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
August 25, 2020

The YMYW Retirement Plan Spitball Analysis was so popular that it’s time for part 2! Where do Roth conversions, your primary residence, and rental real estate investment properties fit in your retirement plan? How much of your Social Security is taxed, and will taking your pension lump sum before taking Social Security have an impact on your taxes?

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Show Notes

  • (02:18) Retirement Plan Spitball Analysis: How Should We Do Roth IRA Conversions?
  • (10:20) Retirement Plan Spitball Analysis: Should Mom Convert to Roth IRA?
  • (17:00) Retirement Portfolio and Real Estate Spitball Analysis
  • (25:30) What Does Our European Retirement Mean for Our Residence When We Return?
  • (29:06) How Much of My Social Security is Taxed?
  • (32:42) Does Taking My Pension Lump Sum Before Social Security Impact My Taxes?
  • (39:00) Can I Receive Up to 180% Social Security Benefits for Caring for a Disabled Child?

Free resources:

 3rd Annual YMYW Podcast Survey: Share your opinions before September 21, 2020, for your chance to win a $100 Amazon e-gift card!

YMYW TAX UPDATE LIVE WEBINAR | Plus open Q&A with Joe & Big Al, especially for YMYW listeners!

Wednesday, August 26, 12pm Pacific / 3pm Eastern. 


Spouses May Qualify for Early Social Security Benefits If They Care for a Child with Disabilities

Listen to today’s podcast episode on YouTube:



Share your opinions about the Your Money, Your Wealth® podcast for your chance to win a $100 Amazon e-gift card! Click the link in the description of today’s episode in your podcast app to go to the show notes and fill out the 3rd annual YMYW podcast survey, and you’ll be in the running for the hundred bucks. US residents only, no purchase necessary, survey giveaway closes at 9am Pacific on September 21st, 2020. Today on Your Money, Your Wealth®, the YMYW Retirement Plan Spitball Analysis was so popular that it’s time for part 2! Where do Roth conversions, primary residences and rental real estate investment properties fit in your retirement plan? How much of Social Security is taxed, and will taking your pension lump sum before Social Security impact your taxes? I’m producer Andi Last and here are the hosts of Your Money, Your Wealth® and lovers of long emails, Joe Anderson, CFP® and Big Al Clopine, CPA.

Joe: If you have money questions, go to YourMoneyYourWealth.com and click on that button ‘Ask Joe and Big Al’. The button’s back up and running, right Andi?

Andi: I believe so. I think it is. It should be. Test it. Find out. Let us know.

Joe: All right. I think we’re back. So we appreciate everyone kind of jumping through hoops here the last few weeks. But we did get all of your emails. Some people get very rambunctious, Alan.

Al: They do.

Joe: It’s like if I don’t answer their question in 30 seconds-

Al: We either get that or we get one that is like 5 pages long.

Joe: Well no, the ones that are 5 pages long, they want to get their financial plan ASAP.

Al: That’s right.

Joe: And get it on the air.

Al: Correct.

Joe: And props. It’s like I don’t know if it works that way.

Al: It’s like the only ones that send us the 5 page things have all this money, so they’re trying to have us say ‘oh you did such a good job’.

Joe: And then we’re getting all sorts of different types of interesting comments. Love your show, but this other show’s better because they’re not as sarcastic or something. I didn’t think we were sarcastic. Are we sarcastic?

Al: Sometimes.

Joe: Maybe.

Al: I think people like that.

Andi: I love the fact that we actually got a comment, somebody said that you come on like an extra spray of cologne.

Al: Oh yeah, that was Joe. How did they describe me? I can’t remember.

Joe: A very nice person.

Al: A very, very nice person.

Joe: That’s what you are.

Retirement Plan Spitball Analysis: How Should We Do Roth IRA Conversions?

Joe: “My name is Pam and we live in Indiana. I would love to have you gentleman spitball our circumstance to see the best way to do a Roth conversion and retire.” In that order?

Al: I guess.

Joe: So “Pam’s 58, husband’s 66. I would like to retire now but will lose my health insurance. Suggestions? My husband of course qualifies for Medicare.” Breaking her stuff down. She’s got $730,000 in pre-tax accounts; $320,000 in Roth; $100,000 in savings.

Al: That’s pretty good tax diversification I would say.

Joe; That’s not bad. That’s about $1,000,000 right?

Al: Yep. Well over.

Joe: $1,100,000. “Between $88,000 – $100,000 in rental income per year.”

AL: Wow that’s impressive.

Joe: Very much so. “Husband receives $1100 in Social Security and a small pension of $400.” So let’s just call that $1500. “At 62 I’d receive $1600 in Social Security. We own 29 rental properties.”

Al: Wow.

Joe: Wow.

Al: That keeps them busy.

Joe: That’s a lot of doors.

Al: That’s like what are you doing this weekend? I’m going to fix a toilet.

Joe: “No mortgages, and would consider selling them as part of the plan or leaving them to our children, whatever’s best. Our home is paid for and is valued at $360,000. We don’t have any debt and I’m currently working and my salary is $70,000. We put $26,000 in a 403(b) and the company matches $7000. We put $14,000 in Roth IRAs and $8100 in the HSA yearly. Currently, expenses are $2300 a month. Our goal is to have $50,000 to $60,000 annually, allows a couple of trips a year. Not sure what other information would be helpful.” Well Pam and husband in Indiana, congratulations.

Al: I think you’re all set.

Joe: Let’s see. (Joe does math) So the current monthly expenses are $27,000 a year, $28,000 a year. And then let’s add another $60,000 on top of that for travel. So that’s $90,000. Then just a rental income alone is $100,000.

Al: Takes care of it. Yeah. Even without the rental income, the fixed income especially when she collects Social Security and just-

Joe: I would not take your Social Security at 62.

Al: I wouldn’t either.

Joe: She’s got $1600 in benefit. Pam, I would push your benefit to age 70.

Al: Unless there’s health consequences for the both of you.

Joe: Correct.

Al:  Otherwise I would just- Yes, I agree.

Joe: Because then- I would say that they probably own those properties for quite some time but-

Al: And I’m thinking even if they’re $100,000 each. That’s $2,900,000 of equity. Maybe they’re $150,000 each. I have no idea. But it’s several million dollars of equity.

Joe: So a couple questions that you and your husband should ponder. As you get older would you want to continue to have 29 properties? Because that seems like a lot of work. You might have a property manager and have them do all the work and you just collect the checks which is great. But man, 29 properties just kind of seems- as people get older they want to consolidate a little bit more. Not necessarily have that much but it seems I mean they’re real estate investors. They know what they’re in for and maybe the kids would love to have those properties because they produce great income.

Al: Maybe so. I don’t know what their cash-on-cash is, but let’s just say it’s 5%, it’s really higher, but that would put it at $2,000,000 of value. So it’s probably a great income. The problem though is it’s a lot of work. And so usually as people retire they want to simplify rather than- So there’s a couple of-

Joe: But they’re still young. I mean she’s 58. It’s not like they’re-

Al: No I understand. But like they want to travel. Right? So either- and I don’t know if they have a property manager already or not but if they don’t then that would be a way to go potentially. The thing about holding the properties and just you living off the income, there’s nothing wrong with that. But then all the build up of equity then the kids will get that.

Joe: I think that’s a good plan though. Then the kids will get it; they get a step-up in tax basis. So then if the kids don’t want to have the properties, they can sell it and pay no tax. It gives them really good income through life. Maybe some of the income is sheltered through depreciation. There’s probably some repairs and everything else. I guarantee you the $100,000 or $88,000 that they’re getting is not 100% showing up on their 1040.

Al: Oh absolutely.

Joe: So if I’m looking at it like that he’s already collecting his Social Security and pension. So call it they’re in the 12% tax bracket and providing everything that they need.

Al: Potentially. So then if we go to the question about Roth conversion if you’re in the 12% bracket then do a Roth conversion to the top of the 12% every year you can.

Joe: Right, you’re 58 years old. But your husband’s 66. So there’s a little bit shorter time frame for your husband so you start at your husband’s 401(k) or IRAs first-

Al: First, correct.

Joe: – start converting those out. You could go to the 12% or even the 22% tax bracket because they got $730,000 in deferred accounts at 58. Even if it grows, half of it’s hers, half of it’s his, I would say most of it might be hers. To guess just looking at the Social Security number, that it looks like she probably made a little bit more wages than he did.

Al: That’s what it looks like.

Joe: And so maybe these are her liquid assets because she’s saving into the 403(b). Maybe he was buying the real estate. Who knows? I don’t know. But if this is all in her name then she’s got a lot more time to convert. But if it’s in his name then you would probably want to convert to the 22% because that $730,000 could grow. And then now you have your Social Security, his Social Security, his pension, the real estate income, and then the RMDs. Tax brackets could be who knows when. So taking advantage of the 12%’s no brainer; 22% looks pretty good.

Al: Maybe, it just depends.

Joe: It just depends.

Al: If this is mostly her money and pre-tax then she would have 14 years to convert until her RMDs, so there’s a lot of time.

Joe: Ton of time. Let’s see what else, health insurance. Well I don’t know. You can still afford- you don’t spend any money Pam. You could just bank in another $15,000 for health insurance or private-

Al: And you’ve got a HSA plan currently. So just buy a similar plan. The premiums aren’t that high. I mean relative to other kinds of plans. Keep putting money into the HSA.

Joe: I don’t know if you can have a- well I guess she can at 58, but you can’t at 65.

Al: All the way to 65. Husband cannot. But Pam can.

Joe: So I think you’re there. I mean if I’m spitballin’ here.

Al: Yes.

Joe: I would say this is not advice. This is called a spitball.

Al: A spitball analysis.

Joe: It’s free. I’d say go for it.

Al: I agree. I think Pam, you’re in a great position. I would do Roth conversions at least to the 12%. I would consider 22%. I don’t know whether that would make sense or not. You’d have to look at that more, But you’re in a great spot to do everything you want to do. Then just go ahead and buy the health insurance and enjoy life. Get a property manager if you don’t have one, so you can travel.

Joe: Congratulations Pam. Job well done.

Retirement Plan Spitball Analysis – Should Mom Convert to Roth IRA?

Joe: We got Minnesota Nice Native. All right cool. Subject to “Yo Money Yo Wealth.”

Al: I like that.

Joe:  “Please use.”

Al: Wow.

Joe/Al: Yo.

Andi: And then it said ‘Andi rocks’ in the subject line so that it’ll get on.

Al: We get a younger audience that way.

Joe: We’re changing. We’re changing it, Yo Money Yo Wealth. “Hi Andi, Big Joe-” or Big Joe- “Hi Andi, Big Al and Joe. Joe, sorry for last billing but this may be more of a Big Al question.” This is two in a row here.

Al: Two in a row right?

Joe: “Well Andi is just awesome the way she keeps you guys in line. Joe, we’re from near your old stomping grounds, Rochester, Minnesota.” Southern Minnesota boy. All right. Sounds good. Oh, I don’t know if it’s a boy or just a Minnesota Nice Native.

Al: That’s all we know.

Joe: Got it. “Writing in on behalf of my retired 69-year-old mother. She asked me to review some of her financials to determine if anything needed to be adjusted. I do have a financial planning degree but I haven’t practiced so I don’t have a CFP® designation so I don’t understand most financial concepts but probably know enough to be dangerous.” So I have a financial planning degree. But I don’t know anything.

Andi: Actually he does say “I do understand most financial concepts, but probably know enough to be dangerous.”

Al: Oh, I thought you said I don’t know-

Joe: Andi you’re just kissin’ up because he kissed up to you. So let’s see here. “Mom’s got inherited stocks $240,000 with the basis around $120,000; of this $160,000 is in Apple. This concerns me.” Yeah, that would concern me too.

Al: Same, yeah.

Joe: “She hasn’t touched it since inheriting it, but it may be time and she is ok with putting some of it in other assets. She’s got about $100,000 in an IRA with an annuity, $55,000 in a regular annuity; $250,000 an IRAs; $40,000 in the checking account.” Did you add all that up there Bud? So we got $250,000, $350,000, so $350,000, plus 4, 5, $600,000. Call it $700,000. “Current income- in regards to the annuity, she needed reassurance of a base level of income. She’s drawing on them and is pulling $1200 a month out of those for the next 15 years. Her Social Security is about $1000 month. She’s currently living with her longtime boyfriend and her living situation may change in the next 5 to 10 years due to him being older and male versus female lifespans etc.. At that point, she’s planning on a modest apartment here in the Midwest. She has always lived conservatively and has goals to be comfortable and pass assets on to her children; and in my case, her grandchildren.” So Minnesota Nice is getting bypassed.

Al: He’s all set.

Joe: He’s got a disclaimer. I don’t need her money.

Al: I’m good.

Joe: I’m good. I’ve got a financial planning degree.

Al: I made the most of it. I’m wealthy now.

Joe: I killed it. So he’s got some questions here. “Since she has very low or no income taxes, at this point should she be converting traditional IRAs to Roth IRAs given her living situation may change at some point and RMDs are around the corner?” Yeah. If she’s not in any type of tax bracket you could convert at least some tax-free. Convert a little bit more at the 10% and convert a little bit more at 12%.

Al: Correct.

Joe: She’s got not a ton in retirement accounts but about $300,000 some-odd. She’s already taking some from the annuity. I’m not sure if it’s the regular annuity that’s ordinary income, but I would probably look into doing some conversions there.

Al: I think I would sell the Apple stock first though.

Joe: I think her Apple stock is $160,000 makes up too much of her overall non-annuity of investments of $490,000.

Al: Because you can use that 12% bracket, sell the Apple stock and pay no capital gains, at least to the feds.

Joe: Yeah for sure. So I mean so there’s two tax plays here. There’s the tax gain harvesting where she could sell some of the Apple stock. You’re not getting hit in taxes. Or she could take the money and convert it. How old is Mom? 69.

Al: 69. So she’s got 3 years before RMDs. So the way that works- for example, let’s just say Mom’s taxable income is $20,000 and the top of the 12% bracket’s about $40,000. So she could sell roughly $20,000 of gain in stock. And let’s just say the basis is 1/2 of the value. She could sell $40,000 of Apple stock to produce a $20,000 gain and pay no tax. That way she could get diversified over the next couple of years.

Joe: I would definitely get rid of the Apple stock, at 69. But she doesn’t necessarily need the money. So maybe hold on to it. Who cares? They just did the split.

Al: I know but it’s just that it’s 33% of your assets in one stock. That makes me nervous.

Joe: I know you’re very concerned. I don’t know. Let’s say if he inherits that Apple stock it’s going to his kids. So you could look at it as that we got a $100,000 some odd that potentially is going to go to my grandkids. It’s gonna get a full step-up in tax basis there.

Al: I know. But she might need it because their living situation may change.

Joe: I would run the numbers a little bit more to see how much money that she actually needs on top of Social Security and on top of once the annuities are gone. She’s 70, 85 is when the annuity income, so she’s pretty close to life expectancy in 15 years. Maybe she doesn’t need any of the other income. I’d keep the Apple stock and let it go to give to the grandkids.

Al: I’d sell some this year and some next year.

Joe: Well. “I listen to your show very often I love the dynamics you all bring and have going on. We greatly appreciate your thoughts and insight. Take care. Minnesota Nice Native.”

Hey, speaking of cap gains, do you have any idea what’s going to happen with capital gains taxes if Biden wins the election? Or if Trump wins the election? Joe and Big Al are talking about that, and all things taxes, tomorrow, Wednesday August 26 at noon Pacific 3pm Eastern, on the LIVE YMYW tax update webinar. Don’t miss your chance to have the fellas answer your tax questions on the spot, and find out what the 2020 election may mean for future tax laws, and the overall financial landscape. Click the link in the description of today’s episode in your podcast app to go to the show notes and sign up for the YMYW live tax update webinar – but hurry, because it’s tomorrow! And don’t forget, you can send in your tax and other finance-related questions in advance by clicking the Ask Joe and Al On Air banner in the show notes too.

Retirement Portfolio and Real Estate Spitball Analysis

Joe: We got Bob. He writes in from San Diego, Big Al.

Al: OK.

Joe: He goes “I won’t bother you with the details but I have four pages here that I got written.”

Al: There seem like a lot of details here.

Joe: There sure does.

Al: I wonder what his non-

Joe “My adjusted gross income is $86,242.57.” That’s a joke, Al. I know you’re looking down the page for it.

Al: So where is that?

Joe: “I’ve been watching you guys on Sunday mornings, Your Money, Your Wealth®.” I like how he put that in like we were on another TV show or something.

Al: Yeah, right?

Joe: “And previously a devoted watcher of all things Suze Orman, I watch because I’ve never had a passion or desire for following the market, day trading etc., but have always sought out the experts. Bottom line, I’m not very smart about where to put my money or how to make it grow. So I’ve searched for the smart guys and ladies to help. I’ve just turned 60 and retirement cannot come too soon. That said I recall a commercial from several years ago that had a tagline of ‘What’s Your Number? How Much Do You Need to Retire?’ So here’s a simplified version of my balance sheet.” Let’s see. He’s got an “investment portfolio of $2,000,000; checking is $200,000. Retirement accounts with current employer $100,000. Florida house; equity, rental; no mortgage; $350,000. California house; $1,400,000 market value $1,100,000 equity.” So there’s $3,600,000, Big Al. He’s got a military retirement- Thank you very much Bob for your service. “-$65,000. He’s got rental income $24,000; Social Security he doesn’t know yet. He’s got some liabilities, $300,000 some odd- $350,000 let’s call it from the current mortgage; beloved son still sucking from the family teat, but soon to be independent, fingers crossed; so utilities, not much there. So planned lifestyle expenses, conversion of a detached garage.” So he wants to do that. So consider selling the Florida home maybe thinking that. So that would reduce his rental income from $2000 to about $1500; eventually may lead to an onsite care provider. Wants to buy a motorhome, $250,000 to $300,000.”

Al: The nice one.

Joe: That’s real nice. Own it for 5 years and then get rid of it for $120,000 to $150,000 or maintain it and rent it to others. So he’s gonna be in the business of renting a motor home. He wants to travel. Lots of travel. So I guess here we go. “What’s the best plan for the purchase of the motor home? Use the proceeds to invest the portfolio? Sell the Florida house?” So let’s see, where’s his questions? OK here we go. “How are we doing? Seriously. Perhaps better than some? Many? But not necessarily Rockefeller or rockstar status.” I would agree with that, Bob. You’re doing pretty good. Sounds like you have a really good fixed income. You’ve saved some money. You have very little debt. Kudos to you. Congratulations. “Number two, if we sell the Florida house and split the proceeds between the building costs of the ADU and purchase of the motorhome, are we going to get shellacked with a huge tax bill i.e., with the $350,000 be considered regular home in a single year-”

Andi: Regular income.

Joe: So I guess answered that question. So do we know the basis? So $350,000 is the market value for the Florida home.

Al: It doesn’t say. So Bob you got to look at, what did you pay for it? And how much have you depreciated? So let’s say you-

Joe: – bought it for $100,000?

Al: -$100,000 and you depreciate it to $50,000. So you wrote off $50,000 now it’s worth $50,000. So we’ll just use that example, you sell it for $350,000 net, $50,000 basis, $300,000 gain. So you live in San Diego my friend which means it’s subject to California tax even though it’s located in Florida. For you to avoid California tax, you’d have to be a Florida resident. So we’re going to add California tax. Not really knowing which your other income is but let’s just say-

Joe: It’s going to be $400,000, $500,000 because he’s got a pension of $60,000, he’s got-

Al: Yeah yeah yeah yeah. So it’s probably going to be mostly 15% federal maybe some 20%. So we’ll start with 15% we’ll add a little bit. Then state of California probably 9.3% let’s just call it.

Joe: Net investment income tax?

Al: Yeah. So we’re now at it we’ll call it-

Joe: 25%.

Al: 15% to 10%, we’re 25% plus net investment income tax which is another almost 4%. So let’s call it 30%; 30% of $300,000. That’s about $100,000. I don’t know what the basis is but that’s how you calculate that.

Joe: Then you got depreciation recapture there too.

Al: Which makes it a little bit higher which is why I added a little more.

Joe: Got it. You’re rounding.

Al: I’m rounding up.

Joe: Cool. “If I tap into my Social Security at 62 my estimated monthly stipend will be $2000 a month; at 67 $3000; and at 70 $3800. When should I begin to draw my benefits?” Well you have other income Bob. I would push that Social Security out as long as you possibly can.

Al: I would too although I don’t think you told us what you need to live off of. But assuming that you don’t need the money right now then push it out.

Joe: “Bottom line if I retire at 62, how much can I expend annually?” Well let’s see, how much time do I got?

Andi: About 30 seconds.

Al: Well let’s just say-

Joe: Hold on. I can- we can do this real quick. He’s got- call it I’m gonna go- $2,300,000. Okay I’m gonna say $2,300,000. Let’s go for 4 there- 92 plus $65,000- Plus plus cut-

Al: Call it $36,000 Social Security. If he does 67 just to throw out a number.

Joe: Then plus is he married? Maybe not.

Al: Doesn’t say.

Joe: Well right now, without any rental income if you sell the Florida home you could spend about $160,000 without any rental income and without Social Security.

Al: And that’s inclusive of taxes. So maybe you spend $140,000 or $130,000. You know whatever.

Joe: So I mean you’re pretty close. I mean this is of course really back of the envelope stuff. You would want to run the numbers.

Al: This is a spitball.

Joe: Yeah. This is spitball. But if Bob goes hey, a better question with this novel he wrote us would be like ‘I’d like to spend about $100,000 a year. Is that feasible?’ Yes. Then if you want to get an exact number well now you’re selling a home, you’re building on, other things, there’s going to be taxes there, you’re buying a motor home, then you’re selling the motor home. There’s a lot of decision points along the way and then you’re saying maybe I want to retire at 62. If he spends $50,000 a year then yes, retire tomorrow. But if you’re spending $250,000 dollars you’ll need more assets.

Al: And I like your math. So I would round it down just for just for conservancy. So let’s say $150,000 gross and take out $30,000 for tax. You could spend $120,000 plus your rental income.

Joe: And then plus Social Security.

Al: No, we already added that.

Joe: No I didn’t.

Al: You didn’t? I thought you did.

Joe: No. It’s just the assets.

Al: Oh that’s just the assets.

Joe: I said no Social Security.

Al: Okay. Right. Okay.

Joe: So he’s out $150,000 and then he’s going to have another $30,000 some odd there. So call it- he’s close to $200,000 if he keeps the rental. Or then he’s got this other parcel that he’s gonna rent out, get $1500. It’s gonna be $175,000 to $200,000.

Al: So for most people that we know that’s plenty to live off of.

Joe: But he’s retiring at 62. So you’re gonna have a bridge the gap depending on how much that he’s spending to push the Social Security to 70.

Al: Of course.

Joe: That’s going to keep him in a fairly low tax bracket. He’s got $3,000,000 in retirement accounts that he probably wants to convert to Roths.

Al: While he’s in lower brackets.

Joe: While he’s in lower brackets. So there’s a lot of moving parts here. But I guess to answer the question, I think he’s done a great job. I think he’s on track to do whatever he wants to do unless he wants to spend $250,000.

What Does Our European Retirement Mean for Our Residence When We Return?

Joe: “Hello Andi, Al and Joe. Jim from Santa Cruz calling. Love your show. Best financial podcast that I found and I’ve tried at least a dozen.” How do you try a podcast?

Andi: You taste it.

Al: You just turn it on and see if you like it or not.

Joe: Well Jim appreciate-

Al: It must’ve been one of our better podcasts that he actually wanted to listen to another one.

Joe: I don’t know if we have a better one. “I have a question that I’m hoping can be answered on the podcast.” Well here you are Jim, it’s your lucky day. “My wife and I plan to spend our first few years of retirement in Europe-”

Al: Oh, I like that.

Joe: “-and during that time we plan to rent out our home which we purchased in 2003. Upon returning to America we will move back into the home and expect it to be our primary residence for several years.” Very cool Jim. I like his vision of retirement.

Al: Can I come with ya Jim?

Joe: Yeah, Big Al, He’s ready-

Al: I’m ready.

Joe: – to get the hell out. “When we sell our home, what will be the tax implication of the rental period? I understand that any appreciation would normally be tax free since the home we have been our primary residence for at least 2 of the preceding 5 years. But will the rental period affect that?” So he’s talking about the 121 tax exclusion, where you can exclude $500,000 if you’re married from any type of gain of a primary residence as long as you lived in the house 2 of the last 5 years. “If we take the depreciation during the rental period, do we have to give it back when we sell the home?” He thinks there’s an option-

Al: Yes, that’s-

Joe: – to take depreciation.

Al: Yeah he does.

Joe: “Will our cost basis be affected? Any other stuff we outta consider?”

Al: So here’s how that works Jim, that you purchased a home in 2003. So it was originally a residence. So this is going to affect my answer. And so because it was originally a residence. So you leave for a few years and then you come back. Now when you come back you’ve got to re-establish living 2 out of the last 5 years. So once you come back up to live in at least 2 more years before you sell it but then you’ll get the $500,000 exclusion as a married couple. I guess he doesn’t say it does he? Or $250,000 single. Yes-

Joe: “My wife and I plan to spend our first few years-”

Al: Oh you’re right. Okay so $500,000. Now the amount during the rental period, you have to take depreciation. And in fact if you don’t take depreciation, the IRS presumes that you should have taken it because it’s allowed or allowable. So make sure that you take it because you’re gonna be docked it anyway. So let’s say you take-

Joe: You’re gonna pay it back even if you didn’t get the tax benefit.

Al: That’s right. You’re gonna- say you take $20,000 of depreciation so there’s $20,000 of depreciation recapture. But I will tell you what happens to a lot of folks it depends upon your income. You may not even get to deduct that depreciation because of the passive loss rules. And then if it’s suspended by the time you sell the property it frees up all this passive loss appreciation and the two things net together. So that was a lot in a short amount; but I started taking CPA speak there. A couple CPAs say ‘yeah that’s right’. But I guess the bigger question- the bigger issue is yes, you have to take depreciation. Go ahead take it. Maybe you’ll get a tax benefit. And if you do, yeah you’ll pay that back. But you got the benefit. So no harm no foul.

Joe: No.

How Much of My Social Security is Taxed?

Joe: He’s got another question here. “Also, below is the formula for determining taxable portion of Social Security.” Thank you for sending us that formula Jim, because I would have been lost without it.

Al: We got the whole IRS table.

Joe: I know. He sent us the whole IRS document.

Al: This is very good.

Joe: “Do these brackets change every year? More exactly, when we retire in 2025, is the top of the 15% married brackets likely still to be $44,000? Thanks for all you do.” OK. No, they haven’t moved those brackets in forever.

Al: No.

Joe: So they don’t adjust those for inflation or they haven’t adjusted those for inflation.

Al: But will they between now and 2025?

Joe: I don’t know.

Al: Who knows? We don’t know. But it’s been these numbers for a decade or two?

Joe: Oh more than that.

Al: For awhile.

Joe: So if you look at why he’s saying $44,000 and Jim, what you’d need to figure out too is what your provisional income is. So it’s not adjusted gross income. It’s provisional income, to determine how much of your Social Security is going to be subject to tax. It’s not a 50% tax bracket; 50% of the benefit will be then included in your adjusted gross income. Provisional income is calculated with your adjusted gross income with some add-backs. And the add-back would be half of your Social Security. Just to keep this really simple. So take half your Social Security, plus your adjusted gross, add it together. If it’s over $44,000, then half of your Social Security is going to be subject to tax. Or if it’s more than $44,000 then 85% of it is going to be subject to income tax.

Al: But one thing I want to say, you take your adjusted gross income minus Social Security. So you start with that, then you add back half of the Social Security.

Joe: You add half of your social security into your adjusted gross-

Al: You don’t add it twice.

Joe: Got it. Thank you for that clarification. If it’s over $44,000, then 85% of your benefit is subject to income tax or the amounts over that it’s going to be taxed at 35%, is a better way to say that.

Al: But I would say if you’re trying to do this for planning purposes it’s probably not going to change. Because it hasn’t changed for a long time. But we don’t know that for sure.

Joe: And so- even for provisional income purposes municipal bond interest is calculated in that number.

Al: That’s another add-back. That’s right.

Joe: The only thing that- not only thing, I shouldn’t say that- but Roth IRA distributions is not included in provisional income.

Al: Yes. Agreed.

Joe: So if you have a lot of money in Roth IRA accounts and you’re taking distributions from that, that’s not going to show up anywhere on the tax return. So you could potentially have a very high income and pay very little tax if you do the appropriate planning. So keep listening to the show Jim, you’ll find a lot more strategies like that if you go back into the archives. Good luck.

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Does Taking My Pension Lump Sum Before Social Security Impact My Taxes?

Joe: We got Iona. She writes in.

Andi: I think it’s Ilona.

Al: Ilona.

Joe: Ilona. Iona? What did you say?

Andi: I L O N A . Ilona.

Al: Ilona. Okay. You know when you get the capital ‘I’, it looked like two ‘I’s.

Joe: It looks like a double ‘I’.

Al:  Yeah it does. I get it.

Joe: Good thing I didn’t say 2ona. Iona. Ilona. All right whatever. I’m sorry. Ilona. “Hi, Joe and Al. I’ve been watching you both for many years.” For those of you who are confused when they say ‘watch us’.

Al: Yeah, because you don’t watch a podcast usually.

Joe: You don’t want a podcast, you listen. You go to YourMoneyYourWealth.com, you can see Alan and I on our television program.

Andi: Which just happens to have the same name.

Joe: Yes. It’s Your Money, Your Wealth®. It’s part of our brand, Andi, it’s part of our being.

Andi: Exactly.

Al: Right. It’s like it’s a coincidence. How did that happen?

Joe: I can’t believe. ” I’m 62 and currently unemployed. I’m thinking of retiring and withdrawing my pension as lump sum and start Social Security. Should I first take my pension then Social Security? Does this impact my taxes? Thanks for keeping the great topics on finance on the show.” If you’re going to take the lump sum Ilona, there would be no tax event by taking the lump sum. The tax event occurs when you take distributions. So people get confused; it’s like I’m gonna give you $500,000 lump sum or $1500 a month for the rest of your life. And people say I’m going to take the lump sum. I’m going to get $500,000 and they assume that that could be a taxable event to them.

Al: Well it can be. They have to put it into an IRA.

Joe: Correct.

Al: So if they forget to put it in an IRA, it’s fully taxable.

Joe: But hopefully that doesn’t happen to-

Al: But we get that question sometimes. It’s like I don’t wanna take the lump sum, I don’t wanna pay all the taxes.

Joe: Correct. So she took the lump sum of whatever dollar figure it is, she didn’t share that information; she would roll that directly into an IRA. So there would be no big tax bill and then whatever she withdraws from the IRA is gonna be subject to tax. So if she rolled over in this hypothetical example, $500,000 lump sum, she takes that, rolls into an IRA; no taxes due. And then takes out $20,000 through the course of the year, $20,000 would be subject to tax, not the $500,000 and then, would that affect her Social Security? It could or it may or may not, depending on what her deductions-

Al: But she may also be asking, so what if I do that and I could take- but I need $30,000 or $40,000 whatever. So do I take $20,000 from pension? And then do I start Social Security and get another $20,000 from that or do I just take $40,000 from the IRA and delay my Social Security?

Joe: I would delay Social Security because in most cases- does she live in California?  Well she watches our TV show so she probably-

Al: Probably.

Joe: The state of California is not going to tax Social Security benefits. So that’s a pretty big benefit because we have a very high tax rate in the state of California.

Al: Yes. So in other words, if you can delay your Social Security benefits you get higher income, which is tax-favored.

Joe: Right. And then potentially only 85% at the worst case- only 85% of the benefit is going to be subject to tax. So now I delayed my benefit I have a lot larger benefit that’s tax-favored. I’m not taxed in California and at most only 85%. Where IRA distribution is fully taxable from state and federal. So I would want to burn those dollars out, defer my Social Security, have a lot larger benefit that’s tax-favored.

Al: I think that the only downside I could think of is if the lump sum isn’t that big and if you end up burning through that whole lump sum and so you’ve got no other resources except Social Security.

Joe: But wouldn’t you want a lot larger benefit?

Al: I would. But I’d also like to have some money in savings that I can draw upon.

Joe: I want my cake and eat it too Al.

Al:  I do.

Joe: I want $1,000,000,000. But look at interest rates right now. Where are you going to get an- because if you delay Social Security, Ilona is going to receive an 8% delayed retirement credit from her full retirement age to age 70.

Al: Right. But she’s only 62.

Joe: Right. She takes it at 62, she’s going to receive a 25% permanent haircut on those dollars.

Al: I know but all I’m saying-

Joe: Ilona seems very spry and healthy. She’s going to have a long life. So when she takes her Social Security at age 62,  she’s got a permanent lower benefit. And then she still burns through her money.

Al: Right.

Joe: Because she wants to visit Big Al in Hawaii. It’s expensive there.

Al: I’m just saying she may not be able to delay all the way to age 70. So there might be some kind of hybrid depending upon her circumstances.

Joe: She could- work longer is the best answer.

Al: Or at least work part-time ____.

Joe: Work longer and don’t spend any money.

Al: That’s always the best answer. But that’s not a popular answer.

Joe: No. It’s awful. There are consequences with choices though. If she takes her Social Security- if she’s strictly worrying about taxes because this is what this is conversation’s about. ‘If I take the lump sum, how does this impact my taxes?’ So she’s concerned about taxes.

Al: So we alleviate that, it goes into an IRA. No taxes.

Joe: Delay your Social Security as long as you possibly can. If Ilona was my mother, that is exactly what I would tell her. Because it’s like you would want to make sure that you lock in a lot higher rate. And right now with the markets as they are, and depending upon how much money that you have and how much that you’re drawing from, you probably have to be somewhat conservative with interest rates almost at zero. I mean it’s like I would much rather have a guaranteed by the government a lot higher rate of return. And I know some people are like oh it’s not gonna be there.

Al: Do you trust the government?

Joe: Do you trust the government? You’re an idiot.

Al: It’s not a political issue.

Joe: It’s not gonna – so whatever. That’s what I would do. So good luck with that Ilona. But good news is that there’s no tax if you do the lump sum, if you roll it into an IRA.

Can I Receive Up to 180% Social Security Benefits for Caring for a Disabled Child?

Joe: Seeme John? Simi John.

Andi: Siem John?

Al: Siem.

Joe: Siem. Siem. “Seeing your YouTube videos where it’s suggested that a spouse, me, can receive Social Security benefits up to 180% if caring for disabled child. I’ve been doing so for the life of my now 25 year old who currently receives Social Security benefits and Medicaid. I just turned 62; my wife is 64 and we would like to retire as soon as possible. We’ve spoken to two local financial advisors and a Social Security attorney-” I didn’t know there was such a thing as a Social Security attorney.

Al: Learn something every day.

Joe: “- and none of them are familiar with this. We need advice on how to proceed. Perhaps you can advise us.” So he’s asking- receive 180% of Social Security benefits? And that was on our YouTube channel.

Al: I don’t remember saying that but maybe we did.

Joe: Did someone hack it?

Al: But that’s a correct statement. In fact when you go to the Social Security website, it’s between 150% and 180% of the benefits. They don’t explain which one you get. But here’s what I thought would be important because when you go to the Social Security website you get lost as most governmental websites. This is an example. I think this will kind of help illustrate it. This was I think written by- who was it written by? Oh, Elder Law Net. So this is-

Joe: Is that a person?

Al: Yeah, Elder. And here’s the title I think this is Fitz ‘Spouses may qualify for early Social Security benefits if they care for a child with disabilities.’ So here’s the example, when a parent of a child with special needs retires and begins receiving Social Security retirement benefits her child may qualify for Social Security Disability Insurance based upon the parent’s work record, if the child’s disability manifested itself before the child turned age 22 years old. But a little known provision in the Social Security regulations allows for the spouse of the retiree to also receive Social Security benefits even though he has not yet reached retirement age, so long as he’s caring for a child with disabilities at home, which I think is our case here. Here’s the actual example, father retires and begins receiving Social Security because his daughter developed a disability prior to turning 22. The daughter will begin receiving SSDI benefits at this point, Social Security Disability Income. Furthermore because the 58 year old mother is caring for the couple’s daughter at home she may be also to be able to receive spousal Social Security benefits even though she hasn’t reached the minimum retirement age. Of course there’s a catch and the catch is there’s that limitation of between 150% and 180% which how they calculate the family benefit. And in this particular case the daughter’s benefit could be reduced but the family benefit itself could be higher.

Joe: The maximum family benefit.

Al: The maximum family benefit. So that is a true statement. Now in terms of how you go about this, I would probably go to the Social Security office and then you get someone that’s never heard of it and then ask for the supervisor and then try again. This is not easy stuff but I think what we’ll do is we’ll put this article in the show notes; take a look at it and I think this maybe will help you with what you’re trying to do.

Joe: Or Andi can just email it to him.

Al: That’s true too.

Joe: She stalks everyone.

Andi: I do not. I don’t do that anymore.

Joe: Got it.


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