0% Capital Gains Tax vs. Roth Conversion vs.... a Cruise? - 517

Summary

Your Money, Your Wealth Podcast Episode 517 Summary

Release Date: February 18, 2025

Hosts: Joe Anderson, CFP® & Alan Clopine, CPA of Pure Financial Advisors

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Introduction

In Episode 517 of the "Your Money, Your Wealth" podcast, hosts Joe Anderson and Big Al Clopine tackle a series of listener-submitted financial questions. The episode delves into nuanced topics such as retirement savings strategies, asset allocation in relation to Social Security benefits, inheritance investment plans, and the intricate decisions surrounding Roth conversions versus capital gains tax advantages.

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1. Nancy's 401(k) Loan vs. Brokerage Account Investment

Question Overview: Nancy from Washington is contemplating whether to take a loan from her 401(k) to invest in her brokerage account as a means to accelerate her retirement savings. With a substantial brokerage portfolio and concerns about Required Minimum Distributions (RMDs), she seeks advice on optimizing her financial strategy.

Key Discussion Points:

• Current Financial Status: Nancy has $750,000 in her brokerage account, $25,000 in a rollover IRA, and additional smaller accounts. She maximizes her 401(k) contributions and receives an employer match.
• RMD Concerns: Approaching RMD age, she's wary of the tax implications without having converted to a Roth account due to her 32% tax bracket.
• Loan Consideration: Joe advises against taking a loan from her 401(k), emphasizing that her current savings trajectory appears robust.

Notable Quote:

Joe Anderson [04:19]: "I would do exactly what you're doing. The only thing that I would change... You're in the 32% tax bracket, though. So it's like single. 32%. That's a lot of income."

Conclusion: The hosts agree that Nancy's existing strategy is sound. They suggest considering small Roth conversions upon retirement when her tax bracket may be more favorable, but taking a 401(k) loan is not recommended.

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2. Brian's Asset Allocation Considering Social Security Stability

Question Overview: Brian from Naperville, Illinois, at age 58, aims to retire at 62 and sustain his portfolio until age 100. He inquires whether his asset allocation strategy accounts for the stabilizing effect of monthly Social Security payments.

Key Discussion Points:

• Asset Allocation Strategy: Brian currently holds a 70% stocks and 30% bonds portfolio, which he finds somewhat aggressive.
• Social Security as an Asset: He considers whether Social Security payments can be treated as a fixed income asset, influencing his equity allocation.
• Demand on Portfolio: The discussion highlights assessing the portfolio based on the actual demand for funds versus treating Social Security as part of the investment strategy.

Notable Quote:

Big Al Clopine [09:00]: "It's a little bit more thought of, hey, is it just a 60, 40 portfolio or 70, 30? You really want to dive in a little bit deeper to say, what's the demand? Or what's the money for?"

Conclusion: Joe and Big Al concur that while Brian's approach is innovative, it's essential to focus on the actual financial demand from the portfolio. They recommend ensuring that the portfolio's asset allocation aligns with the specific income needs rather than solely relying on treating Social Security as a bond-equivalent asset.

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3. Jay's Advice on Allocating Inheritance for a Brother with Financial Challenges

Question Overview: Jay seeks guidance on advising his brother, who has struggled with addiction and mental illness, on managing an upcoming inheritance of approximately $400,000. The goal is to ensure his brother allocates the funds wisely for retirement while safeguarding against potential financial mismanagement.

Key Discussion Points:

• Protective Measures: Big Al suggests establishing a trustee-managed account to prevent impulsive spending.
• Retirement Account Contributions: Emphasizing the importance of maximizing retirement account contributions to secure long-term financial stability.
• Portfolio Diversification: Recommending a balanced 60% stocks and 40% bonds portfolio, tailored to his brother's unique circumstances.

Notable Quote:

Big Al Clopine [15:18]: "I would want to have maybe some protection, some barrier to the funds that you'd have to talk to someone to get the funds."

Conclusion: The hosts advise implementing protective strategies such as trustee-managed accounts and robust retirement contributions to ensure Jay's brother can effectively utilize the inheritance for his financial future while minimizing the risk of mismanagement.

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4. Joy's Strategy for Investing Inheritance in a Brokerage Account

Question Overview: Joy, who recently retired at 56, is contemplating how to invest her inheritance of $400,000, which she has placed in a brokerage account. She seeks advice on optimal asset allocation to secure her and her husband's financial needs.

Key Discussion Points:

• Comprehensive Portfolio Review: Emphasizing the importance of viewing all assets collectively rather than in isolation to determine the appropriate investment strategy.
• Diversification and Asset Location: Recommendations include a globally diversified, low-cost portfolio with strategic asset location to maximize tax advantages.
• Holistic Financial Planning: Encouraging Joy to assess her entire financial picture, including retirement accounts, savings, and existing income streams.

Notable Quote:

Joe Anderson [19:27]: "Look at your entire portfolio. If you've got 401s, Roth IRAs, your cash accounts, your brokerage accounts, look at your entire portfolio and say, here's the allocation that I want."

Conclusion: Joy is advised to adopt a holistic approach to her investments, ensuring that her entire financial portfolio is balanced and optimized for growth, safety, and tax efficiency. This involves integrating her inheritance seamlessly into her existing assets for a coherent investment strategy.

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5. Mike's Dilemma: Roth Conversions vs. 0% Capital Gains Tax Rate

Question Overview: Mike from Texas faces a complex decision between executing significant Roth conversions or capitalizing on the 0% capital gains tax rate. With a substantial taxable account and upcoming RMDs, he seeks clarity on the most tax-efficient strategy.

Key Discussion Points:

• Tax Implications of Roth Conversions: Converting traditional IRA funds to Roth IRAs could mitigate future RMD taxes but involves immediate tax liabilities.
• Capital Gains Consideration: Selling assets in a taxable account to utilize the 0% capital gains rate offers immediate tax benefits but may limit long-term growth potential.
• Long-Term Financial Planning: Balancing the conversion strategy with portfolio diversification and future tax rate uncertainties is crucial.

Notable Quote:

Joe Anderson [36:01]: "The worst thing that happens with very good savers is that they're forced to pay tax on income they don't need. And those RMDs are just forcing this out and putting all of that income on your tax return."

Conclusion: The hosts recommend prioritizing Roth conversions to preemptively manage tax liabilities associated with RMDs. They advocate for a diversified, tax-efficient portfolio while leveraging Roth conversions to secure long-term financial benefits and minimize future tax burdens.

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Closing Remarks

Throughout Episode 517, Joe Anderson and Big Al Clopine provide insightful, personalized financial advice tailored to each listener's unique situation. Their expertise in retirement planning, tax strategies, and wealth management shines through, offering actionable strategies to help listeners navigate complex financial landscapes with confidence and humor.

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For more financial insights and personalized advice, visit YourMoneyYourWealth.com.

Transcript

[Andi Last]

Should Nancy in Washington take out a 401k loan and invest it in her brokerage account to catch up on saving for her retirement? When Joe and Big Al talk about having a balanced portfolio of various asset classes like stocks and bonds, Brian in Naperville, Illinois wonders whether that asset allocation strategy takes into account the stabilizing effect of monthly Social Security payments. That's today on youn Money, you, Wealth podcast 517 Plus. Joy and her brother are each inheriting $400,000. How should they each invest it for their different financial situations? Mike in Colorado has a good guaranteed income stream. So what should he do with the money he's drawing from his taxable IRA every year? Convert it to Roth, put it in a brokerage account, go on a cruise? And finally, Skipper asks the fellas to spitball on whether he should do Roth conversions or take advantage of 0% capital gains tax rates. I'm Executive producer Andi Last and here are the hosts of youf Money, you, Wealth, Joe Anderson, CFP and Big Al Clopine, cpa.

[Joe Anderson]

All right, we've got Nancy from Washington. Hello Joan, Big Al, six Euros. I'm a six year old who is a single mother and got a late start of my retirement savings. My 401 has about $750,000 in a brokerage account of $90,000. I continue to max out the allowable pre tax contributions of my 401 including the catch up in my employer matches 6%. I plan to retire at 65 sooner possible. I'm approaching a point where I'm concerned about RMDs but I have not converted to a Roth because I'm in the 32% tax bracket. So here's my question. Does it make sense to pull a 401 loan which will pay myself back at 9% interest and put those funds in my brokerage account where I can increase wealth outside of my 401. I watch the show every Sunday morning as part of my routine and appreciate the information you share. Additionally, I have a rollover IRA of about $25,000, another brokerage account of $10,000, Social Security income of $37,000 at $65,000, tiny little pension of $5,000 annually annual spending is $75,000 only debt is a mortgage. I'm not a good saver and spend more than I should as I'm working on being a better steward of my finances and really want some financial freedom in security in retirement. Okay Nancy, $750,000 in a brokerage account of about $100,000 so $850,000 plus the rollover 8.

[Big Al Clopine]

Call it $900,000. Ish.

[Joe Anderson]

Okay.

[Big Al Clopine]

I think that's Nancy, actually. I think you're a good saver. I wouldn't beat yourself up at all.

[Joe Anderson]

Right. She spent $75,000. She's got 3740. Call it $45,000. She needs 35. She's got close.

[Big Al Clopine]

Yeah. Close to 900. Yeah. So she's there even if you do a little math. So five years from now, Joe, 6% adding, call it $30,000 a year, she ends up with about $1,300,000. At that point, her spending at 3% inflation would be $87,000 minus the fixed income of $42,000. I didn't even do a COLA on that. Just $42,000. $45,000 shortfall to $1,300,000. That's a 3.5% distribution rate at $65,000. That looks pretty good to me.

[Joe Anderson]

Yeah, that was a lot of numbers, Al.

[Big Al Clopine]

Yeah, but that's important for the context I got.

[Joe Anderson]

Well, she's. She'll have $1 million. And I think the distribution rate from the million dollars will cover her living expenses with the help of her Social Security and pension.

[Big Al Clopine]

That's the correct statement.

[Joe Anderson]

I would not be worrying about taking loans out of your 401k. Don't do that.

[Big Al Clopine]

I would agree with that. I definitely would not.

[Joe Anderson]

Don't be worrying about doing Roth conversions because you're going to be taking 4% out anyway. The RMD on retirement accounts is probably going to cover your spending. You don't have a ton outside of retirement to pay the tax, so. No, I would do exactly what you're doing. The only thing that I would change. You're in the 32% tax bracket, though. So it's like single. 32%. That's a lot of income.

[Big Al Clopine]

Yeah, that's above $200,000.

[Joe Anderson]

So $200,000. If she says she's spending $75,000, there could be some excess there that she could potentially.

[Big Al Clopine]

I think that's what she is implying. So maybe the $75,000 is the goal, what she wants to spend. I would probably. I agree with everything you said, although I probably would look at Roth conversions upon retirement because, Nancy, I think you'll be in a low enough tax bracket and I might even do a small conversion right now. 2000, 3000, 5000 just to start the five year clock. I think that's maybe what I might do.

[Joe Anderson]

What does she have an IRA of 25,000.

[Big Al Clopine]

Yep.

[Joe Anderson]

We'll put the $25,000 into the 401 and then do a non deductible IRA and convert it.

[Big Al Clopine]

Could do that, too.

[Joe Anderson]

Yeah, that won't cost her any tax at all. And she's got the money outside, but.

[Big Al Clopine]

Doesn'T start the five year clock yet.

[Joe Anderson]

Yeah.

[Big Al Clopine]

What? Well, in the 401k, but if you roll it to an IRA, you got to start over.

[Joe Anderson]

Yeah, no, you do a backdoor Roth. That's what you.

[Big Al Clopine]

I know, but when she retires. That's what I'm saying. If it's in the 401k.

[Joe Anderson]

Right.

[Big Al Clopine]

Oh, I got. I never mind.

[Joe Anderson]

Because she's going to have a Roth IRA that has a five.

[Big Al Clopine]

I'm with you now. You're right.

[Joe Anderson]

Got it.

[Big Al Clopine]

Yep. You're right.

[Joe Anderson]

All right, good luck, Nancy. Thanks for watching the show and thanks for listening to the podcast. All right, let's move on to Naperville, Illinois. We got Brian. He writes in. He goes, hey, I'm 58. I hope to retire at age 62 with sufficient portfolio that will last me to age 100. Over the years, my investing strategy has changed along with my lifestyle. When I was younger, I used to drink floater shots in college. Floater shots. Is that right?

[Andi Last]

What is that?

[Joe Anderson]

It's like 151 or something like that.

[Big Al Clopine]

Yeah, you light it where the alcohol is so heavy it floats on top of whatever else.

[Joe Anderson]

Yeah. Light it on fire and just let her go. Wow.

[Andi Last]

Don't want to be doing that with Pappy.

[Joe Anderson]

Yeah, no, no, no. Floater shots drove a two door sporty car and invested 100% in stocks. Now I drink a lot less. I drive a minivan, and I have an asset allocation of 70% stocks, 30% bonds. My asset allocation is a little aggressive, but I'm blessed to have two parents still living in their 90s. And so I'm investing in a case I live to $100,000. I have a few questions for the asset allocation that are generally. For the asset allocations that are generally recommended, does it take into account the stabilization effect of Social Security payments?

[Big Al Clopine]

Wow, that's deep. Let's see what he means by that.

[Joe Anderson]

All right. Additionally, how should your asset allocation change depending on your Social Security income? For example, if you retire at age 62 and claim your Social Security benefits, the present value of that social payments could be considered as an asset being the equivalent to, let's say, a tip, and therefore you can have more equity. All right, so he's saying the fixed income component of his Strategy is like a bond.

[Big Al Clopine]

Yeah. So he's taking the Social Security payments and equating that to an asset.

[Joe Anderson]

Yeah. He's going to do the present value calculation and calculate it to.

[Big Al Clopine]

Very, very clever tip.

[Joe Anderson]

Treasury play to protected security.

[Big Al Clopine]

Right. Because it goes up with inflation.

[Joe Anderson]

Yeah. Look at the big brain on Brian here.

[Big Al Clopine]

Yeah. Right.

[Joe Anderson]

All right, let's see. In contrast, if you retire at age 62 but claim your Social Security later, let's say at age 70, then you will be reliant on a greater portion of your 401 portfolio for your day to day needs for ages 62 to 69. In this second scenario, you would want less equity heavy portfolio. So the strategy would be to increase your equity holdings the moment that Social Security payments start flowing even though you are older. More precisely, you should value your Social Security payments as a bond and adjust your allocation based on the total assets. Is this correct? Another angle on this topic could be considered that your Social Security payments are probably going to be there when you need them and therefore be more aggressive with equity allocation regardless of when you claim Social Security. Brian's doing some spreadsheets. He's doing the math and he's thinking.

[Big Al Clopine]

He'S probably already got it figured out.

[Joe Anderson]

He sounds like a smart guy.

[Big Al Clopine]

He wants to see what we think.

[Joe Anderson]

Yeah, I've seen a couple of different studies here where the overall allocation gets more aggressive as someone ages. It was counterintuitive what most people think, because the demand of the portfolio shrinks in some cases.

[Big Al Clopine]

Yeah. And plus the longevity shrinks too.

[Joe Anderson]

Right.

[Big Al Clopine]

So you don't need it for as long.

[Joe Anderson]

Exactly. So then it's, it's looking at this glide path they call it in. Michael Kitsis did a study on this. It was like, all right, well here, this is, you know, the older that as we age in our fixed income increases. Sometimes for some people, their income or their income need decreases as you age.

[Big Al Clopine]

That's true too.

[Joe Anderson]

And so the demand of the portfolio, you always, I mean, not always a good way to think about your asset allocation and how you're managing the money is what is the demand on the portfolio? What is the money for? Is it strictly for income? Well, then you're going to have a lot less growth in the portfolio if it's like, hey, I need a little bit of income for this, but I want to make sure that I leverage this so that I have some cash available if I make it to age 100. And then from there it goes to the kids or grandkids or whoever that you want the money to go to. So it's a little bit more thought of, hey, is it just a 60, 40 portfolio or 70, 30? You really want to dive in a little bit deeper to say, what's the demand? Or what's the money for?

[Big Al Clopine]

Yeah. I'll tell you what, I do like the idea. I think it's a great idea, but it's not really how I think about it. I think about it and we think about it as you take your total expenses and you subtract out your fixed income like Social Security, and you end up with a shortfall. And then you compare your shortfall to the assets that you have to figure out what rate of return you need to make this work. I think that, I mean, although I understand your argument, but I think you get a better allocation that way because that's your true need on your assets to cover that shortfall. I think that's just a safer, better way to think about this.

[Joe Anderson]

Yeah. For instance, you have a million dollar portfolio. You need 40,000 from the portfolio, like, all right, well, how much money should I have in fixed income versus bonds?

[Big Al Clopine]

Right.

[Joe Anderson]

Well, you still need that 40,000. Let's say your, your true income need is 100. But 60,000 is going to come from Social Security or pension.

[Big Al Clopine]

Right.

[Joe Anderson]

I think what Brian's doing is saying, all right, well, this 60,000 that's coming in as my pension or Social Security or both, you know, we should count that as a bond. It's so that million dollars that I have, I should probably have more stocks because I already have a good fixed income base. And I think Alan and I both agree with that. But you have to look at the shortfall. The 40,000 is really what the demand for the portfolio is. So if you have a million dollars, 4% of that million is 40 grand. So the allocation should be based on that demand. So maybe you want 10 years of total fixed income, so you don't care what the market does over the next 10 years. 40,000 times 10 is 400 grand. So then you want like roughly a 60, 40 portfolio, given that scenario.

[Big Al Clopine]

Yeah. And the other way is just think about what rate of you need for this portfolio to be sustainable for your lifespan. 25 years, 30 years, whatever you think it may be. So I think that's a safer way. Although, like I say, I do get why you came up with this, and it's actually quite clever.

[Joe Anderson]

Okay, good luck, Ryan. Thanks for the email.

[Andi Last]

See for yourself how various changes to your financial strategy may impact your retirement nest egg. With our free financial blueprint. Tool. Input your financial details like cash flow, assets and what you expect to spend in retirement. And it'll output a detailed report with three scenari that'll provide you with a better look at where you stand on the path to retirement. Click or tap the financial blueprint link in the episode description to get started. Also notice there in the episode description the link to register for our Risk Management and Retirement planning webinar happening Wednesday, February 26th at noon Pacific, 3pm Eastern Time. There's a lot going on in the world today. Are you concerned about the risks of longevity, inflation, sequence of returns, interest rates, liquidity, market volatility and taxes? In this free webinar, David Cook CFP will share actionable strategies to help you manage those risks as you prepare for retirement. Click or tap the link in the episode description to register for free.

[Joe Anderson]

All right, let's go to Jay. Go see Joe. Big Al. Andy, Love the show. Thanks for all what you do. I Drive a 2023 Jeep Grand Cherokee. I have a cat named Joe.

[Big Al Clopine]

Okay. After you.

[Joe Anderson]

All right. When I do drink my drink of choice, it's seven and seven. Hope this could be a two for one Spitball. Well, two for one.

[Big Al Clopine]

All right, two questions.

[Joe Anderson]

Maybe seven to seven. Seagram. Seven. That's a bourbon.

[Big Al Clopine]

Yeah, seven up.

[Joe Anderson]

Yeah, my brother used to drink those.

[Big Al Clopine]

That doesn't sound good. Yeah, if I'm going to drink it bourbon, I just would drink the bourbon. Probably.

[Joe Anderson]

Yeah, straight up. Little rocks on there maybe?

[Big Al Clopine]

Yeah, maybe little rocks.

[Joe Anderson]

Yeah. You. Are you a fan of like the Big Rock?

[Big Al Clopine]

You know, I had one for the first time in Sydney and I kind of liked it.

[Joe Anderson]

I thought didn't you have like. Don't you make them?

[Big Al Clopine]

I don't make them.

[Joe Anderson]

Like the big ice cubes you that was talking about?

[Big Al Clopine]

No, that was someone else.

[Joe Anderson]

Okay.

[Big Al Clopine]

That was your other friend named Big Al.

[Joe Anderson]

Yeah, Big John.

[Big Al Clopine]

Big John.

[Joe Anderson]

All right, so let's go for the two for one here. My brother, age 47, has struggled with addiction and mental illness. He has many low paying jobs. He has never saved into a 401. When our parents passed away two years ago, he received enough money to buy a small house outright. He's also received shares of stock of about $150,000. This is all he has. He is able to pay his bill with his current income. Recently our uncle had passed away. He will inherit close to $400,000. How should I tell my brother to allocate his money for his retirement? Currently he's sober, but he has his ups and downs. Would Some sort of annuity. Be good for him so that the money can grow until he is able to collect Social Security.

[Andi Last]

And I'll point out, she says we will each inherit close to $400,000. So her brother will get 400,000 and she will as well.

[Joe Anderson]

Yeah, that's what I found.

[Big Al Clopine]

Yep.

[Joe Anderson]

Okay, sounds good. All right. He's 47 years old, $400,000. He's going to get the cash. How should he allocate it? So sometimes we need protection from ourselves.

[Big Al Clopine]

We do.

[Joe Anderson]

Even. I mean, if you have addiction, mental illness, or just perfectly sane, rational people. Right. They continue to make mistakes with their money, so. But in this situation, Big Al, what do you think? Well, you like the annuity idea?

[Big Al Clopine]

Not really. I would probably. Gosh, what would I do? I might even open up an account with a trustee when someone else handle it. So I didn't have access to it. I mean, that may not be what he wants to do, but that could protect it from himself. I would try to get as much of it into retirement account as possible. If he has a 401, just go ahead and load that up. Even if he doesn't have enough money to live off of, instead of living off his paycheck, he takes a similar amount from the $400,000. So he gets it in a 401. I would have him do a Roth IRA contribution. Just try to get as much in the retirement accounts. I would, probably. Without knowing anything else. I mean, you always kind of default to a 60% stock, 40% bond portfolio without knowing anything else. I don't know if that's the right portfolio or not, but that would be a starting point. But I just would want to. If I were him, I'd want to have maybe some protection, some barrier to the funds that you'd have to talk to someone to get the funds.

[Joe Anderson]

So he bought a house. He's got $150,000 of stock that he inherited two years ago. So it's like, all right, well, if he's letting that ride to make sure that he can fund his overall retirement, he has some discipline.

[Big Al Clopine]

Well, we don't know if he still has it, but he received, I suppose.

[Joe Anderson]

Yeah, I'm assuming he does.

[Big Al Clopine]

Yeah, could be.

[Joe Anderson]

So at $650,000 that he has at 47, that's a lot of cash that a 47 year old has. I mean, that's. That. That's a ton of money. By the age 57, that could be a million and a half.

[Big Al Clopine]

It could be, yeah. If you don't touch it that could.

[Joe Anderson]

Then, you know, help. And then another 10 years at 67.

[Big Al Clopine]

Right.

[Joe Anderson]

And that could be $3 million. And if it doubles every 10 years, assuming that 7%, then he claims his Social Security, he could potentially be living the exact same lifestyle or maybe a larger lifestyle in retirement if he can continue to let the money grow. So I don't know. I think you would want to have a globally diversified, low cost portfolio. I don't like the annuity idea.

[Big Al Clopine]

No, I don't.

[Joe Anderson]

The only time annuity would be good if he goes in there. But I think there's other ways that you can help him without putting it into a product that's going to blow him up if he tries to touch it prior to 60.

[Big Al Clopine]

Yeah. I mean, at the very least, maybe you find an advisor and you give the advisor. So in other words, to get the money, you have to go through the advisor. And if the advisor has instructions from you to not let me take too much. I don't know.

[Joe Anderson]

Yeah, his money, he can do whatever he wants.

[Big Al Clopine]

That's right. And we don't know enough about the situation. I mean, maybe he's had addiction problems, but maybe he's fine now. And if that's the case, then just invest it. 60, 40 and call it good. Probably Cool.

[Joe Anderson]

All right, now her question. All right. If you have time. Oh, Joy, we have time. I just retired from my job at age 56. I'm pretty sure with my retirement accounts, which I do not have to draw until it's RMD time, my husband and I are able to take care of our needs. On his income alone of $83,000, I have $520,000 in 401 s, 26,000 in Roths, $170,000 in the savings account, $130,000 in CDs, $40,000 in cash. I will receive a tiny pension of $350 a month and my husband will receive one in six years of about $850,000 a month. Main home and vacation home are both paid for. How should I invest my inheritance? But I put it in a brokerage account. What would the allocation be? Thank you for making me laugh. I never thought the highlight of my week would be waiting for a new episode of a financial podcast to come out. Joy. Boom. Wow. That's incredible.

[Big Al Clopine]

Yeah, that's pretty good.

[Joe Anderson]

Thanks for the compliment, Joy. I would do the same, Joy. Right. Globally diversified, low cost portfolio. Look at how hilarious that was.

[Big Al Clopine]

It was hilarious because it was predictable.

[Joe Anderson]

Yeah, I don't. I mean, yeah. So people get so confused. I think sometimes it's like they compartmentalize their money. So my retirement accounts, I'm going to invest this way. And then I got some CDs and I got some cash and I got some high yield stuff and oh, then I got this inheritance. How should I invest that? Look at your entire portfolio. If you've got 401s, Roth IRAs, your cash accounts, your brokerage accounts, look at your entire portfolio and say, here's the allocation that I want. Here's how much money that I want in cash and safety, here's how much money that I want to have in stocks, here's how much money that I want to have in bonds. And then look at it that way. And then if the money's outside of a retirement account versus inside the retirement account, then you want to look at asset location. Put your more stock type investments in your brokerage account because you get better tax advantages. If you have Roth accounts, you want more growth oriented assets in those accounts because it's growing tax free. Your retirement accounts, you want a little bit more safety. So look at your entire assets as one big portfolio versus saying, well, this is, you know, his is over here, mine's over there. Should I invest this inheritance differently?

[Big Al Clopine]

Yeah. So 100% agree. That really is the right answer. The right answer is look at your overall situation. Figure out, so what your cash flow needs are going to be. Your husband retires, what that looks like, what you need to be invested in to get to a certain asset amount to fund your lifestyle. That's really the answer. You. And you look at everything as a whole instead of in compartments. And Joe, you're absolutely right.

[Joe Anderson]

What absolutely right. What a lot of people, Absolutely right.

[Big Al Clopine]

In this case, what a lot of people do is they, they assume, oh, retirement accounts are, they're already set. So now I got this extra money, what should I do with that? And now you got to take a step back and look at the whole thing in one fell swoop.

[Andi Last]

All right, so now we've got a voice message. So this is Mike. He went to YourMoneyYourWealth.com he clicked on Ask Joe and Big Al on air and he left us this.

[Mike]

Hey, y'all, my name is Mike, coming to you from the great state of Texas. All right, so here's the situation. I'll give you the simple things first. I guess we don't have any pets. I have a 2024 Silverado 1500 we purchased about a year ago. My wife's got a brand new 2024 Lincoln Nautilus, she just purchased here a couple months ago. And the situation is pretty simple. We have a pretty good guaranteed income stream coming in, about almost $17,000 a month after taxes, coming in between our pensions, and I'm military retired and I'm disabled and so forth. So we bring home about $205,000 a year in retirement. However, only about 140 of it's taxable. That being said, we've got about 1.2, 1.3 million in assets, and most of that's in taxable IRAs. They're both traditional. So we need to pay the tax on that when we draw it out, and that's what we kind of do. Now. I'm drawing about 10, $15,000 a year right now to draw that down. And so I guess my bigger question is, would it be wiser to do the Roth conversions and just spend that money on a cruise or something every year or put it into our trading account in the sense of stockbroker account? All that being said, I'm not sure what's the best idea for us, but I do know we have about $250,000 in cash. I keep to the side. I'm just a cash guy. I like to keep a lot of cash just in case something happens. That's our thoughts. Give us our spitball. What you think we should do in the sense of what you would do? I guess I know you can't give advice, but something to think about for us. I'd appreciate it. Listen, you're all doing a great job, all three of you. Without one of you, there's not a team. All right, y'all take care. God bless.

[Andi Last]

Oh, thank you, Mike.

[Joe Anderson]

Mike from Texas.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Hell of a job. Thank you for your service. First, Michael. Yeah. Do the conversion, and then if you want to take the money out of the account, go on vacation. You got $250,000 in cash, but you got a ton of fixed income. He's got a VA pension that's coming to him tax free. He's got $140,000 taxable income, or $140,000 that's taxable of the pension. So $140,000 let. But he's got $110,000 of taxable income. I would keep her to the top of the 22% tax bracket, which would give him 22.

[Big Al Clopine]

That would be about 200 grand. 200. 207.

[Joe Anderson]

Yep.

[Big Al Clopine]

207,000. Yeah, I would, too. And the reason is because with all this fixed income, it's Almost like you've already got a bunch of money in an IRA that's paying out. You're paying ordinary income. So you have a lot of ordinary income already. So when you get to RMD required minimum distribution age, then you're going to. All of that money is going to be taxed at a higher rate still. So go ahead and bite the bullet now. Get some of this, get more of this out probably after the 22% bracket. So we're talking about what close to $100,000 you could do. You've got the money to pay the tax and go on the cruise. Have fun. You've earned it, man. Just have fun.

[Joe Anderson]

Yep, $100,000 conversions. You don't know where tax rates are gonna go. If tax rates go up, you know, just more money of that hard earned money that you saved is just gonna go to the irs. So this is a prime conversion case for sure. Very large fixed income, really good savers, doesn't spend a ton. You know, their fixed income is covering their expenses. He's trying to leak some of the retirement accounts out. You put it into a brokerage account, you're just gonna be taxed at ordinary income. I mean not ordinary income, but capital gains on any gains that you have or if you have short term gains, it's going to be taxed at ordinary income. If you convert it, you're still paying the same amount of tax. If you moved it in your brokerage account, if you spent the money, or if you put it into a Roth, if you put it into the Roth, all future growth is going to grow 100% tax free. So for sure, put it there. And then if you want to take the money out and go on a cruise later, then do that.

[Andi Last]

Yeah, a retirement strategy is kind of like a basketball game. You want every single shot you take to be nothing but net. But sometimes you miss and you need a retirement rebound. This week on youn Money, you, Wealth tv, Joe and Big Al show you how four plays can help you turn things around, get that rebound and score a comeback. Click the link in the episode description to watch it now. Plus, after a lifetime of saving, making the transition to retirement means facing a whole new set of challenges. How are you going to generate income in retirement? Download the Retirement Income Strategies guide for five questions you need to ask yourself before you retire. The sources of income available to you in retirement, how to maximize your Social Security benefits, and how to develop a retirement income strategy that meets your needs. Click the links in the episode description to watch retirement rebound on ymyw tv and to download the Retirement Income Strategies Guide for free.

[Joe Anderson]

All right, we got Skipper. Hey, guys. This is skipper, wife, ginger, boat 65. Where's Gilligan?

[Big Al Clopine]

He didn't make the cut.

[Joe Anderson]

Who's your favorite character?

[Big Al Clopine]

Marianne?

[Joe Anderson]

Not the professor. Mr. Or Mrs. Howell.

[Big Al Clopine]

I did like. Well, I mean, they were all fun.

[Joe Anderson]

Gilligan.

[Big Al Clopine]

Yeah. I mean, goofy fun, though. Yep.

[Andi Last]

I was going to say that's from a different show. Goofy was not on Gilligan's Island.

[Joe Anderson]

He was Goofy.

[Big Al Clopine]

He was Goofy.

[Andi Last]

Joe, who's your favorite?

[Joe Anderson]

I liked Gilligan. Yeah.

[Andi Last]

I was a fan of the Professor.

[Joe Anderson]

Yeah. Very dapper. He was able to make brainy telephones out of coconuts. But they couldn't figure out a way to fix the boat. It's like, what the hell?

[Big Al Clopine]

It's funny how they always had, like, spare parts to build. Whatever.

[Joe Anderson]

Just whatever, man. Except for a boat he was building. AI robots. But still stranded on that island.

[Big Al Clopine]

Yep.

[Joe Anderson]

How'd they ever get off?

[Big Al Clopine]

I don't remember.

[Joe Anderson]

Yeah, I don't know if I ever.

[Big Al Clopine]

Saw the finale because there was a. I think there was a movie where they'd gotten off, if I remember.

[Joe Anderson]

Well, I don't know. Wasn't there, like.

[Big Al Clopine]

But they really. They were in a studio in la, so it wasn't. They weren't exactly.

[Joe Anderson]

Come on. No, I think they were definitely shipwrecked.

[Andi Last]

I can't believe you felt the need to say that, Al.

[Joe Anderson]

Yeah, well, you know, they were actually in the studio. Are you kidding me?

[Big Al Clopine]

So they. Well, you asked the question. How'd they get off every night? They got off and went home.

[Joe Anderson]

I don't think so. All right.

[Big Al Clopine]

They drove the cars home. No problem.

[Joe Anderson]

First, the drinks. We both enjoy California red wines, and I occasionally enjoy, like, a Moscow Old Fashioned Mezcal. Mezcal? What's that? Tequila?

[Andi Last]

I think it's related. I don't think it's exactly tequila, but I'm not really sure.

[Joe Anderson]

All right. The question relates to Roth conversions versus taking advantage of the 0% capital gains rate. Oh, this is a juicy one here.

[Big Al Clopine]

Yeah, it could be.

[Joe Anderson]

All right. Okay. We're both mostly retired. I do have some part time consulting income. After that fades away in 2025, our ordinary taxable income will be in the lower end of the 12% tax bracket, leaving room to harvest about $70,000 of long term capital gains each year at the 0% tax bracket until Social Security starts at age 70 and then RMDs at age 73. Of course, California will take their bite, as always. But we really Want to do some significant Roth conversions. As I learned from Big Al in a prior episode, the first $70,000 of a Roth conversion in those years will have an effective federal tax rate hit of 27% with the loss of the 0% long term capital gains rate to 15, plus an additional 12% ordinary income from the Roth conversion. Did you follow all that?

[Big Al Clopine]

Yeah, and I have said that and that's a true statement.

[Joe Anderson]

I've run an eight year projection. Okay, Skipper. Yeah, call the Gilligan up and actually.

[Big Al Clopine]

Call the professor, have some. He'll be able to tell you if this is a good plan.

[Joe Anderson]

Eight year projections. And I'm thinking maybe try and optimize each year with some heavy long term capital gains and other years of heavy Roth conversions. Also while keeping an eye on Irma tiers. 3.8% net investment income tax plus cash flow to support our lifestyle and the tax on conversion. The dilemma is that we will make it difficult to reach the Roth conversion target of $800,000. And I really don't like missing out at the 0% cap gains rate. What do you suggest? What the hell is he talking about?

[Big Al Clopine]

Well, he's thinking, from what I said, he needs to do one or the other in any given year.

[Joe Anderson]

Was this the same guy that Skipper called in before or something?

[Andi Last]

We've had a number of people that have been from Gilligan's island, so I'm.

[Big Al Clopine]

Not sure if he's Skipper.

[Joe Anderson]

Okay, so here's his investments. He's got a taxable account of $1.6 million with 750,000 unrealized long term capital gains. He's got a retirement account of $2 million and he's got a couple of bucks in a Roth. Plus we have a rental house and a primary residence, both with solid equity. All right, thanks for looking forward to your ideas and the laughs. All right, well, this is the only time I think I ever need to know what is in the taxable account. Like some people give us like ticker symbols and everything else. I'm just kind of ignore that. But is this individual stock? Is this just a couple mutual funds? Did it get lucky and bought Nvidia Apple? Was this a magnificent seven?

[Andi Last]

The Fangs?

[Big Al Clopine]

Well, you are right because it depends what the investments are, whether you need to reallocate.

[Joe Anderson]

Right. There's a lot of concentrated risk. You need to diversify. If it's diversified and they're in decent investments.

[Big Al Clopine]

Yeah, then stick with it and do Roth conversions all day, all year, year after year after year.

[Joe Anderson]

Yeah, don't worry about the long term, unless you need the money to live off of. So the plan that you have to figure out is, all right, well how much money do I need to take from the overall portfolio? So in that case it's like, all right, well here maybe you take enough out of the non qualified and get that in to a high basis area where you can live off of that money for a couple of years while you're doing the conversions and you don't necessarily have to worry about the tax. But there's a lot more analysis, I think, on this. But if you don't need the non qualified and it's diversified and good investments.

[Big Al Clopine]

Roth conversions all day, 100% and plus, I mean, so we're talking at the moment we're talking about $1.6 million taxable estate and less than half of its capital gains. What if that became 2 million or even 3 million to sell it? Yeah, you pay capital gains tax, but not on the whole thing. It's very tax efficient. But your problem is you got almost $2 million in a taxable retirement account. You got to get that over to Roth the best you can. That needs to be the priority. Unless, Joe, as you said, the portfolio is not correctly allocated. If you need to diversify, then maybe focus on capital gains for a couple years.

[Joe Anderson]

Ye, that 1.6, let's say if you have a concentrated position or it's not allocated, that 1.6 drops back down to $750,000. I don't know. I bet you'd been a lot happier to pay some tax than to look at your balance and say, oh, I got my basis back and I could sell it now and I don't have any tax. So you got to look at both here. I mean, you want to make sure that you have the appropriate diversified portfolio of the entire estate. So it's almost $4 million of liquid assets that you currently have. Your house is paid for, you got a rental house, you got Ginger, you got the life. What you're worried about is, okay, some taxes and do you take advantage of the 0% capital gains rate? Because in a non qualified brokerage account, you can sell as long as you stay in the 12% tax bracket of taxable income and it's 0%. So he's really loving that 0% cap gains rate.

[Big Al Clopine]

Yeah, I think maybe a way to think about this is pick one or the other. Right. If you do want to diversify and you want to sell some of your assets, then sell enough not only to fill up the 12% bracket and pay no taxes on that. But then go higher. Right. Because you're only paying 15% taxes on that. Don't do Roth conversions that year. But then get your portfolio allocated properly over a couple years, then if you need to, and then switch to Roth conversions after that. That's the bigger problem. I see. Unless you're not diversified.

[Joe Anderson]

Yeah. Let's say he's got $2 million in a retirement account. His RMDs are roughly in 10 years, let's say that money doubles. Now it's at $4 million. That's $360,000 RMD. Just the RMD alone is going to be taxed at what, 36%? Well, 32%.

[Big Al Clopine]

Yeah. 32 as it stands right now. Yeah. Well, actually 24% as it stands right now. But we're supposed to be going back to the old rate, so. Yeah, we don't.

[Joe Anderson]

And then he's going to have. Well, he'll have Social Security.

[Big Al Clopine]

Yeah, true. I mean, he may be approaching 32%. Yeah, yeah, you're right.

[Joe Anderson]

So, I don't know, you might be thinking you're tripping over, you know, dollars to pick up pennies here. Right. I want to take advantage of the 0% capital gains when you could pay 15% or you're going to pay 32% potentially, or a lot higher tax on the ordinary income when it's forced out. The worst thing that happens with very good savers is that they're forced to pay tax on income they don't need. And those RMDs are just forcing this out and putting all of that income on your tax return. And then all you're doing is putting it in your brokerage account anyway.

[Big Al Clopine]

Right.

[Joe Anderson]

And so now you're getting interest in dividends and paying capital gains tax on the money that you just paid tax. So you're. It's. It's just this tax cycle. So get ahead of it now you're 65 conversions, I think is the right answer. But of course, that's just a spitball.

[Big Al Clopine]

Yep.

[Andi Last]

At a good spitball, it was at that. Funny how Roth conversions are often the answer. Skipper, thank you so much for your question and thank you all for sending in your money questions and for watching and listening to us each and every week. Your money, you, wealth is your podcast. And this show would not be a show without you. If you enjoy ymyw, help us grow it, keep sending in your money questions. Leave your honest reviews and ratings for your money, you, wealth in Apple podcasts and all the other apps that accept them. Subscribe to our YouTube channel to watch us do the YMYW podcast and to join me in the comments and tell everyone you know that we're making fun of finance over here at yout Money, you, Wealth Get a free financial assessment today with the experienced professionals on Joe and Big Al's team at Pure Financial Advisors and see if you're on track. They'll analyze your situation, identify any potential roadblocks, and create a personalized plan to help you get on the road to where you want to be in retirement. Click or tap the free assessment link in the episode description or call 888-994-6257 to schedule your assessment, either online or in person at one of our offices all around the country. 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.