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 [...]

Brian Perry

In addition to overseeing Pure’s investment offering and platform, Brian works closely with Pure’s financial advisors, helping provide them with the tools and resources necessary to serve their clients and continue the firm’s mission of providing the highest quality financial education and planning to as many people as possible. He has been actively involved in [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
September 10, 2019

An entire episode dedicated to money questions that run the gamut: from Roth conversions and the Mega Backdoor Roth strategy to IULs to insure future income, reverse mortgages in recession, divorce and retirement accounts, and much more.

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Show Notes

  • (00:50) IULs to Insure Future Income
  • (10:11) Is It Better to Buy Mutual Funds or ETFs in Your IRA?
  • (16:01) TSP Changes & Roth Conversions: Tax Penalties and Form 2210
  • (22:35) Should We Form a Trust?
  • (25:30) What’s the Best Short-Term Retirement Plan?
  • (28:25) Should I Do a Reverse Mortgage Leading Into a Recession?
  • (31:21) Do Spouse’s Accounts Count in Roth Conversions? Mega-Backdoor Roth
  • (36:59) Should My Son Contribute to Roth 401k or Traditional 401(k)?
  • (42:16) Should I Increase Roth Contributions?
  • (46:16) In a Divorce How is a 401(k) in One Spouse’s Name Handled?
  • (48:09) Compliments & Complaints: More Serious Content, Less Screwing Around


:50 – IULs to Insure Future Income

Joe: G. Los Angeles. L.A., G.

Al: That’s the name?

Joe: What up G? What up? Hi Joe, Big Al, and Andi. Joe, I see more and more financial advisors are suggesting index universal life insurance, IULs, as a way to ensure income in future. Matter of fact, two advisors that I spoke with, they own IULs. Go figure. So why do most CFPs say “buy term and invest the rest”? If you like IULs, which company do you like? And what index to tie to? Thanks.” G. Yeah. I don’t like IULs.

Al: Why?

Joe: Index universal life insurance. Let’s see. How can I say this?

Al:  Let’s say it succinctly.

Joe: Yep. It’s a product that I think is sold and not purchased. I think in very few small instances it may make sense in someone’s overall financial plan. But here’s what an index universal life insurance policy is. It’s a whole life policy or Universal Life. I’m sorry a universal life policy. Some insurance agents are probably gonna call me a dumb ass. It’s a universal life-

Al: It’s a UL.

Joe: Yes, it’s a UL. It’s a permanent policy, I meant to say. I got that interchangeably with whole life. And so universal life. So there’s flexibility in universal life such as you can change premiums and potentially death benefits and things like that where whole life it’s pretty strict. But you’re buying a permanent policy so it’s like I need life insurance and you build cash value up in the overall life insurance contract. And I think universal life policies, variable universal life, whole life policies, I think were created basically as a piggy bank or a savings account for some individuals that you could build a cash value that was tax-favored in regards of taking distributions. So if you wanted to take money out of the policy down the road you could. In regards to FIFO tax treatment, first in first out, so you can take money out, don’t pay any tax, and then the remaining earnings on that you could take out as loans. So that was a feature or benefit of the overall product. Or some people wanted to build up the cash value because they wanted to die with the policy.  Most people just wanted to rent a period of time. You know what I mean? So it’s like I’m in my 20s. I need it until I’m 55 or 60 just to cover the mortgage, maybe the kids-

Al: And then after that, I may not need life insurance.

Joe: Right. Because maybe the mortgage is paid off. Maybe I have enough assets and maybe I’m retired.

Al: Maybe I got a pension.

Joe: Yeah sure. So you’re looking at it’s an income replacement depending on what your goals are for the life insurance. So when people say buy term and invest the rest they’re saying term is a very cheap policy so you just buy the term just to cover a short period of time.

Al: Whatever term that you need.

Joe: You got it. Ten years, 20 years, 30 years.

Al: Which is a lot cheaper than a permanent policy.

Joe: Unless you need the insurance after the 30 years. So let’s’ say if I buy a 30-year policy, $1,000,000, my premium’s $1,000 a year. And then all of a sudden 30 years later, I still need the $1,000,000 policy, my premium now is gonna be like $20,000 a month.

Al: That’s right. I’m a smoker. I’ve got all kinds of issues.

Joe: I’m older and everything else, so just being underwritten it’s gonna be very, very difficult. So if I want to die with the policy, that’s where a permanent policy comes into play. So it’s like I want to die with this thing because I want to leave a legacy to my kids and grandkids or I have a special needs child, so if I die that child still needs some cash. I have XYZ goal then I want to make sure that life insurance goes to whatever proceeds. So that a need for a permanent policy. So then, IUL? Sure.  What the hell? You can do that, you could buy whole life, variable life or just the standard universal life. Universal life is gonna give you a fixed rate. An IUL ties to an index. So it’s like I want to tie to the S&P 500, Russell 2000, things like that where I could get a little bit higher expected rate of return than maybe just the fixed guaranteed rate-

Al: On the surface that seems a lot better than a fixed rate.

Joe: That’s the only reason why I would buy that policy. If I needed to die with it. But what G’s asking us, is suggesting universal life for an income play or investments-

Al: Ensure your income in the future.

Joe: Well first of all insurance is not an investment. It’s insurance. It’s illegal to say. Insurance is an investment, first of all.

Al: But if you’re getting a guarantee, if there’s some sort of guaranteed income rider-

Joe: Well now, what he’s saying here is that there’s no guaranteed income rider in a universal life insurance policy. This is life insurance, not an annuity. So you’re building up cash value with inside the life insurance. So he’s funding this thing and he’s building up more cash value instead of just saying I want a paid up policy. I want to build up all this cash inside this life insurance policy and use that as income. Start taking distributions from the cash value once I reach a certain age.

Al: And on paper that sounds appealing because it’s tax-free. What’s the problem with that?

Joe: There’s a cost to it. You have a cost of insurance. So what’s your cost of insurance? Well, why don’t you just go with a Roth IRA? There’s no cost of insurance there.

Al: And for sure it’s tax-free. One of the problems with these is if you take too much out then the policy can lapse and then it’s all of a sudden taxable.

Joe: So what they call these things is like super Roths. You could take penalty-free distributions early and everything else. I would map that thing out. If you really want to look at a tax-free vehicle, a Roth IRA is going to be a hundred times better. And I know some of you are saying what if I don’t qualify for a Roth IRA?  Baloney you don’t. You can convert money into a Roth. You pay taxes on it but it’s the same effect, put an after-tax dollars into a life insurance contract.

Al: That you’re already paid taxes on.

Joe: Right. It’s the same same. So G, I don’t know if you can tell or not, if you need the life insurance because you want to die with it then by all means. But if you’re using this as some sort of investment gimmick to create income tax-free in retirement, I’m not a fan at all.

Al: And I would say this, that the folks that I see that need a long term permanent life insurance policy, couple reasons. One is if they have such a big estate for example that their estate is going to have to pay estate taxes and they have illiquid assets. Maybe they got big real estate properties or they got a business.

Joe: A farm.

Al: Yes, something like that and all of a sudden if they die and the farm is worth $50,000,000 or whatever the number is doesn’t really matter, that all sudden there’s this big estate tax due and there’s no way to pay it. So that’s a reason to have it, that’s a common reason. There you have to set up an irrevocable life insurance trust and all that kind of stuff. A second reason that I’ve seen is in some cases parents have felt like this is maybe a good way to get money to the kids tax-free.

Joe: Absolutely.

Al: That would be another reason.

Joe:  If that’s the play, if you want to pass wealth to the next generation or any generation after you die. Then a permanent policy is by far, that’s leverage. Because you’re putting in premiums of let’s say$10,000 a year for a couple million dollar policy. If you die prematurely you know your IRR on that’s huge. On the death benefit.

Al: That’s right. So you’re basically almost guaranteeing them a certain benefit. And even if you pass away early.

Joe: And it goes to the heirs 100% tax-free. So if it’s an estate planning play, sure. If it’s for estate taxes or if there’s pension protection. You screwed up and my pension is only a single life and I got married and all of a sudden if I died my wife or husband’s not going to have any retirement income because of the pensions and sole income. Yeah, you probably need to get a permanent policy there. So there are multiple reasons for a permanent policy. But to jam it up with a bunch of after-tax dollars into a theoretically BS index, which is not an index. It’s just the mirror of an index. You’re basically buying call options on whatever index that you choose. I’m not a big fan. I just don’t think it’s positioned appropriately. And I think it’s sold like, here you can get stock market-like returns with no downside risk and blah blah blah blah blah, and all this other stuff inside those universal life insurance policies. Then they’re going to show you an illustration that has a crazy internal rate of return that probably will never happen. The commissions on it are quite large. So there are a lot more negatives than positives. But if it is I think for all the reasons that Al stated and I stated, that you’re using it for the death benefit then yes. If you’re using it for any other reasons, I think there’s a lot cheaper, better, more efficient, alternatives to create income in retirement.

Al: Wow, you got kind of fired up on that.

Andi: And G actually has a second question.

Joe: Now we’ll get you to G.

10:11 – Is It Better to Buy Mutual Funds or ETFs in Your IRA?

Joe: Hi Joe.

Al: She really likes you because her questions are addressed to you.

Andi/Joe (simultaneously): How do you know it’s a girl?

Al:  Oh. Well, I’m just. Good point. I don’t know.

Andi: It’s G.

Joe: Like What up G? Like gansta.

Al: I say that because she’s writing to you, who is single.

Joe: Got it. Got it. Got it. All right. So G. Yes I am single and I don’t know. Anyway. Hi Joe. It seems nobody can give me a straight answer. Is it better to buy ETFs or mutual funds in your IRA? Is one more efficient and cheaper over the other? Also as far as Vanguard goes, both their mutual funds and ETFs have the exact same cost and track the same index. So why even bother with ETFs? I don’t really care if mutual funds have a $3,000 minimum. What wouldn’t be my deciding factor?

Al: Well that wouldn’t be-

Joe: Oh, I’m sorry. That won’t be my deciding factor. My only concern is one, overall costs in the long run to tax efficiency-

Andi:  If there even is this concern.

Joe: I’m sorry. I got a little flustered here.

Andi: We’re just trying to help you here, Joe.

Joe: If there is even this concern thanks. Okay, G. I got the straight answer for you brother. Or or-

Al: Or gal-

Andi: or sister?

Joe: Yeah. Or G gansta.

Al: G, Yes. What’s your answer?

Joe: The answer is this: it depends. It sounds like G is a long term investor. I’m not going to get super technical, but I think this answer would suffice. Index fund is sold at net asset value, NAV. And so if I purchase a mutual fund during the trading hour, I get the market closed price. If I want to buy an ETF it trades like a stock. So I can purchase the ETF while the market is open at whatever price that I see and it has a bid-ask spread. So there is going to be minute kind of differences here. So if I’m a long term investor, does an ETF or does a mutual fund make any difference at all? In my opinion, no. As long as the ETF is large enough. If you’re doing some obscure small ETF that’s trying to track a certain type of index then I probably would go with a mutual fund. Because you’re just trying to mirror that index as much as possible. You’re going to get the index minus whatever cost it is for them to package it. So in regards to Vanguard, it doesn’t make a difference unless you’re trying to trade it. You know people buy ETFs to trade. That’s why big money managers will put options and they trade the damn things.

Al: I agree with that. I think that the principal difference is that ETFs, they have fluctuating prices during the market hours and the mutual funds do not. And index funds do not. In other words, if you buy into a mutual fund or index fund at any time during the trading day, you’ll get the price at the close. Or if you sell anytime during the trading day, you get the price at the close. Whereas an ETF, it’s up to date just like a stock. And so I totally agree. If you’re a long term investor it doesn’t matter at all. And certainly from tax efficiency, in an IRA it does not matter at all either. Even if it were a non-qualified non- retirement account it really doesn’t matter because they’re basically doing the same things. Their long term investments trying to mirror an index. But you also do bring up a good point is some ETFs are newer, so they don’t have a lot of assets in them and they could be subject to bigger swings. That’s one of the things that we look at for our clients in terms of investments. If an ETF does not have enough assets in it, we’re not going to have that as something in our client’s portfolio, just because we may have multiple clients and it may cause a market swing and you could- My dad even, and he showed me this one time. He bought into a few shares of stock and he showed me because it was at a certain price and he said I’ll buy it if it’s at this price. And the next day it was down by that difference. In other words, he changed the market.

Joe: He was a market mover.

Al: He was a market maker. And the same thing with ETFs. If you’re buying and selling enough shares you can actually change the market.

Joe: But I think more importantly than that it’s looking at, let’s say you want to buy an index that has 2000 stocks in it. Well if it’s a small fund ETF and you won’t know. So you have to do some due diligence and take a look at how much assets are in it. They’re just trying to mirror it so they’re not going to own all of those. They’re going to leverage the larger ones that kind of move the overall index, so- but ETFs in index funds are awesome investments. I don’t think it really makes a difference. If you’re with Vanguard, you know, who cares.

Learn how to grow your investments in all market environments, how to avoid poor investment decisions, and how to protect yourself from risk: Click the link in the description of today’s episode in your podcast app to download 8 Timeless Principles of Investing. It’s a free white paper, right there in the show notes, just before the transcript of today’s episode. These tips will help you feel confident in your portfolio even when markets are volatile. Click the link in the description in your podcast app to go to the show notes at YourMoneyYourWealth.com and download the 8 Timeless Principles of Investing white paper. While you’re at YourMoneyYourWealth.com you can also scroll down, click Ask Joe and Al On Air, and send in your money question as a voice message or an email.

16:01 – TSP Changes & Roth Conversions: Tax Penalties and Form 2210

Joe: We got Tim. He writes in. He goes hey I listened to your podcast recently in which you both discussed tax penalties in tax form 2210. I remember that just like it was yesterday.

Al: I do too.

Joe: Tax form 2210. So Tim. He’s planning on doing a partial Roth conversion from my traditional IRA. Since withdrawal option rules are being changed in the TSP. I want to convert only enough to stay in the 24% tax bracket. This conversion is near the end of the year. He’s going to do it in September. And was not anticipated. So my current tax withholdings do not account for the added income jump and will result in an underpayment of taxes and possibly result in a tax penalty for not paying quarterly taxes. If/when I convert and at the same time check the box for the TSP to withhold 24% taxes, will that avoid any tax penalties for not paying quarterly over the year? Or do I still need to do that form 2210? So that’s kind of a mouthful. So what he’s trying to do Al, he’s going to do a Roth conversion that’s taking money from a standard retirement account that was pre-tax, grows tax-deferred, will be taxable coming out as ordinary income rates. He’s looking at the tax rates and saying you know what, 24% seems pretty cheap. So maybe I convert and stay in that 24% tax bracket. When you do a conversion that adds income.

Al: And which could be subject to penalties, but not always. So let me explain. First of all, as long as your current year withholdings equals last year’s tax, then you are not penalized, even if you end up owing taxes at year-end, with one caveat. If your income is $150,000 or more in the prior year, it needs to be 110%. So just to do a little example. So if your taxes last year were $20,000 and your income is under $150,000 for last year, you just kept up $20,000 withheld this year and you’re good even though you may owe a large amount on April 15th.

Joe: So with Tim’s case he’s got a TSP. So I imagine that his income is probably not hugely volatile. And that’s what I guess through savings planning, maybe a government worker, something like that.

Al: That would be a good assumption. I think the other thing you look at is if that doesn’t work then you look and make sure that you have enough withholding to cover 90% of this year’s tax. And if you do that then there’s no penalty. Now in this particular case, my guess is it’s a large enough dollar amount that there’s just not enough withholding. And maybe Tim doesn’t qualify for last year. I don’t know.

Joe: So is that $150,000 a modified adjusted gross income number? Or is that total income?

Al: Yes. It’s modified adjusted gross income.

Joe: So let’s say Tim does a conversion. Hypothetically, $50,000 to push him over that $150,000.

Al: But that’s for that’s for next year though. So, in other words, you look at last year’s income. If last year’s income was more than $150,000, now you’ve got to do 110% of last year’s tax for withholding. So that $150,000 doesn’t really apply until the following year.

Joe: All right. So all he needs to do is that he has some take a look at what he withheld in 2017 or what he paid in tax for 2018, and making sure that he’s-

Al: has enough withholding to cover that. Whether it’s 100% or 110%, depending upon his income level. Now let’s say that’s not true. And let’s say that he’s got to make estimated payments. So you can either have more withholding from his TSP, which would not be my first recommendation because now you’re paying taxes on taxes. In other words, you’re withdrawing money from your TSP to pay taxes which is going to cause taxes. So that’s not the first choice. The first choice is to pay the tax with non-qualified or non-retirement money. But the way that you do that simply to avoid penalty if you don’t fall under these other rules, is you file Form 2210. I think it’s on page 4. It’s the annualization method and you just show that your Roth conversion was in September. And September means that you won’t have to make an estimated payment until the 4th quarter. Which would actually be January 15th. So what you do on that form is you show your income at 3 months, at 5 months, and at 8 months, and September’s in the 9th month. So that would actually then, they’d be for the 4th quarter. And if you fill out that form accurately then you’re not penalized for having a spike in income right at year-end.

Joe: Yeah. I want to piggyback too on withholding money for conversions.

Al: Yes.

Joe: So Tim, a couple of things. We’re not big fans of withholding dollars. If you’re going to do a conversion from your IRA to a Roth IRA or your TSP to the Roth TSP, try not to withhold. If you’re under 59 and a half and you do this, you’re going to be subject to a 10% penalty. Because that withholding is not, what’s the word I’m looking for, it doesn’t qualify-

Al: it’s a premature distribution.

Joe: It’s a non-qualified distribution. It’s going to be subject to a 10% penalty. The conversion itself is classified as a rollover-

Al: Correct.

Joe:  But the withholdings of taxes are disallowed in regards to penalty-free distribution.

Al: So not only on that withholding, you pay tax on the withholding, then you may pay a penalty. And if you happen to live in California, you pay another penalty in California as well.

Joe: So you’re paying tax, so you’re getting money out of a retirement account and paying tax on those dollars, to pay a tax. And then a penalty to boot if you’re under 59 and a half? Don’t do it. It doesn’t make any sense. The numbers won’t jive. So I don’t care what bracket you’re in, don’t do the conversion if that’s the only way to come up with the additional dollars.

Al: Right. Right. But to your question is you basically look and see if you qualify under either 100% of last year’s tax for withholding or 90% withholding for this year’s tax then there’s no penalty even though you owe. Or if in this case you don’t qualify under either one of those then you just file this form 2210. You do the annualization method to show that the Roth conversion came in towards the end of the year and you’ll still be fine.

22:35 – Should We Form a Trust?

Jon from Riverside, California. My wife and I are in our late 50s. Our net worth is over $1,000,000, including our house, cars, and my retirement account from Trader Joe’s 18 years, over $700,000. We both teach. Her 30 years and I have been teaching 14. She will retire in 5 years. Should we form a trust? We have 3 grown kids and a grandson. Also, what is the best short term retirement plan? Retiring in 10 years. Combining income over $200,000 a year. Mortgage done in 7 years $2000 a month.

Andi: I’m kind of confused because he says that his wife is retiring in 5 years and then he says what’s the best short term retirement plan for retiring in 10 years.

Joe: I thought he worked at Trader Joe’s.

Al: Yeah. Well, he did. Now I think he’s a teacher. Unless he’s still did some of both.

Joe: He’s getting $700,000 in a retirement plan at Trader Joe’s?

Al: That’s very good.

Andi: From 18 years’ worth. So he was crammin’ it in there.

Al: Yeah, but still that’s good.

Joe: But now he’s a teacher.

Andi: Yep.

Joe:  He’s been teaching 14. She’s been teaching 30.

Al: He’s probably going to want to teach another 6 years for a pension. I’m guessing? 10 year, 10 year mark?

Joe: All right. Should we form a trust?

Al: Yeah we’ll start there. That’s easy enough. The reason why you form a trust is to help distribute your assets more efficiently when you pass away. And avoid probate. So to the extent that you have assets outside of retirement accounts which you do, then where the trust- With a trust, the assets get distributed by the successor trustee in accordance with the trust. You don’t have to go to court. If there’s just a will, then your executor has to go to court and say, here’s the will, we need to get court approval on this. That’s the principal difference.

Joe: Yeah. So it sounds like the bulk of the wealth is in the Trader Joe’s retirement plan.

Al: It does. It says net worth is over $1,000.000.

Joe: So that could be $10,000,000.

Al: It could. But the more assets that you have outside of retirement, the more likely you are going to want to have a trust.

Joe: So the house. The house is what you wouldn’t want to name in the trust.

Al: Yes the house, and then any other accounts that are outside of your retirement account.

Joe: OK. So if you want to avoid probate, there are other ways to avoid probate.

Al: There are. Yeah, you can. You can set up the transfer and death TOD on the investment accounts. Even now on real estate in California.

Joe: Yep. So now he lives in Riverside. So it depends. It’s like how elaborate how- And then I think too with a trust versus maybe a TOD, you have kids and a grandchild, maybe you want to say I don’t want to distribute any part of the trust until someone turns age 40, and then 45 and then-

Al: It’s more control, right?

Joe: You have a lot more control there.

Al: Sure.

Joe: With a will, we’ll just distribute to the heirs at your passing.

Al: Good point.

25:30 – What’s the Best Short-Term Retirement Plan?

Al: Second question. What’s the best search term retirement plan?

Joe: I don’t know what the hell short term retirement plan is.

Al: Well, as usual, we need a little bit more money–  more information.

(Simultaneous laughter, all)

Joe: That too.

Al: I meant information.

Andi: What a slip.

Al: That was a slip.  So how you go about this Jon, is you take a look at your spending.

Joe: Combined income of over $200,000 a year. Man, they’re banking.

Al: Well we don’t know. Maybe they’re spending-

Joe:  No I’m just saying they’re making a lot of money.

Al: They make a lot of money. But the formula is simply this. You look at your spending or what you want to spend in retirement and then you subtract out your fixed income-

Joe: your pension.

Al: which is pensions and Social Security and then you get a net number. Which is a shortfall and then you divide that shortfall into your liquid assets. In this case maybe $700,000. And if you’re retiring in let’s see, late 50s, another 5 years maybe you’re gonna be in your early 60s. You know somewhere around, you want to make sure that that number is around 4%, maybe 3.5%, and then that would be acceptable.

Joe: Yeah.

Al: If not, if that distribution rate’s too high, let’s say you get 6% it means, oh well we’re not quite there. So we’re gonna have to make some changes. We either need to spend less or we need to work longer or we need to downsize our home or any number of things.

Joe: If you want more information there Jon, just write us back, give us a little bit more clarification of what you mean. You’ve got $700,000. You’re making $200,000 a year. So if you’re making $200,000 a year and let’s say you’re spending, I don’t know what taxes on that, let’s say a $125,000, you’ve got no Social Security or pensions, you would need $3,000,000. You have $700,000. So you still have a long way to go here. But you’re teachers, so you’ll have CALSTRS. You worked at Trader Joe’s, so you could have a little bit of Social Security, so-

Al: Yep.

Some of us understand things better when we can see it in print rather than hearing two fellas debate the topic, so if you fall into that category, Big Al has a formula that can help you determine whether or not you’re on track for retirement. Get a copy of Big Al’s Quick Retirement Calculation Guide in the show notes for today’s episode at YourMoneyYourWealth.com. You don’t have to input any of your financial data, it’s just a one-sheet that lays out exactly how to calculate your retirement progress. Simple way to access it, just click the link in the description of today’s episode in your podcast app and you’ll find it within the transcript – look for Big Al’s Quick Retirement Calculator. Now let’s switch gears: Joe recently went to visit family in Minnesota. While he was gone, Big Al Clopine, CPA and Brian Perry, CFP®, CFA took over answering listener questions.

28:25 – Should I Do a Reverse Mortgage Leading Into a Recession?

Andi: So the first one up is from one of my favorite listeners because she said that she likes it when Andi asks questions. So she’s getting a whole bunch of that.

Al: Yeah she is. That’s all we’re doing today.

Andi: This is from Judi in San Diego. She says if a recession is coming. Should I take out a reverse mortgage HELOC before it hits to protect investments? House is paid off. What are the pros and cons?

Al: That’s a great question, Judi, actually rather astute. There’s a very smart individual in our industry by the name of Wade Pfau, Ph.D., who’s done all kinds of studies on safe withdrawal rates and he actually has looked into reverse mortgages. Not because he wants to sell them, just, are there reasons to have them other than the obvious, which is, you have no other choice. And he’s come up with several reasons that might make sense to get a reverse mortgage, and your exact situation is one of them. Which is this: if a recession is coming, let’s say it comes and let’s just say your investments are temporarily down. You may not want to be pulling from your investments at the time where that stock markets lower. And a reverse mortgage with a HELOC home equity loan component, meaning you can draw on it as you need to. You might be able to draw from the HELOC during those periods of time when you don’t want to draw from your portfolio and let your portfolio recover.

Brian: I love the idea. I mean the idea of not having to sell securities if they’ve fallen in value, in or out of a recession. Stocks could fall even without a recession, but the idea of not having to sell in a down market if you have the ability to tap some other income source is fantastic. And I think it’s something that a few years back, the reverse mortgage area was kind of the Wild West and it’s cleaned up some. And in a lot of areas of the country house prices have appreciated to the point where people have enough equity that it’s an important consideration when it comes to their retirement planning, what to do with that equity.

Al: And I will say as far as the cons go as you alluded to Brian, it used to be a little bit easier, or I guess the banks had a little bit more power in terms of what they could and couldn’t do. And sometimes we found one spouse, surviving spouse, was kicked out of the home for a variety of reasons. Also, I will say that some of these loans have rather high costs. So that would be a con. But it’s the concept is good and I support that.

Brian: You know the one thing I would say is there is, it says reverse mortgage HELOC. There’s a reverse mortgage and then there’s like a home equity line and those are two different things. And so maybe the reverse mortgage might be a little bit more of a significant step. Maybe you just open up a line of credit against the house and then tap it if you need it and that may not involve as many costs.

Al: You can do that, although during the Great Recession my home equity loan got shut down, like a lot of people.

Brian: And that kind of blows up that plan.

Al: It kinda does.

Brian: It’s like what did they say about the bank, they’ll lend you money exactly until the time you need it?

Al: And the thing about the reverse mortgage, in some cases you might want to take a lump sum. But you can also set up a line of credit right in the reverse mortgage and I think that’s what she’s getting at.

31:21 – Do Spouse’s Accounts Count in Roth Conversions? Mega-Backdoor Roth

Andi: Mike in Los Angeles. He says, Hey Big Al, Joe and Andi. And Brian.

Brian: Where’s the love?

Al: I like how he says my name first.

Andi: Yeah right. “I’ve been listening to the podcast for over a year and I really enjoy it. Thanks for the great laugh-out-loud content.” Hey, thank you, Mike. That’s awesome. “I’ve heard you guys talk a lot about Roth conversions but one thing I don’t hear about Roth conversions is how it impacts married taxpayers. My wife has a traditional IRA that was rolled from an old 401(k) account. She has a Roth as well. I have a Roth IRA only, but no other IRAs. I have a couple of 401(k)s. My question is whether the pro-rata rules apply to each taxpayer separately, or if we have to look at the combined/married filing joint IRAs that we each have. So I only have 401(k)s and I want to create a non-deductible IRA and then convert it each year. My understanding based on the limited info I found on the subject is that I would not have to take my wife’s IRA into account when doing the conversion and the pro-rata rule would have no effect on me since I only have a Roth. Does that sound right?”

Al: Mike you are correct.

Andi: The end.

Al: Ok, next. No, let me go on. When you’re talking about doing Roth conversions you only look at yours to figure out what sort of taxation you’re going to have to come up with. So the pro-rata rule, let’s talk about that. And so when you do a Roth conversion, let’s just say when you do a conversion then what happens is, let’s say of $100,000 in an IRA and you have $5,000 of basis. In other words, where you did not get a tax deduction. $95,000 was tax deduction or maybe was a rollover from a 401(k). $5,000 was a non-deductible Roth contribution. And so when you do the conversion that ratio is 95% to 100%, so 95% of the Roth conversion is taxable, 5% is tax-free. Now if you don’t have any other IRA and 401(k) doesn’t count in this computation, Roth IRA doesn’t count on this computation, then you can do a non-deductible IRA contribution and then you can turn right around and do a Roth conversion. If your income is high enough or you don’t get a tax deduction which I’m assuming is your case because you brought up the question and that would be for a married couple over $203,000 of income, then that’s called a Backdoor Roth. You can do a Backdoor Roth. There’s no issue. Now for your wife, that’s a completely different thing. Because she has money in an IRA that was a rollover from a 401(k). So in that particular case, she would have to do the pro-rata rule but the pro-rata rule is on an individual basis, based upon IRAs. The income limitation of $203,000, which is the most that you can make, or actually when you make over that you can no longer do a Roth contribution. That’s a joint income. So that’s where it’s joint versus individual.

Brian: Then I guess the one option open to Mike’s wife if she has an active 401(k) plan would be to roll the IRA back into a new 401(k) plan. Then she won’t have IRAs and won’t to have to worry about pro-rata.

Al: Now, on the other hand, let’s say your income if you’re a married couple and your income is below $193,000. That’s the beginning of the phase-out period. You can actually do a Roth contribution directly so you don’t really have to worry about this Backdoor Roth provision, which is really what he’s asking.

Brian: You know in speaking of Backdoor Roths, there was a bonus part of his question too, where he asks about mega Backdoor Roth’s through a 401(k) and maybe we talk about that a little bit because that’s a way that really funnels some serious dollars into a Roth account.

Al: I think a lot of people don’t realize that if you have 401(k) plan that allows you to put after-tax money or post-tax money into the plan then, of course, it will accumulate just like any other monies in the plan. But upon retirement or upon termination, let’s say you leave or if you turn 59 and a half and can do an in-service withdrawal you can actually take those funds, those post-tax funds, and put them directly into a Roth IRA. It’s of course plan specific as to how much that you can put in. I’ve seen $30,000 as a number. And so you put in your $19,000 which is the max you can put into the 401(k) on a pre-tax basis and if you’re over 50 it’s $25,000, but maybe you put in another $30,000 post-tax if you happen to be at age 59 and a half you can actually pretty much immediately then put that money right into a Roth IRA directly. And the reason that you’d want to do that obviously is it’s kind of a sneaky way to do a big Roth contribution. Because otherwise you’re limited to $6,000 or $7,000 per year if you’re over 50.

Brian: If you’re using your Roth 401(k) theoretically, and you’re over 50, you could be putting $55,000 a year directly into the Roth 401(k) at that point, right?

Al: Absolutely. And I would say honestly this works better or best for those that are closer to retirement than younger. Because if you’re younger and doing this and not planning on leaving your job then this post-tax money is going to accumulate and all the growth in that will still be taxable. So there’s less benefit than let’s say you’re 60 years old and you do this. If you have that opportunity and you’re 401(k), it’s kind of a no brainer at that point to do it. Or if you know you’re going to quit. Because when you leave your job you can then roll the post-tax money into an IRA at any age and the pre-tax money to a regular IRA.

Brian: So what you’re saying is if you’re younger and you’re about to do mega Backdoor Roth, don’t tell your boss?

Al: Exactly. They might be suspicious if they listen to our show.

36:59 – Should My Son Contribute to Roth 401k or Traditional 401(k)?

Andi: Dave in Rochester, New York. He says “Hi guys, love the podcast. My son recently graduated from college and started his career. He’ll be making good money for a new grad. Around $90,000 a year. I recently recommended that he split his 401(k) contributions into 50% traditional 401(k), and 50%  Roth 401(k). I recommended this based on giving him the most flexibility in the future as no one knows where we will be from a tax perspective. However, I’m now questioning my recommendation. Maybe I should recommend that he contribute 100% of his 401 contributions to Roth 401(k) in order to keep things simple and maximize the benefits of the Roth. What would you recommend to a new grad contributing to a 401(k)? All Roth 401(k)? Or some split between traditional and Roth? Thanks in advance for your feedback”.

Al: Well Dave first of all, I got to say congratulations to have a grad that’s starting at $90,000-

Andi: Yeah really.

Al: that did not happen with my kids. And that did not happen with me either. Even inflation-adjusted, not even close. So gosh, that must be, what do you think? Finance maybe?

Andi: He’s on a good path apparently.

Brian: I was gonna guess accounting.

Al: Accounting?

Brian: Yeah.  Big Four kind of firm.

Al: Well, could be. Could be. Anyway, that’s a great starting salary. So I’m going to give you my thoughts and Brian you can chime in. Based upon that starting salary, I’m gonna presume it’s a great career path and the opportunities for increases will be substantial. So given that, I would actually do a 100% in a Roth 401(k). Because probably your son’s going to be in the lowest tax bracket that he’ll ever be in. So the tax deduction although nice and somewhat important is not as important now as it probably will be later. And if your son is or will be a disciplined saver and ends up with a lot of money in his 401(k) over time then having the Roth 401(k) component having a lot in there may be kind of focusing on that more in the early years might be a better way to go. As his income increases in the tax brackets increase, then perhaps he starts switching it around. But yeah, that’s what I would do. What do you think, Brian?

Brian: I agree. I agree for the reasons you said and then also people get used to living on whatever they have coming in and so right from the start if he gets used to living on the amount of his paycheck, less the Roth conversion, that’ll just be what he knows. And it’ll be like paying yourself first, which I think would be pretty powerful and also even taking taxes out of it. With that many years I mean he probably has what 5 decades until he’ll be taking this money out. I mean I think that the growth even if he’s in a lower tax bracket in the future, the tax-free growth will probably outweigh any tax benefits he’d get today.

Al: And you also think about when you’re starting out and you’re putting money into the Roth 401(k)and you’re not going to retire till 50, 60, 70, unless you’re part of the FIRE movement than the retired 34, it might be a little different.  But let’s just say you’re on a more traditional path, then you’re going to want to kind of stack your assets to asset classes that have higher expected growth. That means stocks. And certain kinds of stocks like smaller company stocks and value stocks and emerging markets tend to have better longer-term performance. They’re more volatile. I’m not saying go 100% in those. But you want to kind of put some of those asset classes in your Roth IRA starting at this point. You might have 30, 40, 50, years of growth and end up with a lot of tax-free income in the future.

Brian: I would agree 100%. I mean I’d go so far as to say that I almost would put 100% of that portfolio in emerging markets and small-cap stocks. I don’t know if I do that indefinitely. But with 5 decades of growth, I’d find the highest expected return asset classes and particularly ones that like emerging markets that haven’t done well the last several years. I’d take advantage of that and pile into those now and then just kind of close my eyes and forget about it and wake up wealthy.

Al: Something else to consider is when you’re doing it this way you’re putting a little bit in each month. So it doesn’t really matter how volatile it is. In fact, you kind of like volatility because you end up buying some shares cheaper.

Brian: You’re absolutely right. That’s a good point. I mean we’ve talked a lot the last couple of weeks about potential bear markets and recessions and market volatility and I think it’s important to note that when you’re just out of college bear markets are the single best thing that can happen to you. And Warren Buffett has talked about this a lot where the worst thing that can happen to Dave’s son, is for markets to go up. He should hope that they go down because he is dollar-cost averaging in at low levels and in the long run he’ll build far, far more wealth that way.

That’s Brian Perry, CFP®, CFA, he’s the Director of Research and Executive Vice President for Pure Financial Advisors – if you didn’t already know it, Pure is responsible for the Your Money, Your Wealth® podcast! Brian has done a very comprehensive video guide to preparing for a bear market, find it in the show notes for today’s episode at YourMoneyYourWealth.com. You’ll learn the signs of a bear market, when a market decline becomes a bear market, and why market ups and downs are so difficult to predict. He explains the history of bear markets and their recovery times and he has some key investing strategies to help your portfolio ride out times of market volatility and decline. A Comprehensive Guide to Preparing for a Bear Market, in the podcast episode show notes at YourMoneyYourWealth.com. Click the link in the description of today’s episode in your podcast app to access it.

42:16 – Should I Increase Roth Contributions?

Andi: This is from Zach. He is a student who is from Minnesota. But he’s currently going to school pursuing a master’s degree in North Dakota. So he says currently my stipend- actually I should back up. He says, first I enjoy listening to you all on this awesome podcast and gain a lot of information to consider as I enter the workforce.

Al: Please don’t forget that line.

Andi: Yeah right.

Brian: Yeah, out of every line in there.

Al: You just like skipped right over it.

Andi: I was just getting to the meat of it. He says “I’m 22 and a graduate student pursuing a master’s degree in North Dakota. Currently, my stipend is around $20,000 pre-tax. After graduation in 2021, my expected salary range in my field will be $55,000 to $80,000. I have 3 months of living expenses saved, $3,000 in a brokerage account, mostly stocks and short term reserves, luckily getting around 8% annual returns, and about $950 in a Roth that I contribute $150 monthly in a variety of ETFs. Also a $150 to savings monthly. All for a goal of saving 20% to 25% of my income. Should I be focused on now increasing Roth contributions to $300 dollars a month, since I have some emergency cash saved up? Or continue to save in a savings and Roth account? Also”- did you want to start there? Or should we keep going?

Al:  Let’s stop for a sec.

Andi: Okay.

Al: That’s a lot right there. Let me see if I can unpack this, Zach. So you’re a student, you’ll be graduating and you’re thinking your salary will be around $55,000 to $80,000. Congrats that’s another great starting salary. Again I wish I was, did that well.

Brian: I started on a $1,000 a month.

Al: I was a late bloomer but I got there. I got there eventually. Anyway, so you have 3 months of living expenses saved. Bravo. That’s fantastic. You’ve got $3000 a brokerage account, so that’s a non-retirement account. And you’re investing that getting about 8% annual returns that’s mostly stocks. And then you’ve got money going into Roth and in a variety of ETFs and also $150 dollars going into savings monthly. That’s great. Your goal is saving 20% to 25% and that’s fantastic. I would say this, that you can look at all kinds of studies on how much to save and what you see coming up over and over again is 15% to 20%. Of course, that’s over a lifetime of earnings. If you’re part of the FIRE movement, you might want to save a lot more than that. But if you’re more traditional plan then that would be 15% to 20%.  20% to 25% is a good number. Now the fact that you have the emergency funds, the fact that you have other funds, yeah I would put as much as you can into a Roth IRA. Because that’s going to grow tax-free. I mean given that versus just savings outside a retirement account. Why not go for that tax-free growth in the future. One caveat though, if you’ve got some short term goals like you go to graduate and you eventually want to buy a home and there’s a timeframe there, you might want to set aside some money for that. Or maybe you want to get a really cool car when you retire. Not recommending it, but maybe you do.

Andi: You’re setting him up for a midlife crisis already.

Al: I know because I went through it. I did it with a Mustang.

Andi: Oh wow.

Al: Red convertible Mustang.  It was awesome.

Brian: Is there any other way to do that?

Al:  No. Maybe a Corvette.

Brian: Yeah. Corvette

Al: Corvette. Actually I just saw Mike Fenison from our firm just showed me the brand new Corvette for $60,000, looks like a premier car. And it’s red. You know it looks pretty cool.

Brian: Well let’s hope Zack keeps saving for a few more years before he goes out and buys a new Corvette. One thought I do have for Zack, is the short term reserves and he talks about luckily getting around 8% annual returns mostly in stocks. If those are truly short term reserves and for a rainy day or any kind of home purchase, that money really shouldn’t be in the stock market. Stocks over any given period time could easily fall. So that’s something whether it’s CDs, a money market fund, just a savings account at the bank, that rainy day fund really should not be in the financial markets and should be in something safe.

Al: I agree with that because you may need to have access that quicker than you know.

46:16 – In a Divorce How is a 401(k) in One Spouse’s Name Handled?

Andi: This comes from Green Yoga House.

Al: Green Yoga House. OK.

Andi:  In a divorce situation, how is a 401(k) under one spouse’s name handled?

Al: Good question. I hope that’s not you, Green Yoga House, but it’s for one of your friends. But what tends to happen is typically the assets get split up. Now we in California live in a community property state so usually it’s split up 50/50. There may be some separately owned assets. Maybe you inherited money and it’s in a separately stated trust. And so there are certain cases where maybe one spouse would keep their own assets, but generally, anything that you have earned and saved and invested together is going to be community property even if only one spouse was working. So it’s split 50/50. But in many cases what we see as the biggest asset is the retirement account and it’s only in one person’s name. So in that particular case when you’re figuring out the property split then perhaps the 401(k) will be split as well. It could be 50/50, it could be something else. Maybe one spouse keeps the home and gets less of the 401(k), or vice versa. So in that particular case, then what they do I think it’s called a QDRO.

Andi: It’s a Qualified Domestic Relations Order, that comes from the courts when you get divorced and they tell you how to how to divvy everything up, right?

Al: You’re like this encyclopedia. Great to have you around.

Andi: Thank you.

Al: At any rate, so with that arrangement then whatever part of the 401(k) is going to be attributed to you, gets put into your name.

Brian: And importantly that doesn’t count as a distribution correct?

Al: That’s right. It doesn’t count as a distribution and I guess that’s a good point. As far as anything. So if you’ve got stocks and bonds outside of retirement, that’s not considered a sale. If you have a property or rental property, that’s not considered a sale, it’s just a distribution.

Compliments & Complaints: More Serious Content, Less Screwing Around

Al: So do we have any compliments?

Andi: We do actually. We’ve got some compliments, but actually I want to tell you about the complaint. Jeff from Rancho Santa Fe said, “the jokes and silly interactions take up too much time.” Sorry, Jeff. He wants more serious content and less screwing around.

Al: That’s not going to happen.

Andi: He thinks that the podcast should be 30 minutes or less. The podcast videos are good but the transcripts are better. And when asked, “would you recommend this podcast?” On a scale of 1 to 100, Jeff gave it a big 36.

Al: 36?!

Andi: 36 out of 100. So thank you for that, Jeff.


Just for you, we’ll dispense with the Derails today. Actually that isn’t for Jeff at all, I just don’t have any this week! Thanks to Brian Perry, CFP®, CFA from Pure Financial Advisors for joining us once again to answer some of your money questions, and thank you to all of you who have sent in your questions – your participation is what makes this podcast what it is, and we appreciate you. If your question didn’t get answered this week, make sure you’re subscribed to the podcast because we’re slowly but surely making our way through the list and the fellas WILL answer it in a future episode. Go to YourMoneyYourWealth.com, scroll down and click “Ask Joe and Al On Air” to send in yours.

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