Show Notes

• 00:00 – Intro
• 00:50 – In-Plan Roth Conversions From 457 to 403(b): Do I Need a Financial Advisor? (David, OH)
• 10:54 – Calculate a Free Financial Blueprint, Learn About Pure’s Financial Assessment
• 12:13 – Retirement and Roth Conversion Spitball + How to Get Out of Variable Annuity (Chris, DC)
• 20:05 – Anxious I Made a Mess of My Finances. How Much Should I Convert to Roth? (Kim)
• 28:13 – Watch Retirement Rebound: 5 Plays to Score a Comeback on YMYW TV, Download the Retirement Income Strategies Guide
• 29:08 – Inherited Assets: Best Strategy for Tax-Efficient Retirement Withdrawals? (Alissa, Cedar Rapids, IA)
• 42:10 – Outro

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Transcription

Intro

Andi: Should David in Ohio use 457 funds to do an in-plan Roth conversion in his 403(b) plan, and should he hire a financial advisor? Chris in DC needs a retirement and Roth conversion spitball analysis, and he needs help getting out of a variable annuity. And Kim is anxious that she made a mess of her finances and she wonders how much she should convert to Roth, today on Your Money, Your Wealth® podcast number 497. Plus, what’s the best way for Alissa in Cedar Rapids, Iowa to make tax-efficient retirement withdrawals from an inherited IRA? To get your money questions answered, or for a Retirement Spitball Analysis of your own, click the Ask Joe and Big Al link in the episode description and send us a priority voice message or an email. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

In-Plan Roth Conversions From 457 to 403(b): Do I Need a Financial Advisor? (David, OH)

Joe: Okay. David from Ohio.  “Should I use 457(b) funds to do a in-plan Roth conversion in a 403(b)? Okay. “We are 49 and 41 with $1,700,000, most of which is in pre-tax.”  All right. Hello. “For the last 6 years, I’ve been tuning into your show  and I’m grateful for the informational content you deliver. Before that I would just put money away, never thought about it. Now I’m thinking about it and I need help. My drink of choice is a K-cup  Starbucks French roast.”  What the hell is a K-cup?

Andi: Isn’t it those little individual cups that you can make at home, just one thing goes into your coffee maker and it spits out one cup of coffee?

Al: Yeah, it could be it could be they have this little powder thing. I don’t know.

Joe: K-cup. All right, sounds good. “I’m 49, wife is 41. Since my late teens, I’ve been contributing money to different pre-tax retirement accounts, but have rolled these accounts as I move from job to job. Although I initially contributed to a Roth IRA account in my 20s, my wife and I no longer meet the eligibility requirements due to our combined annual income of roughly $260,000. Regrettably, my wife and I pulled money from our Roth accounts when we first married to fund a down payment on our home and they have underperformed compared to my pre-tax accounts, resulting in majority of the funds being in pre-tax accounts. Here are the details. He’s 49, he’s got $1,100,000 total. About $40,000 of this is Roth, $680,000 all pre-tax in a 403(b) that allows in-plan Roth conversions, $170,000 in a different 403(b), which I’m currently maxing out with Roth contributions and plan to do so in the 24% tax bracket.  I’ll rethink this if taxes go up in 2026, 5% of the funds are Roth and the rest are set pre-tax. $170,000 all pre-tax in Ohio 457 plan. Since I no longer work for this employer, I’m able to use these funds.  $40,000 in a TIA plan, then I contribute $8000 a year annually. $30,000 in a Roth IRA.  Investments for the most part are growth value, international bonds, mainly large cap. Wife is 41, she’s got $600,000, about $20,000 of this is Roth.  The rest is in 403(b).” And so on. “So she’s doing 100% Roth contribution. She is fully utilizing this opportunity, and we continue to do so in the 24% tax bracket. If taxes rise in 2026, we will reconsider.”  He kind of just cut and paste his, his, his wife.

Al: Yeah, it got it.

Joe: You’re not going to reconsider with the wife, but you’d reconsider with you. I mean, that would have been rude.

Al: It would. Yeah. So equal time.

Joe: Yeah.  “My wife’s investments-” Okay. I don’t really care what she’s invested in. “It’s too early for me to seriously consider retirement, but I still need advice. We have 4 children, one finished college and is now on their own. The others are 5, 9, and 12.  We have a plan in place to fund college by contributing $400 a month to each of their 529 plans. The 529 plans will likely cover most of the expenses as faculty position I hold will help fully fund their undergraduate education. It’s highly unlikely for my wife and I, who are in healthcare, to face any difficulty in finding work. Despite that, we do have a high yield savings account with about $20,000 in it. The 457(b) has the potential to serve as an emergency fund as well.  I estimate that my wife and I could be comfortable, have a comfortable lifestyle with a monthly income of about $10,000 a year. According to the Social Security website, my estimated Social Security at 67 is $36,000 and my wife’s is $32,000. In any case, I foresee a possible tax disaster due to my delayed start in funding Roths.  I want to optimize my tax strategy by using the 457 plan to pay taxes for an in-plan Roth conversion from the 403(b) plan that allows it, taking advantage of the current tax brackets and converting to the top of the 24%, about $100,000 this and next year. Despite knowing that my pre-tax accounts will decrease in value, I think it’s best to convert some pre-tax money to the Roth now and switch back to pre-tax contributions at the 33% tax bracket in 2026.  I have considered a financial advisor but have trouble paying the 1% to 1.5% fee and I don’t want to necessarily roll my money out of the other plans. I fully intend to use one eventually when I’m about 5 years out from retirement.  That’s when I see the real value.”  But you’re writing to a financial advisor now.

Andi: Yeah, but you’re free.

Joe: Yeah, I’m free.  Get what you pay for. “Any thoughts on this strategy. Do you think I need an advisor now?”  Okay. Big Al, he’s going to roll- He’s going to, he’s going to do it in-plan conversion, but take the money out of a 457 plan to pay the tax. Do you like that strategy?

Al: I think I do because he and his wife have a lot of money in a pre-tax. We know the tax brackets are lower for the next couple of years for sure. Right. 2024, 2025, the 457 money is available to pay taxes without penalty. So-

Joe: But he’s got to pay taxes on it.

Al: True. True. So you got to factor that in.

Joe: Yeah, that’s a huge factor.  I would not do it.

Al: You wouldn’t?

Joe: No.

Al: You, Mr. Roth, wouldn’t do it?

Joe: I wouldn’t. Yeah, I’m just Ah, touché. No! I mean, this is the second week in a row here. I do not like to pay tax to pay the tax to pay the tax on the tax.

Al: I think, I think there can be exceptions.

Joe: There can be exceptions. But is there other liquidity here? Let’s take a deeper look here.

Al: I, I don’t think so.

Joe: So everything’s pre-tax and just a couple bucks in Roth.

Al: Yeah.  I think the reason I think it could make sense, like I said, is because we know there’s lower tax brackets. There’s, he’s still 49 and probably, I mean, with this much savings in retirement accounts, probably will keep adding. I think this could be a pretty big tax time bomb.  So I think it, I think, I think it does have potential merit, even though I do agree this isn’t one we would normally say yes at. Because we don’t really like using pre-tax money to pay taxes on the conversion.

Joe: Yeah, I would have to run the numbers here. I think off the surface. I don’t like it. He’s 49 years old. They got $2,000,000 in retirement accounts, right? So he’s got $1,200,000. She’s got about $700,000. I would just switch your savings all to Roth from now until the end of life, right, until you stop working. That $2,000,000 will continue to grow. Maybe one spouse will stop working. The tax rates, I don’t know. I think taking money out of a pre-tax account to pay the tax on the conversion at this age, it just it could probably make up for itself. I would want to run the numbers, but I would not convert $100,000 over the next two years. And you’re paying 24% tax on that. So where does he live? He lives in Ohio. I don’t know what the state tax in Ohio is, is 5%. So let’s say it’s 30% tax.

Al: Yeah. Let’s say it’s 30%. And so you’ve got to pull $30,000 out of your 457 plan. But guess what? You got to pay another 30% on the $30,000. Well, you got to pay another $9000 in tax to get $39,000 to pay $30,000 in tax to pay the tax man.

Al: No, no, you, you, you do $100,000 total. So you take $30,000 out to pay the tax and it’s actually doesn’t quite work out $70,000 for the conversion. So it’s, it’s an algebraic calculation, probably $75,000 for the conversion, $25,000 for the tax, somewhere in that vicinity. If you’re going to do this. I get, I get your logic, Joe, but I like the fact that we got some low brackets and we got a lot of pre-tax and he’s at a young age and getting this tax-free growth for the next 15, 20 years. I kind of like that.

Joe: The point is, is that he’s going to pay another $15,000 in taxes to the conversion. So you have to look at what your effective rate is today, what the effective rate is going to be in the future, and to see is that rate going to be lower today or the same in the future. If it’s the same or lower today, then absolutely do it, depending on what tax brackets that you think, but you want to live off $100,000 a year or $10,000 in retirement. So, I don’t know, you have to run, this is a tricky one, because I just hate paying taxes on to that, because you got to pay the tax, pay the tax.

Al: What’s hard on this too is at 49, when we don’t know $10,000, what’s $10,000 a month going to be in 20 years, 15 years, right? So yeah, I mean, it does- I agree with that comment, Joe, it does take a little bit more analysis, but first blush, I might do it.

Joe: All right. Well, good luck.  So you need an advisor.  Definitely. This is true. I mean, you could blow yourself up here.

Al: Because even we can’t decide.

Joe: Yeah, you have to run the numbers and making sure that- work with the CPA that understands Roth conversions and a CFP for sure. Yeah, don’t worry about the 1% and 1.5% fee because they could save you maybe just 20% or 15% in tax this year alone. So, find a good person and go after it.

Get a Free Financial Blueprint, Learn About Pure’s Financial Assessment

Andi: advice of a financial planner, and you’re still not quite ready to take that leap, you can get an idea of how long your money will last in retirement with our new Financial Blueprint tool. It provides personalized insights, identifies potential shortfalls, and suggests actionable steps to help you secure your retirement future. Once you’re armed with the information you need, consider at that point meeting with the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors for a Free Financial Assessment, either in person or from the comfort of your own home via Zoom. The Financial Blueprint and the human assessment are both free, with the goal of educating and empowering you.The Pure team will help you develop a thorough financial plan that goes beyond the basics, offering guidance that addresses both your unique immediate needs and your long-term retirement vision. You know how Joe and Big Al always say they don’t give advice? That’s because Pure is a fee-only financial planning firm that only gives financial advice to clients. At the end of the assessment process, you can decide whether becoming a Pure client can add value to your financial life, and what those next steps look like. Get your Financial Blueprint and learn more about the assessment process. Click the links in the episode description to get started.

Retirement and Roth Conversion Spitball + How to Get Out of Variable Annuity (Chris, DC)

Joe: “Hey Joe and “I’m a big boy now” Al.”  Okay.  “I live in Washington, D. C. with my dog and 3 kids, twins that are 5 and 9 years old. My wife is a wine snob and likes to sip pinots from the Willamonte Valley.

Andi: Willamette.

Joe: Willa what?

Al: Willamette.

Andi: Willamette. It’s actually in Oregon. It’s Oregon wine country. It’s south of Portland.

Al: That’s good. Willamonte.

Joe: Willamonte. It sounds a little “oui oui”.  “I’m more of a perdestrian, pedestrian, with my tastes. And enjoy Corona with lime during the summer months. Our dog is an 11-month-old Pomsky. My wife is 44. I’m 45. We cruise around in a 2013 Honda minivan. Here’s the numbers.”  It’s been a long day.  And I’m going to blow up most of these questions.

Al: We can do it, Joe.

Andi: It’ll be fun.

Joe: A little tongue-tied, a little tired, but here we go. Okay, we, this is, do we know, who are we talking to? Chris.

Andi: This is Chris in D.C.

Joe: “$1,200,000 in a traditional IRA, $100,000 in a Roth, $20,000 in I-bonds, $175,000 in a variable annuity, $575,000 in a brokerage account, $100,000 in cash.” Did you add all that up, Big Al?

Al: Yeah, if you’re keeping score it’s $2,200,000.

Joe: $2,200,000 at 44 and 45.

Al: Excellent.

Joe: Way to go, Chris.  No wonder why your wife’s a-

Al: A wine snob?

Joe: A wine snob.  I would be too.  “Our income can fluctuate a lot year to year. In a bad year we make $325,000, but in a good year we can make as much as $600,000. Our living expenses are pretty high with 3 kids plus the dog and a mortgage at about $225,000 per year. We want to retire around 65 and plan to spend $225,000 per year in retirement, $137,000 in today’s dollars.” How did you come up with $137,000 in today’s dollars?

Al:  Chris apparently has it dialed in.

Joe: Got it. He’s got spreadsheets, you think?

Al: I think so. All right, he “maxes out his 401(k) tax-deferred every year and planned to do so even when their income isn’t on the high end of the range that he gave. When we make a move, when we make more money, we can save another $75,000 to $150,000 a year in our brokerage. I figure about half the time we’re on the low-end need. So the income we can make in the other half, we’re closer to the high end.”  Whatever that means.

Al: Half the time he makes $325,000, half the time he makes $600,000.

Joe: Must be rough.

Al: That’s what I get.

Joe: Got it. “First question. Are we on track to retire?”  Yes.

Al: The answer’s a resounding yes. So here’s the math. So you start with $2,200,000, Joe, and you add, I said, because half the time they’re adding money plus 401(k), I added $75,000 a year, 6%, 20 years, they end up with $9,700,000. With their spending at $225,000, it’s a 2.3% distribution. Check, no problem.

Joe: Okay. But he’s saying $225,000 per year in retirement. So he’s already doing the math on that. So $225,000 into the what? $8,000,000 bucks?

Al: $225,000 into $9,700,000.

Joe: Oh, $9,700,000. That’s it.

Al: That’s 2.3%.

Joe: Okay. Yeah. That sounds pretty good.

Al: Yep.

Joe: “Second question. What should my strategy be around Roth conversions?” All right.  Let’s see. You got $1,200,000 in retirement accounts. He’s going to fully fund the retirement accounts and then the extra he’s going to put in the brokerage accounts. He’s at $375,000 or $600,000.  So he’s in very high tax brackets no matter what.  What should the strategy be? Do you think he should convert? He’s 45 or he’s, his wife’s 44, he’s 45?

Al: Well, if they, if he makes $325,000 at least for the next two years, Joe, he’s in the 24% bracket.  Maybe those years you think about doing Roth conversions, but the higher income years you don’t. It’s simple as that.

Joe: Yeah, I think the 24% tax bracket, it’s a good bracket for Chris. He’s young.

Al: Me too.

Joe: I think it will behoove him to have Roth IRA dollars compounding over the next several years.

Al: By the way, that goes up to about $400,000. And with the standard deduction, let’s say $425,000 of income, in rough numbers, which means he could convert about $100,000 in a low year, based upon what he told us.

Joe: Yeah, I think in a low year, you do some larger conversions, in a high year you don’t.

Al: You don’t. Mm hmm.

Joe: Yeah. We’ll just look at that 24% tax bracket at the top of the 24%, I think that’s the right bracket to go to.

Al: Yep.

Joe: All right.  I agree with that. We’re on the same page. So “I max out my 401(k) tax for every year and plan on doing so even when our income isn’t on the high end.” Okay. I already read that.

Al: But that’s very clear.

Joe: It’s very clear now. Yes. Do conversions on the low end in not on the high end.

Al: Okay. All right. Let’s go to the 3rd question.

Joe: Okay.  “3rd question. I want to get out of my variable annuity. And I’m outside of the period where I incur a surrender charge. Fees are about 1.25% per year on it. Should I jump ship? Thanks, love the show.”  Yes, jump ship, for sure.  You’re probably paying more than 1.25% for a variable annuity. But let’s just say it’s 1.25%. I don’t care if it was free, I would jump ship. And the reason for that is that a variable annuity is going to grow tax-deferred for you, which is great, you’re not going to pay a lot of taxes on the growth because it’s deferred. But guess what? All of that income is going to come out as ordinary income.  So you’re already going to be in a pretty high tax bracket with the amount of money that he has in retirement accounts and the amount of savings that he has in the retirement account, I would look at what the basis is first and then I would probably jump ship.

Al: Now, one other thing, Joe, if it’s in a retirement account, no problem. If it’s not in a retirement account, jumping ship means 10% penalty on the gain part.

Joe: Correct.

Al: So if that’s the case, then you probably would roll it to another annuity that doesn’t have those charges.

Joe: Yeah, there’s like fee only. It’s gonna be a tough day.  There’s a fee only, a variable annuity that you can roll. It’s a 1035 exchange from annuity to annuity. There’s no taxes on it. Then you can be in a lower cost annuity. 1.25%, that seems pretty cheap to me for a variable annuity. We usually see probably twice that.

Al: Yeah, it, it probably, there’s probably more fees in there.

Joe: It could be, but- Yeah, I’m not a big fan of variable annuities because I don’t think he will need a guaranteed income stream at retirement. You’re going to have several million dollars. And if you’re going to tone down the savings, like you said you are, I don’t know if there’s needs for guarantees there. So if you want guarantees, that’s what a variable annuity will give you. It’s an insurance contract. So are you looking to buy an annuity for a guaranteed income?  Then you go with the insurance companies. If you don’t need the guarantees, then don’t go with the insurance companies.

Anxious I Made a Mess of My Finances. How Much Should I Convert to Roth? (Kim)

Joe: Got Kim writes in. “Hi Big Al, Joe, Andi. Oh my gosh!  I’m so anxious as I write this as Joe said, to keep it half a page in 14 point fonts.  I’ve only been listening for about a month. I’m listening two to 4 hours a day to catch up. I ABSOLUTELY LOVE YOUR SHOW.”  Unbelievable.

Al: In all caps.

Joe: Two to 4 hours a day.  That is insane. You need to go to therapy. “Your dynamics is a perfect recipe. I try to listen to- I try to listen to learn, but most of the time I fall over belly laughing because Big Al botches the reading so much and Andi and Joe have to help him stay on track. Yeah, way to go, Big Al. You just botch everything up.

Al: Finally, someone’s on your side.

Joe: I think you got that backwards, Kim, but that’s alright.  “How this all started. My 62-year-old husband is retiring 5.25.2025. Oh, “he loves 5s.” That’s clever. “So I thought I would spend a day or so determined how we would find our retirement. So I listened to a podcast that somehow linked me to yours. And that was when I learned about RMDs and how messed up we were going to be if we did not do Roth conversions. Oh, and I pulled out $2,600,000 funds out of Morgan when I retired in 2017 and had the time to assess the outrageous fees. Now that we are at the numbers below and I’ve made a mess of things as I dabbled in stock trading from 2018 to 2011. I hope to be liquid end of year.”  You follow along there, Big Al?

Al: Yeah.

Joe: Am I botching this thing or-?

Al: A little bit.

Andi: The stock trading was from 2018 to 2021, not 2011, but that’s fine.

Al: Yeah. Yeah. That’s all right.  Close enough. And she asked, how would she fund our retirement? How would we find our retirement? But besides that, you’re-

Joe: But she pulled $2,600,000 funds out of Morgan. And so, did she roll it out or she cash it out?

Al: Well, it doesn’t say, but down below, she’s got her assets.

Joe: All right. There we go. Let’s go. Let’s go, Kim.

Andi: So get with it, Big Al.

Joe: Yeah. “57 years old, retired, married at 34 years.  Michael is 40 with $200,000.” All right. “We put our heads down, worked and raised two girls.  We own a lake house with Master Crafts. And had a very blessed life. Mastercrafts, well, I like to go to the lake house, cruise around with him.  M drives a Panorama, me, MBenz. I love pina coladas. M loves red wine. And when I’m looking to get lucky, I will pour M a shot of tequila.”  Kim. All right.  Who’s M?

Al: That’s Michael.

Andi: I think M is Michael.

Joe: All right. Michael is-

Al: Husband.

Joe: Got it.  She’s Kim.  Michael’s 40. She’s 57.

Al: No, no. Michael is 62. She was 34 when she was married and Michael was 40-

Joe: Oh-

Al: – when they got married.

Joe: She was reminiscing.

Al: Yes.

Joe: Back to the good old days when they were just young lovebirds.

Al: And I like it how she says, we had a blessed life. Is it no more blessed? It’s that past tense.

Joe: “I need help. Know nothing about finance.”  She’s “very bad with numbers.”

Al: Okay. Well, we can try to help her.

Joe: We can help you out Kim.

All right, “Last two years, taxable income, $150,000. Michael’s got $2,700,000 in 401(k) IRA, $200,000 in Roth. Social Security at age 70 is going to be $54,000. Pension at 70 is going to be $28,000. Me, I got $1,500,000 in an IRA. $55,000 in a Roth. Social Security at 67 is $40,000 a year.  No debts.  $2,500,000 in a joint trust, home is worth $700,000. They got 529 plans, $100,000, two years left to college, $60,000 in HSA. Girls have $20,000 in Roths, checking is $30,000, expenses $120,000 as we’ve been living our best life before the girls are on their own. Guessing maybe $600,000 in expenses in 2026 moving forward.”  I think, Kim-

Al: I think she’s okay.

Joe: -you’re doing pretty good. Pretty good, girl.

Al: If you’re keeping score, that’s almost $7,000,000.

Joe: $7,000,000, that’s it. Kim, you do have a blessed life.

Al: You do.

Joe: “Start Roth this year or wait- or Roth conversions this year or wait until next year approximately one amount? In listening, J has to go first because he’s 70 in 10 years.”  All right.  Yeah. Well, the, the, the person-

Al: The older, older person, you should kind of, yeah, it’s closer to RMD age should probably convert first.

Al: It looks like they’re about 6 years apart. So that makes sense.

Joe: And he’s got $2,700,000. She’s got $1,500,000.

Al: Yep. I like that.

Joe: Yeah. I like that too. Probably go to the top of whatever bracket that you’re in.

Al: Yeah. So the tax income has been $148,000 last couple of years. So you at least fill out the 22% bracket. Maybe, maybe 24%, given these, these large amounts.

Joe: 22% is-

Al: 22% bracket, married couple goes to a couple hundred thousand and, and $400,000ish for 24%.

Joe: All right. “Is Michael’s pay stub, should we do all Roth 401(k)?  Big Al keeps saying contribute 100% in the Roth.” Yeah, Big Al, stop saying that. How dare you?

Al: Actually that’s what Joe says.

Joe: “What is that in actual total dollars amount? And what are the limitations? After max Roth contribution, can M fund his 401(k) after-tax and do a backdoor Roth?” Yeah, if Michael has an after-tax component in his 401(k), he can do that and do a conversion. He can do a fully funded 401(k) Roth. You just look at tax brackets. So if there are tax brackets in the 22%, I think that’s a good bracket to go all Roth, especially when you have $5,000,000 in pre-tax 401(k) plans right now.

Al: Oh, good. Thanks, Big Al.

Joe: Yeah. You got it, there, son.

Al: Son.

Joe: Oh. Can’t wait to go home and have some lemonade.

Andi: Watch a Hallmark movie?

Joe: Yeah, watch some Hallmark movies, cry on the couch.

Al: Oh, it’s just, it sounds like an amazing life, Big Al.  I get stuck in these police murder shows. I hate them.

Joe: Oh, okay.

Al: I wish I had your life sometimes.

Joe: Yeah, me too. I wish I had yours.  “2025, daughter works making $106,000 a year. Putting everything in Roth IRA. Is this the lowest income prediction for marriage? And what’s it do with the rest? We plan to buy her first house and a new car soon.” Oh, I don’t know. The daughter’s making $106,000. Put everything into a Roth. Yeah, I don’t know. She’s probably, she’s young.

Al: Yeah, and she’d probably make a lot more. Lowest income years ever. Yeah, start Roth for sure.

Joe: Yeah.

Al: Easy enough.

Joe: All right.  Kim, keep listening. Two to 4 hours a day.  You’ll get this.  Great job on your retirement and, yeah, keep cruising along and living that blessed life on the Mastercrafts.

Watch Retirement Rebound: 4 Plays to Score a Comeback on YMYW TV, Download the Retirement Income Strategies Guide

Andi: A retirement strategy like a basketball game: you want every single shot you take to be nothing but net, but sometimes you botch it, and you need a Retirement Rebound. This week on a brand new episode of Your Money, Your Wealth TV, Joe and Big Al show you how four plays can help you turn things around, get that rebound, and score a comeback. Click the link in the episode description to watch it now. Plus, after a lifetime of saving, making the transition to retirement means facing a whole new set of challenges – how are you going to generate income in retirement? Download the Retirement Income Strategies Guide for 5 questions you need to ask yourself before you retire, the sources of income available for you in retirement, how to maximize your Social Security benefits, and how to develop a retirement income strategy that meets your needs. Click the links in the episode description to watch Retirement Rebound on YMYW TV, and to download the Retirement Income Strategies Guide for free.

Inherited Assets: Best Strategy for Tax-Efficient Retirement Withdrawals? (Alissa, Cedar Rapids, IA)

Joe: We got Alissa from Cedar Rapids, Iowa. “Hey, Andi, Big Al, Joe. I’ve been listening to the show for about a year and enjoy it very much. I often listen to it while drying my hair or on the drive to work. I always find it entertaining and educational.”  Drying your hair.

Al: That’s a first I think.

Andi: I don’t know how you listen to a podcast with a hairdryer going.

Joe: Yeah, I mean, I think this is the best podcast to listen to while you’re dry your hair. I think you-

Al: I think you’re right. Totally get-

Al: Because if you only catch about every 10 words, it’s good enough.

Joe: It’s perfect. Oh yeah. “I’m 43, drive a 2018 Honda Odyssey and my drink of choice is a Monster energy drink, the turquoise one.” All right. I used to drink a lot of Monster.  Thought I would have a stroke or heart would explode. So then I went to Celsius.

Al: Yeah. You think that’s a lot better?

Joe: No, I don’t. I don’t think so. A little bit less sugar.

Al: Okay. Got it.

Joe: All right. “My husband, 49, drives a 2011 Toyota Highlander and enjoys a Guinness draft beer or peanut butter whiskey on occasion.” A little peanut butter whiskey, you know, that was made here in Southern California, San Diego, a couple of different bars. They claim the fame that they were the first bar to make it. So they kind of fight back and forth. And then that is the making of Screwball.

Andi: And it just made it all the way to Cedar Rapids, Iowa.

Joe: See, all the way up to Cedar Rapids, Iowa. They could go to Offshore Tavern, right by my old house. We had a couple company little get-togethers there. They had, they have homemade peanut butter whiskey.  And then I forget the other one. That’s actually probably the real creator of it.

Al: Is that the Belching Beaver?

Joe: No.

Al: No?

Joe: No.

Al: Well, they have peanut butter and beer.

Joe: Yeah. Beer versus whiskey. Yep.  The Noodle- Something Noodle in OB. Ah, man. Whatever. Mazza, okay. So, peanut butter, whiskey. Let’s keep going. “We have two dogs, two cats, and 4 kids, ages 16 to 17. Our combined income is about $110,000 a year before any type of deductions. I recently inherited some money, and I’m trying to make sure I’m handling the inherited IRA distributions in the most tax effective, effective way possible by ensuring that I drain the account by 2034. I like a little spitball strategy that will help us achieve these goals and hopefully set us up for a good retirement someday. And our investments include $100,000 in Roth-“ or I’m sorry, “-$100,000 in a 403(b), $220,000 in Roths, $70,000 in a traditional IRA, $43,000 in a brokerage account, $290,000 in 529 plans. My inherited investments include $450,000 in a self-directed trust, and $926,000 dollars in an inherited IRA.” Wow, alright.  “My plan at the moment is to withdraw from the inherited IRA each year so as to fill up our 22% tax bracket starting this year, 2024, the 10-year rule officially starts in 2025. My husband and I will both max out, maximize our Roth IRAs, pre-tax 401(k)s, and 403(b) contributions. In the next year, he’ll be eligible for catch-up amounts.  We would plan to do this for the next 10 years while withdrawing from the account. We will likely have to take about $2000 a month from these withdrawals to live on since we’re saving so much into our personal accounts from our personal income. As clergy, my husband also have the option of taking half of his salary as a housing allowance, which would allow us to have even more room to fill up the 22% tax bracket. Assuming that we start this year and assuming a 7% growth, I estimate that we could take $150,000 in 2024 and 2025 and that we need to take out about $120,000 in the following year, assuming a 7% growth, and we would stay in that 22% tax bracket with an effective rate of around 14%. Some questions I do have about the following scenario.”  Yeah, there was, that was a mouthful.

Al: It was.

Joe: “Do you agree with this strategy being the best one for a tax efficiency in withdrawing the account within the 10 year period?”  Okay, let’s just take a little bit of a step back.  So they have 403(b) accounts and they got 401(k) accounts, and-

Al: Yeah, so they got a-

Joe: He’s got a, he’s clergy, so he could take half his salary via housing allowance, which would come to him tax-free.

Al: Correct.

Joe: And so they’re kind of hovering between this 12% and 22% tax bracket without the distributions of the inherited IRA.

Al: Right.

Joe: They inherited roughly $925,000 and then they inherited an IRA, which needs to be fully distributed in 10 years.

Al: Yeah, and that’s new because of the SECURE Act. It used to have, used to be able to do a stretch IRA over your lifetime. And that went away in, what, 2019, I believe.

Joe: Right, and at 43 years old, the distribution on that would have been pretty small.

Al: It would have, but now in 10 years and what they’re suggesting is with a 7% growth rate, they’re going to have to take out more than $100,000 a year just to make this happen.

Joe: So they have the option, depending on when the deceased died. Because, do they have the 10 year rule? Or do they have to take the distribution based on the deceased, given that the new rules that came out on how these inherited IRAs work today?

Al: Yeah, and I don’t, you don’t necessarily have to take 1/10 in most cases.

Joe: Right, you could take zero and then take 100% out in year 10.

Al: Right, right. In some cases.

Joe: Yeah. Yes. Right.

Al: Let’s be clear. Even though that’s not very clear. Yeah. But, but the problem Joe, is if you do that, then you, then you take out $1,000,000 in one year and you’re in the highest tax bracket. So what they’re trying to do, I like the thinking- they’re trying to spread this out over time and maybe fill up this 22% bracket.

Joe: So, you take $100,000 out and they have to pay tax on that $100,000, but they’re also trying to jam a lot of money into the overall retirement accounts to reduce that tax bracket. So, you have to look at it to say, alright, well, how much can I get my tax bracket, how low can I get it with saving into the 401(k) plan, the 403(b) plan, the clergy allowance. And taking a look at what that baseline tax bracket is. And then you could fill up to stay tax neutral, and then continue to fill up to stay at the top of the 22% tax bracket. I think that’s right on.

Al: Yeah, I like the strategy. I think it makes a lot of sense because otherwise, if they just wait, if they can wait, depending upon the decedent, right, if they were taking an RMD or not, then they can sort of maximize this by taking it lower brackets. The sooner they get it out of the retirement account, the sooner it can grow on a capital gains basis. So I like it.

Joe: So then the next question, which is a really good one as well, is “Should I be,  excuse me, contributing to the Roth 401(k) instead of my pre-tax, even though it would leave us $23,000 less room in that 22% tax bracket?” So again, she’s playing with the tax bracket. So tax brackets are effective. So you pay 10%, 12%, 22% and it’s stair steps. So she’s looking at what’s the top of that 22% tax bracket. She’s looking at taxable income to determine how big of a distribution that she’s pulling from the account. So if she goes Roth 403(b), that’s going to fill up that tax bracket a little bit more. So the amount that she can get out of the inherited IRA is going to be less by that $23,000.  I think I like that strategy even better because she’s still getting a lot of money out of the inherited IRA.

Al: Right.

Joe: And who knows what’s going to happen to tax brackets over the next 10 years.

Al: True.

Joe: I don’t know what’s going to happen to the overall market in this- the faster that you could get money into a Roth and get compound tax-free growth. I don’t know. I like that quite a bit.

Al: I think I, I’m happy either way. In some ways I would, I would say no, don’t do this. Only because you only have about $170,000 right now in qualified accounts. So it’s not like it’s a giant number that you’re adding to it, but you know, you got to get this, this $1,000,000 out of the IRA in 10 years. So, but I would be totally fine if they do it. I, I might not do it just for the reason I just mentioned.

Joe: Yeah. No, I mean, that’s a good point, but they’re saving quite a bit over the next 10 years into the plain stuff. So they’re maxing them out.

Al: That’s true. And maybe for a few years you’d get a bunch out of the inherited IRA and then start, I don’t know-

Joe: Start converting.

Al: I mean, I’m actually happy either way, to be honest.

Joe: All right, “Should we withdraw more, maybe up to the 24% tax break in 2024 and 2025 in case the TCJA tax cuts expire?”

Al: Tax Cuts and Job Act.

Joe: That’s Trump cuts.  “And if so, should we fill up the 24% tax bracket entirely?” No, I think the 24% tax bracket is giant.

Al: Yeah, it’s too high, I agree. And especially, right, for 2024, I would do the 22% bracket. In 2025, if it’s clear we’re going to the new, the old tax rates, maybe you change your mind for 2025 and not for 2024. I don’t think.

Joe: Yeah, I don’t think so either because the top of the 24% tax bracket is like $400,000. You could get half of your inherited IRA out, but then you’d pay $200,000 in taxes. Then where are you going to come up with the money to pay the tax?

Al: You take care of your brokerage account and I guess you, you got a self-directed trust. So you kind of bleed that out too.

Joe: Yeah. I don’t know. I don’t like that.

Al: I would agree with you.

Joe: All right. “Is there any drawbacks withdrawing the money before the 10 years? For example, withdrawing up to the 24% tax break in the first few years, won’t the money-  won’t the money accumulating in the brokerage account will create its own income further pushing us into higher tax brackets?” It could.

Al: It could.

Joe: “Finally-“

Al: But you can manage it so that’s not bad.

Joe: Yeah, and it’s capital gains for the most part depending on if how it’s invested it could be I guess interest or maybe non-qualified dividends. All right “Finally I am trustee of my own inherited trust. I am told by a friend, also a tax attorney, that I should just move the money out of the trust and put it into my brokerage account to simplify taxes, etc. Is there any reason why I shouldn’t do this from a financial perspective? Thank you in advance for any advice you can provide. I feel very overwhelmed and sincerely appreciate your thoughts.” Don’t feel overwhelmed and this is not advice.  So, I’m not sure who passed, she was the beneficiary of a retirement account. So we kind of talked about the strategy there. I would not go in the 24%. I like the 22%. If you want to go in the 24% in 2025, maybe but I wouldn’t blow- I would I’d be careful of how much that you put in there. Maybe a little bit in the 24%. So she’s also has this trust. She was the now the successor trustee.

Al: Correct.

Joe: I would establish my own trust, a family trust, or you could put it in a separate property trust, you could keep it in the trust.

Al: You could. The reason, the only reason you keep it in the trust, you continue the trust going, is your creditors don’t have access to the funds. Right, that would be the primary reason, although the tax rates can be higher if you leave it in the trust, unless you distribute all the income.  I think for simplicity, I would be probably inclined just to blow it out. But the reason why people keep the money in the trust is to avoid any issue with creditors down the line, because if it’s your own assets, it’s very difficult to get that asset protection. But if you inherit a trust, you get asset protection.

Joe: Yeah, but then you’re subject to trust tax.

Al: I know. That’s what I’m saying. It’s not a silver bullet.

Joe: Right. Because it’s- it’s not subject to creditors because it’s basically kind of in this irrevocable trust.

Al: Because you don’t own it. You’re a trustee, you have access to it, but you don’t own it. So if you went bankrupt, it’s not an asset of yours, so it’s still there.

Joe: But you would have to distribute 100% of the income out.

Al: Yeah, to avoid the tax problem. So to me, it’s a, it’s a big amount, but, it, what would, what would sway it as if it were like in the $1,000,000 range or more, I might think about that.

Joe: Yeah, I don’t know.  Simple’s better sometimes.

Al: Yeah, agreed.

Joe: Alright, hopefully that helps. Are we done?

Andi: You’re done. You get to go home now.

Joe: All right. All right.  Thank you all. Andi, great job as always.

Andi: Thank you.  Thank you for sticking it out. Thanks for toughing it out, Joe.

Joe: Oh, yeah No problem. Big Al, thank you so much.

Al: It’s fun. You too.

Joe: It was fun being Big Al.

Al: It’s fun being Joe for one, one question.

Joe: I can’t wait to go and watch those Hallmark movies.

Al: I’ll send you a movie list.

Joe: Yeah. Harrison Ford is my favorite actor.

Al: I think I did say that. Yeah.

Joe: Okay. That’s it for us. We’ll see you guys next time.

Outro

Andi: It just goes to show, it’s you, the listeners, participating in YMYW that make it so much fun. This show would not be a show without you. If you enjoy YMYW, please tell your friends. And don’t forget to leave your honest reviews, comments, and ratings for Your Money, Your Wealth in Apple Podcasts, on YouTube, and in all the other podcast apps that accept them, like Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Podcast Addict, Podchaser, Podknife, and don’t forget Spotify. We’re on all of ‘em!

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 podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.
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