January 4, 2023 • 31 mins
We’re at the dawn of 2023 and Co-Hosts Josh Bretl and Dave Schmidt are here to help us all fill our buckets – financially and otherwise!
Join us for a special New Year Edition of the Retirement Equals Freedom Podcast focused on figuring out how traditional and Roth IRAs as well as 401k plans can work for you!
#TaxNerds: You’ll come away understanding the benefits, limitations and rules of the road on contributions just in time for tax season – with a little historical context about retirement investing and pensions thrown in for good measure!
Don’t miss breaking news about everything from big plans for entertaining in the Bretl’s new kitchen to Dave’s secret passion for the harmonica to some fun reading recs. Let’s make the year ahead a great one!
Check out this cool new pod link resource with all the latest and greatest about Retirement Equals Freedom and one-click access to your favorite platform for listening!
And don’t forget to join the conversation at our private Facebook group, which you’ll find here.
Click here to explore the services that FSR Wealth Strategies offers and schedule a discovery call with one of the team’s CPAs. When it comes to living your best life, it’s never too early to get started!
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Josh Bretl (00:02):
In the grand scheme of things, IRAs
are relatively new.
Your parents or grandparentsnever even knew what the
heck they were, and theywere totally reliant upon
pension plans and companysavings and things along those
lines, and those went away.
So they created these 401ksand these IRAs with the idea
that they can travel withyou, and the savings get
built up time over time,and it can do a few things.
(00:23):
One is it gives the employeemore control, and two is it
cuts cost for the employer.
But also, they're portable,so you can take them with you.
But we've never reallytalked about how we put
money into those accounts,how we put money into IRAs.
And should you, or shouldyou not put money in?
We wanted to do an episodeon what we call IRA
contributions and some ofthe nuances that go into it.
Dave Schmidt (00:47):
It's the dawn of 2023, and Josh and I are
hoping to fill your bucketsboth financially and otherwise.
Our special new year editionof the Retirement Equals
Freedom Podcast is focused onfiguring out how traditional
and Roth IRAs, as well as your401k plans, can work for you.
Alex (01:07):
Hashtag tax nerd.
Dave Schmidt (01:08):
You'll come away from this episode,
understanding the benefits,limitations, and rules of
the road on contributionsjust in time for tax season.
This is The RetirementEquals Freedom Podcast.
Your host, Josh Bretl, is theowner of FSR Wealth Strategies.
And for the last two decades,it's Josh that's been
(01:29):
helping fine folks like youthrive in your retirement.
Well me?
Hey, I'm Dave.
Josh's longtime friend, co-host,and fan of beef barley stew.
So now, let me let you letme end this introduction
so you can learn allabout IRA contributions.
FSR Wealth Management is aregistered investment advisor
(01:49):
located in Elmhurst, Illinois.
Information and opinionscontained in this audio
have been arrived atby FSR Wealth advisors.
All information herein isfor informational purposes
and should not be construedas investment advice.
It does not constitute an offer,a solicitation or recommendation
to purchase any security.
FSR is not providing legal,tax, accounting, or financial
planning advice in this audio.
These views are as of thedate of this publication
and are subject to change.
(02:28):
Oh, Canada.
Josh Bretl (02:36):
David, happy new year.
Dave Schmidt (02:38):
Happy new year.
Josh Bretl (02:39):
Oh.
That just ruined everything.
Dave Schmidt (02:42):
Way to start it off, Josh.
We came in with thegoal of being just super
professional and not knockingthings around in the new
year, and what do you do?
Josh Bretl (02:52):
One of my favorite compliments that
I get is that I'm not youraverage accountant or CPA.
I'm not your averagefinancial advisor.
I take that as a compliment.
And people used tosay that to my dad.
I remember hearing as a kid," You're not what I think of
when I think of an advisoror when I think of a CPA."
And I always thought thatwas kind of weird, but
now it makes me feel good.
(03:12):
And I also feel likethis podcast is another
example of that.
We do weird okay here.
Dave Schmidt (03:17):
You remember the story I told you when
I was working at the bankand the sweet old lady
called me out for havinga beard or a scruffy face?
Josh Bretl (03:25):
Mm-hmm.
Dave Schmidt (03:26):
Bankers don't have scruffy faces.
"Well, ma'am, they do now."
Hey, look, you're human.
No one wants to workwith someone that's
like, "I do taxes.
Ah, ah, ah."
Josh Bretl (03:37):
I agree with you.
Dave Schmidt (03:38):
Look, Josh, 2023, my new goal is to be
a, I don't know, a sparklingconversationalist, if you will.
Josh Bretl (03:45):
With who?
Dave Schmidt (03:46):
I don't know.
You, on a podcast.
Josh Bretl (03:49):
like that idea.
Dave Schmidt (03:49):
Thank you.
Josh Bretl (03:49):
We have all sorts of big dreams for the 2023 podcast.
I don't know what we're goingto execute on, because we're
good dreamers, not always thebest executors when it comes
towards the podcast stuff.
Maybe someday, we'll actuallyhave a studio that...
Oh, oh, oh, oh, oh, oh.
Dave Schmidt (04:05):
Did it ship?
Josh Bretl (04:05):
I want to show you something.
I haven't gotten anotification of shipping yet.
Dave Schmidt (04:07):
Aw.
Josh Bretl (04:07):
But you know how on Facebook, you can see things
like follow them on Facebook?
Dave.
Dave Schmidt (04:13):
Yeah.
Josh Bretl (04:14):
I think that might be us.
Dave Schmidt (04:15):
Oh.
If that is, that's gorgeous.
Okay.
What he's referring to isthere is a video on Facebook
from the company Josh orderedthis table from that has them
showing the table and thengoing from table to the truck
that's going to ship it hereto us, so it's got to be ours.
Josh Bretl (04:32):
It's got to be ours.
Yeah.
Dave, I am really excited for2023, and on many reasons.
I've got on a personalfront, on a business front.
Hopefully by the timethis podcast comes out,
we will have finished ourconstruction on our house.
We'll have our houseback to normal.
We've gotten through Christmas.
Dave Schmidt (04:49):
Josh, I'm excited for your house.
You went home and saw yournew countertops the other
day, and what was thefirst thing I asked you?
You remember?
What was I concerned about?
Josh Bretl (04:57):
So the first question you asked me probably
had to do with somethingI was going to make you.
Dave Schmidt (05:00):
Yeah.
I asked you, A) what's the firstcocktail you're going to craft
for me on your new countertops?
And then, what areyou going to cook me?
Josh Bretl (05:07):
I don't know, but Missy and I have decided when
we're all done with this,2023 is going to be the year
of parties at our house, so-
Dave Schmidt (05:14):
Yes.
... Josh Bretl (05:14):
it's going to be fun.
Dave Schmidt (05:15):
Cocktails and steaks at Josh's house.
Josh Bretl (05:18):
I look forward to it.
But on a business front, we'veset some really cool things
up, and we have some greatlisteners of the podcast.
Our clients are doing great.
Who knows what the economy'sgoing to do this year?
Don't ask me for a crystal ball.
What I always say is beprepared for anything.
2023's going to be a good year.
Dave Schmidt (05:33):
2023 is shaping up to be a good year.
Yeah.
Josh Bretl (05:35):
Now, here's my big question.
Dave Schmidt (05:36):
What is it?
Josh Bretl (05:37):
Over Christmas, you and I talked about playing
a new sport, pickle ball.
Can you and I play pickle ball,learn how to play pickle ball?
Because it's all the rage.
And two, can we play basketballat least once this year?
Dave Schmidt (05:49):
Oh, I know.
The logistics of findingthe spots to play
basketball, I think, areharder than pickle ball.
I feel like basketball,you can't just...
If you and I were to goto an open gym, we will
be dead within 30 seconds.
We have to find a placewhere you and I can just
kind of shoot around, getour legs out from underneath
us, and then start playing.
Josh Bretl (06:07):
All right.
We'll talk about that.
We'll get that squared away.
Dave Schmidt (06:10):
Yeah.
But pickle ball, we'vealready talked about doing
a entire office pickle balltournament, which I will record.
That would be fun todo a production around.
Josh Bretl (06:18):
Yeah.
Well, so far, if anyone'slistened this far in, you're
bored off of your gourd,because we've talked about
nothing for a few minutes, so-
Dave Schmidt (06:27):
Bored off of your gourd.
That might be a new hashtag.
I'm just sayin-
Josh Bretl (06:32):
Hashtag bored off your gourd.
Dave Schmidt (06:33):
I'm just saying.
You know what, Josh?
I was up late last nightthinking, "What is something
that we just haven't done adeep dive on in a long time?"
And financial wizard, soI know all these things.
I'm like-
Josh Bretl (06:46):
Do not say Social Security.
Dave Schmidt (06:47):
No.
No.
We just finished a three partseries, which we're actually
going to win some awards for.
Josh Bretl: Especially part three. (06:52):
undefined
Dave Schmidt (06:52):
Part three is amazing.
But what about IRAsand contributions and
things of that sort?
Josh Bretl (07:02):
Oh, great.
I love talking about that stuff.
Dave Schmidt (07:04):
Okay.
Josh Bretl (07:05):
No.
Actually, this idea camefrom Erin, as do a lot
of our ideas, apparently.
We've done a couple episodeson conversions and Roths
and the difference betweentraditionals and Roth IRAs.
But we've never reallytalked about how we put
money into those accounts,how we put money into IRAs.
And should you, or shouldyou not put money in?
(07:25):
We wanted to do an episodeon what we call IRA
contributions and some ofthe nuances that go into it.
Dave Schmidt (07:32):
Such as?
You're going to getinto that, I hope?
Josh Bretl (07:34):
Do you want me to?
Dave Schmidt (07:35):
I mean, yeah.
Nuance is your middle name.
Josh Bretl (07:39):
In the grand scheme of things, IRAs
are relatively new.
Now, a lot of our clients whoare in their late 50s, 60s,
and 70s, they've been aroundthe for the majority of your
life, but in your working years,they probably just got started.
They really were relatively new.
Your parents or grandparentsnever even knew what the
heck they were, and theywere totally reliant upon
(07:59):
pension plans and companysavings and things along those
lines, and those went away.
Dave Schmidt (08:04):
They did.
Yeah.
Josh Bretl (08:04):
Actually, Erin did some research
for us, and I didn'trealize some of this stuff.
It was kind of neat.
didn't realize that thefirst pension in the United
States came into existencein 1875 for American Express.
Dave Schmidt (08:13):
I saw American Express, and I'm like,
"The credit card company?"
Josh Bretl (08:17):
Well, first off, I didn't realize American
Express was around in 1875.
Dave Schmidt (08:19):
Yeah.
Right?
Josh Bretl (08:20):
But also the fact that they had
the very first pension.
Dave Schmidt (08:22):
Good for them.
Josh Bretl (08:23):
And then by 1960, half of the private sector
workforce had a pension.
That wasn't that long ago.
My father graduated highschool in 1970, went to
college, graduated in '74.
And at that point intime, pensions were
still hot and heavy.
They were really going.
Due to some law changes in the'80s, the rules around pensions
(08:46):
became really difficult,and we saw a major decrease
in the companies wanting toadminister pensions, especially
for smaller companies,things along those lines.
And the governmentknew that there was a
problem with savings.
And people were changingjobs more often, which Erin
threw out this one too.
I thought this waskind of interesting.
According to the Bureau of LaborStatistics, that the modern
(09:06):
employee will hold over 11 jobsbetween the ages of 18 and 48.
And so what happens iswith a pension, if you keep
changing jobs, those pensionsdon't usually go with you.
They don't accumulate theway they're supposed to.
And one of the benefits ofa pension is working a long
period of time so you get thebiggest payout and things.
That's how you maximize those.
So they created these 401ksand these IRAs with the idea
(09:31):
that they can travel withyou, and the savings get
built up time over time,and it can do a few things.
One is it gives the employeemore control, and two is it
cuts cost for the employer.
But also, they're portable,so you can take them with you.
Now, that sounds all great,but I think what we've realized
as a country is that peopledon't always want control.
(09:53):
They fear control sometimes.
They don't know how to do it.
The market's scary.
What if you're makingthe wrong decision?
So we've tried to simplify itand do things along those lines.
But one of the overarchingcomments or the overarching
themes was that youjust had to save.
Pensions weren'tgoing to be there.
You just had to save.
And they wanted to give yousome advantages to savings.
(10:18):
401[k]s are company sponsored.
They're run by your employer.
And if your companyhas one, odds are you
can put money into it.
And your companycan put money in.
They don't all do that.
But if you put moneyin, that there's very
rarely any income limits.
But your investmentchoices are limited to
(10:39):
what the company tells youyou can put money into.
Some of them have wide choices.
Some of them havejust a few choices.
But the choices that youhave are limited to what the
company tells you you can have.
Dave Schmidt (10:49):
Are you saying...
because I don't remember.
Last time I had a401[k] was 12 years ago.
An employee sometimes cango choose how aggressive
their portfolio is?
Josh Bretl (10:58):
Mm-hmm.
Dave Schmidt (10:58):
Okay.
Josh Bretl (10:59):
They might have 12 mutual funds
they get to pick from.
There's thousands and thousandsof stocks out there, but they
might only have 12 mutual funds.
Dave Schmidt (11:06):
I see.
Josh Bretl (11:06):
There's some limits as those come into play.
But the other thing, and you'rea great example of that, is
you had a 401[k] when youworked for the large bank,
but when you went to becomean independent contractor,
401[k]s don't really exist,or they're hard to exist for
small companies or individuals.
So the governmentcreated these IRAs.
IRA, it's a government acronymand actually easy to understand.
(11:28):
It's individualretirement account.
And what they said was, "Justlike a 401[k], you put money in.
You'll get a tax deductionfor putting money in."
Even to this day, sometimesthey make that seem like
it's the best thing ever.
You're getting this taxdeduction to put money in.
You're gettingthis tax deduction.
Well, what you're essentiallydoing is you're kicking the
tax calculation down the road.
(11:48):
It could be a good thing.
It may not be a good thing.
I will tell you, savings isalways a good thing, but just a
matter of where are you saving?
What happens there?
IRAs and Roth IRAs areindividual accounts.
We want to go through some ofthe rules that go through this.
So 401[k]s, if you're under age50, you can put in a maximum
(12:10):
of $22,500 this year in 2023.
If you're over 50, theyallow what they call
catch-up contributions,and you can put $30,000 in.
How much you should put in,that's a whole different
topic of conversation.
We always tell people, "Saveas much as you can, but
don't go into debt to save."
Dave Schmidt (12:29):
401[k]s, Josh, most employers, do you know,
can you continuously adjusthow much you're contributing?
Or is that an annualthing you have to choose?
Josh Bretl (12:36):
It's become a lot more flexible recently.
It's really dependentupon the company.
The company can set limitsas to how much you can put
in and how much you can putout, or how much you can put
in, when you can take it out.
Now, here's a couple rules on...
Once money goes intoa 401[k], the company
doesn't have access to it.
They can't steal it ordo anything like that.
But they can put handcuffs asto when you can get it out.
(12:57):
They may or may notallow you to borrow money
from it, called loans.
They may or may not let you takemoney out while you're working.
Now, the one rule is youcan always get money out
when you leave the employer.
When you leave, you canalways take the money out.
But you do have the right toleave it there too, if it's over
a certain dollar amount, so-
Dave Schmidt (13:14):
Oh, okay.
... Josh Bretl (13:14):
there's pros and cons.
You have to weigh those prosand cons as to where it sits.
But just getting themoney in is what we're
going to focus on today.
Dave Schmidt (13:20):
Sure.
Josh Bretl (13:20):
If you put that money in there, now,
there aren't generallyincome thresholds that's
out there for 401[k]s.
But there are some testingand some different rules
that go onto 401[k]s.
For smaller companies, if youhave a 401[k], they may say,
"Hey, you've put too much in."
There are also Roth optionson a lot of 401[k]s.
They don't all have them, butsome do have Roth options.
Roth versus traditional, we'vedone whole episodes on that, The
(13:43):
big difference there is taxes.
The only differencebetween regular and
traditional is taxes.
Now, let's go to IRAs, becausethose are a little different.
If your company does not havea 401[k], or any retirement
plan, to be factual there,you have the ability to
(14:05):
put money into an IRA.
And there's some specific rules.
And you actually, if you'remarried, you have to know,
if neither of you have a401[k], pretty much you can
put money in no matter what.
It's deductible.
If one of you has a 401[k],there's income thresholds.
You can't earn too much.
If both of you have 401[k]s,it's very restrictive.
(14:25):
Very rarely can you putmoney into an IRA and
have it be deductible.
Okay?
But there's a lot oftimes that putting money
in can be beneficial.
For You may be late in yourcareer, maybe a retiree,
and you may have a sidejob, and you earn, I don't
know, 15,000, 20,000 bucks.
And you're normally in the 12%or 15% tax bracket, but this
(14:46):
side job just puts you up andabove into the 22%, 24% bracket.
Well, in that case,let's put the money in.
Let's get a deduction, and thenwe'll take it out later at 15%.
That makes a ton of sense.
There also going to besome things for Medicare.
The cost of Medicareis dependent upon your
adjusted gross income.
It could be helpful for that.
There's just some thingsthat putting 10,000 to
(15:07):
15,000 bucks away in yourIRA if you're married
can be beneficial to you.
But you have tohave earned income.
That's the key to thisone, is earned income.
Earned income ismoney from a job.
Dave Schmidt (15:17):
Not Social Security.
Josh Bretl (15:18):
Social Security is not earned income.
Investment is not earned income.
401[k] distributionsare not earned income.
Dave Schmidt (15:23):
Pensions?
No?
No?
Josh Bretl (15:24):
Pensions are not earned income.
It's income from working-
Dave Schmidt (15:28):
A job.
... Josh Bretl (15:28):
in some way.
Dave Schmidt (15:29):
Yeah.
Okay.
Josh Bretl (15:29):
Yeah.
It could be selfemployment income.
It could be W2 income, whichmeans an employer paid you.
It has to come from a job.
Dave Schmidt (15:37):
I read poetry on the street corner, and
people throw coins anddollars at me as tips.
Does that count as income?
Josh Bretl (15:42):
Only if you're going to claim it on your
tax return, which legallyyou're supposed to, but I
don't know what you're doing.
I don't do your tax return, so-
Dave Schmidt (15:49):
I made $17 all of last year doing it.
Do I have to claim that?
Josh Bretl (15:52):
Well, legally, yes.
Dave Schmidt (15:55):
Oh, man.
Josh Bretl (15:56):
Do a lot of people do it?
No.
But legally, yeah, you'resupposed to claim that.
Dave Schmidt (15:59):
Oh, okay.
Yeah.
Josh Bretl (16:00):
Any and all income sources.
Roth contribution limitsare a little different.
Now, if you put money into anIRA and you're above income
thresholds, you're stillallowed to put money in, but
it becomes non-deductible.
And you have to file a form8606 on your tax return, because
(16:21):
you have to track how muchof your IRA is non-deductible
versus deductible.
Alex (16:24):
Hashtag tax nerd.
Josh Bretl (16:25):
Oh, yeah.
It's a fun thing,because that'll follow
into our backdoor Roth.
Dave Schmidt (16:30):
Really quick though, if I were to ask Al
what form is needed to file,would he be like, "8606?"
Would he know whatforms are needed?
Is he not quite that-
Josh Bretl (16:39):
You've just set my 2023 goal.
Dave Schmidt (16:41):
To teach him what form needs to be filed.
Josh Bretl (16:43):
I am not a form guru.
I don't know which forms, whatschedules, which this, all that.
But 8606 is a commonform for people who have
non-deductible IRAs.
We see those a lot.
Get the 8606 out.
Let's see the 8606.
Dave Schmidt (16:58):
Yeah.
It's kind of fun.
It just rolls offthe tongue, too.
Josh Bretl (17:00):
It does.
Dave Schmidt (17:00):
It's fun.
Yeah.
Josh Bretl (17:00):
It does.
Dave Schmidt (17:01):
Yeah.
Josh Bretl (17:02):
There's probably people listening to this
podcast that know more aboutform 8606 as a client than
some of your advisors do.
But we'll get back tothat one, but let's talk
about the Roth limits.
If you decide from a taxreason that you want to put
money into a Roth versus atraditional, there are very
strict income thresholds.
And again, it hasto be earned income.
(17:23):
But for a single taxpayer,that starts at 138,000 and
phases out up to 153,000.
If you have less than$138,000 of earned income,
you can put money in a Roth.
It doesn't matter ifyou have a 401[k].
It doesn't matterany of those things.
You can put money into a Roth.
If you get above153, you cannot.
And if you do, the penaltiesare actually very severe.
(17:44):
You have some time totake it out and do what
they call a reversal, but-
Dave Schmidt (17:48):
So if you make a mistake, you can fix it-
Josh Bretl (17:49):
You can fix it.
... Dave Schmidt (17:50):
before...
Yeah.
Josh Bretl (17:50):
But if you leave it in there, and they catch
you, I want to say, don'tquote me, but it's close to a
50% penalty on the earnings.
Dave Schmidt (17:58):
Oh, my gosh.
Josh Bretl (17:59):
It's pretty substantial.
Dave Schmidt (17:59):
On the earnings.
Josh Bretl (18:01):
Yeah.
Dave Schmidt (18:01):
Not-
Josh Bretl (18:01):
But it's still pretty substantial.
Dave Schmidt (18:02):
Yeah.
Josh Bretl (18:03):
It could be a substantial penalty.
For a married filing jointtaxpayer, that phaseout starts
at 218,000 and goes up to 228.
If you're a high incomeearner, you probably can't put
money into a Roth directly.
Dave Schmidt (18:16):
Those numbers are pretty high for me.
Josh Bretl (18:17):
Yeah.
I know.
That's a high income earner.
Now, that brings usto the backdoor Roth.
The way that works ispeople put money into
an IRA non-deductible.
They haven't deducted it.
And they do aninstant conversion.
And that is essentiallythe third...
We always say there's threeways to get money into a Roth.
(18:37):
One is a contribution,which we just talked about.
Two is a conversion.
A conversion is going froma regular IRA to Roth IRA.
And the third's abackdoor Roth conversion.
Dave Schmidt (18:47):
Okay.
Josh Bretl (18:47):
Now, what that means though, is
you're taking money out.
Still it's a conversion, butyou have to be very careful,
and you really have to planthese out, because whenever
you take money out of an IRAthat has a non-deductible
portion to it, so it has a form8606, we have to follow what
they call the pro rata rule.
Okay?
Listen to me on this one.
Let's say your IRAis worth $20,000.
(19:10):
Okay?
Dave Schmidt (19:11):
20,000.
Josh Bretl (19:11):
And your form 8606 says you've put in 10,000-
Dave Schmidt (19:15):
10,000.
... Josh Bretl (19:16):
as basis.
Dave Schmidt (19:16):
Basis.
Josh Bretl (19:17):
Half as basis, half as earnings.
Dave Schmidt (19:18):
Yeah.
Yeah.
Josh Bretl (19:19):
Okay?
Dave Schmidt (19:19):
Totally.
I'm on it.
Yeah.
Josh Bretl (19:20):
Great.
And you do this backdoorRoth conversion for $10,000.
You think, "Hey, I'vegot this basis of 10,000.
I'm just going to convert it.
No big deal."
You do the conversion of$10,000, but because of the
pro rata rule, half of yourIRA was non-deductible.
Half was earnings that youhaven't paid taxes on yet.
Your tax return's going to show$5,000 of non-deductible and
(19:41):
$5,000 of actual taxable income.
Dave Schmidt (19:43):
Got it.
Josh Bretl (19:44):
Just have to be aware of the pro rata rule.
At that level, it's nothuge, but we've seen
people make mistakes inthe $100,000 range there.
Dave Schmidt (19:51):
Oh.
Josh Bretl (19:51):
You have to be careful with that.
Dave Schmidt (19:52):
With your Roth limits though, if someone
earns over that 228, let'ssay as a couple, 228,000, can
they still do a conversion?
Josh Bretl (20:01):
There are no limits on conversions.
Dave Schmidt (20:04):
Could someone in theory just contribute to
an IRA, then the next day,convert it to a Roth, even
though they're over that limit?
Josh Bretl (20:11):
That is a backdoor-
Dave Schmidt (20:13):
That is a-
... Josh Bretl (20:13):
conversion.
Dave Schmidt (20:14):
Okay.
Josh Bretl (20:14):
Or in Illinois, this is a tip or trick, tip,
trick, this is somethingthat people don't realize.
Dave Schmidt (20:21):
Hashtag Josh tips.
Josh Bretl (20:23):
Oh, I like it.
That's new.
Dave Schmidt (20:24):
Thank you.
Josh Bretl (20:25):
Illinois as a state is unique, where they
don't tax retirement income.
So IRA distributions, 401[k]distributions are not taxed
at the Illinois level.
But you still get a deductionfor putting money in.
At the Illinois level, we telleverybody, "If you're choosing
between an IRA contributionand a Roth contribution and
you have the option for both,you are almost always better
(20:48):
putting money into the IRA.
You get a federal deductionand a state deduction.
And converting instantly,you'll pay a federal tax,
so those net to zero, butyou won't pay the state tax.
You will get a state of Illinoistax benefit by doing that, so-"
Dave Schmidt (21:05):
I knew there was a reason we lived in Illinois.
It's for that Josh tip alone.
Josh Bretl (21:09):
The Josh tip only applies to Illinois residents.
Other states, please checkyour local laws, but-
Dave Schmidt (21:15):
You sound like the little disclaimers on
pharmaceutical commercials.
Josh Bretl (21:17):
I know.
Every state is so different.
It's crazy.
If you're going to putmoney in, you just need
to make sure you're makingthe right decisions there.
Dave Schmidt (21:24):
Okay.
You've been talking here aboutcontributions a little bit
too long for my liking, so...
Yeah.
What?
What?
Okay.
Hey, Mr.
Josh.
Let's take a break.
You've been talking for solong, and my ears are sore.
Let's not make them snore.
Listening shouldn't be a chore.
(21:45):
Let's get to know Josh and Daveand watch our ratings soar.
Give me the cackaw.
Josh Bretl (21:49):
Cackaw!
Cackaw!
Dave Schmidt (21:49):
Oh, yeah.
I was thinking about doingthe Gritty here on camera and
making Landon super proud.
Eh, there's a better thanaverage chance that I would
pull a hamstring doing it, soI opted out for episode 29.
(22:10):
There's a lot ofpressure on you.
This is the first get toknow Josh and Dave of 2023.
Josh Bretl (22:15):
I actually struggle with it a little bit.
Dave Schmidt (22:16):
Did you?
Josh Bretl (22:17):
Yeah.
Because, well, I read thecards, and I think it's
a good question, but Idon't know how I'm going
to answer the question yet.
Dave Schmidt (22:23):
Oh.
Josh Bretl (22:23):
Here's our question, and again, I think I have an
answer for what you're goingto do here, but what would you
do with an extra hour in a day?
Dave Schmidt (22:31):
One extra hour?
Josh Bretl (22:32):
One extra hour.
Every day, an extra hour.
What would you do?
Dave Schmidt (22:34):
I may be overanalyzing, but
when does that hourfit into our day, like-
Josh Bretl (22:38):
it's your day.
You decide.
Dave Schmidt (22:39):
Oh.
An extra hour in my day.
First thing that comes to mindis napping, but I usually nap
during normal 24 hours, so Idon't need extra time for that.
Napping is covered.
Josh Bretl (22:48):
Do you really nap?
Dave Schmidt (22:50):
Almost daily.
Almost daily.
Between 20 minutesto 40 minutes a day.
That's actually one ofmy forms of meditation
that we talked about.
Josh Bretl (22:57):
Yeah.
Dave Schmidt (22:57):
I don't always fall asleep, but I lay down.
With an extra hour a day,I do have a list of new
things I want to learn.
I want to learn acouple languages.
I want to learn howto play the harmonica,
potentially the guitar.
I think I would use thatone extra hour and just
hardcore learn somethingnew with that one hour.
Josh Bretl (23:16):
I think learning something makes sense.
But the harmonica?
Dave Schmidt (23:20):
Oh, you know I have one, right?
Josh Bretl (23:22):
No.
Dave Schmidt (23:23):
I wanted to surprise listeners
with a jingle.
I'm just not quiteat that point yet.
I can only make certain soundswith it, but I bought it at
the heart of COVID thinking,"This is what I'm going to do."
And-
Josh Bretl (23:35):
youTube videos?
You're learning theharmonica via YouTube videos?
Dave Schmidt (23:37):
That was the plan, but it's kind of just
sitting there on my deskat home collecting dust.
Josh Bretl (23:43):
I think if I had an extra hour, I would read more.
Dave Schmidt (23:46):
Oh.
Yeah.
Kind of similar to mine.
Josh Bretl (23:48):
Yeah.
business books,motivational books, life
books, fiction books.
I like all that stuff.
And I don't think I read enough.
Dave Schmidt (23:55):
Peppa the Pig books.
Josh Bretl (23:57):
I read a lot of those.
Dave Schmidt (23:57):
Yeah, I like
- .Josh Bretl: Actually, not anymore.
The kids are gettinga little older.
We're reading Harry Potterright now as a family.
Oh.
We still read Pig the Pug.
Those are still timeless.
Josh Bretl (24:03):
Oh, Zach loves Pig the Pug.
Dave Schmidt (24:05):
Yeah.
He's the best.
Josh Bretl (24:06):
He also loves harmonicas, and so he got
one for Christmas as well.
We'll see.
Dave Schmidt (24:10):
Did he really?
Josh Bretl (24:11):
Yeah.
We'll see.
Dave Schmidt (24:11):
Yes.
Josh Bretl (24:11):
We'll see how it goes.
Dave Schmidt (24:13):
We're totally going to start a band, Zach.
Josh Bretl (24:17):
I do learn things about you during these
get to know Josh and Dave.
Dave Schmidt (24:20):
Yeah.
This is back to back episodes.
I see mind blown.
Josh Bretl (24:26):
The one with you meditating really blew my mind.
Dave Schmidt (24:28):
Did it?
Josh Bretl (24:29):
In fact, I was listening to that episode again.
I went, "Man.
I knew him so well, and-"
Dave Schmidt (24:34):
I'm proud of you.
You've actually listened tothe episode before I have.
Josh Bretl (24:36):
Oh.
Look at this.
Dave Schmidt (24:37):
I'm really stuck on this true crime
called Bone Valley.
Man, I cannotrecommend it enough.
It is the best truecrime I've ever heard.
It's kind of like...
Dave relates to retirees.
Yeah.
Josh Bretl (24:51):
I'm a little nervous.
Dave Schmidt (24:52):
Yeah.
Yeah.
Josh Bretl (24:52):
By the way, I'm a little nervous about how you go
from a true crime podcast rightinto you relating to retirees.
Dave Schmidt (24:59):
Well, listen.
Whenever I do this withmy paper stack, Josh
knows he's in for a treat.
Josh Bretl (25:05):
There's notes.
There's notes, folks.
Dave Schmidt (25:07):
There's got to be notes.
I take notes pre-episodeand mid-episode.
What I learned today, Josh, wasthat retirees will contribute
to an IRA for any numberof reasons, assuming they
qualify, of course, right?
But generally, they'llcontribute it for
tax savings, right?
Josh Bretl (25:25):
Taxes are important.
Dave Schmidt (25:26):
Yeah.
Taxes are very important.
They contribute tosomething for a benefit.
Have you heard of the bookHow Full is your Bucket?
The kid version.
Josh Bretl (25:35):
I've heard of the kid version.
Yes.
Dave Schmidt (25:36):
Yeah.
Okay.
That's the onlyversion I know, too.
Josh Bretl (25:38):
Okay.
Dave Schmidt (25:38):
To your point, I don't read enough either.
But we use the whole bucketphilosophy in the Schmidt
house, and we love it.
And so I contributeto Carla's bucket.
And yes, I do it to make herhappy, but I also do it because
I get a big benefit out of it.
Here's some examples.
Are you interestedin hearing examples?
Josh Bretl (25:55):
I love examples.
Dave Schmidt (25:56):
There may be one night where she makes
her gluten free vegan dinnerfor everybody, and I eat it.
Now, look, I like all food.
I eat everything.
I'll eat it, but it'snot my favorite food.
I'll do that for a few nights.
And I'm contributing to herbucket so then I can say,
"Oh, Carla, looks good.
I'm going to getmyself a calzone, if
that's okay with you."
And her bucket is sofull from me eating her
(26:18):
meals, she's like, "Yeah.
Absolutely.
You contribute to my bucket.
You go get that reward."
It's not a tax savings.
It's a calzone.
But it's still the same thing.
Or if there's some social thingsgoing on where I have to go
talk to people and hang out withpeople, I'll fill her bucket.
I'll contribute to her bucketby doing a few of these.
But then one night I'llbe like, "Oh, Carla, it's
a good game on tonight.
(26:38):
I'm kind of justnot feeling social."
And she'll think back.
She'll be like, "Davecontributed to my bucket,
so he gets the reward ofhanging out in the basement
by himself all night."
Retirees, I get you.
I get you.
And now it's time for Joshto wrap it all together.
(26:58):
Pen drop.
Carla, I love you, by the way.
Josh Bretl (27:00):
He does love you, Carla.
What you said about thatbook, and we've read this book
since the kids were little,and for those listeners that
aren't aware of the bucketbook, the bucket book has to
do with being kind to otherpeople, and kindness is as
you fill up their bucket.
As you're being kind to them,it fills their bucket with love.
And the more full their bucketis, the better they feel,
(27:22):
and the better their life is.
And when you're mean tothem or aren't kind to them,
it drops water out of thebucket, and they become
miserable human beings.
Dave Schmidt (27:31):
I think equally as important to
that is finding what fillspeople's buckets, because
it's different for everybody.
Josh Bretl (27:36):
Yes.
Yeah.
And I was a little worried asto how you were going to try
and equate this to retirees.
Dave Schmidt (27:43):
It's on point.
It is a perfect one toone connection, Josh.
Josh Bretl (27:47):
You're not too far off-
Dave Schmidt (27:49):
Oh.
... Josh Bretl (27:50):
Here's where I'm going with this.
Full House music.
I hope this resonates.
Dave Schmidt (27:54):
Oh, it's been playing.
Yeah.
Josh Bretl (27:56):
You are putting stuff away for a future benefit.
And like a retiree who, puttingmoney away right now is not fun.
I'd rather spend iton something else.
I'd rather go out andbuy something cool, a
new toy, better food,whatever it might be.
But I'm going tosave for the future.
(28:16):
I'm going to contributeto my IRA, my 401[k],
whatever that might be.
Now, you are contributingto Carla's bucket so that
in the future, you canreap the rewards of this.
Dave Schmidt (28:28):
Correct.
Josh Bretl (28:28):
But here's the difference that
I'm struggling with.
When I contribute to the401[k], it is truly out of
I'm going to get somethingin the future out of this.
Dave Schmidt (28:38):
Okay.
Josh Bretl (28:38):
I think the theme of that story, the bucket story,
has everything to do with makingthe other person feel very
good, and has very little to dowith expecting future benefits
that you'll receive from makingthat person feel good, so-
Dave Schmidt (28:55):
That's just one man's interpretation, Josh.
All right?
Josh Bretl (28:59):
It's kind of like my daughter saying, "Well, if
I give her a gift, then she'sgoing to give me a gift."
Dave Schmidt (29:04):
I haven't really matured past
the age of nine, or 8.
Josh Bretl (29:08):
No.
I understand where you'regoing, and I think the
retirees will get it.
But I also think that theywill hope that you're just
going to fill up Carla's bucketbecause you want to be a good
person and it makes you feelgood to fill up her bucket.
And Dave, if you ever needsomething non-vegan, gluten
filled, come on over.
Dave Schmidt (29:26):
Oh, I know where to go, believe me.
This kind of ties backnicely to the whole Bretl
countertop situation, whereyou'll cook for everybody.
I'll just have Carla stopand get a salad for herself-
Josh Bretl (29:36):
She does do that.
Dave, our first podcast of2023 is in the books, and-
Dave Schmidt (29:41):
It's in the books.
... Josh Bretl (29:42):
I'm excited to see what the year
holds for us and for thepodcast listeners as well.
Please, if you like the podcast,share it with a friend, a
family member, someone elsewho you think would find us
entertaining and insightful.
Dave Schmidt (29:56):
Yeah.
Josh Bretl (29:57):
Well, I'm the insightful one.
Dave Schmidt (29:58):
Very insightful.
Josh Bretl (29:59):
You're the entertaining one.
Dave Schmidt (30:00):
Hey, listeners, it's as simple
as telling a friend,"Hey, go to pod.link/ref.
Josh Bretl (30:05):
R-E-F, Retirement Equals Freedom.
Dave Schmidt (30:08):
That is us.
Josh Bretl (30:09):
Pod.link/ref.
Dave Schmidt (30:11):
We don't own that website, but it's a cool
website to just send somebodyto, and it's like a really
quick recap of everything we do.
It can send them to allthe different podcast apps.
Pod.link/ref.
Just give it a shot.
Josh Bretl (30:25):
Well, with that, my friend, do you have
something you'd like to say-
Dave Schmidt (30:30):
Let's see.
... Josh Bretl (30:31):
to Debbie?
Dave Schmidt (30:32):
Deb, I will say this.
Next time you hear ourcompliance message, it
will be from our brand newpodcast desk, so what I say
now is just a simple bye.
Bye.
Worst ending ever,
Josh Bretl (30:51):
Which part?
Dave Schmidt (30:52):
I don't know.
The whole thing.
Alex (30:55):
Hashtag tax nerd.
In the grand scheme of things, IRAs
are relatively new.
Your parents or grandparentsnever even knew what the
heck they were, and theywere totally reliant upon
pension plans and companysavings and things along those
lines, and those went away.
So they created these 401ksand these IRAs with the idea
that they can travel withyou, and the savings get
built up time over time,and it can do a few things.
(00:23):
One is it gives the employeemore control, and two is it
cuts cost for the employer.
But also, they're portable,so you can take them with you.
But we've never reallytalked about how we put
money into those accounts,how we put money into IRAs.
And should you, or shouldyou not put money in?
We wanted to do an episodeon what we call IRA
contributions and some ofthe nuances that go into it.
Dave Schmidt (00:47):
It's the dawn of 2023, and Josh and I are
hoping to fill your bucketsboth financially and otherwise.
Our special new year editionof the Retirement Equals
Freedom Podcast is focused onfiguring out how traditional
and Roth IRAs, as well as your401k plans, can work for you.
Alex (01:07):
Hashtag tax nerd.
Dave Schmidt (01:08):
You'll come away from this episode,
understanding the benefits,limitations, and rules of
the road on contributionsjust in time for tax season.
This is The RetirementEquals Freedom Podcast.
Your host, Josh Bretl, is theowner of FSR Wealth Strategies.
And for the last two decades,it's Josh that's been
(01:29):
helping fine folks like youthrive in your retirement.
Well me?
Hey, I'm Dave.
Josh's longtime friend, co-host,and fan of beef barley stew.
So now, let me let you letme end this introduction
so you can learn allabout IRA contributions.
FSR Wealth Management is aregistered investment advisor
(01:49):
located in Elmhurst, Illinois.
Information and opinionscontained in this audio
have been arrived atby FSR Wealth advisors.
All information herein isfor informational purposes
and should not be construedas investment advice.
It does not constitute an offer,a solicitation or recommendation
to purchase any security.
FSR is not providing legal,tax, accounting, or financial
planning advice in this audio.
These views are as of thedate of this publication
and are subject to change.
(02:28):
Oh, Canada.
Josh Bretl (02:36):
David, happy new year.
Dave Schmidt (02:38):
Happy new year.
Josh Bretl (02:39):
Oh.
That just ruined everything.
Dave Schmidt (02:42):
Way to start it off, Josh.
We came in with thegoal of being just super
professional and not knockingthings around in the new
year, and what do you do?
Josh Bretl (02:52):
One of my favorite compliments that
I get is that I'm not youraverage accountant or CPA.
I'm not your averagefinancial advisor.
I take that as a compliment.
And people used tosay that to my dad.
I remember hearing as a kid," You're not what I think of
when I think of an advisoror when I think of a CPA."
And I always thought thatwas kind of weird, but
now it makes me feel good.
(03:12):
And I also feel likethis podcast is another
example of that.
We do weird okay here.
Dave Schmidt (03:17):
You remember the story I told you when
I was working at the bankand the sweet old lady
called me out for havinga beard or a scruffy face?
Josh Bretl (03:25):
Mm-hmm.
Dave Schmidt (03:26):
Bankers don't have scruffy faces.
"Well, ma'am, they do now."
Hey, look, you're human.
No one wants to workwith someone that's
like, "I do taxes.
Ah, ah, ah."
Josh Bretl (03:37):
I agree with you.
Dave Schmidt (03:38):
Look, Josh, 2023, my new goal is to be
a, I don't know, a sparklingconversationalist, if you will.
Josh Bretl (03:45):
With who?
Dave Schmidt (03:46):
I don't know.
You, on a podcast.
Josh Bretl (03:49):
like that idea.
Dave Schmidt (03:49):
Thank you.
Josh Bretl (03:49):
We have all sorts of big dreams for the 2023 podcast.
I don't know what we're goingto execute on, because we're
good dreamers, not always thebest executors when it comes
towards the podcast stuff.
Maybe someday, we'll actuallyhave a studio that...
Oh, oh, oh, oh, oh, oh.
Dave Schmidt (04:05):
Did it ship?
Josh Bretl (04:05):
I want to show you something.
I haven't gotten anotification of shipping yet.
Dave Schmidt (04:07):
Aw.
Josh Bretl (04:07):
But you know how on Facebook, you can see things
like follow them on Facebook?
Dave.
Dave Schmidt (04:13):
Yeah.
Josh Bretl (04:14):
I think that might be us.
Dave Schmidt (04:15):
Oh.
If that is, that's gorgeous.
Okay.
What he's referring to isthere is a video on Facebook
from the company Josh orderedthis table from that has them
showing the table and thengoing from table to the truck
that's going to ship it hereto us, so it's got to be ours.
Josh Bretl (04:32):
It's got to be ours.
Yeah.
Dave, I am really excited for2023, and on many reasons.
I've got on a personalfront, on a business front.
Hopefully by the timethis podcast comes out,
we will have finished ourconstruction on our house.
We'll have our houseback to normal.
We've gotten through Christmas.
Dave Schmidt (04:49):
Josh, I'm excited for your house.
You went home and saw yournew countertops the other
day, and what was thefirst thing I asked you?
You remember?
What was I concerned about?
Josh Bretl (04:57):
So the first question you asked me probably
had to do with somethingI was going to make you.
Dave Schmidt (05:00):
Yeah.
I asked you, A) what's the firstcocktail you're going to craft
for me on your new countertops?
And then, what areyou going to cook me?
Josh Bretl (05:07):
I don't know, but Missy and I have decided when
we're all done with this,2023 is going to be the year
of parties at our house, so-
Dave Schmidt (05:14):
Yes.
... Josh Bretl (05:14):
it's going to be fun.
Dave Schmidt (05:15):
Cocktails and steaks at Josh's house.
Josh Bretl (05:18):
I look forward to it.
But on a business front, we'veset some really cool things
up, and we have some greatlisteners of the podcast.
Our clients are doing great.
Who knows what the economy'sgoing to do this year?
Don't ask me for a crystal ball.
What I always say is beprepared for anything.
2023's going to be a good year.
Dave Schmidt (05:33):
2023 is shaping up to be a good year.
Yeah.
Josh Bretl (05:35):
Now, here's my big question.
Dave Schmidt (05:36):
What is it?
Josh Bretl (05:37):
Over Christmas, you and I talked about playing
a new sport, pickle ball.
Can you and I play pickle ball,learn how to play pickle ball?
Because it's all the rage.
And two, can we play basketballat least once this year?
Dave Schmidt (05:49):
Oh, I know.
The logistics of findingthe spots to play
basketball, I think, areharder than pickle ball.
I feel like basketball,you can't just...
If you and I were to goto an open gym, we will
be dead within 30 seconds.
We have to find a placewhere you and I can just
kind of shoot around, getour legs out from underneath
us, and then start playing.
Josh Bretl (06:07):
All right.
We'll talk about that.
We'll get that squared away.
Dave Schmidt (06:10):
Yeah.
But pickle ball, we'vealready talked about doing
a entire office pickle balltournament, which I will record.
That would be fun todo a production around.
Josh Bretl (06:18):
Yeah.
Well, so far, if anyone'slistened this far in, you're
bored off of your gourd,because we've talked about
nothing for a few minutes, so-
Dave Schmidt (06:27):
Bored off of your gourd.
That might be a new hashtag.
I'm just sayin-
Josh Bretl (06:32):
Hashtag bored off your gourd.
Dave Schmidt (06:33):
I'm just saying.
You know what, Josh?
I was up late last nightthinking, "What is something
that we just haven't done adeep dive on in a long time?"
And financial wizard, soI know all these things.
I'm like-
Josh Bretl (06:46):
Do not say Social Security.
Dave Schmidt (06:47):
No.
No.
We just finished a three partseries, which we're actually
going to win some awards for.
Josh Bretl: Especially part three. (06:52):
undefined
Dave Schmidt (06:52):
Part three is amazing.
But what about IRAsand contributions and
things of that sort?
Josh Bretl (07:02):
Oh, great.
I love talking about that stuff.
Dave Schmidt (07:04):
Okay.
Josh Bretl (07:05):
No.
Actually, this idea camefrom Erin, as do a lot
of our ideas, apparently.
We've done a couple episodeson conversions and Roths
and the difference betweentraditionals and Roth IRAs.
But we've never reallytalked about how we put
money into those accounts,how we put money into IRAs.
And should you, or shouldyou not put money in?
(07:25):
We wanted to do an episodeon what we call IRA
contributions and some ofthe nuances that go into it.
Dave Schmidt (07:32):
Such as?
You're going to getinto that, I hope?
Josh Bretl (07:34):
Do you want me to?
Dave Schmidt (07:35):
I mean, yeah.
Nuance is your middle name.
Josh Bretl (07:39):
In the grand scheme of things, IRAs
are relatively new.
Now, a lot of our clients whoare in their late 50s, 60s,
and 70s, they've been aroundthe for the majority of your
life, but in your working years,they probably just got started.
They really were relatively new.
Your parents or grandparentsnever even knew what the
heck they were, and theywere totally reliant upon
(07:59):
pension plans and companysavings and things along those
lines, and those went away.
Dave Schmidt (08:04):
They did.
Yeah.
Josh Bretl (08:04):
Actually, Erin did some research
for us, and I didn'trealize some of this stuff.
It was kind of neat.
didn't realize that thefirst pension in the United
States came into existencein 1875 for American Express.
Dave Schmidt (08:13):
I saw American Express, and I'm like,
"The credit card company?"
Josh Bretl (08:17):
Well, first off, I didn't realize American
Express was around in 1875.
Dave Schmidt (08:19):
Yeah.
Right?
Josh Bretl (08:20):
But also the fact that they had
the very first pension.
Dave Schmidt (08:22):
Good for them.
Josh Bretl (08:23):
And then by 1960, half of the private sector
workforce had a pension.
That wasn't that long ago.
My father graduated highschool in 1970, went to
college, graduated in '74.
And at that point intime, pensions were
still hot and heavy.
They were really going.
Due to some law changes in the'80s, the rules around pensions
(08:46):
became really difficult,and we saw a major decrease
in the companies wanting toadminister pensions, especially
for smaller companies,things along those lines.
And the governmentknew that there was a
problem with savings.
And people were changingjobs more often, which Erin
threw out this one too.
I thought this waskind of interesting.
According to the Bureau of LaborStatistics, that the modern
(09:06):
employee will hold over 11 jobsbetween the ages of 18 and 48.
And so what happens iswith a pension, if you keep
changing jobs, those pensionsdon't usually go with you.
They don't accumulate theway they're supposed to.
And one of the benefits ofa pension is working a long
period of time so you get thebiggest payout and things.
That's how you maximize those.
So they created these 401ksand these IRAs with the idea
(09:31):
that they can travel withyou, and the savings get
built up time over time,and it can do a few things.
One is it gives the employeemore control, and two is it
cuts cost for the employer.
But also, they're portable,so you can take them with you.
Now, that sounds all great,but I think what we've realized
as a country is that peopledon't always want control.
(09:53):
They fear control sometimes.
They don't know how to do it.
The market's scary.
What if you're makingthe wrong decision?
So we've tried to simplify itand do things along those lines.
But one of the overarchingcomments or the overarching
themes was that youjust had to save.
Pensions weren'tgoing to be there.
You just had to save.
And they wanted to give yousome advantages to savings.
(10:18):
401[k]s are company sponsored.
They're run by your employer.
And if your companyhas one, odds are you
can put money into it.
And your companycan put money in.
They don't all do that.
But if you put moneyin, that there's very
rarely any income limits.
But your investmentchoices are limited to
(10:39):
what the company tells youyou can put money into.
Some of them have wide choices.
Some of them havejust a few choices.
But the choices that youhave are limited to what the
company tells you you can have.
Dave Schmidt (10:49):
Are you saying...
because I don't remember.
Last time I had a401[k] was 12 years ago.
An employee sometimes cango choose how aggressive
their portfolio is?
Josh Bretl (10:58):
Mm-hmm.
Dave Schmidt (10:58):
Okay.
Josh Bretl (10:59):
They might have 12 mutual funds
they get to pick from.
There's thousands and thousandsof stocks out there, but they
might only have 12 mutual funds.
Dave Schmidt (11:06):
I see.
Josh Bretl (11:06):
There's some limits as those come into play.
But the other thing, and you'rea great example of that, is
you had a 401[k] when youworked for the large bank,
but when you went to becomean independent contractor,
401[k]s don't really exist,or they're hard to exist for
small companies or individuals.
So the governmentcreated these IRAs.
IRA, it's a government acronymand actually easy to understand.
(11:28):
It's individualretirement account.
And what they said was, "Justlike a 401[k], you put money in.
You'll get a tax deductionfor putting money in."
Even to this day, sometimesthey make that seem like
it's the best thing ever.
You're getting this taxdeduction to put money in.
You're gettingthis tax deduction.
Well, what you're essentiallydoing is you're kicking the
tax calculation down the road.
(11:48):
It could be a good thing.
It may not be a good thing.
I will tell you, savings isalways a good thing, but just a
matter of where are you saving?
What happens there?
IRAs and Roth IRAs areindividual accounts.
We want to go through some ofthe rules that go through this.
So 401[k]s, if you're under age50, you can put in a maximum
(12:10):
of $22,500 this year in 2023.
If you're over 50, theyallow what they call
catch-up contributions,and you can put $30,000 in.
How much you should put in,that's a whole different
topic of conversation.
We always tell people, "Saveas much as you can, but
don't go into debt to save."
Dave Schmidt (12:29):
401[k]s, Josh, most employers, do you know,
can you continuously adjusthow much you're contributing?
Or is that an annualthing you have to choose?
Josh Bretl (12:36):
It's become a lot more flexible recently.
It's really dependentupon the company.
The company can set limitsas to how much you can put
in and how much you can putout, or how much you can put
in, when you can take it out.
Now, here's a couple rules on...
Once money goes intoa 401[k], the company
doesn't have access to it.
They can't steal it ordo anything like that.
But they can put handcuffs asto when you can get it out.
(12:57):
They may or may notallow you to borrow money
from it, called loans.
They may or may not let you takemoney out while you're working.
Now, the one rule is youcan always get money out
when you leave the employer.
When you leave, you canalways take the money out.
But you do have the right toleave it there too, if it's over
a certain dollar amount, so-
Dave Schmidt (13:14):
Oh, okay.
... Josh Bretl (13:14):
there's pros and cons.
You have to weigh those prosand cons as to where it sits.
But just getting themoney in is what we're
going to focus on today.
Dave Schmidt (13:20):
Sure.
Josh Bretl (13:20):
If you put that money in there, now,
there aren't generallyincome thresholds that's
out there for 401[k]s.
But there are some testingand some different rules
that go onto 401[k]s.
For smaller companies, if youhave a 401[k], they may say,
"Hey, you've put too much in."
There are also Roth optionson a lot of 401[k]s.
They don't all have them, butsome do have Roth options.
Roth versus traditional, we'vedone whole episodes on that, The
(13:43):
big difference there is taxes.
The only differencebetween regular and
traditional is taxes.
Now, let's go to IRAs, becausethose are a little different.
If your company does not havea 401[k], or any retirement
plan, to be factual there,you have the ability to
(14:05):
put money into an IRA.
And there's some specific rules.
And you actually, if you'remarried, you have to know,
if neither of you have a401[k], pretty much you can
put money in no matter what.
It's deductible.
If one of you has a 401[k],there's income thresholds.
You can't earn too much.
If both of you have 401[k]s,it's very restrictive.
(14:25):
Very rarely can you putmoney into an IRA and
have it be deductible.
Okay?
But there's a lot oftimes that putting money
in can be beneficial.
For You may be late in yourcareer, maybe a retiree,
and you may have a sidejob, and you earn, I don't
know, 15,000, 20,000 bucks.
And you're normally in the 12%or 15% tax bracket, but this
(14:46):
side job just puts you up andabove into the 22%, 24% bracket.
Well, in that case,let's put the money in.
Let's get a deduction, and thenwe'll take it out later at 15%.
That makes a ton of sense.
There also going to besome things for Medicare.
The cost of Medicareis dependent upon your
adjusted gross income.
It could be helpful for that.
There's just some thingsthat putting 10,000 to
(15:07):
15,000 bucks away in yourIRA if you're married
can be beneficial to you.
But you have tohave earned income.
That's the key to thisone, is earned income.
Earned income ismoney from a job.
Dave Schmidt (15:17):
Not Social Security.
Josh Bretl (15:18):
Social Security is not earned income.
Investment is not earned income.
401[k] distributionsare not earned income.
Dave Schmidt (15:23):
Pensions?
No?
No?
Josh Bretl (15:24):
Pensions are not earned income.
It's income from working-
Dave Schmidt (15:28):
A job.
... Josh Bretl (15:28):
in some way.
Dave Schmidt (15:29):
Yeah.
Okay.
Josh Bretl (15:29):
Yeah.
It could be selfemployment income.
It could be W2 income, whichmeans an employer paid you.
It has to come from a job.
Dave Schmidt (15:37):
I read poetry on the street corner, and
people throw coins anddollars at me as tips.
Does that count as income?
Josh Bretl (15:42):
Only if you're going to claim it on your
tax return, which legallyyou're supposed to, but I
don't know what you're doing.
I don't do your tax return, so-
Dave Schmidt (15:49):
I made $17 all of last year doing it.
Do I have to claim that?
Josh Bretl (15:52):
Well, legally, yes.
Dave Schmidt (15:55):
Oh, man.
Josh Bretl (15:56):
Do a lot of people do it?
No.
But legally, yeah, you'resupposed to claim that.
Dave Schmidt (15:59):
Oh, okay.
Yeah.
Josh Bretl (16:00):
Any and all income sources.
Roth contribution limitsare a little different.
Now, if you put money into anIRA and you're above income
thresholds, you're stillallowed to put money in, but
it becomes non-deductible.
And you have to file a form8606 on your tax return, because
(16:21):
you have to track how muchof your IRA is non-deductible
versus deductible.
Alex (16:24):
Hashtag tax nerd.
Josh Bretl (16:25):
Oh, yeah.
It's a fun thing,because that'll follow
into our backdoor Roth.
Dave Schmidt (16:30):
Really quick though, if I were to ask Al
what form is needed to file,would he be like, "8606?"
Would he know whatforms are needed?
Is he not quite that-
Josh Bretl (16:39):
You've just set my 2023 goal.
Dave Schmidt (16:41):
To teach him what form needs to be filed.
Josh Bretl (16:43):
I am not a form guru.
I don't know which forms, whatschedules, which this, all that.
But 8606 is a commonform for people who have
non-deductible IRAs.
We see those a lot.
Get the 8606 out.
Let's see the 8606.
Dave Schmidt (16:58):
Yeah.
It's kind of fun.
It just rolls offthe tongue, too.
Josh Bretl (17:00):
It does.
Dave Schmidt (17:00):
It's fun.
Yeah.
Josh Bretl (17:00):
It does.
Dave Schmidt (17:01):
Yeah.
Josh Bretl (17:02):
There's probably people listening to this
podcast that know more aboutform 8606 as a client than
some of your advisors do.
But we'll get back tothat one, but let's talk
about the Roth limits.
If you decide from a taxreason that you want to put
money into a Roth versus atraditional, there are very
strict income thresholds.
And again, it hasto be earned income.
(17:23):
But for a single taxpayer,that starts at 138,000 and
phases out up to 153,000.
If you have less than$138,000 of earned income,
you can put money in a Roth.
It doesn't matter ifyou have a 401[k].
It doesn't matterany of those things.
You can put money into a Roth.
If you get above153, you cannot.
And if you do, the penaltiesare actually very severe.
(17:44):
You have some time totake it out and do what
they call a reversal, but-
Dave Schmidt (17:48):
So if you make a mistake, you can fix it-
Josh Bretl (17:49):
You can fix it.
... Dave Schmidt (17:50):
before...
Yeah.
Josh Bretl (17:50):
But if you leave it in there, and they catch
you, I want to say, don'tquote me, but it's close to a
50% penalty on the earnings.
Dave Schmidt (17:58):
Oh, my gosh.
Josh Bretl (17:59):
It's pretty substantial.
Dave Schmidt (17:59):
On the earnings.
Josh Bretl (18:01):
Yeah.
Dave Schmidt (18:01):
Not-
Josh Bretl (18:01):
But it's still pretty substantial.
Dave Schmidt (18:02):
Yeah.
Josh Bretl (18:03):
It could be a substantial penalty.
For a married filing jointtaxpayer, that phaseout starts
at 218,000 and goes up to 228.
If you're a high incomeearner, you probably can't put
money into a Roth directly.
Dave Schmidt (18:16):
Those numbers are pretty high for me.
Josh Bretl (18:17):
Yeah.
I know.
That's a high income earner.
Now, that brings usto the backdoor Roth.
The way that works ispeople put money into
an IRA non-deductible.
They haven't deducted it.
And they do aninstant conversion.
And that is essentiallythe third...
We always say there's threeways to get money into a Roth.
(18:37):
One is a contribution,which we just talked about.
Two is a conversion.
A conversion is going froma regular IRA to Roth IRA.
And the third's abackdoor Roth conversion.
Dave Schmidt (18:47):
Okay.
Josh Bretl (18:47):
Now, what that means though, is
you're taking money out.
Still it's a conversion, butyou have to be very careful,
and you really have to planthese out, because whenever
you take money out of an IRAthat has a non-deductible
portion to it, so it has a form8606, we have to follow what
they call the pro rata rule.
Okay?
Listen to me on this one.
Let's say your IRAis worth $20,000.
(19:10):
Okay?
Dave Schmidt (19:11):
20,000.
Josh Bretl (19:11):
And your form 8606 says you've put in 10,000-
Dave Schmidt (19:15):
10,000.
... Josh Bretl (19:16):
as basis.
Dave Schmidt (19:16):
Basis.
Josh Bretl (19:17):
Half as basis, half as earnings.
Dave Schmidt (19:18):
Yeah.
Yeah.
Josh Bretl (19:19):
Okay?
Dave Schmidt (19:19):
Totally.
I'm on it.
Yeah.
Josh Bretl (19:20):
Great.
And you do this backdoorRoth conversion for $10,000.
You think, "Hey, I'vegot this basis of 10,000.
I'm just going to convert it.
No big deal."
You do the conversion of$10,000, but because of the
pro rata rule, half of yourIRA was non-deductible.
Half was earnings that youhaven't paid taxes on yet.
Your tax return's going to show$5,000 of non-deductible and
(19:41):
$5,000 of actual taxable income.
Dave Schmidt (19:43):
Got it.
Josh Bretl (19:44):
Just have to be aware of the pro rata rule.
At that level, it's nothuge, but we've seen
people make mistakes inthe $100,000 range there.
Dave Schmidt (19:51):
Oh.
Josh Bretl (19:51):
You have to be careful with that.
Dave Schmidt (19:52):
With your Roth limits though, if someone
earns over that 228, let'ssay as a couple, 228,000, can
they still do a conversion?
Josh Bretl (20:01):
There are no limits on conversions.
Dave Schmidt (20:04):
Could someone in theory just contribute to
an IRA, then the next day,convert it to a Roth, even
though they're over that limit?
Josh Bretl (20:11):
That is a backdoor-
Dave Schmidt (20:13):
That is a-
... Josh Bretl (20:13):
conversion.
Dave Schmidt (20:14):
Okay.
Josh Bretl (20:14):
Or in Illinois, this is a tip or trick, tip,
trick, this is somethingthat people don't realize.
Dave Schmidt (20:21):
Hashtag Josh tips.
Josh Bretl (20:23):
Oh, I like it.
That's new.
Dave Schmidt (20:24):
Thank you.
Josh Bretl (20:25):
Illinois as a state is unique, where they
don't tax retirement income.
So IRA distributions, 401[k]distributions are not taxed
at the Illinois level.
But you still get a deductionfor putting money in.
At the Illinois level, we telleverybody, "If you're choosing
between an IRA contributionand a Roth contribution and
you have the option for both,you are almost always better
(20:48):
putting money into the IRA.
You get a federal deductionand a state deduction.
And converting instantly,you'll pay a federal tax,
so those net to zero, butyou won't pay the state tax.
You will get a state of Illinoistax benefit by doing that, so-"
Dave Schmidt (21:05):
I knew there was a reason we lived in Illinois.
It's for that Josh tip alone.
Josh Bretl (21:09):
The Josh tip only applies to Illinois residents.
Other states, please checkyour local laws, but-
Dave Schmidt (21:15):
You sound like the little disclaimers on
pharmaceutical commercials.
Josh Bretl (21:17):
I know.
Every state is so different.
It's crazy.
If you're going to putmoney in, you just need
to make sure you're makingthe right decisions there.
Dave Schmidt (21:24):
Okay.
You've been talking here aboutcontributions a little bit
too long for my liking, so...
Yeah.
What?
What?
Okay.
Hey, Mr.
Josh.
Let's take a break.
You've been talking for solong, and my ears are sore.
Let's not make them snore.
Listening shouldn't be a chore.
(21:45):
Let's get to know Josh and Daveand watch our ratings soar.
Give me the cackaw.
Josh Bretl (21:49):
Cackaw!
Cackaw!
Dave Schmidt (21:49):
Oh, yeah.
I was thinking about doingthe Gritty here on camera and
making Landon super proud.
Eh, there's a better thanaverage chance that I would
pull a hamstring doing it, soI opted out for episode 29.
(22:10):
There's a lot ofpressure on you.
This is the first get toknow Josh and Dave of 2023.
Josh Bretl (22:15):
I actually struggle with it a little bit.
Dave Schmidt (22:16):
Did you?
Josh Bretl (22:17):
Yeah.
Because, well, I read thecards, and I think it's
a good question, but Idon't know how I'm going
to answer the question yet.
Dave Schmidt (22:23):
Oh.
Josh Bretl (22:23):
Here's our question, and again, I think I have an
answer for what you're goingto do here, but what would you
do with an extra hour in a day?
Dave Schmidt (22:31):
One extra hour?
Josh Bretl (22:32):
One extra hour.
Every day, an extra hour.
What would you do?
Dave Schmidt (22:34):
I may be overanalyzing, but
when does that hourfit into our day, like-
Josh Bretl (22:38):
it's your day.
You decide.
Dave Schmidt (22:39):
Oh.
An extra hour in my day.
First thing that comes to mindis napping, but I usually nap
during normal 24 hours, so Idon't need extra time for that.
Napping is covered.
Josh Bretl (22:48):
Do you really nap?
Dave Schmidt (22:50):
Almost daily.
Almost daily.
Between 20 minutesto 40 minutes a day.
That's actually one ofmy forms of meditation
that we talked about.
Josh Bretl (22:57):
Yeah.
Dave Schmidt (22:57):
I don't always fall asleep, but I lay down.
With an extra hour a day,I do have a list of new
things I want to learn.
I want to learn acouple languages.
I want to learn howto play the harmonica,
potentially the guitar.
I think I would use thatone extra hour and just
hardcore learn somethingnew with that one hour.
Josh Bretl (23:16):
I think learning something makes sense.
But the harmonica?
Dave Schmidt (23:20):
Oh, you know I have one, right?
Josh Bretl (23:22):
No.
Dave Schmidt (23:23):
I wanted to surprise listeners
with a jingle.
I'm just not quiteat that point yet.
I can only make certain soundswith it, but I bought it at
the heart of COVID thinking,"This is what I'm going to do."
And-
Josh Bretl (23:35):
youTube videos?
You're learning theharmonica via YouTube videos?
Dave Schmidt (23:37):
That was the plan, but it's kind of just
sitting there on my deskat home collecting dust.
Josh Bretl (23:43):
I think if I had an extra hour, I would read more.
Dave Schmidt (23:46):
Oh.
Yeah.
Kind of similar to mine.
Josh Bretl (23:48):
Yeah.
business books,motivational books, life
books, fiction books.
I like all that stuff.
And I don't think I read enough.
Dave Schmidt (23:55):
Peppa the Pig books.
Josh Bretl (23:57):
I read a lot of those.
Dave Schmidt (23:57):
Yeah, I like
- .Josh Bretl: Actually, not anymore.
The kids are gettinga little older.
We're reading Harry Potterright now as a family.
Oh.
We still read Pig the Pug.
Those are still timeless.
Josh Bretl (24:03):
Oh, Zach loves Pig the Pug.
Dave Schmidt (24:05):
Yeah.
He's the best.
Josh Bretl (24:06):
He also loves harmonicas, and so he got
one for Christmas as well.
We'll see.
Dave Schmidt (24:10):
Did he really?
Josh Bretl (24:11):
Yeah.
We'll see.
Dave Schmidt (24:11):
Yes.
Josh Bretl (24:11):
We'll see how it goes.
Dave Schmidt (24:13):
We're totally going to start a band, Zach.
Josh Bretl (24:17):
I do learn things about you during these
get to know Josh and Dave.
Dave Schmidt (24:20):
Yeah.
This is back to back episodes.
I see mind blown.
Josh Bretl (24:26):
The one with you meditating really blew my mind.
Dave Schmidt (24:28):
Did it?
Josh Bretl (24:29):
In fact, I was listening to that episode again.
I went, "Man.
I knew him so well, and-"
Dave Schmidt (24:34):
I'm proud of you.
You've actually listened tothe episode before I have.
Josh Bretl (24:36):
Oh.
Look at this.
Dave Schmidt (24:37):
I'm really stuck on this true crime
called Bone Valley.
Man, I cannotrecommend it enough.
It is the best truecrime I've ever heard.
It's kind of like...
Dave relates to retirees.
Yeah.
Josh Bretl (24:51):
I'm a little nervous.
Dave Schmidt (24:52):
Yeah.
Yeah.
Josh Bretl (24:52):
By the way, I'm a little nervous about how you go
from a true crime podcast rightinto you relating to retirees.
Dave Schmidt (24:59):
Well, listen.
Whenever I do this withmy paper stack, Josh
knows he's in for a treat.
Josh Bretl (25:05):
There's notes.
There's notes, folks.
Dave Schmidt (25:07):
There's got to be notes.
I take notes pre-episodeand mid-episode.
What I learned today, Josh, wasthat retirees will contribute
to an IRA for any numberof reasons, assuming they
qualify, of course, right?
But generally, they'llcontribute it for
tax savings, right?
Josh Bretl (25:25):
Taxes are important.
Dave Schmidt (25:26):
Yeah.
Taxes are very important.
They contribute tosomething for a benefit.
Have you heard of the bookHow Full is your Bucket?
The kid version.
Josh Bretl (25:35):
I've heard of the kid version.
Yes.
Dave Schmidt (25:36):
Yeah.
Okay.
That's the onlyversion I know, too.
Josh Bretl (25:38):
Okay.
Dave Schmidt (25:38):
To your point, I don't read enough either.
But we use the whole bucketphilosophy in the Schmidt
house, and we love it.
And so I contributeto Carla's bucket.
And yes, I do it to make herhappy, but I also do it because
I get a big benefit out of it.
Here's some examples.
Are you interestedin hearing examples?
Josh Bretl (25:55):
I love examples.
Dave Schmidt (25:56):
There may be one night where she makes
her gluten free vegan dinnerfor everybody, and I eat it.
Now, look, I like all food.
I eat everything.
I'll eat it, but it'snot my favorite food.
I'll do that for a few nights.
And I'm contributing to herbucket so then I can say,
"Oh, Carla, looks good.
I'm going to getmyself a calzone, if
that's okay with you."
And her bucket is sofull from me eating her
(26:18):
meals, she's like, "Yeah.
Absolutely.
You contribute to my bucket.
You go get that reward."
It's not a tax savings.
It's a calzone.
But it's still the same thing.
Or if there's some social thingsgoing on where I have to go
talk to people and hang out withpeople, I'll fill her bucket.
I'll contribute to her bucketby doing a few of these.
But then one night I'llbe like, "Oh, Carla, it's
a good game on tonight.
(26:38):
I'm kind of justnot feeling social."
And she'll think back.
She'll be like, "Davecontributed to my bucket,
so he gets the reward ofhanging out in the basement
by himself all night."
Retirees, I get you.
I get you.
And now it's time for Joshto wrap it all together.
(26:58):
Pen drop.
Carla, I love you, by the way.
Josh Bretl (27:00):
He does love you, Carla.
What you said about thatbook, and we've read this book
since the kids were little,and for those listeners that
aren't aware of the bucketbook, the bucket book has to
do with being kind to otherpeople, and kindness is as
you fill up their bucket.
As you're being kind to them,it fills their bucket with love.
And the more full their bucketis, the better they feel,
(27:22):
and the better their life is.
And when you're mean tothem or aren't kind to them,
it drops water out of thebucket, and they become
miserable human beings.
Dave Schmidt (27:31):
I think equally as important to
that is finding what fillspeople's buckets, because
it's different for everybody.
Josh Bretl (27:36):
Yes.
Yeah.
And I was a little worried asto how you were going to try
and equate this to retirees.
Dave Schmidt (27:43):
It's on point.
It is a perfect one toone connection, Josh.
Josh Bretl (27:47):
You're not too far off-
Dave Schmidt (27:49):
Oh.
... Josh Bretl (27:50):
Here's where I'm going with this.
Full House music.
I hope this resonates.
Dave Schmidt (27:54):
Oh, it's been playing.
Yeah.
Josh Bretl (27:56):
You are putting stuff away for a future benefit.
And like a retiree who, puttingmoney away right now is not fun.
I'd rather spend iton something else.
I'd rather go out andbuy something cool, a
new toy, better food,whatever it might be.
But I'm going tosave for the future.
(28:16):
I'm going to contributeto my IRA, my 401[k],
whatever that might be.
Now, you are contributingto Carla's bucket so that
in the future, you canreap the rewards of this.
Dave Schmidt (28:28):
Correct.
Josh Bretl (28:28):
But here's the difference that
I'm struggling with.
When I contribute to the401[k], it is truly out of
I'm going to get somethingin the future out of this.
Dave Schmidt (28:38):
Okay.
Josh Bretl (28:38):
I think the theme of that story, the bucket story,
has everything to do with makingthe other person feel very
good, and has very little to dowith expecting future benefits
that you'll receive from makingthat person feel good, so-
Dave Schmidt (28:55):
That's just one man's interpretation, Josh.
All right?
Josh Bretl (28:59):
It's kind of like my daughter saying, "Well, if
I give her a gift, then she'sgoing to give me a gift."
Dave Schmidt (29:04):
I haven't really matured past
the age of nine, or 8.
Josh Bretl (29:08):
No.
I understand where you'regoing, and I think the
retirees will get it.
But I also think that theywill hope that you're just
going to fill up Carla's bucketbecause you want to be a good
person and it makes you feelgood to fill up her bucket.
And Dave, if you ever needsomething non-vegan, gluten
filled, come on over.
Dave Schmidt (29:26):
Oh, I know where to go, believe me.
This kind of ties backnicely to the whole Bretl
countertop situation, whereyou'll cook for everybody.
I'll just have Carla stopand get a salad for herself-
Josh Bretl (29:36):
She does do that.
Dave, our first podcast of2023 is in the books, and-
Dave Schmidt (29:41):
It's in the books.
... Josh Bretl (29:42):
I'm excited to see what the year
holds for us and for thepodcast listeners as well.
Please, if you like the podcast,share it with a friend, a
family member, someone elsewho you think would find us
entertaining and insightful.
Dave Schmidt (29:56):
Yeah.
Josh Bretl (29:57):
Well, I'm the insightful one.
Dave Schmidt (29:58):
Very insightful.
Josh Bretl (29:59):
You're the entertaining one.
Dave Schmidt (30:00):
Hey, listeners, it's as simple
as telling a friend,"Hey, go to pod.link/ref.
Josh Bretl (30:05):
R-E-F, Retirement Equals Freedom.
Dave Schmidt (30:08):
That is us.
Josh Bretl (30:09):
Pod.link/ref.
Dave Schmidt (30:11):
We don't own that website, but it's a cool
website to just send somebodyto, and it's like a really
quick recap of everything we do.
It can send them to allthe different podcast apps.
Pod.link/ref.
Just give it a shot.
Josh Bretl (30:25):
Well, with that, my friend, do you have
something you'd like to say-
Dave Schmidt (30:30):
Let's see.
... Josh Bretl (30:31):
to Debbie?
Dave Schmidt (30:32):
Deb, I will say this.
Next time you hear ourcompliance message, it
will be from our brand newpodcast desk, so what I say
now is just a simple bye.
Bye.
Worst ending ever,
Josh Bretl (30:51):
Which part?
Dave Schmidt (30:52):
I don't know.
The whole thing.
Alex (30:55):
Hashtag tax nerd.
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