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 [...]

Published On
January 14, 2020

Joe and Big Al tackle your SECURE Act retirement planning questions: how minors can distribute inherited IRAs, whether a trust should be your IRA beneficiary, and what effect the new law has on required minimum distributions, or RMDs, and qualified charitable distributions, or QCDs. Plus, the fellas get schooled by YMYW listeners on their Thrift Savings Plan miss in episode 254.

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Show Notes

  • (01:06) SECURE Act: Can the Grandkids Distribute Over 10 Years?
  • (04:58) Should My Trust Be the Second Beneficiary With the SECURE Act?
  • (09:35) With the SECURE Act, Can I Make Roth conversions Until Age 72? What is My RMD Based On? Are RMDs Taxable in CA?
  • (14:26) Qualified Charitable Distributions (QCDs) and the SECURE Act
  • (17:18) Should We Convert to Roth Before Taking Social Security? Will Medicare Part B & D Surcharges Hit?
  • (20:03) SECURE Act: Should We Change IRA Beneficiaries in Revocable Trust Back to the Kids?
  • (24:30) Explanations: Tax-Exempt TSP Contributions for Military Service Members in Combat Zones

Resources mentioned in this episode:

SECURE Act: Retirement Savings, Stretch IRA, and RMD Changes:

LISTEN | YMYW podcast #253: The SECURE Act Changes Retirement Savings, Stretch IRAs, RMDs, and More

LISTEN | YMYW podcast #234: SECURE Act: Discretionary vs Conduit IRA Trusts

LISTEN | YMYW podcast #224: Jamie Hopkins: How the SECURE Act Would Change Retirement. Death of the Stretch IRA?

Listen to YMYW podcast #255 on YouTube:


No surprise, with new retirement laws come all-new questions. Today on Your Money, Your Wealth®, Joe and Big Al tackle your SECURE Act questions: how minors can distribute inherited IRAs, whether a trust should be your IRA beneficiary, and what effect the new law has on required minimum distributions, or RMDs, and qualified charitable distributions, or QCDs. Plus, the fellas get schooled by YMYW listeners on their big Thrift Savings Plan miss in episode 254. I’m producer Andi Last, and here now are the hosts of Your Money, Your Wealth®, Joe Anderson CFP®, and Big Al Clopine, CPA.

01:06 – SECURE Act: Can the Grandkids Distribute Over 10 Years?

Joe: You know how many people that actually like use the tool to ask us questions on our website?

Al: I’m gonna say in the entire history maybe 3.

Joe: We got 4. We got what, Dale from Santa Rosa. He what-

Andi: His was TSP. Greg is actually the one who has the SECURE Act question. He’s on page 3.

Joe: Oh. Got it. Well, how many pages we got today?

Andi: 13.

Al: We’re starting with page 3.

Joe: OK we’re starting with page 3 because I wanted to start out with the SECURE Act. So we got Greg from Temecula. He calls in:

“Hey Big Al and Joe. This is Greg from beautiful Temecula, California. I love the podcast. Have a question for you about the new SECURE Act. My mother-in-law had set up her Roth to be inherited by her 4 grandchildren. And I was just reading in the SECURE Act that it looks like if I read it correctly that the grandchildren would not actually even get the 10 years before they’d have to take their distribution. It looks like they would actually have to take that distribution immediately at her death was something we were trying to avoid when we had originally set up this plan so that they would have actually been able to carry it for their whole lifetime. But now it’s looking like they will immediately have to cash. I was wondering if you’ve looked into it and if so if you think my assessment is correct or if I maybe just not quite understanding what’s happening here. Listen to the podcast and hopefully hear a great answer that I want to hear. Thanks.”

Joe: Well thanks for the question Greg from beautiful Temecula.

Al: Yeah. I like Temecula.

Joe: Yeah because there’s a bunch of wine there.

Al: There is.

Joe: Oh I love it.

Al: Plus we go to Idyllwild quite a lot in the mountains which is about a 2-hour drive out of San Diego. It’s very pretty up there.

Joe: Never been.

Al: And I go right through Temecula each time.

Joe: Greg I’m not sure what you read because they have 10 years just because they’re minor children. So here’s the rule. Let’s say if it wasn’t the grandmother it was Greg’s retirement account. For minor children, they’re able to stretch the IRA out until they reach of age majority. So there’s kind of this weird rule within minor children that they can still stretch it over their life expectancy until they reach the age of majority then they have to take the 10 year. But grandchildren it’s still 10 years.

Al: They’re still minor kids.

Joe: But they don’t have the cash it out all at once.

Al: And Greg I agree with Joe. I’m not sure what you were referring to either but we should say the SECURE Act that was just passed and signed late last year one of the main things it did was eliminated the stretch IRA for inherited IRAs, inherited non-spousal IRA. So that’s kids, grandkids, friends, neighbors, whatever, non-spouse. So before that, you could when you inherited an IRA let’s say from your father, grandfather, grandmother, whatever, you could stretch it out over your entire life. So you just take a little piece for the whole rest of your life. Well, that went away with the SECURE Act and now the SECURE Act says that you have to take the withdrawals within 10 years. I’ve never heard of an immediate withdrawal either. So I’m not sure what that’s referring to.

Joe: I don’t know where he read that but I have a pretty good source, his name’s Big Al.

Al: You trust me?

Joe: I do trust Big Al.

Al: Sometimes.

Joe: On taxes. Investments, not so much.

Al: Wow. Okay.

Joe: But no, I think he’s good. I get what the grandmother wanted to do. I have 4 grandchildren. I want to give the IRA to the grandchildren. They’re probably in a lower tax bracket so as they’re taking the distributions out over 10 years they might not be that hurt depending on how old the grandchildren. Greg didn’t sound that old. So his kids are probably under 21 I’m guessing but who knows. But Greg I don’t know what you read but if you find whatever source that you read that from, you could shoot it our way and we can verify that- I’m not sure what the heck that is. So hopefully that’s good news for you.

04:58 – Should My Trust Be the Second Beneficiary With the SECURE Act?

Joe: We got Rich. He wrote in from Chicago. He goes “Hi Joe and Al. l love the show. I never miss a podcast.” Wow.

Al: Never. Good for you Rich. He’s my brother.

Joe: Good.

Al: So he lives in Redding. Rich in Redding.

Joe: “I’m 57. And my question is about the new law that eliminates the stretch inherited IRA. I currently have my spouse as my first beneficiary, my children second. With this new law should I choose my trust as the second beneficiary? My spouse would remain as the first. But my thinking is that naming the trust as the second that may stretch out the payments longer than the new law 10-year rule. My oldest child is 29 years old. Is my thinking correct? Or are there other considerations on naming the trust as the second beneficiary? Thanks.” A lot of confusion out there Alan.

Al: Yes well the SECURE Act is confusing.

Joe: So no Rich you do not- I mean the trust is- now we’re going to get in the weeds here.

Al: Oh boy.

Joe: But you have to be careful on who you’re naming your beneficiary. There’s no way around the 10-year- if you name a beneficiary. So it’s going to be- is it a discretionary trust or a conduit trust? Is it a look-through trust? And then when you’re naming a trust the beneficiary of a retirement account it even gets a lot more complex than the SECURE Act itself and the SECURE Act isn’t really that complex. He’s trying to stretch out the retirement account to his child longer than the 10 years. Is there a way to do that? The only trust that you might want to consider if that were the case would be a charitable remainder trust. That’s it. And I’ll get into that in a second but if he’s just talking about a normal trust I don’t see where that logic is coming from.

Al: I would agree with that that basically the trust it basically inherits the same position if you will. I mean it could actually even make it worse, but it’s not going to make it better. And I think that’s what Rich is trying to do is trying to stretch out that the life expectancy longer and the trust does not do that.

Joe: So, for instance, let’s say that there are IRA trusts out there. I think you have one. Your living trust also has a component for IRAs.

Al: I do and now I think there’s less need for it.

Joe: You probably need to get rid of it.

Al: I probably do.

Joe: Yeah. And because what happens is that they’ll say once Rich deceased and his wife is passed. So now they have this IRA that’s going to his child that is now 29 years old. He probably will inherit it. You know 30 years from now, 50 years from now, whatever. And so if it goes to a trust, it depends on if it’s a discretionary trust or a conduit trust. A discretionary trust is going to say the trustee has discretion on how those dollars get distributed. And it stays in trust but those dollars have to come out of the retirement account and they’re gonna get taxed at trust rates. So the top rate of 37% is that what income Al? Like $13,000?

Al: I’d say $13,000, $14,000 of income.

Joe: Something like that. So if you have a large IRA you’re going to get blown up. You’re going to lose most of that to taxes.

Al: And the reason they set it up that way, it’s basically the same tax brackets as individual rates. But you hit those high brackets very soon because they didn’t want you shifting income from yourself to the trust to have two low brackets. So that’s the reason why they did this.

Joe: Or someone like Rich trying to stretch out the stretch even more. If it is a conduit, let’s say IRA trust in within the language they were saying just feed out the RMD. Because in an inherited IRA there’s an automatic required distribution over the life expectancy of the inheritor. But now it’s a 10-year rule. So no money is not going to come out at any of those plans until the 10th year and everything is going to come out and it’s going to blow up potentially in taxes. So be careful if you want to name the trust. We could get into more complex I guess strategies Rich, a charitable remainder trust might make some sense, Roth conversions probably make some sense, really depending on what you are trying to do and I guess what the financial acumen of your child is. Are you trying to hold assets and only dribble a little bit out to the kid? Or are they responsible where they can handle a fairly large inheritance?

09:35 – With the SECURE Act, Can I Make Roth conversions Until Age 72? What is My RMD Based On? Are RMDs Taxable in CA?

Joe: Judi writes in from San Diego. She goes “Happy New Year Andi, Joe, and Al.” Look, top billing.

Al: Top billing for Andi.

Andi: Judi and I are pals.

Joe: Got it. “Thanks for filling my brain with new information both useful and oblique. Did I say that right?

Al:  I think so. I think that means UNuseful.

Joe: Okay. I thought that’s like a muscle in your-

Al:  Well yeah, that too.

Joe: She’s working out while she listens to us. Today, questions. She has three. Judi, taking advantage of Andi’s friendship here. “With the SECURE Act, does this mean I can continue to make Roth IRA conversions until I’m 72?” Judi, you can make a Roth IRA conversion until you’re 92. There is no age restriction on Roth IRA conversions. So yes you can continue to convert is your heart content.

Al: Yeah I think there are lots of ways you could read this question. I think she might be talking about IRA contributions instead of Roth conversions. Let me go through the different flavors here. So in terms of a Roth conversion you’ve always been able to do that at any age as long as you have an IRA. So, in other words, you could be 20 years old and do a conversion. You could be 90 years old and do a conversion. That hasn’t changed.

Joe: But I think people get confused because as soon as they have to take a required minimum distribution from the retirement account they might feel that they are not able to do a Roth IRA conversion any longer.

Al: That’s true.

Joe: And that’s not the case.

Al: And the one caveat is if you’re 70 and a half although now 72 with a SECURE Act your required minimum distribution needs to start. You have to take that required distribution before you do the Roth conversion.

Joe: If you want to do a $30,000 Roth IRA conversion and you have a $10,000 RMD you have to take the RMD first. That cannot go into the Roth IRA. You would have to spend it or put it in your savings or brokerage account and then you could do a conversion thereafter of whatever amount.

Al: There’s a lot of confusion Joe on this on this deferring or delaying the RMD until 72. So here’s the way it works. If you turned 70 and a half by December 31st of 2019, you fall under the old rules and you have to take your first required distribution, either you took it last year or you have to take it by six months after-

Joe: It’s April 1st of next year.

Al: Next year, thank you. I’ve got myself confused a second. However, if you turn 70 and a half on January 1st, 2020, then you can wait all the way till age 72 to take that first RMD.

Joe: And you can actually wait until April 1st the year after you turn 72.

Al: That’s true. So but then you have to take two RMDs.

Joe: Let’s say April 1st you take your first RMD then you have to wait until or you have until the end of the year to take the RMD for your age 73. So her second question is “if I turned 72 in February 2024, is my RMD based on the value my IRA on that date, or at the end of the year? If it’s based at the end of the year, must I do an RMD withdrawal on the 31st to be sure if the amount is precise?” It’s the year before Judi. So let’s say you turn 72 in June of 20 or I’m sorry, February, she turns 72 in February of 2024. They’re going to use the balance up 12-31-2023 of your retirement account.

Al: And the reason they do that is because you need to have a year-end balance to know how much the required minimum distribution should be. So that’s why it’s the year-end balance the year before. Now if you-

Joe: So you’re gonna be very precise because you will know that.

Al: You will know it. And it’s not the date you turn. And plus, now if you defer it as we talked about till April 1st of 2025, then you’d have to take two RMDs, one based upon the balance on December 31st, 2023 and one based upon the balance of December 31st, 2024.

Joe: Very good. Look at that. “Are RMDs s taxable income in the state of California?”

Al: Yes they are.

Joe: What do you think Judi? Come on. It’s the Franchise Tax Board. Yes. They’re going to take all that they can. So yeah. Thanks for your questions, Judi. Keep listening. We appreciate you writing in and being good friends with Andi. You guys going out for cocktails later or something?

Andi: We haven’t had a chance to do that yet. She actually told me I should steal your Darth Vader mask and go party for New Year’s Eve.

Joe: Well let’s do it.

14:26 – Qualified Charitable Distributions (QCDs) and the SECURE Act

Joe: We got Stan from Richmond, Virginia. “So a CPA friend told me today that QCDs would still apply to a person to reach 70 and a half but was not taking RMDs based on the just passed SECURE Act. I sent him this info below and asked for his source. No answer yet. From Forbes, one planning technique might be advise adversely affected by the extension of RMDs plan holders can direct up to $100,000 of IRA funds to be directly to charity. This is called a QCD or a qualified charitable deduction that has the effect of a dollar for dollar deduction for charitable contributions for the plan holder. QCDs may now have to wait until age 72. SECURE Act Section 107(b) provides rules to coordinate the new rules with QCDs. I cannot find the section 107(b). Do you know-?” Forbes is off. They’re done. That’s a terrible source. I’m sorry, Forbes.

Al: Well that’s probably an opinion written by somebody in Forbes.

Joe: So it’s a Forbes beat writer-

Andi: A “contributor.”

Joe: You could do a QCD still. It did not affect the age 72. So if you want to do a QCD as long as you turn 70 and a half you’re fine. It’s 70 and half is the number or the age for QCDs, not 72.

Al: I completely agree with that. And the thing is the way tax law works is that if they don’t talk about it in the new bill, the old law didn’t change and they didn’t talk about QCDs.

Joe: So you’re good Stan. I appreciate that and but it might not make sense to do a QCD if it’s not an RMD.

So if the SECURE Act makes retirement planning a little more complicated for Greg, Rich, Judi, Stan, and Lilian coming up, maybe it does for you or someone you know, too. Find out how this new law might affect your retirement, your required minimum distributions, and leaving your assets to your heirs: check out Big Al’s SECURE Act recap video, and download our free SECURE Act Guide in the podcast show notes at YourMoneyYourWealth.com – just click the link in today’s episode description in your podcast app. Then, share away! Post the episode link on Facebook or Twitter or LinkedIn or blast it out via email, so that your friends, family, and colleagues will be just as well-prepared for these retirement changes as you are. This new law may also open up some retirement planning opportunities you haven’t yet considered. Click the Free Assessment button at YourMoneyYourWealth.com for a personalized look at your financial situation. Getting back to your questions now, but I want to mention first that there is a full two minute derail at the end of this episode about the location of our next emailer, Lilian. Keep that in mind, Lilian, and stick around to the very end of the podcast to hear what about that location scarred Joe for life when it comes to travel.

17:18 – Should We Convert to Roth Before Taking Social Security? Will Medicare Part B & D Surcharges Hit?

Joe: So anyway Lilian from Des Moines, Iowa. “Good morning Joe and Al. Longtime listener and a huge fan. I like that you get right to the topic.”

Andi: Just like that.

Joe: Yeah, just like that.

Al: Whoops. Not so good this time.

Joe: Sorry Lilian. Oh boy. Screwed that one up. “Should we convert 401(k) to Roth when we are 67 to 72 before Social Security for 3 years and before RMDs? Or should we leave 401(k) where it is? We will get hit with Medicare Part B and D surcharges if we choose to leave it alone.” OK. That’s question number one. Well, Lilian, we need more information. Should you convert to a Roth? I don’t know. It depends on what your taxable income is. It depends on how much money you have in the 401(k) planning. It depends on how much money you want to spend. What’re the overall goals? What’s-

Al: But I would say in general at that age people are retired and in general their income is lower than it’s going to be at age 70 when Social Security kicks in or 72 when the required minimum distribution kicks in. So oftentimes, I’m generalizing, oftentimes that is a great time to convert because you’re in a lower tax bracket. You’re going to be in a higher bracket later so you’ll want to convert. You have to pay tax on those IRA dollars-

Joe: You may. Hypothetically.

Al: You may, yeah, good point. You may, however, I think what she’s talking about was what about the Medicare, the premiums for Part B and D? They could go up if you do a conversion. Now a married couple if you keep your adjusted gross income modified adjusted gross income under $170,000 it’s not going to change those Medicare premiums so I would at least go up to that. But the smarter thing is to take a look at your tax bracket now versus in the future based upon your Social Security and based upon your required minimum distributions to help you decide.

Joe: But she’s asking. We will get hit with Medicare Part B and D surcharges if we choose to leave it alone? No. The part B and D surcharges happen is that, it’s means-based. So the more income that you have the higher the premium that you have to pay for Medicare. So if you did not do the conversion that will not be added to your taxable income or adjusted gross income. That would not if you left it alone.

Al: If you left it alone.

Joe: But later if you have a higher income then you’re gonna be stuck with those surcharges maybe for a longer period of time.

Al: That’s right. So I would say most people ask the question in such a way that it’s like should I not do Roth conversions because in two years with higher income I’m going to have higher Medicare premiums? And yeah you do want to consider that but that’s not the most important thing. The most important thing is your tax brackets.

20:03 – SECURE Act: Should We Change IRA Beneficiaries in Revocable Trust Back to the Kids?

Joe: “Should we change IRA beneficiaries in revocable trusts back to the children after the SECURE Act?” It depends. I would say yes. Because it’s not- if you wanted to control the money from the grave let’s say I don’t trust-  or not trust the kids, but you would much rather control the money. I mean that’s why people put IRAs either protection from lawsuits and liability is a good reason to have IRA monies in a trust but I would just put them to the children, depending on what type of trust you have.

Al: In general I think that’s the right answer and the SECURE Act didn’t change anything in that regard.

Joe: Correct. It depends on if it was an IRA trust, if it was discretionary.

Al: That’s true.

Joe: I don’t want to talk about that again.

Al: First segment we already did that.

Joe: “Any other better ways to leave our children now every IRA, Roth IRA and 401(k) are under the 10-year withdrawal spell.” Any other better ways to leave to our children now every IRA, Roth IRA and 401(k)?

Al: Well I would answer it this way, to the extent that your income, your taxable income tax bracket is lower than your kids. If they’re in higher brackets you’re going to want to do more Roth conversions out of your IRA or 401(k). Pay those tax dollars in a lower bracket. That’s if you’re in a lower bracket than your children. That would be a smart thing to do. They’ll still have to take the Roth IRA dollars out in 10 years but they won’t have to pay taxes on it. And I think as- because of that, I think we’re probably going to see more Roth conversions at least for those that have big IRA balances.

Joe: Did you read that differently?

Andi: The only thing I think is that she left out the word ‘that’. “Any other better ways to leave our children now every IRA, Roth IRA and 401(k) that are under the 10-year withdraw spell? That’s what I’m guessing that she intended.

Al: Yeah.

Joe: Well I don’t know. You know what we’re going to hear a lot of Big Al? We’re going to hear a lot of this: “take distributions from your retirement accounts and buy life insurance.”

Al: Yeah I’m sure that’s going to come up.

Andi: Oh boy.

Joe: It is. Guaranteed. You heard it now. Is that because the retirement accounts are going to come out over 10 years. Why don’t you take some dollars out? Buy a life insurance contract because then that contract is going to go to your heirs 100% tax-free. So that’s going to be a planning technique. It may make sense for some depending on the size of the IRA. Depending on the cost of insurance and the sheer ability of them. But I think we’ll get a lot of questions on that. I’m guessing in the year to come.

Al: Yeah but the Roth, if they get more money in the Roth IRA that goes to the kids tax-free too. The only difference is they have to pull out those dollars in 10 years versus stretching it over their lifetime.

Joe: Correct. Life insurance proceeds-

Al: Tax-free as well. The main reason you would do that strategy is if you could get life insurance since for some reason you knew you had impaired life expectancy.

Joe: Well that’s just leverage. You’re just leveraging to say I’m going to pay a premium. Let’s say I buy $1,000,000 policy. And I’m going to pay $30,000 a year for that policy. And if I make it the life expectancy I put in about $800,000, $900,000 in the policy and the kids die with $1,000,000. But if I died in 4 years then I only put in $100,000 some-odd and the kids get $1,000,000 that’s called leverage.

Al: It’s also I would say a bet to die strategy.

Joe: It is a bet to die strategy. It is a very good bet to die.

Al: So if you like that strategy, go for it.

If you missed any of the previous SECURE Act discussions on Your Money, Your Wealth®, give a listen to episode 253 from right after the Act passed, episode 234 on Discretionary and Conduit IRA Trusts, and episode 224 when Professor Jamie Hopkins from Heider School of Business at Creighton University gave us an overview of the Setting Every Community Up for Retirement Enhancement bill back when it was still being considered in Congress. You’ll find links to all three episodes in the podcast show notes at YourMoneyYourWealth.com – just click the link in today’s episode description in your podcast app.

24:30 – Explanations: Tax-Exempt TSP Contributions for Military Service Members in Combat Zones

Joe: Let’s go where, where are we going now? We got something?

Andi: Whatever you would like to do. Would you like to discuss the TSP?

Joe: Let’s go with the Thrift Savings Plan because Dale from Santa Rosa, California, sent me a voicemail and just said “you’re a complete idiot. You don’t know anything that you’re talking about.” And so I said ‘you know what Dale? You are absolutely right. I think I know a lot about a little.’ And I’m not an active duty individual in the Thrift Savings Plan. Dale is. So I’m going to have Dale educate our listeners.

Al: He’s going to explain all this to us.

Joe: I hope so.

“Hey, Joe. My name is Dale. I love your podcast and your YouTube channel. Thank you very much for putting out that content. I’ve got your latest newsletter e-mail about a recent podcast where there was a question about the Thrift Savings Plan. I’m active duty military and I thought I would explain. It looked like there was a question about how someone could have non-taxable contributions to a traditional TSP account. Well, that can happen if you’re deployed. All military pay is tax-free if you’re deployed to a combat setting. So, for example, I have non-taxable contributions to a traditional TSP before Roth TSP was even available. So that’s how someone can get non-taxable contributions to a traditional TSP. If you’d like any further explanation, please give me a call. Thanks a lot. Bye”

Joe: Dale. Love you, Bud. Thank you very much for your service. And appreciate you kind of setting Big Al and I straight. Because Al and I are nowhere near a combat zone.

Al: No, we’re not.

Joe: We’re in San Diego, California.

Al: It’s pretty nice here.

Joe: We’re close to military individuals.

Al: The closest I got to military service is my dad was in the Army.

Joe: I thought you were in line for a draft.

Al: I was actually the first year where they took away the draft lottery.

Joe: Oh really.

Al: Yep. So didn’t have to serve. I do appreciate those that do. Including Dale.

Joe: I absolutely do too. Yes. Thank you, Dale.

Joe: Nick from Fairbanks, Alaska. That has to be one of the farthest places that has ever reached out to us.

Andi: At least in this country.

Al: Have you been there? That’s pretty far out there.

Joe: Yeah we’re very popular in Guam or something.

Andi: Ghana. Number one.

Joe: Where the hell’s Ghana?

Andi: Africa.

Joe: Is it? See that shows that I don’t go on vacation and I don’t leave my bubble often. But Fairbanks, Alaska. I do know where that is. Never been to Alaska. Would like to go.

Al: I’ve been twice.

Joe: I know you have. Al, you’re just a traveling fool.

Al: But I haven’t been to Iowa.

Joe: Let’s go to the Amana Colonies. You and I brother. “Andi, Joe and Big Al. l just came across your podcasts at the end of 2019 and was largely impressed by your ability to bring levity to such a dull topic as TSP conversions.”

Andi: He said ‘droll’, but that’s fine.

Al: ‘Dull’ is fine.

Joe: ‘Dull’ and ‘droll’. Whatever. “I’m afraid however there-” Let me just see, I’m guessing Al that we’re going to get schooled again on this one.

Al: Yeah we’re gonna get schooled.

Andi: This one is much more in-depth.

Joe: I’m afraid however there-“

Al: “-there was a wide miss.”

Joe: Oh. “to the understanding of how TSP can house after tax-exempt dollars. So here’s my attempt to beef up, or for the vegan in the room bean up-” Yeah.

Al: Like it.

Joe: Big Al.

Al: Bean burrito.

Joe: The vegan.  “- the knowledge base. When a military service member continues to contribute to the TSP while located in a tax-exempt region a.k.a. combat zone, those contributions enter into TSP as tax-exempt. That is to say, tax is not allowed on the contribution or on its later disbursement. Don’t confuse this with a Roth contribution. To add to this unique color of money issue the TSP holds these tax-exempt funds in the regular TSP account, not a Roth. As such a monthly statement may show that’s one’s regular TSP balance is $80,000 of which $50,000 is designated as tax-exempt. For the matter of rolling these tax-exempt dollars as I did after my military retirement at age 42, the new custodian must certify that it accepts tax-exempt balances. If they do, the $50,000 will go directly into the ROTH account while the remaining $30,000 will simply be rolled into a traditional IRA. There is or at least at the time I did, no allowance to separate this process. That is when rolling a regular TSP over the entire balance must be rolled tax-exempt in pre-tax dollars. Based on my experience this is delicate and tricky process and it depends on how knowledgeable the random custodian agent is who process this transaction. So as I see it your question, Matt from Carlsbad who has a healthy tax-exempt a portion of his TSP is not only combat vet, but one who is thoughtfully thinking about his financial future come to the end of his military service. Thank you, Matt. And to Joe and Big Al, I appreciate you taking the fiduciary oath, as people like Matt deserve no less.” Whoa, thank you. I got chills.

Al: Yeah right.

Joe: He was a combat vet. I met a guy today and it was kind of an interesting conversation. He was a fighter pilot for the Navy but he was air-to-air combat.

Al: Okay. Wow.

Joe: He’s not dropping bombs. He’s like- the fight is in the air.

Al: Fighting in the air.

Joe: And then he got- and it was kind of weird. He goes ‘Yeah, I got the last kill in Vietnam in the air.’ And I was like, ‘oh. Interesting. Ok.  Good chat.’

Al: How did you respond to that?

Joe: I was like ‘that’s awesome.’ But then I was like –

Al: Maybe not that awesome.

Joe: ‘Hey how about those Bears?’ But you know, it’s war. These guys are fighting for our freedom and I appreciate everything that they do there. Their lives are at risk.

Al: Same. Yeah. I have a lot of respect for our folks in military service for sure.

Joe: Yeah. So Matt from Carlsbad, we truly apologize for the bad advice that we gave. I don’t even remember what we said. But it was probably pretty bad.

Al: But our listeners know better.

Andi: I think you were you’re like ‘yeah there’s no tax-exempt TSP. What are you talking about?’

Joe: I’m like ‘Matt, you’re probably an idiot. What are you talking about?’ But no, you are a combat vet and we truly appreciate everything and hopefully, Nick and Dale straightened us out. That’s it for us. Thank you for your email questions folks. Keep on bringing them and we’ll try to get to them each and every week. Without you, this would be an awful, awful show. Thank you, Andi. Thank you, Big Al. I’m Joe Anderson. We’ll see you next week.


Thank you to everyone who wrote in to let the fellas know about these tax-exempt TSP contributions, there were a lot of you. It doesn’t happen often that listeners know more about a financial topic than Joe and Big Al, so if you hear a miss, we definitely want to know about it. Click Ask Joe and Big Al On Air in the podcast show notes at YourMoneyYourWealth.com to send in your comments, corrections, and money questions. Hopefully, they’ll actually know the answer.

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