Show Notes

• • (00:58) Income Increased Dramatically. Should Our Retirement Tax Strategies Change? (Cookie Baron, Texas)
  • (08:59) Can I Use Capital Gains to Make Roth Contributions? (Aaron)
  • (12:12) Early Retirement Spitball: Should I Keep Gutting it Out at My Current Job? (Alligator Joe Frazier, The Sunshine State FL)
  • (18:11) Contribute to 401(k) or Buy Company Stock Before Quitting to Start a Business? (Catherine, TX)
  • (20:32) Retirement Spitball: Income is Too High for Roth Contributions (Kelly, Owensboro, KY)
  • (25:10) Retirement Spitball: Structured Settlement, ACA Credits, & Inherited Assets (Kara from PA)
  • (29:42) Should We Transfer Annuities to CD, or Defer Interest Into Another Annuity? (Norma, Chula Vista)
  • (34:00) The Derails

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Transcription

Today on Your Money, Your Wealth® podcast 417, how should your financial strategy change when your income increases dramatically? We’re talking like $450K one year to a million and a quarter the next? If you guessed Roth conversions might be in the answer you’d be correct! Joe and Big Al also spitball strategies for when your income is too high to make Roth contributions. Plus, can you use capital gains to make Roth contributions? Can Alligator Joe afford to retire early or does he need to keep gutting it out at his current job wrestling alligators? Should Catherine contribute to her 401(k) or buy company stock before she quits her day job to start a business? The fellas also spitball retirement planning involving structured settlements, inherited assets, and ACA credits, and they discuss transferring annuities to a CD vs. deferring the interest into another annuity. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Income Increased Dramatically. Should Our Retirement Tax Strategies Change? (Cookie Baron, Texas)

Joe: We got Cookie Baron from Cookie Baron, Texas.

Al: Cookie Baron. Okay. Cool.

Joe: You ever been to Cookie Baron?

Al: No.

Andi: I think this is their name.

Al: I think so too.

Joe: There’s no city- well you would think if there was a city named Cookie Baron, it would be in Texas.

Al: Yeah, that’s probably true.

Joe: All right, let’s go with this question here. “I could use your spitball. I’m 44, my wife is 46. I drive a Ram 1500, have two-year-old Italian water dog and my drink of choice is any and all varieties of beer. Our financial situation has changed dramatically in the last year. I’m trying to figure whether and how our retirement savings strategy needs to evolve. Facts. I work for a state institution and make approximately $250,000 a year.” That’s pretty good for a state institution.

Al: I’m thinking, I wonder what- is that like a professor maybe?

Joe: That’s high end.

Al: Or administrator? High end administrator?

Joe: Governor.

Al: Yes.

Joe: “I have a 401(k), 403(b), 457 plan, which I’ve always maxed out, tax-deferred. Wife is an attorney. She took a decade long hiatus, spent some time with our young kids. Then a few years ago, went back to work earning about $150,000 to $200,000. At the end of 2021, she was made equity partner and changed everything. She earned $1,000,000 last year.”

Al: Wow.

Joe: Geez.

Al: I’m not seeing a problem so far.

Joe: Oh my God. “This dramatically increase was a complete shock to us.” Okay, we’ll continue on. “In addition to her surprise income, we also invested in a small business a few years ago that is now generating $300,000 to $500,000 in profits.”

Andi: To be the Cookie Baron.

Al: Keeps getting better.

Joe: Oh my God. And a genie came down-

Al: -and said, you will live forever.

Joe: Oh, and I dramatically lost 25 pounds of fat and gained 15 pounds of pure muscle. GQ Magazine calls me weekly- All right, “In addition to her surprise income, we also invested in the business now $300,000 to $500,000 in profits. Accelerated depreciation through reinvesting in expansion means there has not been much taxable income from it. But that will change next year. Last year, between my wife and I, I maxed out our tax-deferred retirement accounts with approximately $150,000, including employer contributions. It put $200,000 in a taxable brokerage account. We also invested another $350,000 into our small business and her law firm. I’m not sure when we’ll retire, but it won’t be for at least 9 years when our boys are hopefully through college. Currently, we have $1,300,000 in tax-deferred retirement account, $350,000 in a taxable brokerage account, $100,000 in old Roth accounts. The business will probably sell for a couple mil.”

Al: Wow. Okay, good.

Joe: “We will probably continue saving and investing $600,000 to $700,000 a year while we work. We feel very fortunate.” Well you should.

Al: Yeah, I would too.

Joe: “And the skyrocketing income has come quickly and unexpected. Here is what I’m trying to figure out. If you were in our shoes-“Oh, just-

Al: Now we’re dreaming. Let’s pause for a minute. Let’s think about this.

Joe: Give me 30 seconds. Just let me just dream.

Al: What kind of car would you buy? What kind of house would you live in?

Joe: I’m just trying to figure out what shoes I’m wearing right now.

Al: Oh, you took it literally. Got it. What shoes would you pick?

Joe: I don’t know. Are they Prada? “Would you continue to shovel the $150,000 in the tax-deferred retirement accounts to shield it from the highest tax bracket? Or would you start doing some tax diversification and put as much as possible, or some percentage into Roth options in our 457, 403(b) and 401(k) plans. I’ve been doing our annual backdoor Roth IRA contributions, but my wife has an old traditional IRA with about $150,000 in it. So we can’t do backdoor Roth contributions for her unless we convert it. Should we consider converting this to Roth and paying the taxes on it now? We pay so much in tax, I hate to increase it, but I don’t wanna be shortsighted. I imagine that our current tax-deferred savings rate will be staring down the barrel of a significant, uncontrollable, ordinary income in 20 to 30 years. It may leave a tax headache to our children. On the other hand, if we retire early, we may have plenty of time to potentially convert them to Roths in lower tax rates.”

Al: Okay. Well, all right, so you’re in his shoes-

Joe: Cookie Baron’s shoes.

Al: Yeah. What do you- what are you- what are you thinking?

Joe: Well, I know what I would do.

Al: I know what you would do too.

Joe: I know-

Al: And I would do something different.

Joe: Yeah. Well see, they’re making a ton of income. They’re saving a ton of income.

Al: Yeah, they are.

Joe: I would go Roth, me personally.

Al: On everything. Everything that you can.

Joe: Everything that I can. Because it comes right out of the paycheck, right? He’s making- Cookie Baron’s, making peanuts compared to his wife. His wife making millions.

Al: That’s right. He was- he’s feeling good. I’m working for the state, making $250,000.

Joe: He’s the governor. He’s the lieutenant governor of the State of Texas. And his wife is absolutely killing the game. And then they, oh, we put a couple of bucks in this business, said, boom, it’s gonna be worth millions. So he’s got a lot of different things. So yeah, if I’m looking at a tax diversified strategy, it’s gonna be difficult to get money into Roths. He could do after-tax, I know he’s in a large tax rate, tax rates are going up. He’s gonna pay 37%. If he continues to pay $150,000- or they put $150,000 into tax-deferred accounts over the next 10 years at just a simple growth rate-

Al: It’s gonna be a lot.

Joe: It’s gonna be giant. It’s gonna be way too much money. And he’s right. There’s gonna be an uncontrollable ordinary income tax burden. And God forbid if one of them passes away early, the other one’s gonna get killed, the kids will get smoked in taxes. Tax rates are only gonna go up. I would say 37%’s cheap and he’s not gonna miss the tax break.

Al: And there’s no taxes in Texas, state taxes.

Joe: Okay, so there you have it.

Al: Okay. So can I have his shoes now?

Joe: Sure. You can have his shoes. They’re very nice.

Al: Can I put them on?

Joe: I don’t wanna give ’em away.

Al: Yeah, what I would do, I would go 100% deferred. You’re in the worst tax bracket right now- uncontrollable taxes, you’re already there. So what’s the difference? If you’re thinking you might retire, you say it, you’re gonna work at least 9 years. You’re in your 40s. Let’s say you work 15 years, so you’re 60 when you retire, you’ll have probably 15 years to do Roth conversions, probably in lower tax brackets.

Joe: I’m taking the uncertainty of taxes off the table.

Al: I understand.

Joe: Roth conversions might be off the table too.

Al: Yeah, that’s true. And what could change that for me personally is if the Cookie Baron with all this newfound wealth said, okay, I’m gonna- I’m moving to California. And now I think I would go 100% Roth, because right now you have no state taxes, so the deduction isn’t as important. If you move to California-

Joe: That’s another 13%.

Al: If you’re in the worst brackets, it’s 13.3% is right. So if that’s a possibility, I would probably go Roth now. If I was gonna stay in Texas long term, then I would probably go deferred, just like I said.

Joe: Very fortunate couple there.

Al: Yep.

Joe: Very cool. Congratulations on your new found success and fortune and yeah, keep us posted.

Can I Use Capital Gains to Make Roth Contributions? (Aaron)

Joe: Aaron writes in, I dunno, where Aaron’s from. He goes, “Hi, I have a mutual fund that was grown well over 20 years that I’ve been investing, although I have not contributing to it in over 10 years. I’m considering using the capital gains-” was this just like into our website or something?

Andi: Yes. Yeah. They sent it to info@PureFinancial.com. Which is the email address that we give on the YouTube channel and all of that.

Joe: This guy’s not following protocol. So I don’t know if we answer people that don’t follow protocol.

Al: You mean in terms of we don’t know where they live or what they drink or-

Joe: We don’t know what they’re- yeah, it’s just ‘hi, I have mutual fund.’ I have a mutual fund that has grown over 20 years. I’ve been invested. Although I’ve not contributed to it over 10 years. I’m considered using the capital gains from the fund to make contributions to a Roth IRA in the amount of $6000 per year. The tax rate on capital gains is 0% from my taxable income for the year is less than $41,000. So let’s say my taxable income’s $34,000. And I sold $6000 worth of the mutual fund. So my total income would be under $41,000, and therefore I would incur no taxes on the $6000. Can I contribute the $6000 to my Roth without penalty? Is this considered taxed at 0% or is this still considered untaxed money by the IRS? Is there any reason not to do this? Thanks for your help.” No. All the way. You have earned income of $31,000. It doesn’t matter if it’s taxed or not, you have earned income. That’s how the IRS- you pay payroll tax on it.

Al: Yeah. Yeah.

Joe: So yeah, capital gains tax, there is no capital gains tax rate if you’re in the 10% or 12% tax rate, and Aaron is in that tax rate. So yeah, you could sell capital gains to free up some cash and deposit that into a Roth.

Al: Yeah, absolutely right. So first of all, the money that you have in the capital gain account, the non-retirement account, that’s already after-tax money. And to the extent it grows, you put it on your tax return, you pay tax on gains. If your tax rate’s 0%, so be it. That’s after-tax money. So you’re totally fine there. The key here is you have to have earned income, which it sounds like you probably do. But you have to have earned income of $6000 to be able to do a Roth contribution. But that’s a great strategy. Go for it.

Remember, to give you a good Retirement Spitball Analysis, Joe & Big Al need to know the relevant details: 

• Your name, age(s), and location. The name can be whatever you like; the ages and location should be real (in case state taxes play a role in your spitball)
• When you (and your spouse, if you have one) want to retire
• How much you think you’ll need to spend annually in retirement
• How much you make and save now
• What you have saved, and in what types of accounts (401(k), Roth, brokerage, etc)
• Any other relevant financial details

Irrelevant details (to help Joe better visualize the situation!):

• Where or how you listen to YMYW
• Your drink of choice
• Your pet(s)
• What you drive

Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, then click Ask Joe & Al On Air to get your Retirement Spitball Analysis. 

Early Retirement Spitball: Should I Keep Gutting it Out at My Current Job? (Alligator Joe Frazier, The Sunshine State FL)

Joe: “Hey, YMYW team, I’m (insert cool alias here).”

Al: So I think Andi helped him out.

Joe: So yeah. Andi, can you tell the story?

Andi: Yeah, so this emailer is in Florida and in their email they say that they travel a lot. So I came up with Alligator Joe Frazier, who was one of Florida’s earliest showmen and entertainers. He put on alligator and crocodile wrestling shows in the early days of Palm Beach and Miami. He weighed 300 pounds. He was very strong and he had traveling road shows across the USA with alligators and other Florida wildlife. So there you go. Alligator Joe Frazier, here’s your question.

Al: He didn’t live that long. Alligator got him maybe.

Andi: Apparently.

Al: Weighs 300 pounds, Big Al.

Al: That too.

Joe: Alright. “I enjoy Old Fashioneds and an occasional wheat beer. My wife and I have a ferocious 20 pound miniature schnauzer and a cat that I believe is plotting my death. I’m 37 and my beautiful wife is 39. I make $150,000 a year and she is self-employed, making around $60,000. We file separately, and have about $300,000 in a brokerage account, $150,000 in a Roth IRA, $550,000 in a 401(k), and about $1,000,000 total. I’d like to retire as early as possible. My current job requires a lot of traveling, which is getting old and likely to move on soon. I’m expecting my next job to be a significant pay cut to about $90,000 a year. Our current lifestyle is about $100,000 a year with extra going towards investing in savings. I like to keep the same $100,000 lifestyle in retirement. Ideally, I’d like to have my retirement plan set before I change jobs as I won’t be able to contribute to my 401(k) like I do now. My current 401(k) allows after-tax rollovers to a Roth IRA, which I’ve been taking advantage of. I also have 4 rental properties. The rents don’t cash flow, but there is about $1,000,000 in equity between them. For Social Security, my full retirement age is 67. An estimate income will be $40,000 a year.” This guy’s only 37.

Al: I know. he’s done a great job. Alligator Joe.

Joe: Alligator Joe. “Can you spit ball our situation and what you think is the best way to set ourselves up for a prosperous and potentially early retirement? Should I gut it out on my current job for as long as possible and maximize my contributions? Do you think I should do some Roth conversions? If so, how should I go about them? When I change jobs, what should I do with my former employer’s 401(k)? Any tips greatly appreciated.” Okay, let’s- he wants retire as early as possible. He’s got $1,000,000 equity in real estate. He’s got $1,000,000 liquid. $2,000,000.

Al: $2,000,000. Yep.

Joe: He wants to spend $100,000 a year. Let’s say at 37, maybe if he retires at 40, you wanna pay what? 2% out?

Al: Yeah. We’ll do 3%. Be generous. 3%. That’s, what, $3,300,000?

Joe: $3,300,000?

Al: Yeah. So you need $3,300,000. You got $2,000,000, if you sold your rentals, which would cause taxation. So that doesn’t quite count. Or if you could turn your rentals into cash flow over the next few years. We don’t really know what ‘as soon as possible.’ Does that mean a couple years? Does that mean 10 years, 15 years? So it would help to know that. But we’ll take you at your word ‘as soon as possible’. We’ll go with yours, Joe. Wanna retire in 3 years.

Joe: Or, but let’s say his wife wants to continue to work then these numbers drastically change.

Al: Totally change.

Joe: He wants to make $100,000 a year. So let’s say at 4% distribution rate. Okay, you need-

Al: $2,500,000

Joe: $2,500,000.

Al: At 3% you need $3,300,000.

Joe: So you’re really, really close, right? So if your wife is gonna make $60,000 in her business, you wanna spend $100,000. So you gotta come up with $40,000 somewhere. So you’re gonna work part-time, you’re not gonna travel. You come up with $40,000 and then you let your properties ride. You pay down some of the debt with the rents. You’re gonna increase those cash flows there. And then your, of course, your portfolio’s gonna continue to grow. You’re 37 years old and you got $1,000,000. That thing is gonna double every 10 years. At 47 it’s gonna be $2,000,000 and 57 it’s gonna be $4,000,000.

Al: And that’s without adding to it.

Joe: Without adding the dime to it. And you only really wanna spend $100,000 a year. I think you’re in really good shape. I would, knowing those facts, I think the grind might be easier. It’s just you know what? I hate this, but I’m gonna grind a little bit more just to give me a little bit more cushion. And if anyone pisses me off or if I have a bad day, I’m gonna go tell him to pound sand and I’m outta here.

Al: Got it. Yeah.

Andi: Feed him to the alligators.

Joe: Wait till that day. So that’s interesting. So I would actually quit and get the new job because life’s too short to work on a job you don’t wanna work in.

Joe: Yeah. Why are you still here?

Al: That’s a good question.

Joe: I think we’re on the same page, Al. We just gotta keep grinding until that one day when I’m like, you know what? Okay. I’ve grinded enough.

Al: But that’s- but you know what, that’s what I- because the thing is, so let’s just say you, you take the lesser job. Let’s say you save a little bit less. Let’s say you, you could work 6 years instead of 3 or 10 years instead of two or 5 or whatever. I think life’s a journey. You wanna be happier during the journey. I think if you retire at age 40 or 45 or 50, you’ll be a little surprised-

Joe: How bored he’s going to be?

Al: – if you’ve been a grinder to all of a sudden not be grinding, it may not be quite what you think it will be. I’ll just tell you that.

Joe: Yeah. And then he is gonna get bored and then he might be even more unhappy not grinding. And it’s oh, should have been, could have been, oh, I should have just busted it out. I think he’s got some time to run the numbers. I think financially he’s doing really well because he saved a ton.

Al: He’s doing great.

Joe: He’s in the top 25%.

Al: Saved $2,000,000. 37 and 39. That’s amazing.

Joe: He’s 37. Awesome job.

Al: So there’s a lot of choices here, I guess.

Joe: All right. Great question. Good alias, Andi.

Contribute to 401(k) or Buy Company Stock Before Quitting to Start a Business? (Catherine, TX)

Joe: Got Catherine from Texas writes in. She goes, “Hi Joe and Big Al. I’ll be quitting my W2 job in a few months to start my own business.” All right. Congratulations. “I’ll not be provided a 401(k) until next year in my business.” She’s pretty strict on herself.

Al: Yeah. You’re not allowed to have one.

Joe: I put in some eligibility requirements on myself.

Al: Gotta wait a year. I gotta qualify. So first of all, you don’t have to wait a year. If it’s your own business, you can set up a solo 401(k) as long as you don’t have an employees and you can waive the employment restriction and start it right away if you want to.

Joe: I’m gonna cut myself off from all types of benefits-

Al: – cuz I don’t qualify.

Joe: – just to prove that I’m gonna be a loyal employee to myself. “Currently on my W2 job I contribute to a 401(k) and also buy company stock at a 15% discount. Should I continue to do this? Or should I stop the stock purchase and increase the 401(k) contributions to try to get close to the maximum annual contribution limits before I quit? I have a year salary along with startup cost to cover over the first year of starting my business. I DCA into IRA. Appreciate this spitball. I drive a Toyota Tundra and enjoy a nice tequila.” Yeah, Catherine from Texas likes a little tequila. Let’s see. She’s got a year’s worth of liquid cash to cover her needs.

Al: Yeah. Which I like. Starting a new business.

Joe: So should she stop the non-qualified stock purchase plan at the 15% discount and fully fund the 401(k)? Or keep doing what she’s doing?

Al: I would- I don’t know the company, so assuming the company is solvent and you feel good about the company, I personally would do the employee stock purchase plan at 15% discount. And here’s the reason, I’m getting stock at a discount. I’m allowed to keep it after I quit and if I need to sell it because I need liquidity because that first year wasn’t as good as I thought. I’m not making a profit by year two. I would like to have a little bit more cushion. So that’s what I would do.  I would keep buying that.

Joe: My thoughts, exactly. Yeah, I would put it into the stock. Keep it liquid and if you have to sell it, you have access to it versus the retirement account. Alright, congratulations Catherine. Keep us posted on your business.

Retirement Spitball: Income is Too High for Roth Contributions (Kelly, Owensboro, KY)

Joe: Alright. Kelly from-

Al: Owensboro?

Joe: Owensboro, Kentucky. “Joe, Al, Andi. First time, long time. Love the pod. Listen every day while I exercise.”

Al: Every day.

Joe: Every day.

Al: We got- how many podcasts do we have, Andi?

Andi: 417? Yeah.

Al: We’re 417. So you got a year and a few months.

Joe: “To help Joe with reading, I’ll try to keep this short and use small words.” How? Kelly.

Al: Right off the bat.

Joe: Right off the bat. Just maybe looking at this thing and I’m like, this thing is giant.

Al: Well, it is on one page. We have had worse.

Joe: “My wife and I are both 41. And we have 4 kids. Due to a recent promotion and increase in pay, 2023 will be the last year we can contribute directly to our Roth IRAs. My income is about $265,000 and extra $46,000 in RSUs. I now max out my HSA and my 401(k) and get a small match from my employer. My wife worked for the state. We use her entire income for pre-tax deductions, HSA, FSA, max out 403(b) and the balance to our 401(k). In about 4 years, the wife will use her 457 and 401(k) balances to purchase service credits to retire early from the state and will receive a pension of about $3000 a month. She says she will begin a second career, but we’ll see. We have no debt having paid off our home just recently. We live about $7000 a month. We don’t have expensive tastes. Assets: home is $500,000, rollover IRAs $175,000, Roth IRAs $75,000, her Roth $27,000, my 401(k) $57,000, HSA $10,000, her HSA $3000. Plan to work about 15 more years before heading to the golf course.” I’m in about 15 more minutes.

Al: I knew you’d say that.

Joe: “Question. What is the best approach for somewhat young investors once income makes Roth contributions impossible? Is it better to focus on converting my rollover IRA to Roth by making annual contributions (sic) as cash flow allows?”

Al: (“Conversions”)

Joe: “Should we contribute annually to non-deductible IRA and use the backdoor to convert to Roth? Should I move my rollover IRA to my 401(k)? It is a great account and good investment options of very low fees so that the pro rata rule doesn’t come into play. Or should we just focus on making regular contributions to the brokerage account? By the way, I drive a 2016 Ford F-150 and being in Kentucky, I drink bourbon. When I’m not drinking bourbon, I prefer an ice-cold Busch latte. One dog and he’s a brat. Thanks. Keep it going.” All right Kelly.

Al: Kelly.

Joe: Good questions. All right, so Kelly’s making a lot of money. He doesn’t qualify for Roth IRAs. Here’s what I would do. I’d roll my IRA into the 401(k). I would do backdoor Roth IRA. I would slowly convert my wife’s. She’s got $27,000, oh my rollover, $175,000. She doesn’t have one. So you could do two backdoor Roth IRAs, right? And then do brokerage accounts. Keep funding your 401(k)s. But if you have extra dollars that you were putting in, just do the backdoor. If you pay a couple of bucks extra in fees and you’re not in the Vanguard total US stock market fund versus a large cap growth fund in your 401(k), it’s not gonna- it’s not gonna kill you.

Al: Yeah. And you get that tax-free growth in the Roth. So that, yeah, that all sounds good to me. I think you wanna keep contributing to the 401(k). I think, Kelly, you’ve done a great job with assets, but you wanna keep that going, for another 15 years with compound interest and growth. I think that is gonna work nicely for you.

Kiplinger calls investing in a Roth account “one of the smartest money moves a young person can make” for that sweet lifetime tax-free growth on investments, but make sure you understand Roth accounts thoroughly! Visit the podcast show notes to download The Complete Roth Papers Package – you’ll receive the 5 Year Rules for Roth IRA Withdrawals, the Roth Basics Guide, and the Ultimate Guide to Roth IRAs. Now with the new SECURE Act 2.0, there are even more Roth options available, so watch our brand new webinar, also in the show notes, to find out how this new law will impact your tax strategies and your retirement planning. Click the link in the description of today’s episode in your favorite podcast app, go to the show notes, download the Complete Roth Papers Package, watch the SECURE Act 2.0 webinar, and share the show and all these free financial resources – all yours, all from Your Money, Your Wealth®.

Retirement Spitball: Structured Settlement, ACA Credits, & Inherited Assets (Kara from PA)

Joe: We got, “Hi, my name is Kara from PA. I drive a 2018 Jeep and have two dogs, a German Shepherd and a mini Poodle mix. My drink of choice, little vodka cran.”

Al: Ah, okay.

Joe: “I’m 53 and work part-time with full-time benefits. My husband’s 57, disabled, collecting Social Security disability, $25,000. He currently gets a tax-free annuity of $50,000 a year, which is good until the end of his life, but should he become deceased, it will run out the year I turn 70. I’d like to quit my job soon and use ACA credits for insurance. I’m pretty sure that we can live within this budget. Just mailed last child that lives at home- last tuition payment!!!!”

Al: Yeah, that’s a good thing.

Andi: 4 exclamation points.

Joe: Congrats. Pretty excited. “Am I correct in thinking his annuity payments, which was a structured settlement from an accident, will now count as income for the ACA credit?” For those of you who keep score, that is the Affordable Care Act. “My plan is to pause his Social Security when he reaches full retirement age until he turns 70. So his payment will increase and I may start taking mine when he turns his off. So this way his benefit will be higher for me in the case he dies first.” Okay, a little strategy there. “I have $250,000 in a 403(b), he has $160,000 in an IRA. We own our home valued at $450,000 and we have a vacation home in Florida worth $350,000. $100,000 in savings and emergency fund, receive $2000 a month from the sale of a property that we hold the mortgage. Moving forward, we plan to just saving this. There’s 24 years left on the mortgage and there will be a balloon payment at the end, $400,000. My mother just passed away and my portion from the sale of her home would be about $225,000. I should also receive stock currently valued at about $240,000. Should I leave this in stock? Or should I cash it out and do something else with the cash? Roth conversions? Love the show. Thank you for it. Looking forward to the spitball. Plus, both houses are paid for.” Did you get a question? I got one question.

Al: There’s- there was one in the middle.

Joe: The ACA credits.

Al: Yeah. Why don’t we start there?

Joe: Okay. So he’s got an annuity, structured settlement, tax-free. So she’s looking to retire soon. And does that count as income in regards to the credits?

Al: What you have to look at is your modified adjusted gross income to see if you qualify for the ACA subsidy, which by the way, for 2023 for a family of two, I’ll just go with two because one kid is about to leave maybe. The poverty rate is $18,000, but 400% times the poverty rate’s about $70,000. So if you’re under $70,000 family of two, you could get subsidies for health insurance. So that’s what Kara is talking about. Modified adjusted gross income is how you figure out are you below the $18,000 or below the $70,000, whatever it may be. You start with your adjusted gross income, which is all of your income sources, your taxable income sources, on your tax return. Then you add back non-taxable Social Security. You add back tax exempt interests and you add back foreign earned income and housing expenses if you live abroad. So I’m guessing maybe they don’t have any of those 3 things. So it’s just the adjusted gross income. This structured settlement payment, which was the question is if it’s not taxable, and I’m assuming it’s not. If it’s not taxable, then no, you don’t add it back in. It’s not an add back. But structured settlements on lawsuits can be taxable, may not. So I don’t know enough about this particular lawsuit. Because your husband’s on disability already, I’m assuming this happened maybe a while ago and so it’s non-taxable.

Joe: He’s on Social Security DI so the accident might have put him on SSI.

Al: No, I understand, but it takes a while to get that get there.

Joe: Got it.

Al: And so I’m thinking they’re already getting the structured payments, so it’s probably not taxable.

Joe: Correct.

Al: But I don’t know that. As long as the structured payment is non-taxable, it does not count for your ACA credit subsidy.

Joe: Alright, thanks for the question.

Should We Transfer Annuities to CD, or Defer Interest Into Another Annuity? (Norma, Chula Vista)

Joe: All right, we got Norma from Chula Vista. “I’m 54 years old, husband 59. I’m self-employed and he’s not planning to retire for at least 6 or 7, me, 10. We have two small IRA annuities, $86,000 and $15,000, one non-qualified annuity of about $15,000. There are no surrender charges in these any longer, however, it’s either 1.5% fixed or S&P performance caps at 3%. So I want to move it somewhere else. Is it wise to put them in another annuity? 7-year term guaranteed 1% up to 7% based on performance? I was gonna transfer them to a 11 month CD earning 4.5% but I think it’s best to defer the interest. Please advise.” We don’t advise Norma. Don’t advise.

Al: We spitball.

Joe: We spitball.

Al: We kind of think about, yeah, what would I do or what do I think?

Joe: So Norma’s conservative, she’s got some product. She wants to get out of ’em.

Al: Right. Because they haven’t paid that much.

Joe: Yeah. You have $15,000 in a non-qualified annuity. You gotta figure out what the basis is on that annuity. Because if you get out of the annuity, you’re gonna pay ordinary income tax and whatever the gain is.

Al: But it’s, she says it’s an IRA annuity.

Joe: No, there’s two. ‘I got two small IRA annuities, $86,000 and $15,000, and one non-qualified annuity at $15,000.’

Al: Got it. Yeah. Okay.

Joe: So the $86,000 and $15,000, yeah, go ahead and put those in CDs. I like the 4.5% rate. 11- yeah. Do that-

Al: And it’s tax-deferred because it’s in an IRA.

Joe: Right.  But with the $15,000 non-qualified, then it’s like you gotta- you’re gonna pay tax on that regardless.

Al: Plus penalty.

Joe: None-

Al: 54 years old?

Joe: He’s 54. I thought she, I said 50- Yeah. So yeah, you have to move it into another annuity-

Al: Unless it’s your husband’s, then he’d have to be 59 and a half.

Joe: Correct. So we need more information. So what’s the basis, first off, who owns it? Because you put it into a non-qualified annuity it’s gonna grow tax-deferred. But when the income is received, that’s taxed at ordinary income rates. The basis comes out tax-free. But you do have to be 59 and a half or older to have that triggering event. I don’t know. I think with the IRAs, I like the 4.5% CD.

Al: I do too. I’d do that all day. Or if you wanna take a little bit more risk, the market is lower than it was a year ago. So maybe stocks are on sale. Maybe not. We won’t know and-

Joe: But I would- Norma, stay out of these products that people are selling you, 1% floor, 3% cap. She’s buying indexed annuities. She’s buying all sorts of things that maybe sound good on the surface because she’s searching for yield, but she has no risk tolerance. She wants to defer the tax. She doesn’t wanna take on any risk, but she wants a greater rate of return. So people are going to prey on Norma to say, hey, you can get stock market-like returns with no risk. Why don’t you go into this particular product? And I think Norma went into those products and now she realizes after they’re on a surrender, they’re like, hey, they haven’t performed. So be careful to not fall prey to that trap again. I like the CD. You can get out in 11 months and get your 4.5%. Alright, that’s it, we’re outta here. Show’s called Your Money, Your Wealth®.

Andi: Aaron, vodka cranberry, and The Offer in the Derails at the end of the episode, so stick around. Help new listeners find YMYW! Tell your friends to follow the podcast for all the knowledge and the funny, and leave your honest reviews and ratings for Your Money, Your Wealth in any podcast app that accepts them.

The Derails

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