9 Answers to Boost Tax-Free Roth Retirement Income - 507

Summary

Podcast Summary: Your Money, Your Wealth Episode 507 - "9 Answers to Boost Tax-Free Roth Retirement Income"

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Introduction

In Episode 507 of Your Money, Your Wealth (YMYW) titled "9 Answers to Boost Tax-Free Roth Retirement Income," hosts Joe Anderson, CFP®, and Big Al Clopine, CPA, delve into the intricacies of Roth conversions and strategies to maximize tax-free retirement income. Released on December 10, 2024, this episode remains consistent with YMYW's reputation for making finance both informative and entertaining, as recognized by various accolades including “Top 10 Personal Finance Podcast” by US News & World Report (2023).

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Key Topics Discussed

1. Roth Conversions and Tax Implications

   The episode kicks off with a discussion about Roth conversions, focusing on the tax liabilities they entail. Joe Anderson questions the feasibility of paying taxes from the Roth account itself versus utilizing other income sources:

   Joe Anderson (00:00): "If you take the money out of your retirement account, what does Joe mean that you'll be paying the tax?"

   Big Al Clopine emphasizes caution when considering Roth withdrawals, especially for those contemplating early retirement:

   Big Al Clopine (02:40): "Peter, don't touch the Roth. I mean, we could explain the rules, but I think that's the last place that I would want to be pulling from, especially if I'm in my mid-50s."

2. Early Retirement and Withdrawal Strategies

   Listener Peter Lemon Jello from Florida poses a scenario involving early retirement at age 55, raising concerns about covering expenses before reaching the 59.5-year threshold. The hosts explore options like the 72(t) rule and the implications of Roth conversions in such contexts.

   Big Al Clopine (05:00): "So the rule states that you can pull the money out for five years or until age 59 and a half, whichever's longer."

3. Tax Payment Strategies During Roth Conversions

   A complex scenario is discussed where a listener faces compounded tax liabilities by paying taxes from within the retirement account. The hosts caution against this practice, highlighting the risk of a snowball effect of taxes due to compounded withdrawals.

   Big Al Clopine (06:28): "They blew out most of their liquid assets. The next year they got a little tax bill of 200,000."

4. Backdoor Roth IRA Contributions

   David from Cincinnati, Ohio, age 30, seeks advice on whether to pursue backdoor Roth contributions or channel excess savings into a brokerage account. The debate centers around tax efficiency versus flexibility for future financial needs, such as purchasing a home or raising children.

   Big Al Clopine (11:06): "I would much rather fully fund the Roth because if he doesn't necessarily need to touch it, it's going to all compound tax free if he does need it."

5. Required Minimum Distributions (RMDs) and Roth Conversions

   Mike from Pennsylvania, age 66, with substantial pre-tax and Roth retirement accounts, inquires about the benefits of Roth conversions given his high current income and looming RMDs. The hosts analyze his situation, suggesting that Roth conversions could be advantageous despite the tax implications due to his high income bracket.

   Big Al Clopine (16:36): "So Roth conversions probably do make sense. The hard part is you don't have money outside of retirement to pay the tax."

6. Consolidating Investments: Stocks vs. ETFs

   A listener question about whether to consolidate multiple individual stock holdings into a diversified ETF like the S&P 500 is addressed, weighing the benefits of diversification and reduced management effort against potential capital gains taxes from selling existing positions.

   Big Al Clopine (21:45): "You have 20 different stocks... S&P 500 is more diversified... it's a little bit more labor intensive and you don't have the diversification."

7. Home Office Deduction Post-Tax Cuts and Jobs Act

   The hosts clarify misconceptions regarding the home office deduction, explaining that while it remains available for self-employed individuals, it has been eliminated for employees due to the removal of miscellaneous itemized deductions.

   Big Al Clopine (26:42): "If you're an employee, the home office deduction was a miscellaneous itemized deduction which is no longer allowable."

8. Mixing Pre-Tax and Roth Contributions

   A Facebook listener asks about the viability of splitting retirement contributions between pre-tax and Roth accounts. The hosts discuss how this strategy affects tax planning and withdrawal flexibility during retirement.

   Big Al Clopine (27:29): "Anything pre-tax is going to come out as ordinary income. Anything Roth is going to come out tax free."

9. Five-Year Rule for Roth Conversions

   The complexities of the five-year rule for Roth conversions are unpacked, particularly in scenarios involving after-tax contributions and self-directed Roth IRAs. The hosts stress the importance of understanding how conversions trigger this rule, affecting the accessibility of funds without penalties.

   Big Al Clopine (24:38): "It's a conversion. So the rule is based on conversion versus contribution."

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Notable Listener Questions and Insights

• Peter Lemon Jello’s Early Retirement Concerns (02:40 - 05:14):

  Addressing the challenge of covering expenses before age 59.5, the hosts discuss the limitations of the 72(t) rule and the potential pitfalls of withdrawing Roth contributions prematurely.

  Andi Last (03:50): "All I'm suggesting is if you look at it and do the math, maybe you start it when you retire."

• David’s Asset Allocation and Backdoor Roth Decision (09:06 - 15:22):

  A young listener with substantial savings seeks guidance on prioritizing backdoor Roth contributions versus building a brokerage account. The consensus leans towards maximizing Roth contributions for long-term tax-free growth, despite immediate flexibility needs.

  Andi Last (12:22): "I think it's more of a personal choice. Either one's a fine answer."

• Mike’s High-Income Retirement Strategy (16:17 - 17:48):

  For a near-retiree with significant pre-tax and Roth accounts, Roth conversions are recommended to mitigate the impact of high RMDs and future tax increases, even though it necessitates paying taxes from within the retirement accounts.

  Andi Last (17:22): "So Roth conversions probably do make sense. The hard part is you don't have money outside of retirement to pay the tax."

• Robert’s YouTube Query on Quarterly Payments (18:05 - 20:44):

  Clarifying misconceptions about paying taxes from Roth conversions, the hosts explain the scenarios where quarterly estimated payments are or aren't necessary, emphasizing the importance of proper withholding to avoid penalties.

  Andi Last (19:58): "If you do a Roth conversion, you have tax to pay. Right. And so typically, if you don't have enough withholding, you have to make quarterly estimated payments."

• Listener’s Question on Roth Withdrawal Orders (24:25 - 25:46):

  Explaining the hierarchy of Roth withdrawals—contributions first, then conversions, followed by earnings—the hosts highlight how this order affects the application of the five-year rule and potential penalties.

  Big Al Clopine (24:48): "Whenever there's a conversion, you have a five-year clock on the principal part."

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Insights and Conclusions

Throughout the episode, Joe Anderson and Big Al Clopine provide nuanced perspectives on Roth conversions, emphasizing the importance of strategic tax planning in retirement. Key takeaways include:

• Avoid Paying Taxes from Within Retirement Accounts: Doing so can deplete funds and trigger additional tax liabilities, undermining long-term financial security.

• Understand the Five-Year Rule: Whether dealing with contributions or conversions, being aware of these timelines is crucial to avoid penalties and ensure fund accessibility.

• Balance Between Tax Efficiency and Flexibility: Especially for younger savers or those with imminent financial needs, balancing Roth and pre-tax contributions against more flexible investment accounts is essential.

• Diversification and Simplification: Consolidating investments into diversified vehicles like ETFs can reduce management complexity and improve portfolio efficiency, albeit with consideration for potential tax impacts.

• Stay Informed on Tax Laws: Tax regulations are subject to change, and staying updated ensures compliance and optimization of retirement strategies.

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Conclusion

Episode 507 of Your Money, Your Wealth offers a comprehensive exploration of strategies to boost tax-free Roth retirement income, addressing real-world scenarios and listener queries with expertise and clarity. Joe Anderson and Big Al Clopine adeptly navigate complex financial topics, making them accessible and actionable for listeners aiming to enhance their retirement planning. Whether you're contemplating early retirement, strategizing Roth conversions, or seeking to optimize your investment portfolio, this episode provides valuable insights to inform your financial decisions.

For more information and resources discussed in this episode, visit YourMoneyYourWealth.com.

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Notable Quotes with Timestamps

• Joe Anderson (00:00): "If you take the money out of your retirement account, what does Joe mean that you'll be paying the tax?"

• Big Al Clopine (02:40): "Peter, don't touch the Roth... it's the last place that I would want to be pulling from, especially if I'm in my mid-50s."

• Andi Last (03:50): "Maybe you work part-time, maybe you cut your spending."

• Big Al Clopine (05:00): "So the rule states that you can pull the money out for five years or until age 59 and a half, whichever's longer."

• Big Al Clopine (16:36): "So Roth conversions probably do make sense... you don't have money outside of retirement to pay the tax."

• Big Al Clopine (21:45): "You have 20 different stocks... S&P 500 is more diversified... it's a little bit more labor intensive and you don't have the diversification."

• Andi Last (12:22): "I think it's more of a personal choice. Either one's a fine answer."

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About the Hosts

Your Money, Your Wealth is brought to you by Pure Financial Advisors, a fee-only financial planning firm adhering to the fiduciary standard of care, ensuring that advisors act in the best interest of their clients at all times. Hosts Joe Anderson, CFP®, and Big Al Clopine, CPA, leverage their expertise to provide insightful discussions on retirement planning, investing, tax reduction, and wealth management strategies, all infused with humor to make finance enjoyable.

For personalized financial advice, visit PureFinancialAdvisors.com or contact them directly at 888-994-6257.

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Stay Connected

Subscribe to Your Money, Your Wealth on YouTube or your favorite podcast platform. Engage with hosts Joe and Big Al by leaving reviews, ratings, and comments to shape future discussions tailored to your financial questions and interests.

Transcript

[Joe Anderson]

Joe and Big Al spitball on paying the tax on your Roth conversions Today on youn Money, you, wealth podcast number 507 if you take the money out of your retirement account, what does Joe mean that you'll be paying the tax? To pay the tax, to pay the tax, can you pay it from the Roth account itself or from your monthly pension tax withholding? Are the fellows wrong on this whole topic altogether? They also spitball on withdrawing Roth 401k contributions that were rolled into an IRA and those infamous five year rules for withdrawals from Roth accounts, as well as when to do Roth conversions, saving to tax deferred, taxable or tax free accounts and how long term capital gains taxes fit into the picture. Plus consolidating individual stock investments and the fate of the home office deduction as Joe and Big Al spitball for Peter Lemon Jello, David in Victoria, Mike in Pennsylvania, and a whole bunch of our YouTube viewers and one of our Facebook followers. Finally, what does Joe think about the Apple Podcasts reviewer that says he's checked out? I'm Executive Producer Andi Last and here are the hosts of youf Money, you, Wealth, Joe Anderson, CF and Big Al Clopine, cpa.

[Big Al Clopine]

I got Peter Lemon Jello. I'm coming in from Florida. Hi gentlemen and Andy, I'm reaching out while drinking a Dos Equis Amber, contemplating my upcoming early retirement. I have sufficient savings and retirement plans for retirement. I also have enough current savings to make it to approximately age 58, maybe longer. I'm worried about not being able to cover the last year or two before I hit that magic 59.5 age. I know about the 72T tax, but that isn't really ideal as I would have to stretch it out over five years, not one or two as I needed. I was thinking about the removal of some Roth contributions and that led me to feel the need to write you in the IRA world. I know Roth contributions can be removed at any age for any reason without penalty or taxes. But what happens if most of my Roth contributions were made to a 401 then rolled over to an IRA in 2025? Can I still remove the Roth contributions as if they were made directly to the IRA? If so, do I now have to wait five years from the rollover? I'm only 51 so the five year wait would be okay. I'm just not sure about the rules related to removing Roth contributions that have been removed around from different plans and more importantly removing them before age 59 and a half. Thanks always Peter. All right, so he wants to retire at 55.

[Andi Last]

It sounds like he wants to retire. Well, he doesn't say I'm 51. Upcoming early retirement, so I'm guessing soon.

[Big Al Clopine]

Got it. Peter, don't touch the Roth. I mean, we could explain the rules, but I think that's the last place that I would want to be pulling from, especially if I'm in my mid-50s.

[Andi Last]

I 100% agree. However, to answer his question, if you have basis in your Roth 401k when you convert it, not convert it, when you roll it to a Roth ira, you still have that same basis. You can still pull it out. The only difference on the five year rule there is you have to wait five years or 59 and a half for earnings. Yeah, whichever is longer. So that's true. But yeah, don't do that. Let's try to think of another way. Maybe you work part time, maybe you cut your spending. Or here's another thing, roll everything into.

[Big Al Clopine]

The 401k, then you take the money out at age 55.

[Andi Last]

I think he wants to retire before then. I'm guessing, but he says.

[Big Al Clopine]

I also have enough current savings to make it to approximately age 58.

[Andi Last]

So I can. Well, he didn't. He doesn't say exactly. He just said he's contemplating my upcoming early retirement. So I assume that means soon. Here's that if there's no other option, do the 72T when you retire and then just bank the savings for those last two years where you need it and then you take care of that five year. I think that's what I would call.

[Big Al Clopine]

So 72 tax election avoids the 10% penalty out of an IRA, but you have to take separate equal periodic payments and there's three different kind of calculations. It's still not a ton of money that you can pull out of there.

[Andi Last]

It's not, but maybe it's enough to get him through that last year and a half or two years or whatever. Whatever it is, yeah.

[Big Al Clopine]

So the rule states that you can pull the money out for five years or until age 59 and a half, whichever's longer.

[Andi Last]

Right.

[Big Al Clopine]

So if he's 51 years of age, he could start pulling money from his retirement accounts and not pay a 10% penalty. But he would have to pull the money out until 59 and a half.

[Andi Last]

Right? Yeah, that's.

[Big Al Clopine]

Which is a long time. And then if you look at the calculation, depending on how much money he has in his retirement account, it's going to be pennies.

[Andi Last]

Yeah, well, right. And that's the problem with a 72, you never get as much as you need or want. All I'm suggesting is if you look at it and do the math, maybe you start it when you retire, and maybe in those five or six or seven years, you will have pulled out enough to be able to cover this shortfall for a year and a half or two years. I don't know. We don't know the numbers, but that's what I would look at.

[Big Al Clopine]

Right. And then taking that money out of the Roth ira, you want that to compound as long as you possibly can, tax free. If you're pulling that out, mid-50s, I just think that you're ignoring your future self.

[Andi Last]

And so, yeah, it was hard enough to get it in there.

[Big Al Clopine]

Right.

[Andi Last]

Let's try to keep it in if we can.

[Big Al Clopine]

Yeah. For a little longer. You got David podcast 501. Jim 2179. Oh, my God. Ask if it mattered where you pay the tax from the Roth conversion. Joe didn't like paying the tax out of the retirement account because you're paying a tax to pay the tax. Then you said you don't want to pay the tax. Pay the tax on top of the tax to pay the tax. I'm not sure what the hell you meant.

[Andi Last]

What did you mean?

[Big Al Clopine]

So I get a tax bill. Let's say the tax bill is $10,000.

[Andi Last]

Yes.

[Big Al Clopine]

I don't have any liquid assets but my 401 plan. So then I pull $10,000 out, but I have to pay tax on the $10,000 to pay the tax of $10,000 that I owe the IRS. So I don't really owe the IRS $10,000 because I got to pull more money than 10,000 because I have to pay the tax on the 10,000 to pay the tax.

[Andi Last]

Yeah. So let me maybe say it another way. You do a Roth conversion, to use your example, you owe $10,000 in tax, but you don't have it. Right. And so the tax bill comes.

[Big Al Clopine]

Well, you don't have it outside of your retirement.

[Andi Last]

That's right. That's what I mean. So tax. April 15 comes around next year, you don't have the money to pay the tax, so now you got to get the 10,000 out of your 401k or if. If you can. Or your IRA. Right. So now you got $10,000 of income. Now you got to pay the tax on that next year comes around. Now you got to pay 3 or $4,000 because you got to pay the tax on the $10,000. So now you got to pull 3 or 4,000 out. And then the following year you got to pay the tax on the tax and on the tax on the tax.

[Big Al Clopine]

Well, here's why I started saying that, because the truth, this happened now several years ago, but a person came into the office and they bought their dream home.

[Andi Last]

Yes.

[Big Al Clopine]

For like a half a million dollars. And it was like in the desert and it was. Yeah, well, we cleaned out our 401k to buy the house.

[Andi Last]

Yeah. We had a mortgage and I decided to pay it off.

[Big Al Clopine]

Paid off. So that was the liquid assets. They took out four or five hundred thousand dollars from the retirement account to pay off the mortgage. And they blew out most of their liquid assets. The next year they got a little tax bill of 200,000.

[Andi Last]

So they had to go get a mortgage that they paid off.

[Big Al Clopine]

They had to get the mortgage to pay off the tax.

[Andi Last]

They were in a giant tax bracket because they pulled it out all at once.

[Big Al Clopine]

A lot of mistakes that happen in retirement accounts because of the taxation of those accounts. If you're doing Roth conversions and you're paying tax with in the retirement account, just understand that it has to come out. It's not liquid, it's not after tax dollars. And the more that you convert, potentially the more tax that you're going to have to pay. And if tax rates continue to go up, then it's like you're just. You're compounding the effect. So in some cases, it does work. So it really depends on what tax bracket that you're in, how much money that you have in a retirement account, what assumptions that you're using for growth rates, what you think tax rates are going to do. There's a lot of assumptions involved there and how long that you live. So if all those assumptions come into play. Well, yeah, then of course it's going to make a lot of sense to pay the tax from the retirement account. But in general purposes, you probably don't want to do that.

[Andi Last]

Yeah. And I will just add, as long as you're 59 and a half, because if you pay the tax out of your retirement account when you're younger than 59 and a half percent penalty, then you get the tax and the penalty. Right. So just be careful of that.

[Big Al Clopine]

Okay. Hopefully that explained, I think I said tax quite a bit. Not. Okay, we're off to. Where are we off to? Cincinnati. Hi, Joe, Big Al. Andy, thanks for taking my question. The show has become the highlight of my Tuesday. My name is David. My wife's name is Victoria. We live in Cincinnati, Ohio. Probably one of the younger listeners at age 30 and have many years of work ahead. But I'm doing the best I can to set my wife and I up for a successful retirement by making good choices. Now hearing the spitballs and all your thoughts on a weekly basis helps me think about our situation at a deeper level. And while we have a long way to go on our journey, enjoy the fact that we still have time for even small choices. All right. I like the small choices that we make now will have a greater impact or a great impact by the time we need it when we retire. Now for the question my background. My wife and I both make good salaries and a combined household income of $350,000. We currently have no kids, but they are in the plan here in the next future we have the following assets. As of today we have retirement accounts of traditional 250 Roth 200 brokerage account 20, profit sharing plan 70, HSA 40 cash 50 home worth 600 mortgage 40. So total assets there, big Al keeping track.

[Andi Last]

About 630,000 at age 30. That's amazing.

[Big Al Clopine]

Amazing. All right. We are, we are, we are. Oh my God. We have become good savers. Saving 20% of our gross salary at about 5050 into Roth and traditional 401ks for tax advantaged savings. With my wife's company matching 6% to her 401k in my employer contribution 10% of salary to the PST plan profit sharing plan.

[Andi Last]

Yep.

[Big Al Clopine]

Because of our age we have 100% of invested assets in equities, 50% s and P25 in small 25 in international. My questions, we currently max out contributions to all tax advantaged accounts other than the backdoor Roth. My question is should I pursue this or continue to contribute excess savings into the brokerage account? I recognize there is likely not a right answer but would be very interested in your thoughts on the trade offs between those two options. From what I can see, the main trade off between tax is between tax and flexibility. De facto Roth will help avoid capital gains tax. The beach. Okay, I would do backdoor Roth.

[Andi Last]

I think I would do. I wouldn't do that. And the reason I wouldn't do backdoor Roth is because at age 30, kids on the way, you might want a nicer home. You might have some expenses with the kids. I think I'd rather build up the non qualified account more.

[Big Al Clopine]

Well, that's savings. That's not non qualified I guess. What is it earmarked for? So the excess savings, is it earmarked for retirement or is it earmarked for the Unknown.

[Andi Last]

I'm just saying if I'm 30 and I'm married and kids are in the plan, I think I want to build up my non qualified asset.

[Big Al Clopine]

He still has access to the Roth IRA account.

[Andi Last]

I know, but you've said a million times, don't pull out your contributions.

[Big Al Clopine]

Right, but he's not fully funding the Roth. I would much rather fully fund the Roth because if he doesn't necessarily need to touch it, it's going to all compound tax free if he does need it. All right, well, okay, well, just know that you have this other pool that you might touch because you could put it into a brokerage account, save exactly the same way. It's both after tax, one's going to be taxed out of capital gains, one's going to be zero. Yeah, I would take zero all day.

[Andi Last]

I get it. But I think he's going to want it before. If I were 50, I would agree with you.

[Big Al Clopine]

Okay.

[Andi Last]

At 30, I think I would build up my non quality.

[Big Al Clopine]

Well, I'm closer to 30 than you are to 50.

[Andi Last]

I don't think that's right. Actually, when you do the math.

[Big Al Clopine]

That'S a related question. If we do proceed with the backdoor Roth. See, he's already thinking he's on backtrack here. Could we withdraw back to Our rollover Roth IRA contributions prior to 59.5 without a penalty similar to what we can do with the typical Roth IRA contributions?

[Andi Last]

Yes, well, with a caveat. Because it's a conversion, you still have to wait the five years.

[Big Al Clopine]

Understand. But he's got other Roth dollars that he has contributions in. How the rule works, it's four tiered. You look at contributions come out first, conversion dollars come out second, then the earnings on contributions come out third, and then earnings on conversion dollars come out fourth. I believe that's right. It's been since I looked that up.

[Andi Last]

That sounds right.

[Big Al Clopine]

But do you think anyone from the irs actually, you know, I don't know how you track that. It's very difficult to track. It is, but if you already have Roth dollars, let's say you do a backdoor, you've already contributed to Roth iras for a while and then you start doing backdoor Roths over the next couple of years. Yeah, you have to wait five years for those conversion dollars because you're under 59 and a half, but you might have other dollars that you contributed years prior that you would have access to.

[Andi Last]

Yeah, agree. I agree with that.

[Big Al Clopine]

But yeah, I guess we're both right and wrong because I think he's thinking about the liquidity of it. He's got kids on potentially in the plan.

[Andi Last]

Yeah, I think it's more of a personal choice. Either one's a fine answer. I think for me I would want to build up non qual a little bit more because 630,000 but only 70. I should. It's not only 70,000 is a lot of money, but 70,000 outside of retirement. If they want to buy a nicer home, maybe it's going to be a good sized down payment. They want to get different furniture for the little babies coming. I don't know. I think I want to build up the non qual myself.

[Joe Anderson]

All right, the top three barriers to retirement for most people are not having enough retirement savings, not having a formal plan, and overspending. This week on a brand new episode of youf Money, you Wealth tv, Joe Anderson, CFP and Big Al Clopine, CPA show you how to break through those retirement barriers. Check the description of this podcast episode for the link to watch it on our YouTube channel. Then calculate your financial blueprint for free. To help you determine your probability of retirement success, just input your income and savings, your investments in debt and your expenses, expenses and goals. The financial Blueprint tool will analyze your current cash flow, assets and projected spending for retirement and output a detailed report outlining what you can do now to help you achieve your retirement goals in the future. Minimize stress, maximize life and prepare for the future. To start taking control of your retirement, just click the financial Blueprint link in the episode description.

[Big Al Clopine]

All right, we got Mike from PA. He goes, I'm 66 years old, my wife is 59. We have $4 million in pre tax retirement and $1 million in Roth. We plan to start using retirement funds in four years and collect my Social Security with spousal benefits in four years. Should I be considering Roth conversions at this age? With my time horizon to retirement at age 70, I will still be making income of about $350,000 annually until age 70. All right, so he's 66, he's got 4 million. He's still working $350,000 annually till age 70. If he continues to save into that retirement plan until age 70.

[Andi Last]

Yep. And then RMDs at 75.

[Big Al Clopine]

It's going to be a $350,000 RMD.

[Andi Last]

Yeah. At least. Right.

[Big Al Clopine]

So does it make sense that you can. Well, you're making 350,000 now and you're going to be making 350 as a forced distribution in retirement.

[Andi Last]

Right. And it Only goes up from there, plus Social Security.

[Big Al Clopine]

Right.

[Andi Last]

So you're going to be in a giant bracket. So Roth conversions probably do make sense. The hard part is you don't have money outside of retirement to pay the tax. This is a case where, because you're over 59 and a half, I think it's fine to pay the tax through your retirement account.

[Big Al Clopine]

32% tax bracket tax rates go up. Yeah, he's right on the cusp there. Yeah, I think you chip away at this thing. For sure.

[Andi Last]

Oh, yeah, yeah, for sure.

[Big Al Clopine]

Yeah. We're switching gears here, going a little YouTube.

[Joe Anderson]

Yeah. All of these have come from people that have left comments on our YouTube channel on various videos throughout the channel. And you can do that, too. Just go to the your money you wealth channel on YouTube. Subscribe and you can comment and join the conversation.

[Big Al Clopine]

Okay.

[Andi Last]

All right.

[Big Al Clopine]

Love people blowing us up. We got Robert. He's like on your podcast clip, when to pay tax on the Roth conversion. Big Al said you're supposed to make quarterly payments. If you don't, you get charged interest. Wrong. Wow. He was aggressive, wasn't he? If you wait and do a withdrawal at the end of the year and withhold the taxes owed at that time, it is deemed they have been equally paid throughout the year and no penalties or interest is owed.

[Andi Last]

Okay. I can probably think of three or four reasons you don't have to make quarterly estimated payments, and this is one of them. Right. I'm not sure I said that was the only way to do it, but who knows what I said? But anyway, as far as estimate, you do a Roth conversion, you have tax to pay. You need to pay that tax somehow. Right. And so typically, if you don't have enough withholding, you have to make quarterly estimated payments. But if you increase your withholding. Right. And you do this in December, then in fact it's treated as you paid it ratably or evenly throughout the year. You didn't have to make quarterly payments. If you.

[Big Al Clopine]

But yeah, this withholding from your paycheck for your paycheck. How about if you don't have a paycheck?

[Andi Last]

Yeah. Well, then you withhold from the, the, the, the 400k or the IRA.

[Big Al Clopine]

But if you do the convers.

[Andi Last]

Yeah.

[Big Al Clopine]

What are you going to withhold then? You're withholding. What?

[Andi Last]

Well, you're, you're paying tax out of the retirement account. Yeah. Which we generally don't want people to do. Plus, if you, if. I mean, there's a lot of reasons you don't have to make quarterly Estimated payments. I'm not going to go into all of those right now. But if you don't follow, if you don't have any of these exceptions and you do a Roth conversion and you do it in April.

[Big Al Clopine]

Yeah.

[Andi Last]

You have to make quarterly estimated payments. If you're not able to add to withholding, if you do it in December and you can't do additional withholding, then you just have to make the payment on January 15th because that's Q4. You do the annualization method on your tax return wrong.

[Big Al Clopine]

Are all of these going to be like this?

[Joe Anderson]

No. And actually, if you jump down a few to Big Tony, he says, can I just pay Roth conversion taxes from my monthly pension withholding? I can easily increase or decrease withholding as needed.

[Andi Last]

All right, next page. The answer is yes, you can. But just be aware that, I mean, if you're under 59 and a half, you're going to pay a 10% penalty on that, but you can do that. Sure. And that that's treated as withheld ratably throughout the year.

[Big Al Clopine]

All right, we got little 108 on video podcast 498 RMDs reduced or spend. Make some sense on this for me. Oh, can you make some sense for this? On this, for this, please. I currently have a Schwab account. It was transferred from td. My question is, I sell and buy stocks on my own. I have 20 different stock positions and I'm wondering is it a good idea to consider to consolidate to an ETF that have the same holdings, for example, put into an S&P 500 or Voo, to name a few and just go with that. Sorry for being so wordy, but it took me a long time to get it from thought to paper. Lol. Just came across your show. Love it. Thank you. All right. I don't know. You got 20 different stock positions and he wants to say, should I just sell it and just go and do s and P500 ETF or index fund?

[Andi Last]

You can, I don't know what 20.

[Big Al Clopine]

Different stocks that you own.

[Andi Last]

I don't either. See the main difference here. S&P 500 has 500 stocks. So give or take, on any given day, it might be 498 or 502, I don't know. But yeah, you have 20 different stocks. So S&P 500 is more diversified. On the other hand, your 20 different stock positions, maybe you got a lot of gains in. I mean, you don't necessarily want to sell them because then you got to pay all these capital gains. So I guess it depends. I mean, having an index type fund like s and P500 is easier. You don't have to do much with it. When you have 20 different stocks, you might want to be watching them. You might want to do more tax, less harvesting and things like that. So it's, it's a little bit more labor intensive and you don't have the diversification. But if, but it's, it's not a bad way to invest.

[Big Al Clopine]

Sure. Yeah. I don't know what stocks that you own, but I agree with everything you said there, bud.

[Andi Last]

Okay.

[Big Al Clopine]

All right. Five year rule is confusing. Yes, I know it is.

[Andi Last]

Yeah, we. Yeah, you're not kidding.

[Big Al Clopine]

This is NR. He's like, I'm making after tax contributions to my 401k that Vanguard automatically converts to Roth. And then I move the contributions to a self directed Roth IRA account. All right, so he's doing after tax contributions to the 401k that they convert to Roth within the 401k, then he's moving those into a self directed Roth IRA account. The conversions to Roth in my case is not taxable event. So why would the five year rule conversion rule apply to me? My understanding is that the five year rule on a Roth conversion only applies to taxable Roth conversions. No, it's any conversion. Well, these YouTube you can't type. I mean, these questions are. It's not me reading and I know people make fun of me all the time on that, but the five year rule is confusing. I'm making after tax contributions to my 401 that Vanguard automatically converts to Roth. And then I moved the contributions to a self directed Roth account. Okay, so first again, the conversion to Roth in my case is not taxable event. So why would the 5 year Roth conversion rule apply to me? My understanding is that the five year Roth conversion rule only applies to taxable Roth conversions. And if the conversion isn't taxable, you can withdraw the principal at any time. Can you correct me if I'm wrong in my understanding? Maybe it was me reading.

[Joe Anderson]

I wasn't going to say anything, but.

[Big Al Clopine]

That worked out pretty well.

[Andi Last]

Yeah, that's a good question.

[Big Al Clopine]

Yeah. What's a conversion? Conversions have the five year clock and contributions do not on the contributions.

[Andi Last]

That's the tricky part. Yeah. So, yeah, you still have a. Whenever there's a conversion, you have a five year clock on the principal part.

[Big Al Clopine]

The reason for that, because it was in a tax deferred environment and tax deferred environments that are pre tax or after tax in a shell of a 401 or an IRA, you have to pay a 10% penalty on any of those earnings or all of those dollars if it's in a pre tax account.

[Andi Last]

Yeah, now, but let's take a step back. I'm making after tax contributions to my 401.

[Big Al Clopine]

That's fine, but it's not a Roth. He's making after tax contributions that he's.

[Andi Last]

Converting into a Roth. And it has basis, but it's still the principal.

[Big Al Clopine]

It's a conversion. So the rule is based on conversion versus contribution.

[Andi Last]

Unless you're over 59 and a half.

[Big Al Clopine]

Correct. If you're over 59 and a half, you're fine.

[Andi Last]

Doesn't matter. Doesn't matter if you had a Roth already.

[Big Al Clopine]

Correct.

[Andi Last]

That's why this is so confusing.

[Big Al Clopine]

Yeah, but I could be 100% wrong too. But I'm standing by my answer.

[Andi Last]

I think you're right.

[Big Al Clopine]

I think so too.

[Joe Anderson]

If you haven't already downloaded our guide to the five Year rules for Roth IRA withdrawals, this would be the time to do it. This handy one pager shows how those five year clocks work for Roth contributions versus conversions. Whether you're over or under age 59 and a half and the order of withdrawals. You'll find the link in the upper U.S. a description to download it for free along with the Withdrawal Strategy Guide. Learn tactics that'll help you prolong the life of your retirement savings in the most tax smart way possible. Get both the five Year rules for Roth IRA Withdrawals and the Withdrawal Strategy Guide from the links in the description of today's episode, either in your favorite podcast app or on YouTube. And when's the last time you browsed our [e-mail] there's a ton more free and valuable financial resources there waiting for you, George.

[Big Al Clopine]

Let's see. Was the home office deduction eliminated in the Tax Cuts and Jobs Act? I have no idea.

[Andi Last]

The answer is no. It's still available. However, if you're an employee, the home office deduction was a miscellaneous itemized deduction which is no longer allowable. If you have your own business, it's allowable on your Schedule C or your partnership or whatever it may be, you still can take that deduction. I guess it's worth noting that many states did not conform to this federal rule, so you can still take that. If you qualify, you can still take the deduction on the state return, but as an employee, that has been eliminated because there's no miscellaneous itemized deductions. If you're self employed, you can still take the home office deduction.

[Big Al Clopine]

All right, Morial?

[Joe Anderson]

I think that's correct, yeah.

[Big Al Clopine]

All right. There's a little podcast clip. It says, I'm contributing 15% pre tax, 5% Roth. Is this a good retirement savings mix? I think the intent is that most people try to decide between either Roth or pre tax. But is this a viable strategy to mix the two? I assume it would count as long term capital gains, right? No. So anything pre tax is going to come out as ordinary income. Anything Roth is going to come out tax free. There's no capital gains in either of these equations. So based on the current numbers, a single person could withdraw 47,000 out of a taxable pre tax bucket. Well, taxable Pre tax bucket, 47,000 would be taxed at ordinary income rates.

[Andi Last]

Correct.

[Big Al Clopine]

So then whatever you need over that for the year, take out of the untaxed Roth bucket. Just like taking it out. It would be just like taking it all out of Roth, except the first chunk has more room to grow. Doesn't it work that way? And if so, what happens if you throw some dividend income on top of that, presuming pretty decent savings and the low end of the 24% tax bracket? I prefer not to give details on my progress or else friends start needing loans.

[Andi Last]

Okay.

[Big Al Clopine]

All right.

[Andi Last]

Well, Joseph, I actually had a chance to read this before this. Now I read it four times and I think I know what's being asked, although it's not very clear on the first. I think what's being asked is when I do a Roth conversion, how does it work? Does it start with the lower brackets? And then I got this other income tax at the higher rates. And if that's what the question is.

[Big Al Clopine]

I don't even see a conversion anywhere in this question.

[Andi Last]

Well, not a conversion, it's just whether to go pre tax or Roth.

[Big Al Clopine]

Okay.

[Andi Last]

But then withdrawing 47,000 out of. Yeah, it's hard to make any sense of this one. But here's I'm going to answer what I think is being asked, and that is if you have a bunch of other income, that income happens first. And then if you're deciding then to go 401k traditional or 401k Roth or do a Roth conversion, it's your current marginal rate that's going to determine what the tax is. So all the other stuff is there to start with. And then anything else you do on top of that sits on top. That's how I would answer that question. I'm not sure if that's what the question was. But it's the best I can do.

[Big Al Clopine]

Michelle, great show.

[Joe Anderson]

This one came from Facebook.

[Andi Last]

Okay.

[Big Al Clopine]

Facebook don't have a Facebook account. Is Facebook still a thing?

[Joe Anderson]

Facebook is still a thing. Pure Financial Advisors has a Facebook page. So this is where she commented.

[Big Al Clopine]

Got it. All right, great shell question. Would it make sense to do use Roth dollars to pay for larger conversions, ie, convert $100,000 of 401k funds to Roth and use $24,000 of Roth dollars to pay the tax. This would prevent needing to take out 131,000 to end up with $100,000 in the Roth. Okay, so this would gain me about $7,500. What am I missing? I like that. Versus paying the tax out of the retirement account. But if you had the money in a non qualified account, I would love that even the most.

[Andi Last]

Yeah, I would love that more too. I think if you ran the math out, it works out the same. But maybe psychologically it looks better because you're only giving up 24,000 instead of 31,000. Correct. But you're giving up the 24,000 that's tax free instead of the 32,000 that's taxable. I don't know. I think. I think it works out the same.

[Big Al Clopine]

All right, we got a review here. So Joe is clearly checked out.

[Andi Last]

You checked out.

[Big Al Clopine]

Decent advice from Big Al. Yeah, but Joe can't follow the questions or the numbers or what's going on. Well, he's not lying.

[Andi Last]

Is that right?

[Big Al Clopine]

Sometimes if it's a couple of questions, he lets Al just take him over and he has very little to add. He thinks he's funny. I think it's annoying.

[Andi Last]

Well, you don't have to listen.

[Big Al Clopine]

Yeah, I can't listen to him anymore. It's just because of him. Al needs to drop Joe. Will you drop me?

[Andi Last]

No. This is what makes it fun. It's Joe.

[Big Al Clopine]

Yeah.

[Andi Last]

Can you imagine a show with just me reading questions?

[Big Al Clopine]

I clearly checked out. I. I check out half. Half the time. I mean, I try to read some of these. I'm like, I have no idea where we're going with this.

[Andi Last]

Right.

[Big Al Clopine]

Well, you have all the time to prep, too. I just throw you the pot, you know?

[Andi Last]

Yeah, you give me the. Yeah, the hard ones because I already looked at them.

[Big Al Clopine]

Yeah.

[Andi Last]

Yeah.

[Big Al Clopine]

So. Well, thank you for not even sharing your two star review, though.

[Andi Last]

Well, because of me. Because of me.

[Big Al Clopine]

Yeah. You got two. I got a couple. I got a negative. I got negative three. So. All right, that's it for us. That's a wrap. I'm definitely checked out of this show right now, so we'll see you guys next week. Thanks for listening. Thanks for your questions. Andy, great job for putting all this together. Big Al, thanks for taking all those questions.

[Andi Last]

That was fun.

[Big Al Clopine]

And yeah, we'll see you guys next time. Show Scott you'd Money Wallet John in.

[Joe Anderson]

Pennsylvania, Tiger Knot woods and Lioness Charlie in Castle Rock, Colorado, Worrywart mom in Seattle, Esther in the Bay Area and James and Tiara Santa. Listen for answers to your questions next week in YMYW podcast episode 508 dedicated listeners did you know that your Money, you, Wealth is also a video podcast? Has been for a couple of months now. Watch us subscribe and find me responding to you in the comments on YouTube. Follow and watch on Spotify or keep listening in your favorite podcast app, especially if you're driving. Have you left your honest reviews and ratings in Apple podcasts? Like our anonymous friend earlier, we love it when you do. Your Money you, Wealth is presented by Pure Financial Advisors. Making the most of your money and your wealth in retirement requires more than just a spitball. The experienced professionals on Joe Big Al's team at Pure Financial Advisors will meet with you in person or online to take a deep dive. They'll review your financial blueprint and help you devise a flexible and secure roadmap for your retirement future. Just click the Financial Assessment link in the episode description. Click get an [e-mail] or call 888-994-6257. Tell them you heard about it on the podcast. Pure Financial Advisors is a registered Investor 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.