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
October 25, 2022

New research says some young people shouldn’t save for retirement. Find out what Joe and Big Al think about that. Plus, is it tax fraud if you re-file your taxes to take advantage of new student loan forgiveness? Should you invest in CDs instead of bonds, since both stocks and bonds are getting crushed right now? How can you consolidate your stock portfolio to minimize capital gains tax? Also, charitably inclined YMYW listeners want to know how to use donor-advised funds when spitballing tax planning around an IPO, and whether to do more Roth conversions or more qualified charitable distributions. 

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Show Notes

  • (00:53) New Research: Young People Shouldn’t Save for Retirement?! (Josie, Atlanta)
  • (07:19) Is Re-Filing Our Taxes for Student Loan Forgiveness Tax Fraud? (Buoyant Swimmer)
  • (12:49) Stocks and Bonds Getting Crushed. Should I Invest in One Year CDs Instead of Bonds? (George, Charlotte, NC)
  • (17:41) How Can I Consolidate My Stock Portfolio to Minimize Capital Gains Tax? (Michael, VA)
  • (22:13) How to Use Donor-Advised Funds in an IPO Tax Planning Spitball Analysis (Greg)
  • (26:52) More Roth Conversions, or More Qualified Charitable Distributions? (Judi, San Diego)

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The Journal of Retirement recently published new research that says some young people shouldn’t save for retirement. Find out what Joe and Big Al think about that, today on Your Money, Your Wealth® podcast 401. Plus, is it tax fraud if you re-file taxes to take advantage of new student loan forgiveness? Should you invest in CDs instead of bonds, since both stocks and bonds are getting crushed right now? How can you consolidate your stock portfolio to minimize capital gains tax? Also, charitably inclined YMYW listeners want to know how to use donor advised funds when spitballing tax planning around an IPO, and whether to do more Roth conversions, or more qualified charitable distributions. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

New Research: Young People Shouldn’t Save for Retirement?! (Josie, Atlanta)

Joe: Okay. Josie writes in from Atlanta, Big Al. “Joe, Big Al and Andi. First time, long time. New research on the life cycle model says young people shouldn’t save for retirement, shouldn’t be auto-enrolled in retirement plans at work. You should buy a house instead. Based on everything I’ve heard from YMYW and, well, common sense, this sounds ridiculous to me. I’d love to hear what you think on the reasoning of this article. PS. 2004 Toyota Tacoma. No pets. Drink an occasional glass of red. Listen to YMYW in the shower-”

Al: That might be a first.

Joe: “-while getting ready for work. Thank you.” Wow. Interesting. Shower time.

Andi: You don’t listen to podcasts in the shower?

Joe: Just try to get-

Al: If you like a picture where they are.

Joe: There we go. All right. Josie, thank you. Oh boy.

Al: Got the image?

Joe: Yes.

Al: Okay. All right.

Joe: So let’s talk about savings here. I didn’t read the article.

Al: Yeah, but we kind of- Andi just skimmed it for us.

Joe: I think what- I don’t know. This guy is a PhD from Stanford. He probably knows more than I do. But what’s he saying? I think the gist of the article is that young people should enjoy their spending.

Al: So a couple of things I got from the article. One was $1000 means more to you at age 25 than 45. So I agree with that. So why not spend it now? You’re going to have more later. Let me start with that comment, which is true. However, this is my experience. I mean, maybe you’re different, right? But this has been my experience with myself and other people around me, which is if you get used to spending what you have right now, as you make more, you’ll get used to spending more, and then you get used to spending more and then you never have anything. So I don’t like that concept. I’m all for enjoying life. I’ve always been for enjoying life. But not to the extent of not saving.

Joe: Right. I guess the point of the article might be, people will start saving more aggressively in their late 30s and 40s. They’re making more income at that point. And so it will be easier for them to catch up versus a 25 year old that’s making I guess, lower wages in their life cycle in regards to income, hey probably just spend that. Or buy a house and have the equity because interest rates are low. But interest rates are not low anymore. So maybe this article was written-

Al: – a few months ago or a year ago, whatever.

Andi: It shows that this research just came out, so yeah, it’s interesting that he’s saying interest rates are low.

Al: So that’s the other concept in the article. Buy a house instead because the equity builds up. Well, that can work if you live on the coast where there’s lots of appreciation. If you live in the Midwest, where there’s less appreciation. Is that a smart idea? Maybe, maybe not.

Joe: Josie lives in Atlanta. I used to live in Atlanta.

Al: I know. Yeah, exactly. So anyway, so I’m a believer in doing a little bit of everything. I’ve always been that way. So contribute to retirement account, try to get to the match. Have some money in savings, have emergency cash, start putting money aside for vacations, for house. Right. And I know that this is difficult, particularly when you’re 25 and just starting out, you don’t have a lot of income. So I’m not saying that it’s going to be easy, but maybe you just start with little bits here and there, and as you start making more money, you add a little bit more, and then that’s, to me, a much more sensible approach.

Joe: Yeah. I don’t see any reason why you wouldn’t want to save when you’re younger.

Al: Yeah. I mean, we’ve all seen the charts.

Joe: Just the compounding effect is huge.

Al: Right. If you can start in your 20s-

Joe: – just a couple hundred bucks.

Al: Yeah, it’s big. I mean, waiting 10 years, you can still do great, right.
But waiting 10 years, it’s a whole different ballgame than if you would have started 10 years earlier.

Andi: Interestingly, this article actually even says that Social Security replaces 70%, 80%, or 90% of one’s preretirement income. And that’s another reason why it’s not necessarily that important to save for young people, which that sounds really like a bad idea to me as well.

Al: Yeah. If you never saved a penny and that’s your only income. That’s true, but that’s not the lifestyle that most of us aspire to.

Andi: Right.

Joe: All right, well, if we’re talking about the population as a whole, what is the average account balance of a retirement account?

Al: It’s $100,000.

Joe: If that. What’s the median balance? $14,000?

Al: Yeah. It’s a lot lower. Yeah. When you take the average, there are some big ones in there.

Joe: Right. So you take the median, which is, like, right in the middle of all participants. It’s like $15,000.

Al: So in other words, half the people have $15,000 or less. Half the people have $15,000 or more. That’s actually a better benchmark.

Joe: Probably most people that listen to the show as we go through their questions, we have $4,000,000 in our IRA. We have $5,000,000, we have $500,000. They’re on the upper echelon. So if you look yeah, 50%, 60%, 70% of individuals will be in a lower tax bracket. Right. So most people will be in a lower tax bracket because they don’t have any money.

Al: They haven’t saved.

Joe: They haven’t saved. Yes. Social Security will make up quite a bit of their overall income. So you can go with those statistics and say, you know what, screw it. I’m not going to save.

Al: Gonna have fun.

Joe: But just understand that okay, well, can you live off of $30,000 a year? Right. Let’s say you’re making $150,000. You’re not saving anything. Okay. Well, your Social Security is only going to replace X amount. If you make $30,000 a year, well, it’s going to probably replace 80% of it, right, or more.

Al: Sure. That is true. Anyway, at least what I heard about the life cycle model, I’m not a fan.

Joe: Yeah. I don’t get it. What’s he trying to prove?

Andi: The other thing is that auto enrolling young workers in a 401(k) plan is also something that he says it’s not worth doing.

Joe: Out of sight, out of mind? Doesn’t work.

Al: It does work.

Joe: It does work.

Al: In my view. It’s huge. You got to do it.

Andi: There ya go.

Joe: Okay.

Is Re-Filing Our Taxes for Student Loan Forgiveness Tax Fraud? (Buoyant Swimmer)

“Hi, Big Al, Joe and Andi. I love your show and listen to it on the way to the pool and lake where I swim regularly.” All right. Little pool or lake. “I’ve been listening for about a year, and your podcast has helped me dramatically in taking control of my retirement in 1800 days.

Andi: 1860. He’s counting them down.

Al: Yeah, one of those calendars. Just X X X- Government job.

Joe: Hate my job, hate my job. Okay, 1859. 1858.

Al: So what’s that about 6, 5 years, something like that.

Joe: “We are no longer hoping, we’re planning.” Alright.

Al: Okay, good.

Joe: Okay. “Could you please address a quick inquiry regarding student loan forgiveness? I exercised some aging options, 2021, and consequently made $250,000 in 2000 and 2021. Our daughters, age 22 and 20, both took out government student loans. These loans are their contribution to their education, and we did not cosign. Our 22-year-old graduated this past May, and the 21-year-old is a junior. Apparently because we claim the ladies as dependents in ‘20 and 2021 forgiveness depends on parental income, and we made $250,000. Thus we will not qualify for the $10,000 in forgiveness. Should I just refile our 2021 taxes and remove them as dependents, have them refile their taxes and redo the FAFSA’s so they receive the forgiveness? Is this tax fraud? Will I go to jail? If so, are there any with swimming pools?”

Al: Ever been to jail with a swimming pool?

Joe: No, I’ve never been to jail.

Al: Yeah, me neither. I don’t know, but I’m guessing no.

Joe: Well, it could be a swimming pool, but not what you’re thinking of.

Al: Okay. I’m not sure where you’re thinking. It could go all kinds of directions.

Joe: “I don’t want to get into the politics of this subject, but want my daughters to have the same benefit their peers are getting, if possible, and no, we’re not paying their loans. Enough is enough. Please help. Buoyant Swimmer.” Yes. All right.

Al: I guess Biden administration did come out with a $10,000 forgiveness as long as your income was low enough. And that’s a true statement. If a parent claims their child as a dependent, they’re going to school, then you have to look at the parents income. So then the question is, maybe I shouldn’t have done that, but can I refile and change the FAFSA? It seems like a lot of work. Can you do it? You could.
Does it work? You’ll have to try. I have no idea whether it works. Me personally, no. Just let it go. That’s what I would say. But yeah, you can always amend your return, changing the FAFSA. Can you do an amended FAFSA?

Joe: I don’t know.

Al: I don’t either. I’m not sure it works. But like I say, if it were me, I would just say, oh, well, and move on.

Joe: Yes. Well, I mean, if you want to go through all of that, try it and then let us know if it works.

Al: Yeah. You’re not going to go to jail.

Joe: No. You can still swim.

Al: Yes, you can still swim. You might get your-

Joe: It’s just going to get rejected or accepted, probably.

Al: Yeah, if they reject it or if this works and the IRS comes back to you and says no, or not the IRS, the student loan, whoever does all that stuff. So then what happens? Then maybe you got to pay the $10,000 back with interest back. I don’t know.

Joe: Yeah, but no, I see the point. It’s like, okay, well, here- I don’t want to get in the politics of this either, but I get her point. It’s like, okay, well, here why can’t we get the same benefits as everyone else? Just because they have some options in these years, and they claim the kids as dependents, and they probably have a lot higher income in the two years, and some-

Al: – coincidentally?

Joe: Thank you. It just kind of falls together. All right. Buoyant Swimmer. Kind of a cool name. We have the best guests or the best listeners.

Al: We do. Yep.

Joe: They’re getting better and better.

Al: Yes. The names keep improving.

Joe: The stories and the emails and everything they say.

Al: And you can picture what they’re doing while they’re listening to the show.

Joe: Yeah, we got one in the shower.

Al: Yeah, that’s a first.

Joe: That was great.

Now it’s your turn! The show would not be a show without you, so if you’ve got money questions or want a retirement spitball analysis of your own, click the link in the description of today’s episode in your favorite podcast app to go to the show notes, then click Ask Joe & Big Al On Air. Tell the fellas your name and where your from, your age, when you (and your spouse, if you have one) want to retire, how much you need to spend in retirement, as well as how much you make now and how much you have saved – and any other details relevant to your financial situation. Then, to help Joe and Big Al really get into your mindset for this spitball, tell ‘em the irrelevant stuff too: how do you listen to YMYW in the shower, in the pool, in the car, walking your dog, over drinks? What kinda car? What kinda dog? What are you drinking? Final thing, tell a friend to listen to YMYW, and to send in their money questions and the whole hilarious cycle starts all over again. 

Stocks and Bonds Getting Crushed. Should I Invest in One Year CDs Instead of Bonds? (George, Charlotte, NC)

Joe: George. Charlotte, North Carolina writes in “Hey guys, love your show. It’s my number one financial podcast.”

Al: Number one. Right.

Joe: Number one financial podcast. Wonder how many he listens to.

Al: Right. And there’s a lot of other podcasts he’d rather listen to, but financially we’re number one.

Joe: Got it.

Al: In his book.

Joe: “I know bonds and stocks are usually uncorrelated assets, but this year they’re both getting crushed. I decided to move my bond portion of my portfolio into one-year CDs ranging from a 3% to 4% yields. I know these will still fluctuate in value, but I’m taking comfort knowing they will mature at par. I can then evaluate getting back into bond funds later next year when rates levels off. What do you guys think of the strategy?” Well, I don’t really like George selling assets when they’re down to go into a fixed asset. I don’t know.

Al: Well, I think he just went from his bond portion to CDs.

Joe: No, I agree.

Al: The bonds are down. You’re right. Without a chance to recover. So basically what you’re doing is you’re locking in your loss right now by going into CDs. And by the way, CDs do not fluctuate in value. They are what they are.

Joe: It’s a certificate of deposit.

Al: It’s not a bond investment, it’s just a certificate of deposit at a bank, usually.

Joe: So let’s talk about both of these investments real quick, Al. So here’s what a bond is. It’s a loan. Let’s say I have $100,000 that I’m going to lend Alan. Alan’s going to pay me 3% per year on that $100,000 loan and then it could be for 3 years. It could be for 5 years, it could be for 10 years. At the end of that term, guess what? I get the 3% and I get $100,000 back. That’s a bond.

Al: That’s what a bond is.

Joe: It’s a loan. Okay. And so as long as you hold the bond to maturity, you get your 3%, and then you get your money back. As long as there’s not a default.

Al: Yeah, as long as I got the $100,000.

Joe: Right. And then how high are default rates right now? Very, very low. So you can go safe bonds, you can go risky bonds. And right now, why do bond prices fluctuate? Is because interest rates and bond prices, they have an inverse relationship.

Al: Correct.

Joe: As interest rates go up, bond prices go down. But as long as you hold that bond to maturity, you’re going to receive your money back, as long as you don’t sell it.

Al: Right. So let’s think about that. So you got 3 year bond. You loan me money for 3 years. After year one, you want your $100,000 back, and I say, I don’t have it. I’ve invested in my business, I’ll pay you in two more years like we agreed. And that’s like, but I need the money. So then you go to the marketplace and say, will someone buy my bond, the Clopine? And they’ll say, well, but the current interest rate is 5%. Why would I want a-

Joe: – bond at 3%?

Al: Yeah. So if I’m going to buy your bond at 3%, you need to discount it, because otherwise I want to be equivalent to earning 5%. So maybe the bond is now worth $90,000. That’s only if you sell it early.

Joe: Correct.

Al: If you hold it for the 3 years, you get your $100,000 back.

Joe: Right. Because if I’m trying to sell or try to create that liquidity, as Alan just said, prior to the maturity date, then that’s when you sell it at a discount or a premium.

Al: And it can be a premium. That’s right. What if interest rates go down? So you’re getting a 3% payment, but now interest rates are 1%. People would like to have a 3%, so you get to charge more for that because it’s such a good interest rate.

Joe: Correct. What did George do? George said, you know what, I want to get out of these bond funds or bonds or whatever that he was in, because they’re down. Well, they’re down right now just because interest rates are up. And if you sell them on the open market, you’re going to receive a discount for those bonds. If they hold them to maturity, the bonds will come back and you will get it back at par. So you sold at a loss to buy almost the same instrument. It’s the same thing, it’s the same concept, but you’re not going to see the fluctuation of a CD move unless you try to sell it prior to maturity. And what they’re only going to do there is probably just take away your interest.

Al: Right. And so you locked in your loss. Now, if bonds and bond funds keep going down because interest rates keep going up for a long, long, long time, maybe that’s a good move. But now you’re predicting the market, timing the market, which is impossible. So really what you’ve done in doing this is you’ve locked in your loss because you’ve sold out of bonds while they’re down. And now you’re in CDs, which don’t fluctuate.

Joe: Correct.

Al: Understand what you did.

Joe: So what do you think of the strategy?

How Can I Consolidate My Stock Portfolio to Minimize Capital Gains Tax? (Michael, VA)

Joe: Michael from Virginia. “Hey Joe, Big Al. Big fans.” Alright, it’s Big Al and big fans. “Listen to you every week and love what you do.” Well, thank you very much, Michael. “I’m in the process of trying to consolidate my list of stocks because I have a lot of overlapping.” So he’s got Spy and triple Qs, some other stuff. Then he’s got Apple, Microsoft, Google. “And I want to see how best to sell these stocks in an intelligent way to avoid paying as much tax as I can. There is a combination of short term and long-term capital gains, but I feel like this is the right approach for my long-term plan. Any insight would be greatly appreciated.” Interesting. Okay, so what does he want to do? Does he want to go more kind of like globally diversified? But everyone has overlap.

Al: Right.

Joe: Does he want to sell the ETFs? Mutual funds, and go more into individual stocks? Does he want to sell the individual stocks?

Al: Yeah. Not sure.

Joe: Do you want to sell all the stocks he’s listed?

Al: I mean, I think the way I think about it is, what’s your portfolio now? What would you like it to be? And then you come up with a gradual plan to make that happen, right?

Joe: But do it right away. Sometimes you don’t necessarily want to have the tax, like manipulate what you’re thinking in regards to your overall portfolio, right?

Al: Yeah. And especially I would agree with that. When you don’t have the right portfolio- like let’s say you’re way too concentrated in Apple and Microsoft, for example. Not that they’re not good stocks, they’re good stocks, but you’re very concentrated and you’re taking a lot of risk. So you might want to go ahead and not worry about the tax to diversify, particularly now in the down market. Because the tax cost will be cheaper.

Joe: I would look at long-term capital gains before short term.

Al: Yeah, I wouldn’t take short term if I could help it.

Joe: And I don’t know who has short term capital gains unless in today’s market.

Al: It’s hard to find.

Joe: Right.

Al: Unless you- well, you bought it a long time ago.

Joe: That would be long term.

Al: That would not be short term, would it? You had to buy in-

Joe: You bought some _____ or something.

Al: – last Fall.

Joe: I know that doesn’t really help, Mike, and I’m sorry, you probably are never going to listen to the show again.

Al: But I would also say this. If you don’t have the right investment allocation, then just change it, pay the tax and move on. But if you’ve got a decent allocation, but you just want to create less overlap, then you can come up with a gradual plan. You look at what you have, you look at what’s going to be tax cost the most and you just come up with a plan. Maybe a little bit this year, a little bit next year. Maybe you straddle over two years, maybe over 3 years, and you pay less tax that way.

Joe: So I would put together a spreadsheet and take a look at, okay, well, what is the cost basis and what is the gain or loss? And then you would go to your lowest gain, to your highest gain, and then you could see how much that you can diversify depending on how much tax that you’re willing to pay in a given year. That’s what we kind of do, we’re looking at all right, well, let’s say we want to stay in the 15% tax bracket, or maybe they’re in the 12% tax bracket and we don’t want to pay any tax at all. So how much can I sell to free up and diversify out and stay in that 0% capital gain bracket? Or maybe that you’re going to hit net investment income tax. So if you’re at the $200,000 range, if you’re single, $250,000 if you’re married, you want to look how close are you to that number, and then you want to sell to not get that other 3.8% tax. So then you want to look at how much can I sell out with the paying the least amount of tax. Do a spreadsheet and go from the lowest gain to the highest gain. And then you can see dollar figure of how much that you can actually diversify out and if it’s worth anything. Then do what Al said, straddle it over two years. We’re already in October. You got a couple more weeks until 2023. All right, see, we redeemed ourselves there, Al.

You only have a couple more months to complete transactions for capital gains or losses in 2022, so now is the time to download our 2022 Tax Planning Guide from the podcast show notes at YourMoneyYourWealth.com. We all want to pay as little tax as legally possible, right? The Tax Planning Guide is full of important deadlines, limits, checklists, and strategic tax planning tools and ideas, so you’re fully prepared to lower your tax bill before next tax season. Get the 2022 Tax Planning Guide and other free financial resources from the podcast show notes by clicking the link in today’s episode in your favorite podcast app. 

How to Use Donor-Advised Funds in an IPO Tax Planning Spitball Analysis (Greg)

Joe: I got an email from Greg. He goes, “Love your show. Could you spitball tax planning for a potential IPO in the next 12 to 24 months? I know that you can’t ever count on IPO timing, particularly in this market, but the exercise seems valuable in order to start preparing now. Married, filing jointly, 3 kids, mid-30s, charitably inclined, income is $250,000 range, $125,000 in liquid investments between Roth 401(k)s, IRAs and brokerage accounts. It’s light, but I only got started two years ago.” There’s the excuse on the end there. Just got to throw that disclaimer in, don’t you? “The IPO will possibly generate between $350,000 and $1,500,000 gross between stock options and RSUs. And I’ve already exercised and holding about 30% of the stock options. Plan to continue to exercise options each year while avoiding AMT in order to have more favorable tax treatment on those shares. Also consider creating a donor-advised fund for charitable contributions in the year of the IPO. What actions would you take now during and the year following an IPO liquidity event?” So he’s going to have a tax event and he’s thinking about ways to shield some of the-

Al: To minimize it. There’s two kinds of stock options. There’s incentive stock options, there’s non-qualifying options. The fact that you’re talking about AMT leads me to believe it’s an incentive stock option, which basically means you can exercise, it’s not an income tax event, but it is income for alternative minimum tax purposes. You pay the alternative minimum tax, but you start your holding period. And as long as the IPO and resulting sale happens more than a year later, you will get long-term capital gain all the way back to your exercise price. Not what it was when you exercised it, but all the way back to your exercise price, which will be a lot lower tax. You get your AMT tax generally refunded upon sale. So it’s a great strategy, but there’s big risks in that. And I have seen this before, especially during the dot com bust. This was a while ago, but I’ll give you a story. A friend of mine had a tech company. The stock was worth $14 per share. He exercised a bunch of incentive stock options, thinking there was no tax consequence. When he got his tax return, he owed $2,000,000 in alternative minimum tax. He did not have the money. And then the dotcom bust hit and the stock went down to $.30 a share and he declared bankruptcy. So that’s a pretty extreme example. But that’s- the risk is when you exercise and pay the alternate minimum tax, make sure you’re okay financially in case the stock goes down a lot more than you expected.

Joe: That was a very pleasant story, Alan.

Al: Well, I’m being realistic here. Now, if it’s a non-qual option, then it’s just fully taxable when you exercise it. But you start the clock running. If there’s any future gain, then that’s long-term capital gain. So there’s advantages there too.

Joe: All right, so what’s he going to do to mitigate some of the tax here?

Al: So that’s it.

Joe: Donor-advised fund?

Al: Well, first of all, you exercise to get capital gain, but then the year that you have all the gain, ordinary income or capital gain, a donor-advised fund is a great way to go. So what that means is you set up an account with usually a brokerage company. You put money into that account, or better yet, appreciated stock. And then whatever the stock is worth when you donate it is the amount of your deduction, and then the account holds it. It doesn’t necessarily go to charity right away. It goes to charity over time as you see fit. So if you’re charitably inclined, which Greg is, then that’s a good way to get a deduction this year or the year of the IPO when you need it and then dole out the money later when you’re in a lower tax bracket.

Joe: All right, well, good luck with the IPO, Greg. Donor Advised Fund. Is there any stipulations in regards to what charities that would be able to get doled out to? Let’s say, could he give it to the church on Sundays?

Al: It needs to be a formal charity. It’s called a 501(c)3, which all charities in the United States have. So just make sure that- it can’t be like a homeless person, because that’s not a charity, but you can give to a charity that helps homeless people.

Joe: Wow. Bankruptcy, homeless people.

Al: I’m just being real.

Joe: Next you’ll talk about terminal illness-

Al: But I think it’s important because a lot of times people exercise without realizing the risk. That’s why I bring it up.

Joe: Alright. Thanks, Greg.

More Roth Conversions, or More Qualified Charitable Distributions? (Judi, San Diego)

Joe: Judi writes in Big Al, from San Diego.

Al: Okay.

Joe: “I am in my 70s. Social Security and pension pay all my bills with a little bit left over with an income of $55,000. I own my home, car, golf cart and have no debt. $500,000 in an IRA, $20,000 in a Roth, $20,000 in brokerage. Most will go to charity upon my death. RMDs are split between QCDs and transferring to brokerage. I’m in the 22% tax bracket. So bottom line, my life is great as is. I’m healthy. I’m not a good spender even now. I’ve done my traveling. I don’t mind paying my taxes, but would prefer not to pay more than necessary. I’ve been doing Roth conversions every year, $12,000, paying the tax from my IRA as the tax rates will increase in 2025. But now I’m unsure and would like your thoughts. Is it prudent for me to continue to do conversions in a down market? I’m trending towards yes, as I will have to pay the tax in the future. But I have friends who say no, as I won’t make the cost back.”

Al: Mmm, okay, breakeven. We’ve heard that before.

Joe: There’s cost, I guess, associated.

Al: Yeah, taxes.

Joe: You won’t make it up.

Al: Right, because you’re too old to start. Or so the argument goes.

Joe: They’re wrong, by the way.

Al: They’ll tease her.

Joe: “Does it matter when I pay taxes, now or later? Am I wrong thinking pay now works fine? I appreciate your thoughts. Thanks.” Okay, a couple of things. She says her income is $55,000. With the standard deduction, she’s in the 22% tax bracket?

Al: Yeah. Single, $55,000 minus $12,000ish.

Joe: Barely.

Al: Barely, yeah barely.

Joe: So she gives half of her RMD, which is $10,000, to charity and another $10,000 or $12,000 and $12,000 is what she’s doing here?

Al: Right. I guess what pushes her over is the RMD, probably.

Joe: But she’s given half that as QCDs-

Al: I understand.

Joe: – which is straight to charity.

Al: Yeah, correct.

Joe: Then the other one is going into the brokerage. So she’s converting $12,000 and she’s paying taxes out of the IRA.

Al: Right. Because she doesn’t have a big brokerage account.

Joe: She’s got $25,000. But the RMDs are going in the brokerage account.

Al: Right. True, that’s true.

Joe: So a couple of things- well, if you’re paying taxes out of the IRA, I don’t know if that makes any sense.

Al: Well, here’s a couple of my thoughts right off the bat. So if the money is going to ultimately go to charity, and then you do QCDs, the Roth conversions are not as important.

Joe: Yeah, it makes zero sense.

Al: Right. On the other hand, if you have some- I don’t know, you say ‘most will go to charity upon my death’ -if you have some kids or nephews or grandchildren or whatever you’d like some money to go to, then the Roth IRA is definitely the best way to go. And so then that would make sense to continue. Also, Judi has already noted that the tax rate is going up in 2025. The 22% bracket will be 25%, so it will be more expensive later. And furthermore, if you do conversions now in more of a down market, it’s to your advantage, because you get more in and it’s less tax. If you’re going to use the money yourself or give it to nieces and nephews. If you’re never going to use the money yourself, a Roth conversion isn’t really that important.

Joe: Right. If it’s going to charity, then do 100% QCD and it doesn’t matter. You’ll never be in that bracket. You’ll never pay taxes on the RMD. And then if the beneficiary’s a charity, then they’re not going to pay taxes when they inherit it. However, if you want more cash flow or if you want to have to build- because she’s taking half of the RMD and she’s putting half in her brokerage and half not. Or half to charity. So I guess we got to square that away first to determine what makes sense. But here’s the argument that she’s having with her friends is saying it’s going to take her too long to catch up because of the cost of the conversion. So I guess the argument or where she’s having these discussions with her friends of saying you’re not going to make up the cost, right?

Al: Which is what you see in article after article.

Joe: Right. You got to be younger to do a Roth conversion because there’s a tax cost. So let’s just assume for simple math that she’s in the 25% tax bracket and she converts $100,000, it’s going to cost her $25,000 to do the conversion. And how long is it going to make up to reap back that $25,000 that went to the IRS?

Al: That’s the question.

Joe: And that’s the argument. But what are they forgetting?

Al: Well, they’re forgetting that no matter when you pull the money out, you have to pay tax. So it’s like the $100,000 in your IRA is not really $100,000 to you. Let’s say a 25% bracket. It’s only $75,000 to you. Right. So you have to calculate the tax you got to pay now versus later. And when you do the math, if you’re always in the same tax rate all the time, all the time, forever and ever, then it makes no difference, right?
Because whether you pay the tax today or tomorrow, it’s the same tax. You pay 25% on an IRA that’s grown versus 25% on a lower IRA. The numbers work out the same. Trust me. If you do it on a piece of paper, you’ll see what I mean. Now, on the other hand, when you are in a lower tax bracket, or when you want the money to go to nieces and nephews that may be in a higher tax bracket, or when the market is lower and you can take advantage of the market recovery, there’s a lot of reasons to do Roth even if you’re going to be in the same same same tax bracket.

Joe: Right. Okay. Because what they’re not looking at is the purchasing power of the money. Like you said Al, $100,000 in an IRA is not worth $100,000. I can’t take $100,000 out and buy something with $100,000.

Al: You got a partner, that’s the IRS.

Joe: Right. So I got to pay my partner first for me to take the $100,000. So if I find something beautiful that I want to buy for $100,000 and I look at my account and my IRA is worth $100,000, I can’t afford whatever I want to buy. Let’s say it’s a nice little cabin somewhere in northern Minnesota, right? I suppose-

Al: It wouldn’t be a very good cabin.

Joe: – small, yeah, it’s a really dumpy cabin, but who cares?

Al: But at least you could buy it.

Joe: I can’t afford it because I don’t have enough money, because as soon as I take the distribution, $100,000 out, I’m going to owe $25,000 in tax, assuming that simple math. In this case, 22%. So $22,000. So she’s looking at this wrong, or her friends or the discussions that she’s having, they’re looking at it wrong. Because as the IRA grows, you’re right, it’s the same tax, it’s the same number. But what’s the difference between a Roth and a traditional IRA is you have a lot more control. You don’t have an RMD in a Roth IRA. It passes 100% tax-free to nieces and nephews. If it’s going to a charity, like we’re trying to look at before the point’s moot.

Al: Yeah. You actually pay tax that you didn’t need to pay. Except that- that so let’s say Judi lives to 100 years old. Then she has all these required minimum distributions at higher tax rates that she could have done something about with the Roth IRA. So there’s actually a reason to go ahead and do it now.

Joe: But not if she’s going to give 100% of the RMD to the QCD.

Al: That’s right. But that’s not what she’s doing now. She’s doing 50/50. But yeah, if 100% goes to charity QCD, which means once you’re over 70 and a half, you can give your required minimum distribution to charity and you don’t pay tax on it, that’s perfectly allowable. And if when she passes, everything goes to charity, you would never do Roth conversion. There’s no need to.

Joe: Right. And I don’t know, it’s like she can’t spend more. She’s already done her traveling. She’s already done everything. So why is she taking- why isn’t she giving 100% of the RMD to the QCD? I guess would be my question. Why don’t you just do that and then avoid the taxes altogether?

Al: Here’s why, I would. It’s because the brokerage account isn’t really it’s got $20,000. It’s not chump change, but it’s not a lot in case something happens that you want the money. So I would actually build that up a little bit.

Joe: But I would use that to pay the taxes on the conversions. If she’s going to do conversions, if it makes sense.

Al: I agree with that.

Joe: But in this case, I’m not sure if it makes sense because of how charitably inclined that she is.

Al: I would agree with that.

Joe: Alright. Thanks, Judi. We got to take a break. The show’s called Your Money, Your Wealth®.


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