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 [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
January 16, 2024

It’s a voice message extravaganza as Joe and Big Al talk about tax gain harvesting on Dante in New York’s daughter’s custodial account, and the tax impacts of Leon in Chicago investing in his brokerage account. The fellas also spitball on whether Michelle in San Diego, en route to San Francisco, should buy or rent in her 60s, the mega backdoor Roth and the pro rata rule for Sean and his cichlids in Winter Springs, Florida, and whether Jason in NOLA can do the backdoor after recharacterizing his contribution. Plus, should Kevin in Ohio make like the Steve Miller Band and “take the (pension) money and run”? Can Scott in Colorado make like Johnny Paycheck and “take his job and shove it” when it’s time for the rule of 55? And should Suzi and Peter consider long-term care insurance and protecting their assets with an irrevocable trust?

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Show Notes

  • (01:07) Custodial Account Tax Gain Harvesting: Reported on My Daughter’s Taxes or Mine? (Dante, NY – voice)
  • (05:17) Tax Impacts of Investing in a Brokerage Account? (Leon, Chicago – voice)
  • (12:28) Is it Better to Buy or Rent in My 60s? (Michelle, San Diego – voice)
  • (19:50) Mega Backdoor Roth & the Pro-Rata Rule (Sean, Winter Springs, FL – voice)
  • (26:56) Should I Take the (Pension) Money and Run? (Kevin, OH – voice)
  • (33:08) Should We Consider Long-Term Care Insurance and Protecting Our Assets with an Irrevocable Trust? (Suzi & Peter, San Diego)
  • (39:23) Can I Do a Backdoor Roth After a Re-characterization? (Jason, NOLA)
  • (43:42) Spitball My Early Retirement Plan & the Rule of 55 (Scott, CO)
  • (52:29) The Derails

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Andi: It’s a voice message extravaganza, today on Your Money, Your Wealth® podcast 464. Now that we’re all finally back from the holidays (and Hawaiian golf tournaments), Joe and Big Al are back behind the microphones to talk about tax gain harvesting on Dante in New York’s daughter’s custodial account, and the tax impacts of Leon in Chicago investing in his brokerage account. The fellas also spitball on whether Michelle in San Diego, en route to San Francisco, should buy or rent in her 60s, the mega backdoor Roth and the pro rata rule for Sean and his cichlids in Winter Springs, Florida, and whether Jason in NOLA can do the backdoor after recharacterizing his contribution. Plus, should Kevin in Ohio make like Steve Miller and take the pension money and run? Can Scott in Colorado make like Johnny Paycheck and take his job and shove it when it’s time for the rule of 55? And should Suzi and Peter consider long-term care insurance and protecting their assets with an irrevocable trust? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Custodial Account Tax Gain Harvesting: Reported on My Daughter’s Taxes or Mine? (Dante, NY – voice)

Joe: Happy New Year, everyone. We’re back at it. Got a big laundry list here. 50 pages or so of emails that we’ll bust through here in the next few weeks, but let’s get started here.

Dante: “Hey, Joe and Big Al, this is Dante from New York. I had a tax gains harvesting question. My daughter, who is 19 years old and is a college student in Illinois, was gifted highly appreciated Apple stock from her grandmother a couple of years ago. This is sitting in a custodial account at Schwab and that account is in my daughter’s name and Social Security number. This past year, she made about $8000 in earned income and the value of that Apple stock is $30,000 with a really low cost basis of around $2 per share. So what I’d like to do is sell all that Apple stock and then buy it back immediately in order to reset the cost basis. Since the amounts involved is under the $44,600 limit for individuals, my understanding is that the capital gains tax would be 0%. My concern is whether the capital gains will be reported under me as opposed to my daughter since it’s in a custodial account. The account itself has some sort of designation that it is custodial until my daughter turns 21 years of age. So it’s not clear to me, despite talking to multiple people at Schwab, as to whether my daughter needs to create a separate account and then move the Apple assets over before doing this or whether I can just do it while it’s in its custodial account. One supervisor did tell me that if my daughter did create a separate account, I could then write a letter basically asking them to simply move the assets over. But if these additional steps are not necessary, then I’d just rather avoid it. I did ask my tax person and he thinks that should be fine doing this while it’s in its custodial account. But I was just looking for a second opinion. Thanks again. And let’s say I drive a 2014 BMW with over 200,000 miles on it. And I hope to hit the links with you guys sometime in the near future.”

Joe: Well Dante from New York.

Al: Right.

Joe: Custodial account. UTMA. UGMA’s, remember those?

Al: Yes. I do. People still use them. Obviously.

Joe: Yeah, so basically what these custodial accounts are is that an adult can kind of place trades and manage some stocks, bonds, mutual funds for a minor. There are some tax advantages in some of these accounts where you get like, I don’t know, a couple thousand bucks tax-free, but then everything kind of flows through to the parent is what my, you know, it’s been a while since I’ve seen these or opened them for that matter. But what is your thought?

Al: Yeah, you’re right on track. I’m not too worried about the custodial account. It’s in the daughter’s name and Social Security. That’s not the problem. The problem is the kiddie tax. Right? And the kiddie tax applies to all kids that are under 18 at year-end, now that his daughter’s 19. But a full time student between 19 and 23 still qualifies for the kiddie tax. Unless, here’s the caveat, unless the earned income of the student is no more than half of his or her support. So if daughter makes $8000, then total support could be no more than $16,000, right? Which is probably unlikely. So the kiddie tax is the issue, not the custodial account. So then the reason for the kiddie tax is for this exact reason. So parents, grandparents transfer assets to the kids. The kids sell them. Kids sell them to go to college and pay a much lower tax. No, they don’t allow that. So, I would say that’s the problem here is the kiddie tax. And by the way, the kiddie tax, the first $1250 is taxed at zero. The second $1250 is taxed at the kid’s rate and everything else, all the additional gain is taxed at the parent’s rate.

Joe: Sorry, Dante. Well, if your CPA is gonna do your taxes, then he’s like, yeah, I don’t see a problem.

Al: Then maybe you’re okay.

Joe: Yeah, maybe on the return it’s gonna be zero, but-

Al: Yeah, we’ll see if it sticks, right?

Joe: Yeah, I don’t think it will.

Tax Impacts of Investing in a Brokerage Account? (Leon, Chicago – voice)

Joe: Alright, let’s move to Chi Town.

Leon: “Hello, this is Real Life Ninja. Do you remember me, Joe? I’m fully stocked up on magic dust and throwing stars. I’ve been training for the better part of two years, stalking corporate elevators, wearing all black, all the time, and getting some strange looks from people in the street. Probably because of my nun chucks. Only kidding, that guy was a clown. This is Leon from Chicago. Thank you for answering my question about the origins of YMYW at the end of 2023. Now I’m back for more. I have a few questions about the tax impacts of investing in a brokerage account. I’ve been maxing out pre-tax 401(k) and 457(b) plans as well as an HSA to keep me inside but near the top of the 32% federal tax bracket each year, married filing jointly. I understand that the funds inside the brokerage account are taxable, but my questions pertain to how and when these taxes will affect me. I have begun a dollar cost averaging approach with my new brokerage account, investing $3000 monthly into a mix of low cost mutual funds and a handful of individual stocks. If I buy and hold all of my mutual funds, do I pay capital gains tax on the growth this tax year or only when I sell the shares? If the fund is an index fund with a low turnover rate, will I pay less in taxes? In other words, do I pay capital gains taxes each year on the shares of individual company stocks that are sold by the fund manager or by whatever rebalancing algorithm a passive fund uses to buy and sell stocks within any given mutual fund? And what about dividends? If I have my account set to automatically reinvest any dividends by purchasing more of that stock or fund, do I still pay ordinary income tax rates this year on those dividends that I receive? I imagine that interest from taxable bonds will also be taxed at ordinary income tax rates, similar to interest received within a high yield savings account or a CD, but please correct me if that’s wrong. One last question relating to this. Let’s say one of my individual stocks flames out miserably in 2024 and I have a $5000 loss. Can I sell it and tax loss harvest even if I only own the shares for 6 months or do you have to own an equity for over one year to do this? A sincere thank you to Joe and Al for your weekly knowledge, sharing, and just the entertainment that you bring. And props to Andi for the awesome value you bring to the show. I mean this in the best possible way, guys, but your show desperately needed a woman’s touch. Happy New Year, everybody.”

Andi: Thanks, Leon.

Al: I agree with that, by the way.

Andi: Oh, well, thank you, Al.

Joe: So, I kind of like it when they’re reading their own questions. I could take a break, but I zone out. I don’t even know what the question is.

Andi: I was gonna say, did you get any of that?

Joe: I think he wants to invest in a non-qualified account, and he desperately needs Andi.

Al: Yeah, that’s all you got. Let me- most of this is tax, so let me kind of tackle this Joe. So when it comes to owning mutual funds, do I pay capital gains tax on the growth this year? The answer is no, only when you sell the shares, at least for part of it. There’s other parts what we’ll get to in a second, but the fact that the mutual fund, index fund, whatever it goes up in value, you’re not going to pay that capital gains tax until it goes up. Now, here’s the exception, right? Is that mutual fund or index fund is buying and selling shares inside the fund. And that is, that part is considered capital gains or sales. That’s why you get capital gain dividends at year-end, because these are the gains that the fund manager incurred by selling investments inside that fund during the year. And, and it’s your share. You’re a part owner of this fund, and so you have to pay capital gains taxes on that. That’s called a capital gain dividend. That dividend actually goes on Schedule D. Schedule D is where you report capital gains, and on Schedule D, if you have a capital loss, if you sell a stock at a loss, as he mentioned, you can net that loss against that, the capital gain dividends. So that does work.

Joe: But the loss, it doesn’t have to be a- over a year loss. I mean, it could be days. If you’re short in 3 days, you sell it. That loss will, it’s a short term loss, but that will offset again, long term gains or short term gains.

Al: The way it works on the form is it offsets against short-term gains first, which is to your advantage ’cause it’s short-term loss. If there’s any other losses available still, then it goes against your capital gain dividends. So that’s actually a pretty good result. When it comes to dividends, whether you reinvest or not, it’s taxed at dividend rate, which mostly is qualified dividends. So mostly it’s taxed at capital gains rates. So that’s good news. You cannot offset your capital losses against capital gain dividends. I’m sorry, against regular dividends, you can against capital gain dividends. When it comes to interest, yeah, that’s ordinary income, right? Unless it’s municipal tax-free.
Joe: So Leon’s going to invest a few thousand bucks a month. It’s not going to be a huge deal until that $3000 a month accumulates to a pretty good size balance as he’s dollar cost averaging in. But on an index fund, it’s going to be fairly minimal depending on what type of stocks that you buy. You know, if you’re buying high dividend paying stocks, well, sure, you know, but so you just want to be tax efficient on what you’re looking at when you start investing outside of the retirement accounts.

Andi: Leon, I appreciate the kudos, thank you my friend. If you don’t know what Leon was talking about with the Ninja and the nunchucks, that’s from a one-star Apple Podcasts review of Your Money, Your Wealth from August of 2021. Joe loves reading those one-stars, but really, all of your honest reviews and ratings for YMYW help new listeners find the show, which means that we get more diverse and nuanced questions, like Nacho Wizard requested in his Apple Podcasts review just this week. Nacho, hopefully you like today’s episode, it’s all over the map in terms of topics! There are three things you can do that help YMYW be the great show that it is: First is subscribing in your favorite podcast app or on YouTube. Second is leaving those honest ratings and reviews, or your likes and dislikes for us, on YouTube, Apple Podcasts, Audible, Castbox, Goodpods, Pandora, PlayerFM, Pocket Casts, Podcast Addict, Podchaser, Podknife, and Spotify. The third thing is telling your friends about YMYW, and finally, go to YourMoneyYourWealth.com, click Ask Joe and Al On Air, and send in your money questions.

Joe: We got a lot of people that have been waiting, Alan, for their emails to be answered.

Al: Right,  we took a, you know, we took some holiday days off, and so now we’re trying to get caught up.

Joe: Andi infused a new rule, so if you leave a voicemail message, you get to the top of the-

Andi: I’ve literally been saying that for a couple of years now and people just finally took me up on it.

Joe: Got it.

Al: It’s because we’re getting behind. Maybe that’s why-

Andi: Exactly. They’re just backed up.

Joe: They’ve been waiting for 2 years.

Al: It’s like they already wrote us the question 2 months ago and now they’re going to call with it to read it so they can get it on the air.

Is it Better to Buy or Rent in My 60s? (Michelle, San Diego – voice)

“Hey guys, happy new year. I’m a repeat offender here, Michelle. I wrote in last Fall. Thank you for your spit balling guidance. I would love your wisdom on a financial topic that indirectly affects retirement finances. Whether to buy or rent. First off, I’m a dog lover, chocolate lover. I drink coffee, seltzer, and hard cider.  I’m 67, single, no family, no debt. I have, at this writing, about $3,100,000 in investable assets, cash, and brokerage accounts in taxable IRA and Roth IRAs. I moved to San Diego and bought my current primary residence condo downtown in August 2020 for $930,000 in cash, which was a huge mistake, with the proceeds from the sale of my previous residence. It turns out I’m not a fan of San Diego. And I want to leave specifically to go to San Francisco. I’ve been visiting every two or three months for over a year now. Do not believe the doomsayers. It’s really, in my opinion, a nice place to live, especially if you’re from Europe, as I am.  Onto the issue at hand, should I rent or buy? These, I realize these decisions aren’t purely financial, but I’m interested in your spitballing on the financial aspect of the decision. Currently, my monthly housing costs are about $2000. The HOA is $800, the property tax is $1000, and condo insurance is about $150 a month. I cannot deduct most of my property tax, because I pay close to $10,000 in state income tax, and they cap that to $10,000. The two combined since 2017.  My current condo is estimated at $1,200,000, $1,300,000, and I will sell it, not rent it.  If I buy elsewhere, the comparable type of residence would be about $1,100,000, between $1,000,000 and $1,100,000. And the HOA and the property tax in San Francisco would be essentially the same as it is here. The plan would be to put about $400,000 down, borrow the rest, and invest the rest of the proceedings from the San Diego sale in 60/40 stocks and ETFs bond stock and bond ETFs as the current assets are invested. If I were to rent instead for a comparable unit in San Francisco, the monthly rent would be between $4500 and $5000. Someone said recently to me that after 60, you’re supposed to rent, which I’ve never heard. I like the idea of owning because it allows you to make changes to the unit if you want with the floor, the counters, etc. I also love the idea of a mortgage deduction. So from a financial standpoint, what do you guys say about this? Thank you.”

Joe: All right.

Al: What do you think? Yeah, well, I don’t think it was a huge mistake if you bought the home for $900,000 and selling it for $1,000,000 or $1,200,000. I think you did all right.

Joe: Yeah, she just moved here a couple of years ago.

Al: Yeah, but be that as it may.

Joe; So she’s gonna sell the place, she made a couple hundred thousand dollars.  Should she rent, I mean, interest rates right now, what, 6.5% or even higher?

Al: Yeah. Yeah, they’re higher. I would buy because it’s about the same cost. I mean, relatively right. It’s actually going to be more because she’ll have a mortgage when she maybe didn’t on the other one.

Joe: Would you pay cash or would you, or would you finance?

Al: I would pro- that’s a good question. I’ve already got in this case $3,100,000. I might pay cash just because interest rates are so high.

Joe: Exactly.

Al: And, or if I finance, I’m okay with financing, but then as soon as the rates come down or hopefully they come down, then I would refinance and have it be a better mortgage.

Joe: So, Michelle, she’s got $3,500,000, it sounds like she’s doing pretty good. Her state taxes are over $10,000, so she might be still currently, is she currently working? I don’t know. I mean, she’s done a heck of a job of saving some money. She’s single, no family, no debt, no whatever. She moved to San Francisco. You know, you take a $400,000 mortgage at, you know, 6% or 7%, that’s $30,000 in- just in interest payments.

Al: It is. Well, that’s the down payment. So the mortgage would be more than that.

Joe: Oh, is that? Oh, she wants $400,000 down.

Al: Yeah. Right.

Joe: So a $600,000 note.

Al: Yeah. It’s a, it would be expensive. I- because the interest rates are so high, I might be- because my home that I’m selling would cover the home that I’m buying.  And I would probably be tempted to pay all cash, but if she wanted to finance, I’m okay with that. I would just look to refinance when interest rates come down. But I think buying versus selling the costs are about the same. And the cool thing about buying is it’s your place. You could do with it what you want to. You get the future appreciation. San Francisco is likely going to be an appreciating area. And furthermore, you lock in your payment, right? With the mortgage. It’s not like rent that goes up every year for the next 20, 25 years, 30 years, whatever. So I would be buying in this scenario.

Joe: Yeah.  Her mortgage payment will be about $4000 a year. So the rent is going to be $4500 to $5000.  If she has a $600,000 note at 6.5%.

Al: Yeah. $4000 a month. You said per year.

Joe: I’m sorry. $4000 a month. So the cost is pretty equivalent, but you’re building equity.  You could do what you want with the home. And then if she really likes the mortgage deduction, she could do that. But the arbitrage is, the $600,000 that you have as a note that you’re paying 6.5% to the bank to have that money, do you think your 60/40 split of mutual funds is going to perform better than the interest rate that you’re paying the bank? Because if you paid cash, you get a guaranteed 6.5% rate of return.

Al: Yeah. That’s a good way to think about it. When you think about it that way, you might be, I don’t know, that’d be a bit of a gamble to try to assume you’re going to make 6.5%.

Joe: If she didn’t have any liquidity, I would be like, yeah, maybe that makes sense,  but she’s got $3,000,000 in liquid assets.

Al: And she’s got enough equity in her house to just put it into the next one. So it’s not like she’s going to touch it. Right.

Joe: So she reminds me of like a character from like a James Bond movie.

Al: Oh yeah. Yeah. That nice accent. Yeah.

Joe: Yeah, she seems like she could do some damage there.  She’s definitely doing some good work with her finances. It’s too bad that she doesn’t like our hometown here in San Diego.

Al: Yeah, but that’s okay. I mean, San Diego, in my opinion, is great, but it’s not for everybody.

Joe: I suppose. All right, Michelle. Thanks so much for the email or the voicemail.

Mega Backdoor Roth & the Pro-Rata Rule (Sean, Winter Springs, FL – voice)

“Hey, Joe and Big Al. This is Sean from Winter Springs, Florida.  My question is about the mega backdoor Roth. So my company allows for in-service distributions. So a couple years ago, I rolled out all of my after-tax money. My company required me to roll out after-tax. And also the gains from the after-tax, I believe. And I had to put some into a traditional IRA, and then the remainder, which was a bulk of it, went into a Roth IRA. So I have $260,000 in the Roth and $96,000 in the traditional, which used to have nothing, because I was doing the normal backdoor Roth, not the mega. My question for you is, now that I’ve accumulated additional after-tax money in my 401(k), how or is there a way I can roll this out and put the additional money back into my Roth IRA? So doing a second mega backdoor Roth, and I understand now that I have a traditional Roth with $96,000 in it, I have to do something called the pro rata rule. So I’m hoping you guys can help me out. I drive a 2013 Toyota Tundra. And I have about, I don’t know, 30 African cichlids. And my favorite beverage is water. Yeah. Thanks guys.”

Joe: All right.  The mega backdoor, the Megatron.

Al: Yeah. Yeah.

Joe: Let’s talk a little bit about-

Al: What is it, first of all?

Joe: Like a couple of things is that- let’s first go- I like how he said a traditional Roth. I mean, Roth is just scream Roth to on the rooftops. But now everyone, what’s a traditional IRA? I only want to do Roth. All right. So after-tax dollars, they grow tax-free. Roth 401(k)s, after-tax dollars, they grow tax-free. Roth IRAs, you have income limitations to put money into a Roth IRA. There is no income limitations to do a Roth conversion, only a contribution. So, a conversion is taking money from a pre-tax account, paying the tax, and moving it into a tax-free account.  So, when we look at strategy, the backdoor Roth IRA is when you make too much money where you cannot directly make a contribution to a Roth IRA, so you make an after-tax contribution, you don’t get the deduction, and you’re able to convert that money and not pay any tax because you didn’t receive a tax deduction. 401(k) plans now also have after-tax contributions that you can contribute to.  So what he’s doing is that he’s going Roth IRA, or if he’s going pre-tax, but then he’s also putting money into the after-tax component of the 401(k).  Those after-tax dollars, because they are not pre-tax or have never been taxed, you can move those into a Roth IRA without paying any tax because they’ve already been taxed. So then this whole mega backdoor, Megatron, whatever crazy name, backdoor, the barnyard, the garage door, whatever. Right, so that’s what that is because you can put a lot more money into an after-tax component. However, there’s a pro-rata rule and the aggregation rule. So if you have IRAs, they’re saying, all right, for you to do a backdoor Roth, you have to look at all of your IRAs in conjunction as a- it’s held as one. And if you have pre-tax dollars in an IRA, and if you convert any after-tax dollars, you have to combine the pre-tax dollars and do a pro-rata calculation to determine what is going to be tax-free on the conversion.  So when he did the after-tax dollars from his 401(k), he had growth in those after-tax dollars. So I think he said he converted $260,000. $100,000 or $96,000 of that was growth. So he did an in-service withdrawal to take the after-tax dollars out. What carried with him was the growth of those after-tax dollar contributions. So that $96,000 of growth is now in the IRA. The $260,000 of after-tax contributions went directly into the Roth.  So now he wants to do another mega backdoor.  So.  What he needs to look at is how often can he do the mega backdoor conversion? Because you want to do it right away. As soon as you do the after-tax, one pay period, the next pay period, can you move the money out and move it into the Roth? Because you’re not going to have any growth at that point. Or, if he does it again, if it’s in a 401(k) and this is in an IRA, it doesn’t matter. Right? The after-tax will still go in the Roth, and then the growth of those after-tax will just go into the IRA.

Al: Yeah, so it depends upon the plan, right?

Joe: Right.

Al: So you gotta look at the plan and see how often you can move it, and you’re better off moving as soon as possible, Joe, just like you said. Because, like, if you wait 5 years, then any growth that you have at that point will have to go into your IRA and will be taxed. But as soon as you get the Megatron into the Roth, any future growth from that point is tax-free.  So that’s the whole point of moving it as soon as you can.

Joe: So if you’re looking- what he needs to do now is try to get the $96,000 out of the IRA, if he wants to do backdoor Roth contributions, the mega backdoor,  because it’s coming from a 401(k), take the after-tax, move it into the Roth, or take the after-tax and move it into the Roth provision in the 401(k), right, so there’s multiple ways that he can kind of maneuver this thing around, but the $96,000 now that is sitting in an IRA, is going to be subject to the pro rata rule if he wants to do a backdoor Roth IRA contribution. So he’ll need to start converting that $96,000 out, or you just have to do the pro rata, you know, calculation, which basically will tell you that maybe 10% of your, you know, Roth, backdoor Roth contribution conversion is going to be tax-free.

Al: Yeah, that’s correct. Or, I don’t know why his company had him roll it out. Maybe there’s a new 401(k) plan. Maybe the new 401(k) plan, if that’s what it is, will allow the money to be transferred, the traditional IRA to be transferred back into the 401(k). Then you don’t have any problem. You can go back to the backdoor Roth.

Joe: That’s a good idea. Yeah. I don’t know why I did it in-service instead of like an inner plan move.

Al: I don’t, yeah. But most plans will allow you to put money back into it because, they like to have your money in the plan, right?

Joe: Yeah. Take the $96,000 and move it back into the plan. Because then that would be like a pre-tax contribution. Now you don’t have any money in an IRA and then every time you have after-tax dollars, that is accumulated. Before they accumulate too much from growth, convert it out, put it into the Roth.

Al: Right.

Joe: Genius, Al. You’re a genius.  All right.

Al: Between the two of us.

Should I Take the (Pension) Money and Run? (Kevin, OH – voice)

“Hello, Joe, Big Al, and Andi. Love the show. It’s Kevin in Ohio, and I’d like to move to the front of the line. I’m a 55-year-old educator with a wife and 3 kids. Willow, Smalls, Bear, Wendy, Sugar, Buttercup, Ollie, and Lily. Those are my dogs, cats, and horses, and one of those names is my wife. I drive a 2009 F150, cranking along at 220,000 miles. I like beer, two being Bell’s Oberon and Great Lakes Oktoberfest. I have a $3,500,000 net worth with $2,000,000 in real estate, including a home, a vacation property, and two rentals. And I have $2,000,000 invested. My big question and burning question for you is I’d like to retire, wouldn’t we all? In two years. I could get a $40,000 a year pension or the account value would be about $500,000. I’d like to take the money and run. I love the Steve Miller band. What are your thoughts on taking the pension or taking the money and running? Thanks a lot. Love the show.”

Andi: Come on, take the money and run.

Al: I love the accent. Well, Joseph, I did a little math already.

Joe: Got it. $40,000.

Al: Yeah, $40,000. I just said 30 years, right?  7%. What’s the present value of that? It’s $496,000. Same, same.  Right? Or if you go 35 years, it’s $517,000. I think it’s the same either way. If you want to take the money and run, go for it.  The only issue there is you have to be responsible for investing it. And if you’re good with that, great. If you’d rather have someone do it for you, then maybe you take the pension.

Joe: How old is he?

Al: 55.

Joe: 55. And he wants to retire  in a couple years?

Al: Couple years, yeah.

Joe: And  you used 30 years?

Al: Yep. 57 to 87.  Or I did 35. Either way, it’s around $500,000. It’s kind of the same.

Joe: So, if you want to look at an internal rate of return, so what I did is that I did a $40,000 payment for 30 years.  And future value of that’s $500,000, brought it back, present value is zero, and what is the internal rate of return? So, in other words, what does Kevin need to do?  It’s either, if he’s going to live longer, the internal rate of return is a lot higher, but 30 years? Let’s say, he’ll be 60, so he lives until 90?

Al: Yeah.

Joe: That seems pretty accurate. I got a 7.1% internal rate of return.

Al: Yeah, that makes sense.

Joe: That’s a pretty good rate of return, because I think that’s what you did too, right? You just looked at, alright, well what’s the present value if he got 7% on it over 30 years?

Al: That’s right. That’s why we’re getting the same number, because we used the same things in the 30 year.

Joe: So, Kevin, if you think that you can do better than 7% and you want the liquidity, then take the money and run. If you think that you’re going to do less than 7% over 30 years, and don’t want to take the risk, and you’re happy with 7%, then take the pension.

Al: Yeah, that’s a good way to say it.

Joe: What would you do?

Al: Me? It depends if I had liquidity or not.

Joe: $3,000,000.

Al: Oh, did he say that?

Joe: Yeah, he’s got $2,000,000 in retirement accounts. He’s got a-

Al: Oh, yeah, you’re right. A $2,000,000. Okay.

Joe: Bitty, bear, sugar, buttercup. He’s got all sorts of stuff.

Al: Okay. Yeah, I got it. I forgot that. I’d probably take the pension because I like that rate of return and I already got $2,000,000. That’s probably what I would do.  How about you?

Joe: Yeah. I think $40,000, I mean 7% is pretty good.

Al: Yeah, right.

Joe: Typically we see in pensions like this, it’s probably 4.5%. So 7% is pretty rich, but there’s risk. How about the company, is it strong, you know EGC, the pension benefit Guarantee Corp, but they’re broke. So if he wants to take the money and run just know that 7% is the bridge. It’s like it’s kind of like Michelle, our last question. Should I get a mortgage or not? I like the liquidity or not, but it’s, if you got a guaranteed 6.5% rate of return, that’s what your mortgage payment is, or I think Andi looked it up. She’s actually in studio here today.

Andi: For the first time since 2020.

Joe: Has it been that long?

Andi: Yes.

Joe: It’s  good to see you. Yeah.

Andi: Yes, anyway, I looked at the mortgage rate and it was 7.35% for a 30 year old.

Joe: 7.35%.

Al: There you go.

Joe: All right, so that’s the math. But then, whatever your personal preference is.

Andi: But you didn’t answer the question, would you take the pension or not?

Joe: I don’t know. At 55? 57? I got a couple million dollars, I’d like to quit. 7% is pretty good, you know. I’m on the fence. I’m on the fence.

Al: Yeah, it could go either way. But yeah, now me in my 60s, that sounds pretty good.

Joe; Yeah, me in my 40s?

Al: You’re just hanging out by a fingernail.

Joe: That’s not even close.  Alright, thanks Kevin.

Andi: Does your outdated, tired, set-it-and-forget-it financial plan need a complete money makeover? Assumptions you make about your finances can make or break your retirement lifestyle – will it be bad or beautiful? Kicking off season 10 of the Your Money, Your Wealth TV show this week, Joe and Big Al show you how setting goals, revamping your portfolio, and doing a tax turnaround can give your retirement plan the financial facelift it needs. Watch YMYW TV and download the companion Money Makeover Guide for free from the podcast show notes. Once again, this is a limited-time special offer on that guide, so get yours before this Friday – it probably won’t be available again for several months. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, watch Complete Money Makeover, and download the special offer by this Friday. Know someone who would enjoy YMYW? Why not click share in the show notes and tell them about it? Let’s get back to the emails Joe.  Now you have to read ’em!

Should We Consider Long-Term Care Insurance and Protecting Our Assets with an Irrevocable Trust? (Suzi & Peter, San Diego)

Joe: Alright, here we go.  “Greetings, Joe and Al, Susie and Peter here. 67, 73 respectively. Live in San Diego. No kids, no pets and enjoy good wine.” I wonder if we should introduce them to Michelle, maybe?

Al: I think so.

Joe: They can hang out and she’ll stick around a little bit.  “We are retired basically. And I have a question regarding long term care insurance. Some basics. We own 8 properties. This will probably make Al cringe.  Two of which are personal residences. Net worth approximately $7,000,000, low side.” Of course it’s the low side. “And yearly net income is about $200,000 after all expenses. I drive a 2018 Kia Niro-“

Andi: PHEV-


Al: plug in hybrid electric vehicle.

Joe: Oh, look at that.

Al: How about that?

Andi: Tesla driver.

Joe: Look at the big brain on Al.

Al: I just have a full electric with a Tesla.

Joe: What does PHEV mean?

Al: Plug in hybrid electric vehicle.

Joe: Okay, alright. “And Peter drives a 1990 Miata.”

Andi: Or Miata.

Joe: Yeah, Miata. That small little-

Andi: Yeah, yeah.

Joe: Okay. Yeah.

Andi: $7,000,000 driving a Miata. Isn’t that what they say about rich people?

Joe: I think so.  “We are starting to travel and love to ski and snowshoe in the winter.  Peter’s still skiing easy black diamonds, even with a hip replacement. We are getting older, yet are quite healthy for our ages.”

Andi: Good for you.

Joe: “Is long term care insurance something we should consider? Peter has a family history of stroke, and I have a family history of cancer.  Neither of us suffer from any long term ailments at this point.”

Andi: Smiley face.

Joe: “Your thoughts about long term care insurance, since you have some background now.  What do you think about a irrevocable trust added to our revocable trust to protect assets? Or is an LLC just as good to protect assets? Thank you. I love your show. Suze.” $7,000,000 on the low side there, Big Al. Long term care insurance. So a couple things, and I’ll spitball this and I’m sure you, this is a little bit closer to you than me.

Al: Right.

Andi: Because it’s long term care.

Joe: Long term care. They don’t necessarily need the insurance. Because they have a lot of cash, so they can self-insure. But what I think, they’re looking for asset protection, so if they need care, long term care insurance would be pennies on the dollar, because you’re basically leveraging the insurance company to help pay for that. So you pay $100,000 in premiums over your lifetime, and you probably get $500,000 of tax-free benefit. So, I don’t know. I think if they want to protect the assets to pass it to the next generation, I think long term care insurance makes sense. It’s super expensive. A lot of these companies don’t necessarily want to insure it anymore because everyone uses that insurance. No one got rid of it, right? Life insurance, you only use it for, I mean, you only purchase it for a certain period of time. You’re like, well, I don’t need this anymore. Disability insurance, right? You pay premiums forever, and then you retire, and you’re like, oh, I don’t need that anymore.  People bought long term care insurance, it’s like, I’m never giving this thing up, because I know at some point, I’m probably going to need this.

Al: Right. Yeah. So me personally, I would self-insure, but you’re absolutely right, Joe. So if you pay a certain, if you need it, right, if you pay a certain amount of premiums, it entitles you to a pool of money. It’s not generally unlimited. So understand that. You’re paying premiums for, $200,000, $300,000, maybe $500,000.

Joe: Yeah. Maybe it’s like $200 a day benefit for a certain period of time.

Al: Yeah. So, so it’s like any insurance. If you need it, it’s great. If you didn’t need it, it’s a waste of money. Now, in this case, they could go either way. If they want to protect their assets, it’s a way to do that, right? On maybe pennies on a dollar if they think they’re really going to need it. If they don’t need it, they just, you know, just like any insurance, they just spent money on that.

Joe: They’re not going to need it.

Al: I don’t think so.

Andi: Well, come on. She’s got a family history of cancer. He’s got a family history of stroke.

Joe: They’re going to beat it.

Al: Yeah. Yeah. They’re going to, they’re going to beat the odds, right? With their lifestyle choices.

Joe: For sure.

Al: So anyway, yeah, so you could go either way. I think as far as protecting assets, irrevocable trust, that just means you take some assets outside of your estate. You could do that, but then you don’t have any control over those assets. And if you need them-

Joe: You gave them away.

Al: You gave them away. You don’t have them, right? So be careful on that one. LLCs. Yeah. If you want to be ultra safe, you use one LLC for each property. So if something goes wrong with a property, then it’s the judgment or lawsuits limited to that property, unless you’re negligent. I believe that’s how it works. I’m not an attorney. That’s my understanding. You can also get, you know, a lot of good liability insurance.

Joe: But that’s not going to protect their assets from a long term care stay.

Al: No, but if they’re, but if they’re trying, if they’re just trying to protect their assets.

Joe: Asset protection. Got it.

Al: Yeah. Yeah. Yeah.

Joe: So long term care will, the insurance will help protect their net worth in regards to a long term care stay up to a certain dollar figure. An irrevocable trust, you’re moving assets outside of your taxable estate into your non-taxable estate, but you’re giving those to the irrevocable trust and you lose control.

Al: Yeah, irrevocable trust means it’s irrevocable. You can’t get it back. You can’t say, okay, just kidding. I need that asset back or at least give me the income from that asset.

Joe: Just kidding. Just kidding.

Al: No, you already gave it away. So just be careful on that one.

Joe: Yeah. I mean, I’m sure there’s some different strategies and the estate planning attorney can probably come up with and charge you a bunch of money, but it’s a $7,000,000 estate. I wouldn’t get too crazy here.

Al: No, not needed right now. And even if the, if we revert back to what the pre-Trump, and then we go back to $5,000,000 exemption per person plus inflation, it’d probably be at least $6,000,000 per person. So that would be $12,000,000 exemption per couple. I think they’re okay. At least at the moment.

Joe: Sure.

Can I Do a Backdoor Roth After a Re-characterization? (Jason, NOLA)

Joe: We got, “Hi Andi, Joe, Big Al, Jason here writing from NOLA.” New Orleans.

Al: Yeah, Louisiana.

Joe: “New Orleans.  Love the show.  Although, I’ve only been listening for about a year or so, I’ve learned quite a bit. Thanks for all you do. I’m 36 yo. Not married. And we’ll be filing H of H-“ little head of household. Jason. “-for the 2023 tax year with a child dependent. I’ve been contributing the maximum to my Roth IRA each year since 2020. In February of this year, I contributed the maximum amount of $6500 to my Roth IRA.  As the year progressed, I realized that my AGI would be above the normal limit of $153,000 a year due to unexpected overtime hours throughout the year. I’m expected- I’m expecting a MAGI of about $165,000. Upon realizing this, I contributed my- I contacted my IRA brokerage and recharacterized that contribution to a non-Roth IRA. Also, I contacted my 401(k) custodian and was informed that I can only roll IRAs from previous employers into my 401(k). So that option is off the table. I’ve already maxed out my 401(k) HSA and even limited purpose FSA. I’m not sure if there are any other legitimate ways to decrease my modified adjusted gross income in my situation. Can I roll this amount into my Roth IRA later this year essentially doing the beloved backdoor Roth?  Is that even possible considering I’ve already done the recharacterization? If no, how do I get this money out of the traditional IRA so that I don’t have the pro rata?  I learned that from you guys, by the way. Problems with future backdoor Roth conversions? I drive a 2014 Dodge Challenger RT with the 5.7 liter V8 Hemi.”  We’re going to get very specific here, Alan.

Al: We are, right? It’s not a V6, it’s a V8.

Joe: Yeah. What was the P V H V C?  “I don’t drink much these days, but on occasion I’ll have a port wine with dinner. Again, thanks for all you do. Looking forward to the spitball.”  All right. Jason from NOLA.  So he did a Roth IRA contribution,  made too much money, was over the income limits for the Roth IRA contributions and said oop, so he recharacterized it, moved it into an IRA.

Al: Yeah, traditional IRA.

Joe: But, the guy makes $165,000 a year, he does not qualify for a tax deduction, so that IRA is a non-deductible IRA with basis that is sitting in that account.

Al: Correct. And so therefore-

Joe: You convert it.

Al: – you convert it. That’s known as a backdoor Roth. So you basically that’s available, right? Because you couldn’t go directly to a Roth and the workaround as long as you don’t have other traditional IRAs is to put money into a non-deductible IRA, which officially you did and then convert that to a Roth and there’s no tax cause you got no tax deduction.

That’s what a backdoor Roth is. So you can use this one as your backdoor Roth. So go ahead and convert it and you’re all set to do the same thing next year.

Joe: Or you can even contribute. Now that we’re in 2024, you can make a contribution of- well, he doesn’t know what his income is. So, he could go Roth again, or he could go traditional and then convert it.

Al: Yeah, you could just pretend, whether you’re over the limit or not, you could still do it backdoor Roth.

Joe: Because he’s over the limit to take the tax deduction, so, but this won’t affect the pro rata rule unless he has other IRAs that he didn’t share with us. So, if this is his only IRA, there’s basis in that IRA, you just convert it and or you do another non-deductible IRA put it into the same account and convert both of them.

Al: Yeah, I like that. Yep. Perfect.

Joe: Thank you very much, Andi. She’s like right next to me, just like-

Andi: I’m directing.

Al: She’s giving you hand signals, huh?

Joe: Yeah. She’s like, keep going.

Spitball My Early Retirement Plan & the Rule of 55 (Scott, CO)

Joe: “Hi, YMYW. You all have the best personal finance show out there.” Yes. Thank you very much.

Andi: Thanks, Scott.

Joe: “I’ve listened to a whole slew of them since 2020.” Slew. Whole slew.

Al: Yeah. That’s a- It sounds like a lot.

Joe: Sounds like a ton.  “Could you help me spit ball my early retirement plan or otherwise just tell me how you feel about it?  When I’m not skijorking-“ What the hell is that?

Andi: I’m looking it up.

Al: Skijoring.

Joe: Skijoring?

Andi: A winter sport in which a person on skis is pulled by a horse or a dog or another animal.

Joe: Oh, that looks badass.

Andi: Or a motor vehicle.  Skijoring.

Joe: Skijoring. Wow. So Scott from Colorado. Skijoring. “- with my pitbull mix or sippin a little Pino, Pino”

Al: Pino, “Pino Noir”

Joe: Pino-

Andi: Pino Noir.

Joe: I know, I would just say Pino.  “-I’m riding-“  oh boy, he’s got a motorcycle  “-Aparela Tuareg through the beautiful Rocky Mountains. I’m 52 and plan to retire Johnny Paycheck style-”

Andi: Isn’t that take this job and shove it?

Joe: Is that what Johnny Paycheck style is?

Andi: I think so.

Al: I think you’re right, Andi. Yep.

Joe: “-when I turn 55  and use either the rule of 55, a 72T, or just my after-tax accounts to get me over the hump to age 59 and a half. My wife is a spry 40. We’re both W 2 employees, and she plans to keep working for several years. We keep our finances separate, but we file jointly in a 32%  tax bracket. Colorado State is 4.5%.  By the year I turn 55, I plan to have $40,000 in my HSA, $140,000 in my Roth, $600,000 in a commingled traditional Roth 401(k) from a former employer, $80,000 in a non-qualified account. With my current employer, I plan to have 100,000 in my Roth only 401(k) when I turn 55.  My current 401(k) plan administrator said that I can get a distribution from the 401(k) via 1099R when I turn 55 and leave service. I’ve searched and searched, but I can’t find any guidance on the rule of 55 when it comes to 401(k)s that are 100% Roth. I started that 401(k) in 2023,  but I’ve contributed to my Roth IRA for 10 plus years. In case the 5-year rule is in play here. So does that mean I could take the entire 401(k) as a distribution when I turn 55 and pay no taxes or penalties? Seems too good to be true. Scott, Colorado.”  Man, skijoring.

Al: Yeah. You’re still on that, aren’t you?

Joe: I am. I am. All right. A couple things here. So he wants to retire at 55. First of all, does he want to know if he can?

Al: Well, we’re assuming he can, because he didn’t ask us that question.

Joe: 55. So that I wonder what he’s, what’s he spending?

Al: Yeah, I don’t know.

Joe: He’s got 3 years. What’s it, what’s the total amount of assets he’s got?

Al: He’s got close to $1,000,000.

Joe: $1,000,000. All right. So that’s like $30,000 a year.

Al: Yeah. 3% distribution at 55%, $30,000 a year. If that’s, if that covers it, then great. If not, now maybe he’s got good Social Security, so he can do a little bit more than 3%. You know, I don’t know. We don’t know any of these things. But anyway, the rule of 55. The rule of 55, when it comes to Roth IRAs or Roth 401(k)s, the 5-year rule and the rule of 55, the 5-year rule pertains to that plan, not other plans. So he’d have to have 5 years with that plan to be able to take all his money, right? And take his money and run. However, he’s kind of missing the point. The point is you can always take out your contribution.

Joe: Right. It’s a distribution, you have to look at, it’s FIFO distribution of like, what’s available first before you run into the 5-year clock.

Al: Yeah. And I think, yeah, exactly. So let’s just say, I mean, the current one’s $100,000, probably a lot of that’s contribution, I’m guessing, or at least a good chunk of it. He could take that out with, whether he’s 55 or 52 or it doesn’t matter when you take out your contribution. It doesn’t matter what age. And then he’s also got $140,000 in a Roth IRA. Probably a lot of that’s contribution. It has basis. So you can take that out and you take out your basis first and you’re earning second. So there’s probably plenty in here to make this work. I’m guessing. But the bigger question is, can he retire, and we don’t have any details on that.

Joe: So, Scott, how plan distributions work. So let’s just talk about the rule of 55. If you separate from service at your current employer and you have a 401(k) at that employer, The rule to get money out of that plan is not 59 and a half, it’s 55, as long as you separate from service at 55 or older. So you can take money from the plan, and there is no penalty. So then, but, his second question is like, well, wait a minute here, it’s all Roth money, and I haven’t had it for 5 years, does this is 5-year rule pertain to me? Well, how the distribution works is that first contributions come out, and then earnings come out after that. So if all of that is contributions, well, yeah, then you could probably take almost all of that out. But the earnings have to season inside the Roth for 5 years or 59 and a half, whichever is longer. Or you can roll that into the Roth IRA because you’ve already had that for 10 years. So that already qualifies for the 5-year clause.

Al: That’s a good point. Yep.  But the chances are he’s not going to, I mean, all he would need is contributions anyway, so he wouldn’t even get into it.

Joe: Right. Because- I wouldn’t take out any more than $30,000 or $40,000 a year here.

Al: Yeah. Particularly you get, it was hard to get money into a Roth. You kind of want to not take out any, if you can, or at least the lowest amount possible.

Joe: Right, right, right, right, right. Yeah. So I think Scott’s just got to dive in, maybe a little, I get it, man. Take the money and run, get the hell out of there and go skijoring and have some Pino. Yeah. Yeah. I’m with ya. I want to get out of here before I’m 50.

Andi: 6 months.

Al: Which is very soon as we’ve established.

Joe: This is the last show. I get it, but I’m not ready. You gotta do some planning. You gotta, gotta figure this stuff out. But from just a rules perspective, you’re fine. But I think from a numbers perspective, we would need a little bit more information to kind of spitball to say, hey, you know what? Can you really do this or not?  So, but skijoring, love it.

Al: Yeah. Me personally, Joe, I would probably try to keep the money in the Roth. If all I needed was $30,000, I’d get a part time job and better quality of life, work less, you know, whatever.

Joe: Give people’s rides on your motorcycle.

Al: Yeah. Or charge for skijoring.

Joe: Give skijoring lessons.

Al: How much would you pay for that, Joe?

Joe: About $30,000?

Al: Probably alot.

Joe: If I’m going to Colorado. All right. All right. Yeah, that’s it for us. Thanks, Scott for a wonderful question. Good luck with all of that.

Uh, we got to get the heck out of here. Happy New Year, everyone. We’ll see you next week. For Big Al Clopine. Andi Last, I’m Joe Anderson. Thanks so much.

Andi: Joe domesticating himself away from downtown San Diego, cichlids, Al snowshoeing into long-term care and Joe approaching 50, Joe skijoring back to his Norwegian roots, pinot noir, and the Aprilia Tuareg in the Derails at the end of the episode, so stick around.

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The Derails



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