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Joe Anderson
ABOUT Joseph

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

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. As CEO he currently leads Pure Financial Advisors along with our executive team. As CFO he is responsible for the financial operations of the company. Alan joined the firm about one year after it was established. At that time the company had less than [...]

Published On
November 2, 2021

In what order you should contribute into which accounts for retirement? Joe & Big Al explain the reasoning behind the sequence of retirement savings, and where a health savings account (HSA) fits in that sequence. Following some retirement plan spitball analyses and Roth conversion strategizing, the fellas explain whether capital gains are taxed progressively, how required minimum distributions are taxed, and they revisit indexed universal life insurance.

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Show Notes

  • (00:49) Where Does HSA Fit in the Sequence of Retirement Savings? (Craig, MI)
  • (07:09) Retirement Spitball: Where to Contribute? (Lee, Jacksonville, FL)
  • (12:05) Roth Conversion Strategy Follow Up and Mortgage Payoff (Annie, TX)
  • (16:10) Retirement Spitball: Why Do the Experts Say I Have To Work to 70? (Paul, NJ)
  • (19:12) Are Capital Gains Taxed Progressively? (James, AZ)
  • (24:30) What’s the Tax Rate on My Required Minimum Distribution? (podcast survey)
  • (28:40) Should We Keep Our Indexed Universal Life Insurance Policy? (Em, Florida)

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LISTEN | YMYW PODCAST #325: Capital Gains vs. Ordinary Income Tax Explained

LISTEN | YMYW PODCAST #246: Why This Life Insurance is for the Most Part a Scam(IUL, Indexed Universal Life Insurance)

2021 Key Financial Data Guide

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Transcription

Where Does HSA Fit in the Sequence of Retirement Savings? (Craig, MI)

“Wondering how you see HSA fitting into a retirement portfolio. I’ve noticed in listening to your podcasts the order you suggest is:

  1. 401K Match
  2. Max our Roth IRA
  3. Go back and max our 401K
  4. Money into brokerage

With HSA providing an initial tax deduction, retirement free growth and tax-free distributions on eligible medical expenses, where would you put contributing to HSA in the above order of retirement funding? As long as someone is comfortable with the high deductible insurance plan I see this after 3 in the above order if not after 2.

Thanks for everything you all do on this podcast….. I have learned so much over the past year listening to you and have laughed along the way as well. PS – I have a cockapoo that I walk as I listen to your podcasts.”

Retirement Spitball: Where to Contribute? (Lee, Jacksonville, FL)

“Hey again Big Al, Joe, and Andi (not necessarily in that order). This is Lee from Jacksonville and I appreciate that you answered my question in podcast 338. I have a new one that I probably should have asked first as it is more important to our path toward wealth.

I currently receive 100% VA disability and will for the remainder of my life as I am categorized as total and permanently disabled. In addition, if I kick the bucket before my wife, she will receive a dependency and indemnity compensation check each month. We are pretty far off from retirement at age 45 and 43, but probably will only need about $60-$70K (in today’s dollars) each year when we get there. I currently receive $48,000 a year which increases with COLA like Social Security. Due to my VA status I am covered 100% for all medical/dental/and vision and my spouse also receives medical insurance through me which will cover any costs as a secondary insurance to Medicare in the future. We have about 13 years left on our mortgage and then it’s done. Wife makes $130K a year and plans to retire at age 64.

All this is to say that we have a significant amount of costs covered into retirement. Since we have current retirement accounts totaling $495,000 – 175,000 IRA, 150,000 Roth, 70,000 401k, and 100,000 brokerage. We also have about 30K sitting in cash. Is it your opinion that reducing the risk on these investments and the current contributions toward both max Roth IRAs and max Trad 401k a smarter move? Given that we are guaranteed a good income in retirement from both my VA compensation and future Social Security, virtually all of our expenses will be covered without needing much of the retirement money.

Thanks again for your ideas on this. Also Joe, since you like Fireball try a Prairie Fire next time you feel frisky. I think you’ll like it.”

Roth Conversion Strategy Follow Up and Mortgage Payoff (Annie, TX)

“Hello again, Pure Financial Crew.  I was so excited when you aired my email but was kicking myself when I did not provide that one piece of info regarding my income. I make $80,000 and my husband makes $40,000.  I was hoping to optimize taxation so I was thinking of converting to Roth when I went part time. I will be making $40,000 at that time.

Al so intelligently questioned why we had so little in our brokerage account. Joe said that maybe something major had happened.  Both of you are correct. We had a late start to investing. We paid off our mortgage about three years ago. That was the major change that sent me on this journey. We used the money that was previously going to rent and started investing for retirement.  I know many financial advisors do not recommend paying off your mortgage, but in my case, it was the best thing. It freed up so much income.  We bought too much home and 45% of our income went to the mortgage every month.  When we paid off the mortgage, we did not inflate our lifestyle.  We learned to budget and invested what would be going to the mortgage.

I attached the previous email in hopes you could answer my original questions. I know Joe was thinking I could just throw everything at the Roth 401k now but would that be the best strategy in our situation?  We are very disciplined and would stick to the best tax optimization plan you spit ball for us.

On the podcast, you mentioned y’all were going to start a dance crew.  What dance song would you pick? Love you guys, God bless and keep up the good work.”

Annie’s previous question (from YMYW podcast episode 348):

“Hello Pure Financial Crew. You guys have the best financial podcast. I have been a loyal listener for six months. My husband and I are 44 and 45. We got a late start to our retirement planning but are trying to catch up. We have no debt including our home. We drive a Ford Focus 2016 and Honda Civic 2013. We have three kids 18, 17 and 11 and three dogs. I need help coming up with a retirement plan. I want to go part time at age 50 and retire at age 60. Hubby wants to work full time until age 60 and then retire as well. We currently net $120,000. We have:
• IRA $86,000
• ROTH IRA $72,000
• 401K 162,000
• Brokerage $15,000
Until I reach age 50, we will contribute yearly:
• ROTH IRA $12,000
• 401k $19,5000
• ROTH 401k $4,800
• Brokerage $6,000
At age 50 we will stop all contributions except for $4,800 to my husband’s Roth 401k. At age 50, I want to start conversions. Our income will be $80,000. How much do you recommend I convert? I want to convert over 10 years until age 60.

Do you recommend I change my 401k contributions now to Roth 401k contributions? Do you recommend I change my allocations now and add more monies into the Brokerage? We are 100% in stocks and primarily invest in the FZROX and FZILX. We currently live on $4,000/ month and are saving the rest. We are comfortable with that amount and believe we can live on that during retirement as well. Can you help us fine tune our plan? God bless and thank you in advance. Your loyal Texas listener, Annie”

Retirement Spitball: Why Do the Experts Say I Have To Work to 70? (Paul, NJ)

“My wife and i make about 200,000 a year combined. Using the 80 % Rule that says we need about 160,000 a year. Yet when i subtract out the money we never see, taxes, social security, Unemp. Insurance, 401k, ira contributions. We spend about 83000. I will get a 32000 pension, have about 1 million in deferred and about 240000 in roths. Using the 83000 number i think i can retire at 60 (accounting for 2 % inflation, h care premiums included). What am i missing why do the “experts” tell me i have to work until 70? signed confused 60 year old.”

Are Capital Gains Taxed Progressively? (James, AZ)

“Joe, Al and Andi, Thanks so much for your podcast! I have a quick question: Are capital gains taxed progressively like income or do we pay the same tax rate on all long-term capital gains after the gain amount is added to the top of our adjusted income?

I did a Roth conversion early in the year to take me to the top of the 24% bracket. With home prices skyrocketing this year, we took advantage and sold our second home for a net gain of $225k. How will the capital gains tax be calculated on the $225k? We are married, filing jointly.

Taxable income after standard deduction will be $326,500 (top of 24% bracket) + $225,000 long term cap gain = $551,600. Does that mean all of the $225,000 gain will be taxed at 20%? Thanks so much for clarifying this. – James in AZ”

What’s the Tax Rate on My Required Minimum Distribution? (podcast survey)

“in the 24% tax bracket, there are multiple buckets of taxes to be paid. How does one figure out the what the aftertax income will be when RMD’s start? For example we have to pay 3.5% extra on investments, 80% of Social Sec. is taxed is this all before or after the 24% tax?”

Should We Keep Our Indexed Universal Life Insurance Policy? (Em, Florida)

“Hi Joe, Al, and Andi, I’m Em from sunny Florida. I drink champagne. I drive a Pontiac g6 convertible circa 2007, that no longer converts. I have a striped house cat. I turned 40 this year and realized I had to grow up and get serious about investing. Married with 2 kids under 5. Gross annual income over a million, effective tax rate over $30%, but happy to not to pay state income tax.
My husband has held the financial reigns for most of our marriage. He believes we will always be in the highest tax bracket, and that capital gains tax rates will continue to rise and someday equal normal income tax rates. He doesn’t want to put a ton of money into a taxable account, so we purchased IUL policies that combined cost $300k/year. We are now 7 years into a 30-year term. The combined Surrender value is currently $2mil. We were sold these by a family member and my husband is adamant we keep them.

  • We have $750k Roth. We have converted all our retirement to Roth.
  • $1 million taxable.
  • $500k his business investment (he is w2 employed, with private equity investment).
  • $600k in 529.
  • $33k HSA.
  • $25k real estate.
  • We max out 401k, back door Roth, and HSA. Husband will at some point inherit over a million from same family that sold us IUL.

Spouse only buys single stocks and Bitcoin equivalents (about 70% of portfolio). I’ve added index funds to the portfolio (30% of portfolio) in the last 2 years and minimal real estate. We have no bonds-only stocks in Roth and taxable. My attempt at financial literacy has caused marital stress. I am uncertain where to direct the money going forward. IUL will likely stay; hubs says “think of IUL as a giant bond fund. Guaranteed returns, less volatile.”

  • Do you think keeping this giant IUL and treating it as a giant bond fund, moving forward with a more reasonable (broad index fund) 90% or more stock portfolio is a reasonable financial plan?
  • How much to invest yearly outside of this IUL and stay on track?
  • Should we add bonds at some point?
  • Do we keep putting all retirement in Roth, if possible with these tax changes?
  • Thoughts on that big 529? Can we transfer (not change beneficiary on account) to a nephew and ask then to pay us some of the money in a $15k gift? Thoughts on penalty withdrawals later?

Random tidbits: Would like to retire early. Owe $700k on our home. Y’all are hilarious and sometimes helpful. Thanks for that. Are you interested in buying my convertible? It’s a hard top. No spam, please. Have a great day! – Em”

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Kicking yourself, dancing with the YMYW dance crew, Prior Fairy, and the Retirement Readiness guide in the big ol’ Derails at the end of the episode, so stick around. 

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