Defusing a Future Tax Bomb With Roth Conversions - 510

Summary

Podcast Summary: Your Money, Your Wealth – Episode 510: Defusing a Future Tax Bomb With Roth Conversions

Release Date: December 31, 2024
Hosts: Joe Anderson, CFP® & Alan Clopine, CPA of Pure Financial Advisors
Executive Producer: Andi Last
Episode Title: Defusing a Future Tax Bomb With Roth Conversions

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Introduction

In Episode 510 of the Your Money, Your Wealth (YMYW) podcast, hosts Joe Anderson and Big Al Clopine engage listeners with a series of thought-provoking financial questions. The episode, produced by Andi Last, delves into strategies around Roth conversions, retirement planning, tax avoidance, real estate investments, and charitable donations. True to the podcast’s reputation for making finance fun, the hosts infuse humor while providing valuable insights.

Notable Introduction Quotes:

• Andi Last [00:00]: "Does it make sense for Alex and his wife in Massachusetts to do Roth conversions now to the top of their eventual tax bracket?…That's today on your Money, your wealth podcast number 510 plus."

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Roth Conversions and Tax Planning

Listener Question: Alex from Massachusetts

Joe receives a detailed query from Alex regarding the benefits of Roth conversions given his and his wife’s current and projected tax brackets.

Key Points:

• Current Situation: Alex, 59, and his wife, 57, have a combined income of $271,000 ($200,000 after deductions) with substantial retirement savings, including $2.5 million in TSP, $400,000 in a 401(k), and $1,000,200 in Roth IRAs.
• Retirement Plans: Alex plans to retire at 62, with social security benefits starting at 67 (Alex at 70). They expect a stable $24% tax bracket post-retirement due to Required Minimum Distributions (RMDs) beginning at age 75.
• Roth Conversion Dilemma: Alex is contemplating whether converting to a Roth IRA now, while in the 24% tax bracket, offers any substantial benefits.

Host Insights:

• Big Al Clopine [04:40]: "If you convert in the same tax bracket, you're going to be in the future."
• Joe Anderson [05:25]: "The uncertainty of taxes off the table…Roth IRAs are 100% all yours."

Conclusion:

• Flexibility and Tax Certainty: Converting to a Roth IRA now can provide tax certainty and protect against potential future tax rate increases. Additionally, Roth IRAs eliminate RMDs, offering greater flexibility in retirement.

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Listener Story: Steve from San Diego

Background:

Steve shares his financial journey, highlighting significant growth in his portfolio over five years following tough love advice from Joe and Big Al.

Steve's Financial Snapshot:

• Age: 71, single, no dependents
• Investments: $775,000 across brokerage accounts, rollover IRA, Roth IRA, self-employed 401(k), HSA, crypto, and a $600,000 home with $300,000 equity.
• Income: $140,000 from work, $47,000 from Social Security, $28,000 from dividends/interest
• Expenses: $100,000 annually
• Questions: When can he retire? Should he perform Roth conversions?

Host Responses:

• Big Al Clopine [11:36]: "You went from $100,000 to $800,000 in five years. You took it seriously…"
• Joe Anderson [12:19]: "I would say a couple more years to pad that savings… he’s all in equities. Start toning down the risk."

Conclusion: Steve is nearing retirement and is advised to gradually reduce investment risk to safeguard against market volatility. Roth conversions are deemed unnecessary at his stage, given his income needs and tax implications.

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529 Plan and Roth IRA Conversion: Barbara from New Jersey

Barbara's Query: Barbara seeks advice on transferring excess funds from her grandson Nick’s 529 plan to a Roth IRA and the implications of withdrawing contributions after five years.

Key Points:

• Age of Beneficiary: Grandson, Nick, is 18 and an electrician.
• 529 Plan Status: Excess funds beyond educational expenses are considered for conversion.
• Concerns: Rules surrounding the rollover and penalty-free withdrawals after five years.

Host Insights:

• Big Al Clopine [16:17]: "If you convert in the same tax bracket, you're going to be in the future."
• Joe Anderson [17:48]: "Let it grow for retirement, tax-free."

Conclusion: While possible under specific conditions, converting 529 funds to a Roth IRA involves complex rules, including earned income requirements and contribution limits. The hosts ultimately suggest maintaining the 529 for retirement savings unless the complexities outweigh the benefits.

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Tax Avoidance Strategy: P. Ware's Cunning Plan

P. Ware's Proposal: A listener proposes gifting appreciated stock to his adult daughter to sell without incurring capital gains tax and then have her gift the proceeds back to avoid taxes.

Host Responses:

• Joe Anderson [19:10]: "Sure, if you like tax evasion."
• Big Al Clopine [19:46]: "I wouldn't try it…the IRS doesn't like this sort of thing."

Conclusion: The hosts strongly advise against this strategy, categorizing it as potential tax evasion. They highlight the risks of IRS scrutiny and the ethical considerations of such maneuvers.

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Real Estate Investments: Mike's Rental Property LLC

Mike's Question: Mike inquires whether forming an LLC for his three duplex rental properties offers financial advantages over holding them personally.

Host Insights:

• Big Al Clopine [21:37]: "It doesn't do anything tax-wise… it's for asset protection."
• Joe Anderson [22:36]: "Anything deductible in an LLC is also deductible on your Schedule E."

Conclusion: Forming an LLC primarily provides liability protection rather than tax benefits. For those seeking asset protection, especially with multiple properties, establishing separate LLCs can shield individual assets from potential lawsuits. However, the administrative hassle may outweigh the benefits for some.

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Qualified Charitable Distributions (QCDs)

Listener Feedback: A listener questions the efficacy of Qualified Charitable Distributions, suggesting they may not offer tangible benefits over taking RMDs and paying taxes manually.

Host Clarifications:

• Big Al Clopine [23:46]: "If you're charitably inclined, this is a way to create a tax deduction."
• Joe Anderson [24:07]: "If you're already giving to charity, then it's about maximizing tax benefits."

Conclusion: QCDs are advantageous for those who are already inclined to donate to charity, as they allow for direct transfer of RMDs to charities, thereby avoiding taxable income. However, for those not charitably inclined, QCDs may not offer significant benefits compared to managing RMDs independently.

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Inheritance and Tax Implications: Sherry from California

Sherry's Inquiry: Sherry seeks advice on whether her children can inherit her savings account without tax penalties and recommendations for high-yield, safe investments.

Host Insights:

• Big Al Clopine [26:21]: Affirmation of flexibility in inheritance without penalties.
• Joe Anderson [26:22]: Explanation of Transfer on Death accounts and tax implications for inherited assets.

Conclusion: Inherited savings accounts, typically structured as Transfer on Death (TOD), pass directly to beneficiaries without tax penalties. While savings accounts themselves don’t benefit from a step-up in basis, they remain straightforward in their transfer. For higher-yield, safe investments, options such as certain bonds or high-interest savings accounts may be recommended, though specifics were not detailed.

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Charitable Remainder Trusts (CRUTs): Hoori from New York

Hoori's Question: Hoori inquires whether her IRA or company retirement plan can fund a Charitable Remainder Unitrust (CRUT) and if there are any amount limitations.

Host Insights:

• Big Al Clopine [28:00]: Discusses the limited annual allowance for IRA to CRUT transfers.
• Joe Anderson [28:20]: Explains the purpose and tax benefits of CRUTs.

Explanation of CRUTs: A CRUT allows individuals to donate appreciating assets to a trust, which then provides income streams to the donor or beneficiaries, with the remainder going to charity. This strategy helps avoid immediate capital gains tax while supporting charitable causes.

Conclusion: CRUTs can be funded by IRAs under specific, limited conditions following the Secure Act. However, due to administrative costs and strict regulations, CRUTs are typically suitable for those with significant assets and philanthropic goals.

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Closing Remarks and Resources

Final Thoughts: The episode wraps up with the hosts encouraging listeners to engage with their content and explore additional resources.

Promotions:

• Roth Papers Package: A free bundle of guides on Roth IRAs, available via the episode description.
• Retirement Pop Quiz: An 18-question assessment available on YMYW’s TV show and website.
• Free Financial Assessment: Offered by Pure Financial Advisors for personalized retirement planning.

Conclusion: Joe and Big Al conclude the episode by extending holiday wishes and teasing upcoming episodes, emphasizing their commitment to providing insightful and engaging financial advice.

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Key Takeaways

1. Roth Conversions: Offer tax certainty and flexibility but may not be beneficial for all retirees.
2. Retirement Planning: Diversifying investment risk is crucial as retirement approaches to mitigate market volatility.
3. Tax Avoidance: Complex strategies to evade taxes carry significant risks and are generally discouraged.
4. Real Estate Management: LLCs provide liability protection but may not offer tax advantages over personal ownership.
5. Charitable Giving: QCDs and CRUTs can be effective for those with philanthropic intentions, offering tax benefits while supporting charitable goals.
6. Inheritance: Proper structuring of accounts ensures seamless transfer of assets to beneficiaries without tax penalties.

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Notable Quotes:

• Joe Anderson [04:40]: "The flexibility is the biggest benefit that you're going to get."
• Big Al Clopine [05:25]: "If you have several million dollars in Roth IRAs, that's 100% all yours."
• Joe Anderson [16:31]: "You got $575,000 and you're taking a fairly large distribution. I wouldn't worry about that."
• Big Al Clopine [22:55]: "It's for liability, it's not for tax purposes."

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Resources Mentioned:

• Complete Roth Papers Package: Available for free at YourMoneyYourWealth.com
• Retirement Pop Quiz and Retirement Readiness Guide: Accessible through the episode description or show notes.
• Free Financial Assessment: Schedule via Pure Financial Advisors at 888-994-6257.

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Disclaimer: Pure Financial Advisors is a registered Investment Advisor. This podcast does not provide personalized investment advice. Listeners should consult with a financial professional before making investment decisions.

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Stay Tuned: Episode 511 will continue the annual tradition with a Best of 2024 segment, featuring highlights from previous years and answering more listener questions.

Transcript

[Andi Last]

Does it make sense for Alex and his wife in Massachusetts to do Roth conversions now to the top of their eventual tax bracket? Steve in San Diego got serious about saving for retirement after Joe and Big Al gave him some tough love five years ago. Is he good to retire now and should he convert to Roth? That's today on youn Money, you, wealth podcast number 510 plus. Can Barbara and New Jersey's grandson move excess 529 funds to a Roth and withdraw the money after five years? P. Ware has a cunning plan to gift appreciated stock to avoid capital gains tax. But will it work? Should Mike create a limited liability company for his rental properties? And finally, qualified charitable donations just don't make sense to get smart, Paul, Sherry in California wonders if her kids can inherit her savings account without any tax penalty and whether there's a safe high yielding investment that she should put it in. And Hoori in New York wonders if her IRA can fund a charitable remainder unitrust or a crut. I'm Executive Producer Andi Last and here are the hosts of your your Wealth, Joe Anderson, CFP and Big Al Clopine.

[Joe Anderson]

CPA Alex from Massachusetts, Joel Ymyw Team Call me Alex. I thoroughly enjoy the show Lighthearted Monarch mockery and lighthearted Light hearted mockery.

[Big Al Clopine]

Mockery. Is that what we do?

[Joe Anderson]

Yes, well, being extremely thankful for the insane amount of useful information you share, thanks for all you do. All right, well, thank you, Alex. I'm a long term listener and given that my attention span approaches that of a goldfish, I frequently review the I frequently frequent a frequent reviewer of past episodes, probably due to a consistent sampling of scotch and bourbon. Not together.

[Big Al Clopine]

All right.

[Joe Anderson]

My wife prefers her amigo Tito in soda and we both enjoy a good cab with our dinner. We both drive Lexus vehicles. I'm a GS350 sedan, Intertank GX460 SUV. We keep our vehicles for the long term and consistently get well over 350,000 miles on each of them. No pets due to our demanding work travel schedules. Looking for a little spitball on the value of Roth conversions into the 24% tax bracket, given that our eventual tax bracket will likely be 24% based on today's tax conditions, once RMD start at 75. So the question is, if he converts in the 24 and he's going to stay in the 24, what's the benefit?

[Big Al Clopine]

Yeah, that's a good question.

[Joe Anderson]

All right. Okay, here's the specifics. I'm 59. My wife's 57. We have a combined income of $271,000. Approximately $200,000 after deductions. I'm a high earner and plan to retire completely at age 62. My wife will work past 65 to carry the health insurance until we are eligible for Medicare. We will start Social Security at 67 and I will start at 70. At that point, my wife will transition to spousal benefits and the PIA increasing from $27,000 and mine at $54,000. Assets. We have $2,500,000 in our TSP. She has $400,000 in her 401. We have a Roth IRA, $600,000 each. So that's 1,000,200 in Roths.

[Big Al Clopine]

Right?

[Joe Anderson]

Very good. All right. Brokerage accounts totaling $700,000 $150,000 cash reserves. We continue to max out all of our retirement contributions, including catch ups and backdoor Roths, and make monthly contributions to brokerage accounts. I will continue my Roth contributions until my wife retires. No dad, home and cars are paid off. Credit cards are paid off monthly. We estimate a $200,000 a year income requirement to maintain our lifestyles. I have two pensions that will cover 140,000 and plan to cover $60,000. Gap with the tsp.

[Big Al Clopine]

Long winded, but we're getting there.

[Joe Anderson]

Roth accounts will be used to splurge when needed. Worried about the impending tax bomb and wanted to mitigate via Roth conversions, if that makes sense. Not sure where taxes are going to be in 2027, but in today's environment, we are at the top of the 22% tax bracket. After deductions will continue to be in post retirement. Any conversions, we move into the 24% tax bracket. My back of the napkin calculation puts us at the top of the 24% tax bracket once our RMDs are materialized. If I do nothing.

[Andi Last]

Okay, once the RMDs materialize, if one.

[Joe Anderson]

Of us decides to die, what to do? All right, so he's going to be in the 24. He's doing some projections. So what's the benefit?

[Big Al Clopine]

Right, yeah. So if you convert in the same tax bracket, you're going to be in the future.

[Joe Anderson]

The flexibility, I think, is the biggest benefit that you're going to get.

[Big Al Clopine]

Because if you don't convert, you have to take a required minimum distribution whether you want it or not. And therefore you're going to be in whatever tax bracket Is. Now they're 59 or 57. Required minimum distributions start at age 75. Who knows what the tax rates will be in 16 years from now you're.

[Joe Anderson]

Taking the uncertainty of taxes off the table.

[Big Al Clopine]

Right.

[Joe Anderson]

Taxes could be a lot lower. Taxes could be a ton higher or.

[Big Al Clopine]

Could be the same.

[Joe Anderson]

But if you take a look at the balance that you have in 16 years by doing the conversions, and you have several million dollars in Roth IRAs, that's 100% all yours. I'm sure you're not going to complain.

[Big Al Clopine]

Yeah, I agree with that. So anyway, it's the uncertainty. Plus, as you mentioned, if one of you passes away now you're in the single tax bracket, so you got to be concerned about that. Right. Which is that means you're going to be in a higher bracket that way.

[Joe Anderson]

Yeah. Because I think a lot of people don't consider this. I get why, because it's pretty morbid.

[Big Al Clopine]

It is.

[Joe Anderson]

But the RMDs are. They don't change. So let's say you take a look at if they're both past the required beginning date.

[Big Al Clopine]

Right.

[Joe Anderson]

So let's just assume they're both 75 and he's taking his RMDs from his 401, she's taking RMDs from her IRA, and let's just assume that RMDs $100,000, one of them dies, the RMD doesn't get cut in half. It's the same percentage that you have to pull out on all of the retirement accounts.

[Big Al Clopine]

Yeah. The only thing that goes away is the lower Social Security benefit. Right. That's it. Otherwise, it's the same income.

[Joe Anderson]

Right. Yeah. The force out of the retirement accounts is going to be the same.

[Big Al Clopine]

Yeah. And the tax brackets are the same. Married versus single. It's just with single, you hit the higher brackets much earlier with lower income levels.

[Joe Anderson]

So the income roughly is going to be the same. But now instead of being in the 22% tax bracket, you're likely going to be in a lot higher tax bracket just because of how the tax brackets work. It's single versus married. You kind of double the dollars to get to that same bracket as a married couple.

[Big Al Clopine]

Yeah. I think if they don't do anything under current law, they'd probably be in the 32% bracket. But chances are, I mean, we don't know if tax rates are going to go up or not, but we know they're slated to go up in just two years and that that 24% bracket will be 28, probably subject to alternative minimum tax as well. Who knows what it's going to be in the future. But one other quick point, Joe, is if you have. If you paid the same tax and to get the money into the Roth as you do when you pull the money out from your rmd. One other advantage is with a Roth, you can put your asset classes that have higher expected returns. You might still have the same asset mix, but you have assets that have higher expected returns than a Roth, where you get a benefit for taking that risk because you don't pay tax. So you can end up with more money in your pocket that way.

[Joe Anderson]

Cool. All right, let's go to Steve from San Diego. He goes. Hi, Joe. Big Al. Andy. First, I want to thank you for your wisdom you've shared with us all these years. You've helped many people achieve the holy grail of financial independence and a financial healthy retirement. That's no small feat, and you made a significant contribution to society. Wow, Steve, look at you.

[Big Al Clopine]

Nice.

[Joe Anderson]

Is he being sarcastic?

[Andi Last]

He's buttering you up to ask you a Roth conversion question.

[Joe Anderson]

I've been listening to your show for about eight years, and it just keeps getting better and better. And I love the humor, which makes the subject so enjoyable. The banner's great, and the knowledge is stellar. If I can get my own essentials out of the way. Let's do that.

[Big Al Clopine]

Okay.

[Joe Anderson]

I love a little dark roast coffee, an occasional glass of red wine, or a bottle of craft beer. My favorite food is dark chocolate. I drive an older car, so I can throw all of my money into investments. Wonderful. All right. I wrote to you about five years ago when I was 66, and you answered on the show. My portfolio at the time was worth about $100,000. Al, you said I'll be living in a trailer. Joe, you said I better be able to do a side hustle from my wheelchair until I'm 80.

[Big Al Clopine]

You remember that?

[Joe Anderson]

I don't remember that.

[Big Al Clopine]

I don't either, but it sounds like something we might have said.

[Joe Anderson]

Well, wheelchair side hustle.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Okay. By the grace of God, I don't have to worry about either of those. I will say I've been in some very nice trailers, and theoretically, I can do a side hustle, as you say. I appreciate the tough love he gave me, even though it was tough on me at the time. It spurred me on to get even more serious about my nest egg. Now, I can give you the true details here. I'm 71, a single male, no kids, no pets, no exes. My current investments add up to about $775,000. We're in the middle of a bull market around Thanksgiving in 2024. As I write this here's the breakdown. Rounding up for each $150,000 in a brokerage account, $575,000 in a rollover IRA, $2,000 in a Roth, $39,000 in a self employed 401 $3,000 in an HSA and about $9,000 in a crypto account. My current income is $140,000 per year before taxes. Social Security is $47,000 per year also before taxes. My current expenses are about $100,000 annually. I don't have a pension, so my only source of income and earnings is from work plus Social Security plus my investments. The investments are all in equities and I include a number of dividend stocks plus REITs, plus an MLP and bond like funds. In addition to a few growth stocks. Dividends and interest are currently about $28,000 per year. I also have a house worth $600,000 if you believe Zillow. And the remaining mortgage on that is less than 300, so the equity is about 300,000 plus. But we know that that's not something easily gotten to, although I guess it does count on my net worth understanding the stock market is volatile and there could be sequence of return risk. My questions are these. First, when can I retire? And second, should I be doing Roth conversions at any point over the next few years? Thank you so much for your wisdom and guidance, AKA opinions. Always keep in mind that you are appreciated out there in this podcast in radio land and we all wait eagerly for those episodes. On Tuesday, Steve in San Diego. Steve, the Wheelchair side hustle.

[Big Al Clopine]

Yeah, I guess he got serious. Well, I'll tell you Steve, you went from $100,066 to $800,000 in five years. You did take it seriously and this puts you in a whole different situation.

[Joe Anderson]

He wants $100,000 a year. He's got $50,000 coming from Social Security. When can I retire? He can retire soon.

[Big Al Clopine]

I would say soon too, because when you're in your 70s, you can probably do a 5% distribution rate. Just saying, if he had a million dollars, that'd be 50,000. He's basically there. So he's really close. Or I mean he's just very close. You could potentially even do it now just by. You might have to watch expenses just a wee bit, but yeah, should be all right.

[Joe Anderson]

Yeah, I would say a couple more years for sure just to pad that savings. But he's all in equities. I would start toning down the risk a little bit here, Steve, because you're going to have to take, let's say anywhere from a 4 to 6% distribution from that overall account.

[Big Al Clopine]

Correct.

[Joe Anderson]

If the market drops 20% now, that's a pretty big number. 8, $9 million depending on when you actually retire.

[Big Al Clopine]

Yeah. And so if you could get it up to a million, let's just say based upon your numbers and Maybe at least 250,000 is safe because you need about 50 grand a year just for. To supplement Social Security, then maybe something like that.

[Joe Anderson]

I don't think Roth conversions make a ton of sense for Steve.

[Big Al Clopine]

I agree with that.

[Joe Anderson]

You got $575,000 and you're taking a fairly large distribution. You're going to be spending the distribution. Your RMDs are probably going to not push you in any higher tax bracket.

[Big Al Clopine]

100% agree. Especially because he needs them. So I wouldn't even worry about that. Yep.

[Joe Anderson]

I can't believe you said he's going to be living in a trailer.

[Big Al Clopine]

Well, I can't believe you said to be on a side hustle from a wheelchair till 80.

[Andi Last]

Nice job. Tough loving on him so that he got his portfolio up so high that was. He's accrediting that to you guys.

[Joe Anderson]

Yeah. He still probably needs to do a wheelchair side hustle. He's still a little short.

[Big Al Clopine]

Not necessarily. He's pretty close.

[Joe Anderson]

Still a little short, Steve. But no, very good job. Great job saving. Yeah. And good luck in retirement. And thanks for the very kind words. It's always.

[Big Al Clopine]

It's nice to hear. Even when we kind of treated you poorly.

[Joe Anderson]

It's called tough love, Al.

[Big Al Clopine]

And that's what he said.

[Andi Last]

Steve's situation is probably different from yours. Maybe Roth conversions do make sense for you. Download our complete Roth Papers package to find out. This bundle of guides includes the Roth IRA Basics Guide to get you started, the five year rules for Roth Withdrawals, and the Ultimate Guide to Roth iras. It's packed with useful stuff. You'll learn the difference between a Roth contribution and a Roth conversion. The pros and cons of saving into a traditional IRA versus a Roth IRA versus a Roth 401k, how to withdraw money from your Roth without penalty, and what you can do if you make too much money to contribute directly to a Roth. The complete Roth Papers package is yours free, courtesy of your money, you, wealth and pure financial advisors. Click or tap the complete Roth Papers package link in the episode description to get yours.

[Joe Anderson]

All right, let's go to Barbara from New Jersey goes. Hello, Joe, Big Al, Andy. Financial spitball is going to have to wait. I'm 73, drive a 2018 Honda HRV and drink a little red wine. If there's no red, I'll drink white. There you go. My question's not about me. It's about my grandson. He's 18. My son in law opened a 529 plan for Nick when he was born. As it turns out, Nick has become an electrician. While some money in the 529 plan will pay for those educational expenses, there absolutely will be some left over. I started the process to roll over that money to a Roth ira, but some rules around this are not clear to me. I've searched and searched and cannot find an answer to the following. Mainly, I need to know if Nick ever needs those funds. Would he be able to withdraw the 529 rollover contribution after the account has been open for five years? I know the earnings cannot be touched till 59 and a half unless 10,000 for a home, et cetera. I love your podcast. I just found it a few months ago and have become a forever listener.

[Big Al Clopine]

Dang.

[Joe Anderson]

All right, thank you. Thank you for any info. You may proffer. Barbara Proffer. So she's going to move the money into a 520 or the 529 plan dollars. She's going to move out and put it into the Roth.

[Big Al Clopine]

Right.

[Joe Anderson]

So she's going to put $6,000, $7,000 into the Roth IRA after five years. She's curious, hey, can he take those contribution dollars out without any penalties?

[Big Al Clopine]

Right.

[Joe Anderson]

And I would say the answer is yes.

[Big Al Clopine]

I would say so too. Although this is such a new thing. I'm not sure IRS has even discussed it, but that's how other conversions are. So by the way, just so you know, so this is a relatively new law. You can take $35,000 from a 529 plan and convert it to a Roth. But several caveats. So you have to have had that Roth for 15 years or longer.

[Joe Anderson]

Okay, 529.

[Big Al Clopine]

529. Sorry, sorry. The 529 for 15 years, you're limited to your annual contribution amount, which is $77,000 right now, plus your contributions and earnings of the last five years. You can't do it on those. And the Roth owner has to be the same as the beneficiary for the 529 plan. So if you can do all of those things, you can get $7,000 in a year. Oh, and the individual has to have earned income to be able to qualify for this. So it's a lot of steps here but it can be done. And I'm assuming it'll be similar to other conversions where you have access to the principal within five years.

[Joe Anderson]

Yeah, the tracking or tracing rules is going to be pretty hard to find.

[Big Al Clopine]

It is.

[Joe Anderson]

So let's say Nick's already got a Roth ira. He's made contributions in the past. Then his grandmother puts money into this from the 529 plan. Assuming that Nick's the beneficiary and has earned income that qualifies for a Roth ira.

[Big Al Clopine]

Correct.

[Joe Anderson]

She puts whatever dollar amount that she puts in for this year or the next couple of years, Nick needs the money five, six years from now. Right. It's going to be so hard to figure out, well, what were contributions versus rollover versus this versus that.

[Big Al Clopine]

So here's a better idea. Don't take money out of the raw.

[Joe Anderson]

There you go.

[Big Al Clopine]

Let it grow for retirement, tax free.

[Joe Anderson]

Okay, great. Thanks for the question. Here's another one from. I don't know where this question's coming from.

[Andi Last]

This one's pware. This is from somebody who saw us on YouTube and then emailed infourfinancial.com.

[Big Al Clopine]

Okay.

[Joe Anderson]

My wife and I have an adult daughter with little income this year. Can we give her $36,000 of appreciated stock so that when she sells it, there are zero capital gains at the tax of sale, Then she can gift it back to us after the sale and save the 15% taxes we pay? Does that make sense? Sure, if you like tax evasion.

[Big Al Clopine]

Well, I would say it's probably tax avoidance. It wouldn't fly if it were checked because you're basically just doing this to avoid a tax. So I wouldn't try it. I mean, theoretically you could.

[Joe Anderson]

So you're gifting $36,000 to your daughter. Your daughter doesn't have any income.

[Big Al Clopine]

Right.

[Joe Anderson]

The daughter sells the stock. They pays no capital gains tax because she's in. Or, yeah, she's in the 0, 10 or 12% tax bracket. And then when she sells the stock, then she's going to gift it back to mom and dad.

[Big Al Clopine]

Yeah. And because that would be in. Well, I guess she's below the gifting limits. But yeah, I wouldn't do it. I wouldn't do it. Because basically you're trying to avoid a tax. The IRS doesn't like this sort of thing, this kind of strategy. And you see this in different things. It gets always gets overturned when it's found and looked at.

[Joe Anderson]

What about when does the kiddie tax come into play again?

[Big Al Clopine]

Well, I think it's up to age 18 and younger or 24 if they're full time college student.

[Joe Anderson]

So then. But it's still tax at the parents rate, correct?

[Big Al Clopine]

That's correct, yep.

[Joe Anderson]

So.

[Big Al Clopine]

So it would have to be a. Well, he says adult daughter. So assuming that the kiddie tax doesn't apply. But I wouldn't, wouldn't do it. I think it's the only way this would really work is if you really wanted the daughter to have the 36,000, gift it to her, she can sell it, pay little or no tax, and then keep it. If that's your goal, then this is a great strategy. If you're just trying to avoid this tax, I wouldn't do this.

[Mike]

Hello, this is Mike. I have a question about rental properties. My wife and I own three duplex rental properties and we've been told by a few people that it might be financially advantageous for us to create an LLC for the rental properties and run them as a business versus just taking the income as personal income. What are your thoughts? Thank you.

[Joe Anderson]

Okay.

[Andi Last]

He decided to call from his car.

[Big Al Clopine]

Yeah, yeah, all good.

[Joe Anderson]

He's driving, right?

[Big Al Clopine]

He's driving to one of the rentals.

[Joe Anderson]

He's driving to the duplex.

[Big Al Clopine]

Yeah.

[Joe Anderson]

He's got to collect his rent.

[Big Al Clopine]

That's right.

[Joe Anderson]

Llc. Al, what do you think?

[Big Al Clopine]

Well, it's a great question and you hear this a lot. You should have LLCs. And I can tell you it doesn't do anything tax wise, because if you set up an LLC as a husband and wife, it's a single member llc, it's disregarded. So there's not even a separate tax return. It just goes on your individual tax return just as it would normally. So why do people have LLCs? It's because of asset protection. Right. So they put their properties in an llc. Something goes wrong with one of the properties, they get sued. Then theoretically, the assets of that LLC are the only assets that are available for a lawsuit or a judgment. Right. If you want to have ultra protection, get three properties, you set up three LLCs. There's a huge hassle factor, but that's what some people do if it's worth it to them. Or you can just get liability insurance and call it good, or maybe you do both. But it's a, it's a Joe, it's for liability, it's not for tax purposes.

[Joe Anderson]

Well, as a rental, he's got a duplex. People that have multiple duplex, they're running that like a business anyway.

[Big Al Clopine]

Yeah, you already are. You should be. And in other words, anything that is Deductible in an LLC is also deductible on your Schedule E personal tax return. There's no difference in what's deductible and what's not. Yep, that's what I'm saying.

[Joe Anderson]

Very good. This person writes in, he doesn't think a QCD donation, it doesn't make sense to him. Okay, so qcd, qualified charitable distribution. Just backdrop on that. Is that you can give up to $100,000 or is it a little bit more? Now they index that with inflation.

[Big Al Clopine]

It is indexed. So it's a little bit more than 100, I think.

[Joe Anderson]

So you could give that directly to a charity versus taking the rmd. And so he's like, well, this doesn't make sense.

[Big Al Clopine]

Why would I do that? Why don't I just take the rmd, pay the tax, don't. I think that's what he's going to get to.

[Joe Anderson]

So it's like taking the RMD when I don't need the cash is better than giving it all to charity. For example, if I don't pay state income tax and the RMD is federally taxed at 25 and 35%, then I'm basically donating the 65 to 75 out of my pocket. That money can be reinvested. What am I missing?

[Big Al Clopine]

Nothing.

[Joe Anderson]

Nothing. You're not charitably inclined, so don't do it. If you're charitably inclined, this is another way to give to charity. So if you're already giving to charity and you. You're taking a charitable deduction, but now that most people take the standard deduction, the QCD works out quite well because the distribution avoids the tax return. It goes directly to the charity.

[Big Al Clopine]

Yeah, exactly. So you don't have to pay tax on what would have been a required minimum distribution. And I used to get this question a lot as a tax preparer in my old days, which is simply this. Don't I do work? Do I do better giving to charity than I would just taking the money? The answer is no, absolutely not. Because all you do in a case like this is you just pay the tax so you end up with more dollars in your pocket. But if you're charitably inclined anyway, this is a way to create a tax deduction that you might not otherwise have.

[Joe Anderson]

Yeah, right. If you're already giving to charity, that's the key, then it's looking at what is the most effective and efficient way to give to the charity to maximize whatever tax benefits you're looking for.

[Big Al Clopine]

Right. Yeah.

[Andi Last]

All right, Pop Quiz Are you required to take minimum distributions from your Roth account? How much money do Americans think they need when they retire? Are you ready for retirement? Test your retirement knowledge this week on the youe Money, you, Wealth TV show as Joe and Big Al give you a retirement pop quiz 18 questions to get you ready to retire. With each question, Joe and Big Al have actions you'll want to take now to secure your future retirement. Watch Retirement Pop Quiz on youn Money, you, Wealth TV and download the free Retirement Readiness Guide to find out how to control your taxes in retirement, create income to last a lifetime, make the most of your retirement investing strategy and much more. You'll find links for both in the description of today's episode, in your favorite podcast app, or in the show [e-mail] along with the episode transcript we got.

[Joe Anderson]

Sherry from California writes in Big Album My savings account has and in the event of death, my children inherit my money. Does that go to them without tax penalty? I'd like to invest my money in safe investments that gives a higher interest rate of return. Do you have any recommendations? No, zero recommendations for sharing in California. But I'm assuming she's got a savings account and she passes away. She wants to know what happens to the money. Yeah, the kids inherited. Sounds like there's a transfer of death on the account without tax penalty. No, there's a step up in tax basis. I don't know. I don't.

[Big Al Clopine]

Yeah, that's right.

[Joe Anderson]

There's a savings account.

[Big Al Clopine]

Savings account. It's pretty liquid. I mean there's. Well, there's not really a step up because there's no growth. But she would have been paying interest, taxes on interest all throughout. So. But anyway, yeah, I think that's right. I think she's talking about a transfer on death account, which you can do without regard to a will or trust. You can just take like a savings account, even a brokerage account, and have a transfer on death so it would go directly to your beneficiaries. In the case of a brokerage account, typically there is growth or loss, but it gets stepped up to current value. In the case of a savings account, it's already principal, so it just is what it is. There's no penalty. In fact, the kids get. And that's true of any inheritance except for retirement accounts where they have to pay taxes, they take the money out. But typically you get an asset from an inheritance, you don't pay tax on it.

[Joe Anderson]

Speaking of retirement accounts, we have a question that came in can an IRA or a company retirement plan fund a crut? Is there any amount limitation?

[Andi Last]

What is a crut?

[Joe Anderson]

The Charitable Remainder Unit Trust.

[Big Al Clopine]

I got some information on that, Joe.

[Joe Anderson]

Yeah, you can. And this was a strategy that people are using, depending on the size of the retirement account that you would use it as. Like the old stretch.

[Big Al Clopine]

Yeah. Now that would be to set up the charitable trust as a beneficiary of the ira. And I think that still works. But there's something new that just happened with the Secure Act. You actually can do a once in a lifetime amount from an IRA to a charitable remainder unit trust or a charitable gift annuity of $50,000?

[Joe Anderson]

Yes. Not very much.

[Big Al Clopine]

No. 53,000 in 2014, but yeah, it's not very much. I'm not sure who would do that. But you can.

[Joe Anderson]

Right? So Charitable Remainder trust. Let's explain that for a second. Is they're used to avoid capital gains tax.

[Big Al Clopine]

Yeah, that's the primary purpose.

[Joe Anderson]

So let's say you bought an investment for 100,000 and it's worth $2.1 million today.

[Big Al Clopine]

Okay.

[Joe Anderson]

So you have a $2 million gain. A lot of times there's a ton of tax here where most people don't necessarily want to pay the. They might hold onto that asset until they pass away, and then the beneficiaries would get a full step up in tax basis. They could sell that asset and not pay any tax. However, they need liquidity. If they need to use some of that asset, you can sell it outright and pay a bunch of tax. Or there's strategies such as a charitable remainder trust or a CRUT or a tax exempt trust where you can put that asset in the trust. The trust sells the asset, it pays no tax, you then get an income stream from the trust, and then the charity gets the remainder. Depending on when you pass away, if you live until life expectancy, it could be as little as 10%. If you pass away prior to life expectancy, it could be a lot more than that.

[Big Al Clopine]

Yeah, that's exactly right. And so typically it has to be set up, Joe, where at least 10% goes to charity. I mean, that's the design. That would be kind of the minimum now, but that's based upon actuarial tables. So if you live less than, or if you live less than normal life expectancy, charity will probably get more than 10%. If you live longer than normal life expectancy, per the IRS tables, then charity may get less than 10%. So it's a way to not pay taxes currently, although when you get your distributions, annual distributions, quarterly distributions. However you set it up, you will pay tax on those distributions. It'll be some interest and dividends, depending upon the earnings in the charitable trust, and the rest will be capital gains. That same capital gain that you tried to avoid, you will pay tax on it, Joe. It just comes out slowly over time, which can be an advantage because you might be in lower tax brackets. And plus, deferring a tax is always a good thing.

[Joe Anderson]

I wonder what the goal is that Houri. What's his name?

[Andi Last]

Hoorie. It's her and her name is Hoori.

[Joe Anderson]

Oh, sorry, Hoorie from New York. I have no idea what the goal is.

[Big Al Clopine]

I don't know either. But there's IRAs and charitable trusts. I mean, so those are the couple things I've heard is that new once in a lifetime thing where you can put 50 grand in from an IRA or the other one is the cost of the trust you would never do it for.

[Joe Anderson]

That is going to cost way more to administrate. That trust is going to cost way more than whatever savings that you get by putting 50 grand.

[Big Al Clopine]

So it would only be if you already have one, right?

[Joe Anderson]

I suppose, yeah.

[Big Al Clopine]

Yeah. Right. So I don't like I say that's a pretty limited thing. The more important thing I think is the. Is setting up a charitable trust and having it as the beneficiary of an IRA could accomplish something similar to the stretch. Not as good as a stretch, but you get sort of some of the same deferral.

[Joe Anderson]

All right, that's it for us. Have a wonderful weekend. Happy holidays. Chills gone to your wonderful. It's a wonderful. I'm just in the. Holly, Holly, what's it, huh? Holiday spirit.

[Big Al Clopine]

Yes.

[Andi Last]

Happy New Year.

[Big Al Clopine]

It's also your money, you wealth. Thanks for listening.

[Joe Anderson]

All right, we'll see you soon.

[Andi Last]

There you have it. It's the final YMYW episode of 2020. Happy New Year, my friends. I hope you've enjoyed watching and listening to YMYW this year as much as we have enjoyed making it for you. And I hope 2025 brings everything that you hope for next week. In episode 511, we'll continue our annual tradition with the youe Money, you, Wealth podcast. Best of 2024. Check out the best of 2021, 2022 and 2023 in the episode Description. Edward in Illinois, Pebbles and Bam Bam in Kentucky, Stone, Keith in Connecticut, and Gus in Philly. Listen for answers to your questions in YMYW podcast 512. If you haven't already gotten serious about your retirement plans like Steve did earlier in the episode? What better time? Start the new year off with a resolution to get a free financial assessment from the experienced professionals on Joe and Big Al's team at Pure. They'll analyze your financial situation, identify any potential roadblocks, and help you create a personalized plan to get where you want to be in retirement. Click the free assessment link in the episode description or call 888-994-6257 to schedule yours. 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, podcasts 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.