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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently leads Pure Financial Advisors along with Michael Fenison and Joe Anderson. Alan joined the firm about one year after it was established. At that time the company had less than 100 clients and approximately $50 million of assets under management. As of [...]

Published On
February 2, 2021

Find out just how intertwined healthcare and retirement really are as Joe and Big Al answer your questions about Social Security and Medicare, Health Savings Accounts (HSA) and Medicare, and the impact required minimum distributions from IRAs have on Medicare premiums. Plus, they also answer questions on strategies for Roth IRA conversions and Social Security, saving for retirement in an after-tax IRA or a brokerage account, and paying debt by taking money from retirement funds or by refinancing the mortgage. Plus, a couple of corrections from attentive listeners.

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Show Notes

  • (00:59) Can I Turn on Social Security at 70 Without Automatically Starting Medicare? (Steve, Olympia, WA)
  • (04:59) HSA: What If I Have To Retire Suddenly? (Steve, Olympia, WA)
  • (06:11) Should I Do a Roth Conversion? (Nick, Philippines)
  • (10:09) Does It Make Sense to Pay 40% Tax Today to Fill Up 24% Bracket? (Pete, Patchogue, NY)
  • (14:51) Roth Conversion Social Security Strategy (Tony)
  • (22:26) Withdrawing from Roth 401(k)/Roth IRA (Bob, Western New York)
  • (27:46) Should We Save for Retirement in an After-Tax IRA or a Brokerage Account? (Mary, Sacramento)
  • (32:36) Should I Withdraw Retirement Funds or Refinance My Mortgage to Pay Debt? (Victoria)
  • (34:22) How to Avoid Increased Medicare Premiums with RMDs? (Ed, Palm Desert)
  • (37:44) CORRECTION: Backdoor Roth IRA Basis from FIPhysician.com
  • (41:23) CORRECTION: Clergy and Social Security (Christine, Pete & Tiny)

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Transcription

Today on Your Money, Your Wealth® podcast #311, we’ll find out just how intertwined healthcare and retirement really are, as Joe and Big Al answer your questions about Social Security and Medicare, Health Savings Accounts or HSA and Medicare, and the impact required minimum distributions from IRAs have on Medicare premiums. Plus, they’ll also answer questions on strategies for Roth IRA conversions and Social Security, saving for retirement in an after-tax IRA or a brokerage account, and paying debt from retirement funds or by refinancing the mortgage. That is, they will do their best to answer your questions on these topics, but we’ve got a couple corrections from listeners in this episode too. If you’ve got money questions, comments or limericks for the fellas, click the link in the description of today’s episode in your podcast app to go to the show notes and hit that “Ask Joe and Al On Air” banner. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Can I Turn on Social Security at 70 Without Automatically Starting Medicare?

Joe: Steve from Olympia, Washington. “Hi, YMYW. Great show. Greetings from WET Western Washington.” Was kind of confused with the WET for a second.

Al: Yeah, in all caps.

Joe: It was all caps.

Al: Right. Is that an acronym?

Joe: I thought- I wasn’t sure. Threw me for a loop there, Steve.

Al: Yeah right.

Andi: Just emphasis.

Joe: Got it. Got it. Maybe he should have put, like, an emphasis on it.

Al: How do you do that?

Joe: Like italics or something.

Al: Oh, ok.

Joe: Maybe bold?

Andi: He went with capital.

Al: 12, bold and italics, that would have made more sense that way.

Joe: That would have, yes.

Al: Instead of-

Joe: – and maybe underlined.

Al: Because-

Joe: Use all 3.

Al: Because when it’s capital letters, we think of acronym. I was thinking the same thing, what’s this mean?

Joe: Because our listeners, sometimes they come up with some crazy-ass stuff-

Andi: You realize now we’re going to get a whole bunch of emails that are all going to be underlined, bold and capitalized.

Joe: Perfect, because it’s all black and white for me. I don’t care. “I learned about you folks on YouTube, but I listen to your podcasts as I work out on the weight machines at the gym with a mask on, of course.”

Al: Wow, look at you.

Joe: I bet he’s just rippin’, getting shredded.

Al: That’s awesome. I hope he’s not using earbuds, so he’s letting other people listen too.

Joe: Yeah, speakerphone. Yeah, he’s gettin’ jacked. He’s gettin’ jacked listening to YMYW in WET Western Washington.

Al: Yes.

Joe: “I’m planning to work till 75 because leaving a legacy is important to my family. I have 2 HSA questions. I’m utilizing the HSA as a safety vehicle. I will contribute to it until I’m 75 and don’t plan to spend from it until after retirement.” Well, first of all, 75 Steve- how old is Steve?

Al: He doesn’t say.

Joe: Ok, well you can’t contribute to an HSA until age 75.

Al: Well you can I think if you’re not on Medicare. If you decide not to elect Medicare, I think you can.

Joe: Ok. 65 is what-

Al: That’s what you remember?

Joe: That’s- yeah.

Al: I think you can.

Joe: Ok. “I will start taking Social Security at age 70, but I won’t want to start Medicare until I retire at 75.” Ok, so maybe. “Is there some way I can turn on Social Security at 70 without automatically turning on Medicare?” Medicare automatically turns on, doesn’t it? Like because-

Al: When you sign up for Social Security at that age, yeah.

Joe: Correct.

Al: So I think you can and I think you just have to tell them because I do think it’s automatic. Unless you let them know, probably.

Joe: So if he claims Social Security, and then Medicare will kick in, that kicks him out of the HSA.

Al: It does, yeah. So, I’m not sure of the answer, to be honest. I would- when you’re ready to take Social Security at around age 70, I would call up the Social Security Administration and tell them you want to start Social Security without Medicare. And-

Joe: I’m not a Medicare expert by any stretch.

Al: I’m not either.

Joe: I’m probably a 2 out of 10 on Medicare and HSA.

Al: I’m probably the same. I just happen to know what I just said because I looked it up. You can do HSA after age 65 if you’re not on Medicare.

Joe: So you’re doing some homework?

Al: Yep. I’m- usually on the first 2 questions and then I run out of time and patience. So this was the 2nd question.

Joe: Got it. OK, well, let me clarify here. So even if- I was under the impression, too, that Medicare- that you would want to still enroll, I suppose, if you’re an HSA, that you probably don’t. Because some insurances that Medicare would be primary over- even your employer’s- I should just shut up because I don’t know what I’m talking about.

HSA: What If I Have To Retire Suddenly?

Joe: Now, number 2, question number 2. “I understand I am supposed to stop contributing to the HSA 6 months before I start Medicare, but what if I have a- but what- ?”

Andi: – retire all of a sudden?

Joe: “- retire all of a sudden?” Like all of a sudden, I’m going to retire. “Do I pull money out of the HSA, pay tax on it and ask for forgiveness? Thanks for all you do, Steve.” Steve, I won’t worry about it if you have to all of a sudden retire. That’s a new retirement program.

Al: I think- I think-

Joe: How did you retire?

Joe: All of a sudden.

Al: It was – I wasn’t expecting it. It just happened yesterday. All of a sudden, I woke up, I had an epiphany. I want to be retired. I already put it the HSA, but I don’t care.

Joe: We sit down with clients, what kind of retirement do you want? You want a all of a sudden retirement? Or do you wanna plan for it?

Al: I think I’m probably about a 2 out of 10 on HSA also. But I would say you probably- your contributions up until you all of a sudden retire, are probably okay, even though they’re in the same year.

Joe: Yes. All right Steve. I know that didn’t help at all. We just made fun of ya. Do we have a guide or something? Who’s the Medicare expert? We got to get that person back on. Maybe save these questions for-

Al: Oh, Dr. Katy.

Joe: Dr. Katy.

Should I Do a Roth Conversion?

Joe: Nick, he writes in From the Philippines, Alan. “To Al, Jo and Andy. Love your show. My question is, should I do a Roth conversion?” First of all, he spells Joe J-O and Andi A-N-D-Y.

Al: Yeah, he’s got-

Andi: Wow, you actually know how to spell my name?

Joe: A-N-D-I. Yes. Not A-

Andi: Oh my gosh, I had no idea.

Joe: Really?

Andi: I didn’t know you knew how to spell it.

Joe: I know spelling is not my forte or reading for that matter.

Andi: Or talking.

Joe: Or talking. So Nick is retired and lives in the Philippines. His monthly expenses are $35-

Al: Right. He says $3500, but probably meant $35.

Joe: Ok, $3500. So he’s got a 401(k), Al, $750,000. He’s got a brokerage account, call it another $150,000. He’s got an IRA of $14,000; Roth accounts of $160,000 and $75,000 in cash. Present income is $2200 withdrawal from the 401(k) a year. And he’s got a pension of another $2700.

Al: $26,000-

Joe: Oh, $26,700 a year. Got it. And then he’s pulling out $21,600 a year from the 401(k).

Al: Yeah. So he’s pulling at about $50,000, give or take.

Joe: Future income, Social Security at 66 is $36,000 for me and my wife and the RMD at age 72 is $25,000 a year. Appreciate your answer. Merry Christmas, Nick.” Should he do a Roth conversion is his question, Alan. He’s got $750,000 in a retirement account and his current income today is $50,000.

Al: Sure.

Joe: The answer is yes.

Al: His future income is going to be higher than his current income and tax rates are low. So that’s a recipe for wanting to do a conversion.

Joe: Just look at the tax bracket too. So let’s say he’s got $50,000 of income and the standard deduction is $25,000. So his taxable income, call it $25,000. Ok, he’s just barely in the 12% tax bracket. No, he’s in the 10% tax- no, he’s $25,000, so $20,000 for the top 10%.

Al: Sure.

Joe: So he’s got plenty of room in the 12%. The 12% tax bracket’s dirt cheap.

Al: So that goes up to about $80,000 for married couples. So he ought to do probably at least $50,000.

Joe: I would for sure.

Al: That would be a good number.

Joe: So if you’re in the 10% or 12% tax bracket, if you ever ask us the question, should you do a conversion, our answer is probably always yes.

Al: Yes, I totally agree.

Joe: Right. Unless, you know, then you get into certain Social Security issues when you convert in the 12% tax bracket and you don’t have a lot of money in retirement accounts. That might jack up the taxation of your Social Security. That’s the only time I probably would say no.

Al: Yeah, I would agree with that. So the basic answer is this, when you’re the 10% or 12% bracket, at least do a Roth conversion to max out the 12% bracket, that’s a cheap tax rate. And you’re right, Joe, that’s the exception is if you’re receiving Social Security and more of the Social Security becomes taxable, then you might want to at least think twice. At least run a calculation to see if it still makes sense.

Joe: Because how it works is the more additional ordinary income that would show up on your tax return, more Social Security is subject to income tax.

Al: Yeah, yeah. So here’s how that works. In some cases, you add $1 more of Roth conversion and now all of a sudden another $.85 of Social Security income is taxable that was tax-free before. So now it’s like your $1-

Joe: – cost you$1.85.

Al:  – call it $2 of extra income. Basically doubling your tax bracket. So just be careful of that.

Joe: So, yeah, thanks a lot for the question Nick, from the Philippines.

Roth Conversion: Does It Make Sense to Pay 40% Tax Today to Fill Up 24% Bracket?

Joe: We got Pete from Pechagooey-

Andi: Oh, wow.

Joe: Pechagooey. I don’t know. How the hell do you pronounce that?

Andi: Notice his last sentence is, ‘can’t wait to hear how Joe pronounces this one.’

Al: It’s Patchogue, New York.

Joe: Pechagooey.

Al: Patchogue.

Andi: Did you actually look that up, Al?

Al: Yeah, I did, because I didn’t know.

Andi: I was going to say Patchogue.

Al: Pat- Pat- Patchogue. Patchogue. Patchogue? Patchogue?

Joe: Pechagooey. “Good morning, Big Al and Joe-”

Al: Let’s go with Pechagooey.

Joe: “- and Angie.”

Andi: Yeah, that’s a new one.

Joe: Angie. Hey Ang. “I love the show and the humor you guys bring to the financial planning. I have a question about your favorite topic, Roth contributions. I’m a 49 yo professor who is expected to get a pension from the state of New York. The pension amount depends on when I retire. Assume I retire at 55, I’ll collect $55,000 a year in the pension. I’ll likely have $1,000,000 spread out over all tax deferred Roth and non-retirement brokerage accounts. I’ve recently been maxing out both 403(b) and 457 plans with Roth contributions. This past year, my total gross income was $175,000, which bunts me up into the 32% federal tax bracket. I know my pension will be taxed at ordinary income, so Roth made sense since I can afford to pay the tax now. I think many businesses such as my college will likely become the next Blockbuster Video and be replaced by an online version which would bring my future income down. Does it make sense to pay close to 40% in taxes today to do a Roth up to the 24% tax bracket? Does it make more sense to contribute into the traditional now and do conversions later? Do you have a rule of thumb by tax bracket? I assume it would be the aggregate of both state and federal taxes. Thanks again, Pete, from Pechagooey, New York. Can’t wait to hear how Joe pronounces this one.” There you have it. Pechagooey. I don’t know. What do you think, Al?

Al: Well, we could use a little bit more information.

Joe: So the question really is, does it make sense to pay close to 40% in taxes today or do a Roth up to the 24% tax bracket? What is he talking about?

Al: Well, I think he’s adding New York tax maybe.

Joe: But 6% New York. So he thinks he’s in the 32% tax bracket at $175,000 of gross income?

Al: Well, I guess he’s –

Joe: Is he married? Is Pete from Pechagooey married?

Al: Must be single, I’m guessing.

Joe: $175,000 is not the top of the 32%.

Al: I know. I’m aware of that. So the answer is, if you’ve got a pension of $55,000 and let’s say you end up with $1,000,000 in your retirement account, even if it’s all deferred, your RMD is going to be $40,000-ish. So that’s $90,000 of income. So that’s- and then if you take away your standard deduction- again, I don’t know whether you’re single or married, let’s say you’re single, that is going to be what is currently the 22% bracket, which will later be 25%.

Joe: Well, if he’s single, I don’t know if- what his taxable income is.

Al: I’m just going to go to the future. I don’t know what his current income is. But if, in other words, his future tax bracket will probably be the 25% bracket based upon his pension amount and his RMD. I don’t know- are you planning to live in New York at a high tax rate? You’re right, it says 6.4% and 32%, but I’m not sure you’re in the 32% bracket. But we don’t- I don’t have-

Joe: $165,000 taxable income roughly, about $165,000, $170,000 I think- is getting in the 32%. So he says he’s making $170,000, so he’s a couple of bucks into the 32%. But I don’t know if he’s- if that’s gross income or taxable income. If it’s taxable income- if your taxable income is $170,000 then no, I don’t think it makes sense to do a conversion because now you’re at 32% plus state, you’re 40%.

Al: Yeah, because we just did the math and in retirement based upon the numbers you just gave us, you’d be in the 22% bracket currently, or 25% when we go back to the new tax brackets.

Joe: The rule of thumb is this. Are you going to be in a higher bracket or lower bracket in the future? If you’re going to be in a lower bracket in the future, then don’t do a conversion. If you’re going to be in a higher tax bracket in the future, or the same tax bracket, then you want to do a conversion.

Roth Conversion Social Security Strategy

Joe: We got Tony. He writes in, with no location given. “Hi Joe and Al, love your show. I have a burning question for you about my retirement planning and Roth conversion.” Who has burning questions about Roth conversions? Al: Well, Tony, apparently.

Joe: Big T. “58 years old, looking to retire in the next year or 2. My question is about where- whether to convert all my 401(k) IRA to Roth by age 69 up to the 24% tax bracket so that I can begin collecting tax-free Social Security at age 70, no other income. I can then supplement my Social Security with tax-free Roth as needed and I’ll never have to file another tax return again. Is this smart planning to convert everything and go for the tax-free Social Security? Or should I leave some funds in the IRA so that I can take advantage of the standard deduction and utilize the lower bracket during the golden years? Do you think the IRS may change the tax law to include Roth income when calculating tax on Social Security? Thank you, Tony.” All right, Tony, that’s an interesting take on things.

Al: That sure is. Here’s what I think.

Joe: Ok.

Al: I think that you don’t need to convert everything because there is a standard deduction. And so likely, even if maybe a little small RMD causes a little bit of your Social Security to be taxable, it could potentially be tax-free because of the standard deduction. So I would hate to pay taxes now on something that could be at least partially tax-free later.

Joe: If your income Tony, is under $32,000 of provisional income, it’s tax-free. So that’s your starting point. So provisional income, taxable income, and adjusted gross income are all a little bit different.

Al: Sure, yes. So explain provisional.

Joe: So provisional income is half of your Social Security. So let’s say, Tony’s Social Security benefit is $20,000. So provisional income is your adjusted gross. So let’s say- he said he had no other income.

Al: That’s what he said.

Joe: So his provisional income in that example would be $10,000. Because the provisional income is half of your Social Security, plus your adjusted gross. So if he had interest, if he had dividends, if he had a pension, if he had even tax-free income from a municipal bond, all of that would be added up. And then if that number is below $32,000, then the tax on Social Security is $0. So if he’s looking to be in the 0% Social Security zone, then keep your provisional income under $32,000. What he’s very smart on is that the Roth distribution is not included in provisional income. So you can have $100,000 Roth distribution that’s not even included in the calculation. So you can have $20,000 Social Security plus $100,000 Roth distribution. You got $120,000 of income, $0 taxes paid. That’s I guess, Tony’s goal.

Al:  And of course, we don’t know how he’s going to live all the way till Social Security if he retires in the next year or 2 at 58. So do you have money outside of retirement to be able to live? And you have money to pay taxes on Roth conversions? How much to convert? See, the thing is, because of the provisional income, which is only half of Social Security, and then you add other income, maybe some IRA income, some RMDs, things like that, you could still be not only in a 0% tax, or the lowest brackets, 10% bracket, maybe 12%, which is cheap. I don’t know what your salary is now. If you’re in the 24% bracket now, why would you do that? Because basically you’re saying I’ll pay 24% now to save 12% later. Not a good deal.

Joe: You want to look at- but he’s on the right track. He’s doing more calculations than I think than most.

Al: He is. Because, he’s aware that Roth conversions or RMDs or any income can affect the taxability of your Social Security, which is right.

Joe: And so you’re looking at, is there a possible solution here? You want to look at- because in some cases Al, if he did convert in the 24% tax bracket to keep him in a 0% tax bracket for life, is that going to make sense? Maybe. It depends on how big of an IRA that he has, and how old he is and how long he has to convert. So we’ve done calculations where, yes, if you do convert in a higher bracket, it’s going to make sense because you’re putting yourself in a very low tax bracket or 0% tax bracket for the rest of your life. So then you look at the tax savings by being in that 0% tax bracket for the next 20 years versus paying a fairly high tax bracket for the first 5, then you just do the calculation that way.

Al: So I guess all I’m saying is that you don’t have to convert every penny to stay in the 0% bracket.

Joe: Exactly. You want to at least keep some balance. So if you convert it all, you just paid too much tax.

Al: But there’s something to be said for never having to file a tax return again at age 70. So maybe that’s not a bad idea.

Joe: Right.

Al: It’s like paying off your mortgage. You don’t have to think about it.

Joe: I don’t think filing a tax return with a couple of bucks of income is that big of a deal.

Al: Well, you don’t have to get Turbo Tax or go to your accountant, right? You’re not part of the tax system anymore. Kind of like that.

Joe: Because you can doing taxes for 40 years.

Al: Yeah, I’m sick of them.

Joe: That’s the Big Al plan. Hopefully that answered your burning question, Tony. Did we did we feed the fire of your burning question on Roth IRA and Social Security? So just understand provisional income, looking at the numbers and so do the calculation. You want to run a spreadsheet. I’m sure Tony’s got a spreadsheet of figuring out, here’s my provisional income, what tax bracket I’m going to be in? And how much can I get out? Question for you, Alan is that, on provisional income is on the front side to determine the taxation of Social Security is on the above the line? versus below the line? Let’s say, because he’s got a $25,000 deduction. Let’s say if he claims the standard. So if he did have income, that would push the Social Security, let’s say, to $33,000. So now you have more Social Security tax where it’s above that zero line? But then you have a deduction. It’s still going to wash out anyway because the taxation of the Social Security is going to be wiped out. I answered my own question.

Al: Yeah, that’s what I’m thinking. So you don’t have to convert all of it.

Joe: Got it.

I’ve got a whole stack of new financial resources for you this week in the podcast show notes. If you missed it, on Friday we released a quick special YMYW podcast about the GameStop short squeeze situation that had everyone abuzz – you can check that out, along with a blog post about the whole thing. We have a lot of Roth IRA, Roth conversion, Roth contribution and Roth withdrawal questions this week, so I’ve also posted the Ultimate Guide to Roth IRAs, and a link to all of our white papers. They’re free and chock full of useful information, so why not avail yourself of all of them? Learn how to crack the financial code at any age, download our Social Security Handbook, get all the key financial data for 2021 including current tax brackets, and deadlines, retirement account contribution limits, and much more. Click the link in the description of today’s episode in your podcast app to go to the show notes and start downloading. 

Withdrawing from Roth 401(k)/Roth IRA

Joe: Bob writes in from Western New York. “Hi, Andi, Joe and Dr. Roth.”

Al: Oh, that’s me.

Andi: Very good, Al.

Joe: You’re excited about that.

Al: That’s pretty exciting. That’s first time I’ve been called doctor.

Joe: Doctor?

Al: Other than the guy at my church.

Joe: Doctor?

Al: Yep.

Joe: Doctor.

Al: Dr. Roth.

Joe: Doctor? Doctor. Ever seen that movie?

Al:  Doctor- what?

Joe: ‘Spies Like Us’.

Al: Yeah. So long ago I couldn’t even tell you what it was about or even who was in it.

Joe: Chevy Chase, Dan Aykroyd.

Al: OK. All right. Now it’s coming back.

Joe: Yeah. OK.

Al: I did see it.

Joe: “First things first. I drive a 2008 Volvo XC 90, with $110,000- 110,000 miles-

Al: Andi’s got the picture up on the screen, that’s a cool looking car.

Joe: “- still going strong.” He’s got a golden retriever, a-

Al: – neurotic-

Joe: a neurotic. Thank you for that spell check there.

Al: I was trying to save you from yourself.

Joe: Thank you. I’m- really bad reading. “I have a question regarding withdrawing funds from a Roth 401(k)- Roth IRA. I know if you retire at 55, you can withdraw funds from a 401(k) without a 10% penalty. I also realize that if you roll the 401(k) into a traditional IRA at 55, you have to wait until 59 and a half to withdraw the funds. My question is, if you roll the Roth portion of a 401(k) into a Roth IRA, can you withdraw the contribution portion of the Roth at 55 without incurring the 10% penalty? I know you said that Roth contributions can be withdrawn at any time, but I wasn’t sure if there were different rules with the Roth 401(k) contributions after they were rolled over. Thank you for the insight.” Well, why does he want to do that, first of all?

Al: Because he wants to live in the go-go years.

Joe: No, he doesn’t. He drives a 2008 Volvo XC 90 with 110,000 miles on it. Bob’s-

Al: I know but that’s why he’s got the money so he can have fun.

Joe: What do you think?

Al: A contribution is a contribution. Right?

Joe: It’s after tax.

Al: It’s after tax. So if it’s a contribution in a Roth 401(k) or it gets rolled into a Roth IRA, the contribution character of that carries over to the Roth. So yes, you can pull out contributions from a Roth IRA. You can actually do that any age. You don’t have to be 55. You can do that any age without penalty. Right?

Joe: Out of an IRA, but not out of a 401(k). It’s up to the plan document rules, so-

Al: But he-

Joe: He’s rolling the money out.

Al: He’s rolling it out to a Roth IRA.

Joe: But if he doesn’t have a Roth IRA, there’s still going to be a 5-year clock within the earnings on that. But I believe the contributions are going to be fine.

Al: Yeah, right. So there’s 2 components to this. And we should backup. So if you have a 401(k) and you’re still working at that company that has that 401(k) at age 55 and then you retire, so you have to be 55 when you’re retiring with that plan, then you can pull money out without the penalty. And that would essentially be true of a regular 401(k) and a Roth 401(k). So the answer is yes, to both of those. But he was wondering if you roll that into a Roth IRA, is it the same rule? Not on the earnings. But on the contribution it would be because the contribution part, I don’t really care whether you contribute to a 401(k) or a Roth IRA, the contribution part would carry over into that Roth IRA. I think that’s what he’s asking.

Joe: So my question is, if you roll the 401(k), the Roth portion of 401(k) into a Roth IRA, does it have FIFO tax treatment? is basically what he’s saying. He wants to have access to the contributions before 55. I would never do that, though, Bob. Don’t do it. It doesn’t make any sense to do it. Because I don’t know the answer to this without 100% certainty, because I would never, ever give this advice. Because you got money into the Roth IRA, it’s difficult to get money into the Roth IRA. We preach on this stupid show of why you want to have money into a Roth IRA to compound tax-free for a long time. The last thing you want to do is retire early and then blow out your Roth. I mean, you’re shortsighted here. No, that’s the last place you would want to go. So I believe you could have access. I don’t even want to give Bob the answer.

Al: I already did. You can do it. But then Joe is saying don’t. And I agree with that logic, too. Especially if you retire and you don’t have any income, at the very least, pull it out of your 401(k) because you’re in such a low bracket.  Why would you pull out of the Roth?

Joe: I don’t know. Well, no, because he doesn’t want to incur the early withdrawal penalty because he’s under 55. Let’s say he’s a FIRE guy, Bob. You know, he’s probably 45 years old. And he’s thinking he’s going to retire at, like, our other boy that retired, John, at 45, but he’s like, oh, I got this money in the 401(k) plan, I got to bridge the gap. And so I’m going to move the money from my Roth 401(k) into a Roth IRA and I’m going to live off of the contributions until I can have access to the money. Bob, don’t do it.

Should We Save for Retirement in an After-Tax IRA or a Brokerage Account?

Joe: Mary writes in from Sacramento, California. “Would we be better off putting money into an after tax IRA or opening a brokerage account? What are the pros and cons of each? Would we be eligible for a non-deductible IRA? Or the dreaded backdoor Roth?” It’s not dreaded. The dreadness is me talking about it.

Al: I think that’s what Mary’s referring to.

Andi: You scare people, Joe.

Al: You’re gonna have to talk about the-

Joe: – the dreaded backdoor Roth IRA. I know I am. “Would we be better off to open another IRA, as we both already have established IRAs? And do a backdoor Roth IRA every year?” You don’t know what a backdoor Roth IRA is Mary, if you’re asking this question.

Al: It’s like every other episode. We’ve already answered it. Go back to listen to every other podcast.

Joe: Mary, I love you. Don’t get me wrong. This is why it is a dreaded backdoor Roth IRA.

Al: Right. I’ll give you a quick answer. If you already have other IRAs, the whole backdoor Roth concept doesn’t work because of the aggregation rules and the- what’s the other-

Joe: pro-rata-

Al: -pro-rata. Thank you. Look those 2 things up. Those are the reasons why it doesn’t work. And actually you’re better off putting- in your situation because you already have IRAs- is to put it in a brokerage account because you’ll get capital gain treatment. So there’s your answer.

Joe: “Husband and I are in our early 50s. I’m maxed out of 401(k); spouse’s maxed out simple IRA. I earn about $150,000 a year. Spouse income varies from $120,000 to $180,000. We have some debt, a couple of cars, 3% APR and a student loan, $40,000, 4%.” It’s not a lot of debt. So early 50s, they’re maxing out 401(k)s. He’s got a simple plan. I would want to know a little bit more about spouse. Because if spouse has a simple plan, is he an employee of a small business that the small business owner set up the simple plan? Or is he the small business owner that set up the simple plan? And does he have employees? Or is he self-employed? Because you can set up multiple different plans in regards to the simple that could take some of these excess dollars that you would want to save, that you’re contemplating backdoor Roths, and brokerage accounts and stuff like that. Well, you could probably be maybe a little bit more efficient with the retirement plans that he currently has, depending on what that status looks.

Al: Well, and also, if Mary’s 401(k) allows for after tax contributions, now it can do a garage door Roth conversion.

Joe: Mega backdoor, garage door, baby.

Al: That’s actually the better answer still. But on the question you asked, is it better to do a non-deductible IRA or a brokerage account? It’s better to do a brokerage account, unless you can do the backdoor Roth, which you cannot very successfully because you already have other IRAs.

Joe: And the reason we’re saying that is the tax efficiency that you can have in a brokerage account is pretty powerful today than maybe it was 20 years ago. Because you could get into exchange traded funds, tax efficient-type mutual funds, index funds that don’t kick out a lot of, let’s say, interest or capital gains, that kind of hampers the growth. Because before it was tax deferred would always be taxable because all the growth and interest and dividends that you’re receiving on your investments, you don’t have to pay tax on them. And so the compounding fact of those dollars grows. But then you have to pay ordinary income tax on all the growth anyway on the way out. But if you tax manage a brokerage account effectively by looking at tax efficient investments plus tax loss harvesting, and then you’re only paying a capital gains rate coming out as you spend it, we find that that’s a lot better long term, depending, of course, on the numbers and how you manage the money. So, yeah, I think I agree with you Al, is you could be a little bit more efficient maybe with the retirement plans that you have, depending on your husband’s status. But if there’s no money in a brokerage account, there’s very little tax diversification. It all sounds like just retirement accounts and it’s all ordinary income coming out when they retire, maybe in 20 years or 15 years.

Al: The problem with putting money into non-deductible IRA, you don’t get a tax- you don’t get a benefit right now in terms of a tax deduction. You do get basis in the accounts. So you will get it back, but it will be on a pro-rata basis. And then all the future growth on that money is ordinary income. So that’s why that’s not necessarily the best idea.

Should I Withdraw Retirement Funds or Refinance My Mortgage to Pay Debt?

Joe: Victoria, from Poway. “I have too much credit card debt, $20,000, and an upcoming parent/student loan of $30,000, that’s due in February. I’m not sure if I should pull the money out of my retirement investments or refinance my home and pull some out of the equity. I’m 60 and I’d like to retire soon. I’m not sure what to do. I can’t sleep at night.” Well, Victoria, I’m your Ambien, baby.

Al: You have an answer? How is she gonna sleep, Joe?

Joe: Oh she’s gonna sleep like a baby after this answer. I don’t know, to be honest with you.

Andi: You got me all excited.

Al: I thought you were gonna say have your kid pay for the loan. You don’t have to pay for your kid’s college.

Joe: I would, to be honest with you, I would refinance it. I would take it out of the equity. And I know I’m going to get hate mail for this, but here’s my rationale because of it. So let’s say you got $50,000, right? You push that thing off, you’re going to get a low interest rate. I’m sure Victoria, she’s got good credit. You refinance, you get a lower rate, 3%, something like that, maybe 4%, 3.5%. But the payment on that is going to be small versus taking it out of a retirement account and paying 12%, 15%, 20% in tax. I’d much rather pay 2% to the bank versus 20% or 15% or whatever the tax rate is by taking it out of the retirement account to the IRS.

Al: So if you’re going to take out $30,000 or $50,000 to pay off the debt, you really have to take out about $75,000 to cover the tax to pay on the- so it’s- I would tend to agree with you, although I don’t really like to borrow money for these sorts of things. But I would say, given what little we know, that’s probably the right answer.

Joe: All right. Good luck, Victoria.

How to Avoid Increased Medicare Premiums with RMDs? Roth Conversions Aren’t Suitable

Joe: Ed from Palm Desert writes in. He’s 77. And let’s see, he’s got a large portion of his retirement savings in traditional IRAs. “I’m very concerned that as my required minimum distributions increase annually with age, I will reach a point where my Medicare premiums increase substantially. Is there any action I can take to preclude this increase in Medicare premiums? I do not consider conversions to a Roth IRA as a suitable candidate solution due to the immediate tax burden that would be incurred. I’m married and my wife is my age. Thank you.” All right, Ed. So finally, we got someone that doesn’t like the Roth. Maybe first time listener. First time caller. Ed from Palm Desert.

Al: You got the wrong show, Ed.

Joe: Yeah. He’s 77. Well, first of all, I don’t know how big your RMDs are. So you’re going to increase your Medicare premiums substantially. We need to know what the required distribution-

Al: Let’s just do this, Joe. So when you’re married, as long as your income is less than $176,000, you’re in the lowest rung of Medicare.

Joe: $167 a month or something?

Al: Yeah, it’s $148.

Joe: $150.

Al: Yeah. So OK, so $176,000 RMD at a 4% distribution- well, it’s more than that because he’s 77 but-

Joe: Close enough.

Al: – roughly. Let’s call it, he’d have to have $4,000,000 in his IRA to be pushing up against this.

Joe: So I wouldn’t worry about.

Al: I wouldn’t either, unless you got that. And if you got that, then great. You got some other problems.

Joe: So you could do a QCD, a qualified charitable distribution.

Al: Exactly.

Joe: So, Ed, if you are charitably inclined, you could take a portion or all of your RMD up to $100,000 and give it to a qualified charity.

Al: And that way it comes off right on the front of your form 1040. It’s not included in your income, so it’s not included in this for Medicare. So we’d have to know a lot more to be able to help you. But you’d have to have a very large required minimum distribution to run up against this.

Joe: So there you go, Ed. I don’t know if a Roth conversion makes sense, just understanding what the limitations are. Well, I don’t know. He doesn’t want to pay the tax up front, but he’d rather pay the tax- But he’s worried about RMDs. He’s worried about the tax on the RMDs, but he doesn’t want to pay the tax upfront at almost all-time low tax brackets.

Al: And that’s the thing to consider is since tax brackets are so low right now, you might want to rethink the Roth idea.

Is a Roth conversion suitable for you? What’s the best strategy for you to pay off debt? What accounts should you be saving into for the most tax-efficient retirement? We get these kinds of questions every week on YMYW and the fellas answer them to the best of their ability with minimal time and prep. We also offer free 45 minute digital workshops on Taxes in Retirement, more comprehensive two-day digital retirement courses, or you can take a deep dive with a Free Financial Assessment and get comprehensive, professional help in identifying the financial strategies that will set you up for a successful retirement given your specific circumstances, goals and needs. Sign up for a tax workshop, a retirement class, or a financial assessment in the podcast show notes at YourMoneyYourWealth.com. Click the link in the description of today’s episode in your podcast app to get started.

CORRECTION: Backdoor Roth IRA Basis from FIPhysician.com

Joe: I guess we blew something up too, Al.  But we got a call in from our buddy from the FI finance guy-

Andi: FIPhysician.com.

Joe: Yeah, thank you.

Al: Oh yeah, yeah. Nice.

Joe: So you want to tell the story there, Andi?

Andi: Oh, he gave us a shout out. He rated Your Money, Your Wealth® as the Best Retirement Podcast with Humor, 2 years running. So apparently nobody else is funny.

Joe: Yes, but we screwed up. So we gave an answer that wasn’t true. You didn’t see his email that come through? Am I the only one that reads emails around this place?

Andi: Apparently so. I missed that one. From the FIPhysician guy?

Joe: Yeah. He’s like ‘hey we can’t let Big Al blow up and kill his reputation’. That’s why we got a 3-star.

Andi: He must have sent it directly to you.

Joe: No, it came through the normal channels. So we talked about backdoor Roth IRAs. And then do the conversion. And then we said that you would still have to wait 5 years if you’re under 59 and a half to have access to it because it was a conversion. Do you remember having that conversation, Alan?

Al: We’ve had that conversation many times. Sure.

Joe: He said we were wrong.

Andi: I just found the email.

Joe: – so that we were wrong, is that- and then he wrote a big blog on it. So I guess we need to share that with everyone.

Andi: Alright.

Joe: Because Al and I are idiots. And I appreciate him calling us out on this. Because-

Al: So it’s 5 years or 59 and a half, whichever is sooner?

Joe: No, there is no 5-year clock because it’s basis. You have access to the basis.

Al: Oh the basis. OK, well that’s different.

Joe: So you did an after tax- because we were thinking- all these FIRE people are calling us because they want to do these backdoor, mega backdoor and all of stupid backdoor stuff, that may or may not apply to Roths, to get money out of their retirement accounts prior to 59 and a half because they think they can retire at 45. And they’re going to live in whatever shed. And so they’re- like we had 2 questions today about this. So we said, no, you have to wait 5 years because it was a conversion.  He goes, ‘no, you have basis’ and then it now makes sense. You have basis, yeah, then you have access to the basis.

Al: Did we know there was basis? I don’t think we knew that.

Joe: It’s a backdoor Roth IRA, Al.

Al: OK, I guess you’re right. Yeah, that does that have basis. OK, well then 3-star. I agree.

Joe: So what’s the- yeah, David?

Andi: Thank you to, yes, to David from FIPhysician.com. And yes, he does, I see he does have a blog post that he wrote about the backdoor Roth emergency fund.

Al: Oh, there you go.

Joe: Yeah. You guys call David. If you want the backdoor Roth to be an emergency fund, if you want to spend this money prior to, let’s say, 60, yeah, we’re not the show. He’s got a nice blog, though. It’s really well- look at that, little table of contents. We don’t have a table of contents in our blogs.

Andi: That’s not true. We do too.

Joe: Maybe I’ve never read-

Andi: Do you read our blogs, Joe?

Joe: No, I do not. I’m very busy. What-

Al: OK, well, I think- you know what? That’s the first time we’ve made a mistake, right?

Joe: No. Yeah, well, we got-

Andi: Christine on page 10 has got a follow-up for you.

Al: That’s the second one. No, we do make mistakes and usually when we find out about them, we own up to them. Because when you’re talking quickly off the cuff, sometimes things come out.

Joe: That’s right.

Andi: I think you should do Christine.

Joe: Ok, fine. Let’s-

Al: Is that another mistake?

Andi: Yeah.

Joe: What page?

Andi: End of page 10.

CORRECTION: Clergy and Social Security

Al: She wrote a- is that a limerick?

Joe: Oh yeah.

Andi: I think, yes, she gave you a limerick.

Joe: “Hi, team. This is Christine from near Pittsburgh. I listened to the answer to my question from Joe and Al in podcast 309 broadcast today, January 19, 2021 and here’s my response.” Are we playing this game? So we give- we’re trying to help all of you people with your finances-

Al: – and we get limericks with our mistakes.

Joe: And then ‘here’s my response’. Is Christine the one with the dog that was like gonna drool on me?

Andi: Yep.

Al: In the convertible?

Joe: Yep. I figured so much. I knew I was gonna get some backlash on that one.

An error from Joe, I believe.

But his goal was not to deceive.

He skipped the detail in my lengthy email,

so I’m willing to give him a reprieve.”

Al: That’s very clever.

Joe: Christine has got too much time on her hands, I’ll tell you that. Sounds like- Ruthie does stuff like this, my mother. “Joe stated that my clergy husband would not be entitled to Social Security spousal benefits because he had opted out of Social Security, which is an option given to clergy. However, my understanding is the option of opt out of Social Security is only for income received as a member of the clergy who work as a minister. If the minister has earnings from other non-clergy work, that income is treated as regular income and all taxes are due. In my husband’s case, I did say he had also done other non-clergy work and had paid the normal taxes on the income and would receive a small Social Security check at retirement based on those non-clergy earnings. So is it possible that Joe made a mistake by saying that my husband would not get spousal benefits based on my Social Security, which is higher than his? I’m betting he did make a mistake.” You know why I made the mistake, Christine? Because I skipped like 3/4 of the email.

Al: That was a long one, right?

Joe: Yeah, I was just trying to fly through the thing so we weren’t- we didn’t spend two hours on it.

Al: So, Christine, the answer is yes. If your husband had other work outside of the clergy, then yeah, then he could be eligible for Social Security, as long as he has 10 years, 40 quarters.

Joe: ” – because he missed that detail in my long – which he described as a novel.” It was more than a novel. It was longer than a novel.

Al: I kind of remember that. I think you got to the point where you started skipping paragraphs.

Joe: I had to. I had to. And I thought I did a pretty good job of skipping and still not missing a beat.

Al: But you got a limerick.

Joe: Oh, my God.

Andi: Honestly, I think you did actually read it all out loud. I don’t think any of it made it into between your ears.

Al: Well, that could be.

Joe: That could be very true. Because I did drink a big giant glass of vodka before I read it. I’m kidding. I’m kidding. Christine’s going to give me another limerick. Well, hopefully, yes. So you’re good. Christine, thank you for the nice little poem. She’s good. She’s clever.

Al: Yeah, very clever.

Joe: I like it. I like it.

_______

Thank you all for your questions and comments and corrections, you’re keeping the fellas honest! Check out FIPhysician.com’s backdoor Roth blog post in the podcast show notes at YourMoneyYourWealth.com and stick around to the end of today’s episode for the Derails.

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