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 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 moderator for the firm's digital events. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm [...]

Published On
May 10, 2022

Joe & Big Al talk strategy for converting to Roth and paying tax from the IRA when you have limited funds, eliminating required minimum distributions (RMD) on a Roth 457 and avoiding the 5-year Roth clock, and Roth TSP strategies. Plus, the fellas spitball pension options, retiring early, and an intricate – and potentially risky – deferred compensation strategy.

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Show Notes

  • (00:47) Funds Are Limited. Should We Convert to Roth and Pay Tax From the IRA? (The DUKE, TN)
  • (06:31) How to Eliminate Roth 457 RMDs and Avoid the 5-Year Roth Clock (Steve, Seattle, WA)
  • (10:28) Roth 457 vs Roth IRA and Pension Options Retirement Spitball (Clay, Westerville, OH)
  • (21:15) Go All-In On Roth TSP? Early Retirement Spitball Analysis (Rob, VA)
  • (29:21) Deferred Compensation Early Retirement Spitball Analysis (John, Nashville, TN)

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Today on Your Money, Your Wealth® podcast 377, Joe and Big Al talk strategy for converting to Roth and paying tax from the IRA when you have limited funds, eliminating required minimum distributions on a Roth 457 and avoiding the 5 year Roth clock, and Roth 457, Roth IRA, and Roth TSP. Plus, the fellas spitball pension options, retiring early, and an intricate and potentially risky deferred compensation strategy. Get a spitball analysis of your own: visit YourMoneyYourWealth.com and click Ask Joe and Al On Air to send in your money questions as a priority voice message or as an email. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Funds Are Limited. Should We Convert to Roth and Pay Tax From the IRA? (The DUKE, TN)

Joe: This is from The DUKE. The DUKE.

Al: The DUKE. That’s a great name.

Andi: Capitalized too. DUKE.

Joe: It’s all capitalized. “Love the YMYW podcast here in East Tennessee. Should I do a partial Roth conversion before I retire in 2026 at age 69? Should I pay federal income taxes from the IRA funds to save double taxes on long-term growth if we live to our 90s, like the last two generations of both families? My wife is 61 years old, a caregiver, and plans to start Social Security at age 62. The income is $80,000, 12% tax bracket. Pre-tax IRA balances are $256,000, Roths, $100,000, and emergency cash $22,000. Currently save $17,000 per year into my Roth, wife’s Roth, and my 401(k) Roth contributions. I pay tax on the 2021 $50,000 conversion by lowering the 2021 Roth contributions and feel this was a mistake since I only have 48 months of income to support Roth contributions. Almost forgot, 1996 F150 or 2006 accord.” Okay. I like the total different cars there.

Al: Yeah, you bet. Right?

Joe: I guarantee that’s The DUKE’s. He’s “got no pets, Southern sweet iced tea.” You ever had sweet tea there, Big Al?

Al: I have. I don’t like it. It’s too sweet for me.

Joe: Oh man. I used to be a bartender in Florida when I went to school.

Al: You did. Yeah.

Joe: The amount of sugar that we would put-

Al: I can imagine. I can taste it. As soon as I sip it, it’s like no, it’s not gonna work for me.

Joe: It’s all good. Or Bud Light, whichever works.

Al: That does work for me. Just FYI. Or FWIW.

Joe: FWIW. So he wants to do Roth conversions. But what he did is he lowered his contributions to pay the tax on the $50,000 conversion. And he was like, well, this is a mistake. So then he’s asking should I pay the tax out of the IRA to do the conversion? You lower your contributions and you do the conversion. You pay the tax outside versus paying the tax, but he’s in the 12% tax bracket. So it’s not going to hurt him.

Al: I think if there’s limited funds and you can only do a conversion versus a contribution with the same funds, I kind of like a contribution because the tax that you pay is a lot less than what you’re going to contribute. So you get a lot more money into a Roth IRA if funds are limited. But I guess based upon what we have here, there’s not a lot in the taxable IRA, $256,000 right now. And you know, maybe by RMD- let me finish. Okay. Yeah. I can see how that came out poorly. What I meant to say, let’s call it $400,000 when he retires, but then you multiply that by 4, that’s $16,000 of RMD. That’s what I meant to say is not that much. Not that $256,000 is not an inconsequential balance.

Joe: The RMD is not going to potentially blow them up into a large tax bracket.

Al: Yeah. That was my point.

Joe: So I like it- let me rephrase what Al said. Because what he meant to say is to do the conversion versus the contribution with limited funds. So if you have $7000 that you could, that you have as free cash flow, and you can take the $7000 and you can make a Roth IRA contribution. Or you can take that $7000 and pay the tax on the conversion. So if he did a $50,000 conversion and he’s in the 12% tax bracket, let’s say, 12% on $50,000 is $6000. So you could get $50,000 roughly or more than $50,000 into the Roth with a $6000 cost. Or you take the $6000 and directly contribute that to the Roth IRA and have the $6000 compound 100% tax-free. Our point is you could get leverage again. Now you’re leveraging tax versus debt. You could get a lot more money into the overall Roth instead of making those contributions. You just hold back on the contributions and do the conversions and you’re going to have a lot more money. But then I think that the issue is that you have to look at it to see, well, what tax bracket is The DUKE gonna be in? Does it make sense for him to pay, how much conversion is he going to do if he forecasts out to say, here’s my required distribution, here’s my Social Security. We don’t know what other income sources that The DUKE has. He could have a giant pension. So from there, it’s like, okay, well, you might be in a higher tax bracket in retirement because of all your other income sources. So yeah, you want to convert to the top of the 12% or whatever tax bracket. But if you’re going to remain in the 12% tax bracket, even with your RMDs, well, then you just want to be sensible on how much that you convert. You don’t have to convert everything. Because those dollars from the RMD might not throw you into another tax bracket, even though tax rates are going to go up. I still like the strategy, but I guess it’s just doing a little bit more math.

Al: And I think that virtually anybody, Joe, that’s in the 12% bracket, and if you can convert to the top of the 12% bracket, that’s almost always a great idea. But to go into the 22% bracket, which is the next bracket, if in fact in retirement, you’re going to be in the 12% with an IRA balance that we see here, it probably wouldn’t make a ton of sense.

How to Eliminate Roth 457 RMDs and Avoid the 5-Year Roth Clock (Steve, Seattle, WA)

Joe: I got Steve writes in from Seattle, Washington. He goes, “Hello Joe Big Al, Andi, love the show, listen to every episode.”

Andi: Me too.

Joe: Al and I do not. “I have a question about employee Roth plans. I know you’ve discussed this topic a little in your previous podcasts.” A little?

Andi: I think he might be being facetious.

Al: It’s possible.

Joe: “I know you have discussed this topic a little in previous podcasts and that the answer depends on what the employer plan allowed. Could you talk about this again?” Yeah. What the hell? Let’s rip it out. “I plan to retire in 4 more years at age 65. I’m contributing to a Roth 457 with my employer. Here’s what I’ve gathered from previous shows. Employer Roth plans, 401(k), 457, etc., will have an RMD, even if they’re not taxable. Employer Roth plans can be rolled into a Roth IRA to eliminate the RMDs. However, I read this could trigger a 5-year rule specific to this type of rollover. Is that correct? I called my plan custodian and the associate said my plan does allow for this type of rollover. He suggested that I could do a custodial transfer for my Roth 457 to an existing Roth IRA I have at another custodian I opened up 13 years ago. This associate wasn’t completely sure what the exact federal rules would be though. I wonder if you could discuss this in greater detail, assuming an employer plan allows it and what would the possible solutions be? Are there any drawbacks or pitfalls?” He wants to eliminate the Roth 457 RMDs. He wants to avoid the 5 year holding rule and he wants to consolidate to one Roth IRA, if it makes sense. “Looking forward to more great content.” Yes. So here’s the rule. If you have an existing Roth IRA, and that Roth IRA satisfies the 5-year clock, any dollar that is put into that Roth IRA will go by that Roth IRA’s 5-year clock. So if you move money from your Roth 457 plan into your existing Roth IRA, your 5-year clock is satisfied. If you move the Roth 457 plan into a new Roth IRA, you will have another 5-year clock, because it’s a new Roth IRA. So you wouldn’t want to do that because your goal is to consolidate. Put it in the existing Roth IRA and you are good to go, sir.

Al: Then you would eliminate the RMDs on the 457. You’d have no problem with the 5-year holding period and you can consolidate everything into one account. I like it. Go for it.

Joe: Very good.

Kiplinger calls investing in a Roth account “one of the smartest money moves a young person can make,” but those 5 year Roth clocks are tricky, so make sure you understand them thoroughly before you make any further moves! Learn all about earning tax free growth on your investments for life when you sign up to receive The Complete Roth Papers Package. You’ll get, not only the 5 Year Rules for Roth IRA Withdrawals, but also the Roth Basics Guide, and the Ultimate Guide to Roth IRAs. From eligibility to income limits to the differences between the traditional IRA, Roth IRA, and Roth 401(k), and most importantly, Roth tips and strategies to make the most of your retirement savings – you’ll get it all. Click the link int he description of today’s episode in your favorite podcast app to go to the show notes, read the transcript of today’s episode, download the Complete Roth Papers Package, and share the show and the financial resources – all for free, all from Your Money, Your Wealth®.

Roth 457 vs Roth IRA and Pension Options Retirement Spitball (Clay, Westerville, OH)

Joe: “Clay from Westerville, Ohio. Westerville. I don’t know where that is.

Al: One thing it’s in Ohio. I can tell you that.

Joe: Okay. “I just found the show and I’ve been binge-watching.” Wow. What are these people doing, binge-watching?

Al: Have you ever binge-watched our show?

Joe: No, I’ve never seen it.

Al: Never, ever seen it.

Joe: I’ve never seen the show. I’ve listened to a couple. Andi did a really good job, I don’t know, a couple of years ago on the Best Of, or something. I listened to that.

Andi: A couple of years ago, he listened to one.

Joe: She did like a montage of something and she asked me to listen to it.

Al: Got it. Okay listened to that. You did that.

Andi: (whispers) I “asked you” to listen to it…

Joe: I did that. Yeah. I was on the ride to Palm Springs. So I thought-

Al: Got it, yeah, you might as well. And I’m probably about the same. I have heard our shows before, but not that frequently. Cause I mean, once through is enough, right?

Joe: It is. It’s the same show over and over and over again. But he’s bingeing. I’m bingeing The Last Kingdom, I think it’s the name of the show? Have you seen that?

Al: Have not, I’m not bingeing anything right now.

Joe: No? Yeah. You’re just drinking Mai Tais, chilling and-

Al: I’m drinking Mai Tais, enjoying the waves and the ocean.

Joe: Hanging loose, brah.

Al: That’s right. You know, the Hawaiian “hang loose” is that- do a little wiggle there.

Joe: Got it.

Al: Just so you know.

Joe: Thank you. So he’s binge-watching, he’s got a little Dr. Pepper Zero, just pounding away the Dr. Peppers, just absorbing Your Money Your Wealth®. Just can’t get enough of it. He’s got a 2008 Honda CRV with a double doodle roaming in the house.” A double doodle. Uh. “42. Wife’s 40. I make about $135,000. The wife stays home with the kids. We have approximately $650,000 in my governmental 403(b), all pre-tax, and $350,000 in a Roth.” Man. At 42 years old? Wife at home with the kids? The guy’s killing the game.

Al: Impressive.

Joe: Very impressive. Got $1,000,000. “Our best case is retirement at 58, with $3,500,000, which we’re on track for at a 6% rate of return. If we were to hit that number before 58, I could retire before that, our mortgage would be paid off, and likely need about $75,000 in income. We currently save 25% of our income. I max out both Roths and just started contributing to the 457 Roth option. We do not pay into Social Security, so there’ll be no Social Security income.” He’s got a couple questions. “1) Should one maximize Roth 457 first instead of our Roth IRAs, because of the additional flexibility it grants to us to get- it grants us to get us to 59 and a half and also help solve for the ACA credits in the future. I also have $100,000 in a retirement medical account, like an HSA after you retire, which will likely be about $200,000 at that time. So in theory, I could just pay for health insurance out-of-pocket, as well as draw on those funds in doing some Roth conversions of my 403(b).” So couple of things. With the 457 plan, there’s no 59 and a half. Everyone kind of gets confused on, when can I take money out of my account? In a 401(k), as long as you separate from service, the age is 55. It’s not 59 and a half. With IRAs, individual retirement accounts, it’s 59 and a half. However, Roth IRAs are totally different than that as well because you have access to the contributions at any time. So if he’s making $100,000 contributions for the next several years, he always has access to that because it’s first in first out. The earnings or the growth of the overall Roth will need to season for 5 years or until he turns 59 and a half, whichever is longer. So, should he stick with the Roth IRA or go with the 457? If I was sitting in Clay’s shoes, drinking my little Dr. Pepper Zero with the little dopper doodle, I would go 457. I don’t know. What about you, Big Al?

Al: Yeah, because you can put a lot more in, right?

Joe: Putting a lot more in, you have a lot more flexibility. Um, yeah, I think, do that all day long. Your paycheck, it’s easier. You don’t have to take it out of your savings account.

Al: And then there’s ACA credits, which we should explain that, Affordable Care Act credits. So this is to help you pay for your insurance when your income is low. And so what people tend to do is they try to keep their income low enough until they get to age 65, Medicare age, where they can then get credits and get help on paying for health insurance. And if you’re able to draw money out of Roth IRAs, or you’re able to draw money out of your savings, or maybe a non-qualified, non-retirement account and you don’t have a lot of taxable gain, then that can work.

Joe: Because then the income is virtually zero.

Al: Correct.

Joe: Right. Okay. Number 2) here, is that, “how do you guys look at pension options? A 403(b) can be completely or partially converted at 55 to a pension as I choose the self-directed plan, not the guaranteed pension option when I started 20 years ago. I will have a COLA that matches CPI, but can’t exceed 3%. Traditional view is that a 6% distribution to take it and I liked the idea of converting some of it to create an income floor, conservative portion of assets, similar to Social Security between $25,000 and $40,000. But I also feel like I could take the money. I’d allocate the pension and create my own, while controlling my taxes with our Roth IRAs and possibly converting some of those balances to Roth. Just curious how one would spitball that. I am aware that I’ll likely die first and want to keep things as simple as possible for my wife. Really appreciate it. Loyal listener now.” Yes. Clay. Look at that, he’s already thinking about death. The guy’s 40.

Al: Yeah, 42. Is that something you think about these days?

Joe: I think about it every day. Every day I drive into the office and I’m like, I just wish this semi would just take me out.

Al: It’s like, I’ve had enough. I’m in my 40s. Good enough.

Joe: I killed it. Got married.

Al: Killed it.

Joe: A month in? I’m ready.

Al: I got a great legacy.

Joe: Bucket list.

Al: Take me now. Got it.

Joe: No, I don’t really think- I love life. I love my life. I’m a happy-go-lucky guy. But he’s responsible. The guy’s got $1,000,000 at 40. Of course, he’s thinking about his wife and estate planning and getting things dialed in there. How do we look at- well, there’s a lot of calculation that goes on in looking at, do you take the pension or the annuity stream versus the lump sum? In some cases it makes a lot of sense to take the lump sum and he’s right on track, because if he takes the lump sum, then he could create his own income from the overall portfolio. He could control his taxes, he can do conversions. He’s already got a lot of money in Roth. He’s doing the right things. He’s going to have even more money in the Roth because we just told them to max out the 457 Roth. And so he’s going to control his taxes quite a bit. If he takes the annuity, well, then that’s a guaranteed income floor- he doesn’t have Social Security. So then it’s like, at least I need some sort of floor of income. I’m going to have a lot less balance. And if I pass away, that income could stop either at his life or his spouse’s life. So it really depends on what’s the pension payment versus the lump sum? So there’s a calculation there to really determine kind of what the internal rate of return that you’re getting from the pension. Then it also deals with your risk tolerance. I mean, a lot of people like that floor. So then take the floor. Because you’re going to have a ton of other assets as well. So, he’s got to do a little bit more calculations here, but I think he’s right on the right track of at least thinking about it. But yeah, I would- if he doesn’t have Social Security, I would probably take the pension.

Al: I would probably take the pension too. And the reason is because 6% is a decent payout and it’s got cost of living increases. A lot of times with pensions, maybe they start around 8%, but there’s no cost of living increase. So by the time you get 10, 20 years in, it’s a lot lower payment in terms of purchasing power. It’s the same payment, but it will buy you a lot less because of inflation. So I kind of like that too. Plus the fact that he’s got, they have, so many other assets to utilize for other purposes, particularly they’re thinking $3,500,000. Yeah, I think I would take that, but I think that’s how I think about it. It’s just like you said, Joe is, you do the calculations, you see what’s going to be better, but in this case, I would probably lean towards the pension based on what I see.

Joe: Right. Well, let’s say if he doesn’t take the pension and then you look at his income needs, what is the burn rate? What’s the distribution rate, is what he really needs to figure out. So he wants to spend $75,000 today, forecast that out with a 3.5%, 4% inflation rate to see what that number is. And if he takes the pension, let’s say that’s $90,000 of income need, and he’s got $50,000 coming in from pension. So now he’s short $40,000, he’s got $4 million. That’s a 1% burn rate. Okay. That’s pretty healthy. Or you take the lump sum and you do the same number. Maybe it’s a 2.5% distribution rate. Well, that’s still pretty healthy. But if you’re running into 4% or 5% burn rate on that money, then it’s like, okay, well probably the pension might make a little bit more sense because you’re going to have to take on more risks in that overall portfolio, and he wants to retire early. And he’s probably going to have super longevity, just because the Dr. Pepper Zeros-

Al: Instead of beer? Or harder-

Joe: Cocktails? Yes.

Al: Well, you actually brought up a good point. So health does come into this. So if you think you and your spouse, if you get the survivor benefit, have impaired life expectancy and you’ve got kids, maybe you do want the lump sum, so you can maximize that for the kids. So there’s a lot to consider really.

Joe: Cool. Thanks for the question. Thanks for being a loyal listener. Welcome to the family, Clay. You’re one of 4.

Go All-In On Roth TSP? Early Retirement Spitball Analysis (Rob, VA)

Joe: Rob from Virginia writes in. He goes, “I love the show. Appreciate all y’all work and humor with genuine answers to the questions provided. I’ll make sure I stick with easy vernacular in my question to make it easy on Joe.”

Andi: Starting off with “vernacular.”

Joe: Love you too, bro. “I’m 38 right now.” I’m not gonna blow Rob up.

Andi: Well, he’s thinking by the time you get to his question, he might be 40.

Joe: Yeah. He might be 45. Hey right now I’m 38. Tomorrow 39. Just round Rob, you can round, it’s all right. “Wife is 38. And I would like to retire at 60, but hopefully as early as 55. I’m trying to figure it out and need to adjust where my retirement savings go in order to make the early date a reality. We have $440,000 in retirement savings now.” He likes now. “$345,000 in Roth. Each in the Roth TSP, $90,000 in traditional and only $6000 in taxable. I’m also planning to have a military retirement pension sometime after the age of 44 to help supplement my cash flow later on. I think I would need to generate about $40,000 or $50,000 a year in extra cash flow to supplement my military pension prior to age 60. I have $28,000 a year in after-tax to dedicate to retirement savings.” $28,000 a year to dedicate to retirement savings. Way to go. Rob. “I’ve been sticking with each of our Roth IRAs is a no brainer, but I’m trying to figure out how to use the other $16,000. Up to now, it’s been going straight into my Roth TSP since I’m active duty. I am in the 22% tax bracket, 12% effective tax rate. I think all of my Roth balances will have me in a lower bracket in retirement at this point. Should it all go to my Roth TSP? Should I go something like $10,000 in Roth TSP and $6000 taxable? Do you see a reason to contribute all to the traditional side of the TSP? For example, can I get some pre-tax money and potentially pay the penalty if I want to use it early? Am I missing some other way to get after this problem? Joe can make fun of me if I’m being an idiot.” Come on Rob. I don’t make fun of people. And of course, you’re not being an idiot. Just like the word now, 38 right now, I got $440,000 now. Thank you again for the entertainment and education. Cheers, Rob.” All right, well, first of all, Ron, thank you for your service. Really appreciate that. And congratulations. You’re doing a fantastic job with the amount of money that you’ve accumulated at a very ripe age of 38 now. So he’s got a lot of money that he can save, Al.

Al: He does. So I like the money into the Roth IRA. I guess his other choice is the TSP. So I guess that’s the two choices, right? The Roth IRA and the TSP or-

Joe: No, he’s going into the Roth TSP is what he’s doing.

Al: Yeah, I understand. I guess the first thing, and he didn’t say, but I want to make sure he’s got a reasonable emergency cash fund. If it’s only the $6000, I would suggest that everyone should have at least 3 months of expenses, if not 6 months of expenses. So I would build that up if you don’t have it already. And then after that- he’s already got pretty good balance. So I don’t have a strong preference where he puts it. What do you think, Joe?

Joe: Okay, so I would max out the Roth- I would max out the Roth IRA. I would max out his wife’s Roth IRA, and then whatever dollar I have left over, then he’d go on the brokerage account. So here’s kind of the rule of savings, right? Depending on your tax bracket, he’s in the 12% tax bracket he said. Oh, I’m in the 22% tax bracket? He’s 38? Still, that’s a low tax bracket. He’s going to have a pension, Social Security. He’ll have other investments. The guy’s already saved it over $500,000 at 38. Yeah, I would go 401(k) to the max, TSP than the max, which he’s doing. He’s got the TSP plan, put the money in there. And then I would go Roth IRA, which he’s doing for him and his spouse. And then from there, I would look at going back to fully funded, but he’s already fully funding his TSP plan or thrift savings plan. I like everything Roth. And then the rest, I would go into cash or, build up more cash reserves or, a brokerage account.

Al: The only thing that gives me a little pause is he’s got a ton of money in Roth IRAs and Roth TSPs, if I read this right, he’s only got $90,000 in an IRA and he’s thinking he’ll be in a 12% bracket in retirement versus 22% now. So it might be useful- I think that’s why he’s struggling, is it more useful to get a tax deduction now or wait until- go ahead and do the Roth so you have more Roth in the future? And Joe, you and I might have a different answer on that. I think I would do a little more deductible. Or just put some into the non-quality because I’m concerned there’s not enough there to just pay the tax on it.

Joe: Yeah, no, I’m with you. I mean, I think he could probably look at you could contribute- I don’t know what his taxable income is, but maybe you contribute into the TSP on the traditional side until it gets to the 12% tax bracket. So I don’t know if that’s $6000, $10,000 or $20,000. And who knows, or $17,000, I guess he’s 38. So maybe he does that. And then you max out to two Roth IRAs. And then from there, you got the tax deduction. So that freed up probably a little bit more additional cashflow where you could put more into cash or, or non- But you’re right, but he’s going to have a pension. He’s going to have Social Security. He wants to retire at 55. He could have- The problem is, is that, how does he bridge the gap? So if I have money, if I separate at 55 and I have my pension, then I can take distributions, from a qualified plan at age 55 when I separate from service.

So I think he should be fine there. So we’re splitting hairs, it’s 12% and 22% tax bracket. And who knows where tax rates are gonna go? I mean, where things are looking, the 12% could be 25%.

Al: True, we’re talking about an analysis on current law, which we know is not going to stay the same. And if I think about it, so at age 55, I’m not sure- oh, military pension starts at 44. But when he retires, he doesn’t have his current income, he’s got the military pension, he could pull money out of the regular TSP at that point. And still stay in a low bracket. So you don’t necessarily have to have everything in a Roth, I guess is my point.

Joe: A lot of people that retire at 55- Do you think they’re not going to just- this guy’s active duty. I don’t know. I think he’s probably still is going to do something. It’s just my hunch. With the amount of money that Rob has saved at his age, I’m guessing that he’s going to continue to grind and do some sort of activity that probably generate some sort of revenue or cash. So to take the uncertainty of taxes off the table, go Roth. If you want to get cute and be a CPA, listen to Al. Gotta mix it up.

Al: That’s fair.

Joe: If you want to take the uncertainty off the table, go Roth because then who cares? Then you’re never going to worry about taxes again basically. Because most of your wealth is sitting in a Roth IRA. You’re not going to remember the tax deduction that Big Al told you to take back in 2022, when you listened to this podcast, right? You saved a couple of bucks because you went pre-tax and so on and so forth, blah, blah, blah. But if you went Roth and never had to pay a dime in tax again on that. You’re going to be like, Joe is the man.

So you’re confused about which accounts you should be putting your retirement savings into, you’re stressing about protecting your assets with how crazy the markets have been lately, and you want to make sure you avoid the tax time bombs ahead of you. Stop losing sleep over your retirement portfolio. Schedule a free meeting with one of the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors. They’ll review your entire financial situation and help you make the best choices for where you are now, and for your needs and goals for the future. Pure Financial is a fee-only fiduciary, they don’t sell any investment products or earn any commissions and they’re required by law to act in the best interest of their clients. Click the link in the description of today’s episode in your podcast app to go to the show notes. Then click Get an Assessment to schedule a no cost, no obligation financial assessment, either online, or in person at one of the Pure Financial offices in Southern California, or the brand new office in Seattle.

Deferred Compensation Early Retirement Spitball Analysis (John, Nashville, TN)

Joe: John writes in from Nashville, Tennessee. He goes, “Hello, Joe and Big Al. I have written in before and found your discussion and insight very valuable. So here we go again. Drink of choice is cold brew coffee. And pet is Cavapoo.” Cavapoo. Right?

Andi: We’ve had those before, yeah. Popular dog on this show, apparently.

Al: Yeah. That’s why you know how to pronounce it. We’ve had it before.

Joe: Um, and he drives a Tesla. “Now down to business. I have an opportunity to-“ an “oppty.” I like how people, just like- what oppty, have you ever wrote oppty? I have an oppty.

Al: No, they’re trying to mess you up, Joe. On purpose.

Joe: “It’s an opportunity to participate in a deferred comp program through my employer. And I can contribute as much as my salary and bonus as I want, which proceeds to be paid out evenly over 10 years, following my separation from employer.” So the deferred comp plan. “These deferrals can be invested as I wish as the same as my 401(k) options. Good diversification, low cost. I’m 48, plan to retire- The plan provides a 1.5% match on what I contribute, but the contributions don’t count toward my 401(k) eligibility earnings. So I miss out on about 5% of employer contributions if I defer enough income that I don’t max out 401(k) eligible contribution max. So in effect, I’m losing out at 3.5% on that amount. This year I’ll lose 3.5% or $50,000 or so roughly- on $50,000, so $1700. In exchange for that, I’m keeping $100,000 of income out of the 32% tax bracket. So it feels like an okay trade-off.” So what he’s saying is that there’s additional match and there’s maximum contribution limits and eligibilities, and he didn’t even have to put that paragraph in. Just FYI. Irrelevant. His salary and bonus is roughly $350,000 annually and any/all of that is eligible for the deferred comp. “I also receive $75,000 annually in stock awards, as well as $90,000-ish in investment income. So my gross taxable income will roughly be $165,000 even if I choose to defer all of my salary and bonus, which I won’t/can’t do. I will take at least enough income to cover the 401(k) max contribution, other tax-deferred paycheck items like medical insurance, HSA contributions, etc. For 2022, I decided to defer roughly $100,000. And with other pre-tax deductions, standard deductions, etc., I am projecting taxable income of right at $340,000, which was purposeful to stay out of the 32% tax bracket. As I look forward to next year, I have to make the deferral election by June 15. I’m wondering if maybe I should defer even more as the picture is as follows: paid for house at $2,500,000, which I plan to downsize at around retirement likely freeing up $1,000,000 or so. Tax-deferred balances are roughly $1,500,000, Roth balance $260,000, brokerage account at $3.7 million. Total liquid is $5,500,000. Over allocation is 70% equities. I love the idea of deferring taxes, but I stick to that deferral amount that I used this year that will yield a total deferred balance of $1,000,000-ish when I retire. Or $100,000 over the next 10-years, plus maybe $100,000 in investment income. So that would be about $200,000 a year in income at retirement. Deferring more now will only drive that income up more. So I’m struggling with whether that makes sense in my situation. Would love to hear your perspective on the issue and related items that you think I should consider as I make deferral decisions. Thanks for your help.” That was a mouthful. It was very long.

Al: It was. It spanned over 3 pages.

Joe: You could’ve just shortened that thing up. I have a deferred comp plan. I can defer all of my income. Should I do it because the pitfall is, is if I defer it, I don’t pay tax now, but I’m going to have to pay tax later. And the problem with deferred comp plans is that you have to elect how you want to receive that income before you make the election to defer. And so he’s electing to defer a 10-year payment out on the deferred comp payment once he retires.

Joe: John from Nashville is thinking about deferring $100,000 a year from his income, keeping him out of the 32% tax. So he’s like, okay, well that saves me $32,000 right there. And then I deferred, I can invest it any way that I like in regards to the low cost, probably index fund that he has through his 401(k) provider. And then when he retires, he’s going to have to take a 10-year payment. So if he’s got $100,000 in there, he takes $10,000 per year. And that’s the distribution amount. So now his problem is, or what he’s thinking about is that what is his income going to be in retirement? So he likes the fact that he’s getting himself out of that high tax bracket. But is he just going to blow himself up at retirement? Is what he’s thinking. And what do you think?

Al: Well, here’s what I think. He’s currently 48. He’s going to retire at 55. If he has a 10-year payout, it’ll be 55 to 65. So his required minimum distribution date won’t have hit yet. If the $100,000 is like the only income, that’s a low enough bracket, he could actually do Roth conversions, right to the, oh-

Joe: He’s talking about his investment income is $72,000.

Al: Yup, sure. Then maybe he can’t. But I think the deferred comp, I don’t have a problem with deferring it, especially if you save taxes and because when you’re going to get the money out it’s before you have to take your required minimum distributions, it’s also before Social Security. My problem with deferred comp plans is you have to understand what they are. They are basically the company deferring some of your salary and it’s a company liability. It’s not necessarily a separate account, although he does say it can be invested, which is different from most deferred comp plans. And so I’d have to know more about it. But I guess my point is, if it’s a company liability instead of a separate account, then if the company goes bankrupt, you lose that money. That’s how most deferred comp plans are. So I’d want to make sure, well, first of all, if that’s the case, what’s the stability of the company? So you’re basically saying you’re going to get a payout in 7 years from now- Over 10-years. Right? So you’re basically thinking the company will be solvent for the next 17 years. That’s to me, that’s one of the problems with deferred comp plans.

Joe: That’s the risk.

Al: Yep. That’s the risk. But I like the idea of saving in the 32% tax bracket. And I think he’s got an opportunity to manage his tax brackets. I mean, if we look at 55 to 65, if that’s right, $78,000 investment income, $100,000 deferred comp, that basically keeps- he actually still could do, under current brackets, he could do a little Roth conversion. And then when he hits 65, you could do much bigger Roth conversions if he wanted it to. So that’s how I would think about it. I would be- I’m not so worried about the future taxes. I think that can be managed because he’s young enough, but I’d be worried about the safety of the plan.

Joe: I agree. Because he’s worried about I’m going to have $1,000,000 or so in this deferred comp plan when I retire, but he’s retiring at 55. And so If I’m looking here, what does he think? He’s going to have $100,000 withdrawal and then plus he’s going to have whatever investment income in his brokerage account. Yeah. I think a couple of things that he might want to consider as well. Yeah, that’s the biggest risk, right? If he’s fine saying, you know what, I want to defer this and he’s really focused on the taxes, then you want to combine strategies in some instances. He’s thinking, do I do more? You might. You might want to do more because he doesn’t necessarily need to live off of any of that money he said. He could defer all the way up until the 401(k) contribution limits and some of the other HSA, BS or whatever. So like 90% of his income, he could defer and not pay tax on. If he were to do that, the next step would be to do the conversions now. At his young age, right? So he’s reducing his income to a very low level historically, given his income history. And then from there, I would take the retirement accounts and convert, or his 401(k)- do an inner-plan conversion. So let’s say instead of deferring $100,000, he gets himself out of the 32% tax bracket. If he converts or let’s say if he defers another $100,000. Now he’s in the 24% tax bracket. Okay, so he’s deferring another $100,000, but on the flip side, maybe he does a conversion of $100,000. So he’s creating a deduction of $100,000, but he’s also added income of $100,000. So he’s tax neutral. So he still stays in that 24% tax bracket, but essentially he got $100,000 in a Roth IRA virtually by paying no tax. But of course, you want to run the numbers out to see if he did a $200,000 deferment, what is that going to look like in that ten-year payment? And what other income sources are going to come in, or what hypothetically he thinks is going to come in from dividend or interest, but he can control that as well. In his brokerage account, he might be in like dividend-paying stocks, or, I mean, that sounds pretty tax-inefficient. I don’t know how tax-managed he is within that brokerage. But getting the $100,000 on $3,000,000, given today’s environment, that’s kind of seems high.

Al: It does seem high. I love that idea, Joe, because now you’re getting a lot of the Roth – you’re getting a lot of the Roth converted now, still staying in a lower bracket. And when you get the deferred comp payout, well, then you’re in a low bracket because you don’t have a lot of other income. I think that’s a great idea.

Joe: Right. So he’s just going to live out the deferred comp. Hopefully, he can be a little bit more tax-managed in the brokerage account and then everything else, or a lot of the other dollars, the 401(k) dollars he’s converting out at 38, 39, 40, 41 or whatever. Or, and then when he turns 55, then you start really maximizing wealth big time because he’s, I mean, he’s in a really awesome- by being as young as he is and having the amount of wealth that he has. But he also has a deferred comp plan that most people don’t have. That he could kind of manipulate the overall income on the tax bracket and start maneuvering assets around that other people potentially cannot do because they don’t have access to those types of plans. I would really take a hard look, but you’re right, Al. The biggest risk that he has is to say, all right, well, is this company going to be around? And you know, if they blow up, what really does this look like? What are the odds? I don’t know. I don’t know. We don’t know what the company.But usually, they’re pretty large companies that have deferred comp plans.

Al: Typically they are. We have seen situations where larger companies have failed. So it’s a concern. It’s a risk.

Joe: Yeah, I totally agree. But if he’s just strictly looking at taxes, there’s a lot of cool things you potentially can do. Alright, that’s it for us, thank you so much. Go to yourmoneyourwealth.com, get your money questions in there and we will answer them. We’ll see you again next week, the show is called Your Money, Your Wealth®. 


Big Al in Hawaii and Joe’s mai tai experience in the Derails at the end of the episode, so stick around. 

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