Show Notes

• (01:12) Can Our Retirement Portfolio Handle $150K Annual Withdrawals? (JJ, FL)
• (04:08) What Should My Asset Allocation Be, Post-Employment? (Midwestfabs)
• (12:39) Tax Spitball: Married Filing Separate and Start Roth Conversions? (Peter LemonJello, FL)
• (14:58) Roth Conversion Tax Implications for an Early Retiree in the 32% Bracket (Randy, Chicago)
• (21:34) Self-Employed and Over the Max to Contribute to Roth – Now What? (Caity, Salt Lake City)
• (25:07) Impact of Roth Conversions After Age 73 on RMDs (Ben, Oceanside, CA)
• (28:52) Does the Math Make Sense on a Company-Matched Kai-Zen IUL Policy? (Kickass Seabass, NJ)
• (34:53) Social Security Family Benefits Earnings Limits (Ed, VA)
• (42:42) The Derails

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Transcription

Andi: Should Peter LemonJello, who has high income, and his wife, who is retired with zero income, file their taxes as married filing separately so they can start Roth conversions? What are the tax implications of Roth conversions for Randy in Chi-town, an early retiree in the 32% tax bracket? Caity with a C in SLC is self-employed and over the income max to contribute to a Roth, so now what? And Ben in Oceanside, CA wants to know what impact Roth conversions will have on required minimum distributions after age 73? Joe and Big Al spitball on all these Roth conversion tax reduction strategies, today on Your Money, Your Wealth® podcast 466. Plus, does the math make sense on a company-matched Kai-Zen indexed universal life insurance policy for Kickass Seabass in New Jersey? Ed in Virginia wants to know the earnings limits for family Social Security benefits. But first, can JJ in Florida’s retirement portfolio handle withdrawals of $150,000 per year? And from the banks of the Mighty Mississippi, what should midwestfabs’ post-employment asset allocation be? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Can Our Retirement Portfolio Handle $150K Annual Withdrawals? (JJ, FL)

Joe: We got Jay from Florida writes in, he goes, “Hey, I wanna know a spitball if a portfolio can handle spending of $150,000 after taxes beginning in retirement in February of ‘24.”  Good thing we’re, we’re answering this now because we’re right there. We’re knocking on the door.

Al: Nothing like waiting the last minute.

Joe: “I’m 66. Spouse is 65. We have $2,500,000. The $2,500,000, so that’s in 401(k) or IRA types of accounts, and they have another $400,000 in cash, house is worth $500,000, other real estate worth $300,000, pension of $45,000 a year, 2%, 2.5% COLA, 100% survivor, Social Security of $30,000 at 67 and spouse’s of $45,000 in 2029. “Would like to leave a legacy for our family or charity, how aggressive or conservative do we need to be to meet our goals?  We both drive Toyota SUVs. I like a cold Yuengling- or minging.  What’s that called again?

Andi:I think it’s Yuengling.

Joe: “-Yuengling. Or a Maker’s bourbon.  Spouse likes a cold glass of wine, no pets.” yulinglinglingling.

Al: I would have no idea how to pronounce it.

Joe: I guess I don’t drink that.

Al: I wonder what it is.

Joe: It’s beer. I’m guessing. So he wants to spend $150,000 after tax. It sounds like he’s pretty close there, Big Al.

Al: Yeah, he’s right on, actually. So, if you take that $150,000 he wants to spend, minus $45,000. Take $105,000, divide it into his $2,900,000. You get about 3.6%, 3.7%. Even without Social Security. So right off the bat, yeah, you made a good decision to retire. You got the assets to do it. But I think his real question was, if he wants to save for family or charity, “how aggressive or conservative do we need to meet our goals?” And the thing is, you want to make sure, you know, the math is relatively simple. You take the $150,000 minus $45,000 minus Social Security, right? Which you’d be collecting and whatever that shortfall is, make sure you have enough of a portfolio to be able to cover that with maybe a 60/40 portfolio, maybe something like that. And the rest of it, you can be more aggressive if you want to, because it’s not necessarily for you.

Joe: Yeah, I guess that’s a good point. You look at, you could split this up into different buckets.

Al: I think so, yeah.

Joe: Here’s the bucket for your overall spending needs, given what that needs to look like, and then, hey, you have some legacy accounts where you can be a little bit more aggressive because it’s for the kids or grandkids or charity.

Al: Yeah, and when I say aggressive, I don’t mean buying one stock. Buy stock, mutual funds, stock index funds, stock ETFs, that’s what I mean by being more aggressive.

Joe: Alright, good luck. Good job.

What Should My Asset Allocation Be, Post-Employment? (Midwestfabs)

Joe: We got a question from the banks of the mighty Mississippi. “Joe and Big Al, I was writing in to give you an update and have a question on future asset allocation. As a brief recap, my employer offered me an early-out package that would allow me to retire at 57. After doing lots of soul searching, number crunching, and YMYW listening while drinking a few Baja Pilsners-“

Andi: Bauhaus.

Joe: “-Bauhaus Pilsners, accompanied by Jake from State Farm, I decided to take the bait-“

Andi: That’s the dog, by the way.

Joe: Jake from State Farm is the name of her dog.

Andi: Yes.

Al: Yeah, you can see it in the picture on the next page.

Joe: She named her dog Jake from State Farm.

Andi: You got it.

Joe: Got it. All right.  Okay.  “-Jake is ecstatic, and I’ll be FI, which will allow him to RE.”

Andi: Retire early.

Al: I didn’t know he was working.

Joe: “He feels like a king of the rock. See the picture below. My question is regarding asset allocation going forward, especially once I leave the employed world. My pension is around $15,000 gross. Social Security will be per annum- per annual statement, $1800 a month at 62, $3500 a month at age 70. I pretty much maintain a 70/30 asset allocation across my entire portfolio for as long as I’ve been saving and investing. Given my future pension and Social Security income, should I consider this guaranteed income as part of the 30% bond allocation?  If yes, is there a way to do so? And/or how should one calculate and marry it into their overall portfolio? I feel comfortable and confident that my portfolio will sustain my and that of Jake’s current non-penny-pinching lifestyle of around $60,000 to $70,000 a year, while the initial pension starting at 57, and then Social Security kicks in. Taking more risk with the portfolio given the guaranteed income sounds sensible, but I’m hesitant at the same time. Currently, my basement fridge is bursting at the seams with an elgo-“

Andi: Amalgamation.

Joe: “- Amalgamation.”

Al: That is a tough word.

Joe: That means a lot.

Al: It does.

Andi: A mixture.

Joe: A mixture.

Al: That’s a mouthful.

Joe: “-amalgamation of local brews and a few Spotted Cows from Wisconsin.” All right. Yeah, I like Spotted Cow.  Awaiting a gopher weekend backyard tailgate party.  Slated to be a balmy 50-plus degrees with some of Jake’s closest friends and their respective and beloved humans. Thank you for your spitballing and all the education you provide to the YMYW tribe. And especially the many laughs in between. Cheers from midwestfabs. P. S. I’m still 53, still single, still a renter with no debt. I make about $100,000 a year, max out my employer and self-directed retirement accounts, plus $50,000 catch-up contributions. I also save approximately $5000 in my brokerage account, and my portfolio sits at that 70/30 allocation. So, roughly about $700,000 in the 401(k), $100,000 in Roth, that’s $800,000. Self-directed Roth is another $200,000, so that’s $1,000,000. Checking account is $300,000, that’s $1,300,000. Social Security is $1800, and then that’s $70,000, $35,000.” Alright, so she wants to look at the fixed income as a bond allocation.

Al: Because she’d rather invest in stocks, apparently.

Joe: Sure.  So, she wants to spend $70,000 a year. Her pension is how much again?

Al: $15,000.

Joe: $15,000?

Al: Yep, so her shortfall is $55,000.

Joe: $55,000 on $1,300,000?

Al:  Yeah, it’s, without considering any adds, growth, or anything, it’s a 4.4% distribution rate, which is generally a little bit higher than we’d want to see for a 57-year-old. However-

Joe: She’s 53.

Al: I know, but she’s going to retire at 57.

Joe: Oh, sorry.

Al: Yeah, but because of the Social Security benefits, it’s probably okay, and it’s probably okay because I haven’t added in 4 years of growth and additional- Because it’s, she’s probably going to be closer to 4% or even a little under 4% at 57, I’m guessing.

Joe: Yeah.  So does she maintain- the distribution rate is too high for her to start thinking about the pension and her Social Security as a fixed income alternative. Because she still needs a lot of safety in the portfolio because she’s still taking out 4% plus tax. If she had a 1% distribution and most of her fixed income was going to be covered by the pension, then I would look at the pension more as the fixed income, as allocation. I would be more aggressive from that perspective. But if you’re taking 3% to 5% out of the portfolio, I mean the portfolio could blow up in the next 4 years too. 70/30, I think, is still risky.  I think a 60/40, 70/30 portfolio, hypothetically, is probably the right number.

Al: Yeah. Agreed. And I think you said that perfectly. It’s like if you have a very low distribution rate, then the fixed part of your portfolio matters less. But in this case, it’s kind of a full distribution rate, even kind of on the edge. It’s like, absolutely not. You consider the normal formula that we talk about, which is your spending minus your fixed income. What’s the shortfall? Okay, in this case, $55,000. Divide that into the assets at 1,250,000, you get a 4.4% distribution. But more importantly is, $55,000 is what you’ve got to produce until you hit Social Security, which is going to be a while.

Joe: Why does she want to take on more risk?  Is it, does she want to spend more money? Does she want to give more to Jake the State Farm dog? So I need to understand that more. Because there’s no reason to take the risk. She’s done a really good job. She’s got $1,300,000 and she’s going to continue to work and max out the plans for the next 4 years. Why take on added risk when you don’t necessarily need to?

Al: Yeah, now, if you, depending upon when you take Social Security, like, let’s say you wait until full retirement age of 70, you’ve got a lot more fixed income, maybe you could at that point.

Joe: At 70.

Al: Yeah, yeah, because now you’re pretty much covered.

Joe: Then your Social Security and your pension’s covered.  So, you have to do some, how I would look at this to really get this thing dialed in is I would look at, you know, 10 years, there’s this gap period. And I would look at, alright, here’s my income, here’s my expenses, and here’s the cost of living on the expenses, and here’s a certain growth rate on the investments. And there’s going to be a shortfall for a period of time until Social Security kicks in. And I don’t know what that shortfall is at Social Security or if there’s going to be one at all. And I think that’s what she’s already thinking, is like, well, if there’s no shortfall there, well then maybe I take on a lot more risk. But why? I don’t know why you would want to take on more risk. That $1,300,000 drops to $700,000, or if that $1,300,000 goes to $300 or $3,000,000, I think if it goes to $700,000 or $500,000. That’s going to affect her a lot more if it went to $3,000,000.

Al: Yeah, she may be going back to work at that point. And here’s another point I think people should know, and that is, you look at your Social Security statement. I’m going to get this benefit at 62, this benefit at 70. That’s presuming that you work until that time period, either age 62 or full retirement age if you’re going to collect at 70. And so if you’re not, if you’re retiring at 57, you’ve got all these years where you’re not making this higher income, your benefits very likely going to be lower. So just make sure you calculate that.

Joe: All right, midwestfabs. Hopes that helps.

Andi: Check out the cute picture of midwestfabs’ dog, Jake from State Farm, in the podcast show notes, and read our latest blog post: in 2023 we saw political strife, regional banks in crisis, Fed rate hikes, inflation and recession worries… and now in 2024, we’ve got an election ahead of us – and a whole bunch of questions about many of these same issues. Should we be concerned about a stock market decline? Is the economy too hot, or too cold, or just right? Tech stocks did well last year, why not just go all in on ‘em this year? Is AI taking over?! Read insights on these questions and many more from Brian Perry, CFP®, CFA, Pure Financial Advisors’ Executive Vice President and Chief Investment Officer. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes and read Brian’s 2024 Financial Market Outlook. Tell us what you think – click Ask Joe and Big Al in the podcast show notes and send in your comments, or your money questions. 

Tax Spitball: Married Filing Separate and Start Roth Conversions? (Peter LemonJello, FL)

Joe: “Hi, YMYW. Love the show. Listen to the show while driving around in my 2021 Jeep Wrangler. Top down, of course.  If my income is high, but my wife has zero income, retired, what is it to keep us from filing separately and start working on converting her traditional IRA to Roth? With the individual standard deduction being around $14,000, would that mean she could convert that much tax-free? I’m sure I’m missing a lot here with this strategy, so perhaps you wouldn’t mind a little spitball for me? Thank you. Peter LemonJello.”  Peter LemonJello. He likes LemonJello in frosted mugs.

Al: Apparently, yep. He likes salt in his- I put limes in Dos Equis Amber, but not salt.

Andi: I always ask for my Mexican beers without the fruit. They always want to put a lime or a lemon on it.

Al: They do, don’t they? I like it, the fruit.

Andi: I don’t dig the fruit.

Al: Got it, okay.

Joe: No fruit, huh? No fruit, no sides, no nothing.

Andi: Yep.

Joe: Got it.  Alright, filing separately, Al, what do you think of that strategy?

Al: Yeah, it’s great. Go for it. The only thing you have to consider is, if you’re in a community property state, which I do not believe Florida is, but if you’re in a community property state, then half of your income is hers, and half of her income is yours, and you end up with mirror returns with less deductions. One other thing to consider on filing separately is, if you itemize, then she needs to itemize. She can’t just take the standard deduction. So you have to remember, you have to think about that too.

Joe: There’s also phase-outs. Like, you can- from a Roth contribution perspective.

Al: A lot more phase-outs, right?

Joe: Yeah, I don’t think the IRS really cares for people filing separately.

Al: No, for that reason. But, it, I mean, just if you’re asking about this one thing could work.

Joe: All right. Peter Lemangello.

Al: Remember we had a couple that we told them not to get married on Thanksgiving?

Joe: Yes.

Al: And they waited until the next year so they could do a bigger Roth conversion for the woman?  And then we heard about that for 10 years. It did work. It was a great strategy. It was a great strategy.

Roth Conversion Tax Implications for an Early Retiree in the 32% Bracket (Randy, Chicago)

Joe: “Hey Joe, Big Al, Andi. Love the podcast. I’ve been listening to old episodes daily on my way to work.  Anxiously awaiting new ones to be published.”

Al: On Tuesday, right?

Joe: Tuesday’s his favorite day.  “I discovered you in the Summer of 2023 when I searched for retirement info following a family vacation, that made me realize my work is slowly killing me and I needed to make a plan to downshift in the next 10 years or so. Don’t get me wrong, I love my work. But it’s physical and emotionally demanding. And I doubt I’ll be wanting to work at my current pace when I’m 50.”  I hear you, brother.

Al: Can you relate to that?

Joe: I can relate.

Al: Yep. Okay.

Joe: “I hope to soon be ready to submit my full financial picture to get a YMYW retirement spitball, but for now I have what is probably a simple question to help me understand when to do Roth conversion.” Oh boy, here we go.

Al: Okay.

Joe: “As for the personal stance, I’m married to a gorgeous former chemist-“  Wow.  “-turned a stay-at-home mom that is a youthful 42 and I’m 40, an ICU doctor-“

Al: That would be stressful.

Joe: Geez, yeah.  “-that works in the north suburbs of Chicago-” Wow, he’s in Chi-town. ICU doctor? “-for the top academic medical center in the state.” Wow, look at the big brain on you, bud. “The former chemist drives a little white 2018 on an Audi Q7 with massage seats. Pretty sweet, right?”

Al: Yeah, I never heard of that.

Joe: Yeah. Massage seats. “I drive a black 2019 Acura that our kids call the Batmobile.” Oh, that’d be cool.  “Our drink of choice is a strong black coffee to get the day going. No pets at the moment, though my youngest son has been campaigning for an English Mastiff.” Wow, that’s a big dog.

Al: It’s gonna happen.

Joe: “My question relates to 457(b) distributions. As a non-profit organization, my employer offers both pre-tax 401(k), 457 plans, which I max out every single year. When I begin to take distributions, likely at the age of 50, I understand that they will be taxed at ordinary income, but does this also count as earned income? I ask primarily because if I retire at age 50, my gap years will be financed with the 457(b) as well as withdrawals from my brokerage account. My wife has a rollover IRA of a $60,000 that I can- that I would like to convert to a Roth IRA.  We are solidly in the 32% federal tax bracket with my current earnings, so I hesitate to do the conversion now. I’ve been weighing the benefit of tax-free growth over the next decade versus the potential significant tax hit I would take now compared in 10 years after I scale back and drop into a much lower tax bracket. The other consideration I have is that once the rollover IRA is converted to Roth, I could start to do a backdoor Roth for her every year since she has no other IRAs. If the 457(b) turns out to be the only income we bring in outside of the long-term capital gains from my brokerage account, withdrawals from age 50 to 60, will we be able to do Roth contributions during those years? If not, I think I’d rather take the tax hit now and start loading up my wife’s Roth IRA today. If the 457(b) distributions do count as earned income, I think I would opt for the 20-year payout plan as opposed to the 10-year payout plan to allow that earned income to fund our Roths even longer. Appreciate you sharing your knowledge in the form of a friendly spitball.  If you are ever in town visiting the Chicago Pure Financial Advisors Office, Coors Latte is on me.”

Joe: Oh, Randy.

Al: Oh, Randy. I’ll probably come out this year.

Joe: Yeah, I’ll definitely be out in Chi-Town this year.  We got big things going on in Chicago.

Al: We do.

Joe: So, yeah, we’re growing like a weed in Chicago. One of our busiest offices.

Al: Yeah, very busy, right?

Joe: Yeah, just unbelievable.  Okay, couple things. Randy, I would convert her right now. You don’t have to do it all. Maybe you just do $10,000 a year for the next couple years, 6 years.

Al: To get it done.

Joe: Just to get it done. But, if you want to take the hit and just do it. You make plenty of cash, you’re young enough, the compounding tax-free growth, you’re gonna forget about the tax that you paid this year. I promise you. In 10 years from now, you will forget it.

Al: You won’t remember you did that.

Joe: You won’t remember. You’ll look at the $60,000 that now is $150,000, 100% tax-free.

Al: Yeah, and so the earned income question, I think the answer is no.

Joe: It is not earned income. It’s an IRA or retirement distribution. So, it’s going to be ordinary income tax, but it doesn’t count as earned income.

Al: But something else to think about, and you bring this up all the time, which is, yeah, you could do a backdoor Roth. But you’ve already paid tax on that money in your brokerage account to do the backdoor Roth. Or you could do a Roth conversion where you haven’t paid tax. It’s kind of the same, it’s just you’re adding it to this year instead of a prior year.

Joe: Correct. The only subtle difference is that you can put more money into a Roth, so you can do a conversion and a backdoor, just the- Or do the conversion now, and then now it gives you the ability to do the backdoor. I mean, everyone’s so high up on the backdoor.

Al: I would also see if Randy’s 401(k) allows Roth and after-tax contributions that he could move to Roth.

Joe: Yeah, so he’s got the 457 plan. He can take distributions without the 10% penalty at any age. The 401(k) has to wait until 59 and a half or 55, depending on when he separates from service.

Al: Sure.

Joe: So if he’s 50, he’s going to bridge the gap with the 457 plan in his brokerage account like that. Then he can do conversions at that point. But 10 years from now, I don’t know where tax rates are going to be. I don’t know what his living expenses are. And if he’s taking most of the income from the 457 that’s taxed as ordinary income anyway, he’s probably going to be in a pretty high tax bracket then as well.

Al: Yeah, depending on his spending.

Joe: My vote is convert it all.

Al: I think I would agree. Why not?

Joe: Wow.

Al: And then you continue to the backdoor Roth. And then you see what your options are in the 401(k).

Joe: All right. Can’t wait to have some Coors Lattes with our man Randy in Chi-Town.

Self-Employed and Over the Max to Contribute to Roth – Now What? (Caity, Salt Lake City)

Joe: So we got, “Hi, All. Hope you’re well. I’m 29 years old, married, and self-employed. My husband is employed.” That’s good.  “We make about $350,000 combined. He makes $100,000 and I make $250,000.”

Andi: Go Caity.

Joe: Yeah. I like how she put that out there.

Al: Yeah, I would do that too. I’m proud of that.

Joe: “We have $120,000 in a brokerage account. My husband has about $85,000 in a retirement account between 401(k) and Roth. I had $50,000 in my SEP and $6000 in my Roth.  After the first year contributing to a Roth, I was over the max income limit and could not contribute.  Should I just leave the $6000 in there and never contribute again? Or pull that out and put it in my SEP? Would that $6000 grow if I don’t touch it, then what would that be like in 30 years? Not sure the best route here.  I also feel like we are on track with our retirement savings before turning 30 years, but wanted your opinion?  Thank you.” We don’t give advice here, Caity.  K A I T Y.

Andi: C A I T Y.

Joe: I mean C A I T Y.

Andi: Caity.

Joe: Caity. I’ve never seen Caity spelled that way.

Andi: I wonder if it’s short for Catherine spelled with a C.

Joe: Maybe.  Do you always do that with your hand when you say C?

Andi: Only when I’m in the same room with you.

Joe: Got it. Got it.

Al: All the stuff we haven’t seen for years, Joe, and now we get Andi in studio. It’s awesome.

Joe: It’s good to see you. Sign language.

Andi: I’m telling you to keep going.

Joe: Got it.  Okay, Caity with the C A I T Y. First of all, I would change up your retirement account. Get rid of the SEP and get a solo 401(k). I’m not sure if she’s got employees, but I’m assuming she’s self-employed. That means it’s just her.  Get rid of the SEP, solo 401(k).  You could put the same amount of money into a solo 401(k).  And then from there you would be able to do backdoor Roth contributions. So the $6000 that you made over the limit that you tried to put into the Roth, but you made too much money now has basis in it. You could do the conversion. But if she has the SEP, that’s going to apply the pro rata rule.

Al: Yeah, that’s right. And I think now if she does have employees, you might stick, she might stick with the SEP because it would be less of a contribution probably and simpler than a 401(k). Because now she’d have to go to a safe harbor 401(k) and it would be a little bit more costly.

But if she doesn’t have employees, and we’re assuming she has her own business because she has a SEP, which-

Joe: Well, she says self-employed.

Al: Oh, she did? Oh, she did. Okay. Yeah. So yeah.

Joe: Thanks for showing up.

Al: Yeah.  I wasn’t listening when you were reading.

Joe: Got it.

Andi: You’re thinking about K versus C.

Al: I know. I got stuck on that.

Joe: Yeah. So I would move the money from the SEP, open up a solo 401(k) plan, transfer the $50,000 in the SEP into the solo 401(k) plan, make the $50,000 contribution into the solo 401(k) plan. Now the money’s in a 401(k). The pro rata doesn’t apply to 401(k) plans. It only applies to IRAs. Because a SEP is an IRA,  you’re going to be stuck with a pro rata when you try to convert that $6000 that you recharacterized into the standard IRA that you wanted to get into a Roth. Yeah, I think, I mean, you make a ton of cash. You’re 29 years old.  And then if you continue to save this way, yeah, you’re right on track, Caity. Good job.

Impact of Roth Conversions After Age 73 on RMDs (Ben, Oceanside, CA)

Joe: Now, let’s go to Ben from Oceanside. “Can you still utilize Roth conversions after age 73? And what, if any, impact would this have on the RMD?”  Alright.  Yeah, there’s no age limit on the required minimum distribution. However, you have to take the distribution first before you take the conversion, or before you do the conversion.

Al: Yeah, that’s a good point, Joe. And I think there is a lot of confusion because the rules are different to make a Roth contribution, right? So with a Roth contribution, you’ve got to have earned income, which is the main thing, which is if you’re retired, you’re not going to be able to do that. But a Roth conversion, anyone can do at any age for any amount, right?

Joe: Any income.

Al: Any income. There’s zero limitations on that, and should you do a Roth conversion at age 73? Maybe. I mean, it just depends. So, so, if you’re doing it for yourself, if you think you have longevity, and you would like to reduce your RMDs, that’s a good way to do it, potentially, depending upon your tax bracket. If you’re doing it for your kids, because you don’t need it, because you’re in a lower bracket than they’re going to be in, great idea to do Roth conversions. But Joe, you and I have had many questions about people in their 60s that read some article, it’s too late to do a Roth conversion. And I don’t really agree with that.

Joe: Yeah, I think any age would make sense. It just, once you reach the RMD age or your required beginning date, the distribution has to come out first. So you cannot do a conversion. So this is what happened or this is why that rule exists is let’s say I do a Roth conversion of $100,000. And now that money’s in my Roth IRA, then I’m going to compute what my required minimum distribution is. And the RMD is going to be a lot lower because that much more dollars came out of the IRA.  What has to happen is the RMD comes out first. So let’s say that you have $60,000 in whatever tax bracket that you want to utilize. And your required distribution is $40,000. So you take the $40,000 out first. That will be deposited in your checking account, your brokerage account, or you spend it. But you still have $20,000 of room in that bracket, hypothetical bracket. So that $20,000 is the dollar amount that you would want to convert in this hypothetical example. So you just be careful with conversions when you are over your required beginning date because A) the distribution has to come out first, and then you can do the conversion, of course, but you don’t want to push yourself up into higher brackets because that distribution came out. You cannot convert an RMD.  So the RMD has to go into a brokerage account or a checking account. It cannot go into a Roth account. It has to be a full distribution. Then from there you can do the conversion.

Al: Yeah, and it has, yeah, it has to be in that order. It doesn’t matter that they’re in the same year. That RMD has to be first, Roth conversion second.

Joe: All right. Thanks for the question, Ben.

Andi: Mile markers along the road to retirement let you know how much you’ve traveled, and how much further you’ve got to go – but you might need to pull over and ask for directions. Watch Your Money, Your Wealth TV and find out if you’re on track to retire comfortably, or if you’re headed for the ditch! Joe and Big Al will show you how to ensure you’ve got enough gas to make it to the finish line. Download the Retirement Readiness Guide to find out how to control your taxes in retirement, create income to last a lifetime, make the most of your retirement investing strategy, and much more. Click the link in the description of today’s episode in your favorite podcast app, go to the show notes, watch the Mile Markers to Retirement, and download the Retirement Readiness Guide – all free, all yours from YMYW. Tell a friend, won’t you?

Does the Math Make Sense on a Company-Matched Kai-Zen IUL Policy? (Kickass Seabass, NJ)

Joe: All right. We got a Kickass Sea Bass from Jersey. Kick his ass, Sea Bass. You know what movie that’s from?

Al: No.

Joe: Dumb and Dumber.

Al: Oh, okay.

Joe: “Firstly, thank you for putting out this podcast. Year in, year out, you guys are still among the best finance podcasts out there. Here’s my scenario. My employer is going to start offering a Kai-Zen plan.” Ooh, okay, that’s an IUL policy with leveraged financing. “It has a deferred compensation benefit, and for some reason, it’s going to match 50% of the contribution up to $15,000. Ordinarily, I would never do this IUL with premium financing, but in the setting where the company has given me $7500 annually towards the premium, does this make sense to do? I don’t need the insurance, but feel like this might be a fringe case in which the math might make sense. Would appreciate any insights. Thanks in advance for the spit ball.” Remember premium financing, big Al?

Al: I do.

Joe: All right.  I need a lot more information because this is a very complex strategy. So to give you just a high-level overview of what this is, is that they’re using leverage to fund a life insurance policy. What leverage is, is they’re taking a loan from the bank to fund the policy.  So usually, how these illustrations are ran, is that, alright, I’m going to invest $30,000 a year for 5 years. I’m also going to take a loan from the bank to continue to fund the IUL. I just want to jam-pack a bunch of cash into the life insurance policy. How it’s sold and what the benefit is, is that all of those dollars will grow tax-deferred. And then you can take dollars out of a life insurance policy via loans, or FIFO, first in, first out, and then loans, where the benefit comes out to you tax-free.  So how do you get a bunch of money into a life insurance contract is, well, you can fund it yourself, or you can fund it yourself and take a loan from a bank. And how this works is based on the arbitrage. So what is the interest rate that the loan is from the bank, and what do you feel like this life insurance contract is going to do from a performance perspective? Just, I mean, you’ve used leverage your whole life. Sometimes it works, sometimes it doesn’t.

Al: That’s exactly right. It’s a double-edged sword.

Joe: It’s risky as hell.  What makes this a little bit interesting is that, alright, well, how much skin does Sea Bass have into this? Because the life insurance contract will be written on his life, so the premiums will be based on his- looking at his underwriting status, if he’s preferred, super preferred, standard, whatever, because there’s a cost of insurance involved with this. How big of a policy is it? But what he has to realize is the bank is in control. The bank is funding most of this. The bank is going to get paid first. The bank is going to decide if they want to cancel the policy. So you’re giving up control. So depending on how much money that he’s funding, depending on what the illustrations look like, and given interest rates right now, I don’t think an IUL would outperform 7.5%.

Al: Yeah, you know a lot more about these products than I do, but the fact that it’s leveraged, and the fact that we have high interest rates right now, it seems like a, sort of a risky deal. Without knowing any more, right?

Joe: Yeah, we would have- we would need to look at this a lot more in detail, but this is just an overview of how this thing works. The only thing that’s a little bit interesting to me is that, all right, well, the employer is going to put some skin in the game. But I haven’t seen these Kai-Zen policies in years, and usually, it’s someone that has a $10,000,000 to $15,000,000 net worth. Someone that can afford the leverage. Someone that can take the risk, that they’re an accredited investor. Because this is complex. You’re using bank-funded dollars to fund this thing. And if the arbitrage works, hey, it could work out great for you. If it doesn’t, it’s going to blow up. And that life insurance contract will- or the bank will just say, screw it, I’m not going to put any more money in here. Or whatever money that he put in potentially could be lost. So, you know, just like with any investment, there’s risk in return, but anytime there’s life insurance and then there’s premium financing, it just reminds me of our good old days there, buddy.

Al: Yeah, it does. And it’s so much more complex. And even if you read all the stuff, you may not fully understand it.

Joe: I don’t understand- okay, I get the fringe benefit, but what’s the catch? What is he trying to accomplish, the employer? So he wants to really fund this with company dollars, right, so okay, well, is he going to take a tax benefit from the company to fund the policy, and then potentially those dollars are going to come out tax-free? Is it a way to, to keep? You know, Sea Bass in his seat where he doesn’t find another job to say, hey, you know, I’m going to fund this. We’re already doing a 401(k) and we’re doing this and this is just another fringe benefit. I don’t know what type of business it is and the CE- you know, is he willing to fund huge cash into these policies for all his employees? I don’t know. I guess I would just have to learn a little bit more.

Al: Well, if it’s a deferred compensation plan, it’s probably, it may only be the executives. And I would guess that the older executives, this really works well for them. But they have to offer it to the younger executives to make this work.

Joe: I don’t think it, no, because the cost of insurance for an older executive would be through the roof. If I’m 35, the cost of insurance is going to be pretty cheap and I can really fund this thing.

Al: Yeah, but-

Joe: It’s just going to give you more time too, to fund it.

Al: Yeah, well, okay, so maybe they’re younger, but they want this benefit for themselves. And so the company, their company, they’re running, which they’re in charge of, is willing to pay this. So they get the benefit. I don’t know.

Joe: Yeah, I don’t know either. So, hopefully that helps. Probably not.

Social Security Family Benefits Earnings Limits (Ed, VA)

Joe: Got Ed from Virginia writes in, he goes, “Hey Joe, Al, Andi, follow up question. I asked about a year ago. 55, wife 42, our child is 3. My question concerns the earnings limit for collecting Social Security. If I begin taking Social Security at 62, wife can collect a benefit until her son turns 16, son can collect a benefit until he’s 18, all up to the family max.  I understand I will be subject to the earnings limit while I’m collecting Social Security early.” So, his question is, “My wife, is she subject to the same earnings limit while she is collecting on my benefit for those years when she is 49 through 54 and the son, age 10 through 16?  In other words, can she earn $45,000 salary while collecting her parent benefit off my earnings during those 6 years? I’m a pale ale drinker, Honda Civic driving, non-pet owner. Love the show. Been listening for going on two years. Thank you.” Ed, you probably wrote this question in two years ago. It just took us that long to get to it.

Al: To get to it. It’s a hard question.

Joe: Yeah, it’s- So, let’s explain a couple of different things, because this is not very common.

Al: No.

Joe: This is going to happen to me. So I’m, I have a vested interest.

Al: It is going to happen to you, so you better get tight on this.

Joe: I know. I gotta, we got a couple of years to really get this thing dialed and the rules will probably change. Because I just saw something that they’re trying to already cut slash Social Security benefits anyway.

Al: Yeah, right.

Joe: So, family benefit.  Ed is older than his wife. And Ed is collect- he’s going to collect benefits early at 62. That’s his plan. And the reason for that, that triggers a family benefit. So his wife could be a caretaker. So she gets a benefit because, I mean, this is how bad Social Security is too. Because, like, when Social Security was established, men were not allowed- or, they weren’t included in the spousal benefit. Because it was so sexist. It was like, the man works, and, alright-

Al: – men always make more, so it doesn’t matter.

Joe: So the spousal benefit was for the women. So, this family benefit is like, alright, well he’s working, he’s gonna collect at 62. It could work the opposite way if she was older. However, he’s older, he’s going to collect, that can trigger a family benefit, so she’s going to receive a benefit because they have a child under 18 years of age.  So in the old country, if someone was working, and so, hey I’m collecting Social Security, let’s add more dollars to the overall household if you had young children in the household. So there’s this family benefit where he’s going to collect his benefit on his record, she gets a benefit, and the child gets a benefit up to a family max. And there’s certain calculations here.  So it gets somewhat complex and usually, you know, to have that age discrepancy and then just, and have a really young child, you just don’t see it every day.

Al: Yeah, you don’t. And so, to be able to make this work, Joe, as you said, one parent needs to qualify for benefits and be taking them. So that’s right off the bat. And if you’re a spouse, it doesn’t matter how old you are-

Joe: You can be 25.

Al: – you claim this, you could be, technically. You can claim the benefit, caring for a child under age 16. So that’s the spousal part of this. It doesn’t affect the spousal benefits and they’re on their record in the future. But they do have to qualify under the earnings test, which $45,000 salary would be over the earnings test, so she couldn’t receive any based upon this example. However, the child can collect on his- actually all the way till under 18. The earnings limit applies for the child as well. But in either case, the benefit is 50% for the spouse and 50% for the child. In most cases, the family benefit is between 150% and 180%.  So in this particular example, what’s going to probably happen is the spouse will not be able to collect, but the child will be able to collect 50% of the primary insurance amount as long as they’re not working.

Joe: So, in other words, there’s 3 benefits. There’s the spouse that is taking their benefit on their record. There’s the spouse that is not taking any Social Security, but they have a child that is being cared for by the household, and then the child also gets some cash. So there’s 3 benefits. So you have to look at, all right, well, are all 3 of these individuals working, all 3 of them would be subject to the earnings test.  If one of them is working at age 62, that person’s going to be subject to the earnings test, but if the spouse and the child is not working, then those benefits would not be reduced.

Al: Yeah, that’s a good way to say it. So let’s just say that the person that’s age 62 retires and is not earning any money.  So they’ll get their full benefit and let’s say the spouse and-

Joe: They would get a reduced benefit. That’s whatever. They’re 62.

Al: Yeah, exactly. But the spouse and the child could get their benefits, 50% each, except there’s a family maximum of somewhere between 150% and 180%, depending upon a bunch of calculation factors. So in that particular case, you’d be limited to the family max. But in this particular case, the spouse is working and making more than the $21,000 or whatever it is, then they don’t get any benefit, but the child would get benefit presuming they make less than $21,000.

Joe: If the child’s working, then that would affect them as well.

Al: Yeah, and where the spouse can collect if the child’s under age 16, the child can collect as long as they’re under 18.

Joe: So, the spouse collects from the child’s age up to 16, but the kid will be able to collect until the child turns 18.

Al: Yeah, exactly.

Joe: Clear as mud, isn’t it?

Al: And then there’s, then they can be 19 and still collect if they’re a full-time student. So talk about complex.

Joe: So, he’s got some time. Because he’s only 55, so he’s got 7 years to collect, or to map this thing out.

Al: Well, he does, and maybe his-

Joe: The rules will probably change by then.

Al: Probably, and maybe his wife won’t be working, and then this works just fine.

Joe: Or this was all for nothing.

Al: Yeah.

Joe: Yeah, alright.  We got to take a break. Show’s called Your Money, Your Wealth® – we’re done. We’re out of here. Thank you, Andi.  Off the hook. That’s it. Hopefully you enjoyed another episode of Your Money, Your Wealth®. We’ll see you next time folks. Andi, great job.

Andi: Thank you.

Joe: Big Al, good to see you in person again.

Al: Yes, good to see you too. Good to see you both.

Joe: Yeah, it’s been a couple weeks since I’ve seen you.

Al: A couple weeks. I’ve been Hawaii, Maui, Kauai, Berkeley. All over the place.

Joe: All right, we’ll see you next time. Show’s called Your Money, Your Wealth®.

Andi: We’re all in studio again, the Anderson family visit to the ER, Big Al doing some damage, and Al’s frosty mugs in the Derails at the end of the episode, so stick around.

Help new listeners find YMYW by telling your friends about the show, and by leaving your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and all the other podcast apps that accept them.

Your Money, Your Wealth® is presented by Pure Financial Advisors. Click the “Get An Assessment” button in the podcast show notes at YourMoneyYourWealth.com or call 888-994-6257 and schedule your free financial assessment, in person at one of our many offices around the country or online, a time and date convenient for you, no matter where you are. Chances are, one of the experienced financial professionals at Pure will be able to identify strategies to help you create a more successful retirement.

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.

The Derails

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