Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:00 – Can We Convert an Inherited Trust to Roth Without Distributing It? Should the Trust Own Our Home? (Ted & Georgette Baxter, Madison, WI)
• 10:02 – Watch 10 Tax-Cutting Moves to Make Now on YMYW TV, Download the Top 10 Tax Tips Guide before this Friday!
• 11:08 – I’m Joint Owner of My Parents’ Bank Accounts. What Have We Done? (Melissa, Rockport, TX)
• 16:35 – Can I Contribute to My Wife’s Roth IRA? Can I Max Out Multiple Roth Accounts? Should We Do Roth Conversions? (Theodore & Louise, Seattle, WA)
• 23:43 – Should We Use Inherited IRA RMD to Pay Roth Conversion Tax? (Ralph & Alice Kramden, SC)
• 27:35 – Can I Fund Roth IRAs for My Grandchildren? (Marc, Encinitas)
• 28:40 – Watch the Cybersecurity Webinar on demand, Download the Identity Theft Guide
• 29:32 – Should We Maximize the 24% Tax Bracket With Roth Conversions This Year and Next? (John)
• 37:55 – Outro: Next Week on the YMYW Podcast

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Transcription

Intro: This Week on the YMYW Podcast

Andi: Ted and Georgette in Madison, Wisconsin have inherited $1.6M in a trust. Can they convert that money to Roth without distributing it? Should the trust own their home so they can use the home equity? Melissa in Rockport, Texas was added as joint owner on her parents’ bank accounts after a medical event, but what have they done? Should Ralph and Alice in South Carolina use the required minimum distribution from their inherited IRA to pay Roth conversion taxes? We’ll find out, today on Your Money, Your Wealth® podcast number 504. Plus, can Theodore in Seattle contribute to a his wife Louise’s Roth IRA? Can Marc in Encinitas make Roth contributions for his grandkids? Finally, John would like Joe and Al’s viewpoints on his Roth conversion strategy, and the fellas come up with a very unique way that John may be able to pay the tax on it. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and, back from Hawaii, Big Al Clopine, CPA.

Can We Convert an Inherited Trust to Roth Without Distributing It? Should the Trust Own Our Home? (Ted & Georgette Baxter, Madison, WI)

Joe:   We’re answering your money questions. Go to Your Money, Your Wealth®, click on that special offer. We click-

Andi: Click on Ask Joe and Big Al On Air and ask your money questions.

Joe: Yeah, not the special offer, we’re not giving anything away.

Andi: I mean you can click on the special offer if you want, you can download a white paper. But, if you want a question answered, click Ask Joe and Big Al.

Joe: There, okay. When is it going to be Ask Andi?

Andi: It’s not. It’s not. Because so many of our old podcasts and TV episodes all say Ask Joe and Big Al, so we’re leaving it like that.

Joe: Got it.  All right. Well, let’s get to it. We got Ted from Madison, Wisconsin. He writes in, he goes “Greetings YMYW crew. I found your podcast through a Google search about 3 years ago.  Enjoy the copious information-“ did I get that right?

Al: Yeah copious. Yeah, which means a lot.

Joe: A lot. Killed it. Yep, “- and in the humor. I listen while walking the 3 border collies outside the pasture where our 3 horses graze.” I can just picture Big Ted.

Al: You ever have a horse?

Joe: No.

Al: No? Okay.

Andi: Ever ridden a horse?

Joe: Like in high school.

Al: Yeah. Okay.

Joe: That was a few years ago.

Al: Got it.

Joe: Madison, Wisconsin. I lived in Madison, Wisconsin for a little short stint there.

Al: That’s, yeah. I was thinking maybe you had a horse.

Joe: Yeah. No.

Al: No.

Joe: No. I lived kind of in the city. Let’s see. “My wife, Georgette, retired from nursing this year at 55 yo. She drives the dogs around in a 2023 Toyota Sienna. It’s a minivan. And pulls her horse trailer with a 2024 Toyota Tundra.  I’m a 59 yo, engineer and plan to work until at least 65. I drive the vehicle Georgette leaves behind. Georgette’s drink of choice is a lime margarita in the Summer and a fine cabernet in the Winter. I enjoy anything bottled by Founders Brewery.”

Andi: That’s a brewery in Grand Rapids, Michigan. Home of the delicious all day IPA.

Joe: All day IPA.

Al: Okay, means you can drink it anytime during the day and just continue.

Andi: I guess so.

Al: Okay.

Joe: Yeah, I’m drawing a blank on-

Al:  Don’t remember that one.

Joe: No, never had, no. You know, the only, I don’t drink microbrews.

Al: I know you don’t.

Joe: The only ones I did was from Wisconsin.  But I, it’s just, I’m drawing, it’ll come to me.

Al: Okay.

Joe: Alright.  “We have $3,200,000 in tax-deferred accounts, but no spare cash for which to pay for Roth conversions. Our homestead is worth $850,000 with $500,000 in equity. My parents left me a trust worth $1,600,000 with a $1,200,000 basis. Here’s the question I’m hoping you’ll spitball.”  Okay, but he said he has no cash to pay for Roth conversions, but he’s got $1,600,000 dollars in a brokerage account? That sounds like liquid cash to me.

Al: Well, it’s in a trust. It’s probably an irrevocable trust, I’m guessing, maybe.

Joe: Ah, he can only get the income or something?

Al: Because, parents left him a trust, so he doesn’t, it’s not really his, it’s his, he’s a beneficiary of the trust, I’m guessing.

Joe: Okay. “Is there a reasonable way to use the trust without distributing it to convert some of all, or this pre-tax money?  Should the trust buy a house to free up the equity? Do you think using the trust this way is a good idea? Do you have any other suggestions for leveraging the trust for this purpose? Thanks Ted and Georgette Baxter.”

Andi: That’s from the Mary Tyler Moore Show.

Joe: Got it. Alright.  So, you know, people get confused when they inherit money that is in a living trust from let’s say a parent.

Al: Right.

Joe: So, they’re the trustee or the successor trustee or they could be the beneficiary of the trust. But it could be a total- Like a revocable trust, so they could just rename the trust into their name.  Or, is it in an irrevocable trust where they’re the income beneficiary of it?

Al: Right.

Joe: Do they have access to the corpus of the trust or not? You know, I mean-

Al: It depends on the trust document. But I would say, and I’m not an attorney, but what I’ve seen more often than not is that a living trust from your parents, what happens is when you inherit it, it becomes an irrevocable trust. Whether you can get rid of the trust or not, that’s up to the trust documents. A lot of them you can, some you can’t, Joe, but in many cases you want to keep the-

Joe: So do you have a trust?

Al: I do.

Joe: Right. You have assets in your trust.

Al: I know, but if I, if Ann and I were to pass away, the kids would get it and it’s irrevocable to them.

Joe: So you’re going to keep the money in trust and then you have distribution rights? Or is it going to be an outright distribution at death?

Al: No, it’ll be in the trust. The kids have the ability to in.

Joe: They can do whatever they want with the assets, just to protect it from predators and-

Al: Which is probably the case here. And so the real answer is this. When you distribute things from the trust, Joe, it’s taxable to the extent there’s interest income. Right, or dividend income. So the first money that comes out of the trust is considered income, goes on your tax return. But any extra money that comes out, it’s just principal. There’s no taxation on that. So that’s the way to do this. There’s really no reason to buy a home, your home through the trust. In fact, that would be a terrible idea because you would blow the $500,000 exclusion when you sold the home later.  So, so, so, yeah, I mean, I guess it depends upon the trust document, but in all likelihood, income will come out first on a distribution. And then-

Joe: $1,200,000 a basis. So he’s got $400,000 dollars of gain.  So that would be a flow-through. That would be taxed at capital gains.

Al: Yeah, and usually with trust, the capital gains are taxed in the trust, but interest and dividends are taxed to whoever keeps it. The trust would pay the tax if it keeps it. If it distributes it, then the beneficiary pays the tax.  That’s typically how it’s done.

Joe: I’ve seen it done.

Al: Oh, you’re a trust expert.

Joe: No.  No. Most people set up like a revocable living trust to avoid probate.

Al: No, I understand that. But once the person that set up the trust, the grantor and spouse dies, then it becomes an irrevocable trust to the kids subject to the terms of the trust. And most attorneys now would tell you keep the assets in the trust because they have liability protection, but you don’t have to.

Joe: So, he could distribute 100% of the trust to his own living trust.

Al: Yeah. Assuming he’s, yeah-

Joe: Assuming that-

Al: – he’s the only beneficiary.

Joe: Correct. Right. Right. Right.

Al: There’s a lot we don’t know about this one.

Joe: But, should he use those dollars that are sitting in the trust to help pay the tax for the conversion?

Al: Yeah. That’s really the second question that he didn’t ask. What do you think about that?

Joe: Well, no. That is the question. Is it reasonable to, way to use this trust without distributing it to convert some of this pre-tax money.

Al: Oh, yeah. You’re, right.

Joe: So he doesn’t want to distribute it. He wants to keep it in there. So do the conversion and just distribute enough out of the trust to pay the tax.

Al: Yeah. And if there’s a little tax to pay from the income, either the trust will pay it or he will pay it. I guess what he’s saying is there’s no cash, so it’s all stock. So what you do in that case is you look at the stocks that have the least amount of gain, and that’s what you end up just selling and then distributing. So there’s very little capital gains. It doesn’t have to be done pro rata, where you say you sell a whole bunch, or maybe you’ve got multiple mutual funds or whatever it may be. Just sell the particular fund or stock that has the least amount of gain.

Joe: So he’s going to work until age 65, and I’m assuming that they’re going to live off of his salary until age 65. So they already have $3,200,000 and he’s 59. So he’s going to work another 6 years. And he’s probably maxing out the 401(k) because they have several million dollars in a pre-tax account. Let’s say in 10 years with those contributions or 16,  you know, there’s a-  He’s going to have a tax problem.

Al: There’s no question. So should he do conversions? Yes.  And can you use the trust assets to pay the tax? Yes, you can.

Joe: We should have just said that. That would have been so much easier.

Andi: Yeah, but you guys talk in circles and you’re known for that. So it works.

Joe: We get, sometimes we get way too much information and sometimes we-

Al: – don’t get near enough.

Joe: We’re just trying to picture what the hell’s going on here.

Al: Right.

Joe: But we do the best we can.

Al: Yeah.

Joe: Yes.

Watch 10 Tax-Cutting Moves to Make Now on YMYW TV, Download the Top 10 Tax Tips Guide before this Friday!

Andi: You know what? I forgot when we were talking about the special offer at the top of the show, this week’s offer is only available for a limited time – it’s the Top 10 Tax Tips Guide, and you gotta download it before the special offer changes, sometime this Friday, because it won’t be available again for months! This is the companion guide to this weeks’ episode of Your Money, Your Wealth TV, called 10 Tax-Cutting Moves to Make Now. There are several ways to lower your 2024 taxes, but most of them need to be done by December 31 – which means that as of today, November 19, you’ve only got six weeks left to convert to Roth, max out your retirement contributions, or harvest your tax losses or gains for it to count for 2024 when you do your taxes. Find out more about these and other things you can do before the clock strikes 2025, so you send less of your money to the IRS: watch 10 Tax-Cutting Moves to Make Now, and download that Top 10 Tax Tips Guide before the special offer changes on Friday. Click the links in the episode description to watch the show and download the free guide. Let’s get back to those inheritance issues.

I’m Joint Owner of My Parents’ Bank Accounts. What Have We Done? (Melissa, Rockport, TX)

Joe: “Hi, Andi. I hope you’re well.”  How are you?

Andi: I am. Thank you. Thank you very much, Melissa.

Joe: Okay. “Very good. I last wrote to YMYW in 2020. Cheery! Time flies.  But I’ve remained a loyal listener.” Okay. Well, thank you very much. “Since we retired 6 years ago, our net worth has doubled.” So thankfully, it’s from listening to us, Big Al.

Al: I don’t think so.

Joe: No. “We breezin and we give Joe and Big Al a great deal of credit.” Oh, look at that.

Al: Wow.

Joe: Wow.

Andi: You left out the fact that she gave me a great deal of credit too, but that’s fine.

Jo: I didn’t see that.  “We are breezy and we give Joe and Big Al and you-“I’m sorry, Andi,  “-a great deal of credit.”

Andi: It’s okay. All I do is convey the emails. It’s cool.

Al: I’m sitting here reading it. I didn’t even see it. Sorry.

Andi: No worries.

Al: It’s because it was went to the next line and we got-

Joe: All right.  “Husband and I have a net worth of $6,500,000.”

Al: Wow.

Joe: “And my 90something parents have a net worth of $2,000,000, almost completely of CDs and cash, so  it shouldn’t be much of a step-up in basis in their future estates. We are all debt free. This Summer, we are experiencing a medical crisis, and we felt sure we would lose one parent.  When the smoke cleared, my parents added me as joint owner on all of their bank accounts with rights to survivor. I am the executor and also beneficiary of 50% of their estate.  I have two nephews, who will inherit 25% each. I intend to do right by them.”  Well, if they’re the beneficiaries.

Al: Not anymore.

Joe: Oh, because she’s joint.

Al: Mmm, Go ahead.

Andi: She’s executor and beneficiary of 50%.  So-

Joe: All right. Yeah. I’ll do right by them.  “But what have I done?”  I don’t know.  Oh. “When the time comes, after the loss of both parents, will I essentially be giving the nephews a gift when I distribute their shares to them? Is there a gift tax?  Should my parents file a gift tax return?  Thanks so much.” Melissa from Rockport, Texas.  All right. So that’s one of the last things that you should do.  And I think she realized this after the fact, is that sometimes people, like parents, will put kids on joint title of either, you know, assets that they have outside of retirement accounts.

Al: Yep.

Joe: And this is the issue that comes into play, is that now you’re an owner, there’s no step-up basis, she had other beneficiaries. Well now she’s the owner 100%, but she still wants to do right by the nephews, so she has to give them, what, $500,000 each?

Al: That’s what this would imply. Correct.

Al: That would be, require a gift tax return.

Joe: That would, because what’s the annual gift?

Al: What is it, $18,000 or whatever it is now?

Joe: Yeah.

Al: Yeah, so a better way to do this would have been set up an account on it as a transfer on death. That way you can have multiple beneficiaries. And that, that would have solved this very easily instead of joint ownerships with rights of survivorship. What that means is that when both parents pass away, now you are the sole owner. You own it. It’s your asset. And if you want to distribute some of that, you can, but it’s a gift. So you have to file a gift tax return. So then I guess the question, Joe, is can this be undone? And we’re not attorneys.

Joe: Attorneys, yeah.

Al: I don’t know. But if possible, that would be something you should try to do is undo this if you can.

Joe: Totally agree there. Yeah. Transfer of death. And then you are, or just put it, do they have a trust? You can put it in the title of the trust.

Al: You can put it in the trust.

Joe: Power of attorney, financial. And so you could have- You know, if there’s cognitive issues, then she could step in and, help.

Al: She could be limited power of attorney, do it that way, so that the, so the beneficiaries are all intact. That would have been the smarter way to go.

Joe: Yeah. Taking, and she realizes that after the fact, it’s like, okay, well here, we have a medical issue. Hey, let me get on title so I can help you and I can figure all this stuff out. And, you know, and that’s what a lot of people do. And that. It. That seems like the right thing to do, right? I have some financial acumen. I can come in, I can step in and I can help you out. And then after the fact it’s like, oh my gosh, what did I just do? Because now there’s all these kind of weird laws and loopholes and things like that, and they already have a phenomenal estate of like $7,000,000, right? So now you add the $2,000,000 on top of that, and then now they’re utilizing their gift exclusions and exemptions, things like that when they might need it themselves.

Al: Yeah, and does she have to pay, do the parents have to do a gift tax return? Possibly. So that you have to get with an estate planning attorney to figure this out.

Joe: Because the parents gifted her $1,000,000 bucks.

Al: I mean or $2,000,000 actually, the whole account, right? Anyway, see what can be undone if possible.

Can I Contribute to My Wife’s Roth IRA? Can I Max Out Multiple Roth Accounts? Should We Do Roth Conversions? (Theodore & Louise, Seattle, WA)

Joe: “This is Theodore.  I’m 61, and Louise, my wife, she’s age 60. We’re living in North Seattle.  Louie, Louise, likes red wine from one of the many wine club memberships that we have. I drink a cold Pilsner, red wine, occasionally Fairmont Lush.” What’s a  Fremont Lush?

Al: Fremont.

Andi: That is an IPA.

Joe: Oh.

Al: Oh, IPA.

Andi: Wouldn’t work for you.

Al: Oh, there you go. Okay.

Joe: “Got no pets. We raised two young men who are financially independent. Yippee!”

Al: That was very good.

Joe: Yeah, killed it.  “My wife and I are both elementary school teachers. I plan to retire, I plan on retiring after 33 years this coming Summer at the age of 62. My pension will be around $38,000 a year with a COLA of 3% annually. My wife will continue working until she’s 65 and have a pension of about $40,000. She will pay my medical until I’m 66. She’s on a different state plan than me and will be teaching 12 years, so is unable to collect her pension until 65. We will both collect Social Security at 67. My Social Security will be $38,000 and Louise will be $34,000. I have a 403(b) state teacher account of $930,000, additional 403(b) of $250,000 and $70,000 in Roths.  Louise has a $260,000 403(b) and a $70,000 Roth.  Together, we have a brokerage account of $210,000 and $60,000 in our savings account. Louise will continue to add $2000 a month to her 403(b) and contribute $8000 yearly to the Roth until retirement. Our annual income is $260,000. However, we put into our various accounts about $5500 per month of that income. We would like to spend $160,000 annually after taxes when we are both retired. During the 4 years until  Louise retires, her salary will be $142,000, and I will have my pension of $38,000, adding up to $180,000 gross income for those years. We’ll be taking little from any investments or our retirement accounts during that time. Here’s our questions.  Is the plan feasible?”   Sure sounds like it.

Al: I think so too.

Joe: You got-  Let’s see $2,000,000 liquid. Roughly. And then, the bridge when he retires, she’s going to continue to work. So he’s got his pension is $40,000 and she’s got her income.

Al: Yeah. So when she retires, then she’s got her pension. He’s got his pension. The $2,000,000 is going to be worth more because she’s adding to it. Right? Right. And then that’s even without Social Security. So yeah, I think this looks pretty good.

Joe: Yep.  “As I understand it, I can keep contribute to my Roth IRA until Louise retires,  since she is contributing to a Roth. Is that true?” Well, kinda. There’s a spousal contribution. So this is a really good question.

Al: It is a good question.

Joe: Is that, so Theodore is retiring, so he doesn’t have earned income. So there’s certain qualifications that you have to put into retirement accounts and earned income is one of them. But he’s retired. He’s collecting a pension, but the pension isn’t earned income. It’s not classified, even though he earned it from an IRS perspective, it’s not called earned income.

Al: Yeah. The reason is because he didn’t currently pay Social Security taxes on it.

Joe: So, he’s like, well, if my wife puts into a Roth, can I put in, or can I put into a Roth? Well, the qualification has nothing to do with her putting money into a Roth IRA. The qualification is, she has earned income in, if you’re married to her.

Al: Correct.

Joe: If she has earned income and you’re married to her, then you can put money into a Roth. It’s called a spousal Roth IRA or spousal IRA contribution.

Al: Right.

Joe: So, good to go.  “My employer in the last year is giving a Roth option. Can I have two Roth accounts?  What is the max for both?”  Okay, well now you’re confusing two different things. You’ve got a 403(b) that’s a Roth. You can absolutely fully fund that. And then you can fully fund a Roth IRA.

Al: Yeah, two different things.

Joe: Two totally different things. You’ve got the 403(b) or a 401(k). For those of you that have a 401(k) plan or a 457. Let’s say he has a 457 with a Roth option, which I believe he does. He could go 100% Roth in all of the plans.

Al: Yep.

Joe: So the limit on 403(b)’s-  $30,500?

Al: Yeah.

Joe; And then $8000 for the Roth?

Al: Correct.

Joe: So yeah, you could fully fund that, and then you could do a conversion. Here’s number 4, here’s the Roth conversion show with Big Al.

Al: No, I think it’s the JoeJoe show.

Joe: “I think we are very underfunded in Roths. Would it be wise to start doing conversions? If so, how do we choose the amount each year that the account, how do we choose the amount each year and what account do we use to pay the taxes? Thank you for any non-advice you can give.” Thanks Theodore.  This is not advice at all. Use your taxable account, use your brokerage account to pay the tax. Should it make sense to do conversions? Your fixed income is going to be roughly $150,000 per year. You’re not going to touch the $2,000,000 that you currently have now for maybe-

Al: – for a while-

Joe: – for a while-

Al: – maybe for a long time.

Joe: Yeah. The amount that you pull out is probably not a lot. Right. So does it make sense to do conversions? I would say, yeah, you would probably want to map it out a little bit, but out the back of the envelope here, I would say,  yeah.

Al: I think so too, and I would, probably, given your situation-

Joe: So he retires at the end of this year?

Al: In the Summer this year. So, and, so, should he do a conversion this year? Depends upon his income and whether he got extra vacation pay and whether it makes sense. But the thing is, probably stay in the 22% bracket.

Joe: Yeah, stay in the 22%, and the top of the 22%, taxable income is-

Al: Yeah, that’s- Let me see-  That’s a couple hundred thousand dollars.

Joe: So taxable income, so it’s not your gross income adjusted gross, so you have to look at your tax return and kind of forecast this out. So look at your taxable income, stay in that 22% tax bracket, and that’s where I would kind of start. And if I were to pay the tax, I would pay it from my cash or taxable income.

Al: I would too. And to say that another way, $200,000 is the top of the bracket, standard deduction is about $30,000. So total income about $230,000. ish is what you could do. So it would be your income, your wife’s income, plus Roth conversion, no more than $230,000.

Should We Use Inherited IRA RMD to Pay Roth Conversion Tax? (Ralph & Alice Kramden, SC)

Joe: “Hi Andi, Joe, Big Al, love the show.  Have watched almost every episode.” Wow.  “Enjoy occasional 15-year-old Scotch. Drive a minivan, married, 63 years old, wife 61, both retired.” All right. That’s right to the point. Love it.  We got Ralph and Alice, oh the Honeymooners, Ralph Kramden. Did you make this up or is that what he wrote in?

Andi: That’s what he wrote in.

Al: Okay. Good.

Joe: Okay. Very cool. So let’s see here, “We got $34,000 a year, it’s a pension income with the cost of living adjusted. We have $1,300,000 in deferred assets, $100,000  in a brokerage account,  $50,000 in my savings account,  $250,000 in our Roths.”  Okay, so “$162,000 in inherited IRA, prior to the 2020 stretch rules, RMD about $6500 currently. No debt, in 12% tax bracket, 7% state tax bracket. Drawing about $40,000 a year from traditional IRA currently, on the top of the pension for living expenses. Social Security at 70 will be $55,000 a year combined. I’m having a hard time to justify using my cash buffer and leaving us cashless even the event of a market downturn. Planning on doing a conversion starting this year of about $40,000 and using the RMD from my inherited IRA to pay the taxes. Trying to figure out if Roth conversions make sense for us.  Does making the conversion and paying the tax out of the conversion kill the benefits if we won’t take Roth withdrawals for 10 to 15 more years?”  So he’s got an inherited IRA, and so he’s got an RMD from the inherited IRA of $6500. That is mandatory that he has to take out. Even though he’s not of RMD age, because he inherited it from a non-spouse. So he’s like, should I take that money and pay the tax to do a conversion? Does it make sense?  Okay.

Al: Would you do it?

Joe: Let’s see here. Well, Ralph and Alice, it’s kind of like almost the same. He’s got $2,000,000, roughly.

Al: Yeah.

Joe: And then the fixed income he has with the pensions and Social Security is  roughly $100,000. They spend $74.000.

Al: Yeah, so fixed income, when Social Security kicks in, will be greater than spending. So they don’t necessarily need their tax-deferred, which means it’s, as she says, or he says, it’s going to keep growing for 10 or 15 years.

Joe: But they’re not going to pull Social Security for another 10 years, or 8 years, call it.

Al: That’s true.

Joe: Right? So they got a bridge of 8 years. So they’re pulling $40,000 on top of their pensions. Their combined pensions is $34,000, and they’re spending $74,000.

Al: That’s about a 2% distribution rate. Right now. So if it’s invested in stocks and bonds that could earn, let’s call it 6%, it’s still going to grow.

Joe: He’s got $160,000 roughly in taxable in cash.

Al: Yeah.

Joe: So don’t take the cash. Don’t look at the brokerage account and see if there’s some, you know, or take that RMD. What are you going to do with the RMD?

Al: Yeah, I would start with the inherited RMD. I think that’s a good use of it. And then if you want a little extra from the brokerage account, but, yeah, go ahead and stay in that 12% bracket. Cause that’s what you’re in right now. I did a little quick math and I think maybe you could convert even a little bit more, but I think it would all be in the 12% bracket.

Joe: Yeah, trying to figure out how it makes sense. Look at Big Al, doing a little work for you.

Al: I would do it.

Joe: I would do it too.

Can I Fund Roth IRAs for My Grandchildren? (Marc, Encinitas)

Joe: We got Marc from Encinitas writes in. He goes, “I have 5 grandchildren, age 2 to 18 and I have started a savings account for each of them. Should I put money into a Roth IRA for each or just keep it in a savings account?” Well, Mark, they need earned income.

Al: Yeah, that’s the key.

Joe: Yeah, that two-year-old.

Al: Yeah, so the 18-year-old probably, I’m guessing, has earned income, so maybe that’s a good idea, and the ones that are, anyone that has earned income, yeah, you can do that, but if they don’t, you can’t do it.

Joe: Yeah, Mark, you can contribute to your grandkids accounts, but they just need to show income that they’re paying into Social Security.

Al: Yeah.

Joe: And up to the limit, whatever is greater. So $7000. So if they make $5000 of earned income, then they can, you can contribute $5000 into a Roth IRA for them.

Al: Yeah. Because the idea is it’s a retirement account, right? And so you have to have income to put money into a retirement account. So that’s where this, it can come from you, but they have to have earned income to qualify for it.

Watch the Cybersecurity Webinar on demand, Download the Identity Theft Guide

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Should We Maximize the 24% Tax Bracket With Roth Conversions This Year and Next? (John)

Joe: All right. Let’s go to John.  “Hi, Al and Joe.” Hello.  “I recently found your show and have enjoyed hearing your viewpoints.”  Viewpoints, Al.

Al: Okay.

Joe: I didn’t think we had viewpoints.  He sounds like someone with some cash.  “My wife and I are 63 and retired. Our drink of choice is a craft beer and we are driving a 2013 and 2015 Tesla Model S.”

Al: Oh, they both have Model S’s. Oh. Cool. Look at that.

Joe: “Our only debt is $280,000 for 12 years at 2.125%. My wife receives a pension of $2300 per month in monthly Social Security, reduced by WEP is $1150. Plan on waiting on my Social Security at age 70.5-“why would you wait until 70.5?

Al: It’s actually 70.

Joe: “- it will be $50,000.” So don’t wait, John, until 70 and a half. 70 is when you want to take it.  “We estimate our annual spending budget to be $210,000 to $260,000 a year, depending on how much traveling we do or help our family members.” I knew this guy had cash.  You wouldn’t, it says viewpoints. I’m like, okay, there’s cash involved.

Al: I never associated that word with cash, but you know something I don’t.

Joe: He’s sophisticated.

Al: Yeah, okay.

Joe: He’s like, hey, I like your friendly banter. It’d be like, yeah, he’s probably.  I love the viewpoints that you guys share.  Cash.

Al: Got it. Okay. I’m following you now.

Joe: All right. “We have $7,000,000 in traditional IRAs. My wife has $2,000,000 and I have $5,000,000.  She has $20,000 in Roth and I have a $10,000 in Roth. We do not have any post-tax investments. We are looking at current tax rates, our withdrawal rate and how much the IRAs will become by the time we hit RMD age at age 75. Does it make sense to convert to the traditional IRA money to a Roth by maximizing 24% tax bracket this year next?” Alright, “-Then decide what is the best based on the new tax rates 2026. The taxes will be paid by the funds withdrawn for the traditional IRA since we don’t have any post tax income.  Or savings to offset the Roth conversion dollars. We would like to minimize the taxes going forward and are looking at scenarios such as one of us paying or as one of us are passing in the survivor filing as an individual versus married. We are concerned with leaving the funds to our 3 children. They are all making good money and the inheritance will just jack up their tax brackets over the next 10-year window.  We appreciate the spitball on how to get the most of the money out of the traditional IRA. Thanks, John.” John, thanks for the question. Congratulations on the wonderful nest egg that you and your wife have saved over the years.  63 years old.  And Al, I would, I’d like to hear your viewpoint.

Al: Okay. I would say, I mean, so Joe, we don’t normally recommend people do a Roth conversion and pay the taxes with the money out of the IRA. In other words, you have to pull extra money out just to pay the tax. However, in certain cases where it’s rather extreme, like you have an IRA worth $7,000,000.  And no cash or brokerage account to speak of.  Yes, I would seriously think about doing it. I would go to probably the top of the 24% bracket, like, like he was, John was saying. Here’s the tricky part, though, is it’s not, like let’s say they’re spending $210,000 to $260,000, but they have to withdraw probably $60,000, $70,000, $80,000 more just to pay the tax on that. So there’s probably not that much room.  There’s some, but, and I would do it to the extent, I mean, the top of the, 24% bracket is, what? $384,000. We add the standard deduction to that. We get to about $415,000 of total income. Maybe that’s as much as you want, but you just have to be careful that you pull enough to pay the tax. Cause if you don’t, then the next year you got to pull extra to pay the tax for last year that you’re going to have to pay the tax this year. So it’s just, it’s a little tricky calculation.

Joe: Right. It’s a mess.

Al: It’s good. It’s a good problem.

Joe: Yeah, it’s a great problem to have. It’s just trying to map this thing out what’s gonna be the best solution here?  He’s young enough. Yeah, so it’s not like he’s 73 years old and has this problem. So he has time to leak this thing out before the RMDs kick in right? I would like to understand maybe a little bit more about the real estate.  He’s got $280,000, 12 years left, 2%.  Is there HELOC or something maybe that could, he could get some liquid assets from that? He’s got plenty of cash to pay the debt off. Because once the RMDs hit, potentially, let’s say in 10 years, at 7, and he’s, let’s say he’s taking a 2% distribution and grows at 5. I mean at 3% even of growth on $7,000,000 over 10 years? It’s still a giant number.

Al: It is. So that’s a heck of an idea. And I can’t believe we haven’t talked about that for a while. Yeah, rates are high and it doesn’t usually, it’s not usually a very good idea. But in this case, that there’s so much in IRA, what we’re suggesting is to borrow on your home, which is normally not what you want to do in retirement, but you borrow on your home, use that money to pay the tax, Joe. And then when the RMDs kick in, you pay that thing off quickly because you’ve got more money than you need.

Joe: You’ve got more money coming out than you can spend.

Al: Right. And that’s a more tax efficient way to do this.

Joe: Because then you’re just paying interest versus  the tax upon the tax.

Al: Yeah, I would say for 99% of the people, that’s, this is a bad strategy.

Joe: Terrible. But for John, it might make sense, it’s just looking at the numbers, there’s going to be a cost to get this money out, and so it’s either going to be taxed to pay the tax, and what I mean by that, right, you have to pull money out of the retirement account, you have to pay tax on that money, and then you give it back to the IRS because of the tax that you had to pay to get the tax out, to pay the tax. You take a loan, and you pay 6% on the loan, I think that could be a cheaper way, but, you know, when people get close to retirement, they don’t want to have added debt, he’s already got $280,000 is my only debt, we’re only paying 2%, that all looks great, where’s John from, do we know, like, what state he lives in?

Andi: This one he emailed Info@Pure, so he didn’t actually give us the information. All we know is that it’s John.

Al: Anyway, I think I just want to be really clear that this is not a great strategy for almost everybody.

Joe: This is a very specific ball of spit for John.

Al: Yes.  That’s a good way to say it.

Je: So, but again, congrats. Hopefully our viewpoints shed some light. But, yeah, it’s in a good spot. It’s Yeah, it’s You just map it out. He sounds like a really bright guy. Yeah. Yeah.  What, what’s gonna be the, what’s gonna be the most comfortable for you to sleep at night? Yeah. The tricky or you don’t do anything.

Al: Yeah. The tricky part for me is at 63, you’ve got 12 years before RMD, so you wanna have extra debt for 12 years. It just have to decide whether this makes sense for you.

Joe: Right. Or he doesn’t do anything.  And then you just wait.  And then you’re, right? And it’s like, okay, well now you have a lot larger nest egg, and then you have no debt, but your tax bill is going to be giant.

Al: Yeah, you get to pick, or, you just do what we originally said, is you do enough Roth conversion-

Joe: Just to get to the top of that 24%.

Al: To get to the top of the 24%, and save enough for, to pay the tax for what you pulled out.

Joe: All right, thanks for the question, John.

Outro: Next Week on the YMYW Podcast

Andi: Barney and Betty and Ricochet J in Colorado, we had last minute a shuffling of the email deck this week, and your emails will be answered next week in episode 505, along with emails from Micah in South Dakota and Amir in New Mexico – I promise. I appreciate your patience.

We got a comment on our YouTube channel recently from a listener who didn’t know we turned on comments earlier this year, so yes, comments are open on our YouTube channel! Come watch this episode and join in the conversation! You can also leave your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Podcast Addict, Podchaser, and Podknife. Comment and let me know if I left any out!

The end of the year is almost here, and a lot of changes will be coming along with the new administration in January. It’d be a good idea to schedule a no cost, no obligation comprehensive Financial Assessment with one of the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors to see if your retirement plans are in good shape before the year end. Do it now, while there are still open slots on the calendar. Click the Free Assessment link in the episode description or call 888-994-6257 to meet with our team either in person or online.

Your Money, Your Wealth is presented by Pure Financial Advisors, 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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