Island Living and IRAs

Our 2 Cents – Episode #168

Island Living and IRAs

On today’s episode of Our 2 Cents, Steve and Gabriel discuss two great topics. First is the best islands for retirement and then they pivot to common mistakes to avoid with IRAs. They share the significance of proper tax planning to maximize the benefits of IRAs and avoid potential costly mistakes.

1. Island Living in Retirement:
   • Retiring to an island may appeal to many retirees, and we’re sharing the best scenic locales to consider.
   • Some international islands offer incentives to retirees.
   • Plus, a U.S. based island location that may surprise you!
2. Deep Dive: How to Avoid IRA Mistakes:
   • The importance of contributing to IRAs before the deadline.
   • Consider the benefits of both Roth and traditional IRAs based on individual circumstances.
   • Utilizing backdoor Roth IRA contributions.
   • Exercise caution against speculative investments in IRAs, putting the wrong types of investments in IRAs, and forgetting about required minimum distributions (RMDs) for traditional IRAs.

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Podcast Transcript

Announcer: You’re listening to Our 2 Cents with the team from SGL Financial, building wealth for life. Steve Lewit is the President of SGL Financial, and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.

Gabriel Lewit: Welcome to the show. It’s Gabriel and Steve back in action here with Our 2 Cents, coming to you today, live for us, later for you probably. We’re just excited to be on another episode here with you here today, one of our favorite things to do each week. This is one of our highlights.

Steve Lewit: It really is. You know, I-

Gabriel Lewit: We get a chance to goof around a little bit.

Steve Lewit: Yeah, I get-

Gabriel Lewit: Talk turkey.

Steve Lewit: Excited. It’s like a performance, sort of.

Gabriel Lewit: Yeah, yeah.

Steve Lewit: Yeah, it’s nice.

Gabriel Lewit: I don’t know. I just… I enjoy rambling, so this is good for my rambling-ness.

Steve Lewit: Yeah, so I’ll be back in a few minutes folks, while Gabriel rambles.

Gabriel Lewit: Well, we’ve got some good topics here for you today. We’re going to start off with, courtesy of Travel and Leisure Magazine or online magazine, if you will, the… Hold on here. I don’t want to butcher this, the 12 best islands for retirement, ranging from the Caribbean to the Mediterranean.

Steve Lewit: Okay, so first of all, have you ever thought that when you retire, you would move to an island?

Gabriel Lewit: Well, hold on just one second, as I wasn’t ready to jump in.

Steve Lewit: Okay.

Gabriel Lewit: I was just giving the lay of the land.

Steve Lewit: I’m so sorry.

Gabriel Lewit: But that’s a very good question, so don’t-

Steve Lewit: Go ramble.

Gabriel Lewit: Don’t forget.

Steve Lewit: Go ramble.

Gabriel Lewit: After that, we… You’ve got to stay tuned, because we are going to talk about the top 20 IRA mistakes to avoid shortly thereafter, okay? So, very important topic, because I believe all of you out there probably have IRAs, and then there are mistakes that you do want to avoid, and we are going to put those together to help you learn what to do and what not to do with your IRAs.

Steve Lewit: And which island to buy on, and which not.

Gabriel Lewit: And which island to be doing or not doing those things from, right?

Steve Lewit: Yes.

Gabriel Lewit: Exactly.

Steve Lewit: Good. Good, I’m ready.

Gabriel Lewit: That’s our agenda topic here for today. All right, so well, let me go back to your question. Would you like to ask that again, Mr. Lew?

Steve Lewit: Yeah. Have you ever considered… Like the thought never entered my mind that, if I ever retired, I would move to an island, like Jamaica or Bermuda or any of these 12 best islands, which, by the way, none of my favorite islands are on this list, but island life is such a different life.

Gabriel Lewit: Well, you know, I have thought of it before, namely because I’ve had a few clients that have mentioned to me they could consider seeing themselves living on an island, but many of them have yet to pull the figure, I’ve found. That could be-

Steve Lewit: Yeah, what about you?

Gabriel Lewit: Me, personally?

Steve Lewit: You, personally.

Gabriel Lewit: I like the Hawaiian Islands.

Steve Lewit: Oh, well, Hawaii is beautiful.

Gabriel Lewit: That might be on the list here. I won’t spoil it for you. It may or may not be, so you’ll have to just wait and see, okay? But, yeah, it’s definitely… What’s the vision of island life? When you think about it, you’ve got a margarita in hand, or maybe a pina colada.

Steve Lewit: Mm-hmm.

Gabriel Lewit: Maybe even a Dos Equis. You pick, or even just a spritzer.

Steve Lewit: The waves rolling in.

Gabriel Lewit: Okay, if you’re not a… If you’re not-

Steve Lewit: The sound of waves rolling in your ears.

Gabriel Lewit: If you’re not into alcohol, you get something non-alcoholic, a virgin pina colada. There you go.

Steve Lewit: Yeah, exactly.

Gabriel Lewit: Yeah, so you’re on the beach. Maybe you’re strolling through the sand. The sun’s shining on your shoulders.

Steve Lewit: Nice.

Gabriel Lewit: You’ve got the breeze, and the cawing of the seagulls.

Steve Lewit: Yes.

Gabriel Lewit: I won’t imitate their sound.

Steve Lewit: No.

Gabriel Lewit: Caw. Caw, caw.

Steve Lewit: Caw, caw. Yeah, what else have you got? You’ve got the-

Gabriel Lewit: Oh, what else do we got… We’ve got-

Steve Lewit: Well, water lapping at your feet.

Gabriel Lewit: Yes, the water lapping at your feet. You’ve got a beach ball with some beach volleyball right next door.

Steve Lewit: Right, right.

Gabriel Lewit: You’ve got the Jeep with the top down, cruising through the surf side on an evening sunset.

Steve Lewit: You’ve got the mosquitoes.

Gabriel Lewit: The Dengue fever.

Steve Lewit: Right.

Gabriel Lewit: No, I was just kidding.

Steve Lewit: Right. You’ve got all the bugs.

Gabriel Lewit: We weren’t going to go down that path. Okay, okay.

Steve Lewit: Well, you’ve got to balance it out. It can’t be like pure nirvana, you know.

Gabriel Lewit: Nice restaurants. Bistro… What’s that called? No, what’s the one where you eat outside?

Steve Lewit: Outside restaurants.

Gabriel Lewit: Alfresco? No, is it alfresco? Yeah, alfresco bistros with five-star Michelin chefs.

Steve Lewit: Double the price because it’s on an island.

Gabriel Lewit: Yes. All right, so that’s what we’ve got in store for us here today.

Steve Lewit: All right.

Gabriel Lewit: All right, so now-

Steve Lewit: What does T&L have to say here?

Gabriel Lewit: Yeah, so I didn’t custom curate this list. I mean, I would love to say that I went and visited each of these islands personally, so I could give you a hands-on report, but Steve wouldn’t let me do that.

Steve Lewit: No, no. No, you’ve got to work. You’ve got to work to your bones, man.

Gabriel Lewit: So, we’re going to just read you some of the recommendations here from Travel and Leisure, okay? All right, and then we’ll talk about some of the challenges of island life and/or moving, if that’s something that you’re thinking of doing.

The first one on our list here is Malta. Okay, Malta is located south of Sicily, and it has a sunny island climate with temperatures rarely falling below the 50s. Also, to note, English is the second official language of Malta, and many residents speak it and Italian in addition to Maltese.

Living costs are somewhat lower than the U.S., and there’s a large expatriate, expat, expatriate?

Steve Lewit: Mm-hmm, yep, yep.

Gabriel Lewit: Expatriate, expat, that’s where I got confused there, expatriate, expatriate community, including people from Americas, the European nations and from the UK. Okay, so lots of water sports, golf, other outdoor activities, and Malta is home to museums, historic sites, and cultural events at an affordable price.

Steve Lewit: Yeah. No, I’ve heard of Malta as a great place to go. Again, it’s not a place that I would consider going, but now, hearing about it and really loving Italy, this sounds like a really attractive place to think about going.

Gabriel Lewit: Yeah, so what we’re going to do here… We probably won’t do all 12, at least in depth, as we see here, but I’m going to ask Producer Katie here to pull up a picture of the Island of Malta, so we can describe its beautiful ocean shores for you. Oh! Look at this. Okay, so we’re looking at a picture of Malta here.

You’ve got… Hold on. Go back. Yeah, you’ve got gorgeous blue waters. You’ve got old, ancient historical buildings paralleling the coast here. Yeah, looks nice.

Steve Lewit: It does. It really does. Now, Malta, wasn’t that a big war zone in World War II, Malta?

Gabriel Lewit: Gosh. Beat me. Now it does say it’s only 12 hours and 30 minutes away from Chicago, so you’re in luck, all right?

Steve Lewit: Yeah, but I bet it’s not nonstop, though. Probably not.

Gabriel Lewit: It might be.

Steve Lewit: Who knows?

Gabriel Lewit: Yeah.

Steve Lewit: Okay.

Gabriel Lewit: So, that’s one option you’ve got for you.

Steve Lewit: That actually… Look how blue the water is.

Gabriel Lewit: Yeah, very pretty. Well, that’s a different spot. Katie changed it on you.

Steve Lewit: Oh, she did. Well, look at how blue that water is. What am I looking at now here?

Gabriel Lewit: Well, now, you’re going to do our next one. Remember, sometimes when we do these tours like this, we rotate who is the better tour guide, so Steve?

Steve Lewit: No, I’m not a good tour guide.

Gabriel Lewit: Dad, this is now your chance to describe, and you are a writer, so let’s show your chops.

Steve Lewit: I am a writer of nonfiction that I write. This is an island called… Now, don’t you laugh, Isla Mujeres.

Gabriel Lewit: Not bad.

Steve Lewit: Not bad.

Gabriel Lewit: Yeah, so what you don’t know, folks, is-

Steve Lewit: Don’t you laugh at me.

Gabriel Lewit: Before we started the show, Steve was previewing this. He’s like, “How do you say this?”

Steve Lewit: Isla Mujeres.

Gabriel Lewit: It sounded like he was saying Macheres.

Steve Lewit: Mahacheres.

Gabriel Lewit: He was trying to pronounce it. It was kind of funny. Okay, maybe you had to be there.

Steve Lewit: This is a small island in the Caribbean Sea. It’s a ferry ride from Cancun. Now, if you’ve ever been to Cancun, that’s a kind of fun place to go. You’ve been there, Gabriel. It’s a-

Gabriel Lewit: Yeah, a couple of times.

Steve Lewit: Yeah, I actually think I’ve been here, because I remember taking the ferry ride, and I didn’t realize I had been on this island, Isla Mujeres.

Gabriel Lewit: Look at you.

Steve Lewit: Big fishing village.

Gabriel Lewit: Big traveler.

Steve Lewit: Yeah, look at that. Big fishing village, a lot of snowbirds go down there, like they go to Cancun. The weather is warm, and it’s usually… Cancun is usually very windy, so I don’t know. They don’t say anything about that. Spanish is the language, but everybody there speaks English. When I was there, you could speak English, and everybody would understand you. I’m not sure I would go back, though. I think it was very nice, but it wasn’t like Malta.

Gabriel Lewit: Yeah. What it says here is the exchange rate provides exceptionally good value, okay? So, that might be one of the reasons why, but you do have to have private medical insurance.

Steve Lewit: Yep. I mean, there’s nothing there.

Gabriel Lewit: Yeah, yeah. It’d be a small island for you, but it is on the list. Again, it’s not our list, but the list here.

Steve Lewit: Sure. I always preferred… From what I recall, it was really very, very nice, but yeah, I spent a day there, and that was enough.

Gabriel Lewit: Got you, okay.

Steve Lewit: One of those places.

Gabriel Lewit: Got you. All right, well, now we’ve got another one for you. This one’s going to be a little different. Now, this isn’t our list.

Steve Lewit: This is San Juan.

Gabriel Lewit: Believe it or not, they are suggesting San Juan Island in Washington.

Steve Lewit: I didn’t know there was a San Juan Island in Washington.

Gabriel Lewit: Okay, so instead of a tropical island, it says, “Some retirees prefer cool air, winter snows, and pine forests. This archipelago…” How do you say that?

Steve Lewit: Archipelago, yeah.

Gabriel Lewit: “Archipelago in Puget Sound,” I’m reading from the description, folks.

Steve Lewit: Yes. Yes, he is.

Gabriel Lewit: “Offers all of that in spades. It stays cool, even in the summer, where getting above 80 is pretty rare, and it gets about half the rain of Seattle,” which is very nearby. So, yeah, this would be a quiet, peaceful lifestyle.

Steve Lewit: Well, here’s the deal.

Gabriel Lewit: But the big problem here is your median home price-

Steve Lewit: Is…

Gabriel Lewit: Pushing well north of $1 million.

Steve Lewit: Yeah, but here’s the deal. It says, “Life in San Juan is quiet.” Now, as soon as they say life is quiet, do you know what that really means?

Gabriel Lewit: Sure.

Steve Lewit: There ain’t nothing to do on this island.

Gabriel Lewit: Yes. You’ve got birds and canoes.

Steve Lewit: That’s exact, so it says, people will want to ferry to the mainland for supplies and entertainment, so there’s another place where there’s nothing.

Gabriel Lewit: Yeah, and Washington State, as far as retirees go, does not tax social security, pension, or retirement account income, so it’s similar to Illinois, in that respect.

Steve Lewit: Yes.

Gabriel Lewit: But if you’re looking for the island life in the United States, that is one of the options available to you. Now, speaking of United States islands, we’ve got one more for you, of course, which I hinted at a little bit earlier, which would be the Hawaiian Islands. Now, I do have a client that is retired in Hawaii, or she has a Hawaii home and, gosh, she just loves it. I love Hawaii.

Steve Lewit: Is it the Big Island or is it Maui? Do you know where it is?

Gabriel Lewit: Gosh. You know, I should know. I can’t recall off the top of my head.

Steve Lewit: I have one client considering buying in Maui, which I love Maui. I’ve been there a few times, but again, I’m not sure I’d love to live there 12 months out of the year.

Gabriel Lewit: Well, yeah, so obviously you have choices, if you’re going to move to an island. You’ve got to decide if island life is right for you, but you also don’t have to live there year round. You could have six months of a Hawaiian or island lifestyle, and then the other six months, you could have a residence anywhere else you’d like.

Steve Lewit: Sure, sure.

Gabriel Lewit: You know?

Steve Lewit: Absolutely, yeah.

Gabriel Lewit: Why is Hawaii a good choice? Well, of course, it’s very tropical, but you’ve got the benefits of still being in the U.S., U.S.-based health care, retirement benefits, everything, TV, and all the comforts of home you’ve got on a tropical island just a short, eight-hour flight away from Chicago.

Steve Lewit: Yeah, and I find Hawaii has this rich culture to it that is all over the Hawaiian Islands that I think is very compelling.

Gabriel Lewit: Mm-hmm, yeah, so very, very, very different than probably Malta or Mexico or Washington at the San Juan Island, but you’ve got your pick here of many islands in the U.S., if island living is for you, okay? All right, what would we pick next? There are more here. If you’d like the full article, happy to send it to you. You can send us an email at info@sglfinancial.com.

Steve Lewit: I mean-

Gabriel Lewit: Maybe we pick one more here.

Steve Lewit: It’s pretty interesting. I mean, they have Penang Island in Malaysia, where I would never think of going. I’m really so focused on different areas of the world, I would never consider going to Malaysia.

Gabriel Lewit: Yeah, apparently in Malaysia, there’s a Malaysia, My Second Home program, which is a renewable, multi-year, multiple entry social visit visa, very popular among many retirees seeking residency.

Steve Lewit: Of that, it’s beautiful, but it’s just not one of those places I would want to go.

Gabriel Lewit: Yeah. Did you know that Malaysia was formerly a British colony? So, English is one of their languages.

Steve Lewit: Yeah. I’m going to bring up Turks and Caicos.

Gabriel Lewit: Mm-hmm.

Steve Lewit: I don’t want to sound like a real-world traveler here, but I was in Turks and Caicos many years ago. I was there when a hurricane went through Turks and Caicos, and we were stranded there, with your brother and sister on that island, with no electricity, with water everywhere, and I wasn’t sure we were getting out, so I would never want to live in Turks and Caicos.

Gabriel Lewit: Well, that’s a little bit of an overreaction.

Steve Lewit: But it was gorgeous, I mean, gorgeous. It’s just a gorgeous place.

Gabriel Lewit: Yeah, we’ve got some pictures of it up here, beautiful turquoise waters, lush landscapes, tourists everywhere. No, I’m just kidding.

Steve Lewit: Right, with children.

Gabriel Lewit: Screaming, crying children and babies splashing water on you. No, just kidding. All right, just in case you’re interested, because we do want to move on here, I’ll read you the rest of the islands on the list, and I’ll give you my quick recap here. Okay, so of course, we had Malta. We have Puerto Rico.

Steve Lewit: Puerto Rico.

Gabriel Lewit: Okay, there’s an option for you, U.S. territory of Puerto Rico.

Steve Lewit: I have clients that are living… I have two clients, actually, that live in Puerto Rico, and they love it.

Gabriel Lewit: We’ve got Isla Mujeres; San Juan Islands, Washington; Barbados was on the list here, previously a British colony.

Steve Lewit: Nice, yeah.

Gabriel Lewit: We’ve got… Hold on. Hold on.

Steve Lewit: Hold on.

Gabriel Lewit: Got the wrong page here.

Steve Lewit: That’s okay.

Gabriel Lewit: My thumbs don’t want to turn.

Steve Lewit: You’re learning. You’re learning well.

Gabriel Lewit: Okay, we’ve got Mallorca, Spain.

Steve Lewit: Majorca.

Gabriel Lewit: What is it? Majorca?

Steve Lewit: Majorca.

Gabriel Lewit: There you go, Mallorca.

Steve Lewit: Mallorca.

Gabriel Lewit: Is it like Malort, for the Chicago drink?

Steve Lewit: Majorca.

Gabriel Lewit: All right. You can tell I haven’t been there. Let’s see. We’ve got Big Island, Hawaii, and just Hawaii, in general; Penang Island, Malaysia, as you mentioned; U.S. Virgin Islands.

Steve Lewit: Ah, yes.

Gabriel Lewit: Saint Thomas, Saint Croix, Saint John.

Steve Lewit: Saint Croix is beautiful.

Gabriel Lewit: Okay, we’ve got those. Now, I didn’t agree with this one, but it’s just me, Dominican Republic. Been there. Not my favorite.

Steve Lewit: I’m with you there, yep.

Gabriel Lewit: Okay, I’m probably going to butcher this, Anguilla? Did I say that right?

Steve Lewit: Anguilla. I don’t know.

Gabriel Lewit: It’s the northernmost of the Leeward Islands, about 165 miles east of Puerto Rico.

Steve Lewit: Ah, okay. I don’t know if it’s Anguilla or Anguilla.

Gabriel Lewit: It says it’s relatively remote. You have to take a ferry from Saint Martin, or no, you have to take a ferry to Saint Martin to stock up on supplies. Okay, yeah, that’s a little-

Steve Lewit: Not going there.

Gabriel Lewit: That’s a little different. You’ve mentioned Turks and Caicos, and that is the list we’ve got for you.

Steve Lewit: It’s a pretty good list. Folks, if you would like the list, like Gabriel said, jot us a note, and we’ll send it to you.

Gabriel Lewit: Yeah, send you on your way. If you do want to live on an island, one thing I would recommend-

Steve Lewit: Bug spray, bug spray.

Gabriel Lewit: Other than bug spray, is a financial plan.

Steve Lewit: Oh, for God’s sake, yes. You bet.

Gabriel Lewit: Budgets would change. Insurance costs would change.

Steve Lewit: Food, clothing.

Gabriel Lewit: Lifestyle, travel expenses. Cost of living is higher, so if the island life is right for you, or you think it is, I do also recommend visiting there first.

Steve Lewit: For sure.

Gabriel Lewit: For, perhaps, an extended period of time to see if you really like it. Go, take a month, Airbnb or something, or even a nice hotel, and see what island life is like for you.

Steve Lewit: Mm-hmm.

Gabriel Lewit: Okay.

Steve Lewit: Let us know.

Gabriel Lewit: So, we hope you enjoyed that journey. If you’ve been to any of those islands, would love to hear your feedback, either good or bad. We could share those on the next show. Just send us a note, info@sglfinancial.com, and we will share your feedback on the next show, if we get any, okay?

Steve Lewit: If you have a favorite island, let us know that, too. I’d like to know what it is.

Gabriel Lewit: Yes, and we did get some feedback on our last show about the scams, and the security from phishing, vishing, smishing.

Steve Lewit: That’s so funny. That’s so funny.

Gabriel Lewit: One of the comments was from a listener that said, “Make sure you mention that you also should change your passwords regularly.” I’m not sure if I specifically did or didn’t mention that but, yes, very good idea. Change passwords very frequently is one of those things, or you can use a password manager, like LastPass or others, to help you, because changing passwords is a pain.

Steve Lewit: Yeah, and they can generate passwords for you that you’ll never remember.

Gabriel Lewit: Correct, yeah.

Steve Lewit: Yes.

Gabriel Lewit: Okay, so let’s move on. The rest of our show here, we’re going to a little bit of a deeper dive into IRA mistakes. Now, as far as IRAs, what are they? Let’s just start with the basics. They are retirement accounts, individual retirement accounts, to be precise, hence the title IRA.

There are various flavors of IRAs. You’ve got tax-free, called a Roth IRA. You’ve got pre-tax, called a traditional IRA. You’ve also got what’s called a rollover IRA, which is generally a traditional IRA that was rolled into from a, say, 401(k), for example. You’ve got what are called nondeductible IRAs, which are funded with after-tax dollars. We’ll talk about those. You’ve got SEP IRAs. You’ve got beneficiary IRAs. You’ve got a large world of IRAs.

Steve Lewit: Some never even heard of IRAs.

Gabriel Lewit: Okay, you’ve got a large world of IRAs, and they can be complex. They can be difficult to understand if you don’t know all the rules. That’s really what we want to focus on here are some of the more common dos, don’t dos, to help ensure that you maximize and take advantage of the entire world that IRAs bring to the table.

Steve Lewit: And it’s a hugely important world, Gabriel, because most people save their money, guess where?

Gabriel Lewit: In IRAs.

Steve Lewit: In IRAs and in 401(k)s, which become IRAs.

Gabriel Lewit: IRAs, yeah.

Steve Lewit: Or 457s.

Gabriel Lewit: You say IRAs. I’ll say IRAs.

Steve Lewit: IRAs.

Gabriel Lewit: IRAs.

Steve Lewit: IRAs.

Gabriel Lewit: Okay.

Steve Lewit: IRAs.

Gabriel Lewit: IRAs, okay. I just thought of a very bad dad joke. Something along, that I could-

Steve Lewit: We don’t want to hear it.

Gabriel Lewit: Something along the line of “what does a pirate save for in retirement? IRAs.”

Steve Lewit: Yeah, keep that between you and me, all right?

Gabriel Lewit: Yeah, well, now it’s in the world, so-

Steve Lewit: IRAs.

Gabriel Lewit: IRAs. The dad jokes just come to you when you’re a dad.

Steve Lewit: That was cute. That was cute.

Gabriel Lewit: They just come to you. I never know how. It just-

Steve Lewit: That was very cute. Yeah.

Gabriel Lewit: A switch flips, and then it just comes to you, okay?

Steve Lewit: I actually like that. Yeah.

Gabriel Lewit: Well, my son wouldn’t get it, but he would… No.

Steve Lewit: He’d like the sound. Arrr.

Gabriel Lewit: Yeah. All right, so okay, what are some of the challenges here, mistakes? The number one mistake on the list, and I really think this is a big one, is missing the deadline to contribute to an IRA, and then it’s forever gone to you, that contribution opportunity.

Steve Lewit: How many people do we see, and say, “Oh, God, I forgot.”

Gabriel Lewit: Oh, my gosh.

Steve Lewit: I just, “Oh, did I miss the deadline?”

Gabriel Lewit: Well, and it’s not just that. I think, in particular, one of the no-brainer opportunities is a Roth IRA for somebody that has the ability to contribute, because there are income threshold limitations. There are earned income requirements, but let’s say you have $50,000, $20,000 sitting in cash in a checking account, and you have the ability to contribute to a Roth IRA, and you can do it up to tax time, okay, April 15th, for the prior year, and you do not put that money in the Roth. You are simply missing out on a tremendous opportunity, because let’s face it, money that grows tax-free in a Roth is going to pay a lot less in taxes than money that grows in a taxable account.

Steve Lewit: Well, it’ll pay zero in taxes, so that’s a lot less, and if taxes go up, it’s even less. These little accounts, even if you’re putting in $7,500 a year, over 10 years, that’s a lot of money, and it grows, and if taxes go up in the future, that’s a big miss.

Gabriel Lewit: Yeah, so missing that opportunity is one of those major points there.

Steve Lewit: And you can set it up automatically, Gabriel.

Gabriel Lewit: You could. You can do monthly contributions. You can do quite a bit there. Okay.

Steve Lewit: Yep.

Gabriel Lewit: Now, related to that is assuming that a Roth IRA is always better than a traditional IRA. There is so much out there now, where everybody says, “Roth, Roth, Roth, Roth, Roth.”

Steve Lewit: Well, I’m one of those people.

Gabriel Lewit: Okay, Roth, Roth, Roth.

Steve Lewit: Roth, Roth, Roth.

Gabriel Lewit: You could keep saying it.

Steve Lewit: Roth, Roth, Roth.

Gabriel Lewit: You can sort of fall into the trap of, oh, it just must be better than the pre-tax, traditional.

Steve Lewit: Well, most of the time, I think it is.

Gabriel Lewit: Well, you, sir, know as well as I do that that would be incorrect.

Steve Lewit: That is incorrect.

Gabriel Lewit: It depends on your income level.

Steve Lewit: For sure.

Gabriel Lewit: Okay, if you are in a higher than, let’s call it a, we’ll say, a 32% bracket, the pre-tax IRAs, there’s income limits, of course, that preclude you, but let’s just, as a goal, right? Pre-tax 401(k)s are really good for high income earners, if you’re over the threshold for a deductible IRA. It all depends on will your tax bracket in the future be lower than it is today?

Steve Lewit: Right.

Gabriel Lewit: Even if you do qualify, let’s say you’re making 100 grand, but in your plan, hypothetically, in retirement, you’re going to solely be living off of Social Security… I’ll use a simple example. You might be in a lower bracket in retirement than you would be while you’re working.

Steve Lewit: Yes.

Gabriel Lewit: So, the pre-tax option could be a better choice for you, okay?

Steve Lewit: It could be. Rarely, however, I must add. Most folks that we meet in retirement actually spend more money, because they’re traveling. They’re buying gifts for the kids/grandkids. They’re funding houses, and they need more income, so the tax brackets actually go up when it was expected for them to go down.

Gabriel Lewit: It could. Yeah, just had a client yesterday, planning on living off Social Security, very simple, not a lot of expenses, mortgage paid off, pretty low taxes for Illinois. Yeah, these do pop up. The whole point here is you’ve got to run the tax numbers. Don’t just always blindly follow advice that you hear online.

Steve Lewit: Good advice.

Gabriel Lewit: Okay. This is a quick one. Just so you’re aware, you can split between Roth and traditional. Same with your 401(k). You don’t have to be all or nothing. Some people think you have to be all or nothing, so that’s another key thing to note here.

Another mistake, honestly, is in general using a nondeductible IRA. I’m not a big fan of those, and we could get into the reasons, but what a nondeductible IRA contribution is, is when you’re over the limit for the income threshold, you can make a contribution to an IRA, but you don’t get to deduct the taxes.

Steve Lewit: It’s with after-tax dollars.

Gabriel Lewit: Yes.

Steve Lewit: Not pre-tax dollars.

Gabriel Lewit: Now you’re really comparing that. Is this better for me than putting this in a nonqualified brokerage account, which, when you get to pay taxes in the future, you’re going to pay at capital gains, but in a nondeductible IRA, all the income, all the gains down the road that come out, come out of ordinary income.

Steve Lewit: Exactly.

Gabriel Lewit: Okay? So, it may not be actually the better choice for you.

Steve Lewit: Yeah, and generally, the capital gains rate is, for most people, 15%. It could be zero. It could be 20, but even at 20%, that’s normally lower than the marginal tax rate for an individual, which is usually 22, 24, or like you said, 37 or higher.

Gabriel Lewit: Yeah, so once again, it could depend on your income brackets but, in general, I’m more of a fan of brokerage accounts versus nondeductible IRAs, with the caveat of our next point, which is missing an opportunity to do a backdoor Roth IRA contribution.

Steve Lewit: Can you explain that?

Gabriel Lewit: Yeah, so there’s a concept called a backdoor Roth IRA. The way it works is quite simple, actually, in theory. You contribute to a nondeductible IRA, and then you essentially immediately convert that after-tax, nondeductible IRA to a Roth IRA, because there are no income limits for a nondeductible IRA, but there are for Roth IRAs, but there aren’t income limits on Roth conversions, so you can do, hence, the backdoor approach. You do the nondeductible IRA contribution, followed by a conversion. Voila. You’ve got money in a Roth IRA.

Steve Lewit: Yeah, so you’ve taken taxable money, and basically made it nontaxable for the future by doing a backdoor Roth.

Gabriel Lewit: Yes. Yep, so yeah, if you are above the income limit, when we talked about the Roth contribution, there are ways around that. Now, there are also a lot of rules related to Roth IRAs, backdoor Roth IRA conversions, so they are complex. If you have questions on them, let us know. There’s pro-rata rules. You don’t want to go into them blindly, but they can be very, very powerful. I get a number of clients who do that.

Steve Lewit: Well, explain what a pro-rata rule is.

Gabriel Lewit: Well, I’ll do it quickly, just because I want to make sure we get to as many of these as we can, but if you have pre-tax IRAs and nondeductible IRAs, and you go to do a conversion to a Roth, you can’t just convert the after-tax portion and pay no taxes. The IRS will require you to convert a portion of your pre-tax IRA, hence, what’s called the pro-rata rule.

Steve Lewit: Good job. Good job.

Gabriel Lewit: Thanks.

Steve Lewit: That’s hard to describe.

Gabriel Lewit: It is a little bit, yes. Okay, now if you have money in an IRA today, you might think the backdoor option is off the table for you. There are ways around it. One of them would be to do a Roth conversion of the pre-tax amounts and just get rid of any pre-tax amounts, so you can go forward, do as many backdoor Roth conversions as you’d like. The other option is you could put money into a 401(k) from an IRA, believe it or not, and then you can go ahead and do your backdoor Roth conversion.

Steve Lewit: Yes, but you could… I don’t understand that. What am I missing?

Gabriel Lewit: You could-

Steve Lewit: Because you said you convert-

Gabriel Lewit: If you take your pre-tax IRA, you could put your-

Steve Lewit: Oh, your pre-tax, your pre-tax.

Gabriel Lewit: Pre-tax IRA into a 401(k). Then it does not trigger the pro-rata rule.

Steve Lewit: Definitely, got it.

Gabriel Lewit: Okay?

Steve Lewit: I see what you’re saying. Yeah, I had forgotten that one. Now, if I do a Roth conversion, then do I have to worry about the five-year rule?

Gabriel Lewit: There are five-year rules, yes. We will not be able to do a deep dive on those here.

Steve Lewit: They’re pretty complicated.

Gabriel Lewit: There’s a lot of them, and you should know what they are before you get into that world, so if you have questions on the five-year rules, let us know, but essentially the most important one is you’ve got to have money for five years in a Roth, five tax years in a Roth, before even when you’re 60 or 59-1/2, you could pull the interest out tax-free. If you make your first Roth contribution when you’re 59, you can only pull out the contribution.

Steve Lewit: The principal.

Gabriel Lewit: Right, the contribution itself. The interest that’s earned will be subject to both your age limit as well as a five-year rule.

Steve Lewit: Yeah, so that’s very important, because I hear a lot of people come in and say, “Well, my money is stuck in there for five years.” Well, your growth, the interest you earn, is stuck in there for five years, but not the principal, the amount that you contribute.

Gabriel Lewit: Yeah, exactly. All right, so some other ones here are, forgetting the fact that even if a spouse doesn’t work, if you work, they can still contribute to their own IRA, so you could essentially double up on any of your contributions, very important, either Roth or pre-tax. Let’s see. Let’s see. Let’s see.

Some people think that they’re too close to retirement to make Roth IRA contributions or even IRA contributions, so oh well, I’m going to retire in a couple of years. I don’t need to do that. Well, again, it’s not necessarily just about the fact that you’re going to retire. If you have a couple of years left, where you’ll have earned income, those are key opportunities to put money into a Roth, that you will otherwise no longer have, and you could just be subjecting yourself to a lot more in taxes down the road.

Steve Lewit: Yeah, so what you’re saying, Gabriel, is it makes a lot of sense to put a heavy emphasis on Roth contributions, especially if you think taxes are going to go up in the future.

Gabriel Lewit: Well, and especially if you just have money already sitting in a cash account that’s already been taxed. It’s kind of like a no-brainer.

Steve Lewit: Most especially, yep.

Gabriel Lewit: Yep. Okay, some people are very speculative with their IRA money, thinking, hey, whatever this grows to will be tax deferred. That can be risky. It could backfire on you, so that’s just something to be careful of is how you invest in that IRA.

Some people put the wrong types of investments in their IRAs, not just from a speculation perspective, but let’s say you put Muni bonds in an IRA. What would be the downfall of doing such a thing? Well, Muni bonds are already not taxed on the federal level, right? So, or yeah, federal, correct. Sorry. Some states, as well, just depending on your state, so you’re not going to gain any of the advantages of the tax deferral in the IRA.

Steve Lewit: Yeah, so the rule is, if you’re going to invest with an IRA, that’s the place to really take your most speculative investments, because there are no capital gains. However, those turn into income taxes in the future, rather than capital gains.

Gabriel Lewit: Mm-hmm, yeah, so there are definitely… There are some good things to put in IRAs. If you aren’t going to need income and something spits off a lot of dividends or passes through a lot of capital gains, you don’t want to pay taxes on those. IRAs can be helpful, from a tax deferral perspective.

Let’s see. There’s mistakes that a lot of people make when they do rollovers, where they inadvertently create taxable events by taking a distribution from their IRA. Those are something you want to be very careful of.

Steve Lewit: Well, let’s fill that in a little bit. If you’re moving IRAs from one account to the next, that’s a rollover, but if you take possession of the money, in other words, “Hey, cut me a check from my IRA.” You take the check, 50 grand, let’s say, and you put it into your bank account. You have 60 days to make that a rollover and put it into another account before it becomes taxable. Then, if you take possession of the money, you’re only allowed to do that one time in the year. You can’t have multiple rollovers.

Gabriel Lewit: Yes, yes.

Steve Lewit: Now, it’s a little confusing, because if you move an IRA from custodian to custodian, that is also called a rollover, but it’s not the same kind of a rollover as if you take possession of the money.

Gabriel Lewit: Correct. Correct. Good points, very good points. Okay, last one. It wasn’t all 20, but it was close. We’re just running up on our time, would be not remembering that your traditional IRAs, pre-tax, are subject to RMDs. Okay, a lot of people are surprised by this when they get closer to retirement and start learning a little bit more about IRAs and 401(k)s and realize, oh, there’s this thing called a required minimum distribution.

Steve Lewit: Right, or they know it, but don’t really think about it.

Gabriel Lewit: You know? What it means is, at some point, you’re forced to take money out of these accounts. It’s going to be 73 right now, and 75 for some of the younger folks, but what it means is, if you’ve accumulated a substantial pre-tax balance, you can have very large required distributions that, whether you need them or not, you’ve got to take, because the IRS wants to collect their taxes.

Steve Lewit: So, if I don’t need them, I can’t just leave them there.

Gabriel Lewit: Unless you give them to charity, called a QCD, qualified charitable distribution. No, you can’t just leave them there. You’ve got to take them out and pay the taxes, and that can trigger what we call ripple effects, which is bump you into higher tax brackets, bumping you into Medicare surcharges, increasing your Social Security taxation, a lot of ripple effects related to these RMDs, that you may or may not have any control over.

Steve Lewit: Yeah, and if the market is down, and your IRAs are in the market, and the market’s down 30%, you can’t say, “Well, I’m going to wait until the market comes back. I have to sell those stocks.”

Gabriel Lewit: Yep.

Steve Lewit: You may reinvest, but if you’re spending that money, then you’re selling them when the stock is low.

Gabriel Lewit: Then, last but not least… Sorry. I thought of one last one.

Steve Lewit: I see that.

Gabriel Lewit: Is not doing a Roth conversion from your IRAs, when you have the opportunity to do so at a tax bracket where it makes sense.

Steve Lewit: Yep.

Gabriel Lewit: Now, a big mistake you can… All of these mistakes, what do they do? They add up to, in some cases, tens and tens or hundreds and hundreds of thousands of dollars of lost growth, of extra taxes paid, of missed opportunities. There are just so many things here to pay attention to, and that’s one of the things that we can certainly assist you with here and guide you through here at SGL Financial.

Steve Lewit: Well done. Well done, Gabriel.

Gabriel Lewit: Well, today was the day of lists.

Steve Lewit: It was. It was. I’m listed out.

Gabriel Lewit: Me, too. Me, too.

Steve Lewit: I wasn’t going to say I’m listless after all of that.

Gabriel Lewit: That’s good. Well, we appreciate you tuning into our show here today. We had a lot of fun, as we said, going through these lists here today with you. If you have questions, call us at 847-499-3330 or go to sglfinancial.com, click Contact Us, or you can always email us at info@sglfinancial.com and don’t forget to email us your travel island experiences.

Steve Lewit: Please.

Gabriel Lewit: We’d love to hear it.

Steve Lewit: I want to see that.

Gabriel Lewit: All right, well, have a wonderful, wonderful day or week, and we will talk to you on the next show.

Steve Lewit: Stay well, everybody.

Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at 847-499-3330 or visit us on the web at sglfinancial.com and be sure to subscribe to join us on next week’s episode.

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