Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 00:57 – Should High Earners Do Roth Conversions in the 37 Percent Bracket? (McDreamy Dempsey)
• 06:50 – The Hidden Roth Conversion Lag: When Conversions Don’t Actually Pay Off (Gary, LaCrosse, WI)
• 18:03 – Should You Prioritize the ACA Subsidy Cliff or Roth Conversions Before Medicare? (Wine Guy & Gal, No CA)
• 26:27 – Traditional vs Roth Contributions: What’s Better When You Make $400K? (Robert, Napa)
• 33:09 – Roth or Traditional Contributions? Save More or Coast After Debt Payoff? (Luke & Lorelai, Indiana)
• 42:13 – Roth or Traditional at Age 48: Which Strategy Makes More Sense? (Phil & Claire, CA)
• 49:19 – Outro: Next Week on the YMYW Podcast

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: All your lifetime tax-free investment growth needs in a Roth megasode, today on Your Money, Your Wealth podcast number® 558. McDreamy Dempsey wants to know if converting to Roth in the 37% tax bracket ever makes sense. Gary in La Crosse warns the fellas about Roth conversion lag and when it DOESN’T make sense to convert. Wine Guy and Gal in Northern California want a spitball on whether they should protect their ACA subsidies or keep converting to Roth before Medicare kicks in. Then it’s the classic question for Robert in Napa, Luke and Lorelai in Indiana, and Phil and Claire in California: should they save for retirement in their traditional pre-tax accounts, or their post-tax Roth accounts? Different needs and situations, same big question: which strategy gives you the smarter tax outcome? Let’s dig in and find out. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should High Earners Do Roth Conversions in the 37 Percent Bracket? (McDreamy Dempsey)

Joe: Okay. McDreamy Dempsey.

Andi: You know you get that reference right?

Joe: That’s Patrick Dempsey. Yeah.

Andi: Patrick Dempsey, when he was on Grey’s Anatomy, he played a character, Derek Shepherd, who was known as Dr. McDreamy.

Joe: His name is Dr. Shepherd. But they called him McDreamy.

Andi: Yes. Because I mean, you know what he looks like, right?

Al: He was good looking, yes. Got it. But even I could see that as a guy. He was good looking.

Yeah.

Joe: All right. We got drink Russell’s Re So he’s calling himself McDreamy?

Al: Yeah. He must be really good looking. He must be super hot. Yeah, I think so. Why didn’t we get a picture?

Andi: Well, here’s what Dr. McDreamy looked like.

Joe: Yes.

Al: Yeah. Yeah. He is a good looking guy.

Joe: Yeah. I met him like long time ago.

Al: You did?

Joe: Uh-huh. He drives race cars and so,

Al: Oh, okay.

Joe: Drove race cars with my college roommate’s buddy.

Al: Oh. So, okay. Anyway, but you’re, part of the rich and famous.

Joe: Yeah. I’m just dropping names.

Al: Who else have you met?

Joe: It was like, hello. That was about it. he McDreamy. How’s John? That’s exactly how the conversation went.

Al: Yeah, it lasted that long.

Joe: Yeah.

Al: Yep, All. And did he even look at you?

Joe: No, not really. Let’s see. Drink Russell’s Reserve Whiskey Sour. Okay. All right. He drives a little 2015 Audi eight. Eight diesel. Diesel. Wow. Okay. Here’s this question. He’s 55, currently has over three and a half million dollars in tax deferred accounts.

Expect to retire at 65 with the value increasing to well over $7 million with contributions and estimated 7% return. We got a cash brokerage account to cover Roth conversions. I’m currently in 37% tax bracket in addition to Maxwell security benefits at age 70. I expect $200,000 of yearly income at age 65 from commercial properties to what tax bracket should I convert?

No wonder he’s McDreamy. He’s got a ton of cash. He does a lot of income and a lot of cash. A lot of income. Yeah. We’re gonna have this, we’re gonna have that. yeah, his balance sheet is definitely McDreamy,

Al: so, well, if you look at, let’s use his number, which probably is right, 7 million, 4% of that would be 280,000 of income. That would be the RMD roughly.

Joe: Mm-hmm.

Al: Then you got 200,000 of commercial real estate. we don’t know if that’s sheltered with depreciation or not. Let’s assume it’s not just for now. So that’s 4 80, 480 plus Social Security plus whatever else there might be. So that’s a pretty high bracket, call it $500,000.

Joe: Yeah, call it 500,000. And I think that’s probably 32% bracket. So if you can convert anything into the 24, do it. I mean, it doesn’t sound like you can right now, but, that even the 37% tax bracket.

Al: Yeah. I can’t do it now. I don’t think I would convert at 37. I don’t think you’d be there. I think I might wait until,

Joe: Would you switch contributions?

Al: currently?

Joe: Yeah.

Al: Oh, to Roth?

Joe: Mm-hmm.

Al: Probably just for a little diversification, even though it. I mean, it doesn’t really pencil out, but just to get it started, he’s gonna be in. The 35% bracket at least 32.

Joe: 32. Yeah.

Al: Yeah,

So I don’t know. I think I would, if it were me, I probably would switch to Roth contributions just to start some tax diversification, knowing that I’m paying a lot of tax on that.

I get that. But then when I retired 65, then I’d be doing conversions for 10 years till I hit 75. that’s what I would do.

Joe: Yeah.

Al: Cause at that point, income’s lower, less social. You know, you don’t have Social Security yet. Income’s lower, don’t have your RMDs yet. So that would be a good time to do it.

Joe: 35% tax bracket is 250 to 6 26. So what, he makes over $600,000 now? yeah. That’s a pretty big rocket. 37 is 626,000. or above is the 37. So. It’s 55 gonna work another 10 more years. That’s it. Well, I mean, it’s a good problem to have. Again, it is three and a half million dollars, 7 million if it’s all pre-taxed. Maybe you do Roth just to get the tax deferment, tax free deferment.

Al: Yeah. Just to get started on the current over 10 years.

Joe: You max that out at 30,000 plus if he has after tax dollars and you convert those.

Al: Yeah. No, I’m fine with that. I just wouldn’t do a big conversion.

Joe: I wouldn’t do a big conversion.

Al: Yeah. I, without retirement.

Joe: Yeah. And I think it’s an easier play. Like to do a conversion, you gotta cut a check to write to the IRS. Mm-hmm. And that’s always kind of a pain in the ass. You know, when you make as much as he is making you probably, you’re not gonna miss the cash. He doesn’t even know what his net paycheck is

Al: that even look

Joe: at it.

He doesn’t even look at this. Money shows up in his you Exactly. Money just appears in the account. That’s why he’s McDreamy. Yes. Yeah. So yeah, he’s done a good job. Congrats. But I don’t know if I was gonna pick a name. Wouldn’t be there. I’m just gonna write in. I don’t know if I’m gonna go maked dreamy on myself.

What would you, oh, I think I’m very handsome.

Andi: I was gonna say, you’re usually so self-deprecating, but wow, that just went out the window. What’s,

Al: well, who would you pick?

Joe: I don’t know.

Al: Someone cool

Joe: but that, yeah, I don’t dunno. Papa Ganouche.

Al: There you go. I do. I’d be Chuck Norris, Chuck.

Al: Oh, you do kinda look like Chuck. Chuck is getting old, man. He’s getting old. Yeah, I guess that’s what I’m gonna look like in it’s Chuck nor his nineties. No, he’s probably 80 Ranger..

Andi: He’s 85. He was born March 10th, 1940. He’s 85 years old as of the date of this recording.

Al: Yeah,

Joe: I bet he still kicks the ass.

Al: Oh, I wouldn’t want him wrestle with him.

Joe: Yeah. And when he does pushups the earth moves.

Al: Yeah, You know.

The Hidden Roth Conversion Lag: When Conversions Don’t Actually Pay Off (Gary, LaCrosse, WI)

Joe: We got, this is just a comment?

Andi: It’s a comment, but it’s it’s got some meat on it, so I figured this would be a good thing for you guys to talk about.

Joe: Yep. Got it. Alright. Joe Big Al, love the show. Entertaining, educational, keep it up. I have an observation about what seems to be the fact that the vast majority of financial advisor, yourself included, sing one off conversion song without really giving. The no conversion. It’s due. It’s due. Yeah. I’ve talked about when it makes sense to convert or not to convert multiple times.

Andi: That’s one of our most popular episodes.

Joe: Yes.

Al: Yeah. I think we’ve kind of gone, there’s pros and cons. Yeah. Every situation’s different. There’s probably 10 cons

Joe: to deal with conversion. And I could go through them in a, let’s just kind of continue to

Al: in a, hot

Joe: minute. Minute. In a hot minute. It might take me a little bit more in a hot minute ’cause I’m still a little tired from my flight back from Charleston.

Al: Got it. Okay.

Joe: specifically FAs. Oh, he’s calling them FAs. He’s gotta be in the business.

Al: Yeah, a hundred percent. In the business right here

Joe: known as financial advisors, seem to think that all Roth conversions will be paid by some magic cash account hidden under the neighbor’s rug.

Al: Wouldn’t that be awesome? that’s what we assume, right? Totally. We are always assuming that you got a rug at your neighbor’s house. That’s magical. Magical. Yeah.

Joe: Assuming the typical person may need to pay the conversion out of the traditional IRA pot, which will cause a leg for the Roth for as much as 15 to 20 years at four.

To 5% interest before the total balances traditional or Roth post tax in the 12 to 15% federal tax bracket in 68 state rate are the same. Give it a go on a spreadsheet, starting with $20,000, earning 5% in a traditional versus $16,000 in a Roth, 20,000 minus four in tax. Given this reality to Roth or not to Roth, it’s not as easy of a decision as you all make it out to be.

If you are young, no brainer. Convert to Roth. If you are within 15 to 20 years of life expectancy, the lag in the overall balance in traditional Roth post-tax upon inheritance net depends on your goals. If you want more money in your go-go years of this guy. Go, Yours.

Al: That’s your favorite.

Joe: I hate it. No conversion makes more sense. If your goal is to maximize hair, heir inheritance, then convert.

Al: I like that recovery.

Joe: Yeah. It’s short. It seems like FAs need to include the fact that many retirees will need to take from traditional to pay for the Roth conversion. What this early payment does for accumulation, total balance is traditional versus Roth. That is the Roth leg. Roth lag, okay. Okay. You got the lag and the Roth. Mm-hmm. Okay. Needs to better be presented and understood. It’s not a no-brainer. Decision. Okay. To make up for my potential suggestion, I owe you a beer at the Bodega Pub in La Crosse, Wisconsin. Thanks for hearing me out. Okay, great. Okay. Alright.

Andi: And he said to make up for his pointed suggestion.

Joe: Alright.Yeah. Okay. The Bodega Pub. Yeah. You’ve been there. Nope. Lacrosse though. Yeah.

Andi: You can go and have an argument about Roths with Gary here.

Joe: Oh, that would be such a good time. I think that’s exactly what I would want. Have a beer and have an argument. Roth arguments at the Bodega Pub. I do like a good pub.

Al: Yeah, me too. I found one in Idyllwild.

Joe: You did?

Al: It’s the Idyllwild Brewery. It’s pretty good. Yeah.

Joe: Yeah. I’d rather take a pub than like a nice fancy restaurant any day.

Al: Same.Yeah. It’s more casual.

Joe: Yeah.

Al: Yep.

Andi: Better place to have a Roth argument.

Joe: Yeah, I don’t know. yeah. Okay. If you’re gonna take the money outta the IRA to pay the tax, how many times have we said it probably doesn’t make sense to do the conversion?

Al: I think we’ve said that every time.

Joe: Unless you have millions of dollars in your IRA.

Al: If you have no other choice,

Joe: you have no other choice to pay the tax inside the IRA, then it may make sense.

But if you’re paying tax outta the retirement account to do the conversion, in most cases, the math doesn’t pencil out because you gotta pay the tax. It’s to pay the tax. You’re taking money out, paying tax on that to pay tax. It doesn’t, it’s like, yeah, that, that’s a hard recovery. Maybe that’s what he means by the lag.

Maybe that’s the lag. I like to say it, you gotta pay the tax. To pay the tax. Like I’m on the Yeah, because it’s just like,

Al: yeah. Yeah. Gary, we’re kind of agreeing with you. I mean, I think we say that almost every time now. That’s part of the reason why we have people tell us what their assets are, how much they have in a retirement account in a Roth and in a non-retirement account.

So if they have money in a non-retirement account that they don’t necessarily need to live on, then they’ve got additional cash to be able to pay tax on Roth conversions if it makes sense given their bracket. And Joe, I agree with you. I mean, I think the only time where we suggest it, let’s say someone’s been, I’d much

Joe: rather take a home equity line of credit out.

Yeah, before

Al: paying tax on my retirement account. Paying tax on tax. So, so five, let’s say you have a $5 million IRA and no other assets whatsoever. And you’re 55. By the time you’re 75, maybe it’s gonna be 20 million. If it doubles twice, I would rather actually pay some tax out of the IRA to get some of that into a Roth.

But that would be a, an unusual situation we don’t see very often, but we hardly ever recommend that. But I will also say, I think when you look at dollars in an IRA or 401(k) net of tax, I actually think the day you do the conversion, you’re in the same exact spot. And let me. Quick example, right? So you got a hundred thousand dollars and let’s say what can you spend?

If it’s 25% tax rate, you can spend 75,000. You take the a hundred thousand out, you gotta pay $25,000 tax, you got 70, that’s what you got. So let’s say you do a Roth conversion and using the example of paying it for outta your ira, even though we don’t necessarily. Recommend that. So yeah, you a hundred thousand comes out.

You got 75,000 in the Roth. ’cause you gotta be 25,000 in tax. It’s the same thing now you got in the Roth 75,000 versus what you could have spent in the IRA. And if you’re thinking, well time value, money growth, well let’s double it. So that a hundred thousand dollars IRA becomes 200,000. 25% tax, that’d be 50,000.

You have 150,000 spending power, great. $75,000. Roth doubles, 150,000. You’ve got the same spending power. It’s same, It’s that people don’t really seem to get that right. They look at the total balance of the account and that’s how they’re running their spreadsheets. Yeah, I, guess if you are looking at total balance, I agree with that, but

Joe: you have to look at net of tax. What can you spend The sooner that you get the money outta the retirement account and into a Roth IRA, you take the unnecessary tax rates out outta the. Onto the picture if you’re gonna be in the same tax bracket, it makes sense to do the Roth, because now all of the money in the Roth IRA, even though on your account balance, it’s going to be lower.

Yes. But all of that money is yours. If it’s in a retirement account, all of that money’s not yours. Your partner’s still with the IRS and you gotta give the IRSA little chunk of change, depending of course on what tax bracket that you’re in.

Al: Yeah. It’s not like a home loan that stays steady. The taxes keep going up.

The more you got in your retirement account,

Joe: the, higher the account balance grows, the more time you have. He’s like, well, I got 15, 20 years. It doesn’t make sense. Well, you got 20 years of growth.

Al: Yeah. And

Joe: then it could double twice. And guess what? Your tax bill doubles twice. It’s the same.

Same. Unless tax rates go down, if tax rates go down and the tax rate might not double twice, but it’s still gonna be a lot of money, right? The longer that you keep the money into the IRA, the more

Al: tax you’ll pay period. The reason that you do the Roth, even if it’s the same bracket, is because, so now you got more flexibility in retirement.

If you have a year where you need extra cash, you can pull some out of the Roth and not go into a higher tax bracket. Or maybe you favor some of your growth assets, your growth mutual funds. In your Roth and your safer assets in your retirement account. So now you’re gonna end up long term, more vulnerable, long term, you should end up with more in the Roth ira.

You’ll be in a better spot. Or what if tax rates go up or what if you’re married and a spouse dies? Now all of a sudden you’re in single rates and your tax rates went up. There’s a lot of reasons why you should convert, even if it’s the same bracket. But Joe, there’s no diff same from day one.

Joe: I don’t know.

there’s several reasons not to convert. You have to also take a look at, here’s the other reasons, right? if you have, if, you’re gonna blow yourself out of a tax credit. So we talked about this a couple weeks ago, right? With the new, I don’t even know what it’s called. Income. Oh, the senior tax credit.

The one bigger, the senior bonus deduction. Badass had

Al: the extra deduction. 6,000 per person.

Joe: Yes. Of credit. So then you have to really do the math there, or you have to look at your Irma premiums so that could jump you up into a higher bracket.

Al: Or health insurance. Or the ability to deduct your rental real estate losses.

That phases out, or your net invested income tax is an extra tax if you’re at above a certain income level.

Joe: Or if your Social Security’s gonna be subject to income tax, or if you’re gonna pull, or if you’re in the 0% capital gains rate and you do a conversion, now your capital gains might jump up to the 15% rate.

Al: Yeah. I can think of a lot of reasons not to do it,

Joe: but there’s also probably just as many reasons or more to do it. It depends on your situation. Yep. But, yeah, thanks. thanks for the. It’s a conversation.

Al: Yeah. Good one. See there

Joe: was some

Andi: meat on that bone. Some,

Al: yeah. I’d still grab a beer with Gary and chat about this more.

Andi: If McDreamy and Gary haven’t convinced you that Roth conversions can get messy fast, especially when you push your tax bracket too far or fall into the conversion lag, this is your moment to get the Ultimate Guide to Roth IRAs. Click or tap the link in the episode description to download it for free. You’ll have valuable information, in print mind you, about how Roth IRA contributions and conversions really work, how to avoid the mistakes that cost people thousands, and how to take full advantage of that lifetime tax free growth. And yes, the infamous Backdoor Roth strategy is in there too, for anyone who makes too much money to contribute directly. You’ll also learn the differences between a traditional IRA, a Roth IRA, and a Roth 401(k), the pros and cons of each, the rules for taking money out of your Roth account, and a whole lot more that we cannot cover in one podcast episode. Click or tap the link in the description of today’s episode and download your copy of the Ultimate Guide to Roth IRAs. And feel free to share it, along with the other free financial resources, with anyone you know who needs to get their Roth strategy together before the end of the year.

Should You Prioritize the ACA Subsidy Cliff or Roth Conversions Before Medicare? (Wine Guy & Gal, No CA)

Joe: We got Wine Guy and Gal Northern Cal.

Al: Okay.

Joe: You helped us with an answer last year. We decided to retire this February, and we’re saying, why didn’t we do this sooner?

Al:

Oh, I thought he was gonna say,

Joe: and you blew us up

Al: and it was a big mistake back at work.

Joe: Yeah. We went bankrupt.

Al: We used to drink champagne. Yeah. Now PBR.

Joe: Yeah, exactly. all right. The freedom from work, emails, work, emergency requests and waking up stressed on Monday morning are priceless. Drink of choice is a Sonoma wine.

From Russian River, but love the occasional Paloma or Margarita. You little tequila guy, huh? Yeah. All right. The Russian River, you know where that is?

Al: Yeah. That’s Northern California. Near Healdsburg, I think.

Joe: Done. Wow. I’ve never heard of Healdsburg.

Al: Yeah, it’s ’cause you haven’t been there. I actually have been on that river on a canoe before.

Joe: Oh.

Andi: I’ve been on on that river on a jet ski.

Al: On a jet ski, yep. Funny little side story. I was just getting to know Anne. And she used to live there for like a year. Okay. Yeah. So I’m on the canoe and I’m trying to impress her.

Joe: You tipped it.

Al: Well, almost, I, was paddling, I was going like right straight for the bank, you know, and right into the bushes. And I would show her my skills where I’d just like go like that really quickly and you can’t turn a canoe that quickly. We went right into the bush.

Joe: I don’t think I’ve ever been on a canoe. Yep. Well, maybe I was when I was a child at camp. Maybe so. So you were in your twenties on a canoe? Yeah. Got it.

Al: I was but upset.

But more recently, I would say, well, I’ll do better than that. Three weeks ago I was in a kayak on the Ley River.

Joe: Ooh, kayak. Were you wearing a helmet?

Al: No.

Joe: Dare devil you. Oh, okay. The wine guy’s got a new question now. Okay. Should we delay Roth conversions until on Medicare, after the latest tax bill recreates the ACA cliff? Yeah. Oh, he’s getting into this.

Al: Yeah. Well, the Affordable Care Act cliff. Yeah. Let’s, let’s get into the specifics and then we’ll answer it.

Joe: Alright. it seems going above the cliff is significant cost that distracts the Roth convergent benefits. Alright, we’re 58 56. Currently on Cobra.

We will have. To move to a CA healthcare plan next year, the estimated healthcare costs are $800 a month, if below 84 a thousand maji, 400% poverty level for a couple. Yeah, we will go $1. If we go $1 above 84,000, then we lose all subsidies and healthcare would be $2,000 per month or approximately $15,000 extra per year.

We could keep our income below that $84,000 as we have $1.7 million in a brokerage account to cover our daily expenses. We have another two and a half million dollars in retirement accounts that would not convert until we hit each 65 and go on Medicare. The Affordable Care Act EL is wasn’t really meant, for people that have $4 million.

Al: No, but that’s how it’s being used right now. Okay. ’cause, just go back one second.

Joe: You saw 400% of the poverty level Yeah.

Al: Afford, but

Joe: is at the top 0.01% of all wealth.

Al: So it’s, it was designed on income, not on wealth, not on network. So, so in, in our opinion, I’ll speak for you too, Joe. It’s, it was slightly flawed how it was set up because that means very wealthy people that can keep their taxable income low, can qualify for these subsidies,

Joe: which are great subsidies.

Al: They are, they’re a lot.

Joe: And by all means, if you qualify go for it a hundred percent.

Al: And so, and I think that’s gonna be my answer, but let’s keep going.

Joe: Okay.So he’s worried about the cliff. The cost of going over $84,000 income with Roth conversion seems to be too high. Even if we converted a hundred thousand dollars, it equates to an extra 15% tax on top of the 22% federal in 9% California.

Of course, the issue is that the IRAs will grow and cause more conversions between 65 and 75 when RMDs are required. As a side question. Would you suggest we do extra Roth conversions this year? While we’re on cobra, we are planning to convert to the top of the 22% tax bracket, but considering going to the 24% tax bracket, $250,000 taxable income while the extra 3.8 kicks in.

Thanks and love the combination of humorous and banter and knowledge. So it’s not an extra 15% tax, is it?

Al: Well, if they do a hundred thousand conversion, that’s what you, that’s what, oh, because it’s

Joe: 15% or $15,000 extra. So that 15,000 on the a hundred thousand is a 15% tax on,

Al: yeah. So maybe to translate a couple things.

So the way this works is once you’re over the 400%, the poverty level, which in their case. 400% is 84,000. So if you’re 84,001, they call that a cliff, which means that whole subsidy, goes away. And in this case, they’ve calculated theirs to be $15,000. So if you keep it below that, you got a $15,000 insurance subsidy.

If you go a dollar over it, that whole $15,000 is lost. So it’s a, pretty, it’s a pretty big deal. And so if you think about, Should they do Roth conversions this year while they’re in Cobra? Yes, of course. You got, what, two and a half million, million dollars in tax deferred and you’re in your fifties 58 and 56.

Yeah. You, yeah, you should be converting that to the top of the 24. ’cause this year you don’t have that issue. Next year you probably won’t do conversions because of the a BA pre premium credit. Mm-hmm. However, they’re currently supposed to expire at the end of 2025, and we don’t know if they’ll be extended or not, but,

Joe: what do you think, in how many years have you been in tax?

I would imagine they extend.

Al: Well, you know, that’s why we had the government shut down ’cause the Republicans didn’t wanna extend. So I would typically say, yeah, they will extend them. But in this particular political environment, no idea. So I think next year, I think they wait to see what happens on their conversion strategy, but as it stands right now, I wouldn’t convert next year because then you’d lose that $15,000 unless, here’s one exception, and that is you don’t convert a hundred thousand, you convert like 300,000, right?

To get to the top of the 24% bracket, maybe 350,000. That way, that extra $15,000. Relative to 300 or three 50 is a lot lower percentage. So either you don’t do any or you go big is what I would say.

Joe: Yeah. I don’t even know if 24 makes sense for them. If they got, what do they got two and a half in their fifties?

Eight. They’re not 68. So they have time.

Al: They do.

Joe: I guess it depends on the. The ac, the credits, because if they extend through 65, he probably doesn’t wanna lose that 15%.

Al: Totally agree. if they, let’s say they extend them, then I wouldn’t do any more conversions until age 65. Personally. Yep.

’cause that’s, it’s just too expensive.

Joe: He’s gonna take a huge bite. And some, it’s, yeah, I think there’s more math, but just looking at his simple math of saying, Hey, I’m gonna spend an extra 50. You gotta look at the effective rate of what the RMD is, but it’s too far out. It’s 20 years from now.

Yeah. Who knows what tax rates are gonna be and who knows what other subsidies

Al: are gonna be in place. Yeah, I know it’s hard. All we can do is based on current law and current law, is. Well, we’re sort of guessing whether things are gonna be extended or not, but un under current law, these subsidies go away in 2026.

Will they be extended? Maybe, not. We’ll have to see, but I think for me, the biggest point would be I would do a full conversion to the top of 24, top of the 24 in 2025. Because you’re on Cobra, so the subsidies don’t apply to you that way. You get a big chunk out and then after that maybe you wait all the way to 65 depending upon what the tax laws are.

We up to see.

Traditional vs Roth Contributions: What’s Better When You Make $400K? (Robert, Napa)

Joe: Cool. Alright, we got Robert from, Robert from Napa.

Al: Okay. Another Napa.

Joe: Yeah. Hey Joe, big Allen. Currently 50. Wife is 49 and we’re planning to retire in about five to six years. We live in California and currently rent. But we plan to relocate to a lower cost state like Tennessee or Arizona after retirement.

Wife and I enjoy a nice medium bodied Napa cab, medium body. Got it. Yeah, I like full body. Got it. I’m gonna keep reading You better. Combined it come of 425,000, okay. 380,000 base, $45,000 consulting income. We have rental in, we have a rental unit that grosses about three and a half, thousand dollars per month.

Net $5,500. Given our current tax bracket and our future plan, does it make more sense to continue taking traditional retirement contributions or would it be wiser to switch to Roth? Below is our retirement contribution options. My wife, she’s got a 401(k), 31,000. my 401(k), or I’m sorry, his 401(k) is 31,000.

Wife’s is 23,000. They have a Roth option. He’s got a Roth option. wife’s. 401(k) after tax. Additional contributions. She can do the mega backdoor. Yeah. She also has a 4 57 B plan that she can max out as well. And then he’s got a sep IRA from the consulting business that he can do.

Al: Yeah, so that’s about a hundred grand in contributions.

Joe: currently they got a traditional IRA of about two and a half million Roth IRAs of 250,000 HSA accounts of one 60. Brokerage account of 600. High yield savings is 300 Crypto. It’s one 20. Yep. That’s, and then, they’re getting

Al: more and more common.

Joe: Yeah. That’s $4 million. Yep. Total. Okay. So what does he do?

Well, he is got two and a half million dollars. He’s 50 years old. In the traditional IRAI would switch, this is what I would do if I was him.

Al: Yeah, go for it.

Joe: I would go Roth IRA and my 401(k)I would go, traditional IRA, no, I would go traditional four. Sorry. Let me do this again. I would go traditional. Oh my God. Third time’s a charm.

Al: What’s that word?

Joe: I would go Roth 401(k) of $31,000 for Robert.

Al: For him. Okay.

Joe: The wife. I would go Roth 401(k) of 23,000 for her. Okay. I would also do the after-tax thousand of 15,000 and convert.

Al: Yes.

Joe: And then I would go pre-tax on the 457 at 23.5. Okay. And then I would set up a, yeah, you could do a SEP IRA or you could do just a standard IRA ’cause he’s only putting $8,000 into it to.

Al: yeah, true. Can 457(b)s, do they have Roth options or no?

Joe: Yeah, they do. I don’t know. She works for a hospital private, yeah. Or school district.

Al: So that would be a possibility too.

Joe: But I think that’s enough Roth. I would then have some pre-tax.

Al: Yeah. So, so the fact that they’ve got about two and a half million already.

Mm-hmm. And they’re 50 and 49. Mm-hmm. And Roth, they have got some two 60. Yeah. I think I would tend to agree with that. I don’t think, I don’t really know, or we do know what the income is 300. 80,000, 45,000 consulting. So 4 25. So they’re kind of, they’re right at about the top of the 24. So they, so in other words, that extra deduction on the traditional doesn’t help ’em that much ’cause they’re in the 24% bracket.

So I think I would agree with you. I would, do as much Roth as possible. yeah. yeah, for sure. Then as far as conversions, I probably wouldn’t convert much. ’cause they’re already at the top of the 24, right? Yep. So just leave that as is. So they got

Joe: $4 million liquid. They wanna spend $130,000 on the contract to retire in the next five to six years.

Yeah. If you spend, if you save a hundred thousand dollars a year over the next five to six years, yeah. Even at a 3% growth rate. You can afford 130,000. Yeah,

Al: I agree. So here’s my numbers. starting at 4 million, five years from now, 6% rate of return at a hundred thousand dollars a year, you end up at 5.9 million.

Well, let’s just take $4

Joe: million today. If they take a 3% distribution rate, that’s $120,000 a year. They wanna spend 130.

Al: Yeah, I know. They’re already there. They’re already there. And that’s not even, that’s not including their rental, yeah. Rental

Joe: income or Social Security

Al: income. Yeah. And, but just doing my math.

And then they’re spending one 30 inflated becomes 1 51, then it’s a 2.6% distribution rate. And you’re right, they’re just over 3% right now before the rentals. So it’s, could potentially retire sooner.

Joe: Yeah. I think they’re all set to retire. I mean, punch right now, they wanna move to a low, but are they gonna buy a house in Tennessee or Arizona?

So does $600,000 of the brokerage account go to a mortgage or I mean to a new house purchase? Maybe. ’cause they’re renting

Al: today. Yeah, maybe that would be a reason they’re renting today. maybe that would be a reason to keep working. So they got extra capital for that. So, but I still think they’re in really good shape.

Me too. I, I.

Joe: Okay,

Al: well to Napa. And I think, and I think, you know, hopefully you get some Napa cabs, in Tennessee. I’m sure they have them.

Joe: Yeah, hopefully mild body.

Al: Yeah. Medium.

Andi: Joe and Big Al spitball Roth vs. traditional, post-tax vs. pre-tax retirement savings for two more couples in just a sec – but what about you? Are you saving enough? Are you saving to the right account for tax efficiency for your needs? Now is past the time to jump on your year end planning. Watch 10 Tax Cutting Moves to Make Right Now on YMYW TV, and get this week’s limited time Special Offer, the companion Top 10 Tax Tips Guide, for real steps you can take before December 31 to lower your 2025 taxes. We’re talking Roth conversions that count for this year, maxing out your retirement contributions, harvesting tax losses or gains, and a bunch of other moves that only help out if you do them before the calendar flips. And as of today, you’ve only got four weeks left. Get the full checklist of what to tackle before time runs out so you send less of your money to the IRS next April. Click or tap the links in the description to watch the show and to grab the free guide before the Special Offer changes this Friday.

Roth or Traditional Contributions? Save More or Coast After Debt Payoff? (Luke & Lorelai, Indiana)

Joe: Hi guys. Love the show. Started to binge listen a few months ago to pass the time on a work trip, and I learned something new on every episode. All right. Okay. I’d listened to several episodes before I pulled up the website to see what you guys actually look like. Oh God. Here we go. In my head, I pictured Joe to be Murray from the Goldbergs. Know who Murray is and I don’t know what the Goldbergs are.

Andi: You don’t wanna know, but I’ll show you anyway.

Al: Oh my God.

Joe: Oh, spitting image. Identical twins. And I was not disappointed.

Andi: That looks like Joe doesn’t it?

Al: That looks like Joe.

Joe: Yeah, that guy weighs like 350 pounds.

Al: Yeah. Joe doesn’t, you’re a trim.

Joe: I’m like 200 pounds.

Andi: This is a good shot of him too.

Joe:And I was not disappointed. What does that mean? Does that mean

Al: means he thought you looked like

Joe: Yeah, just Exactly. Spitting image. Uhoh. Okay. All right. Wonder what he thinks I, Luke and Lorelai

Andi: Luke and Lorelai, that’s actually, a reference to the Gilmore Girls TV show.

Joe: Oh,

Al: okay.

Joe: So this guy watched the Goldbergs and the Gilmore Girls.

Andi: Gilmore Girls, yes.

Al: I haven’t seen either one. Have you?

Joe: No. I drive a 2023 Bronco. Yeah. All right. And Lorelai drives a 2019 Honda Odyssey. My drink of choice and flavor of Sam Adams in Lorelai enjoys some red wine on occasion.

Here’s the numbers. Luke 42, Lorelai 39. Salary, $220,000. Total investments 450,000, which includes. 270,000 in a 401(k), 105 in a TSP, 30,000 in a Roth and 45 in a traditional IRAI plan to retire somewhere between 1665. We plan to spend around $120,000 per year in retirement. Lorelai has mostly been a stay at home mom. Works part-time and will retire whenever she wants. I’ll receive $1,500 a month monthly pension with a call of 60 and will be eligible for TRICARE at that age. I receive $1,300 a month from a VA disability and will continue that for life. I’m on track to get $4,000 a month. Social Security at 67. Lorelai will take a false benefit of $2,000 per month. I will contribute. $20,000 per year to my 401(k) and the employer matches $20,000. How come he didn’t say anything about you?

Al: good question. I don’t know. Yeah. I’m, he, was only curious to see what you looked like,

Joe: I guess, so that’s kind of disturbing. I am wondering. It would be smart to start pulling out a, start putting all or most of the $20,000 contribution into my employer’s Roth 401(k) option instead of the pretax. Since it is so common for you to recommend Roth conversion, does it make sense to just get more into Roth now the four oh ones with fidelity, so there’s plenty of good investment options, including the option to use a brokerage link, which allows you to invest in almost anything you want in the stock market.

Two. Okay. In my estimate, we will have plenty of fixed income and retirement savings. We’ll cover $120,000 per year and still leave a very nice inheritance to our four daughters. Should I be ramping up my retirement savings once I have some debt paid off? $25,000 out loan in $50,000 heat lock, or can I go on coast mode?

Keep my savings rate the same. the poor girls are expensive and we love to travel, so I have plenty of things to spend the money on. Thanks for the spitball, Luke and Lorelai.

Andi: do these folks look familiar to you? This is apparently Luke and Lorelai.

Al: no. I don’t recognize, Nope. Those characters. Yep. I guess you and I,

Joe: is there any kung fu?

Al: I don’t think so. Is there, is it a spy thriller?

Andi: No blood, no violence, Joe’z out.

Al: Alright, well here’s a couple things to set the table, Joe. So, didn’t really ask for retirement spitball, but I felt like doing one instead.

Joe: Okay.

Al: So I said what happens if he retires at age 60? Based upon the numbers we have, and that’s starting with about $450,000, 18 years from now, 6% rate of return, adding about 40,000 a year, you end up with about two and a half million. Okay, so far, so good. Now, spending, I wanna spend 120,000 a year, but you gotta do an inflation rate. 18 years at 3%, that’s 204,000, you’re up over 200,000 in spending. And then a pension, between the two of ’em would be about 2,800 at age 60.

Joe: Now that would be call it 40 grand.

Al: Yeah, about 40, about 48 actually at that point.

Yeah. 50 grand. Yeah. Yeah. Call it 50. So about one fifty, one fifty five is the net on 2.5 million. That’s a 6.2% distribution rate. I know we’re not including Social Security yet, but that I would feel uncomfortable with that. Yeah. Now, age 65, that looks a little bit better because now he ends up at 3.6 million.

Spending minus fixed income is about 180 4 now that’s about a 5.1 distribution rate. And then you got Social Security right around the corner. I’m okay with that.

Joe: Yeah. He said 16 to 65.

Al: Yeah, and the truth is, I mean, we’re talking. 18 to 20 something. Three years. So, so the real truth is when the time happens, you’ll be able to decide when you can retire.

So I’ll give you kind of a blanket answer. Yes, you can retire between 60 and 65 based upon the numbers you gave me. 65 is probably more realistic than 60, but I think you’re in the ballpark there. So we’ll start with that, Joe.

Joe: Okay. He’s got $30,000 in a Roth IRA. And his total income is how much.

Al:  I’m not sure he said, or, oh, here it is, 220,000 between the 20 20,000 between two of them,

Joe: between the two of them. Mm-hmm. All right, so he’s in the 22% tax bracket. Yep. Yeah, I would switch to Roth. I would do

Al: Yep. Agree with that.

Joe: because you’re probably gonna be in the 22% tax bracket in retirement with a $60,000.

Well, he’s got the va, so that’s tax free. Yeah. So he’s gonna have decent fixed income. He is,

Al: yeah.

Joe: And then if all of his savings is going into the retirement account, at this point, he’s got 400,000 roughly in retirement accounts that are pre-tax. Mm-hmm. I think hit the 22% tax bracket. Makes total sense.

Al: Yeah. And the, you know, a couple more of my thoughts as to even why that makes even more sense is being at age 42, chances are you’ll make more money over the next 20 years. The, you know, and so. Plus tax rates are lower right now than they have been historically. Will they continue? maybe not who knows?

But it’s a good tax rate and you’re young enough that you’ll probably make more money later, maybe be in higher tax brackets. So, so yeah, I would definitely go the Roth option. I wouldn’t do, I don’t think you need to do any Roth conversions, but just start. Start funding the Roth with current 401(k)K contributions.

That’s what I do.

Joe: What do you think? Should he ramp up some savings?

Al: Oh, when he pays off the debt?

Joe: Yeah. Or cost? Well,

Al: if it were me and I, they love to travel, so, and I like to travel too, so I get that. I would, go 50 50. I. I would, take that extra savings and then I would travel and whatever on half of it.

And the other half

Joe: I would imagine there’s gonna be increase in income.

Al: Yeah. Well, for sure. Right now I’m just saying if, I really wanna retire at 60, then I want to kind of supercharge this a little bit more so that, that would be kind of my thinking on that one.

Joe: Cool.

Well, all Yeah, I would, I think coast mode is, I wouldn’t say coast mode, but let’s say he doesn’t have to put a lot of gas on the old fire. No,

Al: I think, and, that’s kind of, I think a good way to think about your career anyway, which is every time you get a raise or bonus. You can increase your lifestyle.

Maybe half, right? Maybe it’s a different figure, but increase it some, but save more as you, because Joe, you and I have seen this many times. People make more money, they spend more, they make more money, they spend more, and then they get to retirement age and they don’t have much to show for it except they expensive lifestyle.

Joe: I know that

Al: you have some experience

Joe: in it. I do have some experience. Nothing personally just been in the business 25 years. Got it. that’s called, what is that style creep? Yes. Yeah.

Andi: Lifestyle creep.

Joe: Yeah, lifestyle creep. Lifestyle creep. Yep. That’s, yeah. Okay. Okay. Yeah, I think TLC sang a song about that too.

Al: Oh, really? Okay.

Andi: (sings) And so I creep.

Joe: Yeah. Yep. There you go.

Roth or Traditional at Age 48: Which Strategy Makes More Sense? (Phil & Claire, CA)

Joe: Okay, we got Phil and Claire from California. Hey Joe, Big Al, Andi. We’re both 48. When I to retire at 60, we make about $400,000 per year. My Social Security income at age 67 will be 50 k. My wife is not eligible to collect Social Security, but she will have a COLA pension at $60,000 per year, beginning at age 62. Wow. Okay. As we head down the home stretch, we wanna make sure that we are saving enough and we’re putting our funds in the right types of accounts. Our funds are aggressively invested. In the 90/10 stock bond type index portfolio at Vanguard, our jobs are very stable and my only concern when the market drops is that I don’t have enough cash to buy more stocks. We max out our 401(k) and 403(b) accounts every year. We also actively trying to build out our taxable account. In total, we’re trying to save about a hundred thousand dollars per year. Here’s the total funds tax deferred, 1.2. Roth four 50 taxable, 2 25 total 1.9. Question one. Based on the back of the envelope calculations, I’m guessing we could get a five to 7% return and have about five to $6 million at 60, but getting a spitball from you would be nice if we can hit our savings goal. We’ll be able to retire at 60 and spend $150,000 per year. All right. What, how old are they? 40, 48.

Al: They got 12 years.

Joe: 12 years.

Al: and they’ve been a hundred thousand dollars a year, and they got, close to $2 million that, that, that works. And so here’s the math that I did. So you start with one point 9 million, right? And then I just added 75,000 per year. ’cause they said they, they’re trying to save a hundred thousand. So let’s be a little conservative. Let’s go 75,000 savings, 6%, 12 years. Pretty conservative rate, $5 million. So I’m agreeing with this five to 6 million.

Joe: 3% of 5 million is 150.

Al: Mm-hmm. And then you look at spending one 50 at a 3% inflation rate at 12 years from now would be 214,000 divided into 5 million would be 4.3% distribution rate, which is at 60. It’s maybe just a little high, but not bad. Especially when you consider she’ll get a pension in two years of 60 grand. Of 60 grand. You add that in and now you’re at a 3% distribution rate. So yeah, it seems just fine.

Joe: I really would like to have more Roth money to optimize taxes in retirement. Being in a high state tax is a bit painful, and we’ve been joint paying less taxes now. But I wonder if we should be investing in a Roth version of the 401(k) and 403(b). Should we shift our pre-tax retirement contributions to Roth or should we keep investing in the pre-tax accounts to do Roth conversions in retirement? Thanks for all you do for this community. For the community Al.

Al: Yeah, we’re doing our community service.

Andi: It’s the personal finance community.

Joe: Yes. We really enjoy the show. Yeah. I would switch to Roth Phil. Phil and Claire. Is that like a little catchphrase? Any catchy names there?

Andi: That is from, yes, that is from, oh, what is it? Modern Family.

Al: Oh, there, yeah, that’s right. Okay. I got that. Modern Family.

Joe: Yeah. Never, never got into that one.

Al: Yeah.

That’s actually a pretty good one.

Joe: Is that with that Bundy.

Al: Yeah.

Joe: Got it.

Al: Yep.

Joe: Yeah,

Al: he married, what’s her name, Sophia. Oh, yeah. in the TV show. In the, okay. Not in real life. Got it. yeah, 395,000 per year. Great income, but that’s in the 24% bracket. we kinda like that for Roth contributions, so I agree with you.

I’d switch to the Roth contributions there. Switch the Roth. Then you, know, think about this. At age 60, you got a lot of time to convert the rest of your dollars into a Roth IRA at lower tax brackets. So that’s when I’d be thinking about Roth conversions. Personally. Lot of money on this show.

Andi: Yeah, Your Money, Your Wealth. Imagine that.

Joe: a lot of successful people.

Al: Yeah, I was just waiting for the people that had 11 million to say, can I retire? Yeah. Can I retire in a hundred thousand dollars? And then we’d get about 25 comments. You only talk to people about people that have a lot of money. Yeah. How about, you know, know, I,

Joe: you know who I met? I met Ken and Barbie.

Al: Ken and Barbie. Barbie.

Joe: Yep. Remember them?

Al: No,

Joe: They were, and I screwed up the, question. ’cause it was like they had millions and it was like. And I thought they said I wanted to spend $20,000 a year. Oh. But it was actually $20,000 a month.

Al: Well see. I, okay. I do remember it and I think that’s what I said. Let’s assume that. I think we did assume that. Yeah. Yeah.

Joe: very nice people.

Al: How’d you meet ’em?

Joe: Huh? Well, people tracked me down. Ken and Barbie. Okay. Well that’s pretty good. Yeah. Anytime any of these, our listeners will – They can find me.

Al: Yeah, they can find you.

Joe: They know where I work.

Al: They put in, yeah, they do know where you work. They can just stand outside the building.

Joe: Well they just get in a, you know, ask for me and give ’em a real life spitball.

Al: Yeah.

Joe: Alright. I’m tired. Yeah. Charleston, South Carolina You ever been?

Al: I have not. Was it good?

Joe: Yeah, it was a good time.

Al: I’d like to go. I’ve heard good things.

Joe: Yeah. It’s great.

Al: You liked it?

Joe: Yeah, I really enjoyed it. I stayed on Kiawah Island though, which I thought was pretty close to Charleston, which about an hour.

Al: Oh, okay. So the closest I’ve been is Chattanooga, Tennessee.

Joe: Okay. I’ve been to Chattanooga as well. Oh, but oh, the travel. You’re traveling to Tahiti? Yeah. next week. Oh man. Yeah. San Diego Airport wasno bueno.

Al:  I can imagine. Well, hopeful, hopefully. Yeah. A lot of people fights, a lot of people upset. Hopefully the government’s open by then and we don’t have a problem.

Joe: Yeah, we had a couple hours away.

Al: I’m sure at least you got you. You made it.

Joe: We made it. It was foggy though. I thought for sure they were gonna circle and land in Ontario. Yeah. So, yep. yep. All right. There we go. another wonderful episode.

Thank you Andi. Thank you both. How’s the weather down under?

Andi: let’s see. At the moment it’s overcast and it looks like it’s planning on raining. We’re going into, you know, we’re in mid spring now going into summer, so the temperatures are supposed to start ratcheting up as we get into Christmas season get pretty nice.

Al: Yeah, absolutely. Maybe even get hot at some point.

Andi: Oh yeah, absolutely. yeah. We’re getting up to like 30 degrees. You can translate that, Al.

Al: That’s about 82. 80 ish, something like that. I think.

Andi: A little bit more. Yeah.

Al: Little more. 85.

Andi: Yep. Somewhere in there.

Joe: 30 degrees Celsius.

Al: Celsius.

Joe: I drink Celsius.

Al: You have to be, you have to be a world traveler to understand she was talking Celsius.

Joe: Got it, got it. All right. That’s it for us. Thanks, again for the questions. We’ll see you guys next week. Show’s called Your Money, Your Wealth®.

Outro: Next Week on the YMYW Podcast

Andi: Next week on YMYW we’ll continue the Roth vs. traditional conversation for Todd and Margo in Texas, who want to retire early at age 50. David asks for a retirement spitball for those not in the top .01%, Mia and Jessie in Seattle are hoping they can buy their dream lake house and retire, Yosemite Sam in Texas wonders if he should pay off his lake house or keep his low rate mortgage, and Birdie and Bogie want to know if they can afford a $500K beach home and still retire early at 55. Join us next week, won’t ya?

Your Money, Your Wealth® is your podcast, and this show would not be a show without you and your questions and your feedback, like Gary sent us this week. Subscribe on YouTube, turn on notifications so you can see the spitballs as soon as they’re available, and jump into the comments with me and tell me your thoughts on Roth conversions too. Send your friends a link and invite them to join us – tell ‘em we’re over here making fun of finance every week on YMYW. And finally, leave your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts and any other app that accepts them, like Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Podcast Addict, and Podchaser.

Your Money, Your Wealth is presented by Pure Financial Advisors. We are in the final month of 2025, and maybe you’ve been procrastinating making those last minute moves to lower your 2025 taxes? I mean, yeah, you can contribute to a Roth by April 15 of next year for it to count for this year, but a conversion? You only have 4 weeks and one day left. Click or tap the Free Financial Assessment link in the episode description to schedule some one-on-one time with the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors. They’ll help you craft your best strategy to save as much as possible on taxes, and they’ll build with you the retirement plan that matches your unique needs and goals. Anyone can get a Retirement Spitball. But you’re not just like anyone else – and your financial plan shouldn’t be either. Meet in person at one of our 14 offices around the nation or online, via Zoom, right from home. Call 888-994-6257, or click or tap that free assessment link in the episode description, and schedule your Free Financial Assessment today – while there is still time.

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.

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