Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:05 – Will These Historic Low Tax Rates Be Extended? Insight from Jeff Levine, CFP®, CPA/PFS, ChFC®, RICP®, CWS, AIF, BFA™, MSA
• 19:54 – Make These 3 Investments for a Happy Retirement and Watch Take Control of Your Retirement Plan on YMYW TV
• 21:06 – What to Do With Required Minimum Distributions When You Don’t Need the Money to Live On? (Judi, San Diego)
• 24:40 – How Much NOT to Convert to Roth to Keep RMDs Under Control? (DH from SoCal)
• 32:26 – LIMITED TIME SPECIAL OFFER: Download the DIY Retirement Guide by Friday, April 11, 2025!
• 33:39 – How to Calculate How Much Roth Conversion I Should Do? (Joe, voice)
• 38:42 – How Can I Reduce My Required Minimum Distributions? (Joel, CA)
• 40:18 – How Can Minor Beneficiaries Avoid Probate? (Esther, San Francisco)
• 46:04 – YMYW Podcast Outro

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Transcription

Intro: This Week on the YMYW Podcast

Andi: Will your taxes go up? Stay the same? Go down, even? Jeffrey Levine is Chief Planning Officer at Focus Partners, Professor of Practice in Taxation at the American College of Financial Services, and the Lead Financial Planning Nerd at Kitces.com. In other words, he’s one of the savviest tax minds in the country. Jeff returns to the show today on Your Money, Your Wealth® podcast number 524 with his thoughts on what will happen to taxes under the new administration, saving for retirement in a Roth IRA vs. a traditional IRA, managing inherited retirement accounts, and the future viability of Social Security. Plus, how do you go about calculating the maximum amount you should convert from your retirement account to a tax-free Roth account? Joe and Big Al spitball for YMYW listener Joe. Also, how can Joel in California reduce the distributions he’s required to take from his retirement accounts, and how can Esther in San Francisco’s minor beneficiaries avoid probate? I’m Executive Producer Andi Last, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA, and our special guest today, Jeffrey Levine.

Will These Historic Low Tax Rates Be Extended? Insight from Jeff Levine, CFP®, CPA/PFS, ChFC®, RICP®, CWS, AIF, BFA™, MSA

Al: You’re one of the smartest guys I know when it comes to taxes and-

Jeff: Thank you.

Al: -and general financial planning, and you’ve got, you’re a CFP®, a CPA-

Jeff: Indeed.

Al: You got 5 more designations.

Jeff: You can never stop learning.

Al: Right. Good for you. Well, I wanna talk taxes.

Jeff: Okay.

Al: Because I know that’s near and dear to your heart.

Jeff: Indeed.

Al: We’ve got, we got the, the Tax Cut and Jobs Act of 2017 set to expire-

Jeff: Sure.

Al: – at the end of this year, 2025, what do you think? Will it be extended or what, how should we be thinking about that?

Jeff: Well, I have to start by saying anytime you talk about taxes and tax policy, it inevitably flows into a little bit of politics.

Al: It does.

Jeff: So we’ve gotta try to separate the two.

Al: I hear you.

Jeff: And, what I would say is whether you’re really happy with the election results, you’re sort of indifferent or you’re really unhappy-

Al: Yeah.

Jeff: – the end result from a tax policy perspective is probably the simplest possible outcome we could have hoped for. Because the rules that are in place today were largely put in place by Republicans back in 2017. Right. And so it stands to reason that their primary goal is to extend many of these same rules into next year. Now, certainly there’ll be some changes.

Al: Right.

Jeff: Exactly. What. We don’t know yet, but some likely candidates are the SALT cap, the state and local deduction that currently is capped at $10,000 for itemized deductions. We’ll probably see that lifted somewhat to a higher total. Right. There may be some changes to the child tax credit. There’s been talk about that along with the president has campaigned for tax-free Social Security, tax-free overtime, tax-free tips.

Al: Yes.

Jeff: As for how much of that ultimately makes it into the final bill? Still very much up in the air, but the point is, like most of the rules that exist today, are probably going to be the same or very similar to the rules that exist next year and into the foreseeable future, which from a planning perspective, again, whether you’re happy, sad, or indifferent. It’s easier. Right. And we deserve easy. After the last, you know, 5 or 10 years, there’s been a lot of legislation thrown at us. We deserve a little bit of a break.

Al: You know, I like the way you say that. That would be nice to kind of have it calm down just a little bit.

Jeff: Right. Yeah. I mean, if you think about the alternative, had there been a divided Congress, one of the things that everybody agreed on was that they didn’t want the Tax Cut and Jobs Act changes to just expire wholesale. The problem was everybody wanted different things to be extended. And people forget back in 2012, Congress was in a similar situation where tax cuts were set to expire. Things were scheduled to sunset, and it took Congress until January 2nd, 2013 to pass the 2012 TAX Act, which meant as we got to the end of the year, people were very unsure of what to do. Makes it very difficult to plan. Again, thankfully we probably don’t have to worry about that this year.

Al: I do remember that. I remember some sometimes things passed after the year already ended. And then they’re retroactive. It’s like, how do you plan for that?

Jeff: Yeah. You change the rules of the game after the game is Oh, that’s not very fair.

Al: It makes it more difficult. So we, talk a lot about Roth conversions as a strategy-

Jeff: Sure.

Al: -on the, on this podcast. And well that’s certainly one thing that would be a little bit easier if we know the tax rates are gonna stay the same ’cause they’re obviously lower-

Jeff: That’s right.

Al: -than they would be if the tax cuts expire.

Jeff: That’s right. We don’t have to rush to do any last minute Roth conversions. We don’t have to rush to do gifting towards the end of the year to take advantage of what would be a potentially lower exemption, ’cause it’s likely to stay the same if not higher. So, all those like last minute rush around, try to get these things in situations, we, can, you know, no guarantee is ’cause the law hasn’t been passed yet. But it’s, it seems very likely that we’ll get that sometime in the near future.

Al: And estate planning, estate tax exemption. You see that probably staying the same-

Jeff:- if not higher. Yeah. If not higher. I mean, there’s, some discussion of eliminating altogether, right? The question is it politically worth it to do that. You know, that becomes a clear quote, unquote talking point for the other side of-

Al: Sure.

Jeff: It’s a gift to the wealthy, ’cause it clearly is just really for that. I mean, at this point, it would only affect families with more than, you know, $28,000,000. So that’s, right. Very few people already have to deal with.

Al: Right, right. So at this, at this conference, you’ve talked about the death of the traditional IRA and what do you mean by that?

Jeff: Well, the whole premise behind the traditional IRA was, you’ll put some money in now, you’ll get a little bit of a tax break, and then down the road you’ll pay taxes at a lower rate when you retire. And that’s all well and good if that’s what actually happens. But for, you know, for many individuals, especially those who are really good savers, who have been high earners over the course of their career, they may be in some sense, victims of their own success, where they’ve done such a good job saving and in some cases have sacrificed things that they could have enjoyed in their younger years for, you know, for these benefits when they’re older, that they have as much income, if not more, when they’re older and taking out money from their IRAs, their 401(k)s, they have Social Security and in some cases they may even have inheritances from a prior generation that also generate income. So the question really becomes, is it better to forego that tax break now and instead just bite the bullet, so to speak. Pay the taxes today, be done with it, and have everything grow tax-free forever. Obviously that depends a lot on whether someone’s future tax rate is going to be higher or lower than it is today. But the point is, a lot of people end up with a lot more income in the future than they expect. And I mean, at some point you have to imagine that we’re gonna have to pay for the deficit and debt that we’re running up as a country. And there’s, it’s really hard to figure out how that could be done without, at some point, raising taxes for at least those who are more, you know, more fortunate. And so if that’s the case, when you combine a higher income than you might expect in retirement, plus potential for future higher taxes, again, it just lends itself to wondering, should I just pay the tax down and be done and not have to worry about it in the future.

Al: You know, I think that’s well said. Now for people that haven’t saved or don’t have the discipline to save, they very likely will be in a lower bracket and probably in most cases.

Jeff: Sure.

Al: But as you say, those have done the right thing. They’ve ended up saving and they ended up with a lot of money in their IRA, their 401(k) compound growth over decades.

Right. And then all of a sudden they’ve, and assuming they’ve been told, they’ve been assuming they’ll be in a lower tax bracket.

Jeff: That’s right.

Al: Retirement comes around and they’re not.

Jeff: I mean, it is a very bourgeois problem to have, right? Like, I have so much income that I have more, you know, more tax rate than I expect, but it is a problem for those who have accumulated it. The whole point is to try and preserve as much as your wealth as possible, and the more that’s eroded via taxes, the less that’s available for you and your heirs of money that you’ve worked hard and saved and sacrificed all your life for.

Al: So the solution then is to try to get as much money into a Roth IRA, whether it’s a Roth provision in a 401(k) or Roth IRA contribution. Or Roth conversion from your prior IRAs.

Jeff: Yeah. Ultimately to, to me it’s about timing that income and figuring out when are you going to be at your lowest tax rate. Right? And that’s a function of not only your own personal income. And your own personal deductions, but obviously also what happens externally. And we don’t know either of those things, right?

Al: Yeah.

Jeff: Things can change over time, so it does involve a little bit of guesswork, but ultimately it’s pay your taxes when your rate is lowest. So if you have the opportunity today to defer, let’s say you’re, you know, approaching retirement now, you’re 4 or 5 years away, you’ve, you’ve got some high income today, but you expect to have a few years off between when you retire and when you start taking Social Security. And maybe when you start your RMDs, those may be very low income years. And it might feel great to go, ah, I didn’t have any tax liability this year. But from a tax planning perspective, that’s actually really bad. You know, I always say low income years are a terrible thing to waste. And you know, the Roth conversion is effectively like a magic wand that creates income in exactly the year that you want it. And so if this is a otherwise low income year, you waive the magic Roth conversion wand and poof, you create income. It’s shifted into the current year and now you pay tax on that income at a rate that is lower than you otherwise would have, either in the past when you were working or in the future when you may have more retirement distributions that you have to take.

Al: I think that’s one of the biggest mistakes early retirees make is they don’t think about getting money into a Roth IRA when they’re in a low bracket. And their accountant, you’ve done a great job. Look at this. You don’t have to pay any taxes. And then all of a sudden they hit 73 or 75, RMDs kick in. And they’re in a gigantic tax bracket. They’ve missed that opportunity. And in some cases it could be as many as 10 years where they could do a little bit of Roth conversion every year.

Jeff: Absolutely. Yeah. It really does come back to bite you if you don’t act in a proactive manner. And I’m always trying to encourage people. Don’t look at this year’s tax bill. This year’s tax bill, I don’t wanna say it’s irrelevant ’cause it matters, but it only matters a fraction. Yeah, ’cause it’s one of a set of lifetime tax bills. And ultimately what your goal should be as a, as an individual. And certainly our goals as planners is to try and help individuals to create the lowest lifetime tax bill. And actually, when we’re talking about retirement accounts sometimes thinking about the lowest lifetime tax bill is actually not long enough because we may do such a good job that we’re not gonna spend all our money and we’re gonna leave it over to our heirs.

Al: Good point.

Jeff: And there’s no step-up on an IRA. In other words, children, grandchildren, etc., will still have to pay the tax liability when they take out the money. So sometimes it’s about thinking about how do we create the lowest multi-generational tax bill. And so looking at one year is too myopic. It’s just too, it’s just not looking broad enough. We’ve gotta try and look at the big picture.

Al: I like to say, if you did tax planning over the next 20 years, you’d make a different decision and this year than you would if you’d just focused on the current year.

Al: That’s exactly right. Yeah.

Jeff: Yeah.

Al: So let’s talk about the SECURE Act. SECURE Act 2.0.

Jeff: Sure.

Al: The death of the Stretch IRA for most people. There a few people can still take it, but most people can’t do the Stretch anymore. They need to get the money out within 10 years after receiving the IRA for non-spousal IRA beneficiary. What are strategies that could help alleviate that? Or are there things that people can be thinking about?

Jeff: Well, I think the first thing we have to consider is who we’re talking to because there, there could be really two different types of individuals you and I might sit down with. One is it’s the beneficiary they’ve just inherited and they’re trying to figure out, what do I do with mom or dad’s IRA, right? The other one is mom or dad sitting down and saying, you know what? We’ve done a really good job and we’re enjoying ourselves and we just can’t spend our money fast enough. Again, another nice problem to have, right?

Al: Sure. Yeah. Right.

Jeff: But like, we know we’re gonna leave over money and we thought our kids would have 30, 40 years to take out this, these dollars. And instead they’re only gonna have 10 years. It’s gonna compress that income into a shorter period of time, which means more income coming out in any one year, which means higher tax rates in all likelihood. So, you know, when we think about that, we start with the first of those groups, the beneficiaries. You know, there’s a couple of options. One is you can just kind of kick the can down the road and wait. Now for most people, that’s probably not a great idea. ‘Cause if you inherit, let’s say $500,000 today and you leave it alone and you didn’t take anything, in some cases, that’s okay. If you wait until the end of the 10th year. It’s very possible the account could double over 10 years. Just a 7% rate of return over 10 years. Your $500,000 turned into $1,000,000.

Al: Sure.

Jeff: And now you’re taking that all out in one tax year. That’s not very efficient for most people. Right. So, you know, you say, well, no, nobody should do it. Well, not, that’s not true. There’s different circumstances for everyone. Someone who’s in the highest tax bracket today might look and say, if I have to pay the top rate today, I might as well get 10 years of tax deferral and pay the same top rate down the road.

Al: If it’s the same rate the whole time.

Jeff: That’s right. Yeah.

Jeff: Or even a Roth beneficiary, right?

Al: Yeah.

Jeff: Like why would you touch money growing tax-free until you have to?

Al: Good point.

Jeff: So some people should just let it go for as long as possible. In other circumstances, it would be spread it out as much as possible. You know, someone may be working now and they expect to have relatively similar income over 10 years. They may wanna spread it out, sort of sprinkle in almost the IRA income-

Al: Kind of fill up their current bracket-

Jeff: Exactly.

A: -Without going into the next one. Yeah.

Jeff: You know, those sorts of situations. And there we sometimes can get actually 11 years, even though it’s called the 10-year rule. Yeah. ‘Cause year one of the 10-year rule isn’t until the year after death. And so if a beneficiary is motivated, we can actually act in the calendar year of death to get some money out and now spread it out over 11 years. And then for others it’s just a matter of strategically timing it. So someone might be 60 and working for the next 5 years but plans to retire at 65. Well, maybe we spread it out over the last 5 years of the 10-year rule. Or maybe someone’s 65 and they just retired, but at 70 they have Social Security.

Al: Sure.

Jeff: And it’s 72. They have a- or 73, now they have RMDs.

Al: Right.

Jeff: And so we front load it, but the whole concept is you look at all your other income, you look at all your other deductions and figure out how do we just layer this other income that we have to take on. And make everything kind of as level as possible.

Al: Yeah. Another perfect example of tax planning over a decade or more instead of just focusing on one year at a time.

Jeff: That’s right.

Al: And a lot of CPAs, I’m a CPA, you’re a CPA, I had my own tax practice. And you do find yourself just trying to say, well, let’s see what you can save, you know, this year.

Jeff: That’s right.

Al: And then I sort of switched industries a little bit and I realized, no, that’s not the best way to do this. But a lot of the CPA community is very focused on the one year.

Jeff: Yeah. Well, I mean, I understand that from their perspective, because if you go to the CPA and the CPA says, hey, your tax bill is, you know, $10,000 this year, but you’re gonna save money in the future. But then you show it to someone else. Like, oh, you’re, this is wild. You could have done this and saved $2000. You go, what? I could have saved $2000 without any context behind it.

Al: So true. Good point.

Jeff: You know, it becomes difficult sometimes, right? Just even from a, you know, a communication and education perspective. And, you know, you said you know, you’re a CPA, you prepare tax returns for many years. I also did, like in the height of tax season, you don’t have the same time to educate clients about all of these things because you’re just trying to get, I mean the forms come out between like January and February-ish, and you’re trying to get everything done in like 8 weeks.

Al: You are, right.

Jeff: It’s very difficult to-

Al: Well, and the other thing is a CPA preparing taxes, you don’t have all the information that you need to make the right decision. So that’s why you rely on the financial planner. But if a financial planner doesn’t know about taxes, they’ll say, go to your CPA. And it’s a tough thing.

Jeff: It is. That’s why we have, you know, I always say, I never worry about job security. The government makes things complicated enough.

Al: Good point.

Jeff:  We’ll be here for the foreseeable future.

Al: I’m in the same boat. Alright, let’s talk about Social Security.

Jeff: Okay.

Al: Because a lot of people are concerned about its future viability. And even more so now given the political climate going on. What are your thoughts?

Jeff: Well, once again, I think we’ve gotta kind of separate groups of individuals. Yeah. I think those who are close to Social Security age or, already receiving Social Security, I think they’re likely fine. And I’m not saying that nothing could happen, but I think it’s very unlikely that their benefits will change much, if at all. Now, for younger individuals, I think there likely are going to be changes. I mean, if we just, we have to have changes. Whether it’s delaying the age at which Social Security may begin, or increasing the Social Security taxes, some combination of all of those things. But ultimately for those who are in or approaching retirement right now, I don’t think too much will change. And there’s a lot of reasons behind that. One of them is simply the, you know, the political climate. I mean, you don’t take away things from people who vote for you. And the greatest-

Al: Good point.

Jeff: -voting block is seniors. I mean that the AARP is one of the most powerful lobbies in Washington, so, right. It seems unlikely from a political perspective that you’d be on, you’d wanna be the one on record saying, yes, I reduced your benefits. You know, so that’s one thing. But going beyond that, like Congress historically has given people a pretty good runway, for when they made changes, and they’re pretty good about estimating the changes and how well they will do. For instance, right now, a lot of people probably are familiar with the fact that if you have fairly modest income, none of your Social Security is taxable. If you have some more income, up to 50% of your Social Security is taxable. In some cases for higher earners in retirement, up to 85% is taxable. Those changes along with the fact that right now there’s a transition period where full retirement age is going from 66 to 67. Those changes all were made in the year I was born, 1983. So it has literally been 40 plus years since those changes were enacted. Yeah. And at the time, well, first off, the full retirement age thing, 66 to 67 is only starting to impact people now. Right? Right. Like it’s, they gave people 40 years to plan and when they made those changes, they said, we think Social Security by doing this will remain solvent for another 50 years. That was their projection. Right? Well, right now, Social Security is projected to run outta money in about 2031, 2033, depending upon what study you believe. Yeah. That’s 50 years. Like they were really good.

Al: They were right.

Jeff: When you look at large numbers of people, you can make pretty accurate projections. So I think there’ll be some tough decisions in Washington as to where to draw those lines and who to make changes for and who not to. Yeah. But I think if you’re in your 40s, you’re probably not looking at the system being exactly what it is today, but if you’re in your, you know, mid to the late 60s, I think you can count on whatever you’re getting today or project it to get today to be there for you.

Al: You know, a little historical context. So my dad who lived into his early 90s, I remember him telling me when he was in his 50s, maybe mid 50s, I’m never gonna receive a benefit of Social Security. I’m paying in for my mother-in-law. And yet he received it for year after year, And now my mom is still taking his benefit.

Jeff: Oh my goodness. Amazing.

Al: Yeah. So it, yeah. I feel like that’s one thing that can be fixed and solved and maybe tough decisions. And I feel like politicians don’t wanna make those decisions ’cause they’re unpopular. But we have in the past, and it seems like we will, moving forward.

Jeff: We’ll get there. Unfortunately, the farther we get towards 2033, the more drastic those changes need to be.

Al: Good point.

Jeff: And so, you know, it, there may have to be larger changes than necessary because our politicians may not have the courage to act sooner rather than later. But eventually they’re going to, I mean, it is an important component of so many individuals’ retirements. That they’re going to have to find a way to fix it. Again, it’s probably some combination of changing the full retirement age, changing the tax rates, maybe changing the amount of income that is subject to the tax rates. I mean, there’s lots of levers that they can pull.

Al: Sure.

Jeff: And it ultimately, it’s probably gonna be a combination of several of them.

Al: Yeah. I would tend to agree with you. Well, Jeff, what a pleasure chatting with you and your insights. I really appreciate it.

Jeff: Thanks so much for having me.

Al: All right, man. Thanks.

Make These 3 Investments for a Happy Retirement, Watch Take Control of Your Retirement Plan on YMYW TV

Andi: We also want to thank the American College of Financial Services for making it possible for us to bring you insights from their thought leaders. Watch or listen next week as retirement planning expert and author Jamie Hopkins returns to YMYW with ways to manage risks in retirement. Check out the previous episodes to learn the three investments that make for a happy retirement with Dr. Michael Finke, and choosing your style of retirement income with Dr. Wade Pfau. Watch on YouTube or Spotify, or listen on your favorite podcast app. And don’t miss the Your Money, Your Wealth® TV show: reading the daily headlines, you may feel less in control of your finances. What will happen to your money in the long term? You are not alone in those feelings. That fear of the unknown can lead to stress and anxiety. In a recent survey, more people reported fearing retirement than DEATH! This week on Your Money, Your Wealth® TV Joe and Big Al show you how to lower your stress level and learn to take control of your retirement plan. Find links in the episode description to subscribe to both the Your Money, Your Wealth® podcast and the Your Money, Your Wealth® TV show. And, keep listening, later in the episode I’ll tell you about this week’s limited time special offer free download – it’s a YMYW audience favorite, you definitely do not want to skip it. First let’s get to more of your questions!

What to Do With Required Minimum Distributions When You Don’t Need the Money to Live On? (Judi, San Diego)

Joe: Okay, we got Judi, calling in, or writing in from San Diego. She goes, “Hi Andi, Joe, Al. There is a group of 8 of us that swim at the Y every morning. The current discussion is about RMDs when you don’t need the money to live on. Three people say take the money out at start of year and put it in the brokerage account. Three people say take it out at the end of the year so it grows tax-deferred for the year. One person says take it out monthly and dollar cost average into a brokerage account, and one person says it doesn’t make a difference. You guys get to decide the deciding vote. Lunch is riding on the answer.”

Al: We better not blow it. This is a lot of pressure.

Joe: Okay, Judi? We got 8 people at the Y. So every morning they get around and they talk about RMDs. Yeah.

Andi: Well, they’re swimming, so they’re in the pool having this conversation.

Joe: Yeah. All right, so first, let’s define what an RMD is for those of you that are taking score. An RMD is a required minimum distribution. It’s the dollars that need to come out of a retirement account once you reach a certain age. And that dollar amount is based on life expectancy.

Al: Yeah. And that age currently is 73 years old. It will be 75 for those born 1960 and later. Currently it’s 73.

Joe: So 1973. So Judi and the gang. Yeah, they’re all taking their RMDs, so they’re swimming laps every morning in their 70s.

Al: Yeah. And they don’t need their money, so congrats. Yeah, that’s good. Good for them.

Joe: That’s impressive.

Al: Yeah. It is.

Joe: Okay, so do you take it out in the beginning of the year? Do you take it out at the end of the year? Do you dollar cost average or-

Al: – you could care less?

Joe: What say you Big Al?

Al: Well, I’m not that of that age yet, but, my plan, Joe, is to take it out at the beginning of the year. And the reason is because, you know, if you leave it in all year, it guarantees whatever that growth is, it’s gonna be taxed at ordinary income. If you take it out at the beginning of the year, you invest it in an asset that goes up in value, you hold it for at least a year. Well, that’s gonna be capital gain treatment, which is a better tax treatment than ordinary income. So being that the market goes up more often than it goes down, no guarantees, two outta 3 years it goes up. I would rather have the money out earlier and try to take advantage of capital gain rates.

Joe: I would agree 100%. Because the money’s forced out anyway.

Al: Yeah.

Joe: You have to pay the tax so the longer the money stays in that account, it’s growing tax-deferred, which is great that you don’t have to pay the tax on. But let’s say that dollar continues to grow, you’re still gonna have to pay tax on a certain percentage. So the longer it stays in that account, more tax potentially you’re going to pay because of the compounding effect on the force out. So if it’s $100,000 and going down, you’re gonna pay less tax because less dollars are coming. If I can get that money out sooner, now that dollar sits in a capital gains environment, a brokerage account where it’s taxed at capital gains rate. If the market goes down, then I can tax loss harvest and tax manage it. If the market goes down in the overall retirement account, there’s no tax benefit there.

Al: Right, right.

Joe: So, yeah, I like, I wonder who won, who got lunch? Who got brunch?

Al: Well, if Judi’s listening to our show, maybe she heard us say that already. We, I don’t know.

Joe: What are you talking about?

Al: If she wrote in and she’s a listener. We have talked about that before on other shows.

Joe: Oh, I see what you’re saying there. But we haven’- Okay, got it.

Al: Yeah. Yeah.

How Much NOT to Convert to Roth to Keep RMDs Under Control? (DH from SoCal)

Joe: Alright, moving on. We got, “Hey Joe, Andi, Big Al. Hope you’re having a great day. This is DH from SoCal, 63 and single. Honestly. I listen and watch your show for the comedy. Ha. I know of no other places to get a laugh and learn about money on a weekly basis. My favorite show is 469.”

Al: You remember that one?

Joe: No. “To trigger your memory, this show was dominated by divorce talk. (K-Dog, doctor burning checks to his ex-wife at $11,000 a month.) But what grabbed my attention was the scenario from Laura on the Olympic Peninsula.” Peninsula.

Andi: Well done.

Al: Yep.

Joe: All right. “Per Joe, she has everything. Her husband, he has nothing, and then Al, Mr. Precise says, I like when you said she has $1.62? Joe. Be tired for every show.”

Al: I guess you’re tired that show.

Joe:  “You’re funny as hell.” All right.

Al: Stay tired, my friend. Yeah.

Joe: But when we tape this, it’s like a full day.

Al: I know. It’s a day.

Joe: It is like the last thing I kind of wanna do, to be honest with you.

Al: Yeah. But when we’re done, you’re so pumped up with energy.

Joe: Oh yeah. It’s like once we get going, we’re good.

Al: Yeah. Right.

Joe: But I do have a day job.

Al: I know you do.

Joe: You know? Yeah. So people are like, yeah, you hanging up, but you mailed it in, what was that one? Oh, Joe mailed it in like. I’m like, dude, it’s like 8 o’clock at night. We’re grinding still. Oh. Funny as hell. Thank you for that compliment. That’s what I’m here for. I like the little comic relief.

Al: Yes.

Joe: We’re trying to make finance fun.

Al: Yeah, we do our best. I mean, there’s only so much you can do with it.

Joe: Yeah. Oh, man. Okay. Let’s get on, let’s get back on track here. Alright. “Please spit on this scenario.” Alright, we’ll spit on. “I’ve been converting my 401(k) to a Roth IRA since 2016. Honestly, I’m tired of converting, but I can’t stop now as you review my data. I’m trying to determine a range. How many 401(k) IRA dollars to leave on the table, not to convert in order to keep those darn RMDs under control? I mean, converting from the bottom to the top of the 24% tax bracket. But now this woman, IRMAA has shown up. You know what IRMAA stands for again? Al?

Al: Yeah. Income related month, monthly adjustment amount.

Joe: Wow. Like that big brain on Big Al.

Al: How about that.

Andi: Didn’t even have to look it up.

Joe: No. “I will not let her get in my way of converting, but I must watch her at all times. Taxes on conversions are being paid from my taxable account. Thank you in advance for looking into this. Vehicles 2013 Audi E7, 2019 Honda Ridgeline, Favorite drink, Captain Morgan Coconut Rum.” When’s the last time you had a little Captain Morgan?

Andi: High School?

Al: Probably in Hawaii a few months ago.

Joe: Wow. Yeah, I don’t know. When’s the last time I’ve had a little Captain.

Al: And the coconut rum is particularly good.

Joe: Oh, okay.

Al: I’m just saying.

Joe: “We got Jack Daniels Tennessee honey whiskey shots TO GET A BUZZ.”

Al: Yeah.

Andi: In all caps.

Joe: That’s a big ass buzz.

Al: That would be it.

Joe: All right. “Income living expenses, $100,000 broken out as follows, currently working part-time W2 Income, approximately $60,000, $15,000 annuity, no COLA, $25,000 from my 401(k). Most likely will take Social Security at 70. Will reconsider if I get tired of working. I’m planning to implement QCDs at 70 and a half, approximately $10,000. Current assets, $2,600,000, $1,300,000 in deferred money, $950,000 in a Roth, $350,000 taxable, projected to spend at 75, approximately $120,000. In closing, you have made my personal conversion from full-time to part-time employment a lot of fun. Thank you. Stay safe, DH from SoCal.” Okay, cool. DH, how old’s DH? 63 years old and he’s single. All right, so $1,300,000 and he’s converting in the 24% tax bracket. At the top of the 24% tax bracket roughly is single taxpayer.

Al: Single taxpayer. That would be $197,000. Yeah. $200,000.

Joe: $200,000. Alright.

Al: Yep.

Joe: So he is going up to $200,000. He’s got $1,300,000. He is got 10 years. $1,300,000 could be, I don’t know, $2,500,000, 4 times two and a half is 80. so that’s putting him in the 24%. I mean, I’m just trying to calculate what his RMDs potentially will be in 10 years.

Al: Sure.

Joe: So at $1,300,000. So he is converting, he doesn’t need a ton of money from here. So if it grows at 4% or 5%, he’s still gonna have growth in the overall account. He’s got taxable account, he’s still working part-time.

Al: He’s pulling out about $25,000 a year. So it’s, so there’s some drain on it. And then I guess-

Joe: – so he’s pulling 2.5% out of the account.

Al: Yeah. When/if he stops working, he’ll be pulling a lot more.

Joe: Sure, sure.

Al: I guess- Yeah, if, if he’s spending $100,000 and he’s pulling out $25,000, but if he stops working, he’ll pull out about $85,000 and on the total liquid assets, that’s about a 3.3% distribution rate. But the question is, do you keep going on Roth conversions? Right?

Joe: If he retires, I don’t think so, because he could pull a lot of that money out in the, at least 22% tax bracket for life.

Al: Yeah, that’s what I’m thinking too. And I’m thinking I was-

Joe: Because if he’s paying 24% from the conversion, yeah. Then he could just kinda run the math to say, all right, over how much can I, is the RMD going to be a spike where it’s gonna push me in the 24% or higher?

Al: Right. Yeah. And I’m thinking one of the things that you don’t wanna do is have your RMD be greater than your need, ’cause now you’re paying taxes on money you don’t need. So I guess maybe a way to think about this in retirement is how much you’re spending and subtract out your Social Security fixed income to get your shortfall. I’ll just give you a super simple example. So let’s say you’re spending $120,000. Your Social Security is $40,000, so you need $80,000 from your portfolio. The RMD starts at about 4%. So you can take that $80,000 divided by 4%, or if it’s easier to multiply it by 25, you get the same number. That would be a couple million dollars. If your IRAs are lower than that, then you’re not being taxed on more income than you need. So that could be one way to think of it. Plus, if you’re doing QCDs, is qualified charitable distributions, those will not count as income. So you can actually have more in an IRA. Furthermore, if you have medical needs later on, you can pull that out and get a tax deduction. So that’s why you don’t have to completely drain that IRA, 401(k) account. So just consider some of those things.

Joe: Yeah. I wasn’t even listening to a word you said.

Al: I know you tune out. That’s how much you trust my answers, huh?

Joe: Sounded really good. Sounded really good.

LIMITED TIME SPECIAL OFFER: Download the DIY Retirement Guide by Friday April 11, 2025!

Andi: Alright, here it is – your chance is here once again: hit that link in the episode description right now to download the DIY Retirement Guide! It’s our Special Offer this week, but it’s only available until some time this Friday! Learn the steps to understand and plan for your retirement income, sophisticated strategies for choosing a tax-efficient distribution method, guidance on developing an investing strategy that meets your needs, tips on preparing for the unexpected, and other actionable information that’s normally only available in our retirement classes or one-on-one meetings. Nearly all our other white papers and guides and handbooks are always freely available in the Financial Resources section of YourMoneyYourWealth.com, but the 40 plus pages of this guide are so packed with practical, do-it-yourself information that we only make it available on a very limited basis – and after this week, it won’t be offered again for another few months. Click the link in the episode description and claim the DIY Retirement Guide before the Special Offer changes sometime this Friday, April 11, 2025. Go get yours now. If you’ve got money questions or want a retirement spitball analysis of your own, click or tap Ask Joe and Big Al in the episode description and send us an email or a voice message, like this one:

How to Calculate How Much Roth Conversion I Should Do? (Joe, voice)

“Hey Joe, Big Al, and Andi. My name is also Joe, and I’ve got yet another Roth conversion question for you, but it’s a little bit of a twist. I have an old traditional 401(k) that I never rolled over into my current one and really didn’t do anything with, except leave it as is in my Fidelity account. I have a current Roth IRTA, also with Fidelity, and I’d like to start converting some of that old 401(k) into the Roth IRA while my tax bracket is still on the 24% bracket. I’d like to know exactly how to calculate how much room in the 24% bracket I have to fill up so I know how much of I can convert in order to stay in the 24% bracket. I have my current 401(k) that I contribute to the max allowed, but I split that contribution 50/50 in traditional and Roth within my 401(k). I have an HSA that I also max out. I’m single and I use either the standard deduction or itemized deductions depending on the year and whichever amount is greater. I’m not sure if I’m missing anything other than possible deductions that I can use in order to estimate my AGI. But perhaps you can give all your listeners a breakdown of how to think about it and how to figure out how much to calculate of your income space we have in order to fill our current bracket with Roth conversions. Thanks in advance. I currently drive a 2022 Tesla Model Y and my drink of choice is a local little hazy IPA local.”

Andi: And he said a little hazy IPA and I actually searched for that to see if that is the name of a particular brand. And no, I think he got that from you, Joe, ’cause you always say that. A little something, you know, a little hazy IPA, a little craft beer, whatever.

Al: Yeah. Well, typically, hazy IPA is not necessarily low calorie, but maybe there’s some.

Joe: Well, for little ones.

Al: Maybe. Yeah. Yeah. Small portion, half, half portion.

Joe: Okay.

Al: Filling up the 24% bracket.

Joe: Single.

Al: Yep.

Joe: All right. Top of 24% is $200,000.

Al: Yep. $191,000, $190- $197,000. So, so here’s how you think about it. So pull out your tax return from 2024 or 2023 if that’s the one you have. 2024’s return, the taxable income line is line 15. Right. Find that same line on 2023 if that’s the return that you have. And that’s your starting point. That was your taxable income for whatever tax year you’re looking at. Then think about your current year. Is it gonna be about the same? Is did your salary go up? Right? Or did something change where you have less income? So factor that in. Maybe you make $20,000 more than you did in 2023 or 2024. So add that to your taxable income. See what number you have and you wanna get to $197,000 if you’re single. If you’re married, it’s double that. It’s almost $400,000. That’s how you fill up that 24% bracket.

Joe: Yeah, look at taxable income and then just guesstimate. So if you have a lot of interest or dividends or other type of income, it gets a little bit more challenging. But if you’re a W2 wage earner, that you can easily predict, you know, or forecast what your income’s gonna be. Yeah, just look at line 14 on the tax return, taxable income, and then whatever dollar that you fill up. So let’s say that’s $100,000, right? If you do $100,000 conversion, that’s gonna get your taxable income to $200,000. So most of that is gonna be taxed at the 24% tax bracket, up to $197,000. Yeah. So $3000 of the $100,000 conversion would be taxed at the higher rate. So if you wanna get it perfect. I mean, you could wait until you absolutely know what your income is. But if you go a little bit over or go a little bit under, it’s not that big of a deal just because those added dollars are gonna be taxed at the higher rate, not everything on your taxable income.

Al: I, I think that’s such a good point, ’cause a lot of people, they don’t want to go a dollar over that next tax bracket. And the point is it doesn’t really matter that much, that dollar or the $3000 or $5000, what-however much you went over. Yeah. That’s taxed when in this case, the 32% bracket, but everything else is taxed in the 24%- going to the next bracket doesn’t mean all of your income is taxed in that bracket. It’s just that little extra that went into it.

Joe: Yeah. So, then each year you just kind of take a look at line 10. What- or line-

Al: I think line 15.

Joe: Line 15.

Al: Yeah. It changes every year.

Joe: Kind changes every year with the returns.

Al: Remember when it was line 37?

Joe: It, yes. but, alright, well no, very cool question, Joe. But yeah, that’s how you wanna just max out the bracket. You just, if you don’t know what the brackets are, you can just go online and just look at, well, what are the top of, you know, the marginal US tax brackets and it’ll give you the chart.

Al: Yeah, that is true.

Joe: Or Andi, we have the-

Andi: The Key Financial Data Guide, you can get the key- you’ve got it in your hand, Joe. Hold it up to the camera. Show the people. We will send you one of those. It’s got the tax brackets on it.

Al: That’s true.

How Can I Reduce My Required Minimum Distributions? (Joel, CA)

Joe: Okay, let’s go to Joel from California. He goes, “Hey, I’ll be 73 next year, and I have to start taking my RMDs from my traditional IRA. I’ve been doing annual Roth conversions in December every year to maximize my 12% tax and avoid larger quarterly tax payments early in the year. Should I do my RMD the same way? Anything else I can do, relative to the tax burden of my RMDs?”

Al: So this is, kind of an estimated payment question.

Joe: You can take that one and I’ll-

Al: Yeah, I’ll take that one. So what, I guess how you need to think about this is estimated payments. When you don’t have a job and you don’t have enough withheld, let’s say from pension or Social Security, you have to make estimated payments quarterly to cover the income that you have at each point during the year. Now generally, people just figure out what this payment should be, and they make the equal amount over 4 quarters. But if you have uneven income, like for example, you do recquired minimum distribution in December, then you only have to make that extra estimated payment on the fourth quarter, which is due January 15th. So if you’re trying to minimize your estimated payments, at least the timing of them, then you would make it in December. On the other hand, there is arguments for making that RMD in January because you get it out of the retirement account and two outta 3 years the market goes up. Wouldn’t you rather have the money outside of retirement account growing at capital gain rates? Anyway, you can look at it a couple ways, but when it comes to estimated payments, you’d rather wait till the end.

Joe: Yeah, I agree. I would want to get that money out sooner than later.

How Can Minor Beneficiaries Avoid Probate? (Esther, San Francisco)

Joe: Let’s go to Esther San Francisco. “Love your podcast. I especially love listening to it before I go to bed. Best way to unwind at the end of the day.”

Al: Puts her to sleep. That’s, there you go.

Joe: “I have a very specific nuanced question. I’m hoping your experts can help answer.” Experts.

Al: Yeah. I don’t- wrong, wrong show.

Joe: Yeah. “I’m reading about IRA and all the in-“

Al:  -intricacies.

Joe: Thank you. “-about inherited IRAs and tax implications. One thing that caught my eye was that your minor children as a designated beneficiary fall under the eligi- eligible de, oh my God- fall under the eligible-deni designated beneficiary category, which is not subject to the 10-year rule, until they reach majority. However, if they are a minor, it will trigger probate. I read that if your minor child continues their schooling-“ Oh my. This is what- question is this? Is she CPA?

Al: Keep going.

Joe: “However, if they’re a minor, it will trigger probate. I read that if your minor children continues their schooling to the age of majority is extended until they finish their education or age 26. Does this, in essence mean they can still qualify as the EDB and avoid probate if they’re in school and between the ages of 18 and 26? I know it’s a weird specific question, but I was curious how this works. Thanks so much.”

Al: Okay, let me take a stab at that.

Andi: EDB being eligible designated beneficiary, right?

Al: Yeah. So what, well, maybe let’s talk about what it is. Eligible. Let’s see, let me make sure I get it right. Eligible designated beneficiary. So here’s what happens is, when you have an IRA owner passes away and that asset, the beneficiary is like a child, for example. And if that child is under age 21, they’re a eligible designated beneficiary, which means they don’t have to take the money out in 10 years until they become of age of majority. Now every state has a different age of majority, but the IRS actually, Joe, in July, 2024, decided 21 was the age of majority. So I’ve read this too. There’s different things about 26 and schooling, but I don’t think that’s available anymore. I think it’s age 21. And at that point that the minor child of the IRA owner then has to start that 10-year payout of IRAs. Right. And they actually have to take a required minimum distribution each year. That was part of the new rule in 2024. As far as probate, Joe, that’s a legal question. I have no idea.

Joe: Why would a designated beneficiary go to probate? I would, if it’s minor-

Al: I would not, I wouldn’t think it would.

Joe: That’s a whole reason why you have a beneficiary designation.

Al: It’s not part of your estate in terms of that. In other words, it doesn’t, it, it doesn’t transfer to the next person by way of a will or a trust. It’s a beneficiary statement, which typically means that it’s not subject to probate. I’m not sure where she got this question.

Joe: If you have a designated beneficiary, that will avoid probate 100% of the time. The only thing that’s thrown me for a little bit of a loop is that with the SECURE Act, there’s been rules that haven’t been fully ratified.

Al: Well, they keep, yeah. it’s, and-

Joe: They keep changing it.

Al: Right. And so according to Ed Slot, they came, they actually did solidify, at least what I just said, in July of 2024.

Joe: So if it’s a minor, so let’s say a 2-year-old inherits an IRA,

Al: -if it’s a 2-year-old child.

Joe: Child, right? Yes. So they don’t have to take the 10-year rule until age 21.

Al: 21. Correct.

Joe: And- but if they’re two years old, they fall under the old rules. Which they have to take out a required minimum distribution based on their life expectancy, don’t they? That’s, from my latest reading, I don’t think that’s true, but I will say it’s not entirely clear to me.

Joe: Well, then we’ll also have to talk about when was the, what was the required beginning date of the deceased?

Al: Yeah. And apparently that doesn’t matter. And at least in terms of that 10-year period, according to-

Joe: So, so- If someone dies after they started taking distributions from the IRA, right, it goes to a minor child. Right. So you’re saying that the minor child does not have to take a required distribution from that account until that minor child reaches age of majority? But that, that, but it’s also saying that all that money’s gonna go to probate.

Al: Well, what, here’s what I think I know, okay. From Ed Slot, who’s the foremost authority I think, on IRAs in the country is just this, if it’s a, if it’s a benefit, if the beneficiary is your child. And they’re under age 21. I don’t believe you have to do anything until age 21. And then you have a 10-year period whether the person that passed away started their required beginning, their required minimum distribution or not. They still have to take a distribution every single year, and then at year 10, they have to distribute the balance. So by age 31, it’s all out. That’s what I, that’s what I understand to be true. The other part is a little bit unclear and, here, and I, sort of get the confusion on the question. Because when you try to look this stuff up, it’s ’cause IRS has changed their mind so many times. It’s, unless, I don’t know, it’s, unless you’re a tax attorney that really dives in, it’s very difficult to figure this stuff out.

YMYW Podcast Outro

Andi: There you have it, Your Money, Your Wealth®, your podcast! If you enjoy YMYW, do us a favor and tell your friends and help us reach more listeners like you. And don’t forget to leave your honest reviews, comments, and ratings for Your Money, Your Wealth® in Apple Podcasts, on YouTube, and in all the other apps that let you do that.

Your Money, Your Wealth® is presented by Pure Financial Advisors. To really learn how to make the most of your money and your wealth in retirement, you need more than a retirement spitball with Joe and Big Al: schedule a no-cost, no obligation, comprehensive financial assessment with the experienced professionals on the fellas’ team here at Pure. Click the Free Financial Assessment link in the episode description or call 888-994-6257 to book yours. Meet in person at any of our locations around the country, or online, right from your couch. No matter where you are, the Pure team will work with you to create a detailed plan tailored to meet your needs and your goals in retirement.

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

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