Learn how to rack up tax-free Roth retirement income: Roth IRA vs. Roth 401(k), paying the tax on a Roth conversion, how to avoid violating the 60-day rollover rule on a mega backdoor Roth, and Roth IRA contributions when receiving restricted stock units (RSU) in retirement. Plus, moving money from solo 401(k) to IRA before age 59.5, suggestions for a CFP® to be, and matching your umbrella insurance policy to your net worth.
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- (01:01) Pros and Cons of Roth IRA vs Roth 401(k) (Smitty, The Villages)
- (06:11) RSUs Are Earned Income. Can I Contribute to Roth Even Though I’m Not Employed? (Tom, Chicago)
- (11:37) How Should I Pay the Tax on a Roth IRA Conversion? (Greg, Hampshire, IL)
- (15:10) Mega Backdoor Roth: Did I Violate the IRA 60 Day Rollover Rule? (Satish, YouTube)
- (22:44) Can I Transfer from Solo 401(k) to IRA Before Age 59 and a Half? (Karl, Denver)
- (29:08) Joe and Big Al’s Suggestions for CFP® to Be? (Andy, Alexandria, VA)
- (39:04) Should I Match My Umbrella Insurance Policy to My Net Worth? (Eric, Sacramento)
- (42:13) Comments about Joe’s Mom Ruthie and YMYW TV (Juan, Las Vegas)
- (44:33) Comment: 529 Plan Can Be Used For Golf Academy (Tom, Chantilly, VA)
Roth IRA vs. Roth 401(k): What Are the Retirement Differences?
Listen to today’s podcast episode on YouTube:
Today on Your Money, Your Wealth® podcast #326, Joe and Big Al help you rack up more tax-free retirement income in those ever-important Roth accounts: they’ll talk about the pros and cons of a Roth IRA vs. a Roth 401(k), how to pay the tax on a Roth conversion, how to avoid violating the 60 day rollover rule when doing a Megatron – or rather, mega backdoor Roth, and Roth IRA contributions in retirement when receiving restricted stock units, or RSUs. Download a free copy of the Ultimate Guide to Roth IRAs from the podcast show notes at YourMoneyYourWealth.com to find out how you can get lifetime tax-free growth on your investments. Plus, can you move money from solo 401(k) to IRA before age 59 and a half? What suggestions do the fellas have for CERTIFIED FINANCIAL PLANNER™ professionals-to-be? And should your umbrella insurance policy match your net worth? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Pros and Cons of Roth IRA vs Roth 401(k) (Smitty, The Villages)
Joe: Smitty from The Villages. Our boy Smitty. “Hey guys. Recently I transferred my individual 401(k) from Fidelity to Vanguard because Vanguard offers a Roth 401(k) option with their individual 401(k). Fidelity does not. I asked my rep at Vanguard if they had any restrictions with me moving money from my individual Roth 401(k) to my Roth IRA, also at Vanguard. My rep said I’m free to do so. So I have two questions. Can I move funds from my individual Roth 401(k) to my Roth IRA multiple times per year? Or would there be restrictions? What are the pros and cons of leaving my funds in an individual 401(k) versus moving some of the funds out into my Roth IRA? I don’t believe I have the same access to all Vanguard index funds with either account- I do believe I have the same access.” Smitty from The Villages. He’s got 2013 Edgewater Bay boat. “By the way, I prefer the derails at half-speed because it sounds a lot like you all milked happy hour for all you could.” Oh wow.
Andi: So he listens to the derails really slow so we sound drunk? Thanks Smitty.
Al: Maybe it’s funnier that way.
Joe: I don’t know.
Andi: Sounds like.
Al: I think we should try double speed, don’t you Joe?
Joe: Well yeah. Triple speed. That’s how I listen to my books on tape.
Andi: So that was about you.
Joe: It was not about me.
Al: No, it was not. It was about another person that we all know.
Joe: Yes. So I can listen to 8 books in a half an hour.
Al: You know, if you get multiple devices you can listen to 2 or 3 books triple speed and in one day you could-
Andi: Have one in each ear.
Joe: I keep my car running. I have a book playing in there.
Al: Book playing in there, and then you have your phone going and then you got some other portable device, your iPad. So you listen to 3 at a time.
Al: Just cram it in. You probably do it when you go to sleep too. That way, you’re like- 24 hour period, you’ve listened to 400 books and you’re really smart.
Joe: Anyway. People are driving me nuts with this individual 401(k) versus the Roth 401(k). It doesn’t matter. They’re both at Vanguard. You have the same funds. There’s very, very little difference whatsoever. So by moving the individual 401(k) to the Roth IRA, it doesn’t make a lot of sense. You don’t really get the- if the individual Roth 401(k) has the same protections as a safe harbor 401(k) in regards to bankruptcy, I don’t think it does.
Al: It doesn’t. But you still, as far as IRAs, at least in California, you get somewhere a little over $1,000,000 of protection.
Joe: There’s no difference in my opinion. I would keep it in the Roth 401(k) until you decide to move it once you turn age 72. That’s the big deal. Age 72 in a Roth 401(k), you have to take a required minimum distribution. Smitty, I don’t think you’re anywhere near age 72, so keep it in the Roth 401(k) until you fully retire where you’re not funding the Roth 401(k) anymore. Can you move the Roth 401(k) into a Roth IRA? Or can you move a Solo 401(k) into a IRA? The answer is maybe. You have to look at in-service withdrawals because it is under Section 401(k). You can move IRAs all you want in regards to transfers. But you can only do a rollover once a year. Same with 401(k) rules. It depends on the plan doc and how you set the thing up. Does it allow for in-service withdrawals? And what that means is that the plan is still in service. You’re still working, you’re still an active participant in that 401(k) plan and it allows you then to take money from the 401(k) plan as you’re still contributing to the plan and moving it into an IRA. But there’s no difference, really, until he turns 72, in my opinion.
Al: I would agree. I can’t think of any reason to do it unless you’re 72. Because if you’re 72, if it’s in a Roth 401(k), you have to start taking required minimum distributions, even though it’s a Roth 401(k). If you transfer it to a Roth IRA, then you do not have to take RMDs. So that would be the reason. But the only reason I could think of.
Joe: We’re going to get emails on this. Are you sure about this? Roth 401(k)s have a required minimum distribution. Roth IRAs do not have required minimum distributions.
Al: I think that’s not widely known, Joe. So it’s good to repeat it. We probably said it 50 times over the last 100 shows, but it’s worthwhile saying.
Joe: Hopefully that answers your question, Smitty.
RSUs Are Earned Income. Can I Contribute to Roth Even Though I’m Not Employed? (Tom, Chicago)
Joe: We got Tom from Chicago writes in. “Andi, Joe and Massive Al.”
Al: Oh, Grande Al, but now Massive Al.
Joe: Massive. “I have a follow-up question regarding RSUs. This is Tom from Chicago here again. Still loving your podcast and not advice that you provide weekly. I would like to clarify that I’m not 45 years old. I’m really 60 and I’m true to this financial podcast.” Was he lying to us before or something and now he’s coming whole?
Andi: I don’t know.
Al: I think we guessed he was 45 and he’s a little older. Apparently.
Joe: We’re going to have a new segment. I want people coming in asking for like advice on everything but finances.
Andi: Oh boy.
Al: We’ll give you advice on how to change electrical outlets and how-
Joe: No, I just I want to get in, you know, people lying to their spouse or they caught in some weird ass predicament.
Al: Oh, you want that kind of show.
Joe: I would like to know. And then I would give them my perspective on their life.
Al: So you want to be like a psychologist?
Joe: No, I would like to be like-
Andi: He wants to be Dear Joe.
Al: Dear Joe.
Joe: Yeah, that’s right. I got a column coming out next week.
Al: Dr. Joe instead of Dr. Phil.
Joe: Yes. “I really am 60 and I am true to this financial podcast. I’ve tried a few others but only subscribe to YMYW.”
Andi: Wow. Thanks, Tom.
Joe: Thanks, Tom. “I really would like to retire in 3 years and have been trying prep for that during my morning runs, listening to the pearls of wisdom you guys impart weekly. I have some specific, possibly odd questions, due to my background and training. I’m a PhD statistician working for a tech company-“
Andi: Wait a minute. You can say statistician?
Al: That’s easier to say than particularly.
Andi: That just like rolled off your tongue.
Joe: Because I took statistics in college. I’m very statistical inclined.
Al: He’s particularly good at that word.
Andi: Apparently so.
Joe: “We make CPAs look flashy.” This guy’s a PhD statistician?
Al: Oh, I like that.
Joe: Oh, my God, Tom. He’s like, look at the big brain on Tom. And he listens to our garbage. This is what just blows my mind.
Al: We try our best.
Joe: We got PhD’s listening to this stuff. “But we are not as nerdy as math professors. As such, I tend to be- ” oh God, what is that? pununtuous?
Al: Punctilious. Andi defined it for you. Showing great attention to detail or correct behavior.
Joe: OK. “When I retire, my RSUs will continue to vest over 3 years after I leave my job. No early vesting like some companies have at retirement.” Oh, wow. OK, it’ll continue to vest after he leaves.
Al: That’s pretty sweet.
Joe: “Should receive about $60,000 the first year; $40,000 the second; and $20,000 third year. As RSUs count as earned income, does that mean I could contribute to a Roth IRA $7000 maximum each of the first 3 years of retirement? As I am married, can my wife also contribute to her Roth IRA for the same amount, even if she is not employed? Thus together we can put $14,000 a year as the RSUs vest. Thanks again for your wonderful show and keeping me entertained and engrossed on my 6-mile morning runs.” All right, Dr. Tom. OK, so he’s got RSUs. He’s not working. RSUs are taxed at ordinary income. Can he contribute to a Roth IRA? Is it earned? Is the question. Is it earned income?
Al: It’s a good question. And the answer is Tom, probably not. Because there’s a few different ways I think, that companies report RSUs, in this particular case. I think what’s generally done is that the Social Security taxes are paid at the point that you retire. Which, whatever date that is, or in some cases the company can elect to report that, but before year-end, but file it before year-end. So I think what’s going to happen is the $60,000 and the $40,000 and the $20,000, that would just be ordinary income and you would have already paid the Social Security taxes in that first year. That’s what I’ve seen. Not every company understands this rule. I mean, it’s kind of an obscure rule. So if your company happens to give you a W-2 for 3 years, that has it on there with Social Security withheld, go for it.
Joe: Yeah, then why not?
Al: Why not? Or if they give you a 1099 that you can call self-employment income, go for it. But that’s what I’ve generally seen is they’ll kind of front load the FICA so you don’t really get it over time.
Joe: All right, hopefully that helps Tom.
How Should I Pay the Tax on a Roth IRA Conversion? (Greg, Hampshire, IL)
Joe: OK, Greg, he writes in from Hampshire, Illinois. “Andi, Big Al and Joe, got a tax question for you regarding, you guessed it, Roth conversions, and the best way to pay the taxes. We’re married. We’re a married couple. Over the years, we’ve accumulated a couple of million dollars in IRAs, 401(k)s, 403(b)s and 457s, and other investments. Currently distribution is 80% standard IRA, 401(k), $2,000,000; 10% Roth, $200,000; 10% in other savings; staying within the 24% tax bracket. We’re considering Roth conversions this year by converting $125,000 per year. Living in Illinois, it’s my understanding that we won’t be paying any state income taxes, so we’d only be paying federal. The question, what is the best way to cover the taxes?” What’s the best way? What do you think?
Al: Well, he’s got two choices.
Joe: Yeah, I know, but he’s- you’ve got to pay the tax outside of the Roth. That’s my-
Al: Well, that is the best way. So he’s got two options. Should he have withholding out of the conversion because he’s turning 59 and a half later this year? Or should he take $30,000 out of the after-tax savings? That’s almost always the preferred way is the after-tax money, because then you get more into the Roth IRA. I mean, think about it. If you pay the tax out of the $125,000 that you’re putting into the Roth, pay $30,000, you’re going to end up with $95,000 in the Roth. You took out your $30,000 in the cash account- savings account. I’d rather have the $125,000 in the Roth. Because it’s all future earnings are tax-free even if you need it later. Just pull it out tax-free. So yeah that, that to me is the way to go.
Joe: So you have a couple hundred thousand there. $30,000 a year. You could get a good chunk out of the 24% tax bracket and then when you retire, you probably just want to go to the 12%. So you spend a little bit on tax but you’re building a bigger core in the tax-free. You can take it out of the conversion, but we very rarely- you have to have a lot more, I think, than $2,000,000 in a retirement account or you have to have pensions. There’s some circumstances where it does make a lot of sense to pay the tax from the conversion itself.
Al: I agree with that. So let’s say you had $2,000,000 in an IRA and you’ve got $100,000 pension- $150,000 pension and you have zero non-qualified. It’s like, OK, you’re kind of in an extreme tax situation. So I think I would recommend withholding in that case. As long as you’re over 59 and a half, you got to put that caveat in there. Because if you’re under 59 and a half that withholding, not only do you have to pay tax on the withholding, but you have a 10% penalty too.
Joe: So you want to be careful there. So good question. Great job of accumulating some wealth, Greg from New Hampshire.
Download that Ultimate Guide to Roth IRAs for free from the podcast show notes at YourMoneyYourWealth.com to learn the differences between a Roth IRA, a traditional IRA, and a Roth 401(k), find out about Roth contributions vs. Roth conversions and backdoor Roth conversions, learn about taking withdrawals from a Roth 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. Of course, you can also click the get an assessment button and schedule a free financial assessment video call.
Mega Backdoor Roth: Did I Violate the IRA 60 Day Rollover Rule? (Satish, YouTube)
Joe; OK, we got “Hi, my name is Sattish.
Andi: I’m going to guess at Satish?
Joe: Al? Any guesses?
Al: Andi usually has really good intuition. So I’ll go with that, Satish.
Andi: Thanks Al.
Joe: I think it’s Sattish.
Al: Satish sounds cooler.
Joe: Satish. “I saw your YouTube financial advice videos. Thanks for sharing the knowledge and helping the community. Hope you can help me clarify the situation I encountered with a rollover.” OK, let’s see what we got here. “I was trying to follow the savings strategy known as ‘mega backdoor Roth’.” Oh. In quotes there “mega- mega backdoor Roth.’ The strategy is characterized by the ability to make after-tax contributions to my employer 401(k) and then do an in-service withdrawal of the after-tax contributions to a non-company Roth IRA. My employer 401(k) offered in-service withdrawals of after-tax contributions and associate earnings.” OK, everything sounds good to me.
Al: Yep. So far, so good.
Joe: “For the first rollover request, I received two distribution checks from my employer’s plan. One check was related to associate earnings that came as a direct rollover with ‘Payable to Vanguard’, my financial institution holding IRA FBO of my name, and I deposited the check into the Traditional IRA tax-deferred. The second check was related to the principal after-tax contributions that came on my name. I think it will fall into an indirect rollover or 60-day rollover, that I deposited into my Roth IRA, tax-free. My employer 401(k) Plan administrator confirmed I can do multiple rollover requests at any time and there’s no limits on the frequency. I repeated the rollovers 3 times with 3 different amounts and 3 different dates during March and April of 2021. Question. Vanguard, my financial institution holding IRA, told me I may have violated the 60-day IRS rollover policy by depositing more than one check that came in my name into my Roth IRA account. As per them, indirect 60-day rollover in IRA can only be done once in 365 days.” I agree that an IRA rollover in such a manner is once a year, but she’s not doing an IRA rollover. It’s not going from IRA to IRA and she’s not doing a 60-day rollover is I guess my point. It seems to me that she’s doing a direct rollover.
Al: But it’s strange that it’s coming in her name. So she just putting that into a Roth account? Or she’s putting it into her bank account and then putting it into the Roth by writing a check? That would be a problem for sure. The way it’s supposed to happen is that you get the in-service withdrawal, but it’s in the name of your financial institution, like Vanguard, then it’s- it doesn’t- there’s no issue. But when it’s in your name, it’s- it could be a little bit dicier. Joe: So Satish. Satish. Sunrise.
Al: That’s what it means, apparently.
Joe” “Is my employer 401(k) plan administrator- ”
Andi: It’s a boy’s name.
Joe: Got it. “The only restriction for how many 60-day rollovers you can do within a year would be from IRA to IRA, not from 401(k) to IRA. So there’s no issue with the number of indirect rollovers I did in my Roth account. Asked, as IRA and retirement experts, can you please help clarify what is the actual rule? Did I violate any IRS rules? Or can I do a multiple indirect 60-day rollover from my 401(k) plan to an IRA? Thanks in advance for your help and guidance. If needed, I can call to share additional details to get your guidance.” By all means, please call. First of all, we’re not experts on anything, so thank you for that. See she’s putting the pressure on us, Al.
Al: Yeah. Or he.
Joe: Or he, sorry. “As IRA and retirement experts.”
Al: Well, I think Ed Slott’s an expert. We’re just a couple radio guys.
Joe: What Satish is doing is right on. Because we have clients that have very similar provisions where they can do multiple in-service withdrawals. He’s doing an in-service withdrawal. That’s not a 60-day rollover. Your employer plan is correct or your 401(k) plan administrator is correct. I would not- you’re talking to someone at Vanguard, probably from an 800 number, right? No offense, I love Vanguard, but they’re probably not a true expert on what they’re actually doing. You’re getting checks and they’re like, oh, is this a 60-day rollover? Well, you can only do a 60-day rollover once every 365 days, which used to be once every calendar year. And what a 60-day rollover is this. I have an IRA that I’m taking money out of the IRA. I have 60 days to pay the money back into the IRA with no harm, no foul. So I move it out of my IRA. I can move it back into my IRA or I can move it into another Traditional IRA. So it’s not an ACAT transfer. So a transfer is moving that from Vanguard to Fidelity, Fidelity back to Vanguard, Vanguard to Merrill Lynch, whatever. That’s ACAT. You don’t see the money. A 60-day rollover is usually used to use capital for 60-days. It’s like a zero cost loan. You’re just taking the loan from yourself and then you pay yourself back after 60-days. It’s a 60-day rollover that you have access to the money with no penalties, no taxes, as long as it’s paid back within the 60 days. You could do that one time every 365 years. What this individual is doing, is doing an in-service withdrawal from a 401(k) plan. The 401(k) plan is sending him two checks. One check is the after-tax component. So they’re just putting that in his name because it’s after-tax. He’s taking that and he’s putting it into his Roth IRA. The other component is taxable, right? Because that’s the growth of whenever after-tax dollars that he had to do the mega Megatron backdoor barnyard Roth conversion.
Al: To me, the only caveat is when he gets that check in his name, he would have to send that right to the custodian. If he puts it in his account first and then writes the check, now you’ve got a problem.
Joe: What, a little commingle? A little scam? A little arm’s length?
Al: Yep, little issue there.
Joe: Hopefully that helps. Appreciate Satish. Appreciate it.
Can I Transfer from Solo 401(k) to IRA Before Age 59 and a Half? (Karl, Denver)
Joe: We got Karl from Denver, writes in. He goes, “Let me explain my situation. I’m now confused about the 401(k) move I want to make. I wish to transfer liquid funds from my Solo 401(k) over to an IRA. Prior to watching your program, I thought I was allowed to do so without any risk of penalties or scrutiny once I reach 59 and a half years old, but now I’m not so sure. After watching all of your programming on tax-related planning, I have come to believe that either a) I can go ahead and move my money now, even though I’m not quite 59 and a half yet, because that’s allowed as long as I’m 55, which occurred a long time ago.” So he’s not quite 59 and a half, but 55 was just like decades ago.
Al: Long time ago.
Joe: “I can’t do that even after I reach 59 and a half unless I inform the IRS that I’m retiring. But I don’t want to because I want to keep working and plowing my earned income into my Solo 401(k) and my IRA both. So what is it, A? Or B? Or more likely, neither? Can you help me? Signed, Confused in Denver.” So I reached out to Karl.
Al: That’s what you told me.
Joe: He keeps e-mailing. He’s like, did you get my e-mail? Did you get my email? I’m like, we get hundreds of these things. And he wrote it to you, Big Al.
Al: He did.
Joe: And I don’t know why the hell I’m answering it.
Al: Because you like to answer these. I’m too busy.
Joe: Yeah, exactly. Sometimes when people annoy me enough, they might just-
Al: They might get your answer.
Joe: So I go, why the hell do you want to do this anyway? You know what I mean?
Al: We went through this already earlier in this show.
Joe: Exactly. It’s like-
Al: Generally with a Solo 401(k), it’s probably at the same brokerage firm as your IRA, same investments. What’s the difference?
Joe: And I said in a Solo 401(k), depending on your income, you can put a lot more money, $50,000 some odd in a Solo 401(k) depending on what your income is, and then you could still contribute to the IRA. So why do you want to mess with all this stuff? Because he wants to invest in individual stocks, Al.
Joe: And I was like just transfer the 401(k) to a brokerage house that will allow you to invest in individual 401(k)- I mean individual stocks. He wants to make his life difficult. Well, I don’t want to do that because then I got to move the money. It’s like well then who cares? Then why are you bothering me? So then he went on to say, ‘I think Big Al is the smartest guy in the world. Joe, you’re OK, but I really want to sit down with Big Al.’
Al: ‘I really want to meet with Big Al.’
Joe: And ‘I gotta meet with Big Al’. And I was like, Big Al? You’re given the guy too much credit. He’s old. He’s forgetful.
Al: That’s probably true.
Andi: He can’t remember.
Al: I can’t remember that part. We could just answer his question. Can he transfer from a Solo 401(k) to an IRA before 59 and a half? It depends upon the plan. But most plans we’ve seen, Joe, you have to be 59 and a half for an in-service withdrawal.
Al: It doesn’t matter whether you’re 55 or 57 or 58. It’s the Solo 401(k)’s plan and what it allows you to do with regards to in-service withdrawals. It’s as simple as that. But I would agree with you, Joe. I don’t really see a good reason to do that. If you want to invest differently, then change the type of account you have in your Solo 401(k). It’s no big deal.
Joe: But the custodian that he has only allows mutual funds, ETFs and the like. They- apparently, according to him, I didn’t do any research for this.
Al: Oh, in the IRA?
Joe: In the Solo 401(k). So but he can do it in the IRA, so he wants to do the in-service withdrawal, move it into the IRA so he can buy his Tesla. Yes. Or Netflix or Google or you know, Alphabet. So I just said you’ve got to check the plan doc, if you can do an in-service withdrawal and you can do it as much as you want, then by all means do it. If you can’t-
Al: If you just really, really want to do this, then close out your Solo 401(k), transfer to an IRA and then later set up another one. How about that? It’s a lot of work for nothing. But you could.
Joe: You could absolutely do that. Just close down the 401(k), roll that into an IRA and then open up another Solo 401(k). And then you just can play around with the stocks in there and then the future contributions will have to go in your index funds and-
Al: And then once you hit 59 and a half then you can start doing in-service withdrawals.
Joe: Or just move it to another brokerage account that allows individual stocks inside your Solo 401(k).
Al: That seems simpler.
Joe: OK, Karl. Karl loves you.
Al: Well I appreciate the kudos because usually it’s Joe, you’re the one that’s getting all the acclaim.
Joe: Yeah, well, I got one.
Al: Every now and then I get somebody.
Joe: I got one. My guy. He loves me.
Al: He does.
Joe: Besides that, everyone else calls me Joel.
Andi: And Al’s being called massive.
Joe: Oh, all right.
Al: Should I set the stage straight? My BMI is 24. I’m not massive.
Joe: Your body-
Al: – mass index.
Andi: – mass index.
Joe: – mass index? I was getting there.
Hey, do you know what’s included in The American Rescue Plan, and how we’re paying for it, and how it might affect your retirement plans? Download our free guide from the podcast show notes at YourMoneyYourWealth.com to learn about this new COVID-19 relief package, the recovery rebates, the enhanced child and dependent tax credits, unemployment, and much more. Click the link in the description of today’s episode in your podcast app to access the show notes and all the free resources, and of course, click Ask Joe and Al On Air in the show notes and send in your money questions, and your comments and suggestions as well.
Joe and Big Al’s Suggestions for CFP® to Be? (Andy, Alexandria, VA)
Joe: Andy from Alexandria, Virginia, writes in. “Hi, Joe. Big Al and, Andi, my favorite. But I’m biased on the name.
Andi: Thank you, Andy. Nice to meet you.
Joe: Andi and Andy. “I’ve been really enjoying the podcast over the last few months since I’ve discovered it. And I’m working my way through older episodes, which I know baffles Joe, why anyone would bother.” Very true, Andy. Very, very true. “Unlike most of your listeners, I’m not looking for advice on my own finances, but more enjoying your episodes as examples of types to help others as I’m looking on how you approach answering them. This is because I’m looking to switch careers into financial planning from software product project management, and I feel like I’m learning a lot from the episodes. I’m in my mid-30s and currently working for my CFP® coursework with plans to take the CFP® exam in the coming year. This is while still working my current job. My question, therefore, isn’t about a garage door Roth. But is what advice would you give someone looking to move into the industry and looking to be a desirable hire for companies like Pure? What else should I be doing in the meantime before starting on job applications? I drive a Honda Fit and we get paid to watch other people’s dogs. So we got a new furry friend in the house every week. Thank you so much, Andy.” Well, that would kind of bug me to have a furry friend in my house every week.
Andi: Even if you got paid for it?
Joe: I don’t know. I got, like, friends that come into my house every week.
Al: It’s the same thing.
Joe: You’re furry and fuzzy.
Al: They slobber around looking for Coors.
Andi: You can’t get paid for that?
Joe: No, I wish I could. All right, Andy, let’s talk about your career here in financial planning. So there’s two sides of this career. One is that there is the technical side. So congratulations on getting that coursework done. The CFP® is the gold star of our profession. It goes through several different areas of financial planning, takes a deep dive. The exam is very difficult. And if you can get through the coursework, get through the exam and the pre-course study work and everything else, that is a huge accomplishment. And you should be extremely proud, as I am, because I’m a CERTIFIED FINANCIAL PLANNER™.
Al: Yeah. From you, the CFP®.
Joe: Yes. CPA-
Al: Are you proud of yourself, Joe?
Joe: CPA’s a joke.
Al: Wow. That’s not what I’ve heard.
Joe: I’m kidding.
Al: You know, actually, the chartered financial analyst has us both trumped.
Joe: Yes, the CFA.
Al: That’s harder still.
Joe: That is harder still. So that’s one side of it, right? I think you’re doing the right thing by listening to financial podcasts, probably reading financial books. What I used to love to do is read other financial advisors’ books. Even though I didn’t learn a thing, I learned how they communicated certain financial topics when I was getting into the business. Because the one side of it is that you could know everything in the world about financial planning, taxes, investments, insurance, estate planning, whatever, but if you don’t have anyone to share your information with, you’re not going to be in the business that long. Because you have to gain clients and to gain clients, you need to have an ability to get yourself out there and to motivate people to take action once you get down and sit down with them. So some people hate that side of the business and some people love it. So what should you be thinking about? Or what career track would you want to go down? You know what I mean? So you could go, let’s say, the wire houses like the big Merrill Lynch’s of the world and Morgan Stanley and Wells Fargo, they could put you in a training program. I would say most, 80%, 90%, I don’t know what the exact percentage is, fail out.
Al: In about, what, a year or two? 18 months?
Joe: Yeah, year or two. Because they don’t have anyone to sell to. It’s like here’s my friends and family. Here’s my natural resources. He’s in his mid-30s, so he’s got a little bit of an advantage than someone right out of college. Because Andy’s got- and I don’t know if Andy’s a girl or guy. I’m sorry, Andy, but he spells it like a guy. So I’m going to assume. But Andy’s got life experience more than someone at 21, coming out of college and, coming straight out of college like I did to get in the profession, it was a nightmare. I hated this career for at least a couple of years. All I did was cold-call people in the middle of their dinner to try to sell them a loaded mutual fund.
Al: So would you just go through the white pages or how did you get your list to call?
Joe: Oh, I’d buy leads Al, come on.
Al: You’d buy leads.
Joe: Oh yes. The Glengarrys.
Al: Got it.
Joe: That were mostly wrong numbers and disconnected lines.
Al: Got it. That sounds like a good time.
Joe: Yeah, it was great. 150, 200 dials a day.
Al: You better like rejection, right?
Joe: Oh God. Yeah. So you know, the goal was to set maybe two appointments a day. So you’re constantly doing that and then you finally get someone, then you got to get them in and you set the appointment. Then they don’t show up, of course. And then they’re like, hey, yeah, can you come over? I don’t want to come to your office. Sure, I’ll come over. Then you’d come over. You knock on the door, you see him sitting in the living room. They’re not answering the damn phone- you know the door. You know, it’s the middle of winter. You finally do like meet with someone and then I’m sitting at their kitchen table and then they’ve got kids screaming, the dogs humping your legs. I mean, it’s a total nightmare of a business.
Al: So you don’t recommend that route.
Joe: Right. So you got to find a firm that- what are you looking- ? If you have a natural market, if you’re really good and you have people that you can give advice to already, well, then you’re way ahead of the game. And so you want to find a firm that will give you a career track. I think some really good CERTIFIED FINANCIAL PLANNER™s don’t necessarily want to be client facing. They don’t want to motivate the client. They don’t want to sell anything. They just want to give advice. Well, then join a firm that has a slot where you don’t have to bring in your own clients, that you can work with other advisors as a team. Then you can kind of cut your teeth there to figure out what steps do I want to make? But if you get your CFP®, you’re going to be way ahead of the game. You have life experience. You’ve got a CFP®. A lot of firms, I think, will give you a shot. You might want to go to, like Fidelity or Schwab. You could start there and work in their centers where you don’t necessarily have to gain clients. You can service those clients and then get referrals from those clients to get more. Or you could go out on your own. I mean, there’s all sorts of different routes that you could go, but I guess you’re going to have to research. Do I want to go strictly fee only? Do I want to work in the broker/dealer where there’s product sales? Do you want to- I guess the options are endless, which is exciting, but it’s also a very difficult business to get into.
Al: It can be and Pure Financial is a registered investment advisor. And I think the industry is shifting, slowly, but shifting from the old broker/dealer to registered investment advisors. Some RIAs are fee-only, like Pure Financial, some are hybrid. So they sell product as well. But I think if you’re a CFP®, you probably would be interested in a registered investment advisor, hooking on with a firm that is going to fit what your longer-term goals are, as you said, Joe. And then from there, maybe it works out at that firm or maybe not. Maybe there’s a different firm or maybe you want to do it yourself. Yeah, there’s all kinds of ways to go.
Joe: Andy, once you get closer, I’ll be more than happy to talk to you and point you in the right direction, depending on- or introduce you to some firms looking at what you want to do. I think this is an awesome profession. We do so much for people helping them accomplish their overall financial goals and dreams, save them money in taxes, pass money to the kids, get kids through school. So it’s very rewarding career. And it’s also a lot of fun, but it can be miserable. Speaking from-
Al: If you go the wrong way.
Joe: Speaking from experience. So understand what you’re getting into, you know what I mean? It’s like I love the financial advising part, but if you don’t have anyone to advise, you’re not advising anyone. You’re not helping anyone. So you’ve got to get a client base. So there’s a sales aspect to it. There’s a business development aspect to it, that I think a lot of advisors that are getting into the business don’t truly understand. And I think that’s why they fail out and that’s why it’s a shame. And I think the industry is failing these younger advisors to make sure that they have a true career path in changing the industry as a whole. Because everyone out there probably needs some sort of advice, either if it’s hourly, even if it’s free or whatever, someone that kind of bounce some ideas off of. That’s why we get thousands of these, or not thousands, probably 4 of these email questions a month. We just make up the other ones.
Al: Well, that’s not true. We actually get a lot of them. We try to read them. We try to get to them all. But some are like 4 or 5 pages. And they- really what you need is a financial plan. That’s what you need.
Joe: Instead of us spending an hour reading your question on the air.
Should I Match My Umbrella Insurance Policy to My Net Worth? (Eric, Sacramento)
Joe: Eric, Sacramento, a non-Roth question. “I have $1,000,000 umbrella policy in addition to standard home, fire and auto insurance. Should I increase my umbrella coverage as my assets increase? Background, age 58, retiring at age 60. I got the policy when my assets, home and money were around $1,000,000. A decade later, I have $3,500,000 net worth.” Boom. Well, good job. What do you think? Should he match his umbrella policy to his net worth, Alan?
Al: That’s kind of a general standard rule of thumb, not a bad idea. So sometimes it’s difficult to get too high of an umbrella. I probably at least go to $2,000,000 and see what the options are past that. Yeah, I would.
Joe: Me personally, I’ve always- with my liquid assets in real estate, let’s say if my net worth was $3,500,000, I would definitely go $3,000,000 for sure. It’s cheap, right? What’s a $3,000,000 umbrella policy going to cost him? Maybe $1000 a year?
Al: Yeah, it’s cheap and you probably will never need it. But if you do, you’ll sure be glad you have it. Put it that way. Because what an umbrella does is it takes your limits on your auto and home, and lets just say the auto is $300,000 or $500,000 per accident. But you are in a terrible accident and there’s all kinds of medical bills or whatever. And so the judgment against you is $1,500,000. Your insurance only pays $500,000. So you pay the other $1,000,000. But if you have an umbrella policy, it sits on top of that. And so the umbrella insurance company pays that extra $1,000,000. That’s the point of it.
Joe: And if you have a fridge full of Coors Lites in your garage-
Al: – and friends come over and they stumble down the stairs-
Joe: – you might need to double that thing up. So just depends. So thanks, Eric, from Sacramento, California, which is also north of San Diego and Orange County.
Al: That’s true Joe.
Joe: Yes, thank you, Eric.
Andi: That is a reference to a previous emailer who told you that something was- I think it was Orange County was north of San Diego.
Joe: I do remember that. I do remember that.
Al: Well Joe, you do have a reputation of staying in your bubble. Meaning you don’t wander too far away. So sometimes people want to make sure you’re clear where these places are.
Joe: Got it. Got it. No, I am going to go to Orange County one of these days when it opens up a little bit and see our buddy play a little gig.
Al: A little golf.
Joe: No, I’m going to go see our-
Andi: Paul Lemire.
Joe: Paul Lemire. Yeah.
Al: Oh, OK.
Andi: Our musician friend.
Andi: Oh no, it’s Lemire, Paul Lemire like “Revere.”
Joe: Yes. I’m going to throw down a couple of Coors Lites and listen to some acoustic wonderfulness in the ears.
Al: That would be pretty fun. I might be up for that trip.
Joe: All right. So, yeah, I’m going to put it in the calendar for the Summer, sometime this Summer.
Comments about Joe’s Mom Ruthie and YMYW TV (Juan, Las Vegas)
Joe: I want to thank Juan for writing in “Jose, mi amigo mejor. Throwing a wet blanket on those finicky FIRE folks and sending eviction notices to mom’s basement-dwellers everywhere. Loved it. Speaking of moms, hopefully you were exaggerating that your mom looks like Magda, the leathered, tanned, heater-smoking, booze polishing-off icon from Something About Mary?” Sends me a picture. Looks just like Ruthie.
Andi: That is so mean. It doesn’t look anything like Ruth.
Joe: Ruthie got that tan. Sitting outside my house. Just catching heaters, throwing down bottles of booze like left and right.
Al: I’m looking at the picture. I don’t remember Ruthie with a wig like that. And I don’t remember Ruthie with that skin color. I do recall Ruthie having a cocktail.
Joe: I don’t think- she got that dark, though.
Al: Did she? When?
Joe: When she was in San Diego. She just left. I had to kick her out. She was here for about a month and a half. And so she sat outside my house and it was very nice in San Diego. She’s from Minnesota. So she got back and she was the talk of the town. Look how beautiful you look with that tan. Very cool. Let’s see. Oh, we got this other one. Who’s this dude that writes in? Smokin Joe?
Andi: That’s also Juan.
Joe: Juan loves me.
Andi: He loves you. He’s gotten to the point where he emails every day- or every week.
Joe: “Smokin Joe. Although he knocks it out of the park on the Sunday morning cable community access in the former infomercial time slot. Maybe time to take him up a notch or two to the CNBC or Bloomberg time.” Wow.
“Whether or not he takes little Big Al and Andi- ” you guys are left behind. Juan. He just wants me to hit the big time. Not going to happen, Juan. We are a family here. But when we all go or none of us goes. Isn’t that the saying? something like that?
Andi: All for one and one for all?
Joe: Something like that. Except for I’m leaving first. You guys can decide what you want to do.
Comment: 529 Plan Can Be Used For Golf Academy (Tom, Chantilly, VA)
Andi: Joe, I was going to say there is a question at the top of page 13 or rather a comment, that I really think that you should read because I think it could apply to you this weekend.
Joe: OK. “Joe, Big Al and Andi.” Tom from Chantilly, Chantilly, Virginia, “Chantilly, as Joe likes to say. I’m driving my 2019 silver Honda Pilot down the street with my German Shepherd Border Collie mix in the passenger seat, listening to the Derails on Podcast 322. Joe mentions using a 529 for culinary or theater classes. When I got home, I did a quick search and found out that it can also be used for a golf academy. Where has this information been? I hear about the barn door, garage door, mega backdoor, Roth conversion so much that I’ve started to incorporate it in my dreams.” Trust me, Tom, me too. It’s all I see is the Megatron backdoor now. “I will save this for a separate email. Where has this nugget of information been? Heck with the kids, Daddy is going to Golf School. Love the podcast. Keep it up. Great work.” I’m joining you. I’m going to the Golf Academy.
Andi: I told you, I think we just made plans for you this weekend.
Joe: There it is. Now, I’m just done with this job. Andi- we’re hiring, right now. We got to CFP® vacancy because I’m trying-
Al: There’s just one minor problem, one minor problem, Joe. You don’t have a 529 plan.
Joe: Well, I could put some cash in.
Al: You could start one.
Joe: I can start one. Guess I’ve got to work a couple more years just to fund that thing so I can go to my golf academy.
Al: There ya go. Right.
Joe: All right. Wonderful show. Thank you very much, Andi. Great job.
Andi: Thank you.
Joe: And Big Al, you were a hit. You were a wonder.
Al: It was fun.
Joe: Big Karl loves you. So we’ll see you guys next week. The show’s called Your Money, Your Wealth®.
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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.