Chelsea Jones (00:13)
Hello, physician moms and dads. I am Chelsea Jones, a certified financial planner and primary advisor.
Kyle (00:19)
Kyle Helsley, certified financial planner and retirement investing specialist.
Chelsea Jones (00:25)
I'm sure all of you listeners out there can recognize there's something different about today. We don't have Nate with us. It's Kyle and Chelsea. You get the Kyle and Chelsea show today. But we're excited to be here. and Kyle, I was thinking about like this time of year, and we're getting into summer, and I think out west school is still going, but the like all the schools here are done and parents are talking about
Summer camps and summer activities and how to keep their kids busy. What do summers usually look like for you?
Kyle (00:58)
β you know, we've kind of over the years, you know, we've kind of gone through I guess the all the different ways you can do summer. Like we one year we went all in on camps. Like we we did so much camps and it was too much camps. And then the next year we dialed the camps back a little bit and that was better. so I would but my kids kind of I don't know they didn't
They lost interest in camps. You know what I mean? Like it was like they didn't want to go to anymore. It was fun at one point and it's not fun anymore. So my my oldest daughter does a lot of sports. So our summer this summer is gonna be β traveling for soccer tournaments. for my oldest. And then my middle child, she's gonna do some like summer schooling because she she's expressed over the summers being bored.
And wanting to read and have more math challenges and things like that. And so there's a summer school program that's gonna let her kind of keep going. So she's she's gonna go do that. So we just kind of it's it's kind of amazing. Like as you get tied in with other parents and kids, there's so there's actually a lot of different opportunities out there that are not just kind of the obvious ones. So we we kind of keep it open and flexible because there's you know, there could be some other things that might pop up. But yeah, mainly sports and β some summer schooling for us. How what about you guys?
Chelsea Jones (02:14)
Yeah.
Well, Anna is s she hasn't started school yet. She's still in daycare slash early preschool. β so she her schedule stays pretty consistent. but she is moving up to a new classroom next week. And so she's excited about that. And everything right now with the transition at her school is focused on potty training. Like she can't go up to the preschool room yet 'cause she's not fully potty trained at two and a half. So she's in this like
middle ha like h halfway transition class to the older room. β but she's excited to have new teachers and I think most of her friends are gonna move to that class with her, so β but they have water days at her school every Wednesday. So she'll get to start playing outside in the water, β 'cause it's unbearably hot here. They need water to be outside. But
Yeah, it's definitely a time of transition. Parents are people are busy year round, but summer is just a different kind of busy, right? So keep your questions coming. You don't have to think much about it. Just ask them to us and we'll answer. β I speaking of questions, we always answer questions, but I do have an asking for a friend question for you, Kyle. Which again, asking for a friend is β a segment that we do where we kind of ask questions that
maybe seem like simple or like you should know them, but we can't expect everyone to know everything. So no shame. Ask your questions. Wink wink for a friend. β so the question this wink this week is what is a Form 8606?
Kyle (04:02)
Yes. Eighty six six. β this is one of those forms that gets missed sometimes. So it's a it's a good one to ask about, you know, I think because yeah, it just sometimes it there's it should have been documented and it wasn't documented. And so an eighty six six is a form that keeps track of after tax contributions to your IRA. So
Chelsea Jones (04:14)
Mm.
Kyle (04:32)
β that's important because you only get taxed once on on these dollars and you don't want to get taxed twice. So because you don't have to get taxed twice. The IRS is gracious and doesn't tax you twice unless you make a mistake. So when you fund a traditional IRA, for example, with after tax dollars, so you you earn too much, maybe, and you're in the phase out range, which is to say you can't deduct your IRA contribution anymore, you're you're beyond the phase out range, then
Chelsea Jones (04:40)
Mm.
Kyle (05:02)
you can still make that IRA contribution with after tax dollars from your bank account and you don't get the deduction, so it remains after tax. But if you don't document that on 8606, when you go to withdraw that money in retirement, maybe, β if that's not documented, then you would β pay taxes again on those contributions that you already paid taxes on previously because you didn't get a deduction. So if failing to document your after-tax contributions can have real
ta negative tax consequences. And I I I tried to keep that high level, but it it is kind of complicated because there are a lot of scenarios where this could feed into an eighty six six. But the takeaway is if you if you if you cannot deduct your IRA contribution and you make it anyways, whether that's for a backdoor Roth or you just want to get money into your IRA for retirement, you want to make sure that eighty six six is being documented each year because you don't want to get taxed twice on those after tax contributions. That's the big takeaway.
Chelsea Jones (05:34)
Yeah.
Yeah.
Yeah. 'Cause it can get really messy if you roll your old four one K into this IRA that you've made after tax contributions and when the money gets all mixed up, if it's not recorded what's what, then the IRS is just gonna assume it's all pre-tax and tax accordingly. β
Kyle (06:19)
Mm-hmm. Mm-hmm.
And imagine imagine funding your IRA after tax for say twenty years, you know. think about the annual IRA contributions over those twenty years. If they're all after tax, that's a significant amount of after tax dollars sitting in your IRA that, you know, no sense paying double taxes on that when you when you the money comes out of the IRA. It's it's just, you know, it could it could be it could be a big saver, you know, big
Big lifesaver having an A six six documented so you don't pay a whole bunch of unnecessary taxes. Who wants to do that? So it's a great question.
Chelsea Jones (06:55)
Yeah. Yep.
Very good. So the next question comes from a neurosurgeon in Connecticut. They said, I've been reading up a little bit more on Trump accounts. Initially, I thought this was only for newborns, but now I understand that it's eligible for children less than 18 years of age, and we can contribute up to five thousand per year starting July 5th this year. Our older son is turning 18 on July 17th. Are we able to open an account for him? So this
Again, we get more and more questions about Trump accounts as they start to get rolled out β later this year. But in this situation, there is an age cutoff rule that applies. β so d and all of these rules are new, by the way. Every we're we're learning the rules as the account basically gets rolled out this year. β but there is an age cutoff rule that basically says
β you have to be under the age eighteen in the year that you make the contribution. So for this child that turns eighteen in July, they have to be in order to for the parents to make a contribution to this Trump account or this five thirty A account, β he had to be less than eighteen years of age on December thirty first of this year.
So since he turns 18 before the end of this calendar year, you cannot make contributions for him in this calendar year. but since he is turning eighteen, β this opens up some opportunities to maybe open up a Roth IRA if he starts working β and has an earned income. You can put some money in a Roth and get get tax free growth, which is better than what the Trump account offers. So
just because this account doesn't work out doesn't mean that there aren't other opportunities for investing that are suitable. So
Kyle (08:58)
Yeah. Yeah. And I think a lot of things that parents ask are that's kind of like another borderline follow up question of this is, well, if my child has earned income β from a job, you know, say they like five thousand dollars in a summer, do they have to put that money in the IRA? Can we put money in the IRA for them? You know? And if you think about it, you know, it's it's under the gift exemption, you know, of gifting money to somebody. you know, doing doing the say they say you want to put the full five thousand of their earned income in a Roth IRA for them.
You know, that's under the gift exemption for gifting the money. So you the parent could put the five thousand dollars in the IRS doesn't care where the money actually comes from when it goes into the IRA. They just care that that person who's the owner of the IRA has that does has that sufficient earned income. Yeah. So β that's another opportunity for parents who want to help their kids start saving early for retirement. β want to encourage them to get a job. You know, hey, if you get a job, I'll put money in your Roth IRA for you, you know, as a way to encourage the child and to teach them about
Chelsea Jones (09:37)
Has enough. Yeah.
Kyle (09:58)
investing in and education and and yeah. Talk about the time value of money. Can you imagine putting money saving for retirement when you're eighteen, Chelsea? Yeah. Yeah. Let's get it let's get it started.
Chelsea Jones (09:59)
Best thing. Compound growth and yeah.
Starting at eighteen. Come on now.
Yeah, so great question. Maybe for this child consider a Roth IRA. the next question comes from the spouse of a dermatologist in Pennsylvania. They said I want to make a withdrawal or take a withdrawal from my taxable investment account to buy a car, but I only want to sell my bonds to minimize my tax bill. But doing so would liquidate all of the bonds that I hold. Is this okay?
Kyle (10:41)
Yeah, that's a good question. β I I get the, you know, we all have we we have to be sensitive about taxes. We all have our different tax sensitivities. So I get definitely the methodology here is makes sense, right? Like I have these this bond asset, I can I can pay less taxes, I liquidate those. So this is a great question. I think there's just some kind of larger factors you need to consider when you're when you're doing that. β
Chelsea Jones (10:51)
Mm.
Kyle (11:09)
One is, you know, what's the s what's the size of the account? What's the you know, then in this case it's for a car, so we can assume it's probably less a hundred thousand or less. β so, you know, not not maybe a tremendous amount of money overall in the lifetime of physicians saving for retirement and all the money they're gonna have. β but just as a general concept for this, you know, selling all your bonds, let's let's assume even a larger taxable account, maybe it's an even larger account. But that
Chelsea Jones (11:18)
Mm.
Kyle (11:37)
My point is that I'm trying to make, sorry, as I'm straying a little bit, is that the size of the account matters, right? So how much what's your bond target? What percent is your bond target and what size is the account? Because if you're if it's a significant part of your portfolio and you're selling off all the bonds of that significant part of your portfolio, that could have an β really throw you out of balance in globally for your whole portfolio, right? And so you wouldn't want to do something like that because we don't know what the future's gonna hold. You know, you you need your capital preservation baked in there and then you just
Chelsea Jones (11:42)
Mm.
Kyle (12:06)
You take a bunch of money out of your retirement or your other goal, you're basically taking money out of a goal to to do this. Because I believe the question the I and I'm sp I know the specific client situation because they're planning on putting the money back into the taxable account and over time to replenish it and buy bonds back, right? That's that was the plan. So the other question is is well if that's your strategy, then how quickly can you buy back those bonds? Like how much is your monthly your ability to buy back those bonds? So that kind of goes back to the first part. How much
Chelsea Jones (12:21)
Mm-hmm.
Kyle (12:35)
of your overall portfolio bonds are we losing and how quickly you're gonna be able to to to put that money back. Because a better option, if you have a bunch of money to aggressively buy back your bonds, a better option might be just to get a regular auto loan and take that money you're gonna use to aggressively buy back your bonds and just aggressively pay that loan off. Yeah, you know. So I mean if you take a hundred grand out to buy a car, you're putting five grand a month back into the taxable account, you could just get a loan and and pay five grand a month towards that loan. You know what I mean? And just pay it off quickly.
Chelsea Jones (12:47)
Mm-hmm.
Pay it off, yeah.
Mm.
Kyle (13:04)
So that that's just another option that someone could go through. But I'd be kind of thinking about all these things and and really what again, I'd come down to the overall impact on the portfolio, you know, like how is this gonna affect the overall allocation? How much are we talking about here? What is this a percent of of the overall portfolio? So β otherwise I'd be thinking maybe outside of I'd maybe leave the bonds if it was gonna be set you back too far.
Chelsea Jones (13:30)
Mm-hmm. Yeah, 'cause I mean, I feel like everything comes back to either a risk benefit analysis or a cost benefit analysis. And in this case, the way that I am kind of picturing it or in my head as you're explaining it is what they're wanting to avoid is the cost of the taxes. But the β the result of that is that their asset allocation might be out of whack, which means that they're taking more risk than they need to be, than we agreed to take. and so that could
Again, it all goes back to the size of the account, but that could cost them more than the taxes would have. So we always gotta keep the big picture in mind, keep the risk in line. β 'cause just because paying some taxes is painful. It's painful for everybody. β sometimes if you don't have other sources of cash, it's just the better option. So
Kyle (14:30)
Yeah. And and and and a nod to to you planners out there, β Chelsea and and Nate, β you know, this is where a good r good plan comes comes into play too, because you might see that you're ahead of schedule for retirement, in which case you should feel comfortable taking out money out of that taxable account to buy a car because you you are on track or you in fact you're beyond track. So β just a you know the importance of having a a live plan.
Chelsea Jones (14:30)
Mm-hmm.
Mm-hmm.
Mm-hmm.
Kyle (14:59)
You know, that's that's active just to know you have those options, even to know that even to know you have those options to begin with. So
Chelsea Jones (15:03)
Yeah, for sure.
Absolutely. So our next question, β moving on here, comes from a double doc family in Illinois. They said, We're thinking about starting social security for the retired spouse this year on their 66th birthday. Does that make sense to do or should we wait? So I'll take this one because it was one of my clients asked me this and it's it's right in my lane with retirement planning, retirement income planning.
But to give a little bit of background for this client, β specifically, β one spouse is still working and earning six figures while the other's retired. So what that means is if they were to take β the the husband's social security this year on his 66th birthday, β 85% of the benefit would be taxable because with the wife's income, they're over that earned income threshold that
β starts getting them into taxable benefit territory. β so 85% of that benefit would be taxable. and also just a piece that I know about this family. They just received some inherited stocks from a family member like within the past few months. And inherited stocks get a step up in basis. And this is money that we didn't include originally in their plan.
And so it's kind of it was a windfall, it was a boost. β and so they could liquidate those stocks and pay very little taxes because they get that step up in basis and there's not a whole lot of gain β for them to be taxed on. And so kind of looking at the big picture, knowing that their benefit would be taxable, their social security security benefit would be taxable, β knowing that they got that that windfall from the inherited stocks, β
And just the fact that the full retirement age for the client is sixty-seven. So if they're able to wait one more year, they'll get an unreduced benefit. β all of those things kind of paired together, β we ultimately decided to wait a year or for him to wait a year to get his social security benefit. and to fill any cash flow needs in the meantime with those inherited stocks that have a high basis. So that way we could minimize the taxes, make sure their cash flow was taken care of, β
And avoid getting a a slightly reduced social security benefit. So
But social security is something that I always get questions about. β and it's really a decision that has to be made when the time comes, you know, 'cause we can plan around it all we want, but the fact is we don't know what your situation is gonna be when you're retired. And that's what matters. because the numbers all day are gonna say wait till seventy. But there are a million things in life that could happen that would warrant you taking it earlier, so
yeah, talk to your advisor about it. It's social security can be complicated to understand with the different benefits and the timing and all of that. So it's definitely worth considering carefully before you file.
All right. Excuse me. Our last question comes from a pediatric endocrinologist in Tennessee. They said, I have two traditional IRAs. One is empty and one has rollover dollars. How come it is not recommended for me to fund and convert my empty IRA while my other IRA has a rollover balance?
Kyle (18:45)
Hmm. Yeah. I I see this one all the time and and with the portfolio work I do with clients. They the IRS β has what's called the pro rata rule, and they aggregate all your IRA, all your pre-tax IRA balances into one giant pool, one giant bucket. I love and have analogy I love for this. It's the the coffee and cream analogy. So
Chelsea Jones (19:11)
Mm.
Kyle (19:13)
This this is how a way to kind of visualize backdoor how to set up a backdoor Roth. So the IRS, let's for a minute the the the rollover dollars in this this client's instance here, that is money that's gonna be subject to taxation. β if it's the money's taken out of the IRA and that includes for a Roth conversion. Okay. So that is the bitter coffee, the taxable money that's it's super bitty bitter roast bold. It's just super bitter.
But then you have the cream, which is those after tax IRA contributions you couldn't deduct that you want to convert because you've already paid taxes on those and you so you put that cream into your coffee cup. And you might have a bunch of different coffee cups with a bunch of different coffee in it, but the IRS doesn't care. They're gonna take all that coffee and pour it in a one giant mug, and then they take your cream and they pour your cream in there and it all mixes together. And so when you go to do a Roth conversion, no matter how many IRAs you and what their balances are, the IRS just puts it all in one cup and they take that spoon and they go like this, and out comes a proportion.
Chelsea Jones (19:42)
Yeah.
Kyle (20:12)
Of the little bit of cream that you'd put in proportionately to all of the bitter coffee. So all your pre-tax dollars, or sorry, your after tax dollars divided by the total of all your pre-tax dollars, that's the rate at which your Roth conversion will get taxed. So it doesn't matter in this client's case where he's got the two IRAs, doesn't matter if the one's empty and the other one has a balance. The IRS is going to aggregate all that together. And when you do a conversion in that empty IRA, they're going to weigh in that.
Chelsea Jones (20:27)
Mm-hmm.
Kyle (20:41)
Other rollover IRA at the pre-tax balance into that calculation when you do that conversion amount. And it's going to be taxed based off of the ratio or the pro router ratio of the pre-tax divided by the after-tax. And so that could be significant. Imagine having, just for easy math, $10,000 in after-tax and $100,000 in rollover dollars. That means when you convert, even say you convert $1,000.
The ratio of the 10,000 to 100,000 is ten percent. So when you convert a thousand dollars, ten percent of that is after tax, not taxable, and ninety percent of that is rollover pre-tax subject to taxation. So it doesn't you convert a thousand dollars, you're you're paying taxes on ninety percent of that because of that big old rollover, hundred thousand dollar rollover IRA in this made up scenario I just made up. So that's why you have to be really aware of this.
Chelsea Jones (21:34)
Mm.
Kyle (21:38)
That's why it's not recommended to do that conversion in the empty IRA while you still have this large rollover balance, because you're basically making that conversion and that empty IRA extremely tax. It's done completely tax inefficiently. And you could have avoided that by just simply emptying out that rollover IRA. And there's a whole strategy on how to empty out that role over.
Chelsea Jones (21:49)
Mm.
Yeah. And again, if you don't have your eighty six six after that first conversion and everything's in the rollover IRA, there's no way to distinguish the pre versus post tax contributions. And so that is essentially double taxation.
And this
Kyle (22:14)
Yeah,
you're right. And we just went full circle. We're back to the eighty six six again. So when you make those after tax IRA contributions that should go on in eighty six six, that's important because when you go to do your Roth conversions, you should not pay taxes on those after tax contributions again. But if you fail to document them, there's a strong chance you you would pay taxes again on those after tax contributions. So yeah, we went full circle again. So the eighty six six feeds into that pro radar rule nicely. β
Chelsea Jones (22:18)
Mm-hmm.
Yeah.
Yeah, and I think we had we talked about the pro rater roll as part of or Roth conversions and then we touched on the pro rater roll as part of a asking for a friend a few episodes ago. And we β 'cause you can parse the basis. It takes some work. The eighty six six makes it easier because then you know how much to parse. β
But we used a water analogy and like muddied water versus clean water. So the muddied water is the mixed and the clean water is the after tax. β and there are ways to, you know, clean that up and parse the basis. And I think the way that we described it was you could either pay a cleaning fee to just kind of convert everything. And that usually that might make sense if the rollover balance, the pre-tax balance is very small. So
might be worth it to just pay a couple hundred bucks in taxes, the cleaning fee, to get everything into your clean jug of water, which is your after tax Roth IRA, tax free growth Roth IRA. or you could filter the pre-tax water out. And that takes either the eighty six six or going through months, sometimes most of the time years of statements to see the contributions and when the rollover came in and
separating them out very carefully, which takes a lot of paperwork and a lot of time. β but all that's to say it can be cleaned up.
Kyle (24:09)
Yeah. I've once
Yeah, I once went through like 20 years worth of statements one time. And I'll tell you what, I love a good December thirty first statement that has a year end summary total on it. Cause then you just need the one statement for every year. But when you have to find it, it's just like on a per monthly basis or per quarterly basis, it's a ton of work going back and doing that. It would have been so much easier to have just reported your after tax contribution on your AD six six and
Chelsea Jones (24:23)
Yes.
Mm.
Kyle (24:40)
'Cause it has a it it'll keep a running total. Every year you add you report the new amount and then it has a total from the previous years it adds together for a for a final total for the end of that that tax year. So if you are stay up on that eighty six six, when you go to do this Roth conversion setup and separating the muddy water from the clean water, you already have like you know exactly how much clean water you have. You're like, I have thirty five milliliters of clean water because it's on my eighty six six.
Chelsea Jones (25:01)
Mm.
Exactly.
Kyle (25:08)
failing to document it throughout the years, you wake up 15 years later, you decide to do a backdoor Roth and and you're like, I don't have an A six six. Well, you better hope you can find all your statements. You know, and that can be hard. Once you get past seven years, seven, eight, seven years, I believe, is the the kind of the minimum requirement for statements, I think. Yeah. Ten, you're usually 10 if you're lucky, you'll find that online. So, you know, if you're thinking about setting up your backdoor Roth, you know, get on it.
Chelsea Jones (25:18)
Yeah. It's gonna take some work. Yeah.
Custodians, yeah.
Mm-hmm. Tell your tax preparer.
Kyle (25:37)
Don't don't wait.
Yeah. Ask if you have an A six six if you're making after tax contributions β to your IRA. Make sure that you have that. Even if you've been doing a Roth conversion, you know, strategy, make sure it's good if you're if you're not sure you have an A six six, it's worth your time to go look.
Chelsea Jones (25:57)
Mm-hmm. Absolutely. It's one of those preventative things. It's it's simple to do in the moment, even though it is an extra step, but it can save you so much time and headache later on.
Kyle (26:09)
And it be as easy as if you have a CPA or a tax preparer that's sharp that that keeps track of your correspondences. You can even send them a note and say, Hey, when we do our tax filing next year, remind me to up or make sure you update my eighty six six, because you don't have to do it necessarily mid year. You just do it when you do your next filing. But you if you if you don't have one, you do want to definitely make sure that that's on the radar for the next tax filing year. So yeah, exactly. So
Chelsea Jones (26:26)
Mm.
Yeah. Get the paper trail started now.
All right. Well that's all the questions we have to for today. Thank you so much for listening. if you liked it, please be sure to subscribe so you don't miss when we release a new episode every week and lead us leave us a rating wherever you are listening. if you'd like to work with us, visit physicianfamily.com to schedule an interview. And if you aren't ready for that, just send us a question at podcast at physicianfamily.com. We'll answer it even if it doesn't make it on the podcast.
So until next time, remember you're not just making a living, you're making a life.
I think Nate told us to give him a thumbs up or something when we're done.
