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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Next question, David, have we got?
David:Yeah, let's talk about Roth. So Ken, thank you for this question Ken. He says, I was advised to create a separate account each time that I did an IRA to Roth conversion. The reason was that I have a way to confirm the date of the account creation and have a way to con to confirm the growth satisfying the five year rule. At the end of the five years, I then roll the conversion account into the original Roth.
David:So the question is on on the five year rule as it relates to an inherited Roth. So there's a lot to maybe go through here, so if in case people don't know about the
Mike:Mhmm.
David:All these rules. But anyway, to continue on here, the question is on the five year rule as it relates to an inherited Roth. Does the benefactor have to wait the remaining time of the original five years before any of the growth is withdrawn without penalty being charged?
Mike:Yeah. On the inherited Roth, I will admit, I don't know. I'd have to look that one up. And the reason is, most Roths have already been there for several years. I believe you still have to wait.
Mike:I'm like 90% sure, but I'll double check on that, and then we'll write an email about that in our newsletter.
David:Okay. Yeah.
Mike:But I because the tax laws have changed several times over the last few years, I'm just gonna double check that one, and this is what you get for life questions. And I rather say, I'm not sure but I believe so. But let me let me explain the Roth nuance just for a second. Okay?
David:Let's do that.
Mike:Because people do not get the the general parts correct. So if you do a contribution to a Roth, contribution is after tax money, so like in your savings account that goes to a Roth, all of the money needs to wait for five years before you're supposed to take it out. Okay? That's what's supposed to happen. A conversion, so it's in your IRA and you convert it to a Roth, the basis or the dollar amount that was converted does not need to wait five years, just the gains of that initial conversion for So what he's doing was probably recommended by an accountant who is scared to death of an audit or wants to lean on complete rigidity.
David:Okay.
Mike:If you're like most retirees and you're putting money into a Roth and at some point you're gonna be done converting it, It's for legacy purposes anyway. It might be a non issue. We're creating a mountain out of a molehill. It's good to keep these things right. I don't know how restrictive regulators are on this kind of like thing.
Mike:Yeah. You should always follow tax law. I'm not encouraging to get sloppy with it. Yeah. What I'm saying is, just if you're just trying your best and you're taking the basis out, as long as something's still in the Roth.
Mike:If you're in like, if you're an inherited Roth and you didn't drain all of it within the first five years, you're probably okay. Mhmm. If you do an IRA to Roth conversion and you didn't drain all of it in five years, you're probably okay. If you did a contribution and that dollar amount you didn't touch for five years, you're probably okay. So I don't want people to create all of this work and panic with this fear that you're probably gonna be fine.
Mike:I'd stick to making sure that you're right on the tax filing of things that you're not, you know, you're not making up weird tax rules of like you donated, you know, some priceless art that really wasn't that priceless. Like those are the things I'd be more concerned about or starting a business in retirement, where it's really your hobby and you dressed up as a business. Like those are the things where people get in trouble.
David:Okay.
Mike:Don't do that crap. But, know, better, best, that is an accurate and easy way to keep track of things.
David:To create all these new accounts and But I I personally wouldn't do it.
Mike:I think it's unnecessary work. But that's that's to each their own.
David:Right.
Mike:Alright. So let's see. Alright. Can I do the next question here? Yeah.
Mike:Yeah. Alright. So this next question says, so I don't need income, but I am looking for something other than bond funds to lower my risk in the portfolio. What else should I be considering? So there's really a threshold here.
Mike:When I say a threshold, you've got one side which is no market risk, but has inflation risk. And then the other side which has market risk, but lower inflation risk. That's the general spectrum that I wanna say when someone says, I'm looking for something other than bond funds to lower my risk. Let's make sure we're defining the risk and you're you're trying to lower market risk which increases your inflation risk. And you wanna be cognizant of that because the Strait Of Hermos and tariffs put us at inflation risk.
Mike:So we don't wanna go all in on one side of the spectrum. We want balance. So hopefully this individual is considering that. Now on the the very left side of this, on the left I mean, like low market risk but has inflation risk. You've got CDs, treasuries, and MYGAs.
Mike:They all grow at a fixed rate. That's Okay? And MYGAs, you can't get on your own. Gotta go through an insurance company to get through them. So like someone like us.
Mike:And don't worry, they're not high commission predatory products. Like they pay very little of anything on commissions.
David:Okay.
Mike:Okay, so don't worry about anyone trying to finagle something like they're Yeah. Costs about the time to do the paperwork is what the commission's worth. Alright. But it's important to always disclose. Yeah.
Mike:It's very important to always disclose. So, alright. Then you go up a little bit, and this is where you then go to buffered ETFs. So buffered ETFs are going have a little bit less upside potential than like the other options here, but also you've got more liquidity. Okay?
Mike:So I call it the index threshold. You've got buffered ETFs, a little bit less growth if you're doing full protection. If you want a little bit of risk, you can get more upside potential. There's a spectrum with that. And then you've got fixed indexed annuities, which also can work, but you're gonna lose liquidity for a little bit more structure.
Mike:And then we'll talk about that in a second. And then you've got cash value life insurance, if you also want the death benefit. If you don't want the death benefit or the life insurance components, please don't buy it. Yeah. Now look, I like cash value life insurance personally, because I'd rather have that than pay for term life insurance, and all these other things.
Mike:Like I can consolidate it, as long as I lower my death benefit to make insurance cheap. So there are ways around it if you're young enough to use it, and long term it can be a great asset. But if you're 70 years old, you shouldn't be talking about life insurance.
David:And that's because why do you feel passionate about that?
Mike:The cost of insurance is ridiculous.
David:Yeah. So that cost outweighs whatever potential benefit you might have. Yeah. Okay.
Mike:Like, so it just but but cash, the index universal life has growth potential, but no downside risk. Just the fees you have to consider. So again, you've have this kind of lowering your risk area of things to consider. Now you also have other things too, like you could do something like a structured note. But for structured notes to really work well, I like it when, you know, after the markets have gone down to then start to buy them just in case the markets keep going down but you've got more upside potential, like there's a season for them.
Mike:Right now it's not really the season, but a structured note, buffered ETF, like they all have this kind of indexed area where you've got upside potential, little or less or no downside risk depending on what you buy, and that allows you to have slightly more growth potential than CDs. So let's say arbitrarily, you can get around 4% from fixed. It's four to 5% on fixed. Okay. That means you might be able to get zero to 7% on the indexed category that can lower risk.
Mike:And if you're looking at, let's say you've got a couple million dollars, and you want a million of your dollars to have no risk. Okay. Or you're lowering the risk. Yeah. Bond funds are like two to 4%.
Mike:So you could do fixed and call it good. You could do index, and if you got one to 2% better cash growth on a million dollars to $1,500,000. After twenty years, that's like a lot like 7 figures potentially of extra money through efficiencies. Just through a slightly better return. Mhmm.
Mike:So it's it's understanding that lowering your risk, you don't have everything available to you as a retail investor, but going through an advisor that you would trust to show you the different options can help. Then you've got this last category. So I put it as above the indexed and below the variable category, and variable is not variable annuity. I don't really care for variable annuities. They're high fees, lot of restrictions, a lot of cost insurance, but variable like stocks have a variable growth rate.
Mike:It can go up or it can go down. That's the variability.
David:Okay.
Mike:But there's this kind of in between category called real estate. Uh-huh. So you could do some preferred stock in real estate, where you're gonna get a nice set dividend. Right? It has risk, but like it's this in between kind of diversify outside the market, but it still has some risk, but it has some stability and it's this beautiful thing that can be a nice company to a portfolio.
David:So you're giving somebody your money and then you're you're getting like a set dividend and and your money is getting invested in a property or
Mike:Yeah. So REITs used to be the thing. So REIT is a real estate investment trust.
David:Okay.
Mike:You put it in there, it's illiquid basically. The REIT, the trust is gonna go heavy into the real estate properties, and then you're getting the cash flow from the properties. Now because it's illiquid, more money goes to the properties. If it were liquid, like a publicly traded REIT, they'd have to keep a lot of cash on hand in case you wanted to redeem or pull your money out. So the illiquid REITs do pay better, but there's a lot of ones that are just old.
Mike:And they need a lot of maintenance, they don't pay out as well. So people have shifted, the big companies have shifted to preferred stock.
David:Mhmm.
Mike:Where you might buy in and your share price doesn't increase, but you're gonna get a payout of like, let's say arbitrarily 8%.
David:Okay.
Mike:I'm not quoting any sort of investment to product. Okay? Just saying arbitrarily, you might get like 8%. That accounts for the appreciation of the property values and that portfolio plus Mhmm. You know, some cash flow and so on.
Mike:And you might get that for a couple of years.
David:Alright.
Mike:But usually they're callable, which means it might say, oh, you can hold it for like five years, but maybe things shift and we're gonna give you your money back and then end it early because interest rate shift or something like that, like that could happen. So it's not a contract in that sense. There's just there's some risks associated. But the idea is, you know, hey, you're bringing more stability in your portfolio. It's outside the stock market.
Mike:It's a diversified portfolio, and you're a share owner of this company that owns these real estate properties. Yeah. And maybe they don't call it, and maybe you keep it keeps paying for a long term period of time. It's just you can't, like they can force you to sell it.
David:Okay.
Mike:That's the caveat you need to understand with it.
David:Okay.
Mike:And so just understand the nuance of these certain things. But those are different ways you could lower your risk.
David:Okay.
Mike:The one thing you don't wanna do is try to time the market. Notice how everything is exposed to some sort of growth. And there's usually a spectrum that people have some in fixed, some in index, and some in long term growth. What you don't want do is go in cash, wait for the markets to crash and then go all in, because you might be waiting a little bit longer than you thought.
David:Mhmm.
Mike:And I've seen this even from the pros.