How to Reduce the Widow’s Tax Penalty - 501

Summary

Podcast Summary: "How to Reduce the Widow’s Tax Penalty" | Your Money, Your Wealth Episode 501

Released on October 29, 2024

Hosts:

• Joe Anderson, CFP®
• Big Al Clopine, CPA
• Executive Producer: Andi Last

---

Introduction

In Episode 501 of the Your Money, Your Wealth podcast, hosts Joe Anderson and Big Al Clopine delve into the complexities of the widow’s tax penalty—a significant concern for individuals who find themselves widowed and facing altered tax circumstances. The episode features real-life questions from listeners, offering in-depth analysis and actionable strategies to navigate these challenging financial waters.

---

Main Discussion: Jennifer’s Case – Reducing the Widow’s Tax Penalty

Timestamp: [00:59] – [09:03]

Jennifer's Situation: Jennifer, a 55-year-old from Washington State, shares her predicament:

• Income & Retirement Accounts:

  • Annual salary: $250,000
  • Retirement assets: $3.3 million in retirement accounts (all in her name)
  • Social Security: $2,500/month from her 70-year-old retired husband

• Challenges:

  • Her husband has experienced significant losses through day trading, leaving most retirement funds solely in her 403(b).
  • Employer restrictions prevent in-plan Roth conversions until she separates from her employer.
  • Absence of the Rule of 55 at her employer, necessitating a 72(t) tax election for early distributions.

Key Insights and Strategies:

1. 72(t) Tax Election:

   • Big Al: “You can take a separate equal, periodic payment out of a retirement account and avoid the 10% penalty.” ([02:54])
   • This allows Jennifer to access retirement funds before age 59½ without incurring penalties, though taxes remain applicable.

2. Roth Conversions and Employment:

   • Joe: “She can roll the 403B into a 401K that allows age 55 distributions.” ([07:20])
   • Suggestions include temporarily taking another job or starting a consulting business to facilitate Roth conversions and access to her retirement funds without penalties.

3. Financial Projections and Tax Implications:

   • Big Al: Evaluates Jennifer’s expense projections and the sustainability of her retirement plan, emphasizing the importance of continued employment to manage tax liabilities effectively.

4. Tax Bracket Management:

   • Joe: Highlights the significant tax impact of filing single versus jointly: “She's going to lose a lot more potentially in taxes because of her tax bracket.” ([08:58])

Conclusion for Jennifer: The hosts advise against immediate retirement solely for Roth conversions due to the high tax implications upon widowhood. Instead, they recommend strategies to maintain lower tax brackets and increase liquidity to manage tax payments effectively.

---

Suzanne’s Situation: Navigating Widowhood and Roth Conversions

Timestamp: [12:21] – [17:36]

Suzanne’s Profile:

• Age: 65, recently widowed
• Retirement Accounts:
  • $2.3 million taxable IRA
  • $200,000 Roth IRA
• Income:
  • Social Security: $2,300/month
  • Post-retirement withdrawals: Approximately $6,500/month pre-tax
• Current Tax Situation:
  • Estimated AGI for the year: $165,000 due to severance and vacation payout

Key Discussion Points:

1. Roth Conversion Strategy:

   • Big Al: “Maybe she could do 60, 70,000, something like that.” ([15:39])
   • Suzanne is concerned about converting taxable IRA funds without available cash to pay the associated taxes, potentially impacting her IRMAA (Income-Related Monthly Adjustment Amount) status.

2. Tax Bracket Optimization:

   • Joe: Discusses the balance between converting amounts that fit within lower tax brackets to mitigate tax hikes: “Convert 40 and pay 20 in tax.” ([15:45])

3. Sustainable Withdrawal Rates:

   • Big Al: Emphasizes calculating realistic withdrawal rates to avoid depleting retirement funds too quickly, considering both current needs and future tax implications.

Advice for Suzanne: The hosts recommend a cautious approach to Roth conversions, suggesting partial conversions that align with lower tax brackets to minimize immediate tax burdens while maintaining long-term financial stability.

---

Listener Questions: Expanding Financial Insights

Timestamp: [19:07] – [30:19]

The episode transitions to addressing additional questions from YouTube viewers, covering topics such as:

1. Brokerage Accounts and Required Minimum Distributions (RMDs):

   • Lou’s Question: Can RMDs be paid out in-kind (e.g., shares of stock) and rolled over into a brokerage account?
   • Big Al: Clarifies that distributions from a 401(k) must be in cash, but IRA holders can transfer in-kind shares to a brokerage account before paying taxes.

2. Roth Conversion Taxes:

   • Jim’s Scenario: Debates whether it’s more beneficial to convert pre-tax IRA funds to a Roth IRA, considering tax implications.
   • Big Al: “Me, personally, I'd rather have a $70,000 Roth if those are the two choices.” ([22:23])

3. Inherited IRAs and the 10-Year Rule:

   • Invictus’s Inquiry: Questions about the applicability of the 10-year withdrawal rule for inherited IRAs.
   • Big Al: Explains the 10-year rule for non-spousal inherited IRAs, emphasizing the need to fully distribute within the decade while considering life expectancy.

4. Extended Market Index Funds:

   • Audience Question: What are extended market index funds and their role in a diversified portfolio?
   • Big Al: Describes extended market index funds as those that include smaller and value stocks beyond major indices like the S&P 500, providing broader market exposure.

5. Sustainability of the 4% Withdrawal Rule:

   • Nancy’s Comment: Questions the sustainability of a 4% withdrawal rate over a 40-year retirement period.
   • Joe: Explains the concept of sequence of returns risk, illustrating how prolonged market downturns can erode retirement savings despite conservative withdrawal rates.
   • Big Al: Reinforces that many factors influence sustainable withdrawal rates, advocating for a dynamic approach based on annual financial assessments.

---

Final Thoughts and Resources

Timestamp: [34:03] – [34:55]

The hosts wrap up the episode by highlighting the importance of proactive financial planning and utilization of available resources:

• 2024 Key Financial Data Guide:

  • A comprehensive resource outlining current tax brackets, capital gains rates, retirement contribution limits, and more, available for free download [in the episode description].

• Interactive Tools:

  • Ask Joe & Big Al On Air: For personalized retirement spitball analyses.
  • Financial Blueprint Calculator: Helps listeners assess retirement readiness and explore different financial scenarios.

• Community Engagement:

  • Encouragement to share the podcast, leave reviews, and schedule free financial assessments with Pure Financial Advisors for tailored financial planning.

---

Notable Quotes:

• Joe Anderson: “You can take a separate equal, periodic payment out of a retirement account and avoid the 10% penalty.” ([02:54])
• Big Al Clopine: “Maybe she could do 60, 70,000, something like that.” ([15:39])
• Big Al Clopine: “I'm not sure. Does she have any pre-tax? I mean, after tax?” ([09:35])
• Joe Anderson: “She needs 180. The 72T is not going to do anything.” ([11:48])
• Big Al Clopine: “The 4% rule is not necessarily that magical. It’s just a guideline to tell you if you're kind of on track.” ([34:38])

---

Conclusion

Episode 501 of Your Money, Your Wealth offers valuable insights into managing the widow’s tax penalty, emphasizing the importance of strategic retirement planning, tax-efficient withdrawal strategies, and maintaining financial flexibility. Through real-life scenarios and expert analysis, Joe Anderson and Big Al Clopine provide listeners with actionable advice to safeguard their financial futures amidst life’s uncertainties.

---

Resources Mentioned:

• YourMoneyYourWealth.com – Access free financial resources, episode transcripts, and participate in the Ask Joe & Big Al On Air sessions.
• 2024 Key Financial Data Guide: Download link available in the episode description.
• Financial Blueprint Calculator: Available through the episode description for personalized retirement planning.

For more detailed advice and personalized financial strategies, schedule a free financial assessment with Pure Financial Advisors here.

Transcript

[Andi Last]

Should Suzanne in Michigan do roth conversions in 2025 and 2026? Since she's widowed and won't be married filing jointly, how should she pay the tax on her conversions? Jennifer in Washington state is 55 and her husband is 70. Should she retire now and do aggressive Roth conversions before her husband passes? We're talking about the widow's tax today on youn Money, you, wealth podcast number 501 plus answers to questions from our YouTube viewers. What's a brokerage account? What's a good way to pay tax on RMDs? How does the rule work on inherited IRAs? What are extended market index funds? The fellas also spitball on the 4% rule for retirement withdrawals. Listen in your favorite podcast app or watch us right now on YouTube or Spotify. To ask a money question or get a retirement spitball analysis of your own, click the Ask Joe and Big Al link in the episode Description. 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]

We got Jennifer from Washington State writes in hi Joe, Big Al, hoping you can give me a little spitball because retirement podcasts rarely consider my situation. Ben, she's a big listener to a bunch of retirement podcasts.

[Big Al Clopine]

Yeah. And they don't really address her situation. So let's see what we can do.

[Joe Anderson]

All right, I brought a little 2018 Subaru cross check. Oh, Washington.

[Big Al Clopine]

Yeah, yeah, that's right.

[Joe Anderson]

Every Washington writer calls him with the little Subaru.

[Big Al Clopine]

That is a common vehicle. Colorado too. A lot of Subarus in Colorado.

[Joe Anderson]

It's a great car. My drink of choice is Diet Coke. All right, let's see what Jennifer's got here. 55. Salaries, $250,000. My husband is a lot older.

[Big Al Clopine]

70, exclamation point.

[Joe Anderson]

And he's retired. All right, 55 and 70. He gets about $2,500 a month from Social Security. Got $3,300,000 across all my retirement accounts. Good for you, Jennifer.

[Big Al Clopine]

Amazing.

[Joe Anderson]

All in my name because my husband lost all of his day trading.

[Big Al Clopine]

Ooh, sore subject there.

[Joe Anderson]

This old man losing all our money. No retirement podcast knows my situation.

[Big Al Clopine]

Not going to be in his name.

[Joe Anderson]

The vast majority is in my employer's 403 pre tax. My employer doesn't allow in plan conversions, so I can't do Roth conversions on that money until I separate from my employer. My employer also doesn't do the rule of 55, so I would have to do a 72T tax election. How does she know about a 72T?

[Big Al Clopine]

He's been listening.

[Andi Last]

She listens to retirement podcasts.

[Joe Anderson]

72T. So what that means for everyone else.

[Big Al Clopine]

Yes, like all of us, is that.

[Joe Anderson]

You can take a separate equal, periodic payment out of a retirement account and avoid the 10% penalty.

[Big Al Clopine]

Yeah. So you still pay tax on it. You just don't pay a 10% penalty.

[Joe Anderson]

If you're under 59 and a half. But I read something this week is that millions of people avoid or like, didn't pay the 10% penalty. Billions and billions of dollars.

[Big Al Clopine]

No kidding.

[Joe Anderson]

And then the IRS just figured it out or something. Oh, I didn't read the whole article. I probably should have if I was going to mention. Since you brought it up, it was just a headline. That headline. Got it.

[Big Al Clopine]

Got it. Okay.

[Joe Anderson]

All right. My expenses are $15,000 a month. But I expect that to decrease in a few years when my 18 year old son becomes independent. I pay for all his expenses because I want him to focus on graduating from high school and. Okay, you think he's got a lot of expenses. He had kids in high school.

[Big Al Clopine]

There's. It gets more expensive when they go to college.

[Joe Anderson]

Yeah, right.

[Big Al Clopine]

And then when they come home after college.

[Joe Anderson]

Yeah. All right. He goes to college. If he goes to college, he'll probably be a community college, which I can afford from his $40,000 in the 529 plan. We own a house worth about 900,000 with a $400,000 mortgage and a condo worth 600 grand with no mortgage. Here's the problem. Because my husband is 15 years older than me and has health problems, he's likely to die much earlier than I will. Oh, boy, here we go. A little morbid.

[Big Al Clopine]

Yeah, a little bit.

[Joe Anderson]

When he dies, I will have to file single, which will raise my taxes a lot.

[Big Al Clopine]

Explanation.

[Joe Anderson]

He's so concerned about taxes. I want to retire sometime between tomorrow and age 60. Okay, Jennifer, you're 55. Fidelity Retirement Calculator says I can retire at 57 and live to 100 even with significantly worse than average economy. Have you ever played with the old Fidelity Retirement calculator, Big Al?

[Big Al Clopine]

I haven't. Have you?

[Joe Anderson]

No. No, I haven't either. It's like, how does Fidelity Retirement calculator now significantly worse than average economy? I don't even know what that means, but I'm not sure how. It's calculating the taxes because I will be married for part of the plan in single for part of the plan. Am I crazy for waiting to retire wanting or wanting to Retire a year or two, or should I retire immediately and do aggressive Roth conversions before my husband passes?

[Big Al Clopine]

Wow. Jennifer, Keep. Keep working. Working is always a better choice, particularly.

[Joe Anderson]

What is he. Is he on his deathbed?

[Big Al Clopine]

Well, I don't know.

[Andi Last]

It does say he's got health problems, and he's 70 and he spent all of his money on day trading.

[Big Al Clopine]

So, I mean. I mean, let me. Let me.

[Joe Anderson]

I mean, do you think she wants to. Probably. She's still pissed about the day trade?

[Big Al Clopine]

I think so. A little bit. Yeah. Because she's more concerned about her tax rate than her husband.

[Joe Anderson]

I wonder if she's left to the condo that's paid off and he lives in the other one with a mortgage.

[Big Al Clopine]

Yeah, let me. Let me rephrase that. If. If you. If you want to retire to be with your husband, who's older and has health problems, go for it. Your situation looks all right, except for you don't have access to most of your money. So that's. That's a little bit more of a challenge if you want to. If you want to retire just because you want to do Roth conversions instead of not. No, that doesn't make any sense. I mean, the longer you work, the less you'll need to dip into your savings, which is actually not really available that much because you're not.

[Joe Anderson]

Here's how she can get availability of her savings. She retires, she rolls the 403. She gets another job.

[Big Al Clopine]

Okay. Now, okay. You still have to work, but she.

[Joe Anderson]

Can work for like a month.

[Big Al Clopine]

Yeah.

[Joe Anderson]

She rolls the 403B into a 401K that allows age 55 distributions.

[Big Al Clopine]

Yeah. That's creative. I like that. That does work. Or you start up your own little consulting company.

[Joe Anderson]

That's my other. Yeah. You start a care facility for your husband.

[Big Al Clopine]

Oh, my. Well, there might be a need.

[Joe Anderson]

So she could start her own 401. She just rolls it right into that bad boy.

[Big Al Clopine]

So the concept is you got a 401. You can roll your 403 into the 401. The 401 will have the ability to have you retire, and you'll be 55 or older and then be able to access that money without penalty.

[Joe Anderson]

But here's the crux is that she's 55. She wants to spend $15,000 a month. It might be a little bit lower. She needs probably 5 to 6 million. Well, probably $4,500,000 to support that lifestyle.

[Big Al Clopine]

Yeah, but she says her incomes. In a few years, it'll be. Expenses will be lower.

[Joe Anderson]

So I don't know how much lower?

[Big Al Clopine]

She doesn't really say. So I don't really.

[Joe Anderson]

So you take away the Social Security from. Right. She's got a huge bridge. If she retires at 55, takes it at 67, that's 12 years. At 15,000, 180,000 for the next 12 years.

[Big Al Clopine]

Yeah.

[Joe Anderson]

$2 million that she's going to need for her living expenses plus tax, she's got 3.3 million. So you put a little bit of growth on that. That math doesn't work for me.

[Big Al Clopine]

It all depends upon how much less she can spend when her son leaves and when that. I don't, I don't know how old he is.

[Joe Anderson]

Does it say 70? 70.

[Big Al Clopine]

No, no. And the husband, I mean, the son's going to.

[Joe Anderson]

18 year old son.

[Big Al Clopine]

Yeah, yeah, yeah. Oh, yeah, 18 year old.

[Joe Anderson]

18.

[Big Al Clopine]

So maybe it. Yeah, we need to know how much it's reduced, but yeah, it's tight. It is, It's a little.

[Joe Anderson]

So no, don't retire tomorrow to do Roth conversions. I get it. She's. She's worried about the widow or tax. Right?

[Big Al Clopine]

That's a valid concern.

[Joe Anderson]

Yeah. She's got $3.3 million. That's a ton of dough.

[Big Al Clopine]

Yeah, yeah.

[Joe Anderson]

And so it's all in a retirement account. And so when she pulls that out to live off of 15,000 or $10,000 a month, $120,000 a year as a single taxpayer, she's not a 22, she's in the 24, potentially going to the 28. So she's going to lose a lot more potentially in taxes because of her tax bracket. So you continue to work, you continue to save, or you can roll the money into an ira, you can do conversions there or into your new jobs, 401k, work a couple paychecks, start your own business.

[Big Al Clopine]

I'm not sure. Does she have any pre tax? I mean, after tax?

[Joe Anderson]

No, it's all pre tax.

[Big Al Clopine]

Yeah, that's what it looks like. So it makes it harder to do a conversion too.

[Joe Anderson]

Yeah. You have no cash to pay the tax, right? Yeah. Oh, this is the issue. Right. 55 at $3,300,000. So she was a hell of a saver. So congratulations there, Jennifer. But this is a problem that we see quite a bit on the show is that most of the savings are in a retirement account and they want to do conversions, they want to be more diversified, but then they don't necessarily have the excess liquidity or the cash to pay the tax to do, so.

[Big Al Clopine]

Right, right. So let's just do the math. The Most conservative, say 3.3. We'll just say 3 million. At 3% distribution rate, 90,000. Let's say she could pull 100,000 DOL from the portfolio, disregarding the fact that it's all in. It's all taxable with a potential penalty, but she can pull 100 husband four one. I mean, Social Security, that's another 30K. So 130, that's probably the number instead of 180.

[Joe Anderson]

Yeah.

[Big Al Clopine]

That. That she can pull out. Maybe she could stretch it to 140, even 150. 180 is a bit rich if you want to retire right now, if that's the goal.

[Joe Anderson]

Other.

[Big Al Clopine]

Otherwise you work a few more years and you. Maybe even to 59 and a half or close to it. So you don't have this problem.

[Joe Anderson]

Well, the Fidelity retirement calculator said 57.

[Big Al Clopine]

I understand.

[Joe Anderson]

All right.

[Big Al Clopine]

But it. And that depends upon what your expenses are really going to be. We don't know what. What that figure is.

[Joe Anderson]

Yeah. Maybe she. Yeah. Her money's locked. Right. Until she retires or she leaves that job and finds another job to roll the money into another plan.

[Big Al Clopine]

Yep.

[Joe Anderson]

And that's. That's a pain in the.

[Big Al Clopine]

It is. Just for that.

[Joe Anderson]

Just for that.

[Big Al Clopine]

Right, Right. I'd rather. I think I'd rather do a 72T.

[Joe Anderson]

Oh, that's. That's awful as well.

[Big Al Clopine]

I know. It's awful because you can't get as much as you need.

[Joe Anderson]

Yeah. And you can't stop it.

[Big Al Clopine]

And now you're. Now you're only probably. I don't know how much you get. 40. 40,000 instead of 100.

[Joe Anderson]

Yeah. Yeah. She needs 180. The 72T is not going to do anything.

[Big Al Clopine]

I know. Right. Because that's based upon life expectancy.

[Joe Anderson]

Right. Well, there's three ways to calculate it, but it's still all less than what she needs.

[Big Al Clopine]

Yes, agreed.

[Joe Anderson]

So.

[Big Al Clopine]

So that's a little tricky.

[Joe Anderson]

Yeah.

[Big Al Clopine]

I think you're. If she has to retire, you either spend less or you. You get another job somewhere. We can roll the 401k. That's not a bad idea, actually.

[Joe Anderson]

All right. Well, really sorry to hear about your husband. Hopefully he lives a long life and thanks for. Thanks for the question. All right, Jennifer, good luck. We got Suzanne. She writes in from Michigan.

[Big Al Clopine]

Hey, guys.

[Joe Anderson]

And Andy. I'm 65, retired in January and recently widowed. Oh, sorry to hear that. 65, that's young.

[Big Al Clopine]

It is.

[Joe Anderson]

My retirement accounts have been combined into my IRA that are taxable at $2.3 million and the Roths are $200,000. I'll be taking my husband's Social Security about $2,300 a month. We plan to switch to mine at age 70. Estimate at $3,500 a month. I have very little liquid cash and have been taking about $6,500 pre tax per month. I expect that going forward I'll need about $110,000 a year pre tax. But our estimated AGI for this year is $165,000 due to severance and vacation payout from my job. I'm wondering if I should convert some of my taxable IRA this year and probably in 2025. Not just because I expect rates to increase in 2026, but also because I won't be able to file jointly for 2025 if. Yes, how much? Don't have the cash to pay the tax. So any conversion would have to be grossed up for taxes. And I'm concerned that converting too much will push me into higher IRMAA in a couple years when I'll be paying more proportionately due to what I hear about the widow's tax. Essentially higher tax rate because I'm now single. I have a 97 Chevy 2,500 truck. 2,500 Chevy, 2500. Am I saying that right?

[Big Al Clopine]

Yeah, I think so.

[Joe Anderson]

Never heard of a Chevy 250097 in 1990. Mazda Miata. Wow.

[Big Al Clopine]

Got some old.

[Joe Anderson]

It's 2024 today, correct?

[Big Al Clopine]

I think so.

[Joe Anderson]

Look at Suzanne. All right.

[Big Al Clopine]

Damn. Okay.

[Joe Anderson]

Mazda Miata. My college roommate had a Mazda Miata. You could barely fit in that thing.

[Big Al Clopine]

My sister had one. They're small.

[Joe Anderson]

No, tiny. My drink of choice is lemon water. Thank you for your show. I've learned so much. And thank you for your help with this question. Well, our pleasure. Wow. It's the widow's. The widow's weekend here at yout Money, you, Wealth. She can't pay the tax, but she is filing jointly in 2024. And the estimated AGI she's thinking for this year is going to be $165,000. So you subtract the standard deduction for married and whatever she put into her 401k. I don't know. I'm guessing that's going to be about 120.

[Big Al Clopine]

Yeah, it could be under 20. Ish. Ish, yeah. Yeah.

[Joe Anderson]

That's 22% tax bracket.

[Big Al Clopine]

Yes. The top of the 22 for married couple is 200,000.

[Joe Anderson]

200,000.

[Big Al Clopine]

Top of the 20.4% is about 380,000. Here's the tough part is there's no cash to pay the tax. Yeah, it's a little tough. I do like the idea of converting this year because the rates are lower. Maybe you go to the top of the 22.

[Joe Anderson]

Top of 22.

[Big Al Clopine]

And that's all I would, you know, that $200,000. So maybe she could do 60, 70,000, something like that.

[Joe Anderson]

Yeah, but then you subtract out the tax.

[Big Al Clopine]

I know.

[Joe Anderson]

Convert 40 and pay 20 in tax.

[Big Al Clopine]

Well, I mean, you have to math. Right. But yeah, you, you're, you're going to have to figure out the convert. Yeah. Let's just say you convert 60, you're probably only going to be able to convert, have 40 to 45,000 go in the Roth and the rest goes to tax. Not something we normally like to do, but given your circumstance, you might want to consider it. Plus, if you do that, you would stay in the lowest IRMAA category. So that would, that would, that wouldn't affect that. But then after that it gets. Gets tougher. Right. Because as you say, you're going to be in single rates.

[Joe Anderson]

Yeah. $110,000 a year. Most of that is going to be taxed at ordinary income. For single taxpayer, the top of the 12% tax bracket is what, 70,000.

[Big Al Clopine]

The 12%? Yeah.

[Joe Anderson]

More half that.

[Big Al Clopine]

Well, for single. Yeah. Half that. For marriage, 94 singles. 47.

[Joe Anderson]

47, yeah. So 50,000. And then. So she's going to be in the 22% tax bracket.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Moving forward. Yeah. Until RMDs hit.

[Big Al Clopine]

She is.

[Joe Anderson]

And then that's going to pop her up. So I would def.24, probably. The math makes sense. But yeah, that's a huge biting tax that you have to pay the tax to pay the tax.

[Big Al Clopine]

I couldn't do that.

[Joe Anderson]

I couldn't do it either. Yeah, you have to pull money out, pay tax just to pay the tax, man.

[Big Al Clopine]

Well, maybe here's another way to think about it. So she's spending 110. Social Security is $28,000. So her shortfall is $82,000. And if she were RMD age today, the RMD would be about 92. My point is the RMD is mostly paying for expenses, so the RMD itself is not going to throw her into a higher bracket. So I like the idea of converting, but maybe you don't have to be super aggressive.

[Joe Anderson]

Right. Okay. Well, sorry about your loss, Suzanne. Enjoy that lemon water and the Chevy.

[Big Al Clopine]

That old truck and that Mazda Miata.

[Joe Anderson]

This is around on the weekends with the Mazda with the top Down.

[Andi Last]

Did you see that document that Big Al referenced when he was talking about tax rates? That is the 2024 key financial data Guide. And along with their email list and their HP12C financial calculators, that single two sided sheet is a must have for Joe and Big Al to be able to spitball for you. You should download a free copy for yourself from the link in the episode description. It shows at a glance this year's tax BR& capital gains tax rates, retirement plan contribution limits, tax on Social Security, Medicare premiums, and all the current deductions, credits, exemptions, distributions and exclusions. All the numbers that affect your financial strategies as you plan for retirement. One listener said that basically this guide alone is worth the price of admission to ymyw. In other words, it's priceless. Just click the links in the episode description to download the 2024 key financial data guidelines to ask Joe and Big Al your money questions and to share YMYW with your friends.

[Joe Anderson]

Andy, want to kind of open this thing up for us? What are we doing here?

[Andi Last]

Now that we are doing the podcast on video on YouTube, we are getting comments like crazy, which we've been getting for quite some time. And so there's a number of questions that have racked up and I thought it'd be good if we could get through some of those so that we could get answers for the folks on YouTube. Thank you for watching. By the way.

[Joe Anderson]

We're answering questions from our YouTube listeners is what we're doing.

[Andi Last]

Actually they're YouTube viewers, but yes.

[Big Al Clopine]

Technically they do listen also.

[Joe Anderson]

Or they could read.

[Big Al Clopine]

Yeah. Closed caption or transcript? Yeah, transcript. Okay.

[Joe Anderson]

All right. Lou writes in what is a brokerage fund? All right, I ask as we have to do RMD soon and I keep hearing roll over to a brokerage account, is that a brokerage firm? Schwab, Fidelity Vanguard. When it comes time to do an rmd, can you pay the required taxes with cash out of hand and then just roll over the entire amount into a brokerage account? Okay, yeah, really good question, Lou. I wonder where's she hearing that from though?

[Big Al Clopine]

I don't know. But she basically wants to take a required minimum distribution in stock or mutual fund shares as opposed to cash, it depend.

[Joe Anderson]

So if it's in a 401, the answer is no. The distribution from a 401 will come to cash and then from cash you will then buy the stock.

[Big Al Clopine]

So the shares have to be sold inside the 401.

[Joe Anderson]

Unless you're doing an NUA, which means that you have company stock within the 401, you take that and move that into a broker.

[Big Al Clopine]

Another topic for another day.

[Joe Anderson]

If you have, let's say, an account, a brokerage account is. Yeah. Schwab, Fidelity Vanguard. So let's say you have your IRA at Charles Schwab, and you have to take your RMD of $20,000.

[Big Al Clopine]

Okay.

[Joe Anderson]

And so you could go in kind the $20,000 shares of XYZ Mutual Fund and move that directly into a brokerage account at Charles Schwab and pay tax on the $20,000. So, yes, if that's what you want to do, Louis, then you're good to go.

[Big Al Clopine]

Yeah. And a brokerage account really is nothing more than an account outside of retirement. And a brokerage house like Schwab, for example, Fidelity Vanguard, they allow you. They hold the. Their custodians. They hold the stock shares for you.

[Joe Anderson]

Okay. Thanks, Lou. All right.

[Big Al Clopine]

Okay, what else we got?

[Joe Anderson]

We got Jim, GM2179ER. I don't think it matters where the tax for a conversion is paid from. If I could pay the tax without a penalty out of my traditional IRA balance, I would convert $100,000 this year and next. At the end of the day, all that matters are the final balances. Would you be better off having $100,000 pre tax or $70,000 Roth? That's what matters. Jim, I love it.

[Andi Last]

I knew you were going to love.

[Joe Anderson]

This one, but I don't think sometimes the math always works out that way.

[Big Al Clopine]

Well, it depends upon your bracket. And you have to be 59 and a half to do this without penalty.

[Joe Anderson]

Correct. And that's what he said. Yep. So what would you rather have, a $70,000 Roth or $100,000 IRA?

[Big Al Clopine]

Me, personally, I'd rather have a $70,000 Roth if those are the two choices.

[Joe Anderson]

Yeah, me too, because the $70,000 is all mine. The $100,000 is going to continue to compound tax deferred, and then you still have to pay the tax or the toll coming out of the account. But if you're paying tax out of the retirement account, you just have to do the math. You pull the money out, then you have to pay tax on that distribution, then to give it to the tax man. So you're paying tax to pay tax. I hate that. So you don't want to pay tax to pay the tax on the tax, to pay the tax. So you get the point, right, Jim? But yeah, in this scenario with your math here, that's 30%. So you're going to pay 30% all in. In tax as you withhold. Yeah, I mean, sure, I think there's a lot more to this, but that's if we're in a bubble, if we're in the YouTube bubble, I'll buy it.

[Big Al Clopine]

That's all that matters. Jeff.

[Joe Anderson]

Okay. Okay. We get Invictus, Is that right? Invictus.

[Andi Last]

That's correct, yes. Invictus.

[Joe Anderson]

If we roll over our inherited ira, there isn't a ten year rule. The ten year rule is only for withdrawals. Correct. As a child to a past parent. So he's a child. So his parents passed. Depends on how old is this child, I wonder. Invictus.

[Big Al Clopine]

Well, probably old enough to write our show, so I'm going to assume.

[Andi Last]

I Believe Invictus is 35. Invictus comments quite frequently. And I believe he said that in another comment.

[Big Al Clopine]

He's how old? 35.

[Andi Last]

35.

[Big Al Clopine]

Okay, there you go. Not a minor.

[Joe Anderson]

Okay. Does he qualify for the normal stretch? I don't believe so.

[Big Al Clopine]

Nope.

[Joe Anderson]

I don't think so. So the ten year rule is only for withdrawals. Correct. Well, the ten year rule means that the money has to come out of the inherited IRA within 10 years.

[Big Al Clopine]

Correct. So that would be if you inherit an IRA and it's not from your spouse. Non spousal maybe is another way to say that.

[Joe Anderson]

Correct.

[Big Al Clopine]

So from your parent. And there's a few exceptions if you're a minor or if you're 10 years less than 10 years younger than the person that passed away.

[Joe Anderson]

More than 10 years or less than 10 years.

[Big Al Clopine]

10 years or less. Let me say it that way.

[Joe Anderson]

So he doesn't have to take an RMD for the next 10 years, but depends on the required beginning date.

[Big Al Clopine]

Yeah, it depends upon who passed away.

[Joe Anderson]

How old was your parent? When your parent passed, were they already taking RMDs or have they not taken RMDs yet?

[Big Al Clopine]

Yeah. And if your parent, the. The original IRA holder, if they were taking RMDs, you have to take an annual RMD yourself based upon your life expectancy. But it still all has to come out within 10 years.

[Joe Anderson]

How about that? Did you get all that?

[Big Al Clopine]

I get the question.

[Joe Anderson]

These rules are so stupid.

[Big Al Clopine]

I get the question because when you look up the rule, it is so complicated. You need like a Venn diagram because you. If this, that, if, that, this, if, this, that, if. And then you still don't know what you're doing.

[Joe Anderson]

Okay, let's go to the next one here. After 20 years, age 24 and 44. Okay. After 20 years. So from age 24 to 44. I only had access to a traditional 401, which I maxed out every year. Now I'm 44, I have access to a Roth 401 and I will max that out every year. I make too much for a Roth ira, and I'm considering doing a backdoor Roth on some of my existing 401, but it would be taxed at the 35% marginal tax rate. I'm wondering if my withdrawal, Ms. Post Tax and deferred would be enough to keep my taxes down in retirement. I'm wondering if my withdrawal mix. Okay, I don't. When he retires, he's 44, he wants to work for home.

[Big Al Clopine]

He's thinking ahead.

[Joe Anderson]

I think he doesn't have enough. So let's say he works until $64,000 for another 20 years.

[Big Al Clopine]

Yeah. And he's got all this money in Roth, I guess, as well as deferred, I think.

[Joe Anderson]

Yes. If you have diversification. So the concept of tax diversification is to have money in Roth IRAs in your pre tax 401s and then some money in a brokerage account. So as you're taking distributions from the account, it's all not locked in your retirement account because then you're just stuck at ordinary income rates. And the more money that you take out, let's say for trips or vacations or for inflation or whatever the case may be, the more doll, the more tax potentially you're going to pay. So if you have money in different areas, you can control your tax brackets more easily because you can pull your retirement account and stay in whatever bracket and then you can pull from your brokerage account or Roth account and stay in those lower rates. So having a diverse mix of Roth and $401 is key. He's 44, so he's still very young. And if he's going to work for the next 20 years. Yeah, Max out all Roth and go from there.

[Big Al Clopine]

Yeah, I like that. And the reason why this works, it's not like you're going to take half out of one and half out of the other. You're going to fill up whatever tax bracket you're in, probably with the deferred part, pay taxes on and maybe do the Roth for the balance. Of course there's a lot of variations on this, but that's the concept, right? You can control your taxes by how much you take out of each account.

[Andi Last]

The presidential election is next Tuesday, November 5th. How might a Kamala Harris presidency or another Donald Trump presidency affect your taxes, your wallet and your Retirement Savings Watch Cancel the Noise Economic and Market impact of the 2024 election with pure Financial Advisors Executive Vice President and Chief Investment Officer Brian Perry, cfp, cfa. It's on demand. Learn how the candidates policies may impact the deficit, the national debt, tariffs, tax reform, inflation and the US economy and the financial markets. Click the link in the episode description to watch Cancel the Noise Economic and Market impact of the 2024 election webinar and don't forget to vote. Then calculate a free financial blueprint to find out your likelihood of retirement success. Input your financial details and receive a comprehensive report with three possible future scenarios including taxes and actions you can take now to help achieve your retirement goals. Take control of your retirement future with a financial blueprint today. Click the link in the episode description to get started.

[Joe Anderson]

Let's see. Hi Andy, Big L and all knowing Joe.

[Andi Last]

He knows how to pat you on the back.

[Big Al Clopine]

This would be a question for you, Joe.

[Joe Anderson]

I love it. This would make every Monday of mine so much happier if I just read this right when I get out.

[Big Al Clopine]

You want me to read it for my sermon?

[Joe Anderson]

Yes, please do. All knowing, I have a question that I would love if you maybe touch on what are extended market index funds? Why should we have or not have them in our portfolios?

[Big Al Clopine]

Okay. All knowing Joe.

[Joe Anderson]

No clue. No idea.

[Big Al Clopine]

Let me tell you what an extended market index.

[Joe Anderson]

Oh, you've got some research here. See I don't read any of this stuff and Alan spends like months.

[Big Al Clopine]

I have no other job, remember? That's what you told me.

[Joe Anderson]

An extended market. I can make something up.

[Big Al Clopine]

No. Well here's what it is. Extended market just simply means it's an index fund that favors like smaller and value things that are not in the S&P 502. Who made that up? I don't know but it's like a cap of emerging. I mean they already have it.

[Joe Anderson]

Okay, I understand.

[Big Al Clopine]

Yep.

[Joe Anderson]

So in extended so and it extended outside of the standard core market.

[Big Al Clopine]

Or you could do the Wilshire 2000 or 5000 or no get same thing Russell.

[Joe Anderson]

Okay.

[Big Al Clopine]

Yep. Yeah.

[Joe Anderson]

So. Yeah. All right. Well it's the all knowing. Alright, we got one more. Should we post this?

[Big Al Clopine]

Yeah.

[Joe Anderson]

All right. So perhaps I missed a nuance here, but it makes me a little nervous that there was some hesitation in your voice that taking less than 4% distribution would be sustainable for 40 plus years.

[Andi Last]

This was specific to a question where somebody asked whether or not they could afford to have a 40 year retirement. But the rest of their question is very important here.

[Big Al Clopine]

Okay.

[Joe Anderson]

I was under the impression that less than 4% might be on the conservative side, considering that other financial advisors might recommend as sustainable. I do not appreciate that you mentioned that future.

[Andi Last]

I do appreciate.

[Joe Anderson]

Oh, I thought this was going to be a negative. Nancy, I do appreciate that you mentioned that future market performance and lack thereof can make a major factor in the long term success of the retirement. However, I also thought that the longer the span of time, the more chance you would take advantage of averages in market gains. Thanks for the great content. This is just a comment.

[Andi Last]

Yep.

[Joe Anderson]

But 40 year retirement at 4%? Yeah, you're probably right that over that time period you're going to receive the market averages. But averages don't mean anything. They don't. It's just math. As you're taking dollars out of your account, you're retired, so that means there's a demand for the portfolio. So as you're accumulating, averages are great. Some years you get 5%, some years you get negative 7%, some years you get positive 20, and so on and so forth. And over your 10, 20 year period, let's say if you average 8%, you average 8%. It doesn't matter when those or when those market returns hit the account, you average 8% because you weren't taking dollars from it. But what happens, it's called reverse dollar cost averaging. When you start taking dollars out over a 40 year time period, averages mean nothing. Because let's say if you take out your 4%, which Al and I thought would be more aggressive or we didn't feel comfortable with that, over a 40 year time period, maybe it's closer to three. So let's say you have $1 million hypothetically, and you take 3% out or $30,000 out of the account, but then it drops 20%. So if it drops 20% and then the next year it gains 20%, most people think, hey, I got my money back and I only took 3% out, so I'm fine. Al, if you lose 20%, how much do you need to get your money back?

[Big Al Clopine]

It's not 20%, it's about 25%.

[Joe Anderson]

I think because you're working at a lower balance. 20% of a million is not right at $800,000, right?

[Big Al Clopine]

Yeah. And 20%, $800,000.

[Joe Anderson]

20% of $800,000.

[Big Al Clopine]

$160,000 is not enough. You're not there.

[Joe Anderson]

And then you're also taking your $30,000 out of the account to live off of. So you need a lot higher rate of return to get caught back up. So that's why you look at a lower distribution rate. Now, if markets go up for a consistent period of time, three, four, five years, all right, you could take probably a little bit more, maybe you stuff a little bit more into cash where you can kind of cushion your lifestyle. That's why retirement income planning is so different than, like, accumulation, because you have all sorts of different types of risks. That's called sequence of return risk. So I don't know, I just babbled on.

[Big Al Clopine]

I think you did pretty well. I'll just add one more quick thing, and that is this. When we talk about the 4% rule, or 3% if you retire younger, this is just a guideline to figure out if you're close to being on track. The real truth is when you get to retirement and you're pulling money out, it should be a more dynamic approach, meaning it's something you look at every year depending upon what the market has done, what you want to spend, what you're invested in. There's a lot of things that can affect this. The 4% rule is not necessarily that magical. It's just a guideline to tell you if you're kind of on track.

[Joe Anderson]

Is that it for us today?

[Andi Last]

That is it for you, Joe. Yes. Thank you very much for answering all those. All of our YouTube viewers are going to appreciate it.

[Big Al Clopine]

All right, awesome.

[Joe Anderson]

We will see you all next time, folks. Show's called your money or your money, you, wealth. Oh, man, I'm tired.

[Andi Last]

This show that is you, Money, you, Wealth wouldn't be a show without you, and we love that you're a part of it. Bauer and Laney in Illinois, Brad in Michigan, N and N in San Francisco, and Elizabeth in Connecticut. Join Big Al spitball for you next week in episode 502 when you share YMYW with your friends and leave your honest reviews, comments and ratings for your money, You, wealth on YouTube, Apple Podcasts, Spotify, and the like. It helps us reach more listeners and viewers like you, and we appreciate you for it. To really make the most of your money and your wealth in retirement, schedule a free financial assessment with the experienced professionals on. Join Big Al's team at Pure Financial Advisors. They'll go beyond a simple spitball to provide you with a comprehensive analysis of your income, expenses, assets and debts so you've got a clear roadmap towards your retirement goals. They'll help you understand your comfort level with investment risk. To craft a plan with you that's aligned with your needs, goals, and risk tolerance, click the free assessment link in the Episode Description to schedule your financial assessment today. 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.