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
August 13, 2019

The revamped 2019 tax “postcard,” how the SECURE Act could be a tax problem for those with IRA trusts, and answers to your money questions: is indexed universal life insurance a good investment for education costs? Should you roll your 401(k) to an IRA? How much can you convert from 401(k) to Roth after age 70 and a half? Will you go to jail for filing your taxes before receiving form 5498?

Listen to the podcast on YouTube: 

Subscribe to the YMYW podcast

 Subscribe to the YMYW podcast newsletter

FOLLOW US: FacebookTwitter | YouTube | LinkedIn

Show Notes

  • (01:08) The 2019 Revamped Tax “Postcard”
  • (08:33) SECURE Act: Discretionary vs Conduit IRA Trusts
  • (16:15) Indexed Universal Life Insurance for a College Savings Investment?
  • (28:25) Should I Roll My 401(k) to IRA?
  • (32:50) How Much Can I Convert from 401(k) to Roth IRA at Age 73?
  • (36:53) I Received Form 5498 After I Filed My Taxes. Am I Going to Jail?
  • (39:58) YMYW Compliments & Complaints: A Followup


Today Joe and Big Al discuss the big revamp of the tax postcard for 2019 and the tax headaches that the SECURE Act could cause if you have an IRA trust. Plus, they answer your money questions: is indexed universal life insurance a good investment for education savings and will Joe need an ambulance when answering this question? Of course, we’ll talk about rolling and converting 401(k) money, and the fellas will let listener Clint know if he’s goin’ to jail. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

01:08 – The 2019 Revamped Tax “Postcard”

Joe: Hey so tell me about the postcard.

Al: Well it’s the most exciting thing of the week, tax-wise. We have IRS revamps its new postcard-size tax return. This is a draft return for 2019. So you may recall that in 2018, we had new tax law and part of the reason for the new tax law was to simplify so that we could do our taxes on a postcard. And so they took that form 1040, which was a 2-page form and they turned it into a postcard. So far so good. Sounds good. But then every single thing that was on the 1040, they set up support schedules with the same line numbers. So there were 6 support schedules along with the postcard, which is page 1, page 2. So essentially in 2018, they took 2017 as 2-page form and made it 8 pages, 6 support schedules, and the postcard. So anyway, I guess there were some complaints about that.

Joe: So I’ve got a question for you before you move on. So the old 1040 before the postcard, how have they ever changed with that in the 30 some odd years that you’ve been

Al: Oh you mean like the EZ form?

Joe: No, just the 1040.

Al: That’s pretty much the same. They may have added or deleted a line here and there but it’s basically been the same thing for my entire career.

Joe: It looked the same.

Al: Now in 2018—

Joe: It’s completely different.

Al: What’s interesting is it’s actually the same exact form. In fact, when you go to schedule 1, and all the things that are supposed to be added up to put on the postcard, those are the same line items that were on the original 1040. And when you’re looking at your return it’s so much more complicated to try to think because you’re looking at it you go OK, I get $6,000 income from Schedule 1. Then you go find Schedule 1, and then it’s capital gains, tax refund, rental property. Then you go back there, back to the first page, and then oh pensions and then. So crazy anyway. So now, the postcard’s a little bit bigger, inch and a half longer. So they’re able to fit a couple more lines and now they got it down to 3 support schedules.  So now it’s 5 pages. Remember it used to be 2. So now it’s that the postcard, front and back. Every little possible inch is taken up. I will show you, Joe. That’s the new form. Anyway, page 1 has 11 lines instead of about 6. And page 2 has a few more, so it eliminated some of the support schedules.

Joe: Good.

Al: And the accounting community is in favor of this.

Joe: So who creates this stuff?

Al: I don’t know. IRS I guess.

Joe: A couple of people sitting in the back room?

Al: Graphic artists? I have no idea.

Andi: Somebody who was told “make this fit on a postcard.”

Al: It goes back to the original premise of tax simplification and that idea’s good. I think we all would like simpler taxes but you can’t just say we’re going to take this very complicated tax system. And so you can put it on a postcard and we’ll have 25 support schedules, which is basically what it is. It’s the 3 or 6 support schedules that they made plus all the other ones that have always been there, Schedule A,  Schedule B, Schedule C, Schedule D, Schedule E and so on. They’re all still there.

Joe: Well, they have to be.

Al: Because the tax law didn’t change.

Joe: For individuals haven’t changed much at all.

Al: Hardly at all. We got lower tax brackets and there were a few changes, but substantially not much. And this is something that I think people don’t realize with this new tax law that we got in the end that 2017. What essentially happened was the new tax act made changes to the existing law. It didn’t replace it. It just changed it. And so few things got tweaked here and there but the things that weren’t discussed or talked about are all still there. So it’s why you can’t really do this on a postcard. The tax system is very complicated.

Joe: And the main reason, I just read something is that 30% of people itemize their deductions, now with the new law. I think last year was 10%. Because it’s hard because there are only really 5 or 6 things that you can write off like medical expenses if it’s over 10% of AGI. So I mean you’ve gotta have a fairly large medical expense.

Al: And actually last year was 7 1/2%. But it’s going to 10%. And so what that’s left. Taxes, state taxes, property taxes. But you’re limited to $10,000. You can still deduct your mortgage if it’s less than $750,000, or $1,000,000 if it was before the enactment date. You can still deduct charity. That’s it. You can’t deduct your unreimbursed employee expenses or your investments.

Joe: If you are subject to a Ponzi scheme. You can write those off.

Al: And you can still take off your gambling losses.

Joe: That’s about it. So then they increased the overall standard deduction so more and more people, not only 10%. Now I guess if you have a giant mortgage or give a ton to charity. And you have a huge medical expense. You’ve replaced two knees and two hips and that bunch of teeth.

Al: Knees and teeth.

Joe: That’s a really terrible year.

Al: It’s like you get in a car accident and the knees and the teeth—

Joe: Wow, what happened, train accident?  No, just trying to get a tax deduction.

Al: Well I will tell you in California and other high tech states where property taxes and state taxes are high, and we’re in California, so we’re limited to $10,000. And if you paid off your mortgage, then that’s your deductions plus your charity, for the most part. So basically, to itemize your deductions, if you are married, you’d have to have about $14,000, $15,000 of charity to even claim any. Because the standard deduction is that high.

Joe: It’s what, $2,400?

Al: $2,440 unless you’re over 65 that’s a little bit more.

Joe: But I guess that’s simpler. But they got rid of exemptions. We beat this down

Al: But I thought you’d be interested in this new tax form.

Joe: Because I still don’t get used to the old one. You know what I mean? It’s like I’m looking for stuff and I can’t find it.

Al: It’s buried in the schedules now.

Al: And of course that brings up another question. Would you actually file your taxes on a postcard?

Joe: Never. I’ll put all my stuff on right there. Social Security and salary. Here’s how much money I made.

Al: Joe Anderson. $14,000.

Joe: That’s the stupidest thing. Who’s gonna mail it in on a postcard, Alan.

Al: I don’t, I can’t imagine. I mean you can’t because that’s the Social Security number.  Although, I have noticed there is no place to put a stamp. So it’s not really a postcard. It still needs to go in an envelope.

08:33 – SECURE Act: Discretionary vs Conduit IRA Trusts

Joe: So the Senate and House are still debating on the SECURE Act, Alan.

Al: They sure are. And we thought for a while that was going to pass relatively quickly, but that didn’t happen.

Joe: We still believe that’s going to pass. And one of the biggest things that paid for every small little stupid tweak that they did, was get rid of one of the better financial planning tools that the IRS gave us 19 years ago.

Al: Are you referring to a stretch IRA?

Joe: I am. The stretch IRA which allowed non-spouse beneficiaries to stretch out their tax liabilities of the IRA throughout their lifetime. So with that being said, they’re saying we’re not going to let you delay or spread the taxes out over your lifetime it’s going to be over 10 years and still that’s pretty good. It’s not awful because to be honest with you I think most people probably blow through that before 10 years anyway.

Al: Well I’d say at least 9 out of 10, if not 19 out of 20, that’s exactly what they do.

Joe: But for those of you that are good savers that have accumulated a lot of money in retirement accounts. This is where it’s really going to have an effect. And the problem is, is that a lot of these individuals that have large retirement accounts, they put in place like an IRA trust. To control the money from creditors, as their kids are alive but they’re dead. So they wanted to have a little bit more control to say, hey these are a lot of dollars that I saved throughout my life. I’m gonna pass it off to the next generation and I want to secure it so that the kids don’t blow through it, and second, I want to continue to keep it protected from creditors. But there’s a big problem now for those of you that have named trust the beneficiary of your retirement account or that would create an IRA trust at your passing. For two main reasons. Because there are two different types of trusts. What type of trust do you have in your IRA trust, Alan? Do you know?

Al: It’s an IRA trust.

Joe: Yes but is it discretionary or is it a conduit?

Al: It’s discretionary.

Joe: So Alan’s got a problem potentially. Alan’s trust is still going to be protected from creditors, but now he’s got a tax problem. So let me explain the difference between the two. A conduit trust is this, now the IRA is sitting in a trust. And it’s going to be Alan Clopine IRA Trust Beneficiary blah blah blah.  So you’ve got to have special titling, and I’m not going to get through all that BS.

Al: And I need to die.

Joe: You do need to die, Alan. And I don’t want you to die.

Al: Sad story already.

Joe: But now the money is in the trust and then so on a conduit trust there is a non-spouse beneficiary. So the kids are the beneficiary of the retirement trust and so they are going to receive a required minimum distribution. Depends on how their trust is set up. So it could be based on the oldest son. It could split up into several different trusts and those RMDs would be based on each beneficiary’s lifespan.

Al: Yeah that’s what I have, I have sub-trust.

Joe: Sub-trust. All right. Super complicated. Big Al with a big trust. So now he’s got sub-trust and it’s all great. A conduit will just pour out the RMD, so if Robbie’s got an RMD, it’s going to whatever his RMD is going to take him or he could take a lot more than that, it really depends on so you know what that beneficiary wants to do. But he has to take at least the required distribution or more. In a discretionary trust, what happens is that the RMD stays within the trust. It doesn’t go out of the trust to the beneficiary and then it’s by the discretion of the trustee to distribute those dollars to the beneficiaries. But what happens if it’s in the discretionary trust, it’s now taxed at trust rates.

Al: Unless it’s distributed.

Joe: If it’s distributed, it’s going to be taxed at the individual’s rate. If it stays in trust it’s going to be taxed at trust rates.  If you want to keep it in trust to keep the protection, you’re going to have a terrible tax issue.

Al: And the reason is because trust taxation, you get to the highest rate, 37% at about $12,000, $13,000 of income.

Joe: $13,000 of income, now you’re in the 37% rate. And then plus another 10% state of California. So a 50% tax rate on anything over $12,000 of income. So it’s like do I want to keep it protected from creditors, keep it in the discretionary trust? Or if it’s a conduit trust, you’re like I’m going to pass this stuff out in that RMD would last over their lifetime. But the RMD’s going to— everything is going to be distributed within 10 years. So there’s no purpose of really holding the trust because everything is going to be distributed out anyway. So if you want the discretionary trust where you can hold it in trust to protect it, you’re going to get screwed there because you’re gonna give half of it to tax.

Al: And that’s the reason why most people have that is because it allows the asset protection and it prevents the kids from spending too much.

Joe: So, I guess the point is, if you have an IRA that you probably are not going to spend down and you want to pass it to the next generation and you set up a trust to protect that IRA balance to go to your kids or grandkids or something like that, I would highly suggest you sit down with a qualified professional because there are several moves that you could potentially make. But it’s not going to be nearly as good as the stretch. Now you’ve got to look at Roth conversions. You get that thing into a Roth. Because let’s say now you have a discretionary trust. You can hold it in trust because the distributions are tax-free. You’re not going to get hurt by the tax trust rates. You could set up another type of trust, the charitable remainder trust. We kind of hit on that. I don’t know, maybe last year, how that would work. That’s complicated.

Al: It is. That’s more complicated than I want to get into right now.

Joe: So there are different things that you could potentially do to, to preserve what you have, instead of losing it, and still accomplish your goals to some degree. There’s always going to be some give and take here.

TRANSCRIPTS – WE’VE GOT ‘EM! 12 of you have told me in the podcast survey that you didn’t know that we have transcriptions. They’re available for every single episode of this podcast since February of 2017. Don’t let all that typing be in vain! Go to YourMoneyYourWealth.com. Pick a podcast episode. Scroll down to where it says “Transcription”. Voila. Read to your heart’s content! Now, for more on how this new legislation could affect your retirement planning, Professor Jamie Hopkins from Carson Wealth and the Heider School of Business at Creighton University joined us on episode 224 to explain the SECURE Act in detail. missed it, just go back to Your Money, Your Wealth® episode 224 in your podcast app or click the link to episode #224 in today’s podcast show notes at YourMoneyYourWealth.com. In the coming weeks, Pure Financial Advisors’ own Matt Balderston will talk about Pure’s investing philosophy, especially in times of market volatility and Karsten Jeske from EarlyRetirementNow.com will discuss safe withdrawal rates for early retirees, so now would be a great time to subscribe to YMYW and share the podcast with anyone who will get value from it! If you have money questions, go to YourMoneyYourWealth.com, scroll down and click “Ask Joe & Al On Air” to send in your question as a voicemail or an email.

16:15 – Indexed Universal Life Insurance for a College Savings Investment?

Joe: Marcus from Alabama. Al? I was gonna say Al?

Al: Marcus and Al.

Joe: So Marcus writes in. From Alabama. “Hello, Andi.” And she’s first I guess, Joe, and Big Al.

Andi: I’m the one that emails all these people.

Joe: Got it. “This is Marcus from Alabama, Tennessee again.” All right Marcus, where the hell are you from? Are you from Alabama? Are you from Tennessee?

Al: It’s that slash.

Joe: Oh come on. Because are you like giving us, this is Marcus from Alabama, and then you write in again this is Marcus from Tennessee?

Al: I could be from Tennessee.

Joe: Just so you could get a couple of freebies from us? And then it’s gonna be Marcus from Wisconsin. Anyways, “I’m enjoying the show and content.” Thank you, Marcus, from Alabama/Tennessee. “I particularly enjoyed Joe’s response to the fixed index annuity question. Such passion.” Thanks, Marcus. Thank you. “This was very informative. While you were describing an indexed annuity, I couldn’t help but think about how the cons are similar to an index universal life insurance policy. With that said, what are your thoughts around using IULs or any cash value life insurance product as an investment for the average family, in particular, an IUL, Index Universal Life, as a way to invest for child’s education instead of the traditional education savings account or the 529 plan? P.S. No I’m not in the business, per se.”

Al: Yeah you thought he might be because it’s such a good question.

Joe: Yeah. Because he’s like trying to get information from us to play back to his client.

Al: That’s what you’re thinking right. He still may.

Joe: I know, exactly. “I enjoy learning about finances and using you to confirm my thoughts and opinions. With that said, make sure Joe has blood pressure medicine available or paramedics around before he answers this question. “

Andi: Apparently, you get a little excited with the annuities.

Al: I will get the ambulance on speed dial. Just in case.

Joe: Index Universal Life Insurance Policies.

Al: So, basically those are insurance policies, permanent policies that have cash surrender value. And he’s saying, is this a good alternative for the average family as a way to invest for a child’s education instead of traditional ESA or 529 plans. So that’s the question.

Joe: All right. So, the answer is no.

Andi: Well that was easy.

Al: Next question.

Joe: And here’s why I say that. Because just saying no it’s just not good enough. No, we’re really good on this show.

Al: And we’re transparent. And we may not have the right ideas. But we have ideas.

Joe: And some of you might disagree with me. This is where I’m at. And I know why some people would recommend this and I understand that too. So look, let’s just get everything out on the table and then let the people decide.  I’m going to unpack it a little bit.

Al: Nice. Okay, I’m ready for this.

Joe: Okay, so first of all what an equity-indexed annuity is — or an equity-linked product, you could have a CD, you can have an annuity or universal life insurance policy, is that the insurance company is buying basically a zero-coupon bond and putting a call option on it. Let’s say the S&P 500. And how it’s sold, is that how would you like stock market-like returns with no downside risk. So it’s a fixed product, basically. You’re not going to lose any money in it. But how it’s sold is that you can get higher expected returns then let’s just say a standard CD.

Al: And so your rate of return is kind of based upon the index that you happen to pick.

Joe: It’s linked to it, but it’s not going to give you anywhere near what that index does. It’s BS.

Al:  It’s when you get into the fine print.

Joe: Yes. Because there are participation rates, there are caps, there are all sorts of stuff. So I was explaining this the other week.

Al: And apparently you got pretty animated.

Joe: Apparently I did.

Andi: There’s video of that.

Joe: And then Marcus said, how about if I put it in an IUL, a cash value life insurance product. So you get the same crappy product, but now it’s in a wrapper of an insurance product. Now you just add more fees. So it’s like I’m buying this because I’m thinking I’m getting stock market-like returns with no risk. Well, that’s fantasyland, first of all. So you could get potentially higher returns in a straight fixed annuity or a CD rate, with an equity-indexed annuity or an equity…

Al:  Easy for you to say. Equity indexed annuity, is that what you’re trying to say?

Joe: Index Universal Life Policy. It’s the same kind of concept of investing. But now with the IUL, I’m just going to call it that from now on.

Al: Yeah good idea.

Joe: Is that you have the cost of insurance.

Al: Okay so it’s not just the investment, you have to pay for the insurance.

Joe: So now I’m buying life insurance.

Al: But if you die, maybe that’s good.

Joe: So if I need the life insurance then here’s what the mathematical computation needs to look at. If I already paid for life insurance and I also want to save money, does it make sense because the cost of insurance then is moot because I already have that sunk cost? 99% of the time, it still doesn’t add up. I would much rather have this person invest in a 529 plan, ESA or just a non-qualified brokerage account. Are you fully funding your 401(k)? Do you have Roth IRAs? Because all of that is fairly cheap, it’s inexpensive. Roth IRAs grow 100% tax-free. You have FIFO tax treatment. You could pull the money out at any point to pay for college education. 529 plans use that. Here are the naysayers of this. This is why this product gets sold for college education is that it’s a sheltering mechanism for financial aid. Or grants or all that other, you’re basically trotting the university. I’ve got millions of dollars but I’m going to shelter it inside a stupid life insurance contract to make the agent rich and so I get free financial aid.

Al: So it doesn’t look like I have money.

Joe: Because I hid it from whatever. So if you want to play that game, you can do that. So put it into a life insurance contract, the money grows 100% tax-deferred. You could pull the money out of a life insurance contract 100% tax-free because it has FIFO tax treatment, just like a Roth. So you’re pulling it out and then you would have to take loans from the remaining if you want to take the rest of the cash value out. But you have to have a certain level of cash value in the policy for the remainder of the policy or it’s going to blow up and then everything is going to be taxable to you that were gains.

Al: So I suppose another way to say that is if there’s not enough cash in the policy, it could lapse. And that means all the unpaid taxes are due at that time.

Joe: Right. Because everything was tax-free to me because I took FIFO out, but then the rest the gains I took out as loans, but those loans are now gonna be a taxable event.

Al: And if the policy goes away the loans are now taxable.

Joe: Correct. And then it’s like okay, well now I’ve gotta keep this thing alive. I’ve got to keep floating and I to keep putting cash into it. So you gotta fully fund the thing. You’ve got a max fund this bad boy. You’ve got to put a ton of cash inside these policies because there’s already a fixed amount of expenses. So here’s an analogy, is that all right you’re gonna fuel up an airplane that fits 400 people but you’re the only guy in it, makes no sense. That airline would go broke. So they got to fill that thing up with 400 people to fly the plane. So that’s the same thing with the insurance policy is that if you only got 1 or 2  people on the plane it’s not going to work, because you already have these fixed expenses you’ve got a max fund that thing and throw a ton of cash. So I would say if I’m going to throw a ton of cash at something, it’s not going to be inside of a life insurance contract for the average American family or average family. It could be an average Spanish family. Or Portuguese family.

Al: Any nationality.

Joe: Yes, Russian family. Any family. So that’s my explanation there. Was that fair? Was that good enough?

Al: It was fairly clear.

Andi: So what would you suggest for college saving?

Joe: 529.

Andi: Not Roth?

Joe: You could do Roth, but I’d much rather have the Roth go for retirement. But it’s sold like this, here’s this great product, Alan. But with a Roth IRA, it sucks because you can only put $7,000 into it and you’re subject to AGI limitations. Here’s this. This is the super Roth! DA DA DA!!! It’s awesome!! It’s life insurance and every family needs one!

Al: You know when I was a young CPA and I didn’t really understand this product very well, what I was told was it’s a private pension plan. That sounds pretty good.

Joe: Oh yeah. It works if – let’s say if I’m fully funding the 401(k) plan, if my wife is fully funding a 401(k) plan, and I got Roths and everything else — prior to 2010 though, Roth conversions, you had to have adjusted gross income under $100,000 to do a conversion. So prior to 2010, funding a life insurance contract, max funding it, maybe a second to die to keep that insurance really, really low, might have made sense. But after 2010, it doesn’t make any sense at all, especially if you don’t need the insurance. And the cost of insurance is so cheap today than it was, you know 10, 20 years ago, just because of the competition. There’s so much more competition with insurance that they’re reducing premiums, we’re living longer so life expectancy and all of that stuff has changed. So, no, IUL? I don’t know. If you’re an insurance agent you know God bless you. I understand that there are some absolutely real hardcore benefits in those products. I’m not arguing that. What I’m arguing is that sometimes it’s presented in a way to an individual that is not a really good fit where there could be a cheaper more productive alternative. Is that fair?

Al: That’s fair, sure.

Joe: I’m not here to rip on anyone or any profession. I’m not a huge fan of some of this stuff and how it’s sold. But if they understand clearly, that here’s their cost of insurance, here’s really the range of return. You’re not going to get 8% on this IUL. Maybe in a blue moon, you could. I’m not going to run an illustration and say let’s run this at 8%. Net of all fees.

Al: Yeah. This works out pretty good.

Joe: Look at this. You can put in $50,000 and millions come out tax-free. This is your private pension, Al!

No offense to those good insurance salespeople who are legitimately trying to help people, but before you go buying life insurance from some slick sales guy making it sound too good to be true and just trying to get a fat commission, learn about some basic, expensive mistakes you’ll want to avoid. Download our free white paper 5 Costly Life Insurance Mistakes from the podcast show notes at YourMoneyYourWealth.com. On a completely unrelated note, this week on the Your Money, Your Wealth TV show, Joe and Big Al are Getting Real about Real Estate in Retirement and they want you to watch. You can catch it whenever you want, it’s waiting for you at YourMoneyYourWealth.com. Now let’s answer more of your money questions. Scroll down YourMoneyYourWealth.com and click “Ask Joe & Al On Air” to send in your questions, comments, compliments, and complaints.

28:25 – Should I Roll My 401(k) to IRA?

Joe: So let’s go with Connie. She doesn’t give a location. So, she goes. “Hello I have a question on my 401(k). I recently got laid off. I will be getting a severance of one year’s salary. Do I roll over my 401(k) to somewhere else? The plan will be terminated as of December 31, 2019. I didn’t want to start taking distributions from it until I’m 66, which will be next year, and also take Social Security benefits. Please let me know. Thank you.” All right Connie. So you’ve got a lot of different options here. So you got laid off and she’s curious if she should roll over the 401(k) plan to somewhere else.

Andi: I’m going to guess that you’re going to say you don’t have enough information.

Joe: Well no not necessarily with this. There are pros and cons. I can kind of give her the pros and cons here. The only thing I really don’t understand is that what she’s stating is the plan will be terminated as of December 31, 2019. I don’t know why the plan would be terminated. Because when you retire, you don’t have to move the money out of the 401(k) plan. But if the plan is getting terminated that tells me something else and maybe she’s just saying she’s not going to be an active participant in the plan as of December 31, 2019. If that’s the case, here are the options, Connie, you can keep the money in the plan you do not have to roll the money out of the plan in most cases. Unless it’s under like $5,000, sometimes they just want to get those small balances out, because they have to do record keeping and send statements and all that which is kind of a pain and expensive, but I’m doubting that that’s the case here. So you could keep it in the plan. There are pros to keep money in a 401(k) plan. One of the pros is if it’s a large company, the cost of the investments could be institutional type pricing so could be cheaper than you know something that you could get on your own. If you are 55 years of age in separating service at 55, there is no 10% penalty, but I think she is older than that?

Andi: She said she’s gonna be 66 next year, so she’s 65?

Joe: OK 65. So another reason to keep it in the 401(k) plan is ERISA protection. So let’s say she gets sued. Files bankruptcy, does whatever. She has a little bit better protection in a 401(k) plan than an IRA. It really depends on what state she’s in because if you roll over your 401(k) into an IRA, a lot of that protection carries over up to a couple million bucks, but it’s all based on state by state since she didn’t give us where she is. So she needs to do a little bit more research. But if she’s a doctor, you probably want to keep it in the 401(k) plan but if you know because you could get sued or something like that. Or if you’re self-employed business owner, you probably want to keep it in the 401(k) plan. If you have a lot of different properties where someone could trip and fall and break their leg and sue you because you didn’t keep it in the 401(k). I would say everything else, I wouldn’t worry too much about it.

Andi: Well, she does say she doesn’t want to start taking distributions from it and so she doesn’t need to, right?

Joe: Well no, I mean she can move it into an IRA and still not take any distributions. The pro of an IRA is that you could consolidate. You kind of keep everything in one place. So if I have a brokerage account, a Roth IRA or an IRA I have everything then at Charles Schwab, Fidelity, TD Ameritrade, whatever, Vanguard. So it’s easier to manage IRAs. You have the full array of investments that you can possibly think of. So you’re not tied to whatever the 401(k) has. You know, it really depends on what she wants to do, but she doesn’t have to, but should she? Yeah, I think so. I mean it’s easy just to keep it a little bit more organized and then you can start taking distributions from the IRA or the 401(k). But, that’s what I would do. Anytime I left an employer, I rolled my 401(k) into an IRA. So I think it’s just easier just to keep things all in one place and simple and easy.

32:50 – How Much Can I Convert from 401(k) to Roth IRA at Age 73?

Joe: Terry from San Diego. “Other than the tax impact…”?

Andi: Impaction.

Joe: Impaction?

Andi: I think he means the impact that taxes will have. Actually, I don’t know if Terry is male or female.

Joe: Is that a word?

Andi:  Impaction? To me, it sounds like an impacted tooth or something.

Joe: Impaction. “I’d like to know the tax impaction.” Oh that’s a cool-ass saying. Tax impaction. I don’t think that’s a word.

Andi: Oh it is. “The condition of being or a process of becoming impacted.”

Joe:  Huh. “I’d like to know the tax impaction. Is there a maximum that I can convert my 401(k) to a Roth IRA? I’m 73 years old.” Terry, you can convert it all, outside of your RMD. So let me explain a few things here.

Andi: Now this is 401(k) to Roth.

Joe: Okay, but it doesn’t matter.  I think it was a Pension Protection Act of ’06 allows 401(k)s to directly go to Roths. Before you had to go to an IRA to a Roth IRA. So what is a conversion? Well, that’s taking money from a retirement account, that was pre-tax, that grew, tax-deferred. And when you take the dollars out, they’re taxed at ordinary income rates. A Roth IRA is just the opposite. You don’t get a tax deduction going in grows 100% tax-deferred. But when you pull the money out, it’s tax-free if it’s a qualified distribution. So Terry is looking to convert the 401(k), pay a little bit of tax and then put it into a Roth IRA. Anyone can do this at any time, there are no income limitations. There’s nothing. No age limitation. Nothing. So other than the tax impaction, so what that means is that there’s tax on the conversion. Is there a maximum that I can convert? And the answer is No. But Terry is over 73. So Terry would have to take his required minimum distribution out of the retirement account first before Terry converts. Big mistakes happen there where someone’s over 70 1/2, where they have a required distribution. They do a Roth conversion.

Andi: So over 70 1/2 is the age that matters. Instead of 73.

Joe: Yes 70 1/2, your required beginning date is April 1st the year after you turn 70 1/2. But if you’re taking distributions.  So in that distribution on the RMD is based on December 31st the prior year. And so if someone does a conversion prior to them taking an RMD, it’s going to reduce their RMD. So I do a big conversion of $100,000, January 1st and then December 31st, is like oh I didn’t do my RMD this year, then it could potentially be less. So you have to take the required distribution out first and then you can do the conversion. So depending on what your tax bracket is, Terry.  And how much tax that you want to pay. You absolutely can do whatever you want, but just make sure you take the RMD out first, put that in your brokerage account, checking account, savings account, whatever and then the remaining could be converted. So if he or she converts or if Terry converts prior to the RMD, then that would be an excess Roth IRA contribution.

Andi: Ah. So there is a gotcha there.

Joe: Yeah, there’d be a penalty each year that that excess RMD is actually in the Roth. So hopefully that answers your question.

36:53 – I Received Form 5498 After I Filed My Taxes. Am I Going to Jail?

Joe: OK. We got Clint, he wrote in from Florida. Clint. “I have a question about receiving form 5498 from my postal NBA union. The Roth IRA amount of $4,400 was deducted from my pay in 2018. I filed my 2018 return in early April. This is assuming that I received all W-2, 1099, etc. I also received a refund of close to $1,400 a few weeks after filing. So early May comes around and I received this form 5498 postmarked May 1, 2019. Should I expect jail time for not adding this line to my 2018 tax return?”

Al: Wow. Well, Clint, for our listeners, a 5498 is, it’s called the IRA contribution form or IRA contribution information. These are not due until May. And the reason is because you can do an IRA contribution until April 15th or a Roth contribution until April 15th. And there’s some other stuff on here, like rollover contributions and conversions, recharacterizations of contributions, also Roth IRA conversion amounts. Anyway, this form comes out in May. Now so if I understand what you’re saying, you had some Roth taken out of your paycheck. Usually, it’s a 401(k) with a Roth option but there are a few employers that have programs where right out of your paycheck can go right to a Roth IRA. So I’m going to assume that’s true. So $4,400 was deducted. Now on line 10, you’re referring to on the form 5498, that’s the Roth IRA contribution line. With that Roth contribution, there’s nothing you do on your tax return. So, no there’s no jail time. And the reason why you got this form after the fact, is that’s as I told you, that they don’t really know what’s going to happen until after tax season comes around. So, I guess in certain cases what we find is people forgot to enter transactions on their return and they get this form and then you would have to go and amend the tax return. But that’s not your case. In your case, you’ve had Roth IRA, which was apparently deducted from your pay. And there’s nothing to report. A Roth IRA is nondeductible.

Joe: Yeah, it’s after-tax.

Al: So don’t worry about it. No jail time.

Joe: Maybe, Clint what else are you doing in your spare time? If you’d like to write in about that. We can see if you’d go to jail. I’m getting bored, Al. I wanna hear better stories. I want to hear like something exciting. (laughs) I’m just gonna shut up.

39:58 – YMYW Compliments & Complaints: A Followup

Joe: All right. So Ross writes in here. “Dear Joseph.” He actually wrote Joseph?

Andi: And Alan.

Joe: Wow. “I thank you so much for answering my question with clarity and humor. I’m glad my typ…”

Andi: “Typographical error.”

Joe: All right. I’m with you, “on $10,000 damage when I meant to say $10,000 property tax, was so enjoyable to you both. I am at the age where when I use my computer I’m grabbing for one of several different pairs of glasses on my desk causing my vision not to be so perfect. I appreciate the detail upon which you explained your answers. You characters are still enjoyable even though I was the butt of your explanation. I don’t hit any walls, but I defend all kinds of people who hit one thing or another.” Ross’ got a good sense of humor. “I’ll continue to watch you as I do learn a great deal from you both. It takes a lot of work to make your future secure to the lifestyle you want. I will continue to watch and learn since my lottery winnings have not yet come in to fruition. Thank you. Take care.” Blah blah blah. All right thanks, Ross. It didn’t say that. That was mean. He didn’t really say blah blah blah. He said Take care.

Andi: He loves your show, Joe.

Joe: And thank you once again. All right. That’s it for us. Andi, great job.

Andi: Thank you, Joe.

Joe: Thanks again for all your hard work. Big Al kind of snuck out of here a little bit early. And I’m Joe Anderson. Thanks a lot for listening once again. Fill out that survey, we’re curious on what your thoughts are. We’ll see you next week.


Yep, you heard the man, don’t forget to fill out my podcast survey in the show notes at YourMoneyYourWealth.com before August 18th for your chance to win a $100 Amazon gift card. And if you’re into the silly stuff, stick around because we’ve got some Derails ahead. If that’s not your thing, skip out now. But hey, you should know that Your Money, Your Wealth® is presented by Pure Financial Advisors. Click here for your free financial assessment.

Subscribe to the YMYW podcast

 Subscribe to the YMYW podcast newsletter

FOLLOW US: FacebookTwitter | YouTube | LinkedIn

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.