Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
August 17, 2021

Joe and Big Al answer several versions of what is probably the most common question we get here on YMYW: should we convert money from tax-deferred retirement accounts to Roth, with tax-free growth on our investments for life? Should we do Roth conversions before we get married? Should we do a 403(b) to Roth conversion? When and how much should we convert to Roth if we want to keep our ACA subsidy? Should we do Roth conversions with more aggressive funds first? If we use our cash to pay the tax on Roth conversions, will we run out of money for our early retirement? And to cap it off, something completely different: can you sell without selling your house? What do the fellas think of Ric Edelman’s answer to the question, “should you pay off your mortgage?” 

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Show Notes

  • (01:24) Should We Do Roth IRA Conversions? (Dom, Columbus, OH)
  • (07:35) Should We Convert from 403(b) to Roth to the Top of the 12% Bracket? (Chris, Ft. Lauderdale, FL)
  • (09:48) Should We Do Roth Conversions Before Marriage? (Steve)
  • (14:25) When Should We Convert to Roth? We Want to Keep Our ACA Subsidy (Dave, Iowa)
  • (23:55) Should More Aggressive Funds Be Converted to Roth First? (Craig, Seattle)
  • (33:25) Will We Run Out of Cash for Early Retirement If We Pay Roth Conversion Taxes? (Gloria Not My Real Name, San Antonio, TX) 
  • (41:15) Sell Without Selling? Thoughts on Ric Edelman’s Answer to “Should You Pay Off Your Mortgage?” (April, Tinley Park, IL)

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Should you move money from tax-deferred retirement accounts into an account that’ll give you tax-free growth on your investments for the rest of your life and your kids’ life? Whaddya think? Today on Your Money, Your Wealth® podcast #339, Joe and Big Al answer several versions of what is probably the most common question we get here on YMYW: should we do Roth conversions – before we get married? Should we do a 403(b) to Roth conversion? When and how much should we convert to Roth if we want to keep our ACA subsidy? Should we do Roth conversions with more aggressive funds first? If we use our cash to pay the tax on Roth conversions will we run out of money for our early retirement? And to cap it off something completely different, can you sell without selling your house? What do the fellas think of Ric Edelman’s answer to the question, should you pay off your mortgage? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should We Do Roth IRA Conversions? (Dom, Columbus, OH)

Joe: Got Dom writing in from Columbus, Ohio. He goes “Hi, I generally enjoy your show and have shared YMYW podcast with most of my closest friends.” Why only most, Dom? Why not all?

Al: And he actually said, I genuinely enjoy- I think you said generally.

Andi: That’s what I was confused at too. I generally enjoy your show, not all the time. No, he said genuinely.

Al: I tell some of my friends about it.

Joe: I’ll give you a 2.1 star. I love Big Al.

Al: Oh, he genuinely-

Joe/Al: – genuinely-

Joe: OK. You know, my pronunciation efforts-

Andi: Really. He really enjoys the show.

Joe: Yes, he enjoys it. But only shares it with most of his friends.

Al: Most. Not all.

Joe: Not all. “When I debate Roth strategies with a friend, I discovered your show and I won the debate, thanks to you. My wife is 36 and I’m 39. I have two kids under the age of 6 and we plan on retirement age 65. My question is about converting my current 401(k) balance to Roth IRA. Would it be more beneficial to convert our current 401(k) balance to a Roth over the next 5 years? Or just leave it as is? It seems highly likely taxes will rise in the future. We have changed all future 401(k)  contributions to Roth. Based on average returns I estimate close to half my 401(k) will be taxable 27 years from now. Goal, $6,000,000 by age 65. The quest seems simple. But I’m curious if the current 401(k) balances not converted to Roth, if there is a way to utilize my taxable funds in a FIFO-like method in retirement to provide a favorable tax situation. Details, wife and I now max out 401(k) annual contributions, $19,500 each, and Roth IRA $6000 each. Salary is $150,000, my salary- “ OK, Dom. “- wife’s salary is $100,000. So they’ve got a 6% match on Dom and the wife at 4%. Current assets, got a nice primary residence, $650,000, $150,000 mortgage. Got some rental props, $500,000, $350,000 in mortgages there. His 401(k) balance Al, $525,000 at age 39.”

Al: Yeah.

Joe: Pretty good.

Al: Yeah, really good.

Joe: “Future 401(k) contributions and Roth contributions beginning 2020. Wife’s 401(k) is $100,000; future 401(k) contributions are Roth contributions; brokerage account $150,000; Roth IRA $24,000. He’s got a little ESPP plan- .” I like how he has to put like company stock like we don’t know what the hell an ESPP plan is.

Al: Employee Stock Purchase Plan, we do know that. But maybe our listeners didn’t.

Joe: Just in case. “ – $25,000. He’s got a 529 plan as well for the kids. He’s got no pets, a Cadillac. CT6.” It’s a badass car, and he’s an avid golfer. Dom, what’s your handicap? You’re going to put avid golfer, you gotta say what, scratch, plus 4.

Al: Yeah, yeah. I’m an avid golfer and my handicap can’t really compute.

Joe: Oh, just shut up on that one. So he’s got $550,000 in a 401(k) plan. He’s saying, Joe, Al, should I convert this over the next several years to-

Al: And it’s-

Joe: They’re making $250,000 a year. And they’re in the what, 24%, 22% tax bracket?

Al: Well, plus they’re maxing the 401(k)s $20,000 each, so that puts them at $210,000. Then they got a standard deduction-

Joe: No, no, they’re Roth though.

Al: Oh, yeah, you’re right. OK, you’re right. $250,000, standard deduction, call it $225,000 taxable income. Probably could convert about $100,000 plus or minus to stay in the 24% bracket. That might not be a bad idea from the standpoint that it’s probably at 7% rate of return is going to double more than twice. Plus more than that because of the match, that’ll be taxable. So, yeah, that’s what I might look at is maybe $100,000 a year. Stay in the 24%. I wouldn’t go past that.

Joe: That’s the simple answer, Dom. I think we could be a little bit better than this is. Math is- you want to retire at age 65. First of all, you’re doing the math right in regards- here’s the goal- $6,000,000. But why is that the goal? What are you trying to spend? What are you spending now? What is going to be your fixed income sources? So are you spending $100,000 today? and then you want to spend that $100,000 in the future? and then you’re doing an adjustment for inflation on your living expenses in the next 27 years? And then you’re subtracting out your Social Security? Or maybe you don’t believe that Social Security is going to be there? and what your shortfall to get to that $6,000,000? Then from there you’ve got to find your shortfall in retirement to determine how much money that you want in deferred versus tax-free versus taxable to really optimize this.

Al: Yeah, agreed. But that’s tough at 39. Easier at 50.

Joe: Totally impossible almost. That’s why it’s an ongoing process. There’s no- this is why this is not advice at all. We’re just a couple of kids having a conversation. But if Dom really wants to get serious, he needs to look at this on an annual basis to figure out what should I be converting now. If I convert and just listen to the show one time. Al, you’re right. Convert to the top of the 24% tax bracket. You guys make great income. That’s only going to go up. You’re probably going to only be in higher tax brackets, especially as the mortgage goes down on the rentals, as much as more cash flow comes in. But look at this annually because tax rates will move on you, the markets move on you.

When markets go down, it might be a better time to convert than today when markets are very high. But listen to Al, just convert to the 24%.

Should We Convert from 403(b) to Roth to the Top of the 12% Bracket? (Chris, Ft. Lauderdale, FL)

Joe: “Hi Joe, Big Al. My income dropped enough this year to put me solidly in the 12% tax bracket. Can I roll over some of my 403(b) into a Roth IRA in order to pay the taxes at the lower rate this year? I expect to be up in the 22% tax bracket next year. Great show, Chris, from Fort Lauderdale.”

Al: So what are the rules on a 403(b)?

Joe: Well, it depends on if he’s still contributing. If it’s an active plan, I don’t know where he worked. 403(b) is a little bit different animal than a 401(k). 403(b) is for a nonprofit, school districts, medical and they have different plan docs and a little bit different rules then a standard for 401(k) plan. So if he’s an active participant or she is an active participant, I’m not sure if Chris is a boy or girl, is putting money into the 403(b), I’m not sure if you can do- if the plan document of Chris’s employer allows, let’s say, like an inner plan conversion.

Al: Yeah. So, well, here’s another question. Do 403(b)s typically have a Roth option? or can they have a Roth option?

Joe: Sure.

Al: OK, so if you have a Roth option, then you just do an in-plan conversion, then it’s real simple.

Joe: But I don’t even know if that 403(b) allows the in-plan conversion.

Al: Yeah, I don’t know either.

Joe: Because before the 401(k) plans did, but the 403(b)s didn’t.

Al: So that’s what you have to check to see if your plan, well first of all has a Roth option, and secondly, whether it has an in-plan conversion.

Joe: Or if it’s an old plan, then yes, you can convert it into a Roth IRA. Sorry this is not cut and dry. But yeah. If you can do it then for sure do it. It’s in the 12% tax bracket. And if you’re going to be in the 22% tax bracket, then by all means.

Al: I guess that’s one way to answer the question is, yes, do it if you can, see if you can.

Joe: Yeah. See if you can first and then go from there.

Al: Fill up that 12% bracket because that’s cheap tax money. So, yeah, you definitely want to do that if you can.

Should We Do Roth Conversions Before Marriage? (Steve)

Joe: “Hey Team, Steve here.” Hey, Steve.

Al: Are you responding for the team?

Joe: Yeah. “Hey Team, Steve here. I want to say thanks as I’ve learned a lot from your show. Super helpful. I listen to it on my commute home from work and the laughs are an added benefit.”

Al: Is there humor in this show?

Joe: Tons.

Al: We’re just talking finance.

Joe. Tons.

Al: Tons?

Joe: “I have a Roth conversion question. Yes, I know, not your favorite, but, hey, at least it’s not a back door mega back door question or the Megatron. My fiancée and I are to be married next year, and she currently has a Traditional IRA that she has been contributing to but recently got covered by her work plan and is now contributing to a Roth IRA. She makes approximately $100,000 a year. When married, we will likely have a combined income of $400,000.

Given that, I was curious if you think it makes sense for her to do a Roth conversion of as much of her Traditional IRA that would still keep her in a lower tax bracket, assuming we have the cash to pay the taxes? She has $70,000 in a Traditional IRA and $5000 in a Roth IRA. Thanks. Keep up the good work.” All right, Steve here-

Al: Last name’s Here, first name’s Steve?

Joe: Yep.

Al: Got it.

Joe: OK, so if she makes $100,000 a year, minus $12,000, call it- $90,000, she’s in, what, 22%, close to-

Al: Top of the 24% bracket for single taxpayers is about $164,000, $165,000.

Joe: OK. Do we know ages? No. But they’re engaged so I’m guessing younger.

Al: That would be a reasonable guess. Assuming they’re younger, probably not a bad idea right? Because when they get married, the following year, it’s probably too high of a bracket to do it.

Joe: Oh yeah. You wouldn’t want to convert at $400,000.

Al: No.

Joe: At $70,000, she could probably convert $50,000, $60,000.

Al: Yeah. If she’s making $100,000, assuming that the money that she’s adding is going into the Roth option. So $100,000 minus, just call it $10,000 to make it easy math, $90,000 to get to $160,000 is about $70,000. And that’s the amount. So, so roughly, yes. And depending upon if you’re young and chances are your income will go up and now is an opportunity in a lower bracket. Sure. I think it’s a great idea.

Joe: Just know that you’re going to have to cut a check at tax time of $20,000.

Al: That’s right. Yeah, you bet.

Joe: Right. So, you know, it’s probably the right thing to do. OK, so I’m guessing that Steve’s future wife, maybe doesn’t listen to the show. And he’s doing all this financial planning ahead of time before they’re even married, which is a very good planner, Steve.

Al: Sure. Trying to think of what’s the angle here?

Joe: What’s the angle here? Because we’re going to be in a high tax bracket. She’s got $70,000. Or $100,000 in retirement accounts. If he’s already doing the financial planning, he’s the planner. And then he’s like, honey, just convert it. And then so she’s going to do her individual tax return.

Al: And convert.

Joe: And goes to her CPA-

Al: And she’s gonna owe $20,000 next year.

Joe: And she’s going to owe $20,000. And she’s like, Steve, what are you doing?

Al: That wasn’t a great idea.

Joe: I’m out of here. The marriage is off.

Al: True. Good point.

Joe: So make sure you communicate or she’s super tight on this and she listens to the show. All good. But it’s going to be a big tax bill. It’s probably worth it. But just make sure you communicate that as well.

Al: Yes.

We’ve got more “should we do a Roth conversion” questions coming up, but what about you? Should you be moving money into that Roth account and getting lifetime tax-free growth on your investments? Click Get an Assessment at YourMoneyYourWealth.com to schedule a no cost, no obligation, one on one, personalized deep dive into your entire financial situation with a CERTIFIED FINANCIAL PLANNER professional on Joe and Big Al’s team at Pure Financial Advisors. The Roth conversion is an awesome tool, but it isn’t a one size fits all cookie-cutter financial solution. What works best for you and your family is entirely dependent on your current circumstances, your risk tolerance, and your retirement goals. Find out what strategy is going to help you make the most of your retirement dollars – go to YourMoneyYourWealth.com and click Get an Assessment now.

When Should We Convert to Roth? We Want to Keep Our ACA Subsidy (Dave, Iowa)

Joe: “Hello Big Al and Joe. First, let me say I love your show.” God, I love hearing those words, Al. 

Andi: So much better than, “oh you’re so arrogant.” 

Joe: I know, “you’re such an arrogant jackass.” 

Al: We get that too occasionally, not too often though. 

Joe: “It’s one of the few podcasts I listen to every week. My name is Dave. From Iowa.” That was like in bold.

Andi:  I put it in bold, he’s the one that put “from Iowa” in parentheses.

Joe: OK, sometimes I get confused. Maybe he wanted to put it in bold. It was like, “DAVE!”

Al: That was important. Say that loudly, Joe. 

Joe: “And I have a few questions around my current asset allocation and drawing down my assets. I’m 58 and 57. Let’s get with the formality out of the way. I drive a Jeep Wrangler.” Yes, I had a Jeep Wrangler in college. Top down, bikini top? Badass. 

Joe: Yeah, right. “My wife drives one of those cute little SUVs that 95% of the country drives. I recently retired and my wife works part time. Our kids have just graduated from college and mostly off the payroll – mostly. So let’s be clear. I’m not looking for advice. I want to have a conversation, but let’s call it spitballing”. I like Dave, he’s from Iowa. People from Iowa just get us, good people.

Al: Yeah. Midwest good people.

Joe: So here’s the deal. Let’s see what Dave has got going on. “Combined, we have approximately $2.3 million in IRAs, old 401(k)s rolled over. $250,000 in Roths, $2.2 million in our taxable brokerage account, total of $4.75 million. We have no debt. Our portfolio allocation is approximately 70/30, so it might be a bit aggressive.” 70/30, meaning 70% equities, 30% debt for those keeping score. “We don’t use an advisor to manage our portfolio. It’s all in mutual funds, mostly index funds. We can easily live off $70,000 per year, actually about $60,000. But hey, we might want to live a little. So throw in a $10,000 cushion. We’ll start collecting Social Security in about nine years, and our monthly check will be around $4300. Before we collect Social Security for the next eight or nine years, we plan on living off our taxable brokerage account. To avoid risk, we have enough money in a couple of muni bond funds to cover the expenses for at least seven years. At this point, our strategy for health insurance is to buy the ACA exchange.” OK, a little Obamacare. “Unless the program changes, we can easily keep our income well below the thresholds for the full credit. Now, the dilemma: I do want to start converting IRA holdings over to the Roth accounts, but we need to be mindful of how much to convert to keep the subsidies in place.” 

Al: Uh oh, here we go. Do you like the subsidies? You like people gaming the system?

Joe: I do. I love it. Dave, “I got $18 million.”

Al: “But I want to get my $7,000 credit!”

Joe: “I gotta get that subsidy. I have to! And I don’t care if I have to pay 39% in tax in five years, as long as I got that subsidy.” “Financially speaking, I think we’re in a good place. Probably not going to run out of money. We do have 14 years before RMDs kick in, so I’d like to hear your thoughts on a conversion strategy. Should we even convert, and when? Theoretically we could aggressively convert now, but is it worth losing the ACA subsidy, or should we wait until 65 to start converting the IRAs to Roths? Incidentally, we have fully paid for our health insurance out of pocket in our state. We’ll probably be looking at $18,000 to $20,000 per year. Having said that, in addition to our conversion spitball, am I making a glaring mistake in thinking, and is there something else that I should consider? Thanks for the conversation, Dave.” All right, Dave. So, his question is this: he’s got $2.3 million in retirement accounts and Dave again is fifty some years old, right? 

Al: Yeah 58, wife 57. 

 Joe: OK, so let’s just use the older 58 to point to he’s going to live off his taxable account. So he’s going to pay very little in taxes for a while because when you start pulling money from a taxable account, it’s a capital gain rate and he has no other income. So he’s going to be pulling $60-70,000. That’s going to keep him in the 15% tax bracket and there’s no capital gains tax if you keep yourself, oh I’m sorry. In the 12% tax bracket. So he’s going to live tax free. Being in that low of tax bracket, the government thinks he’s broke and it’s like, we’re going to give you subsidies. 

Al: Because you can’t afford your health insurance. So here you go. 

Joe: And it’s a benefit. So by all means, take advantage of it. 

Al: You just got a little fired up on this one. 

Joe: It’s okay. I’m getting over it because Al, you’re right. It’s the right advice. It’s tax advice. So he’s saying, alright, well, you know what? I want to keep those subsidies because it’s a couple of bucks that health insurance is extremely expensive and if I get some money from the government to help pay for the health insurance, well let’s do it. So the question here is, is that I have all this money in a retirement account that’s growing that I don’t have to pull out, probably ever. But at 72, a mandatory or it’s a mandate for me to start taking the RMD. By that time what Dave has to calculate is how much is the RMD and what tax bracket is it going to be in. That’s the first step. 

Al: Sure and it’s going to be high, isn’t it?

Joe: It is. 

Al: We could tell already.

Joe: If it’s $2.2 million today and he’s got how many years? 14 years until he has to take the RMD?

Al:  Yeah. So it’s going to be $6 million probably. 

Joe: So let’s go 7%… $5.7 million. Dave’s RMD is going to be $227,000. 

Al: Plus Social Security, plus income from the nonqualified. 

Joe: Okay, so let’s call that $275,000. Ordinary income tax, roughly. OK, so he’s in a 0% tax bracket today in 14 years at $275,000 of income. What tax bracket is he going to be in?

Al: Well if we go back to the old rates, the pre 2018 he’ll be in the 28% bracket, but he’ll probably be subject to alternative minimum tax depending upon how much tax his state has. So it could be equivalent 35% because of the the way Aultman tax works. 

Joe: Plus the state of Iowa will want their share. So that’s the first step Dave, is to take a look at that. Of course they’re all hypotheticals. We have no idea what the tax brackets are going to be in 14 years. But then Dave is going to ask himself, do I believe that tax rates are going to be higher or lower or the same in 14 years from now. If he believes they’re going to be the same or the higher they can use this? And it’s like, OK, well, it’s going to be roughly 35% plus state or 28% plus state versus zero today. 

Al: Right. Here’s another way to think about this. What Dave is saying is that if he makes too much money, he doesn’t get the subsidy and it’s a cliff best thing, which basically means once you hit 300% times the poverty level and you’re a dollar over, you lose 100% of your subsidy. So, I don’t know what a subsidy is, but let’s just do some real simple math. Let’s say he wants to convert to the top of the 12% bracket, married couple, that’s about $80,000. So I’m going to take $80,000 taxable income times 12%. It’s really a little bit less, but roughly, call it $10,000 tax. If he loses a subsidy, let’s just call it $7000. I don’t know what the subsidy is, but let’s call it $7000. So now that’s $17,000 extra tax that he had to pay for $80,000. That’s the 21%. That’s pretty good.

Joe: Versus 35.

Al: So then once you lose the subsidy you’ve lost the subsidy. The next bracket after that is 22%. Well do that if you’re going to be in a 28% or 35%. Right?

Joe: So the math again, Dave, is look at the tax that you’re willing to pay. Then add in the loss subsidy to that tax line…

Al: As a tax and see if it still makes sense as a percentage. 

Joe: Right because you’re out of pocket, you just call it a tax because you’re not getting it. You lost it, you have to pay for it. So in this example, it’s $17,000 because you had to pay $10,000 in tax, plus he added a subsidy of $7000. 

Al: You lost $7000 of a subsidy. So $17,000 is what it costs for an $80,000 conversion. So what’s that? Seventeen divided by eighty equals 21%. Well, it’s actually not a bad rate when you think of it that way. 

Joe: So would you rather pay 21% today or would you rather pay 30 whatever % later? So the sooner you get the money in the Roth the better off you’re going to be because then you get compounded tax free growth for your entire life, for your wife’s entire life and then for the kid’s entire life. So if you’re going to keep it in the IRA, just know that you’re going to pay a lot more in tax and the kids will pay a lot more tax.

Should More Aggressive Funds Be Converted to Roth First? (Craig, Seattle)

“Hi, Joe, Al and Miss Andi. Craig from the mountains outside of Seattle. Six rescue cats. Two Rottie Shepherd mix pups and drive a 2012 Durango and a 2007 Subaru Tribecca. Jameson”, ooh.

Andi: “Caskmates Stout, accept no substitute”. 

Joe: Love it. He’s in the mountains just sipping on a little Jame-o.

Al: You like to sip a little Irish whiskey?

Joe: Yeah. I like to have a little sip-a-roo. 

Andi: Would you go with the Fireball? 

Joe: Well that’s the sipper. 

Al: I’ve never seen you sip Fireball. 

Joe: Because I’m hanging out with you Al on my day off.

Al: Trying to keep up with me.

Joe: Yes. “It’s about the four letter R word. I have about $440,000 in my 401(k) plan and a large tech company with decent diversification. I’m 50, married, debt free and I do the mega back door, garage door, circus tent door”.

Andi: “Farm bunker Roth thingy”. Wow!

Joe: Oh, I love it. “So I contribute roughly $53,000 catch up, including starting this year, post-tax to my Roth 401(k) and employers match $9750 in pretax. I also max out Roth IRAs for my wife and I have an HSA which is all invested. Plan to retire to Wyoming in 10 years. So well behind in the retirement funds, but hopefully we’ll catch up over the next 10 years”. Wyoming, it’s kind of a hopping little state nowadays.

Al: Well, that’s what some people say thats the best state in the country if you want to avoid taxes. 

Joe: “I didn’t start doing the Roth 401(k)”, um Yellowstone. What’s Yellowstone? Is that Montana? You know, the TV show?

Al: I think it’s Wyoming. Could be Montana. I don’t know. 

Joe: “I didn’t start doing the Roth 401(k) until 2018 when I cashed out to pay off my mortgage and then didn’t start doing the post-tax mega back door until 2019, so I’m a bit behind, but I plan to start converting pre-tax Roth to my 401(k) this year and the next. Just became eligible this year in our plan. I have roughly $141,000 in pre-tax for my contributions at $180,000 in employer match. So I should be able to do the majority of that over the next couple of years without hitting the next tax bracket. But it will be close”. Okay, so he’s got a bunch of stock funds, large cap, small cap, international DFA, Vanguard. That all looks okay. “Strategy questions. Is there any tax advantage or reason to #1, convert the more aggressive things first in bonds, so small in value start growing tax free sooner”? Interesting strategy question which I enjoy here. So Craig wants to do a Roth conversion. He’s going to do an interplaying conversion. He’s got mutual funds in one plan. He’s going to move them into the other plan. He’s not going to sell the funds. He’s just going to transfer the shares. What shares should he transfer first? Should he transfer the high growth or the low growth? 

Al: High growth.

Joe: High growth, that’s asset location. So you want to make sure that you’re compounding the more volatile, higher expected return to asset classes in the Roth. 

Al: Yeah, and you don’t even have to sell them. You just transfer shares over. Easy. 

Joe: “Rebalance everything in the pretax and employer match to the bond fund? Not sure if this would be advantageous or what will that do to cost basis of anything? #2, rebalance”? Yeah, again, asset allocation. You want to keep lower investment asset classes in the retirement account higher in the Roth. But be careful about your total asset allocation. If you got 90% of your money in a Roth and 10% in a pre-tax and you want a 50/50 split of stocks and bonds, then there’s going to be bonds in your Roth or vice versa.

Al: Yeah, exactly right. 

Joe: Well Andi’s he’s got me all confused here.

Al: Page six. You got it

Joe: No, oh, there it is. Okay. “#3, I can change investment allocations by source so I can make 100% of employer match forward to go into the all bond fund. These are the only bonds that I have in the 401(k). The employer match will continue to be pre-tax bucket and I want all three in retirement Roth traditional brokerage. I will change investment allocation per check going forward to remove bonds from the post-tax to the Roth 401(k) and just build my bond holdings using the employer match in the traditional”. No, don’t do that because you want to make sure that you take advantage of dollar cost averaging. So you still want all of your contributions to be in a high growth asset class, because as markets go up and markets go down, you’re buying shares at different prices as you’re putting the dollars in on a month by month, quarter by quarter or I guess month by month or paycheck to paycheck. So you’re putting in, let’s say, $1000 a month or $500 every two weeks. Well, the markets are volatile, so you want to take advantage of that volatility. If you go all in bonds that are pretty stable, you’re not going to really get a good reward there. 

Al: Yeah, and that works because the markets tend to go up over time. If they tend to go down over time, we would say something totally different. Like don’t invest it. 

Joe: Yeah (laughing) here’s a good recommendation invest in this. It goes down all the time. “With bonds, income is roughly $230,000 annually. With bonus, income is roughly $230,000 annually with base salary around $181,000 and the rest in stock and bonus cash. About $250,000 in a brokerage account that is pretty aggressive in small cap value, large cap value and international small cap value”. Man, he listens to the show. We said, you know, small value is probably the most aggressive. Let’s load up!!! I’m behind in my retirement.

Al: Let’s say let’s get some international too. 

Joe: When that market goes down, I just drink a little Jame O and everything is just fine. Alright, he’s got some “cash emergency opportunity in shop fund. I’m building a shop next year, that will be about $100,000 and I have that set aside in the brokerage, split between a couple ticker symbols, paying cash. Not a fan of debt. Curious your thoughts on VWELX as they are not great bonds, but have far outperformed other bond indexes but concern me a bit. I don’t feel like I understand bonds well enough to know what I don’t know. Love the show and have listened to all of them. Lost a bet”. You had to have lost a big bet.

Al: So that looks like a high yield. That’s a little tricky. That’s risky, I mean, as far as bonds go.

Joe: So if you think of it like this, this is a real simple example and we are way over the clock. A bond is a loan. So you’re lending your money and I’ll just… super simple to the federal government. If you’re going to lend your money to the federal government, the likelihood of the federal government paying you back is pretty high. 

Al: Since they print money.

Joe: Since they print money and they almost guarantee it. So I’m going to give you a loan. You’re going to give me a very small interest rate, because it’s safe and the probability of you, getting all your money back is very, very, very high. Now, let’s say that Craig wants to lend his money to a company that just started out of their garage yesterday. They said, Craig, give me $100,000. For Craig to give them $100,000, he needs to demand a little bit higher interest rate.

Al: A lot higher.

Joe: A LOT higher because who knows if this garage company is going to make it. 

Al: In essence, that’s high yield. 

Joe: High yield. High risk. So because of the yield of the bond is a lot higher. There’s more risk in the overall bond. So do we like the high yield bonds? Well sure. It’s going to pay more because there’s a lot more risk in it. But don’t try to look at the return to evaluate the overall investment. That’s not how you look at it. You would have to look at the risk and expected return to evaluate the overall investment. Hopefully that helps Greg. Enjoy the Jame-o. 

You’ve heard all about all aspects of Roth conversions on here YMYW, now find out why Kiplinger calls investing in a Roth IRA “one of the smartest money moves a young person can make.” Download that Ultimate Guide to Roth IRAs for free from the podcast show notes at YourMoneyYourWealth.com.  to learn the differences between a Roth IRA, a traditional IRA, and a Roth 401(k), find out about Roth contributions vs. Roth conversions and backdoor Roth conversions, learn about taking withdrawals from a Roth and more. Click the link in the description of today’s episode in your podcast app to go to the show notes to download your Ultimate Guide to Roth IRAs for free. 

Will We Run Out of Cash for Early Retirement If We Pay Roth Conversion Taxes? (Gloria Not My Real Name, San Antonio, TX)

Joe: We got Gloria, not my real name, from San Antonio.

Andi: That’s actually what she put as her last name. First name, Gloria. Last name, not my real name.

Joe: It’s best- we don’t really care to- just give us a name. Make fun, I don’t care.

Al: You should all make up the names.

Joe: Yeah, right. Make up where you live too. We don’t really care. It just sounds better when you say Gloria, not my real name from San Antonio, Texas, versus a writer or someone who writes in.

Al: It’s nice to have a name.

Joe: Yes. Yes.

Al: And a location.

Joe: Yeah because we might talk about San Antonio-

Andi: And if where you are has anything to do with taxes, then probably should tell us your actual location.

Al: At least the state.

Joe: Well not the exact address-

Andi: No.

Joe: – because Andi will find that anyway.

Andi: Give us the state.

Al: You could say you live in Austin even though you live in San Antonio. Close enough.

Andi: There ya go.

Joe: And then we could talk about our buddy that lives in Austin that hangs out at the-

Andi: – the food trucks. Chris.

Al: That’s right.

Joe: Just hanging out. How you doing? Want to talk about some finances?

Andi: Joe completely made that story up about him.

Joe: Guarantee that happened. We got Gloria from San Antonio. We gotta get back to Gloria.

Al: Yeah, we do.

Joe: “Hello YMYW team. Always a pleasure listening to your show. I’d like to know if our plan would work. My husband and I will turn 55 next year and would like to retire if possible. We earn a combined income of $170,000. My husband also receives $5800 a month from a military pension. Our monthly expenses are about $9000. We have combined $1,000,000 in TSP; $180,000 in a Roth; $250,000 in brokerage; and $50,000 cash. We have $550,000 left on the mortgage, 28 years to go at 2.5% or 2.25% interest rate. We are paying off the last car loan this year. We have two young adult children in college but still living with us. Their tuition fees are taking care of. We have 3 rental properties in Germany from when my husband was stationed there. They have minimal cash flow. It does not cover the $8000 or $9000 property tax. We can refinance these rentals in 2023, which would increase the cash flow. Planning for my husband to take Social Security at age 62 while I wait for mine at 67. I will also receive a pension at 62, $1500 a month. We all think we can survive between age 55 and 62 without working. We also are extensive travelers and this is not included in our monthly budget. I’m kind of nervous. I don’t even want to convert our regular IRA to a Roth because I’m afraid we’re going to run out of cash if we pay it for the taxes. Love your team and thank you in advance.” Uh, I don’t remember Gloria’s question.

Al: I don’t either. So I think first time we’ve seen it.

Andi: I think you got stuck in the Internet system.

Al: Yeah, we had, what, a couple of weeks where we didn’t get questions.

Andi: Yep.

Al: Yep. Sorry, Gloria.

Andi: I think that’s what happened.

Al: That was probably you.

Joe: Andi deleted the whole data base.

Andi: Just blame me. That’s fine.

Joe: She has, what’s it called, big thumbs?

Al: Fat fingers?

Joe: Fat fingers. Big thumb or fat finger, same thing.

Al: That is a term with traders, investment traders. Fat finger.

Joe: Yup. OK, so he wants to retire at 55. They have $5500, let’s call it $6000 coming in. They want to spend $9000.

Al: Yeah, so they need $3000. Right?

Joe: They need $3000.

Al: And they got about $1,000,000. You can do that math in your head, can’t you?

Joe: Well no, I’m looking at some other things. But with travel, right?

Al: She doesn’t say what the travel is. Before travel, if you need about $3000 and you got $1,000,000, that’s a 3% distribution rate, that’s probably OK at 55 to 62. I guess I’m OK with that. But how much do you want to spend on travel? That would make me a little bit nervous, too. If you want if you want to spend a lot of travel and you’re going to kind of blow through this budget. But yeah, I think at age 55 Joe, you probably want around a 3% distribution rate, which without the travel is about right.

Joe: No, they got more than this, $1,000,000 in the TSP; $180,000 in a Roth and $250,000 in a brokerage there, smart pants.

Al: Oh, I thought it was a combined million-

Joe: No, $1,500,000.

Al: OK, $1,500,000. OK, then I stand corrected. They could probably- 3% of $1,500,000 -they could take about $60,000-

Joe: Come on, you can do the math, can’t ya?

Al: Yeah. They need, they got $60,000. They need about $36,000. They got $24,000 extra for travel. Done. Go for it.

Joe: So yeah. You could pull about what, $45,000, $50,000 from the account, plus-

Al: I get $60,000, right? 3% of $1,500,000?

Joe: 3% of $1,500,000.

Al: Oh no $45,000. Sorry. I couldn’t do it in my head.

Andi: I thought you guys could do this in your head.

Al: Really.

Joe: I did. I said it’s close to $50,000 and he’s like well I said $65,000.

Al: Apparently not. Yeah.

Joe: But you did say it with authority.

Al: I did. I did.

Joe: Then you kinda double checked and I’m like wait a minute.

Al: Just like you always do even though I know it’s wrong.

Joe: Someone will question me, I just say it right back with authority. They’ll be like, oh ok.

Al: I didn’t think of it that way.

Joe: A good way to look at that. Didn’t even cross my mind to look at it that way.

Al: Basic math fail.

Joe: Yeah. Anything in life you just say it with confidence and authority, on the other side, they’re going to back down.

Al: Let me go back. You can take $45,000.

Joe: Yes.

Al: You need $36,000? So you got, we’ll call it $10,000 extra for your travel. Give or take. These are very rough numbers.

Joe: I agree. I like it. You can spend, call it $120,000 a year, give or take. And if that can cover everything all in, you’ve got another $8000 or $9000, you’re going to refinance the Germany houses to get a little bit better cash flow. I don’t know if the $8000 or $9000 of property taxes are included in the $9000 a month.

Al: I don’t either. Yep.

Joe: You got travel on top of that and so on and so forth. Your $1,500,000, the pension’s huge, the $6000 a month pension and then plus the pensions that you’re going to receive. We’re not even including Social Security here.

Al: No, I know. We’re just talking about the stump period.

Joe: If I’m looking at the pension alone is probably worth close to $2,000,000. I would need- because I’m not going to receive a pension- I would need roughly like $2,000,000 to produce that type of income.

Al: At age 55. You’re right.

Joe: So that’s what you got to be thinking about, Gloria, is that you got $4,500,000, right. Or $3,500,000 dollars. Because $1,500,000 plus the $2,000,000 in the pension.

Al: Yeah. The equivalent. How much you would need to generate the $5800 a month from the pension.

Joe: So I would not be afraid to be looking at conversions because now as this continues to grow. Because you’re going to be pulling from your brokerage account, you might be pulling from some other accounts here, that TSP is going to continue to compound on you. And then you’re going to have your pension. You’re going to have his pension. You’re going to have Social Security. Your fixed income at that point at age 65 or whenever you- at 62 and you want to claim it at age 70, I mean, you’re going to have a large fixed income source. Plus the required distribution might even push you into a higher tax bracket. You’re fine to retire as we’re just kidding around here and chatting.

Andi: Spit balling.

Joe: This is not advice. But there’s more planning, I think, that you want to look at. Don’t be afraid.

Al: Agreed. But my- I guess my overriding comment is, is yeah. This doesn’t look out of whack. I think you could probably make this work.

Sell Without Selling? Thoughts on Ric Edelman’s Answer to “Should You Pay Off Your Mortgage?” (April, Tinley Park, IL)

Joe: We got April from Tinley Park.

Al: Tinley. Tinley Park, Illinois. You ever heard of that?

Joe: Never heard of it.

Al: Me neither.

Joe: “Joe, Big Al and Andi, my husband has been retired for 12 years and I still happily go off to work in my 2008 Honda Civic.”

Al: Nice.

Joe: Nice. “We have a white Turkish An-

Andi: Angora-

Joe: – Angora- Angora cat that only likes me when I feed her.”

Al: I guess it’s his cat.

Joe: Well, she’s the only one that feeds her.

Al: I don’t know about that.

Joe: The Turkish cat doesn’t like anyone. And when you feed it, it might like you for a last couple of minutes.

Al: You can pet the cat while you’re feeding him or her.

Joe: April would like our thoughts on the following article. “In June, 2021, Inside Personal Finance, number 7 of 11 bullet points regarding ‘should you pay off your mortgage’.

Al: OK. ok. OO, we haven’t talked about this in awhile.

Joe: “Mortgages allow you to sell without selling. Your house may have increased in value since you bought it and you might now worry that will fall in value. Can you protect your home equity without having to sell? Yes, simply get a new mortgage and pull the equity out of the house.”

Al: Like it?

Joe: OK. “An intriguing thought as my husband loves to collect stuff. And while I keep it somewhat under control, it would be impossible to sell the house right now. So should we take advantage of the current high value of our house? Thanks.” So should you pay off your mortgage? So this is Ric Edelman, June, 2021, Inside Personal Finance. So it’s like, can you sell without selling?

Al: In other words, you can take money out without selling. Which is true.

Joe: I got a house that has $500,000 of equity. I would like to tap that equity but I don’t want to sell the house. There’s no way I want to sell it. My husband and wife collect stuff. So I’m guessing there’s what, a little hoarderville and there’s no way they can move all the stuff out.

Al: Yes, it would be too expensive. Might as well just refinance.

Joe: So refinance. Pull the money out. And there you go.

Al: It works, theoretically.

Joe: Yeah. I don’t like it at all.

Al: Me neither. I’ve done it before and wished I hadn’t. Put it that way. And why is that? Why do I say that? Because-

Joe: It’s called leverage.

Al: In the Great Recession, I was very sorry that I did that because then I was too highly leveraged when I had all this equity on paper and then it went away, 50% of it or more went away during the Great Recession. All of a sudden I was underwater on properties.

Joe: But the debt can go away, didn’t it?

Al: No, debt- they didn’t pull out 50% of the debt when that happened. So just be aware this- if you just look at raw numbers, what Ric Edelman is saying is true. But the flip side of this is the more money you borrow on your home or your rental properties, the more risk you’re taking on. You’re more exposed to a downturn. Any real estate book that you read if the author’s being honest, they will tell you they’ve lost everything before. And this is why. They kept leveraging their properties, buying more properties or buying stuff. And then they were sorry they did it.

Joe: The only- not only- but I think sometimes it makes a lot of sense to refinance your mortgage.

Al: Get a lower rate.

Joe: Get a lower rate, maybe push out the term longer just to keep your payment lower.

Al: And that’s a good one. If you’re retiring and you don’t quite have enough cash flow and you want to stay in your home long-term, just refinance, have a longer term, lower your payment, as long as you can afford the payments.

Joe: Right. If you want to pull money out, then it’s all about time and cash flow. What is your fixed income source? If you’re looking to go into retirement and now you have a lot larger mortgage, but you have liquidity, be careful with anyone selling this. I remember back in the day, the roadshows and there would be like, oh, untap your house and put it into a life insurance contract and have the money grow tax-free and all this other crap. Be really careful with anything like that, taking money out of your house and then, like, using it for arbitrage. Your interest rate is 2.5%, but you could get 8% or 10% in the market and the difference there is money that you would never earn. And why are you have-  you know, I don’t know. I’m not a big fan of that. Maybe we’re just conservative in nature.

Al: Maybe. I might- well, but I’ve done it and I got burned, so that’s why I’m not a big fan of it.

Joe: So there you go. April from Tinley Park, thanks for the email.

Al: But theoretically, this does make financial sense. As long as your investments that you buy with this money go up in value more than the loan.

Joe: I guess any time that someone comes into our office and says, you know what, I took $300,000 out of my house, it’s sitting in cash, I’m looking for something to do with it. Those are always the worst clients.

Al: But, you know Ric Edelman would say, well, the flip side is if you had $300,000 cash, wouldn’t you just- and you didn’t get us in a refinance, would you pay down your mortgage? And we’d probably say no. So there’s kind of a flaw, I guess, in what we’re saying. I’m just saying I don’t like to take on more debt unless I’ve got a really good reason, because it’s risky.

Joe: I see your point there. So you’re saying if I had $300,000 debt and I had $300,000 in a brokerage, would I sell the brokerage account to buy to pay off the debt.

Al: Yeah, right. Which is the reciprocal of that. And we would say no.

Joe: But I’m also increasing my overall debt service in my monthly payment by taking up the debt. So again, it’s all based on cash flow.


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