Ep 16: CARES Act

On This Episode

The Coronavirus (COVID-19) is having a dramatic impact on our daily lives and many people are taking a huge financial hit from lost wages, a volatile stock market, and general economic uncertainty. Congress recently passed the CARES Act to try and help alleviate some of the financial impacts. John and Nick will give us the rundown on this new bill.




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PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:


Speaker 1: Hey everybody, welcome in to this edition of Retirement Planning Redefined with John and Nick from PFG Private Wealth. And boy, guys, welcome into yet another week of bizarro world. What’s going on? How are you?


Nick: Pretty good. Staying busy. We’ve just been kind of proactively trying to reach out to clients and put our psychiatrist hats on for the last few weeks. But we’re kind of bunkered down working from home and just trying to stay in touch with everybody.


Speaker 1: Yep. John, how are you man?


John: Doing good. Doing good. Definitely doing the challenges of working from home with two little ones and homeschooling and all that, but we have my parents helping us quite a bit, so that’s been a nice relief.


Speaker 1: Okay, good. Yeah, I think we’re all in that boat, so one good thing about all of this is we have the technology right now to continue to do some business and work. We’re staying home, we’re staying safe. So if you’re checking out this podcast, don’t worry, we’re not doing anything wrong. We’ve been practicing social distancing, which is a new word in everybody’s lexicon, for a while. We do these shows remotely anyway, so we’re kind of ahead of the curve in that respect. But you can still work with John and Nick. If you’ve got questions or concerns, you can still talk with them via virtual meetings and things of that nature. And today we’re going to break down the CARES Act a little bit. And Nick, I know you’ve got something you want to share real fast before we do.


Nick: Yeah, the big thing that we wanted to make sure that we pointed out for this is that we see this session as more informative and not advice based. So we just want to make sure that everybody knows that sticking to the plan is ultimately the primary goal. And if any of the provisions of the new act and the new legislation are something that people think that may be something they need to take advantage of or use or might be applicable to them, we highly recommend that they consult with not only their advisor, whether it’s us or someone else, but a tax professional as well. We just don’t want to see anybody harmed longterm from any of the provisions inside of this act.


Speaker 1: Yeah, definitely. Well, let’s go ahead and jump into some of those provisions and let’s talk about some of the things inside the CARES Act. Whoever the guy is or gal that gets the job of naming things there, they’ve been on a roll lately. They got the SECURE Act, the CARES Act, they all have these, whoever the czar of acronyms is …


John: Yeah, they definitely make you feel good, huh?


Speaker 1: Yeah. Really. So hit us with some of these provisions, Nick. What do you got?


Nick: Sure. So the first provisions that we’re going to kind of review and go over are provisions that make people’s money inside of their retirement accounts a bit more accessible without incurring penalties. So as an example, investors are now able to take out up to $100,000 in 2020 without paying the 10% early withdrawal penalty, which can be a big deal. So normally the early withdrawal penalty is a 10% penalty, so that penalty is waived for any anybody at any age. And then although that withdrawal will be a taxable withdrawal, taxes can be avoided if the money is replaced in those accounts within three years. So essentially what happens is, if someone needs to take out $50,000 from their investment account, their IRA, or 401k account, and they’re taking it as a distribution, not as a loan, then the 10% penalty is waived if they’re under 59 and a half.


Nick: If they replace the money over three years, they can avoid any sort of tax on it, but they can also spread the tax on the distribution over three years, which then kind of builds in some flexibility and time to pay that back. So that’s a pretty big deal. The distributions can be taken for corona-related issues, but really the rules are pretty loose. So we do recommend people kind of document what in theory they’re using the money for and why, just so that they have some records. And for those of us out there that may need to take advantage of loans out of a 401k. So maybe you say, “Hey, I don’t want to take a distribution. I want to take a loan.” Typically, and these are usually plan sponsor dictated, but typically the maximum amount that somebody could take out via a loan is 50,000 and actually what’s happened is they’ve increased that limit up to 100,000 of a fully vested balance.


Nick: So that’s a pretty big deal as well. And the biggest difference there, though, that people want to understand is when you take a distribution out versus a loan, a loan is typically going to have a preset repayment schedule. So if cashflow is a significant issue, the loan may be much more difficult to manage than the distribution. And the last thing, for those of our clients out there who are due to take required minimum distributions or RMDs, they are actually waiving that requirement for this year, which is kind of a big deal. So the thought process with that for people is, “Hey, maybe you don’t need the distribution from your account, you don’t need that additional income, and you’re trying to let your account balance back after the hit it’s taken in this market cycle. So why recognize the loss while you can keep the money in there for now?” And we just kind of pick up where we left off on next year.


Speaker 1: Okay.


John: Also, one thing with the loans as well that people should be aware of, and again it’s up to the plan itself, is that if you leave your employer, so let’s say you take out a loan and then something happens, you were to be laid off in a few months. Some plans have a provision where you have to pay back the loan within 30 to 60 days of your separation, so that’s going to be important. If you’re looking at that as an option, just understand that, “Hey, if I take out 50,000 due to what’s going on right now,” if you were to be laid off or separated from service in the near future, you may have to pay that 50,000 back in a certain timeframe. So it’s just important to really understand where you’re getting into and just really talk to a professional that can walk you through it.


Speaker 1: Yeah. And obviously with the CARES Act, it’s very fresh. At the time we’re taping this podcast here, it just was a few days ago. So there’s still going to be a lot of data coming out. The guys are sharing some good provisions and thoughts with you, but as always, as they mentioned, please check with a qualified professional before you take any action and see how it’s going to affect you. So John, on that kind of front for a minute, how do you feel about these changes overall? Do you see these as being effective?


John: Yeah, so I think anything to help people out during this time is good. Definitely a lot of people are nervous and scared, especially if you’ve been laid off or let’s say your company is slowing down and you’re not getting as much work. So this definitely helps alleviate some of that stress, saying, “Hey, you know what? I have this in my back pocket that I can access without the penalty, and there’s nice rules in place where I can put it back in and avoid the taxes.” So we ultimately think that’s good. But as far as when we, and I believe our next session we’re going to talk about planning, you definitely want this to be kind of a last resort type thing. You don’t want it to be the first kind of bucket of money you go towards, cause when you save for retirement you want to set that money aside for retirement.


John: So when we do planning for clients, we try to make sure that, “Hey, we have three to six months in emergency savings.” Which basically this would constitute accessing that right now, it’s an emergency and you have three to six months to kind of get you through your everyday living expenses. So we would say definitely kind of try to access some other money first. But this is the last resort. Again, it’s just a nice thing to have in case you need it.


Speaker 1: Yeah. Yeah. And I was going to ask you that. I was going to say, did it make sense from a financial retirement planning standpoint? But you kind of answered that question for me. So you kind of view this as hopefully people are going to view this as a last resort should they need it.


John: Yeah. And like Nick mentioned, you really want, if you’re working with someone important, to before you do anything, talk to that person you’re working with to make sure what you’re doing is right for your situation. Because as we know, and we say it when we teach our classes and we’ll say it now and we say it during our podcast, everyone’s situation is different. So everything depends on what’s important to you and what your goals are. 


Speaker 1: Yep, absolutely. That is a given. Well, Nick, let’s talk a little bit about the unemployment benefits. What’s some data and some things to consider in this area?


Nick: Yeah, so there’s been a couple of changes in this act for unemployment benefits. So typically unemployment benefits are state to state, which will stay the case. However, really for corona-related unemployment what they have done is increased the amount that people can collect to an additional $600 per week for really the next four months. For example, in Florida I believe the maximum amount per week is $275 a week, which isn’t going to really go too far with everything that’s going on. And I know that the unemployment filing systems and websites and everything is completely inundated and hard to get through.


Nick: But the extra $600 a week is a big deal. And I will say this too, that they have expanded the people that can file for unemployment. So previously a lot of people in this kind of, I’ll kind of describe the additional people who can file. A lot of times they were unable to file, so those that are not otherwise eligible but are based on this are self-employed, independent contractors, gig workers, part time employment seekers, people that lack sufficient work history, or those that have exhausted their unemployment benefits elsewhere. So that’s kind of a big deal. I’ve got a family member up north who owns a barber shop and is self-employed and normally would not be able to file and so he will be able to file with this. So that’s a pretty big deal.


Speaker 1: Well, let’s hit the big question a lot of people have, John, and that’s the checks to the individuals. Obviously that’s clearly on the front of everybody’s mind when it comes to the stimulus side.


John: Yeah. So individuals can get up to about 1,200 and that’s per person and then $500 for each child. So example, let’s say my wife and I, I could get 1,200, she can get 1,200. That puts us at 2,400. We have two kids. That’s an extra thousand dollars, 500 a piece. So that gives us a direct cash infusion of $3,400. Now, this is means tested. So basically this is for anyone that’s earning up to 75,000 individually or 150,000 for couples, and that’s adjusted gross income. And this is based off of your 2018 tax return or 2019, whatever one is the most recent.


Speaker 1: Small businesses, there’s a lot going on with that. And we know that that makes up a large portion of, workers in this country work for small businesses, more so a lot of times than actually work for the larger corporations. And so there’s a lot of provisions in there for those folks as well.


John: Yeah. So one thing that we’ve been noticing is that the small businesses seem to be the most effective so far. So what they’ve done is they’ve actually allocated about 350 billion to prevent layoffs and business closures, which will be a nice feature, especially for the small business owners that were forced to basically shut down. That will give them up to eight weeks of cashflow assistance. And one of the benefits to this is if they kind of maintain payroll, use a portion of the loans to cover interest, mortgage, utilities, rent, things like that, the loan could potentially be forgiven. And our disclaimer, we’re not attorneys, we’re not accountants, we’re not bankers. Important just to basically talk to those professionals that you work with to figure out if your situation works for this. So again, just check with professionals. Some places you can go to to look into this is FloridaDisasterLoan.org and then spa.gov to really get some information and maybe start the process if you’re interested in that.


Speaker 1: Yeah, and there’s a lot of data and a lot of information that’s, again, going to come out about this and there are so many people affected by it. Nick, any thoughts from you? Any kind of final thoughts as we wrap up this week’s podcast you want to share with us?


Nick: No, I would just say, from the standpoint of keeping an eye, these pieces of legislation are huge and so as you kind of mentioned, things kind of unwrap over time and everybody’s still kind of sifting through it all. So try not to act in haste and kind of work through and building contingency plans, and make sure that the decisions that you’re making are as sound as they can be in what we know is a pretty chaotic time.


Speaker 1: Yeah, definitely. I think that’s a good piece of advice. We have extra time on our hands, that’s for sure, so there’s no shortage of a few extra hours here and there since we’re not going out and doing as much. So make sure you’re taking the time, do the due diligence, look through things, talk with your advisor. If you’re not working with an advisor, reach out to John and Nick and have a conversation with them. You can do things virtually through Zoom meetings or GoToMeetings, phone calls. There’s lots of ways that,. one good thing about this happening now is that in 2020 we do have a lot of technology on our side to help us continue on with the business of planning for retirement, getting to it, getting through it, all those facets. And we will probably put this up in the notes as well, but I’ll go ahead and give it out again.


Speaker 1: The resources for those loans that John mentioned was FloridaDisasterLoan.org. That’s FloridaDisasterLoan.org. And also the sba.gov, www.sba.gov. As always, guys, make sure that you reach out to John and Nick, like I said, if you have questions or concerns here in the Tampa area at PFG Private Wealth. You can find them online at PFGprivatewealth.com. That is PFGprivatewealth.com. Subscribe to the podcast on Google, Apple, Spotify, whatever platform you choose. You can either search by typing in Retirement Planning Redefined or find it on the website, either way. Give them a call if you’ve got questions and you need to take immediate action. Before you do, definitely talk with them at (813) 286-7776. They are financial advisors, (813) 286-7776. Guys, thanks for your time this week on the podcast. I appreciate it and we will talk again soon for some more on the CARES Act.







Ep 15: Roth IRA 101

On This Episode

Last week we covered the basics of the traditional IRA and today we will shift our focus to the Roth IRA. John and Nick will once again explain the basics to this investment vehicle. We will also compare and contrast the Roth IRA to the traditional IRA.

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Check out all the episodes by clicking here.



PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

Speaker 1: Hey everybody. Welcome back in to Retirement Planning Redefined. Thanks for tuning into the podcast. We appreciate it. Maybe you’ve received this podcast through the team’s newsletters or email blast. Or maybe you found us online on various different podcast outlets like Apple or Google or Spotify. Either way we appreciate your time. And we’re going to spend a few minutes with John and Nick talking some more about IRAs. And this go round we’re going to spend some time on the Roths. But first guys, what’s going on? How are you?

John: I’m good. So my one year old is sleeping through the night very well, so I feel like a new man.

Speaker 1: That goes a long way that’s for sure. Well kudos on that. And Nick, how you doing, buddy?

Nick: I’m pretty good. My 15 year old dog is not sleeping through the night.I’m okay.

Speaker 1: Yeah, getting up there. I’ve got a 13 year old dog and she’s a pistol. I got a 22 year old daughter and I can’t tell which one’s a bigger pain in the butt, the dog or the daughter. But they’re both doing pretty well. The kid’s actually graduating from nuclear engineering school. Actually I get to go see her Friday, and she’s now a petty officer. She ranked up in the Navy. So we’re all proud of her.

Nick: Congrats.

Speaker 1: Yeah, I appreciate that. I’ll tell you what, let’s not talk about babies, dogs or the Navy for just a minute. Let’s talk about the Roth IRAs as I mentioned. So if you happened to catch the last podcast, we wanted to go through and talk about IRAs, about the vehicle. And we spent some time on the traditional side. So guys, do me a favor first, let’s just do a recap, a little bit, of the traditional IRA before we switch over to the Roth so people have some context on that.

Nick: So one of the biggest benefits for any sort of IRA account are some of the tax benefits. But one of the things that we wanted to remind everybody of, and this helps with IRA accounts, but also just really any investment account. Sometimes the feedback we’ve gotten is it’s helpful for people to think about the different types of accounts in three phases of taxation. There’s as the money goes in, is it taxed, is it not taxed. As the money grows, is it taxed, is it not taxed. And then when it comes out so that you can use it, is it taxed or not taxed. So for traditional IRA, you know the first one, as it goes in, in the last session we talked a little bit about it. Most of the time for most people it’s not going to be taxed. But there will be some rules on when that’s after tax money, it’s going to grow tax deferred. So you’re not going to get 1099 on it each year as it grows. And then when it comes out, it’s going to be ordinary income tax.

Nick: And then for the Roth IRA, which is what we’re going to get into today, it is money that’s already been taxed is going to go in. It’s going to grow tax deferred. So [inaudible 00:02:43] 1099s, and then on the backside it’s tax free. That’s the comparison as you go through.

Speaker 1: Okay. Since you brought it up, let’s go ahead and just jump right into it. So John, give us a few things to think about on the Roth side. He already mentioned the tax deferred part. What are some other limitations and things of that nature we talked about like with the traditional, some numbers or some things we need to know?

John: Yeah, so like the traditional IRA, the contributions are based off of earned income. So again, that does not count real estate state income, any interest, income like that, but earned income. And as far as the limits go, if you’re below 50, [inaudible 00:03:20] 6,000. Anyone above 50 can do 1,000 catch-up, which gives you a 7,000 total. And just to again reiterate some mistakes we’ve seen where you can only contribute 7,000 between the two of you. You can’t contribute 7,000 each. Okay, so 7,000 total.

John: And something that some people aren’t aware of is that even if, let’s say one spouse is not working and is staying home for whatever reason. They are eligible to make a spousal contribution to an IRA, whether that’s Roth or traditional, which is a nice feature because that does come up quite a bit. So to talk about the contributions of a Roth, we gave the example of traditional IRA as far as making a pre tax contribution. As Nick mentioned, the Roth is after tax dollars. So example of that, 100,000 of income for somebody, they make a $5,000 contribution to a Roth, their taxable income stays at 100,000 in that given year. So there’s no tax benefit up front with the Roth IRA versus a traditional IRA, you could have a tax savings up front when you make the contribution if it’s deductible.

Nick: So from an eligibility standpoint, for a single person, somebody that makes under 122,000 can make a full contribution. If their income is between 122,000 and 137,000, there is a partial that can be made. If their income is over 137,000, they are not able to make a contribution to a Roth IRA. For married filing jointly, if their income is below 193,000, they can make contributions for both of them and their spouse. If the income is between 193 and 203,000, it’s a partial. And if the household or the married filing jointly income is above or greater than 203,000, then they are not eligible to make the contribution.

Speaker 1: Gotcha. Okay. All right, so we’ve covered some of the contributions, some of the eligibility you mentioned already in the tax deferred growth part. What about access? Did we cover some things there?

John: So one thing the eligibility and it’s becoming more popular now with Roth 401k. So if you’re not eligible to make a Roth IRA contribution, one thing to do is check with your employer and see if they offer a Roth 401k, which actually has no income limits for you to be able to participate in it, which is a nice [inaudible 00:05:37]

Speaker 1: Okay, that’s good to know. Yeah, absolutely. All right, that’s a Roth 401k. Maybe we’ll do another show about that another time. What about the access side, anything there? Is it the same 59 and a half, all that kind of stuff?

John: So rules are fairly similar, where you as far as access getting to the account, there is the 59 and a half rule. And if you do draw early there’s a 10% penalty on your earnings. And I stress earnings on that, because with a Roth IRA and I say this, consult with your tax preparer, tax advisor, we don’t give tax advice. But with a Roth IRA, you can actually access what we call cost basis prior to 59 and a half without any penalty. I’ve seen a couple of people do it where basically let’s say if you’ve put in 30,000 into your Roth in your account at 50. So 20,000 earnings, 30,000 is what you’ve put in, which is considered your cost basis. You can pull that 30,000 out without paying a penalty. It’s just you have to keep very good records of your contribution amounts. And if you do pull it out, you have to work with your tax preparer to go ahead and let the IRS know that you pulled out a portion of your tax basis. And that’s would avoid any type of a penalty on that.

Speaker 1: All right, so we’ve covered several things on the Roth side, so the access, the eligibility, contributions, all that good kind of stuff. So let’s just get into the fact that it’s been hugely popular. It’s been a very hot button issue for the last really couple of years. Obviously one of the reasons, we mentioned earlier that it’s tax deferred. Really, the taxes are low, right? We’re in a historically low tax rate. So one of the reasons that a Roth might be a good place to go, or a Roth conversion I guess I should say, is because of the tax thing. So what are some other reasons why the Roth is just really popular?

Nick: You pointed to one of the biggest reasons from the standpoint of we are in historical low tax brackets. And one of the things that we talk about with clients and it really became evident towards the end of 2019 is, the thing that might be the quote unquote best strategy today, it may not be the best strategy five years down the road, 10 years down the road. So for most of the clients that we meet with, they’re substantially overweight on pre-tax money and maybe only recently have started to build up Roth money. And we think it’s really important to have balance and to have options in retirement. Your ability to be able to pivot and adjust to law changes, rule changes, market conditions, etc. are really important. And then part of that is not having to be forced to take out a required minimum distribution on a Roth helps you maintain that balance and maintain the nest egg, those tax free [inaudible 00:08:18] roles help give you flexibility and balance, the ability to be able to pass on funds to beneficiaries, Roth dollars.

Nick: Especially if you have… Maybe your kids are high-income, you’ve done a good job planning. We go through the numbers, we built the plan and there’s a pretty high probability that you’re going to be passing on money to the kids. The rub, money is usually much better to plan or to pass down, because of the fact that it will be tax-free to them as well. So the ability to really create flexibility in your planning and strategies is one of the reasons that we think the Roths are a really important piece of the pie.

John: Just to jump in. One thing, just backtracking to accessing it tax-free. Just a couple of rules with it is you have to be above 59 and a half. And you actually have to have had a Roth IRA account for at least five years. So an example would be, let’s say I open one up at age 60. I’m above 59 and a half. The person cannot actually withdraw tax free until basically 65. So I have to wait five years and that’s from the first Roth I ever started up. So one thing that we typically will work with clients is if they’re eligible, we might just go ahead and start a Roth IRA just to start that five year window.

Speaker 1: Okay. All right. That’s good. Yeah. Good information to know on that. Now with the beneficiary thing and passing things along, is the change in the SECURE act, does that make a difference in the Roth as well? Is there anything there that would pertain to people if they’re thinking about it that they should definitely be checking with you guys on before doing a conversion or something like that?

John: Yeah, so I believe we’re doing a four part session to this. We’re going to talk about conversions, but yeah, that makes conversions a little more appealing where you have to pull the money out over a 10 year period now. Where basically at least if you have to pull it over 10 years, there’s actually no tax hit. So as your IRA gets bigger, if you’re pulling out of a $1 million IRA over a 10 year period, that’s going to really affect your tax rate. If it was all Roth money, it would have no bearing on your taxes.

Speaker 1: Gotcha. Okay. All right. Yeah, and we are going to continue on with this conversation on a future podcast about which one might be right for you and all those good kinds of things. Nick, anything else that we may have overlooked in there we need to throw in?

Nick: No, I just can’t really say it enough from the standpoint of building in flexibility is key. Most of the people that listen to the podcasts are going to have pretax money, but if they don’t have any Roth money then just getting started can be really important to build that up. Because even if they’re within a few years of retirement, just remember that we’re still planning for 30, 40 years down the road. Having money that compounds over a long period of time and then has tax free withdrawals on the backside is a pretty significant leverage point and benefit.

Speaker 1: Okay, one final question I’m going to ask you guys is you sometimes hear people say, if I’m still working, can I contribute or should I contribute to both kinds, the traditional or the Roth? What do you say when someone asks that type of question? Should someone do both the traditional for the tax reasons and then the Roth for the non-tax? What’s your answer?

John: We’ll answer that in the next session.

Speaker 1: Nicely done. Look at him teeing that up. There you go, folks. All right, I’ll tell you what. We will take care of that on the next session and that way you have a reason to come back. A cliffhanger if you will. So if you’ve got questions about the Roth IRA, make sure you talk with your advisor about that. If you’re not working with an advisor, you certainly should be. Reach out to John and Nick and give them a call at PFG Private Wealth. And you can reach them at 813-286-7776. That’s the number to dial. 813-286-7776 here in the Tampa Bay area or go to their website, check them out online at pfgprivatewealth.com. That is pfgprivatewealth.com. Don’t forget to subscribe to the podcast so you can get those next episodes as they come out. Nick, John, thanks for your time this week.

Speaker 1: I hope everybody has a great week and you guys enjoy yourself and continue to get some good sleep while that baby’s resting, all right?

John: Hopefully it continues. I think it will.

Speaker 1: Yeah, there you go. Nick, appreciate your time, buddy. Take care.

Nick: Thanks. Have a good one.

Speaker 1: We’ll see you next time here on Retirement Planning Redefined with the guys from PFG Private Wealth, John and Nick.






Ep 14: Traditional IRA 101

On This Episode

We cover the basics on the traditional IRA. John and Nick will break down what this investment vehicle is for and how it may be able to benefit you.

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More Episodes

Check out all the episodes by clicking here.



PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

Speaker 1: Hey everybody, welcome into this edition of Retirement Planning Redefined with John and Nick here with me, talking about investing finance and retirement. From their office, their PFG Private Wealth in Tampa Bay guys, what’s going on? How are you this week, John?

John: I’m good. How are you doing?

Speaker 1: I’m hanging in there. Amidst the goofiness of the world, I’m doing all right. How about you, Nick? You doing okay?

Nick: Yep, yep. Pretty good. We finished up the retirement classes that we teach recently, so just meeting with a lot of people after that class.

Speaker 1: Okay. Those went pretty well?

Nick: Yeah. Yeah, always good. Always fun.

Speaker 1: Okay, well, very good. Listen, I got a little bit of a kind of a class idea for us to run through here. I wanted to talk this week about IRAs, really just an IRA 101, if you will, and then we’ll follow it up with our next podcast coming up after this one. We’ll follow up with the Roth side of the coin. Let’s jump into here just a little bit and talk about this and get rocking and rolling. Just do us a favor. Just assume that we don’t all have the same knowledge base. What is an IRA? Give us just a quick 101 on that.

John: So yeah, good question. Especially with a tax season coming up, because I know a lot of people when they’re doing their taxes, and whether it’s TurboTax or working with an accountant, at the end of it it says you might want contribute to an IRA and maybe save some taxes this year. Or maybe get [inaudible 00:01:22] taxable income down the road. But you brought this topic up. So when I raise an individual retirement account on the personal side, a lot of people have their employer sponsored plans, but the IRA is for the individual. Really, there’s a lot of tax benefits to it to provide for saving for retirement. One of the biggest questions that Nick and I get, or I guess assumptions, is that most people think an IRA is an actual investment, and it’s really not. I explain it as imagine a tax shell, a tax shell you can invest in a lot of different things, and you have some tax benefits within the shell.

Speaker 1: Okay. So it’s like a turtle shell, if you want to look out that way. It’s a wrapper really, right? So it’s what your Snicker bar comes in. It’s the wrapper. Then inside there you can put all sorts of different stuff. So who can contribute to IRAs?

John: Well, there’s two main types, and Nick will jump into that. But there’s your traditional IRA and then a Roth IRA.

Speaker 1: Okay.

Nick: From the standpoint of how those break down, how those work, we’re going to focus on traditional IRAs today. The number one determination on whether or not you can contribute to an IRA is if there is earned income in the household. So if it’s a single person household, they have to have earned income. That does not include pension income, social security income, rental income. It’s earned income. You receive some sort of wage for doing a job. So that’s the first rule. You can contribute for 2019 and for 2020 essentially, if you’re under 50, you can contribute $6,000. If you’re over 50, you can take part in what’s called a catch-up, which is an additional $1,000 for a total of $7,000.

Nick: So as an example, let say that it’s a two-person household. One person is working, one person is not, and the person that’s working has a least $14,000 of income. Then as long as they satisfy a couple other rules that we’ll talk about, they can make a contribution for themself for the $7,000 and for the spouse for the $7,000. So earned income doesn’t have to be for both people. It has to be for one, and then the amount ties in the amount of earned income.

Speaker 1: Oh, okay.

John: One thing to jump into that, and I’ve seen some people, not our clients, but others, make some mistakes where they think that, we talked about the two different kinds, traditional and Roth, where they think they can make, let’s say, $7,000 into one and $7,000 in the other. It’s actually $7,000 total between the two of them.

Speaker 1: Oh, that’s a good point. Yeah. So, okay, so those are good to know. Whenever you’re talking about just the contribution, the base set up of them. So let’s stick with the traditional IRA and talk about it. What are some key things to think about like as an investment vehicle, as a machine here? These are pre-taxed, right?

Nick: Yeah. When we talk about, and this is where the confusion really sets in for many people, when we talk about traditional IRAs, we really like to have conversations with people to make sure that they understand that there can be both a tax deductible or pretax traditional IRA, and there can be non-deductible traditional IRAs. So the logistics are dependent upon, really, a couple of different things whether or not they’re active in an employer’s plan. Then there are income limits that will determine whether or not somebody can participate in the tax deductible side of a traditional IRA. So that can be a little confusing. We usually have people consult with their tax prepare or and/or their software so that they can fully understand.

Nick: But part of the reason that we bring that up is a real-world scenario is, what [inaudible 00:05:17] this client, worked at a company for 10 years, and she contributed to the 401k on a pretax basis. She left the company, rolled her 401k into a rollover IRA, and she’s no longer working, but her spouse is working and wants to make IRA contributions for them. But he has a plan at work and makes too much money. They might have to do a non-deductible IRA. So usually what we will tell them to do is to open a second IRA, and when they make the contribution, they’re going to account for it on their taxes as they made it. They’re not going to deduct it. So we try not to commingle those dollars together. So a nondeductible IRA, we would like you to be separate from a rollover IRA. Otherwise, they have to keep track of the cost basis and their tax basis on nondeductible proportion commingled, and we’re really just [inaudible 00:06:16] nightmare.

John: Yeah, that’s never fun to try and keep track of and never easy. One thing with with the pretax, just give an example of what that means is, let’s say someone’s taxable income in a given year is $100,000, and doing their taxes, it says, you might want to make a deductible contribution to an IRA. If they were to put $5,000 into the IRA, their taxable income for that given year would be $95,000. So that’s where people look at the pretax as a benefit versus a nondeductible. That same example, $100,000 of income, you put $5,000 into a nondeductible IRA, your taxable income stays at that $100,000.

Speaker 1: Okay. So what are the factors that determine if it’s deductible or not?

Nick: The answer is that it’s fairly complicated. The first factor is, if we talk about an individual, they’re going to look at do you have a plan at work that you’re able to contribute to? So that’s the first test. The second test is an income test. The tricky part with the income test is that there is a test for your income, and then there’s also tests for household income. So usually we revert to the charts and advisors. We work together with the tax preparers to help make sure that we’re in compliance with all of the rules. It should be much less complicated than it actually is. But it’s really, honestly, a pain. I will say that if you do not have a plan at work that you can contribute to, your ability to contribute in [inaudible 00:07:56] to an IRA, a traditional IRA is much easier.

Speaker 1: Okay. Gotcha. All right. So if that’s some of the determining factors in there, what are some other important things for us to take away from a traditional IRA standpoint?

John: Yeah, one of the biggest benefits to investing in an IRA versus, let’s say, outside of it, is and if the account grows tax-deferred. So let’s say you had money outside of an IRA and you get some growth on it, I say typically, because nothing’s ever absolute. But you can really get it [inaudible 00:08:28] every single year and the gains and the dividends and things like that. Within the IRA shell, going back to that, it just continues to grow tax-deferred. So really help the compounding growth of it.

Speaker 1: Okay. So when we’re talking about some of these important pieces and the different things with the traditional, what are some other, I know a lot of times we know that it’s the 59 and a half, right? All that kind of stuff. Give us some other things to think about just so that we’re aware of the gist of it. Now, there was some changes to the Secure Act, which also makes them some of these numbers a little bit different now. The 59 and a half is still there, but now it’s gone from 70 and a half to 72, right?

John: Yeah. With good things like tax deferral and pre-tax, we do have some nice rules that the IRS/government basically hands down to us. One of them is as far as access to the account, you cannot fully access the account without any penalties until 59 and a half. After you’re 59 and a half, you do get access to your account. If you access it before that, there is a 10% penalty on top of a whatever you draw. So that’s basically deter to pull out early. There are some special circumstances as far as pulling out before 59 and a half, which could be any type of hardships financially, health wise, and also first time home purchases. We get that quite a bit sometimes where people say, I’m looking to buy a house and I want to go ahead and pull out of my IRA. Can I do so and avoid the penalty? The answer is yes, up to $10,000.

John: Some of the changes with the Secure Act where they used to be after 70 and a half, you can no longer contribute to an IRA, even if you have earned income. That’s actually gone, which is a nice feature when we’re doing planning for clients above 70 and a half, where we can now make a deductible contribution to an IRA, where before we couldn’t. Nick’s the expert in RMD, so he can jump in and take that.

Nick: One of the biggest things to keep in mind from the standpoint of traditional IRAs are that they do have required minimum distributions. The good thing is that those required minimum distributions are now required at age 72 versus 70 and a half. So that makes things a little bit easier for people. And again, that’s kind of a big differentiator from the standpoint of a Roth IRA does not have an RMD, a traditional IRA does have an RMD.

Speaker 1: Right, and with the RMDs, it’s money that basically the government says, we’re tired of waiting. Where’s our tax revenue? Is there any basic things there just to think about when we’re thinking about having to pull this out? Is there a figure attached to it?

Nick: I would say we try to give people an idea, because sometimes there’s uncertainty on any sort of concept of how much they have to take out. But on average it’s about 3.6% in the first year. I would say though, that probably one of the biggest, or I should say one of the most misunderstood portions about it are that the RMD amount that has to come out, it’s based on the prior years and balance of all of the pretax accounts. So you may have multiple accounts, you don’t have to take an RMD out of each account. You just need to make sure that you take out the amount that is due, and you have the ability to be able to pick which account you want to take that out of, which really, at first thought that can seem more complicated. But if you’re working with somebody it helps increase the ability to strategize and ladder your investments and use a bucket strategy where you can use short-term, mid-term, long-term strategies on your money, and have a little bit more flexibility on which account you’re going to take money out of when.

John: To jump on that, we went through that paycheck series when we talked about having a long-term bucket, and in some strategies that’s where by being able to choose what IRA you draw from, you can just let that long-term bucket just continue to build up and not worrying about pulling out of it.

Speaker 1: Gotcha. Okay. All right. So that gives us a good rundown, I think, through the traditional side of it, and gives us some basic class, if you will, on what these are. Of course, as the guys mentioned, they teach classes all the time. So if there’s things you want to learn more about the IRA, the traditional IRA, and how you might be able to be using it or better using it as part of an investment vehicle, then always reach out to the team and have a conversation about that specifically. Because again, we just covered some basics and general things that apply to just about everybody here. But when you want to see how it works for your situation specifically, you always have to have those conversations one-on-one. So reach out to them, let them know if you want to chat about the traditional IRA, or how you can better use the vehicle, or change, or whatever it is that you’re looking to do.

Speaker 1: (813) 286-7776 is the number you call to have a conversation with them. You simply let them know that you want to come in. They’ll get you scheduled and set up for a time that works well for you. That’s (813) 286-7776. They are financial advisors at PFG Private Wealth in the Tampa Bay area. Make sure you subscribe to the podcast on Apple, Google, Spotify, iHeart, Stitcher, whatever platform of choice you like to use. You can simply download the app onto your smartphone and search Retirement Planning Redefined on the app for the podcast. Or you could just simply go to their website at pfgprivatewealth.com. That’s pfgprivatewealth.com. Guys, thanks for spending a few minutes with me this week talking about IRAs. So let’s, next podcast, talk about the Roth side. We’ll flip over to the cousins, okay?

John: One more thing I want to mention before we go is withdrawing from the accounts of, let’s say someone goes to retire above 59 and a half, and it’s time to really start using this money as income. So it’s just important to understand that whatever amount that you withdraw out of the IRA, assuming everything was pre-tax that went into it, it adds to your taxable income. So for example, if someone’s pulling $50,000 out of their IRA, their taxable income goes up by $50,000 in a given year. So we just want to point that out, because as people are putting money into it, we sometimes do get questions of, when I take it out am I actually taxed on this, the answer is yes, if it was pretax put into it.

Speaker 1: Gotcha. Okay. Yeah, great point. Thanks for bringing that up as well. So I appreciate that. And again, folks, the nice thing about a podcast is you can always pause it, and you can always rewind it, replay it. If you’re learning, trying to learn something useful, or get a new nugget of information here, that’s a great thing about it. That’s also why subscribing is fantastic. You can hear new episodes that come out, as well as go back and check on something that you were thinking about, and that way when you come to have that conversation, you can say, listen, I want to understand more about how withdrawals with my traditional IRA is going to affect me, or whatever your question might be. So again, guys, thanks for your time this week. I’ll let you get back to work and we’ll talk again soon.

John: Thanks.

Nick: Thanks.

Speaker 1: We’ll catch you next time here, folks, on the podcast. Again, go subscribe. We’d appreciate it on Retirement Planning Redefined with John and Nick from PFG Private Wealth.