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Joe Anderson
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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 153 out of 715 RIA’s nationwide by total assets under management by [...]

Alan Clopine
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Alan Clopine is the CFO & Chairman of the Board of Pure Financial Advisors. He has been an executive leader of the Company for over a decade. As CFO he is responsible for the financial operations of the company as well as investor relations. Alan joined the firm in 2008, about one year after it [...]

Andi Last
ABOUT Andi

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

Published On
December 28, 2021

Joe and Big Al spitball, what else, Roth conversions: a conversion and pension lump sum strategy, converting vs. harvesting 0% long-term capital gains, and how to avoid double-taxation on a Roth conversion. Plus, how to allocate assets when preparing to use the Rule of 55? Do retirees regret not spending more in retirement? Will paying a thrift savings plan loan with real estate income avoid income tax? And will assets be better protected against litigation when transferred from a 401(k) to a TSP or an IRA?

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Show Notes

  • (01:02) How Does My Roth Conversion and Lump Sum Pension Strategy Look? (Mike, PA)
  • (12:46) Rule of 55: How to Allocate Assets in Our Retirement Investment Portfolio? (Lisa, Brookfield, WI)
  • (16:21) Harvest Zero Percent Long-Term Capital Gains or Do Roth IRA Conversions? (Jim, Santa Cruz)
  • (21:08) Withdrawal Strategies: Do Retirees Regret Not Spending More in Retirement? (Jim, Portland, ME)
  • (27:28) Can I Avoid Double Taxation On My Roth Conversion? (Jeff, Lincoln, NE)
  • (31:13) Will Paying Off a TSP Loan with Real Estate Income Avoid Income Tax? (Sam, Orange County, CA)
  • (35:00) Transfer 401(k) to TSP or IRA for Asset Protection in California? (Greg, No. Cal)

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Transcription

Welcome to Your Money, Your Wealth® podcast #358, the final YMYW episode of 2021. Today Joe and Big Al spitball on, what else, Roth conversions: we’ve got a conversion and pension lump sum strategy, converting vs. harvesting zero percent long term capital gains, and how to avoid double taxation on a Roth conversion. Plus, how should you allocate assets in preparation for using the Rule of 55? Do retirees regret not spending more in retirement? Will paying off a thrift savings plan loan with real estate income avoid income tax? And will assets be better protected against litigation if they’re transferred from a 401(k) to a TSP or an IRA? Get your money questions in now via email or voice message for YMYW in 2022: visit YourMoneyYourWealth.com and click as Joe and Al On Air. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

How Does My Roth Conversion and Lump Sum Pension Strategy Look? (Mike, PA)

Joe: Mike writes in from P.A., Pennsylvania. “Now my tax advisor turned me on for your podcast last week and I’ve been bingeing ever since. I did consider in my high-level planning and I’ve worked on getting a layer deeper, especially around Roth conversions. Important stuff first, I enjoy a Moscow Mule, but red wine is my go-to drink. I drive a 2013 Jeep Wrangler or a 2018 Grand Cherokee. Depending on what my wife is driving I’ve listened to the podcast while exercising, walking around the house and even in the shower. First question does my Roth conversion strategy look reasonable? Plan to convert all current IRAs 500k over the next eight years? What spitball changes? What do you make? Details retiring in 2021. Same month, I turned 59 wife is also retired and she was 56. Didn’t make sense to do rather than to do Roth contributions while I was working as we were at the top tax bracket for the past 10 years. Backdoor was not an option as we both had pre-tax IRAs in place, and we live in Pennsylvania. Financials not bad, planning around spending about $100,000, taking our pension at this time. Pension currently is a lump sum value of $425,000. I can take in at any time. Interest is paid at the 30-year T-bill rate, but has a floor of 4%. At age 70, I will have to take the lump sum or the annuity option leaning toward the lump sum planning to treat this as a bond growing at 4% annually until age 70. Deferred income $450,000 distributed evenly over four years, earning a prime rate. It’s got a million and a half in a brokerage account, pre-tax IRAs of a half a million and a Roth IRA of $60,000, 401(k) $750, plan to leave 401(k) for added risk protection will draw from this starting in 2030. Let’s get an HSA of $43,000 of retired medical and can will contribute to my HSA until 65. Then we’ll open up in HSA for my wife to contribute to as she can stay on my employer health plan for three additional years. A plus for the Roth conversion for these years. Other savings $50k, vacation home $400,000, total pre-tax 401(k) IRA deferred income pensioners, $2 million brokerage rather than other after tax haven is 1 1/2 each. HSA is $43,000. All right, we got on that Big Al? All right, Roth conversion plan. He wants to do $50,000 per year for the next four years while receiving his deferred compensation. This will be in the 22% tax bracket. May be 25% by then, approximately $90,000 per year for years 5-8. We’ll manage this to the 12% tax bracket with withdrawals from my brokerage account. Can manage this without significant capital gain issues, big reduction in tax bill for conversions. OK, so he’s got the deferred comp plan that’s going to be kicking out income. So he’s like, OK, for those years that the deferred comp plan is paying me because it’s ordinary income. He wants to do conversions to the 22% tax bracket. It could be 25 as tax rates might roll back to pre Trump’s tax cuts. So the first question he asks. Now does my Roth conversion strategy look reasonable? Plan to convert all 500k? What spitball changes would you make? Second question, should I look at rolling over my pension lump sum to an IRA at 68 and extend my plan by two years to exclude converting a portion of my lump sum to a Roth IRA before starting Social Security at age 70? Let’s have a conversation.”

Andi: And he actually said to include converting a portion of his lump sum, not exclude.

Joe: “This account will likely go to our two children at some point. We already have much of our big spending out of the way. We hope. Bought an RV for travel. Kids are through college debt free. We also have helped them get to the point where they will own their homes mortgage free. Time for us to hit the road.” So Mikey wants to spend about $110,000 per year. He’s got a couple million bucks. We don’t know what his Social Security benefit is and I don’t truly know what his deferred comp payment is for those five years. I don’t know if it’s evenly, but he’s going to convert at the top of the 22. He’s only 59. Do you convert to the 22 in the 12? I mean, both of those sound reasonable to me.

Al: Yeah, same. I mean, even like, let’s say you do nothing and you have to $2 million, which you may or may not need…

Joe: But you you know what? What he’s missing, Alan, is that he’s he wants to convert his $500,000, but he’s got $2.1 million in deferred accounts. So you have to look at the $2.1 as a whole, not necessarily here, though, 401(k) of $800,000 and I have an IRA of $500 and my wife has bought another 401(k). So you just want to take a look at your total qualified plans? Which he is stating here is $2.1, but we have to subtract out the deferred comp plan that is forced out.

Al: Right? Well, I guess what I was going to say that the $2 million by the time RMD age is probably $4 million. So the required minimum distribution on that probably is $160,000 plus Social Security, right? So that basically puts them in the 25 to even 28% bracket. So actually, 22 might still be a good bracket. I do agree with you, you got more than $500,000 to think about. You got you basically have $2 million plus.

Joe: Right. I’m trying to look again what his deferred comp is. Then he has to take. I don’t know what the value was. I lost his deferred income $450,000 distributed evenly over the next four years, earning prime rate. OK, so that’s $112,000 thousand dollars of income that is going to receive in four years, so that is going to convert to the top of the 22% tax bracket. He’s got plenty of assets to live off of too, to supplement because he’s living at $110,000. The deferred comp is going to pay his income over that time period. But I don’t know, do you do conversions there because you’ve got to take that $425,000 out of the equation, so he doesn’t really have $2.1 he’s got $1.6.

Al: $1.6 and in his plan, if he’s going to convert, $500,000 now is left at 1.1, and then that doubles down to 2.2. So that’s $80,000 or $90,000 RMD. Plus Social Security is another $60,000. So that’s, you know, that’s manageable, right? I mean, it’s not it’s it’s not horrible. I mean, so you might you might want to convert more of that. But here’s the thing that people sometimes they over convert and then they end up converting in the 22% or 24% or 32% bracket. And when they get to retirement, they’re in the 12% bracket. That’s like that doesn’t that didn’t make any sense. And so there’s a big jump, obviously between 12% and 22%. But that’s why I kind of did the math on your RMD. So let’s call it more like $90 grand, right? Plus Social Security minus the standard deduction. You know, maybe around 100 currently that would be in the 22% bracket, but maybe it’ll be 15 with the way that this works right? In terms of the brackets, they kind of go up each year.

Joe: So here’s how quickly this is what I would do, Mike. You have to map this out a little bit better because you’re just looking at your $500,000 IRA and saying, Hey, I want to convert this to a Roth IRA over five years. Don’t look at it that way. You have to look at your entire qualifying dollars. Take out the $112,000 and the $425,000. You have this lump sum option. You’re saying, Hey, I’m going to wait for that lump sum. I’m going to continue to have the lump sum grow at, you know, 4% and then I’m going to take either the pension or the lump sum at age 70. Well, if you do that, you know, there’s no conversion. I mean, you’ve got two years to convert down and who knows how large it, you know, if you take it out early or whatever your income sources are going to be. So if you did it that way, then you’re like, OK, well, what is the balance going to be at age 70?
How much qualified money do you have given the strategy that you think at age 72 and do the RMD calculation plus whatever other fixed income that you have? And then just look at today’s tax tables to see roughly, you know, what tax bracket do you think you’re going to be? And it doesn’t make sense to do the strategy that you’re doing. Maybe it makes sense to take the lump sum now, roll it into an IRA, have a globally diversified portfolio and then convert all the way through from 59 to age 72.

Al: Yeah, right. I agree. I think that’s right. You need to look at all these assets together holistically to get the right plan.

Joe: You can’t look at things separately. You look at your whole wealth as one big basket and then that will give you the appropriate plan.

With pandemics and market volatility and whatever the future holds for inflation and Social Security and taxes, it’s hard to know when you’re ready to retire and if you’ve got the appropriate plan. Go to the podcast show notes at YourMoneyYourWealth.com and download our Retirement Readiness Guide for free. You’ll learn how to control your taxes in retirement, make the most of your investing strategy, and create income to last a lifetime. and learn 7 plays to help you get retirement ready, despite all the uncertainties. To download the Retirement Readiness Guide and to access all our other free financial resources like educational videos, webinars, blog posts, and downloadable guides, and to watch Joe and Big Al answer your podcast questions on our YouTube channel, just click the link in the description of today’s episode in your podcast app.

Rule of 55: How to Allocate Assets in Our Retirement Investment Portfolio? (Lisa, Brookfield, WI)

Joe: Lisa from Brookfield, Wisconsin. “Thanks for your podcast. I’ve learned so much. You get more laughs than I do from most sitcoms. I drive in my Lexus with my yellow lab to the dog park and listen to the podcast while we walk. My husband and I are both 50, and I hope to leave Corporate America at 55 and use the rule of 55 to lower our pre-tax balances as I try to dial in my overall allocation strategy. I have some questions on how best to do this while following acid sources. OK. Bullet points here. Big Owl
-1.5 million saving plans 401(k) / 403(b)
– An impressive HSA, including $105,000 in a stable value fund.
Should I put stable value in bond allocation or keep the 3-5 year of safe money out of the overall allocation strategy? All right, first question. Yeah, just always add 100% of your assets. You’re well, $105,000 is no chump change, though. Stable value content, either as your cash reserve or your bond allocation, it’s probably you would look at it as your safe money or your fixed income.

Al: Yeah, but so we see a whole bunch of categories. It’s it’s important that you look at this together, not just one account at a time. Look at what your right investment strategy is and then figure out which assets to put in which accounts. So let’s say that the start.

Joe: Lisa’s got a $1 million DB pension plan. I will take the lump sum, so assume I just leave that out of the allocation until I invest it my own. Got $600,000 in company long term incentives, options are in use. Skews about half invested in versus invested. Should you include any both or none of these in your stock allocation? Yes, absolutely. Those are your dollars if you plan on being there. I would include that in my stock allocation. It’s got $300,000, allocated in cash savings for a vacation home once the market cools down a bit. Florida, hopefully soon, I assume, keeps us some of the overall allocation since it’s earmarked for future real estate. Yes, I would keep them out of the allocation. $100,000 a taxable brokerage account. $3.5 million total. Thanks for the spitball. Lisa from Waukesha County.” So here’s the deal you look at all of your assets that you currently have and find out what the appropriate allocation is.You have stock options if you have incentive plans that are stock that are invested and not invested. I would put that in the stock allocation. If you got money that’s earmarked for a future span in a couple months or a year, I would take that out of the overall allocation because that’s already spent money. So that’s how I would look at it, looking at everything as a whole, come up with the overall strategy from there. And then if you have fixed dollar amounts, such as company stock that you’re not going to sell or that are future grants, I would include that in my allocation.

Harvest Zero Percent Long-Term Capital Gains or Do Roth IRA Conversions? (Jim, Santa Cruz)

Joe: Jim from Santa Cruz, once a week he’s got a new question. “Hello PureFinancial team, Jim, from Santa Cruz. When I’m not listening to YMYW or drinking Sierra Nevada Pale Ale, I’m helping friends Jack and Diane with their retirement plan. It’s kind of catchy. Back in September, Al and Joe helped Diane confirm the tax implication from the sale of her home. Diane now has a strategy dilemma before the sale proceeds, when she retires to lead 65. Diane expects to have $300,000 in brokerage accounts and the cost base is 150. She will also have $900,000 in retirement accounts and $200,000 in Roth accounts. She will start taking Social Security at age 70 with RMD starting in 72. Diane has a 7 year window to maximize a 0% long term capital gain from her brokerage account and/or a Roth conversion strategy. The dilemma is what should Diane do first? Harvest 0% long term capital gains or Roth conversions? Or should she do a little of both each year? Or is this a 6-1/2 dozen of the other situation, whether neither choice have an advantage over the other? Diane is planning to stay out of the third tax bracket in retirement and minimize the tax here. If she or Jack dies before turning 80, her living expenses will not be affected by this decision. Thanks, as always, for the great show, Jim from Santa Cruz.” He’s assuming that, like the market’s never going to go down. The first thing you’ve got to look at the allocation, is the allocation appropriate in the brokerage account. If the allocation is not appropriate in the brokerage account, then you take advantage of the 0% tax bracket just to make sure that you’re allocated appropriately.

Al: Yeah. So the way we would think about it is like, let’s say Diane has one stock. And it’s $300,000 and it’s a big part of her net worth. Yeah, I would favor pulling sum off the table. And if you can keep it in the 12% bracket, great, which is up to $80,000 taxable income, which would also be $105,000 of regular income, minus the standard deduction. You have $105,000 of income as a married couple with a standard deduction, you get to 80 or top of the 12. So if you can stay within those numbers, your capital gains tax free, so that’s a great deal, right? And you can mix and match. I think that’s actually the first thing I would look at, too, is how are the investments allocated? Now if they’re in a globally diversified portfolio with a low cost ETF or index fund? Yeah, you could stick with that.

Joe: I would do the conversion then if I have the right investment strategy and philosophy and I and I feel comfortable with the risk that I’m taking, then I would do conversions because I don’t necessarily need any of that income. And then if I need the income from an overall portfolio, at some point I would stop doing conversion, sell the stocks at a 0% cap gains rate. The market could fluctuate too. So let’s see if the market drops 20%, 30%, which it will at some point, then I mean, then you harvest gains in which he didn’t necessarily need to. If you already had a diversified portfolio where you could put, tax deferred dollars in a tax free environment and a very low tax bracket. Soif you have the right investment strategy, I would do the conversion. If you don’t have the right investment strategy, I would the long term capital gains.

Al: Yeah, and you can mix and match. Right. So one year you need some extra cash and then do the capital gains that year. Don’t do the Roth conversion that year or do a smaller Roth conversion because what you don’t want to do is do a Roth conversion and a capital gain harvesting to put you over the top of the 12% bracket, assuming they’re in that bracket. Making that assumption because now what happened is the capital gains that were tax free are now taxed at 15%. Oh, and by the way, the conversion is still taxed at 12%.
So now you’re in a 27% bracket and it’s hard to comprehend. But anyway, it’s true. So just be careful of that. If you’re around the 12% bracket, you don’t want to do both and push yourself over into the 22 because it gets very expensive.

Withdrawal Strategies: Do Retirees Regret Not Spending More in Retirement? (Jim, Portland, ME)

Joe: Got Jim from Portland, Maine, writes in. “Hey fellas, My name is Jim and a new listener from the show. Love the show in the sense of humor you all bring. I was looking to get your opinion on SWR in retirement, Sustainable Withdrawal Rate. I can’t help wondering if most people end up leaving a lot of money on the table when basing their retirement withdrawals on the fear of running out of money, especially now, with many taking about 3% as the new 4% in the current low interest rate environment. Do you see older clients you work with having regrets about not spending more money over their retirement, especially early in their retirement? How do you look at it withdrawal strategy differently for clients not wanting to leave significant inheritance, instead wanting to spend most of their money? Looking forward to hearing you both opine on this topic?” OK, Jim, this is how we look at things. We do not use the 4% rule or the 3% rule or the SWR rule, which is the 4%. So how we look at things, the 4% rule is a good rule of thumb to determine how much money you probably should have at retirement. What I mean by that is if you want to spend, I don’t know, let’s see. The demand on the portfolio is $50,000, right or $40,000. The math is a little bit easier on $40,000. Second, let’s see what $50,000 is like 1.25 million. OK, so 1.25 million at 4% creates $50,000. So what we look at in the 4% rule is to just to see if someone’s on track, right? That’s how you want to look at it. In my opinion, as a certified financial planner is that Alan wants to retire. He wants to spend $50,000 a year, he wants to retire in five years. So just kind of a back of the envelope for all of you that are kind of sketching out your retirement, how much money should Allan have in five years, roughly in liquid assets to produce the income that he wants to live on for the rest of his life? So a good rule of thumb is to look at 4% or 3% or 3.5% or whatever. So if you use 4%, that’s fine. So Alan’s goal would be to have $1.2 million in five years, right? But when he retires, I’m not going to advise him to take 4% out per year.
It’s going to vary depending on market situations. It’s going to vary what the allocation looks like. It’s going to vary based on other circumstances. It’s a good rule of thumb to see if people are on track because of Alan wants to retire in spend around $50,000 from the portfolio and he only has $600,000. He’s got a lot of work to do in five years to get. He’s got a double his money basically in five years for him to have a chance at retirement.

Al: Yeah, it probably isn’t going to happen. So then in that case, you change your spending, you work longer or any combination. Save more. Downsize your home, whatever. So and just to make sure we clarify this. So the $50,000 example is just for my portfolio. If I’m getting $30,000 from Social Security, then I want to spend $80,000. So this is the demand from the portfolio. $50,000 you divide it by .4, it’s actually easier to multiply by 25. So, 50 times 25 is 1.250.

Joe: So hopefully that answers your question. And you know, most of our clients have a goal of they want to spend X amount of dollars. Some years they’re going to spend a lot more, some years they’re going to be spent a lot less. It’s dynamic. It lives and breathes. So if you’re just thinking about it in a bubble, I’m only going to pull 4% out and guess what the market does X. And now I got all this money that I gave to my heirs, I should have spent it. Well, spend the money, Jim, spend it. We try to encourage our clients to spend more because you’re right. I think people get really nervous when they hit retirement. They’re on a fixed income and they don’t have a paycheck coming in anymore in this portfolio is going to provide them the lifestyle that want to at least maintain. So I get it. But. You have to make sure that you’re planning on going.

Make a plan to deal with the things you might regret in retirement: schedule an assessment with an experienced financial professional on Joe and Big Al’s team at Pure Financial Advisors now. They’ll take a close look at not only your current financial situation, but also your ability to tolerate risk, your specific retirement needs and goals, your tax liability, and many other factors. They’ll help you develop a comprehensive financial plan to reduce your taxes and make the most of your retirement, and best of all, it’s free. Click the link in the description of today’s episode in your podcast app to go to the show notes and click Get an Assessment to schedule a no cost, no obligation financial assessment at a time and date that’s convenient for you. The only thing you’ll regret is that you didn’t do it sooner.

Can I Avoid Double Taxation On My Roth Conversion? (Jeff, Lincoln, NE)

Joe: Jeff from Lincoln, Nebraska, he writes, and he goes, “Hey, I have an old 401(k) that I rolled into a traditional IRA 9 years ago. I had put $6,000 into a traditional IRA and paid tax on it in anticipation of doing a backdoor Roth. Luckily, I researched and found out that this would be subject to the pro-rata rule and didn’t do the back door Roth. My question is, can I now do Roth conversions? And with the money that is currently in the traditional IRA and just pay the tax on what has converted? The $6,000 that I have paid taxes on is really large, insignificant to the entire traditional IRA of $800,000, in essence. I would be paying double taxes on the $6,000 pro-rate amount. I really like the idea of doing some Roth conversions. Thanks. Love the show.” Good news, Jeff from Lincoln, Nebraska. You won’t pay tax on that $6,000, whatever the number is, whatever dollar that you put in after tax will not be taxed as long as you keep track of that basis, because the pro-rata rule is just that, any dollar that comes out of the retirement account or the IRA. So you have to IRAS one is worth $800,000, one is worth $6,000. So you have $800,000 and $6,000 in IRA dollars. So six thousand is, after tax, $800,000 is pre-tax. So if you take $6,000 into $800,000, which is 0.7%, that is what is going to be tax free. When you do a conversion, that’s the pro-rata rule. So if you do a conversion, you know, basically 75 basis points is going to be tax free on every conversion that you do from now until the IRA is drained.

Al: So the answer’s no. You need to pro-rata rule applies. You got $800,000 in an IRA, but you can still do conversions. You can, but you’re going to pay tax on the conversion. You’re going to pay tax on 99.25% of the converted amount. Now, Jeff, if you’ve got a side hustle or another job and you roll your IRA money back into a new 401(k), and most 401(k)s will not take after tax dollars, so you’re left with $6,000 in your IRA, then you can convert and not pay any tax. So that’s the way to go.

Joe: Yeah. So I mean, I think a couple of things is, can I avoid the double taxation on my Roth conversion? If you file an 8606 form and what that does is that says, hey, I made a $6,000 IRA contribution that had basis in it and then that shows on the back of your tax returns. So when you have the other form of what, 5490 that come out of showing what your your IRA balances are and things like that, it will show that you had that $6,000 of basis. So any distribution that you pull, you do the pro-rata rule. And like I said, 99.25% of every distribution or conversion that you do is going to be taxable. 75 is tax free.

Will Paying Off a TSP Loan with Real Estate Income Avoid Income Tax? (Sam, Orange County, CA)

Joe: We got Sam from Orange County, California, writes in, “I’m a 64 year old postal employee. I have a TSP loan of around $40,000. I am planning to retire in a few months, and if the loan is not paid off, it’ll be regarded as a distribution. I also work as a realtor and have income from that. So if I pay off my TSP loan with the income from real estate business, would that help me avoid paying tax on the real estate income since it’s going into the TSP?” Two things, OK. First of all, thanks for the question. TSP, for those of you, keeping score is a Thrift Savings Plan. So okay, you take a loan out of the TSP, Thrift Savings Plan, and if you make a contribution to the TSP, you’re not paying out the loan, you’re just making a contribution pre-tax. But you still have to be employed by the Postal Service to put money into the TSP as a contribution to get the tax deduction. If he’s paying off the loan, there is no tax deduction you’re paying off the loan with after tax dollars.

Al: Yeah, exactly. So I would say, Sam, it depends upon your bracket if you’re retiring in a few months and assuming, well, we just got this question. So that probably means in 2022, maybe we can have a lower salary in 2022. And if you need the funds for other purposes in your non-qualified account, then yeah, maybe just pay the income on it so you don’t use up those funds. I don’t know what other purposes you have for the funds, but that would be a way to think about it, which is you’ll be in a lower tax bracket, probably anyway. So maybe it’s maybe it’s OK.

Joe: So here’s here’s the math, right? If he’s got, let’s say he’s retiring. If he retires and takes the TSP out of the plan and rolls it into an IRA, that $40,000 loan will become a taxable event to Sam. So $40,000 of income will show up on the tax return. He will pay ordinary income tax on the 40 grand. Another option he has is, let’s say, he has $40,000 that is in his checking account or a brokerage account that he doesn’t need. And so he takes that $40,000 and he puts it into the TSP to pay off the loan. So he has after tax dollars of $40,000 that he pays tax on all that $40,000 goes into the TSP. And then he takes the TSP out and rolls it into an IRA. There will be no income on his tax return that year because he paid out the loan. There would be no distribution. But then 100% of the income that comes out of the TSP is going to be taxed at ordinary income rates. So then that’s where the tax rates are so important because he’s taking after tax funds to pay off a loan in a pre-tax environment that the money comes out that he just paid out the loan is going to be taxed again at ordinary income rates. So it’s almost like a double tax.

Al: It’s hard to comprehend as well, but that’s that’s exactly how that works. And so I would say, Sam, if you’ve got $50,000 outside of retirement, don’t do it because you need some capital when you retire. But if you’ve got a whole bunch of money that you don’t know to do with, then go ahead and do it. But the thing is, when you pay off the loan, you’re still going to pay tax on that eventually when it gets out.

Joe: Well, good question, Sam. Good luck on the real estate gig.

Transfer 401(k) to TSP or IRA for Asset Protection in California? (Greg, No. Cal)

Let’s go with “Hey Joe and Big Al and the glue holding it all together, Andi. I’m a longtime listener and enjoy your humor and occasional wisdom on your podcast. On your podcast while walking my two dogs that won’t let me sit down when I arrive home from work. This is now my go to relaxation activity instead of having a Cold Fat TIre Amber Ale. I have a question involving a 401(k) transfer that you may have come across with other California clients, although it does involve some legal issues, I figured that it’s a nice switch from the Roth conversion questions that you get. I am in a highly that litigious profession and recently moved to California and have a 401(k) that my old company is forcing me to transfer from their plan. My option is to roll it to the TSP account on my new job or move it to a traditional IRA. Its value is about $1.8 million, so not insignificant in terms of total retirement savings. I know that 401(k)s and TSPs are protected from seizure from lawsuits. But California law does not protect IRAs. I’m planning on retiring in 2 years age 60 and then starting Roth conversions. My liability risk will be much less by then as statute of limitations will be exceeded for most of the risk of my old job. So here’s the question would you throw some ideas for fun and whether to transfer the 401(k) to the TSP at this time for better asset protection? Or is the legal risk of going to an IRA now not really that significant? I wouldn’t have to assess to more investment choices to the IRA than the TSP. TSP, folks, is the Thrift Savings Plan. Also, the TSP is a bigger pain to move assets out of it for Roth conversions. Would a middle ground to use the TSP for 2 years and then move everything into an IRA at that time for easier management. I know you’re not lawyers, but I figured you’d deal with the risk of situations with their clients. Thanks for all your spitballing. Keep up the good work, Greg.” So a couple of things

Al: I mean, he could get sued and then those assets and we’re not attorneys, but I thought when you moved money from your your 401(k) qualified retirement account into an IRA that counted for similar protection. And you still got another 1.2, 1.3 million for just regular IRA.

Joe: So if it comes from a 401(k) versus straight IRA savings, that protection covers that. But he’s for certain like you’ll be pyles BK. But if he gets sued, it could be held liable, but I don’t know what he would get sued for.

Al: Well, we don’t. We don’t know what his job is. But yeah, there’s always more risk in an IRA than a 401(k) case. I think that I think that is right. It’s a bankruptcy only.

Joe: So you get the same protections there. If it’s in a 401(k) because it transfers with the IRA. Yes, you could be subject of someone suing you for, you know, malicious activity, but it’s got to be pretty bad. And you to be guilty.

Al: Well, not necessarily. We know the courts can work first. We settle and you know, it doesn’t always work out, so I don’t have never had experience with it.

Joe: All right. we’ve got to we’re going to get the heck out of here. Appreciate y’all again, listening to us this week. We’ll see you again next week. Shows called “Your Money, Your Wealth®.”

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That’s it for 2021! Happy New Year, YMYW family! Thank you for your questions, comments, and laughs throughout the year, and thanks as well for telling other people about the podcast. Keep doing what you’re doing, and we’ll do the same. We’ll kick off 2022 next week with a compilation episode answering your best spouse, ex-spouse and survivor Social Security benefits questions, but we’ve got sitcoms and Ginger or Mary Anne at the end of this episode in the final Derails of 2021, so stick around. 

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