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
August 15, 2023

What’s the best strategy for E-Dog’s restricted stock units with his employer, how are RSUs taxed, and how do Roth conversions fit into the mix? Should Jay in Raleigh liquidate his annuities or follow “Stan the Annuity Man’s” advice and take the annual payments? Elisa wants to know how a mutual fund portfolio would work in retirement, and what’s a good way for listener Joe to invest in bonds in a taxable account to bring his portfolio back into proper balance? Finally, the fellas spitball on Medicare savings vs. Roth conversions for David, and an unrealized gain strategy on an UTMA education savings account for Jay in California.

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Show Notes

  • (00:50) Restricted Stock Units: RSU Spitball Analysis (E-Dog, Boulder, CO)
  • (14:44) Annuity Retirement Spitball Analysis (Jay, Raleigh, NC)
  • (26:36) How Would a Mutual Fund Portfolio Work in Retirement? (Elisa)
  • (31:13) Asset Location: How to Invest in Bonds in a Taxable Account to Rebalance? (Joe)
  • (35:09) Medicare Savings Vs. Roth Conversions (David, Logan, NM)
  • (40:04) UTMA College Savings Unrealized Gain Strategy (Jay, CA)
  • (47:05) The Derails

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What’s the best strategy for E-Dog’s restricted stock units with his employer, how are RSUs taxed, and how do Roth conversions fit into the mix? That’s today on Your Money, Your Wealth® podcast 442. Plus, should Jay in Raleigh liquidate his annuities or follow “Stan the Annuity Man’s” advice and take the annual payments? Elisa wants to know how a mutual fund portfolio would work in retirement, and what’s a good way for listener Joe to invest in bonds in a taxable account to bring his portfolio back into proper balance? Finally, the fellas spitball on Medicare savings vs. Roth conversions for David, and an unrealized gain strategy on an UTMA education savings account for Jay in California. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Restricted Stock Units: RSU Spitball Analysis (E-Dog, Boulder, CO)

Joe:  We got E Dog writes in, Big Al. E Dog.

Al: E Dog. All right.

Joe: “Hey there, YMYW crew. I have a couple of questions for you about restricted stock units. I’m 39. My wife is 40. We have two kids, ages 9 and 12. We live in Boulder, Colorado. We have roughly $1,000,000 in retirement savings, $50,000 in a 401(k), $750,000 in a Roth IRA, $180,000 in Roths. We have roughly, what, $270,000 in non-retirement savings, $100,000 in a 529 plan, $85,000 in a HSA, $85,000 split between taxable non-brokerage accounts and a savings account, as well as a fully paid house worth $900,000, total net worth about $2,100,000. We started a new job last year where roughly half of my total compensation comes from RSU vesting.” RSU is Restricted Stock Units.

Al: Restricted Stock Units. Yeah.

Joe: Alright. Colorado. What’s a big company up in-

Al: Colorado?

Joe: Boulder.

Al: In Boulder. Well, there’s- Gosh, I don’t know of a big company, but there’s some government organizations. I sort of forget what NASA, maybe not NASA, but something scientific.

Joe: Well, government agencies don’t offer RSUs.

Al: Okay.

Joe: Can we get a- get a restricted stock unit for the USA?

Al: I guess we are talking restricted stock units. You know what-

Andi: When I do a Google search, the biggest companies to work for in Boulder are Qualcomm, IBM, Google, Target, University of Colorado at Boulder, Amazon, Home Depot-

Joe: Amazon.

Al: Yeah. I couldn’t think of any ones that are headquartered there, but okay. There you go.

Joe: NASA. There you go.

Al: NASA. I want to get some RSUs at NASA.

Joe: E Dog works for NASA. He’s got some RSUs.

Al: Yeah. Yeah.

Joe: “This is the first for me, and I’m trying to figure out how to think about- think about it for a tax perspective and general strategy. Looking for some spit balling.” Okay, so restricted stock units. Let’s talk about that real quickly. So a lot of large companies give their employees some additional benefits.

Al: Right. It’s like equity. It pretty much is equity, except you don’t get it all at once. So restricted stock units simply means that you have access to stock, but it’s currently restricted, meaning that it needs to, there’s something needs to happen.
And usually it’s time.

Joe: Vesting.

Al: Vesting. Right. So usually it’s time. So usually it’s over 3 years, 4 years, 5 years. But if it were 4 years, let’s just say, then 25% of your grant would be vesting each year.

Joe: It depends on the company, like Amazon, for instance, like the first year of vesting, I believe is 5%. And then it goes to 15%, then 40%, 40%, something like that.

Al: It can be all over the place. Yep. And I have seen Joe, sometimes based upon merit and things that you do. So it can be, it can be different, but usually it’s time testing.

Joe: Yeah. Depending, of course, on, I think your role within the firm and how much money that you’re getting and so on and so forth. So, so he’s now receiving this benefit, has never received a restricted stock unit in the in the past and he’s like, okay, well, here, this is pretty cool. What do I do with it now? All right. So he’s like “The initial grant was $300,000 with the 4 year vest. The RSU vest once a year in October, then I can sell on the vest date. No sale restrictions post vest date. I receive additional grants each year of around $75,000.” So he’s got $300,000 vest over 4 years. So $75,000 is what he’s going to receive each and every October. So what happens is that $75,000 of XYZ stock. I don’t know. Maybe he works for Google, Microsoft.

Al: Right. One of those. Not NASA?

Joe: Not NASA.

Al: Got it.

Joe: No. So they’re going to deposit $75,000 into an account. And I believe he says, I don’t know, is it Fidelity or something? Vanguard? Maybe I should just read. “So I’m generally bullish on my company. Stock is up over 110% since my initial RSU grant last year. And want to keep at least a portion of the company stock. However, the total RSU grants is our sizable portion of my overall net worth current value of about $600,000. The unvested stocks are held in E*TRADE where everything else I have is in Vanguard. From an account simplicity standpoint, I plan on selling all the vested RSUs on the vest date and move them- and move the liquidated money into Vanguard taxable brokerage account. I have to pay income tax on the vest date anyway, right? Questions. How are the RSUs taxed? My understanding is the value of the stock at the vest date is treated as taxable income. If the vested stocks are sold within one year of the vest date, the change in value from the date of vest would be treated as short term capital gains. And if the stocks are sold greater than one year following the vest date, the change in value from date of vest would be treated as long term capital gains. Correct so far?” Yes, you are.

Al: Agreed.

Joe: So E Dog- So the $75,000 that he’s going to receive in October is going to be taxed at ordinary income rates. It sounds like he wants to sell right at the vest date anyway. So usually what happens too is that the company is going to withhold a little bit of taxes for you. So you want to make sure that hey, what is your other income? If it’s $75,000, it’s anywhere from 22% to probably 30% some odd percent is what they can withhold that will automatically go to the IRS. So you don’t want to be surprised with the larger tax bill when it comes to some of these vesting. So, yes, the $75,000 is going to go into your account, and if you sell right away, it’s going to be cash, and then you just take the cash and you transfer that into or take it out and deposit it in the Vanguard.

Al: Yeah, and to follow up on that, so the way these work, once they’re granted, there’s no taxation, but once they vest, whatever they are worth on the vest date, that’s what you have to pay tax on. So it can be higher or lower than what you were expecting.

Joe: Right.

Al: And so what it’s worth on the vesting date. So that basically is like compensation, right? It just gets added to your W2 unless you don’t, if you do same day sale, right? So then it’s like- it’s like compensation, but here’s your other choice, is you can elect to not sell it. And just hold it. You still have to pay the tax on whatever it’s worth, but now you got the stock. And once you have the stock, if you wait another year and it goes up, then you would get long term capital gain on that part of the gain. But the first part is always ordinary income. Whether you decide to sell it that that first day of vesting or hold it, you still have to pay the same tax.

Joe: All right, still more to go here for E Dog. “Since we have roughly $750,000 in a rollover IRA, we could roll some of that into a Roth and pay the conversion tax with the RSUs. If I’m bullish on the company, should I sell the vested shares immediately?” Okay. Yeah, I would. “Move the money into a non-qualified Vanguard account, roll a portion of my IRA to a Roth IRA, buy back company shares in my Roth, pay conversion taxes, using the RSU dollars or the liquidated RSU dollars. If I’m not bullish on my company, I would likely sell all the RSUs and convert to VTI or VT in my non-qualified brokerage account. My main hesitancy on Roth conversion at this point is my marginal tax rate begins with the number 3, and our current savings rate is high enough that we’ll likely be in the 12% tax bracket during retirement. My plan following retirement prior to 59 and a half is standard Roth conversion ladder, where I live off of non-qualified taxable brokerage account and slowly convert to the top of the 12% bracket. After building up 5 years of conversion dollars, live off Roth principal while continuing to convert. So paying 32% on conversion now versus 12% on the conversion when I retire gives me heartburn. What am I missing when I’m thinking about RSU vesting? Thanks for your spitball analysis. I’ve written in before, but here’s a little background for you just to paint the picture.” I like to paint the picture.

Al: Yes.

Joe: I want to see what E Dog is really doing here.

Al: And it looks like we have a picture.

Joe: Yeah, we do have a picture of E Dog. He wants to write this out for me here. “When I actually leave the house, mostly to go skiing in the winter or hiking, biking, camping in the summer-“ big outdoors guy here “-I drive a 2021 Honda Pilot usually filled with- filled to the brim with outdoor gear and my golden doodle puppy, who I’m lucky it doesn’t puke on the way up to the windy canyons headed to the mountains.”

Al: Little windy roads.

Joe: Yeah.

Al: Don’t want a dog puking.

Joe: No. Don’t want that. “”Lovely wife drives a 2011 Honda CRV. Beverage of choice is my own home brewed rye IPA.”

Al: Wow.

Joe: This guy is from Colorado. Most definitely. He’s got the little Honda Pilot filled to the brim with just-

Al: – all his outdoor toys with his rye beer that he makes.

Joe: A little Panagonia. What’s that brand?

Andi: Patagonia.

Joe: There you go. Yeah. He’s all- he’s decked to the brim and that stuff.

Andi: And his golden doodle.

Joe: Yeah, the golden doodle. “I tend to listen to the show while I’m walking my dog through the vast open spaces behind my house in Boulder looking westward toward the majestic flat irons.”

Al: Wow. I can now- I can picture that because I’ve hiked-

Andi: It’s in the picture.

Al: Yeah. Well, you’re right. It’s in the picture also, but that’s, I see it. The dog’s big. The flat irons are super small. So they’re in pretty far distance from this one.

Joe: All right. There’s a- there’s a lot to-

Al: There’s a ton. Yeah. So I guess- I guess we already started with RSUs, what they are and how they’re taxed. So we’re probably good there.

Joe: Yep. If he’s bullish on the company, does he take the RSUs? Does he convert and buy the stock in the Roth? I mean, Sure. I mean, you want to have investments in your Roth that will probably give you the highest expected return?

Al: Yeah, but I might disagree. If you’re bullish on the company, why do you sell the stock at all? Just keep it.

Joe: Wouldn’t you rather have it in a Roth?

Al: Well, yeah, if you can buy it that way, I guess.

Joe: Well, why wouldn’t you be able to buy it that way? Because I’m already taxed at ordinary income when I- when it’s on vesting, so I’m already paying the tax, right? So I keep it and I’m going to pay a long term capital gain. I vest, I sell, pay no tax, I mean, no capital gains tax, ordinary income, then I just buy the shares of my Roth.

Al: All right. So you’re saying, okay, you’re saying sell and then just go ahead and rebuy in the Roth.

Joe: Yeah.

Al: Okay. Okay. I- Yeah.

Joe: You disagree with that?

Al: Well, I mean, I was just looking at- I wasn’t going as deep as you.

Joe: Got it.

Al: If I’m bullish on the company, I don’t sell the stock, right? Which is what I was saying. But you’d already taken another layer.

Joe: Got it. I’m selling the stock and rebuying it.

Al: Yeah. I mean, I was just looking at if I’m bullish on the company, I should sell the vested shares immediately. No, that’s the opposite of what you do.

Joe: Got it.

Al: But what you’re saying is, it’s okay to sell because you got to rebuy them at Roth.

Joe: Right.

Al: Okay. So you’re like 5 steps ahead of me today.

Joe: Yeah, I’m quick. I’m quick, Al. I’m quick. I don’t trust his numbers, to be honest with you, because he’s doing some, you know, he’s got to be an engineer. He’s got his spreadsheet out. Right. And you’re thinking, all right, well, with my savings rate, I’m saving a ton of money and I’m going to live off of my non-qualified accounts. I’m going to do conversions to the top of the 12% tax bracket. And then from there, I’m going to live off of the principal of my Roth and still do conversions? You don’t want to do that.

Al: Agreed. I mean, what’s the point?

Joe: What’s the- Yeah. So you want to probably rethink some of the strategy here. He’s smarter than most when it comes to this stuff. He’s probably thought it through. He’s- well, he wrote in before, so we probably gave him advice.

Al: It’s possible. And also, let’s see, he’s young, he’s only 39.
So he’s got a lot of years to do this. And I think just a general comment, if you can pay your taxes on Roth conversions in a 12% bracket versus a 32%, yeah, I’m all over that. It’s just that it’s hard to know when you’re 39 exactly how this is going to roll out. So that’s why we might suggest you do some conversions now, just to make sure you get some in there. We’re assuming Roth conversions will be available forever, but we don’t know that.

Joe: Yeah. If he’s in a 30% tax bracket today, that’s probably a little steep.

Al: It’s a little steep, but you could, to the extent he’s got his 401(k), you might do the Roth option there, which is basically same, same, right? So you could- you could do some conversion. But yeah, the concept is correct, which is you always want to try to do your conversions when you’re in a lower bracket.

E-Dog's Golden Doodle
E-Dog’s Golden Doodle with “the majestic Flat Irons” in the background

Andi: You’ll find a picture of E-Dog’s golden doodle and the majestic Flatirons in the podcast show notes, along with the 6th annual YMYW Podcast Survey! You can help us make Your Money, Your Wealth your top personal finance podcast simply by answering 17 questions about the show, and by doing so you’ll be in the running to win a $100 Amazon e-gift card! Click the link in the description of today’s episode in your podcast app to go to the show notes, see that great dog picture, and access the survey and the secret password. US residents only, no purchase necessary, survey and giveaway close and winner chosen at 4pm Pacific time on August 31st, 2023.

Annuity Retirement Spitball Analysis (Jay, Raleigh, NC)

Joe: “Hey there, Al and Joe, it’s Jay, originally from Brooklyn, New York, and living in Raleigh, North Carolina for the last 17 years. I’m 64. I’m single, less than 3 months from receiving Medicare. I don’t drink as much as I used to for no special reason. But when I do, it’s either Corona with a lime or a little Grey Goose Vodka on the rocks, also with a lime.” Yeah. Mix those two together.

Andi: Oh God.

Al: That sounds like something you would do.

Joe: Yeah, puts a little Corona in my Grey Goose. “I’m driving a little 2018 Jetta with 32,000 miles, which is my fifth leased and/or purchased Jetta since 1985.”

Al: Did you ever own a Jetta?
Joe: Big fan of the Jetta there, Jay Jettaman.

Al: I actually did own a Jetta.

Joe: I didn’t- I’ve never owned a Volkswagen. Oh, okay, back to Jay here. “As a side note, in the mid-60s-“ that’s when Al went to high school-

Al: – ‘70s

Joe: -1973 “- my dad, his partner had a kosher bar, a butcher shop in Brooklyn named Alex and Joe’s.” Oh, it’s kind of like you and I, Bud.

Al: It is.

Joe: “I stumbled upon your podcast a couple of months ago.
And now I listen to 3 or 4 episodes, two to 3 times a week.”

Andi: Oh my gosh.

Al: Wow.

Joe: Wow.

Al: That’s amazing.

Andi: Two days in a row they are listening, like, just like constantly.

Joe: He’s laying out on his pool at his condo. He’s probably got a little speedo on. He’s got the earbuds in. And he’s got a-

Andi: And he’s got a Grey Goose and Corona.

Joe: He’s got a cooler. I can just picture Jay right now. He’s in Brooklyn. Brooklyn, New York. He’s just, he’s laughing his ass off.

Al: You know what? I can’t imagine anything more fun.

Joe: He’s just sitting at the condo pool. He’s got a little Corona on one hand.

Al: Sometimes other people would show up. I wonder, does he have to turn the volume down, put a little headphones?

Joe: Yeah, he’s got headphones. “As for myself, I’m semi-retired, working part time at Target collecting Social Security and receiving a monthly pension. These 3 incomes satisfy my basic needs of roughly $3500 a month. I really pride myself at the concept of living within the means- within your means.”

Al: Yeah, you do. Good for you, Jay.

Joe: Alright, “My net worth is a modest $500,000, not including the $180,000 equity I have in the condo, of which there’s 12 years remaining, with a $115,000 balance at a 2% interest rate. My $500,000 net worth is as follows. I have $220,000 in combined 401(k)s and IRAs. I have a $4000 Roth and about $20,000 in a brokerage account. Now for the annuities. I have a cash annuity with an account value or death benefit of $143,000. Which will give me $12,400 annually once I turn on the payments. I also have a Roth annuity with an account value of $112,000 that will pay me $9800 annually once I turn that on. I own both annuities since- I own both annuities since 2010.
So there’s no longer any surrender charges. Also, the lifetime payments of $12,498 will continue to grow daily at a guaranteed 6.9% annually until I start taking distributions. One nice perk or feature is I can take a one-time distribution from either annuity before taking annual payments, which will reduce the annual payments proportionately. But I really haven’t had the need at this time for that. Some people complain about annuities, but for me, they serve their purpose.” Yeah. He’s just-

Al: – loving it.

Joe: -Hey, man. Yeah. I don’t care what people say.

Al: I’m just doing it.

Joe: I’m just-

Al: I’m going to sit by my pool in my speedo, whether you like it or not.

Joe: Man, they serve their purpose. I don’t care. Because I don’t care about the fees the salesman made on me as long as I get what I signed up for. All right.

Al: Sure. I don’t disagree with that.

Joe: I like that. “Here’s my dilemma. My annuities have a fee of 1% based on the lifetime income basis, which amounts about $4400 a year, as does the lifetime income basis, which is deducted from the account value death benefit. Also, when I start to take distributions, those amounts are also deducted from the account value. Therefore, there’s a definite probability the amount I’ll be leaving to my beneficiaries can theoretically reduced to zero after 11 or 12 years, depending on the market once I start taking payments. I was contemplating liquidating both annuities over a two-year period for the cash annuity in order to accommodate the $43,000 of ordinary income and invest it myself. But it won’t be easy to get the same returns. I made a call last year to Stan the Annuity Man-“

Al: That’s a great name. We should get something catchy like that.

Joe: I’ve got to get Stan the Annuity Man on here, man.

Al: What can we do with Joe and Al?

Joe: We’ll figure it out.

Al: Andi, get on it. We’ll come up with something.

Andi: Okay, I’m working on it.

Joe: That is catchy.

Al: It is. I mean, even I want to meet him.

Andi: Well, I mean, you guys are the Roth Brothers. You do have that.

Al: Yeah, but that doesn’t rhyme.

Joe: That’s not Stan the Annuity Man. That just rolls right off your tongue.

Al: We’ve gotta do better than that.

Joe: “- and he said I should just take the annual payments because that’s what I originally purchased the annuities for. My broker’s advice is basically the same, saying, don’t let the fees bother you.” Yeah, because that’s what- how he got paid. All right. Where’s page 6?

Al: There you go.

Joe: “But my thoughts since taking the annuities 13 years ago, when the sky was falling have changed because I want to leave a nice legacy to my daughters, now, 24 and 26. What do y’all say?” Okay, we get this. So he bought these annuities for income. So he bought them when the sky was falling. He’s like, I don’t want to lose any money. I want a guaranteed income. I want to have a nice, safe retirement. I want to hang out by my pool. I want to listen to podcasts and I want to have my Corona and I want to have my lines. And then maybe a little pop of a Grey Goose every now and again.

Al: So let me- not everyone knows what an annuity even is. Why don’t you start there?

Joe: If you’re buying an annuity, annuity, annuity, annuity.

Al: That’s all folks.

Joe: We’re all done now. It’s an insurance product. And so what you’re doing is you’re guaranteeing yourself an income stream.
And that’s what he purchased it for. He wanted to have a nice retirement. And so it’s like, all right, well, I want to have a guaranteed income. So he put a lump sum of dollars in this overall product. And then the product is saying, hey, we’re going to guarantee you 7% per year on your money until you turn the income on. And then from there, we’re going to give you a guaranteed income stream. Right. And then if the cash value of the annuity runs out, don’t worry about it. We’re still going to pay you whatever that dollar figure is.

Al: We promised it.

Joe: Right. So if you think about it like this, so he put, let’s just call it because I don’t want to do the math. I’m going to make the math really simple. $100,000 into the product. And he did it, what, 13 years ago?

Al: Sure.

Joe: So $100,000, let’s say 10 years later at 7%, the money doubles. So now he has $200,000.

Al: Okay. Got it.

Joe: And so they’re going to guarantee him a payment. Let’s say that payment is going to be $10,000 per year.

Al: Yeah. Which sounds good.

Joe: Yeah. It’s like, wow, $10,000. That’s rich. Right.

Al: And he’s getting $12,000 on $150,000. So he got a better deal.

Joe: So $10,000- So he was like, okay, well, I’m going to get a guaranteed income stream of $10,000 for the rest of my life. But then he’s like, well, the 6% or the 7% rate of return is a really good return, but he’s not getting anywhere near a 7% rate of return.

Al: Yeah, and that’s what people don’t know, so explain why that is.

Joe: Because what they’re doing is they’re giving him his principal back. So $10,000 into $100,000 is 10 years. So it’s gonna take me 10 years just to get my principal back, and then it’s gonna take me another 10 years to get the other $200,000 out. So it’s gonna take me 20 years to double my money. Or more.

Al: 30, because you get your money back first and then 20 more years. So in other words, the rate of return that you’re expecting to get would take 30 years. And if you die before that, you lose.

Joe: And so you really don’t earn any interest on your money until the cash value is gone until you get your principal fully back. If you die with cash value, then the beneficiaries get what the cash value is. But if I have longevity, I’m going to probably run out of the cash value, but I’m still going to get a guaranteed income. So you have to take a look at the total payments that you’re going to receive and divide it into the principal- or the principal that you put in over the many years that you had the product. It’s going to probably end up to be 2% or 3%. I don’t care about the fees either. The fees are regardless because you’re going to get a guaranteed income. If you’re happy with the guaranteed income for the rest of your life, even though you probably are going to deplete the overall cash value, as he said, in 10 years, because that’s his principle back. If you want to leave a legacy, then I would get out of the annuities. If you want a guaranteed income stream and making sure that you can live the life that you want to and not worry about investing the money and be satisfied with a 2% to 4% rate of return, then keep the money in the annuities and just annuitizing things.

Al: And I think, well, don’t you kinda have to look at it where it’s at right now, $143,000. So if you pull that out, you could, you would get nowhere near $12,000. So I think you have to look at it that way too. So I would actually just keep it in. But when you look at the overall rate of return that he could have gotten not doing the annuities. He would have had a lot more than $143,000. I think that’s the- that’s the difference here.

Joe: Well, he’s got $143,000 in one and $112,000 in the other. So $143,000, what is that? $143,000 and $112,000 is $255,000?

Al: Yeah.

Joe: Right. And so he’s saying, all right, I’m going to get $20,000 on $255,000.

Al: Correct.

Joe: So if he cashes those out, you’re going to take 4% on $255,000. It’s going to be $10,000.

Al: Yeah. So income wise, you do better, but there’s no legacy if you die prematurely.

Joe: Correct.

Al: Well, that’s not true. You get the cash value.

Joe: Whatever cash value is left.

Al: Yeah. Right.

Joe: Because when he starts taking that $20,000 out, it’s going to deplete the $20,000, you know, so he’s going to be out of cash value probably like he says, 12 years. So if he lives longer than that, the cash value is going to be zero. And the beneficiaries will get nothing from those accounts, but he’s got other monies. He’s got the condo, right? He probably has a boombox that he listens to Your Money, Your Wealth® on.

Al: I suspect, right? Yeah, so I think I would just keep it too. I think based upon what your goals were, I think that’s right. I think that what, I agree with what you said, Joe.

Joe: He’s not getting 7% is the issue.

Al: Totally agree. But that’s not the question. The question is should I keep it or not? I would keep it. But for those that have not yet purchased an annuity, think about this very carefully because a lot of the rate of return is you’re getting your money back. I can’t say it any more clearly than that. The rate of return is your own money, right?

Joe: Yeah. You got to put return of principle in that overall return.

Al: So it’s not- you’re not comparing apples and apples when you’re looking at other alternatives, in terms of a percentage rate of return.

How Would a Mutual Fund Portfolio Work in Retirement? (Elisa)

Joe: We got Elisa. “Hey guys. Love the show. A long-time listener here. Can you share how a mutual fund portfolio would work in retirement? For example, I have 500-“ is that $500,000?

Al: Yeah, $500,000.

Joe: Alright, “-$500,000 and withdraw $5000 in a year.

Al: $50,000.

Joe: What? There’s no commas!

Al: I know, it makes it harder. Like, let’s see, it’s 5 with how many zeros? Yeah, commas do help us. I will say that.

Joe: “-$500,000 and withdraw $50,000 in a year. Do I hope and pray that the value increases by $50,000 the next year so I can withdraw the same amount? What if the market’s down? Do I wait until it’s up and make my money to withdraw and keep the same strategy each year? Depending on the month, my account goes up and down. Your insights on this- on this- typically works, would be helpful.”

Andi: On how this typically works-

Joe: How this typically works- Very good question.

Al: So you’re taking 10% out, $50,000 out of $500,000, so you hope and pray that it goes up $50,000 so you’re in the same spot.

Joe: So, if you take a look at the long-term average of the overall stock market, it’s roughly 10%.

Al: Yeah, 100% stocks.

Joe: 100% stocks.

Al: Right.

Joe: But there’s never been a year where it did 10%.

Al: That’s the problem, right?

Joe: Some years you might get 15%, some years you might get negative -5%.

Al: Right, right.

Joe: And so this is the problem. Because the strategies that a lot of people use to accumulate wealth, as they say, for retirement, I mean, the rules totally change when you hit retirement and now you have to start taking money out because there’s all different sorts of risks that you have to be careful of.

Al: Yeah, what if the market goes down 10%? Are you supposed to put $50,000 back in that you don’t have?

Joe: Exactly.

Al: Yeah. This is not the best way to think about this.

Joe: Because averages don’t make any sense at all when you’re taking dollars out. Right? It’s like you could average 10%, 5%, 6%, but as soon as you start taking dollars out of the overall portfolio, especially if you have a down year, this is what really blows people’s retirement wide open.

Al: It’s why we talk about a distribution rate, and typically people like to say 4%. 4% is not 10%, right? So 4% of $500,000 would be $20,000, right? So that’s a lot lower figure. But the reason why you want to lower figure is because it takes away the market variability. Also, if you take out what the market pays you every single year, because of inflation, you’re basically- you gave yourself a demotion, right? Every single year. In other words, you may have the same dollars, but you can’t pay for the same amount of electricity, food, clothes, on and on. So we want you to keep some in the account for growth to cover all these things. But you come up with a distribution rate that’s less. Hopefully, less than the rate that you earned so that you’ve got more cushion for these things.

Joe: Yeah. So instead of like hoping and praying for a 10% rate of return-

Al: – which is what you’d have to do.

Joe: Exactly. And the money will last. She could get really, really lucky and have a huge bull market for the first 10 years in her strategy.

Al: Yeah. And if the market goes up zero, she’s got 10 years and she’s outta money.

Joe: She’s done. Right. If the market’s down 10%, she’s down an 8%.

Al: Yeah. Right, right. It goes down 50%. She’s got 5 years, so you just have to, these are the things that you have to think about and, and so it’s why you don’t necessarily take out exactly what you earn every year because of all these contingencies, unless you’re willing to put money back in when it goes down and most people aren’t willing to do that.

Joe: So what she should be looking at or what she should be doing is having more of a long term strategy or figuring out how much money does she need to live off? And if it’s $50,000 a year, don’t take $50,000 from your $500,000 portfolio, pick something substantially less. And then you’re going to have to find part time work. You’re going to have to reduce your living expenses. You’re going to have to do some different things to maneuver, or you’re going to run out of liquid assets. There’s a high probability that she would run out of liquid assets.

Al: That’s the right way to say it, because these are only probabilities here. And what we, what we like to think about is, is what’s a 90%, 95% probability of you not outliving your money, right? We, if it’s 50/50 or something less, that’s too risky to me.

Joe: Sorry for the bad news. Hope that helped.

Asset Location: How to Invest in Bonds in a Taxable Account to Rebalance? (Joe)

Joe: Don’t know where this, where, where’s Joe from?

Andi: He doesn’t tell us.

Joe: So it’s violation.

Al: Reject. Next.

Joe: Next.

Al: He does tell us he’s 41. And do you remember those days?

Joe: When I was 41?

Al: Yeah, way back when.

Joe: No, a couple of years ago.

Al: I don’t think so.

Joe: Yeah. “Hello, Joe and Big Al. 41 years old, max out my 401(k) and Roth IRA every year.” All right, congrats. “I’m trying to stay a little more aggressive with my 80/20 split of stocks and bonds because I will have a pension when I retire. My problem is that I also invest a lot of money each year in a taxable brokerage account that skews my portfolio ratio up to 95% in stocks. What is a good way to invest in bonds in a taxable account to bring my portfolio back to the ratio I’m looking for? I drive a red 2017 Toyota Corolla and I love gin and tonics with a little splash of Saint Germain.”

Al: Sweet.

Joe: Well, here’s what you do, Joe. You don’t buy bonds in your brokerage account.

Al: Yeah. Unless you buy like tax efficient or muni-

Joe: Just buy your bonds in your IRA.

Al: Totally agree.

Joe: There you go. Done. Buy stocks in your brokerage account.

Al: Yeah. That’s it’s much easier. I mean, if you think of your- all of your accounts is one account, right? Which you’re compartmentalizing this, right? So think of your IRA as part of your overall investable assets. Do your rebalancing in your IRA. You want the bonds in there anyway, because bonds produce ordinary income, which is the same as an IRA, and they don’t grow as much as stocks. And you don’t get favorable treatment in a retirement account where you do on the capital gain brokerage side.

Joe: Yeah, because if I have a stock in my brokerage account and it’s $100 and it grows to $200 and I sell it, I’m going to be stuck with the- I mean, I’m taxed at a lot lower rate. It’s a capital gains rate. If I have the stock in my Roth account, $100 to $200, that’s even better because it’s going to come out tax-free. If I have it in my IRA, it’s going to be taxed at ordinary income. So if you want bonds, you want your investments that have a safe- your safer investments have a lower expected rate of return because they’re safer. Right? That’s your balance. So keep those more in your IRA accounts. Right? You want your more aggressive type investments in your Roth in your brokerage account. So if he’s got this 80/20 split, he’s might be thinking, well, I want 80/20 in my Roth, 80/20 in my IRA, 80/20 in my brokerage account. But it sounds like he’s 100%. Does it skews his portfolio to 95%? Well buy your bonds in your IRA.

Al: Yeah. I think that’s exactly right. And here’s the next level.
Here’s how we think about it, which is start with your Roth IRA. Put your highest growth type investments in there. The highest expected return. No guarantees, but highest expected return.

Joe: Most volatile. The most things that go-

Al: Yeah, things that go up over the long-term, like small companies, like value companies, like merging market funds. Those kinds of things tend to do better over the long term, but they’re more volatile. Then you put your safest, safest step in the IRA and kind of fill that up. And then whatever’s left, you put in your brokerage account. Now that’s easier said than done, but that’s- that would be a perfect way to do this from a tax standpoint. You have the same portfolio. It’s just different pieces are in different locations.

Andi: Learn more about Why Asset Location Matters – download the free guide from the podcast show notes at YourMoneyYourwealth.com, and find out how owning assets with higher expected returns in your Roth accounts, lower-returning assets in your your 401(k)s and IRAs, and NOT holding income-producing assets in your brokerage accounts, for example, can generate “tax alpha,” resulting in better returns on those investments. Just click the link in the description of today’s episode in your favorite podcast app, you’ll see the guide just before the episode transcript, along with the Ask Joe and Al On Air banner. Click that, send in your money questions, or your requests for a Retirement Spitball Analysis.

Medicare Savings Vs. Roth Conversions (David, Logan, NM)

Joe: “Dear big Al, Joe and Andi. I live in Logan, New Mexico.” Logan, never heard of it.

Al: Me neither. I’ve been to Albuquerque.

Joe: Yeah. Land of the hot air balloons, isn’t it?

Al: Yes, I wasn’t there during that time, but I’ve seen pictures.

Joe: “Drive a cranky 19 year old Hyundai Accent.

Al: And it’s not dying, so he’s got to keep driving it, maybe.

Joe: It’s cranky, though. “I drink Busch beer, and I aspire one day to move up to Coors Lite.”

Al: That’s great.

Joe: Wow.

Al: Your kind of guy.

Joe: Yeah. “I’m single, 66 years old, live on $19,000 of Social Security. I’m a (stammer) minimalist-”

Andi: (stammer) That’s all folks?

Joe: Marble Mouth is back. How are we all doing?

Al: Minimalist is what you were trying to say.

Joe: “-and usually spend around $12,000 a year. I have no pets. My state gives me around $3500 in savings in Medicare if I keep my income under $19,800. I’ve been making Roth conversions of $30,000 a year and a $500,000 IRA as recommended by Mr. Big Al.”

Al: All right.

Joe: All right. So you-

Al: I’ve changed the course of David’s life here.

Joe: Gave him some recommendations, huh?

Al: Well, I thought we were spit balling.

Joe: Yes.

Al: That’s what he took it as.

Joe: We don’t give advice. We don’t give recommendations on this show. “My question is, should I take Medicare savings or continue with Roth conversions? I’ve always been in a low tax bracket, but my heirs will be paying 20% plus and will be taking contributions from an inherent IRA on their own retirement accounts. Half the money will go to a younger folks who will have to distribute it in 10 years. Thanks.” All right. So David, he’s doing conversions. So he’s getting a subsidy of some sort from the good state of New Mexico, $3500 a year-

Al: – which is pretty good based upon $20,000 of income.

Joe: Yep. And so he’s like, all right, do I give up this $3500 to continue to do Roth conversions or do I don’t do Roth conversions and take the $3500? But here’s this- here’s the issue. Is that he’s going to lose that subsidy? Well, I suppose he’s got 8 years, right? So let’s say $511,000-

Al: Yeah. Required minimum distribution $20,000- It’s going to be over $20,000.

Joe: Yeah, it’s going to be probably close to $40,000. So $40,000 is going to be over the limit.

Al: Sure, it is. Still though, $3500 is a lot based upon the tax bracket David’s in. So I-

Joe: He’s on a 0% tax bracket.

Al: I would, yeah, I would not do any conversions right now. I’d wait till, I mean, if nothing changes, I’d wait till your required minimum distributions kick in where you won’t get the subsidy anyway. And so then you’ll probably be in a low enough bracket to do conversions.

Joe: I don’t think so.

Al: I do.

Joe: His conversions, I mean, he’s going to have $40,000 of RMDs plus his Social Security. And then if he does conversions, I mean, what bracket is he going to go to?

Al: True. Well, true.

Joe: Because he’s converting now in the 12%. The 12% is going to go to the 15%.

Al: But the 12%, it doesn’t feel like the 12%. You add $3500 to, to- it’s going to be-

Joe: – it’s going to cost him 20%.

Al: It’s going to cost him over $20,000.

Joe: Yeah. Because of then the Social Security is going to kick his ass.

Al: If you think of the subsidy being lost. And I think that’s, that’s too important for David in this situation. So I wouldn’t- I wouldn’t do the conversions now. I’m-

Joe: But David drinks Busch beer. He doesn’t spend any money.

Al: Yeah, but he wants-

Andi: He’s a minimalist.

Joe: Yeah. The guy’s perfectly fine living off of $19,000 a year. And he loves his kids, his heirs. And he wants them not to pay taxes.

Al: Yeah, I say, David, it’s the money you made. You enjoy it. It’s going to be a great inheritance for the kids. If you can get some converted, great. If not, I wouldn’t worry about it. That’s my suggestion. But no, it’s not even a suggestion. That’s my spitball.

Joe: Okay, there you go. I don’t know. I’m on the fence, but-

Al: You don’t have to agree with me.

Joe: Yeah. I know. I know.

Al: You wanted him to do the conversion. You, you just always love conversion-

Joe: Well, no, I’m just- I’m looking at this. He’s already doing the conversions.

Al: Yeah. I think he should stop.

Joe: He’s got $500,000 of IRA money. So I wonder if he’s got anything else.

Al: I’d stop the conversion so I get the $3500. That’s what I would do.

Joe: All right. Well, that’s fine.

UTMA College Savings Unrealized Gain Strategy (Jay, CA)

Joe: I got Jay, he emails in, Big Al. He’s like, “Hi Joe, Big Al and Andi. It’s Jay here from California. Thank you so much for an informative show. I’ve been a loyal listener for several years and look forward to each week’s episode. The show is just incredible.”

Al: Well, thank you, Jay.

Joe: “I appreciate your spitball and a potential opportunity for my college age daughter. She had the good fortune of experiencing the power of compounding returns on an UTMA account set up by her grandparents when she was born. They gifted her $30,000 before age 3, which by 21 has now grown to almost $200,000. Reinvested dividends over the year has led to a $70,000 tax basis. Her college tuition and living expenses are fully covered by a 529 plan. We’d like to explore recognizing some or all of the unrealized gains. 0% capital gains tax rate in a narrow window between graduation in a few years and when she is fully gainfully employed. We hope to escape the kiddie tax. If I understand the rules correctly, she can enjoy the 0% capital gains rate as long as her earned income the year she stops being a student plus the realized capital gains are below $58,000. We’d sell enough to hit that limit each year. Few questions. What do you think of this idea? Number two, if she goes $1 over that taxable income limit, does that mean the entire capital gain that year’s tax at 15% or just the part that goes over? Number 3, do we see any way we could start this plan sooner than the year she graduates? I drive a 6-year old station wagon.” He’s got the old station wagon. “And my drink of choice on the weekends is a glass of Californ wine-“ California.

Al: California. I like that.

Joe: Yeah. “Sauvignon Blanc in the summer, Pino in the winter. Many thanks. Best, Jay.”

Al: Damn. Good questions.

Joe: Yeah, so kiddie tax, explain the kiddie tax, Al.

Al: Well, so first of all, if you have a child and they’re 18 or younger, then it applies. Meaning that if the kids make unearned income, which is interest, dividends, something other than a salary, capital gains, there’s a few, like a couple thousand dollars that they get taxed at their rate, but most of it’s taxed at the parent’s rate, if it’s obviously above those figures.

Joe: And this came into play because parents would maybe gift assets to kids, and then the kids would sell it because they didn’t have any income, because they weren’t employed, they weren’t working, and it was like, oh, I can take advantage of these lower rates. And it’s like, okay, well, wait a minute, there’s gotta be some rules in play, so let’s put in the kiddie tax, so if there’s unearned income, that is, such as the UTMA account, there’s a capital gains here-

Al: That’s right.

Joe: – Is that, well, there’s other rules that apply, and he’s trying to avoid this kiddie tax, but he wants to take advantage of the 0% capital gains rate.

Al: Yeah, which is great. Now, I was just going to say one more thing. So the kiddie tax then also applies when the kid is over 18, if they’re a full time student. Which can be all the way up to age 24 per the IRS rules. And so Jay’s daughter, as long as she’s a full time student, the kiddie tax applies, which I think he already alluded to. After she’s not a student, then she’s on her own, right? And then yes, you can sell a pretty good chunk and stay in the 12% bracket. And so the way that that works, the top of the 12% bracket is probably $45,000, but the exemption’s about 12%, 13%, I guess that’s how he gets to $58,000, right? So $58,000 of sales would be at 0%. But one area of clarification, Jay is it’s probably not going to work the year she graduates, because if she was a student, full time student, 5 months out of the year, that counts as the whole year. So you probably, unless it was just a short period of time, you’re probably going to have to have her wait till the following year. So let’s just say she graduates at 22. So then you could do it 23, 24, 25, whatever, right? You can do anything you want after that.

Joe: But if she gets a job-

Al: Well, then her income is going to be higher and there’ll be less opportunity, right?

Joe: Because what- the capital gains tax is a tax on capital assets, and it’s a 0% rate as long as that individual’s in the 12% tax bracket are lower. And so if she gets a job and she makes an income that pushes her above the 12% tax bracket, well, they’re going to pay capital gains tax on the appreciation of the UTMA.
But. I mean, you’re paying tax on a gift of $30,000. I mean, it’s appreciated nicely for you.

Al: It has. And furthermore, the tax rate, it would be 15% plus whatever state, in this case, California, which would probably, in her bracket, would probably be 4% maybe, I mean, maybe 20% total, something like that in terms of a- in terms of a tax. So it’s, it’s, yeah, it’s not that much. And one more thing too is the $58,000. I agree. Cause that’s the top of the 12% bracket plus the standard deduction. Let’s just say she made $50,000. Okay. And you sold $20,000 of stock. Well, clearly now at $70,000 is over $58,000. So the first $8000 is taxed at 0%. The last $12,000 is taxed at 15%. So you still do get some benefit filling up that 12% bracket.

Joe: Yeah. So he was worried if he went $1 over that $58,000, it’s like, oh man, does everything then get taxed?

Al: And that’s- the answer is no. It’s just whatever is above that amount.

Joe: All right. Thanks for the question, Jay. Appreciate it. Alright that’s it, we gotta take a break – er, we’re outta here. We’ll see you next week. The show is called Your Money, Your Wealth®.

Andi: “That’s Incredible”, station wagons, Joe’s midlife crisis, and he’s back on the Celsius – it’s all in the Derails at the end of the episode, so stick around.

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The Derails



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

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