When to HOLD OFF on Doing Roth Conversions - 529

Summary

Your Money, Your Wealth Podcast: Episode Summary - "When to HOLD OFF on Doing Roth Conversions - 529"

Release Date: May 13, 2025

In this episode of Your Money, Your Wealth, hosts Joe Anderson, CFP® and Big Al Clopine, CPA delve into nuanced strategies surrounding Roth conversions, capital gains tax optimization, and early retirement planning. With their signature blend of humor and expertise, Joe and Big Al address real-life financial dilemmas posed by their listeners, providing actionable insights tailored to diverse financial situations.

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1. Navigating Roth Conversions in High Tax Brackets

Listener Profile:

• John from Boston finds himself in the 32% tax bracket due to substantial royalty income from a successful textbook. At 61 years old, John is contemplating whether to proceed with Roth conversions despite his high taxable income.

Discussion Highlights:

• Big Al Clopine initiates the discussion by breaking down John's financials, emphasizing the impact of RMDs (Required Minimum Distributions) and ongoing royalty income.

  [02:24] Big Al Clopine: "Royalties continue, then convert."

• Joe Anderson highlights the uncertainty surrounding the longevity of royalty income, suggesting that Roth conversions might be deferred until royalty streams diminish.

  [03:20] Joe Anderson: "Maybe a way to think about it, if you think that royalties are only going to be around for, let's say five years, is don't do Roth conversions yet..."

• Andi Last and Big Al further analyze John's situation, considering future tax brackets and the potential for minimizing tax burdens through strategic Roth conversions.

  [13:10] Andi Last: "And if they drain it out, you probably end up paying higher taxes doing the Roth conversions than you might be otherwise if you did less."

Key Takeaways:

• Evaluate the sustainability of additional income streams (like royalties) before committing to Roth conversions.
• Consider the timing of conversions to align with periods of lower taxable income.
• Balance between maintaining liquidity and optimizing tax efficiency.

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2. Balancing Roth Conversions with Capital Gains Tax Strategies

Listener Profile:

• Bert and Ernie from New Jersey are evaluating whether to pursue Roth conversions or capitalize on 0% capital gains tax rates amidst their financial growth.

Discussion Highlights:

• Big Al Clopine deciphers the listener's query, focusing on leveraging capital gains tax rates versus Roth conversions.

  [17:21] Big Al Clopine: "Should I convert in the 32% tax break?"

• The hosts explore the intricacies of qualified dividends and capital gains, striving to clarify the listener's terminology and strategy.

  [20:05] Andi Last: "He's talking about the percentage of his income that's qualified versus non-qualified."

• Andi Last advises on prioritizing Roth conversions, especially when poised to exceed favorable tax brackets, while Big Al emphasizes maintaining diversification to preserve liquidity.

  [25:47] Andi Last: "I think that's more important. However, there could be an exception, and that is if you've got brokerage investments that you would like to sell and diversify..."

Key Takeaways:

• Understand the distinction between qualified and non-qualified income to optimize tax strategies.
• Prioritize Roth conversions when expecting to enter higher tax brackets due to income changes.
• Maintain a diversified portfolio to balance tax efficiency with investment flexibility.

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3. Early Retirement Planning and the Role of Bridge Accounts

Listener Profile:

• Michael and his wife from Bellevue, both 34 years old, earn approximately $350,000 annually. They aim to retire in their early to mid-50s and seek advice on Roth contributions and the establishment of a bridge account to support early retirement years.

Discussion Highlights:

• Big Al Clopine reviews their substantial retirement accounts and contemplates the optimal strategy for Roth contributions versus traditional accounts.

  [27:54] Big Al Clopine: "You're making a ton of money now, though, already 350 grand."

• The hosts advocate for maximizing Roth contributions given their current tax bracket, predicting an increase in earnings which would make Roth accounts increasingly advantageous.

  [27:33] Andi Last: "So I would stick with now. Maybe later you're making $500,000 or whatever, then send us a note, we'll discuss it again."

• Andi Last introduces the concept of a bridge account, highlighting its utility in facilitating seamless transitions between early retirement and accessing traditional retirement funds.

  [29:45] Big Al Clopine: "At age 55, if you can work till age 55, you have full access to your Roth 401K and your traditional 401K without penalty."

Key Takeaways:

• Maximize Roth contributions early in high-earning years to capitalize on tax-free growth.
• Establish a bridge account to cover expenses during the early retirement phase, reducing the need to draw from retirement accounts prematurely.
• Understand IRS rules regarding early access to retirement funds to avoid penalties.

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4. Mortgage Payoff and Tax Efficiency of Investments

Listener Profile:

• Frenchie from Maine, a new homeowner, seeks guidance on the financial implications of aggressively paying off her mortgage and the tax efficiency between money market funds and bond funds.

Discussion Highlights:

• Frenchie contemplates whether paying off her mortgage early offers any tax or wealth disadvantages, especially since she doesn't itemize deductions.

  [33:58] Big Al Clopine: "There's no tax advantage of keeping that mortgage or aggressively paying it off. Because she's got the standard deduction, right?"

• The hosts recommend ensuring robust emergency funds and adequate contributions to retirement accounts before allocating excess funds towards mortgage repayment.

  [34:04] Andi Last: "So make sure you have your emergency fund set aside. Make sure you're saving appropriately for your retirement accounts."

• On the topic of investment vehicles, they clarify that money market funds and bond funds are taxed similarly unless the bonds are municipal, which may offer tax advantages depending on the investor's tax bracket.

  [35:21] Andi Last: "They're both taxed the same way, unless it's a municipal bond, which is tax free."

Key Takeaways:

• Prioritize building an emergency fund and retirement savings before aggressively paying down a mortgage.
• Assess the interest rate of the mortgage versus potential investment returns to determine the optimal financial strategy.
• Choose investment vehicles based on tax efficiency and financial goals, considering options like municipal bonds for tax-free income.

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5. Notable Quotes

• Big Al Clopine on balancing Roth conversions:

  [14:13] Big Al Clopine: "You could probably have maybe half of that in Roth, half of that in traditional."

• Andi Last on tax planning flexibility:

  [12:37] Andi Last: "But I just think you have to be a little bit careful. You don't want to go too far here."

• Joe Anderson emphasizing retirement barriers:

  [16:03] Joe Anderson: "The top three barriers to retirement for most people are not having enough retirement savings, not having a formal plan, and overspending."

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6. Hosts' Expert Analysis and Recommendations

Throughout the episode, Joe and Big Al meticulously dissect each listener's financial scenario, offering tailored advice grounded in fiscal responsibility and strategic tax planning. Their discussions highlight the importance of:

• Tax Bracket Management: Carefully navigating tax brackets to minimize liabilities while maximizing retirement savings.

• Diversification and Liquidity: Maintaining a diversified portfolio to ensure liquidity and flexibility in financial planning.

• Strategic Roth Conversions: Timing Roth conversions to align with periods of lower taxable income, thereby optimizing tax-free growth.

• Early Retirement Considerations: Utilizing bridge accounts and understanding IRS regulations to facilitate a smooth transition into early retirement without unnecessary penalties or tax burdens.

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7. Conclusion and Next Episode Teaser

In wrapping up, the hosts briefly touch upon upcoming topics, hinting at deep dives into asset allocation, municipal bonds, and more listener-centric financial strategies.

[36:16] Joe Anderson: "Next week, Joe and Big Al spitball on rebalancing your asset allocation, muni bonds in a brokerage account and Emergency funds for D TJ in St. Louis..."

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Final Thoughts:

This episode serves as an invaluable resource for individuals grappling with complex financial decisions, particularly those related to Roth conversions and tax-efficient investing. Joe Anderson and Big Al Clopine adeptly blend technical expertise with relatable discourse, making intricate financial concepts accessible and actionable for their audience.

For personalized advice and to explore your own financial blueprint, visit YourMoneyYourWealth.com.

Transcript

[Joe Anderson]

John in Boston is in the 32% tax bracket. Should he do Roth conversions? Flight deck dad and Irish girl in Pensacola have a lot of tax free pension income. Should they do Roth conversions? Bert and Ernie in New Jersey wonder if they should convert to Roth or take advantage of 0% capital gains tax rates. Joe and Big Al, spitball for all of them today on youn Money, you, wealth podcast number 529. Plus, Michael and his wife in Bellevue are 34 in the 24% tax bracket and wonder if they should contribute to tax free or tax deferred accounts. And if they should slow down on retirement savings and start a bridging account for the years between when they want to punch the clock in their early to mid-50s and when they can access their retirement savings. Then for something completely different, Frenchie from Maine writes back in. What are the disadvantages to paying off her mortgage asap? And what's the tax efficiency of a money market compared to bond funds? I'm executive producer Andi Last, and here are the hosts of youf Money, you, Wealth, Joe Anderson, cfp, and Big Al Clopine, cpa.

[Big Al Clopine]

All right, we got John from Boston, Massachusetts. It goes like this, Big Al.

[Andi Last]

Okay.

[Big Al Clopine]

All right. How best to plan for twice yearly royalty payments that can push us into the 32% tax bracket? It's a good problem to have, but I do love doing those Roth conversions and not sure I should do them. Our RMDs will be healthy, so to the extent I can minimize those. I'm 61 and disabled, getting a Social Security disability. My wife's 61. I'm planning to work until age 70.

[Joe Anderson]

And that's all the information that he gave us. So then he got an email from me that said, can you give us a little more information? And this is what he provided.

[Big Al Clopine]

Got it. So he's getting royalties. That's pushing them up into the 32% tax bracket.

[Andi Last]

Correct.

[Big Al Clopine]

And he's curious, should I do conversions?

[Andi Last]

Can you still do Roth conversions or not at 32%? Right.

[Big Al Clopine]

I got that question today at that webinar we did. Should I convert in the 32% tax break? I heard you, and I was like, okay, well, we need a little bit more.

[Andi Last]

We do. And fortunately we got a little bit more.

[Big Al Clopine]

Yeah, we got. Okay, so Andy to the rescue here.

[Andi Last]

Okay.

[Big Al Clopine]

So John responds back. He goes, hey, I got no pets. Both like me. Meow.

[Joe Anderson]

I think it's Meow Meow.

[Big Al Clopine]

Pinot Noir, Miyomi Pinot Noir.

[Andi Last]

Noir.

[Joe Anderson]

Or something like that.

[Big Al Clopine]

Is that like a special Pinot, I.

[Joe Anderson]

Think that's the brand name. That's the company that makes it is Meomi.

[Big Al Clopine]

Meow Me.

[Joe Anderson]

Something like that.

[Andi Last]

They both like wine. Yeah, that would work.

[Joe Anderson]

They both like Pinot.

[Big Al Clopine]

Got it.

[Andi Last]

Yeah. That's.

[Big Al Clopine]

Cars in Accra. Plenty saved. But how to best handle the Roth conversions or anything given royalties when RMD is expected to be large? Good problem to have with sale problem. This year, royalties will be $300,000. It was a professor. A little school textbook?

[Andi Last]

I think so, yeah.

[Big Al Clopine]

Yeah.

[Andi Last]

All right. A popular textbook at that.

[Big Al Clopine]

Geez. I wonder if.

[Andi Last]

Being used nationally, I.

[Big Al Clopine]

Think, I wonder if it went to the University of Florida. Maybe $2.8 million in pre tax, $700,000 in Roth, $500,000 in a brokerage account. HSA is 37,000. All right. Social Security is 70,000. Three me wife will be four annual spend 96. So he's got $3 million in a retirement account. How old is he again? 61.

[Andi Last]

Yep.

[Big Al Clopine]

Okay, so $3 million by the time he's 75 is going to be 6 million.

[Andi Last]

Yep.

[Big Al Clopine]

Six times four is $24,000. So $240,000 is what his RMD could potentially be, plus his Social Security. So he's pushing $300,000. He continues to get royalties every year of another $300,000.

[Andi Last]

That's $600,000 of income if they continue. I mean, to me, that's the question, right? What's the expectation on the royalties? Are they going to continue for the next decade or more? Then you have a bigger problem or 20 years or more. It seems to me with a textbook, it's going to go out of date and maybe be replaced by something else. So you wouldn't necessarily have these royalties forever. So the point is, from 61 to 75, you got 14 years before you required minimum distribution. So maybe a way to think about it, if you think that royalties are only going to be around for, let's say five years, is don't do Roth conversions yet, but as they start to decrease, do your Roth conversions later and do them at year end when you know what those royalties are going to be. That's how I think I would do it, Joe.

[Big Al Clopine]

Yeah, 32% tax bracket. You're pushing $500,000 on the top end of taxable income, $400,000 on the low end. So if you want to go, I think you'll probably be in the 24. It could be the 28% tax bracket, depending on where tax rates go in retirement. So his RMD is probably not going to touch 32 unless he gets the royalties.

[Andi Last]

Unless that continues. Right?

[Big Al Clopine]

Yeah, right. Royalties continue, then convert.

[Andi Last]

Yeah. Like, let's say the royalties continue at this level for the next 30 years, then go ahead and convert. Agreed. It doesn't seem that likely though, to me that they continue at that level for that long.

[Big Al Clopine]

You don't know John from Boston. What textbook this is?

[Andi Last]

Well, the other thing too is he could be updating it every year. New version.

[Big Al Clopine]

Yeah, Come on. He listens to your money or wealth. Smart man.

[Andi Last]

Right.

[Big Al Clopine]

Okay. Well, congratulations on the royalty. Could you imagine writing a textbook?

[Andi Last]

No, that would be. I couldn't do it. I don't think I could do a page.

[Joe Anderson]

You said you couldn't write a financial planning textbook or a retirement textbook. I mean, I think you have. I think you basically have. Joe.

[Big Al Clopine]

I don't think a textbook.

[Andi Last]

We could write books. We could orally talk to a ghostwriter. Right, There you go. And have them write it. But a textbook, I'm just trying to.

[Big Al Clopine]

Think of like my finance textbooks. Statistics, calculus, just standard, you know, just Finance 101.

[Andi Last]

They're a little dry.

[Big Al Clopine]

Oh, my gosh. Imagine. But I did have a professor at university. He wrote his textbook.

[Andi Last]

Okay.

[Big Al Clopine]

Yeah. So. All right, well, very cool. Let's move on. Let's see, we got. Hi, Andy, Joan. Big Al says Flight Deck dad. Oh, Flight Deck Dad. An Irish girl here from Pensacola, Florida. Flight Deck Dad. That's a badass name. Flight Deck dad. I found your show on YouTube and you guys are great. Joe's lack of. Okay, gotta bust my balls. Flight Deck Jack.

[Andi Last]

I'll read that one.

[Big Al Clopine]

Pronunciation. I got this reading is hilarious. So you like it when I just sound like a complete imbecile?

[Joe Anderson]

It's amazing how many people say that. A lot of people apparently like it when you sound like a complete imbecile.

[Big Al Clopine]

Yeah, I make people feel better about themselves. About themselves. It's just like, wow, this guy is a complete idiot.

[Andi Last]

I could have pronounced that word.

[Big Al Clopine]

All right, I'm 52 and Irish is 50, 47. I'm retired due to injuries from the Navy and wifey is an administrator at a local hospital. We have two golden retrievers, but if the one year old doesn't stop pissing on the floor, well, one dog. Wow. White deck. Yeah. Conditions just coming off hot. Our office Irish will retire at 56 years old. We will have three spoiled daughters. Age 16, 13, 10 four year degrees, including room and board are paid for by the VA. Drive. A 28 Honda Pilot. So he calls himself Flight Deck Dad. Because he drives a Honda Pilot, or do you think it was actually a pilot in the Navy?

[Andi Last]

I think he was in the Navy.

[Big Al Clopine]

Well, he was in the Navy, but was he on a ship or was he a pilot? Was he. Was he an iceman? He was Rip Val Kilmer.

[Andi Last]

He was. He was on the deck. Okay, that's all we know.

[Big Al Clopine]

He was on the flight deck.

[Andi Last]

Yeah, that's what we know.

[Big Al Clopine]

Got it. All right. Was he like Mikey Martin jumping out of helicopters or was he actually flying the helicopter?

[Andi Last]

I couldn't tell you.

[Joe Anderson]

This is going to be a couple of lifestyle podcasts instead of a financial podcast.

[Big Al Clopine]

All right, so wifey drives a 2021 Jeep Wrangler. My daughter drives a 2024 Jeep Wrangler.

[Andi Last]

Wow. Daughter gets a better car.

[Big Al Clopine]

Little Jeep family.

[Andi Last]

Yeah.

[Big Al Clopine]

All cars are paid off. When you live in Pensacola, it's basically required to have a boat. I paid off as well. Homes primary worth $1,200,000. $490,000. Loan at 2.5%. A beach house valued at $800,000 with a $400,000 balance at 7.375. We do not rent the house, and we'll refinance once the rates come down. Proud to say I'm a three years sober and Irish enjoys Jameson and Guinness. Shocker. Here's the deal. All right. $1 million in a brokerage account, $450,000 in a Roth IRA, $225,000 in Irish's Roth IRA, $230,000 in money market for emergency fund and cash reserves, $800,000 in Irish's traditional 403, $50,000 in Roth 403. Irish puts away $24,500 in a Roth 403, and the company puts in $10,000 in that same plan. Okay. Income me $96,000 tax free with the cola for life. And Irish makes $225,000. We an amount of $8,000 per month. When Irish hits 56 years old, in addition to my income. Okay, all right, so he makes $100,000. They want to pull out another 100, another hundy. All right. Assuming an 8% return, I anticipate a total of $5 million. Our plan is to live off the cash of $460,000 while Irish is age 56 to 59 and do Roth conversions. Since our income will be very low or very little taxable income. Is this a good plan? Do you have any other advice or options? Does it make sense to pay taxes for Roth conversions out of the brokerage account or use the cash. Our goal is to have $3 million in our Roths. When Irish hits 60 years old doing conversions after spending down our brokerage account, our goal is to take the earnings annually from the Roth, meaning that if we have $3 million and the market does 10% and we pull out $300,000 in tax refunds and live out those monies in cash until we need to make another Roth withdrawal while leaving the $3 million balance. Is this a dumb idea? Side note, when our youngest is out of the house, we will live in Ireland for three months per year. Thanks for what you do. Go Navy. All right, let me add this up. What have they got total? He's got a million dollars in a brokerage account, $450,000 in a Roth. So four, five, six. So they got $700,000 in Roths today.

[Andi Last]

Yeah, $725,000 in Roth. They got about $2,800,000 overall.

[Big Al Clopine]

Okay, $2,800,000. He's 52, she's 47.

[Andi Last]

Yeah, she's going to work. I just did. I did a little math. Which is the amount that they have for nine years, 6%, adding about $35,000, they do end up with about $5 million. So I agree with this number.

[Big Al Clopine]

But he.

[Andi Last]

I know. I got it at six.

[Big Al Clopine]

Okay, well, yeah, your calculator's better than his, apparently.

[Andi Last]

Yeah. And then if they want another 96,000, 8,000amonth in nine years at 3% inflation, that's about 125k. So first of all, we check the distribution rate. Right? 125 divided by 5 million, that's 2.5% distribution rate. So check. We like that. There's a lot of cushion there to do what you want to do. You could probably even spend a little bit more. That wasn't your question. But I. I wanted to start with that. But Joe, the question was really kind of sequence of withdrawals and Roth conversions.

[Big Al Clopine]

So he's got a very interesting situation here because he's got $100,000 pension. That's tax free.

[Andi Last]

Right. Which has a cola. Right. And has a nice cola, which is why I ignored that, because I figured that's going to keep up with inflation for the other half of their spending.

[Big Al Clopine]

So he needs $8,000. So it's like, do I want to do massive conversions here? You could still get probably another hundred thousand dollars out of the plan each year and still be in the 12% tax bracket.

[Andi Last]

Yeah, I agree.

[Big Al Clopine]

I would not convert higher than the 12% tax bracket. If I was going to do conversions, I would want to keep that diversification strong to keep my liquidity. So cash and brokerage account you want to have. So you have to map. This is a little bit different circumstance is just because he has that huge pension that's 100% tax free.

[Andi Last]

Tax free. Correct.

[Big Al Clopine]

And then so you still have the standard deduction and then you still have another. I mean, it's $250,000 of total income, potentially that could come to them and they'll still be in a very low tax bracket.

[Andi Last]

Right.

[Big Al Clopine]

So if they want to live off $200,000 a year and they're doing conversions to, let's say the top of the 22 over that time period, I think they would end up paying too much tax.

[Andi Last]

I would agree with you. And the other thing is they've already got a lot of money in a Roth. They've already got a lot of money in a non qualified account. So the $800,000 is a lot in tax deferred. But having all that tax free income provides you a little bit of flexibility. Now you think about this. So later on, if you have higher medical expenses, those are usually deductible. You can take those out of the IRA and have it be deductible. If you want to give any money to charity at a 2.5% distribution rate, you got some cushion, right? You could do a qualified charitable distribution starting at age 70 and a half. So that doesn't count for required minimum distribution. So you don't necessarily want to drain it out. And if you drain it out, you probably end up paying higher taxes doing the Roth conversions than you might be otherwise if you did less. Now, I'm not saying to not do any Roth conversions, but I just think you have to be a little bit careful. You don't want to go too far here.

[Big Al Clopine]

Here's another way to look at this flight deck, dad. I'm looking at $120,000. That's the $8,000 a month that he will need to live off of, given 3.5% inflation. By the time he needs a distribution, right. He's got the $100,000 coming in tax free. So he would need $3 million of liquidity to create the additional $120,000 given a 4% distribution rate. So if I look at that $3 million, he's wanting all of that roughly to be in Roth. I would say, man, you could probably have maybe half of that in Roth, half of that in. So you still get a little bit of the tax deduction today, but it's just mapping this out to make this thing sing for you. Because let's say you got $1,500,000 in a traditional IRA, 4% of that is $60,000. You're never going to hit like a higher tax bracket from your RMDs. You could keep yourself in that 10 to 12 or 15% tax bracket instead of converting everything. I know this is crazy for some people to believe that you don't want to do that, but this case is a little bit unique where you could do some really cool tax planning. And if you run the numbers appropriately and you get the growth rate of what you think you will, I mean, I think the tax savings could be enormous.

[Andi Last]

Yeah. I think one thought that could change that is I don't know what happens to the tax free pension. If he were to die, maybe that goes away. Maybe. And. And then Irish girl is in a higher tax bracket as a single taxpayer. That could change the delta just a little bit. So you got to think about that too. Maybe.

[Big Al Clopine]

Yeah, I agree. Okay, cool. Thanks. Flight deck dad.

[Joe Anderson]

The top three barriers to retirement for most people are not having enough retirement savings, not having a formal plan, and overspending. This week on youn Money, you, Wealth tv, Joe Anderson, C. CFP and Big Al Clopine, CPA show you how to break through those retirement barriers. Click or tap the link in the episode description to watch it on our YouTube channel. Then calculate your financial blueprint for free. To help you determine your probability of retirement success. Just input your income and savings, investments and debt, and your expenses and goals. The Financial Blueprint tool will analyze your current cash flow, assets and projected spending for retirement and output a detailed report outlining what you can do now to help you achieve those retirement goals. Minimize stress, maximize life, and prepare for the future. To start taking control of your retirement, just click the Financial Blueprint link in the episode description.

[Big Al Clopine]

Dear Joe, Big Al, Andy, this is Burt from New Jersey. I've been listening to your podcast since about 2018 while driving or walking and going about in other daily activities. The friendly banter makes listening to an enthralling financial podcast even more fun.

[Joe Anderson]

Nice.

[Big Al Clopine]

I'm trying to make a decision on whether to do a Roth conversion or take advantage of the 0% qualified income tax rates. 0% qualified income tax rates?

[Andi Last]

I think he's talking about capital gains.

[Big Al Clopine]

That's what I'm thinking too. But qualified income tax rate, well, qualified.

[Andi Last]

Dividends fall under that, so maybe that's where you got it.

[Big Al Clopine]

Got it I'm 55 years old and work as a software engineer but intend to stop working for money and trying something different. My husband Ernie is 61 on disability and has significant disability income. We spend about $200,000 per year. We have a total of about $7 million. I'm going to work only part of this year so my taxable income will be reduced to about $40,000. Ordinary $42,000 of dividends. That leaves us qualified income to be taxed at 0% and even some room for tax gain harvesting in 2026. There could even be more tax at 0% since I won't be working earnings. Non taxable income is about $111,000 per year. My annual non taxable income is $8,000 from an inherited Roth RMDs. Okay. Our taxable income is 113,000 AGI. Here's our assets. Pre tax $2,500,000. Roth $2,000,000. Taxable $2,700,000 with another $2,000,000 basis there we have HSAs about $12,000. I'm going to liquidate in 2025 based upon the 2024 medical expenses because I'm not itemizing. I have a cash value pension worth about $28,000 and I expect to start drawing $4,000 of benefit annually in 2035 based on the benefit schedule, I am doing maximum 401 pre tax contributions instead of Roth at this job before I terminate my employment. I can reverse the tax impact of this decision later. If I want to do a Roth conversion. If I want to further reduce our non qualified income to leave room for more qualified income, I can move some assets. Okay. I could hold more the non qualified income producing assets in a pre tax ira. For once they stop working and roll it over. This guy's an engineer, right?

[Joe Anderson]

Yes.

[Big Al Clopine]

The vocabulary uses on some of this stuff. These assets I could move would be cash, bond ETF and some stock ETFs with a lower qualified income percent. Most people are like what is he talking about? I'm even trying to follow here with qualified income percent. The hell is qualified income percent?

[Joe Anderson]

He's talking about the percentage of his income that's qualified versus non qualified.

[Andi Last]

There again I think he means capital gain. That's what I'm going with.

[Big Al Clopine]

But then he uses the same term with two different words.

[Andi Last]

Yes, right.

[Big Al Clopine]

Qualified income percent and capital gains. Just pick one so we can all follow along. My thought is that I should take advantage of the 0% capital gains tax bracket for the next few years while I still Can. I'm not adding to the pre tax IRAs or 401s and since they are heavily invested in bonds, they should grow at a slower rate than the rest of my investments. I can withdraw the inherited pre tax IRA starting in about three or four years from now when the RMDs time for the regular IRAs, assuming that tax rates stay the same for the next 15 to 20 years. I can do some QCDs from the IRAs to keep the AGI in check. Drive 2016 Mercedes C300 or historic 1997 Saturn. Wow, Saturn. Do they still make Saturns?

[Andi Last]

No, that went out a long time ago.

[Big Al Clopine]

Really?

[Andi Last]

Yeah.

[Big Al Clopine]

Did you have a Saturn?

[Andi Last]

No, but I knew about it.

[Big Al Clopine]

Ernie drives a 2021 jeep. We enjoy an IPA, but usually the non alcoholic variety. There's non alcoholic IPAs?

[Andi Last]

Yeah. Athletic. It's actually pretty good athletics and IPA. Athletic beer.

[Big Al Clopine]

Yeah, I've heard of that in San Diego. I didn't know that was an ipa.

[Andi Last]

Well, they have all different kinds.

[Big Al Clopine]

Oh, I suppose.

[Andi Last]

Including IPAs.

[Big Al Clopine]

Got it.

[Andi Last]

Yep.

[Big Al Clopine]

Okay, so what's the question?

[Joe Anderson]

Should he do raw conversions or do the 0% capital gains tax rate?

[Andi Last]

Okay, yeah, that's the question. And so let me recap. So he's got about $7 million and 2.2 million is pre tax, 1.9 is the brokerage, I'm sorry, is the Roth, and 2.75 is taxable. So here's the. Let me sort of explain the question as I understand it. So when you are in the 12% bracket, ordinary income tax bracket, which is about $96,000 of taxable income for a married couple, right. Then your capital gains are taxed at zero, your long term capital gains are taxed at zero, including your capital gain dividends and your qualified dividends, they're taxed at 0%. But once you go over that 96,000 of capital gain income, they're taxed at the 15% rate.

[Big Al Clopine]

And that's taxable income, taxable income.

[Andi Last]

Yeah, that's exactly right. Taxable, not total income, taxable income. So then the question is, well, I basically have about zero income this year or not very much income this year. Should I go ahead and sell some of my stocks or mutual funds at a gain up to that, up to that 96,000 of taxable income and pay zero tax or should I concentrate on Roth conversion? So I think, Joe, I think that's the question. And my answer would be when you've got $7 million and 2.2 million tax, I would focus more on Roth conversions. I think that's more important. However, there could be an exception, and that is if you've got brokerage investments that you would like to sell and diversify because you're too concentrated, then I might switch my answer to go ahead and start tax gain harvesting or maybe even in some cases sell additional and pay the 15% tax just to get a better investment allocation.

[Big Al Clopine]

He's 55 years old. He's a software engineer. He's going to stop working for money. Try something different.

[Andi Last]

Yeah. Volunteer, I'm guessing.

[Big Al Clopine]

All right, so he's got 20 years. So he's going to contribute to the retirement account for another year. He's going to go pre tax. So let's just call $2.5 million sitting in a pre tax account or even two to be conservative.

[Andi Last]

Yeah. And then that could double twice.

[Big Al Clopine]

It's going to be $8 million.

[Andi Last]

Could be, yeah.

[Big Al Clopine]

Four times eight. That's a big number. $160,000 is going to be the RMD, plus Social Security, plus whatever taxable pension, plus he's got a couple million, $3 million in a taxable account. There's going to be interest and dividends and everything else that spits off of that. He's going to be in a lot higher tax bracket potentially because his partner Ernie has got almost $120,000 pension coming to him tax free.

[Andi Last]

Right.

[Big Al Clopine]

Or is that a. It's a disability.

[Andi Last]

Disability. Yeah.

[Big Al Clopine]

I don't, I don't think that stops $111,000 that's coming to them with no tax.

[Andi Last]

Yeah. Right.

[Joe Anderson]

There's more information that I took out of there. His private disability policy, which is about half of it ends at Social Security, full retirement age, and then he's got VA disability that ends at death.

[Big Al Clopine]

Got it. Okay.

[Andi Last]

Yeah. And then let me just sort of interject to the. The, Your math was just a little off. Four times age 32. So 320,000 would be the RMD.

[Big Al Clopine]

Oh, there you go.

[Andi Last]

Just, just to add to it, you know, plus all the income from the brokerage account. Right. And Social Security. So it's going to be a big. The point is it's going to be a big number, a high tax bracket. And so that's why I would probably favor Roth conversions. Unless you want to rebalance the account. Because what we talked about, if you, if, if you've got, if you want to diversify a little bit more, maybe focus more on that, but you've got plenty of time to actually do both depending upon your situation.

[Big Al Clopine]

Yeah. Congratulations on the Mighty net worth.

[Andi Last]

Yeah. Fantastic.

[Big Al Clopine]

All right, we got Bellevue, Washington. Michael, he goes, hey, Joe, Big Al. Just started listening to you about a month ago. I really enjoy the single malt whiskey neat. All right. Oh, single malt whiskey neat. My wife prefers a good Italian red wine. We're both 34, currently making. Right, about $350,000 a year, give or take, with various bonuses. We have $342,000 in retirement accounts, mainly invested in mutual funds and index funds. $175,000 of that is in Roth IRAs. We're currently maxing out my wife's Roth 401. Both the Roth IRAs. Her employer matches all her 401 contributions in the traditional 401, so an extra $11,500 a year. Since we're in the 24% tax bracket, should we be contributing to the Roth 401 or should we do regular? We also do not have a brokerage account and would like to retire early, sometime in our early to mid-50s. Should I slow down our retirement contributions and start building a bridge account for the years we want to retire before we have access to our retirement funds? Thank you for your thoughts. I have greatly enjoyed listening through many of your past episodes since I discovered your show. Cool. Thank you, Michael. Bellevue. We got a pretty big presence now in the greater Seattle area.

[Andi Last]

We do a couple offices. Right?

[Big Al Clopine]

Yeah. Redmond in Mercer Island.

[Andi Last]

Correct. I think. I know.

[Big Al Clopine]

You're 34 years old. All Roth, baby. Oh, Roth Ira.

[Andi Last]

Agreed. I do. And. And here's why. For me, it's because. Well, first of all, 24 is a. It's a pretty good bracket compared to historical brackets, at least over my career. That's Number one. Number two, you're 20. You're what, 34? You're 34. You're probably going to make more money as you age, as you get older, as you get more experience.

[Big Al Clopine]

You're making a ton of money now, though, already 350 grand.

[Andi Last]

I know, but it's probably only going up.

[Big Al Clopine]

Right, Right.

[Andi Last]

So that's what I'm saying. So I. I would stick with now. Maybe later you're making $500,000 or whatever, then send us a note, we'll discuss it again. But Roth conversions or Roth Roth option right now.

[Big Al Clopine]

So here's to bridge the gap. There's FIFO tax treatment in Roth IRAs. So first and first out. So you can always take out the contributions of a Roth IRA and not pay any tax on those. And you have access to those dollars at any time. So I highly don't recommend that you're using the, the basis of Roth IRAs to bridge the gap versus a brokerage account. But if I can max out Roth IRAs, that's where I want to go. Because I love tax free growth all day long. So if I'm not fully funding all Roth options that I have at age 34 and there's still room in Roth, I'm going to go Roth. But now let's say if you make more money or you spend less money or something happens or you get a larger bonus, max out those retirement plans first. Because there's contribution limits. There's only so many dollars that you can put into Roth IRAs as a contribution or Roth 401ks or 403bs or whatever plan that you have. If you, after you max those out, then that's when I would think about the brokerage account. So because you have access to these plans and it's hard enough to get the money in there.

[Andi Last]

Yeah. And I think the other thing to realize is at age 55, if you can work till age 55, you said early to mid-50s. If you can till age 55, you have full access to your Roth 401K and your traditional 401K without penalty. As long as you're working at age 55 and then you retire with your 401K, you have access to that and there's no 10% penalty. Joe, I think a lot of people don't really know that rule. They think everything's 59 and a half.

[Big Al Clopine]

Yeah. All right, cool. Thanks for listening.

[Joe Anderson]

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

[Big Al Clopine]

Hi, Andy and the fellers. Oh, boy. This is Frenchie from Maine. The 2024 YMYW survey winner with 100 bucks. Thanks again. I bought lots of green tea and a bike lock dishwashing pods for the first time in my life. New homeowner.

[Andi Last]

That $100 went for a lot of good.

[Big Al Clopine]

Wow. She bought some lotion and some sunblock. Thank you for everything that you. You purchased with that $100.

[Andi Last]

Right?

[Big Al Clopine]

She bought some dishwashing pods. What the.

[Andi Last]

Never had them.

[Joe Anderson]

She's a new homeowner.

[Big Al Clopine]

Oh, my God. It's a first time homeowner. All right. Congratulations, Frenchie from Maine. I will once more be representing your non wealthy listeners. Heard you were still looking for some. Okay. I'm 54. I live out in the country for a decade. My monthly Social Security currently is projected to be quite low. One reason why I plan on working until at least 70, the heavens willing. My trick of choice is, you guessed it, green tea. I thought she was gonna say dishwashing pods. I'm still driving around in my 2000 Toyota Avalon with the sunroof and $150,000 or 150,000 miles, which I inherited from my mother. Two questions today that I was hoping to get a little spitball on. Number one, as someone new to debt of any sort, I'm eager to pay off my mortgage for the condo I bought several months ago. The mortgage is quite manageable. However, as I put a very large down payment, I'm not certain that I'll be here at this place long term. Is there any tax or general wealth disadvantage to paying off the mortgage as quickly as possible? Especially if I do not itemize my taxes at this time? The only thing about paying down debt super aggressively is that you want to make sure that you have adequate liquidity cash reserves. You know, we get people, I'm paying this thing off and they like everything goes to the debt and they don't have enough cash. Something happens and they're just refinancing their home.

[Andi Last]

Yeah, they're borrowing again, right? Yeah. So I guess the way I would say it is make sure you have your emergency fund set aside. Make sure you're saving appropriately for your retirement accounts. If you're still working you probably still have a 401k or something like that. Make sure you're funding that first. Make sure you got a little money outside a retirement brokerage account. If you still have extra money, then start paying down that mortgage a little bit. But it would help to know how much you have in assets and also what the interest rate is, because those two are going to impact how we might say it, too. But I think the main point, I guess, is that people are sometimes so aggressively paying off their mortgage, they. They. They don't have any savings. And that's not good either.

[Big Al Clopine]

French gal would just go for it. She just bought the condo a couple months ago. She's probably paying, what, 7%?

[Andi Last]

It's probably high. So the way I would look at refinancing, when rates come down, that's what I would do.

[Big Al Clopine]

There's no tax advantage of keeping that mortgage or aggressively paying it off. Because she's got the standard deduction, right?

[Andi Last]

Exactly.

[Big Al Clopine]

All right, Number two, along with the Toyota Avalon, I inherited two small bond funds from my mother when she passed away a few years ago. They are in my brokerage fund, and they give off a small amount of income each month that I reinvest in those funds. I heard Big Al mention that in a taxable account, such as funds may not be tax efficient. However, I either will keep that money in those bond funds or simply put them in a money market fund also in that taxable account. Is there a difference, tax efficiency wise, whether I'm earning interest off that money in a money market fund or dividends off those in bond funds? That money is currently part of my security fund, and I'd like to keep it pretty stable. Okay, so that's her cash reserve. So it sounds like she's got that buttoned up. So from a cash flow perspective, going back to question one, Frenchie, I would aggressively pay off the mortgage. Is there a tax benefit from a bond fund to a money market fund? The money market fund is going to be more stable.

[Andi Last]

Yeah. They're both taxed the same way, unless it's a municipal bond, which is tax free. Whether you need a municipal bond or not is dependent upon your tax bracket, because typically they pay a little bit less than regular bonds that are taxable. So just consider that.

[Big Al Clopine]

All right. By the way, I wrote in over a year ago, and you were wondering on the show what a Franco American is. You remember that?

[Andi Last]

I don't, but we probably didn't know Andy.

[Joe Anderson]

She said that she was Frenchie from Maine and that she was Franco American. And you said what the heck does that mean?

[Big Al Clopine]

I have no idea. I do now. We are descendants from Quebec.

[Andi Last]

That's what it means.

[Big Al Clopine]

We are all over Maine, the largest ethnic group here. We are hard working and really cool. Thanks for all the three of you do. A real pleasure to hear you each week. By the way, I started an MBA program so soon I'll be writing in correcting you. Ha ha. Crunchy. All right, Be one of the Crew.

[Joe Anderson]

Thank you all for sending us your spitballs. Technically, you're all part of the crew because your money, your wealth is your podcast. Next week, Joe and Big Al spitball on rebalancing your asset allocation, muni bonds in a brokerage account and Emergency funds for D TJ in St. Louis, Coach Dobra in Minnesota and Daniel in Stevensville, Michigan, respectively. Tim the Enchanter and Duke in upstate New York. Your spitballs will be featured too. If you haven't gotten your own retirement spitball analysis yet, what are you waiting for? Click or tap Ask Joe and Big Al in the episode description. Watch my how to video, then send us an email or a voice message and I'll see that it gets to the fellas. Your Money, you, Wealth is presented by Pure Financial Advice Advisors, a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.