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
November 1, 2022

Are you behind on your retirement savings? What do you need to do to catch up? If you retire in just a few years, will your money last until age 90? Based on the 5-year Roth withdrawal rules, do you need to open a new Roth IRA for each Roth conversion? Plus, Joe and Big Al spitball a health insurance, capital gains, and real estate strategy to save more money and have more wealth in retirement. Finally, they revisit the SECURE Act rules for withdrawing money from an inherited IRA, and Social Security income limits. 

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Show Notes

    • (00:44) Are We Behind on Our Retirement Savings? (Mr. Anonymous, Atlanta, GA)
    • (08:44) If We Retire in 3 Years, Will Our Money Last Until Age 90? (Hawk, MI)
    • (14:33) Spitball My Health Insurance, Capital Gains, and Real Estate Retirement Strategy (Scott, GA)
    • (25:41) 5-Year Roth Clock: Do I Need a New Roth IRA for Each Roth Conversion? (Jason, CO)
    • (33:43) Wait, When Must You Withdraw Money from an Inherited IRA? (Greg, Beautiful Temecula, CA)
    • (35:36) Social Security Earnings Limits Revisited (Jim, Santa Cruz)
    • (40:43) The Derails

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Today on Your Money, Your Wealth® podcast 402, are you behind on your retirement savings? What do you need to do to catch up? If you retire in just a few years, will your money last until age 90? Based on the 5 year Roth withdrawal rules, do you need to open a new Roth IRA for each Roth conversion? Plus, Joe and Big Al spitball a health insurance, capital gains and real estate strategy to save more money and have more wealth in retirement. Finally, the fellas revisit the SECURE Act rules for withdrawing money from an inherited IRA and Social Security income limits. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Are We Behind on Our Retirement Savings? (Mr. Anonymous, Atlanta, GA)

Joe: All right, next question here is from Atlanta, Georgia.

Al: Another Atlanta.

Joe: Yeah, Hotlanta.

Andi: Mr. Anonymous.

Joe: Thank you.

Andi: You’re welcome.

Joe: “Greeting, Andi, Joe and Roll Tide Big Al?”

Al: Am I a Roll Tide fan now?

Joe: Alabama guy?

Al: Not that I knew of, but I’ll go with it.

Andi: I think that might have been crossed wires.

Joe: “I really enjoy your show and appreciate the information you bring to listeners every week. A lot of material I read very often has made me aware that I’m a bit behind compared to others in my retirement savings. I would appreciate it if you could give me a spit ball if I’m on track for retirement. I’ll try to keep it as brief as possible for Joe.” Thank you. “Personal details. I’m 44. My wife is 46. I drive a 2017 Honda CRV and my personal beverage of choice is a Mojito. My wife and I plan to retire at 62 and 64. Financial details. Household income $160,000. I’ve estimated our annual expenses in retirement to be $50,000, in today’s dollars, not adjusted for inflation. We have $300,000 saved in a combination of a rollover IRA of $200,000, Roth IRA of $50,000 and a Roth TSP of $50,000. I will have the benefit of carrying health insurance benefits into retirement. And after health care expenses and taxes, my pension payout will equal roughly $25,000. The pension will have an annual cost of living adjustment. The pension also carries the $50,000 survivor benefit for my wife. My benefit for Social Security, should I take it at 70, is $3500 per month. My wife’s PIA, at full retirement, is $1500 a month.”

Andi: And by the way, that was 50% survivor benefit, not $50,000.

Al: True, it could be about the same, but who knows? You’re checking it.

Joe: His annual expenses are $50,000.

Al: I know, but you said- you did say $50,000 survivor benefits.

Joe: The pension also carries a 50% survivor benefit.

Al: Yes, you said $50,000.

Joe: Got it. All right. “Finally, our savings rate is currently 23%. I contribute 10% to the Roth TSP, get a match 5%, and the rest we contribute to Roth IRAs for my wife and myself. I will plan on converting the traditional IRA dollars to Roth as soon as possible. But I really wanted to know if our plan is realistic. My math tells me that once we draw Social Security at age 70, we’re likely to have our expenses covered fully with fixed income. But I believe it’s better to over save than under save. Thank you for your time and any feedback.” OK, breaking this thing down. He’s like, do I have a good plan?

Al: Yeah. So he’s in his early to mid-40s. Making a good income, has about $300,000 already saved, but saving 23%, which is a healthy number to save for the next 20ish years, which sounds great. Sounds like fixed income may cover expenses. The plan is fine. Here’s my comment maybe. And that is if you’re making $160,000 now and if you’re saving 23%. So let’s just call that $40,000, right? Just easy math, right? And maybe your taxes are $20,000 or $30,000. If it’s $20,000 plus the $40,000 you’re saving. So that means you’re netting $100,000. So you’re spending $100,000 right now. Are you sure you’re going to spend $50,000? Most people we talk to don’t want to spend less. At least they don’t want that as their central plan. I mean, if it happens, it happens, of course. So I might give that a little bit more thought because at $50,000- you probably still need clothes. You probably still want to go on trips, you probably still want to go out to restaurants. Right. You probably want to spoil kids, grandkids. There’s stuff that you want to think about.

Joe: At 40. This guy’s my age.

Al: Yeah. Do you know what you’re going to spend in retirement?

Joe: I have no idea what I spend on the weekends.

Al: Well, that’s true. That’s a different subject.’

Joe: Right? I’m like, what is he- what is he doing? Like, alright, well, here in my retirement in like 20 some odd years from now, I’m going to spend $50,000 a year.

Al: Yeah. But he’s had a lot of mojitos and thought about it.

Joe: A mojito is going to cost a $50,000.

Al: Anyway, I think that the savings plan is great. The starting income is good. So you can save a lot. You already got $300,000. Good job, great. I just think you’re going to spend more than you think. That’s my comment.

Joe: Right. And then, so here’s what you do. You take a look at really what you’re spending minus- but he’s retiring at 62 and 64. Of course, this is the only show I don’t bring my calculator. So he’s gotta bridge a gap from 62 to 70 because he wants to take his Social Security at 70. He’s going to have a pension. I’m not sure, we didn’t know what the pension is. I just made up the $50,000 number.

Andi: He said the pension is going to be roughly $25,000.

Joe: Okay. And that’s in today’s dollars. So I guess it’s going to be roughly $50,000 maybe when he turned 62.

Al: But let’s keep it today’s dollars because the expenses are in today’s-
Well, I see what you’re doing. You’re trying to figure out what he’s going to have.

Joe: Right. And then what’s the shortfall to determine- saving $20,000 and he’s already got $300,000. He’s going to have a good chunk of money, but is it going to be enough is kind of the question. So $50,000 is probably not your living expense number. So here’s the math that you need to take a look at is probably inflate your living expenses to $100,000. Then subtract out what your pension is going to be. If you’re going to take your pension at 62, there’s a shortfall and then that shortfall needs to come from your investments to bridge the gap from that age to age 70. And then from 70, you’re going to have your Social Security, your wife’s Social Security and your pension. Figure out what that number is and then still inflate your overall living expenses by call it 3.5%.

Al: Yeah, so I did the math really quickly. You start with $300,000, you save $40,000 a year at 6% for 20 years, $2,400,000.

Joe: Okay. And what’s, 3% of that?

Al: Okay, 3% of that is $73,000.

Joe: So $73,000 is going to come from the portfolio for 62 to 70. He’s going to have a higher distribution from that age.

Al: Yeah, I mean, let’s just say it’s $100,000 into $2,400,000. But remember, it can be a little bit higher at the start because you got Social Security coming. That rounds to 4%. It’s actually 4.2%. I’m okay with that.

Joe: Yeah. I think if he continues to save what he’s saving, I think he’s going to be okay. Even though he’s probably misjudged a little bit of his living expenses. Trust me, everyone does that. He probably has a spreadsheet. Well, this is what we’re going to spend on groceries. This is what we’re going to spend on cable TV.

Al: If we have white rice 6 meals a week and beans 6, and we have Cheerios for breakfast.

Joe: Remember that one guy- attorney was making like $800,000 a year and they were like flat broke. And then the wife was like, we should get rid of that Pandora extra that you’re spending $100 a year on.

Al: And the first comment, ‘Joe and Al, we’re not lavish.’

Joe: We’re not lavish.

Al: I think you are.

Joe: You’re spending every ounce of income that you have. You’re spending $900,000. If you’re planning a retirement saying you’re going to spend $50,000. Good luck.

Al: How does that work?

Joe: Yeah, how does that work? All right. Thank you,

If We Retire in 3 Years, Will Our Money Last Until Age 90? (Hawk, MI)

Joe: We Got Hawk, writes in from Michigan. “Dear Joe and Big Al. Longtime listener, first time writer. Looking for a little spitball with your views if I can retire in 3 years. My wife and I are both 53 yo. I drive a 2020 Buick Enclave.” Is that nice? Kind of sounds nice.

Al: Probably.

Joe: Yeah. “She drives a 2019 GMC Terrain. We live in Michigan and like support the local brands. But I do enjoy my favorite beverage from the Rocky Mountains, an ice cold CL-”

Andi: CL. It’s not even Coors Lite anymore.

Al: That’s the new name for it.

Andi: Yep.

Al: Code name.

Joe: Yeah. CL or C minus. “-on occasion.”

Joe: Occasionally. Occasionally. I got CL. Once a week.

Joe: Every weekend? All right, “We have two kids, one who recently graduated undergrad and starting his career and a younger son who is a sophomore in undergrad. No pets, unfortunately. OK, here the numbers. We gross $300,000 per year, spend $120,000 and save $25,000. No debt.”

Al: Save 25%.

Joe: Oh, it’s 25%. “Assets. Two homes worth about $900,000 and $3,000,000 in total savings split up roughly $2,000,000 in pre-tax savings and $1,000,000 after-tax brokerage mix of stocks. I Bonds of cash. College costs are already set aside with 529 and prepaid tuition plans, only $50,000 of the after-tax savings is in Roth. I appreciate your views and sharing your thoughts if you think we have enough money to last until 90 years of age. I’m ready to retire in 3 years. Keep up the great show and laughs. Thanks. Hawk”
Joe: What do you think? He spends $120,000 a year.

Al: Well, okay, so let’s say-

Joe: They make $300,000. He is 52 years old, 53, wants to retire two to 3 years. So that’s-

Al: -55, 56.

Joe: So he’s got 10 years of bridge. He’s got $3,000,000. $3,000,000, $120,000. What’s that math?

Al: Well, let’s see. I’ll just do $3,000,000 times 3% is what? $90,000. And that’s probably about what you should spend out of your portfolio.
So if you want to spend $120,000, you might be just a tad short. The reason we say 3%, rather 4%, is you’re retiring young. And if you want the money to last till 90, then you don’t go 4% right out the gate. The 4% rule, which by the way, is no guarantee, it’s a rule of thumb. But the 4% rule came about if you’re 65-year-old couple and you live to age 90, so it’s a 25-year period, 60% stocks/40% bonds, then no guarantee, but in all likelihood, you won’t run out of money.

Joe: So $3,000,000 today. Maybe the market is down a little bit. Market recovers. He still has 3 years. Let’s say if he saves 25% of $300,000, that’s a pretty good chunk of change.

Al: $75,000, maybe it’s worth $3,500,000 at that point, $3,500,000.

Joe: And then maybe- this is what I would do, Hawk. At 55, you’re going to tone it down. You’re going to stop making the big bucks and then go to Home Depot and make $20,000 and work a couple of days a week.

Al: Because you got to want something to do anyway.

Joe: You’re going to have to figure something out. 55 is pretty young, and you’re going to live till 90.

Joe: So you’re halfway home. You got halfway- half of your life is in retirement drinking CLs.

Al: I guarantee you play golf 3 times a week for 3 months and go, well, okay-

Joe: Get bored?

Al: – I need something else.

Joe: So maybe you figure if you’re going to retire 55, then think of, OK, well, maybe I work part time somewhere that I really enjoy. And let’s say you make $10,000 or $20,000, who cares?

Al: You just got to bridge a little gap between $90,000 or $100,000 to $120,000.

Joe: Right. Because you’re a little bit short and you don’t want to take out any more than call it 2.5%, 3% out of the portfolio. And so let’s say you make $20,000, $30,000, maybe the wife makes $10,000, whatever, or vice versa. At least that kind of bridges the gap for about maybe 5 or 6 years. And then that gives you- the portfolio a little bit more time to grow and do all of that. Because with a name like Hawk, what the hell is he going to do? He’s not going to be like a couch drunk, is he?

Al: No, he’s going to be-

Joe: He’s ripped.

Al: He’s going to be super motivated to do something.

Joe: Hawk is like he drives his Buick Enclave. He’s got a wife.

Al: That’s a cool looking car.

Joe: Yeah, right? I’m just thinking if I call myself Hawk, I got to be a badass.

Al: You’re a doer. You’re not going to sit around.

Joe: Not gonna sit on my ass.

Al: Yeah, whatever that passion-

Joe: Don’t call me donkey.

Al: Whatever that passion is, to make a couple of bucks doing that, you should be fine.

Joe: All right. Thanks, Hawk.

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Spitball My Health Insurance, Capital Gains, and Real Estate Retirement Strategy (Scott, GA)

Joe: We got Scott from Georgia. A lot of Georgia.

Al: Seem to be.

Joe: “Good evening, gentlemen. I’ve been helped and entertained by your podcast. Thank you so much.” Oh, thank you, Scott. “I would like you to spitball my situation. I’m trying not to leave out any important details. My dog years- my dog years ago met a car and is no more.

Al: Oh, that’s sad.

Joe: Yeah. Kind of did it as like a poem?

Al: You just have to think about what it means.

Joe: Oh my God. “My cat fine, but is a talker. I drive a small pickup rarely as I like the more comfortable Camry, late model of course. Please use the name Scott when referring to me. Thanks.”

Al: Was there another name we could have used?

Andi: Yes. Scott is an alias.

Al: Got it. Okay. Scott from Georgia.

Joe: All right, “Details. I have no debt at this time. Yearly income, approximately $100,000. I plan to do some traveling overseas between 60 and 65 years of age. I’m a United States veteran.” Thank you for your service. “Possible life expectancy, 87 years.”

Al: That’s pretty good. Which month? Do you know? Are you going to live to 87 or 85? 84 and a half maybe.

Joe: “I’m 58 years old and single. I am planning to retire maybe year 2023. Expenses. Minimum basic living expenses, $33,000 or less. Income. He’s got a pension of $24,000. Dividends $5000, comes from my brokerage account. Social Security, $19,000 at age 62 and rental income of $8000.

Al: Got it.

Joe: “Got brokerage account assets $350,000, 401(k) before tax $775,000, 401(k) $86,000, Roth IRA $61,000, HSA $31,000, Money market $60,000, I Bonds $10,000, Rental property $50,000, home value $160,000.”

Al: Yeah. So just for your benefit, I added the liquid assets, $1,400,000.

Joe: $1,400,000. All right. Way to go, Scott from Georgia.

Al: Yeah. Good job.

Joe: “I would like to keep my taxable income about $34,000 in order for me to be eligible for VA health benefits and/or to be able to use the Affordable Care Act in early retirement for 6 years between 59 and 65. I will pull money as needed from non-taxable brokerage account first. Georgia at 62 years does not tax retirement income until $35,000. Georgia at 65 years does not tax retirement income until $65,000.
After 65 years, I will try to limit taxable income to the top of the 15% tax bracket. I’m waiting to utilize the benefit 0% tax on capital gains and 0% tax on dividends. I am planning on taking Social Security later in life, maybe 67 or 70 years old. I have about $120,000 in capital gains on the S&P 500 stocks in my Vanguard brokerage account. I would like to realize the brokerage account capital gains over time at the 0% tax rate.
My thoughts are to give close family up to $20,000 to buy I bonds for me this year at 9.62%. I can receive it back as an inheritance or when sold. It has been recommended to realize capital gains first before doing Roth conversions. I plan on investing cash in investment accounts before retiring. Good time now as the markets falling. I have a piece of property with my- and father’s name on it, but paid for. But I paid for it. It will sell at a loss of $15,000. Will I be able to take the tax deduction? Please, what are your thoughts? They will be much appreciated.”

Al: So what are we doing? Spit balling the whole thing? Just go back to the start.

Joe: I don’t know. I just lost interest in-

Al: “I would like you to spitball my situation.” Well, I’ll answer the very last question because it’s fresh in my mind. Will you get a tax deduction? So you got a piece of property with your name and your father’s name on it, but you paid for it. So it depends what kind of property it is. If it was purchased for investment yeah, it would be an investment property. If it’s a piece of land, it’s a capital loss. So you can only do it against capital gains. Right. And if it’s a rental property, then when you sell rental properties at a loss, there’s a special rule that allows you to take ordinary income on rental property losses, but capital gains on rental property gains. So I don’t know which it is, but assuming it’s for investment purposes, yes, you could get a tax deduction. Whether you have to split it with your father or not, the fact that you paid for it, is it 50/50 on the deed? I don’t know. There are some things you might want to consider with your accountant.

Joe: All right. Georgia, 62 years does not tax retirement income. So you pull money out of a retirement account up to $35,000 and not pay any tax? Or is that pension income? What do you think?

Al: Let me get caught up here. Retirement income. I’m going to say pension because that’s Hawaii, which I know, and Hawaii doesn’t tax pension income, but does tax IRAs. I could be wrong, but that’s how I’m going to go with that.

Joe: Yeah, that’s what I thought too. 65 does not tax retirement income up to $65,000. And then after 65-

Al: – try to stay on the 15% bracket.

Joe: Okay. He saved a ton of money. He doesn’t spend any money. What’s annoying to me is that people that have millions of dollars-

Al: I know what he’s going to say.

Joe: – this whole Affordable Care Act.

Al: Let’s get all the benefits we can, even though they weren’t really designed for people like me.

Joe: Right. You got millions and you’re using the Affordable Care Act. Whatever.

Al: I get it.

Joe: That’s the law, that’s the rules, and you can do whatever-

Al: And so the Affordable Care Act. Just to explain how that works. So if your income is low, if you’re in the poverty range, then you can get government assistance to pay for your health insurance and veteran benefits, similar concept. Right. I don’t know as much about veteran benefits, but I’m assuming it’s the same concept. And so if you arrange your affairs to have artificially low income, which you can do, you can qualify for these benefits, but then you can’t really do capital gains because that messes you up. You can’t really do Roth conversions.

Joe: Right. He’s got $125,000 of capital gains. And so it’s like, well, here, if I sell this at the time I need the cash, then that’s going to blow me up into a higher tax bracket, and then that hurts my VA benefits or that hurts my Affordable Care Act in regards to health insurance. So he’s trying to blow out of the $125,000 before he does Roth conversions. So you got $150,000 gain in the S&P 500 fund. So he’s got $1,500,000 total, and he’s got $700,000 in a 401(k) plan, right? Okay, so I forget how old. How old is Scott?

Al: He’s 58.

Joe: 58. OK. So he’s got let’s call it 15 years until RMD age.

Al: Correct.

Joe: Okay. So $700,000 is going to be worth $2,000,000, right? And his RMD is going to be $80,000. Then he’s going to have his pension, Social Security. Right. And what tax bracket do you think Scott is going to be in at that point? Pretty high.

Al: Yeah, probably. And he’s single, so I’m going to say that with the tax rates coming back to what they were, either 25% or 28% bracket.

Joe: He’s got $40,000- He’s going to have $120,000 of income. At 72, single, he might be in the 28% tax bracket.

Al: Yeah, that’s what I’m saying. Exactly. And even if we’re off a little bit, it’s still high income.

Joe: Right. So he’s doing all these maneuvers to save a couple of bucks on health insurance when he’s going to blow everything down the road. Right?

Al: Yeah. That’s the problem with this strategy, is that if you should be doing a Roth conversion, maybe that’s what you should be doing. If you should be rebalancing and paying a little bit of capital gains or even paying no tax on capital gains because you’re in currently the 12% bracket, then maybe you should do that instead of trying to get this benefit. I get that you could qualify for it, but I guess this is a moral issue. Should you? I mean, it depends upon your feeling. I’m just going to tell you, me, personally, I would not. I don’t think this is how this was intended, but I get it. It’s available and people want to take advantage. It’s just my own personal feeling.

Joe: And so how Al and I would look at this is look at the added premium that you would pay by doing the appropriate tax planning so you don’t blow yourself up in the future and count that as a tax. Right. Because you could say, hey, I’m going to zero myself out, I’m going to pay very little health insurance, I’m going to pay very little tax. It’s going to be low for quite some time and then it’s going to spike huge on you.

Al: Right. Because you didn’t do the Roth conversions and the capital gains.

Joe: Right. Because his IRAs is going to continue to grow tax-deferred. He’s not going to pull any money from that. And then he’s going to play the capital gains game, which is fine. And it’s like, okay, well, let’s keep deferring this, kicking the problem down the road.

Al: Yeah. And he’s going to live to 87.

Joe: So if I looked at this as a strategy of say now until age 87, what is the cheapest way to do all of this and what is going to be the most for me and at the end of the day, the most for my beneficiaries, charity or wherever that the money wants to go to. Or if he wants to spend the last dime and bounce the last check? I think there’s a better strategy by looking at multiple years at a time versus kind of looking at in a silo and saying, you know what, I want to get this benefit right now. Same thing with IRMA, hey, I don’t want to do this because I’m going to pay a little bit extra in Part B premiums. Well call that as a tax. And I’m not guaranteeing you, but if you look at this longer term, you’re going to save more money, you’re going to have more wealth, you’re going to be able to do more things and have more flexibility. And if tax rates go sky high or if you have an emergency where you got to pull a lot more money out, you’re going to have the flexibility versus doing this strategy to keep yourself in ultra-low brackets and paying zero in health insurance until everything goes through the roof on you.

Al: Yeah, it does kick the can down the road to where your taxes will be a lot higher later. Right. So you just have to think about that. I will say one thing though, health insurance is expensive. So I do understand why people want to do this.

Joe: Oh for sure. I get the strategy, but don’t be short sighted with it.

Al: Right.

Joe: All right, thanks Scott.

5-Year Roth Clock: Do I Need a New Roth IRA for Each Roth Conversion? (Jason, CO)

Joe: Jason writes in. Just Jason.

Al: Yeah.

Joe: You don’t know where he’s from?

Andi: He didn’t say.

Joe: All right. “Hello.”

Al: He’s lucky to live in Colorado. That’s where he’s from.

Joe: Oh, I guess Andi didn’t read- “I drive a 2004 Subaru, drink sour beers and have a mutt. Lucky to live in Colorado.” So this Jason from Colorado.

Al: Yes.

Joe: “Love the show. I have an existing Roth opened in 2020. I’ll be 59 and a half in 2026 so 5-year rule and 59 and a half will be satisfied whenever I get around to using the funds after that time. No need for them for the foreseeable future. I’ve heard you mention that each conversion has its own 5-year clock if I’m over 59 and a half. Does that mean that if I want to convert stock in a down market now that I need to open a new Roth IRA? And if I want to do more next year, I need a third and so on? Or can I just convert all of it into the existing Roth?
If the answer is the former, separate Roths, can I consolidate them as they each hit the 5-year mark? Thank you.” Okay. 5-year clock again here, Big Al.

Al: I know you love this and it is complicated. And we probably answer this question about every fourth episode. Nevertheless, it comes up a lot because it’s so hard to understand.

Joe: So there’s two 5-year clocks.

Al: That’s right. See how you do. You’re really good at this. You’re better than I am, so go for it.

Joe: All right. There’s a 5-year clock in regards to Roth IRA contributions. So let’s say if you’re under 59 and a half and over 59 and a half. Let’s just start there.

Al: Yeah, I like the differentiation.

Joe: Okay. So if you are under 59 and a half-

Al: All right, what happens?

Joe: You have to have the earnings season in the Roth IRA for 5 years or until you turn 59 and a half.

Al: Whichever is longer.

Joe: Whichever is longer.

Al: That’s for the earnings part.

Joe: Earnings part. So if you do a conversion at 59, you have to wait 5 years for those earnings to come out tax-free, 5 years or 59 and a half, whichever is longer. Does that all make sense?

Al: Yeah. If that’s your first Roth IRA ever. Let’s start there too.

Joe: So if you’ve never established a Roth IRA and you’re 59 years old, you have to wait 5 years to get the earnings out tax-free. However, the contributions are 100% tax-free with FIFO tax treatment, whatever you put in, you can always take out, no harm, no foul, no matter what age.

Al: On a conversion or contribution?

Joe: Contribution.

Al: I agree with that.

Joe: Okay, so once again, contributions-

Al: Contributions.

Joe: – 59 and a half or 5 years, whichever is longer, to get the earnings out of the Roth IRA tax-free. If you’ve never, ever established a Roth IRA before, the 5-year clock starts on January 1, the date that you contribute to- or the year that you contribute to the Roth IRA.

Al: Okay, so I’m 30 years old, I contribute to my IRA or Roth IRA, I should say, in December. So my clock starts on January 1 of that year.

Joe: Correct.

Al: I did a $3000 contribution. 6 months later, Armageddon, I need that money.

Joe: Correct.

Al: So I can pull the $3000 out, no penalty. Even though I’m 30, I’m not 59 and a half.

Joe: That is correct. But the $3000 grew to $3300.

Joe: Correct.

Al: I can’t take that $3000 out. I can- but then I have to pay taxes-

Joe: $300. The $300.

Al: Sorry. $300. I can take it out, but I have to pay income taxes and a penalty.

Joe: Correct. All right.

Andi: So the growth is the part that you can’t have for 5 years.

Al: When it comes to contributions.

Joe: When it comes to contributions and the 5-year clock starts with the first dollar that hits the first Roth. So if he’s continuing to make contributions, you don’t open up separate Roth IRAs.

Al: Right. And so that’s one thing. In terms of Roth IRA, if you have 100 Roths, it’s counted as one. That’s the aggregation rule. So you don’t need 100 Roths- the first one, you got 6 of them. It’s just like you have one. It doesn’t matter.

Joe: So conversions have a different 5-year clock. The conversion is each conversion that you make if you’re under 59 and a half, is that each conversion would have its own 5-year clock on the conversion amount.

Al: So on the principle on the conversion.

Joe: Correct. Because if I do a Roth conversion, that means I’m paying the tax on the money that I convert. And so let’s say I’m 50 years old and I do a Roth conversion of $10,000. I pay the tax on the $10,000. Now I have this Roth conversion of $10,000, and then 3 months later, Armageddon hits, and I need the $10,000. Right. And I pull the $10,000 out of the Roth IRA. Well, the Roth IRA rules say that it’s FIFO tax treatment, first in, first out, because I’ve already paid taxes on the money. So then I take the $10,000 out, but I’m 50. So what did I avoid?

Al: Well, you didn’t avoid the penalty.

Joe: Well, I avoided the penalty if that were the rules, right? So the IRS- because this is how the rules were, right? And then they were like, hey, you know what? People are avoiding the premature penalty of the 10% penalty by taking the money out prior to 59 and a half because they could just convert the money, pay the tax, and then pull it out the next day.

Al: Look, I got away with the penalty.

Joe: Yeah. So they’re like, you can’t do that. So now there’s a 5-year clock on the conversion if you’re under 59 and a half. So each conversion that you make if you’re under 59 and a half have its own 5-year clock until you turn 59 and a half.

Al: And then all of a sudden there’s no 5-year clock anymore for conversions.

Joe: Correct.

Al: On the amount converted.

Joe: Then all of a sudden the 5-year clock on it disappears. And let’s say you did the contribution 10 years ago. Well, your 5-year clock now, if you’re over 59 and a half, is already satisfied by the first dollar that entered the contribution 10 years ago.

Al: That’s true.

Andi: OK, so Jason says he’s going to be 59 and a half in 2026. He wants to know if he needs to continue making- opening new Roths for every conversion. So the answer there is no.

Al: No.

Joe: They’ll just continue to convert. If he wants to pull the money out prior to 59 and a half, then that’s where he’s going to have the issues.
But he says he doesn’t need the money, so don’t worry about it.

Al: Yeah. So after 59 and a half, the only 5-year clock is if you didn’t have any Roth for 5 years. Now you’ve got to wait 5 years until your first Roth, and it goes back to the January 1 of the year you did the first conversion or contribution. So you got to wait for that period to get the earnings. You can always take the principal out, which after 59 and a half is either your contribution or your conversion.

Joe: And how the IRS looks at this is that what comes out first is going to be FIFO from contributions. Then it’s the conversion amount, then it’s the earnings on the contributions, then it’s the earnings on the conversions. So it’s four tiers. I have no idea how they’re going to calculate this, but that’s what it states in the old rulebook.

Al: Okay, that’s sort of clear.

If it’s not clear at all to you, I can understand. A visual aid might help. Learn the where, when, and how of taking money out of your Roth IRA when you download our free guide on the 5 Year Rules for Roth IRA Withdrawals. Your age, contributions, conversions, and the IRS order of Roth IRA withdrawals all impact your access to that money in your Roth accounts, so this is one guide you’ll want to keep handy. Click the link in the description of today’s episode in your podcast app to go to the show notes and get downloading.

Wait, When Must You Withdraw Money from an Inherited IRA? (Greg, Beautiful Temecula, CA)

Joe: Okay, I got Greg. He writes in, Big Al, from beautiful Temecula, California. “Hello, Big Al and plain old Joe.” He’s starting off-

Al: Plain? I know you don’t like that. “I think you might have said something incorrect on episode 398.” I doubt it. Greg. “You said if you were a non-spouse inheriting an IRA, you have 10 years to close the account. That is correct. But you then said you could wait until the 10th year to take all the money. I think the IRS has said their interpretation of the laws that you have to take a distribution every year?”

Al: With a question mark.

Joe: I have not seen that interpretation, Alan. Have you?

Al: No. I’ve seen the SECURE Act changed how this all works. They took away the stretch and they said it had to be paid out within 10 years. But you could mix and match any year you wanted to, including waiting until the 10th year.

Joe: Correct. I remember prior to the stretch IRA.

Al: Then you had to take RMD every year.

Joe: That was the stretch. But then prior to that, you had to deplete the account in 5 years.

Al: Yeah. Right.

Joe: That was pre-2000.

Al: That’s right, exactly.

Joe: So that have the same kind of laws there too.

Al: Yeah. You could do it all at one year if you wanted it to.

Joe: Correct.

Al: So they just continue that rule from 20 years ago.

Joe: Yeah. So, Greg, I don’t know, we’re standing by what we said.

Al: If you know something else, send it to us.

Joe: Why don’t you send us some proof?

Al: Yeah, right, this is-

Joe: Just give us a code number. That would be helpful if you’re going to combat us.

Al: Or something written by the IRS or a publication, not something you saw on the Internet and you assume it’s true.

Joe: Yeah. Listened to this other stupid podcast probably, and they were saying something wrong.

Social Security Earnings Limits Revisited (Jim, Santa Cruz)

Joe: We got. “Hello, Andi, Al, Joe. Jim from Santa Cruz. It’s taken me a couple of months to recover from Joe completely tearing my last email to shreds.”

Al: Do you do that?

Joe: No.

Al: You don’t remember?

Joe: No, I don’t recall. “But I figured out how to recover. This time my question is directed primarily to Big Al.” There ya go.

Al: Okay, I’ll do my best, Jim.

Joe: “I asked, of course, on behalf of my good friends Jack and Diane, who are officially retired in June 30th. Jack is delaying Social Security. But Diane began taking Social Security distributions in July. She recently began performing some part time work, less than 15 hours a week. Because Diane listens regularly to YMYW, and she’s heard this topic discussed before, she mostly understands the SSA special earnings limit rule. But she’s unclear about a couple of things. Big Al, can you help her out?”

Al: Okay, what’s the question?

Joe: All right. “Diane understands that SSA allows her to earn $1630 a month while drawing benefits. She exceeded that amount during the first 6 months of the year. How does she avoid being penalized by the SSA for the excess earnings prior to her retirement?”

Al: Okay, I’ll take that one. So that’s the same as $19,560 per year. So that’s how much you’re allowed to earn without having to pay back some of your Social Security benefits if you take your benefits before full retirement age. There’s a different number of the year you turn full retirement, but let’s just go with this for now. And so if you make more than those amounts, then for every couple of dollars over, you got to pay a dollar back. And what the Social Security Administration does is the following year when you’re receiving these benefits, they say, well, you got paid too much. So instead of paying you whatever number they were paying you, $800 a month. Now they’re only going to pay you $600 a month because we’re going to get our money back. Right. And so you don’t necessarily get penalized. And the cool thing about this is, if you took benefits that you had to pay back, they recomputed as if you never took it. Does that sound right, Joe? You’re the Social Security expert.

Joe: Yeah, yeah, perfect. I don’t know. The only thing is that is yeah, that’s good enough. Good enough answer for a big Jim. We could get more technical, but we’re not.

Al: Keeping a high level.

Joe: Just because it’s Jim from Santa Cruz. “Would contributions to Diane’s solo 401(k) reduce her earnings for SSA purposes? If so, can those contributions be made up to April 15 of next year? Thanks, as always, for your great show. Jim from Santa Cruz.”

Al: All right, so that’s a good question. So Diane apparently has a business that she can do a solo 401(k). If you have your own business, you can set up your own 401(k), individual 401(k), solo 401(k). Same name for the same thing, or different names for the same thing. When you put money into the solo 401(k), it does not reduce your earnings, your Social Security earnings, because the way that that’s computed is your net business earnings without regard to that. So, no, that does not reduce your business earnings. However, like, let’s say Diane needs a new computer, and printer and whatever, and that costs $3000, whatever it is, she can buy that in December. As long as it’s put into service by that date, you can write off the entire amount towards income. And that does reduce your self-employment income, reduces your earnings from your business, reduces your self-employment.
And then maybe by doing stuff like that, you could stay under the $19,560. So you can do that. So for those of you that are self-employed, try to load up on expenses before year-end. And it could be capital equipment, like desk, computers. And with the first year write off, you can go at Section 179. You can write that off dollar for dollar.

Joe: There you go, Jim. Glad you asked Big Al on that.

The Derails

Andi: Get ready for Roll tide, cars, the Hawk show, and sour beer in the Derails at the end of the episode. Stick around.



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