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December 9, 2023 - Money Matters Podcast

After-tax 401(k) contributions, year-end tax tips, guidance on annuities, and more.

On this week’s Money Matters, Scott and Pat discuss why the struggle is real for some younger investors. A 49-year-old California man wants to know whether he should make an after-tax contribution to his 401(k). The director of Allworth’s tax division breaks down strategic moves to make before the end of the year. Finally, a caller who just retired asks whether he should move some of his money into an annuity.

Join Money Matters:  Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here.  You can also be on the air by emailing Scott and Pat at

Download and rate our podcast here.


Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.

Scott: Welcome to All Worths of Money Matters, Scott Hanson.

Pat: Pat McClain. Thanks for joining us.

Scott: That's right. As we talk about financial matters, both myself and my co-host here. We're both financial advisors, co-hosts and long-term business partner, I might add.

Pat: Yeah, long time.

Scott: Since 1991.

Pat: Is that right?

Scott: We started working together. We did joint work together, yeah. Anyway, we are both financial advisors throughout the weekday, and come here to broadcast on the weekends, being your financial advisors on the air and over podcasts, and glad you are with us. I think we're going to have some calls today, as typical. We also have our director of tax solutions talking about some year-end tax tips. So Suzanne's going to join us for a bit.

Pat: She is an important part.

Scott: You think?

Pat: Yes, especially getting down to the end of the year, the things that you can do now that will affect the check that you may or may not have to write in the first quarter or second quarter of next year.

Scott: Before we do that, go to the calls, we were just chatting, just before we went on air, and you were saying you asked someone in our studio here how old they were. You said you were wondering if they were a millennial.

Pat: That's right.

Scott: And then we're having this discussion about millennials and... Some are working their butts off.

Pat: Some are. It is not a fair assessment to throw everyone into a single.

Scott: No, no, no. But I saw a study several months ago and it showed the economic prosperity of millennials and there's this tremendous bifurcation that we had not seen in other generations before, where there's a good chunk that are doing extremely well. You probably have a couple of kids that you would say extremely. And then there's also a massive chunk that are still struggling. Baristas and trying to string together a couple of jobs. And there's like no middle. So they're either working for a tech company or whatever, they're career-minded, doing well, making six figures or plus, or they're struggling. And not a lot in the middle.

Pat: And what did they... Was there any thought as to why this is occurring?

Scott: I don't know. I mean, from a social scientist perspective. It's reality, though.

Pat: It is reality. And with with the housing market today. It's really difficult. I was thinking's funny, I was thinking back like when I was 19 or 20. I was in college, it was a little different, but I remember I had some friends that skipped college and they were just paying rent and like, how hard was it then? So if you got a job back then, minimum wage was four or five bucks an hour in 1990...I'm sorry, 1984 when I graduated high school. Minimum wage, four or five bucks an hour. And rent was, if you worked full time at minimum wage, it still wasn't enough to get an apartment on your own. You would have to share with somebody.

Pat: Or a room or...which is cohabitation, that's just part of life.

Scott: Yes, and it's, but I think it's even more challenging today, even more difficult. And then on the home ownership. It's tremendously difficult. Home ownership, the home that I bought in 1992 when I was first married was about $200,000. The house today is probably $750,000 or $800,000. So it's gone up 4x.

Pat: And inflation hasn't moved that fast.

Scott: That's right. And starting wage for a few years out of college wouldn't have been quite the same.

Pat: Yes, hasn't moved.

Scott: Couldn't afford that same house.

Pat: It has not moved that quickly. And the pandemic. The pandemic actually set lots of...the response to the pandemic set lots of people back.

Scott: Because you could stay in college. There were programs to pay you to stay in college.

Scott: You couldn't actually go in person.

Pat: No.

Scott: Anyway, it's a strange economy...

Pat: Well, it's actually...what we probably will start to see is a relocation. And we've started seeing it out of high-cost states to low-cost states. Many of my clients have moved to the Midwest.

Scott: Yeah, we're broadcasting in Northern California, where we've lived most of our lives.

Pat: Yes. Many of my clients have moved to the Midwest because their children have moved to the Midwest. And you're like, well, why would they move to the Midwest? Well, I know one family. Everyone in the family has moved to the state of Tennessee. And so the grandparents are following to the state of Tennessee. And they've lived in California their whole entire life. They moved here in their twenties and they're in their eighties now, and they're moving to Tennessee. And it's not because they can't afford to live in California. It's because they want to be...

Scott: The kids can't afford to live in California.

Pat: Kids cannot afford to live in California. You know, what was amazing, I was reading yesterday, the highest per capita of the highest per capita incomes in the United States was in the state of Wyoming.

Scott: Wyoming?

Pat: Wyoming because of the taxation and...

Scott: All the wealthy people that have moved to Jackson Hole.

Pat: That's right.

Scott: By the ranches, and they live there seven months a year.

Pat: And dislocated the people that are living there. They dislocated those people. So wealth moves to an area and then... Actually, there was an article in "The Wall Street Journal" a few weeks ago. It was called, "Your House Made You Rich Now Move." And it talks exactly about how in areas where housing prices have gone up so much that people are saying, well, I could live someplace different. It's a strange...

Scott: Right, and at the same time when you've're in a house, let's say you've got a $400,000 mortgage at 3% and unless you're gonna go and move somewhere where you can buy a house with cash...

Pat: You're not moving.

Scott: Which is creating... You know, so I was talking to somebody who had a...they had a place and they moved to Whitefish, Montana. They lived in Canada, they were Canadian, and they bought a place in Whitefish, Montana. Whitefish, that's the name.

Pat: Canada wasn't cold enough for them?

Scott: Isn't it Whitefish? That's the town, right? It's supposed to be like some new hip...

Pat: I don't know, I'm not into it.

Scott: Yeah, Whitefish. I was there briefly a couple years ago. And they were talking about these condo developments, these duplexes that they're selling, and their duplex is going for $1 million. And I thought, Montana, like what state has more land than Montana? That's funny. And you can't even get a single family, you can't afford a single-family home in Montana. I thought it was a bit ironic.

Pat: A lot of the land is actually owned by the government in Montana, but that's a different story altogether.

Scott: I was not aware of that.

Pat: Yes.

Scott: So anyway, all right, let's give out our phone number. What do you think?

Pat: 833-99-WORTH that's 833-999-6784 if you'd like to join the show. And if you call in. We will arrange a time to speak to you.

Scott: That's right. Let's start off here with Jeremy. Jeremy, you're with Allworth's "Money Matters."

Jeremy: Well, hello, gentlemen.

Scott: Hi, Jeremy.

Jeremy: First, I want to say thank you for taking my call, but more than that, I just want to say that I stumbled on your guys' show back in late 1995, I believe. And I hear you guys say you've been doing this for 28 years, and I think that I must have found you very near the beginning.

Scott: Yeah, because we started in the middle of '95.

Jeremy: Okay, and that's when I started my first, what I would call, actual job. And I started listening to you guys, and I'd made it a priority that I would go home on Saturday afternoon, noon I believe it was, and I would wait for you guys' to show to come on and listen to it. I think it was two hours back then. And I learned a lot with you guys over the years, and I really got fascinated with the idea of compound growth.

And you just mentioned you were talking about minimum wage a little ago. And that's... How much I made at the time, it was $5.35 an hour. And I started by saving $20 a week at the time.

Pat: Wow.

Jeremy: And over the years, I've gotten raises and promotions, I've upped that savings. And I put a lot of it onto what I've learned from you guys. And I know I've listened to you guys long enough that you'll say, I did the hard work. I did the hard work.

Scott: You did the hard work.

Jeremy: But it was a lot of the things you said that kept me grounded. Things about the markets going up and down and staying invested, leaving it where it was, not monkeying with the money and changing investments around too much. And just a lot of good advice over the years kept me interested, kept me reading books and learning more and more about finances. And I really want to thank you guys for that. You have a partnership in this, I promise.

Pat: Well, thank you. That made my day. But you were the disciplined one.

Scott: It more than made my day. There were many, many weekends where there was a tremendous sacrifice to come in and do the show and missing kids' sporting events and a variety of things. And I mean, when we used to broadcast live on the weekends, and I suppose I could look back at this stage of my life say this has been my life work. But money it's just a piece of life, but it's really hard to have a lot of peace in your life when you don't have financial peace at home. By having some financial independence, it gives you tremendous flexibility in where to use your gifts and talents in life.

Pat: And you should be proud of your discipline too. You were disciplined.

Jeremy: Yeah. And another thing you guys say that I'm really trying to know, I'll be 50 this later on, early into 2024. And I'm trying to convince myself as we go along that at some point I have to transition from that saver into someone who's willing to spend it. You know, that's going to be a difficult transition for me. But I hear you guys talk about it, and I know that that's something that I need to work on.

Scott: Those are good problems to have.

Jeremy: Yeah, and that's true. I try not to complain. But as you said, the piece of it, and the other thing you guys say about being able to choose what you do, when you do, and how you do it, that's a neat piece of advice. But I always thought the financial security, it just brought me peace at home because I remember a time not having very much money where just little things might cause a rift between me and my wife, which I wouldn't want. But it could. It's just something going wrong with the refrigerator breaking or something. It brings a level of stress into a home, I think.

Scott: Yeah. Yeah. Exactly.

Jeremy: Having some security behind you really, allows you to live just a little more peacefully, I think. That was my goal is.

Pat: Jeremy, to this day, I can remember having almost no money, weeding in the backyard, hitting a rock, the rock flying into a sliding glass window and breaking it and me thinking, what the heck? Just like...

Scott: You have no money for the sliding glass door.

Pat: I had no money. And you're just like, "Oh, well, I've got to replace this sliding glass door." And you think about that now and you think back and you're like, well, that's part of it. That's just part of life. Anyway, what's your question for us?

Jeremy: So last week you were speaking to a gentleman and I thought I'd heard all the questions. And he was talking about an after-tax contribution to his 401(k), and this is something I just started looking into a couple of weeks ago. And you had asked him the question if he had an IRA outside, and I'm assuming that would have to do with the taxation where they call that the pro rata. I don't understand it completely.

Pat: That's correct That's correct.

Jeremy: But he had said no, so you guys didn't continue down that path. But I do, so I'm wondering if that's going to affect what I'm trying to accomplish. Now what I'm going to do, the way my company's plan works is they will do an in-plan conversion on the day that it enters. So they say there won't really be any tax consequences but that I know, as soon as it goes in after tax that day it will convert to a Roth. I didn't know if maybe that would...

Scott: You're kidding.

Jeremy: That's what Fidelity said. I called them and they set it up for me and they said it would be immediate.

Scott: So let me... So this is for contributions in excess of the limits. Is that right?

Jeremy: Correct, correct.

Scott: And they're saying that you can make an after-tax contribution and they will immediately convert it to a Roth 401(k). You don't have to convert it to a Roth IRA.

Jeremy: Correct.

Scott: Wow, I've not seen that. I have. That's new to me.

Jeremy: Oh. I mean, that's the way they explained it to me. And you know, they never asked me where to send, you know, where to send the money outside. But I mean...

Scott: Because what typically happens, first of all, a lot of companies don't allow for excess contributions on an after-tax...a lot of 401(k)s don't allow for after-tax contributions. So once you max out either pre-tax or Roth contributions to your 401(k), you're maxed out, some companies allow you to continue to make contributions on an after-tax basis. And when you do that, let's say you put in $10,000, any growth, if you leave it that way, any growth is going to go into the tax-deferred portion. So let's say that 10 grand ends up making 5 grand over the next several years, that 5,000 is going to be part of the tax-deferred portion of your retirement account. So at retirement time, when you say you transfer it all out, that 5,000 of earnings is going to stick, it's going to go into a regular IRA, while the 10,000 after-tax conversion can go to a Roth. If you can immediately convert it to a Roth, then that $5,000 growth is going to be in the Roth portion. That's why oftentimes it's encouraged to people, on an annual basis, to do an in-service... This is how it's been historically, and it hasn't been happening in that many years where you can do these things. Historically, it's been, you put the money in after taxes, at the end of the year you do an in-service distribution, and you convert it to a Roth IRA. So that way that future growth stays in the Roth as opposed to...

Pat: And that's when the pro rata comes into place...

Scott: With other IRAs.

Pat: With other IRAs, but it doesn't... It makes sense to me. And it makes sense. I don't... We'd have to look at the tax law, but if the plan allows for it, it makes absolute sense.

Jeremy: So if there's no earnings growth, then it probably shouldn't cause any issues for my outside pre-tax IRA?

Pat: That's correct. That's correct. That's correct.

Scott: I'm still suspect.

Pat: I wouldn't, I would do a little bit more research before I said, but what you just explained is correct. It's no different than when I make an after-tax contribution to an IRA. Wait one second, I make an after-tax contribution to an IRA, I convert to a Roth IRA the very next day, it makes perfect sense.

Scott: But you can't call up your employer and say, hey, I've got $100,000 in my 401(k). I'd like to take $10,000 and convert it to the Roth 401(k). I've never heard of that. Because by doing that, this is essentially the same thing. It skirts the rules of having to say, what is your tax basis in your IRAs and taking that into consideration where the pro-rata accounting comes into play.

Pat: How many people did you talk to at Fidelity that answered the question?

Jeremy: Just one. Now, my HR department here that I work for told me I needed to call them to set it up because, you know, I need to call them to set up the automatic conversions. And so, when I called in, I told him what I was trying to accomplish. And he said, they sent me over to the person who handles our company, I guess. And he said, yeah. And I asked him directly, is this going to cause any taxes, like any growth taxes inside this plan that I'm going... I was more concerned with I'm going to end up with another tax filing problem more than anything. And he said, no, it happens immediately. And there won't be any taxes because there won't be any growth.

Pat: Wow. Well, listen. You've been listening to the show for a long time.

Scott: We actually have a retirement plan division at Allworths.

Pat: We can ask them.

Scott: Many companies have full retirement plans with us and I will actually make sure I follow up. My guess is this has been a change that has slipped us.

Jeremy: And maybe if I can add on and just ask, I mean, is Roth...maybe am I getting too heavy into this Roth?

Scott: Nope, nope.

Jeremy: Because I really don't know that I'm going to be in California forever and I feel like I'm paying this big tax upfront that I'm not going to... You know, so basically I'm paying 35% today for what might only be a 20% or 22%, 25% maybe later.

Scott: Well, on the after... So we've been discussing after-tax contributions. We have not...and you have don't have the ability to take tax deductions because you've already maxed out your 401(k). So on your 401(k).

Pat: On A pretax basis. Have you have you maxed out your...

Jeremy: My 401(k) is almost all Roth as well.

Pat: Well, that's a different question altogether. So that's a completely different question. Yeah.

Jeremy: I've got it 50-50. So basically almost to the dollar, I have 50% of our retirement in pre-tax and 50% in Roth.

Pat: And what are those balances?

Jeremy: It's right around $600,000 each.

Pat: And you said you're in your 50s?

Scott: 49.

Jeremy: I'll be 50 in two months.

Scott: And what's your family income?

Jeremy: Oh, probably. I mean, give or take $250,000. We're also...we're in the midst of, you know, we're cash flowing a daughter in college who will graduate later this year. And then we have a two-year break, which is why I was going to go to after-tax because we have a two-year break before our second daughter goes off to college. And so we'll have some excess money. And what I'm trying to get done here is I'd like to have basically my retirement done by like 55. Not that I want to stop working, but I would like us to be able to do more.

Scott: And you think you'll leave California?

Jeremy: I mean, it's actually our dream to leave the United States and nothing against the United States or California. They've been very good to me, but I just I feel like we would like to do we want to try another culture.

Pat: Like move to Spain or...

Jeremy: What's that?

Pat: Spain, Costa Rica, Ecuador.

Jeremy: Costa Rica is our dream. We're going there for our third time next week, as a matter of fact. And when we went down there, I think that we'd kind of like to start a business of running some rental units and rental properties down there.

Pat: Then I would make it all pre-tax contributions, 100%.

Scott: Yeah, because you're going to have a very different tax structure. Because right now, with $250,000, you're right near the 32% tax bracket. So after you, I don't know if you itemize or standardize, but after you... either one of those is probably for most people, the vast majority of Americans take a standard deduction now, which is $27,000. After that, income above $230,000 goes from 32% to 35%. But even at $180,000 you jump from 24% to 32%.

Jeremy: Now, I mentioned I was married, right?

Scott: Yeah, I'm looking at...oh, wait, I got my finger on the wrong spot. And I should be better at this.

Jeremy: You're kind of tethered between the 22% and the 24%.

Scott: Yep, yep, let's just look at it right here. You're 24%.

Pat: So, make those all pre-tax.

Scott: I'd make them all pretax. You're paying 9.3%...

Jeremy: Yeah.

Scott: California. Maybe even more than that.

Jeremy: But the other thing that I listen to you guys a lot on and that's leaned me toward Roth a little bit is that someday they're going to probably strongly means test on the social security. And I thought if they do that, they may start with just your taxable income. And so, you know, if you can keep your taxable income low by using Roth, you might get more of your social security dollars.

Scott: But let's say you're $600,000. Let's say you don't contribute. Well, even if you contribute it for the next several years, let's even say that's $2 million, which would be a long time from now, required minimum distributions about $80,000 a year. That might be your only taxable income.

Pat: Yeah, you absolutely want to go pre-tax. Absolutely.

Jeremy: Okay.

Pat: I would.

Jeremy: We put 1005 of my wife's in pre-tax and usually what I do is I do just enough...I do enough pre-tax to keep us below the threshold so that we can still do Roth in an IRA for each of us.

Scott: Got it.

Jeremy: Does that make sense?

Scott: That does make sense.

Jeremy: So, you know, we take the standard deduction plus the $23,000 deduction for her and then maybe around another $10,000 to $15,000 on mine. We end up just below to where we can do an IRA on the outside.

Pat: That's right. And I would still go pre-tax based on the premise that you're going to leave the state of California.

Scott: I got a question. Are you doing IRAs or Roth IRAs?

Jeremy: I'm sorry?

Pat: He said Roth IRAs.Yeah, so still pre-tax. And you have a question. Oh, I had a comment about Costa Rica. So my family and I went to... It's a small world, right? It is a very, very small world. My family and I went to Costa Rica.

Scott: It's a small world if you have money to buy plane tickets to fly your family to Costa Rica. I don't think you flew to Costa Rica as a kid growing up in the McClain household.

Pat: We went camping. With a two-hour drive. We did.

Scott: Same thing with how I grew up. No Costa Rica for the Hanson family, Hanson kids when I was growing up.

Pat: Oh, this is really now going to sound like a rich person's story.

Scott: Yes it does, yes.

Pat: Okay, we were on a private yacht off the coast of Costa Rica. We were not. We were in Costa Rica and we were on this trip with the four kids and we had...

Scott: By the way, Costa Rica you can do very inexpensive.

Pat: Oh, it's very, very inexpensive.

Scott: Much less expensive than Hawaii. It's probably less expensive than Cabo.

Pat: And it's beautiful. So we get in this van and we go to this resort in the middle of nowhere. And it's up this dirt road and it's muddy, and we get there and we get to the resort and there's almost no one. It's a beautiful resort. There's almost no one at the resort and it's not that expensive. Couple hundred dollars a day per room and it's beautiful and we're at the beach. And at the end of the day my wife and I are in the swimming pool and we swim up to the swim up bar because we can. We can swim and...

Scott: There's a bar in the pool.

Pat: And there's a bar in the pool. And we're standing there and we're having a drink and the guy next to me goes, "Hey, Pat, how's it going?" And I'm like, what? He goes, "Oh, I go from the gym." And I'm thinking... But now you ruined my story by making it a rich person's story. I was in San Francisco a couple weeks ago and the gym that I went to when I was there had a executive men's locker room. There's the executive portion. Oh, so I had never seen...oh, no, the gym I got to [crosstalk 00:24:58.804]

Scott: [crosstalk 00:24:59.062] executive gym.

Pat: But what I liked about the guy is that, in order to save money, he rented a Vrbo right next to the resort and then would sneak in every day. Anyway, well Jeremy, thank you for indulging me in my little story.

Scott: Yeah, and thinking you taught us something today.

Pat: Yes, thank you. Appreciate your time.

Jeremy: And thank you guys for your part in where I am today. I really, really do appreciate it. There's a ton of people out there that you'll never talk to who you've made that difference in their lives as well.

Pat: Wow.

Jeremy: Who appreciate that, I hope.

Scott: Well, thank you. I'm going to play this little clip of recording when I wake up in a bad mood and feel sorry for myself about something.

Pat: I'm gonna play it for my family on Christmas.

Scott: I feel the grave injustices of my life.

Pat: Christmas morning, I'm playing it for my family.

Scott: Before you get the stockings kids, do you guys still do stockings? Does your wife do stockings for the kids?

Pat: Yes, she does. Yes.

Scott: Do you get stocking stuff, a Pat stocking?

Pat: There's one on the fireplace, is there stuff in it? I don't remember.

Scott: Good thing your wife doesn't listen. Because she's...

Pat: I don't think so. I don't think there's anything in mine. Anyway, obviously, I haven't paid enough attention or I would remember.

Scott: Yeah. Hey, we've got a special guest in our studio today, Suzanne Conrad, who, heads up, she's a director of our tax solutions within Allworth. We've got a team of CPAs and tax professionals here to do with taxes. And she was kind enough to join us in the studio to talk about some year-end tax tips. But before we get to that, with the tax season this year and a lot of a lot of California...much of California, people were able to automatically extend till October. And then it...wasn't it like October 15th or something, they just automatic extension again?

Suzanne: Yes, it was like at 11:00 on the due date they decided to give everybody an extra month. So that was fantastic. You know, it helped a few people, but it just went.

Scott: It helped a few, just made your entire life worse, right?

Suzanne: You know, there are a few people that it actually helped and we could take advantage of, but it was so late in the day. It was kind of crazy just since COVID, you know, what's what's happened with the tax world is just...kind of turn things around as it has for so many people.

Scott: So with some things to do, which we're in December now, what are some things that people can do that can have a meaningful impact on their tax bill? Not just next year, but long term.

Suzanne: You know long-term, obviously, planning is an all-year-round thing ideally, but there are things we can do in September and you know towards the end of the year.

Scott: Yeah, it's supposed to be all year. It's supposed to be. Most people are busy with their lives and...

Pat: Let's assume that people wait until the month of December.

Suzanne: Okay, assuming they wait till December, there are, you know, donations we can look at. You can look at gifting, you know, stocks with appreciation to family members, right? So you can transfer those assets out. Maybe your family member is lower earning, they can take advantage of some of the 0% tax bracket.

Scott: Yeah, because even on capital gains, a single person with income of 45 grand roughly or less, there's zero tax on the capital gains, right?

Suzanne: That's correct.

Scott: So like a college student or someone just getting started in life.

Suzanne: Yeah, it's a great family wealth transfer strategy, right? You know, if you want to just pass it on, help your kids a little bit, teach them a little bit about investing, that's a great way to go. Then also, you know, there are some charitable donations you can make with the appreciated stock. You can also donate appreciated stock to a charitable organization. You know, instead of sending your own cash, you send the shares to the organization. You get the fair market value of the donation instead of the cost basis. So the organization benefits from the appreciation. You may get a deduction for that.

Scott: So let me ask you a question about that. How many years have you been doing taxes?

Suzanne: Twenty-four.

Scott: Okay. And how often do you see people that are making...let's just say, large enough charitable contributions that it would make sense to give stock and mutual funds as opposed to cash. How often do you see people who have made cash contributions when they should have made...they would have been better off making contributions of securities?

Pat: Is it the majority of the time?

Suzanne: You know, after the 2018 tax changes, it's a lot harder to benefit from charitable donations, and I think that's what you're getting at.

Scott: Because a lot of people take a standardized deduction.

Suzanne: Yeah, the standardized deduction is so much higher. So you have to get creative in your donating to be able to have a benefit. And that's a great point is, you know, donating the stock, if you're going to donate money anyway. And you're not going to get an itemized deduction for it, why not, you know, move those appreciated shares over so you don't have to take the gains and then give it, you just want to give it directly? It's a better way to go.

Scott: Or we've also encouraged some people, how about give two years worth of giving? Let's say someone, they're tied to their church all the time and they don't get the tax deduction anymore. Say, why don't you throw an extra, use a donor-advised fund, do two or three years worth of contributions?

Pat: And then drive yourself into an area where you could actually take benefit on an itemized deduction basis.

Suzanne: Absolutely, that's a great idea as well. And then you can kind of, you know, in a higher income year, if you tend to tithe 10%, right, then, then you might get over that standard deduction. You do that donor-advised fund, you do two or three years, you get the deduction in the current year, and then you spread out your distributions to the charitable organizations. And if you have medical, you know, some we age, we have more medical issues sometimes. And so if you have enough medical expenses where you're over that itemized deduction threshold, you might want to couple that with a donor-advised fund donation, and then you can take advantage of itemized deductions.

Pat: And I want to step back a little bit about this gifting. So I had some clients that came in last week and they wanted to gift a house to their children, but their children are in the same tax bracket as they are. And they're in clients are in their 80s. And so I had to explain to him how step-up in basis works, right? Which by the way, you know, sitting with a client and talking about their death and how it's actually good for their tax situation is it's a little bit uncomfortable. As I said, look, this is going to...

Scott: It's the reality though, someone's in their 80s, it's like, let's do everything we can to avoid selling some securities. As soon as someone passes away, we can avoid all that kind of thing.

Pat: By the way, if the children are in a high tax bracket, the idea of actually gifting your appreciated stock to them helps nobody.

Suzanne: Nobody, correct.

Pat: Nobody. In fact, if they're in a higher tax bracket, which is often the case, it actually hurts. So when you're hearing this advice, don't take it as like, "This is what I'm going to do." I just want to caution the listeners because a large part of it kind of depends on where you're at in life. And you're in your 60s and the kids are in a lower tax bracket, but not in zero. It might make sense, but if you're in your 80s or 90s and the end is probably near, we don't know, then you might be better off...

Scott: You're much closer to the end than when you're younger. I mean, come on. No one gets out of here alive the last I looked.

Suzanne: Right. As you were saying that, I'm shaking my head, no. And there's been a change in the property tax laws in California, and so I think people are trying to get around increased property taxes by transferring their house, but usually the appreciation in the house and that stepped up benefit is gonna be significantly greater than 10 or 15 years of property taxes. So that's where you really need some planning and to be talking to all your advisors.

Pat: Suzanne, another client three weeks ago said to me, we're moving these properties into my kids' names now because of Prop 13. And I'm like, just.

Suzanne: Hold on.

Pat: Just stop. You're talking about pennies and I'm talking about dollars. So, and they said, well, how do we get out of this Prop 13? And I'm like, you don't. No. You do not. We can make that and you could feel good about getting out of Prop 13 in the state of California, but you're gonna make the overall situation so much worse for yourself. By the way, I do have a question for you.

Scott: That's why she's here to answer our questions.

Pat: Thank you. This step up in bases at death makes no sense to me. It makes none.

Scott: Well, unless you argue that capital gains in and of itself makes no sense. You've already been taxed on the capital and much of that gain is just inflation anyway.

Pat: Okay.

Scott: Anyway, continue with your question.

Suzanne: No, it doesn't, but it's a fantastic thing as long as it's here. In the last round of tax proposals that didn't go through, they actually really were talking about significantly changing that, which is, you know, they always grumble about it, but in my 24 years, this was kind of the most seriously they've really looked at it.

Scott: And it was more if my recollection was correct, it was at higher income folks. Correct. Yeah, certain amounts.

Suzanne: Correct, yeah. About certain amounts. Yeah, so I think we should take advantage of it while it's here.

Pat: And so the Supreme Court is hearing this last week or work on this taxation for unrecognized gain and it was kind of a cork in the law for repatriation of foreign assets, is the way I understood it.

Suzanne: Yes.

Scott: You want her to opine on what the Supreme Court may rule next June?

Pat: Yes. But how do you think about that? If someone's going to pay tax on unrecognized gain, what does...

Suzanne: I mean, it kind of goes against the foundation of the tax code, which, you know, in tax 101, we learned it's based on the wherewithal to pay, right? So you shouldn't have to pay tax if you didn't get some money to pay that tax. And so, I don't know, you know, it just it doesn't make sense.

Pat: It doesn't make sense.

Suzanne: No, it doesn't make sense. So hopefully.

Pat: It's actually very, very bad for capital formation.

Suzanne: Yes, I bet.

Pat: It's extremely dangerous for capital [crosstalk 00:35:15.098].

Scott: Of course.

Suzanne: Yeah, for sure. There's a lot of people with a lot of money that will not like that.

Scott: How disruptive if suddenly you start taxing the appreciated assets that you haven't realized.

Suzanne: Yeah, it's going to be a disaster.

Scott: I mean, you're a farmer and all of a sudden, hey, you owe $3 million.

Pat: Yes. Because someone built a condo next to your property and all of a sudden you're out there growing hay and your property value has gone up and you had nothing to do with it.

Scott: Can you speak a bit to tax loss harvesting? So one of the things that we talk about a lot with our clients in planning alongside with our Allworth tax team, is for money that's outside of retirement accounts, it's managing on a tax smart basis, right? So there are times we look at some tax loss harvesting, there's times when we harvest some gains and realize some gains this year. Like, maybe you can speak to, you know, the benefits and maybe the downsides of those things.

Suzanne: Yeah, and that's a silver lining in a down market, right? We can look at some underperforming assets, take some losses and bank those for future gains. You can either offset it in the current year and then take know, so you always...if you can, I mean, you'd always want gains, right? But if you can't, you want to offset those by losses. And so you can go to zero and below by $3,000. So tax loss harvesting is taking those losses and either offsetting current year gains or future year gains. And it can be stock sale gains, investment gains, or if we know you're going to sell a property next year and you're going to have significant gains, we're in a down market, let's harvest some of those losses so that house sale is tax free. So it's really a good strategy and it takes forward-looking planning, right? You know, it's not just this year, it's two, three, four years out possibly. You know, you want to be careful. A lot of our clients are a bit on the older side as we talked about. So you don't want to harvest these losses and pass away with 200 grand, right? So, you know, we want to be smart about how we're doing it, but definitely an integrated approach and looking at those losses is really useful.

Pat: And it works that as long as you don't buy the same thing within 31 days, you can buy something similar but not identical, correct?

Suzanne: Correct, yeah, otherwise you're subject to watch sale losses, the gain goes away.

Pat: So it's not that hard to do and actually keep your relative same position.

Scott: Well, I think, and even if you look at direct indexing, which if you've got a large enough investment, I mean, direct indexing can work beautifully. Let's say you're trying to mimic the S&P 500. In any year, there's plenty of stocks that have lost money, right? And it gives you an opportunity to harvest some losses.

Suzanne: And I leave that piece to you guys. I tell you what we need. They're going to gain 200 grand on their house sales. What can you do?

Pat: All right, we do our best. We do our best.

Scott: What are some of the most common mistakes that people make when it comes to their taxes?

Suzanne: Not talking to us before they make a move.

Pat: It's true. Yeah, and you know and the losses psychologically it's clients have a hard time with it.

Scott: That's a good answer.

Pat: Right?

Scott: Whether it's that, it's really any major move. I think people oftentimes avoid tax professionals, they avoid financial advisors. I don't know if they think that it's not worth their time and money, and I can just see, "How hard can it be? I think I know what I'm doing. I'll just do it myself." And then it's after the fact, oftentimes there's nothing you can do, right?

Suzanne: No, they come in April. They're like, 'Hey, I sold a house. I have a 200 grand gain. What can you do for me?" I'm like, "Nothing. You know, I don't have a magic wand." So that's where the proactive tax planning really comes into play, where we can look at harvesting losses, or they can make some donations before year-end, make sure they're maxing out their 401(k), you know, with pre-tax dollars to the call you guys had when I came in.

Pat: Or use of 529s.

Suzanne: Yeah, I mean, that's not going to save money tax dollars now, but it will as that money grows. Definitely getting that to support your education is awesome as well.

Pat: Yeah, I mean, it is just part of a long-term financial plan. The 529 is now that you can convert it to a Roth and the...

Scott: You're limited to like 30 grand or something.

Suzanne: Yeah, and you have to have held it a long time, but still that money's not gone, right? Prior to that, the planning was, well, we'll have a 529. If they don't use it for school, we'll pay some penalties. But now you can actually not have to do that. So that's pretty awesome.

Scott: Yeah, well thanks for taking some time, Suzanne.

Suzanne: Thank you, guys. I appreciate it.

Pat: Thanks for being part of the Allworth team.

Scott: Part of it? She's the director of our tax solutions.

Pat: She's still part of a team.

Scott: That's true.

Suzanne: I am a team girl.

Pat: Otherwise there would be no director. Right? There would just be...

Suzanne: Directing myself.

Pat: You would be tax solutions.

Pat: But I know our financial planning team relies heavily on your team too. There's constant communication between... In fact, I had it myself with your team this week.

Suzanne: Yes. Oh good, yeah that's great. I think, you know, I just really truly believe in the integration of tax and financial planning. I think we can add so much value and save people heartache and frustration, you know. That's what we do this for, right, the relationship and helping people out.

Scott: Yes, and it's complicated.

Suzanne: It is hard. What we do is hard.

Scott: It's very complicated and it becomes more complicated. Life is more complicated today than on...

Suzanne: Every day.

Pat: Yeah, it is. It's strange. And it's kind of willy-nilly.

Suzanne: It's not logical. I mean, you know, there's not a lot of logic.

Scott: Well, we know how it all gets created, right? It's the Congress.

Suzanne: Right. And people with interests that argue harder than somebody else that has a difference. You know, it's a game and we find a way around it and then they create a rule. And then we find another way around it and then it's just always constantly moving.

Pat: Yeah, it always perplexed me, like, why 59 and a half for requirement for when you can start, but at 55 from a 401(k), which makes absolutely no sense, and then required minimum distributions moving the age out to 75, like, who was what? Why did you do? Why are you making it more complicated? Why couldn't it have been 60?

Suzanne: Right?

Scott: Well, I would have liked to have been back...and there was some discussion, obviously. They're trying to make the numbers work on passing a spending bill.

Suzanne: Yeah.

Scott: Right? That's what it comes down to.

Pat: I think you put it right by saying there's no logic behind any of this.

Suzanne: No, it's, you know, they built the tax code partially to influence policy, right? And so there's logic and then there's the policy stuff. And we just have to kind of, you know, we're ethically obligated to save our clients money within the bounds of the law. And the law is gray. And so that's, you know, that's how I come about it. My job is I am responsible for, as a professional, saving you as much money as I can. And so that's what I try to do.

Pat: Within the gray.

Suzanne: Within the rules I'm given as I interpret them. I actually called the IRS and I was arguing with this...well, I was talking to this woman. Okay. And she said, well, we rely on CPAs and lawyers to interpret the laws for us. Fantastic. So I can just make it up and we're all good. Yeah, it doesn't. Well, thank you, guys. I appreciate it.

Scott: Thank you, Suzanne. Thank you.

Pat: Appreciate you joining us.

Scott: Well, I'm glad we had her on, Pat. Let's go back to calls here. We talked to Charles in California. Charles, you're with Allworth's "Money Matters."

Pat: Hi, Charles.

Charles: Yes. So I'm 75 and I just retired this year. I was self-employed, so I have a pension with a defined benefit print.

Pat: Okay.

Charles: Unfortunately, it was overfunded because the consultant didn't watch.

Scott: Well, that's not unfortunate.

Pat: Well, no, unless you violated the rules and had to pay a penalty.

Charles: Yeah.

Pat: Is that what happened?

Charles: So I have financial advisor. He suggested me to roll over to IRA. And then he proposed to into this annuity. He proposed two options. One is you get the lifetime 7% guarantee interest rate, me and my wife combined.

Pat: The principles are not guaranteed though. Or is it?

Scott: Or it's a guarantee withdrawal benefit.

Charles: It guarantees the payment every year.

Pat: It's a withdrawal benefit, not a principal benefit. Okay.

Charles: Okay. Yeah, I understand.

Pat: And what's the other one?

Charles: The second one is the S&P 500 index cap of 11.5%.

Pat: Okay, and tell me what income you have coming in. So this was how much money that was...

Charles: This is just small portion.

Pat: How much was it?

Charles: $550,000.

Pat: And what is when what do you have other places?

Scott: What's your net worth ballpark?

Charles: Yeah. Oh, I have about $10 million.

Scott: Oh, this is a waste of time.

Pat: Why are you buying an annuity? You don't need an annuity.

Charles: Well, but this is overfunded, so...

Pat: It doesn't matter.

Scott: It's in an IRA, but now it's in an IRA, you can do whatever you want. It doesn't matter whether it's overfunded.

Charles: It hasn't convert into the IRA yet, so he just proposed...

Pat: Well, don't listen to him. It's garbage.

Charles: How about the penalty? What is the penalty for overfunding?

Pat: Well, I don't know if there is a penalty at all. So, are you the employer?

Charles: I'm a sales employee.

Pat: Okay. So, it was a defined benefit pension plan. How much monthly pension are they actually going to send to you?

Charles: Well, those are the originally I already transferred to IRA, but this is overfounded. So that's why it was sitting there.

Scott: The annuity is not going to solve it. I don't have enough information to know whether or not there's a penalty for overfunding or if this is just something an advisor's telling you as a means to get you to buy a product. But what I do know is that a commercial annuity sold by an insurance company is not going to provide any other relief than just a regular IRA set up at a brokerage account.

Charles: I understand that, yeah.

Pat: Yeah. So your net worth is $10 million. How much of that is investable like in stocks and bonds, mutual funds, that sort of thing?

Charles: I'm pretty aggressive, I was 90%.

Pat: Okay, so what is it?

Scott: Don't buy anything.

Pat: Yeah, just don't don't even go back to this advisor.

Scott: Oh, I really wouldn't this is garbage. What do you need this for? What do you need the guarantees for 7%.

Charles: I thought it was just a small present.

Pat: It doesn't matter. It's just garbage. You don't need a withdrawal guarantee of 7% on this. You're not going to use all your money in your lifetime.

Scott: There's no such thing as a free lunch, right? It's an insurance company. Insurance costs money, right? I have a high deductible on my house and a high deductible on my car because I want to self-insure for those things, right? You've got plenty of money saved for retirement. You don't need to take 500,000 of it and have insurance on that small portion. It's going to do nothing for you. It's not going to do anything with you for your lifestyle.

Pat: So why are you interested in these Charles?

Charles: Well, it's just to... It's hard to... I don't know how to roll over this.

Scott: Yeah, well, he's being sold this. This is why Pat said find another advisor. Because he's going to make 7% commission to sell you these things.

Charles: I understand that.

Pat: Charles, but the overfunding, this doesn't do anything to help any overfunding, if there is even an overfunding.

Charles: So what do you recommend?

Scott: Find a new advisor.

Pat: Roll it into an IRA and put it in a low-cost portfolio. Diversify. Do it that way, but not annuities. Charles, if you were my mortal enemy I wouldn't put you into these products. Actually, that's not true, I might. I can't think of a reason in the world. I can't think of a single reason in the world why these are going to improve your life. It's just going to end up costing you money that you don't know.

Scott: Not that there's not a time and place for annuities, but not in this situation.

Pat: It's $10 million. You don't need the insurance. You're in a fireproof home right now and you're asking me about fire insurance. You're like, your home can't burn down. It will not burn down. Your portfolio, as long as you manage it effectively, this $550,000 annuity is nothing but a hindrance, a waste of time.

Scott: And it's got a high YTB, yield to broker.

Charles: Yes, you mean I can just call one of the brokerage company and ask them to transfer to IRA?

Scott: That's it. That's it.

Pat: Yeah, you might have to fill out paperwork with the pension to transfer it that way. But yes, it can go to any IRA. It can go to your bank's IRA. Don't go to a bank though. Who, do you have brokerage accounts somewhere now?

Charles: Yes, I do have Etrade and Fidelity.

Pat: There we go. Either one of those, they'd be more than happy to help you. More than happy.

Charles: Okay. The penalties, my accountant should be able to handle that.

Scott: Yeah, yes, I don't even know. Look, the guy's trying to sell you an annuity.

Pat: I don't know why...

Scott: So for all I know, he's making up a story to scare you so you put the money in the annuity.

Pat: It doesn't sound like it'd be that grossly overfunded.

Scott: Unless it's a 415 limit and it can't go to an IRA and this is being proposed as... I don't know enough information to give you, but it's a chance, Pat. Let's assume it's a 415.

Pat: Well, how big was the money that got rolled over to an IRA?

Charles: Or I had $2 million and they said the maximum is 1.5. That's why I have over 500k.

Scott: That doesn't sound right to me.

Charles: Well, that was a defined benefit pension.

Pat: Yeah. Yeah. I mean, it could be like it could be a 415 limit.

Scott: If it can't go into an IRA, then put it in a brokerage account and build a proper portfolio. It doesn't need to go into an annuity. And annuities are the worst taxation at death, too. You put it in S&P 500... Look, here's the diff. You're 75, right? No one gets out of here alive. So let's assume you got 20 years. So odds are you're not gonna spend these dollars because you've got 9.5 other dollars, right? So if this goes into an S&P 500 fund and it grows, you pass away, whatever growth is gonna be forgiven at your death through a step-up in basis. You put it in this equity index annuity that's got this cap of 11 and a half or whatever, when you die, all that gain is going to be taxed as ordinary income to your estate.

Pat: Which is the worst.

Scott: So, either way, whether an IRA or not an IRA, these are the wrong products. And I think he's got someone who's trying to make a high commission.

Charles: If it goes to IRA, then if there's something left after I die, my kids will inherit it.

Scott: That's right.

Pat: That's correct. That's correct. Don't use the annuities.

Scott: Charles, I would find another advisor. I really would find another advisor. And Pat, every once in a while you hear me make statements such as, although there are place for annuities, the world would be a better place without them. It's things like this.

Pat: It's nearing that time, the sad time again nearing the end of our show. But I want to let everyone know we've got a year-end webinar on our website. Planning with perspective, it's a year-end wrap-up webinar. I hosted it along with Andy Stout, our chief investment officer. During that, we cover the 2023 economic snapshot, our key market trends and takeaways, some insights for 2024 planning. And to participate with that Wednesday, December 13th. At noon, Thursday, December 14th at noon Pacific, those are both Pacific, and Saturday, December 16th at 9:00 a.m. Pacific. And to sign up, it's Thanks again for being part of our program.

Scott: And as always, if you've enjoyed this show, please rate us and share it with a friend. Yep.

Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.