How to Take the Uncertainty of Taxes Off the Table - 474

Today on Your Money, Your Wealth® podcast  474, Jimmy in Wisconsin will have a pension, Social Security, and a seven year retirement  shortfall. How should he cover it? Skipper in Texas has some unusual pension options, which  makes the most sense for his retirement needs? Should Mike and Carol in Virginia wait to do  Roth conversions if they’ll be in a lower tax bracket in retirement? Where should Duncan in  Texas invest in the 10 years before he retires

We got Jimmy from Wisconsin.  Remember Jimmy from Wisconsin?

Yes. Isn't that your cousin?

Yeah. This is not my cousin.

That's another one, huh? Okay.

Yeah. This is nowhere near my cousin.

Okay.

“I got a spitball for Joe and Al. First,  I would like to thank you for his advice from several years ago. He suggested to someone  go on Roth all the time.” Remember that?

That sounds like you,  sounds like what you would say.

That's what I live by. “I remember  Joe saying, you won't miss the taxes today, and you'll be so much happier in the future.  From that time, I've contributed everything to my Roth 401(k), done several planned  conversions from traditional 401(k) to the Roth 401(k) and maxed out backdoor Roths.  Even though I've been in very high tax brackets, 32% and 35%, I did not miss the taxes on  those Roth contributions or conversions, and I'm thrilled that a Roth  account is our largest account.”

Wow. Cool.

“$3,200,000 total. He's got $1,200,000 of  that in Roth IRAs.” So when you see that balance, Al, you forget about all the  taxes that you paid years ago.

Yeah. Because it's, it's a good balance.

Right. You're taking a lot of money-

You probably would have spent it anyway.

Right. So, what I think people don't-  you can get into all the calculations and of course you should do that. But, if you want  to take the uncertainty of taxes off the table, go Roth. Because you'll never ever  pay taxes on those dollars again.

And most people believe that too.

And so if I believe that, doesn't  it make sense to pay a little bit of tax today and have all of that money grow  tax-free. So on a contribution, it's like, should I go pre-tax or after-tax?  I'll go after-tax. I'm in a decent, a fairly high tax bracket. And I  go Roth 100% of my contributions.

Yeah. So you practice  what you preach. Like it.

I do. Cause I'd like to take  a look at that balance and say, you know what? I'm never paying tax on that.

It's- it's done. This is all mine.

It is all mine. When you look at a retirement  account, IRA, 401(k), that's pre-tax. It's like, all right, well, this is not all mine.  I got a partner, and that’s the IRS.

In your case, IRS and  California Franchise Tax Board.

That's right. I'm moving though.

Are you? To Texas?

I don't know.

Florida?

We'll see. Not Florida. I lived there.  All right. “So he'd like to spend $165,000 a year. On $3,200,000, 4% of that  is $128,000, means he's going to be short about $37,000 until I collect Social  Security. So he's going to wait until 69, the wife is 67. So they're going to have  around $75,000 in Social Security. That's going to cover the 37% shortfall plus future  inflation when we begin collecting our benefits

I don't know, but I'd push to 70 in this case.

I would too. So here's his question. “So  on that 37% shortfall, he's got a pension, Al. There's no COLA. And he's looking at two  options. He's got a 10-year period certain equals, let's call it $50,000, 10-year period certain,  $49,428. So that's going to cover his shortfall, $37,000, right, for the next 7 years. Or if  he pushes his Social Security out to age 70, it's going to cover that shortfall and some.

That's right.

“The second is that he's got 100% joint with  survivors. So the difference between the two, 10 year period certain, is that he will receive  this $49,428 for 10 years. So if he dies two years in, he's the- the heirs will still get  $49,428. After 10 years, year 11, it's zero.

Yep. But the first 10 years are  guaranteed, regardless. Even if husband and wife die, it goes to the beneficiaries. So joint  in Survivor, will be, alright, so you're married, you have a spouse, so it's going to continue to  pay on both lives. So if one spouse dies, this money is going to continue to pay until the second  spouse dies. So, if they both die, tragically, the next year, well then it's done. If they  live until 120, it's going to pay out until 120. Correct.

So, he's going to receive $18,400  for life. This means he would have to take more than his 4% out of the portfolio  for 7 years. So the math he has to do is, what makes more sense? So I take $50,000  for the next 10 years and then call it good? Or do I want $20,000 for the rest of my life?  So there's a real simple way to calculate this, or you can get a little bit more  advanced. Why don't you do the simple one?

Actually, I'm doing net  present value. I already did it.

Oh, you are? Well, here's the simple one.

Okay, you do the simple.

So, you got $50,000, 10 years, it's  $500,000. You got $20,000. He's 60 years old.

Yeah, call it 30 years. Right?

60, 70, 80, all right, so 90. So that's  $600,000. You take the net present value, depending on the discount rate, I  think the 10 year is going to kill it.

Of course it does. Yeah, so net present  value, what that means is you take your payment, you do it over 10 years, you pick your  discount rate. I just did 6%, okay? So net present value of the 10 year sum certain,  is $364,000. And the other one, over 30 years, is $253,000. So not only is it better to take the  10 year, but it's going to feel better because you're not going into your portfolio. I would  take that, in this case, every single time.

Yeah, the math, there's no way.  I don't know how old you have to-

Well, when I went from 25 to 30 years, it almost did nothing. So we could add  another 30 years, it still wouldn't pan out.

Yeah, the 10 year, no brainer. I think  his numbers are wrong, to be honest with you.

It could be, because  usually these are a lot closer.

They're almost identical when you do  a net present value. What Alan's doing is taking a look at the cash flows of that  payment, and just taking it back to say, how big of a nest egg do I need  today, given a certain rate of return, that would equal out. So one is going to be 10  years, one is going to be for life. The $18,000, if you take the net present value of those  future cash flows, is $200,000 versus $350,000?

Yeah. Exactly. So another way to say this is, what is the value in today's dollars,  right? And the 10 years better.

By a long shot.

And the reason is because if you get a payment  in 10 years or 20 years or 30 years, it's worth way less than today. Because if you had it today,  you could have 10 years of interest in growth or 20 years or 30 years of growth. So that's  where this net present value comes into play.

So Jimmy, I got your answer. Congratulations  on a wonderful, well job done. Go Roth, all Roth.

And push Social Security to 70.

Here's one from Texas. Goes “Andi and the  boys. I have a question. And apology for you

Yeah, well, that's not a- you  don't have to listen to the last 3 years to ask a question. On the off  chance we might have answered it.

Got it. “I unknowingly-“

- commandeered-

“- commandeered-“ I was going  to say that. I just had something in my throat. “- someone else's alias when asking  my question. Mia Culpa.” That means aww shoot.

Something like that, yeah.

“To avoid any confusion, if not taken  already, you can call me Skipper. I'm a husky old guy in comfortable clothes. I'll reserve  Ginger for my lovely wife and Thurston for my father-in-law. My question, he's got a pension  from his former employer that came with a generous 2 to 1 match. The account balance will  continue to grow at a guaranteed 7% rate until

Right. Contributions only,  not the rest. So it's not, it's not really like a 401(k),  which is your own money.

Well, it's a pension.

Right.

Yeah. Well, it's a match for a  pension. It's like probably, well, they're- they're matching two to one.  So they're just basing this on a pool of money and life expectancy of that pool  for them to give a two to one match.

Yeah. I understand. I haven't  seen too many pensions like this.

Never.

Have you? Yeah. So that's what  I'm saying. For our listeners, this is not kind of like a typical thing.

Yeah. It's not very common. So he's got  some options here. So he's trying to think through this. And figuring it out. So he's  like, if I go for the long-term growth and then only start taking withdrawals after  retiring. So he's going to max this thing out. He's going to get it as big as he can. And  then he's “going to take the payments when he retires. Or he can start taking the payments  now based on the full balance, full payment,

Yeah, I'm guessing the way he writes  it, the contributions come out first. Maybe?

And then the company match comes out second?

Yeah, but if that were true, there'd be no taxation because it's your  own money. So it seems strange to me.

Right. Okay.

Or maybe it's a blended, right? Maybe  it's pro rata. Maybe it's, I don't know.

But if it's pre-tax, he got a tax deduction, so then if he's getting his contributions  back out, it'd still be taxable.

Well, yeah, actually you're right.  I was thinking about that wrong. Yeah, it'd still be taxable.

Yeah. You're CPA, right?  Can I see your license?

It's expired. No. Just kidding.

Oh, okay. “If I take full  payments, it's 3 and a half years. No, two. My father and both grandfather  died at 62 and 63. I'm 58 and a half, so timing is a very real issue for me.” You  think he's constantly thinking about that?

Well, he wants to take care of his  family. I applaud him for that, but he knows-

58. So is it like he's counting down the  days? I mean, my dad died at 61. I'm like, Oh my God, I wonder what I'm going to be like  when I'm 58. Yeah. I'm going to be, Oh man.

You're going to be getting  all kinds of life insurance.

Got 3 years left. It sucks. So they  all live pretty hard lives. Yeah. My old man lived a pretty hard life. Yeah. I  have not. What do you think a definition of hard life is? Is that like working on  the railroad? Working in the coal mine?

It could be. Or it could  be a lot of drinking, smoking.

Well, that's not hard.

Depends what you're drinking.

That makes life fun. Not  hard. All right, but he is not, but this still weighs heavily.  “I'm comfortable discussing death, but realize others are not. Include if you  see fit.” Oh, it's fitting just like a glove.

Well, I mean, when you're talking about  retirement, that has to be a component, right?

“Relevant information. Ginger and I have  comfortable taxable income, approximately $110,000. Live on approximately $70,000 per year.  No debt. He's got $1,500,000 roughly in retirement accounts. Drink of choice, whiskey and coke. Love  the show. I tell everyone about it. Keep up the good work.” All right. Thanks Skipper from Texas.  So he's got $1,500,000. He's thinking, what should I do here with this payment? Should I start taking  it now? Should I push it off? Do I take 2/3?

I personally would- would start taking some  now. I don't know if I do it all, but I'd at least do a pretty good check to get the process  started is, is based upon what we understand about your pension plan, which isn't very much. But if  that's truly the way it goes, you got to get all your contributions out to get your employer match.  Then I'd, I'd start doing it now, especially with

Start taking, yeah, I think so too. I would do that. Start taking payments  now based on the full balance.

I would worry less about taxes and plus your  income is great, $110,000. But you're in a low enough tax bracket. I mean, the 24% bracket  goes for a married couple, almost $400,000. So and you're in Texas, right? So it's going to  be 24% or lower, probably lower, probably 22%.

Yep. Yeah, I agree.

Spitball your own retirement with the free  calculator at EASIretirement.com. That’s E-A-S-I

Mike and Carol from Falls Church,

Brady Bunch.

Oh, yeah.

Okay.

Is this the theme this week, Andi?

Not intentionally.

Are you sure?

I'm positive. I mean the previous person  that said that he had used somebody else's name, that was because he was using Jack and Diane  previously. So this time he's Skipper and Ginger.

“I've been listening your podcast for  about 3 years. Love the show. I drive a 2017 Toyota Tacoma, wife drives 2016 Honda Civic, I'm  mostly a beer drinker, like almost anything from Germany or Czech Republic. Wife enjoys a dry cedar  from time to time-“ or cider. What’d I say, cedar?

Yeah.

I think I was a dry  cider. Is that like cider?

We had this conversation before, I  have to explain to you that the difference between sweet and dry, like you  would use in terms of white wine, they use it the same way with cider. So it's  whether it's sweet or whether it's like tart.

So it's not a non-alcoholic cider.

No. And it also doesn't mean it's powdered.

You could- you could interpret it that way.

Right.

Right. It's a, it's  dry. There's nothing in it.

You ever heard of like a dry county?

Yes, I have. And that means no  alcohol. So I get the connection.

Yeah. Dry cider. All right. “Two kids,  son, 23, college grad working and financially independent. Daughter is 21, will finish college  this Spring. Her tuition and expenses are covered. I'm 54 yo. Wife is 52. We plan to retire in  about 9 years when my wife is eligible for her federal government pension.” All right. Let's  see. “Our gross income is about $350,000. Of this, we save about 40% each year. We max out our TSP  and 401(k) plans and save the rest in taxable

I think you're- well, I  won't answer yet. Let's go on.

$122,000. All right.

That's impressive. Joe: That's- And Joe, just for your reference,  they've got just under $4,000,000 now.

Okay. Might as well save another  $122,000. You've only got $4,000,000.

You've got to get to $5,000,000  or $6,000,000 at least, right?

Okay. “Everything above the savings excess in  the taxable brokerage account. We are in the 24% federal tax bracket. We currently spend about  $120,000 a year. We want to spend $150,000 a year. Wife's federal government pension will  be $65,000. Social Security will be $40,000.”

Each.

Okay. So, the fixed income is  going to cover your living expenses. So, I think you should save $250,000 a year.

Or you might start enjoying life a  little bit more. As much as possible.

Yeah. Live the Big Al life.

I do like my life.

“Currently, our plan is to do Roth  conversions in our 60s, after we retire and diversify our tax buckets in the interim.  We will build up our cash reserves to pay the taxes. Our logic is that presumably we'll be in a  lower tax bracket that we are in now. Of course,

Well no, he spends $120,000. So  he's going up $30,000. That's- you know how people when they get used to  being frugal, it's hard to change that.

Yeah. $122,000 savings a year, that's-

That's impressive.

All right. “I hope I included all  the relevant information you need to spit ball all my questions above. Keep up the  great year- great work. P. S. I am a mid-senior operations and compliance professional in  the securities industry. I would love an opportunity to interview for a position at your  firm, if and when a position becomes available, and if you would consider remote work, or if you  open a branch office location in the D.C. area.”

Oh, well, there you go.

You know, we are actually  looking for a compliance professional.

I did actually forward this  email to our compliance department.

True. Could be remote, I suppose.

I don't know if we're going to pay him- he's  saving more than what we're going to pay him.

Well, correct. If you look at his income, I don't think we can match that.  I know she's making some too.

This is not a mid-senior.  This would be probably mid-low.

So here's the first comment-

- Junior.

The numbers make sense. You didn't ask  that, but you have plenty of resources to retire at the level you want to retire. You  can actually spend probably a fair amount more.

He's got $2,000,000 in a retirement  account that he's never going to touch. And he's 60 years old. You need  to convert to the 24% tax bracket.

100%. I would go all Roth right now in  your- in your current 401(k)s and convert to the- at the minimum of the top of  the 24%, right? But the thing is, so, so top of the 24% is about $390,000,  but you also get a $25,000 standard deduction. So you can- you can really convert  to $420,000, $415,000, something like that, right? To that level of income, make sure  you've, you, you factor in any dividends you might have from non-qual. Although I guess  I'm not, yeah, $1,500,000 in brokerage.

A ton of brokerage. Because he's  splitting it equally. I love that, that he's doing that. Now he's 52 years  old and, or 52 or 54. “I'm 54, wife is 52.”

Yep. And he worked 9 more years.

And he's saving $122,000 a year. So  he's going to save another $1,500,000 into his $4,000,000 pot. Over the next  10 year that $4,000,000 is going to be $8,000,000 plus another $1,000,000,  he's going to have around $10,000,000.

I would agree with that, right?

Hypothetically.

Yeah based- Yeah, I mean based  upon rates return and all that.

Right. And so that retirement account  is going to continue to build and grow and grow. Then he's going to have a nice pension  of $65,000 plus another $80,000 in Social Security. He only spends $150,000. Only I say  given this is it's pretty low. I would move my contributions to 100% Roth. And then  start converting to the top of the 24%.

Yeah, and the 24% bracket, unless they  continue it, only goes through 2025. So you got two years, and then we'll see what happens after  that. If you look at your almost $4,000,000, Mike, only $150,000 is in Roth. So you start beefing  that up. 24% is a good bracket. So go for it.

Yeah. No, we're not looking to  open a branch in D.C. I would imagine we could. Oh. We got branches now in what,  Sacramento? We have a branch in Denver, Chicago, San Diego, Los Angeles,  Orange County. What am I missing?

Did you get Seattle?

Seattle?

Are we doing something  in Oregon or something?

Portland? Portland, Oregon?

Maybe?

Maybe?

I don't know. I can't  keep them all straight either.

We got Duncan from Texas.  He writes in, he goes, “Hey,

Which is when he emailed us.

Oh, okay, we're catching up.

Okay, we are. Finally.

You're in this year.

Alright. “So he's blessed to have  a great job bringing in $500,000 a year and my wife is an event planner making  $25,000 a year gross.” I like how he, he doesn't say his $500,000 is gross.  He goes, yeah, my wife, $25,000 gross.

Which also means she's got expenses so  it doesn't quite work out in the pocket.

Got it. “Our family currently spends $175,000  a year and put the rest in the savings. We have $1,400,000 saved in retirement accounts and a  $400,000 frozen pension, $1,600,000 in after- tax savings. Our goal is for me to find  an early retirement.” He's eyeing 51. Wow. Yeah. So am I. Duncan.

Good. Good for you. Duncan.

“As my son is entering  college-“ Well, when I-

Not yours.

-I’m 51, my son will  be entering kindergarten.

Kindergarten. You might  have to wait another 12, 13, 14-

Oh my life. I just love it. “- I expect  that we will be earning $25,000 to $50,000 a year from my wife's event planning work. And would  plan to make up the difference with the earnings from our after-tax savings until we hit 59 and  a half during my bridge period. I would also prioritize minimizing my AGI and try to do some  rollover any pre-tax dollars into a Roth IRA, which leads to my question.” All  right, you got all those facts?

Got it.

Duncan wants to retire 51 ish, saved a ton  of money. Makes a lot of money, doesn't spend.

Yeah, doesn't spend very much relative to  his earnings. Right. Wants to work 10 more years.

He’s 41?

Yep, 41.

Wants to retire in 10  years. He's saving how much?

Well, let's see. He's  got about $3,400,000 now.

He makes $500,000. He spends $170,000, puts everything into savings. He probably  spends, he saves probably $100,000 a year.

At least, yeah.

Alright. “My question is, where to direct  my 401(k) savings over the next 10 years, or the $1,400,000 in retirement savings?  About half is currently in Roth accounts, either IRA or 401(k). My 401(k) offers options  for pre-tax Roth or after-tax contributions. I can roll over the after-tax contributions  into the mega Roth conversion. I've always

So he, it sounds like he's already  doing a Roth contribution. He's already, he's planning on maxing out the retirement.

He's doing a backdoor.

Yeah. Right. And he's, and he's doing  the mega Roth, which right now you can put up to $69,000 when you're under 50 in a  401(k). That includes your contributions, the company contributions, and then after,  or yeah, after-tax money that you can then convert to Roth IRA at no charge. So, I think the real question is for his contributions to be Roth or  after-tax. He's already doing after-tax.

Yes. Yes. So, what should he  do? Should he- I know what you're going to say. He makes $500,000. You  want him to get the tax deduction.

I would. And I know what  you're going to say. All Roth.

All Roth. He's 40 years old.

Yeah. The reason I say is, go ahead and  take the tax deduction, is the tax bracket, you've already got 50/50. You're going to be  adding more Roth than regular. By the time you retire 51, you've got like almost 25 years  to convert. So that, that's what I think.

Yeah. No, I get that logic, but  I don't know what's going to happen with Roth IRAs. I don't know what's going  to happen with tax brackets. This guy's going to retire. He's already saying, but  again, we're looking at this in a bubble.

True. Joe; And so, he's 40 years old, and  he's already saved how much? Millions. He's got $3,400,000.

$3,400,000 at 40 years old.

Yeah. It's better than  you and me. By quite a factor.

Come on. And then he's gonna retire  at 50, he's saving $100,000 a year, again, 10 years, $3,000,000, $6,000,000, he's gonna  have $10,000,000 at 50! Do you think he's gonna just go off into the sunset, his kids are  gonna go to college, and he's just gonna chill?

I don't think so.

There's no way. He's  going to continue to grind, to do something else. He's going to start a  business. He's going to make more money. He's a rare breed. He's a hustler. I would go all  Roth. Because I bet you in 10 years from now, he's going to be making more money. He's  going to have a lot more money coming out of his investments. And he's, he's going to  take the uncertainty of taxes off the table.

Yeah. And I get your logic too. I still would  go. I'd get the deduction because of the bracket.

He lives in Texas. There’s no state tax.

True.

You're not going to-

I mean, it's true either  way. If he stays there. Anyway, difference of opinion, either one is  fine. You're going to be in great shape.

We got Jay Z from Minnesota, Big Al.  “Big Al personal finance fanatic here, but recently started listening to you guys.”

Now he's a real fanatic.

“Definitely the funniest finance podcast  out there.” Well, thank you very much, Jay Z. “And among all the podcasts I listen  to weekly, YMYW's so far my favorite.”

It may not last, but so far so good.

Because you're going to listen to 3  episodes and it's going to be the same s**t over

Same thing and over and over. Joe; It's like, Oh my God.  It's like rinse and repeat. Just bleep it.

I'm gonna.

Oops. “I have a quick question  about which accounts are-“ this is like, Andi, you did this again to me.

I didn't. I honestly didn't. These are  just in order that they were sent to us. And I swear to you, they're just, yeah. The one  that you're going to read later that talks about how the content is so similar, it's  because this is what you guys are best at.

Okay. “I have a quick question about  which account to save in. 31 years old, single, 90 years- or $90,000  of annual income. Live super frugally. Monthly expenses  usually around below $3000.”

Wow.

Wow. “I just can't find ways to  spend money. I do love traveling though, and I visit 20 plus countries,  but also on a very low budget.”

So he's staying at youth  hostels and getting discount fares.

Yep.

Good for you, Jay Z.

Yep. “Currently with some family help, I  have $28,000 in a pre-tax 401(a), $51,000 in a Roth 403(b), $61,000 in a Roth IRA, he's got an  HSA and some money market accounts for emergency, and $70,000 in a brokerage account.”  Man, 50% of this is in money market, Al.

For keeping track, it's about $250,000.

And he's 30 years old.

What's a 401(a)?

401(a) is very similar to  any type of retirement plan, but he must work for a hospital, non-profit,  maybe a school, maybe something like that, where there's mandatory contributions usually.  Maybe the employer's putting money in, or you have to dedicate a certain, they just  have certain restrictions on, on the plan.

Thank you.

“Last year, I maxed out my Roth-“  Oh, see 403(b), there you have it. So, it’s probably a hospital. “- Roth IRA, HSA,  along with my 5.5% contribution to my employer 401(a) with 10% matching. Which is 42% savings  rate. By adding the employer match it’s 52.”

Wow.

52. Okay. “A friend of mine thinks I'm saving  too much in retirement accounts and says I should divert money into a brokerage. Their argument is  that a 30% savings rate for retirement accounts is more than enough, and apparently my frugal  lifestyle won't possibly change. So I don't need that much in retirement accounts that I won't  use until 30 years.” Who's telling them this?

His friend.

Got it.

Yeah, the friend. Friend of his.

30%. Who saves 30% in a  retirement account? I mean-

He does.

I wonder what Jay Z's buddy saves. He's  like, oh, man, you're saving 42%? Yeah. Well, no.

You're showing me up. I'm saving 4%.

Well, no, this guy must be saving, like, 41%.

Yeah, I mean, we tell people to try to  work up to 20%. That would be a great goal.

He's got that beat. “Their suggestion  is that I can still pretend to have a savings rate of 40% or 50%, but for anything above  30%, I should put it in index funds in my brokerage account for better liquidity,  which means I will max out my Roth IRAs, HSAs, and maybe only $12,000 in the 403(b)  plan, and put the remaining $11,500 into index funds in my brokerage account. What  do you think? I understand their point,

- imminent-

- imminent?

- imminent. As in pending. Very soon.

Purchase. Pending purchase.

Yes, got a pending purchase. “-  in about 3 to 5 years for a house down payment. I appreciate your spitball  as always. I drive a 2020 Mazda 3 Zoom Zoom and love margaritas,  but no salt. Remember no salt.”

Okay. Got it.

Alright.

Just in case you're pouring  next time Jay Z is in town.

Yeah, all right.

The cool thing is, looks like everything  he's doing, retirement, is going into Roth.

Right. I would keep doing what you're doing,  Jay Z. He's already got brokerage accounts, he's got cash, he's got about $100,000  outside of retirement accounts right now.

He does. Yep.

Your Roth IRAs that  you're putting money into, you always have access, let's say an emergency  of the contributions if you need to take that.

Is that, but is that also  true in a 401(a) and 403(b)?

No. Al: So that's the tricky part. He's not, he's not putting  a Roth IRA or just a 401(a)?

Well, he's got a, he's got a Roth IRA. Yep. Joe; So do Roth IRA. Yep. 403(b), I think it's mandatory with the 5.5%  401(a). Yep. Because it gets a 10% match. Agreed.

I would, no, I would  keep doing what you're doing.

Here's my only exception. I agree  with you, Joe. But depending upon what kind of house you want to buy, make sure  you've got enough for a down payment, whatever you might want, have extra cushion  emergency fund, maybe have a little extra money for travel. Once you factor that  and just keep doing what you're doing.

Because here's the difference. Roth IRAs  grow 100% tax-free. You'll never ever pay a dollar in taxes ever on the growth of those,  unless you have a disqualified distribution.

And here's another thing to think about,  which, which the Roth, once you, let's say you retire before age 55, which at your pace, I'm  guessing might be the case, right? And so if you've got the- the Roth 403(b), 401(a), whatever,  you can roll that to a Roth IRA, correct? So, and if you do that, then you could take distributions  from that, and it's always the contributions come out first, which are tax-free, so it  doesn't matter that you're not 59 and a half.

Yeah, he could do a 72(t) tax election, he could do all sorts of things,  because he doesn't spend any money.

Right.

Tax diversification works like this, Jay Z,  is that you want money in each of the different pools, pre-tax, Roth, in a brokerage account,  because then you can control your taxes long term in retirement. I think Jay Z's like,  you know what, I'm putting everything in Roth because I'm gonna pay zero tax when I start  taking money out. And he's gonna have millions.

Right, and his Social Security will be 100%  tax-free. Because he'll have no other income.

He saves 50% of his income. I don't  know. If I had 50% of my income saved today, I would go 100% Roth, and then in whatever,  30 years or 20 years when I retire-

Unless, unless you want to buy  a McMansion in Rancho Santa Fe.

McMansion. I don’t even know what that is.

Learn how tax diversification and the  infamous Roth can help you control your taxes

We got Ben from San Francisco writes in. He  goes, “Hello there, thanks for the fantastic show.

I think it's Traeger.

Traeger. “I have a question about rule  of 55 for 401(k) plans. My friend is forced to leave her job this year. Her employer has  given her an exit package in laying her off. She's currently 54. She doesn't turn 55 until  2025. Her husband is going to keep working. He has a very large retirement balance. They  have enough cash reserves to replace her lost income until 2025. She doesn't want to go back to  work, but she wants to start to take distributions

Yeah, we'll start there.

All right, Ben. So he's looking  after his girl. She's getting laid off. She's 54. Little layoff. Here's  a little severance package. Thanks for your time. But the rule of 55 is this,  which most people I don't think understand.

I think very few people understand.

If you separate from service from your  employer at age 55, there is no 10% penalty.

Yeah. In other words, you're 55, you separate  from service from your current employer only, not your other 401(k)s, current employer only, then  you can take monies out of that. And of course, you'll pay taxes on it because you got a tax  deduction, but you won't pay the 10% penalty.

If you roll it into an IRA, IRAs are  59 and a half. No matter what. 401(k)s are 55. So it's like, okay, well, man, she's  going to turn 55 soon. He's like, well, how does she get money? She wants to replace  her income. She's going to go get a job.

Yeah, part time job with a 401(k).

That's the only, only-

How about, how about set up your own  little business? And set up a solo 401(k)?

I don't think that works.

We've done it.

At Rule 55? and the solo 401(k)?

Yeah.

Isn’t there like- ? Well, anyway, her  only, her only requirement is that it needs to have a 401(k) plan, right? Because she's  going to roll her 401(k) into that 401(k), then she's going to turn 55. Then  she's going to separate from service.

Yeah, she'll retire  from that new part time job.

That she's worked for 4 months, rolled  her 401(k) in, and she's going to say, See you later, I’m out. And then now  that gives her the ability to take money out of the 401(k) plan and avoid  the 10% penalty. Do you agree with that?

I do. Do you?

Do you think that's worth the hassle? I mean, what is she going to do? Go maybe work at a liquor  store that has a 401(k) plan for like 3 days?

It depends what the dollars are  and how much, which we don't know.

You got to go, you got to interview, you  got to, and then you get the job and then you're, you know, I don't know. I don't know  if I would do all of that. Just, could you imagine just using  your employer for their 401(k)?

I'm sure people do it. Anyway, let's  answer the question. Yes, it works. Would, should you? I guess that's the question you're  asking. You're saying- you're saying you wouldn't.

Well, her husband has a big ass  retirement account, he said. Right. Stick, just borrow, take money from that account.

Yeah, I mean there's  different ways to carve this out.

You could take a 70 50 tax election.

Could. You'd have to roll that 401(k)  to an IRA and take the 72(t). You could do that. You could, you, you could do this. You  could get another job and then retire at 55, 55 or later, right? Doesn't have to be 55.  And then you can pull money out without penalty. So you have basically 4 and a  half years between 55 and 59 and a half, where you pull money out without  the 10% penalty. If you do this.

Sure. “I have a follow up question. She  currently has an IRA account with pre-tax dollars. Can she also roll that IRA into  the account of the new employer next year, and then get access to those dollars  penalty-free as well? 72(t) distribution is not a good fit for her as it wouldn't  generate enough cash flow to meet her needs.”

Got it.

What, what, Ben's running the  72(t) tax election calculation?

Well, it sounds like Ben's an advisor.

It sounds like, yes. And his  friend is his client. She's asking the question. He's like, yeah,  let me do a little research.

Yeah, let me- let me talk to the YMYW.

Let me hit up the boys in San Diego.

So the answer to that question  is yes, you can roll the IRA into the new 401(k) which is actually a great  strategy because if there's any post-tax dollars in there that can be- that can be  converted to a Roth IRA without any tax.

Very good Ben. Hopefully  that helps. If you have more questions for your clients, you know where to go.

I thought that was 3 star.

It's 3 star, but he loves it when they're  one star, so he's downgrading it for us.

Yes. If it's not 5, it's one.  If it’s not first, you're last.

Usually it's one or the other,  right? So this is a 3. We don't get too many 3s. Who, who would do a review with a 3? It's like, you're average.  You know, it's all right. I don't, I'm not, I'm not loving it, but it's all right.

Yeah. “Entertaining show with some useful  input into retirement strategy.” All right.

That sounds like a 5.

Sounds at least a 5. “Understandably,  the spit balls are limited in detail and scope that they can provide. So suggestions can come  across as repetitive after a few episodes.” Yeah, trust me. That's why I've never listened to this.  You've listened to one, you listen to them all.

Here's- we do answer the questions  that are presented. And they are, they do tend to be somewhat similar.

“The feedback provided also  is overly conservative at times.”

Oh, I'm okay with that comment. I would rather  be talking conservative than not, when it comes to finances. Because I don't want to like, make you  think you're fine when you're not quite so good.

“Failing to consider all guaranteed  income or diminished spending as you age when setting appropriate target withdrawal rates.”

Well, guaranteed income.

So what, is that an annuity of some sort or?

Yeah, I mean, I think we do pensions,  we do Social Security. If there aren't, most people that write in don't have annuities,  so it doesn't come up very often. But as far as spending less, yeah, that can be, but  the reason we don't think about that-

I totally agree with this guy or gal.

Yeah, well, I would say this. I would  say there are many cases where spending goes up as you age because you've got  to go to assist a living or a nursing home or something like that. So again, being  conservative, we just try to factor that in.

One of two things happens here  because this person, Wembley. Wemblyy?

Wemby.

Wemby.

Wemby.

I agree. Because here's what happens. I  fumble around and try to read these questions, and it takes me a while to get through the  questions. And then all of a sudden Andi goes, well, you've got one minute.  So then we're, all right, let's quickly do this. Okay. Yeah. 4% looks  good. Okay. All right. Next question. That's terrible. Because we gotta get into a lot more  detail, and he's right, because some people, it's like a 7%, 8% burn rate might be just  fine, because you're gonna spend less,

True.

You know, some people are like,  well, why do you always say 70 for Social Security? I want to take it  right now, because I want to party, and I live in The Villages in Florida. It's like,  all right, well take it at 62. We don't care.

Yeah. Yeah. It's basically when we, when  people ask, am I okay, we're, we're kind of-

This is very conservative  and it's way back of the envelope.

It's, it's just based upon a quick back  of the envelope. This is, this is not gospel. This is just, yeah, you look like you probably  pretty good. Or you, or you look like you, you look like you're fantastic or I don't know, it's  a little close or no, I don't think you're ready.

We're going to switch this thing up,  we're going to spend a little bit more time, we'll talk a little bit more details, we'll  get into some more complex strategies.

I like that. We'll just share, we’ll  just show off our knowledge, you know. We need different questions, like  we need someone to say, you know, I got $1,000,000 of company stock  in my 401(k), and the cost basis is-

What do you think of private credit?  Okay. Well, now I can go on a rant on that.

Yeah. How about alternative investors?

Yeah, I got a private equity fund.

Part of a portfolio.

Should we put that in? Have you  ever heard of liquid alternatives?

So you'd say our show is a 3  out of 5 stars right now too, right?

I would say it's probably  a high one and a half.

Oh, wow.

If I were to rate our  show, I'd give it a good one.

That's why you can't listen to it. Joe; It's well, it's no- Well, I would disagree  with you. I would say most of our listeners give us 5 stars.  And most are very complimentary.

All right. Yeah, no, I  agree. You're Mr. Positive.

My glass is always half full. My  glass is like 90% full. All the time.

Your glass is always full. Even if it's-

Even there's 10% in, it's full.

All right. Thank you all for  everything. We got to get the hell out of here. Show's called Your Money,  Your Wealth®, and we'll see you next time.

Ginger vs. Mary Ann, Patrick  Swayze, Dry January, frugally, the cost of living in Minnesota and visiting the  Traeger Grill in the Derails, so stick around. This show wouldn’t be a show without you,  and when you your friends about YMYW, or leave your honest reviews and ratings for Your  Money, Your Wealth in Apple Podcasts and all the other apps that accept them, you help us grow  the show, and we appreciate you. So thank you.