Mastering Your 401(k), IRA, and Retirement Taxes: Real Calls, Real Advice, Real Results
On this week’s Money Matters, Scott and Pat answer real listener questions about how to make the most of your 401(k) — from handling tithes and required minimum distributions to maximizing Roth conversions and managing multimillion-dollar retirement portfolios.
You’ll hear stories from callers navigating retirement income, tax-efficient giving, and long-term wealth transfer — including a follow-up from a listener managing $5 million across IRAs and 401(k) accounts while planning for inheritance and charitable impact.
With candid insights and practical advice, Scott and Pat explain how smart 401(k) and IRA strategies can help you reduce taxes, simplify withdrawals, and strengthen your financial legacy — all delivered with the straightforward, relatable style that defines Money Matters.
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 questions@moneymatters.com.
Automated Voice: 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-W-O-R-T-H.
Scott: Welcome to Allworth's "Money Matters", Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Yeah, glad to be here as fall is in the air. I don't know if you've got your pumpkins out, Pat. I don't know why I'm talking about this. This sounds horrible. I feel like I'm... But never mind. That's a bad... Let me start over. Welcome to Allworth's "Money Matters".
Pat: I received a solicitation that was a door hanger, and it was someone that would bring to your house bales of straw and pumpkins and would set them all over the front of your house to decorate it for fall for $400. I think it was $440.
Scott: $400?
Pat: Mm-hmm, $440.
Scott: And what did you say? They knocked on your door?
Pat: I wasn't home. I'm sure they probably knocked on my door. But it was a door hanger, and I thought, "Good for them." Most certainly, I'm not going to spend $440 to...
Scott: Halloween has become way too commercialized. They've really forgotten the true meaning of this, "All Hallows Eve". I'm not a big Halloween celebration guy, so I don't know.
Pat: I enjoyed it when the kids were younger.
Scott: But I do like fall. Anyway, this isn't about...
Pat: All right, enough. We're not talking about the weather. Let's go.
Scott: But you like the fact that some... I guess, in your neighborhood, you're not allowed to be doing that either.
Pat: Correct.
Scott: And someone went in and...
Pat: Oh, I love the fact that someone's out there trying to make a living. I don't know, maybe they're making extra income. Maybe they were actually driving Uber or something or DoorDash. I've never done a DoorDash, but...
Scott: You've never DoorDashed food?
Pat: Never.
Scott: You are kidding me.
Pat: No, never done. You know, my daughter does.
Scott: Of course her kids do.
Pat: You know what she does?
Scott: What?
Pat: If it's like a Tuesday and she thinks she might be busy on Wednesday night, she DoorDashes on Tuesday night, and then surrenders the cart at checkout.
Scott: What does that mean?
Pat: She doesn't go through with the transaction and then the very next day they send her coupons.
Scott: Oh, my God. Pat has raised his kids well. Because that's exactly stuff you did as a young person.
Pat: Oh, I just thought, "This is brilliant." She explained to me, she said, you never really have to pay retail. It's great. Anyway, retail's for suckers.
Scott: All right. That is pretty funny. Your daughter's a law student.
Pat: Yeah, she's last year a law student.
Scott: Yeah, well good for her.
Pat: Well, she thinks she wants to be a public defender, we'll see.
Scott: I would think you need really thick skin.
Pat: I would think so, too. I would think so, too. Wow.
Scott: Why can't we just go to a family reunion instead?
Pat: No, come on.
Scott: Pretty much the same group. All right. Let's take some calls with people who've got questions regarding finances, rather than talking about this other stuff. We are in New York talking with Steve. Steve, you're with Allworth's "Money Matters".
Steve: Hey, guys, thanks for taking my call. So, I figured I'd ask the experts. My wife and I...
Pat: But they weren't available.
Steve: Well, I mean, at least, you know a lot about pumpkins.
Pat: Thank you.
Steve: The question is this, my wife and I have been faithful tithers for a long, long time, and God's blessed us. And one of the blessings that I have is a 401(k) that's done very well. But, well, within a year or so, I may be retiring. I'm already in my 70s. So...
Scott: How old are you?
Steve: I'm 72. Yeah. So, if I understand correctly, when I turn 73, I'll be required to RMD by 401(k). And as part of that, that becomes income. And my question is really, how do you tithe on a 401(k) withdrawal? Because there's just some components that are a little confusing to me. One is that you're putting money in, and then secondly, of course, you're taking money out, but then it fluctuates. I mean, you could have a really good year and you tithe on your profit, but then the next year, it's not a good year.
Scott: But wouldn't that be the same? If you go back to biblical times, let's say, and where it was on the first fruits, right? You tithe, you bring your first fruits, but there would be some years you'd have big crops and some years you'd have less crops. So, a tithe would still be relative based upon the crop of the year, right?
Steve: Yeah. I guess, I'm just confused about how to calculate all that.
Scott: Well, the government's going to do it for you. I mean, so one way to do it... And by the way, my wife and I started tithing when we were first married, and I think it's been a great discipline for us, not just spiritually, but financially, because when you give the finances, it kind of takes the money off yourself for the period of time. So, I think there's a good discipline, regardless of someone's spiritual convictions or not. But, I mean, you can do it as just like, if you take $50,000 out, then you're going to tithe 5% of that. But at over age 70, you can have money transferred directly to a charity and not have it come through your tax return, which would most likely be preferable for you. How much do you have in your 401(k)?
Steve: About $1.7 million.
Scott: How old's your spouse?
Steve: She's 60.
Scott: Okay. And is the 401(k) all in your name, or does your spouse have any money in retirement accounts?
Steve: Actually, she has her own 401(k). It's considerably smaller, but she has her own.
Scott: And when you retire, will there be any pension at all?
Steve: Yes.
Pat: Will you be living off any portion of your 401(k)?
Steve: Yeah, I think so, yes.
Pat: How much?
Steve: I'm going to say $40,000 a year right now.
Pat: Okay. So, here's kind of how it works. I'll walk you through it, and I'll give you a 100% practical, and then you can do what you want with the information. When you go to retire next year, you're going to have to take, what's that, about a 3.5% distribution, right? So, 3.5% distribution, which is about 60 grand a year. So, you're going to have to start this distribution. You can do it from your 401(k), but I actually would use an IRA because it makes it so much easier to actually get this done.
Scott: So, when you retire, transfer everything to an IRA?
Pat: Transfer everything. I would do it today, actually.
Scott: You're still working.
Pat: There's just so many different... All right, do it whenever. That isn't that material. So, then you have to start taking about $60,000 out a year for your required minimum distribution. This money that goes to charities can be part of that $60,000 a year. That's how it works. And you have to name the charities and their tax ID numbers. So, this is what I do with many, many of my clients. The beginning of the year, I tell them what the required minimum distribution is going to be. Some of them move it every year. Some of them, it is exactly the same amount.
"Pat, I'm giving $30,000 a year. Here's the list of the charities." And then we just send a check right over to the charities. Then we take the remaining amount. So, in your situation, you said, "I'm going to tithe." So, I'm going to use the number, just $20,000 a year. And then the other distributions of approximately $3,400 a month, we send directly to you, we withhold taxes. And we do it every January, we actually do the planning. In December, I tell them the required minimum distributions, and we just push it out of the way.
Scott: Yeah. But to take it one step further, Pat, and I'm sure this is what you do anyway, but Steve, let's assume for a minute, let's assume your pension's $30,000. Let's assume that your family's Social Security is $50,000, so we have $80,000 there. And we're assuming that your minimum distribution is $60,000, so $140,000 of total income. You want to tithe on that $140,000, that's what you told me. That would be $14,000. You work backwards from them, so we...
Pat: So, if I were in your position, I would take my pension, I'd have it all come home, I'd have my Social Security all come home. And then I'd take my 401(k), I would have $14,000 of that distribution go directly to my charities, the church or whatever you're going to give to. I'd have those go directly there. Because you're probably not able to take an itemized deduction of your charitable contributions. And if it comes out of your 401(k) or your IRA, as part of the required minimum distribution, it doesn't even show up on your tax return.
Pat: That is exactly how I do it.
Scott: And then you've satisfied that 10%, and you've done it in the most tax efficient manner.
Steve: So, one time, we had a church building project. So, I took $20,000 out of my retirement, that's the 401(k), and made a direct transfer right to the church.
Pat: And it came from?
Scott: This was at age 70?
Steve: Yes, actually.
Scott: Okay, yeah.
Pat: Okay. Yes, that was the right thing to do.
Steve: So, I know the principle, but what I didn't know is I could diversify the distribution. So, if I've got several, a church and other organizations that I want to issue.
Pat: Yes.
Scott: Yes, the food bank or whatever it is.
Pat: Yes. I think of her, I actually met her through church. We were on it, strangely enough. I was running a capital campaign in the church and she was a volunteer. And so, I explained it to all the people that were volunteering how to do this. And she came up afterwards and said, I wish my advisor told me that. And she became a client. And 15 years later, not that long, anyway, to this date, I get a list of the charities, their addresses, tax ID numbers, and the amounts. And we just fired off just like that. I do four or five of them.
Steve: So, if I just go to my 401(k) administrator and say, "I've got these five charities that I want to give."
Scott: Well, your 401(k) administrator may or may not, the tax law allows that to happen. And most IRA custodians will accommodate that. Whether or not your 401(k) administrator accommodates that, I don't know, because they don't have that many people over age 70 with balances still.
Pat: That's right. That's why I suggested that you may want to move your 401(k) to an IRA now...
Scott: Now. That sounds right.
Pat: ...because it's just easier to administrate.
Steve: Well, this year, I actually did about a third of that. I put it into an IRA.
Pat: Okay, perfect. Yeah. Well, then you've done it. So, you understand the whole concept. You can name as many charities as you want.
Steve: Okay. That's a great idea, actually. Thanks.
Pat: We didn't actually create it. We just memorized the rules.
Scott: That's what you call this. Yeah, it was not our idea.
Pat: It wasn't ours.
Scott: By the way, if you're stealing from me, you're stealing twice.
Pat: That's right. Because you took it from someone else. Yeah. It was just the American government's ongoing plan to make the tax code more complicated, it was part of that.
Steve: Yeah. But I thank you, all.
Scott: And that way, if you're looking at what your required minimum distributions are, and in good years, it's going to be more, on not so good years, it's going to be less. Or you could just fix a dollar amount...
Pat: I think it's following with the principle.
Scott: ...or you could do wherever your heart leads you.
Steve: Yeah.
Scott: All right. Appreciate the call.
Steve: Well, thanks very much. God bless you, guys. Thank you.
Pat: Thanks, Steve.
Scott: Thank you, Steve. All right. Let's continue on here. We're talking with Kristy. Kristy, you're with Allworth's "Money Matters".
Kristy: Hi. Thanks for taking my call today. I love your show.
Scott: Thank you.
Kristy: So, I'll just get right to it. I'm super behind in saving for retirement. I'm 42 years old, and I just want to make sure that the accounts that I have going are set up correctly.
Pat: By the way, before you start, the mere fact that you called a financial planning show and asked that question means that you're actually...
Scott: Something's changed here, yeah.
Pat: I thought the same thing. Yeah. And that you're probably not behind most Americans. Most Americans at 42 have never even given a consideration.
Scott: That's true.
Kristy: Well, I've listened to your show forever. So, in that regard, I should probably be better at this, but I've had some life things that happen, and here I am.
Pat: Okay. So, run us through.
Kristy: So, yes, I am calling the show.
Pat: Okay. Run us through.
Kristy: So, I am 42 years old. I just started a new job six months ago after being laid off. I'm making less money now, but I am doing 10% of my paycheck with a 6% match into a Roth 401(k). They just put it into a Target 2045 fund for me, and I'm just not sure if that's where that should be. And then I also have a Roth IRA brokerage that was an old rollover from an old 401(k), and that is something that is not invested in anything. It's just in the short-term reserves fund, if you will.
Pat: What are the balances of both these accounts?
Kristy: The employer, the new, the Roth 401(k) has only $7,000 in it, and the rollover, the Roth IRA brokerage account has $9,500.
Pat: And are you married or single?
Kristy: Single.
Pat: And do you own a home?
Kristy: I did, but I sold it last year when I got laid off, so I have a little bit. Now, that's my emergency fund that I have sitting in the high-yield savings.
Pat: How much is that?
Kristy: That's only, I think it's about $35,000.
Pat: And what's your annual income?
Kristy: I'm at $75,000 now. I had to take a pay cut taking this new job.
Pat: Sorry, say that again?
Kristy: $75,000 now at this job that I got.
Pat: Will you receive a pension when you retire?
Kristy: No, no.
Scott: What state do you live in?
Pat: Oh, here it is, Scott.
Kristy: Nevada.
Scott: I'm sorry, I was looking for my tax form. Pat's stole mine.
Pat: We're looking... I didn't take yours.
Scott: It was right on top of yours.
Pat: No one steals someone else's tax form. Flat out.
Scott: I'm like, "Where did it go."
Pat: It is not a desired piece of property.
Scott: I do think the Roth's the right way for you at your income. Just because if you look at the way the income tax brackets work, you're in a 12% tax bracket, and your taxable income, and this is after a standard deduction, above $48,000, roughly $49,000, it jumps to 22%. So, at $75,000, even if you back out a standard deduction, your taxable income's about $60,000.
Pat: No, I don't think.
Scott: I take that back.
Pat: I think a traditional would be better for you.
Kristy: Oh, okay.
Pat: I think a traditional would be better for, just because...
Scott: If I'm doing the numbers.
Pat: ...it's going to allow her to increase that contribution from 10% to 15%.
Kristy: Okay, so switch that to a traditional.
Pat: Yeah, and I'd see if I could push it up to 15%. It's going to be a little tough for you.
Scott: Yeah, because you're in the 22% bracket. And you can take it to an extra deduction at 22%, and odds are in retirement, you're going to be in a lower tax bracket.
Pat: That's right.
Scott: Unless you have some massive inheritance or something.
Kristy: Well, I mean, the hope is that I'd like to get my income back up again, but where I'm sitting right now, the market's pretty tough, so I'm just happy to have a job at the moment.
Pat: Yeah. Do you expect an inheritance?
Kristy: I'm not sure. My mom, I think she's got a little bit of money, but she's also pretty young and already needing some money for assistance.
Scott: Oh, okay. Well, then no.
Pat: If you're not sure, the answer's no.
Kristy: Yeah, I don't hold my breath on that.
Pat: Well, she needs assistance now. That will be a no.
Kristy: I figure that's her money to care for her, and I don't care to, you know, justify something that straight.
Pat: I would do the pre-tax 401(k).
Scott: Move it to 15%.
Pat: And move it to 15%. And then...
Scott: If you're my little sister, Pat likes to say, I think I'd invest those... You're 42, you're not going to be touching those retirement dollars for 20-plus years, right?
Kristy: Right, right.
Scott: So, you want to be in that area that's going to be the highest probability of good return, not today or next week or next month, but for the next 20 years. Which is going to be in the broad stock market, stock market index.
Pat: Yeah, so both the target date fund that you have in your 401(k), the 2045, I'd move two-thirds of it to a total market or an S&P 500 and a third to an international fund. They probably have an index fund in that portfolio, would be my guess. And then on the Roth brokerage with the 9,500, I'd buy the total market.
Scott: Total market index.
Pat: Total market index of both of those. And then I wouldn't worry what they did on a day-to-day basis, but, yeah. And if you have the ability to buy a house in the next four or five years, I think it would be a good inflation hedge, but I wouldn't push it. I would not push it.
Kristy: Yeah, it's just tough right now where the rates are and looking at what the payment would be.
Scott: I get it. I get it.
Pat: Yeah, we understand. And I would just do the 15% in the 401(k). And pre-tax not Roth. And then...
Scott: Don't switch to the pre-tax unless you increase your contributions.
Pat: Thank you. Thank you. Thank you.
Kristy: And then switching it over to the, you said the two-thirds into like the S&P 500 or something of the sorts and the one-third, is that something I can log in and do, or will they help me do that?
Pat: No, you can log in and do it. You'll see it.
Kristy: Okay.
Pat: Yeah. You may...
Scott: I would do 70/30.
Pat: 70/30, yeah. You might have to use a little Google, but if it says MSCI, it will actually be in a column that says international.
Scott: It should be pretty easy to navigate.
Kristy: Okay.
Pat: All right.
Kristy: All right.
Pat: Where in Nevada?
Kristy: So, thank you, guys.
Pat: Where in Nevada?
Kristy: I'm in Northern Nevada, kind of in the Reno-Sparks area.
Pat: Very nice.
Kristy: Yeah, originally from San Jose, so I've been out here 16, 17 years.
Scott: Oh, long time.
Pat: I spent a little bit of time in South Reno.
Kristy: Nice. Nice, nice.
Pat: I enjoyed it very much. So, I have friends that live there.
Scott: Okay. So, keeping everyone up to date. Thanks, Pat.
Pat: I love South Reno.
Scott: Who doesn't love South Reno?
Pat: All right. Appreciate the call, Kristy.
Kristy: Oh, my gosh. Have a great day. Thank you.
Pat: Keep everyone...
Scott: Kristy, Reno's nice, except for, like, two blocks downtown, right? Like, if there's something they could do with that downtown in Reno, it could be a nicer...
Pat: They used to call, the biggest little city in the West.
Scott: Whatever that means.
Pat: But my friend Chuck used to call it the place that cleanliness forgot.
Scott: All right. That's... Good thing Kristy is no longer with us. That's a derogatory comment.
Pat: But it's nice, but there's parts of it, except there is a little downtown part that...
Scott: You know, just hearing Kristy's call, it got me thinking, Pat, about, she'd lost her job. She's talking about her job market's tight right now. Job market is not easy today. And the financial markets are betting that AI is actually going to increase productivity for employers, i.e. less employees needed. And so, the Kristy's of the U.S., of which there are millions...
Pat: Millions.
Scott: Not a lot of buffer there.
Pat: Things are tight.
Scott: Things are already tight. It just...
Pat: Oh, this societal stuff, it's scary. If in fact, the promise of AI lands, the societal implications on a global basis is somewhat scary. Because the people it affects the most are white collar, college-educated young people.
Scott: Yeah. Knowledge workers.
Pat: Knowledge workers.
Scott: And I really think in the future it's going to be, either you've got some hard skills that robotics can't do today, or you've got great people skills, the softer skills will probably be more important. Even in our own profession, the technologies does more and more and more for us. And the best advisors of the future, not be the ones that can crunch the numbers.
Pat: It will be the ones with the soft skills.
Scott: Who can explain it well to clients.
Pat: And help them.
Scott: And helps them. Maybe we should have AI do our show. Maybe it might improve. I tested with that.
Pat: Where the AI did the radio podcast.
Scott: Pat, we can go into a program now. I forget what it's called. We upload a bunch of our podcasts. It will create a podcast with our voices.
Pat: That's like, "Wait a minute. I don't have to show up here anymore," wait.
Scott: All right. I don't want to get depressed with the negative side of things. So, we're going to do something different now.
Pat: We've had a couple of these house calls in the last six months. And it reminds me of the old "Click and Clack".
Scott: The car guys.
Pat: The Tappet Brothers.
Scott: One of them died like 15 years ago. And they still run the program.
Pat: I think.
Scott: Maybe. It was on public radio, what it was, NPR or something.
Pat: So, these are house calls where we check back with a caller from the past, and we see how our advice went.
Scott: It was around this time a year ago, we spoke with Ken. Ken's not an Allworth client, but he is an avid listener of this podcast. And at that time, his goal was to be the most tax efficient as possible in his long-term financial planning with planning for his retirement in a few years with some income coming in, and also, maximizing the tax-free amount that his kids will receive as inheritance. So...
Pat: Just as a disclaimer, the reason we say he's not a client is not because... We'd love for him to be a client of the firm. It's because Security's regulations. If he's a client, it's a different disclosure or something.
Scott: We have to say that this experience is probably not indicative of everyone.
Pat: There's all kinds of...
Scott: Yeah. Then it's an endorsement of some sort.
Pat: Yes, so that's why we...
Scott: If we're going to get an endorsement, we're not going to get it from someone like Ken. We're going to get like a celebrity endorsement like a football player.
Pat: Tom Selleck.
Scott: A wash-up actor. I didn't mean Tom Selleck, is a wash-up actor. Anyway, let's listen to the clip.
Ken: My wife and I, obviously married long time. We have three children, mid-20s to late 20s. And I am thinking ahead of time. And we have an issue with tax deferred IRAs and 401(k)s. We're not retired yet, but the current value is approximately $5 million.
Pat: How old are you?
Ken: I am 57, so is my wife.
Pat: And so, you're talking about 401(k)s and IRAs?
Ken: Correct.
Pat: $5 million.
Ken: Self-employed. Yeah. And we have a rough date when we want to retire. That future value of that based on an assumption of 7% would be $6.4 million.
Scott: So, you plan on retiring in a few years?
Ken: Yeah, probably two and a half, three years.
Scott: Is your business something you can sell?
Ken: It's something, yes, I can sell, but it's not something that would bring in... It's more of a service-type business. It's not going to be very useful or expensive.
Scott: The tax deferred accounts, qualified accounts, were you overfunding a pension plan for yourself?
Ken: Yeah. So, we have a defined benefit plan, yes.
Pat: And you're the only employee of the company?
Ken: As well as my wife. Although she wasn't on payroll the whole time as she was raising our children. So, 95% of those funds are in my name, and only about 5% in her name.
Scott: What's your...?
Pat: Scott, can we step back for a second? So, Ken, brilliant by the way. For the rest of the listeners, because Ken is self-employed, he has a defined benefit pension plan, which is kind of a quirk that allows him to put a lot of money away if he wants to, because it defines a benefit in the future.
Scott: You're not limited to like a typical 401(k).
Pat: Or an IRA. So, it defines a benefit in the future. So, you see this a lot with professionals, architects that are self-employed, or doctors or dentists that are self-employed, anesthesiologists that are in a group. This is where you actually see this done. And I go through the list and Ken's like, "Check, check, check, I'm one of those."
Ken: Yeah. And that's why, you hit it on the head, when I said service industry, you knew that selling the business, there's not much value in that.
Scott: Yeah, yeah, yeah.
Pat: That's right. That's right.
Scott: Unless you want to keep working.
Ken: Exactly.
Scott: And what's your income been the last couple of years? Pretending like you didn't contribute to the defined benefit plan.
Pat: Without the contributions to the defined benefit, what's your income?
Ken: Right. So, my AGI?
Pat: Yes.
Ken: About $3.35.
Scott: All right. And then how much have you been contributing to the pension?
Ken: The defined benefit about $95.
Scott: Okay. So...
Ken: And then...
Scott: Sorry, go ahead.
Ken: ...we're also contributing or fully maxing out a Roth 401(k), both of us.
Scott: Yeah, but you're not bothered by that because that's not the issue you called about, obviously.
Ken: No, no, it's not the issue.
Pat: How much money is in the Roth side of these qualified plans?
Ken: So, the Roth has about $4.25. And if we, once again, assuming a 7%, you know, return per year at $75, it should be worth about $1.8. There's different layers to this, and it's somewhat... That's why I wanted to talk to you guys about this.
Pat: Yeah, yeah, so what's your question?
Ken: So, we would like to leave our children something. And we know that it's better for, at this point in time with the way the laws are, a step up in basis on our brokerage as well as our Roth. So, we want to go through, and once we retire, start Roth converting from the deferred accounts, okay? My thought...
Pat: How much do you have in brokerage?
Ken: And you might remember this conversation. I have invested in tax-free munis for quite a while. But we're able to live off the tax-free muni income plus we have some rentals and plus some, you know, minor dividends and taxable interest. So, the plan is to... That would be our minimum that we would live off of.
Pat: Yeah. But you don't have anything in there that has a step up in basis, to speak of it, other than the real estate.
Ken: No, no, the brokerages would all be step up. The munis plus our equities would definitely be all stepped up in base.
Pat: How much you have in equities?
Ken: $2.6.
Pat: Okay. All right. That makes sense. You said earlier, "I've got munis in there." Okay. All right.
Scott: What's your net worth?
Ken: Honestly, I haven't added it up, but it's probably 10 plus. This is more of a family long-time planning.
Scott: Yeah, I get it.
Ken: Where I'm going with this is I don't want to touch the brokerage or the Roth, and try to spend down or convert the other deferred until about 75. Because the way I've planned it is the tax-free munis should be able to give us income until we turn 25. That's where the maturities level out.
Pat: I disagree. I think there's a mistake here. I don't understand why you have tax-free munis. What do you mean?
Ken: Because you're getting...
Pat: But, no, look...
Scott: And his tax bracket, what's wrong with that?
Pat: No, no, no. With this size of state, you should have nothing but equities in that brokerage account to get the full step up in basis and should replicate that fixed income inside of the qualified plan.
Scott: I would agree with that. So, in other words, if you could wave a wand and say, "I'm going to take a million dollars in my brokerage account. I'm going to sell the equities and have a million dollars of taxable, fixed income, because it's in a taxable account. And at the same time, I'm going sell my munis and buy a million dollars of equities in the brokerage."
Pat: That's right. So, Ken, when we think about this, and I did interrupt you here, but just before you go into this line of thought. So, what you just said to us is, "Look, I have earmarked a portion of this portfolio that I plan on not spending," which was your brokerage account, but you're taking the income off the tax free munis, which you said, "Is a minimum I need to live on." I would look at this and I'd say, I think that brokerage account and the Roth all goes to the kids on a step up in basis, even maybe a little bit before where we actually gift some of those stocks to them if they're in a lower tax bracket than you are. When you go to retire, I'd start a distribution from the 401(k)s and IRAs immediately to live on. And if I had anything access over that for tax reasons, I'd think about converting to a Roth.
Ken: Okay. All right.
Pat: So, then what would happen is... And this is exactly how I manage my own money. This is exactly. There is a portion that I know is going to my kids that they will not... And by the way, we sit down and I explain to them, this is my investment thesis. This real estate, this stock, this will go to you when your mother and I pass, and this is why. And so, what you want to do is take advantage of that step up in basis. And so, you're taking a diminished return on those munis. And my point being is, you're going to have to pay taxes on the IRAs at some point in time anyway. Let's just start that earlier rather than later and get rid of the munis altogether.
Scott: And if you replace those munis with a stock portfolio that was going to grow fairly tax efficient and have a stepped up basis, you're essentially going to be eliminating most of the taxes on that anyway.
Pat: That's right. And you're going to end up...
Scott: I would agree with that.
Pat: There's going to be more net worth in 20, 30 years by using that technique and taking the income from the IRAs today. I think you're too focused on the Roth conversion. I don't know if the Roth conversion is exactly the right thing for you. My guess is it's not. My guess is that you're probably better off leaving everything else alone and then start taking the income from that IRA, and then deciding after that income, why. I know you're certainly better off doing that than you are living off these tax free munis. There's no question in my mind. Because the Roth conversion, remember the tax free munis...
Scott: Pat, you're approach... People are like, "Why doesn't Pat like..." It's not that you don't like tax free munis. You're thinking, if we have an allocation, let's just say our allocation is 50% fixed income, 50% equities, just to be really clear on this. And the objective is to have this tax efficient as much as possible so that our kids have the most amount to inherit. Rather than own munis in a taxable account and equities in our tax deferred account, let's flip it. Let's own that fixed income in our retirement account. And if we're going to do that, there's no sense owning munis because it's all taxable there anyway. So, now, we can go from something that was yielding us 3% to something that's yielding us 5%.
Pat: So, Ken is with us now. Ken, welcome back.
Ken: Thanks to you for having me.
Pat: Thanks. It's been a little bit over a year.
Scott: Yeah, we threw some stones in your plan.
Pat: And hopefully, you went back and re listened to that call a couple times to kind of absorb it because there was a lot going on there.
Ken: Yeah, I went over it about a half dozen times. And, yeah, it's been 13 months. A lot has happened in that 13 months, a lot of volatility, a lot of moving parts with everything. And one of the things that was most difficult is I've been very comfortable with those munis. And there's a reason why behavioral finance gets so much attention is because you're fighting with yourself on something. So, I...
Scott: Well, sometimes there's a balance between, here's... You know, well, no one knows what perfection is because it's all based on future outcomes, right? But here's what kind of the ideal is, and here's what my human nature is compelling me to do, so is there some happy medium where I'm pretty close to what kind of the ultimate plan would be, but yet I'm still comfortable with the position we're taking. So...
Ken: Right. And I understand, you know, Pat was pretty adamant about, you know, selling them right away. There was just a few things besides, you know, fighting myself. There was also the fact that 13 months ago, interest rates were pretty high, so we had unrealized losses on those muni bonds. So, what I've done is kind of that happy medium you were talking about, is as some of these bonds have naturally run off the balance sheet through either bond calls or maturation, I've put that money into separate managed accounts or direct indexing, as you guys suggested. And so, once again, that's a new concept for me. And I understand the concept behind it and why you recommended, especially the tax loss harvesting factor.
Scott: And then at that time, are you concurrently reducing the equities in your tax deferred accounts? And there are some other fixed incomes?
Pat: So, are tax to bond ratios staying constant?
Ken: No, because with the accelerated, you know, appreciation in the market, the bonds have actually... Even though, you know, we're running it off naturally, equities have continued to appreciate. So, naturally, the percentage of bonds in our overall portfolio have gone down as well.
Pat: You know, what is the percentage of bonds in the overall portfolio?
Ken: It's approximately 25% to 30%.
Scott: I mean, I think Pat, the premise was, let's make a change without change in our allocation of stock to bond. Change in our allocation of stock to bond is kind of a second question.
Pat: You could do that, but that wasn't what we were focusing on. What I was trying to do was I was trying to get the delta, the difference between the yields on a taxable bond and a tax-free bond. And you were giving up about...
Scott: Essentially, not changing any risk structure to the portfolio.
Pat: Which is okay if you change the risk structure, but that wasn't the focus that I was trying to relay there. It was, look, if I've got a... So, I live in the State of California, and let's say I got a 3% West Covina municipal bond, which is a...
Scott: West Covina.
Pat: I have a 3% Muni bond. I could get something equivalent yield in a company that would have paid 5%. And because that was in my IRA and you pay distributions on all taxable money that comes out of an IRA, either living or dead or Roth conversion, I was giving myself that delta, that 2%, higher rate of return in my overall net worth. That was the whole concept.
Ken: Right, and I understand that. So, if I'm understanding you correctly, you're just saying, swap out the Munis in your brokerage account and have or buy bonds in your retirement account, correct?
Pat: That's exactly it.
Scott: And only because your tax deferred retirement account is so large relative to your...
Pat: Overall net worth.
Pat: That's right. And I wish I would have given you my cell number after the phone call because if you had told me you weren't selling the bonds because you would have a realized loss, I would have congratulated you and said, "That's awesome. Let's realize that loss." Because if...
Scott: And then get the gain of a bond inside the kind of gap.
Pat: It's a lateral move. It's a 100% lateral move. The only difference is I've got a little bit of tax arbitrage there.
Ken: Right, right. So, you know, going back to the direct indexing that you recommended, in my particular situation where I will be taking Munis out of my retirement account and have to pay the taxes, am I thinking about this clearly if I'm tax harvesting and keeping those losses, and then I'm selling stocks, appreciated stock out of the brokerage account and not paying the capital gains tax because I have all this harvesting and paying the tax on ordinary income when I take it out of the retirement account?
Scott: That's correct. That's correct. I wouldn't get too aggressive on the tax loss harvesting with the direct index. And you can kind of dial those things as aggressive or conservative on the tax loss. Just because if we knew you were going to have some massive capital gain in the future, then we'd say, let's be aggressive on the losses so we can carry those forward to the future.
Pat: Yeah, but you wouldn't.
Scott: Ken, do you have a financial advisor you work with?
Ken: I have someone who I have a loose relationship with. He's kind of a young guy, a large, and I won't say the name, brokerage. And I'm kind of working with him to see... My biggest thing is no one's going to think about your money better than you are. And if something happens to me, I kind of want to vet this guy over a period of time and have him work with my wife because my wife has no interest in what I'm doing.
Scott: That's prudent.
Pat: That makes sense. The thing is...
Ken: So, I'm giving him little things.
Scott: You are giving him...
Pat: But I like the...
Scott: I would be focused more on an overall financial plan where you can do some what if scenarios. Like, Pat made that recommendation. If I do that, what's that going to make my net worth going to look like 20 years out? Well, if I do this, what's that going to look like? If I do the direct indexing and I harvest some losses and I sell some other stocks in the future, to do a Roth conversion, how's that going to appear in my plan?
Pat: But, Scott, but, Ken was so clear in his direction. Truly, Ken, when you said, "This is what my objective is. I want to leave as much money to my children, this amount of money. And it makes sense to leave it in the Roth IRA and the brokerage account because of the step up and basis," the answers were relatively easy to come to because you were very clear in...
Scott: Objective.
Pat: ...your objective. That was reality. Where we fell down a little bit was on the execution. Your advisor should have said to you, "I'm not going to beat up on this kid because I don't know him." I can't believe I just called him a kid. But he should have said to you, "We should harvest every bit of loss right now, especially in muni bonds."
Scott: Because, again, you're not locking a loss forever because you're doing a like for like investment.
Pat: Even if we weren't doing that strategy, you'd recognize every muni bond loss buy...
Scott: Buy something equivalent the same day.
Pat: ...something similar the same day. And the reason is, the bond market's much larger than the stock market, much, much larger. It's so much easier to take losses in the bond market than the stock market because you can get an equivalent.
Ken: Pat, one thing you said in that call 13 months ago that I still can't wrap my head around is the fact you said, "I would take the money out of your IRAs and live off that and not convert to Roth." I think it's a mistake going to Roth where I don't see why that would be. Because between, let's say, 60 and 75 before RMDs, that's your really only opportunity to convert to Roth and have that money sitting aside, growing tax free forever. And you can take some out if you need it.
Pat: Correct. But so, what happens though... We probably should have clarified on that. You are correct. You couldn't be more right. But what you don't want to do is convert to Roth and forgive income because you want more on the Roth conversion so you're sacrificing lifestyle. Someone like you, it's going to be really hard for you to spend money. It's just flat out.
Ken: Yeah, I know.
Pat: That's why you have as much as you have. It's not easy. Look, I'm 62.
Scott: There are some clients we're like, "No, we're going to send you a check. A check is going to be deposited into your check or wire into your check account every month," because otherwise people won't spend it.
Pat: Yes.
Scott: Like, well, how much are the dividends from that account?
Pat: So, the idea is that we set an income level, and then for tax purposes, if it makes sense...
Scott: Figure out the best thing for that.
Pat: ...if there's any margin after that, then you do the Roth.
Ken: Right. And then maybe there's a blending of the two. But you're right. You know, I grew up poor, super saver. I've read the book, "Die with Zero". And I know I can't.
Pat: You can't.
Ken: I cannot do, you know... And people can say whatever you want. You know, if you don't fly first class, your kids will in a way.
Scott: That's right. You've listened to this show before.
Pat: Yeah, but he doesn't fly first class.
Scott: Yeah, you should be flying first class. No, that's funny.
Ken: I have never even flown business class. Common economy, that's as far as it goes.
Pat: Dang it. Okay, we got to do some coaching, not a really fancy restaurant either. Somewhere with a value meal and we can actually talk about trying to fly... I have converted clients into flying first class because their net worth.
Scott: By the way, that's just one example of spending a little more money for a little bit more comfort.
Pat: Yeah, there is charitable, which makes it a little bit more difficult. The other is gifting their children. Gifting to children is really difficult.
Scott: Because you see how they spend it.
Pat: Because you see how they consume it. And you think, "I never do that." And then it changes your view of giving.
Scott: I watch the way my daughter shops in the grocery store. Like, there's no looking at prices. Like, "Oh, it's all organic." Like, she just puts everything in the basket. And I'm thinking, I grew up. It's like you look at everything. This brand is $299, and this one's $249. I'm buying the $249.
Pat: You're like the Lady Lee Brown.
Scott: I buy the plane wraps stuff or whatever.
Pat: Lady Lee. So, you were correct in the in the summary that when I said not the Roth conversion, what I probably should have clarified is, set the income first. And then if the Roth conversion happens, it happens. If it doesn't, it doesn't. But you're correct. It's between the ages of now and required minimum distributions you want to do the Roth conversion. But you really want to spend a little bit of time picking out what you were super comfortable. It might be a 3% distribution from the total, or it might be 2.5%, or it could be 4% of your investable assets, and then starting that income and spending to it. And when I say spending to it, it's not easy. Look, this is a little self-confession, I have been on five safaris in the...
Scott: Have you really?
Pat: Yes.
Scott: Well, you went and climbed and hid with the gorillas or something.
Pat: Yeah, we went to Rwanda to...
Scott: And Pat, I've known Pat for 35 years. One of the cheapest guys I know.
Pat: Super cheap.
Scott: He would negotiate at the grocery store. I mean, the stories I've heard of you trying to negotiate...
Pat: Super cheap.
Scott: ...get then to buy from everybody.
Pat: Oh, yeah. When you open the cereal package and take the coupon out before you buy it, that was me. That was me. We didn't grow up with much. But I got to tell you, getting to that in... You know, you worked hard for this. You know, you didn't land on third base and acted like you hit a triple. You worked hard for it. Setting that mindset where you set yourself a budget and you spend to it is super healthy, because you're going to enjoy your retirement much, much more. And I've learned this from clients time and time again that say to me...
Scott: And you learned it personally.
Pat: And personally, yes. I mean, I would go on another safari. If you said, "Let's go." Ken, I'd say, "Well, you know I'm never spending time with you, Ken, but I'm available tomorrow. Let's go." Unfortunately, my wife won't go anymore. So, she's had enough of the wild animals.
Scott: It's not easy going to Africa and back anyway.
Pat: So, Ken, does that...? Any questions for us, or...?
Ken: You know, no, no, but I do have a comment or a statement. And, you know, I've listened to you guys for years, and I understand that you guys are kind of slowing down work wise. And that's great. You guys are at that same age where you probably will be... That you deserve it. You've worked hard, like you said. But I got to tell you, you guys really do a service to the public. I know you guys have a lot of listeners on the podcast, but you guys really... I can't emphasize this enough, how valuable you guys are...
Scott: Well, thank you. I appreciate that, Ken.
Ken: ...for the normal people out here who are trying to get through this and trying to figure things out. And I just hope you guys are on the air for quite a bit.
Pat: Well, thank you.
Scott: Thank you. I appreciate that.
Pat: So, Ken, my wife has accused me of retiring, but not telling anyone. So, she said, "Are you sure you didn't quit work and no one knows." So...
Scott: We're not as active as we once were.
Pat: Oh, that is most certainly. Anyway, you've done a great job saving. Congratulations to you and your family. Spend a lot of time talking about money with those kids before you start gifting to it or they inherit it.
Ken: You know what? One more thing you guys said gifting to children, which is difficult, but it's even more difficult because I've thought about that. When you have children who are extremely responsible, and then the ones who are not. And trying to balance that and thinking, if I do it for one, I have to do it for the others. And that's just a real world problem.
Scott: I struggled, too. I've got four kids.
Pat: Well, here, I tell you...
Scott: They're not all the same. That's for sure.
Pat: As soon as the kids got any small amount of money, I hired a divisor for each one of them. Happens to be at Allworth. And the reason was, is I wanted that external counsel for each one of the children to how they think about money. And, yeah, it's still difficult.
Scott: But it's still dad's divisor.
Pat: That's right. Yeah, that's right. That's right.
Scott: It's not their own choice.
Pat: But you're right, it is difficult because they're all different, right?
Ken: Right. And then, you know, one's going to use it to buy a house, and the other one's going to use it to go to Bali for a great week or two or whatever it is.
Pat: That's right. And we don't know who's right.
Ken: That's true.
Pat: Right? Who knows?
Scott: Well, I'm watching my college freshman blow through her savings in the first few weeks of college. And I know that's not right. I'm like, "This is not going to end well for you, though. But I don't give you much allotment. You've got room and board."
Pat: Have fun. Anyway, thanks, Ken. Appreciate it.
Scott: I appreciate the call.
Ken: All right. Thank you, guys. Appreciate it.
Pat: This is the great. He's right. Some days, this is a great thing to do, and other days, not so much, but...
Scott: That's right. No, I mean, it's always fun being in the studio with you.
Pat: Yes, yes. Well, thank you.
Scott: And our listeners, I mean, our callers. Well, Pat, that is all the time we've got. As usual, been fun in the studio here with you. And by the way, if you listen to our podcast and you like it, make sure you give us a rating, and also, follow us. Hit the Follow button so you make sure you get it each week.
Pat: And if you need any financial advice, reach out.
Scott: Reach out. Yeah. It's been great being here. Scott Hanson and Pat McClain of Allworth's "Money Matters".
Automated Voice: 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.
Scott: Welcome to Allworth's "Money Matters", Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Yeah, glad to be here as fall is in the air. I don't know if you've got your pumpkins out, Pat. I don't know why I'm talking about this. This sounds horrible. I feel like I'm... But never mind. That's a bad... Let me start over. Welcome to Allworth's "Money Matters".
Pat: I received a solicitation that was a door hanger, and it was someone that would bring to your house bales of straw and pumpkins and would set them all over the front of your house to decorate it for fall for $400. I think it was $440.
Scott: $400?
Pat: Mm-hmm, $440.
Scott: And what did you say? They knocked on your door?
Pat: I wasn't home. I'm sure they probably knocked on my door. But it was a door hanger, and I thought, "Good for them." Most certainly, I'm not going to spend $440 to...
Scott: Halloween has become way too commercialized. They've really forgotten the true meaning of this, "All Hallows Eve". I'm not a big Halloween celebration guy, so I don't know.
Pat: I enjoyed it when the kids were younger.
Scott: But I do like fall. Anyway, this isn't about...
Pat: All right, enough. We're not talking about the weather. Let's go.
Scott: But you like the fact that some... I guess, in your neighborhood, you're not allowed to be doing that either.
Pat: Correct.
Scott: And someone went in and...
Pat: Oh, I love the fact that someone's out there trying to make a living. I don't know, maybe they're making extra income. Maybe they were actually driving Uber or something or DoorDash. I've never done a DoorDash, but...
Scott: You've never DoorDashed food?
Pat: Never.
Scott: You are kidding me.
Pat: No, never done. You know, my daughter does.
Scott: Of course her kids do.
Pat: You know what she does?
Scott: What?
Pat: If it's like a Tuesday and she thinks she might be busy on Wednesday night, she DoorDashes on Tuesday night, and then surrenders the cart at checkout.
Scott: What does that mean?
Pat: She doesn't go through with the transaction and then the very next day they send her coupons.
Scott: Oh, my God. Pat has raised his kids well. Because that's exactly stuff you did as a young person.
Pat: Oh, I just thought, "This is brilliant." She explained to me, she said, you never really have to pay retail. It's great. Anyway, retail's for suckers.
Scott: All right. That is pretty funny. Your daughter's a law student.
Pat: Yeah, she's last year a law student.
Scott: Yeah, well good for her.
Pat: Well, she thinks she wants to be a public defender, we'll see.
Scott: I would think you need really thick skin.
Pat: I would think so, too. I would think so, too. Wow.
Scott: Why can't we just go to a family reunion instead?
Pat: No, come on.
Scott: Pretty much the same group. All right. Let's take some calls with people who've got questions regarding finances, rather than talking about this other stuff. We are in New York talking with Steve. Steve, you're with Allworth's "Money Matters".
Steve: Hey, guys, thanks for taking my call. So, I figured I'd ask the experts. My wife and I...
Pat: But they weren't available.
Steve: Well, I mean, at least, you know a lot about pumpkins.
Pat: Thank you.
Steve: The question is this, my wife and I have been faithful tithers for a long, long time, and God's blessed us. And one of the blessings that I have is a 401(k) that's done very well. But, well, within a year or so, I may be retiring. I'm already in my 70s. So...
Scott: How old are you?
Steve: I'm 72. Yeah. So, if I understand correctly, when I turn 73, I'll be required to RMD by 401(k). And as part of that, that becomes income. And my question is really, how do you tithe on a 401(k) withdrawal? Because there's just some components that are a little confusing to me. One is that you're putting money in, and then secondly, of course, you're taking money out, but then it fluctuates. I mean, you could have a really good year and you tithe on your profit, but then the next year, it's not a good year.
Scott: But wouldn't that be the same? If you go back to biblical times, let's say, and where it was on the first fruits, right? You tithe, you bring your first fruits, but there would be some years you'd have big crops and some years you'd have less crops. So, a tithe would still be relative based upon the crop of the year, right?
Steve: Yeah. I guess, I'm just confused about how to calculate all that.
Scott: Well, the government's going to do it for you. I mean, so one way to do it... And by the way, my wife and I started tithing when we were first married, and I think it's been a great discipline for us, not just spiritually, but financially, because when you give the finances, it kind of takes the money off yourself for the period of time. So, I think there's a good discipline, regardless of someone's spiritual convictions or not. But, I mean, you can do it as just like, if you take $50,000 out, then you're going to tithe 5% of that. But at over age 70, you can have money transferred directly to a charity and not have it come through your tax return, which would most likely be preferable for you. How much do you have in your 401(k)?
Steve: About $1.7 million.
Scott: How old's your spouse?
Steve: She's 60.
Scott: Okay. And is the 401(k) all in your name, or does your spouse have any money in retirement accounts?
Steve: Actually, she has her own 401(k). It's considerably smaller, but she has her own.
Scott: And when you retire, will there be any pension at all?
Steve: Yes.
Pat: Will you be living off any portion of your 401(k)?
Steve: Yeah, I think so, yes.
Pat: How much?
Steve: I'm going to say $40,000 a year right now.
Pat: Okay. So, here's kind of how it works. I'll walk you through it, and I'll give you a 100% practical, and then you can do what you want with the information. When you go to retire next year, you're going to have to take, what's that, about a 3.5% distribution, right? So, 3.5% distribution, which is about 60 grand a year. So, you're going to have to start this distribution. You can do it from your 401(k), but I actually would use an IRA because it makes it so much easier to actually get this done.
Scott: So, when you retire, transfer everything to an IRA?
Pat: Transfer everything. I would do it today, actually.
Scott: You're still working.
Pat: There's just so many different... All right, do it whenever. That isn't that material. So, then you have to start taking about $60,000 out a year for your required minimum distribution. This money that goes to charities can be part of that $60,000 a year. That's how it works. And you have to name the charities and their tax ID numbers. So, this is what I do with many, many of my clients. The beginning of the year, I tell them what the required minimum distribution is going to be. Some of them move it every year. Some of them, it is exactly the same amount.
"Pat, I'm giving $30,000 a year. Here's the list of the charities." And then we just send a check right over to the charities. Then we take the remaining amount. So, in your situation, you said, "I'm going to tithe." So, I'm going to use the number, just $20,000 a year. And then the other distributions of approximately $3,400 a month, we send directly to you, we withhold taxes. And we do it every January, we actually do the planning. In December, I tell them the required minimum distributions, and we just push it out of the way.
Scott: Yeah. But to take it one step further, Pat, and I'm sure this is what you do anyway, but Steve, let's assume for a minute, let's assume your pension's $30,000. Let's assume that your family's Social Security is $50,000, so we have $80,000 there. And we're assuming that your minimum distribution is $60,000, so $140,000 of total income. You want to tithe on that $140,000, that's what you told me. That would be $14,000. You work backwards from them, so we...
Pat: So, if I were in your position, I would take my pension, I'd have it all come home, I'd have my Social Security all come home. And then I'd take my 401(k), I would have $14,000 of that distribution go directly to my charities, the church or whatever you're going to give to. I'd have those go directly there. Because you're probably not able to take an itemized deduction of your charitable contributions. And if it comes out of your 401(k) or your IRA, as part of the required minimum distribution, it doesn't even show up on your tax return.
Pat: That is exactly how I do it.
Scott: And then you've satisfied that 10%, and you've done it in the most tax efficient manner.
Steve: So, one time, we had a church building project. So, I took $20,000 out of my retirement, that's the 401(k), and made a direct transfer right to the church.
Pat: And it came from?
Scott: This was at age 70?
Steve: Yes, actually.
Scott: Okay, yeah.
Pat: Okay. Yes, that was the right thing to do.
Steve: So, I know the principle, but what I didn't know is I could diversify the distribution. So, if I've got several, a church and other organizations that I want to issue.
Pat: Yes.
Scott: Yes, the food bank or whatever it is.
Pat: Yes. I think of her, I actually met her through church. We were on it, strangely enough. I was running a capital campaign in the church and she was a volunteer. And so, I explained it to all the people that were volunteering how to do this. And she came up afterwards and said, I wish my advisor told me that. And she became a client. And 15 years later, not that long, anyway, to this date, I get a list of the charities, their addresses, tax ID numbers, and the amounts. And we just fired off just like that. I do four or five of them.
Steve: So, if I just go to my 401(k) administrator and say, "I've got these five charities that I want to give."
Scott: Well, your 401(k) administrator may or may not, the tax law allows that to happen. And most IRA custodians will accommodate that. Whether or not your 401(k) administrator accommodates that, I don't know, because they don't have that many people over age 70 with balances still.
Pat: That's right. That's why I suggested that you may want to move your 401(k) to an IRA now...
Scott: Now. That sounds right.
Pat: ...because it's just easier to administrate.
Steve: Well, this year, I actually did about a third of that. I put it into an IRA.
Pat: Okay, perfect. Yeah. Well, then you've done it. So, you understand the whole concept. You can name as many charities as you want.
Steve: Okay. That's a great idea, actually. Thanks.
Pat: We didn't actually create it. We just memorized the rules.
Scott: That's what you call this. Yeah, it was not our idea.
Pat: It wasn't ours.
Scott: By the way, if you're stealing from me, you're stealing twice.
Pat: That's right. Because you took it from someone else. Yeah. It was just the American government's ongoing plan to make the tax code more complicated, it was part of that.
Steve: Yeah. But I thank you, all.
Scott: And that way, if you're looking at what your required minimum distributions are, and in good years, it's going to be more, on not so good years, it's going to be less. Or you could just fix a dollar amount...
Pat: I think it's following with the principle.
Scott: ...or you could do wherever your heart leads you.
Steve: Yeah.
Scott: All right. Appreciate the call.
Steve: Well, thanks very much. God bless you, guys. Thank you.
Pat: Thanks, Steve.
Scott: Thank you, Steve. All right. Let's continue on here. We're talking with Kristy. Kristy, you're with Allworth's "Money Matters".
Kristy: Hi. Thanks for taking my call today. I love your show.
Scott: Thank you.
Kristy: So, I'll just get right to it. I'm super behind in saving for retirement. I'm 42 years old, and I just want to make sure that the accounts that I have going are set up correctly.
Pat: By the way, before you start, the mere fact that you called a financial planning show and asked that question means that you're actually...
Scott: Something's changed here, yeah.
Pat: I thought the same thing. Yeah. And that you're probably not behind most Americans. Most Americans at 42 have never even given a consideration.
Scott: That's true.
Kristy: Well, I've listened to your show forever. So, in that regard, I should probably be better at this, but I've had some life things that happen, and here I am.
Pat: Okay. So, run us through.
Kristy: So, yes, I am calling the show.
Pat: Okay. Run us through.
Kristy: So, I am 42 years old. I just started a new job six months ago after being laid off. I'm making less money now, but I am doing 10% of my paycheck with a 6% match into a Roth 401(k). They just put it into a Target 2045 fund for me, and I'm just not sure if that's where that should be. And then I also have a Roth IRA brokerage that was an old rollover from an old 401(k), and that is something that is not invested in anything. It's just in the short-term reserves fund, if you will.
Pat: What are the balances of both these accounts?
Kristy: The employer, the new, the Roth 401(k) has only $7,000 in it, and the rollover, the Roth IRA brokerage account has $9,500.
Pat: And are you married or single?
Kristy: Single.
Pat: And do you own a home?
Kristy: I did, but I sold it last year when I got laid off, so I have a little bit. Now, that's my emergency fund that I have sitting in the high-yield savings.
Pat: How much is that?
Kristy: That's only, I think it's about $35,000.
Pat: And what's your annual income?
Kristy: I'm at $75,000 now. I had to take a pay cut taking this new job.
Pat: Sorry, say that again?
Kristy: $75,000 now at this job that I got.
Pat: Will you receive a pension when you retire?
Kristy: No, no.
Scott: What state do you live in?
Pat: Oh, here it is, Scott.
Kristy: Nevada.
Scott: I'm sorry, I was looking for my tax form. Pat's stole mine.
Pat: We're looking... I didn't take yours.
Scott: It was right on top of yours.
Pat: No one steals someone else's tax form. Flat out.
Scott: I'm like, "Where did it go."
Pat: It is not a desired piece of property.
Scott: I do think the Roth's the right way for you at your income. Just because if you look at the way the income tax brackets work, you're in a 12% tax bracket, and your taxable income, and this is after a standard deduction, above $48,000, roughly $49,000, it jumps to 22%. So, at $75,000, even if you back out a standard deduction, your taxable income's about $60,000.
Pat: No, I don't think.
Scott: I take that back.
Pat: I think a traditional would be better for you.
Kristy: Oh, okay.
Pat: I think a traditional would be better for, just because...
Scott: If I'm doing the numbers.
Pat: ...it's going to allow her to increase that contribution from 10% to 15%.
Kristy: Okay, so switch that to a traditional.
Pat: Yeah, and I'd see if I could push it up to 15%. It's going to be a little tough for you.
Scott: Yeah, because you're in the 22% bracket. And you can take it to an extra deduction at 22%, and odds are in retirement, you're going to be in a lower tax bracket.
Pat: That's right.
Scott: Unless you have some massive inheritance or something.
Kristy: Well, I mean, the hope is that I'd like to get my income back up again, but where I'm sitting right now, the market's pretty tough, so I'm just happy to have a job at the moment.
Pat: Yeah. Do you expect an inheritance?
Kristy: I'm not sure. My mom, I think she's got a little bit of money, but she's also pretty young and already needing some money for assistance.
Scott: Oh, okay. Well, then no.
Pat: If you're not sure, the answer's no.
Kristy: Yeah, I don't hold my breath on that.
Pat: Well, she needs assistance now. That will be a no.
Kristy: I figure that's her money to care for her, and I don't care to, you know, justify something that straight.
Pat: I would do the pre-tax 401(k).
Scott: Move it to 15%.
Pat: And move it to 15%. And then...
Scott: If you're my little sister, Pat likes to say, I think I'd invest those... You're 42, you're not going to be touching those retirement dollars for 20-plus years, right?
Kristy: Right, right.
Scott: So, you want to be in that area that's going to be the highest probability of good return, not today or next week or next month, but for the next 20 years. Which is going to be in the broad stock market, stock market index.
Pat: Yeah, so both the target date fund that you have in your 401(k), the 2045, I'd move two-thirds of it to a total market or an S&P 500 and a third to an international fund. They probably have an index fund in that portfolio, would be my guess. And then on the Roth brokerage with the 9,500, I'd buy the total market.
Scott: Total market index.
Pat: Total market index of both of those. And then I wouldn't worry what they did on a day-to-day basis, but, yeah. And if you have the ability to buy a house in the next four or five years, I think it would be a good inflation hedge, but I wouldn't push it. I would not push it.
Kristy: Yeah, it's just tough right now where the rates are and looking at what the payment would be.
Scott: I get it. I get it.
Pat: Yeah, we understand. And I would just do the 15% in the 401(k). And pre-tax not Roth. And then...
Scott: Don't switch to the pre-tax unless you increase your contributions.
Pat: Thank you. Thank you. Thank you.
Kristy: And then switching it over to the, you said the two-thirds into like the S&P 500 or something of the sorts and the one-third, is that something I can log in and do, or will they help me do that?
Pat: No, you can log in and do it. You'll see it.
Kristy: Okay.
Pat: Yeah. You may...
Scott: I would do 70/30.
Pat: 70/30, yeah. You might have to use a little Google, but if it says MSCI, it will actually be in a column that says international.
Scott: It should be pretty easy to navigate.
Kristy: Okay.
Pat: All right.
Kristy: All right.
Pat: Where in Nevada?
Kristy: So, thank you, guys.
Pat: Where in Nevada?
Kristy: I'm in Northern Nevada, kind of in the Reno-Sparks area.
Pat: Very nice.
Kristy: Yeah, originally from San Jose, so I've been out here 16, 17 years.
Scott: Oh, long time.
Pat: I spent a little bit of time in South Reno.
Kristy: Nice. Nice, nice.
Pat: I enjoyed it very much. So, I have friends that live there.
Scott: Okay. So, keeping everyone up to date. Thanks, Pat.
Pat: I love South Reno.
Scott: Who doesn't love South Reno?
Pat: All right. Appreciate the call, Kristy.
Kristy: Oh, my gosh. Have a great day. Thank you.
Pat: Keep everyone...
Scott: Kristy, Reno's nice, except for, like, two blocks downtown, right? Like, if there's something they could do with that downtown in Reno, it could be a nicer...
Pat: They used to call, the biggest little city in the West.
Scott: Whatever that means.
Pat: But my friend Chuck used to call it the place that cleanliness forgot.
Scott: All right. That's... Good thing Kristy is no longer with us. That's a derogatory comment.
Pat: But it's nice, but there's parts of it, except there is a little downtown part that...
Scott: You know, just hearing Kristy's call, it got me thinking, Pat, about, she'd lost her job. She's talking about her job market's tight right now. Job market is not easy today. And the financial markets are betting that AI is actually going to increase productivity for employers, i.e. less employees needed. And so, the Kristy's of the U.S., of which there are millions...
Pat: Millions.
Scott: Not a lot of buffer there.
Pat: Things are tight.
Scott: Things are already tight. It just...
Pat: Oh, this societal stuff, it's scary. If in fact, the promise of AI lands, the societal implications on a global basis is somewhat scary. Because the people it affects the most are white collar, college-educated young people.
Scott: Yeah. Knowledge workers.
Pat: Knowledge workers.
Scott: And I really think in the future it's going to be, either you've got some hard skills that robotics can't do today, or you've got great people skills, the softer skills will probably be more important. Even in our own profession, the technologies does more and more and more for us. And the best advisors of the future, not be the ones that can crunch the numbers.
Pat: It will be the ones with the soft skills.
Scott: Who can explain it well to clients.
Pat: And help them.
Scott: And helps them. Maybe we should have AI do our show. Maybe it might improve. I tested with that.
Pat: Where the AI did the radio podcast.
Scott: Pat, we can go into a program now. I forget what it's called. We upload a bunch of our podcasts. It will create a podcast with our voices.
Pat: That's like, "Wait a minute. I don't have to show up here anymore," wait.
Scott: All right. I don't want to get depressed with the negative side of things. So, we're going to do something different now.
Pat: We've had a couple of these house calls in the last six months. And it reminds me of the old "Click and Clack".
Scott: The car guys.
Pat: The Tappet Brothers.
Scott: One of them died like 15 years ago. And they still run the program.
Pat: I think.
Scott: Maybe. It was on public radio, what it was, NPR or something.
Pat: So, these are house calls where we check back with a caller from the past, and we see how our advice went.
Scott: It was around this time a year ago, we spoke with Ken. Ken's not an Allworth client, but he is an avid listener of this podcast. And at that time, his goal was to be the most tax efficient as possible in his long-term financial planning with planning for his retirement in a few years with some income coming in, and also, maximizing the tax-free amount that his kids will receive as inheritance. So...
Pat: Just as a disclaimer, the reason we say he's not a client is not because... We'd love for him to be a client of the firm. It's because Security's regulations. If he's a client, it's a different disclosure or something.
Scott: We have to say that this experience is probably not indicative of everyone.
Pat: There's all kinds of...
Scott: Yeah. Then it's an endorsement of some sort.
Pat: Yes, so that's why we...
Scott: If we're going to get an endorsement, we're not going to get it from someone like Ken. We're going to get like a celebrity endorsement like a football player.
Pat: Tom Selleck.
Scott: A wash-up actor. I didn't mean Tom Selleck, is a wash-up actor. Anyway, let's listen to the clip.
Ken: My wife and I, obviously married long time. We have three children, mid-20s to late 20s. And I am thinking ahead of time. And we have an issue with tax deferred IRAs and 401(k)s. We're not retired yet, but the current value is approximately $5 million.
Pat: How old are you?
Ken: I am 57, so is my wife.
Pat: And so, you're talking about 401(k)s and IRAs?
Ken: Correct.
Pat: $5 million.
Ken: Self-employed. Yeah. And we have a rough date when we want to retire. That future value of that based on an assumption of 7% would be $6.4 million.
Scott: So, you plan on retiring in a few years?
Ken: Yeah, probably two and a half, three years.
Scott: Is your business something you can sell?
Ken: It's something, yes, I can sell, but it's not something that would bring in... It's more of a service-type business. It's not going to be very useful or expensive.
Scott: The tax deferred accounts, qualified accounts, were you overfunding a pension plan for yourself?
Ken: Yeah. So, we have a defined benefit plan, yes.
Pat: And you're the only employee of the company?
Ken: As well as my wife. Although she wasn't on payroll the whole time as she was raising our children. So, 95% of those funds are in my name, and only about 5% in her name.
Scott: What's your...?
Pat: Scott, can we step back for a second? So, Ken, brilliant by the way. For the rest of the listeners, because Ken is self-employed, he has a defined benefit pension plan, which is kind of a quirk that allows him to put a lot of money away if he wants to, because it defines a benefit in the future.
Scott: You're not limited to like a typical 401(k).
Pat: Or an IRA. So, it defines a benefit in the future. So, you see this a lot with professionals, architects that are self-employed, or doctors or dentists that are self-employed, anesthesiologists that are in a group. This is where you actually see this done. And I go through the list and Ken's like, "Check, check, check, I'm one of those."
Ken: Yeah. And that's why, you hit it on the head, when I said service industry, you knew that selling the business, there's not much value in that.
Scott: Yeah, yeah, yeah.
Pat: That's right. That's right.
Scott: Unless you want to keep working.
Ken: Exactly.
Scott: And what's your income been the last couple of years? Pretending like you didn't contribute to the defined benefit plan.
Pat: Without the contributions to the defined benefit, what's your income?
Ken: Right. So, my AGI?
Pat: Yes.
Ken: About $3.35.
Scott: All right. And then how much have you been contributing to the pension?
Ken: The defined benefit about $95.
Scott: Okay. So...
Ken: And then...
Scott: Sorry, go ahead.
Ken: ...we're also contributing or fully maxing out a Roth 401(k), both of us.
Scott: Yeah, but you're not bothered by that because that's not the issue you called about, obviously.
Ken: No, no, it's not the issue.
Pat: How much money is in the Roth side of these qualified plans?
Ken: So, the Roth has about $4.25. And if we, once again, assuming a 7%, you know, return per year at $75, it should be worth about $1.8. There's different layers to this, and it's somewhat... That's why I wanted to talk to you guys about this.
Pat: Yeah, yeah, so what's your question?
Ken: So, we would like to leave our children something. And we know that it's better for, at this point in time with the way the laws are, a step up in basis on our brokerage as well as our Roth. So, we want to go through, and once we retire, start Roth converting from the deferred accounts, okay? My thought...
Pat: How much do you have in brokerage?
Ken: And you might remember this conversation. I have invested in tax-free munis for quite a while. But we're able to live off the tax-free muni income plus we have some rentals and plus some, you know, minor dividends and taxable interest. So, the plan is to... That would be our minimum that we would live off of.
Pat: Yeah. But you don't have anything in there that has a step up in basis, to speak of it, other than the real estate.
Ken: No, no, the brokerages would all be step up. The munis plus our equities would definitely be all stepped up in base.
Pat: How much you have in equities?
Ken: $2.6.
Pat: Okay. All right. That makes sense. You said earlier, "I've got munis in there." Okay. All right.
Scott: What's your net worth?
Ken: Honestly, I haven't added it up, but it's probably 10 plus. This is more of a family long-time planning.
Scott: Yeah, I get it.
Ken: Where I'm going with this is I don't want to touch the brokerage or the Roth, and try to spend down or convert the other deferred until about 75. Because the way I've planned it is the tax-free munis should be able to give us income until we turn 25. That's where the maturities level out.
Pat: I disagree. I think there's a mistake here. I don't understand why you have tax-free munis. What do you mean?
Ken: Because you're getting...
Pat: But, no, look...
Scott: And his tax bracket, what's wrong with that?
Pat: No, no, no. With this size of state, you should have nothing but equities in that brokerage account to get the full step up in basis and should replicate that fixed income inside of the qualified plan.
Scott: I would agree with that. So, in other words, if you could wave a wand and say, "I'm going to take a million dollars in my brokerage account. I'm going to sell the equities and have a million dollars of taxable, fixed income, because it's in a taxable account. And at the same time, I'm going sell my munis and buy a million dollars of equities in the brokerage."
Pat: That's right. So, Ken, when we think about this, and I did interrupt you here, but just before you go into this line of thought. So, what you just said to us is, "Look, I have earmarked a portion of this portfolio that I plan on not spending," which was your brokerage account, but you're taking the income off the tax free munis, which you said, "Is a minimum I need to live on." I would look at this and I'd say, I think that brokerage account and the Roth all goes to the kids on a step up in basis, even maybe a little bit before where we actually gift some of those stocks to them if they're in a lower tax bracket than you are. When you go to retire, I'd start a distribution from the 401(k)s and IRAs immediately to live on. And if I had anything access over that for tax reasons, I'd think about converting to a Roth.
Ken: Okay. All right.
Pat: So, then what would happen is... And this is exactly how I manage my own money. This is exactly. There is a portion that I know is going to my kids that they will not... And by the way, we sit down and I explain to them, this is my investment thesis. This real estate, this stock, this will go to you when your mother and I pass, and this is why. And so, what you want to do is take advantage of that step up in basis. And so, you're taking a diminished return on those munis. And my point being is, you're going to have to pay taxes on the IRAs at some point in time anyway. Let's just start that earlier rather than later and get rid of the munis altogether.
Scott: And if you replace those munis with a stock portfolio that was going to grow fairly tax efficient and have a stepped up basis, you're essentially going to be eliminating most of the taxes on that anyway.
Pat: That's right. And you're going to end up...
Scott: I would agree with that.
Pat: There's going to be more net worth in 20, 30 years by using that technique and taking the income from the IRAs today. I think you're too focused on the Roth conversion. I don't know if the Roth conversion is exactly the right thing for you. My guess is it's not. My guess is that you're probably better off leaving everything else alone and then start taking the income from that IRA, and then deciding after that income, why. I know you're certainly better off doing that than you are living off these tax free munis. There's no question in my mind. Because the Roth conversion, remember the tax free munis...
Scott: Pat, you're approach... People are like, "Why doesn't Pat like..." It's not that you don't like tax free munis. You're thinking, if we have an allocation, let's just say our allocation is 50% fixed income, 50% equities, just to be really clear on this. And the objective is to have this tax efficient as much as possible so that our kids have the most amount to inherit. Rather than own munis in a taxable account and equities in our tax deferred account, let's flip it. Let's own that fixed income in our retirement account. And if we're going to do that, there's no sense owning munis because it's all taxable there anyway. So, now, we can go from something that was yielding us 3% to something that's yielding us 5%.
Pat: So, Ken is with us now. Ken, welcome back.
Ken: Thanks to you for having me.
Pat: Thanks. It's been a little bit over a year.
Scott: Yeah, we threw some stones in your plan.
Pat: And hopefully, you went back and re listened to that call a couple times to kind of absorb it because there was a lot going on there.
Ken: Yeah, I went over it about a half dozen times. And, yeah, it's been 13 months. A lot has happened in that 13 months, a lot of volatility, a lot of moving parts with everything. And one of the things that was most difficult is I've been very comfortable with those munis. And there's a reason why behavioral finance gets so much attention is because you're fighting with yourself on something. So, I...
Scott: Well, sometimes there's a balance between, here's... You know, well, no one knows what perfection is because it's all based on future outcomes, right? But here's what kind of the ideal is, and here's what my human nature is compelling me to do, so is there some happy medium where I'm pretty close to what kind of the ultimate plan would be, but yet I'm still comfortable with the position we're taking. So...
Ken: Right. And I understand, you know, Pat was pretty adamant about, you know, selling them right away. There was just a few things besides, you know, fighting myself. There was also the fact that 13 months ago, interest rates were pretty high, so we had unrealized losses on those muni bonds. So, what I've done is kind of that happy medium you were talking about, is as some of these bonds have naturally run off the balance sheet through either bond calls or maturation, I've put that money into separate managed accounts or direct indexing, as you guys suggested. And so, once again, that's a new concept for me. And I understand the concept behind it and why you recommended, especially the tax loss harvesting factor.
Scott: And then at that time, are you concurrently reducing the equities in your tax deferred accounts? And there are some other fixed incomes?
Pat: So, are tax to bond ratios staying constant?
Ken: No, because with the accelerated, you know, appreciation in the market, the bonds have actually... Even though, you know, we're running it off naturally, equities have continued to appreciate. So, naturally, the percentage of bonds in our overall portfolio have gone down as well.
Pat: You know, what is the percentage of bonds in the overall portfolio?
Ken: It's approximately 25% to 30%.
Scott: I mean, I think Pat, the premise was, let's make a change without change in our allocation of stock to bond. Change in our allocation of stock to bond is kind of a second question.
Pat: You could do that, but that wasn't what we were focusing on. What I was trying to do was I was trying to get the delta, the difference between the yields on a taxable bond and a tax-free bond. And you were giving up about...
Scott: Essentially, not changing any risk structure to the portfolio.
Pat: Which is okay if you change the risk structure, but that wasn't the focus that I was trying to relay there. It was, look, if I've got a... So, I live in the State of California, and let's say I got a 3% West Covina municipal bond, which is a...
Scott: West Covina.
Pat: I have a 3% Muni bond. I could get something equivalent yield in a company that would have paid 5%. And because that was in my IRA and you pay distributions on all taxable money that comes out of an IRA, either living or dead or Roth conversion, I was giving myself that delta, that 2%, higher rate of return in my overall net worth. That was the whole concept.
Ken: Right, and I understand that. So, if I'm understanding you correctly, you're just saying, swap out the Munis in your brokerage account and have or buy bonds in your retirement account, correct?
Pat: That's exactly it.
Scott: And only because your tax deferred retirement account is so large relative to your...
Pat: Overall net worth.
Pat: That's right. And I wish I would have given you my cell number after the phone call because if you had told me you weren't selling the bonds because you would have a realized loss, I would have congratulated you and said, "That's awesome. Let's realize that loss." Because if...
Scott: And then get the gain of a bond inside the kind of gap.
Pat: It's a lateral move. It's a 100% lateral move. The only difference is I've got a little bit of tax arbitrage there.
Ken: Right, right. So, you know, going back to the direct indexing that you recommended, in my particular situation where I will be taking Munis out of my retirement account and have to pay the taxes, am I thinking about this clearly if I'm tax harvesting and keeping those losses, and then I'm selling stocks, appreciated stock out of the brokerage account and not paying the capital gains tax because I have all this harvesting and paying the tax on ordinary income when I take it out of the retirement account?
Scott: That's correct. That's correct. I wouldn't get too aggressive on the tax loss harvesting with the direct index. And you can kind of dial those things as aggressive or conservative on the tax loss. Just because if we knew you were going to have some massive capital gain in the future, then we'd say, let's be aggressive on the losses so we can carry those forward to the future.
Pat: Yeah, but you wouldn't.
Scott: Ken, do you have a financial advisor you work with?
Ken: I have someone who I have a loose relationship with. He's kind of a young guy, a large, and I won't say the name, brokerage. And I'm kind of working with him to see... My biggest thing is no one's going to think about your money better than you are. And if something happens to me, I kind of want to vet this guy over a period of time and have him work with my wife because my wife has no interest in what I'm doing.
Scott: That's prudent.
Pat: That makes sense. The thing is...
Ken: So, I'm giving him little things.
Scott: You are giving him...
Pat: But I like the...
Scott: I would be focused more on an overall financial plan where you can do some what if scenarios. Like, Pat made that recommendation. If I do that, what's that going to make my net worth going to look like 20 years out? Well, if I do this, what's that going to look like? If I do the direct indexing and I harvest some losses and I sell some other stocks in the future, to do a Roth conversion, how's that going to appear in my plan?
Pat: But, Scott, but, Ken was so clear in his direction. Truly, Ken, when you said, "This is what my objective is. I want to leave as much money to my children, this amount of money. And it makes sense to leave it in the Roth IRA and the brokerage account because of the step up and basis," the answers were relatively easy to come to because you were very clear in...
Scott: Objective.
Pat: ...your objective. That was reality. Where we fell down a little bit was on the execution. Your advisor should have said to you, "I'm not going to beat up on this kid because I don't know him." I can't believe I just called him a kid. But he should have said to you, "We should harvest every bit of loss right now, especially in muni bonds."
Scott: Because, again, you're not locking a loss forever because you're doing a like for like investment.
Pat: Even if we weren't doing that strategy, you'd recognize every muni bond loss buy...
Scott: Buy something equivalent the same day.
Pat: ...something similar the same day. And the reason is, the bond market's much larger than the stock market, much, much larger. It's so much easier to take losses in the bond market than the stock market because you can get an equivalent.
Ken: Pat, one thing you said in that call 13 months ago that I still can't wrap my head around is the fact you said, "I would take the money out of your IRAs and live off that and not convert to Roth." I think it's a mistake going to Roth where I don't see why that would be. Because between, let's say, 60 and 75 before RMDs, that's your really only opportunity to convert to Roth and have that money sitting aside, growing tax free forever. And you can take some out if you need it.
Pat: Correct. But so, what happens though... We probably should have clarified on that. You are correct. You couldn't be more right. But what you don't want to do is convert to Roth and forgive income because you want more on the Roth conversion so you're sacrificing lifestyle. Someone like you, it's going to be really hard for you to spend money. It's just flat out.
Ken: Yeah, I know.
Pat: That's why you have as much as you have. It's not easy. Look, I'm 62.
Scott: There are some clients we're like, "No, we're going to send you a check. A check is going to be deposited into your check or wire into your check account every month," because otherwise people won't spend it.
Pat: Yes.
Scott: Like, well, how much are the dividends from that account?
Pat: So, the idea is that we set an income level, and then for tax purposes, if it makes sense...
Scott: Figure out the best thing for that.
Pat: ...if there's any margin after that, then you do the Roth.
Ken: Right. And then maybe there's a blending of the two. But you're right. You know, I grew up poor, super saver. I've read the book, "Die with Zero". And I know I can't.
Pat: You can't.
Ken: I cannot do, you know... And people can say whatever you want. You know, if you don't fly first class, your kids will in a way.
Scott: That's right. You've listened to this show before.
Pat: Yeah, but he doesn't fly first class.
Scott: Yeah, you should be flying first class. No, that's funny.
Ken: I have never even flown business class. Common economy, that's as far as it goes.
Pat: Dang it. Okay, we got to do some coaching, not a really fancy restaurant either. Somewhere with a value meal and we can actually talk about trying to fly... I have converted clients into flying first class because their net worth.
Scott: By the way, that's just one example of spending a little more money for a little bit more comfort.
Pat: Yeah, there is charitable, which makes it a little bit more difficult. The other is gifting their children. Gifting to children is really difficult.
Scott: Because you see how they spend it.
Pat: Because you see how they consume it. And you think, "I never do that." And then it changes your view of giving.
Scott: I watch the way my daughter shops in the grocery store. Like, there's no looking at prices. Like, "Oh, it's all organic." Like, she just puts everything in the basket. And I'm thinking, I grew up. It's like you look at everything. This brand is $299, and this one's $249. I'm buying the $249.
Pat: You're like the Lady Lee Brown.
Scott: I buy the plane wraps stuff or whatever.
Pat: Lady Lee. So, you were correct in the in the summary that when I said not the Roth conversion, what I probably should have clarified is, set the income first. And then if the Roth conversion happens, it happens. If it doesn't, it doesn't. But you're correct. It's between the ages of now and required minimum distributions you want to do the Roth conversion. But you really want to spend a little bit of time picking out what you were super comfortable. It might be a 3% distribution from the total, or it might be 2.5%, or it could be 4% of your investable assets, and then starting that income and spending to it. And when I say spending to it, it's not easy. Look, this is a little self-confession, I have been on five safaris in the...
Scott: Have you really?
Pat: Yes.
Scott: Well, you went and climbed and hid with the gorillas or something.
Pat: Yeah, we went to Rwanda to...
Scott: And Pat, I've known Pat for 35 years. One of the cheapest guys I know.
Pat: Super cheap.
Scott: He would negotiate at the grocery store. I mean, the stories I've heard of you trying to negotiate...
Pat: Super cheap.
Scott: ...get then to buy from everybody.
Pat: Oh, yeah. When you open the cereal package and take the coupon out before you buy it, that was me. That was me. We didn't grow up with much. But I got to tell you, getting to that in... You know, you worked hard for this. You know, you didn't land on third base and acted like you hit a triple. You worked hard for it. Setting that mindset where you set yourself a budget and you spend to it is super healthy, because you're going to enjoy your retirement much, much more. And I've learned this from clients time and time again that say to me...
Scott: And you learned it personally.
Pat: And personally, yes. I mean, I would go on another safari. If you said, "Let's go." Ken, I'd say, "Well, you know I'm never spending time with you, Ken, but I'm available tomorrow. Let's go." Unfortunately, my wife won't go anymore. So, she's had enough of the wild animals.
Scott: It's not easy going to Africa and back anyway.
Pat: So, Ken, does that...? Any questions for us, or...?
Ken: You know, no, no, but I do have a comment or a statement. And, you know, I've listened to you guys for years, and I understand that you guys are kind of slowing down work wise. And that's great. You guys are at that same age where you probably will be... That you deserve it. You've worked hard, like you said. But I got to tell you, you guys really do a service to the public. I know you guys have a lot of listeners on the podcast, but you guys really... I can't emphasize this enough, how valuable you guys are...
Scott: Well, thank you. I appreciate that, Ken.
Ken: ...for the normal people out here who are trying to get through this and trying to figure things out. And I just hope you guys are on the air for quite a bit.
Pat: Well, thank you.
Scott: Thank you. I appreciate that.
Pat: So, Ken, my wife has accused me of retiring, but not telling anyone. So, she said, "Are you sure you didn't quit work and no one knows." So...
Scott: We're not as active as we once were.
Pat: Oh, that is most certainly. Anyway, you've done a great job saving. Congratulations to you and your family. Spend a lot of time talking about money with those kids before you start gifting to it or they inherit it.
Ken: You know what? One more thing you guys said gifting to children, which is difficult, but it's even more difficult because I've thought about that. When you have children who are extremely responsible, and then the ones who are not. And trying to balance that and thinking, if I do it for one, I have to do it for the others. And that's just a real world problem.
Scott: I struggled, too. I've got four kids.
Pat: Well, here, I tell you...
Scott: They're not all the same. That's for sure.
Pat: As soon as the kids got any small amount of money, I hired a divisor for each one of them. Happens to be at Allworth. And the reason was, is I wanted that external counsel for each one of the children to how they think about money. And, yeah, it's still difficult.
Scott: But it's still dad's divisor.
Pat: That's right. Yeah, that's right. That's right.
Scott: It's not their own choice.
Pat: But you're right, it is difficult because they're all different, right?
Ken: Right. And then, you know, one's going to use it to buy a house, and the other one's going to use it to go to Bali for a great week or two or whatever it is.
Pat: That's right. And we don't know who's right.
Ken: That's true.
Pat: Right? Who knows?
Scott: Well, I'm watching my college freshman blow through her savings in the first few weeks of college. And I know that's not right. I'm like, "This is not going to end well for you, though. But I don't give you much allotment. You've got room and board."
Pat: Have fun. Anyway, thanks, Ken. Appreciate it.
Scott: I appreciate the call.
Ken: All right. Thank you, guys. Appreciate it.
Pat: This is the great. He's right. Some days, this is a great thing to do, and other days, not so much, but...
Scott: That's right. No, I mean, it's always fun being in the studio with you.
Pat: Yes, yes. Well, thank you.
Scott: And our listeners, I mean, our callers. Well, Pat, that is all the time we've got. As usual, been fun in the studio here with you. And by the way, if you listen to our podcast and you like it, make sure you give us a rating, and also, follow us. Hit the Follow button so you make sure you get it each week.
Pat: And if you need any financial advice, reach out.
Scott: Reach out. Yeah. It's been great being here. Scott Hanson and Pat McClain of Allworth's "Money Matters".
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