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 26, 2020

The windfall elimination provision (WEP), government pension offset (GPO), and spousal Social Security benefits. Also, Roth IRA conversions and Medicare, Roth conversions from a thrift savings plan (TSP), and conversions to buy real estate. Plus, asset location and other tax planning strategies beyond Roth IRA conversions, like life insurance and charitable remainder trusts.

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Show Notes

  • (00:35) Social Security: Government Pension Offset and Spousal Benefits
  • (03:14) Joe’s Social Security File & Suspend Email Experience
  • (05:47) Social Security: How Can I Avoid the Windfall Elimination Provision?
  • (10:25) Should I Take the Pension Lump Sum or Annuity? Should I Take Social Security at 66?
  • (16:00) Can I Switch from the Social Security Survivor Benefit to My Own at Age 70?
  • (19:30) Roth Conversions and Medicare
  • (22:46) Should I Do a Roth Conversion to Buy a House?
  • (29:58) How to Use Asset Location to Reduce Taxes
  • (33:30) Should I Consolidate My TSP and IRA Accounts?
  • (35:46) TSP to Roth Conversion Revisited
  • (40:13) Tax Planning Strategies Beyond Roth Conversions

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Today on Your Money, Your Wealth®, the windfall elimination provision (WEP), government pension offset (GPO) & spousal Social Security benefits. Also, Roth IRA conversions and Medicare, Roth conversions from a thrift savings plan (TSP), and conversions to buy real estate. Plus, asset location and other tax planning strategies beyond Roth IRA conversions, like life insurance and charitable remainder trusts. Wiscosinites, this might not be the episode for you. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.

Social Security: Government Pension Offset and Spousal Benefits

Joe: “I have a question regarding Social Security. My wife is 8 years my senior. I married a cougar.” Ken!

Al: That was Ken by the way.

Joe: Ken, you dog you. A little cougar action.  She’s probably hot. “She retired from the U.S. government and receives a TSP retirement pension which does not allow for her to collect Social Security. If I’d like to start my Social Security at age 62, can she also receive a spousal allotment pay along with my payout from Social Security? Meaning if I receive $11,000 at 62-”

Andi: $1100.

Joe: What’s that?

Andi: “-$1100 at 62-”

Joe: I’m sorry. “- if I receive $1185, $one thousand one hundred eighty-five dollars at 62, can she receive 1/3 of that amount also? Thank you for answering my question.”

Al: So can she receive the spousal even though she can’t collect on her own?

Joe: No. It’s the Government Pension Offset, GPO.

Al: GPO. Right.

Joe: No. It would be limited. There still there could be some benefits depending on if she’s- it sounds to me that her whole career was under the U.S. government so maybe she’s civil service retirement. But she’s got a TSP so that is probably a federal employee retirement. So I’m not sure under what U.S. government plan that she’s on or what pension plan that she has. But no, she would receive a reduced, significantly reduced benefit. She would not be able to take the spousal benefit as a normal individual would, because of her pension. I would need more information but you could just look up GPO, government pension offset. It offsets that spousal and survivor benefit.

Joe’s Social Security File & Suspend Email Experience

Joe: You want to go with Wanda, Social Security here? She’s got a bunch of questions. She’s kind of taking advantage of some time here Al.

Al: I would say you’re the reader of the questions, you decide.

Joe: I mean if they’re this long, you know it’s going to sound awful and I’m gonna make an ass out of myself.

Al: People like that.

Joe: I don’t really think they like it.

Andi: Actually Joe there is somebody who later in the emails says “I can’t wait to hear how Joe reads my question.”

Joe: They laugh.  And it hurts my feelings.

Al: You are a Podcast and YouTube sensation apparently.

Joe: Who can’t read.

Al: That’s what they like. You’re human.

Joe: Okay Wanda. Here goes nothing here. “My name is Wanda and I watched your YouTube presentation on Social Security today. Learned a lot. Have a few questions I hope you can answer.” You know what? I got a question the other day.

Andi: Oh boy.

Joe: Did you see- were you on that chain?

Andi: I don’t know yet. Which one?

Joe: This lady wanted to claim a restricted application. So she sends me this e-mail- No, she downloaded one of our Social Security guides. And she’s like basically sends the email saying this thing is a piece of crap.

Andi: Yeah. She said this didn’t answer any of my questions.

Joe: She’s like this answered zero questions that I had.

Andi: She didn’t tell us what they were.

Joe: So I’m a nice guy right. So I see this pop-up and I reply and I said you know what? There are 527 different combinations to claim this stuff. There are hundreds of rules. Send me a question and I’ll be more than happy to answer it.

Al: Yeah. Ok, good.

Joe: She didn’t like my answer.

Al: Because you didn’t answer her question.

Joe: No, I know. Because here’s what she wanted to have happen. And then of course it’s not her, it’s her neighbor. And then she came up with this argument. I consider them family so I’m doing research for them. It’s like I don’t give a- who gives a crap. So she is like- a married couple, both of them have not claimed benefit. So the older spouse has higher earnings, wanting the higher spouse to continue to have a max benefit at age 70. I want the other spouse to claim a restricted application and a spouse benefit. They’re both 68 years old so they qualify under the rules. And I said sure she could file a restricted application and let her benefit grow only if the other spouse claims their benefit.

Al: That rule changed what, 4, 5 years ago.

Joe: So on April 29th 2015 or 2016 you had to file and suspend. So she was thinking well no, because I’m talking to the IRS and they’re telling me I can’t do it. And I think there’s no way- Oh my God. Anyway, I was like- no you can’t do it. And then I showed her the rules, gave her the links to Social Security. It was pretty tight, I thought. And I said here, I hope this helps. Her reply, doesn’t help at all. She’s like you’re talking about file and suspend. I didn’t even ask you about file and suspend.

Al: So here’s my theory. She’s cranky because of the COVID-19. She’s housebound.

Joe: Wanda, let’s answer your questions.

Andi: We know it was not Wanda by the way.

Joe: No, it was not Wanda.

Social Security: How Can I Avoid the Windfall Elimination Provision?

Joe: “Number one: I was married for 30 years and then divorced. Both myself and my ex-spouse are still single. He is 63 and I am 62. He retired at age 55. I don’t plan to retire until 2021. I heard you mention being able to claim your spouse’s Social Security if he and/or both of you are over 62. My question is can I claim his Social Security until I’m ready to claim my full retirement at 66 and 7 months?” So no, you can’t Wanda, because now there are new rules, it’s called deemed. You can’t kind of flip flop, is what I think she wants to do.

Al: Well she can claim it, but she’ll get a reduced benefit for hers when she gets to age 66.

Joe: They’ll take a look at both benefits. They’ll say here’s the spousal benefit. Then here’s your own benefit. We’re going to combine them together.

Al: Yeah they are.

Joe: At 62. So there’s no kind of flip-flopping anymore.

Al: Unless his is gigantic and hers is small. Maybe, I don’t know.

Joe: Then it would just be his. But then she wouldn’t be able to flip hers.

Al: It would be a reduced benefit. But she wouldn’t be able to flip it.

Joe: “I would like to retire at 63.9 years, however-” 63.9.

Al: That’s pretty good. That’s 11 months and 4 days.

Andi: I’m guessing she means 63 and 9 months. But yeah, that’s not what she typed.

Joe: Here’s where- here’s my retirement date. I want to be 64 years, 4 months and 3 days. I’ve never seen anything like that.

Al: 63.9.

Joe: “I’d like to retire at 63.9 years however; I would prefer to draw my Social Security benefits at full-time retirement age, 66.7 years. My question is by waiting until I’m 66.7 years, will this reduce my overall Social Security benefit because I would not have worked 3.3 years?” A smidge. They’re gonna take a look at 35 years of work history. So if you’re not working from 63 to 66, is it gonna make a huge difference? It depends on how many years of credit that you have. So if you have 32 years of work history, well yeah you would want to work the other three to get the full 35. So that would help.

Al: I think a lot of people don’t realize when you get that Social Security statements, the benefit presumes that you’re going to work all the way up to your retirement age. And if you don’t- like let’s say you work at least 35 years, that’s great. You don’t have a zero year because they take your highest 35 years. But perhaps your last few years are greater pay than your first three. And so yeah you might have a little bit lesser benefit than what’s on the statement but it’s usually not that significant.

Joe: It’s not going to be tens of thousands of dollars. You’re talking a couple of hundred dollars a year maybe. Maybe $1000. Ok. “I was employed with the federal government for 12 years and did not pay into Social Security. I worked in other public agencies prior and after my employment with the federal government totaling over 30 years in which I paid into Social Security.” Oh so look at this. Kind of answers our question here. “Do I fall into the Windfall Elimination Provision where money will be deducted from my Social Security?”

Andi: And then from before, “How do I avoid a Windfall Elimination Provision?”

Joe: You can’t avoid it. I mean you can put in 35 years. But you still have 12 years; you’re still going to receive a pension. So a real easy thing to do Wanda, because we don’t have what your pension is going to be from the federal government, and I don’t know what your Social Security work history looks like, you could plug it in. Just google Windfall Elimination Provision and really what that is, is kind of like that other question we got with the Government Offset Provision.

Joe/Andi: Government Pension Offset.

Joe: Is that if I qualify for a government pension or like CalSTRS if I’m a school teacher, you don’t put into Social Security you put it into another pension system. They don’t want you to double dip. So there’s gonna be a reduction because you’re receiving cash income from somewhere else because you didn’t put into the system. So you just want to do the math and you can do the calculation just by looking at here’s my pension. Here’s my Social Security benefits. Plug in Windfall Elimination provisions. We have these calculators. So if you give me that information I could tell you easily. But just how do I avoid it? It’s hard to avoid unless you want to work another few years, but you don’t. You want to retire in a couple of years so you’re not going to avoid it. So you can maximize your Social Security benefits by working the full retirement age but you’re still going to have a little bit of reduction there depending on the pension. That was kind of a mouthful.

Al: Yeah it was.

Should I Take the Pension Lump Sum or Annuity? Should I Take Social Security at 66?

Joe: Janine in Corona del Mar.

Andi: I think it’s Jean. Or Jeannie. Jeanne. Jeanne.

Joe: Jeanne?

Andi: It’s either Jeannie or Jeanne.

Joe: Jeanne. With a ‘e’ at the end, Jeanne-

Al: Yeah, Jeanne is usually J-e-a-n. Right?

Joe: I’m blowing up the names today.

Andi: You’re good at that.

Joe: Jeanne. Yes, I know. “Just found out I had a pension coming in from a place that I worked 12 years ago-” oh, for 12 years 30 years ago. “I never put any money into it. We have saved for retirement with several accounts. No debt. Our house is paid in full. Should I just take the lump sum, $160,000 and roll it to my existing IRA? We are planning on Social Security for me at 68 and my husband at age 70. I am two years older than my husband with him being the larger earner. Or should I take Social Security at 66 since I don’t know the viability of Social Security given this pandemic?” Well I think Jeanie, we need to know with $160,000 lump sum, what would be the pension amount?

Al: Yeah that’ll be nice to know.

Joe: You’re asking a math question with only one variable.

Al: So basically you look at the monthly payment. Multiply it by 12 and then divide that into the lump sum to get the percentage payout. Now you can do present value, you can make it a lot more complicated. I’m just making it simple. And so let’s just say it came out to 6%.

Joe: I would have done an internal rate of return calculation.

Al: Yeah I suppose that’s better. I stand corrected. IRR. Anyway, so let’s just say you get 6% which sounds pretty good. But then if there’s no inflation riders and you’re going to live for another 30 years, then the 6% may not look pretty get in a few years.

Joe: I think you’re looking at what they’re going to pay you in a guaranteed fixed income. Or that’s “guaranteed” from the company and then you compare that to $160,000 to determine kind of what’s going to make more sense mathematically. But then there’s the emotional side because if you don’t believe that- I mean this is free money in her mind.

Al: She wasn’t expecting it.

Joe: Yeah right. Hey I worked for this company 30 years ago and all of a sudden I find out I got $160,000. I mean let’s just roll the thing in the IRA and call it good.

Al: Yeah. Some people like you know they have control over it. And once it’s in an IRA you can do Roth conversions. If you pass away it’s still there for your spouse or other beneficiaries. So there’s pros and cons but those are some of the pros.

Joe: She’s also thinking about taking benefit at age 66. Husband’s taking at age 70. ‘We are planning Social Security for 68, my husband at 70. I’m two years older than my husband.’ Here’s something you could do is that let’s see I don’t know how old she is- you could take it at let’s say at your full retirement age at 66. Which is fine. Then your husband could take a spousal benefit at age 68 and let his continue to grow and then he can turn his benefits on at age 70. That’s a little bit of free money there and then if you think that the pandemic is going to blow it up-

Al: Except she says she’s two years older than her husband.

Joe: I know. So she takes it at 66-

Al: – and then he would take it – she would take the spousal at 66.

Joe: No, she takes his. He waits two years then he turns 66 his full retirement age. She’s 68 at the time. When he turns his full retirement age, he’s gonna then turn the spousal benefit on. He’s not going to touch his own benefit on his record. So he takes half of her benefit up until his age 70 for four years and then he turns his on at age 70.

Al: Okay. And I think I’m thinking about it differently. But that’s alright. I’m too confused anyway. I’ll go with your answer.

Joe: It’s the right answer.

Al: 50/50. I thought, she’s two years older, so she takes it when-

Joe: When she’s 68, he’s 66.

Al: Yeah, so when she takes it at 68-

Joe: Let’s says he takes it at 66, he’s 64. So he does nothing until he turns 66. So now she’s 68, he’s 66, and she’s already collected for two years. Then when he turns his full retirement age at 66, because he’s full retirement age, he files a restricted application to take the spousal benefit. He receives half of her benefit until his age 70. The only thing though is that I don’t know what year they were born for him to claim a spousal benefit. 1954 is the cutoff.

Al: But if she’s already claiming, it doesn’t matter. At age 66 he can claim the spousal and then switch to his benefit at age 70.

Joe: Yeah but the restricted application is only available to people that were born in 1954 or earlier.

Al: I thought once one is receiving payments, the other can get the spousal.

Joe: Not a restricted application because then now it’s deemed. It qualified for people that were like born-

Al: Even at full retirement age.

Joe: Yes.

Al: OK. So that’s where I was messing up then.

Can I Switch from the Social Security Survivor Benefit to My Own at Age 70?

Joe: We got a question. Let’s see from Deb. She emailed in. We don’t know where Deb’s from. She emailed Info@Pure Financial. So I guess we don’t know. I guess Andi didn’t go snooping around.

Andi: Hey, I was told not to anymore. So I don’t.

Joe: Got it. That it was kind of creepy. “Hi all. Been listening for a few years but need some clarified, need something clarified. When I retired at 65, I retired with survivor benefits as I am a widow. However, I worked for many years actually get a pension from one employer after 24 years. But am now going to be 70 this year. Can I swamped my own Social Security retirement rather than Survivor? To be honest, I have no bills or debts, no health problems, own property in full and I have never pulled anything out of my 401(k), no need. At what age must I pull from the 401(k) and how much? Thanks for all the valuable info over the years.” OK. So when she retired at 65- she’s 70 now, so five years ago. She took the survivor benefit which would be the husband’s benefit versus her own. She is now 70 years old and she’s asking if she can switch to her own benefits. The answer is yes.

Al: Whichever’s higher.

Joe: Whichever is higher.

Al: Take it, yeah.

Joe: Because it was five years ago. Because the rules have changed. 2016, I believe is when they kind of changed. File and suspend and deemed benefits and if you’ve already claimed a benefit, and so on and so forth. But she’s good. She claimed her own benefit or claimed the survivor benefit and then her benefit would continue to grow. So yes, she could switch back to her own. I’m 99% positive there. But-

Al:  I don’t see any reason to doubt you on that one.

Joe: And on the RMDs Deb, you’ll have to start taking distributions from the retirement account at age 72. So two more years and then it’s gonna be a percentage- a rough guesstimate, just call it 4% of what the balance is. So if it’s $100,000 you’re going to need to take $4000 out that year. Anything to add?

Al: No. That’s right on. $3700 to be more exact.

Joe: Got it.

Al: But very, very close.

Joe: Very close. You want to take more than less.

Al: If you take less than the amount that you took- that you didn’t take that you should have, it’s a 50% penalty.

Joe: 50.

Al: 5-0.

Joe: 50.

Al: 50. If you should have taken $1000 more in RMD, you got a $500 penalty.

Joe: Okay Deb, thanks a lot for listening over the valuable years.

There are over 2700 rules around claiming Social Security. Since it is one of the most important decisions you’ll make for retirement, it might be a good idea to download our Social Security Handbook. It’ll walk you through 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. Click the link in the description of this episode in your podcast app to visit the show notes and download The Social Security Handbook, yours free from Joe and Big Al and Your Money, Your Wealth®.

Roth Conversions and Medicare

Joe: Let’s go on to Rick from Colorado. “I know another Roth question-” as long as they’re not asking about dependents at 23 and Stimulus. I think we’re-

Al: Apparently we don’t know the answer to that one.

Joe: I think we’re doing all right. “I know another Roth question as if you don’t get enough. First a little background. My wife and I are both 65. I’m retired. She is still working and planning on retiring in April 2021. We contribute to a Roth and plan on doing a conversion from a regular IRA to a Roth this year. Will the conversion count as income to push me over the limit to a Roth contribution? Or doesn’t a swap- or doesn’t a swap count against the income gap?”

Al: Not sure what a swap is.

Joe: Swap.

Al: We’ll keep going. Maybe we’ll figure it out.

Joe: I don’t know. Is that a new term for conversion?

Al: Maybe.

Joe: Swap.

Al: Swap it in. Swap it. Swap it into a Roth. I like that.

Joe: I love it.

Al: Let’s not do a Roth conversion. Let’s do a Roth swap.

Andi: Roth swap.

Joe: We’re swappin’. We’re tickin’ the box. We’re tinkin’. Tinkin’ the box.

Al: Tickin’ the box and we’re swappin’ the conversion. I assume that’s what it means.

Joe: I think so. “Also we are planning to apply for Medicare next April when my wife retires. We currently have our health insurance through her employer. Will the conversion count as income to push our income over the limit for Medicare where we’ll have to pay a surcharge on Medicare? You probably answered the question before but what can I say? Enjoy your show. Love the back and forth and the timely answers. Thanks. And no, I’m not in Wisconsin per my phone number. That psychopath.”

Al: Andi. Google.

Joe:  Just making sure she hunts you down. “We are now enjoying the sun in Colorado. Have a great one.” We got a couple minutes here to answer this. Maybe a minute. So swappin’. So if you do a Roth conversion, it’s not going to affect the ability to do a Roth contribution. So that’s not going to blow you up from an adjusted gross income standpoint.

Al: So it’s modified adjusted gross income for a Roth contribution and you’re right, a conversion does not count in that. So convert as much as you want.

Joe: But it will affect your Medicare surcharge.

Al: That’s right. In two years from now.

Joe: Correct. So two years, if you do a large conversion. Then your wife’s Medicare premiums will be increased depending on how much that you convert. But you can still do a contribution, the conversion won’t affect that. It will affect your Medicare premiums in a couple of years. So swap.

Al: Yeah, swap it. Swap the IRA for a Roth. I like that.

Joe: ‘So doesn’t the swap count against the income cap?’

Al: Depends what cap you’re talking about. There’s different-

Joe: I don’t know. See, because he’s from Wisconsin. I’m from Minnesota. You would never talk like that. You’re swappin’ and the cappin’-

Andi: He picked that up in Colorado.

Al: He’s not Colorado.

Joe: No, he’s not Colorado. Yeah well maybe he picked that up just in Colorado. He’s 65 years old. He’s retired to Colorado Springs. Livin’ the dream.

Andi: They swap things.

Al: They swap in Colorado.

Joe: He got to get the hell out of Wisconsin. Don’t blame him.

Should I Do a Roth Conversion to Buy a House?

Joe: OK. We got one from Joan. No location given. “Big Al. I consider you a rock star in the world of personal investing.”

Al: I already like her.

Joe: I would say personal income taxes. Investing. That’s a little bit of a stretch.

Al: Hey, I’m on the investment committee. My-

Joe: You finally figured out what a small cap versus a large cap was.

Al: I do. I do know that. $250,000,000 capitalization to $2,000,000,000.

Joe: Got it. “I listen to all your-” I mean I like how she just says yours and you.

Al: Yeah.

Joe: I mean how many videos have you done by yourself.

Al: Like 4. But she watches them all the time. She probably mutes you when you talk.

Joe: Exactly. Especially those about Roth conversions.

Al: Yeah.

Joe: OK. “My situation, I will be 63 this year and work part-time, partial retirement. Because of this, I am now in the 22% tax bracket, single. In one of your podcasts, you said to convert to the 24% tax bracket, $160,000 limit since taxes are only going to go up. I want life to be easy in retirement. However I was thinking about doing this to buy a house using cash in a cheaper state. No local taxes, much cheaper real estate, school taxes, etc.. It occurred to me that successful Roth conversions is only as good as how long it is invested after conversion. Is this the best way to unlock cash to buy a house so that I can live on less in full retirement? Or should I just finance again and let the Roth conversion money continue to grow? My info., I have $300,000 in home equity, $260,000 in a 403(b), $250,000 in a IRA, $65,000 in a Roth IRA and about $100,000 in cash. No debt. Don’t plan on collecting Social Security until 65 or 66.”

Andi: Actually, I think she says $30,000 in home equity. Not $300,000. Counting the zeros.

Al: She did. Counting the zeros. Because there’s no commas. Hard to read.

Joe: She doesn’t have commons in any of this.

Al: That’s what I’m saying.

Joe: I’m just really good at looking at zeros.

Al: So Joan sent me a follow up email that says “I did not tell you I would be moving from Pennsylvania to Arizona where the real estate slash school taxes are 1/3 of what we pay. And there are no local or payroll taxes. Also HOA fees are non-existent or a lot less. And I just learned something I never heard before. If I convert from a tax deferred account to unlock ordinary taxes that take my tax bill over a lousy $1000 the IRS will attach penalties to it. I was told I must pay ahead in 2020. I can pay in one lump sum or quarterly. I guess I will need to fill out 1040ES.” And then she says “From one vegan baby boomer to another.” We share that as well. Love, Joan. No, she said “Thanks again, Joan.”

Andi: No wonder she thinks you’re a rock star.

Al: So anyway-

Joe: Vegan rock star.

Al: Yeah apparently.

Joe: Well, we need to know how much money Joan spends. That would help.

Al: I guess from based on the information we have- she’s saying she’s in the 22% tax bracket right now. Should she convert-

Joe: – to the top of it.

Al: – to the top of that bracket? Well, if you’re in the 22% bracket now and-

Joe: She wants to convert to the top of the 24%.

Al: Maybe. Maybe at least to the top of the 22%, maybe 24%. If you’re in the 22% bracket today you’re going to be in the 25% bracket or more in the future so it would seem like it’s a good deal. Furthermore, the market is not doing that well, you’d actually rather convert while the market’s low so you get that growth and recovery in a Roth IRA. So I kind of like that. But it’s kind of then tied into I guess a home purchase? And maybe there’s- let’s see how much does she have in a non-

Joe: $100,000.

Al: Or $10,000. $10,000 in cash and regular mutual funds, so there’s only so much to go around. So I don’t know how much she’s gonna put down on a new home but I’m not against financing. A lot of folks don’t want to have any mortgage debt in retirement. To me that’s- I don’t have any problem with mortgage debt in retirement as long as it fits within your budget. Interest rates are really low right now. Arizona actually has some really good deals on homes. So I would probably finance it and do as much Roth as you can afford. That’s what I think.

Joe: But I don’t know. She’s also asking- she’d like to do a conversion and then take the money from the conversion.

Al: I didn’t really quite get that. I’m just going to assume that what she’s asking is she only has so many resources to pay the tax versus the home. Although at the same time there’s not enough money in her cash account, unless I’m missing something.

Joe: She’s got- well she sells a home. It’s $30,000 there. Cash, $10,000. That’s $40,000.

Al: Estimate-

Joe: Put that as a down payment then finance the rest.

Al: Yeah maybe that’s it.

Joe: You do a conversion. Does it make sense for her to do a conversion? She’s got $500,000 in retirement accounts. It all really depends on how much money that she’s spending.

Al: I know.

Joe: Because let’s say if she’s only spending $40,000 it might not make sense for her to do a conversion because she’s going to be taking distributions from the retirement accounts. The RMDs is not going to push her up into a higher tax bracket.

Al: Right.

Joe: It’s just I think there’s numbers missing from the equation.

Al: We also don’t- we don’t know what her income is from working part-time. When she takes Social Security, will that replace it? So we kind of have to look at some tax brackets before and after with current earned income. But anyway I don’t have a problem with financing, number one. And number two is I like the idea of converting in the 22% bracket, even 24% depending upon your situation. Now it’s a little bit more tricky in this situation with let’s say $250,000 in an IRA because if you’re talking first year required minimum distribution at age 72-

Joe: She’s got $250,000 in a 403(b) too.

Al: Oh, I missed that. So $500,000 total. So you’re talking about $20,000 of income. Which can be a lot but it may not be enough to throw you in the next bracket we’d need to know what the other income looks like.

Joe: So 24% might be a little aggressive.

Al: Yeah, 24% probably is aggressive 22% may not be.

Joe: Okay cool. Well thanks a lot Joan for the-

Al: Thank you for the compliment.

Joe: Thank you for including me in your email.

How to Use Asset Location to Reduce Taxes

Joe: Richard emailed Big Al. “Hey Big Al. Appreciate your show.”

Andi: His show.

Joe: I know.

Al: That’s the second one we’ve had. How many ones did you get this week?

Joe: I got zero. Because I don’t really care for Richard, Richard’s your… Nevermind. “For retirement I have my aggressive growth in my Roth, my non-aggressive retirement in my traditional IRA, per your recommendations.

Al: I probably did say that.

Joe: Because of contribution limits to your IRAs, I had to put about 1/3 of my aggressive growth savings for retirement in a taxable account. My plan is that once I get to retirement age when I want my retirement savings to be less aggressive in general, I figured I would then move those aggressive funds to the taxable account to more secure investments. Then I realized that to move them I would have to sell them which means I’m going to have to pay a lot of taxes to do so. Bummer. Is there a good strategy that I can employ that would reduce my tax burden? My annual income varies greatly from $30,000 to $100,000, depending on how much I work. Thanks for your help.”

Al: We don’t know how old he is.

Joe: I have no idea. So Richard writes you and it’s a very bad email. Because there is very little info here.

Al: We don’t have a lot of info but let’s do the best of what we do know.

Joe: So he’s talking first about asset location.

Al: I probably did say in a prior podcast is the way we think about asset location is you put the most aggressive asset classes in your Roth. And by aggressive what I mean is those asset classes that have the highest expected return. I don’t mean some crazy investment that’s a long shot. I’m not saying that. The asset classes that have the highest expected return you put it in the Roth. The asset classes that have the lowest expected return that generally produce ordinary income, you put in your IRA 401(k) and then everything else goes into your non-retirement account, non-qualified account. And so for some people they have 1/3, 1/3, 1/3. It works out really well. For some people, they have almost all money in a retirement account and very little elsewhere so everything’s sitting in their retirement account. You just have to go with what you have. So in this particular case it looks like Richard, based upon his asset allocation that he wants to do, he’s going to have to put some higher expected asset accounts in his non-qualified, which I’m ok with. Because when you do sell them, it’s capital gains. And so if you do want to rebalance them over time just to reduce some risk, again it’s still capital gains. You do tax lost harvesting when you can. That lessens the tax bite on that and I wouldn’t really necessarily upon retirement all of a sudden reallocate everything in one fell swoop. You can do this much more gradually. So I guess that’s what I would say.

Joe: Cool.

Strategizing is what it’s all about to make your retirement dollars stretch as far as possible! Download our free guide on Why Asset Location matters from the show notes at YourMoneyYourWealth.com – find out in more detail what asset location is, how it works with portfolio rebalancing, and how asset location may reduce the taxes you pay on the assets in your portfolio. Click the link in the description of today’s episode in your podcast app to get to the show notes. Got questions? You know what to do – click Ask Joe and Al On Air in the podcast show notes and send ‘em on in.

Should I Consolidate My TSP and IRA Accounts?

Joe: We got John from Indianapolis. He writes in. “I’m a retired military and had contributed to TSP while on active duty as well as after tax contributions to a USAA IRA. I have about $100,000 in my USAA IRA and considering transferring into my TSP to consolidate. I opened a traditional IRA with Fidelity and contributed my 2019 $7000, over 50, high earner so this was non-deductible contribution. I’d like to transfer my $7000 to a Roth. My understanding is that the TSP is not included in the basis for all traditional IRAs but the USAA would. Question, if I transfer my USAA IRA into my TSP and then transfer the $7000 into a Roth, is my previously USAA IRA, now in the TSP not included in my basis?”

Andi: Wow.

Joe: So what he’s asking about the pro rata and aggregation rules in regards to doing a Backdoor Roth IRA.

Al: Yep.

Joe: So the answer- I don’t think he keeps- have to tell us it’s USAA. I could care less where the hell the money is.

Al: Well he distinguishes. He’s got a second IRA with Fidelity.

Joe: But that’s his non-deductible IRA.

Al: I’m aware of that, yes. Anyway, the answer is yes. John, once you get the money into the TSP from your IRA it doesn’t count in that aggregation rule. And so if you’re only left with the $7000 with basis in the Fidelity IRA you can then convert that and then have that be tax free. But a caveat there is you have to- the testing date for IRA basis is the last day of the year. So sometimes people do this backwards. They do a Backdoor Roth in March and then in November they retire and they roll their 401(k) to their IRA. Well it’s the IRA balances at December 31st of that year to determine this rule. So just make sure you don’t get caught in that one.

Joe: Very good point. Very, very good point. So you can have an IRA- multiple IRAs up until December 31st. You consolidate, put it into the TSP plan like he does and do a Backdoor Roth and he’s fine.

Al: Yeah that’s fine.

TSP to Roth Conversion

Joe: We got Tiana? Is that how you pronounce that?

Andi: Sounds good to me. Tanai.

Al: Tanai.

Andi: Maybe it’s Tanai.

Al: I’ll go with Tanai.

Joe: Tanai. Cool. It’s kind of a cool name.

Al: Yeah, like it.

Joe: Tanai. Huh. Thousand Oaks, California. “Hi Joe and Al. I’m 63 years old and worked for the post office.” My aunt worked for the post office for 30 some-odd years. “I have a TSP 401(k) through work and a TSP Roth. I want to convert my TSP 401(k) to my TSP Roth but they don’t allow it. Is there another way to convert my TSP 401(k) to a TSP Roth? I know I could open a Roth IRA. But I would only be allowed to contribute $7000. I want to fill up the 24% tax bracket though which is much more than $7000 and that’s why I would like to convert. Thank you for any thoughts on this matter that you can provide. I absolutely love the show and have greatly appreciated the knowledge you guys provide.”

Andi: Nice.

Joe: Well I hope I didn’t blow up Tanai’s name.

Andi: I think you’re getting it right now.

Joe: You think it’s Tanai.

Andi: I think it’s Tanai. Tiana is definitely not right. Looking-

Joe: T-A-N-A-I.

Al: You’d have to have an ‘n’ there.

Joe: Tiani.

Andi: I think it’s Tanai.

Al: Tanai. I’ll go with Tanai.

Joe: Have you ever met a Tanai?

Al: No.

Andi: Well you said Tiana first, which would be T-I-A-N-A.

Joe: But you said ‘yeah that sounds good.’

Andi: It’s because I actually wasn’t looking at the sheet at the time. So just trying to give you the benefit of the doubt. Then I saw it and went ‘wow you’re wrong’.

Joe: It’s T-A-N-A-I.

Andi: Tanai.

Joe: 4 Here’s what I would do is- but I know that they’re not gonna like the answer because everyone loves a thrift savings plan. You cannot convert a thrift- remember that one guy? He was ‘oh you made sound so difficult’.

Andi: Yeah.

Joe: And they he’s like ‘yeah, it took me two minutes to do it’ and it completely blew himself up to a full distribution.

Al: I do remember that.

Joe: So TSP does not allow a conversion. So what you’re going to have to do is get it out of the TSP. You’re gonna have to do a- because you’re 63 years old, you can do a one time in-service withdrawal. Take the money from the TSP 401(k), move it into an IRA. And then from the IRA you can convert it into a Roth IRA. At this point the TSP 401(k) does not go into the TSP Roth as you just noted. So you have to get it out of the TSP. So you gotta open up two IRA’s, move the TSP into the IRA and then open up a Roth IRA and then just do the conversions there. You could get very low cost funds as well if you like to manage this stuff on your own. Everyone’s like the TSP, so great which is a good plan. But to inhibit- just the restrictions that it has- you can still buy Vanguard U.S. stock market fund for just about the same cost as that.

Al: And I guess if you like the TSP just do an in-service withdrawal on part of it. That’s the part that you want to convert.

Joe: I would do it all because you probably want to do conversions throughout maybe.

Al: Well I’m thinking, well I guess Tanai didn’t say when she’s going to retire, but-

Joe: 63 years old, works for the post office.

Al: When she retires then she could do the withdrawals, in-service withdrawals, not in-service, just rollovers at that point.

Joe: No.

Al: No? Is it one time?

Joe: Well, in-service.

Al: Well if she retires, I guess that’s what I’m saying.

Joe: You’re going to do like little baby rollovers from- I don’t- That’s a good question. I don’t think- You know what? I do know that answer but not off the top of my head.

Al: Okay. Well that’ll be for sure 274.

Andi: And by the way that episode with the guy that was said it was so complicated was episode 270. And that was Cliff in Wisconsin. Said ‘why is it so complicated?’

Joe: Dude’s from Wisconsin. Of course he blew it up.

Andi: And Tanai might be male, by the way guys.

Joe: Did I say ‘her’?

Andi: Al did.

Al: Oh.

Andi: Several times.

Joe: Because I said Tiana. And then he was just thinking about it like a beautiful princess.

Andi: No that’s Tiara. Different.

Joe: Whatever.

Al: I think I was thinking Rihanna.

Joe: The pop star.

Tax Planning Strategies Beyond Roth Conversions

Joe: We got Craig writes in from Los Angeles, California. “Joe, Big Al and Andi. I’ve been listening to your podcast for a couple of years, both fun and informative. Being very careful with my spelling, grammar and terminology so as not to be on the fun end of Joe’s stick.”

Al: Oh, there’s no guarantee of that, Craig, you’re probably got to be on it.

Joe: Thank you. Very good grammar and terminology.

Al: So far.

Joe: “Andi. Keep him honest.”

Andi: On it, Craig.

Joe: OK. “Anyway, I’m 58. My wife 57, both retired with two young adult children in college. Currently have $4,500,000 tax-deferred retirement accounts, 401(k)s, IRAs and will receive about another $3,000,000 in qualified pension payments, 5-year period certain, that will roll over into our traditional IRAs over the next four years.” Wonder if Craig works for like Raytheon or-

Al: I was thinking well I don’t know- LA- I was gonna say Qualcomm but that’s not LA. But some technology company that hit big with his- he had company stock in the plans. That’d be my guess.

Joe: Now it’s a pension, 5-year payout that can get rolled into an IRA, like Raytheon has that pension.

Al: Actually. We’ve seen that. Could be Raytheon.

Joe: We have about 100 Raytheon employees as clients. “These amounts are evenly split between my wife and I.” So they both work for the same company. A little romantic around the workplace.

Al: Did they meet at the company?

Joe: I would imagine at the watercooler.

Andi: You’re such a gossip.

Joe: I guarantee that’s what I happened. I don’t know, Craig. You tell me if I’m right. “I have begun Roth IRA conversions this year up to the 24% tax bracket and plan on doing them until my RMDs kick in. With the SECURE Act eliminating the Stretch IRA, what else can you recommend to tax efficiently reduce and/or protect the legacy on our tax deferred accounts? My modelling suggests-” Okay, definitely-

Andi/Joe: engineer.

Al: I’m thinking Raytheon. I think you’re right.

Joe: “-tax deferred accounts will remain sizable even with the conversion strategy. And I’m concerned about the taxes on my heirs especially in the case of our premature deaths; life insurance, term, children as partial primary beneficiaries, retirement accounts, accelerated gifting. Appreciate your thoughts.” Okay so I get it.

Al: So he wants some advance planning since his IRA accounts could be gigantic when he passes.

Joe: Yes they’re going to be huge. Because he’s young.

Al: He’s young. And so these are just keep growing assuming that he’s not spending all that- it is just going to keep growing.

Joe: So he’s got 40 years of this growth and he’s only going to be taking a 1% or 2% on it. And then it’s all deferred. And we see this all the time. It’s looking at here we saved a good chunk into the 401(k) plan. We got pensions. We got everything else. Everything is deferred. Everything is going to ordinary income. And now I’m converting to the top of the 24% tax bracket. That 24% tax bracket it’s pretty wide open. I mean it’s up to what, $400,000 of adjusted gross income, just under that?

Al: Yep.

Joe: So I think that’s definitely the right play. But it’s still not enough as he’s modeling.

Al: And it wouldn’t be.

Joe: He’s seeing this thing and it’s like ‘man, I can’t stop the bleeding here. I’m just trying to- his buckets of water are full and he’s got a teaspoon to try to get it out.

Al: It’s a great problem to have but it’s a big tax time bomb.

Joe: So a few things that you can do that we would probably recommend in this situation. I do believe that life insurance would probably make some sense. A second-to-die life insurance probably on you and your spouse’s life where you could take and let’s say you calculate- let’s call it the required distribution. Or whatever dollars that you’re not going to spend. So he’s already kind of running the numbers here. So Craig here’s what you do. You run the numbers based on what your income is, what your expenses are and then whatever your surplus is. And then you reinvest that and then you can model this thing out until your RMD age. Once the RMDs hit, the required distributions, his surplus is going to be pretty high. So then you could look at here, I can cover all of my needs, all my spouse’s needs, if the market blows up or whatever, assuming a fairly low growth rate, a very high inflation rate, just super conservative. And then you could see how much money is kind of getting lost to taxes and how much money is left over. And then you can kind of take a present value calculation of that and then you can use that to buy a life insurance contract, $2,000,000. It would probably be a lot more than that because they can afford the premium. The cost of insurance would be pretty low because it’s on you and your wife’s life and you’re still young at 57. And then the death benefit doesn’t get paid out until both of your deaths to the children, tax free. So that’s a way to leverage it a little bit. You could get it outside your estate as well.

Al: What about having a charitable remainder trust be the beneficiary?

Joe: You could do that as well.

Al: Because that’s a- I’ll say that again charitable remainder trust, would be the beneficiary; maybe not of the entire IRA. But at least of some of it. And so what would happen there, upon your death it goes- the proceeds go into a charitable remainder trust and you have the kids have- you have that one for- I guess, how many kids? Two kids?

Joe: It looks that way. Yeah.

Al: You have to have two trusts. Because you have a single beneficiary. But then they could get a payout over the course of their lifetime. So it would be almost like the Stretch IRA through a charitable remainder trust. There’s some downsides. You’ve got to set up the trust, which is expensive, and you got to pay for the accounting and taxes to file a tax return each year. But that could be something. The dollars here are sizable enough that might make sense.

Joe: You could accelerate some gifts but you’re still- that doesn’t help you because everything is in qualifying accounts. So you’re going to have to pay the tax to give it to the kids and the kids are going to be the lower tax bracket and blah blah blah blah. But when they inherit it, it’s going to be over 10 years. And I’m guessing that once Craig dies is that the 10 years now something a lot shorter-

Al: It could be five or one or less.

Joe: So appreciate the question, my friend. Good luck with all that. Hopefully that gave you a little food for fodder.


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