Early Withdrawals, Tech Stocks vs. International, Annuities, ESOP and NUA - 533

Summary

Your Money, Your Wealth Podcast Episode 533: Early Withdrawals, Tech Stocks vs. International, Annuities, ESOP, and NUA

Release Date: June 10, 2025

In Episode 533 of the Your Money, Your Wealth podcast, hosts Joe Anderson, CFP® and Big Al Clopine, CPA from Pure Financial Advisors delve into a range of pressing financial topics. This episode, titled "Early Withdrawals, Tech Stocks vs. International, Annuities, ESOP and NUA," offers listeners insightful strategies and practical advice on retirement planning, investment diversification, tax-efficient strategies, and more—all delivered with the hosts' characteristic humor.

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1. Introduction to Listener Questions (00:00 - 01:05)

The episode kicks off with host Andi Last introducing three listeners' financial scenarios:

• Rowan from Georgia: Approaching retirement at 52, aiming to maximize IRA growth through 72(t) early withdrawals.
• Michael from Virginia: Focused solely on U.S. tech stocks, including giants like Google and Amazon, and seeks portfolio adjustment advice.
• Whitney Bill: Interested in backdoor Roth IRA strategies and seeks opinions on handling his annuity.

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2. Rowan's Early Retirement and 72(t) Withdrawal Strategy (01:05 - 09:40)

Rowan's Profile and Financial Plan: Rowan, a 52-year-old preparing to retire after a 25-year tenure at her company, plans to initiate a separate equal periodic payment (SEPP) under IRS Rule 72(t) to withdraw $56,000 annually from her $1.2 million 401(k), rolled over into an IRA. Her goal is to sustain a $56,000 cushion while transitioning to a part-time interpreter career.

Hosts' Analysis:

• Joe Anderson (04:14): "A 72(t) election you don't do lightly, especially at 52. It's crucial to understand all assets outside retirement plans before committing."

• Big Al Clopine (05:04): Explains the mechanics of SEPPs, emphasizing the commitment to equal withdrawals over seven years to avoid penalties.

Investment Allocation Recommendations:

• Joe Anderson (06:15): Advocates for allocating a significant portion ($250,000 to $400,000) of the IRA into safe investments like cash or bonds to mitigate sequence of return risk.

• Big Al Clopine (07:38): Suggests a 60/40 split in the IRA, recommending short-term bonds and cash equivalents to provide a safety net during market volatility.

Discussion Highlights:

• The risks associated with a high withdrawal rate during volatile markets.
• The importance of having additional assets and flexibility beyond the IRA.

Notable Quotes:

• Joe Anderson (06:10): "I would probably want to have five years at least of fixed safe investments... to be safe."

• Big Al Clopine (08:28): "She's done a great job of saving. $1.2 million in retirement accounts at 52—amazing."

Casual Banter:

The hosts engage in light-hearted conversations about Rowan’s upcoming retirement and her choice of beverages, adding a personable touch to the financial discourse.

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3. Michael's Investment Strategy: Tech Stocks vs. Diversification (11:23 - 14:17)

Michael's Profile and Investment Query: Michael invests $4,500 biweekly into select U.S. tech giants—Google, Amazon, Microsoft, Meta, Berkshire, and ASML—and avoids international investments. He seeks advice on portfolio adjustments to enhance long-term growth.

Hosts' Recommendations:

• Big Al Clopine (11:39): Suggests diversifying into international stocks and bonds to spread risk and potentially enhance returns.

• Joe Anderson (12:03): Agrees with diversification, noting the pitfalls of concentrating investments in high-performing stocks that may have limited upside.

Key Insights:

• Risk vs. Reward: Emphasizing that a 100% stock portfolio, especially concentrated in a few high-performing companies, may not yield significantly higher returns compared to a more diversified portfolio.

• Rebalancing Strategy: Highlighting the benefits of having bonds or cash to buy more stocks during market downturns, thereby leveraging lower investments for higher growth.

Notable Quotes:

• Joe Anderson (12:27): "Personally, I would rather have a more globally diversified portfolio including foreign investments."

• Big Al Clopine (13:05): "The risk is the level of risk that you're taking, and you’re not achieving any more reward for that amount of risk."

Casual Banter:

The hosts joke about Michael's strong preference for American companies and discuss the merits of his chosen stocks, maintaining an engaging and relatable atmosphere.

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4. Whitney Bill's Backdoor Roth IRA and Annuity Concerns (15:02 - 24:44)

Whitney's Profile and Financial Questions: Whitney is contemplating backdoor Roth IRA contributions via his solo 401(k) instead of maintaining an emergency fund. Additionally, he seeks advice on managing his fixed annuity.

Hosts' Analysis:

• Big Al Clopine (17:30): Breaks down the logistical aspects of backdoor Roth IRAs and the importance of maintaining an emergency fund separate from retirement accounts.

• Joe Anderson (19:11): Explains the complexities of using a Roth IRA as an emergency fund, particularly the restrictions before age 59½.

Annuity Discussion:

Whitney holds a fixed annuity with a matured five-year surrender term earning 3%. He is considering a 1035 exchange to a new deferred fixed annuity offering 5.5% with a 10-year surrender period.

Hosts' Recommendations:

• Big Al Clopine (22:03): Advises caution with long surrender periods and emphasizes understanding the terms and fees associated with new annuity products.

• Joe Anderson (22:21): Highlights the importance of evaluating the guarantees and potential risks of higher-yield annuities.

Notable Quotes:

• Big Al Clopine (19:39): "I think the question is, can't I just have the money in a Roth and have that be the emergency?"

• Joe Anderson (21:24): "You can’t take the dollars out until you turn 59 and a half without a 10% penalty."

Casual Banter:

The conversation includes playful remarks about "spitting up wet balls" and humorous anecdotes related to financial strategies, keeping the tone light amidst complex discussions.

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5. Tess and Finn's ESOP and NUA Inquiry (25:53 - 31:49)

Tess and Finn's Profile and Financial Questions: Couple Tess (45) and Finn (48) from Texas, with three teenage children and a substantial ESOP (Employee Stock Ownership Plan), seek clarification on Required Minimum Distributions (RMDs) and the nuances of Net Unrealized Appreciation (NUA). They are particularly concerned about the tax implications of rolling over their ESOP into a NUA, especially given their private company's stock restrictions.

Hosts' Analysis:

• Big Al Clopine (27:16): Explains the challenges of utilizing NUA with privately held company stock, noting that companies typically do not allow former employees to retain stock post-retirement.

• Joe Anderson (28:02): Highlights the complexities and restrictions associated with transferring ESOP holdings into a brokerage account for NUA benefits.

Detailed Example:

Big Al presents a hypothetical scenario involving Sherwin-Williams stock to illustrate how NUA works with publicly traded companies versus private ones.

Hosts' Recommendations:

• For publicly traded companies: NUA can be advantageous, allowing for favorable tax treatment on appreciation if the stock is transferred correctly.

• For privately held companies: Often unfeasible due to company restrictions on retaining stock, making NUA less beneficial.

Notable Quotes:

• Big Al Clopine (28:02): "Privately held companies... would not allow you to keep the stock, which basically negates the whole thing."

• Joe Anderson (30:06): "The three things have to happen: be 59½ or a triggering event, do a lump sum distribution, and transfer the shares out."

Casual Banter and Personal Insights:

Amidst technical explanations, the hosts share personal anecdotes and humorous thoughts about interpreting roles and movie references, fostering a friendly and accessible atmosphere.

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6. Personal Reflections and Outro (31:54 - 33:16)

The episode concludes with Joe Anderson sharing personal news about the passing of his mother, Betsy Clopine, adding a heartfelt moment to the discussion. The hosts express their condolences and gratitude, highlighting the supportive community fostered by the podcast.

Final Remarks:

• Big Al Clopine (33:14): "All right, we'll see you next time."

• Andi Last (33:16): Reminds listeners that Pure Financial Advisors is a registered investment advisor and advises consulting professionals for personalized advice.

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Key Takeaways:

1. Early Retirement Planning: Utilizing 72(t) withdrawals requires careful consideration of investment allocation to mitigate risks associated with early withdrawals and market volatility.

2. Investment Diversification: Balancing a portfolio with both domestic and international assets can enhance long-term growth while managing risk.

3. Tax-Efficient Strategies: Understanding the intricacies of backdoor Roth IRAs and Net Unrealized Appreciation (NUA) is crucial for optimizing tax outcomes, especially when dealing with ESOPs from private companies.

4. Annuity Management: Evaluating the terms, fees, and benefits of annuity products is essential before committing to higher-yield options with longer surrender periods.

5. Personalized Financial Advice: The importance of tailored financial planning is emphasized, encouraging listeners to seek professional guidance aligned with their unique financial situations.

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Notable Quotes with Timestamps:

• Joe Anderson (06:10): "I would probably want to have five years at least of fixed safe investments... to be safe."

• Big Al Clopine (11:39): "I would recommend that you invest in international stocks and bonds."

• Joe Anderson (12:27): "Personally, I would rather have a more globally diversified portfolio including foreign investments."

• Big Al Clopine (19:39): "I think the question is, can't I just have the money in a Roth and have that be the emergency?"

• Joe Anderson (21:24): "You can’t take the dollars out until you turn 59 and a half without a 10% penalty."

• Big Al Clopine (28:02): "Privately held companies... would not allow you to keep the stock, which basically negates the whole thing."

• Joe Anderson (30:06): "The three things have to happen: be 59½ or a triggering event, do a lump sum distribution, and transfer the shares out."

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This episode of Your Money, Your Wealth offers a comprehensive exploration of various financial strategies and considerations pertinent to early retirement, investment diversification, tax planning, and managing retirement accounts. Through engaging discussions, real-life scenarios, and expert insights, Joe Anderson and Big Al Clopine equip listeners with the knowledge to make informed financial decisions tailored to their individual needs.

Transcript

[Andi Last]

Before she retires next month at age 52. Rowan in Georgia wants to maximize growth in her IRA, which will be funded with 72t early retirement withdrawals. What did Joe and Big Al think of her substantially equal periodic payment plan and how should she allocate it? Michael in Virginia isn't interested in any international investments and is instead invested in stocks like Google, Amazon, Microsoft, Meta and Berkshire. What adjustments would the fellows make to his portfolio for long term growth? That's today on youn Money, you, Wealth podcast 533 +. Our friend Whitney Bill, who is not a gas siphoner, wants Joe and Big Al's opinion on backdoor rothing his solo 401k instead of having an emergency fund, and on what he should do with his annuity. Also, the fellas explain ESOP and NUA, I.e. employee stock ownership plans and net unrealized income. For Tess and Finn in Texas, I'm Executive Producer Andi Last with the hosts of youf Money, you, Wealth, Joe Anderson, CFP and Big Al Clopine, cpa. To get our retirement spitball analysis of your own, click or tap ask Joe and Big Al in the episode description to send us an email or a voice message like this one.

[Rowan]

Hi Joe, Big Al and Andy. My name is Rowan and I live in Georgia, though I grew up in St. Paul, Minnesota and consider myself a distant cousin to Joe. I've been listening to yalls show for over two glorious years now and it's my favorite podcast of all time. I like to listen in bed early in the morning before I have to get up to go to work for the man. I'm 52 years old with two children, two dogs, two cats and zero husbands. I drive a 2013 Audi Q7 that I plan to drive into the ground then my dream is to buy a used Ford Lightning to go electric. My favorite beer is Negra Modelo. That's the dark one, but I've had to switch to Blue moonlight to reverse an oncoming love handle situation. They've got a citrus wheat with a touch of orange that is delicious and refreshing. I tried switching to the Coors Latte on Joe's recommendation but it just doesn't do it for me. I will never say no to a margarita on the rocks with Tajin and I keep meaning to order a Mai Tai in Al's honor. I am going to retire this summer after a 25 year career at the same company. I'm ready to downshift and de stress from the corporate life. Take some time off to smell the Roses. And also to prepare for a second career as a part time interpreter so that I have a $56,000 annual cash flow cushion of while I transition to my new career. I'm planning on rolling over $1 million of my tax deferred $1.2 million 401k into a separate IRA from which I will start the 72t SEP withdrawals this year. I've used a handy 72t online calculator using the 5% fixed amortization uniform lifetime table to calculate this $56,000 annual withdrawal amount. So here's my really specific question for y' all to spitball. How should I allocate the 1 million dollar IRA for the 72T to maximize growth over the 7 years I'm required to take the 72T? Also, how many years of the $56,000 annual withdrawals should I allocate to cash or bonds or CDs to hedge against sequence of return risk? Thank you so much for your hilarious and informative show. All three of you are making a difference in thousands of lives. And for that you have our undying appreciation and gratitude. P.S. i'd like to retire in July and do the rollover shortly thereafter. So I'm leaving this voice recording to hopefully cut to the head of the spitball line. I'll be listening for you. Take care of and bye.

[Joe Anderson]

All right, that's a nice message. Yeah, I like that.

[Big Al Clopine]

What? Interpreter.

[Joe Anderson]

Yeah.

[Big Al Clopine]

Wonder what she's going to interpret.

[Joe Anderson]

Good, good. I assume from one language to another.

[Andi Last]

But interpretive dance maybe.

[Big Al Clopine]

I don't know.

[Joe Anderson]

That's, that's what I think of 25 years.

[Big Al Clopine]

She's 52. She's pretty young, very young. I don't know if I like, if I love the strategy.

[Joe Anderson]

Well, and we don't know enough about everything else to know, but yes. I mean, a 72T election you don't do lightly. Right? Particularly when you're retiring at 52 and you're taking a million dollars of your 1.2. I hope you have a lot of other assets, Joe. This seems like a lot of money to be pulled out. And what if she, you know what, what? Find another career quickly and then you still have to keep pulling this money out. Right. So I'd love to know how much money you have outside of retirement plans. Maybe you start with that before you go to a 52T or maybe you do a smaller one. Right. But I get, yeah, the 72T.

[Big Al Clopine]

So this is how it works. It's a separate equal periodic payment sepp so basically, if you retire or she's separated from service at 52 years old, so you can't necessarily have access to an IRA until you're 59 and a half, you have access to the 401 at age 55. So if she wanted to just pull it out just a couple more years and wait till age 55, then she wouldn't necessarily have to do the 72 tax election. But what it does is it allows individuals to avoid that 10% penalty. So she's going to retire at 52 in July and say, hey, I need access to this cash. I got $1.2 million in my 401. I already recognize that I'm going to have a $56,000 shortfall. So I need to pull 56,000 from my retirement account. But I don't want to pay the additional 10% penalty. I know that I have to pay the tax on it. So as long as you take this separate equal periodic payment, so you have to take the same amount of money out of the account every single year for five years or until you turn 59 and a half. So in her situation, that's seven years.

[Joe Anderson]

Correct.

[Big Al Clopine]

So $56,000 coming out over seven years.

[Joe Anderson]

Yeah, it's about 400,000.

[Big Al Clopine]

$400,000 plus tax. You're looking at maybe half of the million dollars could be distributed out, assuming zero growth. So then the question is, all right, you're pulling 5.5% out of the account, how much money should be in cash to cushion against sequence of return risk? Because if this market, if the market tanks and we're in volatile markets, that million dollars goes to 800,000, she's still pulling out $56,000 a year. So now that five and a half or 5.6% distribution rate just went to 7%.

[Joe Anderson]

Yeah, yeah. So to answer the question, so I'll put it this way. So if, assuming this is a good strategy, I would, which I'm not sure it is, but let's say it is. I'm going to answer your question is I personally would probably want to have five years at least of fix of safe investments that would be cash or bonds or things like that, that, that don't go down generally or don't go down much in a market decline. So that to me, Joe, that would be 250 to maybe even all 400,000 of the money needed in, in safety, just to be safe. And like, like, let's say it's 44, 400,000 and it's, you know, it's a total of 1.2 million. That's less than 40%.

[Big Al Clopine]

I mean, so the million dollars in the IRA would be a 60, 40 split. 40% fixed income. In the fixed income, I would just go really short term bonds, cash, CDs. I wouldn't go long on your bonds. You probably will get a lot higher rate of return there. But you want to stay safe because bonds can fluctuate just as we saw the stocks can a few years ago.

[Joe Anderson]

But, yeah, me personally, I'd rather look at other alternatives. Maybe there's some other capital sources somehow. I know it sounds like you want to take a break and more power to you. I think that's great. And you've got maybe some resources to be able to do that. Just be aware, you kind of get yourself locked in, and it may not be a great strategy for seven years, it may be a great strategy for two years, but you're locked in. And just think twice before you do this. I would say, well, she's done a.

[Big Al Clopine]

Great job of saving.

[Joe Anderson]

Yeah.

[Big Al Clopine]

She's got a couple of kids. $1,200,000 in retirement accounts at 52.

[Joe Anderson]

It's amazing, right?

[Big Al Clopine]

So I think she can be diligent. She's. If she has to reduce spending, she's got to save a little bit more. She has to go back to work. I think she's the type of person that could probably do so. Right.

[Joe Anderson]

Yeah, and that's a good point.

[Big Al Clopine]

Extremely successful individual here. 25 years at the same company, too.

[Joe Anderson]

Yeah.

[Big Al Clopine]

I mean, I would want to get the hell out.

[Joe Anderson]

We're almost approaching that.

[Big Al Clopine]

I know that's. It's like. That's why you said that. I'm right with you. Get that. Negro Modelo's on ice. Celebrate with some margaritas on the side.

[Joe Anderson]

Speaking of a Negro Modelo, that was my dad's favorite beer when we went to Mexican restaurants. And so when I go to a Mexican restaurant, that's what I get in honor of him.

[Big Al Clopine]

All right.

[Andi Last]

I'm a big fan of the Negro Modelo myself. I upgraded from Modelo especial to the dark beer.

[Big Al Clopine]

Yeah, got it. Yeah. Well, good luck. Thanks for listening. Love the voicemail. Good luck with your new career as a. I want to know what she's interpreting.

[Andi Last]

I bet she's working for the United nations or something.

[Joe Anderson]

I mean, maybe that'd be cool.

[Big Al Clopine]

Like, as soon as he said that, I thought about, like, I just envisioned Rowan as, like Nicole Kidman in the movie the Interpreter.

[Joe Anderson]

Okay.

[Big Al Clopine]

With Sean Penn, I believe was in it. Or I forget what the hell the movie was called Sean Penn and Nicole Kidman. She was an interpreter for the U.N.

[Joe Anderson]

Okay, well, that could be.

[Andi Last]

It's called the interpreters from 2005.

[Big Al Clopine]

Yeah, yeah. She was listening to, you know, she heard something she forgot, like violin in her little booth. So she goes back there and she hears something that she probably shouldn't have heard.

[Joe Anderson]

Got it.

[Big Al Clopine]

And it's off to the races.

[Joe Anderson]

All right.

[Big Al Clopine]

So, yeah. Okay. Well, good luck. Let us know what, what that next career looks like.

[Andi Last]

Have you ever heard the term no regrets? It's a good way to live your life, but unfortunately, plenty of retirees have plenty of regrets. This week on a brand new episode of youf Money, you, Wealth tv, learn from their mistakes. Joe and Big Al show you how to avoid the 10 biggest retirement regrets and to set yourself up to retire happy and secure. They'll also share retirees recollections on everything from lending money to boredom to give you the wisdom of the ages without having to learn it the hard way. Then calculate whether you're on track for retirement. For free. Input your current cash flow, assets and projected spending for retirement into our financial blueprint tool. It'll calculate a detailed report with three scenarios to help you determine your probability of retirement success with actionable steps you can take now to achieve your financial goals. Watch 10 Big Retirement Regrets to avoid and calculate your free financial blueprint. You'll find the links to both in the episode description.

[Big Al Clopine]

All right, we got Michael from Virginia. He writes in, he goes. I'm currently Planning to invest $4,500 biweekly across BOO. Q. Q. Q. Google, Amazon, Microsoft, Meta, Berkshire, ASML. What's.

[Joe Anderson]

I don't know. That one. You got me.

[Big Al Clopine]

I'm not interested in.

[Andi Last]

It's a semiconductor company in San Diego.

[Joe Anderson]

Okay.

[Big Al Clopine]

I'm not interested in international stocks or bonds, but this allocation makes sense for long term growth given my goals. If not, what adjustments would you recommend? I would recommend that you invest in international stocks and bonds.

[Joe Anderson]

I agree with that. You pick some really good companies. But all these companies have done great. Maybe they'll keep going, but it's a little tricky when you're buying stuff that's gone up so far. You buy high and hope it goes higher. Sometimes that works. Sometimes you don't get as much growth as you think. Personally, I would rather have a more globally diversified portfolio including foreign investments.

[Big Al Clopine]

Why does anything like international stocks?

[Joe Anderson]

He's. He's a pro American.

[Big Al Clopine]

A lot of. A lot of good companies there are.

[Joe Anderson]

Yep.

[Big Al Clopine]

No bonds. Doesn't like safety.

[Joe Anderson]

No, no.

[Big Al Clopine]

Okay.

[Joe Anderson]

Yeah. And I would say we don't know how old he is, Joe, but I mean, the younger you are, the more aggressive you can be. So the more stocks you want to buy, whether, whether it's in, in an ETF or index fund or mutual fund or individual securities or. There's nothing wrong with individual securities. It's just a little bit more work.

[Big Al Clopine]

But there's been studies. If you look at, let's say 100% stock portfolio in an 8020 portfolio.

[Joe Anderson]

Yeah.

[Big Al Clopine]

The efficient frontier goes like that.

[Joe Anderson]

Yeah. The risk is the level of risk that you're taking.

[Big Al Clopine]

You're not achieving any more reward for that amount of risk.

[Joe Anderson]

Yeah. And so the point of this then is when you look at risk versus return, the risk is higher for 100% stocks, but the rate of return is pretty similar, 80, 20 versus 100%.

[Big Al Clopine]

And you have to think about. All right, how do you manage the risk from a rebalance perspective? If I have 100% stock portfolio and stocks get crate, they crater. You want to buy low, you want to buy more. Usually if you have a little bit of safety there, bonds, that could be a good cushion just to buy more stocks when markets go down. Because usually bonds go up when stocks go down, because there's a flight to safety depending on what type of bonds, of course, that you own. And there's no guarantee of that. But if I have a little bit of cash or some safe investments when stocks go down, I can buy more stocks with those. But if everything is in stocks, I.

[Joe Anderson]

Can'T buy more stocks.

[Big Al Clopine]

Yeah. I'm just waiting for it to recover or having the dividend reinvestment go back into the stock. So. But hey, I like the companies. Go for it. It's got some big hitters there. Big Al.

[Joe Anderson]

Big hitters. That's right.

[Big Al Clopine]

What do we got up next here? Oh, we got Will, the gas siphoner.

[Joe Anderson]

Oh, boy.

[Big Al Clopine]

Wow. It's been a minute since we've had Will on.

[Andi Last]

He wants to defend his honor here.

[Joe Anderson]

Okay.

[Big Al Clopine]

Well, hello again, guys. Are we planning to try to defend my virtual, virtual honor? I know it's all fun about siphoning gas, but somewhere along the line, you may have dismissed my question as coming from somebody out there. So I submitted proofs to Andy.

[Andi Last]

He actually sent me copies of his receipts that show that he saved $80 per gas fill up and a video showing the gas pump as he gets gas.

[Joe Anderson]

Okay.

[Big Al Clopine]

This guy's not. He's drinking too much gas.

[Andi Last]

So he is out there is what you're saying.

[Big Al Clopine]

So let's kind of tell the story here. So this was years ago that he comes in, right?

[Joe Anderson]

He wrote it. He wrote in, he's got a question.

[Big Al Clopine]

And then he was like, yeah, and by the way, I get free gas. We're like, well, what the hell is.

[Joe Anderson]

How do you get free gas?

[Big Al Clopine]

Like just siphoning gas.

[Joe Anderson]

And then he becomes pretty much one.

[Andi Last]

Of the funniest segments we ever had on the show. I'll link it in the episode description so that you can go back and listen and laugh.

[Joe Anderson]

But I recall a follow up email from him where he really enjoyed the humor.

[Big Al Clopine]

Yeah. But it was like I couldn't even read it.

[Andi Last]

He worked part time, full time, double time.

[Big Al Clopine]

There was no beginning, middle, end to any of his sentences.

[Joe Anderson]

Well, it's a lot better now.

[Big Al Clopine]

It just kind of ran off and.

[Joe Anderson]

There'S periods and capital letters at the start. So you're good now.

[Big Al Clopine]

Well, part of the charm of your podcast is about thinking of creative and legal ways to pay less taxes. Sometimes you urge us to think of ways to bridge the gap. Well, points, couponing and cash backing nets us thousands each year to pay bills and expenses. Cash backing? What the hell is cash backing?

[Joe Anderson]

On your credit card, you get cash back.

[Big Al Clopine]

Oh, cash back.

[Joe Anderson]

Yeah. Yeah. You don't do that apparently.

[Andi Last]

I totally do that. And now they make it so that you can just spend the points right at the retailer themselves. It makes it so much easier than having to go and redeem them in your credit card. Yep.

[Joe Anderson]

We just do the points for travel since we travel so much.

[Big Al Clopine]

Do you have a. Is there. We have a client that is like a master.

[Joe Anderson]

Yeah. And has their own website on how to do all this. And she wouldn't tell us what it is. Remember we kept asking her what's what and she just said that's, you know, that's private.

[Big Al Clopine]

That's my. But yeah, she was able to. I mean, they would go to Europe.

[Joe Anderson]

Yeah. Five star hotels and $30 a night.

[Andi Last]

See there? Maybe Will's got a. Got a thing going here.

[Big Al Clopine]

Couponing and cash backing. All right.

[Joe Anderson]

Yeah, I remember that particular client. Every month they're applying for a new credit card because they got so many more points.

[Big Al Clopine]

Yep. A dollar saved is worth more than a dollar earned. We save at least $3,000 a year, which means pre tax at 22% is about 3,800. $20 an hour salary means not working for 190 hours. That's a month. All right, well.

[Joe Anderson]

Well, that's worth it then.

[Big Al Clopine]

Anyway, the math works to the question I had regarding backdooring, all solo 401 net income to Roth IRA below the maximum $70,000 to start earning tax free without having to save three to six months of living expenses. Okay, now he's getting a little off kilter here. Yeah, I think did not understand.

[Joe Anderson]

I think what he's asking is, can't I just have the money in a Roth and have that be the emergency? But I think that's what he's trying to say.

[Big Al Clopine]

Anyway, the math works. To the question I had regarding backdooring, first of all, backdooring, it's like cash backing.

[Andi Last]

It's all a verb. These are all action items for money.

[Big Al Clopine]

He's backdooring.

[Joe Anderson]

Yeah, man, that just, that just means he's currently doing. He didn't backdoor. He's backdoor.

[Big Al Clopine]

You know what, my mind's going, so.

[Joe Anderson]

You went somewhere else, didn't you?

[Big Al Clopine]

All solo 401k, net income to Roth IRA below the maximum $70,000 to start earning tax free without having to save 3 to 6 months of living expenses. It doesn't have to buy anything yet, but it's already in a Roth account. How often does one need thousands in cash right away? My spouse part time income would pay for immediate living expenses.

[Andi Last]

So that's the first question.

[Joe Anderson]

Okay, so what if your spouse gets loses their job and you need some money? Yeah. You can get your contributions from a Roth. Once you're over 59 and a half and you've had the account five years, you can get all monies out. But if you're not 59 and a half, it can be a little tricky.

[Andi Last]

And as for how often does one need thousands of cash right away? What happens if your roof falls in?

[Joe Anderson]

Yeah, I answered the question that I thought I heard, which was why not just have a Roth instead of a emergency fund? And if you have access to the funds through contributions or you're over 59 and a half, that can work. Fine.

[Big Al Clopine]

Got it. Okay, cool. I know you hate annuities and I don't usually pay much attention because I don't think I had one.

[Joe Anderson]

You didn't think.

[Big Al Clopine]

All right, well, I do have valack. Okay. The five year surrender term ended on 2014 and has been earning 3% since. I'm not sure whether it has life income part, but it looks like a cd. Is there supposed to be another lifetime payment? Since I'm under 59 and a half, I'm planning on doing a 1035 transfer to a deferred fixed annuity. So there's no penalty or fee. 10 years fixed with 10 year surrender is about 5.5%, almost double what it is. What are your guys thoughts or should I take it out? $85,000, pay the 10% fee and put it into a brokerage account. Keep on spit. Keep up the spitting of the wet balls.

[Joe Anderson]

There's a way to say it.

[Andi Last]

Spitting and backdooring.

[Big Al Clopine]

Alrighty, let's keep on spitting up those wet balls. Real examples.

[Joe Anderson]

Did your mind go somewhere else on the.

[Big Al Clopine]

Nope. Keeps it up. Well, regards Will. Thanks, Will. It's always a pleasure to read your emails. Okay, so your email annuity. So he's got a valid. The five year surrender term ended in 2014 and it's been earning 3%. So it's a fixed annuity earning 3%. I'm not sure if it has a lifetime income. No, it's just probably a straight fixed annuity at 3%. Is there supposed to be another lifetime payment? You could annuitize the contract at some point. I wouldn't do that. Since I'm under 59 and a half. I'm planning on doing 1030, 1035 transfer to another deferred annuity. So there's no penalty or fee. So he wants to do a 1035 exchange.

[Joe Anderson]

Okay, that's okay.

[Big Al Clopine]

So if you're in annuity, you can't take the dollars out until you turn 59 and a half without a 10% penalty. It just works just like similar to a retirement account.

[Joe Anderson]

And the 10% penalty is on the increase in value.

[Big Al Clopine]

Correct.

[Joe Anderson]

Because not the whole thing.

[Big Al Clopine]

Right. We're assuming that this is a non qualified annuity. So a non qualified annuity is that, let's say Will here, it's worth $85,000, put $50,000 in and now it's at $85,000. So there's $35,000 of gain or growth. That $35,000 would be subject to the 10% penalty and taxes if he took everything out.

[Joe Anderson]

Correct.

[Big Al Clopine]

Ordinary income tax.

[Joe Anderson]

That's right, Yep.

[Big Al Clopine]

So he could do an exchange. So if you have an annuity that you don't necessarily care for or like, you could do a 1035 exchange. So what that does is put it into another annuity product. So there's no taxes due, there's no 10%. You're not taking it out of the annuity, you're just putting it into another annuity.

[Joe Anderson]

Right.

[Big Al Clopine]

So that could be good or that could be bad. But it sounds like he's putting it into a fixed annuity at 5.5%, almost double. But it's a 10 year surrender, so you have to keep it in there for 10 years without a surrender charge. And I'm guessing if it's a 10 year surrender charge, the commission on that is 10%.

[Joe Anderson]

I think I know if you want to go down that path about what's wrong with those.

[Big Al Clopine]

You can go into another annuity that doesn't necessarily have a long surrender period. What are you trying to accomplish with the money that you have?

[Joe Anderson]

Well, this probably general rule, those that have a long surrender period probably had a big commission and probably there's reasons why you shouldn't necessarily do it. So just be aware of that. Not all of them, but just be careful there. There are annuities, Joe, that have no cost, no fees, no surrender at all. So why not look at one of those? That's what I would say.

[Big Al Clopine]

Sure. A fixed annuity works similar to a CD. So they're going to give him 5.5% guaranteed. That's a pretty big guarantee. It is for 10 years. So they're going to take that money and they're going to try to earn more than 5.5%. So that's why you got to keep it in the product for 10 years. Because over a 10 year time period, they're thinking, hey, we're going to make more than 5.5%. And that spread is how they're going to make their money. If you take the money out prior to that 10 year, there's going to be a pretty big surrender charge because they had to pay the insurance agent to sell you the annuity. They had to pay you the 5% interest rate on the money. And so, yeah, but Yeah, I like 5.5%. If it's real, it's guaranteed.

[Joe Anderson]

Sometimes it's factors and it's not.

[Big Al Clopine]

Yeah. Who knows what it is? It could be saying, all right, well, it's a fixed indexed annuity and it's.

[Joe Anderson]

Average 5.5%, but that's not really your money. That's what your earnings are. Yeah, it can be tricky. It really can.

[Big Al Clopine]

Yeah. I would want to understand the annuity that you want to get into a little bit more. But if it's a straight fix by 5.5% guaranteed every single year for 10 years, then I don't know. That sounds okay.

[Joe Anderson]

Yeah, that's what it is. That's great.

[Big Al Clopine]

All right. Will the thrill tuck it on gas?

[Andi Last]

Pure Financial Advisors now has 12 nationwide locations. We're in Mercer island and Redmond in the Seattle area, Northbrook and Wheaton in the Chicago area, Greenwood Village in the Denver area, Prescott, Arizona, Lehigh near Salt Lake City, Utah and in five California locations, Davis, Brea, Woodland Hills, Irvine and our original San Diego headquarters. Pure is still growing, which means more experienced professionals on Joe and Big Al's team able to provide you with more one on one conflict free financial guidance from more locations without selling you any investment products. But here's the thing. You can schedule a financial assessment with Pure no matter where you are. That's literally what Zoom is for. So even if you're right next door to one of our offices, but you'd rather get a professional free in depth review of your finances while you're at home, in your jammies or on your couch, you totally can. Just click or tap the free Financial Assessment link in the episode description to book yours. Or if you'd rather do it the old fashioned way, just call us at 888-994-6257 and schedule your assessment now. And if you're still not sure, check out YourMoneyYourWealth.com to learn more about us. Then hit the green get an assessment button at the top of the page.

[Big Al Clopine]

Let's go to Hyde Hey I love your show. Informative and funny. I have an Aesop An Nua question. We are Tess and Finn 45 and 48. We have three teenage kids and one dog and we live in Texas. We have a lot of Texas Texans here today. We do love the great state of Texas. We enjoy a little Tito with cranberry or soda. Finn works for a private company, has substantial amount in this retirement esop plan after 25 years and hopefully 12 more to go and all the company match post strong appreciation. We are concerned about RMD since this is all pre tax dollars. On a previous episode you briefly explained how upon retirement the ESOP can be rerolled into a Nua Nua. Please correct my understanding. The amount Finn and the company contribute is taxed as ordinary income and the appreciation is taxed at long term capital gain. From what I read, I think I understood that the contributions will be taxed in the year of the retirement rollover. But the new law the appreciation portion won't be taxed until sold. Since the company is private, can a brokerage account hold the publicly traded stock?

[Joe Anderson]

Non publicly.

[Big Al Clopine]

Let me go. Since the company's private, can a brokerage account hold not a publicly traded stock? I don't think Finn's company allows him to get the company stock after retirement. It seems that we would have to sell the shares of the stock when we do the rollover to the brokerage account. And does that mean everything I get taxed in that year? When I first heard about the nua, it sounded too good to be true. But if we have to pay all the taxes in one year, that's a scary thought. And I'm aware of the rule of 55, but I think the NUA, you have to wait until 59 and a half to use. Is that correct? General question. Why don't more companies use ESOPs? Okay, so there's two different kind of things here.

[Joe Anderson]

Yep.

[Big Al Clopine]

There's an employee stock ownership plan that companies do to kind of share the ownership with their individual employees to get them equity within the overall firm. Most private companies have ESOPs. They're not publicly traded. So if you're thinking about, hey, can I do a net unrealized depreciation on a non publicly traded company stock? That is pretty challenging and difficult.

[Joe Anderson]

It's challenging. You can. It's allowed. But the employer typically doesn't allow you to keep the stock once you retire. Right. So you would have to sell it. So your understanding is right. And you could do a nua, which basically means you take the stock and generally you put it in your brokerage account if it were a publicly traded company.

[Big Al Clopine]

Let's use an example of a publicly traded company. So I work at Sherman Williams. Good company.

[Joe Anderson]

Yeah.

[Big Al Clopine]

Very strong stock.

[Joe Anderson]

You like paint?

[Big Al Clopine]

I do love paint. I like it a lot better than bare. So I work at Sherwin Williams, and I got 400,000, $500,000 in company stock inside my 401 plan.

[Joe Anderson]

Got it.

[Big Al Clopine]

And I have a cost basis of 100,000.

[Joe Anderson]

So you invested $100,000 into this stock, and now it's worth 500,000.

[Big Al Clopine]

Correct.

[Joe Anderson]

Okay.

[Big Al Clopine]

And so what an NUA, or net unrealized appreciation, is because it's publicly traded? I could say, all right, well, here I want to take my Sherman Williams stock out of my 401 plan.

[Joe Anderson]

Right.

[Big Al Clopine]

So you pay ordinary income tax on the basis.

[Joe Anderson]

So 100,000 the year you do it.

[Big Al Clopine]

Throw it in the brokerage account. $100,000 is added as ordinary income on my tax return. Now I have Sherman Williams stocks sitting in my brokerage account.

[Joe Anderson]

Right.

[Big Al Clopine]

So if I want to keep Sherman Williams stock, I can keep Sherman Williams stock if I want to sell it. Now, I'm subject to capital gains tax on the appreciation.

[Joe Anderson]

But you sell it when you want to.

[Big Al Clopine]

Yes.

[Joe Anderson]

Yeah. So you don't pay the tax. That's how you sell. You can sell a little Bit this year, a little bit next year, a little bit in 20 years, whatever.

[Big Al Clopine]

Privately held companies, CEO of that company, the owner of the company is like, hey, you can't just carry my stock.

[Joe Anderson]

Yeah, it's the whole point. The reason why there is stock ownership in a company is a privately held company is the company, the management of the company, the investors of the company want employees to have stock ownership. So they'll act more like owners, they'll do a better job. Right. But once they retire, it's like, okay, you've done your thing and now we want to cash out your stock for what it's worth at that point. Point. So even though it's technically possible to take an ESOP stock shares and go ahead and do the nua, in almost all cases the company would not allow you to keep the stock, which basically negates the whole thing. Joe. Because you pay the ordinary income tax on your example of 100,000 and you pay capital gains tax on 400,000 all in the same year. Yeah, I wouldn't want to do that.

[Big Al Clopine]

You just roll the ESOP into ira.

[Joe Anderson]

Yeah, exactly.

[Big Al Clopine]

Just cash it out within the esop, get cash in the esop, you roll it into an ira, no taxes due, then you just pay ordinary income tax on the distribution.

[Joe Anderson]

Yeah. By the way, if you have publicly traded stock, and generally this is more common in a 401 than an ESOP. So I'll give you three things have to happen. First of all, you have to be either 59 and a half or there needs to be a triggering event like you retire so that allows you to do it. Secondly, it's all or nothing. You have to do a lump sum on the entire thing. So you're not in the plan anymore. Right. And the third thing is the stock shares have to be transferred out. You can't cash it out. You have to actually have the shares, which is why a non publicly traded company is very difficult.

[Big Al Clopine]

Yep. All right. You had a tough week, huh?

[Joe Anderson]

I did have a little bit of a tough week. And my, my mom passed away last week and so she was 9111 half, which was great. She lived a long time, fruitful life. She was very kind person, very caring person, kind of a service oriented person, you know, wanted to help people always. And all of her kids were there when she passed, which was great. And seven of her nine grandchildren saw her that same day. And that was probably the main thing she told me over the last couple months or few months is like when I do pass away, I want you kids to be holding my hands.

[Big Al Clopine]

Oh, wow.

[Joe Anderson]

So that's what we did. Yeah. So I had a friend, Joe, that said, I think you hit the mom lottery with the mom that you got, which I tend to agree. And so that was amazing. I'm going to miss you, mom, but thank you.

[Big Al Clopine]

Oh, making me cry. Big Al.

[Andi Last]

What'S your mom's first name?

[Joe Anderson]

Betsy. Betsy Clopine.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Amazing, amazing lady. Perfect.

[Big Al Clopine]

All right, well, that's it for us today. Thanks for listening. God bless, Big Al.

[Joe Anderson]

Thank you.

[Big Al Clopine]

All right, we'll see you next time.

[Andi Last]

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.