Show Notes

• (00:55) Separately Managed Account for Tax Loss Harvesting To Optimize Retirement Withdrawals? (Linda, MD)
• (11:54) Why is Our Advisor Constantly Trading in Our Professionally Managed Account? (Robert, GA)
• (18:00) Are Flat-Fee Advisors Worth the Fee? (Pete, Knoxville, TN)
• (27:03) Financial Planning for 34-Year-Old Daughter and Pure’s Free Assessment (Daniel, Whittier)
• (35:17) Does Moving from IRA to Brokerage instead of Roth Ever Make Sense for Tax Gain Harvesting? (Brian, Albany, NY)
• (42:12) The Derails

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Transcription

Andi: Linda is retired and financially independent. Her advisor suggests she have a separately managed account, specifically for tax loss harvesting. Joe and Big Al spitball on how to save as much tax as possible on retirement withdrawals, today on Your Money, Your Wealth® podcast number 479. Plus, Brian wants to know if it ever makes sense to put IRA money into a brokerage account, rather than doing Roth conversions, so the fellas explain the benefits of tax gain harvesting. Also, why is Robert and Jane’s financial advisor constantly trading in Jane’s professionally managed account? Pete wants to know if flat-fee financial advisors are worth their fee, and Daniel needs financial guidance for his 34-year-old daughter. He’s considering a free assessment too, but he doesn’t really know what he’s getting himself into, so Joe and Al explain. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Separately Managed Account for Tax Loss Harvesting To Optimize Retirement Withdrawals? (Linda, MD)

Joe: Linda from Maryland writes in. “Hey Joe and Al, I thoroughly enjoy your show. I’m 60 years old, single, no kids, healthy and financially independent. Got parents in their eighties, I drive a 2013 Infiniti sedan and enjoy a hazy IPA.” Oh, Linda likes a little hazy IPA. I like it.

Al: Right, Me too.

Joe: “Retired 4 years ago, I’m comfortable with the sustainability of my 6535 portfolio, I’d like to determine how to best tax manage my portfolio throughout the retirement. I have been realizing capital gains and utilizing my current cash bucket for income needs, approximately $50,000 over the last couple of years. Would like to continue annual spending of $68,000, $20,000 of which is discretionary.” Okay, it’s kind of lengthy here, Linda.

Andi: It’s less than a page.

Al: It is less than a page. We’ve had some two and three pages.

Joe: Alright, so, let’s see, she’s got 5, 6, 7, 8, 9, call in $1million, she’s got a pension of $12,000, she’s got Social Security of $50,000, a lifetime charitable gift annuity of another $7,200,. She wants to spend $68,000, she’s got just about enough fixed income to cover that, I’m guessing there’s probably some bridge that she has to do because she’s 60 years old and she’s going to claim social security and pensions are kind of at numerous ages here.

Al: Sure.

Joe: “I’m inclined to begin taking distributions from my pre tax account in order to meet the income needs and leave in my taxable account as a growth vehicle. Also attempting to assess whether or not I should do more Roth conversions. Leaving a legacy is not a consideration. I currently own my home with approximately $550,000 worth of equity. My mortgage has a balance of $65,000 and will be paid off in a couple years. I don’t anticipate any major large purchases in the foreseeable future.”
It looks like she’s in pretty good shape so far. She’s got $1 million. She’s got a lot of fixed income. She wants to retire at 60. She’s thinking about what is the most tax efficient way to start taking money from the set accumulated portfolio.

Al: Yeah. A couple more things. She actually retired 4 years ago. She’s 60 now. She’s got about $1.1 million, like you said, Joe, and she’s spending about $68,000 and she doesn’t really have any other income right now. So it’s a little rich at the moment, in terms of distribution rate. However, she’s got a pension coming and she’s got very good social security coming. So she’s probably okay. It’s not like it’s a slam dunk, but I think it’s okay.

Joe: “She met with her advisor recently who suggested I liquidate my taxable account in order to invest in a separately managed account – a tax managed US equity index strategy. The impetus for this was the tax loss harvesting opportunity.” All right, the advisor fee of the SMA is 0.4%. The cost basis for the $141,000 taxable account is $108,000. The account currently holds a mix of cash U.S. treasuries, which will mature in June, an S&P 500 index fund, which I’ve held for over 20 years, and a dividend appreciation fund. After she talked to the advisor she started doing research on the SMA. I don’t see the benefits for me. Are there any aspects of the investment that I find attractive? I’d really appreciate your thoughts on this, as well as your recommendation for optimizing my withdrawal strategy from a tax perspective.” Okay, Linda, thank you for the email.

Couple things, right off the bat, I don’t think she has an advisor, first off.

Al: You don’t?

Joe: No, I think there’s a broker.

Al: Yeah, okay, sure.

Joe: Linda is looking at her investments in a silo. She needs to look at the entire portfolio. She kind of looks at products. Well, I have had this S&P 500 fund for the last 20 years. Okay, that’s great. And, you know, I have some treasuries that are coming due and then he’s trying to sell me this SMA because of the tax benefits. Tax loss harvesting, there’s a real tax benefit there. Can you get it in an SMA? Can you continue, can you do it without an SMA? The answer is yes. It’s a tax strategy. It’s not an investment strategy, if you will. So she’s like, all right, well, out of this $140,000, should I do this? And then should I do this with maybe my other account? You’ve got to look at all your investments as a whole. How much money do you have in stocks versus bonds? Where are you drawing the money from? And if he’s recommending you to liquidate your non-qualified brokerage account, but then put it into a stock SMA, doesn’t really make a lot of sense to me.

Al: I agree with you. I mean, it’s a different wrapper, I guess is another way to say it. It’s going to probably have similar investments anyway, so I’m not sure why you would want to do that. So I, first of all, I would just stick Linda with what you’re doing. It’s probably fine. I just have a slight concern because right now, if you look at your distribution rate, it’s 6.8%-Ish. Call it 6.5%.

Joe: Well, plus tax. Well, maybe there’s not a ton of tax.

Al: Maybe not. But then you’ve got some pension coming in, in 5 years, but that’s only $12,000. So you’ve been another 5 years or 10 years total, then social security comes in and you’re fine. I would actually want to make sure you don’t go through your portfolio faster than this is. Going to be sustainable. That’s the first thing I would suggest is make sure this all works. I’m glad you said that $20,000 of your spending is discretionary because it could be when you run an analysis, you may be a little bit rich in terms of having enough cushion if the market goes down and you know, for a sustained period of time. So that’s the first thing that I would say.

The second thing I would say is distribution strategy depends upon your tax bracket. Okay. And right now you’re retired and it doesn’t seem like you have a lot of income. So you pull from your pre tax. You pull your spending needs from your pre tax and maybe even do Roth conversions like you’ve been doing. Because you’re in a low bracket, right? You’re basically in a 0% bracket because you don’t have much income. So that’s how I would think about that.

Joe: I agree. I think you want to look at a distribution plan. She’s got $141,000 in the taxable account that she’s probably going to have to live off some of that. You’re going to pull maybe enough from the pre tax account to get you to the top of the 12% tax bracket. Then maybe you pull the rest from the taxable account to keep a level tax bracket is probably the right strategy. Or if you want to live off the taxable account for the next couple of years and then do a Roth conversion to the top of the 12% tax bracket, that probably makes some sense to, but the point is is that this taxable account needs to be utilized over the next few years for either income or pay tax or some liquidity needs. I know she also has $40,000 in cash so the investment strategy probably needs to change versus having an S&P 500 index fund. Because you don’t want to sell that if the S& P goes down 20%. And I don’t think an SMA and an equity dividend strategy, because they do tax loss harvesting, is probably the right answer anyway. You have money in a brokerage account, so you want to take advantage of tax loss harvesting, but you’re not going to harvest a ton of losses there.

Al: No, you’re not. And if you do this right, you’re in the lowest bracket anyway. So there’s no reason to tax loss harvest because capital gains are zero when you’re in the lowest bracket. And just to put a couple of numbers here. So the top of the 12% bracket for a single taxpayer is $47,000. And then you add the standard deduction on top of that of $14,000, right? So you could probably have about $60,000 plus of income and still stay in that 12% bracket.

Joe: The 0% capital gains rate.

Al: It’s already zero, right? So, why would you do that? Sell all this stuff and pay all these gains to avoid gains? This doesn’t make any sense to me.

Joe: She could sell and reposition those dollars and probably still be in the 0% tax capital gains rate.

Al: I agree. And in fact, that might be a strategy rather than some Roth conversions. Maybe for a year or two you reallocate the brokerage account, take some gains and have a little bit more globally diversified portfolio and achieve what you’re trying to achieve with a better portfolio. Take the gains while you’re in the 12% bracket and you won’t pay any tax on it.

Joe: There are a lot of different options there, but you want to look at your tax bracket first and foremost, and that’s going to determine what your withdrawal strategy is. If you want to do Roth conversions, take a 100% from the taxable account. So you will probably want that in cash or something very safe. If you want to not do Roth conversions, then you’re going to pull from the pre tax account and the taxable account to get you to whatever spending needs. Okay. You know, probably more under the tax bill count to get you the 12% tax bracket. What is that, Al? About $60,000? You just said it

Al: Yeah, about $60,000 you can pull out and still be in that 12% bracket.

Joe: And then supplement the other $8,000 with your brokerage account.

Al: That’s right, and the fact that Linda’s going to need these dollars for living, which is essentially kind of like a Roth conversion, she’s going to be drawing this down anyway, so the RMD is not going to be that big. I like that you have a lot in a Roth already, which is, you know, close to $400,000, but I wouldn’t be too concerned with more Roth conversions because you need living expenses and you’re in the lowest tax bracket.

Andi: You’ve been saving to your workplace retirement account for your entire career. Are you about to shatter that retirement nest egg when you punch the clock for the very last time? This week on a brand new episode of Your Money, Your Wealth TV, Joe and Big Al explain your options for accessing the money in your IRA, 401(k), or other retirement accounts when you leave your employer while avoiding the common mistakes that could cost you thousands if not tens of thousands of dollars. Watch What Happens to Your 401(k) & IRA at Retirement? on YMYW TV and download the Retirement Readiness Guide to find out how to control your taxes in retirement, create income to last a lifetime, make the most of your retirement investing strategy, and much more. You’ll find links for both the TV show and the free guide in the show notes for today’s podcast.

Why is Our Advisor Constantly Trading in Our Professionally Managed Account? (Robert, GA)

Joe: We got Robert from Georgia. “Hi, Joe, Big Al, Andi. Might remember me from a few months ago.” Nope, have no clue.

Andi: Wait till you hear it.

Joe: “I asked how we were doing financially, and you got into a big discussion about couples who have separate accounts. We were on vacation in Cabo when you answered my question on the podcast, and we laughed so hard our stomachs hurt.” Huh. Don’t remember that. Must’ve been a good response.

Al: Must’ve been.

Andi: Obviously, Robert thought it was hilarious.

Joe: That’s awesome. Well, sorry about your stomach. “I think you said my wife’s name is probably Mabel. Actually it’s Jane. That was when you said I had to go to her and ask her to throw me a bone. Anyway, quick question, please.” I think I do remember this one.

Andi: See, I told you you would.

Al: I remember this one too.

Joe: Didn’t Mabel just have a ton of cash? Robert had, like, $50,000

Al: Yeah and he wasn’t allowed to spend anything?

Joe: Yeah. Separate accounts.

Al: Something like that, yeah.

Joe: I do remember Robert. Yeah. Mabel. I don’t remember coming up with the nickname Mabel,

Al: Mabel. Is that a common name from Georgia? You used to live out there.

Joe: I did. All right. “So my wife has a professional managed account, at Fidelity, about $340,000 in it. All of our other accounts are self managed and well diversified.The manager buys and sells tons of stocks every three months in our managed account. Many are dividend paying stocks. I don’t understand his reasoning for the constant trading. My question is, is he doing it because he gets free?”

Andi: A fee.

Joe: I’m sorry, a fee with each trade. He charges her about $550 each quarter. I assume from listening to you guys that we pay ordinary income tax on all the dividends we receive since this account is non-qualified under short term capital gains. I want to fire him! And move this money to her brokerage account and put it in a balanced portfolio. We’re in our early 70s. Both work part time. I love this show and I’ve listened to most of the episodes over this past year. Wish I had started listening sooner because, but then I wouldn’t have almost $1 million in IRAs and had to do RMDs this year. Thanks for the spitball.” All right, buddy. So the guy’s trading every three months. No, he’s not making any money on the trades. He’s charging a fee on the account of $550. So he probably has some sort of algorithm that he feels that he’s trying to time the market and he’s selling certain stocks and buying other stocks that he feels that are in favor and selling the ones that are out of favor. I would look at the performance of it and determine to see if his crystal ball is cloudy or not.

Al: Yeah, I 100% agree. He’s a bit of a market timer. He probably has some kind of trading strategy, as you say, Joe algorithms. He’s got some methodology and how he’s trading. You can look at all kinds of studies and, you know, Professionals do this all the time, that’s what a mutual fund does. And the mutual funds beat the market as a whole. No, they actually lag the market with their fees. If you look at mutual funds collectively. Can some mutual funds beat the market? Sure. Can they do it forever? No. Even the ones that do it year after year after year, often have a period of time where they just swoon back down and sort of become more of a market return. So personally, I don’t like that kind of investing because it’s very tax inefficient. That’s just my opinion. I like your idea of going to your wife’s brokerage account and keeping it in a balanced portfolio.

Al: Yeah, I don’t know. There’s active management and there’s passive management. What active management is, is someone that is buying and selling particular securities that are in or out of favor or what they believe that the future is going to hold within these particular securities. And the best of the best can do it consistently. But, if you add in their fees, it’s very difficult. And if you’re trading $340,000 with some Fidelity broker, you’re not getting the best of the best. No offense to the Fidelity broker. I mean, you have to go to, you know, most of these funds are private, and they cater to the uber rich. Well, I mean, Mabel, she’s got a ton of cash, Robert, maybe we can creep up the food chain there a little bit. I’m guessing he’s got something, maybe it works some years. Maybe it doesn’t work in other years. The fees are not outrageous. You’re not getting charged a fee for the overall, you’re getting just a management fee. It’s not a trading fee for each trade that he does. So I don’t know. Yeah, it’s tax efficient. Because all of this is kicking out on your tax return because it’s a non qualifying account. But, however, because of the trades that he makes, there’s going to be some losses that you can offset the gains. So, if you want to have a small portion of the overall portfolio into something like this, just to have diversification, I don’t know, I’m okay with it. Would I invest my money in a Fidelity advisor that is placing trades every three months? Probably not.

Al: I wouldn’t either. And also remember there’s fees every time a trade is made to Fidelity. But Fidelity kicks it in.

Joe: They’re probably free trades.

Al: Well, it depends what he’s trading.

Joe: Yeah, well, I’m guessing. If he’s on the platform and he’s buying and selling stocks, I would imagine the trades are almost.

Al: Could be. Anyway, yeah, agreed. I mean, I wouldn’t do it myself.

Are Flat-Fee Advisors Worth the Fee? (Pete, Knoxville, TN)

Joe: We got Pete from Knoxville. “Hey, Joe, Big Al and Andi. What up? Questions about flat fee advisors. But first, I drive a 12 year old Chevy pickup. My drink of choice is Bud Light. I have a 10 year old Irish settler.”

Andi: Setter.

Joe: Setter. All right. “My wife and I are both 68 years old. We recently started taking distributions from our portfolio to meet our living expenses, we have just rolled over $5 million in retirement accounts.” Look at the big ass wallet on Pete. Surprised he didn’t mention that first in the sentence.

Al: Well, you know why he didn’t? Because you make fun of people if that’s the first word they say out of the email or whatever.

Joe: I got 5 million, just over 5 million (LOL). “We have a 60-40 allocation and globally diversified low cost portfolio. We own our home and don’t have any debts. We would like to find a financial advisor to take over the management of our portfolio.” Well, hello there, Pete. Came to the right place. Big Al is looking for some new clients. “We have interviewed a couple of advisors, both charge 1% of assets on our management with a sliding scale that reduces the percentage as the account reaches certain thresholds. We don’t need help with accounting or estate planning. We have an account and a lawyer that have helped us for many, many years. We have a financial plan that we pay a flat fee for. Do financial advisors work on a monthly fee basis? We’d be willing to pay. I don’t know, $1,000, $1,500 a month to an advisor? This is more than we pay our account and our lawyer combined. Professional advisors certainly deserve to be paid fairly for the value they provide. I’m aware of the Vanguard study that says a good financial advisor can add up to 3% in earnings each year. However, paying 1% of the total portfolio value seems a bit too high. We can’t get our heads around $50,000 a year or even $25,000 a year for the services we need. Over the next 20 years, this could be $1 million. I’d love to hear your thoughts on this issue. Thanks, Pete.” Well, Pete, that’s a really good question.

Al: It is a good question. What do you have for him?

Joe: Well, there is no fee if there’s value, right? So then you have to define what value is and what is the advisor doing? So he’s like, well, we don’t need an estate plan and we don’t need a CPA. Estate planning is drafting of trust documents. And the CPA that they’re using is for tax compliance, not necessarily tax planning. They got $5 million in a retirement account. I don’t know. I would imagine that there’s several tax issues that Pete has in Knoxville, Tennessee. You have to look at what is, what are you getting for what you’re paying? So is $50,000 a year worth it? Well, I don’t know. Can they save you $50,000 in taxes? Are they going to save you from a $50,000 mistake on how you’re managing your overall portfolio? A good advisor is worth way more, in my opinion, than 1%, depending on the complexity of the overall situation. If they’re just managing your assets and maybe doing a quick rebalance, And that’s all they’re doing? No, then it’s not worth that. It’s probably worth significantly less than that. But if they’re doing more strategy and planning on an ongoing basis to figure out exactly what should be sold, how to re manage the risk, how to tax manage the account, to make sure that they’re adding value every single quarter for the fee that they’re charging for you, then I think you’d be really happy in that type of relationship because you would see the value. If you don’t see the value, then don’t pay for it. If you’re not receiving the value, then of course don’t pay for it. That’s where I stand.

Al: Yeah, agreed. It makes, makes total sense. And I will sort of build one thing on that. When you have your CPA who prepares your taxes, do your tax planning. And I can say this from experience because I used to have my own tax practice for 17 years. You really tend to focus on the year you’re preparing the taxes for, and then you do the return. And then you might tell the client, well, you know, you could have done this, but they hear it and then they forget it and nothing happens. Right. And then really the advice you’re giving might help them next year if they do it. But are you looking 20 years ahead? Right. You know, just some examples, like should you do a Roth conversion or not? Most accountants will say no, because you got to pay taxes today. Well, that might be the complete right answer. If you’re in a low bracket, it’d be higher with RMDs, right? It might be exactly what you need to do, but most CPAs are not looking at 20 years. Same thing with the state planning attorneys. A lot of them prepare documents, but they’re not really looking at advanced estate planning strategies.

Joe: How often do you talk to your estate planning attorney? Let’s say you want to start “gifting” some, some dollars or, Hey, I’m giving to charity right now. Which assets would you want to give to charity? Are you going to call your estate planning attorney or do you do, you know, highly appreciated stock? Do you do a donor advised fund? Are you already taking the required minimum distribution? So maybe you do charitable distributions out of your retirement account. If you look 20 years in advance, you’re going to do different things a little bit differently as you look at your entire lifespan versus year by year. Another thing that I see is that I think the advisors and maybe the advice that he’s been receiving is probably not great. And that’s why he’s saying, man, it’s not worth it. And I totally agree with them. It’s like I already have a financial plan. He’s talking like it’s a product. They told you that you’re going to have enough assets to maintain your lifestyle. Dude, you’ve got $5 million. Yes. I can tell you that I don’t know anything about you besides your name is Pete and you got an Irish setter. If I sat down and paid a couple thousand dollars to get that type of advice, I’d be like, no, I’m not giving you my money because that was just common sense. I can do this stuff on my own. But I think as wealth increases, there’s a lot more things that happen. When you have more wealth, in my experience, you are twice as fearful or maybe four times as fearful to lose what you’ve accumulated over your lifetime. So you make bad decisions, so you need some true professional advice to bounce ideas off of. You have that much more to lose. So when the markets get a little fickle, what happens? I’m out, I’m done.

Al: That does happen. I’ll just make one other comment from the CPA standpoint. And that is this people used to ask me sometimes, should I do a Roth conversion or am I okay for retirement? And it’s like, how would I know? I don’t know what you have in IRAs and 401(k)s. I don’t know what you’re spending. I don’t know any of that. So of course, I’m going to say no. On a Roth conversion, because you’re going to pay more tax. Why would I say yes without knowing anything about it?

Joe: You don’t want to be on the hook.

Al: Of course not. Right.

Joe: You say catch and they do it. They’re like big Al told me to do it. Then they come back after you.

Al: They’re in the highest bracket and they’re about to retire and be in the 12%. Yeah. No, it’s you just, your CPA and your estate planning attorney just don’t have the information needed for good financial and tax planning advice. I would say.

Joe: Here’s the problem with the industry, sorry I’m going to keep going on here.

Andi: Go for it.

Joe: This is what happens, is that, let’s say registered investment advisors, RIAs, that’s what our firm is, and I’m not going to do a plug for Pure, but what happens is that you work in a fee only fiduciary standpoint, and you get really good advisors in this space. But they’re sole practitioners, or maybe they have a couple of partners. And there’s only so much time in the day, right? So then it’s like, they have minimums of $1 million, then it goes to $3 million, then it goes to $5 million, then it goes to $10 million. And so then you find all these really good advisors, you can’t have access to them because you don’t have enough cash. So then this middle market is always kind of left holding the bag with, in my opinion, mediocre advice With Pete here though. I think he just needs to shop a little bit more. He’s got plenty of assets But if he doesn’t want to spend the 1% then he’s probably not going to get the best advisors. If he wants to pay a flat fee, I think surely, he can find someone that he can pay $1,200 a month or whatever that he wants to pay. But again, I think going back to the main point of this is that you have to provide value. If the advisor is not providing value, do it yourself or just listen to podcasts and white papers.

Financial Planning for 34-Year-Old Daughter and Pure’s Free Assessment (Daniel, Whittier)

Joe: We got, “Hey guys, and Andi. I’m Daniel from Whittier.” Whittier.

Al: Yeah, that’s right.

Joe: Where’s Whittier? Wisconsin?

Al: No, keep, keep reading.

Joe: Oh. “The last time I wrote, you guys didn’t know where Whittier was.” Oh, guess what? Still don’t know. “So I thought I’d let you know, it’s about 8 miles west of the Pure Financial Brea office.”

Al: Yeah, I just saw that Joe, and I thought, of course, I’ve driven right past it. I think our advisor Jake Greenberg teaches at a college in Whittier.

Joe: I still don’t know where Whittier is. I know where the office is.

Al: It’s right next to the office. Just call it that.

Joe: A 15 minute drive north of Disneyland. “Brea office will be a part of my second question.” Oh boy. We’re going to get drilled on something here. “My first question is for my daughter, she’s 34 and works at a hospital making $95,000 a year. She owns her house and is doing good at saving and managing her money, but is clueless on investing in retirement planning. She’s been at the hospital for about 9 years. When she got hired, she asked me to set up a 403(b). I put her into the Roth 403(b). I started her off at 5% of her pay to get the 2% match. Over the years, I’ve increased the percentage on every pay raise she received. She’s now at 16% plus the 2% match and another 2% for years working at the hospital. Where it’s been for the last few years. Now, she has $220,000 in funds.” Well, good for her. Good for you, Dad, for taking care of the daughter.

Al: Yeah, so far, that’s fantastic advice.

Joe: “Alright, question number one. I have her contributing, going into the Vanguard Growth and Income Fund, and the Fidelity S&P 500 Fund. My thinking was, she’s young enough to recover from any down years, and in good years, these funds should do well. They’re very low cost compared to the other funds that are planned. Do you think 16% plus 4% contribution is a good number for the next 30 years before she retires? And do you have any suggestions about adding another type of fund? I know you don’t know what funds they offer, but maybe a suggestion on a sector to look at. Thanks.” All right, so what do you think here? She’s got $220,000. She’s contributing 16% of her income.

Al: Yeah, that’s a lot.

Joe: 2% match plus another 2% for the year. So she’s contributing about $20,000 or $20,000 a year, going into the 403(b) plan.

Al: Yeah. Right. ’cause she’s making about $100,000, which is fantastic. We often tell people. If you can get up to 20% of your earnings going into savings, then you’ll probably be golden.

Joe: Right. And 100% of it is in a Roth. So she’s got $220,000 plus $20,000 a year into the Roth. Awesome.

Al: Yeah. I like it. I mean, does she have to do more? Not necessarily. Can she do more? I mean, more is, is always better than less. It just gives you more options later, but what she’s doing is fantastic. She may want to back off because maybe she wants to, I don’t know, improve the home or, or go travel more. I dunno, whatever, but yeah, the 20% is good. 25% is even better, but 20% is fantastic.

Joe: Push some funds around. I don’t know, she’s got, what, an S&P 500. You have the same funds, there’s a lot of redundancy here. You got a growth and income fund in the S&P 500, I would imagine there’s a lot of overlap.

Al: Yeah, I would think so too. There’d be some bonds probably in the growth and income fund. I think what’s missing to me is an international fund, maybe a total stock international fund, something like that. And if you really want to get a little bit more sizzle, you might get a little bit in an emerging markets fund. That’s also international. So that would be a couple more things to think about.

Joe: Yeah, I think with her at $220,000 a year, she could probably do quite well with 2 funds. A total U. S. stock market fund. If they don’t have that, you’re fine with the S&P 500. And then, you’re right, I think you want a little international exposure. Maybe she wants to be a little bit more home biased. So, if it’s 100 % equities, because she’s in her 20s, isn’t she?

She’s really young.

Al: Yeah, she’s 30-something, I think.

Andi: She’s 34.

Joe: Okay so she’s 34, this money’s gonna be in there for another 30 years. If it’s 100% equities, yeah, maybe 70% US, 30% international; 60% US, 40% international. Yeah, up the US to the S&P 500. And if you want more return or more risk, maybe you go on the US side if there’s a small company fund because that’s going to give you a higher expected return over the long term. It’s gonna be a lot more risky, but she’s got time and then you know Big Al, he’s a big fan of the emerging markets lately.

Al: Lately, I would say when you look backwards 20 years, it’s frequently the winter emerging markets, although it’s a rollercoaster ride. I will tell you that it’s a, it’s an up and down fund, but over the long term, it does well. The reason why Joe’s saying maybe a total stock market fund in the US is because it includes not only the S&P 500, but includes medium and small size companies too. Although in terms of a percentage, it will be mostly S&P 500, but you’ll get more exposure. And I 100% agree with that. If you’re going to pick one, that would be a better approach.

Joe: “All right, now for question two, can you explain the free assessment offered at Pure Financial? I’ve thought about doing it, but don’t really know what I’d be getting myself into.” Yeah, don’t do it. Walk into a hot office. The hot box. Yeah, grill you with questions. You know, make you feel really uncomfortable and You know, charge you a whole bunch of money to do financial planning. Free assessment. I don’t know. For some people, it’s very valuable. For our listeners, I think a lot of our listeners go through the process and most of them don’t become clients because they love doing this stuff on their own, but they want a sounding board. They want to have someone to kind of take a look at a high level, their overall situation. So what we do is take a look at a high level, what do you have and why did you make the decisions to get to where you’re at? And then what are the decisions that you’re going to make to get you to where you want to be? And then we’re gonna give you feedback on those decisions. All right, you’ve done a good job here But you probably have to switch your decision-making process as you transfer into Retirement or as you’re trying to create income or as you’re looking at a tax strategy or if you’re passing well. And we come up with different ideas and strategies that you may want to consider and then from there you can decide to take that information, do what you want. Or if you want to hire a firm like ours, we charge a financial planning fee to kind of walk you through it and we’ll give you all the written recommendations that you need.

Al: What’s a little bit different maybe than the industry is. We actually tell you what we think based upon a high-level view. I mean, we can’t get very detailed. This is a high-level view. And then you can decide, great, I’ll do it. Or great. I disagree with it or great, I want to do something like that, but I don’t know how to, will you do it for me? And the answer is yes, of course, that’s how we get clients. There’s no obligation. So don’t worry about it. You’re not going to a hot box. You’re not going to get the second and third closer. That’s how you leave the office. We try to do it low-key. Of course, we’d like you to be a client, but, no, use it, get value out of it and if you want to hire us, great. If you don’t take what you got and go with it.

Andi – If you’re ready for more than a Retirement Spitball Analysis, click “Get an Assessment” in the podcast show notes to schedule yours, or call 888-994-6257 – and tell ‘em you heard about it on the Your Money, Your Wealth podcast.

Does Moving from IRA to Brokerage instead of Roth Ever Make Sense for Tax Gain Harvesting? (Brian, Albany, NY)

Joe: Let’s go to Brian from Albany. “Hi Joe, Big Al and Andi, love the podcast, the best mix of information and humor on the internet.” Wow.

Andi: Is that good enough for ya?

Al: That’s a great start.

Joe: “Is there ever a situation where you’d move money from an IRA to a brokerage account rather than a Roth IRA?” No, never.

Al: I can think of one, but keep reading.

Joe: No way. “Here’s my situation. Of the money saved for retirement, 65% is in an IRA, 25% is in a Roth IRA, and 10% is in a brokerage account. The money in the brokerage account is approximately 50% cap gains. And is in a single total stock market fund. I plan on doing a significant Roth conversion this year as I’m in a very low tax bracket. I’m retired and not yet started Social Security. Would it make any sense to take some money out of the IRA and put it in the brokerage account in different mutual funds? This could give me the important opportunity to tax loss harvest if the market goes down and whittle away at the large capital gains I’ve accumulated. Appreciate this spitball.” No.

Al: Yeah. As Brian, as you’ve written this, absolutely not. There’s zero reason too. I mean, wouldn’t you rather have zero tax on your growth instead of having to pay potentially capital gains tax? I mean, that’s a no brainer. The time you said, is there ever, I like the words ever and never, of course there’s times like if you need the money. Like if you need the money to live off of for the next six months, yeah, you wouldn’t convert it and then pull it out of the Roth. You just put that in the brokerage account. If you need it for a down payment, you’d put that in the brokerage account, but as far as some kind of tax investment play, no, I can’t think of a single reason.

Joe: You would probably put it in your checking account.

Al: Yeah because you need it. Maybe your brokerage account has a better paying cash account. Maybe you do that, but maybe you can write checks out of that, you know, whatever. Not for the reason you described it Brian. You go 100% Roth always.

Joe: Because you always have access to the money that you put into the Roth. It has five fold tax treatment first in first out. So every contribution that you put in, you can take out. 100% tax free, penalty free, at any age. Just the earnings need to grow in the Roth until you turn 59 ½ or 5 years, whichever is longer. You put in $6,000, should I put that in a brokerage account? Even in that case, if I need it in two years, I could put it into a Roth account because I always have access to the principal, I just wouldn’t have access to any of the income or earnings or dividends or anything like that. So it almost is in all cases, I would take money from an IRA if I don’t need it to spend off over the next month, I would want to put that into the Roth IRA because I still have the liquidity that I need in most cases. Now there’s the five year rule on conversion, so it really depends on when you set up the Roth, how old you are, and there’s some nuances here. but yeah, you wouldn’t want to say I’m going to take money from my IRA and I’m going to bleed it out, which we’ve seen multiple times. People will bleed money out of their retirement accounts because they realize that they will have a large required distribution and they put it in their brokerage versus converting because they didn’t think they qualified for a conversion because they made too much money. Conversions do not have an AGI limitation. Anyone can convert at any age, at any time with any income.

Al: Yeah. Whether they’re working or not. A Roth contribution, different story. You have to be below a certain income level. You have to have earned income. But conversion anytime, anytime you’ve got money in an IRA 401(k) that you want to convert to Roth, you can. You can be six years old, you’re a child star. You got a retirement account, you can convert.

Joe: He’s going to be in a pretty low tax bracket. How old is Brian? Do we know here?

Al: He doesn’t say, but he said he’s retired. Let’s assume he’s over 60.

Joe: He’s not taking Social Security yet. He’s gonna push that off. He’s gonna be in a low tax bracket. Not yet started Social Security. There’s a zero capital gains rate too, Brian. So you might want to sell some of that Mutual fund that will be the top of the 12% tax bracket because then that’s 0% taxes So you could diversify out of the fund if you want to buy back. It’s called tax gain harvesting so you can sell at a gain, pay no tax, and then buy the same fund back. So then you just increase your overall cost basis. So that could be a cool strategy. Cause that’s what he wants anyway. He wants to have the liquidity within that brokerage account and not get killed in capital gains tax. But I don’t think the capital gains tax is going to kill him all that much.

Al: No, I don’t either. That’s actually a great suggestion. If you’re single, you can probably make about $60,000 of income. With your standard deduction. inclusive of the capital gains and you will pay zero tax on capital gains, at least for federal. If you’re married, double those numbers. It’s about $120,000 so maybe you bleed it out that way. Assuming you don’t have a lot of other income and either sell and reinvest in something else or as Joe said, you could actually sell by the same thing. Now you have a higher tax basis and you’ve taken some gain off the table without paying tax.

Joe: Awesome. Way to go, Brian. Congratulations there. Andi, great job today. Big Al, have fun in Hawaii.

Al: Will do.

Joe: I gotta go back to work. Where are you going, to the beach?

Al: Yeah, gotta go swim.

Andi: Tough life.

Joe: There you go. Looks like you got a big tan. Like, you look bronze.

Al: Yeah, that does happen when you’re in Hawaii.

Joe: You’ve only been there three days.

Al: I know. Well, I put on sunscreen, but you know, it’s that Irish skin I have, but I do get a little tan, just not like someone, let’s say from Central America, they get a better tan than I do.

Joe: Sounds good. All right. We’ll see you guys next week. Show is called Your Money, Your Wealth®.

Andi: Big Al is back on the islands, my jobs is keep the fellas at bay, and there’s an Irish settler in the quick Derails at the end of the episode, so stick around. When you tell your friends about YMYW and leave your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts and all the other podcast apps that let you do that, you’re not just helping us grow the show, you’re also helping to spread financial literacy. These days, that’s pretty important, so thanks for doing your part.

Your Money, Your Wealth is presented by Pure Financial Advisors, 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.

The Derails

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