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
January 17, 2023

Joe and Big Al are back with a SECURE Act 2.0 recap and a proposed backdoor 529 plan strategy from the new law. Plus, is there a scenario where it makes sense to not max retirement accounts, to avoid being retirement rich and cash poor? Also, the fellas’ thoughts on a break-even point for Social Security, required minimum distributions (RMD) from inherited IRAs, and of course, Roth IRA strategies: as in, the 5-year rules for Roth withdrawals, preserving Roth money and avoiding early withdrawal penalties, and Roth conversions to offset brokerage account losses. 

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Show Notes

  • (01:17) SECURE Act 2.0 Post-Retirement 529 Backdoor Roth IRA Strategy? (Eric, Sacramento)
  • (06:22) High Level SECURE 2.0 Recap
  • (09:51) What’s the Break-Even Point to Claim Social Security Early With Pensions and Longevity? (Roberto, Minneapolis)
  • (15:13) I’m 66 and Confused about the Roth Conversion Five Year Rules (Tom)
  • (19:32) Does This Strategy Avoid the Early Withdrawal Penalty and Preserve Roth Funds? (Jackson, Delaware)
  • (27:15) Can a Traditional IRA to Roth IRA Conversion Offset a Brokerage Account Loss? (Bob, San Diego)
  • (30:09) Does Saving to Brokerage for Early Retirement Instead of Maxing Retirement Accounts Ever Make Sense? (Renee)
  • (35:44) Required Minimum Distributions from an Inherited IRA Explained (Paul, Southern NJ)
  • (43:18) The Derails

Free financial resources:

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Free Download: SECURE Act 2.0 Guide

WATCH | The SECURE Act 2.0: Major Changes to Retirement Savings and Tax Planning

SECURE Act 2.0: Major Changes to Retirement Savings and Tax Planning

5 Year Rules for Roth IRA Withdrawals: Free Download

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Today on Your Money, Your Wealth® podcast 412, Joe and Big Al are back with a SECURE Act 2.0 recap and a proposed backdoor 529 strategy from the new law. Plus, is there a scenario where it makes sense not to max retirement accounts, to avoid being retirement rich and cash poor? Also, the fellas’ thoughts on a “break-even” point for Social Security, RMDs from inherited IRAs, and of course, Roth strategies: as in, the 5 year rules for Roth withdrawals, preserving Roth money and avoiding early withdrawal penalties, and Roth conversions to offset brokerage account losses. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Joe: Thanks for tuning in. Hopefully everyone had a wonderful holiday season. We’re back grinding away. Took a couple of weeks off. I appreciate ya hanging with us. This is going to be the best year et- best year yet.

Al: Yeah.

Andi: Good start.

Joe: Yeah.

Al: I like that. It’s like, oh, that’s a new slang way of saying yet.

Andi: Best yearette. I’m thinking mini-year.

Joe: Just putting them together.

Al: Best yearette.

Joe: Save time. Gotta save time.

Al: You do.

Joe: Gotta get to the questions here, big Al.

Al: You’re right. Okay.

SECURE Act 2.0 Post-Retirement 529 Backdoor Roth IRA Strategy? (Eric, Sacramento)

Joe: All right. Let’s start with Eric out of Sacramento, little NorCal. “In a recent SECURE Act 2.0, there’s a reference to allow excess 529 funds to be rolled over into the Roth IRA up to $35,000. This sounds like a great post retirement backdoor method. I have no income to make continued Roth IRA backdoors-“ like back doors.

Al: Yeah, right? That word keeps coming up in our show, doesn’t it?

Joe: It’s the back doors. It’s the garage door. It’s the megatron.

Andi: Megatron.

Al: Everyone, Joe, everyone likes the secret entrance, like the back door.

Joe: We got a school door, little 529 plan.

Al: Okay. Got it.

Joe: “So I can open a 529 plan with myself as beneficiary, retired at age 60 and in 15 years age 75 move it to my Roth IRA, rinse and repeat for my spouse? This sounds like a great way to convert more dollars to a Roth in retirement, in addition to regular rollovers. Is my thinking correct?” You’re thinking is somewhat correct. Let’s answer the question and then Al, let’s kind of review high level of what the SECURE Act because that was just signed maybe a few weeks ago.

Al: Okay.

Joe: Okay, so he is correct in the sense that what they’re doing is that if you have excess contributions in a 529 plan- so a 529 plan is an educational plan that is a tax-free vehicle if used for higher education.
So if you take the dollars out of the 529 plan and you didn’t use it for education, maybe the kids got a scholarships, they didn’t go to school, whatever. And then you had all this money sitting in a 529 plan, to get the money out, you would have to pay taxes and penalties on the earnings because it’s an after-tax contribution. So the SECURE Act 2.0 says for those of you that have excess contributions in a 529 plan, we will allow you to move money into a Roth IRA. Because it’s already after-tax, it was growing tax-deferred. And it’s like, well, let’s not penalize these people. Let’s allow them to move that money into a Roth IRA. Up to $35,000. But there’s a lot of catches and caveats here. It sounds pretty good on the surface. However, Eric, you need earned income. So for you to move money from the 529 plan into a Roth IRA and if you don’t have an income, you’re not eligible to do this. Second, if you’re already making IRA contributions- for this is that doesn’t apply for Eric- But for people that are already making Roth IRA contributions or IRA contributions, it’s the same limit. You can’t just dump $35,000 into the Roth. It’s a maximum of $35,000. So you can move whatever the maximum allowable contribution limit is in that given year. So let’s say it’s $6500, you’re able to move $6500 of the 529 plan as a contribution into the Roth. So even though there’s some relief for people that have larger balances in 529 plans and it is probably- and it has to season for 15 years. So if you don’t have a 529 plan, you open one up. It has to be in the plan for 15 years. And if you’re making contributions as well, throughout, even though the account was opened up 15 years ago, the last contribution needs to be at least 5 years prior. So, you know, on the surface, it sounds pretty good, but as you dive in with anything, it doesn’t maybe sound as great as it sounds.

Al: Yeah, it’s a nice idea. I’m not sure how many people are going to use it, because of all the limitations you just said. And so you can only do $6500 a year, right? And $35,000 would be your total. You have to qualify to do the $6500 with earned income as you mentioned, Joe. And you’ve got to have the 529 plan open for at least 15 years. So anyway, it’s not going to apply to maybe everybody or even a lot of people. But for those that it does, it’s a nice little thing. It’s a slowly getting more money into Roth IRA, which is kind of similar to a back door, back door Roth.

Joe: Yeah. So, I mean, here’s where I think this applies is that, you know, like myself, let’s say I’m in my 40s and I want to put more money into a Roth IRA for my retirement. And maybe I qualify, maybe I don’t qualify for a Roth IRA contribution. You could fund a 529 plan and let it grow for 15 years. And then see where you fall in 15 years and potentially you can move some of that into a Roth unless they change the law in the next 15 years as well.

Al: Yeah, right, which they probably will, but nevertheless.

Joe: Yeah. So it’s good intentions. It’s good thinking. So for people that do have 529 plans, you are eligible to move that into a Roth, up to $6500 per year if you have earned income.

High Level SECURE 2.0 Recap

So a couple of other real high notes here is that they change the RMD, so instead of 72, now it’s 73. And then if you’re born after 1959, it’s 75. Some additional catchup contributions for people that are 61 through 63, and I think that starts in a couple of years, 2024, maybe.

Al: I think Joe, most of the provisions start in 2024. The RMD starts- the RMD change starts in 2023.

Joe: Correct. Let’s see. There’s a Rothification. Remember that word?

Al: Yes.

Joe: So a lot of things are turning into Roth. You can do a Roth simple plan, a Roth SEP plan. Even your catchup contributions for higher income wage earners are going to go in Roth versus pre-tax. So if you want to take advantage of the catchup contributions in your 401(k) plans, you’re eligible to do so, if they have a Roth provision in the plan, if you’re a high wage earner and it’s all going in Roth. So I think the IRS likes Roth because they get their tax money today. But I think they’ll probably not necessarily like it several years down the road when everyone has all this money in a tax-free pool.

Al: Yeah, I think you’re right. One other thing about the RMDs, required minimum distributions, currently, if you don’t take the distribution when you’re supposed to, it’s a 50% penalty. So that’s going to go down to 25%. And then they also have a stipulation that if you correct it, you found out later and you correct it in a timely manner it’s only a 10% penalty, which is still high, but it’s not as high as 50%.

Joe: 50% was crazy.

Al: It’s a crazy number. I don’t know how- I mean, I guess that’s how serious they were in getting- making you take money out of your IRA so they can get their tax money.

Joe: Yeah, unbelievable. So yeah, now it’s 25%. Thank you very much. Let’s see, anything else?

Al: Yeah, let’s see. I think that I think you touched on probably the biggest things. Let me just kind of-

Andi: We do have a guide on our website people can download if they want to see the most recent changes from SECURE Act 2.0.

Al: There’s a lot of- like qualified charitable distributions have been a $100,000 per person. That’s where you can actually give money out of your IRA directly to charity if you’re 70 and a half and it can count for your required minimum distribution. That’ll start to be indexed for inflation. A lot of little stuff like that, but anyway, yeah, I guess- I guess the guide is where to go, right?

Joe: Yeah, get the guide. Selling some stuff. Andi, where’s the guide?

As always just click the link in the description of today’s episode in your favorite podcast app to download the SECURE Act 2.0 Guide for free right from the podcast show notes and watch the video recap about the new law too. For future reference, if you go to YourMoneyYourWealth.com and click on “Financial Resources” you can find all our white papers and handbooks and guides there, including the SECURE 2.0 Guide. But the podcast show notes should be your first stop.

What’s the Break-Even Point to Claim Social Security Early With Pensions and Longevity? (Roberto, Minneapolis)

I guarantee, no one’s gonna be able to find that thing.

Al: But give it a shot, ’cause you never know.

Joe: Give it a shot. Or just email Andi.

Andi: There you go. Perfect.

Al: She’ll send it to you.

Joe: I got Roberto calling in. “Joe and Al, thank you for taking the time to read my very long email, apologies. I’m on the verge of Santa paying all of us a visit nonetheless. It was a nice surprise while Jake and I were taking a stroll around the Lake of Circus north freezing 25⁰-” what is this?

Andi: “Circa snot freezing negative 25° wind chill type temp.” So he’s thanking you for the fact that you answered his question before Christmas before Santa paid us all a visit. And now he’s asking you another question.

Joe: Oh, this one took me forever.

Andi: This is the guy. Yes.

Al: I remember that.

Joe: Trying to be cute and funny. Who’s Jake? Who the hell is-

Andi: His dog.

Joe: Oh.

Al: You remember that?

Joe: No. I’m like-

Al: I don’t. But Andi does.

Joe: Yeah, okay. “We are in the take Social Security as late as-“ okay, “-we’re in the Social Security camp that will take-“ oh, gosh. I should read these. Especially when-

Andi: You say that every time.

Joe: Well some of this stuff is like in Greek.

Al: Only certain ones.

Joe: “We are in the take Social Security as late as possible camp. But would like to hear your thoughts on when you take Social Security. As a brief recap, both 53, two girls at private high schools, wife and I have pensions of $30,000 and $40,000-“ isn’t she the CEO and he’s-

Al: yeah, I think that’s right.

Andi: Yes.

Joe: “-$30,000, $40,000 per year combined at 60, wife’s Social Security is $4000, his is $3000. Total portfolio sits around $3,000,000. I’m not including in the current overall balance of our portfolio, our wife’s RSU/ESOP, which we think that is gravy.” So let’s get to the questions here. “In general, if one has pensions coming as we do, enough savings to cover more than comfortable lifestyle during retirement-“

Andi: “- cover college expenses, et cetera, and more importantly, a good handle on one’s current cash flow situation and the one which will be ensuring after calling it quits-”

Joe: Just needs to ask the question. It’s like so many words and there’s no question.

Al: I think that’s the stars are questions now that I see this.

Andi: “- is there a break-even moment that makes sense to take Social Security, given all of that?”

Joe: Oh, my goodness, gosh. Is there a break-even moment? Well, there’s two things to consider here. We don’t believe that Social Security is an investment. It’s an income. So there is no break-even in an income. Because you don’t know when you’re going to die. So we believe that you want to maximize it as much as you possibly can. So you want to delay it. That’s going to give you the highest benefit. And if you’re in good health, you’re probably going to live a life- nice, long, healthy lifestyle, and write these emails to me until you pass, and I’m going to have a short life expectancy reading them. But is there a break-even? The break-even if you look at it and say, here, I’m going to take it, I’m going to invest and it depends on what rate of return that you’re using. You know, we’ve seen break-evens if you use a high rate of return on the investment in the 90s. Or if you just look at a straight break-even dollar of, if I take it at 62 versus 67 versus 70, how long do I have to live to bank, the total value? I mean, that could be 85.

Al: Yeah, I’ve seen 79 to 82, but yeah, I agree with you. I don’t really think of it that way. Especially when you’ve got plenty of money. At the very least, I would have one that has the higher benefit wait till age 70.
Because no matter which one survives the other one, the survivor will get that benefit. But what can change all this is if you have impaired life expectancy, which we don’t know, right? So but as a general rule-

Andi: Actually, he does say that they’ve got good long genes.

Al: Okay, oh very good. So as a general rule, I would like to wait as long as possible because I look at it as longevity insurance, if you will. I think that that’s a way to think about it. And it certainly at least the highest Social Security benefit, wait as long as you can, to maximize that benefit for whoever survives the other one.

Joe: Yep. Remember when we had, what was that Social Security guy’s name that would talk and then pause?

Al: Oh, yeah, the guy from El Cajon. I forget his name. Yeah, I know exactly who you mean. And we would start asking the next question. He was just taking a long breath. It wasn’t very good.

Joe: But his claim was always, take it early, and then invest in tax-free municipal bonds. You don’t need the money. Because you’re not going to get taxed on it. But then all these other experts came out and he was like, maybe you should probably delay. All right, buddy. Thanks again for this obnoxious email. I love it how people just put their own little sense of humor into it. And then I try to read it like a normal email and-

Andi: Well it doesn’t help that there’s like no capitalization and-

Joe: It’s just one run on sentence.

Andi: It makes it pretty rough to read.

I’m 66 and Confused about the Roth Conversion Five Year Rules (Tom)

Joe: Tom writes in. He goes, “Hey guys, first of all, thanks for your podcasts. Really enjoy them. I’m a little confused about the 5-year rule regarding Roth conversions.” All right. Welcome to the club, Tom. I think everyone is confused by the 5-year clock.

Al: I always love to hear you talk about that, Joe, I know it’s a passion of yours.

Joe: It is a passion, yes. It’s like every week we got to explain this to people.

Al: And it is a stupid rule. It is so complicated. There’s so many- there’s so many different 5-year clocks. And it’s just crazy.

Joe: “I’m 66 years old. Am I subject to the 5-year rule when converting funds from my traditional IRA to my Roth IRA since I’m over 59 and a half? I understand that the conversion is taxable as income, but I’m confused about the 5-year rule. In other words, am I able to withdraw converted funds- the converted funds principal and earnings from my Roth IRA without penalty as long as it’s converted after I turn 59 and a half? Thanks, Tom.” Tom, that was a very well-written email.

Al: Yeah.

Joe: It flowed. We got to the point.

Andi: Now we got email reviews.

Joe: I mean, it was very nice. I really appreciate that, Tom.

Al: It’s got capital letters to start the sentence. It has periods.

Joe: Yes. And it has periods.

Al: And there’s no double words or words that shouldn’t be in there or misspelled words.

Joe: And just like their weird slang that they like to talk and you know, he’s not trying to be funny. He’s just- he’s getting to the point. So thank you, Tom. And I get his confusion here. So the answer is, maybe. So there’s two 5-year clocks. So there’s two 5-year clocks for everyone that is under 59 and a half, and there’s basically one 5-year clock if you’re over 59 and a half. So Tom said he’s 66 years old, and he’s going to convert money into a Roth IRA. Does he have the 5-year clock to worry about? The answer is yes, if this is his first Roth IRA that he’s ever established. Because all Roth IRAs, no matter what age you are, has a 5-year seasoning. So what that means is if I’m 70 years old, I put money into a Roth IRA. If I convert it or a contribution, the earnings need to season for 5 years within the Roth IRA to receive the tax-free treatment. So if he converted at 70 or in this case 66 years old, if he never opened up a Roth IRA, yes, he has to wait 5 years to take advantage of the tax-free distributions. However, if he had a Roth IRA already established 5 years prior, and he converts into that Roth IRA or a separate Roth IRA, doesn’t matter, then the answer is, yes. He could take everything out tax-free. So it depends, is the 5-year clock- there’s two 5-year clocks for people under 59 and a half, and there’s one 5-year clock for people over 59 and a half.

Al: Yeah, but it’s all so confusing. If you’re over 59 and a half and you convert $100,000, I’ll just make up a number, right? You can always take that $100,000 out any time you want. No harm, no penalty, no tax, because you’re over 59 and a half, no 10% penalty. You just have to wait 5 years for the earnings. And the way the IRS does, they don’t make you take it out pro rata or some earnings, some principal. They let you take your principal out first. So the $100,000 grossed a $120,000, you can still take the $100,000 out anytime you want. Year one, year two, year 3, year 4, you just have to wait for the 5 years for that earnings part. So that’s- when you read the IRS instructions on this, it is so confusing, but that’s the truth. When you’re over 59 and a half do a conversion, you have immediate access to what you converted. You just got to wait 5 years for the earnings without penalty. Unless you already had a Roth IRA for 5 years. How about that?

Joe: That’s pretty good. I think between the two of us, I think we nailed it.

Al: Maybe someone will listen to it 100 times and I got it now.

Joe: Oh. Don’t we have a white paper on that too?

Andi: Yes, we most certainly do. And you can also find that in the financial resources section of the website, or you can email me.

Joe: All right, there you go.

Does This Strategy Avoid the Early Withdrawal Penalty and Preserve Roth Funds? (Jackson, Delaware)

Joe: Let’s go to Jackson from Delaware. He goes, “Hey, Joe, Andi, Al, thanks again for an awesome informative and entertaining show. Your show makes me- your show makes my commute to work much more enjoyable while riding around in my Tesla.” Well, he’s part of the Tesla family.

Al: He is, all right. Welcome, Jackson.

Joe: So do you drive a Tesla when you’re in Hawaii?

Al: Not this time, but last time I came, I did, yeah.

Joe: Do you have a dog?

Al: What?

Andi: Is that a parrot like out in the jungle near your house?

Joe: Are you outside in Hawaii? What are you doing?

Al: Oh, yeah. Well, I’m right next to the window in my condo. Yeah, there’s all kinds of birds outside. So it adds to the ambiance of the show. And plus, it makes it very peaceful. So I can think calmly.

Joe: Got it, got it. Yeah. Well, for those of you that don’t know, Al is in Hawaii. And sometimes when we do the show later in the afternoon, he’s got a couple of Mai Tais in him. So we got to be careful-

Al: You got to do it early.

Joe: -about the questions that we’re asking- so we’re bright and early here in Hawaii time.

Al: Yeah we are.

Joe: So sharp as a tack. All right, let’s get back to Jackson. Let’s see. Oh, the Tesla. Okay, “My wife drives a mini-Cooper. Drink of choice, IPA. No pets, but we do have two kids under 5.”

Andi: Same thing, basically.

Joe: They scream and crap.

Andi: Personal experience.

Al: Do you know about that, Joe?

Joe: I do know about that now. Yes. “Wondering if I could get your spitball analysis on a hypothetical strategy. A couple retires at 50. Needs to bridge the gap for about 10 years.” So 50 to 59 and a half, 60?

Al: Yeah.

Joe: “They need a $100,000 a year for living expenses. Total assets, $5,000,000-“ What’s up with this? Jeez. Everyone’s got $5,000,000 to $10,000,000. Come on.

Al: He does say hypothetical. So maybe it’s not quite there yet.

Joe: That’s his buddies. His neighbors. “Total assets $5,000,000, $3,000,000 pre-tax, $1,800,000 Roth. Some of this was rolled from a Roth 401(k), $600,000 of which was contributions.” Allegedly.

Al: Okay, good.

Joe: “$200,000 in brokerage. Wondering if I could get your thoughts on this strategy that potentially avoids early withdrawal penalty using Roth accounts, but at the same time preserves the Roth IRA balance.” All right. Interesting. You got my attention here.

Al: What do you got, Jackson?

Joe: Okay, so he’s going to do this. “So for years one through 5, he’s going to simultaneously do Roth conversions and withdrawal of Roth contributions. So he’s going to convert $100,000 from pre-tax Roth, paying the taxes using the brokerage money. And then he’s going to pull a $100,000 from the Roth to live off of-

Al: From his contributions.

Joe: So he’s going to convert $100,000 and spend $100,000.

Al: Yep.

Joe: So the balance remains the same. All right. That’s interesting.

Al: Like it so far.

Joe: “Then on years 6 through 10, after satisfying each 5-year clock, one would begin pulling the Roth conversions that started at age 50 and continue with the pre-tax to Roth conversions in the amount of a $100,000 a year.” Okay, so “from years 6 to 10, after satisfying each 5-year clock, one will begin pulling the Roth conversions that started at age 50 and continue with the pre-tax to Roth conversions in the amount of $100,000. Therefore, withdrawal from pre-tax accounts, first to the desired tax bracket. Since its ideal to touch your Roth balance last, would this leave your Roth balance somewhat unchanged from age 50 to 60? And essentially be the same as withdrawing pre-tax money without penalty? Alternatively, is this making things far more complicated than just using a 72T tax election? I haven’t really read too much into this and would love for you guys to review it a bit more. I understand a negative to that is that the amount you must withdraw is set to the duration of the election. However, couldn’t one just reinvest the funds in a brokerage account in market drops and funds are pulled out at a poor time? Of course, this is assuming you have other funds as a cushion. I’m sure I’m missing something, so please let me know.” All right, so he wants to- you know, this is-

Al: It’s complicated.

Andi: High level. He’s-

Al: You know what Joe, I think this works though. So he’s trying to avoid the 10% penalty, which is occurs when you take money out of your IRA at- before 59 and a half. You can always take- on a Roth contribution, right? You can always take your contributions out before age 59 and a half. And apparently, he’s got enough Roth contributions to be able to pull out a $100,000 for years one through 5, age 50, 51, 52, and so on, meanwhile, he’s doing Roth conversions in each of those years, which starts a 5-year clock for the conversion that within in year 6 after year 5, year 6, you can actually withdraw that conversion amount without penalty. I think this works. I think it’s actually pretty clever.

Joe: It’s very clever. I would not do this. If I was Jackson.

Al: Why?

Joe: Because I would do a 72T tax election. And what is 72T tax election is, is it allows you to take money from a retirement account. It’s a separate equal periodic payment, SEPP. And so he’s 50 years old. He wants to retire. He’s got a ton of money in retirement accounts. And he’s like, I got to get access to the money. I would do a 72T tax election.
There’s 3 ways to compute the 72T tax election. There’s an RMD method. There’s an amortization method and there’s an annuity method. And you can just go to like 72T tax election dot com, Jackson, and then put in a balance, and you can figure out what your payment is going to be. You can also break up the IRA. So he’s got like $3,000,000 or something like that in the retirement account. And maybe he doesn’t want to do the 72T tax election on the full $3,000,000. So maybe he takes a $1,000,000. Does the 72T tax election on that. And that’s going to give him, I don’t know, $25,000, $30,000 a year. And so he’s still short the $70,000. Then I would do the whole Roth gig, because I’m going to start depleting my IRA, right? And I’m going to be paying tax at lower brackets. And then I can convert a little bit. I mean, I would get a little bit more sophisticated, of course, in the strategy. But I think I would do the 72T tax election myself versus, you know, taking FIFO and then converting the same amount and stealing Peter to pay Paul to keep my Roth balance. I would want to preserve my Roth as much as I can. So that’s why I would do the 72T. I would want to take more money out of the IRA and leave my Roth IRAs alone.

Al: Yeah. Well, I would do the opposite. For me, the 72T, usually you don’t get it as much as you want, right?

Joe: You’re right. You get pennies.

Al: It’s not a lot. And then you’re sort of stuck with that. And I think the Roth account is preserved because yeah, you take a $100,000 out, but at the same time, you do a $100,000 conversion. So you’re back in the same place. So I personally like the idea.

Joe: Okay. All right, well, let’s see what Jackson does.

Can a Traditional IRA to Roth IRA Conversion Offset a Brokerage Account Loss? (Bob, San Diego)

Joe: We have Bob. He writes in from San Diego. He goes, “I have more than a $1,000,000 realized loss in my brokerage account this year. So can I convert this amount from my traditional IRA to my Roth IRA and offset this loss?”

Al: Yeah, the answer is no, Bob. Unfortunately, because when you do a Roth conversion, it’s considered ordinary income. Same as a salary, same as interest, same as dividends, same as pension. When you sell a stock or a piece of real estate at a loss, that’s a capital loss and you can only use capital losses against capital gains. And if you don’t have any capital gains, you get to take $3000 against that ordinary loss, but that’s it. And then the rest carries over for the rest of your life. If you do have a loss, then you get to offset it dollar for dollar. And whatever’s still left, you’ll still get another $3000 this year plus the rest carries over, over your lifetime. So unfortunately, that’s a great question. We get asked that a lot, but you cannot. It’s a different kind of taxable income.

Joe: What losses can offset a Roth conversion?

Al: Well, a good question. So let’s say you’ve got a business that loses money. So that could be one. Let’s say you have a big itemized deduction, big amount to charity. That could- that could help offset, although there’s different rules on charitable contributions and there are more limitations, you got to think about, got to consider. If you have rental property losses that you’re allowed to deduct because maybe your income is under a $100,000 and you can take $25,000 of losses. That’s an ordinary loss against the Roth conversion, or if you’re a real estate professional, you can actually take unlimited losses against your Roth conversion. We’ve had real estate investors do that quite successfully. So, I mean, there’s a few.

Joe: Not many.

Al: Yeah, not tons. Yeah.

Joe: $1,000,000 capital loss, that’s gotta hurt.

Al: Oh, yeah.

Joe: But if he has other assets, well- remember the movie producer? And he went to one of my classes. And he had a $1,000,000 business loss. Wasn’t that-? Remember that?

Al: Yeah, I sort of have a vague memory of that. But yes.

Joe: But the state of California doesn’t recognize that, right?

Al: On a business loss, they do. They don’t recognize real estate professional.

Joe: Got it.

Have you got a financial strategy you want Joe and Big Al to spitball for you before you pull the trigger? For all your money questions, comments, suggestions, requests stories to tell, or requests for a Retirement Spitball Analysis, click the link in the description of today’s episode in your favorite podcast app, then click Ask Joe and Big Al On Air. Send the fellas an email or better yet, leave a voice message so Joe doesn’t have to try to read your question.

Does Saving to Brokerage for Early Retirement Instead of Maxing Retirement Accounts Ever Make Sense? (Renee)

Joe: All right, “Thank you for getting my question on the air for the guys to answer. I do have two follow-ups if you don’t mind.” Well, now you go on the clock.

Andi: Look out Renee.

Joe: We’re gonna send you a bill here. “If you recall, we have about $70,000 to invest each year. We are fortunate to have multiple retirement accounts to do that in, and we are switching to all Roth contributions, except for the 457(b), where I’m not seeing a Roth option. We’ll check on this. Say we don’t want to cut back-“

Andi: “-do want to cut back.”

Joe: “Say we do want to cut back on part time or completely retire at 55. Is there ever a scenario where it makes sense to not max out all available retirement accounts and bundle some money into our brokerage, which is only about $20,000? If you recall-“ no, I don’t recall. “-we have about $1,200,000 in retirement accounts, not counting our 529 plans. We don’t want to end up retirement rich and cash poor.” Al, have you ever heard that?

Al: No. I’ve heard house rich and cash poor, but that’s a new one.

Joe: I’ve never heard of retirement rich.

Al: I like it.

Joe: Man, I wish I wouldn’t have saved so much. I have so much money. God, I’m so upset with myself.

Al: But I got no cash. I can’t spend a penny, Joe. What do I do?

Joe: Oh. “We will not have any type of pension or real estate income to bridge the gap for Social Security. There’s always the rule of 55, but that would require one of us to completely separate from our employer. And we may not want to do that if we both want to work part time at our current employers. Lastly, I do have that rollover traditional IRA from a previous 401(k) rollover, all pre-tax dollars. We usually don’t get a nice little tax refund each year. Would it makes sense to convert, say $20,000 or so, up to the 24% tax bracket to forgo that refund? Does that even make sense? I realize you probably won’t get this by year’s end, but would still like your take on it. Again, thanks for all you do. I’ve been binging episodes ever since I discovered you guys about a month ago. Still have a sexy minivan and plan on driving it to the ground. Keep up the good work, happy holidays, Renee.” Okay.
Retirement rich, cash poor. Never heard of that. So I would continue to save as much as you possibly can. You can retire early. You can always take your money out of the retirement accounts at any age. You could do a 72T tax election. So it’s an SEPP, separate equal periodic payment. So if they did want to retire prior to, let’s say at 55, yeah, they could take their money out of their 401(k) plan, but if they still wanted to work part time there, they could still take the money out. They could roll it into an IRA and do that election. It’s not ideal, but they still have access to the cash. Do you like her to save- I guess her question is, if I’m reading between the lines here, Big Al, is that they got $20,000. Does it make sense to put that into the 401(k) plan? Does it make sense to put it into a brokerage account? Or does it make sense to give that to the IRS for her to do larger conversions?

Al: Yeah, great question. I think if possible, I would take that extra money and put it into the company retirement plan, but a Roth option. That’s what I would do first. Because you know, then it’s going to grow tax-free. You do have, you know, I guess we go through all the 5-year rules and all that. I guess it just depends. We don’t really know enough about what they’re spending. And if he does retire at 55, what the income sources are? I don’t know. I certainly like the idea of putting money into a brokerage account, especially if you’re going to retire early and need money to spend. But if there’s a choice to put it in a Roth, I’d almost always rather do that.

Joe: Here’s the- here’s the order, right? So you go to the 401(k) and do the match. So, Roth, get the match, pre-tax, get the match, I don’t care. And then if you qualify, then you go max out Roth IRAs. So that’s her and the husband. If they don’t qualify for the Roth IRA, then I would do traditional IRAs, and then I would do the back door and convert them with basis. Then I would go back to the 401(k), 403(b), 457, max those out. If I still want to save, then the choice is- for me, anyway, my opinion would be to convert and use that extra cash to pay the IRS to get more money and leverage more money into Roth IRAs. Or I would fill up the brokerage account. But the problem is, is that Renee wrote us, and she probably wrote us a real nice long email and it probably had all of her details in it and it probably gave us everything of what we’re trying to figure out now two months later on why we can’t really answer these follow-up questions logically.

Al: Yeah, it does make it harder. And then- but part of it though, 457(b), so you know if they don’t have a Roth option, you probably can’t do- if they have a Roth option, you can probably do an in-plan conversion.
That would be probably a good idea. If they don’t have a Roth option, I’m not sure you can do an in-service withdrawal, right? At that age. So I don’t know. You’re right. We don’t really have enough facts here.

Joe: Well, we did, but-

Al: Yeah, that was a couple of months ago. That was pre-holidays.

Required Minimum Distributions from an Inherited IRA Explained (Paul, Southern NJ)

Joe: Paul from Southern New Jersey. “Hi, Andi, Joe, and Al- or Big Al. Long-time listener.” I wonder what a long-time listener is. A couple weeks?

Al: More than one show?

Joe: More than one show? “Love your show. I’ve been taking RMDs from an inherited IRA for 12 years. Last year, I transferred the IRA to a new firm. I took the RMD after I transferred. It was the same year. I heard a couple of different opinions on timing of the RMD. I have been told I needed to take the RMD prior to transferring it. Have I caused myself problems with the IRS by taking the RMD post-transfer? Is there a certain form I need to prove it was transferred or that the withdrawal was to cover the RMD? Much appreciate your comments and opinion.” Okay, who’s giving him these opinions, first off?

Al: Yeah, I don’t know.

Joe: It’s like the most obscure question I’ve ever- we’ve ever received. And he’s like, yeah, you know, I’m at this party. And I’m talking to a couple of my buddies, and I was like, yeah, transferred my inherited IRA after I’ve been taking 12 years of distributions. And they were like, oh, well, did you take the distribution before you transferred or after?

Al: Well, I guarantee they were drinking bourbon at the party.

Joe: And he’s like, well, no, I did it afterwards. Oh, I don’t know.

Al: Big problem.

Joe: Oh. Wow. I don’t know there, Paul.

Al: No, I don’t see a problem at all. Do you?

Joe: The IRS does not care where the money’s at, as long as the money comes out.

Al: Right. I mean, when you’re thinking required minimum distribution-

Joe: The timing on it is the calendar year.

Al: Yeah. Yeah. On a inherited IRA, yeah, of course. You got to do it by December 31st. If it’s your own IRA, and you become of the age where you have to be required minimum distribution, the first required minimum distribution payment needs to be done April 1st of the year after you turn what used to be 72. Now it’s just changed with the SECURE Act, either 73 or 75, and I guess there’s one other thing. And this is not inherited IRA, Joe. It’s a regular IRA. If you have a regular IRA and you have to do required minimum distribution, you got to do that first before you do a Roth conversion. That could screw you up if you screw that up, but I don’t think I’ve never heard of any problem with transferring the IRA to a new brokerage house or bank. I don’t care when you take the RMD.

Joe: Yeah. Unless the- yeah, I’m just trying to- I’m wracking my brain here of-

Al: Why it would be a problem.

Joe: Why it would be a problem. Your distribution- It’s an inherited IRA. So he’s taking distributions on the old rules. So he’s taking a required distribution based on his life expectancy. And so, with an inherited IRA, as long as you take the minimum out, you’re not subject to the penalty. It does not matter where the hell the money’s at.

Al: No, it doesn’t.

Joe: If it’s at Vanguard, then he transfers it to Charles Schwab. Unless the custodian has the issue with it, of saying, you know- because the custodian has- this might be it- I don’t know, I’m just totally, totally thinking this out.

Al: Coming up with an explanation? Okay.

Joe: Yeah. Unless the custodian- because the custodians will come up with the RMD number, right? So your money’s at Fidelity, and then even though it’s your responsibility to take the RMD and to take the appropriate amount, the custodian will still run some of those numbers. So they don’t know- and the RMD is based on December 31st the year prior, to figure out what you need to take out the next year. So on 12/31, you have X amount of dollars in your retirement account and you have to take the RMD. You satisfy the RMD the following year based on the prior year’s balance. So that could be it- is like, all right, well, I don’t know.

Al: Well, I get what you’re thinking, which is, you know, the prior custodian is the one that computed it, because they knew what your balance is and the new custodian, Vanguard, Schwab, whatever, wouldn’t necessarily know that because they didn’t know what the balance was. But as long as you do the RMD with the new one, because you know the amount. You should be fine.

Andi: I just brought up this article just because I’m trying to see if there’s anything useful in it that replies to this.

Al: All right, let’s take a look at this.

Joe: The way the rules work is that the first money distributed from your IRA in a year when you are required to take an RMD will automatically be considered your RMD with a rollover, there is no ability to take the RMD later. So this is a 60-day rollover.

Al: Yeah, it is. That’s not what we got here.

Joe: Right. So he did an ACAT transfer.

Al: Maybe that’s what he got told is this.

Joe: Right. If you’re doing a 60-day rollover, then- yeah, you never want to do a 60-day rollover. You always want to do an ACAT.

Al: Yeah, right.

Joe: Because once you do- because you can only do like one 60-day rollover a year and everything else. So yeah, you get yourself in trouble there. So I’m guessing he just did an ACAT transfer. I don’t see an issue. But if he did a 60-day rollover, which he probably didn’t, then there could be some stipulations because you’re actually taking a distribution and then putting it back in.

Al: I don’t think you could do a 60-day roll over on inherited IRA.

Joe: I don’t think you can either.

Al: So I don’t think that even applies.

Joe: So I don’t know. I would like to know where he goes to get these opinions. Well, we’re back, folks. We’ll keep pumping some content out for 2023. Very exciting. Hopefully, we’ll keep it entertaining, keep it light, but also very informative. We appreciate everyone kind of hanging out with us over the years, and hopefully 2023 will be a lot more good stuff. So thank you all for tuning in. And we will see you next time.

Andi: Sunkist, the 5 hour energy drink, Al at the Kapalua golf tournament and YMYW’s holidays in the Derails at the end of the episode, so stick around. Help new listeners find Your Money, Your Wealth by leaving your honest reviews and ratings for YMYW in Apple Podcasts, Amazon, Audible, Castbox, Goodpods, Podcast Addict, Podchaser, Podknife, Spotify, and Stitcher. 

The Derails



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