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 [...]

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
February 22, 2022

Should you use money intended for Roth contributions to pay the tax on Roth conversions instead? Does the IRS really penalize ineligible Roth contributions? How will a mega backdoor Roth contribution be taxed, and will the step transaction doctrine apply? Are family Social Security benefits affected if the spouse works? Plus, $1800 a month for life, or $2600 a month for 10 years? Joe and Big Al spitball retirement pension options and they take your comments.

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Show Notes

  • (00:49) Should We Convert to Roth Rather than Contributing to Roth? (Lee, Jacksonville, FL – voice message)
  • (07:31) Does the IRS Really Penalize Ineligible Roth Contributions? (Jim)
  • (15:23) Mega Backdoor Roth: Will My IRA Rollover Be Taxed? Will the Step Transaction Doctrine Apply? (Yuan, IL)
  • (20:57) Retirement Pension Spitball: Which Monthly Pension Option Should I Take? (Luis)
  • (30:21) Are Family Social Security Benefits Affected If My Spouse Works? (Edward, VA)
  • (38:50) Comment: I Want YMYW to Look Over My Finances (Jane, Saginaw, MI)
  • (43:32) Comment: Love the Podcast (Simonetti1962)

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Today on Your Money, Your Wealth® podcast 366, does it make sense to use the money you would have contributed to a Roth IRA to pay the tax on a Roth conversion instead? Does the IRS really penalize ineligible Roth contributions? How will a mega backdoor Roth contribution be taxed, and will the step transaction doctrine apply? Are family Social Security benefits affected if the spouse works? Plus, $1800 a month for life, or $2600 a month for 10 years? Joe and Big Al spitball retirement pension options, and they take your comments. Visit YourMoneyYourWealth.com to send your money questions and comments to us as an email or as a priority voice message. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should We Convert to Roth Rather than Contributing to Roth? (Lee, Jacksonville, FL – voice message)

Joe: Lee from Jacksonville, Florida. He left us a message.

(Voice recording) “Hey, Andi, Joe and Al. Quick question from Jacksonville, Florida. We have a Roth IRA with $130,000, a traditional IRA with $120,000. We are currently near the top of the 22% tax bracket. We’ve been trying to convert IRA into traditional IRA pieces at a time, about $20,000 a year. But we’re getting to the point where we’re probably not going to get done by the time the tax hikes occur when they expire in 2026. So our question is, instead of contributing the $12,000 a year to Roth IRAs, $6,000 into my wife’s and $6,000 into mine, should we just bite the bullet and convert as much as humanly possible into the Roth IRA from the traditional using the $12,000 for taxes that we would have contributed to the Roth? We could probably complete it in about 2 years, except we would not be contributing to the Roth. We would have just rolled over everything from the traditional. Really appreciate any spitballing you can give. I am currently driving in my silver Tacoma. I’m not drinking because that would be bad and we have two cats. I emailed before, but I figured I’d give you my voice this time. Lee from Jacksonville. Out.”

Joe: Lee. Nice to hear your voice, Lee. He’s cruising around the Tacoma thinking about converting. So he wants to use some leverage. I like the strategy, but I don’t know if it makes sense.

Al: Why do you say that?

Joe: Couple of things. What Lee is trying to do is get all of his money from the traditional IRA to the Roth. So he’s got $120,000 in his IRA. He’s got $130,000 in the Roth, and he’s like, “Hey, let me bang this thing out. Let me convert 20 some odd thousand dollars a year and over the next several years, that $120,000 is now all going to be in a Roth IRA. I’ll pay the tax and we’ll be good.” I like that. But he doesn’t necessarily have to convert 100% of the IRA. Doesn’t make any sense. The strategy he’s talking about makes sense for a lot of people, but I don’t think it makes sense for Lee. So what Lee wants to do is say, you know what? I’m making Roth IRA contributions. We’re making $6,000 contributions per year for the spouse and I.
So instead of taking that $12,000, that would’ve went into a Roth, maybe we convert $30,000 and we’ll have a tax bill of $12,000. Instead of contributing to the Roth, we’ll just take that $12,000 and we pay the IRS to get the $30,000 conversion in the Roth. I don’t have a calculator. I just kind of totally made that number up.

Al: Close enough. Maybe it’s $40,000, but that’s the concept. Believe it or not, I agree with you. And the reason is because you don’t have to convert everything. If that’s your goal to convert everything, great. But in this example, you’ve got $120,000. I don’t know how old you are, Lee, but let’s just say you’re in your 60s.

Joe: Lee’s not in his 60s.

Al: I know, but I’m going to give two answers.

Joe: Did you hear his voice?

Al: No, but I’m going to give two answers for our other listeners. In your 60s, it means that your RMD is relatively close. It’s probably going to be no more than $5,000 or $6,000 per year. So it’s not a big number. On the other hand, if you’re in your 30s or 40s, which you probably are, then it’s going to grow a little bit more. The RMD, required minimum distribution, when you finally get there will be higher, but you don’t have to convert everything. Because what happens is by converting, you’re paying taxes in a 22% or 24% bracket in order to save a 12% or 15% bracket later. So that’s first of all. The concept is if you’ve only got a little bit of money, should you do a Roth contribution or should you use it to pay the tax on the conversion? I actually would prefer the tax on the conversion because then your $12,000 can get $30,000 or $40,000 converted instead of just the $12,000 going into Roth. So I like the concept. I just don’t think the numbers are high enough to justify it.

Joe: So we’re missing a lot of information, Lee. First, I think a lot of you just like to give us the IRA numbers, but you might have $2 million in a 401(k). Or there’s other retirement accounts or there’s pensions or there’s other income. So we have to map out the entire scenario for you, really, to understand. He’s kind of looking at it in a bubble. He’s like, “I’ve got $120,000 in this traditional IRA.” He might have several other retirement accounts. I don’t know. I don’t know if Lee’s given us more information in the past, but we would have to look at the entire picture. If this is just a picture of only $120,000 here, the _force out_ on the distribution is not going to be that bad where it’s going to pop another tax bracket where you could slowly do the conversions. You don’t have to get 100% of it in the Roth. But I like the concept.

Al: That’s a good point. Let’s say $2 million in a 401(k), then it would be completely different advice. Then I would say it’s a great, great plan because you’re going to want to bleed out as much as you can. And I’d rather have you use the $12,000 to pay the tax on a conversion than do the contribution.

Joe: For other listeners out there, I mean, our listeners love the Roth.

Andi: That’s ‘cause you taught them to, Joe!

Joe: So they want to look at every strategy possible to leverage the Roth.

Al: They like tax free.

Joe: Yeah, I like Lee’s point, and I think a lot of people probably should be looking at that strategy. So again, instead of taking the $12,000 from cash flow to go into a Roth contribution-let’s say that’s the only thing they can afford. There’s no extra cash flow. That’s what they’re going to say. That’s what they’re earmarked for, saving up $12,000. Does it make sense for them to convert, or to add to their savings? Well, are they on track for their goals? First of all, do they need to use that money to continue to build their nest egg? Well, that’s obvious. But if they’re close and they accomplish their goals and then they want more diversification, then you want to use that or some or part of that to do the overall conversion.

Does the IRS Really Penalize Ineligible Roth Contributions? (Jim)

Joe: I got Jim. Writes in, he goes, “Hello, YMYW. I’ll get right to the question to keep Joe’s reading to a minimum. My brother was unaware of the income limits of contributing to a Roth IRA.” Oh, of course. It was your brother.

Al: Always the brother.

Joe: “He is able to recharacterize his 2021 and 2022 contributions. However, he’s been making these ineligible contributions for the past 10 years. I’m aware of the 6% penalty per year, but am curious about the checks and balances of this error since it has gone unnoticed for so long. I’ve heard on other podcasts that in reality, he would most likely never have a problem leaving the Roth IRA contribution from the previous 10 years. Thanks for all the info you provide.” All right, let’s help out Jim’s brother here. What would you do, Alan? If you were Jim. A.K.A., Jim’s brother.

Al: Let me explain what this means. So there are certain income limitations on doing a Roth contribution. So for 2022, it’s, I think, $144,000 single. When you get to that income level, you can’t do a Roth contribution any more. And there’s a phase out before that for a married couple, I think it’s $214,000. Let’s say you make more than that and you do a Roth contribution, then what the IRS says is that by October 15th, the filing date, you’ve got to take it out. You’ve got to recharacterize that. You have to take it out because you weren’t allowed to. And if you don’t do that year after year, you have to pay a 6% excise tax. So if it’s 10 years, it could be like 60% of the account. And it’s worse because of compounding, potentially. So that’s the problem. If the IRS comes after you, they’re going to say, this is disallowed. We’re going to take all this out and you’re going to owe us this penalty, which probably in 10 years is going to be at least 60% or about 60% of the value. So that’s the risk. So the question is, should you do that? Should you go ahead and pay that? Which sounds painful. Or should you just kind of hope it never comes up? Which is what he’s asking, because he’s heard that on other podcasts. I will answer it this way. You are correct. The IRS does not have very good checks and balances on this. So I’m not going to tell you what to do. There’s a risk that this whole thing could blow up in a few years when the IRS catches up with it.

Joe: I would say if Jim does the right thing and says, “You know what? My ‘brother’ was unaware of the wild contribution limits” and asked for forgiveness, I would imagine that some of this could come out without the 6% excise tax.

Al: It’s possible.

Joe: He’s saying, “you know what, I made a mistake, I’m coming clean, I’m going to just recharacterize all of these dollars out. I will pay tax on whatever earnings that the Roth IRA grew to” and then now the money sits outside. Or you could recharacterize those 10 years or $60,000 or whatever. So, you could recharacterize those back into the IRA and then you pay tax on whatever the earnings are. So there’s different options here. Or you can just…

Al: Let it go and see what happens. Start doing it right on a go forward basis. I think that the best answer is to check with your tax professional, whether that’s a CPA or whether that’s a tax attorney. Get their thoughts. They’re probably going to tell you to pay the excise tax because that’s the right answer. What you should do. We just told you, you’ve got a couple of choices.

Joe: It’s the honor system.

Al: Yeah, but the IRS, I will say this, I’ve actually never seen them catch this sort of thing. But that doesn’t mean they couldn’t start. So there’s that risk.

Joe: What would you do?

Al: Putting me on the spot?

Andi: You would have never gotten it wrong in the first place because you would have known.

Al: I would contact my tax professional to get their advice.

Joe: I would let it ride.

Al: I probably would, too. I would start doing it correctly on a go forward basis, for sure. At an absolute minimum. But then you’re just taking a chance. Some people can live with that. Others can’t.

Joe: I don’t know how you can sleep, Jim. I don’t know how you can. I don’t know how you go to bed at night. That’s a tough one. It’s like you’ve made an honest mistake and you could get blown up. But if you come clean, in most cases, you say, “You know what? I made a mistake.” With RMD, that happens. If you forget to take an RMD or something happened or you had an extra account where you didn’t take your…You could file for certain things without the huge tax penalties. If you don’t take a required distribution, it’s a 50% tax penalty. So there’s exceptions.

Al: And we do know that one. If you don’t take your RMD, 50% penalty. Typically, the first time that happens to you, you get one pass. And it’s not guaranteed, but the IRS very often abates that penalty.

Joe: But right now, they’re filing a 5498 every year. To look at, here’s the contributions, or here’s your IRA balances and everything else. So over the last couple of years, they’re getting super tight.

Al: They’re getting tighter.

Joe: On where the money is and all of these accounts, they’re going to cross-reference. OK, well, you made a Roth contribution, or you added money into a Roth, and here’s where your income lies. It’s like – I don’t know.

Al: That’s right. That’s the thing. Can you sleep with this issue or not?

Joe: And then the auditors are going to come and then they’re going to like, “play the tape!” And there’s going to be our podcast and all the other podcasts Jim writes into.

Al: That’s why I didn’t want to say what I’d do. But anyway.

Joe: Well, that’s why we said, do the right thing and talk to your CPA. And of course, Al and I would always do the right thing ahead of time. We would never make this mistake.

Al: Yeah, we know about the rule.

Joe: Thanks for the question, Jim.

Learn all about how Roth contributions and conversions give you tax-free growth on your investments for life. Download the Ultimate Guide to Roth IRAs for free from the podcast show notes at YourMoneyYourWealth.com, and subscribe to the YMYW newsletter there in the show notes as well so the latest podcast and TV episodes show up right in your inbox. Your Money, Your Wealth TV, season 8, starts this Sunday with a Retirement Disconnect: sometimes when planning for retirement what you are doing and what you should be doing don’t match. Joe and Big Al will show you how to reconnect that plan so your retirement picture comes together as it should. Click the link in the description of today’s episode in your podcast app to download the Ultimate Guide to Roth IRAs, read the transcript of today’s episode, and subscribe to the YMYW newsletter. IT’s all free, all courtesy of Your Money, Your Wealth® and Pure Financial Advisors. Share this stuff and help us spread the YMYW word, won’t you please?

Mega Backdoor Roth: Will My IRA Rollover Be Taxed? Will the Step Transaction Doctrine Apply? (Yuan, IL)

Joe: We got Yuan from Illinois. “Hi Al and Joe, love your show. It’s entertaining and educational all at once. I learn a lot. I have a couple of questions about a rollover after tax 401(k) to IRAs. A little background information, I have a Roth IRA and a traditional IRA. Traditional IRA has 0 balance. 401(k) plan at work, pre-tax 401(k), Roth 401(k), after tax 401(k). It’s got about a $20,000 contribution, $50,000 gain. Can no longer contribute to the after tax component of his 401(k) plan. What I would like to do is roll over the $20,000 non-taxable contribution to the Roth IRA and the $50,000 taxable gain to the IRA. Number two, rollover the IRA back into my pre-tax 401(k) before year end. This is because I did the backdoor Roth conversion in January 2022. My 401(k) plan allows the above in-service rollover. My questions: Will it result in any tax? Should I be concerned with step transaction doctrine? Looking forward to listening to you on the podcast. Thank you in advance for your advice.” Yuan. We don’t give advice here. That’s one thing we do not do.

Andi: We spitball.

Joe: We chat.

Al: We chat. That’s about it. We give our thoughts off the cuff.

Joe: Advice is something completely different that you should pay a professional for. Not write in half assed questions to a bunch of knuckleheads. This is not advice whatsoever. OK, so what should he do or she do?

Al: Well, let’s see. I’d like to roll over $20,000 non-taxable contribution to a Roth from the 401(k) and $50,000 to an IRA.

Joe: Because it’s $70,000. So Yuan has made contributions of $20,000. It’s worth $70,000. They want to split it. I just want to put $20,000 of the after tax in the Roth and then the $50,000, going to put it in an IRA and I’m going to avoid the tax.

Al: Yeah, so that works.

Joe: I don’t think it does.

Al: You don’t?

Joe: No way.

Al: Why not?

Joe: Because the $50,000 of gain came from that $20,000. Remember before you had to do all these hoops? That’s why you gotta convert the after tax right away, because if you have any gain, it’s going to be taxed.

Al: So I read that differently. I was thinking it was an after tax contribution, but I guess, he says, a non-taxable contribution.

Joe: It was an after tax contribution, but he never converted the after tax contribution. The after tax contribution has grown now to $70,000.

Al: Ok. But is this a 401(k) or an IRA? It doesn’t say.

Joe: After tax 401(k) $20,000 contribution. $50,000, no longer contribute to this. So you’re saying he could take the $20,000 of after tax, even though that $20,000 grew to $70,000?

Al: Not in an IRA, in a 401(k). In a 401(k), the after tax contribution, you could put that into a Roth IRA. The growth has to go into a regular IRA.

Joe: OK, I’ll buy that. And so he just gets two checks. Put the $20,000 into the Roth, $50,000 in, and then he wants to roll the $50,000 back into the 401(k) because he did a backdoor Roth. And then when the backdoor Roth is going to mess up his pro-rata rules. I think he can do that as well.

Al: Me too, as long as it’s done by year end. Because it’s your IRA balances at year end that count for the back door Roth calculation.

Joe: The only biggest issue here is if they change the rules, which is on the docket. So what he’s trying to do is the mega backdoor. So he’s got $20,000 of after tax that he never converted. So he’s like, can I move that $20,000 dollars? And the $50,000 of gain? When did he do the after tax, I wonder? Or why?

Al: I don’t know, but I thought the law didn’t change because it didn’t pass.

Joe: No, I’m with you. I just read something with _Mr. Sleight_ saying I would wait.

Al: You’d wait because it may change and it may go retroactive. That could be.

Joe: But step transaction? I don’t think so, because they’re already allowing the backdoor. Unless they change the law, then you’re going to have to unwind everything.

Al: I agree with that. I wouldn’t worry about the step transaction. My guess is if they change the law, it’ll be for next year. But you never know.

Retirement Pension Spitball: Which Monthly Pension Option Should I Take? (Luis)

Joe: Let’s move on to Luis. “Hello Joe, Big Al, Andi. I thoroughly enjoy your podcast. It’s my favorite financial podcast as it’s just the right mix of reliable information and humor. I would greatly appreciate your insights on my financial situation. For purposes of identification, I’m partial to 805 Ale Beer. I drive a Tesla Model Y. I’m 65 years old, married and recently retired. I have significant RMD starting at 72, based on a projected $2 million in IRAs, currently about 1.3 million and 80%/20% stock/bond mix. I’m planning to start yearly Roth conversions in 2022 until age 72, sticking about $75,000 to $100,000 a year to at least the top of the 22% tax bracket of my taxable income of about $90,000. My yearly expense will be $140,000. My pension will provide $80,000 of yearly income. I plan to receive my Social Security payments of about $2,400 a month at FRA. I will start taking monthly annuity payments from a deferred annuity in January 2022 which, when added to my pension and Social Security, should cover most of my expenses. I have two options for receiving monthly annuity payments. One option is to take the lifetime monthly payment of $1,800 a month. The second option is to take $2,600 a month for 10 years.” So Luis would get $2,600 guaranteed until he turns 75 if he took it at 65. “I am leaning towards the second option because it gives me more income over the next 8 years when I plan to be more active before I start taking RMDs at 72. Choosing the second option would leave me with no annuity payments after the age 74 so that I would have less income at the same time that I would be taking RMDs and therefore reduce my tax bite than if I opt for lifetime annuity payments. I would appreciate your perspective which annuity option would make the most sense. Also, whether based on my circumstances, you might feel that taking Social Security at a different point than FRA would be more advisable. Thank you for considering my question and for all your contributions to financial literacy. Regards, Luis.”

Al: Very nice, formal closing. I like it.

Joe: OK, I would not do his plan.

Al: What would you do?

Joe: I need to know a little bit more about these annuity options. Is he buying? Is he taking a lump sum and is he buying a fixed or is it a variable annuity that has a guaranteed income on it? Is he buying a _median_ annuity? I’m not sure what that is. Or is it an annuity payment from his employer?

Al: That’s what I’m assuming.

Joe: So let’s just assume that it’s from his employer.

Al: That makes this easier to answer.

Joe: Because if it was a commercial annuity, I would not probably advise that route. Because what he’s doing, he’s adding more income on his tax return than potentially he needs to. And all that does is just create a little bit more tax by being locked into a certain rate. I like guarantees and so if you like the guarantees and you want the guarantees by all means, take the guarantees. But is there a better way to do this? Maybe to preserve more capital and pay less in taxes? The answer could be yes. Maybe yes. I would push out Social Security as long as I could, because then that’s going to increase your guarantee at age 70. So you get that 7% delayed retirement credits each year that you wait after your full retirement age. You have plenty of assets. You’re going to have a couple of million dollars sitting in retirement accounts and you’re worried about the RMD that’s going to create a lot more tax on it. So you’re thinking about this conversion strategy of converting $400,000 or $500,000 over the next several years and you’ll end up paying roughly about $100,000 in tax. But it could be more than that because you’re adding more income on the tax return. You want to reduce the amount of income as much as possible on your tax return as you’re doing a conversion strategy. So you wouldn’t want to lock in a high annuity payment if you could push that out to a later date as you’re converting.

Al: That’s a good point. In other words, if you’re trying to get as much converted as possible, then you’d actually want to take the lower annuity payment, just so you have less income so you can convert more. I actually ran a little math on this, Joe and this would be at a 6% discount rate, which basically means 6% would be your earnings rate, just if you make that assumption. So a 10 year certain period works out to about $234,000 present value. That’s just a reference point and doesn’t really mean much. That’s just the number. And if you do the $1,800 a month, it takes about 18 years to equal the $234,000. So if you just do straight math, if you’re going to live more than 18 years, you’re better off taking the lifetime at $1,800 a month. If you’re going to live less than 18, if you’re just looking at this in a bubble, then you would take the 10 year. Now, when you add on Roth conversions to the top of this, I would agree because it’s an $800 difference in payment and that’s about $10,000. If you took the lower payment, you could do a $10,000 additional Roth conversion each year and stay in that lower bracket until you get to RMDs. I do also like the idea of pushing out Social Security, but we don’t have all the facts, Luis. But at least based upon what you’ve told us, that’s probably what I would do. I would take a look at what I felt my life expectancy was. I’m actually personally fine with the $2,600 for 10 years if you need it, if you want to live it up and spend it.

Joe: Luis is very similar to a lot of people as they approach retirement. Because you’re giving up a paycheck. You and I receive paychecks from our organization. We’re used to receiving a direct deposit of cash into our checking account bi weekly or monthly. And then when people retire, they want to replicate that as much as they can. That’s why so many people take Social Security so early, because then they feel a little sense of security, no pun intended there, that they get that payment. They get some cash flow into their checking account. And then it’s like, “Oh, well, maybe I convert this to an annuity and I get this guaranteed income flow. So if the world goes to hell in a handbasket, at least I have a certain fixed income that I know that I can live up to.” Which is perfectly fine. That is a great strategy if you have that risk aversion. But then if I look at his portfolio, he’s 80% stocks. You just retired. So he’s got his head–and no offense, Luis—you’ve got your head in the freezer and your feet in the oven, and you’re trying to stay warm. You’re taking all these guarantees on one side and you’re taking on tremendous risk with your liquid assets on the other side. I think you just want to maybe take a look at a lot of different scenarios just to figure out exactly what he should be doing. If he does this strategy that he proposed, I think he would be successful. But what’s the overall goal? Are there better ways to tweak this? I think the answer’s yes.

Which pension option works best in your specific financial situation? Is a Roth conversion or a backdoor or Mega backdoor Roth conversion right for your plans for retirement? When and how should you claim Social Security? You can make these decisions on your own, but if you make the wrong choices it could mean throwing away money for years to come. Go to the podcast show notes at YourMoneyYourWealth.com and click “get an Assessment” to schedule a free financial assessment with one of the experienced financial professionals on Joe and Big Al’s team at Pure financial Advisors. Pure Financial is a fee only financial planning firm, and they’re a fiduciary. They won’t sell you investment products and by law they must act in the best interests of their clients. Get a professional assessment of your entire financial picture, and get the help making those decisions that have such a huge impact on your retirement future. Click the link in the description of today’s episode in your podcast app, then click “Get an Assessment” to schedule your one-on-one video meeting at a date and time that works for you.

Are Family Social Security Benefits Affected If My Spouse Works? (Edward, VA)

We got Edward from Virginia, he’s got a little follow up question. He goes, “Hey Joe and Al. This is a follow up from my question on 348. Social Security question had to do with me collecting Social Security early so that my younger wife and younger son can collect family benefits up to the family max. A question I forgot to ask. Will my wife’s Social Security benefit she receives for caring for our young son and me collecting Social Security be impacted if she were to work full time and earn over $20,000? I know Social Security has rules for me earning more than a set amount before Social Security payments are reduced temporarily, but does that same rule apply to my wife collecting family benefit procurement for our minor child? Thanks, as always, for your wisdom and insight. I will toast both with a Little Sumpin’ Sumpin’.” So let’s break this thing down just a little bit more. So he’s collecting Social Security benefits, but then he also has a family benefit. He has a younger wife and a young son that can collect as soon as he starts collecting his benefits. So if he collects benefits, it turns on this whole smorgasbord of benefits for the family.

Al: A possibility of other benefits if your kids and/or your wife qualifies. And there’s two kinds of child benefits. There’s the child benefit, which is when your child is under 18, I think that’s the age, and it goes further if they’re disabled. That’s a whole nother topic. But there’s also a child in care benefit for the spouse. In other words, a spouse that’s not working or working very little can take care of the child and receive child and care benefits, which are in addition to the child benefits that the child gets.

Joe: And then there’s a family maximum that you add up all of the different benefits and there’s a certain max that the whole family can receive. Because Edward, I remember answering this question, he’s a little bit older and his wife is a lot younger than him, and he has a very young child. So he was in the 60s and he’s got like a five year old.

Al: And the child in care benefit, I think they have to be 16 or younger or maybe it’s under 16, but something like that.

Joe: It doesn’t come up very often, and I think we’re going to see it come up a lot more often because people kind of push off marriage, they push off having kids. And then bada boom, bada bing, you’re in your 60s and…

Al: You’ve got a young child.

Joe: So what he’s asking is that there’s this rule. If you claim benefits on your full retirement age, there really is no reduction of benefits. If you claim your benefit early, so from 62 to 66 and 6 months or whatever your full retirement date is, there’s going to be a benefit reduction depending on how much money that you make. And there’s different thresholds depending on when your birthday is. So the year you turned your full retirement age, there’s a certain dollar amount that you can make. I believe it’s like 50 some odd thousand dollars.

Al: $51,960

Joe: Okay. $52,000. You make more than that, every $3 that you earn they take a buck back. Prior to the age of your full retirement age., if you make more than… what is it?

Al: It’s $20,000. $19,560.

Joe: So if you make more than $20,000, every $2 that you earn they take a buck back. Really, what happens is if you make, I forget what the crossover is, but let’s say, $60,000/$70,000, the benefit basically goes away. But it’s not like they’re taking your money away. They just assume that you didn’t claim it. And then you’re going to receive a higher benefit the following year, depending on what your income is.

Al: That’s a good point I don’t think people realize. If you exceed the earnings for the earnings test and you have some of your benefits taken away, you will get them back later when you actually can receive your full benefits.

Joe: Because if you take it at 62, let’s say your full retirement age is 66, you take it at 62, you get a 25% reduced benefit rate. So if your benefit is $1,000, you take it at 62, your benefit is $750. But all of a sudden, if you’re making earnings and you make more than the earnings test that wipes that out, they’re going to be like, “Well, you shouldn’t have claimed. You make too much money.” So they’re going to take that money back. And then let’s say the following year you don’t have any earned income. They’re just going to assume that you claimed that at 63. So instead of a 25% reduced haircut, you’re going to have a 23% reduced haircut. Give or take. But the issue that happens is that when people do that, they get the benefit because the Social Security Administration has no clue how much money you’re making until you file your tax return.

Al: When the year is already over.

Joe: So they’re going to pay you. And then next year, you’re not working and you’re looking for that Social Security check. Guess what? It’s not going to come. So they’re going to say, “OK, even though you qualify for the benefit because you’re not working and you are not subject to the earnings test. We gave you the money last year, so we’re going to get trued up before any more dollars from Social Security can come to you.” So he’s asking if the same rule applies for my young spouse that is taking care of my child if she is making more than $20,000? And we believe that the answer’s yes.

Al: The answer is yes. The earnings test does apply. There’s a lot of differences, though. This is a spousal benefit, it’s different from a normal spousal benefit. In other words, when you turn 62 and you’re receiving a spousal benefit, if you elect to claim it, your other spouse is claiming benefits and you’re getting half of their full retirement age discounted for the fact that you’re starting it early, then you essentially are getting a lesser benefit yourself for life. But in this case, the spousal benefit for child in care doesn’t impact your benefits at all, whatsoever.

Joe: That was pretty hard to follow.

Al: I know I didn’t even understand it when I was saying it.


Joe: It looked like you had a mini stroke.

Al: You know when you go down a path and you go, “Oh, I really shouldn’t have done that.” But it’s too late.

Joe: It’s way too late. “So the spousal benefit, blah blah blah”

Al: I had to go way outside the box to get back to the box. Yes, I’m aware that that didn’t make any sense. So you translate it.

Joe: So the spousal benefit on social security…

Al: Yeah let’s see you do it.

Joe: We got to explain what the spousal benefit is. If you’re married and you have a spouse, the spouse can claim 50% of your benefit as long as you’re claiming your benefit.

Al: As long as they’re 62 or older.

Joe: If they claim their spousal benefit, which is 50% of your benefit or theirs, if they claim it early at 62, they’re going to receive a reduced benefit. It’s not going to be 50% of the spouse. It’s going to be something significantly less. It’s about 33%.

Al: So that’s when I said, roll the tape back.

Joe: Yes. However, the reduction of benefit for spousal benefit does not apply to the child in care spousal benefit.

Al: Yes, that’s true, which is also what I said.

Joe: Thank you.

Al: So maybe the two times we said it, someone might have a chance.

Joe: Yeah, of the .5% of the population that it even just applies to. There’s Edward in Virginia, and there’s like, Tommy in Wisconsin, those are the only two.

Al: The only two that we know of.

Joe: And Donald T in D.C.

Al: Yeah, we do know about that one.

Joe: Yeah, he’s got a young kid.

Comment: I Want YMYW to Look Over My Finances (Jane, Saginaw, MI)

Saginaw, Michigan, Jane writes in, “Hi. Appreciate all of the great information you put out on your podcast. I would like to have YMYW look over my finances and give a suggestion. I want Al to do it. I believe he is the most knowledgeable tax planner I’ve ever listened to or hired.”

Al: Wow.

Joe: She hired you?

Al: No.

Joe: She’s got a little secret man crush on Big Al?

Al: But it sounds like maybe she wants to.

Joe: “Joe is awesome at investments…” No, I’m not. I’m not awesome at investments.

Al: Actually, you’re very good at financial planning strategies.

Joe: Yes. I’m not very good at investments. “…and would appreciate his input as well.” You want my input on investments…

Al: Explain the stable value fund, please.

Joe: Yeah. It’s a fund that is stable.

Al: Right, and it’s valuable.

Joe: Well, you know the value of it is pretty stable. “I imagine you hire great advisors, but honestly, I would fly to California if I could enlist Al and Joe’s help personally. Is that a possibility?” Absolutely not, Jane. Sorry. “Thanks, Andi, for keeping the show moving. You all are fantastic. P.S. – I like pomegranate juice with pear Absolut for my cocktail and all day IPA or Miller Lite beer. No drinks until February. I’m doing the dry January challenge.”

Al: Oh, are you doing that? Or did you do that?

Joe: Well, it’s in February now. Did I do the dry January challenge?

Al: Yeah. Weren’t you talking about that?

Joe: Yeah, I made it 3 days. No, I didn’t do it.

Al: I didn’t even know about it.

Joe: I think it’s every year. I guess when you blow out the holidays.

Al: Sure, with New Year’s Eve.

Joe: I guess. I don’t know. Some people just go on a couple of week bender.

Al: The party for all parties.

Joe: Your Christmas party after Christmas party after Christmas party.

Al: And then the family comes over and then you drink more.

Joe: Yeah, then it’s like, OK, I’m shutting this thing down for at least a month.

Al: I’m going to go to the gym, not drink, cook and eat well.

Joe: No, I didn’t do that. I don’t drink during the week.

Al: No, you’re pretty good.

Joe: Just the weekends because I get up fairly early. If I even have one beer during the week, I don’t know the next day I would just… I like to stay sharp. Not like you, Big Al, where you just get those IPAs going during your lunch hour.

Al: Actually, that’s not true. But I might have a Coors Light each day. But I’ve learned this about myself, I can handle maybe one IPA on a weekend day, is about it. And if I have two I get a headache.

Joe: Well how about that one time? You couldn’t even do the radio show live when we were doing it live back in the day.

Al: Yeah, I had four of them. It was my 50th birthday, which seems like just yesterday, but it was a little while ago. And yeah, I didn’t feel that well, did I?

Joe: Yeah. It’s like, “Oh, you gotta do the show by yourself.” Gotta find a sub.

Al: Find someone else. I remember that one time in the studio you told me, you grabbed the trashcan and you said, “you’re going to have to carry the show because I may not make it.” That was live radio back then.

Joe: That was live.

Al: Remember that?

Joe: Yes, I do.

Al: You held it together, though.

Joe: I did. I was totally fine. I just had a little flu bug.

Al: It was a little flu from the bottle.

Joe: No. Oh no. There were just… bugs.

Al: Bugs in that beer.

Comment: Love the Podcast (Simonetti1962)

Joe: We got Simonetti.

Andi: I think it’s Simonetti 1962.

Joe: I’m so good. A year ago, there’s no way I could have pronounced that.

Al: Yeah, you’re killing it.

Joe: “Love the podcast. Joe, Al, and Andi are the perfect team and deliver great content in a light of humor style.” This is a little review we got. So we finally got a positive one. A little 5 star banger here. So we appreciate that, Simonetti. Usually it’s one star.

Al: Yeah, you get a thing each week from the ninja. It’s like, when are you going to go off the air?

Joe: Folks, this show’s not a show without your money question, so keep them coming each and every week. We really appreciate you writing to us. I don’t know how you continue to do this as I just butcher names and make fun of the questions themselves. You guys barely give us any information to go off of, but we love each and every question, so keep them coming because we will stop the show if you stop the questions, so bring them in. Thanks for listening. We’ll catch you next time. Shows called Your Money, Your Wealth®.

Lil Sumpin’ Sumpin, Luis, Tesla, and what we’re watching in the Derails at the end of the episode today, so stick around. 

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