Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:05 – Tax-Free Roth Strategy When in the 32% Tax Bracket? (Hawkeye & Elle Woods, Atlanta)
• 12:28 – Limited Time Special Offer: Download the DIY Retirement Guide before the Special Offer changes on Friday, Oct 11!
• 13:31 – Spitball on Roth Conversions vs. RMDs, And Should We Buy More Bonds? (Clark & Ellen Griswold, State College, PA)
• 27:16 – Calculate a Free Financial Blueprint, Learn About Pure’s Financial Assessment
• 28:36 – Should We Do 3 Huge Roth Conversions to Reduce Future RMDs? (Tom, Las Vegas)
• 37:59 – Outro: Next Week on the YMYW Podcast

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Transcription

Intro: This Week on the YMYW Podcast

Andi: Hawkeye and Elle are age 61 and in the 32% tax bracket. How should they get money into their Roth accounts for tax-free retirement income? Clark and Ellen are 69 and 68, expenses will pretty much be covered by their fixed income, but they’d like to leave Roth money to their kids. Should they keep converting to Roth, or use required minimum distributions for their living expenses? Tom and his wife are 73, and fixed income will cover their retirement spending too. Is there any advantage to them to make three huge Roth conversions beyond their marginal tax bracket to reduce future RMDs? Should they keep things simple by leaving their money in an S&P 500 Index Fund? That’s today on Your Money, Your Wealth® podcast number 498 – our first official video podcast! You can listen as you always do on your favorite podcast app, or watch us right now on YouTube. If you’ve got a money question or want a Retirement Spitball Analysis, click the Ask Joe and Big Al link in the episode description and send ‘em on in. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Tax-Free Roth Strategy When in the 32% Tax Bracket? (Hawkeye & Elle Woods, Atlanta)

Joe: We got Hawkeye and Ellie. Ellie Woods from Hotlanta, Georgia.  Let’s see. It starts out a little negative.  “Sent this 3.16.2024, but don’t believe I’ve ever heard the spitball. Did I miss it?”  Well, I don’t know. That was a long time ago. It was almost a year ago.

Andi: You know what? I missed it. For the first time ever, I completely missed the email from Hawkeye and Elle Woods in my inbox and so it didn’t get to you guys until now, which is why it’s at the top of the list. So sorry about that, Hawkeye. Hopefully we’ll get you some good answers.

Joe: All right, here we go. Let’s see.  “Please advise. Okay, so married, we’re both 61, two kids, younger one graduates college in May of 2024. I’m an academic-“

Andi: Internist.

Joe: Internist. What’s an academic internist? Apparently I’m not an academic internist.

Andi: It’s a doctor.

Al: Yeah, well, internal medicine is, I mean, it’s a doctor, so academic means probably teaches it.

Andi: So I believe Hawkeye and Elle Woods is in reference to what they do for a living.

Al: Okay.

Joe: Hawkeye from M. A. S. H.?

Andi: Uh huh. And Elle Woods from Legally Blonde.

Al: Oh, Okay. Okay. Okay. Very good. Now we’re with you.

Joe: Now we’re with you. Internist. That’s what I’m going to-

Al: Internist? You want to be an internist?

Joe: Yes.  “-doing patient care and teaching residents, medical students. My wife is a lawyer working for herself in our home since 2009, when her firm reduced staff. Her early financial projections had her retiring at 45, then 50, then 55. Then I just stopped.  Since the gym reopened, I resumed biking to work two days a week. Otherwise, I drive a 2008 Mercedes E350 bought used in 2017 with 18,000 miles on it. 8000. Sorry, can’t resist. Wife rarely drives the 2016 Mercedes GLC 300 gifted by her parents in 2019. Never thought I’d ever be driving a Mercedes, let alone have two in the garage. On Friday, Saturday evenings, I will have a James Bond martini.”  All right. “A 3 parts Gordon, one part vodka.  Whatever second shelf from the bottom, with a splash of white-“  I don’t drink James Bond’s martini, so I’m not sure what a white Lillet is.

Al: Lillet.

Joe: Lillet.

Andi: Apparently it’s a tonic wine, which is basically vermouth.

Joe: Oh.  Well, I know Vermouth, but that sounds a little fancy-nancy to me.

Andi: Yes.

Joe: It’s probably because he’s a, what is he again?

Andi: He’s an academic internist.

Joe: Internist.

Al: Yes.

Joe: Academic internist.

Al: Right. I know. It’s something you always- you wanted to be that or a financial planner?

Joe: Well, it was, you know, it was one or the other and we know where I, where, where, where the apple fell there.

Al: Yeah. We do.

Joe: All right. “Ellie enjoys an occasional dry cider. Total assets, $7,000,000, consisting of $5,500,000 in tax-deferred accounts, $230,000 in Roth accounts, $520,000 in a 457(b) and $820,000 in a brokerage account, with about $266,000 of that in cash.” Okay. “2023 workplace retirement contributions totaled $147,000, all tax-deferred, $520,000 403(b), $22,000 in my 457, $73,000 to the wife’s 401(k), also did backdoor Roths for the past few years, $17,000 for 2024. Mortgage has a $310,000 balance on a 2.65% rate for another 27 years. According to Quicken, we spend $200,000 per year, but I think it’s less, maybe $160,000, $180,000. I’m planning to drop to halftime in January 2025. Unclear when I will fully retire, but let’s say January 2026.  Unclear date for my wife.  2023 AGI was $428,000. For 2024, assume our gross income, AGI, plus pre-tax retirement contributions is the same. In 2025, it will drop about $100,000 and then drop another $115,000 in 2026.” All right. “Social Security should be about $40,000 a year for each of us. Likely wait till age 70. Currently in the 32% federal tax bracket, not likely to change until 2025 at the earliest. If we reduced tax-deferred retirement contributions, we’ll hit 35% thresholds. Had mostly done tax-deferred retirement contributions given that we are in the 32% tax bracket. Plan on doing Roth conversions when we drop to the 24% tax bracket, but that’s down the road. Not sure we have a lot of space to reduce the tax-deferred assets, particularly if one of us passes, then it becomes a single tax brackets. My questions are, should we continue to maximize the tax-deferred contributions, at least until we drop to the 24% tax bracket? If so, should I take advantage of the 457(b) catchup option and contribute $46,000 a year for 3 years? Or should we do some combination of Roth and tax-deferred? Or stop tax-deferred completely? Should we change my wife’s 401(k) plan to a custom plan that accepts voluntary after-tax contributions and do your favorite version of the Roth IRA, the mega backdoor?  Any role for in-plan Roth conversions in my 403(b)? Bonus question-” Oh, this is exactly what we needed.  “-which may be omitted for time.” Yeah, we’re only 20 minutes in here. “Any reason to pay off the mortgage before 73, if ever? The rate is phenomenal, and I would think the cash is better used to help with Roth conversions down the road to deal with sequence of return risk. Looking forward to hearing your spit ball. Thank you very much.”  All right. Hawkeye, hell of a job saving some money, but it’s all in tax-deferred accounts. Yeah. $5,500,000. He’s 61 years old. Wife doesn’t know when she’s going to retire. She’s an attorney works at home, combined income is $450,000, so what, she makes $225,000 and he makes $225,000, something like that?

Al: Well, they didn’t say, but yeah, we’ll go with that for now.

Joe: Well, if she’s going to continue to make a couple hundred thousand dollars a year-

Al: And he’s going to go to halftime. Yeah, you’re probably right.

Joe: So they don’t need any of these dollars, it looks like, at least for the next 5 to 10 years.

Al: Right.

Joe: So, they’re 61, in 10 years they’re 72, that’s going to be $11,000,000, $12,000,000, potentially, if they get like a 6% to 7% rate of return, depending on how much money that they continue to save in their retirement accounts.

Al: Even if they don’t save anymore, just rule of 72, it’s going to be over $11,000,000 by the time RMD age comes, comes in.

Joe: And they won’t need to touch any of those dollars it seems like from now until then, because she’s going to continue to work and he’s going to work part time. And then he thinks he spends $150,000 to $200,000. If she makes that, I mean, it’s still a small distribution compared to the liquid assets that they have.

Al: Right. Yeah. So yeah, obviously they’re fine, in terms of investments for their spending, but the real question is what do they do now? They’re in a high bracket. Should they go Roth? Should they stay deferred? What do you think?

Joe: Well, let’s just assume that the tax-deferred assets at RMD age is going to be $12,000,000 bucks.

Al: Yeah.

Joe: Well, that’s a big RMD, right? That’s like $500,000.

Al: That’s about $500,000. Yeah.

Joe: So that’s ordinary income plus Social Security on top of that. I mean, do you think they’re going to be in a lower tax bracket at RMD age than they are now?

Al: Not unless they do a lot of Roth conversions at some point.

Joe: Right. So it’s either planning over the next 10 years of how much that they can get out to keep them out of the top bracket.

Al: Right.

Joe: I would, I would try to go all Roth right now because of the time value of money. I think we’ll carry that. You have to run the numbers here, but I just looking spit balling this, they’re always going to be in a high tax bracket. And if tax rates go up, It’s going to affect them more than someone in the 12% or 24% tax bracket in the future. They’re gonna, they’re gonna tax higher at the higher rates. So, I would try to revert from going deferred and do all Roth. I would do the mega backdoor in the wife’s retirement plan that she has. It’s a solo 401(k). I would change the contributions to Roth. I wouldn’t probably do any conversions, but I think I would switch it all. That’s just me and my- if this was my personal situation, which there’s, I’m not even close to this personal situation, because I don’t even know how to pronounce what he does.

Al: Well, you can dream about it. Okay. So, yeah, I get it. And there’s a certain logic in there and I would do totally the opposite.

Joe: You’d still go deferred?

Al: I would. Yeah.

Joe: Then you would convert?

Al: I would, I would, when I retired. So, so like, let’s say in 2025, I’m working halftime. Now there’s some room in the 24% bracket. Now I’m starting to do some conversions, or at least at that point, I’m, I’m going to go Roth on my contributions. I basically want to fill up the 24% bracket and then 2026, maybe I’m completely retired. The problem is the tax rates are scheduled to go up. Will they go up? Will they not? Will they be extended? Who knows? So, this, this is a really, a hard one, because it’s hard to do conversions when you’re in a high tax bracket, but they’re going to be in a high tax bracket. So what you’re, what you’re telling me, Joe, has a certain amount of logic because of the tax bracket they will be in. I just would have a hard time doing that, given I’m in the 32% bracket, so I would probably keep getting the tax deduction until I was in a slightly lower bracket. That’s what I’d probably do.

Joe: Yeah, but we’re just talking about peanuts. I mean-

Al: Compared to everything.

Joe:  You know what the hell? I mean, it’s like $7,000,000. You, you switch your contributions to Roth. It’s like, okay, well now I got $5 in the Roth. You know?

Al: Yeah. Well, you still got $5,500,000. That’s gonna be $12,000,000.

Joe: Right. I mean, it, it’s not gonna do a ton of damage, but you’re right. You have to do conversions when he goes, part-time.

Al: Yeah. That, that’s what I would do.

Joe: And then he’s looking at rates. will be at 39.6%.

Al: Yep.

Joe: At that probably income level, but we’re predicting the future here. I have no idea what rates are going to be, but if you think rates are going to go up, then you want to pay at lower rates.

Al: Right. So yeah. Yeah. Right. So there’s logic in that, given that we have a lot of debt in our country and will taxes go up? Probably at some point. So I get your logic, Joe, I just would have a hard time doing that.

Joe: All right. I’m sorry it took us a year to answer this.  Hopefully that helps.

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Spitball on Roth Conversions vs. RMDs, And Should We Buy More Bonds? (Clark & Ellen Griswold, State College, PA)

“Hey guys, great entertaining show and better information. My writing is worse than Joe’s reading. So this should be fun.” Oh my gosh.  My reading is so bad. It’s so embarrassing. I don’t know why we continue to do the show the way we do it.

Al: Because it’s entertaining.

Joe: We’re gonna just make an AI person read this stuff.

Al: We should, yeah.

Joe: “We are the Griswolds, Clark and Ellen.” God, I love the Griswolds.

Al: Yeah, I did too.

Joe: Remember? I used to call you Clark all the time.

Al: Yeah, yeah, I think you still do sometimes.

Joe: You are Clark.  “Important facts. I’m 69, Ellen’s 68. We retired 11 years ago. I was an IT manager for a school district. And Ellen, a kindergarten teacher in State College, PA.  We are Penn State University, where Penn State University is located. Go Lions! Go Lions! A little wide out.” You guys didn’t get that reference, did you, Big Al?

Al: No.

Joe: Okay.  Or as the saying goes, “We are Penn State.  There’s an interesting story behind that chant that you could look up here if you’re interested. Here’s the link.” Okay. Yep. I didn’t look that up. Sorry.

Andi: The cheer “We are… Penn State was first used in 1976 when they were inspired by the opposing team’s enthusiasm. And while it took time to catch on, it became a tradition by 1981. It also holds historical significance because it was used in 1946 when the Penn State football team refused to play a segregated game.” And when they were asked why, they said, “because we are Penn State”. In other words, they’re a team. They’re not going to play without their black players.

Al: Okay.

Joe: Very well done, Andi.

Al: How about that?

Joe: “Currently living in Tettesville, Florida.”

Andi: I think that’s Titusville.

Joe: Titusville, Florida. See my reading is top notch.

Andi: I take it Titusville is not anywhere near where you went to college?

Joe: Tired again. I was gonna say Tittysville or something, but I was like, that can’t be right.

Al: Well, you moved the U where the I was, and you, and you skipped the I.

Joe: So, yeah. “We watch all the rocket launches from the driveway.” Alright. “Akron Aerospace Force Station is only 10 miles away.”  That’s cool. “We travel 5 to 6 months a year in Airstream Atlas Motorhome named-“

Andi: Nittany. You know, like the Nittany Lions.

Joe: So if you have an Airstream, are you supposed to name it? Is that the deal?

Al: Some people do.

Joe: Yeah, my best friend Mikey Martin has an Airstream, and he named it.

Al: Do you name your car?

Joe: No.

Al: Me neither.

Joe: No.  Car.  I have to get in my car. I’m like, I have to get in Little Johnny to go down to the grocery store.

Al: When I got my Tesla, I was supposed to put in a name.

Joe: A name.

Al: Yeah. So I didn’t know what to do. So I-

Joe: You called it car.

Al: I put, I put Tesla.

Joe: Oh, yeah. I don’t know. I don’t know if I could hang out with someone that names their automobile.

Andi: Which is worse? Talking about yourself in the third person or naming your car?

Joe: I think it’s both. If someone, if someone names their car, they definitely talk in the third person.

Al: They probably do.

Joe: Joe’s got to get little Johnny to go to the grocery store.

Al: Little Johnny, come on over. We’re going.

Joe: I’ve got to get Clark some new ho ho hogagoggin. Oh gosh. All right, Airstream.

Al: Okay.

Joe: Yeah, his name, was, like, he named it Dolores or something, or Doris.

Al: Oh yeah, I think you’re right.

Joe: Yeah, I don’t know. That’s just out of my league. All right, Big Al.  “It’s not hard to dump your tanks and get rid of the smelly stuff.”

Al: Yeah, well.

Andi: Al had previously mentioned that he wouldn’t want to be in a motorhome because of the fact that you have to do that.

Al: Yeah, maybe I’ll rethink it.

Joe: All right. “We love sleeping in our bed every night.”  Okay. Well, that’s nice. “We have been to East Mount- East-“

Al: Eastern-most.

Joe: Well, thank you. “Eastern-most point, Southern-most point and the Western-most point and the Northern-most point in the lower 48 states.” Okay. So he’s been all over the US.

Al: Yep.

Joe: “Also, we have swam in Atlanta, Pacific, and Arctic Oceans. The Arctic Ocean swim was after a 600-mile one way drive on a dirt road, Tooka Yucca.” (Tuktoyaktuk)

Al: That’s in Canada.

Joe: It’s a really nice place I heard.  Oh boy, this is, this is, this is tough.

Al: Oh, he says “Joe, can’t wait until I hear you pronounce it.” Let me, let me try it. Took, took, took, took, took, took, took. Tuk, tuk, toe, yuck, tuk. Tuk, yuck, tuk, tuk.

Joe: Tuk, yuck, tuk, tuk. “We got two dogs, 13-year-old Australian Shepherd and a 3 year old miniature Berniedoodle. Okay, alright. “We drive a 2018 Jeep Wrangler and the Atlas Motorhome, normally towing the Wrangler. Drink a choice about any dry red wine. Financial stats.” Finally. Jeez. “We’re both collecting Social Security, total about $60,000 a year. We each have a PA State pension, Ellen’s $14,400 and mine $63,000.” All right. “Ellen gets one half of mine if she survives me. Pensions are static and not adjusted for inflation. We have been doing Roth conversions for the last 10 years and have $1,400,000 dollars in the Roth, $277,000 remaining in traditional IRAs, very little in a brokerage account since we use them to pay the tax on the conversion. We have a $50,000 emergency fund, no debts and the house is approximately $600,000. We normally spend $120,000 to $140,000 per year, which is covered or mostly covered by the pension Social Security. The goal is to leave it tax-free to our two kids, but we can spend it if we need it for assisted living or whatever. Hopefully we will be able to live- to leave $1,000,000 each.”  All right, finally, we’re at the que. I’m sweating. Finally, are we at the question. “Should we keep doing Roth conversions or just use the RMDs for living expense? I had planned to do the conversions until I heard you say there were reasons to have traditional accounts. Please explain that again.”  All right. Well not when you have pensions that are already going to push you in the 24% tax bracket. What does he got? $63,000. She’s got $14,000. Call that $70,000 plus another $60,000 of Social Security, so they’re in the 24%.

Al: Yeah, it’s $137,000 of fixed income already.

Joe: Right.

Al: Yep, so that’s 24% bracket, or 22% bracket currently.

Joe: So, yeah, I would do conversions at the top of the 22% tax bracket. The reason why you want to keep money in an IRA is that you can take those distributions out tax-free in some cases, or you use the 10%, or you use the 12%. But if you’re already, if you’re getting the 22%, which will be the 24%, it probably makes sense to convert it to 22%. And then when it gets to 24%, maybe you don’t.

Al: So I think I would let it be.

Joe: Okay.

Al: And, and here’s why, because if the, if the pensions don’t, they’re not adjusted for inflation. So eventually, if it’s only that, they’ll probably pop down to 12% or future 15% bracket and if they’re going to use the money for either the kids or for health for like a retirement, you know nursing home then that’s fully deductible anyway, so if you pull it out you get a tax deduction. And the RMD you know, whatever it’ll be $10,000, $12,000. It’s not going to make that big a difference, but you could actually go either way, but I, I might be inclined to leave it in. And that’s why the reason to leave it in is because if you might need it for healthcare, you get a tax deduction anyway, which is offsetting.

Joe: Yeah. It’s $277,000 compared to the $1,500,000. He’s already having Roth. It was, if it was reversed. Yeah.

Al: If it was reversed, of course you would. Yeah.

Joe: All right. “I’ve been to conversions up to the IRMAA limit. Now laugh at me.” Why would we laugh at you?

Al: No, you did well.

Joe: Because you’re at the IRMAA limit? “We could convert the $277,000 over 5 years and have everything in the Roth, and non-taxable for us and the kids. The RMDs. If we don’t convert properly, we will not change our tax brackets, but tax rates may increase. Second question.” Okay. “The $1,100,000 of Roth accounts and the traditional IRAs are invested in Fidelity, professionally managed accounts, 95% Fidelity mutual funds, which are 55% to 65% US stocks, mutual funds, 25% international mutual funds at 10% to 20% bonds. This has a fee of 0.7% FYI, anti-Fidelity mutual funds are returned to reduce the fee and the 0.7% is net of those fees. The other Roth, the other Roth, $300,000, I manage with three or four fund plan, 60 total.  The $300,000 I manage with a 3 fund plan, $60,000 in total US stock, 20% international and 20% bond.”

Al: I think it’s 60%.

Joe: Thank you.  “I picked a lower bond percentage because I had no plan to spend the Roths. Now I’m wondering if I should increase the bonds in the personally managed accounts to 20% or 30% of total investments. So if stocks take a dump, I can sell the bonds to buy stocks at a lower price, or even personally invest in those 3 funds. Any spitball will be much appreciated.” Alright, Clark.   Heck of a job.

Al: Yeah, very good job.

Joe: So I think we talked about you could go either way on the conversions.  So he’s asking us about the Fidelity account. Should he keep those there? Yeah, that seems fine. I don’t know.

Al: Yeah, the Fidelity account seems fine.

Joe: Should he have more bonds?

Al: I guess that’s the real question. Should he have more bonds so that when stocks go down, he could then buy bonds, I mean, buy stock at lower prices, which there’s some logic there. However, if you just hold more stocks long term, you’ll do better long term. So, if you don’t necessarily need it and-

Joe: Here’s the problem. It’s the stomach factor.

Al: Well, it’s true. Yeah, because now Clark has a lot of money sitting in Roth accounts that is 100% tax-free that he’s going to be looking at the balance again when he’s on his Airstream.

Al: Right.

Joe: And going to the Northern-most point and the Southern-most point and the Western-most point of the whatever.

Al: Yeah.

Joe: And so he’s going to log on again, and then if he sees that account down 20%, 30%, that $1,200,000 is now let’s say $800,000.

Al: Yeah. Then what?

Joe: What’s he going to do? He’s probably going to freak. So, or just something, right? So having that much risk exposure, I think is the right move because he doesn’t need the money and it’s for his kids.

Al: Correct.

Joe: However, is he going to have the discipline to, to maintain that strategy?

Al: Yeah.

Joe: I don’t know if most people have that discipline.

Al: Yeah. And that’s, I think that’s really well said because yes, that’s the right answer is to stay more in stocks if it’s long term and for the kids, but can you handle it? Right. And, and, oh, only, you know-

Joe: He wants $1,000,000 for each kid. Right. Is that what he says?

Al: Something like that.

Joe: So then you almost get to that $2,000,000 mark and then the mark takes a dump. And then now you got $1,600,000. If you’re like, oh, I almost reached my goal. Now it’s $1,600,000 kids. Now the kids aren’t going to get $1,000,000. The kids will still be fine, but, but I think it’s the, the, the discipline to make sure that they stay the course with whatever strategy that they put forth.

Al: I think one of the ways you can think about this is if you’re a long-term investor, like probably they Clark and Ellen are like, what did you do during the great recession?

Right. And 911 and all these other-

Joe: You know, what they say to themselves. You know, people’s memories-

Al: They’re short.

Joe: Oh, I bought more. Until you met with them in 2008, when they’re like freaking out. I’m not saying that Clark and Ellen were, but right. You know, we talked to so many people. It’s like, okay, well, what’d you do in 2008? Oh, I wanted to buy more. And then you look at it’s like, you see all these losses on their tax return.

Al: Yeah. They sold everything.

Joe: It’s like you sold everything and you went with cash.

Joe: Well, the other thing you see is like when the market’s doing well, as over the last decade, it’s done rather, I mean, there’s been some dips, but it’s done really well. And then people say, yeah, I can handle it. And then the market goes down 50%. It’s like, I can’t handle it.

Joe: There’s no way. I mean, even the most disciplined investors, it goes down 20%, 30%. That’s scary. That hurts.  The more money you have, then you see, it’s like, you got $1,000,000. Now it’s $700,000.

Al: Yeah.  You know, that’s, that’s well said again, because the people that we see that have more money, they worry more, don’t they?

Joe: For sure. Cause they’re totally fine financially.

Al: Yeah. They don’t even need it. Yeah.  But whatever. Anyway, I think that’s right. I think you stay in stocks, but can you handle it? I mean, that’s that’s the that’s kind of up to you.

Joe: All right, good luck. Thanks for the lovely letter.

Calculate a Free Financial Blueprint, Learn About Pure’s Financial Assessment

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Should We Do 3 Huge Roth Conversions to Reduce Future RMDs? (Tom, Las Vegas)

Joe: We got Tom from Las Vegas He writes in. He goes “Greetings Joe, Big Al and Andi. My wife and I are avid fans of your show.” Avid. How can you be an avid fan of this show?

Al: I guess some people like it, I don’t know.

Joe: You think you’re a pretty big star, don’t you?

Al: Not really.  How about you?

Joe: Noe.

Al: You can hardly wait to go to Costco because everyone’s going to recognize you.

Joe: Yeah, you know how much anxiety I would have if I went into Costco? I don’t know what it is because I think I worked at a grocery store when I was a kid.

Al: Oh, you don’t go to Costco?

Joe: I don’t go to Costco. I don’t go to grocery stores.

Al: You don’t?

Joe: No.

Al: Nothing.

Joe: Nothing. I can’t handle it.

Al: You make Rosie do all that.

Joe: I can’t handle it.

Andi: I can’t handle it either. I can’t stand grocery stores. For 13 years that I’ve been with my husband, he has always done all of the shopping, and the cooking, and the cleaning, and I, I’m so grateful because when I go to a grocery store, I need to take a nap afterwards. It’s horrible.

Al: Really?

Andi: Yeah.

Joe: I don’t know if it’s the lighting.

Al: Maybe too bright, just like the studio.

Joe: It’s like, it’s like, I don’t know. It’s like, oh gosh, get me out of here. Then I always pick the line, you know, with-

Al: Oh, the worst line.

Joe: Yep. Anyway, I don’t know how we got on that, but okay.

Andi: Because you were afraid of getting noticed in the store. Somebody coming up to you and saying, you’re Joe Anderson.

Al: That doesn’t happen.

Joe: “We’re catching every new episode and burning through the long list of past shows.  We’re both 73. We have adult children, grandchildren who will inherit our traditional and Roth IRAs.”  Okay. “I have a pension of $75,000 which exceeds our annual expenses. We each currently have $200,000 in our Roth IRA accounts. The combined total in traditional IRA accounts is $3,200,000. In 2024, RMDs was a whopper at $120,000, and the chart shows the figure skyrocketing to $180,000 over the next 7 years and reaching $345,000 before it begins to decline.”  That’s a big RMD.

Al: It is.

Joe: That’s why we’ve talked almost 20 plus years about conversions.

Al: Getting more money to Roth.

Joe Getting more money. Being diversified. Yeah. Tom is living the tax time bomb right here.

Al: Well he is and his pension is $75,000. He’s spending less than that so all this money is extra and so he’s going to be paying taxes on money he doesn’t really need.

Joe: Yep. “We are wondering what you think about us doing a large Roth conversion. Maybe $500,000 per year starting this year. Our reason for wanting to do the conversion is to reduce the future RMDs. We could cut our RMDs in half by doing this over a 3-year period and possibly also reduce an IRMAA after the 3 year plan is completed this year’s RMD will put us right in the middle of the 24% tax bracket converting $500,000 in 2024 and ‘25 should put us about $60,000 in the 37% tax bracket. And who knows where it’d be in 2026. We expect to have enough cash to cover the conversion tax, but if we need more, we can pull more from our after-tax account. We have a Vanguard S&P 500 fund. We have no state income tax and no debt. I’ve heard many times that making huge conversions beyond one’s marginal bracket is obviously not advisable or is usually. We have also noticed that most advice indicates that there is no worthwhile value in conversions after RMDs begin, but we would sure like to hear your take on it.”  Oh, you’ll get my take, Tom. “Do you see any advantage of doing these conversions? One more question, please.” All right.  “If we do not need the IRA, or Roth money to live on and we just want to keep our investments simple, is it reasonable to continue keeping it all in the Vanguard S&P 500 index fund? Thanks for your input. Tom.” All right, Tom. Thanks for the question.  So he needs a strategy.

Al: Yeah, $3,200,000 in IRAs, and so that RMD is going to be up there.

Joe: So he’s doing some projections. It looks like, all right, I got $3,500,000. It’s going to continue to grow at 6%, and I’m taking my RMD out each and every year. It’s going to $120,000, then it goes to $180,000, and then as I get a little bit older, it’s going to go up to about $350,000. So there’s really no way out of these large brackets. So he’s like, well, you know what, why don’t I convert half of it out over the next 3 years?

Al: Right.  That’s what he’s saying.

Joe: He’s like, I got $3,000,000. Let’s go $1,500,000 out. Yeah. Pay the tax over a 3-year time period.

Al: Right.

Joe: What do you think of that?

Al: I wouldn’t do that.

Joe: I would not do that either, Tom. Do not do that.

Al: I would fill up the 24% bracket and I would continue to do that with your RMDs.

Joe: Yeah, take the RMD first and then you continue to convert to the top of that bracket.

Al: It’s no- converting after RMDs, this one is for the kids. So keep doing it, right? Get as much as you can. Keep yourself out of the higher brackets to the extent you can. The kids will be happy you get the Roth IRAs. Maybe you’ll want to spend more someday than $60,000 or whatever the number is.

Joe: Right. Tom, you live in Las Vegas. I don’t know. Just walked down the street.  Put $100,000 on black.

Al: You can’t go to dinner for under $300,000. I mean, $300.

Joe: Yeah. If you convert $1,500,000 over the next 3 years, that’s the, no, don’t do that.

Al: That’s too much.

Joe: Yeah. It’s way too much. you can continue to convert all the way through your entire life. You can do death bed conversions. We’ve done that before too. That’s morbid.

Al: It’s morbid, but that’s because it’s for the kids.

Joe: Right. So let’s say, God forbid, Tom passes a little bit early. You can still do a conversion in the year of death. Right.  Anyway, looking at your situation, great job on the savings. Thank you for listening. Thanks for the, the question.

Al: Oh, the second part of the question, S& P500 index.

Joe: Nah, you’ve got way too much money to be, I don’t know, he’s trying to be Warren Buffet. I don’t know.

Al: I guess. I, here’s what I would do. I would do the total index fund, total stock fund. I do a total international fund.

And if I felt so inclined, I’d do some bonds.

Joe: Yeah, I don’t know. I think I would be a little- you’re leaving money on the table, I think personally.

Al: Well, you really only have one asset class.

Joe: That’s it.

Al: Yeah.

Joe: So, I mean you could- I would want to be a little bit more diversified have some global, you know, exposure. I would if you want to take on a little bit more risk in the Roth accounts. I mean you could be a little bit more sophisticated in the strategy, right? Right and then from a rebalancing perspective, you can manage the risk a little bit more. I mean, there’s a lot of advantages of having, you know, more than one asset class, in my opinion. If he doesn’t need the money. And again, it boils down to the discipline, I think. If you have a globally diversified portfolio, in my experience, people will be more disciplined because it’s not one fund. That one fund goes down, usually if you’re globally diversified, like the lost decade, right? So the S&P 500 over that 10 year period was down 10%. But if you were globally diversified and had money in emerging markets, internationally, had some bonds and things like that, that portfolio actually performed quite well over that 10-year period. So you will probably have a little bit more discipline to stay in stocks and probably achieve a higher expected rate of return over the long term versus maybe just one asset class.

Al: Yeah. And by the way, we’re talking about 2000 to 2010 and that is true. The S&P 500 went down 10% over that 10-year period, but a globally diversified portfolio did pretty decently.

Joe: Did quite well.

Al: Yep.

Joe: Okay. That’s it. We’re done.  Enough of the tongue twisters for today. Alright, movie recommendation for you though, before I leave.

Al: Okay, what do you got?

Joe: I think you’re gonna love this one.

Al: Yeah.

Joe: Ballerina.

Al: No way.

Joe: Nope?

Andi: You actually have switched bodies then?

Joe: You know John Wick?

Al: John Wick, no.

Joe: You’ve never seen John Wick?

Al: No.

Joe: Never heard of John Wick?

Al: No.

Joe: Oh my gosh.  Andi, have you heard of John wick?

Andi: I’ve heard of John Wick. I’m sorry, I have not seen it. I’m a fan of Keanu Reeves and I have not seen the John Wick movies.

Joe: So. there’s 4.  So Ballerina is about, she’s a badass killer.

Al: Okay, sounds like your kinda movie.

Joe: Oh yeah. It was, it was nuts.  I think you’d really enjoy it. Killed like 45 people in like 30 seconds.

Al: I get my popcorn.  My lemonade.

Joe: I think you’ll last about 30 seconds-

Al: Get my pajamas on.

Joe: -watching that one.  Oh, all right. Andi, wonderful job, thanks for everything.

Andi: Thank you.

Joe: Big Al, good to have you back. How was Africa?

Al: Oh, we had such a good time. So many animals, elephants, lions, and giraffes, the whole ball of wax, no tigers or bears, but African animals.

Joe: Got it. All right.  Aaron, good job in the booth there. Thanks buddy.  We’ll see you next time, folks. Show’s called Your Money, Your Wealth®.

Outro: Next Week on the YMYW Podcast

Andi: So there you have it – what do you think of our new video podcast format? What do you think about The Derails happening in real time, instead of at the end of the episode? Leave your honest reviews, comments and ratings for Your Money, Your Wealth in YouTube, Apple Podcasts, Spotify, and anywhere else that accepts them, or just click Ask Joe and Big Al On Air in the episode description and drop us a line. Seth in Montana, Leon in Chicago, Jenn in Ohio, and George and Louise in Illinois, listen next week for answers to your money questions in YMYW podcast episode 499. Then on October 22nd, it’s episode 500. I can’t even believe it! For a hint at what to expect, give a listen to YMYW podcast episode 300 – it’s time for volume 2. Thanks for joining us this week and every week. This show would not be a show without you.

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.

_______

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