Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401ks, 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 Allworth's "Money Matters." Scott Hanson.

Pat: Pat McClain, thanks for being with us.

Scott: Yeah, we're glad you are part of our program today. Both myself and my cohost, we're both financial advisors, certified financial planner, charter financial consultant. We spend our weekdays helping people like yourself, broadcast on the weekends, being your financial advisors on the air. And yes, it's been off to a phenomenally good year, all in all.

Pat: I don't...yeah.

Scott: Global turmoil. What's going on in the tech between China and the U.S.?

Pat: European Union and the global tech companies. Right? So we're going to look like possibly ban TikTok and China's like no more U.S. You know, they've been trying to get rid of the hardware for years and now they're going after the soft... It's just... and the markets just keep marching on.

Scott: Yep. I mean, so I was at a dinner, Pat, this was a week and a half ago, and there was this guy who spoke, he was with an organization called Dimensional Financial Advisors. Dimensional.

Pat: Fund advisors? Okay. Anyway.

Scott: DFA, dimensional something. Dimensional, I think maybe they just call themselves dimensional, anyway. This guy was probably early 70s. He'd been in the industry 50 years or whatever. And he did a 30 minute presentation, I think you'll find this interesting. A 30 minute presentation on historical media claims about the future, right? So he'd use "Money" Magazine, he'd use "Forbes," he'd use "Barron's," he'd quote the top economists of the day, the top stock pickers of the day, and of course, he cherry picked them a bit, but how wrong they all were. And so he went back to 1970, and had you started in 1970, and invested $1,000 in, the stock market versus $1000 in treasuries and where you were at the end of each decade. And it was just...and I've seen all this stuff before.

Pat: That's why they call it the wall of worry.

Scott: But usually when things look the bleakest and all the supposed experts are saying, run for the covers, oftentimes those are the best buying opportunities. And what everyone says how wonderful things are and how awesome this is, typically, not always, but oftentimes, those are the times that you should be a little more concerned.

Pat: Cynicism in investing works.

Scott: It was just brilliant. It was just a great reminder. And look, the reality is it would be wonderful to say, well, okay, I'm going to take that contrarian approach. And when everyone's all excited, I'm gonna sit on the sidelines, but that doesn't work either.

Pat: Yes, because you can't... Sometimes the trade just outruns the time period, right? That where you're like, oh, and you might be right that something bad is coming, but you might be 24 months early. Right?

Scott: So, I'm full disclosure here, right? So, I don't think I bought an option personally in 20 years. Okay. And I've gotta degree in fina... I know all this stuff, right? So, this was in the 2000s. And we all, of course, remember the financial crisis. But leading up to the financial crisis, real estate prices just kept going higher and higher and higher. And rents weren't moving anywhere. Inflation was low. And so you're thinking, what is the disconnect here? Why is an asset going up in value when the underlying earnings of it...Take rentals.

Pat: Doesn't make any sense.

Scott: Doesn't make any sense. So I bought some puts, which means I can profit when values go down, on Countrywide. And who is the other one?

Pat: Washington Mutual.

Scott: I don't think it was two banks.

Pat: Oh. Because I bought puts on Countrywide as well. I didn't know you bought puts then.

Scott: I did.

Pat: I lost money on it.

Scott: So did I. I bought like 24-month puts. But this must have probably...this might have been in 2005 or something. 2004, because at that time it seemed frothy and like, well, clearly, and the reality is we were both right. We were, but lost money. A bull market can run a lot longer. Because there's not necessarily a rhyme or reason. It's not underlying economics that drive prices on a short-term basis. And short-term can be anything under five years.

Pat: So Scott, I bought the puts on Countrywide for two reasons.

Scott: They went bankrupt, by the way.

Pat: Yes. Yes. So, and when you buy a put, it expires at a point in time where you actually have the ability to sell it.

Scott: And a put, it means you can put the stock on somebody else. You can put that asset on somebody else. And so if you have a put at say $40, and the company goes to $2...

Pat: You buy the share back at two dollars and basically deliver it.

Scott: You put it on them.

Pat: That's right.

Scott: Yeah.

Pat: So you're betting that that the price goes down. Well, I thought the same thing about that. But then I met two people that had been newly hired from Countrywide and I asked them what their training was like. And I said, did you learn anything about like the weighted average cost of money or the average weighted cost of money? And they both stared at me like I was from a different planet. I said, you just went through like two weeks of planning...of training with Countrywide as a mortgage broker. What did you learn? He said, how to build relationships. And I said, so you really don't understand like, interest rates and the finances behind them, where the actually loan ends up and how it all works. And they both stared at me and said, no, no, no. It was a relationship.

Scott: So in other words, you say, if you're talking to somebody and they have an $80,000 home equity loan at 7% and they have a $250,000 first loan at 5.5%, what is the actual interest rate they're paying on the combined loan? Which is an extremely important number to know to determine whether it makes sense to refinance.

Pat: That would be about the only thing you would start with, not like who the person actually... Anyway, but the point being...I didn't know you had done that. I did exactly the same, but you...the bull markets can run a lot longer than your patience. So this comes down to it again. Timing the market is a fool's game. And by the way, this FOMO thing I keep hearing about, FOMO, fear of missing out.

Scott: Fear of missing out.

Pat: Comparisons between peoples or situa...people and or situations is the thief of joy. Worry about...

Scott: In any area of life one might, right? I think any psychologist would probably state that, sociologist, religious leader, like, they would all state that.

Pat: Yes, comparison is the thief of joy.

Scott: The sin of comparison, yes.

Pat: Empathy is...is a blessing.

Scott: Yes.

Pat: And oftentimes, the challenge is if you're buddy, person you work out with at the gym, person at the next cubicle over, person who lives down the street, apartment downstairs, whatever. But, Nvidia, two years ago, and keeps telling you how great it's doing, and you didn't buy Nvidia, you're thinking...

Scott: You're thinking you've missed out.

Pat: This is the fear of missing out. And quite frankly, you probably did. But maybe that person.

Scott: Well, if you own an S&P 500, you clearly own it.

Pat: You own a bunch of it already. And look, just because they did it and got. Let's just say they knew something that no one else could see or many people couldn't see or they were just lucky.

Scott: It's one thing before the internet age of maybe getting some information before the rest of the world. Today it's instantaneous.

Pat: Yes. And actually, go back and look at compare Nvidia stock with the Intel stock.

Scott: We talked about that.

Pat: We did talk about that, didn't we? Anyway... All right, I do want to say something on a personal note, Scott. I went to a memorial between now and the last taping, of Lou Gesicki who...

Scott: Was that his legal name or was is it Lou Gallagher? Because he had...

Pat: His legal name was Lou Gesicki. So this is for the rest of the listeners. So we, Scott and I, have been doing this show for what, 29...?

Scott: Almost 29 years.

Pat: So 29 years. And so we went down to this radio station and said, hey listen, we'd like to do a radio station.

Scott: Well, how it started by the way... And we will take some calls, Art, Vince, we'll get you in a moment. It got started because, frankly, you had talked to another successful financial advisor who was in Omaha, Nebraska, and he talked about how great his radio program was as both an education tool for kind of, the masses, but also as a way to build his brand. People can see him in action, hear him in action.

Pat: Get business.

Scott: Yes. Yeah.

Pat: We are business people.

Scott: Yeah, we are business people. At the end of the day, yeah.

Pat: So, I come back from Omaha.

Scott: Pat starts cold calling radio stations. There were more stations back then.

Pat: Yeah, there were a lot more stations. Some of them struggling more than others.

Scott: Now where most of them are just struggling. That is correct.

Pat: And weirdly enough, they said, hey, we're really interested. Are you really interested in buying some advertising during the week? We'd love to have you on Saturdays. We don't care if you play a banjo.

Scott: If you buy enough advertising during the week.

Pat: If you buy enough advertising during the week. And I'm like, yeah, we'll try it. So the first week we get in there, they give us a board operator. His name is Lou Gesicki. But his radio name was Sweet Lou. Lou Gallagher. At his memorial, Scott, they gave...he had about 10 different names he used over his career.

Scott: And he was one of those early...he was a disc jockey years ago that would do like morning pranks on people and stuff.

Pat: Yeah, "Morning Zoo." Like he'd call into the local, he told me called into a local prison. He called in sick for someone that didn't actually exist. So we have to...

Scott: This was before the days you actually had to disclose that this is a live radio program.

Pat: So anyway, he...after our first program, he said to both Scott and myself, you guys really could use some help learning how to actually speak on a radio. And so we hired him for a full year. And after every show he would come back into our office a couple days later or...

Scott: Meet for lunch.

Pat: ...wealth advisory office. We'd listen to the tape and try to get better.

Scott: Yes, he gave us tips every week.

Pat: And so at the memorial, his widow asked me to get up and tell that story because I was sharing how important it was and that you know, it's in anything in life. You could try new stuff, but oftentimes if you don't have a good coach, if you do not, especially if it is in a field that you know nothing about, like, and we knew nothing about radio.

Scott: Except we were listeners.

Pat: I did listen.

Scott: We knew something, we heard others.

Pat: Yeah, we did.

Scott: How hard can it be? Sit behind a mic.

Pat: Obviously, it took us over a year to even get the basics down. So anyway, just a shout out to...

Scott: So two points on this. One is a shout out to Lou. Thank you.

Pat: Thank you Lou, for everything he did to help us and our listeners because we might have gotten booted after a while if we didn't get any better. But secondly, I think to your point, Pat, is the importance... Look any great people, all great athletes, great business people, great whatever, they have coaches in their lives.

Pat: Sometimes formal, sometimes informal. So, all right, it's no different than your finances. It is okay to hire either a formal or an informal coach. But the selection of the coach is really important.

Scott: And the value you're gonna get from your advisor, you'll see part of it early on. Figuring out some tax savings here, cleaning up a portfolio, reducing some risk. Where you really see it is when life happens. And what I mean by that, either something external, go through a financial crisis, dot com blow up, whatever, COVID, and someone to help guide you through that. Change in tax laws. Yeah, major change. Or the second thing, something personal in your life happens. A health issue. A death. Those major issues where suddenly your life completely changes and you need a sounding board. And someone to help guide you financially as your life completely changes.

Pat: That's right.

Scott: Anyway, we're gonna head to...

Pat: Shout out to...because that's what they would say on the morning show, shout out to Lou Gesicki, thank you.

Scott: Shout out, yeah. If you want to be part of our program, love to take your calls. You can schedule us at S... I'm sorry, questions@moneymatters.com. Questions@moneymatters.com or our number 833-99-WORTH. We're starting in California with Art. Art, you're with Allworth's "Money Matters."

Art: Hi, fellas. Thanks for taking my call.

Scott: Thank you.

Art: I have two questions. I hope we can get to both of them.

Scott: Okay.

Art: First one might be kind of fast. It's pros and cons of converting to 401(k)s to a Roth. And the second one is what to do with large capital gains for a federal property.

Scott: Let's... These are... Neither one of these questions we could answer in a vacuum. So my 26-year-old son who has just got out of flight school and is a flight instructor and his income will be low. This is a phenomenal year for him to convert 401(k) to Roth because he's in a low income. It would make 100% sense for him to do it. A physician who's at the peak of his or her career, maybe not the most things. Same thing with...

Pat: So is your son going to convert that $3100 from his IRA to a Roth?

Scott: Anyway, so Vince...I mean, I'm sorry, Art, my point is like, tell us a little bit about yourself.

Art: Okay, so, we're married. We're now both 72. We'll be 73 late this summer. Our annual income pension is about 120. Self-security is about 85. And rental income is about 85. We don't have any debt.

Scott: And what problem are you trying to solve?

Art: Well, right now we're in the 24% bracket. And as I see the tax brackets, the federal tax brackets, it looks like I'm maybe 20K away from joining the 32% bracket. And I think because of the huge deficit, I think brackets are going to go up one way or the other. So I'm looking for...

Scott: How much do you have in your 401(k)s, IRAs, non-Roth?

Art: I have $150,000 in 401k()s. I have 50,000 in a Roth. And then we just have 500,000 in just ordinary investments. But I was thinking about doing the Roth conversions, you know, in a two step, maybe 50,000 each year.

Scott: And how many children do you have?

Art: Two adults.

Scott: And are they the beneficiaries of your entire estate? Is anything going to charity or is it all going to them?

Art: All going to them.

Scott: Okay. And what's their...?

Pat: What does their income look like?

Scott: Are they almost $300,000 like you are?

Art: One is and the other one is maybe one and a half, one fifty.

Scott: Because odds are you're never going to spend these dollars.

Art: Right.

Scott: Right. Just looking at the rest of your assets, like you'll end up taking, if...let's set the Roth aside, if we didn't do the Roth, you'll just do the required minimum distributions and until you end up passing away, and then your kids would end up, you and your wife.

Pat: Are you giving to charity right now at all?

Art: Very negligible.

Pat: Okay, okay. Yeah, that makes sense.

Scott: Well, I wouldn't just pick a number.

Pat: Yeah, it makes sense to do some.

Scott: If I were in your situation, I would wait till near the end of the year. Frankly, I'd probably wait till after the election to see, get a kind of a little more clarity on what...you're not going to get clarity, but maybe have some idea of what could happen when these tax rates expire.

Pat: And do a pro forma tax return and figure out how much you can do with that marginal rate.

Scott: There are some programs that can calculate the stuff where it takes not just my income is 200, it's how it affects your Medicare.

Pat: Yeah, it has everything. So you can, these programs can look at everything and calculate exactly the tax ramification so you can have a good idea of knowing where you're going to be. My guess is this 500,000 in another...variety of other things also spends off taxable income to you, does it not?

Art: Yes.

Pat: But you might have included that in the $85,000 that you mentioned as other income.

Art: No, no, I didn't include that. No. And the reason why I didn't is because, you know, again, it depends upon, you know, obviously, you know, capital gains, but we, we generally, you know, that portfolio 500,000 is split about, you know, 300 value stocks and...I'm sorry, 400 value stocks and 100k just aggressive. And again, we don't really change our investments very much, so it's not going off a lot. It's just...

Pat: And what's the 401(k) invested in?

Art: Target-date funds.

Pat: Why?

Art: Well, that's a good question. That is my bad.

Pat: So you would benefit from actually taking a tax strategy on top of your portfolio? Right? Because you've got value stocks there because you're looking for dividend in there. And I would make the argument that you should probably have those inside the 401(k). And I don't think...

Scott: I would say the same thing exactly.

Pat: And then actually, I don't know why you would own target-date funds either.

Art: Well it was a bad call on my part.

Scott: Well, whatever.

Pat: It's not too late now though. I would have it. Given your situation. I would have 100% equity.

Scott: Yes. Hundred percent equity.

Pat: First of all, you seem like you're an experienced investor. You've lived through markets. You're 72. You've lived through markets up and down.

Scott: Before we circle back, tell us about you've mentioned about capital gains and rentals. What are you trying to accomplish there?

Art: Well, you know, so I manage my own properties, but I'm not going to be doing that forever. And the kids, you know, the two boys, they're about, you know, an hour away from Sacramento, so they're not going to be probably too enthused about it. And I thought, well, you know, we convert that property. I've got, you know, just huge gains because I've had those rentals now for 20, 25 years.

Pat: Do you have a property manager on there?

Art: No, not yet.

Pat: Okay, well that's the first thing I'd do. That's the first thing I'd do is property manage...

Scott: That's gonna be a lot less expensive than the capital gains.

Pat: That's the first thing I would do and the second...You can exchange, but maybe you like them.

Art: I actually had a question about the exchange, so I don't know much about it.

Pat: Okay, so let's hit this one. So I own properties, Scott.

Scott: As do I.

Pat: And I wouldn't think of actually owning these things without, in fact, I could tell you...

Scott: Although I had a conversation last night saying I don't think I'm gonna buy anymore property like the older I get the more I appreciate owning stocks.

Pat: And it doesn't bother me, but I've got...by the way, I've gone through a couple property managers to get to the right one. You probably want to consider buying a property manager. And if you don't exchange, my guess is you're going to die with these.

Scott: Zone exchange is finding a like kind property. You can take two rentals and put them into another larger rental.

Pat: Or you could do them in the commercial.

Art: Yeah, I'm probably leaning more towards commercial.

Scott: You have your own commercial?

Art: Well, if I could do a 1031 exchange from residential property to commercial.

Scott: Have you owned commercial properties?

Art: No, no. I have not.

Pat: Okay, so and what's the value?

Scott: They have their own issues.

Pat: Yeah, what are the values of the residential properties combined?

Art: The equity, I'd say probably, maybe a little under $2 million.

Scott: How many rentals do you have?

Art: Four.

Pat: And what's your basis in them?

Art: See, my basis is probably... Maybe a little under a million.

Pat: So here's what the...at a $2 million...at a $2 million property, where are you located?

Scott: Well, it's more than that. It's got to be...

Art: Sacramento.

Scott: It's the face value.

Pat: Yeah, what's the face value of the property?

Scott: What are they all worth?

Pat: Not your equity, just face value. Forget about the loan amount.

Scott: You've got to exchange the...let's say the buildings are worth $3 million, you've got to exchange $3 million plus, otherwise there's a taxable, you'll have a taxable consideration on the boot.

Art: So market value on all four properties, again, it's probably hitting at $2 million.

Pat: Okay, and so you don't have much in terms of loans against these.

Art: None.

Pat: Okay, so it may make sense for you to actually do a commercial property. What you're going to have there is concentrated risk then.

Scott: And rather than someone...you've got someone to evict an individual, suddenly you have a tenant who quits paying because their business has gone south.

Pat: Oh, I'm just gonna tell you.

Art: Yeah, I agree.

Scott: I mean, then you've got TIs.

Pat: TIs. So what happens is a TI, every time the property...depending upon the type of property, if it flips, they want to move this wall, this wall, this wall, this wall, and then you actually have to negotiate.

Scott: And they want you to pay for it.

Pat: Yeah. And then you have to figure out the net present value of the rent in order to determine whether you want to do that or not. It's got, in your 70s, you know, if you were sitting in my office and you've never owned commercial property again, before, again, well you might not do it before, I would recommend just stay the course, get a property manager, introduce one or two of your children to the property manager, and slowly give that up.

Art: Well, I thought I'd probably if I were to do the commercial property, I'd probably just, you know, just invest in a fund, you know, that does that. And I wouldn't have any.

Pat: Oh, oh, oh.

Scott: So there's the Tennon common.

Pat: The ticks.

Scott: And then there's the other... What's the newer?

Pat: There's the other one. But Scott, it's back. It's back. I got invited to a dinner at the Peati[SP]. It looked pretty good with the Tennon common.

Scott: Chicken or steak?

Pat: Salmon. It was...and I thought, boy, my gosh, it's back. I haven't seen these ticks in a while. The problem with that is lack of control and lack of visibility into the asset itself. And I would highly recommend against that.

Scott: And fees internally tend to be about the same as the capital gain taxes.

Pat: I would stay the course. I would stay the course.

Scott: I would too. I hire property managers, you don't have to think about it.

Pat: I'm 61, I have four children. There will be a point into...I don't trade in these properties, the properties I own. I own some with Scott. I will introduce my children into the...to manage those properties as I age out.

Art: So you don't right now use a property manager?

Pat: No, no, I absolutely do use a property manager, but it takes more than a property manager.

Scott: The commercial properties are more work than you might think.

Pat: Yeah, it takes more than a property manager and I'm lucky enough to be married to an accountant so a lot of that is done for me as well.

Art: Okay. Well, I'm glad that you steered me away from the commercial property.

Pat: Oh, I would stay the course.

Scott: Art, you've done a great job saving, right? You're at a point in your life where more money or less money's not going to make any difference in your life, right? So whether your net income was $10,000 higher or $10,000 lower, not going to have any impact whatsoever. So if you hire a property manager for those four homes you own, it's going to have no impact whatsoever on your lifestyle. Zero. So when you're in the negative, yeah. So when you choose to continue to manage it, remember you're doing that not for economic gain, but because you're getting something else out of that. And maybe that...

Pat: Maybe that's fine. Now, if there's a change in step up in basis at death.

Scott: That's it. Yeah, different story.

Pat: Different story altogether. What you would expect is that when either you or your wife passes away, depending upon how the property is titled, that you would liquidate at that point in time.

Scott: That's right, because you step up basis to limit all the capital gains.

Pat: Just because of the tax, which is crazy to me, Scott.

Scott: Yeah, we'll see if that...I mean that's one of those things... Well, that was with when Trump was in office, you knew he wasn't going to get rid of that because he's a real estate guy. He loves exchanges and we'll see what happens.

Pat: Yeah. I'm glad it's there. Many of our clients and myself will benefit from that, but in terms of tax law, it just seems crazy. So unless there's a major change in step up and basis, I would plan on holding to the first death.

Scott: Yeah. Appreciate the call, Art. Let's head to Missouri. We're talking with Vince. Vince, you're with Allworth's "Money Matters."

Vince: Hey Scott, Pat, how you guys doing?

Scott: We're good. How you doing, Vince?

Vince: Doing great. Wife and I are out on the RV driving down to Alabama and we love your show. We always listen to your show as we're driving and it's a favorite podcast.

Pat: Oh, thank you.

Scott: Oh, well thank you. Your wife...you both like it equally or one tolerates?

Vince: Oh no, she loves it just as much as I do.

Pat: And are you going down to the coast there?

Vince: Yeah, we're going down to Orange Beach.

Pat: Very nice.

Vince: Right next to Gulf Shores.

Pat: Very nice.

Scott: All right. Never been to either place but I'm sure their lovely.

Vince: Yeah, yeah. So my question is, we're in a pretty good situation. My wife retired a couple years ago. She has one of those executive deferred comp plans, non-qualified plan and she has about 2.6 million in it. And she gets it paid out. It was over 10 to 15 year period. She has about 11 total years still to go on that. She's getting about $265,000 a year on that plan. And I'm still working, but we're both going to be 60 this summer. I'm still working, but I'm kind of wanting to retire.

Scott: What kind of work are you doing?

Vince: Well, I'm an accountant.

Scott: Okay.

Vince: And I can work, I'm working one day in the office and four days from home. And so it's a pretty good setup and it's...I can probably keep working, but it does kind of get... It does kind of crimp our, our travel.

Scott: It sounds terrible. Yeah. I'm joking.

Pat: I'm looking at you like what are you talking about?

Vince: Yeah. Oh...me retiring completely. And, so my question is, so when I retire, I won't, I won't have any kind of pension. Well, we're back up. I have a SEP plan. So, I don't have to take that until I'm 73. So I won't have any...
Scott: Are you self employed?

Vince: No, I'm not. I work for a quasi governmental entity.

Scott: Okay.

Vince: And so when I retire, I won't have any income at all. And she will have that deferred comp plan of 265,000 a year. And we were talking about...wondering if we could maybe file separately. And then I could, we have a bunch of money and the SEP plan IRAs and different kind of pots and thinking if we file separately. And she closed that money and I don't claim any money and I can convert all of my IRAs into a Roth.

Pat: And how much do you have in all these IRAs?

Vince: Oh gosh, I have a I have a SEP plan is 1.4 million. I have a 457(b) plan is about 900,000.

Scott: It made it sound like at first, Vince, like you had nothing saved and your wife had all the money.

Vince: She's definitely the breadwinner of the family, but I hold my own a little bit in the marriage.

Pat: Okay, so $900,000 in the 457, $1.4 million in the SEP. What else?

Vince: I have an inherited IRA of 140, traditional non-deductible IRA of about 200 and then she has a bunch of you know, she has rollover IRA of 1.3 million. She has a Roth IRA of 400,000. We did that backdoor Roth about 12 years ago when they first kind of became a thing and so we've just been putting that into her Roth. So she has a Roth, but I don't have any kind of Roth because I had that SEP plan and it kind of prevented me from investing into that.

Pat: Yeah. And when was the last time you made a contribution to the SEP plan?

Vince: I don't actually make the contribution. The company does.

Pat: The company does. Okay.

Vince: They pay 20% of my salary into the SEP plan.

Pat: So how old are you again? You said you're 60?

Vince: We'll be 60 this summer.

Pat: Okay, well first of all just for housekeeping, just for housekeeping, you should start with...you listed at least three qualified plans that you have everywhere. After age fifty nine and a half, you can roll them all into a single.

Scott: Well, except for the beneficiary.

Pat: Except for the beneficiary. But the rest of them you should be able to roll into a self-directed IRA and just for bookkeeping you want to do that but you are an accountant maybe you like things more complicated than they need to be because it's easy for you to keep tracking anyway right but for bookkeeping... Yeah, so I would...I would...just for booking and you're going to have the same menu of investments across the board.

Scott: I would be highly suspect that married filing jointly is going to be better for you. I mean, the best way to determine it obviously is to run the numbers. But like 98% of the time, it is better to file married filing jointly. And typically, what I've seen in at least over my career is the times when it's married filing separately, it's oftentimes, those couples that really want to keep their finances separate. Sometimes it's a second marriage and like my finances and I'm in...none of your business and they file separately, but just the way the tax rates work, it's quite, it's kind of punishing to people on the married filing separately. But, you know...

Pat: You'd have to do the numbers, but I wouldn't, if it was me, I wouldn't even go through the exercise of doing the numbers. That's how confident I am it's not going to be good for you.

Scott: Yeah, I was thinking the same thing.

Pat: Right? It isn't... What's that?

Vince: So then we wouldn't be able to convert any of our money into the Roth because we're in such a high tax bracket. So we're just gonna have to lose that option, do you think?

Scott: Well, I mean...

Pat: You'd have to do it.

Scott: I mean, looking at where your retirement accounts could be 11 years now. So right. So I think the plan is not going to spend any of the other your assets. You've got the 265 coming off the deferred comp. I guess that's what you're planning on living on over the next 11 years. And like, about $4 million in accounts. That's a requirement.

SPEAKER_1: You have to do it.

Pat: You've got about $4 million in accounts. Let them roll.

Scott: Yeah, then the required minimum distributions are going to be less than 265.

Vince: Okay.

Scott: They're probably going to be much lower at 11 years.

Pat: Yeah, even if these doubled.

Scott: That's correct. Even if they doubled.

Pat: Which they...good chance they could.

Vince: So you're saying that I can do the convert into Roth once we turn 70 once the...

Scott: No, I think there's a good chance you'll be in a lower tax bracket. Your income will be lower 12, 13, 14, 15 years.

Pat: Or equivalent.

Scott: Or equivalent.

Pat: Yes. So 3% of 800 million or 3% of 8 million right around there before... Yeah. Yeah. You can do the pro forma and see, you know, you're an accountant. Just do a joint tax return and then do...

Scott: Yeah, and then just break it apart and do it and do it married filing separately. I'm sure you can do probably some free tax service can do a rudimentary one for you online in probably 30 minutes.

Pat: Yeah and then see what it is but I doubt it's gonna do...and quite frankly, it's probably never gonna make sense for you to convert to a Roth IRA.

Vince: Okay, that's what I was kind of wondering, but I just wanted to get you guys' opinion on it. I did have one last question.

Scott: Yes.

Vince: With me being this kind of governmental entity that I don't pay into Social Security, I did for the first 15 years of my career. So I do get a pension... I mean, I'm sorry, I do get Social Security. Will I be subject to that Windfall Elimination Provision because...since I had that SEP plan?

Scott: The SEP won't do it. Only a traditional pension.

Pat: Yeah, only the defined benefit pension plan would trigger the web.

Vince: Okay, well that's good news. Great. And then one last question I have. If we take Social Security at 62, does her deferred comp plan, would that reduce the Social Security benefits?

Scott: No.

Pat: Nothing to do with it.

Vince: Okay.

Pat: Nothing to do with it.

Vince: Wonderful.

Pat: Nothing to do with it. And by the way, if I were you, I'd probably take it earlier rather than later just because based on your net worth.

Vince: Yeah, that's what we're thinking of doing it at 62 based on years of listening to you guys.

Pat: Yeah, yeah.

Vince: That's why I wanted to just confirm these answers. So those are good answers I was looking for.

Scott: Vince, how did you find our program in Missouri?

Vince: Oh, I just was Googling financial podcast years ago, gosh, seven, eight years ago and came upon your podcast. And I just, I think I might've listened to every podcast. And we have some property down at the Lake of the Ozarks here in Missouri. So we'd have a three hour drive back and forth. And I got my wife listening to it and she became hooked on it. So we look forward to listening to your podcast. We feel like we're cheating on each other if one of us listens to it before the two of us are together in the car. So we try to save them and listen the whole way down to the...

Pat: Perfect. Perfect. We appreciate that. And by the way, just... I started by saying just for bookkeeping ease of management, combine that SEP 457. And by the way, that deferred compensation, and it may not be a big deal, but a 457 plan is not your money. It is technically that municipality's money. It is not the same as an IRA.

Vince: Yeah, I think on my particular one, it is mine. It used to be on our company's financials, but quite a few years ago, it got moved off of their financials and balance sheet and individually into our own.

Pat: Understand, but if it's a 457, it's still considered an asset of that particular organization.

Scott: That's right.

Pat: Regardless of how you're looking at it, a 457, and by the way...

Scott: Different than a 401(k). So 401(k), there's a separate, let's call it like a trust, there's a separate account outside of a company that is designed for the participants, those who contribute, and has nothing to do, the company can go bankrupt. So like when Enron went bankrupt, and people were talking about how they lost their life savings, it wasn't, they didn't lose anything that was in their 401(k), they just happened to have the majority of their money in Enron stock that went to almost nothing. Right?

Vince: Right, right. I got you. I thought you were talking about my deferred comp.

Pat: No, I am talking about your deferred comp. Your 457 plan is considered an asset of that. I assume it was a governmental organization of some sort.

Vince: Yes.

Pat: Okay, that yeah, it is considered an asset of that particular organization. That is...look, I have never seen one blow up. I've heard of one blowing up.

Scott: Yeah. You never had a client.

Pat: But I've never seen it personally, but why take the risk? I mean, what's the point? There's no reason.

Vince: I'm sorry. What are you suggesting that I do?

Pat: Move it to an IRA. Fast. You have a black swan event sitting out there that... Look, if that...if they file bankruptcy, do whatever.

Scott: Something very unexpected.

Pat: Right?

Scott: It's not something we can fathom. Yeah, it's something outside of the...

Pat: The creditors could come back and actually claim your 457.

Vince: Okay, is it something I have to... Do I have to wait until I'm retired?

Pat: No, you move it to an IRA.

Scott: At fifty nine and a half you can move it.

Pat: At fifty nine and a half you can move it.

Vince: Okay, and I can move that into my non-deductible traditional IRA?

Pat: That's correct.

Scott: Yep, you can combine a rollover and that. Yep, yep, just easy.

Vince: I'll do that. Thank you for that advice.

Scott: All right, Vince, we wish you well. And Pat, to continue up on that. So with the 457s, there are some times it makes sense to keep the money there.

Pat: Absolutely.

Scott: Because if you're under fifty nine and a half and you separate service, regardless of your age under fifty nine and a half, you have access to those dollars.

Pat: In a 457. Not a 401(k).

Scott: Not a 401(k). You're 53. You leave your employer. If you have a 457, you could access whatever you want out of that. If it's a 401(k) or a 403(b) for that matter, you got to wait till fifty nine and a half unless you do some, there's a couple ways. Your age, 55 or older.

Pat: Couple things, you're age 55 or older in the year in which you separate service, but this show isn't long enough to go through all the minutia.

Scott: Yeah. And but if you if you separate from your employer at 55 or older, you have access to your 401(k).

Pat: But not an IRA.

Scott: But not an IRA. So, if you retire or leave your employer between the ages of 55 through fifty nine and a half, there's a good chance it's still going to make sense for you to move it to an IRA. But when you do move it to an IRA, you're going to lose your ability to take withdrawals from that without any restrictions. So I should say the only restrictions that the employer's plan may have.

Pat: So in saying that, you're like, well, why are you getting into this? Well, I've had clients that have retired from their careers at 56 or 57.

Scott: Where the majority of their assets are in their 401(k) plan.

Pat: And so let's say there's $2 million dollars in the 401(k), I might be...

Scott: Two million bucks in the 401(k), you got 60 grand in the bank and $120,000 in stocks or something, right? That's not uncommon.

Pat: I might leave $200,000 or $300,000 behind in the 401(k), move the rest into an IRA and manage it, but still manage the money on the 401(k), but we can take distributions with them pretty much depending upon the plan, willy-nilly, once a year, once a month, once every six months. So that's why it matters.

Scott: Yeah. Another way someone could accomplish that is by doing what's called the 72(t) distribution where you set up a distribution that's designed to last you to your dying day, which we saw a lot of like in the '90s, early 2000s when people were trying to retire as early as possible.

Pat: Again, this is just some of the stupidest garbage I think that I have.

Scott: What?

Pat: All these different rules about the things that do the same thing.

Scott: Yeah. It keeps us employed. I'm joking.

Pat: It's just dumb.

Scott: But it's never going to change.

Pat: It's not going to change.

Scott: Because we know it's all through legislation and we see how legislation they can't get... They can't get the basics. Congress can't get the basics.

Pat: Like the budget.

Scott: Like the budget, like the border. No one likes the border. They can't seem to get, you know.

Pat: Most people don't like the border. The issues at the border.

Scott: The issue that's...

Pat: Most people do like borders. I like borders.

Scott: You know what I mean? My only point is to expect Congress to come through and say, let's simplify the retirement plans. How in the world they can't get some of the ones that everyone's screaming that we need help on.

Pat: That is an excellent point, Scott.

Scott: Well, as usual, it's been great having everyone and we are about at the time that we are gonna be taking. If you haven't subscribed to our weekly newsletter, we have a great newsletter that comes out each week. I think it's Friday afternoons. Go to allworthfinancial.com, allworthfinancial.com, and sign up for our newsletter. I think you'll find there's some valuable information in there. There's articles, new articles every week. There's also just a bunch of great educational material on our website. Similar to the way we have the program, we're trying to just help people with some of that education. So great being with you. It's been Scott Hanson and Pat McClain of Allworth's "Money Matters."

Man: 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 a state planning attorney to conduct your own due diligence.