Asset location strategies, liquidity, and building up tax-free Roth IRA money when retiring early, how growth is taxed in taxable accounts, the pros and cons of rolling an employer retirement plan into a traditional IRA, how stock futures are determined and why stock price matters, and buying 8-week treasuries. And, if you’re planning to make a killing on eBay or at your next garage sale, the fellas get into the weeds on how to maximize your tax savings.
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- (00:56) Comment: Finished Binge-ing Every Episode! (Mark)
- (02:39) How Are Stock Futures Determined? Why Does Stock Price Matter? (Michael)
- (08:05) Asset Location: Should We Save $70K/Year to Roth IRA Before Early Retirement? (Renee, Nashville)
- (20:29) Pros and Cons of Employer Retirement Plan to IRA Rollover (John, TX)
- (24:38) How to Maximize Tax Savings When Selling Old Junk at a Loss? (Daniel, Ohio)
- (29:22) Should My Wife Open a Roth and Start Doing Conversions? (Buddy, San Diego)
- (35:32) How is Taxable Account Growth Taxed? Should I Buy 8-Week Treasuries? (Jerry, Boca Raton, FL)
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Listen to today’s podcast episode on YouTube:
Today on Your Money, Your Wealth® podcast 408, Joe and Big Al discuss asset location strategies, and focusing on liquidity and building up tax-free Roth IRA money before an early retirement. Also, in no particular order, how exactly growth is taxed in your taxable accounts? What are the pros and cons of rolling an employer retirement plan into a traditional IRA? How are stock futures determined, and why does stock price matter, anyway? Is buying 8-week treasuries is a good strategy? And, if you’re planning to make a killing on eBay or at your next garage sale, the fellas get into the weeds on how to maximize your tax savings when you sell your old junk at a loss. Visit YourMoneyYourWealth.com and click Ask Joe and Big Al On Air to send in your money questions via email or priority voice message. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Comment: Finished Binge-ing Every Episode! (Mark)
Joe: Happy holidays, everyone. Let’s get right to it, Andi. Do we got- is this a recording or is this- or do I read this?
Andi: We do have a recording. We can hit that one right off at the top. Here we go.
“Hey, everyone, this is Mark. I live in San Diego. I’m 32 years old. I work in a shipyard, and my drink of choice lately has been O’Douls, but I can’t argue with a good cold Coors Lite. I ride a 1974 Centurion Road bicycle. But for fun, I have a 2019 Yamaha MT10. I don’t have any financial questions. I’m just calling to let you know that I finally finished every episode available on iTunes and how much I love this show. I recommend it to everyone. I think you’re doing a great job. Keep it up.”
Al: How about- every one? That’s probably a first- that we know of.
Joe: No wonder why he’s drinking O’Douls.
Andi: That’s 407 episodes he’s listened to.
Al: A lot of concentrating.
Joe: Just sobered him up.
Al: You know how funny- so I had a Centurion road bicycle in 1974.
Joe: You did? And you were, like, 52 years old riding it?
Al: No, I was a kid. But yeah, I remember having that bike. It was white. It was a really cool road bike. One of those with the curly- the handlebars where you had to lean over.
Joe: Yeah, yeah.
Al: Yeah. Really like that thing. And Mark is 32, as my son is 32, so I’m guessing it’s his dad’s or his mom’s old bike.
Joe: Oh you know, he might go to a little antique shop, too.
Al: Maybe. Maybe so.
Joe: Well very cool. I wasn’t expecting that. I should probably be even a little bit more prepared. I thought that was a question. Well, every episode. So thank you very much for supporting us.
Al: That’s pretty good.
Joe: I really appreciate you spreading the word there for, you know, Your Money, Your Wealth® followers.
How Are Stock Futures Determined? Why Does Stock Price Matter? (Michael)
Joe: So let’s dive into this one here. This is Michael. “I enjoy your presentations, and you keep me informed and laughing. I drive a Toyota Sienna minivan. They drink most anything.” Love this guy.
Al: That sounds like you.
Andi: I was going to say a man after Joe’s heart.
Joe: “Could you answer the following? How are stock futures determined? Other than the market open, futures seem to have no relevance to stock prices later in the day. Who determines futures?” Oh, boy. Do you got your CFA hat on there, Big Al?
Al: CFA, yeah. We got Robert Noak and Brian Perry of Pure Financial, that helped us out on this, Joe, because the answer is we don’t know.
Joe: Yeah. Derivatives. I mean, it’s a very complex security.
Al: It is.
Joe: It follows closely because it’s overnight trading. So you’re not buying the actual index. You’re not buying the stock. You’re buying the derivative of the S&P 500, let’s say.
Al: So, yeah, S&P 500 future is- follows the index, and it basically I think people watch it when the market closes to open to try to figure out where it’s going.
Joe: But it has very little revelance. Revelance.
Andi: It’s got a little revelence, too.
Joe: It’s got some revelance. Very little relevance later in the day. So you look at what people are doing overnight, what are they buying, and things like that. So it’s kind of a trending mechanism, probably for the open. So it’s tied somewhat closely. But, yeah, if you’re trying to look at the futures and trying to get in right in the morning and think it’s going to go up, you’re probably already too late.
Al: Probably, yeah. And I’ll read the first couple of sentences of what Robert and Brian Perry wrote. They said “They’re derivative securities, which means they derive their value from another asset. So, for example, S&P 500 futures derive their value from the S&P 500 index. They both move hand in hand. So if the S&P index closes up 2%, the futures will also close up around 2%. Not exactly, but around 2%. But the futures also trade after the stock market closes. So overnight and before the market opens, the futures give a good indication where the actual cash index will open, which is basically the link between the futures and the market.” Right. So I think that’s a good enough summary.
Joe: Yeah, I think so. He’s got another question here. He goes, “Why does the company care about the stock price? Haven’t they already sold the share? Other than employee compensation being tied to the stock price, what is the relevance-” See, he likes-
Andi: Well done.
Joe: “- to the company? I must be missing something, but it seems similar to me selling my car and then worrying about the value. I appreciate your show. Thank you.” Well, a couple of things in regards to the stock price, a lot of companies hold their own stock on their balance sheet. There’s a lot of stock buybacks that you might have heard of in recent years. But I think he hit the nail on the head is that a lot of executives are compensated via the stock. There’s restricted stock, there’s stock option plans. There’s all sorts of different things that people or companies want to get their employees involved a little bit more in the overall success of the organization. And so they reward them with stock. And if the stock price goes up, well, their compensation will go up in regards to whatever executive type compensation plan that they have.
Al: Yeah, exactly. Right. And many companies have plans for all employees. So all the employees have restricted stock units or at least the key ones, or stock options. So the employees have a vested interest in having this thing grow. Now, of course, the other part of this is it’s kind of a scorecard, right. Especially if you’re an executive.
Joe: For sure. If you’re the CEO of the company and the stock market dies, if they’re fired-
Al: How are you going to get another job? Right?
Joe: You’re done.
Al: Let’s see what you did for this company. Forget it.
Joe: Right, but that’s a really good point, because once a company goes IPO, it’s like they raised the capital and then now the stock is on the market and other people hold that stock. But even though companies still own their own stock, but the majority of the stock is already distributed out of the company. So it’s a really good question. It’s like, well, why would they care? Well, there’s many reasons why they care.
Al: Yeah, but here’s a good point, as you say, IPO. Was that? It’s-
Joe: Initial public offering.
Al: Thank you. Okay, slipped my mind for a second. So in other words, the company does an IPO-
Joe: – because they want cash.
Al: They want cash, right. So a whole bunch of people buy shares in their company, and the money comes into the company. And the company uses that money to hire new people or R&D or something like that, to build for the future. That’s usually what it’s for. And in some cases, some of the key people take liquidity, they take some shares off the table. So that’s part of it, too. But so typically, once the money comes into the company, it’s all done. And so now one person A is selling to person B that has nothing to do with the company. So the question is, why should the company care? And the reason is because of compensation issues for key employees and sometimes all employees.
Joe: Right. Well, you look at Bezos, you don’t think he owns- he owns a little bit of Amazon.
Al: Yeah. And do you think he cares?
Joe: I think he cares.
Al: I think so.
Joe: I think he cares. All right. Really good question. Thanks for that.
Asset Location: Should We Save $70K/Year to Roth IRA Before Early Retirement? (Renee, Nashville)
Joe: I got one coming in from Nashville, Tennessee. “Hey there. My name is Renee, and I drive a sexy 2015 Honda Odyssey.”
Al: You kind of visualizing that?
Joe: Yeah, sexy. “I also enjoy a cold Mich Ultra from time to time.” Not a big fan of Mich Ultra.
Al: I like those.
Joe: Really nothing there. I like Coors Lite. Coors Lite is nothing there.
Al: I will say there’s not much flavor.
Joe: Sparkling water. “Got a question for you, but first, a little background. My husband and I are 45. Combined gross income of $280,000. In addition to my mandatory DCP plan through this university, we max out his 403(b) and my 401(k) with pre-tax dollars. He maxes out his 403(b) with Roth contributions. With the addition of my traditional IRA from a previous 401(k), we have about $900,000 in tax-deferred assets with about 85/15 allocation.” So 85 stock, 15 bonds, I’m guessing.
Al: Yeah, me, too.
Joe: Okay. “With his Roth 403(b), HSA max and 529 plans, we have about $1,200,000 total investments, with only $20,000 of that in a brokerage account that I just recently started. If all the stars align, we wouldn’t be opposed to retiring at 55, but could easily go part time if needed. No debt except $100,000 in the mortgage. We will be paid off in about 4 years. We got $40,000 in the money market, two boys that will be going to college in 6 to 10 years. I just discovered your show, which is amazing, by the way. Thank you. And I’m now second guessing our retirement fund location due to RMD and lack of liquidity if Roth conversions come into play in the future. Would love a spitball analysis on if we need to pump the brakes on that tax-deferred and concentrate more on liquidity and Roth. I obviously want to get the employer match, but thinking we may need to switch gears. After the new year, I will also have access to additional after-tax option that can be converted to a Roth within my 401(k). So to recap, we contribute $70,000 per year.” That’s a hefty sum there. “We got his 457(b), which is pre-tax, his 403(b), which is Roth. She’s got her 401(k) employer match up to 6% traditional pre-tax, with an option now to contribute to Roth. This new after-tax option within the 401(k).” So that’s going to be the megatron backdoor barnyard Roth conversion. We got a little brokerage backdoor Roth for him, not counting his mandatory DCP in that $70,000.” Okay, so they got $70,000 that they’re saving. I guess the question is going to be where should they be allocating that-“
Al: I think so.
Joe: “-cash flow?”
Al: Let’s see.
Joe: All right. “If I want to go ahead and start those Roth conversions this year, I just want to make sure I’m good to go with the pro rata rule. I have a traditional IRA that has funds strictly from a traditional 401(k) rollover. Pro rata doesn’t apply here, correct?” Yes. Because it’s in an IRA.
Al: Yeah. Incorrect. It applies.
Joe: It applies. Yes. “Additional information to add it if needed. We have $400,000 in equity in house. We’ll probably need around $100,000 in retirement income. No pension. I think I left those details out. I stumbled across the podcast when Googling a question regarding retirement two weeks ago. I’ve been binge listening ever since and spreading the word. You guys are awesome” Much appreciated.” A little Google search. And Big Al comes up.
Al: We came up on a Google search. How about that?
Joe: That’s crazy.
Al: Ever Google yourself?
Joe: I’ve never. Could be some pictures up there.
Al: Could be.
Joe: All right, so she wants to do some Roth conversions. You know, they’re saving a ton of money, and then it’s like okay. They want to retire in a few years. She’s 45. They want to retire at 55. They have roughly $1,000,000 in assets, and so they got a 10-year window. And so they’re thinking, hey, should we start converting now or where should they be putting the $70,000? All right, well, what’s your stab there, Big Al?
Al: Well, let’s see. So they’re saying the income is $280,000. And assuming there’s roughly a $30,000 standard deduction just to make the math easy. So that’s about $250,000 of taxable income. The top of the 24% bracket, married couple is about $340,000. So in other words, there’s about $90,000 of room in their current bracket to stay in the 24% bracket.
Joe: But they’re also- well, don’t forget the contribution. So minus $40,000.
Al: That’s true. That’s true.
Joe: Because he’s doing 457 tax-deferred and her 401(k), tax-deferred. So that’s another $40,000. That’s $60,000 – So call it $210,000.
Al: Yeah, okay, we’ll call it $210,000. So we probably have- call it $130,000 of room. To be able to do conversions.
Joe: $130,000. But what’s the top of the 22%?
Al: Top of the 22%, is $170,000. Yeah. I see where you’re going, and I like it.
Joe: So if they continue to contribute pre-tax and then they could convert to the top of whatever bracket, they can get a little bit more precise with not going into higher brackets. Because there is no AGI limitation to make Roth conversions, and the conversions that you make will not affect your Roth IRA contributions.
Al: Right, that’s true.
Joe: So here’s, just spit balling here, top of my head. Is that I would have the husband fully fund the 401(k) pre-tax. I would have her fully fund the 401(k) pre-tax. Then I would do the 457 pre-tax, get the taxable income down as low as you possibly can. Then I would convert her IRA up into the top of the 22%. Or if she wanted to go into the 24%, she could do that too. But at least there’s going to be a lot of room in the 22%, I think.
Al: Well, wait a minute. No, we’re $100,000 off. They’re $280,000, the top of the 22% is-
Joe: Oh, I thought it was $180,-
Al: – is $170,000. $280,000 minus – I mean, we’re probably going to get to $220,000. let’s just say, if everything goes in Roth. So we’re in the 24% bracket.
Joe: Got it. So either way, let’s say they switch everything to Roth they’re in the 24%. If they stay pre-tax in the 24%.
Al: Either way. So is it a good idea to convert? Well, you can do this two ways, right? You can either convert what you already have or you can have your current dollars from your pay, go into a Roth, which is kind of the same impact.
Joe: So the pro rata rules is that even though it came from a 401(k) plan and let’s say you wanted to do a backdoor Roth, well, if you already have an IRA, even though it came from a traditional 401(k), since it’s in an IRA, they’re still going to count that as the pro rata rules. But what you could do is you move that IRA into your 401(k), existing 401(k). So you rolled it from a 401(k) into an IRA. Now you take the IRA, move it into your existing 401(k), and now you do not have any IRAs. So you would then be eligible to do a backdoor Roth contribution if you wanted to. Then you would also be able to do conversions. But I would be careful with that because depending- she’s only 45 years old. So if I roll all of that money into the 401(k) plan, it’s going to be hard for me to probably convert it out unless I do an in-service withdrawal, which I probably have access to because it’s rollover money going into the plan.
Al: Yeah. And it depends upon the plan. It is easier to convert when it’s your own IRA into a Roth. But many plans that have Roth options and even most maybe, have a conversion opportunity. So you got to check that out. But I guess a couple more things I’m thinking is the fact that they’re 45, they want to retire 55. RMDs. Required minimum distributions, won’t start till age 72. So there’s a lot of time to get this money in. On the other hand, another way to look at it is they’re young. And if it stays in the deferred and they keep adding to the deferred, by the time they get to 72, it’s going to be a gigantic number.
Joe: Right. I just did the math. It’s going to be about $3,200,000 in all deferred.
Al: Yeah. Yeah. So I’m with you. They’re in the 24% bracket, which is not a bad bracket. Especially with-
Joe: At 45, compounding tax-free growth is key.
Al: You look at how much they’ve already saved at this age. You look at they’re going to have the retirement plans from the university in addition to their own savings. You look at that they’re young. All the growth on that. The only tricky part, Joe, is there’s very little money to pay the tax.
Al: That’s the mitigating factor here. You got to figure out how to afford it, too.
Joe: So I think the easiest way to do it is to switch everything into Roth. I would go 100% after-tax and convert that. Because that’s all contributions. There’s not going to be a tax bill at the end of the day. So if you’re making Roth IRA or Roth 403(b) contributions, you’re doing your Roth 401(k) contributions, you’re still going to get the match in the 401(k). Just the match is going to be pre-tax.
Al: I like that too, because then out of sight, out of mind, you don’t have to worry about the tax.
Joe: You’re not going to have a payment big tax bill.
Al: Unlike a conversion. You got to be able to make that tax payment.
Joe: So then they have, let’s say $40,000, $80,000. Well, she has a brokerage account because she wanted the liquidity. So you have a little bit of money there to pay the tax. So maybe you slowly start converting some of this stuff out, and you use up some of the brokerage account to pay the tax.
Al: The only other thing I would say and it wasn’t a question, but I’ll just make it anyway. If your kids are going to be going to college at the same time you retire, I can just tell you from experience that sometimes doesn’t feel the best because all the savings seems like it’s going to pay for college. So you might want to think of working either full time or part time while they go to college. Just my thoughts.
Joe: All right, well, thanks for the question, and thanks for the new listenership, Renee from Nashville.
In which types of accounts you save for retirement matters! Properly locating those assets between taxable, tax-deferred, and tax-free accounts can reduce how much tax you pay, thus improving the returns on your investments. Get our free guide on Why Asset Location Matters in the podcast show notes at YourMoneyYourwealth.com – just click the link in the description of today’s episode in your favorite podcast app. If you still have questions, click the Free Assessment banner in the podcast show notes and schedule a comprehensive analysis of your entire financial plan with one of the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors. It’s free, just like the podcast, but it’s also a comprehensive, one-on-one, deep dive into your financial situation, tailored specifically to your needs. Schedule your assessment now, before the year runs out!
Joe: Andi’s playing hurt today.
Al: She is. Got the low voice going, Andi.
Andi: Yeah, Aaron said that I sound like Lauren Bacall, so I’ll take that as a compliment.
Joe: Lauren Bacall.
Andi: That works for me.
Al: I can see that. A little bit of that.
Joe: No idea who Lauren Bacall is.
Andi: Oh, my gosh.
Joe: Who’s Lauren Bacall?
Andi: She was a famous actress. She acted with Humphrey Bogart quite often. So they were back in the ‘40s.
Al: Way back when you were in kindergarten.
Joe: Yeah. I’m gonna be watching that this week. And I had an MRI today.
Al: Yeah. I’ve not had one. I understand they’re awful.
Joe: I got to admit, that was probably the worst 20 minutes of my life. Almost as bad as this show.
Andi: You guys are such lightweights. I have so many MRIs every year. Not a problem.
Al: Oh, yeah, you’re used to it.
Al: I never had one, Andi, so I don’t even know.
Andi: Oh, wow. I’ve had enough for all of us.
Al: I’ve heard from people like Joe that just said worst 20 minutes of their life.
Joe: Give ya this little button. He’s like, man-
Al: Is it like a panic button? Push if you got to get out?
Joe: Yeah, if you got to get out, push this button. Like 30 seconds in, I was like, oh, my God. I’m pushing this damn thing. Get me out of this thing.
Al: Got it.
Pros and Cons of Employer Retirement Plan to IRA Rollover (John, TX)
Joe: All right, let’s go. We got John from Texas. He goes, “Hey, which episode number did you guys discuss advantage/disadvantages of doing a rollover from an employer plan to an IRA?” Many. But let me just quickly tell you the pros and cons. So if you have a 401(k), there’s definitely pros to keep it in the 401(k) plan, depending on the plan, of course. If it’s a larger plan, you probably have a lot of options in the 401(k) plan. You can kind of do your research. And there’s probably low-cost index funds within the overall 401(k) plan. There’s probably low fees, so why not just keep it in the plan? There’s also a lot of advantages of rolling it into an IRA. Most people would probably roll it to the IRA just for a couple of reasons. Just ease. If you have all these different 401(k) plans out there. So you work at 4 or 5 different employers, and you have 4 or 5 different 401(k) plans. The con of that is that once you get older, you’re going to have to start taking distributions from these accounts.
Al: Every single one.
Joe: Every single one.
Al: When it’s a 401(k). When it’s an IRA, you can have 10 IRAs, but just one required minimum distribution.
Joe: When you’re managing it. So how are you rebalancing all 4, 5, 10 different 401(k) accounts? It’s really hard to kind of manage the risk when you have all these different accounts. Unless you’re an engineer and love spreadsheets. And if you really love mail, then by all means, because you’re just going to get a lot of confirmations and a lot of statements and things like that.
Al: Or emails, if it comes into your email.
Joe: Sure. An IRA, the pro there is that, okay, now you have the full universe of any investment that you want to pick. If you want to go into- from crypto to Treasuries to individual stocks to a globally diversified index portfolio. So you can have a very low cost, well diversified portfolio in the IRA with the full universe of securities that is offered out there. So that’s probably the number one reason. Number two is that you could consolidate all these different accounts into one. So if you had a 401(k), a 403(b) and another IRA and whatever, you could put all of this into one account, and it’s easy to manage the overall risk in it. Because you’re like, okay, I can look at one account versus 10 accounts and say, hey, I might be too heavy in stocks or might be too light in stock, so I can rebalance it. If I want to do Roth conversions, you just take one from the IRA and you just move it to the Roth IRA. It’s really easy to do it that way versus a 401(k) has to come in cash, and then you deposit it.
Al: Here’s a couple of reasons not to roll. One is if you’re going to- if it’s a 401(k) and you’re going to retire at, let’s just say, age 55 or 56, 57, you keep the money in the 401(k), you can actually take distributions. As long as you retire and you’re at least 55 years of age, you can take distributions without the 10% penalty. Otherwise, you got to wait till 59 and a half.
Joe: Right. If you roll it into an IRA and you want to retire at 56, it’s like you got to wait till 59 and a half. Or do like a 72T tax, and it’s kind of a mess.
Al: It’s sloppy. So that’s one thing. Another thing, doesn’t apply to a lot of people, but if you’ve got company stock in a 401(k), there’s a strategy called net unrealized depreciation where you got to keep it in your 401(k). And essentially what happens is on retirement, generally, you go ahead and distribute that stock out to your brokerage account, and you only pay ordinary income tax on what you paid for the stock. And then when you sell the stock, you pay capital gains on that part, which could save you a lot in taxes.
Joe: If you’re still working at 72 and you have money into a 401(k), you’re still an active participant in the 401(k), there is no required minimum distribution.
Al: Good point.
Joe: So if you want to continue to work, you would want to keep it in the 401(k) at that point. Or roll all your other ones into the 401(k) to avoid any type of required distributions. Because your required beginning date doesn’t start until April 1st, the year after you retire or separate from service.
Al: Besides all those things, most people roll from the 401(k) to an IRA just because of simplicity. It’s in one place. They have a bigger universe of investment choices. That’s probably very common.
Joe: Yeah, we just kind of crammed that whole show into 3 minutes. Hopefully that helped.
How to Maximize Tax Savings When Selling Old Junk at a Loss? (Daniel, Ohio)
Joe: All right, let’s go with Daniel from Ohio. He goes “This is an off the wall tax question for us trying to maximize savings. With the IRS mandating 1099s be issued for transactions made on eBay, Venmo, PayPal, and similar services, should people selling old junk that can actually show real losses on sold items now report them as such and deduct a loss? If not, what is one supposed to do with the 1099? Can’t wait for the day the IRS shows up to look through my garage sale items.”
Al: Got it.
Joe: All right, so we got a garage sale. We got a hoarder that’s selling some stuff, and it’s like, all right, well, here I bought this wonderful antique chest, 30 years ago for $500, and they’re selling it for $25.
Can they take the loss?
Al: Apparently, they lost money on it. Well, first of all, 1099, that’s what you get, like, for example, if you’re not necessarily an employee, but you’re doing work for a company, you probably would get a 1099, which is kind of the equivalent of a W2, meaning that, yeah, I did some consulting services for you. You have to send me- the company has to send me a 1099, a couple of $1000, whatever the number is, I need to put that as income on my tax return. Here’s something that not everyone knows. Whether or not you get a 1099, you have to put it on your tax return. And if you don’t, if the IRS audits you, it’s a big problem. So this has been kind of an underground economy, I guess.
Joe: Right. They’re selling stuff on eBay-
Al: – and not reporting it.
Joe: Yeah. Doing some work for the neighbor, maybe. Let me mow your yard. And they’re paying them via Venmo.
Al: So the answer is yes. You need to report that as income. Can you take the loss? Well, first of all, why would you have a loss? Now, I could see where you would. Typically, if you have a business that sells things on eBay, you buy something for $50 and you sell it for $150. That would be a good business model. You have a profit motive, and whatever your profits are, you pay taxes on it. Now, on the other hand, if you keep buying stuff for $50 and you sell it for $5, that’s a $45 loss. If you truly have a profit motive, then, yes, it’s deductible. But it’s debatable whether you have a profit motive when you’re consistently buying something at one price and selling it at a lot lower price.
Joe: But I think his question is that he does garage sales. So let’s say you have a garage sale. I don’t think anyone selling the junk that they have in their garage sale, for a profit.
Al: Well, no, but they’re not at a profit. Yeah, that’s just a loss. But I’m thinking- I’m thinking he buys it at a garage sale and tries to sell it for more. But that’s a profit, not a loss. Unless he’s trying to say, well, I bought this $10 vase that’s really worth $150. It’s what you paid for. It’s not the value. Anyway, the basic rule is this, if you have a for-profit business, if that’s your motive and it’s run like a business, then you can take those losses. If it’s a hobby or just a little bit here and there, no, you can’t take those losses.
Joe: Remember, I would share the stupidest purchases I’ve ever made in my life. So, when I purchased the tour golf bag that is, like, bigger than this studio.
Al: You can’t even carry it.
Joe: Can’t even carry it.
Al: Can’t even fit on a golf cart.
Joe: No other golf bag could fit because this bag is so big and it was very expensive. There’s no way I’m ever bringing the thing on the golf cart. Now it just sits in my garage. And if I wanted to sell it, let’s say I bought it for $2000, and I sell it now for $500. Can I take that loss? But I’m not in business.
Al: That’s a personal loss. It’s never deductible. So, now, if you were in the business of selling golf bags and you consistently did that, you would be out of business pretty quickly.
Joe: Got it. Anyone want to buy my golf bag? It’s orange.
Al: I’m sure it’s beautiful.
Joe: It’s giant.
Al: You’ll need a couple of people to carry it.
Joe: Thousands. You could fit thousands of golf clubs in there.
Learn more last-minute tax-savings strategies before year-end in the podcast show notes at YourMoneyYourWealth.com: Register now to join Big Al Clopine and me for a free webinar on Charitable Giving, tomorrow, Wednesday, December 13 at 12 noon Pacific time. You’ll learn 7 strategies that will maximize the tax deduction you get when you give money to charity. Watch last month’s webinar on End of Year Tax Strategies, and download the companion guides for both webinars, all for free, courtesy of Your Money Your Wealth and Pure Financial Advisors. Just click the link in the description of today’s episode in your favorite podcast app, go to the show notes, register, watch, and download. Hitting the share button and passing all these resources on is a great way to say thank you!
Should My Wife Open a Roth and Start Doing Conversions? (Buddy, San Diego)
Joe: “Hi knowledgeable Joe-”
Al: Oh, you’re the knowledgeable one.
Joe: “-and just Big Al.”
AL: I’m Big. You’re knowledgeable.
Joe: “And ringmaster, Andi.”
Joe: “Been listening to your podcast forever and appreciate all your spitball analysis and comical banter. I drive a Ford F150.” That’s probably one of the most popular-
Al: It seems to be, right?
Joe: Ford F150.
Al: Have you ever owned a truck?
Joe: I had a Wrangler.
Al: You did?
Joe: Yeah. I had a Jeep Wrangler in college. That was really cool.
Al: That sounds like you.
Joe: I took the doors off. No roof. Cruising around. I was one of those schmucks. And I had a Ford Ranger.
Al: Wow, you are cool. I had a Ford Mustang once.
Joe: I know you did.
Al: That was a convertible.
Al: That was my-
Joe: It was the same color as your hair.
Al: That was my midlife crisis car that lasted a decade. I loved that car.
Joe: “I drive a Ford F150. Have a bearded dragon lizard.”
Andi: Check them out. They’re so cool.”
Al: Oh, okay.
Joe: Bearded dragon lizard.
Al: Did you have one of those?
Joe: I don’t-
Al: No, me neither. I’ve never even seen one, except at the zoo.
Joe: Yeah, I think Robert Rogers probably has one of those. “And enjoy top shelf margarita on the weekends.” I thought for sure it was going to be Jack Daniels on the rocks.
Al: Yeah, me, too. F150.
Joe: Yeah, come on. He’s got a dragon lizard. Come on. “My question is whether or not my wife should start a Roth IRA and begin conversions. Would it be beneficial and take into consideration the 5-year rule? Our info is we are both 66 yo and retired. 22% marginal tax bracket. Brokerage account $3,000,000, $400,000 in cash. My Roth is $650,000. My IRA is $200,000. My 401(k) is $875,000. My spouse’s IRA is $880,000. I’ve been doing conversions into my Roth about $122,000 this year. Should my wife also start Roth? Thanks much. Appreciate your guidance. Cheers to you.” Yeah, why not? I mean, you’re almost out of IRAs.
Al: Yeah, they have looks like they- yeah. Well, he’s got a big 401(k) and she’s got a big IRA. So yeah, I mean, I think the answer is kind of what we typically say.
Joe: They’re both 66. He’s got a brokerage account of $3,000,000, right? So he’s got $875,000, she’s got $880,000, and they’re both the same age. How we look at Roth conversions via spouses is that the older spouse should do conversions first.
Al: Bingo. Because they have to take the required distributions first.
Joe: So it doesn’t necessarily matter in this scenario. Unless- who is this? This is Buddy.
Joe: So if Buddy passes, his IRA is going to go into a spousal IRA. So it’s going to just transfer into his spouse’s IRA. And so now the spouse is going to be at a single tax bracket. So it’s going to be combined into one anyway- in their individual account. So if she does a Roth conversion versus he does a Roth conversion, it’s still going to show up on the tax return the same. And if she passes, her IRA is going to go into his. So you just want to kind of keep chipping away at it. But in my opinion, unless I’m totally missing something because I just got out of a tube.
Al: Are you still hearing things?
Joe: (Noises) My brain is still a little mushy.
Al: Got it.
Joe: But I don’t know. I don’t think it matters, do you?
Al: I don’t think it matters at all. I think it’s a personal preference. I think what does matter is your tax bracket. So what you’re saying, you’re in the 22% bracket. The conversion is $122,000. I’m assuming maybe you’re getting into the 24% bracket, which is still a great bracket. Go up to the top of that. Why not? You got plenty of non-qualified money, non-qualified, non-retirement money to pay for the tax. You’ve got a $200,000 in deferred- 66, that’s going to be- at 72, that’s going to be worth $3,000,000. So the RMDs would be $120,000. If you can start chipping away at those Roth conversions, which you’re already doing, but in a maybe a bigger manner because you’ve got a lot of money to pay the tax and can afford it. Yeah. Go for it.
Joe: I guess we could talk divorce.
Al: I wasn’t going to go there. Okay. Since you brought it up. So here’s one thing you might think. Let’s say you’re in a couple and the relationship is not that stable. If one party, let’s say husband. Husband does all the Roth conversions and by the time they split, he gets his accounts. He gets your account-. You get your accounts but his are in Roth, and you paid the taxes jointly. Now, you should get credit for that. But it doesn’t always happen.
Joe: No. A lot of times they miss it. It’s like, here. Here’s my account. It’s $880,000. Here’s your account, it’s $880,000.
Al: Same Same. Even though one’s a Roth and one’s an IRA.
Joe: Exactly. That $880,000 of her 401(k) is nowhere near the value of the $880,000 in the Roth. That 401(k) is really only worth probably $600,000. We’re going to split the $3,000,000. I’ll take $1,500,000.
You take $1,500,000-
Al: And we’re fine.
Joe: – and see you later. I’ll take my lizard-
Al: Let’s split the house. I’ll take the lizard-
Joe: – you take the house. I’m going to take the dragon lizard and my Margarita, and load up the Ford F150 and get the hell out of town.
Al: Now, I’m sure that’s not Buddy’s situation. We’re just talking hypothetically.
Joe: Yes. But another is that it makes no difference, but we have some clients where why does she have all the Roth and I don’t have the Roth and this and that? Once they get educated-
Al: – it doesn’t matter.
Joe: -It doesn’t matter. But maybe they want to see Roth on their statement as well.
Al: That’s true. We do see that.
Joe: Okay, thanks for the email, Buddy.
How is Taxable Account Growth Taxed? Should I Buy 8-Week Treasuries? (Jerry, Boca Raton, FL)
Joe: Okay, cruising along here. All right, what do we got? Jerry from Boca Raton. “Hey, guys, love your show. Great info and a lot of wit mixed into it.”
Al: Wit? Yeah.
Joe: Thank you.
Al: “Mixed in- time to time.
Joe: -time to time. Such nonsense. “Two questions. First, you have a taxable account funded with $500,000 that grows to $1,000,000. You retire and withdraw $100,000. How is the tax calculated? Half of the account was already taxed. Second, sold my house, have cash in the bank and need it on hand for the next few years. Everyone is telling me to buy short term CDs and use online banks. But I thought if I buy 8-week Treasuries yielding over 4% right now and do it 5 or 6 times a year, I can earn 20%, 24% on that money in a year. Or am I wrong? Thanks, Jerry.”
Al: Jerry, you’re probably wrong. First of all, an 8-week treasure yielding 4%, that’s an annualized rate.
Joe: Yes. Per annum.
Al: In other words, now, I know you won’t hold it for a year, but if you did hold it for a year, that’s what it would pay, 4%. So if you’re holding it for 8 years, that’s less than two months. So it’s less than 2/12 of that is actually what you’re going to get.
Joe: And then he’s got $500,000. It’s worth $1,000,000. So how does he pay taxes on it?
Al: Well, presumably that’s in the stock market. Or some kind of investment. Let’s just say you have one investment right now, to make it really simple, I’ll do this quickly. So when you sell that investment, then let’s just say $20,000. So half of that is taxable and half of that’s return to capital. On the other hand, here’s a smarter way to do it.
Joe: You can pick your basis.
Al: Yeah. Certain stocks will have less gain. Sell those first to pay less gain up front. And your bigger gains, you’ll do those later.
Joe: You could pick your basis and say this mutual fund or this share mutual fund has the lowest gain, so I’m going to sell that. Or if I’m in a lower tax bracket, this has the highest gain, so I’m going to sell that and reduce my taxes there. So you could pick and choose on how you sell that’s. It’s not 100% pro rata.
Andi: What do you think about having the Derails in the body of the episode rather than waiting until the very end? Email firstname.lastname@example.org and let me know. Speaking of what you think, if you’re a fellow podcaster, or just interested in the YMYW behind the scenes, I wrote a blog post about how we’ve grown the podcast, which you can read in the show notes – just click the link in the description of today’s episode in your podcast app. TLDR, this show is what we all make it, together, and listening to you, the listeners, is what makes this show a show, so thank you.
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