this product. Why doesn’t that sound good to Steve?

Al: It sounds wonderful.

Joe: It sounds wonderful. Sounds great to me. Where can I get it?

Al: What’s the catch?

Joe: Maybe that’s what he’s thinking. It’s a catch. It’s just a variable annuity that has some downside protection. It’s probably, it’s either equity indexed annuity, one of those BS products that will give you the upside. But there’s participation rates. There’s cap rates. So you’ve gotta be careful of-

Al: You get a much smaller upside than the market.

Joe: If the market does 10%, they might have a participation rate of 40% of the market, so you get 4%. Or it might have month-to-month cap rates where you can only participate in so much of the growth on a month-by-month or per-cap basis. So you gotta read the fine print. So Steve I agree with you. It’s not a great investment but I don’t know why you thought of that. If they just told you what you told us, it looks pretty good. Buyer beware.

Inheriting an Inherited IRA: Rules and RMDs

Joe: We got Patrick and Jackie from East…Islip?

Al: Islip? I guess.

Andi: I think so.

Joe: Andi I thought for sure you would throw me under the bus there.

Al: I don’t know how else you could say that.

Andi: Islip?

Joe: East Islip. Islip. Islip, New York “Dear Joe, Al and Andi, yo!”

Al: Exclamation point.

Joe: What up? What up P? “I drive a black Honda Civic. My wife drives a white Suburban Outback.”

Andi: Subaru Outback.

Joe: Subaru. Oh, Subaru. I just envision her in a Suburban, like a bad ass chick and then he’s driving this Honda Civic. And I was like – “My wife inherited an IRA from her mother about 5 years ago and is currently receiving money annually based on her age. We declined the money this year as per the SECURE Act. Question 1) If I inherit this account do I receive it under the old rules of a stretch IRA?” No, because let’s say if your wife dies and you inherit it- is that what Patrick is asking us?

Al: I believe so.

Andi: I think so.

Joe:  No, then it would have to be distributed out within 10 years even though- because you’re inheriting an inherited IRA, the stretch would not still go on in joint life.

Al: So the key here is, when did you inherit it? If you inherited before December 31st, 2019, it’s the old rules and 2020 and forward, it’s the new rules, no stretch.

Joe: But he is the spouse.

Al: Yeah but it’s a beneficiary IRA, it can’t be a spousal.

Joe: Yes. I’m 90- As soon as I read this again, I was like whoa wait a minute, ____ this. “My 3 children are listed as beneficiaries on this account and we don’t want to leave them with a tax timebomb when we pass. We are 53 and 51 respectively. What are our options to avoid this? I want to drain it now slowly over a few years and reinvest it somewhere else like a Roth. The owner of the Subaru disagrees. She points out that the account is currently about $70,000 with American funds and our growth fund of American doing quite well, lets compounding interest do its job, tax bonds be damned.” Patrick I’m with you, depends on your tax bracket but you can still compound interest in a Roth IRA. You just won’t be taxed on it, will grow forever tax free. So I don’t know what Subaru’s all upset about.

Al: But I think it’s probably in a traditional right now, or does it say?

Joe: Yeah, it’s in an IRA.

Al: It’s in an IRA. So you- well first of all-

Joe: But is he talking about the inherited IRA?

Al: I think so.

Joe: Well you can’t. It doesn’t matter. ________ the kids because they can’t convert it anyway, so they take the distributions out slowly. They could make those distributions as a Roth contribution. _________

Al: So that’s a- Yeah I wanted to make that clear, because you can’t convert inherited IRA. But you can do distributions and if you qualify for contributions then you can contribute to the Roth. But here here’s another thought. I think I’m with the Subaru driver.

Andi: Jackie.

Al: Because $70,000 and you’re going to be draining money out anyway over time and you’ve got 3 kids. How big a time bomb is this going to be? Really.

Joe: Good question. It’s not gonna be huge. We blew up the clock.

Andi: Yeah.

Joe: But this is what you do Patrick. You take it out and you put it in your kids’ Roth IRA. That’s what I would do.

Al: If they qualify. If they have earned income.

Joe: If they have earned income. $6000 a pop. You do that every single year. And then have it compound 100% tax free. That would be a nice little gift.

Al: That would be a cost-

Joe: But Jackie’s not gonna do that because it’s her money, she inherited it and it’s in American funds, it’s in the growth fund of America. She doesn’t want to dink around with it. So good luck with that battle. The inherited IRA kind of threw me off there for a second.

Al: Yeah yeah.

Joe: Because it’s the spouse. If they inherit an inherited spousal-

Al: It’s still- it’s a new inherited IRA for them. It can’t be a- you can’t do a spousal inherited-

Joe: Yeah, because it’s still in the deceased’s name.

Al: Right.

Joe: So it’s in-

Al: So it would start fresh.

Joe: Well no, there’s _____ or they would have to distribute it out.

Al: If she died and he inherited it then it would be a 10 year distribution period.

Joe: OK.

Should I Withdraw Roth Contributions to Pay for College?

Joe: “Hello all. My name is Wilfredo from New York.”

Al: I like that. I think that’s such a cool name.

Joe: Wilfredo. “I currently have two children, 4 year old and 18 months. And I was thinking about max-out Roth IRAs for me and my wife. And in the event that any of the children want to go to college, then we would withdraw contributions, which by the time should be more than enough assuming we can contribute the maximum contributions for the next 13 to 15 years. What’s your opinion on this approach? Thanks. Can’t wait to hear the joke about my question.” Wilfredo. There’s no jokes about these questions.

Al: No, they’re great questions.

Joe: No I don’t hate the idea and I’m not going to make a joke of it.

Al: You’re not?

Joe: Not really. Because what he’s doing, what Wilfredo is doing is like I’m going to put- let’s see, both him and his spouse, 10, they’re going to put like almost $200,000 into Roth IRAs as contributions over the next 13 to 15 years.

Al: Okay.

Joe: And then he’s like I can take the contributions out tax-free, penalty-free and then I’ll have that $200,000 available to take care of the kids when they go to school. I would not jeopardize my own retirement for my kids’ college, first of all. By having $200,000- if you’re going to max fund a Roth IRA for the next 13 to 15 years, by having $200,000 of contributions Al, the market value of that account will probably be a $500,000. And that’s all tax-free for your retirement. I would not do that. I would want to look at a different alternative. They’re so difficult to get that much money into a Roth IRA. I mean we’ve spent years on this show trying to explain different techniques to get people with a bunch of money that’s not tax efficient to a tax-free position. And if you took it out to put the little ones through school, that’s great. But I would use a different vehicle.

Al: I completely agree. I think that’s good advice. I think that the concept’s right though. The concept is simply that if you put in a Roth contribution at any age you can withdraw those funds, no tax, no penalty, no harm, no foul at any time. And so that is a true statement. I guess one way to look at it is if you only had enough funds to do this or a 529 plan, at least if you did this, then at least the earnings are going to compound and grow and you’ll have something in a Roth. I guess that would be one consolation. But I agree with you. I think if you can get this much money into a Roth IRA and assuming with young children I’m assuming Wilfredo, you’re young too. And by the time you get to retirement age, then you’re going to have a good chunk of money that’s all tax-free. That’s like gold.

Joe: I don’t know by the time these kids go to school ________. But I would take a loan. I don’t know. You can’t take a loan out for your retirement so he blows all of his Roth money or a big portion of it.  I don’t know, I’d –

Al: Let the kids pay for it.

Joe: – or something. You know what you do, you just kind of run a couple of different scenarios to say, how much money should I be saving to make sure that we can fund X amount of the kids’ college education that still doesn’t jeopardize my overall retirement? But very nice gesture, Wilfredo.

Al: It is. The only thing I don’t like is you know Patrick and Jackie we found out they were from East Islip, New York; Wilfredo, just New York. We need a little bit more specifics there.

Joe: I wonder if he’s neighbors.

Al: Yeah maybe.

Joe: I wonder what he drives. Alfredo-

Al: What’s the name of your dog?

Joe: I don’t know, what do you think Wilfredo drives?

Andi: What was your name when you were taking Spanish?

Al: Wilfredo and he’s got two young kids. I’m going to say a Toyota Corolla station wagon. I think that’s what his wife drives.

Joe: OK.

Al: And I think he drives a Honda Civic just like Patrick.

Joe: All right Wilfredo. Hopefully that helps. See, we’re not making jokes.

SECURE Act Stretch IRA Trust Beneficiary: What About Minors?

Joe: We got one from Minnesota. ” Hi Joe, Big Al, Andi. This is Matt from Minnesota, love the show. Understand that with the new stretch rules having a trust as a beneficiary of an IRA 401(k) gets me on the taxes. But what do you do if you have minor children? Someone needs to control the money. Are you stuck losing 50% to the government? Should minor children be listed as a beneficiary on an IRA 401(k)? I have a will with guardians specified but I’m confused on how the money gets controlled. Thanks.” All right Matt, good question. So what he’s referring to Alan, is that if you name a trust the beneficiary of a retirement account and it’s not set up appropriately, it kind of blows things up.

Al: Right.

Joe: And here’s why. Before if you passed away with a retirement account you could stretch out the tax liability over the kid’s life expectancy. Matt from Minnesota has minor children so their life expectancy is long and so the distribution that they would need to take out of the retirement account is quite low. So the tax burden is nothing. The recent changes though is that now you have to take a lot of money out of the accounts over 10 years. All of it has to come out within 10 years. So you could take nothing out over 9 years and then everything comes out on the 10th year; or you could do 1/10 or whatever that you want to do. But it accelerates the money coming out of the account. So why is this a big tax issue? Well it depends on what Matt from Minnesota’s goals are. If he names the trust the beneficiary of the retirement account to control the money from the grave to say I don’t want my kids to get a dime of this. I want to hold it in trust. Well what happens then is that there still has to be a distribution from the IRA.

Al: Right. That the money gets- it’s in the trust.

Joe: Then it’s held in trust. And then if it’s held in trust, any income that that dollar generates is then also then taxed at the trust rates which is at 37% with about $10,000 of income.

Al: That’s probably about $13,000 of income, you’re at the highest bracket is right. But you do control the money that way.

Joe: Yes. He’s like I don’t want to give any money to the kids and blah, blah, blah, blah blah.

Al: But remember with the stretch IRA rules, there’s an exemption for minor children, meaning that they can still do their life expectancy up to age 18, the old rules.

Joe: So naming a trust as the beneficiary for minor children still makes sense, so he’s all set.  Any other comments on that? You look a little punch drunk there Al.

Al: I’m just trying to say that- but the stretch IRA rules are still available for minor children. So they do have to take a required minimum distribution, it’s just small.

Joe: He’s got the minor kids, so the distributions-

Al: But part of this too is trust- well if you don’t have a- if you have a trust, you got the trustees set up. If you don’t have a trust and you have the minor children as a beneficiary, you have to name a conservator or a guardian, which he has. So that’s good. That works.

Joe: So the guardian just kind of takes control of the cash.

Al:  I’m not an attorney but my understanding is if you name a minor child as a beneficiary and don’t have a guardian then it has to be court appointed, which is a hassle.

Joe: Be careful with naming trusts as the beneficiary. Because if you want to hold the money in trust, you can- kind of blows you up. Or if you just do ______ or let’s say you take the distribution and it goes directly from the retirement account to the beneficiary. It needs to be distributed within 10 years anyway so having a trust as the beneficiary is not going to protect it from what you want to protect it from anyway. Potentially.

Al: Right.

I’m 75. Is Getting a Home Mortgage and Giving Home Equity to the Kids a Good Idea?

Joe: We got Marion from Clovis. Where the hell’s Clovis?

Al: It’s right near Fresno. My mom and both my uncles, my grandparents- that’s where my mom was raised, in Fresno. And my uncle lived in Clovis for years. It’s actually on the outskirts. I think it’s south of Fresno if I’m not mistaken.

Joe: Reminds me of the cigarettes that smell like-

Andi: Cloves.

Joe: Cloves. Clovis. All right Marion. “I’m 75-” You know what I’m talking about Andi, smoking cloves.

Andi: I’ve never actually done it. But boy you definitely know that smell.

Joe: I haven’t really seen anyone smoke a clove cigarette in quite some time. I think I’m going to start the trend again. Right here in the office-

Al: Oh yeah. Not around me.

Joe: Come on, right near the podcast, doing the TV show, we’ll be smoking cloves.

Andi: Perfect, to even further offend everyone you know.

Joe: What? I don’t think that’s-

Al: Even further. She’s saying-

Joe: It’s not offensive. It smells like incense.

Al: But see Andi was saying you offend everybody, you’d even further offend-

Joe: So she’s not a fan.

Al: She sees you too much.

Joe: So “Marion, 75, wondered if getting a home mortgage is desirable. Low interest rates, have a pension to cover the mortgage and current expenses, may be able to itemize taxes. Money would be gifted to children.” So that’s exactly what the email said. Do you have a question in there? Should Marion buy a house now?

Al: She wants to know if it’s desirable. She probably has a house, paid off. She wants to see if we think it’s a good idea for her to get a mortgage, pull money out and give it to the kids. My answer, if that’s your question Marion, is no, absolutely not. Because you never know when you might need it. We’re living into our 90s or 100s and, are some of us going to need long term care? Might you need that money at some point? The answer is yes. So no, that’s not a good idea, I don’t think.

Joe: That’s pretty good. That’s a good deciphering. I was lost. I was like I don’t know. I have no idea what the question is. But you’re right, now that I kinda look at it.

Al: Now that you look at it again?

Joe: Hey, let’s take the money out, low interest rates, give the money to the kids.

Al: So here’s the even bigger interesting point to me is most women I know are petrified to say their age and she-

Joe: Marion is probably a guy,

Al: -starts – oh, well maybe.

Andi: No, Marion’s a woman.

Joe: How do you know? You probably looked her up.

Andi: Because this is Marion from Fresno. This is Marion who emails us quite frequently. She switches back and forth between Clovis and Fresno.

Al: Because they’re right next to each other.

Joe: I don’t know- you’re stalking here-

Andi: No, I just get a lot of emails from Marion.

Joe: You can be a guy named Marion.

Al: You can. My father-in-law is named Marion.

Al: Marion has even told us that John Wayne was Marion.

_______

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That’s it from Carmen, Alfredo and Pepe – stick around to the end for the Derails to get in on the joke.

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