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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently leads Pure Financial Advisors along with Michael Fenison and Joe Anderson. Alan joined the firm about one year after it was established. At that time the company had less than 100 clients and approximately $50 million of assets under management. As of [...]

Published On
October 29, 2019

Is your advisor’s financial plan for you too cookie-cutter, set it and forget it? Should you stay or should you go? Joe and Big Al weigh in on whether a couple of listeners who are dissatisfied with their financial advisors should ditch the advisors or keep them. Plus, how should you choose investments in your 401(k)? Is it a good idea to make Roth contributions for your kids? How do you manage taxes and penalties because of Roth conversions? And how can you tell if someone in Minnesota is thinking about you??

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Show Notes

  • (00:470) Is My Advisor’s Financial Plan For Me Too Set and Forget?
  • (07:17) Is it Time to Fire My Financial Advisor?
  • (10:26) How Should I Choose Investments in My 401(k)?
  • (17:14) I’m Making Roth Contributions for My Kids. Is This a Good Plan?
  • (22:19) Do I Need to Work for 7 Paychecks to Contribute to My Roth? Is This a Good Time to Do Roth Conversions?
  • (29:52) How to Manage Roth Conversion Taxes and Penalties
  • (37:00) Comment: Don’t Judge Those Taking ACA Subsidies Unless You’re In Their Shoes

Resources mentioned in this episode:

Free Download Newly Updated for 2019: Pursuing a Better Investment Experience

WATCH: Is It Worth It to Hire a Financial Advisor?

LISTEN: Do You Really Need a Financial Advisor?

LISTEN: What You Need to Know Before Choosing a Financial Advisor

LISTEN: Answers to your top Roth conversion questions

LISTEN: The Mega Backdoor Roth strategy

LISTEN: Jonathan Clements: This Might be THE Time to Do a Roth Conversion

Transcription

Should you stay or should you go? Today on Your Money, Your Wealth®, we’ve got a couple of listeners who are dissatisfied with their financial advisors, and Joe and Big Al weigh in on whether they should ditch the advisors or keep them. Plus, how should you choose investments in your 401(k)? Is it a good idea to make Roth contributions for your kids? How do you manage taxes and penalties because of Roth conversions? How do you know when someone in Minnesota is thinking about you?  Get in your comments, stories, or actual money questions now: go to YourMoneyYourWealth.com, scroll down, click Ask Joe and Al On Air, and tell us who you are, where you’re from, how you found out about the podcast, and what you want to know or share. I’m producer Andi Last, and here they come now in Big Al’s imaginary Corvette, Joe Anderson, CFP® and Big Al Clopine, CPA.

00:47 – Is My Advisor’s Financial Plan For Me Too Set and Forget?

Joe: We got Robert from Alabama. He’s writing in. “Currently I have both a rollover IRA and Roth IRA with one of the larger investment firms. I’m 61 but I have no plans to retire in the immediate future” He’s “willing to be more aggressive rather than conservative”. All right I get that. “Yet we agreed to use a retirement age 70 for planning purposes. My adviser has now established an investment plan based upon my hypothetical retirement date and advises against changing anything. This feels very cookie-cutter, akin to set it and forget it. Where’s the planning? Or the adjustments to large market changes? I don’t want to day-trade or play the marke, but should there be a strategy for changing allocations of stocks and bonds or something other than a fixed date in the future?” All right let me see. So Robert from Alabama is going to retire here at age 70 for planning purposes – ten years from now.

Al: He has no current plans to retire but just kind of threw out 70.

Joe: I’m 61, got some cash, wanna retire at 70. And then “my advisers now establish an investment plan based upon this hypothetical retirement date and then advises against changing anything”. So first of all, when did you put the plan together? So is Robert doing this: he meets with his adviser, they say when do you want to retire? I want to retire at age 70. OK. Here’s this, here’s your allocation. Let’s put this in play and then a week later Robert goes, hey why aren’t you changing anything? What the hell are you doing? What am I paying you this money for?

Al: I don’t wanna day trade, but let’s at least trade each week.

Joe: There’s movement in the markets. Let’s move with them. Or was it like 5 years ago. So there are timeframes here. Because of course, you want to adjust it, adapt your plan as you get closer to retirement. Because if I have a 10-year allocation towards my overall goal and then I’m getting now to 3, or 4, or 5 years in those allocations need to change because the demand for the money is going to be needed shorter.

Al: Well I would say potentially. Because what if you don’t even need those assets. So then it doesn’t have to change. Because maybe then it’s a longer-term allocation for your kids or your grandkids. I think the first thing I would say is your retirement date is important in financial planning but it’s not the only thing that you consider. It’s what your need is for the dollars invested. And maybe you’ve got a good pension plan and good social security and you need very little of your assets, which would mean you could go one of two ways. You could go actually pretty aggressive because you’re not going to need to have access so you can sort of ride out the market swings. Or you could go pretty conservative because you don’t need a lot of great returns. It just depends on what your longer-term goals are. Some people if they don’t really need their funds, they want to grow for their kids grandkids and or charity, and some people it’s like you know what I don’t have kids and I don’t really want to take the risk.

Joe: I think Robert needs maybe a little bit more education on what the hell the plan is all about. Because if the advisor’s telling him no, let’s stay the course, that can get frustrating to people when they think that there should be movement. And so what are they doing? How are they managing the overall assets in a sense? Are they rebalancing? Are they tax managing it? What types of trades are they doing? Is the portfolio set up appropriately to begin with? And if you’re asking this kind of seems a little bit cookie-cutter, I don’t know. It might be very elaborate or it could be very cookie-cutter. Could be just kind of an asset allocation that they throw on and you call him and ask him something and oh, who the hell’s Robert? Yeah, just hold the course. Thanks, Robert.

Al: You’re good.

Joe: Yeah you’re good.

Al: So to continue on that theme I would say we have seen decades and decades of research that talked specifically about this. Should you make changes in your portfolio based upon market changes? And the data would suggest that that’s a fool’s game. That if you try to predict the market in the future by getting in and out or by making big allocation changes you end up worse than if you had done nothing. So in some cases holding the course is a better way to go. But I wouldn’t say you want to hold and forget. And I think that’s what a lot of people think. I mean you’ve got to figure out what’s the right allocation for your goals. You want to kind of stick to that regardless of what the market’s doing. But then you want to take advantage of market changes if stocks go down, your bond portfolio has kind of held the course, then you want to use some of that extra bond money to buy into stocks while they’re lower that helps improve your rate of return. Or if stocks have gone down in your non-retirement portfolio you want to tax manage you want to sell those positions buy something similar. So you’re still in the market but now you’ve created a tax loss on your return. So you’re looking at this constantly but you’re not necessarily trading every day. Those that tend to trade all the time tend to not do as well. And that’s not always. That’s not to say you can’t do better. But the data suggests that if you find the right allocation and rebalance and stay the course you do better longer term.

Joe: I think you just need to identify the philosophy of what you want your investment strategy to look like and then adhere to the principles of the philosophy. It’s called an investment policy statement. So where people stray, I don’t care people are active, if you want to actively trade make sure that you have a process in place that you continue to actively trade the same way in any type of market conditions.

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

Joe: Because as soon as markets kind of turn, your gut or emotion comes into play and you’re not following a strict discipline. That’s where people blow themselves up.

Al: Because the emotions take over and then you tend to buy at the wrong times. You buy while the market’s going up-

Joe: You’re not following the discipline that you put into place.

Al: You’re excited, right? And you tend to sell when markets go down – the smart money does just the opposite. They start taking some profits off the table when the market’s zooming up and they buy when it’s down.

07:17 – Is it Time to Fire My Financial Advisor?

Joe: Frank writes in from San Diego. “Hi, Joe and Al. I think your show is great”. Thanks, Frank. “I’ve been listening to the podcasts now for a while and have been wanting to send you guys all my questions. I’ll start with this one. Is it time to fire my financial adviser and close my brokerage account?” Oh Boy. Here we go. It’s getting again heavy.  “Since August of 2010 I’ve opened a brokerage account with a large institutional bank. I opened the account with about $6000 and after the first year, I began adding $200 a month into the account. It has grown to $29,000 as of today. I know the account is small compared to the rest of the accounts the bank has but I should be treated any differently. I was always skeptical of my advisor’s advice since he would always put me in their own bank’s mutual funds. However, he seemed to be good. Seemed to give me sound advice based on the performance of the account. I would try to check in with him once a year but it was always difficult to schedule an appointment to get 30, 45 minutes of his time. At times it would take multiple phone calls over a span of a few weeks to get ahold of him. I found this to be very unprofessional and frustrating as even though I have a small account I feel that I don’t ask for much of his time. Recently the bank sent me a letter-” a little Dear John letter it sounds like here huh?

Andi: Dear Frank.

Joe: Dear Frank letter. That’s good, Andi. “They are replacing my advisor with a centralized team of investment adviser representatives that are available over the phone. I know my account is small but I think this is unacceptable and makes me upset over the fact that the bank has now given me less than personal services. What do you think? Should I give these telephone guys a chance or should I fire them and close my account? Any suggestions are greatly appreciated”. Thanks again. Frank” from awesome San Diego, California.

Andi: You got one minute.

Joe: I would use the call center. Check them out because you could call all the time. They’ll answer your question. There’ll be more than helpful. I would give them a shot.

Al: So I would fire them.

Andi: Wow.

Al: Because I did a little math. Based upon what you said Frank which as you put it $6000 about 9 years ago. And then he added $200 a month starting at the end of year one. And it came out to about 2.5% rate of return. That’s not very good. I think you need to do a little bit better than that.

Joe: $200 a month.

Al: Yeah.

Andi: Joe’s checking your math.

Al: I just did $6000 upfront and I did $2400 a year for 8 years because that’s roughly the same.

Joe: There’s probably fat commissions if he’s in the old bank’s fund, so I would have to do a little bit more. But I would not be disgruntled of a call center because those people are eager. On $30,000 I think they could probably-

Al: Here’s the advantage in the call centers, you probably get answered.

Joe: You’ll get answered. You’re not going to be playing phone tag with your-

Al: But I don’t like the rate of return.

Joe: Neither do I. Good job Al.

10:26 – How Should I Choose Investments in My 401(k)?

Joe: We got Steve, he’s calling in from San Diego. And by the way folks, that’s where we’re from. That’s where we’re sitting right now as we speak, in beautiful Southern California. San Diego. Steve writes in. “Hi, Joe and Al. You’re rocking and rolling with question and answer sessions. Really great to hear these each week”. Thanks, Steve. Keep writing in and we’ll keep on a-rockin’ and a-rollin’.

Al: That’s right.

Joe: So Steve, he wants to ask, “I have a 401(k) at work that has 30 funds in the plan. Until now I’ve directed 100% of my contributions into an aggressive growth fund, which by the numbers has been the best performing fund in the group. But I wonder, what about diversification within this plan? What about taking the top 10 performers and putting 10% of the contribution in each? Or will that dilute performance? In fact, how do you decide which funds to choose? The past performance is no guarantee of future results. Should you disregard the numbers? I know you can’t give advice. I’m just interested in your perspective. Thank you for your thoughts”. That’s a cool question, Steve I like that. It’s an interesting way of thinking. Probably the opposite of what you should do.

Al: So what should he do?

Joe: Well I like the fact that he’s putting 100% of his contributions in the most aggressive fund. But don’t look at it in regards to the rate of return. You have to take a little bit deeper dive. Because if I just look at the past 10 years of rates of return there could be conservative asset classes that have outperformed very aggressive asset classes. Like a bond fund could outperform a small value emerging markets fund over a short period of time. So you can’t necessarily look at past performance. You have to look at the characteristics of the stocks or the securities that you’re purchasing. So if I’m just saying fund A, B, C, D, E, F, G, or whatever, 1, 2, 3, 4, 5, 6, through 10 and pick the top 10 performers. That’s not a really good way to do it. I like the idea but it probably will blow up on you, because what are you doing? You’re buying yesterday’s winners today.

Al: Yeah well the price is high.

Joe: Did you get that Andi?

Andi: That was good.

Joe: Thank you. So look at the-

Andi: You too could write a book.

Joe: I’m going to. I’m going to. Yes.

Al: I think I’ve heard that before.

Joe: But you’re looking at asset classes. So you want a volatile asset class that you’re putting money into on a monthly basis. Because it’s going to go up and down. It’s called dollar-cost averaging. You want that thing to be pretty hot. But then yes, diversify your pool of money that you have. So once each year then diversify out. So you want some stocks, you want some bonds, you want some large, want some small, you want some international, you want some emerging markets, things like that. That’s how you want to gauge it. Not necessarily based on the return. Because U.S. large-cap growth has really done very well over the last 10 years. And if you say, you know what that’s the one I want to go into? You’re buying really high. So it might even make sense, I’ve seen people do the exact opposite. Look at the worst 10 performing funds and put 10% in each of those. And let’s see who wins. Why don’t we do that? Steve, let’s risk your money.

Al: I guess we’ll do that favor.

Joe: Let’s risk your money and let’s do it that way.

Al: I agree with everything you said and this is confusing to people which is past performance is no guarantee of future results. But you have to look at past performance to have some kind of indication. So here’s the way I would say it. Certain asset classes over a very long period of time, 20, 30, 40, 100 years have certain characteristics. And so when you’re looking at last year, or 2 years ago, or 3 years ago, that’s where past performance can get into trouble because certain asset classes or certain funds might have done well and there’s really no guarantee that that would do that in the future. So when you hear that statement it’s not that you want to throw out all past histories. It’s just that we know based upon 100 years of stock market experience that small companies and value companies outperform large companies cap and growth companies.

Joe: Have. Have outperformed. Not will.

Al: Well did. I’ll say did. You’re right. There’s no guarantee. You’re correct. Thank you. And so what that means is that if you invest more in small companies and value companies you have a higher probability of long term success. It has absolutely no correlation on what’s going to happen next year or 5 years or even 10 years from now.

Joe: Yeah, because value has gotten smoked. Growth has outperformed value over the last, let’s say 10 years.

Al: And aggressive allocation will be probably mostly stocks and maybe you’ve got some international, maybe you got some emerging markets, maybe you got some small in value, over the long term, that will most likely the highest probability of being the best performer. No guarantee of that. Now as you get closer to retirement you probably want to take some risk off the table because you’re going to start needing to withdraw those funds. And if the market spikes down at the same time you wanted to draw that money you’re not in a great position. And I would say this, diversification compared to an aggressive stock fund is not going to get you a better return. It just gives you a more steady return.

Joe: It’s going to dilute the return. So you’re right on Sir.

Joe: Yeah. I mean if you start breaking that thing out. You got lucky, so you picked the absolute best fund over the last, let’s say 10 years or whatever that has performed the best. Then now you’re thinking how do I break this thing up because do I want to take some chips off the table? But do I want to dilute my returns? Well you’re gonna have to, but don’t look at the past performance. Look at asset class. Look at what you’re actually invested in to help you make those decisions.

So, is it really worth it to hire a financial advisor? What value do they actually provide, and what you need to know before you hire one? Click the link in the episode description in your podcast app to go to the show notes and get answers to those questions. There you can also find out more about Joe and Big Al’s investing philosophy by downloading their newly-updated white paper, Pursuing a Better Investment Experience. Learn the drivers of expected returns, why chasing past performance is a mistake, and how to let markets work for you. Now back to your money questions. This next batch is, of course, about Roth IRAs, because it wouldn’t be YMYW without some Roth talk. Click Ask Joe and Al On Air at YourMoneyYourWealth.com to send in your money questions, Roth-related or not!

17:14 – I’m Making Roth Contributions for My Kids. Is This a Good Plan?

Joe: We got Nancy from San Diego. “I really enjoy your podcast. I laugh and learn.” Or, “I learn and laugh.” See, the dyslexic kind of comes in sometimes.

Al: It does.

Joe: and “my two children age-“

Al: “are age 24-“

Joe: I got this Al. Shouldn’t have had that vodka before we started.

Al: You know what? Before Andi came on the show, I had to do all the correcting. Now I just sit back and she corrects you. It’s great.

Joe: I’m a lot better at reading now.

Al: I know you are. You have improved.

Andi: You know, when you weren’t here I actually read the questions. It made sense.

Joe: That’s why when you read the questions ratings go down.

Andi: Go ahead then.

Al: That’s false. We had our best ratings when you weren’t here.

Joe: I know. Exactly. That’s why I’m retiring. This is my last show. It’s going to be the Al and Andi show. “My two children are age-” so it should say ages, but whatever-

Al: or aged.

Joe: “24 and 26. I’ve been making a Roth IRA contribution each year for them since they were 16-year-old high school lifeguards. They know it’s happening since the money has to run through their personal bank accounts.”

Al: So they’re aware of it.

Joe: They are.

Al: OK. That’s where we’re going.

Joe: And Nancy they don’t, they’re writing their own check to the custodian. They don’t necessarily need to do that. The parent can write the check to the custodian.

Al: It’s in their name. So they’re aware that this money is going into their account with their name on it.

Joe: I understand. “They have expressed an interest in what I’ve been doing. They contribute enough to obtain the match at their jobs but are low-income earners at this point. They would find it very difficult to make IRA contributions. I’ve been viewing this as the wealth transfer while I’m still alive. I’m not putting my retirement savings at risk other than one of them waking up and insisting on taking control and buy a Corvette. Is there a downside to what I’ve been doing? Thank you”. So Nancy is a wonderful woman.

Andi: What has Nancy got against Corvettes?

Joe: Well she wants to make sure the money that she put into the Roth-

Al: is used for retirement, and not for Corvettes.

Joe: Did you know that Big Al has a Corvette?

Andi: I did not.

Al: I do not. I would like one.

Joe: He drives around with, like T-tops. Puts his collar up with some sunglasses.

Andi: His readers.

Joe: Yes. Drives around San Diego-

Al: Have my readers on so I can read the dash.

Joe: He’s got aviator sunglasses. Drives down the strip.

Al: Most of that’s false. Except for the aviator sunglasses.

Joe: So Nancy what you’re doing is awesome. Because you’re providing your kids a compound, tax-free pot of money when they turn 60 or 59 and a half. Can they take the money, pull it out of the Roth, and spend it on a Corvette? Absolutely. It’s in their name. It’s their money. You’re just gifting the contributions to them. So that’s the downside. If you trust your kids and say don’t touch this then I think it’s awesome because, I mean Al, do the math here. So she’s been doing this since 16. So let’s say from 16 to 26. On average, let’s say the contributions have been $4000. So $4000 a year for the last 10 years.

Al: What kind of interest rate, 7%?

Joe: 7%.

Al: 7% mostly in the market. So that in 10 years is $59,000.

Joe: All right. So now they have $59,000. So let’s go 35 years out, $59,000. Let’s say Nancy does not put another dime in this Roth IRA. So go 30 years out at 7%.

Al: So we’ve got $59,000. She stops funding.

Joe: Yep.

Al: But we go 30 years. At 7%, you get $450,000.

Joe: So $450,000, tax-free, for her kids.

Andi: Per kid.

Joe: Per kid. So that’s awesome if you continue to fund it. That number is going to continue to compound go up and go up and go up and then, you know, it’s really cool stuff.

Al: I agree with that. I got a tip for you, which is this: since you’re contributing each year, it’s very easy. Tell them this is for your retirement. Not to be touched. And if they do touch it you’re not going to contribute anymore.

Joe: And then you’ll never get anything from me again and-

Al: That’s it.

Joe: Very bad things will happen. Karma, bad juju will happen. Big Al will come over with his Corvette and scold them. Paddle them.

Al: I’m gonna have to buy a Corvette so I can follow up on that promise.

Joe: Say “hey, this is what I did kids!”

Al: “I bought a Corvette!”

Joe: “I bought a Corvette! You don’t wanna turn out to be like me!” Anyway, I’ll hold that thought. Nancy. Great job though. But you do have that risk.

22:19 – Do I Need to Work for 7 Paychecks to Contribute to My Roth? Is This a Good Time to Do Roth Conversions?

Joe: We got Joe from Wisconsin. He writes in.

Andi: Again.

Joe: Second question, huh? “Hello, Andi and guys.” OK well, I guess now Andi’s the lead-

Al: Well, she is the one that responds to the emails. You and I just answer.

Joe: Oh. Maybe you should answer this, Andi.

Andi: Go ahead.

Al: And then we could respond to the emails and then we’d be first billing.

Joe: Yes. “As far as finding your podcast-“  Oh yeah, we were kind of ranting about this-

Andi: You asked him to write you back and tell you. He’s doing that.

Joe: I totally forgot about that. Probably a little excited about doing the podcast. “I had searched for relatable to me podcasts with advice about-” So let me set this thing up.  Now I’m getting it.  So Joe from Wisconsin, he writes in a couple weeks ago, answered his question.  We were dialed in and apparently we killed it-

Al: That’s why we got second billing. And guys.

Joe: And then I was like OK well how the hell does Joe from Wisconsin find us. And we started talking about people finding us on the podcast because we’re getting all sorts of different people that we’ve never heard before.

Andi: And they’re telling us “we just found your podcast.”

Joe: Yes. “I just found your podcast last week.”

Andi: And that’s what Joe said.

Joe: Last week, we’ve been doing this for like 15 years, what the hell, where you been? Now it’s all coming back right. Remember the conversation?

Al: I do. I do.

Joe: So now Joe writes back and he goes “as far as finding your podcast, I had searched for a relatable to me podcast with advice about investing in retirement. I think the subject of the podcast was fiduciary and I was hooked”.

Andi/Joe: “So far”.

Al: It’s qualified.

Joe: Whatever, Joe.

Andi: It’s all downhill from here.

Joe: I know. So far so good. Until next week, this thing sucks.

Andi: No, read the next sentence.

Joe: “Other financial podcasts don’t hold a candle to Your Money, Your Wealth®”. Wow. Thank you, Joe from Wisconsin.

Al: That’s pretty nice.

Joe: Hold a candle. Where did that phrase come from? Hold a candle.

Andi: Did you want me to look it up?

Al: That sounds like an old Midwest-

Joe: Don’t hold a candle. Because when you used to go, you have to hold a candle-

Al: to go to the outhouse.

Joe: the john?

Andi: “Apprentices used to be expected to hold candles so that more experienced workmen were able to see what they were doing. Some unable to do that would be of low status indeed. First used in 1641: ‘though I’d be not worthy to hold the candle to Aristotle.’”

Joe: All right.

Al: There you go.

Joe: So he’s got a follow up on his question “regarding turning 65 in January and having enough income to cover $14,000 Roth IRA for myself and spouse for the next year”. So he’s got a gross paycheck of $3000, 403(b) contribution of $500, 401(k) Roth after-tax contributions, $500. (Note, this is a deferred compensation option for the State of Wisconsin workers.) Employee pension contribution $200. Can I assume this amount does not have an effect on the Roth contribution?” So if he’s got $3000 of income, minus $500, minus $500, that equals $2000, times 7, equals $14,000, which will mean 7 paychecks. Correct?

Al: Yeah. Because his first question was how much do I have to earn to put in $14,000 which is the max. And so I would say the calculation is correct. I’m not sure I agree with the employee pension contribution because he wrote the word employee. That sounds like that’s coming out of your pay. So you might have to subtract the $200 as well but that’s the right idea. The right idea is your gross pay, minus your pension contributions, you end up with a net number, before any other state and federal withholdings, but you end up with a net number. And that’s what counts as earned income to do a Roth contribution. So that the concept is correct.

Joe: New question: “Since I’ll only have $14,000 in income next year, plus my pension, plus an annuity old pension and my spouse’s pension, and no Social Security yet, is this a good time to convert 401(k) IRAs to Roths? Any other foreseen problems?” I don’t know. If you only have $14,000 of income I would like to know- I only have a $14,000 of income, plus my pension, plus an old pension, plus my wife’s pension, plus my wife’s Social Security, plus she going to be part-time work.

Al: So we need to know a little more. But I would say based upon what we know or don’t know chances are that your income will be higher at 70 and a half. Because Social Security, assuming that’s when you take it, will kick in, your required minimum distributions, I guess will kick in. So chances are your income will be higher at that age, you’re 65 now. So there are 5 years of perhaps lower income. So maybe, but we can’t really answer that without knowing these figures.

Joe: Right. I have no idea what your pensions are. It looks like he works for the State of Wisconsin. Most state plans are somewhat rich.

Al: Could be. And so Joe’s got a pension, his spouse has a pension. Social Security is coming. So the two things that are coming later, his Social Security and required minimum distributions. So all things being equal his income, their income, joint income will be higher at age 70 and a half. So chances are your income is lower, Roth conversions might make sense but it really depends upon what bracket you’re in.

Joe: Well what bracket? How much is all of this stuff? Because it sounds like he doesn’t need like you said Al, all things held equal if he doesn’t need the 401(k) dollars, then he will be in a higher tax bracket once he turns 70 and a half because the Social Security would kick in.

Al: We don’t have enough information. But I would say a general answer for this fact pattern is this is a good time to do Roth conversions because your income is lower now than it will be in the future.

Joe: Tax rates are all-time lows, are going back up 2026-

Al: They’re going back up. So you have two reasons to do Roth conversions right now based upon what we know.

Joe: But then I know the new question is going to be, how much? And then that’s only another bag of worms.

Andi: Send us your numbers Joe.

Joe: I don’t know, you would just probably maybe I guess on the back of the envelope maybe convert to the top of your own bracket.

Al: Yeah that would be something you could do.

Joe: That’s some easy simple that you could do on your own. All right Joe. Thank you for telling us how you found us. But you typed in the word fiduciary.

Andi: Yeah. Which is interesting, because I don’t think there’s the word fiduciary in any of our podcasts.

Joe: Because Alan doesn’t act like a fiduciary some of the time. Especially on the weekends.

Al: Now that I have my reader glasses I’m going to be much better.

Andi: You’re going to look like a fiduciary at least.

Joe: You’ll definitely look like a fiduciary.

29:52 – How to Manage Roth Conversion Taxes and Penalties

Joe: My nose itches.  Someone’s thinking about me. My name’s Joe Anderson. I’m a CERTIFIED FINANCIAL PLANNER™, with Alan Clopine.

Al: I’m just sitting here. I don’t really care if your nose is itching.

Joe: Oh really?

Al: The show must go on.

Joe: Have you ever heard that? When your nose itches someone’s thinking about you?

Andi: No. I’ve never heard that.

Al: No. That’s Minnesota- I never have either.

Joe: Really? I’m the only one. Someone’s thinking hard about me. Someone’s got a little crush.

Al: Wow. Maybe it’s Cathy from Massachusetts.

Joe: It could be. Cathy writes in “I have a question about out-of-pocket expenses to pay for Roth conversion”. So Cathy, she “converted $10,000 from traditional 401(k) to Roth at the end of the year last year and it pushed my tax bracket up since there wasn’t any additional withholding from my paycheck throughout the year. I’m a W-2 employee so I ended up having to pay tax penalty due to insufficient withholdings caused by Roth conversion. This year I haven’t done Roth conversion but I’m considering it. How to manage the tax liability if I decide to convert? Certainly don’t want it happens again like last year”. I wish I had a Boston accent. How she’s writing this but being like you know, Massachusetts accent. “I heard someone can write up a check sent to IRS to add to the withholding but I’m a W-2 and don’t pay tax quarterly. Thank you both. Love your show”. Well, thank you, Cathy. Love your question.

Al: That is sweet.

Joe: Very common question. So Cathy does a conversion. She does her taxes and the IRS is saying, Cathy, you didn’t withhold enough. You owe a penalty.

Al: You owe taxes and penalties.

Joe: Yeah. What the hell? So what does she do Alan?

Al: Well there’s a couple of things Cathy you can do. One is just increase your withholding in anticipation of a Roth conversion. So you have enough withholding in. And by the way, as long as you pay in 100% in withholding of last year’s tax you’re not going to be penalized. Unless your income is over $150,000, then it’s 110%. So in other words, if your federal taxes last year were $10,000 with the Roth conversion you have to make sure you have at least $10,000 withheld this year. And then even if you owe taxes you won’t be penalized. They call it the Safe Harbor Rule or if as long as you pay in 90% of this year’s tax. But here’s what a lot of people don’t realize, that are W-2 employees, is there’s a second way to pay. And that’s quarterly, with quarterly estimated payments. It’s a 1040ES, estimated payment. That’s a little voucher that you print out, fill out and send your payment.

Joe: How the hell is she gonna get 1040ES voucher?

Al: From the IRS website. IRS.gov, type in 1040ES and it’ll pop right up.

Joe: So what, she just fills out her own voucher? Why does it sound like I’m saying like a bird?

Al: It did sound- I was thinkin’, a vulture.

Joe: Well the IRS, it’s kinda the same-same.

Al: Well it’s not very hard. It’s your name, address, Social Security number.

Joe: The ones that I get my CPA does for me.

Al: I’m saying if you don’t have a CPA. If you have a CPA you can have them do it for you.

Joe: Cathy then is going to have to figure out what her quarterly payments are?

Al: So I’m presuming that she’ll do something similar which is at the end of the year. So the best way to do this is to increase your withholding during the year in anticipation. But if you don’t do that then you make an estimated payment on the 1040ES. As long as you do that by January 15th. But because that estimated of payment was made in the 4th quarter, you’re going to have to fill out the form 2210- but the penalty,

Joe: How about if she does this? So she’s going to do a conversion today $10,000. She’s W-2 employee. She’s already withheld X, so for the next month and a half, 2 months of paychecks, she could up her withholding.

Al: That’s the smartest way to do it.

Joe: Or can’t she just go to IRS.gov and say I want to make a payment.

Al: Of course. That’s the same thing as the 1040ES.

Joe: Yeah but she doesn’t have to fill out all these crazy forms and the 1022s and the 24ES-

Al: The 2210. Absolutely, because that the-

Joe: I don’t.

Al: Well that’s because you don’t care if you pay penalties.

Joe: If I pay one cent of penalty I absolutely go ballistic.

Al: Now the rule is this: if when you do a Roth conversion the IRS presumes it was evenly throughout the year so you had to make 25% in April-

Joe: Got it. I got it.

Al: 25% June, 25% September, 25% January. So if you make that payment in the 4th quarter, then you have to fill out the form 2210 which is the annualization method. This is starting to sound complicated because it is complicated. So you have to show your income at different points of the year so that you’re not penalized. The better way to do it is to increase your withholding because withholding is considered evenly withheld throughout the year and then you don’t have to worry about this.

Joe: So if I understand you correctly is that she does a conversion of $10,000 December 31st, her income spiked only in the month of December. So that 4th quarter quarterly she can’t pay it that way because the IRS is saying that $10,000 came out evenly throughout the year so you under-withheld the 1st, 2nd, and 3rd quarters.

Al: That’s right. And you fill out that form 2210 to explain that’s not true.

Joe: So that 2210 just explains hey IRS I did a conversion at the 4th quarter-

Al: So I only owe taxes in the 4th quarter.

Joe: That’s what that’s all about. Clear as mud. But I hope Cathy, this does not discourage you from doing the right planning. Because sometimes it does get complicated and so people will take maybe the easier road versus doing the right thing for them and their family because they have to fill out a couple of extra forms.

Al: Also remember that the penalty is based upon a 3% annual interest rate which is pretty low. So it’s actually pretty cheap use of money.

If you just can’t get enough of Roth talk, click the link in the episode description in your podcast app and get answers to your top Roth conversion questions, learn about the Mega Backdoor Roth strategy, and listen to Jonathan Clements, formerly of the Wall Street Journal, explain why this might be THE time to do a Roth conversion. If you’re new to all this Roth stuff, start with the basics and find out how you can get 100% tax-free growth on your investments: download the free Roth IRA Basics guide from the podcast show notes at YourMoneyYourWealth.com. Click the link in the episode description in your podcast app to get access to all these free resources, and to send in your money questions, compliments, complaints, stories, or comments, like this one.

37:00 – Comment: Don’t Judge Those Taking ACA Subsidies Unless You’re In Their Shoes

Joe: So David he writes in. This is a couple weeks ago, been kind of sitting on this here, Al. “YMYW team. Love the show”.

 Al: Starts out good.

Joe: All right. “Per comment that Joe made on a recent podcast and another time on a separate podcast as well, regarding some of his clients not wanting to give up their ACA subsidies since they have sizable portfolios but still want to stay under the ACA subsidy limits. I disagree with Joe’s comments. Given the ridiculously high premium costs that we need to take on, if we don’t have subsidies everyone should manage their portfolio if possible to ensure they stay under the ACA subsidy limits. Our government wastes so much money in other areas. It would be great if everyone received subsidies. While asset allocation and income limits for ACA subsidies aren’t, shouldn’t be directly related, they should be considered in conjunction with one another. For example, if a couple needs to pay $1500 a month for a non-subsidy ACA plan-” ACA folks is the Affordable Care Act. “or $300 dollars a month for the same plan being subsidized. This is a huge difference in annual costs that a couple would need to absorb while on a fixed income. They need to come up with an additional net $14,400 annually to cover the premiums alone. If a couple could allocate some of their equity allocation toward a lower yielding asset such as they stay under the income limits and alternately generate unrealized capital gains instead they should absolutely do it. For example, investing in Berkshire Hathaway has no dividend. Please don’t judge about striving for ACA subsidies unless you actually are in the shoes. As I have been there, it is not fun”. All right David.

Al: What do you say about that Joe?

Joe: I will rebuttal.

Al: Got your rebuttal?

Joe: Yes. Because people then are on a non-subsidy plan, or a subsidy plan paying $300 dollars a month, they probably are broke and don’t have millions in the bank. That’s my only point. Al: But his comment is correct. Completely valid.

Joe: Of course. I mean sure if you’re paying $14,400 versus I don’t know what is that, a few thousand bucks? Yes, I think I’m not an idiot. Well, maybe I am. I think David thinks I’m an idiot.

Al: Well I’ll say it this way, at least the way I look at it. I don’t necessarily have to agree or disagree with the subsidy.

Joe: It’s is what it is.

Al: It is. It’s there. And so you have the opportunity to arrange your affairs to get the subsidy. Why not? Now me personally? Do I think it was a good program? I would say no. Because what we’ve seen as people with a lot of money that really can afford health insurance arrange their affairs not to. But that is the law.

Joe: But my gripe is not even that at Al. It’s like they’re tripping over dollars to pick up pennies. Let’s say David’s got a couple million dollars in a 401(k) plan. And so he’s in a 0% tax bracket. He’s got a non-qualified account that he’s managing to keep him in the subsidy. But he’s not taking any distributions from his retirement account to convert into a Roth and he’s setting himself up in a time bomb because he’s so concerned about the subsidies that he’s neglecting future planning. This other call we got was like I’m going to fire, I’m firing- So I want to get all my subsidies, I want to be rich, but I don’t want to pay anything. I mean I get it. That’s how people get rich sometimes. So, David, I’m with you. But I don’t want you to neglect other things, and other planning opportunities in hindsight. All right. Thanks so much for listening, everyone. Andi, wonderful job today, thank you.

Andi: Thank you Joe.

Joe: Hey Alan great job.

Al: Same with you.

Joe: Thank you very much. We’ll see you guys next week. The show’s called Your Money, Your Wealth®.

_______

White paper freaks, the old days of the YMYW radio show and Larry Swedroe’s book Black Swan are in the Derails at the end of this episode, so stick around if you’re into that sort of thing. By the way, did you know YMYW isn’t just on Apple Podcasts and Stitcher, we’re also on Spotify, Pandora, YouTube, and tons more. Subscribe on any or all of them! And hey, if you get any value at all out of this show, sharing it via email or on social media is the single best way to say thanks to Joe and Big Al.

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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.