Joe Anderson
ABOUT Joseph

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

Alan Clopine

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

Published On
May 7, 2019
Social Security, TSP Changes, and Maintaining Your Tax Bracket

Joe and Big Al answer your money questions: from collecting filed-and-suspended Social Security, living off of your investments overseas before taking Social Security, and how you transition from disability to regular Social Security, to how the sale of appreciated company stock or a Roth conversion will change your tax bracket, and what you need to do to prove a change to your state of residency. Plus, the fellas explain how the pro-rata rules for Thrift Savings Plans have changed.

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Show Notes

  • (00:57) Happy Birthday, Big Al!
  • (02:01) Is My Plan to Live Off of My Investments Overseas Until I Take Social Security a Viable One?
  • (07:37) I Filed and Suspended Social Security. How Do I Get Paid Back Retroactively? (video)
  • (15:27) Transitioning from Social Security Disability to Social Security
  • (20:31) Here’s How the Pro-Rata Rules for the Thrift Savings Plan (TSP) Have Changed
  • (25:07) Will Appreciated Company Stock or a Roth Conversion Change My Tax Bracket? (video)
  • (29:38) How Will the Sale of Company Stock Change My Tax Bracket? (video)
  • (35:01) What Do We Need To Do to Prove a Change in State of Residency?


We’ve got no time for a guest on Your Money, Your Wealth® today because Juan, Michael, The Good Driver, Scott, Dan, Barney, and MS are the stars of today’s show – they’ve got money questions and Joe and Big Al are all about answering them! From claiming Social Security, living off of your investments overseas before taking Social Security, and how you transition from Social Security disability to regular Social Security to how the sale of appreciated company stock or a Roth conversion will change your tax bracket and what you need to do to confirm for the Feds and the states that you’ve changed your state of residency. The fellas are gonna do their best to clear all that up for you and not make things more confusing. Plus, the pro-rata rules for Thrift Savings Plans have changed – stick around to find out how. Visit YourMoneyYourWealth.com, scroll down and click Ask Joe and Al On Air to send in your questions. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

00:57 – Happy Birthday, Big Al!

Joe: First one on here is from Helen. Helen just wanted to write in and say, “happy birthday, Big Al. You sound so great.” She doesn’t think you sound like you’re ready for retirement or collecting Social Security.

Al: Apparently she thinks I sound younger. Thank you, Helen.

Joe: Yes, it’s because of what Andi does to your voice. (laughs)

Al: She puts it through a synthesizer. (laughs) If you heard the real voice. Here’s my real voice (speaking slowly): Well, you want to get a tax deduction…

Joe: Yeah we got it we got to jack him up with a bunch of… (laughs)

Andi: Al, try to talk as if you have no teeth.

Al: Oh. (toothless) I think you want to do a Roth conversion… (laughs)

Andi: Yeah that’s why we don’t do that.

Joe: So yeah. Helen says thanks for all your free advice online, love the channel.

Al: I appreciate that Helen. That’s very nice.

Joe: All right. Enough of the flowers, the fluff, and rainbows, and unicorns.

Al: Onto the real stuff?

Joe: Yes.

02:01 – Is My Plan to Live Off of My Investments Overseas Until I Take Social Security a Viable One?

Joe: We’ve got Juan from Los Angeles California L.A. Juan writes in, “My plan is to retire at 60 and live off my Roth 401(k) savings until I’m 67.” So let’s seven years, just for those of you taking score. “Then I plan on requesting my Social Security benefits. Part of the plan is to move out of the U.S. somewhere that the dollar has more value. Is this plan viable? With this plan, will it make a difference if I claim my benefits at 62 instead of 67?”  (laughs) What do you think there, Alan?

Al: Well Juan, let me start by saying…

Joe: We need a lot more information there Juan.

Al: But let me just take this at face value to start, which is, whether you take your Social Security benefit living in the U.S. or outside of the U.S. it’s the same tax consequence or same discounted benefit, I guess.

Joe: So if you take it at 62 versus 67, you’re going to receive a haircut on the overall benefit.

Al: Yeah it’s around 30% less. So if you’re going to get $1,000 at 67, it’ll be about $700 at 62.

Joe: So if you live in, I don’t know, Costa Rica, it’s still going be $700.

Al: Yeah. So there’s no difference there.

Joe: So I think Juan’s main question is, I’m going to live off of my savings from age 60 to 67, or should I live off my savings from age 60 to 62? So I’ve got a few comments here. So if he takes his benefit at 62 and he’s fully retired at age 60, he’s going to see a permanent haircut on his Social Security benefits. But the pros and cons of taking it early versus extending it is that it’s going to be less demand of the portfolio if he takes his benefit at 62 because he’s going to receive some sort of Social Security benefit.

Al: Right. So in other words, he draws less out of his own accounts because he’s getting Social Security earlier.

Joe: Right. Or if he waits till 67, that’s seven years that he’s got to provide 100% of his income needs or expenses from his overall portfolio.

Al: Right. But the Social Security benefit will be higher. So which is better?

Joe: Yes. Which is better, right? Well I think it is a combination of a couple of different things. A, I think it’s how much money he does Juan have? How much money is in his retirement accounts? How much does he have in other types of fixed income sources? It looks like Juan is leaving the U.S. because he wants the dollar to move further. So I’m suggesting that he probably doesn’t have millions? He’s the guy that’s living in San Francisco that’s moving to Cleveland? He’s the guy living in L.A. that’s moving to Puerto Rico.

Al: Right. So he wants to stretch this dollar further. So yeah I would agree with that. So we’re gonna make an assumption that there’s not millions here, that there’s maybe some limited resources and how do you best utilize them?

Joe: So then you also have to take a look at life expectancy, of course. How long do you think Juan’s going to live? If he has got long life expectancy, well then taking it later is probably going to do a little bit better for him because he’s going to have a lot larger fixed income source of income that’s guaranteed by the federal government that will last the rest of his life. So if he runs out of all other assets, he’s got a higher at least paycheck coming in.

Al: Right. So I’ve got another angle to take this question, which is, he may be thinking about is the taxation going to be cheaper if I’m living in a foreign country? And if that’s part of the question…

Joe: I think every question you find tax in there.

Al: I do.

Andi: (laughs) It’s an important part.

Al: That’s my filter.

Joe: I don’t see tax anywhere, but that’s all right. (laughs)

Al: He says, “part of my plan is to move out of the U.S.”

Joe: To make the dollar more valued. That means taxes.

Al: Yes. I’m gonna answer my own question. (laughs) So for those of you thinking of doing that, you still have to pay taxes in the U.S. even if you’re living in another country – be it Costa Rica, Guatemala, Puerto Rico, Italy whatever, it doesn’t matter. You still have to pay U.S. tax.

Joe: Cleveland.

Al: (laughs) Yeah. Then you got to pay Ohio taxes too. Anyway , not a lot of people know that, Joe. You have to pay U.S. tax if you’re a U.S. citizen or you have a green card. You have to pay taxes on worldwide income in the United States, regardless of what country you’re living in. And by the way, you probably have to pay taxes in that same country. That’s where you get a foreign tax credit, potentially, in the U.S. for taxes that you pay in a foreign country.

Andi: That’s the case when I lived in Australia.

Al:There you go. Yeah. So anyway, if you’re thinking that I’m going to get out of U.S. taxes…

Joe: Did you have a little shrimp on the barbie?

Andi: (laughs) They actually call them prawns, but anyway.

Joe: Did you have little prawn on the barbie?

Al: Did you see Crocodile Dundee? Was he down there barbecuing?

Andi: No.

Al: Anyway, you can’t avoid U.S. taxes, and furthermore, Juan lives in Los Angeles. If you leave the country, you still have to pay, if you leave the state of California, you still have to pay California taxes. California’s really tough about that. You pay U.S. taxes and California taxes, even in another country.

Joe: So I hope that helps Juan.

Al: So we answered to every angle. We’ll see if that was the real question.

Joe: He should be happy.

07:37 – I Filed and Suspended Social Security. How Do I Get Paid Back Retroactively?

Joe: Answering Michael’s question from San Diego. He’s like, “Hey, I’m 69 years of age, I filed and froze my Social Security account in 2016” when he was 66. So now three years later he’s 69. The amount was t$2,550 a month. He was born in April of 1950. “I know I made the deadline before the rules change because–” Michael is correct. A few years ago, you can no longer file and suspend your benefits depending on your age. For most of you, it’s already past the deadline. There’s only a small – if you’re born before 1950 and you still haven’t claimed your Social Security benefits I would highly seek financial planning advice because you’re probably leaving some money on the table. So “SSC” – that should be Social Security – SSA but SSC is what Michael’s calling the Social Security Administration.

Andi: Social SeCurity.

Joe: Social Security Company “knows to start payments when I turn 70 YOA. How do I get paid back retroactively all payments at 70 to 66 years of age and take the lower payment amount? Call them?” So here’s what Michael’s wanting to do. And I hope this is not the case but this is usually what happens is that you can file and suspend your benefit. So at 66, at his full retirement age, he went to the Social Security Administration, filed his benefits, but then he suspended them and let his benefit continue to grow. So from age 66 to age 70, he would get an 8% delayed retirement credit, so by age 70 he would roughly get 132% higher benefit. So now he’s at that 70-year mark and so he’s like, “OK well now it’s time to turn on my benefits,” and let’s say his benefit it was $1,000 a month, at age 70 it would be what $1,300 give or take a couple bucks.

Al: Correct. $1320.

Joe: So what he’s wanting to do is not take the $1,320 a month. He wants to take the $1,000 a month.

Al: That he would have received over the last four years

Joe: That he would have received and then continue with the lower payment. But he wants to get a lump sum payment from Social Security of that. So you could do this, you could say, “hey you know what, I was just kidding. Give me all the money that I would have received because I didn’t claim any monies. I delayed my benefit to age 70,” and now something happened in life where he’s either have a shortened life expectancy where he’s like, “I need to get as much money out of this thing as possible,” because that’s the only real reason why you would want to do this. Or maybe he wants a little bit of a lump sum. So you can retroactively go back to Social Security Administration and say, “you know what, I filed for my benefit and I suspended them because I thought I wanted to take the higher benefit at age 70. Nah, life’s changed. Let me go back.” Then from there, retroactively from 70 on, he would get the lower benefit, but he would get a lump sum payment of all the payments that he missed.

Al: And he would have had to have done this file and suspend prior to April 30th, 2016 to be able to do this option according to Larry Kotlikoff. I just checked.

Joe: Yeah. You had to do this, file before the red the deadline. Because this is no longer the case – you can’t get the lump sum anymore.

Al: That’s right. In fact, if you were to file and suspend now, which you can do, then there’s no retroactive benefit possible.

Joe: You can’t necessarily file and suspend – Mary Beth yelled at me.

Al: According to Larry Kotlikoff, he says, “for people who voluntarily suspended their benefits prior to 4/30/2016, the answer is yes, they can get the lump sum. But the answer is no for people who suspend their benefits on or after April 30th” That’s according to Larry.

Joe: So I guess the file and suspend terminology is really for – the only reason why you would file your benefit and suspend the benefit is to trigger a spousal benefit. Because why would you even go through the hassle of filing your benefit and letting the stuff grow? Because the spouse can only claim the spousal benefit if the other spouse had filed for benefit. Today let’s say I could file my benefit, I’m receiving my benefit, I can suspend the benefit. And what happens then is that my benefit would continue to increase. So let’s say I took it at age 62, I received a lower benefit, and then maybe I go back to work, and then at 64, it’s like, “well I don’t need the benefit. I can suspend the benefit,” and then the Social Security Administration will continue to increase my benefit over time. So let’s say now I turn it on at age 70, I would probably get, I don’t know, throwing a dart here, probably about 40% more benefit give or take a couple bucks? Don’t quote me on that? But I can do that. But let’s say if I was married, even though I filed for my benefit but I suspended them, while my benefits are suspended my spouse could not claim a spousal benefit. If she was claiming the spousal benefit and I suspended my benefit, her spousal benefits would go away.

Al: No I agree with that. But if you were claiming your own benefit and then you realized, “you know what, I don’t really need it,” I could suspend at this point. And if you do that after April 30th of 2016, you can no longer do the lump sum option. I think that’s the point.

Joe: So Michael, yes. If that were the case, if you want to take the lower payment and receive the lump sum, you could call them or you could just go to your local Social Security Administration, and I would highly suggest bringing a cell phone that has a podcast app on it that you can listen to Your Money, Your Wealth® for about four or five hours while you’re sitting in the Social Security Administration. And then when they challenge you and say, No, you can’t do this,” you could just say you know what? Listen to this. This is what Joe Anderson said and then they can call me and I can prove them right. This has happened a time or two.

Al: Yes, I would say, in this type of case I would go to the Social Security office because they’re probably gonna tell you you’re wrong and you’re not wrong.

Joe: Yeah they’re saying, “hey you can’t do this.” You’ll be like, “No I can do this,” because but the rules changed but you qualify over the old rules.

Al: And you’ll probably get someone new that didn’t realize that it changed and so they’ll have to get their supervisor, and I don’t know.

Joe: I would go in, but just bring, I don’t know, some activities. It’s like sitting in the DMV, man.

Al: Yeah. And the other thing I would bring is I would actually go to the Social Security website that talks about that you could still do this by filing and suspending prior to April 30th, 2016. So then you hand it to them when they say you can’t do it.

Andi: I think Mary Beth even told us that if you call the Social Security Administration and you get an answer that doesn’t make sense or it confuses you, hang up and call back and talk to someone else.

Joe: Yeah. When this whole rule changed, we were rushing clients into file and suspend and then they would say, no they told us we can’t do it.” No, you can do it. Then how about the doctor, because they were already past full retirement age, we’re like no, you can file and suspend. She can claim – no, they said we can’t do it.

Al: Yeah, so I sent them a bunch of stuff and he went in but he got a different person, no problem. And he had all this stuff he didn’t need. But anyway.

15:27 – Transitioning from Social Security Disability to Social Security

Joe: The Good Driver? That’s her name or his name?

Andi: That’s who it came from.

Joe: It said The Good Driver?

Andi: Yes. That’s the actual from line of the email.

Joe: Alright, here you go, Good Driver. Here’s your question. “Can I get some insight pertaining to the transition from SSDI to SSI?” Well, it’s pretty easy. You’ve just got to make it. (laughs)

Al: (laughs) Next question. Yeah it’s automatic. We’re talking about Social Security disability income changing to Social Security Income, which happens automatically at full retirement age. You have to do anything, it just happens. You just have to make it, as you say. (laughs) You’ve got to get to full retirement age.

Andi: Does the benefit actually change?

Joe: No.

Andi: So it’s just the name that changes.

Joe: Yes. It’s only the name that changes.

Andi: It comes out of a different pot of money?

Joe: Yes, it comes out of a different pool. It doesn’t come out on the right the disability fund, it comes out of the retirement fund. In some cases it may, but I’ve never seen it.

Al: It’s always been the same as far as you know?

Joe: Yeah, as far as I know. I’m not Mary Beth Franklin. So if she’s listening, maybe she can help us out. But I know it automatically changes from a disability benefit to a retirement benefit at full retirement age, and you can actually suspend your benefit and get an increase in benefit on your retirement benefit if you suspended at full retirement age.

Al: Yeah. Which right now is age 66 but will be transitioning to 67.

Joe: So let’s say I’m a Good Driver. Are we going to get these now? Little funny names? (laughs) This show is just turning into a circus.

Al: What’s your Instagram name?

Joe: Mine? Joe Anderson.

Al: That’s it?

Andi: No.

Joe: Zero…

Al: No creativity.

Joe: Joe Anderson…

Andi: 2323 I believe.

Joe:  2323. Yeah. Michael Jordan, Michael Jordan. @JoeAnderson2323. You want to see my golf swing? Check out my Instagram.

Al: Just pointing it out. Because I think a lot of people have different names.

Joe: Yeah. Yours is BIG AL.

Al: Of course. 2520… (laughs)

Joe: So yeah. You can suspend the benefit and then that would increase the retirement benefit.

Al: So that’s at full retirement. That doesn’t apply to disability.

Joe: Yeah. So my understanding – and I’m not a disability expert here. I would say I’m more on the retirement side expert, not a disability expert, but here’s my understanding of it: let’s say you get disabled at 35 years of age and your making X amount of dollars. And then you apply, qualify, and you actually get a Social Security disability benefit. Because it’s almost an act of something to get the benefit. You really have to – it’s hard to get. I mean you have to be severely disabled.

Al: You do. I agree.

Joe: And so with that, they’ll look at it and say, “OK well if you’re making this, your benefit would’ve been this, and this is what your benefit would be.” Because you look at your statement, your Social Security statement now. If you’re 35-45 – well you’re already collecting, right Al?

Al: No. I’m not. Not even.

Andi: He’s eligible though!

Joe: You’re Social Security eligible so you get the statements every year now.

Al: I do.

Joe: See I get mine like once every five years.

Al: Once you hit, I don’t know if it’s age 50 or 60, but you start getting it every year.

Andi: Are they mailing them out again or do you still have to go online?

Joe: If you turn 60.

Al: Once you’re old enough.

Andi: Because they figure you can’t use a computer? (laughs)

Al: Correct. Well, they figure you need it. I don’t know.

Joe: So I don’t know. It’s more in your face?

Al: OK. Well, the answer is, you don’t have to do anything, Good Driver.

Joe: Yeah, just keep driving well. But yeah, like I said, if you want to increase your overall benefit, you could suspend the benefit and then you would get that 8% delayed retirement credit from that overall benefit. I know because I asked Mary Beth Franklin that exact same question last time she was on.

Andi: Ad I will put a link to that show in the podcast show notes when this airs.

Mary Beth Franklin: Spousal Social Security Claiming Strategies You Need to Know

Joe: Yeah!

Al: Look at that.

You may be retiring in a few months or a few years – either way, claiming Social Security is one of the most important decisions you’ll make for retirement. The Social Security Handbook walks you through everything you need to know: who is eligible, how benefits are calculated, the difference between collecting early and late, working while taking Social Security, the rules around spousal, survivor and divorced benefits, and the all-important taxation of your Social Security benefits. Visit the podcast show notes at YourMoneyYourWealth.com to download the Social Security Handbook, yours free from Joe and Big Al and Your Money, Your Wealth®. Now let’s get back to answering your money questions. Get yours to us now to hear the answer on next week’s podcast! Go to YourMoneyYourWealth.com, scroll down and click Ask Joe and Al On Air to send in a voice message or an email.

20:31 – Here’s How the Pro-Rata Rules for the Thrift Savings Plan (TSP) Have Changed

Joe: Okay. This is from Scott. Scott’s writing in, there’s no location given, Scott. Come on.

Al: We need a city.

Joe: We need a city so that we can say, “man, have you ever been to Cleveland?”

Al: And we’ll say, “I have not.”

Joe: (laughs) Yes, see that makes the whole intro of the question so much better. “Joe, Big Al, I just noticed that the TSP is now allowing withdrawals to be made at the account holder’s discretion. If one has both a Roth and traditional TSP, the pro-rata rules are now optional and not mandatory. Could be a nice segment on your podcast. You guys are the best. My wife and I listen to you all the time.” Well Scott and wife, thank you for the nice compliment, and you are absolutely correct. Which is a huge deal. So let’s talk about the TSP and let’s talk about pro-rata rules. TSP – Thrift Savings Plan. Federal employee. Only federal employees, very large f- it’s a 401(k) plan. I don’t know why everyone’s gotta call stuff differently. But they call it the Thrift Savings Plan. Huge benefits of the TSP plan is that there are five investments, roughly. You’ve got a small cap, large cap, you got a government bond fund, international, and very few selections but they’re very widely well-diversified. It’s an index fund. Very, very inexpensive. So the plan is inexpensive. There’s thousands of stocks within all the funds. So it’s a pretty decent plan. The biggest issue with the TSP plan is that once you retire, it’s like, trying to get money out of that thing, “no, you can only take one distribution a year,” and it’s like, “OK so I’ve got to plan my whole year to figure out how the hell I’m going to get the money out.”

Al: They don’t let you do monthly?

Joe: Now they do.

Al: They used to not?

Joe: Yeah. It was very restrictive on how you could take the money out. And then once you turn 70 and a half, get this money out here, get outta here. (laughs) So all these retirees were like, “well, what the hell do I do with this thing? D I keep it in the TSP? Do I roll it out? Well if I roll it out I’m probably going to pay a little bit of extra dollars, but maybe I have more options. Can I do conversions and everything else?” So this is big news with the TSP plan, because the 401(k) world has not caught up to this yet. So what he’s talking about is that now the rules have changed where now you can take monthly distributions, but if you want it bi-weekly, forget about it. One distribution a month. So if you need to take $5,000 out, you set it up, pull $5,000 out a month. And before you would have to make that election and then you couldn’t change it for another twelve months. Anyway. So for those of you that have a TSP, now the rules are a lot more lenient in how you take distributions. I think the federal government finally figured it out. They’re like, “man, there’s a lot of money in here and we are making some money on this,” because there are fees and costs in it, even though relatively low. There are still costs to it. And even though they’re small costs, if you’ve got billions of dollars in the plan, you’re gonna make a couple of bucks. It’s like our buddy Perry that made a couple of dollars selling, like,  five cent Christmas trinkets. It’s like, “Perry, how do you make so much money?” “Well you know, when you sell a lot of them, Joe, it adds up. It’s like a penny doubling every day.” So now the pro-rata rule, Alan, so if I have a 401(k) plan and I have let’s say $100,000 in my 401(k) plan and I have $80,000 pre-tax, $20,000 Roth. So 20% Roth, 80% pre, and I pull a dollar out of that 401(k) plan. What’s going to happen is that 80 cents is going to be taxable, 20 cents is going to be tax-free. Makes sense?

Al: They do it in the same proportion of your investment.

Joe: So every dollar that comes out of a 401(k) plan, if I have after tax and pre-tax dollars, it’s going to be pro-rata. The TSP plan allows you to elect which dollars that you want to pull from. So if you wanted to pull a dollar from the TSP plan, given the fact that you had let’s say 80% in pre, 20% and post or Roth, and you wanted to pull out a dollar, you could say, “no, I want to pull a dollar out of pre-tax, or I want to do 50/50 or whatever.” So you can make that election, which I think is pretty cool.

Al: Yeah. And that’s a big deal because now you can sort of manage your distributions with your own individual tax bracket and get this to where you try to stay below a certain higher brackets and end up with a lot more money in your pocket. So yeah, it is a big deal, I agree.

25:07 – Will Appreciated Company Stock or a Roth Conversion Change My Tax Bracket?

Joe: All right let’s go to Dan from Florida. Dan writes in, “I have a substantial amount of company stock in my 401(k) that has appreciated greatly.” Good for you, Dan. Hopefully, you’re a Florida Gator fan. You know, I went to school at the University of Florida.

Al: I’ve heard that. I’ve seen your T-shirt…

Joe: Yeah. Go Gators.

Al: … it’s about three sizes too small, by the way.

Joe: Oh my God! Wow. No, it’s just because I’m swole. (laughs) “When I NUA this stock, will the cost basis add to my income such that it can change my tax bracket or do I only pay tax at my current tax bracket percentage? I have the same question about 401(k) to Roth conversion moneys. Will conversion moneys add to my income in such a way as to possibly change my tax bracket? Thank you so much guys. Wish I could come and see you in person, but I live in Florida. I watch your shows on YouTube almost every day.”

Al: Wow, daily. That’s awesome, Dan. Thank you.

Joe: Just binge watching YMYW. “Thanks so much for all I have already learned from you. Hope you keep up the amazing show.” Thanks Dan, appreciate that, kind words.

Al: Is Dan your cousin?

Joe: No it sounds like him though. (laughs) But Dan brings up a very good question, because when we do presentations and teach and things like that, I think a lot of times people get confused. So he’s watching the TV show and we’re saying, “OK well you convert up to a certain bracket and then you pay tax at that level.” Let’s say it’s the 22% tax bracket. Or what tax bracket are you in? I’m in the 22% tax bracket. OK. You do Roth conversions, you pay 22% tax. Or NUA, which I’ll explain in a second, if you do an NUA it’s ordinary income tax.  I’m in the 22% tax bracket. Is that net unrealized appreciation gonna be taxed at 22? So the answer is “It depends.” And so what you really have to look at  Dan, is what’s your taxable income, line 10 on your tax return? Because that’s going to tell you what tax bracket that you’re in. And then you will need to go to the IRS.gov to look at the brackets to see what – I don’t know what tax bracket Dan’s in, or else I could just tell him what the top of that tax bracket is. But for instance, the top of let’s say if he’s single – let’s say married. So the top of, let’s say, the 22% tax bracket – the bottom of it starts at about $80,000, the top of it is at $160,000. So you have $80,000 of taxable income is the top of the 12, and $160,000, roughly, is the top of the 22. Give or take a couple of bucks.

Al: Yeah you’re married? Yeah. 168 but you’re in the ballpark.

Joe: Yeah right. And so then Dan has to look at is to say, “OK well if I do a net unrealized appreciation–” what that means is that he has company stock that he purchased that is in his 401(k) plan that has appreciated greatly. He could take the company stock out of the 401(k) plan, but he pays ordinary income tax on whatever the basis is. If the basis in that particular circumstance is, let’s say, $200,000, well it’s going to add $200,000 of income. So yes, some of it is going to be taxed at his rate, but yes, then the other remaining is going to be taxed at a higher rate. So of course, it will jump tax brackets, depending on how much that he does. That’s why looking at your taxable income and looking at whatever brackets that he’s in is going to be very, very important for this type of planning.

Al: Yeah. And I think that’s the key point is you fill up your current bracket at the same rate. And then to the extent you have extra income, it’s taxed at a higher bracket. So it’s not like you get your current bracket on everything if the amount of income is greater than what’s left in your bracket. And we get the same question on capital gains, which is, you’re in the 12% bracket and you sell a stock and you don’t have to pay federal taxes on that as long as you stay in the 12% bracket. So people say, “well, I’ve got a million dollar gain on a property can I sell that and pay no tax?” Well just for the first 10 or $20,000, to the top of that bracket – everything else then will be at 15 and 20%.

Joe: Hopefully that helps, Dan, appreciate you watching us on YouTube and listening to us here at Your Money, Your Wealth®.

29:38 – How Will the Sale of Company Stock Change My Tax Bracket?

Joe: We got Barney from Miami Florida.

Al: Wow. Lots from Florida.

Joe: Yeah, Miami. “I am 65 years old. I currently have my savings in a company ESOP in a 401(k). My taxable income for 2019 is $33,000. What is my tax bracket when I sell those shares of stock? This is kind of similar to Dan in Florida.

Al: Yeah. If it’s company stock.

Joe: There are, call it 2,100 shares “in an ESOP valued that $42.85 a share. There are 1,900 shares in 401(k) valued at $42.85. Should I convert these total shares into a Roth and pay the tax? I plan to take Social Security at age 67. In 2020 I turn age 66. Is it worth converting? I would invest the money in tax-exempt bonds.” (laughs) This way I would not have to report the income while I receive my Social Security.” OK Barney, all over the map here.

Al: Yeah well let me first do the math – so the total is about $170,000.

Joe: OK Barney slow down here. Slow your roll. (laughs) So Barney is 65, he’s going to take Social Security at 67. So he’s got a two-year time frame.  And so he’s got an ESOP plan, he’s got a 401(k) plan, his taxable income is $33,000 and let’s assume he’s single. So if his income is $33,000 as a single taxpayer Alan, he would be in the very top of the 12% bracket – he’s still got room of about, I don’t know maybe another t$10,000? It’s about 42-ish?

Al: It’s I think high – $39,000.

Joe: So the top of the 12% Barney is $40,000. You’re at 33. So anything that you sell up to $40,000 would be taxed at 12%. If you are married and your taxable income is $33,000, you have up until around $80,000. So then you have $50,000 of room.

Al: But I will say if you sell it inside of your plan there is no tax consequence.

Joe: Right. But he’s got an ESOP plan. So people call all these plans so many different things, so I don’t want to give advice if it’s not really a true ESOP.

Al: Yeah, that’s an employee stock ownership plan, which is relatively rare.

Joe: Right. Because if you have an ESOP, you’re an owner of the company and the owners of the company were trying to sell the ownership of the company to the employees.

Al: Yeah and often they’re private companies and you may not be able to sell them. So we don’t really have enough information.

Joe: I’m guessing it might be an employee stock purchase plan, where that’s something a little bit different, where he’s buying company shares of stock. Maybe at a discount, or maybe he’s giving some restricted shares. Who knows. But if it’s outside of a retirement account with the ESOP, we can assume, so he’s got t2,000 shares at $42 a share and Al what’s that, $100,000?

Al: Yeah, it’s about $90,000.

Joe: So $100,000. So I don’t know, if he sells that, it depends on what the tax basis is. If it’s inside a qualified plan there’s nothing. If you convert the money into a Roth IRA, then you’re gonna be taxed at whatever that is. So I’m gonna guess – if it’s an ESOP of what I’m thinking that it is, it could be a qualified plan that he could potentially roll into an IRA. The 401(k) could get rolled into an IRA. Sell the shares of stock. Now you just buy a diversified mutual fund, because you have too much risk. Then you could do small conversions throughout of that IRA into a Roth, and then by the time you reach 67, then you’re pulling some money out of a Roth, a retirement account, and… but you can’t invest in municipal bonds if it’s in a qualified account, it’d still be taxed at ordinary income rates.

Al: Right. Or if it’s in a Roth it’s tax-free anyway. And then if it’s company stock, consider net unrealized depreciation. So there’s that strategy potentially. A conversion is a great idea but keep within your certain tax brackets that makes sense for you.

Joe: Right. If he’s got company stock in the 401(k) plan, then I’m going back to Dan and saying do a net unrealized appreciation, move the company stock, pay the taxes on the basis. Now the money is outside, then invest that in municipal bonds. But if your taxable income is $33,000, you’re in the 12% tax bracket where there is no capital gains tax so municipal bond doesn’t make any sense. Barney! Love you buddy. Appreciate you calling in, but we need some more information here. We probably just confused the hell out of you and most other people.

Tax brackets have changed, retirement plan contribution limits have changed, and you do not have to keep track of all this information in your head. Download the 2019 Key Financial Data Guide from the podcast show notes at YourMoneyYourWealth.com and have all those numbers right at your fingertips, along with the standard deductions, tax deadlines, AMT exemptions, gift and estate tax exclusions and credits, taxation on Social Security and tons more. Click the link in the podcast show notes at YourMoneyYourWealth.com and download the 2019 Key Financial Data Guide. One more email here, then we turn you loose to ask your money questions – click Ask Joe and Al On Air at YourMoneyYourWealth.com

35:01 – What Do We Need To Do to Prove a Change in State of Residency?

Joe: OK. This is from M.S. “Dear Joe and Big Al, we co-own a business with nation… wide and overseas clients.” I should start reading these before we get on the air. (laughs)

Al: So you can be smoother?

Joe: (laughs) Yes. I was like I thought they owned Nationwide Insurance or something there for a second.  “We co-own a business with nationwide and overseas clients. The business is headquartered in Nevada where our business partners live. We work remotely in our California home. Since California taxes all income including K-1 income regardless of where was earned, we are thinking of moving out of California and claiming residency in a state with no income tax. However, we’d like to maintain our home in California, since it’s fully paid off and property taxes are low. We also will return to California periodically to see family and specialist doctors. In the new state we will plan to buy a house, register our cars, change our driver’s license, change our voter’s registrations, become members of a church, switch our gym memberships, find a dentist and a primary care doctor, and establish other daily life activities. What should we do to ensure that California no longer considers those California residents? We are both 52, plan to retire in five years. Thanks. You guys are awesome.” So they’re going to do all this stuff Al, but only live in Nevada for three days out of the year. (laughs)

Al: (laughs) And say they live there all the time.

Joe: Here’s our church membership card…

Andi: Actually they’re not even saying Nevada. They’re just saying a no income tax state.

Joe: We go to Nevada Lifetime Fitness.

Al: That’s right. We go to church there, we contribute there.

Joe: We got our dentist. We haven’t been in two years but they’re ight there in Nevada.

Al: They’re on the right track, which essentially means if you’re going to move out of state, you really need to move out of state. And if you think about it just logically, if you really are going to move out of state, what changes would you make? Well, you would get a new driver’s license and you would have a new registrar of voters and you would probably have a new doctor and you’d probably have a new dentist and all these things that you would do if you actually were moving. So that’s what the state of California expects you to do. So they listed a whole bunch of stuff. Now the caveat of course, is you actually really need to do it. You really need to be there. And if the state of California ever wants to challenge you, it’s not that hard for them to prove that you were in California by looking at where grocery bill grocery bills and where you’re spending your time, where you’re going out to eat, all that sort of thing. And I’ve even heard, I don’t know if this is true, but I’ve heard that California can subpoena your cell phone records to find out your locations.

Joe: But the law is six months and a day. So they want to spend time in California as long as they don’t spend six months here. It would be five months and twenty nine days.

Al: Right. But it can be a little bit trickier than that. Because of this: if you really are spending virtually half a year here then are you really leaving? Have you really made a commitment to leave the state? And California, if the dollars are big enough, they might want to take it to court and say, “No, you really didn’t leave because look you’re coming back half the year.” And so this is where a really good tax attorney that specializes in this is really helpful. If you’re planning on keeping ties in California, which a lot of people are, and in this case it sounds like they are, probably one of the biggest things is time spent in Nevada and doing all the things that t- or wherever, maybe they go to Washington state whatever it may be.

Joe: Sure. Florida.

Al: Yeah. Florida, Texas, Wyoming could be another one. But yeah. You really have to do all these things, and you just have to be careful when you’re keeping ties in California that you don’t go overboard, and this is where a good tax attorney can help you on that. And I’m not saying that – you don’t necessarily have to do everything, and some people keep their home. And some people turn it into a rental, and some people keep this doctor because it’s a specialist. And some people do this and that, it’s just the more things that you can do, the better your case is. And if this is ever challenged, it’s a court case – it’s shades of gray, it’s what the judge is going to consider, is this more like you’re a Nevada resident or a California resident? So the more things that you can do, the better. But for those listening that are thinking of kind of pretending they’re doing it, it doesn’t really work, you have to really do it. The fact that their businesses in Nevada helps a lot.

Joe: If the roles were reversed, what would happen there? Business is in California. They’re living in Nevada.

Al: So they still pay California tax on their business income because it’s California’s source, it’s located in the state of California and so that doesn’t really matter. But because it’s reversed it works pretty well. So in other words, they can move to Nevada or some other tax-free state, and they don’t have a California corporation. So it’s already kind of established as another state’s corporation. So I like that part.

Joe: How do you change a corporation to a different state?

Al: I think the best thing is to just dissolve your California corporation and set up a new one in another state because state by state is where the corporation – the secretary of state and each state issues the the corporation charter.

Joe: So Pure Financial Advisors, we’re a fairly large establishment in California. We’re going to dissolve it and open up Pure Financial Advisors Nevada.

Al:  Yes I think so. Now I’m not an attorney, so maybe there’s others smarter ways.

Joe: They would be like, “What are you guys doing?” You know what I mean? But it has happened. I mean we see all sorts of – like multi-billion dollar firms move to Texas.

Al: I know, but you could set up your company in Nevada before you dissolvedCalifornia and you do it simultaneously. So I don’t know. There might be smarter ways to do this but I don’t think you necessarily would transfer your California corporation to to another state. I don’t think it works that way.

Andi: And we should say that was just an example. Pure Financial is not moving to Nevada are we? (laughs)

Joe: We’re moving to Nevada.

Andi: Al, I got a question – if your headquarters of your corporation is in one or the other and you literally are spending half of your time in one and half of your time in the other, do you pay taxes in both states? If you’re not trying to hide it or anything like that, you literally have two houses…

Al: So in that particular case it comes down to where you are six months and a day, that’s your state of residence. And so if it happens to be in Nevada, so then that’s Nevada sourced income. Even though you’re spending a bunch of time in California. So you could spend time in lots of different states, but it’s still Nevada sourced because that’s your primary residence. So that’s really what it comes down to. But also another thing about California is if you move away and do this and then later on after you’ve sold your business you come back to California, because, “all right, I’m done,” California can actually audit you for four years after you file and if you’ve actually come back, they can successfully argue you never intended to leave and pull back all those tax dollars. So be careful of that too.

Joe: So wait five years to move back?

Al: Pretty much – five years after your final transaction that you don’t want California to get. Like for example you run the business for five more years and then you sell it for a big fat paycheck. You’re going to want to wait five years after that to move back to California.

Joe: How about if you have ailing parents?

Al: Tough.

Andi: I thought you said alien parents. (laughs)

Al: So did I but I figured what you meant. (laughs) If you have alien parents you got other things to worry about besides California taxes.

Joe: (laughs) They’re coming back to get me! Taking me to the homeland, Al!

Al: They’re gonna run a whole bunch of tests on you on a spaceship. (laughs)

Andi: If you have AILING parents.

Al: If you have ailing parents (laughs) that’s another story. There would be reasons to come back but not more than six months. Five months and 29, 30 days, whatever. So I guess ET has alien parents. So I just answered ETs question. (laughs)

Joe: (laughs) All right. Okay. Oh boy. That’s it for us today. Want to thank our lovely producer Andi Last, for Big Al Clopine, I’m Joe Anderson. The show is called what? Your Money, Your Wealth®.


Alien parents – that’s just the first of the Derails, stick around for a couple more at the end of the episode. If you haven’t yet subscribed to Your Money, Your Wealth®, please do so, it helps us out and it ensures you won’t miss a minute of Joe and Big Al, so it’s helping you out too. Subscribe to the podcast on Google Podcasts, Apple Podcasts, Spotify, listen on YouTube or find it on your favorite podcast app. Click to subscribe to the podcast on any of the following apps: 

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