Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Andi Last

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

Published On
May 9, 2023

So you’re about to receive a large inheritance – what should you do with it? Joe and Big Al spitball on suddenly becoming $85 million dollars richer. Plus, is it nuts to semi-retire early? Should retirement contributions be split between Roth and traditional accounts? Can you do conversions to your kids’ custodial Roth accounts? The fellas also spitball tax bracket-based Roth conversion strategies to help you pay the least amount of tax possible, long term, and they discuss RMDs on inherited assets and whether to pay off a 401(k) loan if it’s “paying” you 8% per year.

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Show Notes

  • (00:48) I’m Inheriting Millions of Dollars. What Should I Do With It? (Michael, Binghamton, NY)
  • (07:04) Should I Split Retirement Contributions Between Roth and Traditional 457? (Kevin, Folsom, CA – voice)
  • (11:34) Should I Do 100% Roth TSP Contributions? Am I Nuts to Semi-Retire Early? (Derek, Seattle)
  • (16:30) Should We Do Roth Conversions to the Top of the 22% or 24% Tax Bracket? (Bill, Maryland)
  • (23:53) Is My CPA Correct That I Can Convert $24K to Roth Tax-Free? (Sam, Newark, NJ)
  • (26:52) Can I Convert 457 Money to My Kids’ Custodial Roth Accounts? (Brian, Binghamton, NY)
  • (32:50) RMD Rules for Inherited Roth IRA and Traditional IRA (Dan, Brick, NJ)
  • (38:48) Should I Pay Off My 401(k) Loan That’s “Paying” Me Over 8% Per Year? (Anon, Denver, CO)
  • (42:59) Comments on Keeping Employer IRA Money Separated
  • (44:46) The Derails

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So you’re about to receive a large inheritance – what should you do with it? Today on Your Money, Your Wealth® podcast 428, Joe and Big Al spitball on suddenly becoming $85 million dollars richer. Plus, is it nuts to semi-retire early? Should retirement contributions be split between Roth and traditional accounts? Can you do conversions to your kids’ custodial Roth accounts? The fellas also spitball tax bracket based Roth conversion strategies to help you pay the least amount of tax possible, long term, and they discuss required minimum distributions on inherited assets and whether to pay off a 401(k) loan if it’s “paying” you 8% per year. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

I’m Inheriting Millions of Dollars. What Should I Do With It? (Michael, Binghamton, NY)

Got Michael from Bigham.

Andi: Binghamton.

Joe: Bighamton. Bingham- Binghamton.

Andi: And we’ve actually got two Binghamton people this week. So apparently the word getting out in Binghamton.

Joe: Oh, yeah.

Al: No kidding.

Joe: That billboard I put up is finally paying off.

Al: I thought it was on the bus stop seats.

Joe: Oh, it’s that too. I’m all over the place. “Howdy there. My name’s Michael, 24 years old. I wanna say thanks for answering my question last time about what to do about just getting started with investing. My question now is a real doozy and I’d love a spit ball analysis as well. So I’ll be inheriting roughly $85,000,000 after taxes from my grandparents in about a month and a half.”

Al: Wow. That’s the first time we’ve had a question like this.

Joe: $85,000,000. That’s it. Huh? What the hell?

Al: Yeah, right?

Joe: Well, did you, you almost got written out of the will there, Michael? “I had no idea they had anywhere near this much money to begin with, so I’m not even sure what I should be doing with this. I currently make about $2500 a month net income and only have a couple hundred dollars in my retirement accounts. I also do not own any kind of assets besides my Ford Focus. What is the best course of action for me to use this money to last me the rest of my life? Should I be investing into dividends to be able to draw income from this large sum of money, or just invest it and act as if it’s not there and just let it be?” That’d be hard to do.

Al: It would.

Joe: First of all, I don’t think you tell anyone that you just inherited $85,000,000.

Al: Well, hopefully-

Joe: Because everybody’s gonna start coming from the woodwork.

Al: -Michael changed his name and his town.

Joe: Yes. So he’s got $85,000,000. Should I just ignore it? It’s really not there. Could you? How could you ignore $85,000,000?

Al: That would last a week.

Joe: Last a minute.

Al: You go into Costco. Oh, look at that big 85” TV. Let’s get the LG. Let’s get the latest.

Joe: Oh my gosh. “Or is there another approach I should be taking? Any tips would be greatly appreciated. I appreciate your spitball on this one. Thanks again. Yes, absolutely love the show. You guys are the ZZ Top of finance and retirement.”

Andi: I’m not sure what that means.

Joe: The ZZ Top. He’s 24 years old.

Al: Yeah, you and I have such long beards. And long hair.

Joe: Oh, ZZ Top. I love ZZ Top.

Al: Yeah, me too.

Joe: Okay. $85,000,000.

Al:  Well, that’s an interesting question.

Joe: Yes. Well, if it’s $85,000,000 to $85,000. To $850,000 or $8,500,000. Okay. I think you used the same approach. It’s Michael’s 24 years old, he’s gonna inherit a bunch of money. So first and foremost, you gotta understand, what are you trying to deal with this money? You know, what lifestyle do you wanna maintain? And then just be sensible. A lot of times when people inherit this or you get the big lottery winners- have you ever seen that lotto show?

Al: Yes. Oh yes.

Joe: When they just go bananas?

Al: Sure.

Joe: And then they just blow themselves up in like 24 hours. Right. The money’s gone.

Al: Oh God. And yeah. And most lottery winners, we know this as a fact, most of ’em are broke within 5 years.

Joe: Right. You know, professional athletes have a tough one time with this. They get huge windfalls.

Al: They’re just not ready for it. They’re not used to it.

Joe: And at 24 years old, that’s- that’s a ton of cash to be responsible for.

Al: Well, it is. And, so I actually almost have a word more for the grandparents or for anyone that has a lot of money. This isn’t the best-

Andi: Don’t give this to Michael.

Joe: Right.

Al: Well, I’m- maybe this isn’t gonna be popular with Michael, but- but it’s not the best way. So, so the problem- and Michael, for you, it’s like, I don’t want you to look back 10, 20 years from now and regret you got it because you didn’t- you weren’t productive, you didn’t go for the career. You didn’t- you didn’t have a need. You, you know, there was no need to really try hard.

Joe: The purpose is like, okay, well am I gonna grind at work? Am I gonna try to move up the ladder?

Al: And it’s like, who cares?

Joe: You know, your boss says one word to you. I’d be like, go pound sand. I got $85,000,000,000.

Al: Your longest employment would be 8 days.

Joe: Oh my God. Less than that. I’d just come in hot every day- just trying to piss me off.

Al: You better be nice to me, or I’m outta here.

Joe: If you happen me to do one minor thing that I don’t wanna do I’ll just walk it out.

Al: Yeah. But Michael, for your standpoint- so basically in investing, yeah, pretend like, try to pretend it’s not there. Invest for the future. Invest you know, a diversified portfolio of stocks, bonds, international, domestic. I would say if you wanna try to maybe do some mental tricks, if you will, take- have a certain amount aside, maybe $100,000 or whatever, just to get yourself a better TV and car. I know you’re thinking about it. And that- and that’s okay. But take the rest of it-. I actually heard of one attorney doing this, and I think this is kind of a cool idea and if you- if you have the discipline to do, to do it for yourself, which is this, so whatever you make, each year, $20,000, $50,000, whatever, then be able to withdraw the same amount from the money, right? $20,000, another $20,000, another $50,000. So you’re basically doubling your money, but then it forces you to have to be productive to get at this money. Now, make exceptions if you wanna buy a house or medical or education, but try to be strict with yourself and maybe even, maybe even hire someone to help you- help you with that. So it’s not just you. That’s what I would suggest if I were-

Joe: You’re pimping- you’re pimping your services, Big Al?

Al: No, I’m not. I’m just- if I was your next door neighbor and you came to me, that’s what I would say is hire someone to hold you accountable. So that you don’t go through the next 20, 30 years being non-productive and then ending up you know, just unfulfilled.

Joe: Right. Yeah. It could blow you up if you do this wrong.

Al: It could. It could, yeah.

Joe: Big time. Well, good luck, Michael.

Should I Split Retirement Contributions Between Roth and Traditional 457? (Kevin, Folsom, CA – voice)

Joe: Alright. Hey, if you want your money questions answered, you know where to go, go to YourMoneyYourWealth.com. Click on that button, Ask Joe and Al on the Air. You can leave a email or a voicemail. Like Kevin did, I believe.

Kevin: “Hey Joe and Big Al. My name is Kevin from Folsom, California. I drive a 2023 GMC Canyon. I have a 6-year-old German Shepherd mixed with a cattle dog named Hexa. Drink of choice would be an old Rasputin Stout. You guys gotta try it. So my question for you guys is I work for the state of California. I’ve been here for 9 years. I have a 401(k) with $32,000 invested in there and a 457 with $20,000 invested.  I’m just contributing to the 457 now, not the 401(k). It is currently 50% large cap, 30% mid cap, and 20% small cap, all traditional. I contribute $1200 a month to that account. And my question is, should I split it between Roth and traditional? Other investments, $55,000 in a taxable brokerage, all in the S&P 500, $32,000 in a Roth IRA in the total stock market VTI. And then some smaller accounts of $5000 to $6000, with some stock picks that I play around with. I do work for the state of California, so I will have a pension. Current cash value of that pension is $50,000. I think between all of my accounts, I have $250,000 saved. Just wanted to know the best course of action with the Roth and the traditional 401(k). Thank you.”

Joe: Alright. Raspootin Stout.

Al: Yeah. Have you tried that?

Joe: Raspootin? No.

Andi: Rasputin.

Al: I do like some stouts occasionally.

Joe: Yeah. That’s a little rich.

Al: A little dark for you?

Joe: It’s a little rich for my taste. I might have to try it. You know. Kevin from Folsom says you guys gotta try it. So, Raspootin. Okay. We’re missing some information here.

Al: We’re missing a lot of things. A couple things that’d be nice to know is how old you are and what you’re making. What your taxable income is. Then we can sort of help you further, but- so we’ll just have to make some assumptions. It sounds like he’s younger based upon the fact pattern. I- wouldn’t you say?

Joe: Yep. I would say late 20s, early 30s?

Al: Yeah, 30s is what I’m guessing. So if we make that assumption, and we we’re making another assumption, which is usually when you work for a state, you don’t make giant income. But the tradeoff is you have good benefits and pension.

Joe: Yeah. Great pension.

Al: So assuming that the salary is lower and you’re younger, yeah, just maybe flip to all Roth. Or at least a majority. Right?

Joe: For sure. I would say 100% Roth. He’s gonna have a good pension. He’s been there 9 years. He’s- let’s say if he has a 30-year career there, he’s gonna have a solid fixed income in retirement.

Al: And the pension will be ordinary income. Nothing you can do about that.

Joe: Right. And if you can sprinkle on a little Roth IRA on top of that. That’d keep you in probably a little bit lower bracket in retirement.

Al: Yeah, you bet. So I, based upon what we know, that’s what I’d say.

Joe: He’s done a great job. $250,000.

Al: Super good job.

Joe: Yeah. And I like how he’s thinking about it. But you’ve got $55,000 in that taxable brokerage. I would probably take some of that and put it into a Roth IRA. Because Kevin, you always have access to the principal. So let’s say Kevin put $6000 into VTI and a Roth account, and I don’t know, 5 years from now, he wants to take some of that money out. Well, he has access to the money, anything that he puts in. But all the- it is just gonna grow tax-free for him, depending on what he wants that money for.

Al: True. And I think a lot of people don’t really know that, which is when you do a contribution, this is a contribution, a Roth contribution, then you have immediate basis, which means you can take the money out if you need to. Now, we don’t recommend it. We want you to keep the money in for your retirement. But just to know that you can always take your principal out, which means your contribution, $6000 or whatever you contribute, you can always take that out. The earnings, interest, you know the growth, you have to wait till you’re 59 and a half for that. But the contributions itself you can get at if you need to.

Joe: All right. Thanks for your question, Kevin.

Should I Do 100% Roth TSP Contributions? Am I Nuts to Semi-Retire Early? (Derek, Seattle)

Joe: “Hey Joe, Big Al, Andi. I recently discovered your show and really enjoy listening during my morning walks. I have a long way to go to catch up to all the episodes and look forward to the new show each week.” Long way to go? Just stop now. “My wife and I are planning on semi-retiring in two years when I’ll be 57, she’ll be 61. Considering our age, I have a few questions about Roth contributions within my TSP and then how to manage the TSP after I retire. I max out my traditional TSP every year and currently have a balance of $750,000. My wife and I both have Roth IRAs for a combined amount of $300,000. We also have $75,000 in our brokerage account, another $80,000 in CDs. We also bring in about $18,000 net from a rental home, and we have $75,000 in annual pensions upon retirement. We will still carry a mortgage balance of $200,000 at $2700 a month.

Considering I’ll only be contributing to my TSP for another couple of years, should I start putting all my contributions to the Roth TSP? If I do, are they subject to the 5-year rule? And then when I retire, should I consider pulling all of the money out of the TSP and start doing Roth conversions? And then a quick spitball question.” Well-

Al: How many questions do we have so far?

Joe: Come on. He’s already 4 or 5 questions. Now we got a spitball question.

Al: Yeah. Yeah.

Joe: “Am I nuts to consider semi retiring that early? Thanks. Look forward to hearing the question on your show. My drink of choice is a good lager and I drive a 2007 Toyota Tundra.” All right, little Tundra. Got it.

Al: Cool. Where do you wanna start?

Joe: Well, we’re missing info here again.

Al: Yeah we are.

Joe: So this is Derek from Seattle. Derek, thank you for the email. But we don’t know how much money that you’re spending. We don’t know how much money that you’re making now. We don’t know what you wanna spend in retirement. We don’t know if your pension comes into play at 57 or do you have to be as older than that? So we’re missing a couple pieces of the puzzle here.

Al: Yes we are, but we’ll just go- we’ll do the best we can with what we have. Right. So, so first of all, I would say- so $750,000 in a TSP, $300,000 in a Roth IRA. That’s fairly good balance. That’s, I would say, better than what we normally see.

Joe: Most.

Al: Better than most. But it would be nice to know what you’re making now, what tax bracket you’re in, and what you wanna spend in the future to know- to give you the correct answer. So it’s-

Joe: But here- here’s where I’m at. He’s got- he’s gonna have a $75,000 pension plus Social Security for him and his wife. So that’s probably gonna get him to $100,000. His taxable income will probably be in the 22% tax bracket. The top of the 22% tax bracket today is what? $100,000- $160,000, $170,000?

Al: I was gonna say $190,000.

Joe: $190,000?

Al: Yeah. $190,000.

Joe: Okay, you’re in the 22% tax bracket, so that’s $190,000 of taxable income. I would definitely go Roth IRA. If you’re in the 24% tax bracket, then that’s where it gets a little bit dicey, but I still think Derek could be in the 25% tax bracket in the future if the Bush tax cuts expire. So I think 22% or 24% makes sense for him. So I would definitely switch it to Roth IRA. Even though you- he only has two years. Now, you could roll the Roth TSP into your Roth IRAs. You’ve already had the Roth IRAs for 5 years, so you wouldn’t be subject to the 5-year clock. And if you want to continue to convert the TSP to the Roth, I think that makes sense too. But you wanna just be cognizant of your tax bracket as you do the conversion.

Andi: By the way, you meant the Trump tax cuts, not the Bush tax cuts.

Joe: Well, the Bush tax cuts- those were tax cuts too. All right. Thank you, Andi.

To get a more comprehensive retirement spitball that takes advantage of the tax cuts regardless of who made ‘em, click the link in the description of today’s episode in your podcast app, go to the podcast show notes, then click “Ask Joe and Big Al On Air.” Send us an email or a voice message and include your name, even if you make it up, your age, and location – make sure those are real – and tell us 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, how much you already have saved, and in what types of accounts (401(k), Roth, brokerage, etc), and any other details that are relevant to your financial situation. Then tell us where or how you listen to YMYW and your drink of choice, because that’s what really matters to help Joe fully understand your situation. I would say it’ll also help him decide if he’ll have what you’re having, but I think we all know he’ll have pretty much what anybody is having.

Should We Do Roth Conversions to the Top of the 22% or 24% Tax Bracket? (Bill, Maryland)

Joe: We got Dear Joe, Big Al and Andi. I’m 65, my wife’s 63.” This is Bill from Maryland. “We’re both retired and we have plenty of income and assets to cover our needs.” Way to go, Bill. “See the asset breakdown below.”

Al: Oh, we’re gonna have a table.

Joe:  It’s gonna be up spreadsheet. Could be millions. I could already smell it. Could smell Bill’s wealth from there. “I have a pension indexed for inflation that pays me about $100,000 a year.” Oh boy. Here we go. “If I pre-deceased my wife, she’ll get 55% of the pension for the rest of her life. I will probably take Social Security at my full retirement age at January of 2024. It’s $3100 a month. We plan for my wife to take it at 70.” Okay. That’s interesting.

Al: And that’s $4100 a month.

Joe: “We do not have any extravagant lifestyles, but we would like to spend-“ $75,000 a month.

Al: That emphasis was added, by the way.

Joe: I’m kidding, Bill. Okay, we’ll start over. “We do not have an extravagant lifestyle. We would easily live off my pension-

Al: at least while you’re alive.

Joe: Yes. “-so we are set in terms of retirement Financial needs. Any money left will go to the charities and kids. Starting this year and until my wife takes Social Security in 2029, she will have essentially no income. Given this, our combined income minus deductions puts us right about the threshold between the 12% and the 22% federal tax bracket at $83,550. Do you recommend Roth conversions each year for the amount that gets us to the brink of the 24% tax bracket? Or, I know you are advocates of Roth conversions, but the jump from 12% to 22% is rather large. Further, if we were willing to convert the full amount up to the 22% tax bracket and absorb that 10% jump in the marginal federal tax rate, would converting another $160,000 up to the 24% tax bracket make sense? Since it’s only another 2%. I have health insurance don’t intend to take Medicare Part B. So IRMAA is not a concern. Any thoughts you would have would be appreciated.” Okay. We’re not recommending anything here, Bill. Let’s just get that off the table. We’re just gonna chat about it.

Al: Just talking.

Joe: Yeah. Throw a little spitball at it.

Al: Hmm. I wonder what I would do.

Joe: Just Hmmmm. You know, just a couple kids sitting around. Talking finance. All right. “Drinks. My wife and I both lived in Germany and came to appreciate German beer.” All right. That’s cool. “So our drink of choice is Pilsner, Lager, or Kolsch Beer. Pets. We got one cat named Bella. Or Bela. Our son named her and my wife assumed it’s Bella, as in beautiful. While I assume it’s Bela-“

Andi: as in Lugosi. Bela Lugosi who played Dracula.

Al: Yeah. The Count Dracula guy.

Joe: Oh, Lugosi.

Joe: In like 1930s ish. “That encapsulates our thoughts about the cat.” Wow. He’s got big words, Bill.

Al: Either beautiful or Count Dracula.

Joe: Yes. “Assets, primary residence $650,000. Rental property $350,000. Traditional IRA $3,000,000.”

Al: Okay. Now we’re, now we got some-

Joe: Now, we now-

Al: -now that’s helpful.

Joe: Oh, he’s flexing right now. He just- he’s throwing like a 200 mile fast ball.

Al: I know, but we need to know it to answer his question.

Joe: “Roth IRA is $1,500,000. Brokerage accounts $1,200,000. HSA $70,000.” He’s just- he just waited just to slam dunk that on us.

Al: He, he held back on total net worth.

Joe: Killed it. I knew Bill had some cash. You could just tell. All right, Bill. Yes. You need to do some massive conversions here.

Al: Yes. You do.

Joe: And why? I have a question for Bill. Why is he taking his Social Security at 67 when he can easily live off his pension he said? And he’s gonna make his wife wait until age 70.

Al: Well, I, I think-

Joe: Do you think it’s a personal, like, belief in the system?

Al: No, I think it’s because, I mean, one will outlive the other and they’re both gonna be great benefits, so why not just take one of ’em earlier? I think that’s a fine way to think about it.

Joe: I don’t know. I would push his out to 70 as well. Then that gives him more time to be in lower brackets. You could convert more because that’s gonna take more money off your-

Al: I think we should, run it through our Social Security analyzer- I think it’s okay. I do.

Joe: But she’s younger. So why wouldn’t he take his at 70? She takes hers at 67.

Al: Could- could flip it. I agree with you.

Joe: You would- you would get more benefit then. You would get more bang for your buck at that point. Because he’s taking his at 67 and she’s gonna wait another till 2029 to take her benefit. So he takes his at 70, she takes hers at 67. You’re gonna get more money out of the system, I think. If you both- if they both lived to- to normal life expectancy.

Al: Yeah, I’ll buy that. Okay. Onto the question?

Joe: Yes.

Al: Well, the question is yes, because here’s why. So you have- here’s how to think about it. You got $3,000,000 in your IRA that you don’t really need, right? And you’re 65, so it’s gonna be almost 10 years before you- it’s gonna be 10 years before your RMD hits. So it could be $5,000,000 or $6,000,000 at that point. Let’s just say it’s $5,000,000. So your RMD’s gonna be roughly 4%, probably more than 4% at age 75. And so, you’re gonna have $200,000 of extra income to go with everything else, right?

Joe: So you got $200,000 plus (calculate) plus their Social Security is another –

Al: So think about it that way. What tax bracket are you going to be in? And that helps you decide what tax bracket you should convert to now. And by the way, tax rates are going up again in 2026. And who knows where they’ll be in the future. Now if you’re of the opinion the tax rates will keep falling then don’t do any of this. But I think if you, if you think logically, is it, is it more likely than taxes are gonna go up than down or even stay the same? And I think most of us would say, yeah, probably because the government needs more money.

Joe: I would be interested to know how he got $1,500,000 in the Roth.

Al: Yeah, I would too. Maybe he picked Apple stock or something like that?

Joe: Or did he do a large conversion?

Al: Massive conversion at some point?

Joe: Yeah. Has he been doing conversions along the way?

Al: But if, if he did, he wouldn’t be asking this question. He’s already done it. He’s already done the math.

Joe: So I would go to the 24%.

Al: Based upon $3,000,000 IRA, I would go to the 24% any day of the week. I do it for 2023, ‘24, ‘25, 2026-

Joe: Then wait-

Al: -we don’t know.

Joe: Yeah. Then you wait 2026 to see where tax rates go.

Al: Right.

Joe: If they stay the same, if they go up, they go down or whatever.

Al: Because the 24% bracket would be 28%, at least as scheduled bracket-

Joe: He’s gonna be stuck in alternative minimum tax if it comes back to where it was.

Al: It does. With that income, which means the 28% bracket, the ALMTmin rate of 28% will feel more like 35% because you lose a deduction as you add income. So yeah, 24% is kind of almost a no-brainer. And, and you got the money to pay the tax.

Joe: Yeah.

Is My CPA Correct That I Can Convert $24K to Roth Tax-Free? (Sam, Newark, NJ)

Joe: “Hi Joe, Big Al. My name is Sam and I drive a 2008 Jeep Grand Cherokee. Drink of choice is Macallan 12 on the rocks.” Oh. All right Sam. I’m kinda into the Macallan. Tried it for the first time.

Al: Really? I don’t even know what it is.

Joe: It’s booze.

Al: I’m aware of that.

Joe: It’s whiskey.

Al: Whiskey. Okay.

Joe: “My wife and I are both retired and file married jointly. I’m 72, earn Social Security and small $300 a month pension. My wife is 68 and earns only Social Security. No other income for now. Annual combined income of Social Security and the pensions about $43,000. My wife has a rollover IRA of $350,000 and she does not need any of that money right now and wants to start converting the funds into a rollover IRA. Is there a dollar amount that she can convert up to each year in the Roth IRA without her incurring any added federal or state taxes? We live in New Jersey. Our CPA said we can convert up to $24,000 a year tax-free, but I’ve not read this anywhere else.”

Al: Here’s what I think. There’s no specific rule like that. But I think, you know what, if you got $43,000 of income and almost all of it’s Social Security, you probably have virtually zero income on your tax return. And then there’s you know, there’s roughly a, what is it? $27,000 standard deduction. Now, if you, if you do Roth conversion, it’s gonna make a little bit more of your Social Security tax.

Joe: It’s gonna blow it up.

Al: Yeah. But there is a certain amount that you could probably convert and pay no tax and- I’m giving the CPA credit for maybe he did that calculation for you. But that, that’s not a hard and fast rule. But that could be the number for you based upon the fact that you have negative taxable income right now and you add a Roth conversion and then you sort of get back to zero.

Joe: Right, because of you’re just gonna fill up the standard deduction.

Al: Yeah. I’m guessing right now, You only have $3000 of income cuz the Social Security is tax-free. And then you have a $27,000, $28,000 standard deduction. And so it’s roughly 24%. Now, maybe that’s where he got the 24%. And if that’s what it is, then he’s wrong because as you add more Roth conversion, more of the Social Security will be taxable. You really have to do a tax projection to figure this out.

Al: Yeah, but I think what Sam’s question was, is that I heard if I we could convert $24,000 a year no matter what tax bracket I’m in and I’m gonna be tax-free.

Al: Not true.

Joe: Not true- you’re in a very specific situation because your only income is Social Security benefits and if your Social Security benefit is tax-free because you have very little other income.

Al: That’s right.

Joe: But once you start adding other income to your tax return, then all of a sudden your Social Security subject to income tax.

Al: Correct.

Joe: And so when you do a conversion, that adds income. So you just gotta be careful to determine what that number is. But yes, you would be able to convert some, but it’s not a hard, fast rule.

Al: Individualized and it’s gonna be different every year.

Can I Convert 457 Money to My Kids’ Custodial Roth Accounts? (Brian, Binghamton, NY)

Joe: We got Brian from Bingham, Binginton, New York. I wonder is Brian-

Andi: I think Michael must have told his buddy Brian in Bighamton that he should listen to this show. But who knows?

Joe: Or, but now Brian knows. He’s gonna be hunting down the other dude, which has $85,000,000.

Al: Maybe it’s the same person. Just changed the name to get another question.

Joe: “Let’s go with the important stuff out of the way. I drive a 2014 Toyota 4runner. I have two boxers. I’m at the tail end of a brilliant drinking career-” Ah, Brian, don’t give up. No one likes quitter.

Al: You can’t- you can’t imagine that, can you?

Joe: The tail end? No, I’m just- I’m in my prime right now. “So I don’t drink much anymore as I wanna give my body a break from the earlier years. But when I do occasionally tip one back, it’s anything from mixed drink to a beer, wine, in the past, gin and tonic was the most popular drink of choice.” A little gin and tonic. “Love the show. Just started listening recently. And although it’s not easy to do, the 3 of you make listening about finances fun.” Yeah, because we’re half loaded.

Al: On gin and tonics.

Andi: Speak for yourself pal.

Joe: Oh “I know you get a lot of Roth questions, but mine is a little out of the ordinary. My wife has a 457 account from her working days. We’re thinking about doing Roth conversions into our Roth IRAs, but recently my daughter got her first part-time job. My son will be old enough to get his first part-time job this summer. I just opened up custodial Roth IRA for my daughter and will be doing the same for my son when he gets his first part-time job. Is there anything that would prohibit me from doing a Roth conversion of the 457 funds to their custodial Roth accounts to give their retirement savings journey a nice kickstart, get those dollars compounding early? Thanks for all the great entertaining information your team brings to the airwaves.” All right. Brian. I like how he’s gonna use his wife’s 457 plan to do this, not his.

Al: That’s true. You didn’t miss that, did you?

Joe: It’s like, yeah, my wife’s got this old account. She doesn’t- she doesn’t need it. I’m gonna give it to the kids.

Al: I’m gonna load them up.

Joe: Gonna load my kids up. She’s fine.

Al: We don’t need it. She- she doesn’t really need it. She never talks about it.

Joe: Yeah. Honey, get that gin and tonic going. Oh, let’s see. Okay. No, well, you- yes and no. You can’t convert someone else’s account into another person’s account.

Al: Yeah. That’s an absolute no.

Joe: But you can take a distribution and you could take those distributions and you could save it into their Roth IRAs. It would almost have the same effect.

Al: It would just be a smaller amount. Probably. I mean, so, so-

Joe: No. Well, it depends on how much money they- so if I do $6000 Roth conversion, but he’s gonna open up a Roth. Oh, I suppose- if he wanted to do a larger jumpstart is I guess is what you’re saying.

Al: But, but yeah, so you could use non-457 money and just open- put $6000 or put whatever earned income the kids have up to $6000 into the Roth. It can come from you into their account. You can’t take your money and convert into their account. But I think where you were going, Joe, is you could dis- it could distribute $6000 outta your account and then use that money into theirs, but you couldn’t do more than that. You’re limit- you’re limited to the contribution limits.

Joe: So if you wanted to convert more, and let’s say they, I don’t know, did he give any account balance or anything like that? Let’s say it’s a $100,000 account. He wants to give $50,000 to his daughter and $50,000 to his son. You couldn’t do that.

Al: No. But you could distribute $100,000 or whatever amount you want. And so then you got there to do the $6000 each year. If  they have enough earned income.

Joe: Right, right. So yeah, the contribution limit is earned income or $6000, whichever is lower. So if they only make $4000, then you can make $4000 contribution if it’s, or is it $6500 this year?

Al: Yeah, it’s $6500.

Joe: Yeah, I knew that.

Al: I was, as I said it I was thinking, is that right? The answer is no, it’s $6500.

Joe: $6500. All right. So hopefully that helps Brian. But by all means, the sooner that you can get money into a kid’s Roth IRA, I mean, the better.

Al: Big time.

Joe: So that’s a huge, huge gift for them.

Al: And that’s a good tip for any parent when they have younger kids, open up a Roth account. And if you’ve got the wherewithal to do this, go ahead and- and fully fund it up to their earned income as high as $6500.

Joe: Correct. Yeah. And there’s no age limit, right? So if they’re 12 years old, I don’t know what child labor law rules are, but-

Al: They could be a-

Joe: A child actor or something.

Al: Yeah, they could be a baby model.

Joe: A baby model. Yeah. That’s my kid. Sure.

Al: How much has your kid made? Probably a lot, right?

Joe: Tons. Tons.

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RMD Rules for Inherited Roth IRA and Traditional IRA (Dan, Brick, NJ)

Joe: We got Dan writes in from Brick New Jersey. “Dear Joe, Big Al and Andi. I have been a listener to the Your Money, Your Wealth® Podcast for about 5 years.”

Al: Wow. Another long-term listener.

Joe: Jeez. Ring the bell. Dan from Brick. You ever been to Brick?

Al: No, but that’s a great town name, I think.

Joe: Oh yeah.

Al: I was just in Boston. A lot of brick buildings there.

Joe: “Finally have a topic about my finances that would be of interest on your show. I drive a 2016 Mercedes-” See he’s been listening to the show for 5 years. Of course, he’s got a Mercedes. “-and a historic 1997 Saturn that I inherited from my mother. I enjoy IPAs, including the non-alcoholic type.” Oh, I don’t know why you would put yourself through that torture. “My father and mother passed away in 2021 and ‘22, respectively, at ages 84 and 78. They both had traditional and Roth IRAs and started to take their RMDs. My sister and I were the designated beneficiaries with 50/50 split. We distributed the RMDs in ‘21 and ‘22 as our parents would have using their life expectancy tables. The guidance at the point seemed to be that we could take distributions of any size or skip them as we wanted at any years as long as the IRAs were fully distributed by the end of the 10th year.

However, my understanding of this has changed when I found that the IRS had issued notice 22-53-“ It’s a notice. It’s not law. They’re still not clear on this RMD-

Al: It’s so confusing.

Joe: It’s still not law.

Al: I know. Because they waived the RMD for 2021 and 2022, and they’ll probably waive it for 2023 because they’re still- still don’t have, they’re still no clearance.

Al: I’ve read they’re not gonna waive it for 2023, but who knows? Right? And, I’m not sure they waived it for 2021 and 2022, it’s just that there’s gonna be no penalty, which I guess is like waiving it.

Joe: Yes. You’re still gonna have to distribute the, the account out within 10 years. But is it gonna be based on their life expectancy or was it before or after the required beginning date?

Al: Completely different. How could any layman understand- even we’re having trouble with this?

Joe: “I understand that this notice says we have to take RMDs, but are exempt to ‘21 and ‘22 because of the rules weren’t just issued. It appears that we have to take RMDs at 2023. I’m trying to figure out the amount I need to take for myself. I’m having trouble finding the answer.” Yeah-

Al: You are.

Joe: Welcome to the club. “My custodians like Vanguard and Schwab because their RMD calculators don’t seem to cover this situation.” Yeah, because no one has covered the situation. He’s prudent though, man. This guy on top of it.

Al: He wants to do the right thing.

Joe: He’s like, man, I gotta get this money out. I don’t want that penalty. “I think I’ve gathered that I take a distribution based on the fair market value of the IRA of December 31st of the previous year.” Okay. Yes, you are correct there.

Al: Yep.

Joe: “And then applying divisor, the divisor was from a single life table and based on the age I turned during the year after each of my parents passed away. I turned 52 in 2022, the year after my father passed. And the divisor was 34.3, I subtract one for the additional year and used 33.3 for the divisor for the 2023 RMD.” I think you’re good. Dan.

Al: So let me just say, Dan, your understanding is consistent with mine as well, although I agree with Joe. It’s not exactly clear yet, but that’s- that’s what it seems to say right now is if your- your RMD required minimum distribution, you only have to do it if your parents or the person that owned the IRA had started his RMDs already. In other words, after the required beginning date, which is April 1st of the year they turn either 72 or 73 or 70 and a half.

Joe: Okay. “Similar to my mother, I’m turning 53. Okay, so it’s the same divisor. I’ll have to subtract, blah, blah, blah, blah. Okay. Does this seem right to you?” Yes. We talked about that. “Additionally, do these rules for distributions apply equally to the inherited Roth and the traditional IRA? I’m getting conflicting information when I try to look that up. I’m eager to hear your discussion on this topic on a future podcast.” Yes. All inherited accounts have a required minimum distribution. So if it’s a traditional IRA, if it’s a Roth IRA, if it’s traditional 401(k), Roth 401(k), whatever, they have to be distributed out. So yes.

Al: Within 10 years. But at least currently if you inherit the IRA before the individual’s required beginning date, you don’t have to do an RMD. You can do it all in the 10th year.

Joe: And I still think it’s still not clear. But if I was Dan, because he’s a, it sounds like, alright here, I don’t want to do anything. I want to just get the money out. Just take a look at, okay, well how much money did he inherit? First of all, right? Just to divide the thing. You can use the divisor. I’m totally fine with what he’s currently doing. Just take the minimum out there. You’re going to be fine. And as long as the account is depleted in 10 years. Let’s say they go back and they try to penalize it. You could easily probably apply for an exemption of saying, Hey, you guys, these rules were so unclear.

Al: I can tell you, based upon history, they will not penalize anyone on this cuz it’s unclear. They just won’t.

Joe: All right, Dan. Thanks for the 5 years, buddy. We should- you should give people gifts. They’ve been listening to this garbage for 5 years or more.

Al: Well, we should, or at least at a minimum, we should have a bell, just like you said.

Joe: Yeah, we could give ’em a gift basket.

Al: Yeah, we could.

Andi: I’ve been aiming for t-shirts for a long time, but Joe says, “no they have to be very specific T-shirts.”

Al: Okay. I like that idea.

Joe: Little fan favorite, little, maybe coffee mug or something?

Al: Yeah. Yeah. Hopefully it’s not broken by the time it gets to you.

Joe: Well, Brick, New Jersey. That’s a long ways away.

Al: It is.

Joe: All right.

Should I Pay Off My 401(k) Loan That’s “Paying” Me Over 8% Per Year? (Anon, Denver, CO)

Joe: We’re on…

Al: Page 5, right?

Joe: Okay. “Please don’t share my name on the show.”

Al: We don’t have a name.

Joe: “I hope you’re doing well. I currently live in Denver, Colorado.”

Al: Okay. I’m gonna call you Denver then.

Andi: Joe’s taking on a whole new voice for this one.

Joe: I just like how these start with, please don’t use my name on the show. There’s only 6 people that listen to the show. “I’ve been listening to you since 2019.” Well, wow. Are we asking people now how long they’ve been listening to the show?

Andi: No, not at all.

Joe: Oh, wow.

Al: So that’s, that’s 4, 5 years. Look at another one.

Joe: Yeah. I’m not gonna use your name. Don’t worry about it.

Al: We don’t know it, so that’s good.

Joe: “Married with three kids, 11, 13, and 15.” Their Social Security numbers are-

Al: You can say their names-

Joe: Johnny, Susie-

Al: – and Peter.

Joe: “Regarding my financial planning, I max out my 401(k). I max out IRA, backdoor contribution. Here’s the question, I borrowed from my 401(k).” Oh, now I know why you don’t want us to use your name. How dare you borrow from your 401(k). “So $50,000 in 2016. For 25 years, I’m paying to myself about 4.5%. I currently have cash to cover over 6 months expenses, plus another $40,000. Cash earnings are 4%. I feel that the setup is paying me over 8% a year. Money that if I don’t pay to myself, I would be spending in a different way.” Oh, well forced savings is what he’s doing here.

Al: Yep.

Joe: I also know that in the long term, the 401(k) would perform better if the 401(k) is paid off-“

Andi: $40,000-

Joe: -$40,000 loan is paid off. Am I thinking about this correctly? Should I just pay it and be done with this? I love your show. Thank you.”

Al: Don’t use my name now.

Joe: Yeah. I love your show, but if you even think about talking about me-

Al: Well, so, okay-

Joe: Pay it off.

Al: Well, of course pay it off. It’s silly. But you’re not earning- I don’t count the money you’re paying yourself as earnings. That’s just taken outta one pocket into another. You’re making 4% is what you’re making.

Joe: Correct.

Al: So get the money back in there. You’re gonna make more than 4% in your 401(k) over the long term. And so you’re shorting yourself with this kind of- and you’ve got the money to do it. So, yeah, and, and I would say, borrowing from your 401(k), that’s for emergency. No other choice, not an investment plan.

Joe: So here’s what I would do. I would pay it off and then max out your 401(k) because he’s like, I’m paying back this loan. And so I’m paying myself interest on the loan because the loan is charging me 4.5%. But I’m paying myself back, so I’m making 4.5%, and I’m also making 4% on my CDs. So I’m getting 8.5%, which you’re really not.

Al: That’s kind of funny math.

Joe: It is. Pay off the loan and then max out the 401(k). And if you can’t max – Or because I get what he’s saying, Hey, I could, I’m gonna take this money. I might spend it. Or he wants to do some other forced savings and he feels like he’s making a- this is called that confirmation bias or what were we talking about earlier?

Al: Yeah, confirmation bias.

Joe: Or maybe he’s just thinking about it a certain way-

Al: Talking to people to try to make sure he is doing the right thing. And we’re saying no. It doesn’t count if you’re paying yourself. That’s not really earnings.

Joe: Correct. I just took out a loan for myself. And I’m charging myself like 16%.

Al: I’m making a lot of money.

Joe: I’m killing it right now.

Al: It’s like a required minimum distribution. It’s not- it is income on your tax return, but it’s not really income. It’s just taking outta one pocket and putting it in another.

Al: Yeah. How much are you making on your investments? 16%. How do you do that? Well, I loan myself. And I charge myself.

Al: I decided to do a high loan- high-interest rate.

Joe: Oh yeah, I’ve got bad credit. So I really had to jack up my rates on myself. Yeah, right. Alright, thanks for the question.

Comments on Keeping Employer IRA Money Separated

Joe: We got a lot of comments of-

Al: Of what we did wrong?

Joe: No. We’ve already discussed this in the past. Is that, if a rollover 401(k)- if a 401(k) goes into an IRA, do you still have the same protections because it came from a 401(k)? And so everyone is blowing us up of saying “no. You wanna keep that as a separate IRA just so you can track it in case they get sued.” So thank you all for writing us those several emails of telling us how bad and stupid we were.

Al: And it does depend upon the state you’re in.

Joe: True.

Al: The rules are all different.

Joe: Yes. We’re not attorneys.

Al: Nope.

Joe: We’re barely financial advisors. All right. That’s it. Thanks Andi.

Andi: Thank you.

Joe: And we will see you guys next week. For Big Al Clopine, I’m Joe Anderson. You just listened to, what is this? Your Money, Your Wealth®

Andi: Sorry you found us, non-alcoholic reasoning, German beer pronunciation, Joe’s knowledge of Dracula, and my research skills in the Derails, so stick around. Help new listeners find YMYW by leaving your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and any other podcast app that accepts them.

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The Derails



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.

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