Rules for Inheritances and Making Roth Contributions for Others - 504

Summary

Your Money, Your Wealth Podcast Episode 504: Rules for Inheritances and Making Roth Contributions for Others

Release Date: November 19, 2024

Hosts:

• Joe Anderson, CFP®
• Big Al Clopine, CPA

In Episode 504 of Your Money, Your Wealth (“YMYW”), hosts Joe Anderson and Big Al Clopine delve into intricate financial scenarios involving inheritances, Roth IRA contributions, and strategic tax planning. This episode features insightful discussions on handling inherited trusts, joint ownership complications, spousal Roth contributions, and sophisticated Roth conversion strategies. Below is a comprehensive summary capturing all key points, notable quotes, and expert conclusions.

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1. Inherited Trusts and Roth Conversions: Ted and Georgette's Dilemma

Listener Profile:
Ted and Georgette from Madison, Wisconsin inherit $1.6 million through a trust and seek advice on converting these funds to a Roth IRA without triggering distributions.

Issue Raised:

• Can Ted and Georgette convert the inherited pre-tax money to a Roth IRA without distributing it?
• Should the trust own their home to utilize home equity for tax payments?

Discussion Highlights:

• Nature of the Trust:
  Big Al clarifies that inherited trusts are often irrevocable, meaning the beneficiaries have limited control over the corpus. “[05:17] Big Al Clopine: ...most cases, you want to keep the assets,” he explains.

• Tax Implications:
  Distributions from the trust can be taxable based on the type of income (interest or dividends). Capital gains are typically taxed within the trust unless distributed.

• Roth Conversion Strategy:
  Joe summarizes the situation, pointing out that the trust holds $1.6 million with a $1.2 million basis, resulting in $400,000 of potential capital gains. “[08:00] Big Al Clopine: ...there's no reason to buy a home through the trust. In fact, that would be a terrible idea…”

• Payment of Taxes:
  Big Al recommends using trust assets to pay conversion taxes by selling assets with minimal gains. “[09:31] Big Al Clopine: ...use trust assets to pay the tax for the conversion.”

Notable Quote:

“[09:31] Big Al Clopine: There's no question. So should he do conversions? Yes. And can you use the trust assets to pay the tax? Yes, you can.”
— Big Al Clopine

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2. Joint Ownership and Gift Tax Concerns: Melissa's Challenge

Listener Profile:
Melissa from Rockport, Texas adds her name as a joint owner on her parents’ bank accounts following a medical crisis, becoming the executor and a 50% beneficiary alongside her nephews.

Issue Raised:

• Potential gift tax implications due to joint ownership.
• Concerns about step-up in basis and equitable distribution among nephews.

Discussion Highlights:

• Gift Tax Implications:
  Joint ownership can trigger gift taxes, as transferring assets may exceed annual exclusions. “[14:11] Joe Anderson: That would. Because what's the annual gift?”
  Big Al suggests consulting an estate planning attorney to address possible gift tax returns.

• Step-Up in Basis:
  By becoming a joint owner, Melissa forfeits the step-up in basis, potentially increasing capital gains taxes for beneficiaries.

• Recommended Solutions:

  • Utilize Transfer on Death (TOD) designations to allow multiple beneficiaries without incurring gift taxes.
  • Consider placing assets within a trust to maintain beneficiary designations and avoid unintended tax consequences.

Notable Quote:

“[15:31] Joe Anderson: ...you have to file a gift tax return.”
— Joe Anderson

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3. Spousal Roth IRA Contributions: Theodore's Query

Listener Profile:
Theodore from Seattle, Washington, aged 61 with spouse Louise (60), both approaching retirement. They seek guidance on contributing to a Roth IRA for his wife.

Issue Raised:

• Can Theodore contribute to Louise’s Roth IRA despite not having current earned income?
• Strategies for maximizing Roth contributions and handling taxes.

Discussion Highlights:

• Spousal Roth IRA Eligibility:
  Joe clarifies that spousal contributions are permissible if one spouse has earned income. “[19:12] Joe Anderson: ...it's called a spousal Roth IRA or spousal IRA contribution. So good to go.”

• Contribution Limits and Planning:
  Both spouses can maximize their Roth contributions independently, considering income limits and tax brackets.

• Roth Conversion Advice:
  Big Al advises Theodore to use taxable or brokerage accounts to pay conversion taxes, ensuring that retirement funds remain intact. “[22:22] Big Al Clopine: ...use your brokerage account to pay the tax.”

Notable Quote:

“[20:40] Joe Anderson: ...if you're married to her, then you can put money into a Roth. It's called a spousal Roth IRA...”
— Joe Anderson

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4. Advanced Roth Conversion Strategies: John’s Comprehensive Plan

Listener Profile:
John from Colorado, retired at 63 with a substantial traditional IRA portfolio seeking sophisticated strategies for Roth conversions and tax management.

Issue Raised:

• Whether to convert $7 million in traditional IRAs to Roth IRAs while managing tax liabilities.
• Concerns about inheritance tax implications for children and overall tax efficiency.

Discussion Highlights:

• Roth Conversion Feasibility:
  Big Al acknowledges the complexity but supports conversions up to the top of the 24% tax bracket, suggesting careful mapping. “[32:44] Big Al Clopine: ...you have to be careful that you pull enough to pay the tax.”

• Tax Payment Strategies:
  Considering John's lack of post-tax income or sizable savings, Big Al proposes borrowing against real estate (HELOC) to pay taxes, minimizing direct withdrawals from retirement accounts. “[35:05] Big Al Clopine: ...borrow on your home...”

• Long-Term Planning:
  With John's retirement timeline, leveraging loans to handle immediate tax burdens allows for continued growth of IRA assets, optimizing future financial stability.

Notable Quotes:

“[35:05] Big Al Clopine: It is a heck of an idea... rates are high and it's not usually a very good idea. But in this case... borrow on your home...”

“[37:54] Andi Last: ...your financial assessments...”

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Additional Insights and Resources

• Cybersecurity Awareness:
  Andi Last highlights the importance of protecting financial assets from online scams and identity theft, promoting a cybersecurity webinar and an identity theft guide.

• Promotion of Free Resources:
  Listeners are encouraged to download the "Top 10 Tax Tips Guide" and watch related webinars to enhance their financial literacy.

Notable Quote:

“[28:40] Andi Last: ...learn about common scams and tactics and the best practices to adopt that will improve your digital safety...”
— Andi Last

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Conclusion and Upcoming Content

In wrapping up the episode, Andi Last informs listeners about the scheduling for next week's episode, promising answers to additional listener questions. The hosts also invite feedback and reviews across various podcast platforms and encourage scheduling comprehensive financial assessments with Pure Financial Advisors before year-end to prepare for upcoming tax changes.

Final Quote:

“[37:54] Andi Last: ...meet with our team either in person or online...”
— Andi Last

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Key Takeaways:

• Inherited Trusts Require Strategic Planning: Understanding the type of trust and its tax implications is crucial for effective Roth conversions.
• Joint Ownership Can Trigger Unintended Tax Consequences: Utilizing tools like TOD designations and trusts can help manage beneficiary distributions without incurring gift taxes.
• Spousal Roth Contributions Offer Flexibility: Even without direct earned income, spouses can benefit from Roth IRA contributions through spousal arrangements.
• Sophisticated Roth Conversion Strategies Involve Balancing Loans and Taxes: High-net-worth individuals might explore borrowing options to manage tax liabilities efficiently.

Listeners gain valuable insights into navigating complex financial scenarios, emphasizing the importance of tailored strategies and professional guidance to optimize wealth management and retirement planning.

Transcript

[Andi Last]

Ted and georgette in Madison, Wisconsin have inherited $1.6 million in a trust. Can they convert that money to Roth without distributing it? Should the trust own their home so they can use the home equity? Melissa in Rockport, Texas was added as joint owner on her parents bank accounts after a medical event. But what have they done? Should Ralph and Alice in South Carolina use the required minimum distribution from their inherited IRA to pay Roth conversion taxes? We'll find out today on youn Money, you, wealth podcast number 504. Plus, can Theodore in Seattle contribute to his wife Louise's Roth ira? Can Mark and Encinitas make Roth contributions for his grandkids? And finally, John would like Joe and Big Al's viewpoints on his Roth conversion strategy. And the fellows come up with a very unique way that John may be able to pay the tax on it. I'm executive producer Andi Last, and here are the hosts of youf Money, you, Wealth, Joe Anderson, cfp, and back from Hawaii, Big Al Clopine, cpa.

[Joe Anderson]

I was in Arkansas last week. Big Al, while you're in Hawaii.

[Big Al Clopine]

Yeah.

[Joe Anderson]

I don't know. What do you think is a little bit better, Hawaii or Arkansas?

[Big Al Clopine]

That's a tough call. If I had to pick, I personally would pick Hawaii. Yeah.

[Joe Anderson]

It's a coin toss. Coin toss. We're answering your money questions. Go to YourMoneyYourWealth.com, click on that special.

[Andi Last]

Offer, click on Ask Joe and Big Al on air and ask your money.

[Joe Anderson]

Ask. Yeah. Not the special offer. Why are you giving anything?

[Andi Last]

I mean, you can, you can click on the special offer if you want. You can download a white paper, but if you want a question answered, click Ask Joe and Big Al.

[Joe Anderson]

When is it going to be Ask Candy?

[Andi Last]

It's not. It's not. Because so many of our old podcast and TV episodes all say Ask Joe and Big Al. So we're leaving it like that.

[Joe Anderson]

Got it. All right, well, let's get to it. We got Ted from Madison, Wisconsin. He writes in it goes, Greetings, YMYW crew. I found your podcast through a Google search about three years ago. Enjoy the copious information. Did I get that right?

[Big Al Clopine]

Yeah, copious. Yeah. Which means a lot.

[Joe Anderson]

A lot. Killed it. Yep. And the humor. Now listen, while walking the three border collies outside the pasture, where are three horses Graze? I can just picture Big Ted.

[Big Al Clopine]

Did you ever have a horse?

[Joe Anderson]

No.

[Big Al Clopine]

No.

[Andi Last]

Ever ridden a horse like you have in high school?

[Big Al Clopine]

Yeah.

[Joe Anderson]

Okay, that was a few years ago.

[Big Al Clopine]

Got it.

[Joe Anderson]

Madison, Wisconsin. I lived in Madison, Wisconsin. For a little short stint there.

[Big Al Clopine]

Yeah. I was thinking maybe you had a horse. Yeah, no, no, no.

[Joe Anderson]

I lived kind of in the city. Let's see. My wife Georgette retired from nursing this year at 55. Yo. She drives the dogs around in the 2023 Toyota Sienna. It's a minivan. And pulls her horse trailer with a 2024 Toyota Tundra. I'm a 59 year old engineer and plan to work until at least 65. I drive the vehicle Georgette leaves behind. Georgette drink of choice is a lime margarita in the summer and a fine cabernet in the winter. I enjoy anything bottled by Founders Brewery.

[Andi Last]

As a brewery in Grand Rapids, Michigan, home of the delicious all day ipa.

[Joe Anderson]

All Day ipa.

[Big Al Clopine]

Okay. Means you can drink at any time during the day and just.

[Andi Last]

I guess so.

[Big Al Clopine]

Good game.

[Joe Anderson]

Yeah. I'm drawing a blank on.

[Big Al Clopine]

Don't remember that one.

[Joe Anderson]

No, never had. No.

[Big Al Clopine]

No.

[Joe Anderson]

The only. I don't drink microbiome. I know the only ones I did was from Wisconsin. But it's just. I'm drawing. It'll come to me.

[Big Al Clopine]

Okay.

[Joe Anderson]

All right. We have $3.2 million in tax deferred accounts, but no spare cash for which to pay for Roth conversions. Our home is worth $850,000 with $500,000 in equity. My parents left me a trust worth $1,600,000 with a $1,200,000 basis. Here's the question I'm hoping you'll spitball. Okay. He said he has no cash to pay for Roth conversions, but he's got $1,600,000 in a brokerage account. That sounds like liquid cash to me.

[Big Al Clopine]

Well, it's in a trust. It's probably an irrevocable trust. I'm guessing maybe.

[Joe Anderson]

Ah. He can only get the income because.

[Big Al Clopine]

A trust, so it's not really his. He's a beneficiary of the trust, I'm guessing.

[Joe Anderson]

Okay. Is there a reasonable way to use the trust without distributing it to convert some of all or this pre tax money? Should the trust buy our house to free up the equity? Do you think using the trust this way is a good idea? Do you have any other suggestions for leveraging the trust for this purpose? Thanks. Ted and Georgette Baxter.

[Andi Last]

That's from the Mary Tyler Moore Show.

[Joe Anderson]

Got it. All right, so people get confused when they inherit money that is in a living trust from let's say a parent. So they're the trustee or successor trustee. Or they could be the beneficiary of the trust, but it could be A total, like a revocable trust. So they could just rename the trust into their name, or is it in an irrevocable trust where they're the income beneficiary of it?

[Big Al Clopine]

Right.

[Joe Anderson]

Do they have access to the corpus of the trust or not?

[Big Al Clopine]

You know, I mean, it depends on the trust document. But I would say, and I'm not an attorney, but what I've seen more often than not is that a living trust from your parents, what happens is when you inherit it, it becomes an irrevocable trust. Whether you can get rid of the trust or not, that's up to the trust documents. A lot of them you can, some you can't, Joe, but. But in many cases, you want to keep the assets.

[Joe Anderson]

So do you have a trust?

[Big Al Clopine]

I do.

[Joe Anderson]

Right. You have assets in your trust.

[Big Al Clopine]

I know, but if I. If Ann and I were to pass away, the kids would get it, and it's irrevocable to them.

[Joe Anderson]

So you're going to keep the money in trust and then you have distribution rights, or is it going to be an outright distribution at death?

[Big Al Clopine]

No, it'll be in the trust. The kids have the ability they can.

[Joe Anderson]

Do whatever they want with the assets just to protect it from predators, which.

[Big Al Clopine]

Is probably the case here. And so the real answer is this. When you distribute things from the trust, Joe, it's taxable to the extent there's interest income or dividend income. So the first money that comes out of the trust is considered income, goes on your tax return, but any extra money that comes out is just principal. There's no taxation on that. So that's the way to do this. There's really no reason to buy a home, your home, through the trust. In fact, that would be a terrible idea because you would blow the $500,000 exclusion when you sold the home later. So, yeah, I mean, I guess it depends upon the trust document, but in all likelihood, income will come out first on a distribution, and then he's got.

[Joe Anderson]

$1.2 million of basis, so he's got $400,000 of gain. So that would be a flow through. That would be taxed at capital gains.

[Big Al Clopine]

Yeah. And usually with trust, the capital gains are taxed in the trust, but interest and dividends are taxed to whoever keeps it. The trust would pay the tax if it keeps it, if it distributes it, then the beneficiary attacks. That's typically how it's done.

[Joe Anderson]

I've seen it done.

[Big Al Clopine]

Oh, you're a trust expert?

[Joe Anderson]

No, no. Most people set up like a Revocable living trust to avoid probate.

[Big Al Clopine]

Now I understand that, but once, once the, the person that set up the trust, the grantor and spouse dies, then it becomes the irrevocable trust of the kids, subject to the terms of the trust. And most attorneys now would tell you keep the assets in the trust because you have liability protection, but you don have to.

[Joe Anderson]

So he could distribute 100% of the trust to his own living trust?

[Big Al Clopine]

Yeah, assuming he's. Assuming that he's the only beneficiary.

[Joe Anderson]

Right, right, right, right.

[Big Al Clopine]

There's a lot we don't know about this one.

[Joe Anderson]

But should he use those dollars that are sitting in the trust to help pay the tax for the conversion?

[Big Al Clopine]

Yeah, that's really the second question that he didn't ask. What do you think about that?

[Joe Anderson]

Well, no, that is the question. Is it reasonable way to use this trust without distributing it to convert some of this.

[Big Al Clopine]

Oh yeah, you're right.

[Joe Anderson]

Pre tax money. So he doesn't want to distribute it, he wants to keep it in there. So do the conversion and just distribute enough out of the trust to pay the tax.

[Big Al Clopine]

Yeah. And if there's a little tax to pay from the income, either the trust will pay it or he will pay it. I guess what he's saying is there's no cash, so it's all stock. So what you do in that case is you look at the stocks that have the least amount of gain and that's what you end up just selling and then distributing. So there's very little capital gains. It doesn't have to be done pro rata where you say you sell a whole bunch or maybe you've got multiple mutual funds or whatever it may be, just sell, sell the particular fund or stock that has the least amount of gain.

[Joe Anderson]

So he's going to work until age 65 and I'm assuming that they're going to live off of his salary until age 65. So they already have $3.2 million and he's 59. So he's going to work another six years.

[Big Al Clopine]

Right.

[Joe Anderson]

And he's probably maxing out the 401k because they have several million dollars in a pre tax account, let's say in 10 years with those contributions or 16. You know, there's a. He's going to have a tax problem.

[Big Al Clopine]

There's no question. So should he do conversions? Yes. And can you use the trust assets to pay the tax? Yes, you can.

[Joe Anderson]

We should have just said that. That would have been so much easier.

[Andi Last]

Yeah, but you guys talk in circles and you're known for that, so it works.

[Joe Anderson]

Well, sometimes we get way too much information and sometimes we don't get near enough. We're just trying to picture what the hell's going on here, but we do the best we can.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Yes.

[Andi Last]

You know what I forgot when we were talking about the special offer at the top of the show? This week's offer is actually only available for a limited time. It's the top 10 tax tips guide. And you gotta download it before the special offer changes sometime this Friday because it won't be available again for months. This is the companion guide to this week's episode of youf Money, you, Wealth TV, which is called 10 Tax Cutting Moves to Make. Now, there are several ways to lower your 2024 taxes, but most of them need to be done by December 31st. Which means that as of today, November 19th, you've only got six weeks left to convert to Roth, max out your retirement contributions, or harvest your tax losses or gains for it to count for 2024 when you do your taxes. Find out more about these and other things you can do before the clock strikes 2025 so you send less of your money to the IRS. Watch 10 tax cutting moves to make now and Download the Top 10 tax tips guide before the special offer changes this Friday. Click the links in the episode description to watch the show and to download the free guide. Now let's get back to those inheritance issues.

[Joe Anderson]

Hi, Andy. I hope you're well. How are you?

[Andi Last]

I am, thank you. Thank you very much, Melissa.

[Joe Anderson]

Okay, very good. I last wrote to ymyw in 2020. Cheery. Time flies. But I've remained a loyal listener. Okay, well, thank you very much. Since we retired six years ago, our net worth has doubled. So thankfully that's from listening to us, Big Al.

[Big Al Clopine]

I don't think so.

[Joe Anderson]

No, we are breezing and we give Joe and Big Al a great deal of credit. Oh, look at that.

[Big Al Clopine]

Wow.

[Joe Anderson]

Wow.

[Andi Last]

You left out the fact that she gave me a great deal of credit too. But that's fine.

[Joe Anderson]

I didn't see that. We are breezy and we give Joe and Big Al and you. I'm sorry, Andy. A great deal of.

[Big Al Clopine]

Okay, let's say that all I do.

[Andi Last]

Is convey the emails.

[Big Al Clopine]

It's cool. I'm sitting here reading it. I didn't even see. Did. Sorry.

[Joe Anderson]

Terrible.

[Andi Last]

No worries.

[Big Al Clopine]

It's because it was. Went to the next line and we got.

[Joe Anderson]

All right. Husband and I have a net worth of 6.5 million and my 90 something parents have a net worth of $2 million, almost completely of CDs in cash. So there shouldn't be much of a step up in basis in their future estates. We are all debt free this summer. We are experiencing a medical crisis, and we felt sure we would lose one parent. When the smoke cleared, my parents added me as joint owner on all of their bank accounts with rights to survivor. I am the executor and also beneficiary of 50% of their estate. I have two nephews who will inherit 25% each. I intend to do right by them.

[Big Al Clopine]

Well, if they're the beneficiaries, not anymore.

[Joe Anderson]

Oh, because she's joint, go to executor.

[Andi Last]

And beneficiary of 50%. So.

[Joe Anderson]

All right, I'll do right by then.

[Big Al Clopine]

Okay.

[Joe Anderson]

But what have I done? I don't. When the time comes after the loss of both parents, will I essentially be giving the nephews a gift when I distribute their shares to them? Is there a gift tax? Should my parents file a gift tax return? Thanks so much, Melissa from Rockport, Texas. All right, so that's one of the last things that you should do, and I think she realized this after the fact, is that sometimes people, like parents, will put kids on joint title of either assets that they have outside of retirement accounts. And this is the issue that comes into play is that now you're an owner, there's no step up in basis. She had other beneficiaries. Well, now she's the owner 100%, but she still wants to do right by the nephews. So she has to give them, what, $500,000 each.

[Big Al Clopine]

That's what this would imply, correct? That would be require a gift tax return.

[Joe Anderson]

That would. Because what's the annual gift?

[Big Al Clopine]

What is it, $18,000? Whatever it is now. Yeah. So a better way to do this would have been set up an account on it as a transfer on death. That way you can have multiple beneficiaries, and that would have solved this very easily. Instead of joint ownerships with rights of survivorship, what that means is that when both parents pass away, now, you are the sole owner. You own it. It's your asset. And if you want to distribute some of that, you can. But it's a gift, so you have to file a gift tax return. So then I guess the question, Joe, is can this be undone? And we're not attorney attorneys. I don't know. But if possible, that would be something you should try to do is undo this. If you can.

[Joe Anderson]

Totally agree there. Yeah. Transfer of death. And then you are. Or Just put it. Do they have a trust? You can put it in the title of the trust.

[Big Al Clopine]

You can put it in the trust.

[Joe Anderson]

Power of attorney, financial. And so you could have, you know, if there's cognitive issues, then she could step in and help.

[Big Al Clopine]

Yeah, because she could be. Limited power of attorney. Do it that way so that the. So that the beneficiaries are all intact. That would have been the smarter way to go.

[Joe Anderson]

Yeah. Taking. And she realizes that after the fact, it's like, okay, well, here we have a medical issue. Hey, let me get on title so I can help you, and I can figure all this stuff out. And, you know, and that's what a lot of people do. And that seems like the right thing to do. All right. I have some financial acumen. I can come in, I can step in, and I can help you out. And then after the fact, it's like, oh, my gosh, what did I just do? Because now there's all these kind of weird laws and loopholes and things like that, and they already have a phenomenal estate of like $7 million. So now you add the $2 million on top of that, and then now they're utilizing their gift exclusions and exemptions, things like that, when they might need it themselves.

[Big Al Clopine]

Yeah. And does she have to pay? Do the parents have to do a gift tax return? Possibly. So that you don't have to get with an estate planning attorney.

[Joe Anderson]

Because the parents gifted her a million bucks.

[Big Al Clopine]

Yeah. I mean, or two, actually, the whole account. Right. So.

[Joe Anderson]

Yeah.

[Big Al Clopine]

Anyway, see what. See what can be undone, if possible.

[Joe Anderson]

This is Theodore. I'm 61, and Louise, my wife. She's age 60. We're living in North Seattle. Louise likes red wine from one of the many wine club memberships that we have. I drink a cold pilsner red wine occasionally. Fairmont, Lush. What's a Fremont? Fremont Lush.

[Big Al Clopine]

Fremont.

[Andi Last]

That is an ipa.

[Big Al Clopine]

Oh, wouldn't work for you. There you go. Okay.

[Joe Anderson]

Got no pets. We raised two young men who are financially independent. Yippee.

[Big Al Clopine]

That was very good.

[Joe Anderson]

Yeah.

[Big Al Clopine]

Killed it.

[Joe Anderson]

My wife and I are both elementary school teachers. I plan on retiring after 33 years this coming summer at the age of 62. My pension will be around $38,000 a year with a COLA, 3% annually. My wife will continue working until she's 65 and have a pension about $40,000. She will pay my medical until I'm 66. She's on a different state plan than me and will be teaching 12 years, so is unable to collect her pension until 65. We will both collect Social Security at $67,000. My Social Security will be $38,000 and Louise will be $34,000. I have a 403 state teacher account of $930,000, additional 403 of $250,000 and $70,000 in Roths. Luis has a 260,403 and a $70,000 Roth. Together, we have a brokerage account of $210 and $60,000 in our savings account. Louise will continue to add $2,000 a month to her 403 and contribute $8,000 yearly to the Roth until retirement. Our annual income is $260,000. However, we put into our various accounts about $5,500 per month of that income. We would like to spend $160,000 annually after taxes when we are both retired. During the four years until Louis Louise retires, her salary will be $142,000, and I will have my pension of $38,000, adding up to $180,000 gross income for those years. We'll be taking little from any investments or our retirement accounts during that time. Here's our questions. Is the plan feasible? Sure. Sounds like it.

[Big Al Clopine]

I think so, too.

[Joe Anderson]

Let's see. $2 million liquid, roughly. And then the bridge. When he retires, she's going to continue to work. So he's got his pension of 40 grand and she's got her income.

[Big Al Clopine]

Yeah. So when she retires, then she's got her pension, he's got his pension. The $2 million is going to be worth more because she's adding money to it. Right. And then that's even without Social Security. So, yeah, I think this looks pretty good.

[Joe Anderson]

Yep. As I understand it, I can contribute to my Roth IRA until Louise retires, since she is contributing to a Roth. Is that true? Well, kind of. There's a spousal contribution, so this is a really good question.

[Big Al Clopine]

It is a good question.

[Joe Anderson]

Theodore is retiring, so he doesn't have earned income. So there's certain qualifications that you have to have to put into retirement accounts, and earned income is one of them. But he's retired. He's collecting a pension. But the pension isn't earned income. It's not classified, even though he earned it. From an IRS perspective, it's not called earned income.

[Big Al Clopine]

Yeah. The reason is because he didn't currently pay Social Security taxes on it.

[Joe Anderson]

So he's like, well, if my wife puts into a Roth, can I put in or can I put into a Roth? Well, the qualification has Nothing to do with her putting money into a Roth ira. The qualification is she has earned income. If you're married to her.

[Big Al Clopine]

Correct.

[Joe Anderson]

If she has earned income and you're married to her, then you can put money into a Roth. It's called a spousal Roth IRA or spousal IRA contribution. So good to go.

[Big Al Clopine]

Yep.

[Joe Anderson]

My employer in the last year is giving a Roth option. Can I have two Roth accounts? What is the max for both? Okay, well, now you're confusing two different things. You got a 403. That's a Roth. You can absolutely fully fund that. And then you can fully fund a Roth ira.

[Big Al Clopine]

Yeah, two different things.

[Joe Anderson]

Two totally different things. You got the 403 or a 401. For those of you that have a 401 plan or 457. Let's say he has a 457 with a Roth option, which I believe he does. He could go 100% Roth in all of the plans.

[Big Al Clopine]

Yep.

[Joe Anderson]

So the limit on 403 B's.

[Big Al Clopine]

30,000. 3500. Yeah.

[Joe Anderson]

And then 8,000 for the Roth.

[Big Al Clopine]

Correct.

[Joe Anderson]

So, yeah, you could fully fund that and then you could do a conversion. Here's number four. Here's the Roth conversion show with Big Al.

[Big Al Clopine]

No, I think it's the JoJo show.

[Joe Anderson]

I think we are very underfunded in Roths. Would it be wise to start doing conversions? If so, how do we choose the amount each year that the account. How do we choose the amount each year? And what account do we use to pay the taxes? Thank you for any non advice you can give. Thanks, Theodore. This is not advice at all. Use your taxable account. Use your brokerage account to pay the tax. Should it make sense to do conversions, your fixed income is going to be roughly 150,000 doll per year. You're not going to touch the $2 million that you currently have now for. Maybe for a while. For a while.

[Big Al Clopine]

Maybe for a long time.

[Joe Anderson]

Yeah. The amount that you pull out is probably not a lot.

[Big Al Clopine]

Right.

[Joe Anderson]

So does it make sense to do conversions? I would say yeah, you would probably want to map it out a little bit. But off the back of the envelope here, I would say yeah, I think so too.

[Big Al Clopine]

And I would probably, given your situation.

[Joe Anderson]

So he retires at the end of.

[Big Al Clopine]

This year, in the summer. This year. So should he do a conversion this year? Depends upon his income and whether he got extra vacation pay and whether it makes sense. But the thing is. Probably stay in the 22% bracket.

[Joe Anderson]

Yeah, stay in the 22% in the top of the 22% taxable income is.

[Big Al Clopine]

Yeah, that's. Let me see here. That's a couple hundred thousand dollars.

[Joe Anderson]

So taxable income. So it's not your gross income. Adjusted gross. So you have to look at your tax return and kind of forecast this out. So look at your taxable income, stay in that 22% tax bracket.

[Big Al Clopine]

Yep.

[Joe Anderson]

And that's where I would kind of start. And if I were to pay the tax, it would pay it from my cash or taxable.

[Big Al Clopine]

Yeah, I would do. And to say that another way, 200,000 is the top of the bracket. Standard deduction is about $30,000. So total income about 230,000 ish is what you could do. So it'd be your income, your wife's income, plus Roth conversion, no more than $230,000.

[Joe Anderson]

Hi, Andy. Joe, Big Al. Love the show. Have watched almost every episode. Wow. Join occasional 15 year old Scotch, drive a minivan. Married 63 years old, wife 61, both retired. All right, that's right to the point. Love it. We got Ralph and Alice, the Honeymooners. Did you make this up or is that what he wrote in?

[Andi Last]

That's what he wrote in.

[Big Al Clopine]

Okay, good.

[Joe Anderson]

Okay, very cool. So let's see here. We got $34,000 a year. It's a pension income with the cost of living adjusted. We have $1,300,000 in deferred assets, $100,000 in a brokerage account, $50,000 in my savings account, and $250,000 in our Roths. Okay, so 162,000 in an inherited IRA prior to the 2020 stretch rules. RMD about $6,500 currently. No debt in 12% tax bracket, 7% state tax bracket. Drawing about $40,000 a year from traditional IRA currently on the top of the pension for living expenses. Social Security at 70 will be $55,000 a year combined. I'm having a hard time to justify using my cash buffer and leaving us cashless. Even the event of a market downturn. Planning on doing a conversion starting this year of about $40,000 and using the RMD from my inherited IRA to pay the taxes. Trying to figure out if Roth conversions make sense for us. Does making the conversion and paying the tax out of the conversion kill the benefits? If we won't take roth withdrawals for 10 to 15 more years. So he's got an inherited IRA and so he's got an RMD from the inherited IRA of $6500 that is mandatory that he has to take out even though he's not of RMD age because he inherited it from a non spouse. So he's like, should I take that money and pay the tax to do a conversion? Does it make sense?

[Big Al Clopine]

Okay, what'd you do?

[Joe Anderson]

Let's see here. Well, Ralph and Alice, it's kind of like almost the same. He's got 2 million bucks roughly. All right. And then the fixed income he has with the pensions and Social Security is roughly $100,000. They spend $74,000.

[Big Al Clopine]

Yeah. So fixed income, when Social Security kicks in will be greater than spending. So they don't necessarily need their tax deferred, as she says, or he says, it's going to keep growing for 10 or 15 years, but they're not going.

[Joe Anderson]

To pull Social Security for another 10 years probably or eight years. Call it.

[Big Al Clopine]

That's true.

[Joe Anderson]

Right. So they got a bridge of eight years. So they're pulling $40,000 on top of their pensions. Their combined pensions is 34,000.

[Big Al Clopine]

Right.

[Joe Anderson]

They're spending 74.

[Big Al Clopine]

That's about a 2% distribution rate right now. So if it's invested in stocks and bonds, that could earn, let's call it 6%. It's still going to grow.

[Joe Anderson]

He's got $160,000 roughly in taxable and cash. So don't take the cash. Don't look at the brokerage account and see if there's some. Or take the rmd. What are you going to do with the rmd?

[Big Al Clopine]

Yeah, I would start with the inherited rmd. I think that's a good use of it. And then if you want a little extra from the brokerage account. But yeah, go ahead and stay in that 12% bracket because that's what you're in right now. I did a little quick math and I think maybe you could convert even a little bit more, but I think it would all be in the 12 bracket.

[Joe Anderson]

Yeah. Trying to figure out make sense. Look at Big Al doing a little work for you.

[Big Al Clopine]

I would do it.

[Joe Anderson]

I do too. We got Mark from Encinitas writes in, he goes, I have five grandchildren age 2 to 18 and have started a savings account for each of them. Should I put money into a Roth IRA for each or just keep it in a savings account? Well, Mark, they need earned income.

[Big Al Clopine]

Yeah, that's the key.

[Joe Anderson]

That two year old.

[Big Al Clopine]

Yeah. So the 18 year old probably, I'm guessing, has earned income. So maybe that's a good idea. And the ones that are, anyone that has earned income. Yeah, you can do that. But if they don't, you can't do it.

[Joe Anderson]

Yeah. Mark, you can contribute to your grandkids accounts, but they just need to show income that they're paying into Social Security. Yeah, and up to the limit, whatever's greater. So $7,000. So if they make $5,000 of earned income, then they can. You can contribute $5,000 into a Roth IRA for them.

[Big Al Clopine]

Yeah, because the idea is it's a retirement account. Right. And so you have to have income to put money into a retirement account. So that's where this comes. It can come from you, but they have to have earned income to qualify for it.

[Andi Last]

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[Joe Anderson]

All right, let's go to John. Hi, Al and Joe. Hello. I recently found your show and have enjoyed hearing your viewpoints. Viewpoints, Al. Okay, I don't think we had viewpoints. He sounds like someone with some cash. My wife and I are 63 and retired. Our drink of choice is a craft beer and we are driving a 2013 and 2015 Tesla Model S. Oh, they.

[Big Al Clopine]

Both have Model S's. Cool. Look at that.

[Joe Anderson]

Our only debt is $280,000 for 12 years. At 2.125%, my wife receives a pension of $2,300 per month in monthly Social Security reduced by WEP is 1150. Plan on waiting on my Social Security at age 70.5. Why would you wait until 70.5?

[Big Al Clopine]

It's actually $70,000.

[Joe Anderson]

It will be $50,000. So don't wait, John, till 70 and a half. 70 is when you want to take it. We estimate our annual spending budget to be $210,000 to $260,000 a year, depending on how much traveling we do or help our family members. I knew this guy had cashew. Points.

[Big Al Clopine]

Yeah.

[Joe Anderson]

I'm like, okay, there's cash involved.

[Big Al Clopine]

I never associated that word with cash, but you know something, I.

[Joe Anderson]

He's sophisticated.

[Big Al Clopine]

Yeah. Okay.

[Joe Anderson]

It's like, hey, I like your friendly banter. It'd be like, yeah, he's probably. I love the viewpoints that you guys share. Cash.

[Big Al Clopine]

Got it. Okay, I'm following you now.

[Joe Anderson]

All right. We have $7 million in traditional IRAs. My wife has $2 million and I have $5 million. She has $20,000. Roth and I have a $10,000 in Roth. We do not have any post tax investments. We are looking at current tax rates, our withdrawal rate and how much the IRAs will become based by the time we hit RMD age at age 75. Does it make sense to convert to the traditional IRA money to a Roth by maximizing 24% tax bracket this year? Next. All right, then decide what is the best based on the new tax rates. 20, 26. The taxes will be paid by the funds withdrawn from the traditional ira. Since we don't have any post tax income or savings to offset the Roth conversion dollars, we would like to minimize the taxes going forward and are looking at scenarios such as one of us are passing in the survivor filing as an individual versus Mary. We are concerned with leaving the funds to our three children. They are all making good money and the inheritance will just jack up their tax brackets over the next 10 year window. We appreciate the spitball on how to get the most out of the money out of the traditional ira. Thanks, John. John, thanks for the question. Congratulations on the wonderful nest egg that you and your wife have saved over the years. 63 years old and Al, I'd like to hear your viewpoint.

[Big Al Clopine]

Okay. I would say, I mean Joe, we don't normally recommend people do a Roth conversion and pay the taxes with the money out of the ira. In other words, you have to pull extra money out just to tax. However, in certain cases where it's rather extreme, like you have an IRA worth $7 million and no cash or brokerage account to speak of. Yes, I would seriously think about doing it. I would go to probably the top of the 24% bracket. Like John was saying. Here's the tricky part though is it's not like, let's say they're spending 210 to 260,000 but they have to withdraw probably 60, 70, 80,000 more just to pay the tax on that.

[Joe Anderson]

I know.

[Big Al Clopine]

So there's probably not that much room. There's some, there's some. And I would do it to the Extent. I mean, the top of that 24% bracket is what, 384,000. We add the standard deduction to that, we get to about 3,415,000 of total income. Maybe that's as much as you want, but you just have to be careful that you pull enough to pay the tax, because if you don't, then the next year you got to pull extra out to pay the tax from last year that you're going to have to pay the tax this year. So it's just. It's a little tricky calculation.

[Joe Anderson]

Right. It's a mess.

[Big Al Clopine]

It's a good problem.

[Joe Anderson]

Yeah, it's a great problem to have. It's just trying to map this thing out. And what's going to be the best solution here? He's young enough, so it's not like he's 73 years old and has this problem. So he has time to leak this thing out before the RMDs kick in. I would like to understand maybe a little bit more about the real estate. He's got $280,000, 12 years left, 2%. Is there a HELOC or something maybe that he could get some liquid assets from that he's got plenty of cash to pay the debt off. Because once the RMDs hit, potentially, let's say in 10 years, at 7, and let's say he's taking a 2% distribution, it grows at 5, I mean, at 3% even, of growth on $7 million over 10 years, it's still a giant number.

[Big Al Clopine]

It is. So that's a heck of an idea. And I can't believe we haven't talked about that for a while. Yeah. Rates are high and it's not usually a very good ide. Yeah. But in this case that there's so much in ira, what we're suggesting is to borrow on your home, which is normally not what you want to do in retirement, but you borrow on your home, use that money to pay the tax. Joe. And then when the RMDs kick in, you pay that thing off quickly because you have more money than you got.

[Joe Anderson]

More money coming out than you can spend.

[Big Al Clopine]

Right. And that's a more tax efficient way.

[Joe Anderson]

To do this because then you're just paying interest versus the tax upon the tax. Upon the tax.

[Big Al Clopine]

Yeah. I would say for 99% of the people, this is a bad strategy.

[Joe Anderson]

Terrible. But for John, it might make sense. It's just looking at the numbers, there's going to be a cost to get this money out.

[Big Al Clopine]

Correct.

[Joe Anderson]

And so it's either going to be tax to pay the tax. And what I mean by that, right, you have to pull money out of the retirement account, you have to pay tax on that money and then you give it back to the IRS because of the tax that you had to pay to get the tax out to pay the tax. Or you take a loan and you pay 6% on the loan. I think that could be a cheaper way. But when people get close to retirement, they don't want to have added debt. And he's already got $280,000 is my only debt. We're only paying 2%. That all looks great. Where's John from? Do we know what state he lives in?

[Andi Last]

This one he emailed Infopure, so he didn't actually give us the information. All we know is that it's John.

[Big Al Clopine]

Anyway, I think I just want to be really clear that this is not a great strategy for almost everybody.

[Joe Anderson]

This is a very specific ball of spit for John.

[Big Al Clopine]

Yes, that's a good way to say.

[Joe Anderson]

It, but again, congrats. Hopefully our viewpoints shed some light. But yeah, it's in a good spot. You just map it out. He sounds like a really bright guy. Where.

[Big Al Clopine]

Yeah.

[Joe Anderson]

What's going to be the. What's going to be the most comfortable for you to sleep at night?

[Big Al Clopine]

Yeah. The tricky part.

[Joe Anderson]

Or you don't do anything.

[Big Al Clopine]

Yeah, the tricky part for me is at 63, you've got 12 years before R and D. So you want to have extra debt for 12 years. You just have to decide whether this makes sense for you.

[Joe Anderson]

Or he doesn't do anything.

[Big Al Clopine]

Yeah.

[Joe Anderson]

And then you just wait.

[Big Al Clopine]

Right.

[Joe Anderson]

And then you're right. It's like, okay, well now you have a lot larger nest eggs and then you have no debt. But your tax bill is going to be giant.

[Big Al Clopine]

Yeah. You get to pick or you just do what we originally said is you do enough Roth conversion just to get.

[Joe Anderson]

To the top of the 24.

[Big Al Clopine]

Get to the top of the 24 and save enough to pay the tax for what you pulled out.

[Joe Anderson]

All right, thanks for the question.

[Andi Last]

John Ricochet J in Colorado and Barney and Betty. We had a last minute shuffling of the email deck this week and your emails will be answered next week and episode 505, along with emails from Micah in South Dakota and Amir in New Mexico. I promise. I appreciate your patience. We recently got a comment on our YouTube channel from a listener who didn't know we had turned on comments earlier this year. So, yes, comments are Open on our YouTube channel. Come watch this episode and join in the conversation. You can also leave your honest reviews and ratings for your Money, you, Wealth and Apple Podcasts, Amazon, Audible, Castbox, GoodPods, Pandora, PlayerFlam, Podcast Addict, Podchaser, and Podknife. Comment and let me know if I left any out. The end of the year is almost here and a lot of changes will be coming along with the new administration. In January, it would be a good idea to schedule a no cost, no obligation comprehensive financial assessment with one of the experienced professionals on Joe and Big Al's team here at Pure Financial Advisors to see if your retirement plans are in good shape before the year ends. Do it now while there are still open slots on the calendar, click the free assessment link in the episode description or call 888-994-6257 and meet with our team either in person or online. Your Money, you, Wealth is presented by Pure Financial Advisors, a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. However, 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.