Deferred Comp, Roth Strategies, Asset Protection (and Gold) - 514

Summary

Summary of "Your Money, Your Wealth" Podcast Episode 514: Deferred Comp, Roth Strategies, Asset Protection (and Gold)

Release Date: January 28, 2025

In Episode 514 of the acclaimed "Your Money, Your Wealth" podcast, hosts Joe Anderson, CFP® and Big Al Clopine, CPA of Pure Financial Advisors delve into a variety of complex financial topics with their characteristic blend of expertise and humor. This episode primarily focuses on deferred compensation, Roth IRA strategies, asset protection, and the role of gold in investment portfolios. Additionally, Joe and Big Al address questions from their YouTube audience, providing insightful advice tailored to individual financial scenarios.

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1. Listener Spotlight: Mike from Tampa (00:56 - 07:09)

The episode begins with Mike from Tampa, Florida, sharing his impressive financial journey. At 39 years old, Mike and his 36-year-old wife have amassed nearly a million dollars in savings. With a combined annual compensation nearing $600,000, their financial discipline is evident. However, Mike is grappling with substantial student loan debt of approximately $300,000 from private graduate school.

Key Financial Details:

• Income: Mike earns between $300,000 annually, having recently transitioned to the private sector with a significant salary increase.
• Assets:
  • Cash: ~$104,000
  • Investments: ~$878,000 (excluding restricted stock)
  • Life Insurance: $1,000,000 combined
• Student Loans: $300,000 with a potential increase in monthly payments from $500 to $1,300 due to higher income.

Hosts' Analysis: Joe commends Mike for saving diligently, stating, "You're doing awesome. Keep it up." (05:15). Big Al reassures Mike that despite the high student loan payments, the couple's aggressive savings rate—saving approximately 25% of their income—positions them well for future financial stability and potential early retirement.

Insights:

• Savings Strategy: Maxing out 401(k) contributions and allocating significant monthly bonuses towards savings.
• Debt Management: Balancing high-income growth with increased student loan repayments without hindering overall financial goals.

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2. Retirement Planning Insights (07:09 - 08:14)

The segment transitions to a promotional interlude where Andi Last highlights the importance of proactive retirement planning. She emphasizes the availability of a companion "Cruising into Retirement" checklist and guide, encouraging listeners to download these free resources to enhance their retirement preparedness.

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3. Listener Spotlight: Keith from California (08:14 - 16:22)

Keith, a 55-year-old single individual from California, seeks guidance on managing deferred compensation and retirement withdrawals as he plans to retire within the next few years. With a robust net worth of $6,000,000, Keith's financial landscape includes significant assets and a substantial deferred compensation account.

Key Financial Details:

• Net Worth: $6,000,000
  • Primary Home: $1,700,000 (with a $550,000 mortgage)
  • Retirement Accounts: $1,300,000 in a 401(k), $1,400,000 in an IRA
  • Brokerage Accounts: $1,200,000
  • Deferred Comp: $1,300,000 in a work brokerage account invested in S&P 500
• Withdrawal Plans: Aiming to distribute $40,000 annually from deferred compensation over five to ten years while maximizing contributions to various retirement accounts.

Hosts' Guidance: Joe and Big Al discuss the tax implications of Keith's deferred compensation. Big Al suggests extending the payout period from five to ten years to mitigate hefty tax burdens, stating, "If she could defer it over 10 years, wouldn't that make a lot more sense?" (11:04). Joe elaborates on the tax efficiency, highlighting the importance of spreading out income to avoid high tax brackets and reduce the impact of Required Minimum Distributions (RMDs).

Insights:

• Deferred Compensation Management: Extending the payout period can alleviate tax pressures and enhance long-term financial stability.
• Roth Conversions: Strategically converting traditional retirement accounts to Roth accounts to minimize future RMDs and optimize tax strategies.

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4. YouTube Questions Segment (16:59 - 29:24)

In this interactive segment, Joe and Big Al address a variety of questions submitted by their YouTube audience, providing expert advice on nuanced financial topics.

a. Roth Conversions and IRMAA Considerations (17:00 - 18:54)

Question: Should a couple consider the advantages of performing Roth conversions before triggering Income-Related Monthly Adjustment Amounts (IRMAA)?

Hosts' Response: Big Al emphasizes the importance of balancing Roth conversions with potential increases in Medicare premiums due to higher income. He advises, "You have to do the math to see does it make sense to pay that extra premium in Medicare versus have a low Medicare premium." (17:21). Joe concurs, highlighting the long-term tax benefits of early conversions despite short-term costs.

b. Paying Roth Conversion Taxes (18:54 - 22:34)

Question: How should one approach paying taxes on Roth conversions, especially regarding estimated payments for the tax year?

Hosts' Response: Big Al explains the process of making estimated tax payments using IRS Form 1040-ES, advising listeners to either handle it independently or consult with an accountant. Joe adds, "The market does 10%. I'd much rather be in the market in January than in December because you get the full year of that growth tax-free." (22:34), underscoring the benefits of timely conversions.

c. Protecting a Gifted House from a Child’s Partner (22:34 - 26:19)

Question: How can one ensure that a gifted house remains solely with their child, safeguarding it from claims by the child’s de facto partner in the event of a separation?

Hosts' Response: Big Al suggests establishing separate property ownership or setting up a trust to legally protect the asset, noting that state laws vary. He advises consulting with a legal professional for tailored solutions, stating, "There are ways to help protect the assets that you give to your kids." (23:07).

d. Step-Up in Basis for Inherited Property (26:19 - 27:52)

Question: If children inherit a property and rebuild on the same land, can they retain the stepped-up basis on the new construction?

Hosts' Response: Big Al confirms that the inherited property's basis is reset to its market value at the time of inheritance and that any subsequent improvements add to this basis. Joe further clarifies the mechanism of basis adjustment, ensuring that the children benefit from the step-up plus the cost of new improvements. (24:12 - 25:55)

e. Gold in Investment Portfolios (27:52 - 29:24)

Question: Revisiting a previous recommendation to limit portfolio exposure to gold to no more than 2%, how do the hosts view gold's role in modern investment strategies?

Hosts' Response: Both Joe and Big Al reaffirm their stance on gold, emphasizing its lack of expected returns and its nature as a commodity. Big Al remarks, "Gold can go up and down and fluctuate. It has periods where it does well, but it's not a great long-term investment." (28:17). Joe elaborates on gold's non-yielding characteristics, reinforcing the recommendation to keep gold allocations minimal.

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5. Conclusion and Next Episode Preview (29:24 - End)

As the episode wraps up, Andi Last encourages listeners to download the "Withdrawal Strategy Guide" and engage with the podcast's free financial resources. The hosts tease the next week's episode, where Big Al returns from his holiday, and they will discuss topics such as marriage and financial planning, navigating separations, and optimizing retirement readiness.

Notable Closing Remarks:

• "Your Money, Your Wealth is making retirement planning accessible and enjoyable, proving that finance doesn't have to be dull." (29:27)
• "Join us next week for more insights and practical advice to help you secure your financial future." (29:38)

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Key Takeaways:

• Deferred Compensation: Extending payout periods can enhance tax efficiency and financial stability.
• Roth IRA Strategies: Early and strategic conversions can optimize tax benefits despite potential short-term costs.
• Asset Protection: Legal structures like trusts are essential for safeguarding gifted assets from unforeseen claims.
• Gold Investments: Maintain minimal exposure due to its unpredictable returns and lack of inherent growth.
• Comprehensive Retirement Planning: Leveraging available resources and expert advice is crucial for a secure retirement.

This episode of "Your Money, Your Wealth" underscores the importance of strategic financial planning, personalized advice, and the thoughtful management of assets and liabilities to navigate the complexities of modern finance successfully.

Transcript

[Andi Last]

Mike and his wife in Tampa are 39 and 36. They've got nearly a million bucks saved. Are they on track for retirement? Kate In California is 55 and hoping to retire in the next couple of years. How should she manage deferred compensation and retirement withdrawals? That's today on youn Money, you, wealth, podcast number 514. Plus, Joe and Big Al answer questions from our YouTube viewers on considering IRMAA when making Roth conversions, paying Roth conversion taxes quarterly or in December or in January, protecting a gifted house from a child and the tax impact of rebuilding on an inherited property. Finally, eight years ago, Joe and Big Al said you shouldn't have more than 2% of your portfolio in gold. And one YouTube viewer said that that did not age too well. What do the fellas think today? We'll find out. 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 got Mike from Tampa, Florida. Big fan of the show. Thanks for taking my question. I know you mentioned getting some younger callers, and I recently found your podcast. Oh, that's why, Big Al, you put a calling out there.

[Big Al Clopine]

I did.

[Joe Anderson]

You need some younger callers. And then now we got the fire movement just blowing us up.

[Big Al Clopine]

You know what we also need? My cousin who loves our show, she was telling me over Christmas, she said. She said, I feel intimidated to ask a question because they don't have millions. And I said, well, send it in because we'd like to answer everybody's questions. So we'll see.

[Joe Anderson]

Yeah, let's see if this guy's got millions.

[Big Al Clopine]

Okay.

[Joe Anderson]

I wanted to see how you think we're doing. All right. I'm 39. My wife's 36. I recently transitioned to the private sector a few years ago. Total compensation make about 3 to 350,000. I was making a third of that three years ago. So brand new to making great money. My wife makes roughly $300,000 total. Wow. They're just slumming it.

[Big Al Clopine]

Hopefully they don't want to retire early.

[Joe Anderson]

We have two young kids, a four year old and a two year old. Our state documents are in order and we have a million dollars in life insurance. And My wife has $1,500,000. As far as the accounts, total of roughly $104,000 in cash, 878,000 in investments, not including the restricted stock. And here's the breakdown. Cash 102, capital one to pay the bills. 2000 Schwab Brokerage with low cost index funds 180. Wife's 401 that's matched. Maxing out is 285. We got a Fidelity Brokerage account. 218. Husband 401 66. Let's see. Daughters 529 35. Sons 529 30. Husband, prior retirement account. Government, no pension, but compounds at 8% as long as I don't roll it over. Okay, 64,000. Wife restricted stock is 100. Other assets, liabilities. We bought this house a year ago at 6.99% for 30 years. Ouch. For $770,000 we put a big chunk down. Probably have about $300,000 or so in equity. Both cars are paid off. Here's the kicker. I have large student loan debt from a private grad school. I have roughly $300,000 in student loans. But the good news is on the pay program, we have about nine years left. Okay. I'm currently making about $500 a month in payments. But with my new higher income, my payments will be about 12 to $1,300 a month. Since we file separately, a good amount each month, but not crippling. With two kids in daycare plus the rest of our overhead, our monthly expenses are probably $12,000 to $13,000. We're both maxing out 401 s and with my monthly bonus, I'm able to now stock away an additional amount. Anywhere from 5,000 to $10,000 a month. My goal is to have the two kids 529 at $75,000 or $80,000 by the time this year, next year, which will include a 14 to 16 year Runway before they go to school. And assuming an 8% compound, that would give me $250,000 each for college, which should be enough. Once I get that done, I will transition back to dollar cost averaging to the Schwab account. How am I doing? No desire to retire anytime soon. I can see it's both cutting back at around 60, 65. But I think I'll always do something part time like consulting. Hoping to be in a net worth around 5 to 10 million by the time. Assuming able to continue to stay at the incomes we're at and put away the money at the same rate. Any thoughts or feedback would be great. Appreciate it. Mike from T. Hey, you think they're.

[Big Al Clopine]

On a good path?

[Joe Anderson]

Well, they got a lot of stuff going on here.

[Big Al Clopine]

They do.

[Joe Anderson]

He's got $300,000 in student loan debt, got a huge pay increase and so instead of Paying a few hundred dollars a month. Now he's paying like $1,500 a month. $1,500 a month?

[Big Al Clopine]

Yeah. Call it $18,000.

[Joe Anderson]

$18,000?

[Big Al Clopine]

You need a calculator for that?

[Joe Anderson]

No, I was doing some other math. They're jerky. What interest rate on the loans?

[Big Al Clopine]

I'm not sure that they said so.

[Joe Anderson]

It's going to take 20 years or so to pay off those loans at that rate.

[Big Al Clopine]

I think the payee program pay as you earn. I think you pay 10% of your discretionary income for a 10 year period. I'm not sure you have to pay it all off. I'm not that familiar with them. Yeah, maybe forgiven. What I do know is that there was a bunch of requirements to qualify and they stopped the program in July of this, of last year, 2024. But I think maybe it gets forgiven. I'm not 100% sure. But even putting that aside, Jeff, if they're saving full 401s, so that's almost 50 grand a year and they're saving, he said between 5 and $10,000 a month. Let's just take the midpoint, 7,500. That'd be $90,000. They're saving $150,000 a year. Even with the student loans, they're making $600,000. That's 25% of their savings. The math should work out, I think.

[Joe Anderson]

Yeah, 25% of their earnings for sure.

[Big Al Clopine]

Yep. Yep. So I'd say keep doing what you're doing.

[Joe Anderson]

Right? What's the question? How are we doing? You're doing awesome.

[Big Al Clopine]

You're doing fine.

[Andi Last]

So these are young people that just called into brag.

[Joe Anderson]

Atta boy. Way to go.

[Andi Last]

And they're not planning to do fire, but could they?

[Big Al Clopine]

Well, they didn't ask that. So we're not gonna, we're not gonna go there. But yeah, you guys are doing fantastic. You're, you're, you're in the top 1% plus of people that we talk to, people in the country, people in the world. So keep it up.

[Andi Last]

When it comes to your retirement plan. Are you the captain of a sinking ship? Many of us need a life vest. We're ill prepared and traveling without a compass. By plotting a good course and using proper tools and strategies, you can cruise into retirement. This week on YMYW tv, Joe and Big Al show you how to be proactive and keep your retirement afloat with the steps to prepare, adapt, and remain on course. Watch how to cruise into your retirement and download the companion Cruising into retirement. Checklist and guide from the podcast Show Notes. It's only available for a limited time, so download it before this Friday. Just click the links in the description of today's episode in your favorite podcast app to watch how to cruise into your retirement and to download the companion guide for free.

[Joe Anderson]

All right, let's go to Keith from California. Hey guys, just started listening to your podcast and loving it. All right. Hope you can help me with this situation. Get a Spitball analysis I'm currently 55, single. I have two kids, 18 16. My financial assets are as far follows we got overall net worth of $6,000,000 including $1,700,000 is my primary home with a $550,000 mortgage. $1,300,000 in a 401, $1.4,000,000 in an IRA, $1,200,000 in a brokerage account. Jeez. $1.3,000,000 in deferred income in a work brokerage account invested in S&P 500 fund can be distributed annually over the five or ten years. Got $120,000 in HSA and $50,000 in a Roth. I'm hoping to retire anytime in the next couple of years and was wondering how I should manage my withdrawals. Expenses are going to be about $140,000 pre tax. My plans are to continue maximizing my contributions to the 401 backdoor Roth HSA and about $40,000 in deferred income. My effective federal tax rate is about 28% if I target 58 to retire. My current though is to leverage my deferred over five years and then use my brokerage account for a year or two while converting some IRA 401 to Roth account with a goal to reduce my RMDs. This would bring me to age 65 and then I'll start Social Security. Not sure if this is the best tax in IRMAA strategy. I would appreciate some guidance. Okay, I like this question. So good news is so she's in the 28%. She's single, correct? 55, single, two kids.

[Big Al Clopine]

Yep.

[Joe Anderson]

All right, so she's got this deferred comp at $1,300,000 that she's going to continue to put around $40,000 a year in. So she gets a deduction of $40,000 per year. But then all of that money has to come out over a five year or ten year period.

[Big Al Clopine]

Correct. You have to elect.

[Joe Anderson]

She has to elect before she defers. So I wonder if It's Is it 5 or 10? What did she elect?

[Big Al Clopine]

Well, she's planning on 5. That's what she said. All right, but then there's ways, Joe, to sometimes change the payout period, but then you can't get. You have to wait. There's a waiting period. So it's plan specific. It depends upon the plan. I think where you may be going is if she could Defer it over 10 years, wouldn't that make a lot more sense?

[Joe Anderson]

I think 10 years is better.

[Big Al Clopine]

Me too. Because she doesn't need five years to cover expenses. I think you do 10 years and then you still have probably room to do Roth conversions in all 10 years instead of having way too much income upfront and then doing Roth conversions on the back end. If it can be changed. If it can be changed. Right.

[Joe Anderson]

And it's already 1.3. 1.3. Let's say it goes to 1.5. I don't know what's five years on 1.5? I mean, that's several hundred thousand dollars of ordinary income that's going to be on the tax return regardless over that five year time period.

[Big Al Clopine]

Right. So that's $300,000 of income and Shelley needs $140,000. So one of the things we don't like about RMDs is when you have way more income than you need because you're spending tax on dollars you don't really need. If you can Defer that out, RMDs, we try to reduce those through Roth conversions. In a deferred comp plan like this, if you could do a 10 year because you've got plenty of income, it' better approach. But, but you're right, Jo. Every year you defer, you have to elect. But sometimes there's ways to change those.

[Joe Anderson]

But. All right, so let's say she does the five years, she gets the money out, she's going to be in a pretty high tax bracket, like 300 some odd plus income at a single taxpayer. You're up there from a percentage standpoint. So you get most of that done. All of your other assets are now growing and then you can switch up your overall distribution strategy. I mean, I love deferred comp in a sense that you could reduce taxes today, but then it just handcuffs you in regards to like a tax efficient distribution strategy because over the next five years there's nothing else she can basically do because she's at the top of the bracket. And then she can start thinking about, all right, well now how do I create the income from my other assets? She's got $1,200,000 in a brokerage account. So then you can start thinking about. All right, well now I can live off the brokerage account and then just start doing conversions to the top of the 24% bracket or higher because she'll have plenty of assets, the RMDs, as they continue to build and grow. She's got one. Call it two and a half.

[Big Al Clopine]

Yeah. $2,700,000.

[Joe Anderson]

Call it $3,000,000 over 10 years. That could be six.

[Big Al Clopine]

Yep. And she's only, let's see, she's 55. So it's going to be. It could double twice. It could, it could double twice.

[Joe Anderson]

So I don't know, let's say you got $10 million now in retirement accounts. That's at least $400,000 of, of income. That's all ordinary. So you're going to lose half of. She's going to lose half of the deferred comp plan in tax because that deferred comp payment is going to give her $300,000 of income. So $300,000 of income as a single taxpayer. I don't know. Where does she live? California. All right, so There you go, 50%. So 300,000, a good portion of that's going to go to tax. She's going to live off the rest. She can save the scraps. So she's going to lose quite a bit of that to tax over that five year period. And then the compounding effect of the retirement accounts. So she has to get the money out, but she can't pull the money out of the retirement accounts as she's taking the deferred comp over a five year period because of the tax rate she's in.

[Big Al Clopine]

Correct? Yeah.

[Joe Anderson]

So if she did the 10 year, she could probably start at least slowly dripping some of these dollars out.

[Big Al Clopine]

Yeah, I mean, I think that's our best thought that we have for you is try to Switch from the 5 year to 10 year to the extent possible because it's going to work out much better tax wise for you.

[Joe Anderson]

But either way she's fine.

[Big Al Clopine]

Awesome job.

[Joe Anderson]

I mean, wow, with the amount of money that you've saved. Congratulations. Um, you've really done a phenomenal job. The, the, the bad thing is, the good news is she's, she saved a lot of money. The bad news is is that the government really loves her too. Right. Because of where she saved her money and where the money's sitting is that they're just like, oh my gosh, we love you because you're going to help pay some of the bills. Here.

[Big Al Clopine]

Yeah, we got a five year payout.

[Joe Anderson]

Ooh.

[Big Al Clopine]

And then we got RMDs coming. Yep.

[Joe Anderson]

But yeah, I think you just got to tweak a little bit of what you're currently doing. Run some numbers here. You know, even those RMDs could even be. If she thinks that taxes are even going to go higher, the sooner she gets the money out of those retirement accounts, the better off she's going to be. Tax rates are pretty low. Are they going to change? Does it make sense to pay at. At 32%, 37%? Could it go to 39.6 or higher? Could there be? I don't know. So there's a lot of things to consider. But she's got plenty of money, she can do whatever she wants and she's going to help out the government.

[Andi Last]

Our Withdrawal Strategy guide will tell you more about sustainable distribution rates, optimizing from which accounts you make your withdrawals and when. The impact of market volatility and inflation on your retirement spend down plan and tax saving strategies to make your money last longer in retirement. Grab your copy of the Withdrawal Strategy Guide for free. Just click or tap the link in the episode description to get yours. Then share the show and the free financial resources with your friends, family and colleagues. And if you've got money questions or want a retirement spitball analysis of your own, click or tap the Ask join Big Al link in the episode description. All right, can we go to YouTube questions?

[Joe Anderson]

Yeah, fire away. Let's go.

[Andi Last]

All right, so we have a YouTube question from Thomas, who left this on podcast number 510, which was defusing a future tax bomb with Roth conversions. He said, for the spitball on Alex and spouse, shouldn't you also consider the advantages of doing conversions prior to irmaa look back years. Or is this couple not required to add Medicare, assuming at least one is a federal retiree?

[Big Al Clopine]

Well, let me give you a little bit more because referring back to the email, they're in the 24% tax bracket, Joe. Today they will be in the 24% tax bracket under current tax law in the future with RMDs. So we suggested keep converting to that 24% bracket. And so this question is, well, what about IRMAA? Maybe you should only do it until you're, you know, 65. Right? So I think that's the question. And to me the answer is, yeah, it's better before 65 because you don't have IRMAA, but you have to consider the extra Medicare tax that you pay as an additional tax. And if it still makes sense to do it, then you continue doing it even though your Medicare payments, monthly payments, are going to be higher.

[Joe Anderson]

Yeah. To say that a different way. If I increase my Medicare by $200 a month, so that's an added tax. So to do the conversion, you're going to pay X amount of dollars in tax. And then, hey, I might have put myself in another IRMAA bracket that I'm a little bit more Medicare. You have to do the math to see does it make sense to pay that extra premium in Medicare versus have a low Medicare premium. And then when RMDs hit, you're going to be stuck in these higher IRMAA brackets for life. So it's just figuring out, hey, does it make sense to pay the piper a little bit for a couple of years, then I can potentially save myself a ton of, you know, additional tax and additional IRMAA premiums if I do this thing correctly. So.

[Andi Last]

All right, next question is from Pool Mile 30 on a two year old podcast clip called when to pay Roth Conversion Taxes without Penalty. And I think this one is coming up because we're now approaching tax time for 2024. I need to pay on January 15th. Will I be getting a form from my financial institution? I've never paid any other time other than April, so I don't know how to make that early payment. Can you tell me how to go about making that payment before I file my taxes in April? Thank you.

[Big Al Clopine]

Yes, I think the question is referring to when you do a Roth conversion. It may put you. You may owe taxes and you may have to make an estimated payment. There's reasons why you wouldn't have to, but in many cases you have to make an estimated payment. And it would be January 15th. If you made that Roth conversion in Q4 of last year, you pay it through an IRS form. It's a 1040es estimate payment, so 1040s. And you can down that, download that online, print it, cut it out, write yourself, write a check for the amount to the IRS and put in an envelope and mail it. It's not going to come from your financial institution. You've got to go ahead and get it. You can get it from your accountant, you can download it yourself, but that's generally how you pay it. You can also pay online. Some people like to do that, some people don't. But that's how you have to take the initiative yourself. Or you have to ask your accountant to help you with that.

[Joe Anderson]

Is he asking for a tax form? Or how much the tax is going to be.

[Big Al Clopine]

He's asking for a form. He thought his financial institution might send it to him. Yeah, this is where if you have an accountant will help you, will figure out how much you should pay and then we'll give you the form to pay it. If you are preparing taxes yourself, let's say on TurboTax or some other tax program, then you would have to do a little tax projection for the following year to see how much it is. Print out the form and then go ahead and cut it out, send it in with your check.

[Joe Anderson]

But he did a Roth conversion, so he's always paid taxes in April. He's like, all right, since I did a Roth conversion, I'm going to have to pay money in April 15th. And is there going to be a form? How much money do I pay? How do I go about paying it?

[Big Al Clopine]

Well, he's responding to something that we talked about on paying it January 15th. I think that's what the question is.

[Joe Anderson]

Whoever this person is, is he asking a question about a question that we answered or is he commenting on a question that we answered to someone else?

[Big Al Clopine]

Yes. Yeah, he's commenting. So I probably talked about when estimated payments are due. And then I said if you, if you end up owing taxes, you may have to make a quarterly estimated payment. So he's asking how to do that.

[Joe Anderson]

Sure.

[Andi Last]

All right, all right. And then the next one is actually on that same video, somebody says, this is somebody named Tactical Truth who. So make a Roth IRA conversion in January and you can pay the taxes equally across four quarters. Make the Roth IRA conversion in December and pay the entire tax amount for the conversion by January 5th of the following year. Is that correct?

[Big Al Clopine]

Yes, January 15th. But in, in either case, both the first question and the second question, your fourth quarter income is higher if you make that Roth conversion in the fourth quarter. So you have to, it gets more complicated, but you have to do the annualization method on your tax return or you have to have accountant do it so that you're not penalized to show that you had uneven income throughout the year. But that's a correct statement. We still like Brad. Conversions show generally in January, just because you get another full year of tax free growth regardless of the extra tax that you pay over the course of the year.

[Joe Anderson]

Yeah, the market does 10%. I'd much rather be in the market in January than in December because you get the full year of that growth tax free versus doing the conversion in December. You're only going to get, you know, one month of that growth or this year you would have took a loss.

[Andi Last]

Or last year, the next one is from MJ on best way to help adult kids buy a house. MJ says how do you best protect against your child's de facto ex taking half of your housing gift if they later split up?

[Big Al Clopine]

All right, so I guess he wants to give money to his kid, but his kid's married, wants to make sure that it stays with the kid if they split up. Is that the what you're saying?

[Andi Last]

Basically, yeah. But it says the child's de facto, so it sounds like they're not married, they're living together.

[Big Al Clopine]

Yeah, well, I guess it depends upon the state whether it's a community property state or not, for one thing, Depends upon the laws of the state. But I think what most people do in a case like this where you want to be ultra safe, is you would just set up separate property or maybe even set up a trust. So it's in a trust. I mean, there's ways to protect income. This is actually more of a legal question probably than a financial question. But yeah, there are ways to help protect the assets that you give to your kids.

[Andi Last]

Okay, Fagara on a Peter Keller video on Step up in basis explained says, if I leave my real estate to my children when I expire, then they get it and demolish the old house to rebuild a new house on the same land, will they be able to keep that new stepped up basis on the total value when they sell the property?

[Big Al Clopine]

The answer is yes. They keep that basis plus any new improvements. Building a new home would actually add to that basis. So it would be a greater amount than the stepped up basis when they received it.

[Joe Anderson]

Wait a minute. I don't know if I understand the question. Let's say she has a house, she bought it for 100,000. It is worth a million dollars.

[Big Al Clopine]

Right.

[Joe Anderson]

She dies, the kids inherit the house, then they demolish the house, and then they build a $2 million house on that lot and then they sell it. Is that what she's asking?

[Andi Last]

Yes, exactly.

[Big Al Clopine]

Yeah. So then they'd have a $3 million basis at that time, right? Because it's the original million.

[Joe Anderson]

Well, no, it would be worth the higher the two. The basis would be because they sold the. They took down the house, which was worth a million dollars. And so you're saying if they build a $2 million house, they would have a $3 million basis on a $2 million home.

[Big Al Clopine]

Well, if they build a home for $2 million. Well, first of all, you have to Consider the land part. Right, because you're only, you're only talking.

[Joe Anderson]

Yeah, I'm just saying total value. Total value.

[Big Al Clopine]

Yeah, yeah, yeah, yeah. So that the whatever basis that you inherit it, whatever it's worth when you inherit it, becomes your basis. And if you haven't sold it, you still have that basis.

[Joe Anderson]

Right, Right.

[Big Al Clopine]

Basically you've improved it. So any improvements that you add to that would add to that basis that you inherited.

[Joe Anderson]

Okay, I buy that. So if they sold it when she died and she bought it for 100,000, the basis is now a million. So if they put $2 million of cash and built whatever that they wanted to on their property, you know, they put an extension on it, they built this and that, whatever the basis is a million. Now the $2 million of improvements and the basis now would be 3 million million.

[Big Al Clopine]

Right. Now if they did this, like if the person that passed away gave them the property before he or she passed away, then it's the 100,000. There's no step up. Right. Plus the 2 million. But if they wait until after they pass away and it's inherited, it'd be a million dollars step up plus the $2 million that they put into it.

[Joe Anderson]

Or let's say if she's still alive and they want to do all this remodeling and things like that, and they think they're going to get a larger appreciation, keep it in mom's name, do all the work to the house. And then let's say now it spikes up in value even more. Let's say there's a flipper, keep it in mom's name. Because if mom passes and then they inherit it, they get the full step up. So for this example, it's a million dollars. They go in there, renovate it, they do all sorts of stuff with. What was that, what was the name of the, like, renovation shows you hire Canterbury Farms or.

[Big Al Clopine]

I don't know.

[Joe Anderson]

You guys don't know? All right.

[Big Al Clopine]

There's lots of renovation shows. Oh, yeah, yeah, yeah. What? Yeah, I know who you mean.

[Joe Anderson]

And Chip. Or Chip.

[Big Al Clopine]

Yeah, Chip and Joanne. I don't know what this show is.

[Joe Anderson]

Called, but yeah, Joanne, hire them, have them come in and make your. Your house absolutely gorgeous and then you can sell it, you know, for a million dollars more then.

[Big Al Clopine]

That's right.

[Joe Anderson]

Yeah. So you get a full step up in basis at that. There you go.

[Big Al Clopine]

Yeah.

[Andi Last]

All right. And one final question. Actually, this one is a comment. This is from an eight year old TV show and the clip was called how much of my Portfolio should be in gold. And you guys said basically no more than 2%. It has no expected rate of return and it does not grow. And Eldon said, well, that didn't age too well. So what's your take on gold now, eight years later?

[Joe Anderson]

There is no expected return on gold.

[Big Al Clopine]

Gold can go up and down and fluctuate. And if you look back eight years, it actually did pretty well. But you can look back in history. Gold is generally considered to be like an inflation hedge. And if you look back the last 100 years, it actually hasn't even done as well as inflation. We don't think it's a great investment long term. But yeah, there's periods of time when it can do rather well. You just never know when that's going to be.

[Joe Anderson]

But there's no dividend, there's no coupon, there's no.

[Big Al Clopine]

It's a commodity.

[Joe Anderson]

So when, when we say it has no expected rate of return, because that's the truth, it doesn't. It's whatever someone else is willing to pay for it. So that doesn't necessarily mean. And we don't think that there could be appreciation, but there is no expected rate of return because you have to take. Basically the present value of future cash flows of an investment is really kind of what determines expected return. There is none in gold.

[Big Al Clopine]

Yeah, that's a true statement.

[Joe Anderson]

That is a very true statement.

[Andi Last]

All right, that covers it. Thank you for answering the YouTube questions.

[Joe Anderson]

All right. Hey, yeah. And that's it for us today. Thanks so much for the show. Thanks for joining us. Join us again next week for Big Al andi Last. I'm Joe Anderson. Show's called you'd Money, you Wealth.

[Andi Last]

Next week, Big Al returns from his Australia New Zealand holiday. And I've asked the fellas to spitball on whether old bear should marry as honey. How Sebastian should navigate the financial aspects of separation, determining how much is enough for retirement and when you can take your foot off the gas and more. Join us. Won't you please follow YMYW and your favorite podcast app? Leave your honest ratings and reviews in Apple Podcasts and all the other apps that accept them. Subscribe, watch us and join me in the comments on YouTube. And don't forget to tell a friend we're making fun of finance over here at yout Money, you Wealth. A spitball is great to find out if you're on track for retirement, but please don't base your entire financial future on it. Schedule a free financial assessment with the experienced professionals on Joe and Big Al's team at Pure Financial Advisors. They'll do a comprehensive review on everything from your asset allocation to your yield to help you have zero concerns in retirement. Click or tap the free assessment link in the episode description or call 888-994-6257 to schedule yours. Your Money, your Wealth is presented by Pure Financial Adv Advisors, 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.