Joe Anderson
ABOUT Joseph

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

Alan Clopine

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

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
December 14, 2021

Should those in the 35% tax bracket contribute to traditional 401(k) or Roth 401(k)? Should a self-employed cryptocurrency investor do Roth conversions or tax gain harvesting? Also, a retirement spitball for a couple, age 35, wanting to retire with $5M at age 60. Plus, do the SECURE Act rules for required minimum distributions (RMDs) apply when inheriting an inherited IRA? Finally, comments on some of the proposals in the latest version of the Build Back Better Act, which is currently being considered by the Senate.

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Show Notes

  • (00:59) Contribute to Traditional 401(k) or Roth 401(k) for Retirement? (Shake ‘n’ Bake, TX)
  • (07:10) Retirement Spitball: Are We On Track to Retire with $5M at Age 60? (Alex)
  • (14:43) Do Roth Conversions or Crypto Long-Term Capital Gains to ACA Ledge for Self-Employed? (Johnny G, Iowa
  • (22:50) SECURE Act: Inheriting an Inherited IRA Explained (Eric)
  • (30:27) “A Sneaky Annuity Bill That Will Make Joe Mad” (John, Abilene, TX)
  • (37:41) Can I Make IRA Contributions and Not Convert Under the Current Build Back Better Act? (Frieda’s Boss, Mr Poon)

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Today on Your Money, Your Wealth® podcast 356, if you’re in the 35% tax bracket, should you contribute to a traditional 401(k) or Roth 401(k) for retirement? Should a self-employed investor in cryptocurrency do Roth conversions or tax gain harvest their crypto? Joe and Big Al also spitball a retirement plan for a 35 year old couple who wants to to know if they’re on track to retire with $5 million at age 60. Plus, do the SECURE Act rules for required minimum distributions apply when inheriting an inherited IRA? The fellas also comment on the latest version of the Build Back Better Act currently being considered by the Senate. Visit YourMoneyYourWealth.com and click Ask Joe & Al On Air to send your money questions via email or voice message. We told you voice messages get first priority and you sure did hear that, kicking it off with four voice messages todayl! I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Contribute to Traditional 401(k) or Roth 401(k) for Retirement? (Shake ‘n’ Bake, TX)

Joe: What do we got? Shake and Bake!

(voice message) “Hi Joe, Big Al, Andi, this is Shake and Bake from Texas. So my question today is should I be contributing to the 401(k) or the Roth 401(k) portion of my employer based plan? Here’s some of my numbers. I’m 49 years old claiming head of household because I’m divorced with two kids. They’re both in college, but college is already covered. I have two dogs, Lola, who’s a Cavapoo and Ryker, who is a rescue. He’s a boxer beagle mix. I drive a 2017 Hyundai Santa Fe Sport that’s paid for. I have a steady job. I make $140,000 base, $20,000 in restricted stock units and $80,000 bonus. I have $120,000 sitting in cash, $30,000 thousand in a sinking fund for my next car. I have no debts. The house and the car both paid for. My 401(k) has $815,000 in it. The Roth 401(k) has $58,000 in it. I have a brokerage account with $85,000 and a Roth IRA, which I have been back dooring for about 10 years, it’s got $86,000 in it. So I have 18-20 years left to work. I’m currently in the 35% tax bracket. These last couple of years, I’ve put all $19,500 into the Roth 401(k) portion of my employer plan. Is this the best place or should I be taking tax advantage of the regular 401(k) to help reduce my tax burden now? I go back and forth between the tax advantage of the 401(k) vs. the Roth 401(k), where it can grow for the next 18 to 20 years and help even out the contributions between my various vehicles. I’ll be hitting 50 next year where I can contribute $26,000. I just wanted to level set with you to make sure that I’m going about my investments correctly before I jump off of the deep end and do the $26,000 a year. Thank you very much. Again, Shake and Bake from Texas. Appreciate everything you guys do. I love listening to your podcast.”

Joe: Shake and Bake. Wow!

Andi: Love it!

Al: We haven’t had Shake and Bake before.

Joe: I know what my answer is and I know what Al…

Al: We’re going to go back and forth. You start.

Joe: First of all, I love how Shake and Bake goes “I’ve been backdooring for about 10 years”

Andi: She turns it into a verb, that’s great.

Al: Are we clear we’re talking about a Roth?

Joe: We are. Backdoor Roth IRA. And I’m going with a Roth 401(k), 100%, all day, every day. And here’s my reasoning. Another thing I love about Shake and Bake, she’s super excited about turning 50 so she can put $26,000 in. She’s like, I’m so excited about going 50, because now I can do $26,000.

Al: You got that to look forward to.

Joe: That’s several years… When I’m looking at 50, I’m not thinking about $26,000 a year, I’m like “gosh, I’m too old”.

Al: Oh, yeah, you’re dreaming about it right now.

Andi: That’s why in your entire forties you’ve been saying that you’re in your early 40s, right?

Joe: Yeah, that’s pretty much… still in my early 40s, depending on how you look at it. OK, so here’s why. Even though she’s in the 35% tax bracket, she’s got $800,000 in a 401(k) plan that’s already pre-tax. That’s growing over the next 20 some odd years. So that could double a couple of different times. So let’s say she’s going to have several million dollars in a pre-tax 401(k) account. Would you agree with that?

Al: I do.

Joe: And if she continues to add her $26,000 next year into a pre-tax account, that’s just going to build the overall tax issue down the road. I have no idea what the tax code is going to be in 26 years from now, but I would much rather have a lot more money in a tax free account 26 years from now than in a taxable account. She makes very good income, but she’s also got a very high tax bracket. But she does not–I guarantee you, she will not miss the tax deduction. She doesn’t even feel it. It’s already going into a post-tax account. It’s going into a Roth account. So she’s already used to paying or spending what the paycheck is. Why change?

Al: I agree and disagree. I agree with that last comment. To me, that’s the key. The key is you’re already used to this net pay. If you had extra net pay, would you save it? Most people spend. And so maybe you have a little bit higher quality life, but maybe not. But you end up spending more. People end up spending what their net pay is.

Joe: If she went pre-tax, her paycheck would probably be $500 more per paycheck, right? Because of the tax savings that she’s getting.

Al: So I agree with you there. But I disagree from a CPA standpoint, because the tax rate is 35% plus, well, there’s no state tax because, Texas. So that’s good. And let’s say she’s got $3 million in retirement. What’s the RMD required minimum distribution on that? That’s $120,000. It’s a lot less than what her current salary is. She’ll probably be in a lower tax bracket, but she’s got to add Social Security and maybe there’s pension, maybe not. So that’s the other side of this. That’s the accountant side, which is what tax bracket are you in now versus tax bracket later? So from that standpoint, I would say do the regular 401(k). But I do agree with you, that most people spend their net pay anyway. So if you’re going to spend your net pay and you’ve learned how to live off a lesser net pay by doing the Roth, continue it.

Joe: Right, because the tax savings that you’re receiving by going pre-tax, I don’t know if you’re saving it or if you would save it.

Al: And some people are ultra focused on that, and they save and then they can do that tax arbitrage, their higher tax bracket now than retirement. But anyway, you could argue this both ways.

Joe: I think, Al, people are sick of me reading the questions?

Al: So they’re starting to call them in instead.

Joe: They’re like, “I can’t stand this guy reading the questions one more time”

Al: Well, it’s good for you. You get a break.

Joe: Yeah. I remember the first couple…

Al: You remember when we used to do commercials and it would take us an hour to do 30 seconds?

Joe: Yeah, just a 30 second read. That was bad.

Retirement Spitball: Are We On Track to Retire with $5M at Age 60? (Alex)

All right. We’ve got Alex. He called in.

(voice message) “Hey gang. My name’s Alex and my wife Jessica and I are both 35 and we’re looking for a general spitball and some advice. So to get right into it, the household breakdowns are as follows. Household income is about $180,000 a year, gross. We’ve got $30,000 in our daughter’s 529, $26,000 in 401(k)s, $100,000 in Roth IRA, $600,000 in brokerage account comprised of total US market, world market, and S&P 500 tracking funds, and about $180,000 in cash. We both contribute 10% to our 401(k)’s and max out a Roth each year. I also invest about $500 a month into that brokerage account. Right now, we’re also putting additional $1,500 a month to the mortgage, which we owe $280,000 on, and with the current loan and plan, we will have it paid off in 10 years. So I wanted to know if we’re on track as far as retirement goes. We’re hoping to have $5 million in retirement by age 60. And also, if we should divert that extra mortgage money to the brokerage account, knowing the power of the market and seeing how we could pay the house off still, potentially within that 10 years or before, we still have money left over from the growth, while understanding the risk and tax implications involved. We have a 13 year old chocolate lab, 15 year old Italian greyhound, I drive a 2019 Dodge 2500 Mega Cab diesel, the old lady’s got a 2021 Tesla Model Y performance, both are paid off. And if you haven’t had one, go home and whip up a paper plane, it is the best drink ever. Thanks, guys.”

Al: Heard of that? Paper plane? I know how to make them; I don’t know how to drink them.

Joe: I’ve never heard of it.

Al: So he wants to finance a plan.

Joe: That’s fine. Let’s whip it up. You got a calculator?

Al: Yeah, I got my phone.

Joe: OK, so let’s call it $900,000. They’re maxing out 401(k) plans, so that’s $50,000 a year, roughly.

Al: Well, they’re under 50, though.

Joe: Call it $40,000.

Al: Yeah, we’ll do $40,000. So $900,000, then we’ll add $40,000, which is the payment.

Joe: So you’ve got 25 years at 7%.

Al: 25 years, we do 7%. And future value is… I did something wrong.

Joe: Well, a few things. Do you pay off the mortgage? Do you let it ride? Interest rates are so low right now, I would not necessarily pay it out because it’s only $280,000. If you ever get in trouble, you could pay it out with the brokerage account that you have at $600,000. So I would keep the mortgage as is. What do you got for future value?

Al: $7.8 million.

Joe: $7.8 million. So $8 million, Alex. So you’re definitely on track. What I don’t understand is how the money came to be. If you have $180,000 a year gross income and you’re saving and you’re fully funding 401(k) plans, and you only have $100,000 in the 401(k) plan? So you just started fully funding the 401(k) plans? But you have $600,000 in a brokerage? So maybe you had some stock options?

Al: Yeah, that’s what I’m thinking. Generally this age, that amount of brokerage versus retirement, it’s stock options or inheritance.

Joe: So maybe he works for a tech company. You’re definitely on track. Right now, if you just saved the full $20,000, it’s $19,500 but let’s say $20,000 for you and Jessica into the 401(k) plans, you get 7% on your money over the next 25 years. But the amount of money that you have, you got 8 million bucks.

Al: Yeah, by the way, my first answer was $37 million because I put $40,000 per month. But I realized, no, that’s not right.

Joe: So if you save $40,000 per month, you’ll have $37 million.

Al: You’ll be golden.

Joe: You’ll have Big Al type money. Yeah, I think he’s on track, he’s diversified too. So this is a really good example. If he’s going to save $40,000 a year and all of a sudden all this money grows and he’s going to GM everything into the 401(k) plan, he’s going to have a non-diversified portfolio, from a tax perspective, when he retires at 65. This is why it’s really good to catch people when they’re younger, when they look at a savings strategy over the next 20-25 years. Because most clients, most individuals, when they started saving in their 30s, what did they do? Everything was in a 401(k) plan. And then all of a sudden they come to us and they have millions of dollars in a 401(k) plan and they have very little assets in any other area. So when people start getting this and they’re like, “You know what? I want to be a little bit more diversified”. So it’s not going to be saving everything in the 401(k) plan. He’s already mapping things out. He goes, “I want to be debt free, but does it make sense for me to pay off the mortgage?” Well, you can take $280,000 off today and pay off your mortgage, but you just guaranteed yourself a rate of return of 2.8% or whatever mortgage rate that you have. So over the next 20, 30 years, do you think you could get more than whatever your mortgage is? That’s arbitrage. So you will be paying interest, but hopefully you’ll be making more rate of return in your overall investments that outpays the interest that you’re paying in the bank.

Al: Yeah, I think that’s a good point because people look at their mortgage and they look at how much interest they’re going to pay over 30 years and they think, “man, that’s incredible”, but they haven’t really figured out what they could have earned, and they get to keep the difference.

Joe: So let’s say you pay $20,000 of interest, but you made $30,000 in income. So you still net out $10,000. You’re still ahead of the game.

Al: Yeah, but there’s risk.

Joe: Of course, it could go the other way.

Al: And it does in the short term sometimes.

Joe: Thanks for the question. Hopefully that helps, Alex. I’m going to definitely have a little paper plane.

Far too often, retirement funds fall short of where they should be, and many of us have no idea how to catch up. Our new guide will empower you with Tips to Fast Track Your Retirement regardless of how much your account balance is today. Pour yourself a Paper Plane – or your drink of choice – and click the link in the description of today’s episode in your podcast app to download the guide. You’ll learn the steps to take to boost your retirement savings, stay on track, and keep more of what you make. And here’s a Christmas tip: print out our guides, they make great stocking stuffers! Sharing the YMYW podcast and all the free financial resources with your friends, family and colleagues gives them the gift of financial information and entertainment, and it’s the best gift you can give us, because it helps us grow the show. Happy Holidays, YMYW family!

Do Roth Conversions or Crypto Long-Term Capital Gains to ACA Ledge for Self-Employed? (Johnny G, Iowa)

Joe: Let’s go to our next question.

(voice message) “Hello YMYW team, Johnny G calling back in from somewhere in Iowa. Still drive my 2016 Ford Fusion now that it’s too cold to drive my motorcycle, which is a Honda Shadow 1100. Drink of choice is tequila on the rocks these days, preferably some Casamigos. Quick overview before getting into my questions. I’m 27 and single. I got $58,000 in my Roth, $40,000 in my simple IRA, $30,000 in my HSA, and $44,000 in my brokerage. I’m a couple of years into starting my small business, and due to depreciation and putting most of my income back into the business and living off of savings, I’ll be keeping myself in the 12% tax bracket this year, as well as 2022. But then from 2023 on, I see myself probably being in the 24% or higher. But this year, trying to keep myself at the top of the 12, actually a little lower than the top of the 12 after the standard deduction, because I see the ACA ledge appears to be at $51,500. So I want to stay below that. And so after my salary plus already locked-in capital gains and then maxing out my simple IRA and my HSA contributions, that leaves me with about $34,000 of space to that ACA ledge. So my question is, what do you see as a better use for that $34,000? I could convert almost my entire simple IRA into my Roth IRA, paying the 12% on that $34,000 conversion. But then obviously that’s in there to grow tax free for the next 4-5 decades for me.
Or wondering if you think I should lock in some capital gains on my brokerage account and get the step up in basis and pay 0%, since I’m in the 12% bracket, on those capital gains? That $44,000 in my brokerage account, it’s mainly cryptocurrency and it has a cost basis of about $9,000, seen some pretty good gains over the past couple of years, obviously. They are long term gains, so they would be at 0% capital gains while in the 12% bracket. I do like my crypto holdings for the long term. So I would be purchasing them right back after selling them and just taking the step-up in basis and not paying taxes on it, because based off of my reading, there is no wash-sale rule for cryptocurrency yet. So just wondering what you guys think I should do? Like I said, I’ll have 2021 and 2022 in the 12% bracket before popping up. So probably straight past the 22% and into the 24% in the year-”

Andi: And then that’s where my voicemail cut him off.

Joe: Wow, seems legit. Johnny G, man.

Al: We got some smart listeners.

Joe: The guy’s 27 years old, he’s talking step up in basis.

Andi: He’s been listening to YMYW.

Al: He’s either in the industry or he listens to our show all the time.

Joe: The guy’s killing it. A couple of things. If you sell a capital asset, that’s any type of asset that sells on a retirement account, if you are in the lower two brackets, the 10 and 12% tax bracket, there is no capital gains tax. He’s also looking at the ACA ledge there. American–or Affordable Care Act. I don’t know where the American came in.

Al: Once you said American, I go, hmm, now I’m mixed up myself. The Affordable Care Act.

Joe: That’s Obamacare.

Al: Yeah, that’s what we used to call it.

Joe: I never called it that.

Al: I did.

Joe: People got upset, wrote me letters.

Al: I think it was me.

Joe: He also gets some subsidies because he’s in a fairly low income tax bracket where he’s doing the math. He’s taking a look at everything. He’s looking at his options. He’s been saying, I’m a small business owner. I want to make sure that my income stays in certain levels, certain areas. I’m going to reinvest back into the business and over the next couple of years I’m going to keep my income low and I have some room for me to create more income. So then I can either do a Roth conversion, taking the money from his retirement account and converting that into a Roth IRA. Or he could sell some crypto. Dogecoin.

Al: Get a step up in basis. He wants to keep it, so he’s going to buy it right back, which is fine.

Joe: That’s called tax-gain harvesting.

Al: There’s no problem with that. It doesn’t have to be crypto. It can be anything.

Joe: The wash-sale rule is at a loss. You’re selling at a gain. So there is no wash-sale rule on a gain. It’s called tax-gain harvesting. So you’re selling it in that 0% capital gain bracket and you can just buy it right back.

Al: You could buy it the same day. It doesn’t really matter.

Joe: Correct. Couple of things. He’s got a simple plan. There’s some rules with the simple. You’re putting money into the simple and you want to convert the simple. I don’t know if he can convert the simple because it has to be held in place for a certain period of time without penalty.

Al: Like two years.

Joe: Something like that. And I think he’s already making contributions there. Gotta check that. I would get rid of the simple altogether and do a Solo 401(k) plan.

Al: Yeah, I like that too. And I would convert the simple if you could. I’d rather do that at age 27 and have all those years of tax free growth.

Joe: And then buy the crypto in the Roth.

Al: Oh, that’d be cool.

Joe: The next year, what you do is you sell your crypto and then you buy it back in the Roth. And then because he’s bullish on crypto…

Al: Yeah, when you think about your Roth, that’s where you want to have the high octane investments.

Joe: So you’re going to pay tax on that money at the 12% tax bracket. I would be careful with the simple because there could be some penalties there. Because if you’re going to get rid of it, you could maybe convert it, I don’t know where you set the thing up. But I would change the simple plan moving forward into a Solo 401(k) plan. You could put a Roth provision on the Solo 401(k) plan, so if you wanted to go Roth, you can put in to the max of the 401(k). You could put a lot more money into the Solo 401(k) versus the simple. If you want to go pre-tax, you can do that too. You can also put on a profit sharing plan on top of it.

Al: Now, he may have employees, so we don’t know that.

Joe: True. 27, he probably doesn’t have employees.

Al: Maybe not. So you can do a solo or individual 401(k) if you don’t have any employees. If you do, then you would either do a simple IRA or a safe harbor 401(k).

Joe: Got it. I just realized they set the timer for 8 hours.

Al: We can do about 100 questions.

Joe: We are good. Instead of eight minutes, we got eight hours.

Al: We’re probably seven minutes in instead of seven seconds.

Andi: You’ve got a minute and a half left.

Joe: So yeah, then you buy the crypto back in the Roth and then that compounds 100% tax-free. So he’s already had a huge gain. $9,000 is worth $44,000. And if he’s bullish on it, now the $44,000 or whatever that you have in the Roth IRA, whatever amount that you want to purchase in crypto…

Al: That’s one of those investments that some people think we’ve just scratched the surface. It’s going to be worth a lot more. And some people think it’s crazy and it’s never going to have any value. So it just depends on what you’re feeling.

Joe: Right. But the only issue is that you have to find a custodian that will hold the _??_. The standard brokerage firms, probably. What we’re seeing is, ETFs and there’s some investments that are coming out. But I mean, you can’t buy an ETF of bitcoin. It’s a derivative of bitcoin in some of these other currencies. So maybe you can’t do that. I don’t own any bitcoin.

Al: I don’t either.

Joe: I think we should.

Al: We should buy some.

Andi: You guys don’t own any crypto at all?

Joe: Zero crypto.

Al: No.

Andi: What do you personally think about it? Well, I guess that tells what you personally think about it. You’re not into it because you don’t own it, right?

Joe: Well, that’s not–I’m totally into it.

Al: We’re too busy with…

Andi: You’re just not financially invested in it.

Joe: I’m totally down with some crypto.

Al: I can tell you the last conference I went to I actually kind of reopened my mind on it, so I’m actually open to it again as well. Before I wasn’t really.

Joe: Yeah, I definitely think it’s the future in a lot of different areas, but there’s still a lot of unknowns.

SECURE Act: Inheriting an Inherited IRA Explained (Eric)

(voice message) “Hey Joe and Big Al. Got a fun question for you. The fact pattern is this. The dad has a revocable trust. It’s a pretty standard revocable trust where on his death, it funds a family trust. Mom’s the bene. And then on her death, the trust distributes outright to the kids. Dad has a Roth IRA and he names as a designated beneficiary of that Roth IRA, his revocable trust. Dad passes in 2013. Now, since his trust is named as the beneficiary, mom cannot treat the Roth as her own. However, since the trust is considered a look-through or see-through trust, she is able to elect to receive distributions from the Roth in accordance with her life expectancy.

And she continues to take payments out from the Roth from 2013 following dad’s death. Now in 2020, mom passes. So in accordance with the trust, the family trust, assets are distributed outright to the two children. And they’re adults, they’re healthy, and so they’re able to kind of take it outright. And the question becomes whether or not they need to follow the pre-SECURE Act rules or the post-SECURE Act rules. It’s my understanding that in the pre-SECURE Act world, when you inherit an already inherited IRA or Roth IRA, you continue to take the payments based on the prior owner’s life expectancy. So in this case, when Mom passed in 2020, she had about 3.8 years left in her life expectancy. And so the IRA administrator is saying that the Roth IRA has to be paid out within that 3.8 years with her passing in 2020. Now, my question is, under the SECURE Act rules, in this case, the non eligible beneficiaries have a 10 year window in which to withdraw assets. And in the trust, the kids are named individually and are identifiable, my question is, wouldn’t they be subject to the SECURE Act rules? And then the payment schedule would reset to 10 years and they would have to clear out the Roth IRA towards the end of 2030, so in 10 years. So that was my question and just kind of wanted to get your two cents on this. Guys, appreciate the show. And, Joe, was curious if you ever had anyone tell you that you kind of sound like the actor James Woods. Thought that was always kind of funny. So thanks again for all you do, guys, and take care.”

Andi: James Woods, have you gotten that one before?

Al: Do you know who that is?

Joe: James Woods? Yeah.

Andi: He watches a lot of movies and I think he probably knows who that is.

Joe: I do voiceover for him. I call him Jimmy. First of all, what the hell is Eric talking about? “I got a fun question for you.” There was nothing fun about this question. It’s like, “my mom and dad died. There’s a Roth. And we need a…”

Al: And he started out by saying “the dad.”

Joe: Yeah, like “the Chad.”

Al: Where do you start?

Joe: I don’t know. This guy’s pretty smart. Didn’t we answer this question before?

Al: I think we thought about it. I’m not sure we did. It’s a good question, though.

Joe: Do you follow the new rule? Since it’s already being distributed. So the distribution of the retirement account is already in distribution mode onto the old rule prior to the SECURE Act. He wants it reset when mom dies, because he’s the beneficiary of the Roth IRA, where he wants to use the SECURE Act to his benefit to push the payments out 10 years versus following mom’s life expectancy of 3.8. I think he’s got to pull it out in 3.8 years.

Al: The answer is we don’t know for sure. And I bet you could ask a lot of people and they would have different answers.

Joe: You know what? I bet Eric could do what he wants, and I don’t think the IRS would even know.

Al: They would have no idea. So that’s your answer, do what you want.

Joe: This is not advice by any stretch. This is just us having fun when talking about death and retirement accounts.

Al: He says it’s a fun question. So let’s make it fun. Well, dad’s Roth IRA, the beneficiary is the revocable trust. So Mom never actually owned it.

Joe: Right, because she could not take it as her own because he named the beneficiary as the trust. And that’s a whole nother story of bad planning. You don’t name the trust as the beneficiary of a retirement account.

Al: So this is just a guess. I’m going to guess it doesn’t get a reset because it was never in mom’s name. So 3.8 years would be my educated guess. We’re not estate planning attorneys.

Joe: But we should know the answer to this. But it threw a wrench because before you could take the life expectancy and spread it out, the distributions, over the beneficiaries life expectancy. The problem with this, a few things, is that Eric is pretty smart because he knows that it has to be a look-through/see-through trust, that the beneficiaries have to be identifiable, they have to be people. There can’t be a charity or that pulls it up. What he did not mention here, though, is the delivery requirement.

Al: Oh, you want to go to that.

Joe: Yeah, the trust needs to be delivered…

Al: By October 15th of the following year.

Joe: Something like that. October 15th or something to the custodian. So the custodian actually has to see that trust document.

Al: Key point.

Joe: Yes, it is a delivery requirement. So you know, we’re making death fun here today. I don’t know, Eric. I think the rule is 3.8. We’re guessing here. If you want to take it on 10, I don’t think you’d probably get at it or probably… You’re making a best guess yourself. But if the IRS hears this playback, then you’d be screwed because…

Al: They know we thought it was 3.8 going out. Joe and Big Al.

Joe: Joe and Big Al said 3.8. That’s the source. That’s the source we go to, too.

Al: That’s not a great idea.

For a refresher on the SECURE Act of 2019 and how it changed retirement contributions, required minimum distributions, the stretch IRA, and more for both individuals and businesses, download our free SECURE Act guide from the podcast show notes at YourMoneyYourWealth.com. And of course, keep listening to YMYW for the latest tax law updates while you’re drinking your Paper Planes or walking your dog or hanging out with your wife. And hey, ICYMI, you can now watch Joe and Big Al answer your podcast questions on our YouTube channel. Click the link in the description of today’s episode in your podcast app to go to the show notes, download the SECURE Act Guide, and click the YouTube icon to subscribe to us on YouTube.

“A Sneaky Annuity Bill That Will Make Joe Mad” (John, Abilene, TX)

Joe: “Hi, Joe, Grande Al, and Andi. John from Abilene, Texas.”

Andi: Oh, you said it right! Wow.

Joe: I know, I’ve been practicing.

Andi: You’ve been learning, yeah.

Joe: I’ve been learning. I’m a learner. “I found an article on CNBC that will get Joe mad.”

Al: Ooh, I got to see this.

Joe: Ooh, I’m going to get fired up. “The headline is, ‘workers will soon find out how much guaranteed income their 401(k) could deliver in retirement.’ The article goes on to say that as a mandate in the 2019 SECURE Act, 401(k) administrators will start providing illustrations on quarterly or annual statements showing an estimate of how much guaranteed lifetime income you could potentially get if the balance were annuitized. The article later gives an example of an account balance of $125,000 in the interest rate of 1.83%. The illustration would show that the participant purchased a single annuity that would get them $645 per month for life. For a joint annuity, the person would get $533 monthly until death and that amount would go to the surviving spouse. Could you spitball a better option of informing people how much they could have in retirement instead of the annuity? Thanks.”

OK, John, from Abilene. I don’t know why that would get me now, I am far from mad.

Al: I’ve seen you mad. You’re not mad now.

Joe: I’m actually very happy. I’m thinking about a paper plane.

Al: I thought you were thinking about turning 50 so you can put 26 grand in your 401(k)?

Joe: No, that would make me mad.

Al: That’s a consolation prize for turning 50.

Joe: Happy Birthday!

Andi: Happy Birthday! Here’s a paper plane.

Joe: Here’s a paper plane…

Al: And here’s your 401(k) form.

Joe: I think this is only going to help the overall retiree. This is a guaranteed income source. It’s an immediate annuity. If you’ve ever heard me rant on annuities in the past, it was never on a guaranteed income stream that was annuitized. Because what you’re doing with this is you’re taking cash and then you’re turning it into the insurance company for a guaranteed income for the rest of your life.

Al: Yeah, it’s like buying a retirement plan.

Joe: Exactly. Deferred annuities is that you purchase an annuity for later income at a later time and then they’re filled with fees and things like that. Most people don’t annuitize a product and they take distributions and the insurance companies still get their fees and I think they’re sold terribly, and there’s a lot of misconception and so on and so forth. But this is an immediate annuity. You know what the numbers are. Here’s $100,000. If you live a single life, you’re going to get X. If you put a spouse on it, here’s what the family gets. You’ll never outlive your money. So I like this, actually, I like it quite a bit.

Al: Question for you, when it says interest rate used is 1.83%, what does that mean?

Joe: That’s the interest rate that the annuity is paying out.

Al: OK, that’s what it’s paying out.

Joe: Yes, that’s the interest that you’re probably receiving. That’s your internal rate of return on the product.

Al: Here’s why I’m asking it. So I just ran this for fun. $525,000 present value, $645 monthly payments, assuming a 25 year life came at 3.8%.

Joe: Yeah, because you’re getting principal back too, so there’s a return of principle and then there’s earnings.

Al: 1.83%, so that’s that’s the real rate you’re getting. The 3.8% includes the money that you put in that you’re getting back.

Joe: Correct. And that’s another thing, too. If you take the $645 a month, there’s going to be interest and there’s going to be a return of principal, return of capital. Because they’re investing $125,000. If it was just straight $645 a month and then at the end of life, you still get $125,000 back? Those are two different equations. Those are two different rates of return. So we look at a couple of things. There’s the 4% rule. So 4% of $125,000, that’s what you would get if you want to take a standard distribution rate. When you look at sustainable distribution rate, what that means is that you don’t want to pull more than 4% out of the portfolio. So 4% on $125,000 is $5,000. So if I’m going to get $5,000 a year versus $645 a month, what is that? That’s $7,700. So $7,700 sounds a lot better than $5,000 if I’m only pulling 4% out. The 4% distribution rate is assuming that the overall product is going to grow or the portfolio is going to grow at 6%, you’re pulling 4% out. The other 2% is going to combat inflation and taxes. But there’s no guarantee that that portfolio is going to grow at 6%.

Al: No, there’s no guarantee, but in many cases you’ll still have your principal at the end of the term.

Joe: If it does grow at 6%, you pull 4% out, in 25 years you still have $125,000 that goes to the beneficiary.

Al: So you look at the rate of return 1.3%, that’s what you’re earning. That’s what you’re getting in exchange for having a fixed rate, a fixed income.

Joe: Your exchange, it’s insurance. Annuities are insurance, so you are insuring that you will receive X amount of dollars that you will never, ever outlive.

Al: Yeah, and it’s usually to life or second to die life if you do a joint. So if you both pass away in a year, then you lost, right? And so does the family, because there’s nothing left. But if you live 50 years…

Joe: So you give $125,000, and then both you and your spouse die in a car accident the next month…

Al: Yeah, you got zero. That’s just like a retirement plan. If you die prematurely, it stops unless it’s a joint life of a spouse.

Joe: So there’s pros and cons. There’s mortality credits. And that’s how these insurance companies look at things. There’s pools of life, and that’s how they come up with what these payments are going to be. And that’s how they come up with… If so many people purchase this type of product, some people are going to live a very long time, some people are going to die prematurely. So they kind of take a look at a bell curve and they hit the middle. And there’s actuaries that make a lot of money that are super smart, a lot smarter than Al and I, that come up with this stuff. So is it bad? Am I mad? No, I think it’s awesome. I think it gives people an opportunity to say, “I don’t want to take any risk in the overall market, and I’m going to guarantee and I’m going to lock in.” But then they know what they’re getting. They know what they’re getting.

Al: I agree with that. So the immediate annuity, you know what you’re getting, the deferred annuity…

Joe: Is garbage.

Al: It’s, you don’t know because the illustrations, you don’t know how they’re running them.

Joe: Exactly.

Can I Make IRA Contributions and Not Convert Under the Current Build Back Better Act? (Frieda’s Boss, Mr Poon)

Joe: What do we got?

Andi: Freida’s boss. Do you remember Mr. Poon? I have actually heard from a number of listeners who told us where that came from. Joe, I’m surprised you didn’t get it. This is from the movie Fletch.

Joe: I love Fletch. Such a good movie.

Al: I’ve even seen that one. But it was a long time ago, so I don’t remember a thing.

Joe: “Hello again, Joe, Andi, and Al. All of my retirement is either in a 401(k) or Roth IRA. I have $0 in traditional IRAs. I realize that the new House bill has to go through Senate approval and there may still be changes, but as it stands now, the backdoor Roth conversion is being eliminated. That being said, I cannot find any information on whether this new bill will allow me to make non-deductible traditional contributions and just don’t convert them. Since my basis is zero, I wouldn’t have to worry about any future pro rata distribution. So in essence, this would still be a Roth IRA just disguised under the traditional name. Am I missing anything? Thanks for all your spitballing over the years. Best regards, Mr. Poon.” How old is this question?

Andi: It was sent to us a month ago. Well, not even a month ago. On the 20th of November.

Al: That’s about when that latest change came about.

Joe: So the back door is not gone. You can still do a back door Roth IRA.

Al: For 2021. But the current legislation has it going away in 2022.

Joe: Not the back door, they changed that again.

Andi: Isn’t it 2029 now?

Joe: Yes.

Andi: And that is assuming that the Senate actually approves it, which they haven’t done yet. They haven’t signed off on it, right?

Al: It may come back. So OK, good. I was in Tahiti, not paying attention. So you’re up to date.

Joe: So the back door kind of went away, then it came back and then now it’s back, and then now it’s gone. Who knows? So if you’re going to do a back door, do it now. So continue to look at that. I think you’ll be here. So after tax contributions can still be converted as of today, but that could change, probably tomorrow.


On the Al, the Paper Plane, “old lady”, Fletch and The Godfather, and being in a wind tunnel with Shake n Bake in the plentiful Derails at the end of the episode today, so stick around.

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