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
February 9, 2021

Whether you call it a SERP, an iSERP (individual supplemental executive retirement plan), a private pension, or the “Super Roth,” the strategy is overfunding life insurance, and the question is, is it a good idea for retirement planning? Also: a Social Security, pension, retirement withdrawal, and Roth conversion strategy, portfolio modeling scenarios, the earned income tax credit, and other tax reduction strategies.

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Show Notes

  • (00:57) Second Opinion on Overfunding an iSERP – Individual Supplemental Executive Retirement Plan, AKA “Super Roth” (Dante, NYC)
  • (14:40) What Gains and Inflation Rates to Use When Modeling Retirement Portfolio Scenarios? (Tom, Lynwood, WA)
  • (21:03) How Is Our Pension, Social Security, Retirement Withdrawal, and Roth Conversion Strategy? (Nina, Yorba Linda, CA)
  • (31:41) Tax Filing: Do I Qualify for the Earned Income Credit? (Kevin, TX)
  • (35:39) Tax Strategies for Full-Time Overseas Student: Should I Convert to Roth? (Will, Los Angeles)
  • (40:34) Joe Needs Chiro/PT Suggestions for Sciatic Problems… in His Butt

Free resources:

Joe & Big Al Break Down Indexed Universal Life Insurance:

The Truth About Indexed Universal Life Insurance

Why This Life Insurance Is for the Most Part a Scam

Should I Invest in an Indexed Universal Life Insurance Policy?

What Do You Think of Indexed Universal Life Insurance?

Indexed Universal Life Insurance to Insure Future Income

Indexed Universal Life Insurance for College Savings

Read the blog: Incorporating Life Insurance Into Estate Planning

Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth® podcast #312, whether you call it a SERP or iSERP (that is, an individual supplemental executive retirement plan), a private pension plan, or the insurance agent favorite, the Super Roth, the basic strategy is overfunding a life insurance policy, and the question is, is it a good idea for your retirement planning? You know Joe and big Al have some strong opinions on this one for Dante. The fellas also discuss a social security, pension and retirement withdrawal and Roth conversion strategy for Nina, portfolio modeling scenarios for Tom, and they dive in on the earned income credit and other tax reduction strategies for Kevin and for Will. And finally, chiropractors and physical therapist types, Joe is turning the tables and asking for your suggestions – about his butt. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Second Opinion on Overfunding an iSERP – Individual Supplemental Executive Retirement Plan, AKA “Super Roth”

Joe: I got an email from Dante, lives in New York City, Al. And I had a little back and forth with Dante. Because-

Al: You’ve already been kind of conversing?

Joe: A little bit. Because I just needed to get some facts straight.

Al: Ok.

Joe: And so I’m going to read his question and then I’m not going to read our full conversation because-

Al: You don’t have enough hours in the day.

Joe: – it gets a little weird.

Al: Oh, is that it? Ok.

Joe: No, I’m kidding. So Dante, he writes in, he goes, “Hey, I recently found your podcast and been binging them all. They are quite informative as well as entertaining. So thank you both for providing such an awesome service. I was hoping to get your opinion on an investment product I own called an iSERP-”

Al: Wow.

Joe: So that caught my attention, right, Big Al?

Al: Yeah, little ‘i’, capital ‘SERP’.

Joe: And that stands for Individual Supplemental Executive Retirement Plan. And I’m like-

Al: That’s a new name for the same wrapper that we’ve seen 1,000,000 times.

Joe: And I’m like, OK, red flag. Red flag.

Al: I would say 40 years ago when I first heard of this, it was called the Private Pension Plan.

Joe: Yes.

Al: That’s what they called it at that point.

Joe: Individual Supplemental Executive Retirement Plan. I like how they- hey it’s individual-

Al: It’s very cool.

Joe: It’s a little supplement. You’re an executive, so boom, only executives get it.

Al: Only you get to do it.

Joe: Only you, buddy.  “- which I started in late 2021. I’m attaching-”

Andi: 2011.

Joe: I’m sorry, 2011. Thank you, Andi. “I’m attaching a relatively recent redacted quarterly statement in case it helps.”

Al: Ah, did you look at it?

Joe: Oh yes. Studied it. Studied it. Thank you for the redacted statement there, Dante.

Al: Got it.

Joe: “Here’s what the agent told me. This is an institutionally priced variable life insurance policy that has a razor thin wrapper-”

Al: Wow.

Joe: “- which allows me to minimize the death benefit but maximize the internal rate of return on the cash value. My understanding is that this is different from an IUL-” that’s an indexed universal life, “- in several ways, including the fact that it’s completely optional, whether I put money in. In fact, for the last 5 years, I didn’t put a penny in because I knew the commission rates were really high initially. But when they gradually decrease sales expense charge from payments to 9.75%-” so that’s the upfront load  ‘- for years 2 through 4 to 1.75% for years 5 through 7 and then 0%, for years 8 and beyond. I invest the premiums entirely in an index fund that’s in the wrapper. I recently paid off my mortgage and I’m now completely debt free. I’ve been funneling money that used to be earmarked for my mortgage towards this policy. It’s dead and plan to continue to do so for the next 2 years and will have it fully funded.” I believe the max he can put in is around $100,000. So he “contacted the agent again recently to ask more questions, and he thinks that this is the greatest policy on Earth.” Can you imagine the agent said that, Al?

Al: You know, I can, actually.

Joe: Ok. “Since the fees have dropped off considerably, I think he has less incentive to convince me to continue to fund it. He said it has tax-free access to the cash value because it’s life insurance. If I take partial surrenders up to what I paid in premiums, I pay no tax. If I take a loan, I also pay no tax. He called it non-recourse debt. In the 10th year, this year, there is a wash-loan provision, meaning that if I borrow money, I get charged 4%, but that 4% basically gets credited back to the cash value. So the cost of the loan washes out.” So a zero net cost loan. “Basically, he said this is a super Roth account since nothing is taxed because it’s inside a life insurance wrapper that is razor-thin. He called it super because I’m not limited to $7000 per year through the backdoor Roth mechanism. I’m contacting you guys looking for a second opinion as to whether this is a good idea, as opposed to just leaving the money invested in index funds in a regular online brokerage account.” All right, so in case your thoughts deepen on more background, he’s 55, he’s married, working full time; 35% tax bracket Big Al, and contributes the maximum to all available retirement accounts. He’s got a net worth of around $6,000,000, a relatively large conversion of a traditional IRA to a Roth IRA back when he could pay the taxes over 2 years. And he’s like, “yeah, thanks a lot for your time, Dante.” He goes “P.S. I realize using the 4% rule, I can retire, but my wife says I have to keep working until I’m dead. Any advice on changing her opinion?” Yes, divorce.

Al: That’s the key question here. Does he really have to work his whole life?

Joe: Oh boy. So I reached out to him and I’m like, this whole Executive BS, BS, BS.

Al: Yeah, explain it.

Joe: And so Dante is a physician. And I figured he was because physicians get approached by this type of product all the time. I’m not saying it’s a crappy product- kind of I am, but not really. It can be used in a scenario in some instances. And I’ll explain what I’m talking about. I wanted to know a few things. A) was this priced truly on an institutional basis? What I mean by that, was it like underwritten through the company where the cost of insurance is really dirt cheap. Or was it like an individual policy for Dante himself? Because how it was sold, it sounded like, this is a group policy under a company shell, you could get institutional pricing within it. The answer was no, it’s an individual policy.

Al: Ok.

Joe: Super Roth IRA. He’s in the 35% tax bracket. So then I looked at the policy. Let’s say he’s paying, I don’t know- because how they construct the policies is that you want the least amount of death benefit. There’s a corridor that you have to have with ___ to keep the tax-free component of life insurance. So you’re funding the heck out of this life insurance policy. So you’re putting the max amount of cash value in the policy with the least amount of death benefit.

Al: So you’re overfunding it.

Joe: You’re overfunding it. So you’re trying to stuff as much cash in here as possible.

Al: And there’s a limit.

Joe: There’s a limit that you can- if you overfund it, you overstuff it, then you kind of lose the tax benefits of the life insurance. So that’s a modified endowment contract. So he understands those rules and he’s like, this is a super Roth because I could put $100,000 contribution in this thing. And he’s telling me that, well, $7000 is the only thing that you could put directly into a Roth IRA. Well, you’re already doing that. Well, this will just enhance your overall experience of tax-free growth by putting $100,000 in this policy that will grow tax-free. So he can put $100,000 in the policy. It will grow tax-free if he takes FIFO tax treatment, first in first out, and then takes loans from the policy. The problem is, is that he’s already in the 35% tax bracket. So he made $100,000 of income, but his gross income was what, $135,000-

Al: – to pay for the $100,000 that he netted.

Joe: Right. So he made $135,000. He paid $35,000 in tax, he netted $100,000. Then he places that into this variable universal life contract. Then $100,000 grows tax-free. But there’s a cost of insurance. So he has $100,000 of cash value. He still has to have a death benefit of a few hundred thousand bucks. So he’s paying for that insurance, right? He’s paying for fees and costs in the razor thin shell of this variable life insurance policy. He’s taking FIFO treatment out and then he has to take loans. So he’s like well it’s a zero cost loan because they’re charging me 4%. But I’m netting 4%. Sure. But how about if he takes too much money out of the policy? What would happen? It will lapse and then all of that money comes to you as taxable.

Al: So everything you’ve taken out already- subject to the basis.

Joe: Right- subject to the basis. So instead- then I said, well, do you- because he’s doing the backdoor. So I had to ask him, do you have any retirement accounts that is not your current employer’s plan? And he does. And I said, well, why don’t you just- did you ask your agent- so if he- Al, converts $100,000 of his retirement account into a Roth IRA? What would he pay in tax?

Al: The same as what he would have done doing this. Right?

Joe: He would pay $35,000 in tax versus he paid $35,000 in tax to get the $100,000.

Al: Same, same.

Joe: Same, same. But what does he not have to do if it’s in the Roth?

Al: Yeah, well, the Roth it grows tax-free forever. There’s no cost of insurance and there’s no chance it’s going to lapse. There’s no- there’s no-

Joe: There’s no BS.

Al: – there’s no timebombs here.

Joe: Right. There’s no B.S. It is clean living.

Al: Have you ever seen one of these policies lapse?

Joe: All of them. Every single one.

Al: And that’s been my experience that they very often don’t work out as advertised.

Joe: The only times I don’t see them lapse is that when they’re truly like a wealth transfer play, like they’re buying the insurance. So then I asked him, I go, ‘first of all, do you need the insurance?’ He’s like, ‘no, I don’t need the insurance. No, this is a supplemental income, retirement, executive, super cool backdoor Roth plan.’ And I was like, ‘that thing’s garbage.’ But I spent some time- I wanted to- here’s how I think this would make sense: So Dante’s a physician. Dante probably makes a very good income. And let’s say Dante works for a company and he works for that same company for 35 years. And he’s got a 401(k) plan. And then he’s got his Roth plan. And he’s thinking about some other types of savings that he would like to contribute to. Then putting it into this policy might make sense. Because he doesn’t have the $100,000 to convert into the Roth. In this case, Dante does. So it makes more sense for him to convert his old plans into a Roth versus funding this plan with $100,000 or $200,000. Because you’re going to be better off with just a clean, razor thin Roth wrapper.

Al: Now, what happens to that razor thin life insurance policy when you turn like 80?

Joe: Exactly. You still have to pay for the insurance.

Al: Doesn’t it go up as you get older?

Joe: Right.

Al: A lot.

Joe: So the cost of insurance is going to continue to increase. But, ‘oh, well, I max this thing out and I’m going to live off of that.’ Will you still have to constantly pay for the insurance. And if all of a sudden you blow a little bit too much money out of there. And I don’t know. You don’t need the insurance. just stay far away from this crap.

Al: Like what happens if you get to 85 and you don’t really want to pay for the insurance because it’s unaffordable? You close out the policy. But then everything you took out in the past was taxable subject to your basis.

Joe: Right. If you let the thing lapse, you’re going to blow up. So this is what people do. Is that, they’re going to start pulling things put, pulling things out. And all of a sudden they’re like, you know what? Oh, my God, I think this thing is going to die on me- the insurance contract is going to die before I do. So what do I do? So then they call the agent and they’re like, ‘hey, agent, can I get an in-force ledger? What how much money do I have to put in this thing?’ They’re like, ‘well, it’s going to be about $200,000 to keep it alive.’

Al: And by the way, I’ll take my commission on it.

Joe: No, there probably would be no commission or anything like that. Well, maybe on fresh money, who knows? But, the problem is that it’s already too late. It’s like, you have this dog that you like, but now it’s just, craps everywhere and it’s kind of a pain in the – . What? I don’t have an animal. I don’t have a dog.

Andi: Clearly.

Joe: But it’s like, you can spend $200,000 to keep the thing alive that you don’t even want. So that’s why people just let them die and then they get taxed.  Dante, hopefully that helps.

Joe and Big Al have covered life insurance, and especially indexed universal life insurance,  a number of times before on the YMYW podcast, and you can listen to those previous episodes because they’re all linked in one convenient place in the podcast show notes at YourMoneyYourWealth.com. And before you go buying insurance, or overfunding a plan for investing purposes, because some insurance agent said it was a great idea, learn some of basic, expensive mistakes you’ll want to avoid by downloading our free white paper 5 Costly Life Insurance Mistakes. To get to the podcast show notes for all of today’s free resources, the episode transcript, and to ask more of your money questions, click the link in the description of today’s episode in your podcast app. 

What Gains and Inflation Rates to Use When Modeling Retirement Portfolio Scenarios?

Joe: We got Tom from Lynwood, Washington. Lynwood?

Andi: Yes.

Joe: Linewood?

Al: Yeah, Lynn probably.

Joe: Killed it.” Hello Your Money, Your Wealth® team. Note that I did not mention names, as I know one of your team members is sensitive when he does not receive top billing.” That’s right, Tom.

Al: Who would that be?

Joe: I have no idea. Probably Andi.

Andi: Oh, yeah. Yeah, it’s definitely me.

Joe: “I thoroughly enjoy your show. Keep up the good work. This is not a Roth question.” Thank you.

Al: Perfect. OK, then we will answer.

Joe: “I’m interested in hearing your thoughts on what percentage portfolio gains to use when modeling retirement scenarios. I’m 57, wife 62, and we intend to retire 1 to 2 years from now. We have a globally diversified portfolio consisting of pre-tax brokerage and Roth accounts allocated at 65% stocks. 35% bonds. We also have a rental house that we intend to sell in about 8 years. I’ve worked with several financial modeling software tools, but I’m unsure what I should assume for growth from the portfolio and rental property. My current annual modeling assumptions are 2.25% inflation, 2.25% portfolio returns for the next 10 years, 5.5% portfolio returns until the end of the plan, age 95, and 3% rental home appreciation. Last year in my area homes increased 10% and are expected to increase 11% this year. I have 2 questions. Do you think my inflation and portfolio return assumptions are reasonable? Should I be adjusting for lower returns in the next 10 years to account for the higher market valuation? Thanks for answering my questions. Happy New Year, Tom.” All right. This is a new spin on some financial modeling.

Al: Sure, yeah.

Joe: So it’s interesting- so Tom believes that the market is overvalued.

Al: And I think there are pundits out there that would say because the market is so highly valued that the next 5 years, 10 years, it’s not going to be as good.

Joe: The expected return of stocks might be lower over the next 10 years.

Al: Yeah. Given current valuations.

Joe: So. He’s saying, my modeling- I’m going to have a nominal growth of 0%. Because he is running inflation at 2%, 2.5% or 2.25%. And he’s like, my portfolio won’t beat inflation, will lag-

Al: He’s got the same valuation, same portfolio return as inflation, 2.25%.

Joe: OK, and then it’s like, then thereafter he’s going to run it at 5.5% and keep inflation at 2.5%. So he’s going to have a nominal rate of return of 3% from that age until age 95. What do you think?

Al: I think it’s very conservative, I think it’s- these are good numbers. I mean, if I were doing it myself, I could tell you what I would use. And, it’s subject to your own thoughts and opinions, right? I would probably use 3% for inflation because that’s been like 100 year average.

Joe: That’s what we use with our clients. We use 3% inflation, 6% rate of return, 3% nominal return ____.

Al: And with a portfolio that’s 65% stocks, I would expect to earn 6%. If you want to be conservative, put 5%. As far as real estate, I would probably use either 4% or 5% being on the West Coast and Washington, 3% even more conservative. I’d rather have you be more conservative than more aggressive and then be surprised in the wrong direction.

Joe: Yeah, without question, because this is such a crapshoot. You have no idea what this is all going to fold out to be. So the more conservative you are and if it works, it works, then you’re fine.

Al: Then you’re fine. I would say this about the next 10 years Tom, you may be right, maybe that the returns will be less, but nobody knows. And I would tell you, not all stocks are highly valued. The large growth companies in the US are more highly valued than small US companies, than value US companies, than international companies, than emerging markets. There’s a lot of stock categories that are not-

Joe: That are undervalued.

Al: – that are undervalued-

Joe: – historically from, let’s say-

Al: They’re not at all time heights. So what that tells me is that there’s room in this, even what seems like an all time high market, there’s room for growth.

Joe: But just the statement there of saying that the market is overvalued is assuming that you are foretelling the future. That you’re predicting the future. And we believe it’s very difficult to do that. So you want to make sure that you’re dynamic in your investment approach that you have-, like he’s globally diversified. So hopefully he has money in each of those different areas that you just talked about. And then making sure that you’re rebalancing those. But I think just for modeling- modeling in real life-well, I think we all know are apples and oranges.

Al: That’s right.

Joe: It’s so- you look at that- you just know that you can guarantee that that’s never going to come true.

Al: Whatever shows up on your paper is just a thought of what could happen. It will never come out to that dollar amount because-

Joe: -ever-

Al: – everything changes all the time.

Joe: So but it’s just a confidence booster of saying, this is my strategy, this is my plan. And if the market drops 15%, 20%, you know what? I’m OK. Because if the market comes back and if my portfolio’s flat for the next 10 years, I know that I can still accomplish my goals. Well, then that’s what the modeling’s for. The modeling is not like I’m predicting this in the future. You know, every year I just want to make sure that my account balances are right with my prediction, because I’m going to tell you, you’re going to be very, very disappointed.

Al: Yeah. Yeah. So all we can say is, I think you’re conservative. Like I said, I just- like what I said before. What I would do is 3% inflation, 6% market. I wouldn’t have a 10 years versus future, just 6%. I would use probably 4% for state of Washington, although I don’t know a lot about that real estate. I would use probably 5% in San Diego where we’re at. But again, I don’t know enough about the market. Your assumptions Tom, are conservative, so I think you probably will be fine.

Joe: I like him too. I like him. He’s creative. He’s doing things a little bit different, which is good. He’s thinking about it.

How Is Our Pension, Social Security, Retirement Withdrawal, and Roth Conversion Strategy?

Joe: Nina writes in from Yorba Linda, California, “Hi Joe, Big Al. I am 59 years old. My husband John, is 60, already retired. He retired at age 45. I will retire in February 1st of this year. I’ve been listening to your podcast for a year now, really enjoy the humor and guidance you provide. Some background just in case you need it: Our assets, $2,800,000. Pension withdrawal plan, my pension is $7000 a month for 10 years starting February of this year. My pension does not have a COLA, 10 years is the fastest way for me to withdraw the money, want to use my pension to allow our own assets to continue to grow. If I die before the 10 year period, John will inherit the $7000 a month until the 10 year period is reached. After 10 years, when the pension is done, we will need to withdraw from our own asset base. Social Security withdrawal plan, my husband does not have enough credit for Social Security. To maximize Social Security our strategy is for me to file Social Security at age 62. I will get $2200. John will get half, $1100, totaling $3300. In addition, we are planning to do more travel for the first 10 years, the go-go phase-”

Andi: There it is.

Joe: Oh boy.

Al: Versus the slow-go and the no-go.

Joe: Oh boy. “- so we don’t want to wait until I reach my full retirement age, which is 67, to file for Social Security. Note: $3200 at full retirement age and about $4000 at age 70. Monthly expenses, $9000, plan to withdraw the difference of $2300 from investments, either from taxable or after tax accounts now until I reach age 62. When I turn 62 I’ll file for Social Security, have enough for spending at this point, will not need to tap into our own assets.” You following this so far, Al?

Al: Yeah, I’m with you.

Joe: Got it. All right. “Our question: currently our asset is 66% pre-tax, $1,800,000, $400,000 taxable and $500,000 after tax. Since we will not tap into our assets for 10 years, it will grow and the thought is we will not need to spend our assets until we pass away. We want to reduce the tax liability for our beneficiaries now by converting some of the money into Roth, thinking to convert 50% of our pre-tax $900,000 to a Roth IRA starting in 2021 for $100,000 a year. We’re married, filing jointly. So in 2021 our tax bracket will be in the 24% tax bracket. $110,000 spend plus $100,000 convert which is higher than we would like. We want to stay within the 12% tax bracket but will not be able to convert much. Does this plan of conversion sound good? Or is there any other recommendation you could suggest? Appreciate any guidance you could provide. And I really enjoy your podcast and learn a lot. Best Nina and John.” All right. So she’s got a pension, taking the 10 year, she’s like over the next 10 years- she’s 59 years old, John’s 60. She’s retiring at 59. John’s been retired since 45.

Al: I like that.

Joe: Big baller.

Al: Yeah, right. Right? She’s been working.

Joe: Grinding.

Al: Putting food on the table.

Joe: Yeah. He didn’t even qualify for Social Security. Didn’t have enough credits. It’s like I’m done.

Al: You think he’s a artist?

Joe: I don’t know what he is. I don’t know. He’s smart though. Married Nina.

Al: Very smart.

Joe: Or maybe a lot of these assets are his. Doesn’t really say.

Al: Doesn’t say, yeah.

Joe: But they got $3,000,000, Al. Let’s call it $3,000,000 that they have. They want to push out Social Security- or they want to take Social Security right away. They’re gonna do the 10 year pension from 59 to 69. So then they’re on their own from 70 to end of life. Do you like to plan? On that strategy? And then we can get in the taxes in a second.

Al: No. I would change it actually a fair amount.

Joe: I would change it too. Go ahead. What do you got?

Al: Well first of all, Nina, you’ve got plenty of assets, so you’re a perfect candidate to delay your Social Security, to let that grow. That’s tax favored. So when you do start taking it, you only pay tax on 85% of the total, number1. And number 2, there is no state tax whatsoever in the state of California, which you’re living in. I would- and you’ve got plenty of assets to live off of. I kind of like not having the Social Security because you’ll be in a lower bracket. You’ve got the pension. We’re going to call it $7000 a month. So $80,000+ a year. So if we just start with that, that’s your income right now and there’s a standard deduction of $25,000. So you’re in the 12% bracket, you could do a $25,000 conversion without Social Security and stay in the 12% bracket.

But more importantly than that, I think you have to fast forward to what it might look like at age 70. And if you’ve got a couple of million dollars in pre-tax right now, it may be $4,000,000 by then. RMD is going to be about 4%.  $160,000 of income. Plus Social Security and your pension will be gone by then. But still, you’re going to be in a high bracket in retirement. That’s the whole point. So I would actually convert with what I just said, at least to the 22% bracket and the 22% bracket for a married couple would go up to about $170,000. So you could probably convert close to $100,000 a year by not taking Social Security, living off some of your other non-qualified post-tax dollars and end up converting quite a bit over a 10 year period. That’s what I would do.

Joe: I agree. The 10 year- I need to know a little bit more about the pension, I think. She’s taking the 10 year pension. That’s the fastest she can get the money out. But let’s say, what is the joint with rights to Survivor look like? For her entire life? Her and John’s life. Or is there a 20 year option, a 30 year option? Is there a lump sum?

Al: Good point. Because, she’s figuring she needs to spend the most right now because these are the go-go years-

Joe: -go-go-

Al: – but you got the assets to do it. So if it’s smarter to take the pension and certainly Social Security in a different manner, then I would consider that.

Joe: The end goal is that she wants to spend $9000 a month, plus tax, plus the cost of living. And then she wants to make sure that all the assets go to the kids tax efficiently. And if her and John spend a little bit more money than $9000 and still give a lot of money to the kids, I’m sure she’s going to be happy with that. So that’s why you have to look at all the numbers and how everything kind of correlates together. So I would want to look at the pension a little bit further just to see what’s the internal rate of return of each option that she might have. And then you look at combining different ideas with that, if that’s the foundation. But I’m just going to go with her plan and say you’re going to take the pension for a 10 year period. You’re going to start, let’s say, at age 60. It’s going to end at age 70. I would definitely push out Social Security until at least your full retirement age, take your benefit at that point. And then John will take the spousal benefit based on that amount. Because she’s saying, I’m going to take it at 62 and then John’s going to take the spousal at 62. And he’s- they’re both going to get a reduced benefit from Social Security for the rest of their lives. It doesn’t make any sense to do that. You’re just shortchanging yourselves that you can leave a couple hundred thousand dollars on the table. So at least wait till full retirement age to claim your benefit. As Al said, it’s tax favored. The state of California is not going to tax it. And if you do this right, maybe 50% of the benefit is taxed, or at least at the minimum, 85% of the benefit is going to be subject to tax and 15%’s tax-free. Then you look at the distribution strategies like, you need to take $10,000 or $20,000 a year, maybe a little bit more from now until your full retirement age. It’s not a big deal because you have $4,000,000- or $3,000,000. So let’s say you take $30,000 from the entire portfolio. It’s 1%.

Al: It’s still going to grow, a lot.

Joe: It’s going to grow. Let’s say you get a 5% rate of return. It’s still going to net 4%. And that’s a fairly conservative portfolio over time. If you get a 6% rate of return or 7 years- it’s going to net 6% over a 10 year time period. Now, there’s $3,000,000-  $6,000,000 or close to that. So you just got to maneuver, the puzzle just a little bit differently because she’s like, oh, the go-go years. God, I hate that saying. I hate the go-go, the low-go, the no-go, and the stupid-go. It’s so- they’re not thinking of their future selves. Because when they turn 70 Al, that’s going to be pretty young because that’s still a long time from now and with medicine and health care and-

Al: That’s right. Now the only thing that could change that is if they if they both have impaired life expectancy. Right?

Joe: Right.

Al: Now, if at least one of them feels like they’re going to live a long time, you would want to defer that Social Security because you’ll end up in a lot better spot. If you’re thinking about tax favored income and getting more money to the kids, then, yeah, you want to- and as long as you have reasonable life expectancy, at least one of you, then that’s definitely the way to go. This is a classic case of pushing Social Security out because you don’t need the money.

Joe: Right.

You’ve got plenty of assets, did a really good job of saving money, made decent money, fairly frugal, given the fact that John retired at 45.

Al: Yeah, I like that.

Joe: So congratulations to both of you. Hopefully that helps, but they’re going to still do what they want to do.

Al: Oh yeah, they just want a second opinion.

Joe: So no, I would push out Social Security. You could probably get a lot more money converted and then we could go on and how you should invest it and all that other good stuff. But you didn’t as us that. So we’ll move on.

Download The Ultimate Guide to Roth IRAs for free from the podcast show notes at YourMoneyYourWealth.com. It explains in depth what a Roth IRA is and how you can benefit from having one, how a Roth IRA differs from a traditional IRA and from a Roth 401(k), the rules for contributing to a Roth, Roth conversions and backdoor Roth conversions, the rules for taking withdrawals from your Roth account, and more. Click the link in the description of today’s episode in your podcast app to go to the show notes to download your Ultimate Guide to Roth IRAs for free, and of course, if you still have questions, you can click the Ask Joe and Al On Air banner there in the show notes and send them in.

Tax Filing: Do I Qualify for the Earned Income Credit?


Tax Strategies for Full-Time Overseas Student: Should I Convert to Roth?

Joe: Got a question coming in here. “Hey, Joe, Big Al and Andi. My name is Will and I currently live in Los Angeles with my roommates and their 2 cats.” Where is this going, Al? Where is this going? “I listen to your podcast each Tuesday on my way to and from work while playing Vehicular Tetris on the 101 freeway in my 2013 Dodge Charger. Got a tax question for you. Bottom line, up front, I would like to know if there’s any specific tax strategies I should be looking to take advantage of if I would temporarily be leaving the workforce to become a full time student in an overseas university.’

Al: OK, cool.

Joe: So he’s separating from the military in February ‘22 after nearly 9 years of service. Well, thank you so much, Will, for your service.

Al: I second that.

Joe: And will, Covid willing, be moving to Australia for a year and a half to get my master’s in international business. I’ll be a full time student in this time; do not plan to work when he’s enrolled in school. I’m 30 years old, single with no dependents, I have $125,000 in taxable brokerage account, $48,000 total in the TSP, $43,000 in a Roth. I have no consumer debt. However, I do have $223,000 on a mortgage, 2.75% interest rate on a rental property in Florida that grosses $23,000 a year. I’m a Florida resident. Do not pay state taxes. My thoughts are that I should use this opportunity to either roll over and convert most of the traditional balance on my TSP to a Roth IRA or tax gain harvest and sell some of the equities in my brokerage account. Do one of these strategies make more sense than the other? Additionally, are there any other specific international tax strategies, opportunities that I should take advantage of?” Oh, Ok. “By the way, I’m one of these pesky FIRE people. Do not plan on working until traditional retirement age. Thanks for all you do, Will.” Yeah, he wants to put it all in the Roth so he can spend it all at 45.

Al: Then we’ll have that discussion.

Joe: When you call back.

Al: You can spend your basis only.

Joe: Yes. So I guess the question with Will is- that’s a pretty sharp car. That looks like a military kind of guy’s car.

Al: It does. That’s got some-

Andi: That’s bad ass. That is a muscle car.

Al: That’s got some power. That’s like a supercharged Mustang.

Andi: Well, it’s a Dodge Charger. So it’s referencing back to the old Dodge Chargers.

Al: That’s right.

Joe: Ok, so he’s got a couple- someone that drives that car- you would be like, oh yeah, that guy lives with 2 roommates and 2 cats.

Andi: He’s saving money. He’s in the FIRE movement. He couldn’t help it with the car, though, apparently.

Al: And Fidelity says you’re supposed to have one times your salary by age 30. He’s probably well past that. So good job.

Joe: So the question is, he’s moving to Australia, any foreign tax deals he can do, Al?

Al: Well, he’s got no income, so his thinking is right. He’s got a couple opportunities here. One is to do a Roth conversion on the $34,000 of his TSP that’s traditional. He could do that. Or he could do tax gain harvesting on his $125,000 brokerage account. The tax gain harvesting would be tax-free up to about $40,000. And if he’s got no income, you get a standard deduction of about $12,000 as a single taxpayer. So you could actually have, let’s call it $50,000 or so in gains and sell them, re-buy the stock back or investment back if you want, you increase your tax basis. There’s no current tax, federal or state, because you live in Florida. So, yes, that’s a great idea right there. The second thing is the $34,000 Roth conversion. Yeah, I would look at that, too. Same thing. You already have a $12,000 standard deduction for nothing. So you could convert $12,000 and not pay any tax whatsoever. Or you can convert about $50,000 and- well there’s only $34,000 there so you can’t even convert that much- but you’d be in a nice low bracket. Maybe you do, maybe do half and half. I don’t know how much gains you have in the taxable brokerage account, but yes, you’ve got great opportunities because you’re in a low bracket. So it’s actually a great question.

Joe: Anything-

Al: – international wise?

Joe: Yeah.

Al: Not really. Because if he was making money internationally, we could talk about the-

Joe: -foreign tax credit?

Al: Yeah, well, the foreign tax credit and the foreign income exclusion, I guess is what they call it. You like that word, exclusion.

Joe: Yeah. I like how you talk foreign tax, Al.

Joe Needs Chiro/PT Suggestions for Sciatic Pain

Joe: You know, I got a request, Alan.

Al: Yeah.

Joe: For our doctor/chiropractor/physical therapist, any listener that understands back and sciatic pain.

Al: Yeah, yeah, you got a request? How to fix it?

Joe: Yeah, I need some help.

Al: You do need some help.

Joe: I got, like, something that is not firing in my glute.

Al: All right. So it’s like a shooting pain down your leg?

Joe: Yeah, but it’s like Tiger Woods. My glutes aren’t firing. They’re not activating.

Al: Your glutes.

Joe: My butt.

Al: Got it.

Joe: Right? Andi, have you ever had sciatic pain?

Andi: No, I have not. I have never had pain in my butt – except you guys.

Joe: Ohhhhhhhh-

Al: There we go.  There we go. Ok, I knew it was coming.

Joe: Wow.

Al: I could tell she was in a mood today. Here it is.

Joe: Oh.

Andi: I’m sorry. You guys lined it up. I just couldn’t let that one go.

Al: That was a softball, I gotta admit.

Joe: Yes. So I’m playing golf and so I load up on my left side. I’m trying to swing.

Al: And you swing hard. You don’t swing easy.

Joe: I try not to swing that hard, but apparently I’m just swinging outta my shorts.

Al: When I’ve seen you, it’s like Dustin Johnson and it’s either in the fairway or not to be found. One direction or the other.

Joe: I hit it like a- pretty far, but it’s usually like a 500 yard slice.

Al: Have you ever gone over two fairways?

Joe: Yes.

Al: Yeah, not just one?

Joe: Yes. Yeah. And then all of a sudden I felt something in my ankle.

Al: From one of your swings?

Joe:, No, just playing. And it was like this is kind of funny. And then it just shot up, all the way up my leg. And it starts in my back and then goes down. So anyway, it’s a lot better, but I haven’t played golf in a couple of weeks.

Al: So we need a listener to help you out.

Joe: But yeah, I’m doing stretches. I can’t sleep. Do I heat it? Do I ice it? Is it damaged? Then-

Al: Physical therapy? Exercise?

Joe: Yeah. What do I need?

Al: Motrin?

Joe: We give all of you guys this advice, I’m just asking for a little something in return.

Al/Joe: Something back.

Al: All right.

Joe: That’s it for today. That’s it for this week. We’ll be back again next week. You got money questions, go to YourMoneyYourWealth.com. We’re chugging along here, so we should get to your question soon, so we’ll see you again next week.

Well that was a giant Derail. Stick around, we got a couple more quick ones at the end of the episode for you.

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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.