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
March 30, 2021

Recharacterization of excess Roth IRA contributions, converting post-tax contributions to Roth 401(k), and the pro-rata rule. Plus, target-date fund ladders? Also, investing 529 plan money, section 199A dividends from real estate investment trusts (REITs), and how Matt Stafford should save for retirement with his new $34M LA Rams contract (just in case you’re expecting a football player’s salary anytime soon.)

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Show Notes

  • (00:55) Please Explain the Pro-Rata Rule? (Chris, Austin)
  • (08:30) How to Deal with Excess Roth IRA Contributions? Recharacterization (Richard)
  • (16:53) Can We Convert After-Tax Contributions to Roth 401(k)? (David, NYC)
  • (21:36) Spitballing Roth IRA Conversions and the Medicare Surcharge (Ricky, AL)
  • (25:12) How to Invest 529 Plan Funds for Education? (Eric, CT)
  • (28:08) Should I Invest in a Target Date Fund Ladder? (John, Abilene, TX)
  • (34:20) Section 199A Dividends from REITs (Ulysses, MD)
  • (39:57) Matt Stafford Has a $34M LA Rams Contract. How Should He Save for Retirement? (Jeremy, Cookeville, TN)

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Listen to today’s podcast episode on YouTube:



Today on Your Money, Your Wealth® podcast number 319, Joe and Big Al are back on Roth IRAs, explaining recharacterization of excess Roth contributions for Richard, converting post-tax contributions to Roth 401(k) for David in NYC (where it was snowing back when he sent in his question), and they go over the pro-rata rule once again for Chris, who may or may not be cruising the food trucks in Austin, TX. The fellas also climb the ladder of target date funds for John in TX, they’ll discuss investing 529 plan money for education, section 199A dividends from real estate investment trusts, and they’ll spitball about how Matt Stafford should save for retirement with his new $34M contract with the LA Rams – just in case you’re expecting a football player’s salary anytime soon. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Tom Arnold – I mean, Joe Anderson, CFP® and Big Al Clopine, CPA.

Please Explain the Pro-Rata Rule?

Joe: We got a question. “Hi, Andi, Big Al and Joe. This is Chris from Austin again. It’s a pleasure to get to ask you another question you probably answered many times. But first, I don’t think I’ve ever shared with you, but I drive a 2003 mountain gray Ford T-Bird-” Oh, a Ford T-Bird. “- but prefer to drive my wife’s performance tuned and classically lowered 2001 Dodge Dakota quad cab truck when she lets me.” Wow.

Al: So that’s better than the T-Bird.

Joe: Got a T-Bird and a Dodge Dakota quad cab that’s lowered. Probably has some woofers in there and-

Al: Probably.

Andi: By the way, you may not remember, but I think Chris from Austin is the one that you decided was going to the food trucks to hit on the women.

Joe: Oh, I guarantee. If he’s driving a T-Bird and a lowered quad cab-

Andi: – in his wife’s car-

Joe:- for sure. What are you doing, honey? Can I take your lowered Dodge Dakota quad cab truck please? Gonna get a little-

Al: I need some room to put the women in there.

Joe: I’m going to play a little Fresh Prince of Bel Air, Summertime. And just cruise around the food trucks. You can picture it, right?

Andi: Totally.

Joe: All right. “The pro-rata rule hurts my brain. I know. I know. You’ve covered it many times. And each time I come up blank. I’m not asking to hear Joe’s voice go into a high-pitched chord straining level as he works to contain his emotion, though I do get a kick out of it.” All right. Well, thanks. “I’m just one of those folks that has to hear you insert it-” What?

Andi: “- insert my own situation before I get it.”

Joe: Got it. He’s gotta- see? That’s what I gotta do. I got to be Chris from Austin to truly answer his question.

Al: That’s why you need to know what he drives and where he’s from him-

Joe: -and then I picture him. Driving this lowered 2001 Dodge Dakota cab truck listening to Fresh Prince and D.J. Jazzy Jeff. Goin’ deep here.

Al: Yeah you are.

Andi: Yeah.

Joe: OK. “I’m just one of those folks that I gotta hear it to insert my own situation before I get it, much like many of your listeners, which is why you get to repeat yourselves on these subjects. It’s like 50 First Dates or Groundhog’s Day. But you’re helping each of us individually and we have Alzheimer’s or brain injuries so we don’t get tired of hearing it.”

Andi: And that he’s got a full page.

Joe: Oh boy, Chris. All right. “I want to know for myself why I’m having such a difficult time understanding this concept and if I should be concerned about the pro-rata rule, since I do have a slew of traditional pre-tax IRAs, as well as a Roth IRA. I think my issue of understanding pro-rata comes when they state that a traditional IRA has both pre-tax and post-tax monies in it. OK, how did post-tax money wind up in a pre-tax IRA in the first place? That’s the question you can answer for me. And most importantly, do I have such a case?” It’s very easy. I’m not going to finish this until he goes to his tax return to look at form 8606.

Al: But I bet he doesn’t have it on there.

Joe: Guaranteed. The reason why you could get post-tax money in a pre-tax account is you didn’t qualify to take the tax deduction in the IRA. Most people make IRA contributions and take the deduction on their tax return.

Other people make an IRA contribution that don’t qualify to take the deduction. They do it anyway.

Al: You can still do the contribution. You just can’t deduct it. So if you put like $6000 into an IRA and you could not deduct it, then that’s how you get post-tax money in it.

Joe: “I hope you understand the second question. Do I have such a case of mixing pre-tax and post-tax in an IRA? Being the A&R, ask Andi, person that I am, I moved pre-tax money from job’s 401(k) into pre-tax IRAs. I’ve worked with a company that had both traditional and Roth 401(k)s, even though I chose to go all in a Roth. I still have traditional pre-tax money already in that account and the company matching provided would be posted as pre-tax as well. When I move the money out of the 401(k) into IRAs, I had two checks written for pre- and post-tax. I created separate accounts and post monies for the 401(k) into appropriate pre-tax and Roth IRAs.

Al/Joe: So far, so good.

Al: I like it.

Joe: “So my thought has been since I’ve never had pre or post tax money mixed into the IRA as I know of, should I have any concern with the pro-rata rule when I’m backdooring Rothing from my traditional IRA account into Roth IRA accounts?” OK, you’re not backdooring anything there. That’s just a conversion. What the hell’s wrong- backdoor Rothing- is that a new term that I’m not familiar with? Is that on the CFP® exam, Al?

Andi: Chris just made it up. And by the way, A&R, he said ask Andi. I think he said that means he’s in artist and repertoire, which means he represents musical artists.

Al: Oh, OK. I was thinking something else.

Joe: “I’m tired of sweating whenever I hear the term pro-rata rule that I’m going to get some letter from the IRS telling me that I owe another ton of penalties and cash.” I think you’re fine. Because he had a- if I understand this correctly-

Al: I’ve got lost in all these IRAs.

Joe: So he’s got 401(k)s that he had post-tax and pre-tax. And the reason why he had post-tax is that it was a Roth 401(k) that he was contributing to. But the company matched him. Any company match is pre-tax. So when he rolled the money from the 401(k), he got two separate checks. The Roth 401(k) went to a Roth IRA. The company match that was pre-tax, went into an IRA. All good so far. If he makes any type of- the pro-rata rule only comes into play, Chris, is when you are converting money from your IRA to your Roth IRA and you’re not including 100% of that as income. That’s the pro-rata rule. So you have post-tax dollars. That’s your Roth IRA. You have pre-tax dollars. When you’re Rothing, using your terminology here, if you’re moving money into the Roth from a traditional IRA, there’s no worry about a pro-rata rule, 100% of it is included in your taxable income.

Al: Unless you have post-tax basis in an IRA, then some of that Roth conversion would be non-taxable. That’s where it comes into play.

Joe: Got it. “Just in case you may ask yourselves, so why do I have a slew of IRA accounts? It’s actually just six. One pre-tax and one Roth each. I self-managed two, two are managed by a financial manager, other two, in an SD IRA used to crowdfund invest in commercial real estate – oh, self-directed IRA. And then I started converting it over to Roth account. I’m not trying to make my life complicated for the fun of it. Thank you all for what you do to make your finances and taxes entertaining to listen to. Happy trails to you all.” All right. Thanks, Chris.

How to Deal With Excess Roth IRA Contributions? Recharacterization

Joe: Richard writes in, “Hey, Big Al, Little Joe and Awesome Andi.” I don’t know what the hell I did to Dick here. “I love your show.”

Al: All of a sudden you change his name from Richard to Dick.

Joe: I’m sure that’s what he goes by. “You seem like you have a lot of fun doing it. Your banter keeps the show interesting and you explain things very well. I’ve got a couple of questions that have confused me. In March 2020 I put the maximum contribution of $7000 to my Roth IRA. Then I had an unexpected capital gain that put me over the income limit for contributing to a Roth. So I have to do a removal of excess. I will do that now before the tax deadline of April 15th, to avoid the 6% penalty. Since I’m over 59 and a half, and won’t be subject to any 10% penalty, I will also have to withdraw the earnings on the excess contribution, which I understand will be taxable as income.” So the question is, he put money into a Roth, he thought he qualified because there are income limitations, Al, on Roth IRA contributions.

Al: Yes. So in 2020 he did a Roth contribution, as you said. And if you are single, it starts phasing out at about $125,000. And if you’re married, it starts phasing out at almost $200,000, let’s call it. So you go ahead and make the contribution, then you realize, whoops, I’m over the limit. So I’ve got to take the money back out of the Roth because that’s an excess contribution and there are certain timeframes to do that. And actually, the time frame is you have to do it before you file your tax return, which-

Joe: It’s called re-characterization.

Al: Well, you could do that, too. But you have to- well- I guess. OK. Never mind that comment. So you’d have to do it by April 15th. Or if you extend your tax return, you have till October 15th to do that.

Joe: So you want to scrap that from the record?

Al: Yeah, scrap that. I’m not- Yeah, I’m not sure I’ve heard that is re-characterization, but maybe so.

Joe: That’s the only time you can re-characterize.

Al: Removal of excess. You could re-characterize it to an IRA, or you could remove it altogether.

Joe: I think Dick here is trying to be- trying to show off- removal of excess.

Al: Well but that’s your choice, right? You can re-characterize it to an IRA or you can just remove it. But then you have to take the income that you earned and you have to pay tax on it.

Joe: OK. “Question number one, which tax year will I need to declare the earnings on the contribution, ’20 or ’21?”

Al: 2020. Because as long as you remove the excess out before you file your tax return, you have to record that excess income on the return you are filing. Now, if you remove the excess after the filing date of your return, then the removal of excess income will be in the year that you actually removed it out. That’s the confusion. That’s why you’ve probably seen both.

Joe: “The TD Ameritrade form I’m filling out to remove the excess says that these earnings are taxable in the year in which the excess of distribution and possible subject to penalty. That seems to indicate that the earnings should be taxed as income in 2021 since I’m receiving them in 2021. However, much of what I’ve researched seems to indicate that they should be taxed as income in 2020 since I’m removing the excess before April 15th. So I’m confused.”

Al: Yeah. So it’s the latter. It’s 2020 is when you got- you have to record the income on- if you decide to remove it. And you’re right, Joe, you could re-characterize it, you could say I don’t want to do a Roth IRA contribution, I want to do an IRA contribution. That’s a re-characterization. And then there is no excess penalty. You can just leave it in.

Joe: Correct. And then you could probably convert it-

Al: – later-

Joe: – depending on the pro-rata rule.

Al: Correct.

Joe: “Question 2) I will have to sell some securities to cover the withdrawal of the earnings on the excess contribution. How do I declare that-“ God, he loves word declare too- “- how do I declare this on my taxes? capital gains? interest dividend? Roth distributions? other income?” He has to sell some securities to cover the withdrawal of the earnings of the excess contribution.

Al: So we’ll go back to the original premise here, which is you did a Roth contribution that you weren’t entitled to. So now you want to remove it and you have to remove the excess as well. So assuming that the Roth account’s fully invested, he’s going to have to sell some securities to pull the money out. And so the answer is, it’s ordinary income. There’s no capital gain in a Roth or there’s no- it’s just ordinary income. It’s like pension income. If you pull excess-

Joe: Roth IRA?

Al: – if you pull out excess earnings from a Roth, it’s ordinary income. There is no special capital gains rate.

Joe: But he has to sell some securities to cover the withdrawal, the earnings of the excess contribution.

Al: Selling securities inside a Roth is not a taxable transaction.

Joe: Correct. But I still don’t understand why he would have to sell some securities to cover the withdrawal of the earnings. Does that- I don’t understand the question.

Al: So let’s say the earnings are $1000, but he doesn’t have $1000 cash in his Roth. He’s got to sell some securities to generate $1000 cash to do a distribution.

Joe: Is that what he’s saying?

Al: I think so.

Joe: So if he sells it inside the Roth, there’s-

Al: That’s why I’m saying there’s no-

Joe:  Yeah, but the $1000 coming out, then that’s the ordinary income.

Al: It’s not capital gains, just ordinary income.

Joe: OK. “Question 3) “TD Ameritrade says they will send form 5498 to the IRS, telling them I had excess contribution, but they won’t send me the 1099R that says the excess has withdrawn until January 2022. Will that be sufficient for the IRS? Or is there any other paperwork I’ll need to do to let the IRS know that I withdrew the excess plus earnings before the tax deadline? Thank you very much for your help.” Richard’s a stickler.

Al: Yes, he is.

Joe: Oh, my God. I swear. If he got like a $.7 penalty, the guy would go bananas. I could just see Richard now with his spreadsheets. He’s doing a 5498. He’s like, what the hell? I don’t get the 1099R until January 2022. Oh my gosh.

Al: Yep.

Joe: So re-characterize the stupid account Richard-

Al: – to an IRA and forget about it.

Joe: And then forget about it. That’s what you do. Re-characterize.

Al: It’s a non-deductible IRA, is what happened.

Joe: So you just re-characterize your Roth IRA to a non-deductible IRA. All good.

Al: Yeah. Then you’re done.

Joe: Right. So then there’s no 6% excess Roth IRA contribution. Because if he kept the money in the Roth IRA for several years and if he’s not eligible to keep the money in the Roth, that’s where the 6% penalty comes in. It’s an excise tax. It’s like you put money into a Roth when you shouldn’t have. So each year that you have the money in the Roth, we’re going to have an excise tax of 6%. Well, Richard was like, oh my God, I’m like $4 over the threshold and I cannot have any penalties. Should I write him a huge letter? I’m going to call YMYW. I’m doing- I’m pulling out the stops here. Re-characterize Richard. That’s all you got to do. Re-characterize the Roth IRA to a traditional IRA. Whatever earnings that you have will show up on your tax return, then pay tax on the earnings. Now those will continue to grow tax-deferred for you.

Al: So to answer the question on the 5498, that is true. That comes out the following year. That’s true of everybody. So, yes, the IRS expects this. Don’t worry about. All right. Little Joe. Whatever, dude.

Al: Got you fired up.

Joe: I know.

Al: That’s what he was worth trying to do.

Joe: Well, yeah, anyone that calls me a Little Joe is probably a super stickler. He doesn’t drink Coors Lite and doesn’t have a beer fridge in his garage.

Find out how you can have 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. Learn the differences between a Roth IRA, a traditional IRA, and a Roth 401(k), learn about Roth contributions vs. Roth conversions and backdoor Roth conversions, find out about taking withdrawals from a Roth and more. Click the link in the description of today’s episode in your podcast app to go to the show notes to download your Ultimate Guide to Roth IRAs for free, and of course, if you still have questions, you can click the Ask Joe and Al On Air banner there in the show notes and send them in.

Can We Convert After-Tax Contributions to Roth 401(k)?

Joe: David from New York City writes in Alan. “Hi all. First of all, let me say again how thrilled I was to win the Amazon gift card in last September’s podcast survey contest. I did send a note of thanks the same day I got that news. So don’t give me a hard time for waiting 6 months to show my appreciation.”

Andi: Yes, he did.

Joe: Oh, thank you. “I’m a big fan of the show. Usually listen to a- my walks around Central Park-” Getting a little photo- sends us a photo. Looks a little cold there in the-

Al: Does that remind you of back home in Minnesota?

Joe: I totally blacked everything out.

Al: You don’t remember.

Joe: I don’t remember anything about Minnesota. The winters- the winters-

Al: Right. Sure. I understand.

Joe: “- which can be tough as I’m cracking up when you go off on one of your wild tangents, like about the guy who listens to audiobooks in double time and can’t remember a single one. Priceless.”

Al: Remember that discussion?

Joe: Yes, I do.

Al: Me too. I remember who that was even.

Joe: “How many books you listen to this week?” “Oh, 6.”

Al: “What were they about?” “I don’t know.”

Joe: I have no clue. Have you got a title? No, I forgot.

Al: It’s- I’ll put it this way. It’s someone you and I know really well.

Joe: So there’s books on tape that you’re going at like 10-speed. Slow the thing down.

Al: I tried it once at one and a half speed just to see if I could do it. I couldn’t do it.

Joe: Alvin and the Chipmunks. Feels like you’re on crack. Not that I know what it’s like to be on crack, but anyway- “I’ll try to make my question as brief as possible about after-tax 401(k) contributions. My wife started making those not long ago and contributions of about $5000 have appreciated to roughly $6000. Up to now, she has only made traditional 401(k) contributions, including catch-up contributions to the max each year and right now is set up to max them out again in 2021. I believe it’s possible to convert those after-tax contributions to a Roth 401(k), which I think would be smart since the majority of our retirement savings are in traditional IRAs and 401(k)s, though, some of the IRA money has been converted to Roth recently. If so, do those after-tax dollars become part of the $26,000 max 401(k) allowable for 2021? Meaning her paycheck deductions should be lowered if we want to smooth out those deductions over the entire year. Are there any taxes due on the roughly $1000 in gains on the $5000 contributions? Thanks very much and congrats on being named the most entertaining financial podcast out there. Definitely a deserving honor.” I don’t know if it’s we were voted the-

Andi: We were voted-

Al: By one website.

Andi: Yeah, FIPhysician.com voted us Best Retirement Podcast with Humor.

Joe: Got it.

Andi: Which it definitely is.

Joe: That Al secretly runs.

Al: I was the one- the majority voter on that.

Joe: Let me answer David’s question here. He’s- his wife is doing after-tax contributions to the 401(k).

Al: Yeah. That’s what it sounds like. She did about $5000 which grew to $6000.

Joe: So she could convert the $5000. That will have zero effect on her ability to do the $26,000 401(k). But what is confusing to me, Al, is that if she’s already maxed out at $26,000, how did she get more monies in after-tax into the plan?

Al: Well, that confused me too. So I’m guessing it’s the after-taxes over and above the $26,000. But it’s hard the way this reads.

Joe: Correct. How about if I answer it like this? A Roth conversion does have zero effect on any ability to put money into 401. It doesn’t count as the contribution. It doesn’t account against income. It doesn’t account against anything from limitations to Roth contributions. All it is, is taxable to your tax return. If it’s after-tax, it would be tax-free. If $5000 was after-tax and she converted the $6000, then the $1000 will be taxed.

Al: Yeah, I agree. And I think that’s probably the question. Can she still do the full $26,000? The answer’s yes. If she wants to convert the $5000, no problem. If she wants to convert $6000, she’s going to have to pay tax on $1000 of that, because even though that’s earnings on the after-tax money, it’s still counted as pre-tax.

Joe: Got it. Hopefully that helps, David. Warm up- up there in NYC. Appreciate you hanging out with us again.

Spitballing Roth IRA Conversions and the Medicare Surcharge

Joe: Ricky from Alabama writes in, “Yes podcast around-“

Al: I think it means “best”. I’m just guessing.

Joe: A little typo?

Al: I think so.

Joe: “Yes podcast around.” Yes. All right. Thanks, Ricky.

Al: I’m just- I’m just estimating here.

Joe: Got it. “Financial or otherwise.” He’s probably listening to this. He’s like ‘dammit.’ I should have proofread that email.

Al: I sent it too quickly.

Joe: I was so excited. “I’m currently in the 12% tax bracket. If I convert to a Roth to the top of that bracket, it will take 13 years, even more, when RMD starts in 8 years to convert.” Are you following that so far?

Al: I think so. I think he’s got- so he’s probably 66- 64.

Joe: “If I convert up to the point where Medicare surcharges will kick in, that puts me in the 22% tax bracket. At that rate, it would take 8 years. What’s your spitball advice?” This is a giant spitball.

Al: This is a lot of spitting-

Joe: There’s a- this is all spit, bro.

Al: So I think what he’s saying, he could convert everything in 13 years, but then he’d be getting his RMD and he could stay in the 12% bracket. Or he could do this in 8 years up to the Medicare- the point where the Medicare surcharge kicks in, which is $200,000 for a single person, $250,000 for married. I think that’s what he’s saying. So to me, I guess the concept or the question, the unwritten question here or the assumption is, I have to convert every last dollar out of my IRA 401(k) to Roth, and the answer’s no, you don’t. Because now just think about what you’re doing. If you’re converting in the 22% bracket to avoid being in the 12% bracket later, aren’t you paying too much tax to convert in the 22% bracket if you’re going to be in the 12% bracket later? That’s how I read this question. So I would stick with the 13-year plan and you don’t have to get it all converted. Just stay at the top of the 12% bracket. I think that’s a good way to go.

Joe: Do we know how old is he? The RMDs start in 8 years.

Al: Yeah, so he’s 64.

Joe: But if he’s taking Social Security, Al. Then this throws everything off.

Al: I know. I’ve oversimplified a bit.

Joe: Because if he’s taking Social Security, then maybe he doesn’t want to convert at all because if he’s single and he’s at the top of the 12%-

Al: But then you have to look at, what happens if you don’t convert at age 72? So there’s a lot more math to do this. So the question was do a spitball analysis. So that’s what I did.

Joe: Got it.

Al: It says, “do you know that you look like Tom Arnold?”

Joe: I did not look anything like Tom Arnold. ” PS. Has Joe ever been asked to be the stunt double for Tom Arnold.”

Al: Have you been asked?

Joe: Every time I go out, Al. What the hell is Ricky talking about? Andi, do you think I have any resemblance to Tom Arnold?

Al: She’s gone.

Joe: She’s upset, too. She’s like, hell, no, you don’t look like- I’m almost 6’5” and 220 pounds.

Al: How tall is Tom?

Joe: Tom Arnold is like 5’8” and 350.

Al: Well, maybe you look like Tom to him.

Joe: Ricky from Alabama that likes LSU that says “yes, podcast around.” All right, Ricky.

Joe Anderson, Tom Arnold stunt double?
Joe Anderson, Tom Arnold stunt double?

How to Invest 529 Plan Funds for Education?

Joe: We got 529 plans. We got Eric. “Al and Joe. I’m truly enjoying the podcast and finding the confidence to make changes and look at things with much better knowledge.” Well look at that, Al.

Al: Yeah, that’s very thoughtful.

Joe: I mean, we’re giving people confidence. That’s what we do here. Now, my barbershop, you know, we- the shirts would say ‘we sell confidence’.

Al: Oh, really?

Joe: Oh, yeah.

Al: Is that your slogan?

Joe: No.

Al: They came up with that?

Joe: Oh yeah. When you walk out with a fresh cut, you’re pretty confident. “Thanks for all you do. Here’s my question. I have a 529 plan accounts for my two children, aged 10 and 7. They are through CHET, Connecticut Higher Education Trust, were recently taken over by Fidelity. When transferred over, the money was automatically put into the Fidelity Blended Fund 2030 and 2033. The expense ratios are quite higher .4% compared to the Fidelity Index at .05%, which is an option I can switch to. Given the timeline until the money is needed and the expense ratio difference between the options, does it make sense to switch it to the index funds? Not knowing what the market will do over the next several years is looking at just expense ratio OK to make this decision? There’s no performance to compare as these funds have just been opened. Does it make sense to do a 50/50 split in allocation? I’ve attached appropriate info that you can help answer this question. Thanks for your help.” Sorry, Eric. I didn’t look at the attached info.

Al: We don’t have a front of us.

Andi: I sent it to you like 4 times.

Joe: Yep. I delete attached info.

Andi: Yes.

Joe: So 10 and 7. Just go with the index fund. Who cares? The blended fund, you got a little bit of bonds in there versus a straight index. That’s the only difference. So it’s actively managed with the blended funds. So they might switch the allocation and might switch to age-based. If it’s a straight index, you’re not probably getting any other management at 10 and 7. So you still got 10 years for one and 8 years- or 7 years for the other, that’s still a pretty good time frame.

Al: It’s a long time frame. I agree. I’d go with the index funds, too.

Joe: Just understand what the index funds are invested in. If you’re OK with the appropriate risk, that’s what I would be more concerned with versus the expense ratio. If it’s the exact same fund with higher expense ratio, then go with the lower expense ratio. But if you’re buying something for that added expense ratio, .4% don’t- it’ not the end of the world.

Al: It’s not that much. You probably want to buy an index fund that’s stock based and then maybe one that smaller, bond based.

Joe: But he’s got these- no they’re 529 plans that are 2030, 2033. So they’re age-based. So if they’re already age-based that are going to switch or turn, then go with the index. I think he is over-analyzing.

Al: OK, I’m with you.

Joe: All right. Thanks Eric.

Should I Invest in a Target Date Fund Ladder?

Joe: He says, “Hi, Andi, Big Al and Joe. I’m John from Abaline, Texas.” Right?

Al: Abilene-

Joe: Dammit.

Al: I think.

Joe: “Can’t wait to hear how Joe messes this one up.”

Andi: There you go.

Joe: What is it, Abaline? or Abilene?

Al: You’re thinking abalone?

Joe: Abilene?

Al: Aba, aba, aba-

Andi: e-n-e at the end. I’m thinking it’s Abilene.

Al: Yeah. What’d I say? Abiline? Abilene?

Al: I said Abaline?

Andi: No, that’s what Joe said.

Al: Oh, yeah, you’re right. Abilene.

Andi: You had it right, Al.

Al: I had it right.

Joe: I guarantee you, it’s Abaline.

Al: I think it’s lene.

Joe: Abaline, Texas.

Al: How do you pronounce l-e-n-e? lene?

Joe: Line. That’s with my drawl.

Al: With your accent from Minnesota?

Joe: I got my Texas drawl.

Al: Got it. Okay.

Joe: “I’m 33 and have a Roth account with Fidelity. How do y’all feel about target date fund ladders?

Al: Ladders?

Joe: Ladders. Ooh boy, here we go. Johnny, Johnny, Johnny.

Al: You like this stuff.

Joe: Oh, God. “I’m currently in the Fidelity Freedom Index 2055. I’m wondering if I should do a ladder approach and have money in all 3 target date funds. 25% in 2050 at age 62; 50% in 2055 at age 67;-” That’s when his retirement date is.

Al: Yeah.

Joe: “- and 25% in 2060. I know I have a lot of time but a little guidance would be helpful. I know you can’t give advice on the air. Thanks.” No John, I hate that idea, totally.

Al: Now if you’re going to retire at 3 different times-

Joe: Yes.

Al: – 1/3 of me is going to retire at 62, the other 1/3 at 67, the other 1/3 at 72. That’d be perfect.

Joe: No. Let me explain why. Target date funds will already allocate themselves as you age and so it’s just a total redundant strategy, especially if you got the same fund family that probably has the same allocation, but a different percentage in each of the different funds. They’re _______ funds. Here’s what you do, John. I know everyone in their 20s and 30s love the ladder, like the stupid Roth ladder.

Al: Because, well, he doesn’t know what he’s going to retire. That’s a long ways-

Joe: Well, no, they get a little bit- they’re trying to mess with something that was created to make it easy and they’re making it difficult, is what is happening here.

Al: Let’s have a ladder of a ladder.

Joe: You know, let’s ladder it up, so I have something to say. Well, what you just got one target date fund? No, I ladder mine.

Al: I got- yeah. What’s that mean? Part of me is retiring at 62, the other part at 67.

Joe: My brain retires at-

Al: I’m going to make half as much money after 62 because I won’t be that smart anymore. _________ happens. Is that it? By 72, I don’t- I’m not worth anything. The rest of me is gone.

Joe: So no, don’t do that John. I don’t like- well I mean it doesn’t really matter. It’s redundant. It doesn’t make a lot of sense to be honest with you. You’re not more diversified at all.

Al: Plus you’re 33. They’re all going to be almost the same-

Joe: – almost identical.

Al: for 20 years.

Joe: Exactly.

Al: So what’s it matter?

Joe: Yeah, it doesn’t matter. It’s just- I mean if you like to look at things-

Al: If you’re 60 years old then it would make a difference.

Joe: But you still don’t ladder or you don’t have a multiple target date funds. It’s a point of a target date fund. You’re supposed to invest in one.

Al: Have an idea and you change it if you retire to a different date.

Joe: Right. Because it’s already diversified for you. It’s a portfolio for your entire nest egg is what the target date funds were created for.

Al: But I get the question. So at 33, you have no idea. Maybe I’ll retire at 40, maybe 72. I mean, you don’t know.

Joe: Is that what the ladder strategy is? If he’s like, I don’t know, maybe if I retire at 60 versus 62? And then I just kind of-

Al: – hedging my bet.

Joe: – then as I get older I’m just going to put everything- I don’t know.

Al: I agree. It doesn’t make a lot of sense.

Joe: Here’s what I would do to make it really simple. Just pick one of those. I would pick the 72 one, just because you’re going to have a lot more stock exposure-

Al: – plus you’re in it for longer.

Joe: Right, for longer. Then once that thing builds up- he’s 33. I’m not sure how much money John has, but a lot of our listeners, in their 30s, have quite a bit of money.

Al: By the time you hit 50 and you get more clarity or 55, then switch to the right year.

Joe: Right. Or even 45, you could probably get a little bit more sophisticated strategy by having multiple funds. If you want multiple funds, here are 3 funds that I would go, you can go total U.S. stock market, total international market and you could do a small-cap value fund. Just to get you some hedge or short-term bonds.

Al: Maybe do a little bit short-term bonds. Just for safety.

Joe: Those are the 3 funds that you would want to invest in.

Al: Yeah, I agree.

Joe: So maybe you go- at 33, you go at the very most- this is not advice- 10% or 20% in the bonds and then the rest in the stock. You could probably go 60% US/40% international.

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Section 199A Dividends from REITs

Joe: We got Useless. Yuliessi-

Andi: Ulysses.

Joe: Ulysses Grant.

Al: What’d you say? Useless?

Joe: I didn’t mean to say-

Andi: That’s what he started with.

Joe: Ulysses. Say it again?

Al: Ulysses.

Andi/Al/Joe: Ulysses.

Al: Ulysses or Ulysses?

Andi: I think either are correct, but I will tell you, you’ll notice the last note says, ‘Please withhold or change name’. So I chose this because I knew you’d have a hard time with it.

Al: Well, look at Andi. She’s purposely making us look bad.

Joe: I know.

Al: Especially you.

Joe: I just watched Lincoln.

Al: You did?

Joe: Yes.

Andi: So you should know how to pronounce Ulysses.

Joe: I call him Colonel Grant.

Al: That’s easier to say.

Andi: My family is supposedly related to Ulysses S. Grant.

Al: Really? Wow. Ok. I didn’t know that.

Andi: Yep. I don’t know if it’s true or not, but that’s what my grandfather, whose middle name was Grant, tells me- or told me.

Al: Ok.

Andi: Yep;

Joe: “Hello gang. I’ve been listening since Paul Merriman appeared as a guest and cross-pawsted-

Andi: Pawsted?

Joe: I’m getting tired. “Cross-posted that appearance on his podcast.”

Al: That was a while ago that we had Paul on. I want to say years ago.

Joe: It’s been a while since we’ve had Paul Merriman on. I remember like you and I, Andi, just did an interview. Alan was out. Maybe that was, what, 2 or 3 years ago?

Al: With Paul?

Andi: It’s been awhile.

Al: For me, I’m thinking back to the studio days in Kearny Mesa before Andi.

Joe: Yep. No this was since.

Al: Yeah, ok.

Joe: “I work two full time jobs, 7 days a week-” Geez, need a break. “- to secure my retirement so I don’t have any pets.”

Al: No time for pets.

Joe: I don’t blame you man. You grind it, grinder. “My GF, girlfriend” I don’t think I’ve ever used the word GF-

Andi: Ever type it?

Joe: No.

Al: I have never used that term.

Joe: Useless does. “My GF has two pugs and a cat. I own two Ford Focuses.” Foci?

Al: Plural for Focuses.

Joe: You know, there was a mushroom that goes up to the bar and the bartender goes, no, we don’t serve you. He goes “what? I’m a fungi.”

Al: I should have told that at my golf round.

Andi: Now you’re telling Dad jokes. Holy cow.

Al: That would have been better than Tom Woolway’s jokes.

Joe: “My question concerns Section 1099s- or cap 199A is what he’s doing. 199 cap A.

Al: Ok. You wanna go back and start this section over?

Andi: Please?

Al: “My question concerns Section 199A dividends. You could say cap A if you want.

Joe: “My form 1099 Div list the Vanguard small cap and small cap value funds having Section 199A dividends. Upon investigation, I’m reading that I’m eligible for a tax deduction of 20% of these dividends as my taxable income is below $163,000, even with a Roth conversion I did last year to the top 24% tax bracket. Can someone explain to me in plain English what the rationale for me getting this deduction? I’m not complaining. Just want to understand. My total Section 199A-” That’s the-

Al: It is.

Joe: I was right.

Al: You’re right. Cap A.

Joe: Yeah, cap A.

Al: Anyway-

Joe: But I’ve never- did cap A dividend’s income- he must have- be self-employed but-

Al: No, it’s dividends. I know the answer to that. Keep reading.

Joe: All right. I’m tired of reading this question. “- for both funds are just under $595 dollars. So, is it what I would call a game changer for my taxes? Thanks. Please withhold or change my name.” We should just change or withhold this question.

Al: I think Andi rewrote the question to try to trip you up. So here’s the answer. So Section 199A dividends- So this is relating to either real estate income or self employment income. This was a- it’s a- you get to deduct 20% of your net profits on qualifying real estate-

Joe: It’s QBI income.

Al: QBI, qualified business income. You get to deduct up to 20% of your profits. Now where it comes into dividends, Joe, is when it’s a real estate investment trust that generates dividends, which essentially is the same activity as you owning a piece of real estate. This is just your real estate ownership is through a real estate investment trust. So as a consequence, the IRS has allowed REIT, real estate investment trusts dividends, to get this 20% deduction, which is Section 199A, also known as qualified business income, QBI.

Joe: Got it.

Al: So that’s the answer. So that’s why. And yeah, don’t complain. And I would agree it’s not a game changer, but it’s nice to have.

Joe: Yeah, he tortured me, for $595 of dividend interest that he’s gonna get 20% of that.

Al: Well, he’s gonna get 20% of that. Yes. Right.

Matt Stafford Has a $34M LA Rams Contract. How Should He Save for Retirement?

Joe: Jeremy from Cookerville writes in again.

Andi: Cookeville.

Joe: Why- did you put his, like, area code or zip code- ?

Andi: No, he actually put in his zip code. So I’m assuming that now that we did the guy in the 65657, that’s going to become a thing.

Joe: Got it. The 38501?

Andi: Yep.

Joe: Isn’t he the-

Andi: He’s the supply chain manager.

Joe: I was going to say line cook.

Al: Oh, I remember that.

Andi: He did not put that in his email this time though so-

Al: Did we figure out what supply chain manager was?

Joe: Yeah, we did. Just supplies chains.

Al: Got it.

Joe: “Al, Andi and Joe. Matt Stafford will be a LA Ram in the next two years- for the next two years, earning $34,000,000 over those two years. Do you think he’s better off to invest heavily into tax-deferred accounts, since he is likely to be in a lower tax bracket at retirement age? Also, do you believe he’s got the stuff to help the Rams win the Super Bowl in the next two years? Just in case I ever get offered a two year deal worth $34,000,000 in the future?”

Al:  He’s thinking ahead.

Joe: You’re a supply chain manager/line cook in Cookerville. Anything’s possible.

Andi: No, no, no. He’s the supply chain manager and he also has the boat side hustle.

Joe: Oh, that’s right.

Andi: Remember?

Al: I remember that now.

Joe: Oh, the boat guy.

Andi: He like repairs boats or something and resells them?  Kayaks. That’s it.

Al: Oh that’s right. He doesn’t make a lot.

Joe: No. He did like 400,000 kayaks and made $8.

Al: I remember that. Should I open up a regular IRA or a 401(k)?

Joe: Should I get an LLC?

Al: Doesn’t matter.

Joe: Should I hire a CFO? So, first of all, Jeremy. $34,000,000- we’re not LA Rams fans here anymore. We live in San Diego. They left. And so I don’t really feel-

Andi: No, that was the Chargers.

Al: But we’re not LA Charger fans either.

Joe: See that tells you how much I follow professional football.

Al: So you don’t know if the LA Rams are going to win the Super Bowl because of Matt Stanford?

Joe: I know who Matt Stanford is. He kind of blew up Detroit. So $34,000,000?

Al: That’s a lot.

Joe: That’s a lot. But how much money can he put in a tax-deferred account, Big Al? Not $34,000,000.

Al: $26,000? Maybe he could do the mega, get another $25,000 in. No, he can’t- he’s limited to whatever plan the Rams have.

Joe: He’s going to be in a very low tax bracket after he earns all this money because he can’t put it in tax-deferred account.

Al: Yeah. It’s just- he’s just going to have to pay a lot of taxes.

Joe: – when he receives the income.

Al: Correct.

Joe: But then it will all be in a brokerage account.

Al: That’s right.

Joe: If he saves it.

Al: But then the good news about that is you pay the tax once and then the future income and growth is taxed generally at capital gain rates.

Joe: Correct.

Al: So you have a pretty decent- if you don’t spend it all, you have a pretty decent future.

Joe: Yes. I didn’t know he signed with the Rams. Did you?

Al: No.

Joe: You follow it, don’t you?

Al: I follow it less than you do. I tell you what, I used to be a Chargers fan. Years ago. Dan Fouts, he was my favorite.

Andi: Oh, wow. That’s a long time ago.

Al: That’s way long ago.

Andi: That’s when I was little.

Al: And of course, Philip Rivers, who couldn’t like Philip Rivers, right?

Joe: Yeah, he’s got 400 kids.

Joe: Nice guy. And every after every game, they would talk to- even the most egregious losses and he’d be so positive. Well, we really showed a little bit here and we’re going to come back next time. I was like, good for- good for you, Phil.

Joe: Look at you. Well, thanks for the question, Jeremy. Keep it up with the kayaks. Summer coming in Tennessee. Does it get cold in Tennessee? I don’t even know.

Al: Yeah, I think so.

Joe: I’ve been in Nashville a few times, but it’s always been in the Summer.

Al: In the Summer, yeah. I’m sure it gets cold there.


The Derails continue shortly so stick around.

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