Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 00:58 – Should I Go Roth to Avoid RMDs and Retire at 51? (Captain Morgan, CA)
• 11:33 – Roth vs Traditional for Flat Income Earners? (Klo Jopine, TN)
• 22:53 – Big Roth Conversions to Tame a $3.5M 403(b)? (Brian, NY)
• 27:36 – Can I Retire in 2026 and Spend $200K/yr? (Todd 54 & Margo, UT)
• 34:53 – How High Income Earners Can Reduce Future RMDs (Kyle & Katie, Midwest)
• 44:37 – Outro: Next Week on the YMYW Podcast

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: Saving into Roth instead of traditional accounts to bring down required minimum distributions in retirement, and whether retiring early is in the cards: that’s today on Your Money, Your Wealth® podcast number 579. Brian in New York and “Todd and Margo” in Utah each have over $3 million in their pre-tax accounts. What should their Roth conversion strategies look like, and can Todd retire this year? But first up, should “Captain Morgan” go Roth to avoid RMDs and can he retire in a couple years? Should “Klo Jopine” contribute to Roth instead of traditional if his income will always remain the same? Finally, Kyle and Katie have high incomes and need a spitball on how they can avoid future RMDs. Ya think Roth conversions might be in their future? We’ll find out. Let us know what you think of today’s episode: hop onto our YouTube channel to watch us and to join the conversation in the comments. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should I Go Roth to Avoid RMDs and Retire at 51? (Captain Morgan, CA)

Joe: Let’s kick you off with, Captain Morgan.

Al: You like Captain Morgan?

Joe: No.

Al: You’re not a rum guy.

Joe: No,

Al: I am. I like Captain Morgan.

Joe: Captain Morgan. No sir.

Al: Especially the Spice Rum. I like that.

Joe: Oh yeah. What, wasn’t there like a slogan for Captain Morgan?

Al: Yeah, I mean he,  the pirate, well, I dunno what the slogan was, but he put his, leg and barrel.

Joe: The barrel yeah. That’s what I remember

Andi: “Spice on” apparently is the current slogan.

Al: “Spice on.” Okay, cool.

Andi: There’s also “live like a Captain” and “better than gold.”

Joe: Okay.

Al: Okay. So now we’re in the mood. Captain Morgan. I can sort of, we can sort of place,

Joe: so what is it? Like Captain and Coke? So, or you just go straight, Captain?

Al: No, I, like,

Joe: or you put it in a Lego

Al: maize or all those, Hawaiian drinks. Little free thing.

Joe: pina coladas there. Roman Pina Coladas.

Al: Oh yeah.

Joe: Okay. Yeah. Alright, so my drink of choice is Captain Morgan and Sprite.

Al: Well, that’s another way to go.

Joe: Yeah. Captain Sprite. I don’t know that, doesn’t sound. I’m 48, single, have two kids, 10 and 12. I have a monthly expense of $8,500 and I make $240,000 a year. Currently at 1.9 million across all my investment accounts. In my pre-tax accounts, I have 600,000, adding 23,000 plus 200,000 in the employer match. Have a Roth IRA in Megatron. This guy’s gotta be a long-term listener.

Al: I think.

Joe: So $270,000 at $24,000 mega backdoor and a $7,000 backdoor. IRA annually taxable brokerage million bucks adding $15,000 annually each. Just saved 40,000 max family. 5 29 plan 20,000, adding $3,600 annually, I expect to get $35,000 in my Social Security at age 65. So here’s my question. Should I continue pre-tax 401(k) or change to Roth 401(k) in order to reduce future RMDs?

Al: Yes,

Joe: Captain Morgan.

Al: Captain Morgan’s

Joe: wonder, he’s 48 years old,

Al: right? He’s already thinking about RMDs.

Joe: It’s about something 30 years from now.

Al: Well, that’s called pre-planning.

Andi: he’s apparently been listening into this show for a while for multiple reasons. Not only does he know the Megatron, but he also knows starting early gets you the best results.

Joe: So then he is like also is retiring at 51 Reasonable and still be able to fully fund college tuition. I’m thinking of moving some 401(k) pre-tax to an IRA to withdraw from and pay for tuition to avoid that 10% penalty, please poke as many holes as you want. All right, Captain,

Al: well, let’s start with this first question.

So, his salary, there’s

Joe: $240,000 as a single tax payer

Al: 240,

Joe: 20 4% tax bracket, but he’s tax well

Al: on top of, the 24 is. 200,000.

Joe: That’s married.

Al: Single? No, For that’s, that would be single top of the 2024.

Joe: Okay. Yeah. Top of 22 is 200 for married.

Al: Correct. That’s right, So, so Joe, if you think about it that way, his, 401(k), if it’s pre-tax, that’s about 20,000, 23, 24, whatever.

I don’t know what his interest and dividends are, but let’s just say, million dollars, 2%, 20,000. So I think those two cancel each other out roughly. and then you got the itemized deduction, which is 13, 14,000. I think he’s, I think he’s in the 32% bracket. so I think I’d stick with the pre-tax, me personally.

but you may have a different opinion.

Joe: Yeah. Let’s see. The top of the 24 is 200.

Al: Yeah, 2 0 2 to be exact.

Joe: So taxable income.

Al: Yes.

Joe: 28 years old.

Al: The taxable income is somewhere around 2 25, something like that. That’s with the pretax. So I think I’d stick with pretax.

Joe: Yep. I agree. A hundred percent. 32. Yeah. it’s too high.

Go pretax. He’s 48 years old. He wants to retire 51.

Al: Yeah. So,

Joe: so that’s, a,

Al: that’s a little tricky. I, so I ran that amount. so, so one, 1.9 million is the starting point. Three years, 6% rate of return. he is adding about 90,000 a year, which is great. Now if you’re at listening and wanna do this yourself, you can pick any rate of return.

I like 6% just ’cause it’s a little bit more on the conservative side. I’d rather be conservative than aggressive. But anyway, Joe, that, two and a half million is what he ends up with in three years and spending of 102 becomes with inflation about 111.

That’s about a 4.4% distribution rate at 51.

He

Joe: doesn’t have enough non-qualified to even come close to retiring.

Al: Yeah. Well, right. And so

Joe: you’ve got a million dollars, so, so I suppose what you drain your million dollars from 51 to 60

Al: Yeah.

Joe: He wants to spend a hundred thousand, a million dollars, so he’s got enough. Well, I suppose he’s got enough there.

If he wants to spend a hundred thousand dollars over nine years, it’s 900,000.

Al: Yeah, he’s

Joe: got a million.

Al: There’s enough there. But I think at that age, I’d probably rather see a 3% distribution rate, which would put him at about 75,000, which means to cover the gap, he’d need about 40,000 of income. Part from somewhere.

Joe: I mean, bill has to fund college.

Al: Right. And that’s just to get by for himself, not fund college. So it’s pretty tight. I, think now I ran it at 55 just to see, ’cause that would be, you know, it’s funny how just a few years makes a big difference. Sure. Then with these same assumptions, he would end up at 3.6 million and his spending would be 120 5K.

That’s a three and a half percent distribution rate at 55. It’s still kind of on the border, but that, is more reasonable, I would say.

Joe: Okay.

Al: Still, I’m not sure how he pays for college. Then

Joe: where does the kids want to go?

Al: Yeah. Well, right.

Joe: I mean, it could be pretty cheap or it could be quite expensive.

Al: It sure can.

Joe: Look

Al: at this. We know that’s a, that’s the smartest thing you’ve said all day.

Joe: Oh my God. As soon as it came outta my mouth, it was like, you are an idiot.

Oh,

Al: so, so I would say, if it were me, I would, try to work to at least 55.

Joe: Yeah, I like that. 55. I would continue to go pre-tax. You’re in the 32% tax bracket. you do have a lot of money in a non-qualified account. The bro brokerage account, you’re adding 15,000 to that.

Al: Yeah.

Joe: so you’re doing a phenomenal job from a savings perspective, but

Al: Right.

Joe: You know, when you wanna spend a hundred thousand dollars a year and put a couple kids through school, you need a lot of capital to do so.

Al: Yeah. And realistically, a lot of people work until their kids, they’re outta college or, when they know they can fund the college and still be okay. Right. Maybe that’s another way to say it.

Joe: Yeah. But l let me, if, I think about this, you know, this is just back of the envelope.

He’s got a bridge, so at 51 it’s too rich at 55, I think he’s close with funding college because of the Social Security bridge.

Al: Yeah,

Joe: he wouldn’t have spend a hundred. He thinks he’s gonna get $35,000 there, so his distribution’s gonna go down, so.

it’s close.

Al: It’s close.

Joe: Of course, he gotta run, you know? You’ve gotta run these numbers on an ongoing basis. ’cause who knows what’s gonna happen over the next 12 months, let alone the next 12 years.

Al: But you know, I mean, he could retire at 51 if he got some kind of part-time work in, my view. but sometimes just knowing that Joe makes a difference to where you can handle work knowing that you could quit, there’s an alternative.

Right.

Joe: Right. Yeah, giving up a $250,000 paycheck is tough.

Al: Yeah. When you’re single and have two kids and you wanna put ’em through college.

Joe: Yeah.

Al: Yeah.

Joe: And the kids are 10 and 12.

Al: Right.

Joe: But they were a little bit older and you’re a little bit closer to college where you kind of have a handle of what that expense is.

Al: Correct.

Joe: but there’s a lot of unknowns and given up that paycheck at 51, that’s, I don’t know, 51 is really young to retire. I don’t know what, what would, you do, Captain Morgan?

Al: Well, you would, have to have something else to fill your time. I can tell you that from experience.

Joe: Oh, God. I met with a client that’s always been a little bit of a nervous Nelly.

You know, he retired pretty early.

Al: Okay.

Joe: I was like, how’s your stress level now that you’re retired? Right. You know, he’s just as stressed just because he’s like, well, I need to find my, I, need to fill my time.

Al: Yeah, right.

Joe: You know, it’s like, well before I was like, I, work, but now I’m working on this and, you know.

so yeah, retirement, you have, there’s a lot of planning that w we rarely talk about. That has nothing to do with the dollars and cents.

Al: You know, it’s funny when we do talk about it, Joe, it’s, and I’m all, I’m serious when I say this, which, which is I think that what you’re doing, what you wanna be doing or should be doing, or to fill your time, that’s as important as the financial part.

You know, we’ve seen all kinds of studies of people getting depressed after retiring because their job was everything, their social circle, their purpose in life and, all that.

Joe: Yeah. Then you just think, oh man, my parents died at this age. What time is it? You know, block is ticking on me.

Al: No, I, get it.

And. As you know, I tried to retire myself at 47.

Joe: Yeah, that worked out well for you.

Al: So good.

Andi: If you’re brand new to Your Money, Your Wealth®, welcome, this is a great week to find us. The DIY Retirement Guide is our Special Offer right now, but it’s only available until sometime this Friday, May 1st. This is 40-plus pages of the same practical, do-it-yourself retirement planning information that normally only lives inside our retirement classes and one-on-one client meetings. How to draw from the right accounts in the right order to keep your tax bill low. How to protect yourself from inflation, market swings, and sequence-of-returns risk. And a quick retirement calculation worksheet is on page 44, so you can find out right now whether you are actually on track, or just hoping for the best. We only make the DIY Retirement Guide available a few times a year, and the Special Offer changes sometime this Friday, May 1st. Click or tap the link in the description and claim your copy of the DIY Retirement Guide right now.

Roth vs Traditional for Flat Income Earners? (Klo Jopine, TN)

Joe: Alright, let’s go to Klo Jopine.

Al: I think that’s a play on our names.

Joe: Look at that Klo Jopine. Tennessee,

Andi: that’s gotta be one of the most creative names somebody has come up with to be on this show.

Joe: Klo Jopine. Alright. YMYW. I’m a 39-year-old freelance musician. Well send us some tunes.

Al: Yeah,

Andi: go Klo.

Joe: Yeah. Love to hear what you got. my drink of choice is whatever shows up on stage for free.

Andi: Spoken like a true musician.

Al: You know, that’s a good way to think about it, maybe. Yep.

Joe: I drive a 99 4 runner with an indestructible 4.7 liter engine. I’m in a situation where my income will essentially never raise as I age, roughly $70,000 a annually. Occasionally up to $90,000. Alright, and I’m looking for a three bucket spitball to help escape inflation.

I’m debt free besides my mortgage at 250,000 and IDCA weekly into my Roth IRA, which is 46,000. Currently to max it out over the course of the year

Al: dollar cost average, by

Joe: the way. DC. due to starting later in life, my Roth will continue. Contributions will likely barely make it to a million dollars by 65, putting my 4% withdrawal firmly in the 12% tax bracket if I went pre-tax instead.

As such, should I switch to traditional IRA contributions from here on out. I’m also considering open a solo 401(k) traditional to put more cash away in that case, when you prioritize one account over the other, Rob 401(k) or so, or traditional solo, for my third bucket, I’m hoping to up my brokerage account.

Equally, I could see myself doing $583 a month into the IRA 7,000 divided by 12 583 into the solo and 583 into the brokerage. Beginning 10 99. These are the only accounts available to me, spitball away. Also, I still don’t know how to calculate self-employment tax on, top of federal income tax. Thanks.

okay. Couple of tidbits here.

Al: So yeah, what do you got?

Joe: Let’s see. Klo Jopine, he’s got 70 many thousand dollars that he makes. Occasionally up to $90,000. He’s a single guy, freelance or single gal. I don’t know what Klo Jopine, boy or girl 39.

Al: Hard to say.

Joe: I would open up a solo 401(k) and. With the solo four one K, you can do Roth and or pre-tax.

Al: Right now you are limited to 25% of your income, right?

Joe: Not on a solo four one K.

Al: Oh, I’m thinking

Joe: SA Seppi,

Al: right? You are, I stand corrected. You’re right.

Joe: Yeah. So a solo four one K is a, 401(k) plan for people that are self-employed. So. For this individual, I would definitely open up a solo 401(k) to give you more flexibility of how much money that you can actually put into the overall account.

when I go Roth or pre-tax? let’s see. Well, it depends how much money does he currently have is saved up.

Al: He’s got 46,040,

Joe: right now it’s 46,000 in savings.

Al: It’s all in a Roth.

Joe: It’s all in a Roth.

Al: Yep.

Joe: It,

Al: so we got, we sort of have a clean slate, so this is kind of a good one. So what, would you, how would you do it?

Joe: Single at $90,000. 70 to 90. so he’s in the 22% tax bracket plus self-employment tax.

Al: Right.

Joe: I would probably try to defer as much income as I possibly can

Al: for the tax break.

Joe: For the tax break. Plus that’s also gonna save self-employment tax. So his effective rate is probably a little bit better. Right.

you’re the cpa,

Al: it doesn’t, change the self-employment tax ’cause that’s how you calculate your earned income. But I do agree with you. I think at, this point, I, love getting Seminar Roth, but there’s no,

Joe: so if I had $40,000 of, so I’m playing gigs

And I make $70,000.

Al: Okay.

Joe: Alright. Of cash.

10 99 employment income, and I put $30,000 away in a solo 401(k).

Al: Okay.

Joe: All right. So that equals $40,000 plus my, item or my standard deduction of another, call it 15 if I’m single. So my taxable income at that point would be what? 25 30? 35,000?

Al: It’d be low. Yep.

Joe: So my self-employment tax is based on gross or my tax.

How was, self-employment tax calculated?

Al: Yeah, so self-employment tax show is based upon your bottom line profit in your business. Okay. And so think of it, like as a, like salary. So when you put money, like in employee side, that’s just like a payroll deduction. It’s not a deduction to anybody.

So that’s not a deduction per se. However, if your company makes a match, then that’s a deduction. So that does reduce self-employment tax.

Joe: But if I’m just a sole prop, it doesn’t matter. The sole prop is the business and then that’s gonna determine how to calculate this. Or how would, or maybe I ask you this, how, would this musician reduce his self-employment tax?

Al: The main way you’ve reduced self-employment tax is to have more deductions in the business. Not, in general, but in the business. So, so in other words, buying new musical instruments, mileage, right. Anything you can think of that, you know, maybe you go to conferences with other musicians, I don’t know.

But those are expenses that you could then put against the gross income from the, business.

Joe: Okay. And if I set up a solo 401(k), in. Match myself on the employer side.

Al: Yeah.

Joe: Would that work?

Al: Yeah. Because that would be a pretext match and it would be, let me think how that works. That’s a deduction.

You know what, I don’t think that’s a deduction though for the self-employment because that’s earned income. I, think it’s a, I could be, it’s been a while since I’ve done this, but, I think it may just be a deduction against taxable income, not self-employment tax. Got it. Because if, it was a deduction for self-employment tax, it’d be a circular calculation, right?

Because you’d get the calculation and then you figure out, then it would have to go back into the self-employment income, which changes the Social Security. Yeah, so I’m pretty sure it’s outside of the self-employment, calculation. That’s a frustrating thing for being self-employed. A lot of times you can.

have a pretty low taxable income, but it’s harder to get rid of your self-employment tax ’cause that’s based upon your earned income. And your earned income is based upon your bottom line profit and your business with which that number determines how much you could put into a solo 401(k) and or Roth IRA or regular IRA.

Joe: Got it. So it’s based on earning income non-taxable.

Al: Yeah.

Joe: Got it.

Al: Yep.

earned income for your business.

Joe: yeah,

Al: yeah.

Joe: Alright. Yeah. So I would open up the solo 401(k). You have the flexibility to do Roth or pre-tax. I think right now I would still do pre-tax ’cause of the 22% tax bracket. If he’s gonna do 5 83, I don’t know why.

I think I would all put it into the 401(k) plan versus building up his brokerage. at this point,

Al: yeah, 22% bracket’s a decent bracket that you might want a tax deduction. So I think I agree with that

Joe: because he’s gonna be in the 12% tax bracket given the math that he did. He says, I’m gonna have a hun a million dollars.

I’m gonna draw my 4% at $40,000. I’ll be in the 12%. But you also wanna do some other math here, given what you’re thinking because you, still wanna have some diversification ’cause you could be in the 0% tax bracket in retirement. But if I’m in the 22, so this is an interesting case because let’s go.

I’m, I. I’ll go post tax and put it all into the Roth and pay 22% today, but then when I’m retired, I’ll be in the 0%.

There’s gotta be a, there, there’s a combination here.

Al: I agree.

Joe: I think it’s a little bit of, both.

but you would wanna forecast what both of those would look like. And I think he’s already done that to some degree because he’s looking at, well, if I’m saving X I’m gonna have a million dollars.

So find out. How much that you should save pre-tax, where you can pull out. Let’s call it, you know, $20,000 a year because that would be tax free given if we had the same current, you know, standard deduction for a single taxpayer. Yeah. Given a little bit of inflation.

Al: Now when I looked at this, I think, starting at 46,026 years to retirement, if he retires at 65, did I do that right?

55. Yeah. 65, at a 6% rate return, adding 21,000 a year. That’s a million and a half. That’s actually a pretty decent number. So it just goes to show you can have very little at 40 and still end up in a great spot as long as you’re disciplined and keep, funding it.

Joe: Yep.

Al: but with that $60,000 would be a 4% distribution rate, plus Social Security, whatever that would be.

So that would,

Joe: you’d replace his income almost.

Al: Yeah. Right. Then it would be a 22% bracket as we know it today. Right. So anyway, I don’t mind some diversification, but I do like the idea of some tax, tax deduction. In the pre-tax. I think one of his ideas is split. a third. I, guess, without doing any more advanced planning, that’s probably a good place to start, Jim.

Joe: Yeah. how I, yeah. I, guess, that’s one way to look at it. I think if, I look at this, if I would want to put, I don’t know how that math worked out, but let’s say if I wanna pull out $20,000 from an IRA and pay tax on it.

And then I want all my other income to be tax free capital gains.

Al: Right.

Joe: So that means I need to accumulate at least $500,000 by the time I’m 65. And so if his math says it’s a million, then yeah. Split the baby. I think your math says it’s 1.5, so I don’t know. a third, is probably the right number.

Al: Yeah. I’m good with that. And adjust as you go.

Joe: Yep.

Al: What, you don’t wanna do is end up with too much in a deferred and then, because then more of your Social Security is gonna be taxable.

Joe: Yeah. Right.

Al: In the future.

Joe: Yep. Because if he plans this right, a hundred percent of his income could be tax free.

Al: Yeah.

Joe: Including his Social Security.

Al: Yeah. Or close to it, right?

Yeah. Yep. Klo Jopine, that’s Phil.

Joe: Yeah,

Al: it’s a good one. So, so it, could be, let’s see. Ann Allison, if you do your last name and split it with my first name,

Andi: I could see why they went with Klo Jopine.

Al: Klo Jopine sounds

Andi: It just flows a little better.

Joe: Well,

Al: it’s a little better. Yep.

Big Roth Conversions to Tame a $3.5M 403(b)? (Brian, NY)

Joe: We got Brian in New York. He goes, Hey guys, thanks for performing a spitball on my situation. I’m a 53-year-old and I’m considering retiring at 56. Right now I have three and a half million dollars in a tax deferred account, $2.3 million in a brokerage account, $600,000 in a Roth, IRA, all invested in the s and p 500 index fund.

I’m entitled to $120,000 a year pension, which will cover all of my living expenses. Well, damn Brian, you’re sitting in a pretty good spot.

Al: I would say

Joe: my calm, my concern is my traditional 403(b) account is growing faster than I can convert to a Roth in the 24% tax bracket when I retire. My question is, there an amount I should.

Just do a large conversion when I retire and pay like 35% tax for a couple years to bring that 403(b) traditional account balance down to where the growth in the pre-tax matches the future yearly conversion rate in the 24% individual tax bracket. Haven’t heard you guys talk about this issue before For people with large pre-tax retirement accounts, my employer does not offer a Roth.

1. Alright. Brian, I would like to know what your assumptions are. Sure. In regards to growth rate, so he’s in the s and p 500, what is he running? Like a 10%, you know, growth rate within the overall account

Al: could be.

Joe: You wanna convert when the market’s down.

So you’re a hundred percent all in the market.

So when the market’s down 20%, I’m totally fine with you converting a lot larger number than the 24% tax bracket. Then all of that future growth is gonna grow tax free. There’s no secret science here because you can’t determine what a, a straight line rate of return is in the overall markets because it, you can have an average rate of return.

Your math is gonna be screwed. screwed up once you’re. You put it into practice in real life.

Because it’s like, wow, my account’s up 20% and I, can’t keep up with the growth of my account to get a lot of this out without blowing me up, you know? later in life, I, think you take it year by year, you convert to the, bracket that’s appropriate for you.

But then I think you can take advantage of other instances if, markets, you know, go to decline.

Al: ditto.

Joe: Alright,

Al: you killed it. perfect because I, don’t think you want to convert in these higher brackets just as a matter of course, but the market does dip. It does. Correct. Those are the years where you do large conversions, maybe into the 37%.

You know, you’ve got a lot of money in non-qualified, that you can pay taxes with. So that, and lemme give you an example. It’s, a ridiculous example, but at least you’ll understand the math. So you convert a hundred thousand dollars. You’re in a high tax bracket, let’s just say 37%, Joe, so your tax is 37,000 in between the time you convert, ’cause the market’s low and it does a full recovery and now it’s for 200,000.

Not gonna happen. I just wanna do the math, right? So in essence, you got 200,000 into Roth, but only pay taxes on a hundred. That 37% tax is now more like 18%. Cut in half. Right. So that’s why you wanna think about doing your large ones at the time of a correction. By correction, I mean something that goes down 10% or 2020, right?

Joe: Yeah. I think that the larger the correction, the more conversion.

Al: You got that right? And the thing is, the market may not recover in the time you pay the tax, but it will, and you’ll be glad you did it.

Joe: Yes. but this is where it takes discipline and this is where it takes help and guidance because normally when markets drop 10, 20, 30%, what do you know?

People freeze. They don’t want to do anything. There’s no strategy. They’re like, oh my gosh, should I sell, should I go into cash? The last thing people are doing is converting dollars into a Roth IRA and paying taxes on those dollars, right when their account balance just dropped 25%. But if you understand how markets work.

Is that you would much rather have their recovery. If you don’t believe the market will ever recover and it will go to zero, well then no, you don’t wanna do it because you’re not gonna have any cash anyway.

Al: Yeah. You would never convert. ’cause what’s the point?

Joe: What’s the point? But if you believe that, you know, markets do come back and they recover all of the recovery of the market, it might take 2, 3, 4, 5 years or longer, but that recovery will now be in a tax-free environment.

Versus getting that recovery in a tax-deferred environment. So you will definitely save significantly more taxes over the long term if you’re, if you think about it that way.

Al: Yeah, a hundred percent.

Joe: Cool. All right. Good question. Like that one?

Al: Yep.

Can I Retire in 2026 and Spend $200K/yr? (Todd 54 & Margo, UT)

Joe: Okay. Let’s go to Todd and Margot from Utah.

Al: Okay.

Andi: You know that reference, right?

Joe: I do not.

Andi: Christmas vacation. They were the yuppie couple. Why is the carpet wet, Todd?

Al: Oh yeah, you’re right.

Joe: Oh, wow. That’s with Elaine.

Al: Elaine,

Andi: yes.

Al: Yeah. From Seinfeld. Yeah.

Joe: Todd and Margo. Love

Andi: I figured you’d get that one right off the bat.

Joe: Nah, I, didn’t forget Todd and Margo. Todd’s 54. Margot’s 53. We both like a good old fashioned hers without a hers, without the sweet.

It has to have the right cherry.

All right.

Al: Okay.

Joe: Now we got two 14-year-old cockapoos and a recent empty nest.

Al: Okay.

Joe: Margot retired in 2024 and Todd wants to retire in 2026. We split time between. A home in the valley and a home in the mountains. For a change of altitude and a change of attitude, Todd drives a 2025 Hyundai Palisade I Margot drives a 2020 Infinity QX 50.

Our mountain rides are a or 2002 Silverado and Todd, or that’s for Todd in a 2016 Jeep Wrangler for Margot. Here’s their situation. Primary and vacation homes are paid in full. We got three rental properties with a million dollar total equity and $1,500 a month in cash flow we have at $800,000 in a defined contribution plan with a 10 year annual payout.

A DCP plan, a $2.3 million in 401(k)s, 500,000 in Roths, $150,000 in an HSA $1.1 million in a taxable brokerage account. Two boys in college, 5 29 balances covered their undergrad. Margot plans to take Social Security at 67. Todd at 70. Combine annual benefit of 105,000. Goal is 200,000 pre-tax spending in retirement.

Can Todd retire his plan and give Margot the lifestyle she craves, or should he stay on the grind a bit longer? What would be right for Roth conversion strategy given our situation? Thanks, YMYW. We love your show, Todd and Margot. All right. They’ve done a really good job of saving close to $5 million of liquid assets at 54 and 53.

Al: Amazing. Yep.

Joe: He wants to retire in 2026. So that’s this year?

Al: That’s this year, yep.

Joe: but

Al: so I think he gotta look at it. What’s it look like right now?

Joe: Alright, so he’s, they. As long as he’s 55.

Al: Yeah, I, do think that’s, he should retire when he is 55, or at least in the year he becomes 55, which is probably 2026.

Joe: Yep.

Al: Yeah. So, Joe, I guess the way I look at it is deferred, compensation plan is an asset. Yes. But it’s gonna be paid out over 10 years. So I actually subtracted that outta the assets to get a cash flow for the next 10 years. That leaves 3.9 million in assets.

Joe: Well, what is the $80,000 is gonna get paid on in 10 years?

So I wonder what the discount rate is. What,

Al: Well, we, have payment. We have no idea. I just took straight line. Okay. Eight, 800. 800,000. 10 years. 80,000 a year. It’s gonna be different year to year. Sure, of course. But anyway, so we got 200,000 of, spend that they would like subtract 80,000.

Joe: Yep.

Al: Subtract 18,000. That’s the rental income. Yep. Net rental income shortfalls, a hundred thousand. That’s a 2.6% distribution rate on. 3.9 million. Yeah, I’m okay with that. And be, and that will run out in 10 years, but then they’ll be Social Security. Social Security will kick in pretty quickly thereafter.

So, yeah, I think this looks fine.

Joe: Yeah, I think so too. no debt, they can kind of vary their, they’re spending 200 that’s healthy.

Al: It is healthy, but the, assets and the deferred comp, plan is, pretty helpful.

Joe: Yeah. I mean, they’ve done a phenomenal job of saving them. That much cash liquid assets with no debt.

Al: Yeah,

Joe: at that age is, pretty remarkable.

Al: And they’re empty nesters, so they don’t, you know.

Joe: Yeah. Colleges

Al: paid forward. They’ve got colleges covered. Yep. I like it.

Joe: Yeah, I do too. So, yes, Todd can retires plan to give Margo the lifestyle she craves. How do you crave a lifestyle?

Andi: It’s got dry carpets.

Al: How do you crave a lifestyle?

Joe: Yeah, I just crave a lifestyle.

Al: I do. Which includes travel. And

Joe: you crave it.

Al: Oh yeah.

Joe: Alright.

Al: Yeah.

Joe: Sounds good.

Al: what do you think about the, what’s the right Roth conversion strategy?

Joe: Once he retires this year, they got the DCP plan that’s gonna give him $80,000 a year. They have $1.1 million in taxable brokerage That they can use to supplement their income. They’re gonna be in the, 12% tax bracket.

I would convert a hundred thousand dollars a year or a little bit more to get ’em to the top of the 22. and I would do that for a few years. And, I would just want to keep my taxable brokerage account in check.

I, I wouldn’t wanna deplete it. So, but over the next, I don’t know, I, would at least do a three, four year, you know, conversion strategy of at least a hundred thousand dollars.

Al: Yeah, I think that makes sense to me too. And I think. Yeah, you wait till 2027, Joe, because then he will have no other income then yeah, you could probably convert a hundred to 120, 130.

You know, you have to run the numbers, but in that range to get to the top of the 22% bracket. And just like, with, with our last, listener question, if there is a dip in the market, a correction, you could convert a little bit more in that year. ’cause you got a lot of money in tax deferred. It’d be nice to get a little bit more out than a hundred thousand a year.

Joe: But still, I mean, you could get a good chunk, seven, $800,000 out. You could r and b’s not gonna then kill you. Right. It’s not gonna pop ’em into a higher tax bracket. You can maintain that 22% tax bracket for a while and have, you know, maybe a million and a half sitting in Roth ira.

Al: Yeah. Maybe if the market dips even 5%, you go to the top of the 24 that year.

Sure. I don’t know different ways to think about it.

Joe: Yeah, and, that’s why I think. This is an ongoing thing that you guys need to be thinking about. It’s not set it and forget it. You know that his retirement date

Al: correct.

Joe: but yeah, really good shape. love the savings, love the strategy. Love the question.

Love the names

Andi: Todd and Margo’s retirement math likely works, they have two paid-off homes, and zero debt. But if you have been on social media lately, you may have seen the opposite advice: that equity sitting in a paid-off home is “dead” and you should mortgage it out and invest it. Joe and Big Al tackle that idea head-on, along with a bunch more of the internet’s worst retirement strategies, this week on Your Money, Your Wealth TV. As soon as you’ve finished watching or listening to the podcast, click or tap the link in the episode description to watch YMYW TV and to grab that DIY Retirement Guide. When you’re requesting that guide, see that “how did you hear about us” drop down? Do me a favor and choose podcast. Then do your friends a favor and tell them to get their own copy before the Special Offer changes sometime on Friday, May 1st.

How High Income Earners Can Reduce Future RMDs (Kyle & Katie, Midwest)

Joe: help me avoid a potential RMD nightmare. Hi, Andi, Joe, Big Al. I’m Kyle. A 40-year-old physician working for a state federal university hospital system in the Midwest. My wife Katie, age 38, is a private practice attorney. We file taxes separately. I plan to work full-time for til at least age 50 in between ages of 50 and 60. Would like the option to go part-time or retire. Our long time spending target is around $200,000 a year. My income is $500,000. Total University’s three 50 plus.

The VA is one 50. Katie’s is one 50. My contributions all invest in broad diversified low cost index funds. University’s self-directed pension, mandatory 8% pre-tax, dollar for dollar match of the contribution. I also max my 4 57 and the 4 0 3, in the 403(b) with the 5% match we do back to our Roth IRAs, HSA, and we put $80,000 a year into a brokerage account.

Katie’s contribution she makes 401(k) minimal match in a Roth IRA, former employer. 4 57 is 50,000 assets, me self-directed pension. 300 grand four, 57 is a hundred sixty four oh three B one 90. Former employer 403(b) 180 5. Roth I IRA one 10. Brokerage account two 70 HSA 30. Primary home is 500,000 with a $360,000 mortgage rental property, $250,000 value, $125,000 mortgage.

Currently not cash flowing. Katie’s got $200,000 in a Roth. And about, let’s call it $75,000 in 401(k)s. So total liquid assets for these individuals is what? One one and a half?

Al: Yeah. One and a half, that’s right.

Joe: Okay. One and a half million of liquid assets that’s tied between 403(b)s, 4 57 plans. Roth IRAs And a brokerage account. They also have a three unit rental property, $700,000 value, $400,000 mortgage, 10 years left. Positive cash flow. We have no debt besides these mortgages. My main question, given the high annual pretax contributions and the possibility of significant RMDs later in life, should I begin shifting some of these contributions to a Roth?

alright. So 40 years old, 38 years old, they make $750,000 of total. Income. This is what, this is my just gut reaction.

Al: Yeah. What do you got?

Joe: He’s got a 403(b), 4 57 and he’s got a mandatory pension.

Self-directed pension.

Al: Sure.

Joe: I would do pre-tax in the 403(b) and then, or, in the 4 57, and then I would do a Roth 403(b) if he has that option, which I think he does.

and then the mandatory pension, and then I would have Katie do the Roth. So you would have two Roths going and two pre-tax. That’s what I would do.

Al: Like it

Joe: at 40 and 38 years old.

For sure. You’ve got a ton of plans. What’s interesting about, state employees, teachers, things like that, they have the 403(b) and the 4 57 and a pension.

Al: Yeah.

Joe: So the pension’s pre-tax, that’s gonna come out as ordinary income. But if you have 403(b) and a 4 57, you, you, can, you have two full retirement plans there. So fully take advantage of one pre-tax and then take the advantage of the other one. Rob.

Al: Yeah. And Joe, when I do little calculations here, I just, I just wanna see, could he retire 55?

Just ’cause he said between 50 and 60. So I just picked a number, got about one and a half million to start.

Joe: He’s gonna have plenty, right?

Al: it’s a little closer than you think.

Joe: You okay?

Al: Yeah. I started a million and a half, 6% rate of return. Maybe that’s low, but 15 year, I think he’s adding about 150,000 When you add up all these various categories, including the match.

Which then gets him to 7.1 million, which theoretically he could do anything, right. But his spending at 200,000 now in 15 years with inflation is 312,000, and that’s about a 4.4% distribution rate at 55.

Joe: But he’s gonna have cash flow on all this real estate.

Al: well, and he didn’t say how much, so I didn’t add that. But I think if he retires at 55. He might need to do a little bit of part-time work just to bridge the gap. but, it’s so far out and there’s so many assumptions. It’s hard to know.

Joe: Well, he’s saving $150,000 a year and he’s got 1.5 million liquid at 40 and 38.

Al: Yeah, It’s just a though, it’s just a relationship though between what you’ve got and what you’re spending that we look at.

Joe: Yeah, of course. But. The real estate is a variable that I believe Would, will, give cash flow

Al: and, chances are, if you’re saving for 15 years, you could have it more in stocks and maybe you’re in 7% or even eight.

I’m, I just go conservative just to try to see

Joe: Yeah. They’re, in a really good spot. I like the diversification. They’re putting $80,000 a year into a brokerage account. They’re fully funding their 401(k)s, the 403(b)s, the four 50 sevens, the pension plans. They’re saving more than 120. Al,

Al: I estimated one 50, but

Joe: Oh, one 50.

Al: Yeah. The, maybe, you know, it’s just with those assumptions that I picked, so it’s, hard to know.

Joe: Okay. but yeah, I think they’re in a really good spot. 50 is gonna be a little bit, 50 could be a little bit tight, but yeah, I think 55 for sure is,

Al: and six, right in line 60 is great. 55 is probably fine. but I, come up a little short with my conservative assumptions. I’ll put it that way.

Joe: Okay.

Al: Yeah.

Andi: On page two, they actually ask if they should file separately or jointly.

Joe: I don’t know why they’re filing separately because he’s a doc. That wouldn’t have anything to do with it, I would file join.

Al: Well, I, don’t know.

’cause he’s not in a community property state, so I don’t know how to answer that question without running it both ways. You have your CP run it both ways and he could tell you, or she can tell you what,

Joe: what’s the assumption to. In a sense.

Al: Well, if, if, you’re in a non-community property state, which most are then, I mean community property, we’re familiar with, half of my income is hers, half of her income is mine, and you end up with two mirror returns with higher tax rates.

Right. That’s what we face. But in, in other places, then his income is his, hers is hers. They might be in brackets that are low enough that maybe she could do all Roth in a low bracket and do conversions, and he would do all pretax. But

Joe: that’s your state, is that state and federal.

Al: Yeah. Yeah. In other words, whatever, the state is, the feds follow for, taxation.

So I, I guess I’m not sure because, in like in California community property state, which is where I live, you have two mirrored returns. It’s ’cause half of everyone’s income is each other. So it’s. Two returns that look identical almost unless you have separate property before the marriage and it, when it’s two mirror returns, you’re gonna pay more taxes because it’s like the, married.

Tax brackets cut in half, but with, a little extra tax on top of that, it doesn’t quite work out as good. And I think the IRS doesn’t really want you to file separately to get a tax advantage. So that’s why they like lower standard deduction, you know? Yeah. Lower phase outs. Yep. Yep. Yeah.

Joe: Cool.

All right.

Al: oh, he wanted to know, Roth versus

Joe: Well continued. I didn’t know we had the exact page on that.

Al: Yeah, there is. Yeah. Yeah.

Joe: Aaron printed this out with. Double sided.

Al: Yeah. Makes it trickier.

Joe: Double sided is tricky.

Al: Yeah. I don’t like double sided.

Joe: It’s terrible.

Al: Not when we’re trying to read it on air.

Joe: No. Secondly, okay, how should I think about this? I think we’re on track for part-time or fully retired Between 50 and 60, right? Yeah.

Al: Yeah. We agree with that.

Joe: separate or joint. We don’t know. I think both have pros and cons Depending on what state you actually reside in.

Al: Yeah. You just have to have your accountant run, both the analysis and you can change year by year so you, you’re not locked in,

Joe: early retirement years.

50 to 60 as an opportunity for Roth conversions. How much each year? Thank you. I’d love to hear how you’d approach Roth versus pre-tax optimization for high income, dual professional household with early retirement goals.

Al: Yeah. Well, you already answered that.

Joe: I answered that. but conversions, how much do you wanna do?

How much does he have in non-qualified? Again?

Al: Well,

Joe: do you have enough to the gap?

Al: No, it’s too early to say. ’cause it’s. They have, two 70 right now, taxables

Andi: two 70.

Joe: He saving $80,000 a year for the next 15 years.

Al: Yeah, so it’ll be a big number

Joe: he could keep himself in. I don’t know. I would do conversions.

No, no larger than, 22% tax bracket today, whatever that equivalent is. In 15 years,

Al: I might do 24, but, The real answer is who

Joe: knows?

Al: Calculate when you get there because tax rates will probably be totally different.

Joe: Yeah. cool. Great. Hey, thanks for the questions this week. We gotta run. We’ll be back next week to answer more of your lovely questions. Great job, Andi.

Andi: Thank you. Great job to you both.

Al: And you too. You killed it this week.

Joe: Oh man. I’m tired. We’re going strong.

Al: It didn’t show you. Just like ball of energy.

Joe: Yeah. Thanks Aaron. Appreciate you staying up. We’ll see you next time. Show’s called Your Money, Your Wealth®.

Outro: Next Week on the YMYW Podcast

Andi: Next week on YMYW, when can Martha stop working full time and foster puppies instead? How can “Bandit and Chilli” and “Kevin and Winnie” retire this year? Make sure you’re following us in your favorite podcast app so you don’t miss a thing. Better yet, subscribe and watch YMYW on Spotify or YouTube. Spoiler alert, coming soon, you’ll have the option to listen or WATCH YMYW in Apple Podcasts as well!

If you’re fluent enough in YMYW-speak that you know what the Megatron is, you probably have questions of your own that go a lot deeper than a spitball can reach. You know a spitball isn’t the full picture. The full picture is what you get when you sit down with one of the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors for a free financial assessment. They’ll look at everything: your tax strategy, your investment mix, your income plan, your risk tolerance, and how you can weather inflation and market swings without losing sleep. It doesn’t cost anything. It obligates you to nothing. And you’ll walk away with a lot more clarity than you can get from any spitball. Probably a lot quicker, too. Pure has locations across the country from California to Tennessee, but Zoom works just fine if you aren’t near one. Or if you’d rather just take that call in your jammies. Click or tap the free financial assessment link in the episode description or call 888-994-6257 and get on the calendar now.

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