491 | Answering Your Questions on How to Access Money Before 59.5 | Sean Mullaney

26:27So you wouldn't be able to do this if you were still employed, I guess, depending on the rules of the Roth 401k, right? Yeah, that's a great question. Generally speaking, it's going to be the rules of the plan. Some plans may allow in-service distributions from the Roth 401k to a Roth IRA. But in most cases, especially if we were looking to get all of it out and live off it, generally speaking, under the plan rules, look at your plan, but generally speaking, we're going to have to separate from service to make that an easy process. But there are some plans that allow in-service withdrawals. That can be more of a plan rule than a tax rule issue.

27:04Yeah. Awesome. Very, very helpful. Thanks for listening to Chooseify and for all your support of our mission here. The absolute best way to support Chooseify is when you sign up for your next rewards credit card to use our cards page at chooseify.com slash cards. I keep this page constantly updated, so it should always be the top resource for you. Thanks for being part of our community and for your support. All right, let's move on to the next question. So this came in from Chris and he said, I don't hear much talk about specifically the Roth IRA conversion ladder and the mechanics involved. Because I think a lot of the community may be retiring early.

27:45They, like I, would like to know more. I'm curious about the pro rata rule and want to know if I only transfer the portion I want to convert to my traditional then Roth IRA. Or while this may be determined by the employer plan, I think there could be a lot to consider and want to make sure I'm planning correctly for our future. Yeah, there's a lot there. I'll start with the pro rata rule because a lot of folks in the community get hung up on the pro rata rule. And here's the thing. From a tax law perspective, tax rule perspective, it's something that governs distributions from traditional IRAs, IRAs, simple IRAs.

28:19From a practical perspective, it hangs us up. It hurts us in the accumulation phase. It doesn't really hurt us in the decumulation phase. That's counterintuitive, but there's a lot of counterintuitive stuff in tax. So what do I mean by that? The problem with the pro rata rule is the ability to efficiently do a so-called backdoor Roth IRA, right? We're trying to get money into a Roth IRA during our accumulation years. This is where the problem emerges. Well, what happens is, oh, we're trying to do this backdoor Roth, but the tax rules say if we have another IRA, like a rollover from an old 401k, then we can't really do the backdoor Roth without incurring additional income tax.

28:58And in that case, then it doesn't make a whole lot of sense. So if we're thinking about retirement, we don't have to be all that worried about the pro rata rule with one exception. And it's this, when we leave our job, we should look at our 401k, 401a, 403b, whatever it is. And we have to ask one question, is there basis inside our retirement plan at work? For most Americans, the answer will be absolutely not. But there are going to be some people where the answer is absolutely yes. This happens for a variety of reasons. Now, the basis emerges if we're doing the so-called mega backdoor Roth, but then it goes right away.

29:35So we don't have to worry about it if we've been always just doing the mega backdoor Roth and that's all we've done. But there are going to be some people out there who can't do a mega backdoor Roth and have this old retirement account basis in their 401k or other plan. If that's true, then you want to be worried about the pro rata rule. There's an easy way around it. You take that basis only and you move it to a Roth IRA at retirement. The rest of it would go to a traditional IRA. There's something if you Google notice 2014-54, there'll be all sorts of commentary on the internet about this. Because the alternative to what I just described, moving basis into a Roth IRA and then the rest of it into the traditional IRA is just moving all of it into a traditional IRA.

30:18You don't want to do that. And you don't have to, according to this IRS notice, right? There's a notice from the IRS saying, yeah, take the basis, put it into a Roth IRA, take everything but the basis, put it into a traditional IRA. And now we're outside the pro rata rule. That's really cool, right? So that's the one time at retirement we want to be worried about the pro rata rule. Okay. What about Roth conversions in retirement? People get hung up on this, but it's actually pretty easy. And I would say for most Americans, the easiest mechanism is the traditional IRA, but there are going to be some 401k plans that allow this too.

30:55Easiest mechanism is go into your financial institution with your traditional IRA, say, hey, I want to take$10 ,000,$5 ,000,$20 ,000, whatever the amount is in your particular situation. And I want to affirmatively move it to a Roth IRA. Okay, That's fine. There'll be a big warning sign. This is taxable. You're like, yeah, that's my plan. That's the goal. Doing that on purpose. Yeah. Now they'll also ask about, they may ask about tax withholding. I generally don't like to do tax withholding. There are other ways to pay that tax. If there's going to be that much tax, there may not even be that much tax.

31:30And we just affirmatively move the money from the traditional IRA to the Roth IRA. And one of the things about that is that can set up something called a Roth conversion ladder. So five years later under the tax rules, we can access that money again, penalty free and tax free. That's something we might want to do. We may not even want to do that. We might be living off taxable accounts at that point. We may have other Roth basis. We may have older conversions, older contributions. So we may not have to worry about that five-year rule for that conversion anyway, but maybe that's part of our strategy.

32:03And the mechanics of the Roth IRA conversion tend not to be that complicated. I like to do them later in the year. There's an academic argument to do them in January and February to get the additional months of tax-free growth. I just like to say life is at least somewhat uncertain and Roth conversions are not reversible under today's rules. So I'd rather wait till October, November. Do my little spreadsheet, right? Five people tend to be good with spreadsheets, right? But do my little spreadsheet. Basically mock up a mini tax return. What's my interest income this year? Dividends, capital gains, part-time income, social security, rental income, whatever it might be, just mock that up and do estimates for November and December and say, okay, where am I?

32:45Where am I against maybe the 12 % tax bracket? That's a good guardrail, maybe not the right guardrail for everybody. What does this do to my premium tax credit? And October, November, do a Roth conversion based on that knowledge and manage for tax rate and manage for premium tax credit. Yeah, that is brilliant advice because you would have just simply more insight into your taxable income position in that late, the latter stages of the year. Right. So that's just a cool little tip that I think honestly, most people would not have considered. So yeah, Sean, I like that. And yeah, I think Chris's ultimate question speaks to this sounds daunting.

33:23I think that's why like it's this term, right? The Roth IRA conversion ladder, like it sounds terribly daunting, but in essence, it's exactly what you just said. A, these brokerage firms, they are used to this. This is a fairly standard thing. There's nothing crazy that has to go on. Like you said, very specifically, they are going to give you alert after alert. This is a taxable event. They're going to be taxed on this. Do you want to withhold tax? Okay. We understand it's a taxable event. We're doing that with eyes wide open. We're doing that very overtly and specifically. Like you said, obviously we can't give financial advice.

33:55In most cases, you're probably not going to want to withhold on this if you're doing it anyway, and very specifically, there's probably a reason for it. You're probably paying a very low marginal or effective tax rate on that conversion. So you obviously have to do whatever works for you, but I think it should be pretty simple. But I guess, Sean, actually just kind of like a very precise question about how this mechanically is done. So you're taking, let's say funds from your traditional IRA and you are converting it into a Roth IRA. Now, I guess if it was just cash sitting in your traditional IRA, super easy, it just gets moved over.

34:32What if it's invested in a mutual fund or ETF or something? Does those shares get moved over? Do you sell a certain portion? Am I just not thinking about this right? How would that work mechanically? Yeah, so my understanding is you wouldn't have to do this independent sale and turn it into cash, right? You would log into your traditional IRA and see, I have ABC bond fund, DEF stock fund. You would say, I want to do a conversion of however many shares or dollar amount of each or one or both. 20 ,000 of ABC goes into my Roth IRA. And then you invest in something in the Roth IRA. Maybe the Roth IRA has G-I-H, G-H-I or whatever fund.

35:19You pick the fund or maybe it's the exact same fund, right? ABC bond fund into ABC bond fund, ABC bond fund into DEF equity fund. I'm not aware that you would have to do a separate, that you can only move cash from one to the other. And by the way, my guess is, look, I've never worked for a brokerage, but my guess is what they may do is they may just sell inside the traditional IRA, generate the cash, move the cash to the Roth IRA, and then immediately reinvest it. I can't say what the brokerages do on their end, but I'm not aware that there's any sort of requirement that you separately say, oh, I want to do a$20 ,000 Roth conversion.

35:57So now I need to sell 20 ,000 of cash inside my IRA to then do that. I'm not aware that that's a requirement. I mean, check with your brokerage, but it should be a relatively easy portal. And like you said, Brad, this happens all the time. This is the flavor of the day. People talk about Roth conversions all the time. The brokerages are very used to a traditional IRA conversion to a Roth IRA. I don't think this should be at all daunting. It's just playing on a website. Yep. Wholeheartedly agree. And if you can't figure it out on the website, just call the 800 number for support. In my experience, they're all pretty helpful.

36:32I've called Fidelity, and Vanguard at separate times, and I've never had any problems. So, all right, that was wonderful. Let's move on to the next question. Okay. So Sean, this one came in from Kristen and Kristen actually came up with maybe an option that we didn't consider in the first episode. So she said, I just listened to the latest episode with Sean. Great show, but I'm thinking there's one more option that he didn't mention. Withdrawal from HSA for medical expenses, for current expenses, or for reimbursement of past medical expenses. And she was hoping that we could address it in the next mailbag or update episode.

37:09So what do you think about HSA as maybe the eighth option on the list? Yeah, Kristen raises a very intriguing possibility. So I have a technical term that I made up for this concept. It's called, it sounds like an expletive, but it's not. It's called Puck Me. Previously, no, but Brad, it's previously unreimbursed qualified medical expenses. puck me, right? And so what this is, is this is sort of your register of our, I opened an HSA on day one, whatever that was, January 1st, 2015. Since then, I've had all these medical expenses, weekend warrior injuries, doctor's appointments, whatever it is.

37:48And I've kept my little spreadsheet on them. I never, I just paid them out of my checking account, my credit card, never took money out of my HSA. So now, hey, I'm retired in my 50s. I could take a reimbursement of PUC-ME and that's tax and penalty free. I think Kristen's raising a very intriguing possibility, one that I think might be more of a complimentary player in this rather than a primary player. So what I mean by that is you're limited in your 50s to the lesser of your HSA account balance or your PuckMe balance, right? So if you haven't had that many previously unreimbursed qualified medical expenses, there wouldn't be much runway to take this in your 50s.

38:30Or if your HSA just isn't that big, which it may not be, the contribution limits are still somewhat modest. So it's going to be like a modest supporting player in a early to mid 50s drawdown strategy. The other sort of drawback to that tactic is we generally like to let HSAs bake tax-free for years, if not decades, rather than taking the money out in our 50s. But that said, I think Kristen has identified a very valid supporting player in our pre-59.5 drawdown tactic toolbox. Yeah, I love it. That's why this is the ultimate crowdsourced personal finance show, right? Like you said, it's a supporting option, but it's a really viable one.

39:12So very, very cool. Just while I have you on this, Sean, talking about HSAs. So a lot of people, we don't overtly talk about HSAs all that often. And I know on multiple past episodes, I've talked about maybe how I keep my medical invoices. So basically I have, like you said, I have spreadsheets of every, so by year is how I keep it. So I have a one spreadsheet by year for medical expenses paid out of pocket. And then the invoices that I get, I use a scanning app on my phone. I think it's called Genius Scan. And I just very simply save a PDF of every invoice and just save it to a folder on either Google Drive or Dropbox.

39:54And I feel like the combination of those two is good enough in this instance. But I guess one question for you, and I don't know if you have the answer because this is like really in the weeds, but what I'm saving is the actual invoice from the doctor or hospital, it's not a proof or record of the actual payment made, because in many cases, you don't get that. And I have this lingering fear in the back of my mind that I'm going through all this effort to make the payment, obviously keep the record of it in the spreadsheet, keep a PDF invoice, but I'm saving the wrong thing. Has this ever crossed your plate?

40:32Is there truly a way to document and to do it right? Yeah. So that's a great question, Brad. So what you need to be able to prove is if the IRS audited you and you took like, you're 66 years old, Brad Barrett, you took$7 ,000 out of your HSA for the year and you claimed it was a reimbursement of previously unreimbursed qualified medical expenses. Puck me. Yeah, of puck me. So what the IRS would have to do to overturn that and make that a taxable distribution is they would need to prove you didn't have 7 ,000 of previously unreimbursed qualified medical expenses. But you got to remember, let's say you did that for, let's say you had a surgery and you said that was exactly$7 ,000.

41:18And for whatever reason, the IRS was like, no, you don't have sufficient documentation for that 7 ,000. Yeah, but you might have sufficient documentation for 27 ,000 of other medical expenses. So from a strategic perspective of I'm the IRS, this is going to be a difficult tree to bark up because I could win on Brad's specific assertion and still lose the matter, right? Because, well, it doesn't matter. Brad can't prove that$7 ,000 surgery, but Brad could prove$27 ,000 of other expenses. What are we doing here from an IRS perspective? That said, we don't have to have videotape evidence of you going on your credit card and paying the bill and all this sort of stuff.

42:02You have to have reasonable evidence to prove it to, first level would be to a revenue agent. And then the second level would be to a court if you ever audited or this ever became a dispute. And the level of evidence does not need to be, I've got bank wire transfer, I've got the receipt, I've got my own spreadsheet. right? You would think that some reasonable combination of evidences would be enough. Look, that's going to be up to the judge. It depends on the courtroom, depends on your testimony, right? So I don't want to give litigation advice in this, but I think you just want to think about it from a strategic perspective.

42:40And I would not be losing sleep if I didn't have every last, well, I have the invoice and I have my own spreadsheet, right? Those are two compelling pieces of evidence. I'd feel pretty good about that, right? So So it just sort of depends on the facts of the case, but why the heck did somebody give you an invoice if you never paid it, right? Wouldn't there be some sort of trail of them barking up? Well, there's no trail of them doing debt collection on you. So you probably did pay it, right? Or the insurance paid it, but then, I mean, if the insurance paid it, it doesn't qualify as puck me, but that's a whole other conversation.

43:12If they were billing you, it probably says, this is the amount of your insurance already paid. Now here's the 7 ,000 we want from Brad. Anyway, so sorry. No, that's wonderful. answer. It's not entirely clear, but I also don't lose a lot of sleep on this issue as long as we've got some very valid evidence. Yeah. So it's ultimately a thinking in bets type of scenario, which is in this case, the likelihood of you getting audited period is very, very low. And then you have, in my case, I have very legitimate evidence in two separate cases, and I will have a trail of probably 40 years worth of very precise invoices.

43:51And like you said, okay, are they really going to go to bat over X amount of withdrawal? Because again, in this case, I'll have 40 years worth of backup for it. Almost invariably, I'm going to have enough legitimate invoices, et cetera, maybe in their eyes, even though these are all legitimate to cover this. So the likelihood of this being a problem is almost there. So anyway, that was kind of selfish on my part, but I think it's a larger question of, okay, how do you actually document these things? And I think your answer, if I can summarize is you do the best you can, right? And in this case, okay, very clearly, you paid a bill out of pocket, just documented.

44:29It would be really easy just to have a running spreadsheet and to save something to, you know, print. If you have a print, you get something in email, print it and save to PDF, right? Super easy. Yeah. One, we're not telling people, well, don't worry about it because the IRS won't audit you. That's not what we're saying at all. No, obviously not. These are legitimate. Let's be clear. This is as clear as day, Sean. I'm sorry to talk over you. In my case, these are very, very legit. I mean, I have this tied to the penny, obviously. Yeah. I would say, yeah. One thing you can do is in that spreadsheet, make a note of how you paid it, right?

45:08Whether it was the credit card, whether it was a check, which credit card, right? It was on my Bonvoy, Hilton, Marriott, Hyatt, Delta Airlines, cashback, whatever credit card or whatever. You're increasing the evidence in your favor if you just make that little note, right? And then in theory, now, 20 years later, you're probably not going to be able to pull that credit card receipt. So maybe you still want to save the credit card. But if you had an invoice and you had a spreadsheet like that, boy, that seems pretty good to me. I'm not the judge, right? So get me a judicial appointment and maybe we'll...

45:44But anyway, so there you go. That's awesome. I think we've covered it. And I do precisely that. I write on the thing, credit card payment made, the exact date and the exact amount. And if they give me some type of confirmation code or some such. So just to add to the flavor of it. So all right, I think we're good there. Let's move on. This is a question from Shelly. Can I take withdrawals out of my traditional IRA or 401k to pay for college education while I'm still working? I've tried internet searches, but I can't tell if the 10 % withdrawal penalty applies. What about the Roth IRA or Roth 401k?

46:19Can I take out the gains along with the contributions for education? And how do I deal with this on my tax forms ultimately? All right. So several things going on in this question, Shelly. So So first of all, if it's a workplace account, whether or not you can take that money is going to be up to the plan documents, right? So that's a plan rule, not a tax rule. You have to look to your 401k. Could you take a distribution from your 401k traditional or Roth to fund college tuition, right? That's up to your employer's plan. That's not up to Brad and Sean, unfortunately. All right. But let's think about using retirement accounts for distributions for funding higher education.

46:59Now, there's actually, Brad, I'm going to send you this IRS URL. There's a website where they have all these penalty exceptions. And one of the penalty exceptions applies to IRA withdrawals, but it does not apply to workplace plan 401k type withdrawals. It's for higher education. So what in theory Shelly could do is if she had a traditional IRA, She could take a distribution from it and use that to pay a child's, say, college tuition, maybe her own college tuition, right? You have to just double check the rules on that, but she should be able to take that, pay her child's college tuition. From a traditional IRA, it's taxable, but it won't be subject to the penalty.

47:40And then she's referring to the tax return reporting, which gets really confusing. So what's going to happen is this. Vanguard, Fidelity, Schwab, E-Trade, whatever it is, is going to issue Shelly a 1099R for the year and say, hey, Shelly, you took out$15 ,000 from this traditional IRA. And oh, by the way, it's all taxable or the taxable amount's not determined or whatever it's going to say. That financial institution has no idea what you did with the money. They don't know if you went to Vegas, if you paid for a heart transplant, paid a college tuition bill. They have no idea. So they just say, you took this money out.

48:15All right, now put this on your tax return. Well, guess what? You have to put on your tax return. If it's traditional IRA, it's fully taxable. But then you also attach to your tax return a form 5329. And there's a code on this. What you have to do is you have to say, well, I took this money. I'm not 59 and a half, but don't charge me that 10 % early withdrawal penalty. I took the$15 ,000 out. The code is 08. You put the 08 code, go to the instructions to the 5329. There's a code that tells the tax return software, okay, no problem, no early withdrawal penalty. Still income taxable, but fine. But Shelley also raises the possibility, maybe I use a Roth IRA for college tuition before 59 and a half.

49:00That's a valid move too. All right. And assuming it's a return of old annual contributions, tax free as well. The problem with that is that creates income from a FAFSA perspective. So this is, people don't talk about this too much, but we love Roth IRAs. Who doesn't love tax-free growth, right? But there's this sort of hiccup. If we take a withdrawal from a Roth IRA during the years that are FAFSA relevant, and what we're doing is we're saying, okay, FAFSA people, whoever determines expected family contribution, we have additional income. You say, wait a minute, that was a return of my old annual contributions.

49:40That's not income. Not according to the FAFSA people, right? Their rules say a retirement account distribution, whether it's traditional or Roth, is income. So we may now have a higher expected family contribution to tuition, i.e. we're going to pay more to the college because we had this additional income that FAFSA says is income, but we don't think of as income. So that's sort of an interesting issue. My research on this on the HSA indicates the HSA PUCME distribution would not be subject to this pitfall. So, you know, interestingly enough, there's a little advantage to HSA puck me over Roth basis in this particular case.

50:15So Brad, I hope that answers the question. Happy to talk further about that. No, I think it does. And yeah, it's amazing how, like you said, there's, there are always these interplays between the different things we've talked before at length about the ACA and having enough income, having a low enough income to get subsidies, but to qualify. And now, like you're saying, she's asking very specifically about education. So you have to think FAFSA. And it's fascinating that that really does come into play. So just like always with this stuff, it's just the more you know, and that's just another piece of information that we all have to file away, which is like you said, retirement account withdrawals, create FAFSA income, hard stop.

50:58It's just something we need to know. So yeah, very, very helpful, Sean. All right. The next one came in from Matt and Matt said, how does the rule of 55 work with solo 401ks? Can you retire pre 55, work a side gig and open a solo 401k at age 55, roll funds into that account, separate from service and then withdraw penalty free. So I like Matt's thinking here. It's certainly outside the box, but Sean, is this viable? All right. So really interesting question. And I think Matt is touching up on a somewhat uncertain area of the tax rules. So to my knowledge, the IRS has never issued any definitive guidance on this particular issue.

51:41So there's two things that are in play. One is this, in order to use this rule of 55, which we talked about last time, you have to quote unquote, separate from service, right? That means you have to leave the job. And in Matt's case, that job would be self-employment, You can separate from self-employment. You just don't do any more self-employment. But then there's a second rule we're running up against, and it's this. A solo 401k needs an employer to sponsor it in order for it to exist. If I'm self-employed, I have Schedule C income, and then I retire from that, aren't I no longer self-employed, meaning I'm no longer an employer, meaning I can no longer sponsor a solo 401k.

52:29So I can't say I've thought about all the permutations and combinations here, and I'm not here to give anyone a definitive answer. But my initial analysis here would be, I would be very hesitant to rely on the rule of 55 in the solo 401k context, because that means I've separated from service, which means I'm no longer an employer, which probably means I can no longer sponsor the solo 401k, at which point the solo 401k would need to be direct trustee to trustee transferred preferably into a traditional IRA. Or if you'd go to a W-2 and they've got a 401k, you could move it over there. So Matt's touching upon a really interesting issue.

53:09I can't say there's a 100 % definitive answer here, but my analysis is it's probably not available in the solo 401k context. Okay. Yeah, that certainly makes sense, the logic of it. I guess a more general question, and this I feel like is something I should probably know, but it's just so specific, is I guess to Matt's larger question, forget the solo 401k, but he's talking about rolling funds into account. So in order to kickstart this rule of 55, now, can you roll an old 401k into your current 401k? Let's say, forget this solo again, forget that this is a side gig, just you're working a job and then have it all subject to the rule of 55?

53:54Is that something, does it depend on the rules of the plan? Is that something that's viable or am I just totally off base there, Sean? I think it's totally viable. I would double check the plan. I've never actually come up against that scenario. So theoretically it should be fine. I would just double check the rules of the plan though, to make sure that that money can easily come out after the year you turn The year you turn 55 or later, you separate from service. Before you rely on the rule of 55, regardless, you just want to make sure, okay, I separate from service. I'm 56 years old. How easy is it for me to get partial periodic payments regardless of what you were talking about?

54:35Maybe I've been there 30 years. I just want to make sure that this is an easy, under the plan contours, it's easy for me to go in in March and grab$7 ,000. And then in May, it's easy to get$8 ,000. And then in June, 3 ,000, July, 8 ,000, whatever it is. I just want to make sure that that is going to be easily done. And plans have a wide latitude in terms of how their distributions, particularly before 59 and a half work. So that's one of those diligence points. If we're relying on the rule of 55, we just want to go in and do our diligence in terms of our specific plan. But conceptually what you're saying, it absolutely seems possible.

55:14Okay, cool. Very cool. And yeah, I think the upshot of all of this is check with your plan. Go to the HR department. If they don't know, the brokerage that helps facilitate the plan can help. So just ask these questions. Every plan is different. And I think that's something we've seen as a through line on both of these episodes. So, all right. Next question, Sean, came in from Kiva. And the question was, Sean said the tax code wants us to be early retired and married. I see what he means with the early retired part. But I don't see what the additional benefit of being married is, though. The numbers, for example, deductions, brackets for single filers are generally just doubled for married filers, right?

55:53And I did notice that you circled back and confirmed the early retired part, but not the married part. So I still wanted to check in for clarification. So yeah, great question. Would love to hear your thoughts on this. Yeah, this is a great question. And so I've got three different areas I look to. The first area is this year's tax return. Husband and wife, they're both accumulators. Does the tax code want us to be married or single? In most cases, the tax code probably wants us to be married, but that to my mind is sort of nickel dime. I don't really worry about this year's tax return too much from a planning perspective.

56:27I'm a lot more interested in the future and especially the long-term future. And that brings us to two points. One is early retired and married tends to be the sweet spot, right? So I think this is where the married folks have a real advantage. And it's a confluence of sort of two things. The correspondent is absolutely right that all they do for the standard deduction and for those low tax brackets is they just sort of double them. So we think, oh, okay, so singles are about the same as marrieds. But we have the confluence of two different things that sort of say, no, marriage are actually much advantaged in early retirement.

56:59One is this, a married FI couple tends not to spend two times what a single five person spends. Now, this varies. For food, it's probably about 2x, but for hotel stays, it's not 2x. For airfare, yeah, it is 2x. For housing, it's probably not 2x. So it varies, but it generally doesn't get to double what our single person spends. And that then affects their tax return because they don't have to take out as much money. They're not creating as much taxable income as double a single person. The second thing is when we have two people married, one of them earned less and generated less in terms of retirement accounts, taxable accounts.

57:39And so when we put all that together, the less spending and the fact that one of them didn't build up as much in terms of retirement accounts, taxable accounts, when we do our initial analysis, maybe we get before tax planning, we get a single person with say 15 ,000 of adjusted gross income. what's the married couple going to look like? In most cases, they're not going to look like 30 ,000. They're going to look like 20 ,000 or 25 ,000. Well, once you start with that premise, our Roth conversion runway is going to be so much more every year, and this will compound, our Roth conversion runway is going to be more for our married couple.

58:18So that's the first big reason is it just turns out that Roth conversion runway tends to be more than 2x for a married couple than a single person just because of these phenomena of we don't have 2x to spend, we don't have 2x the wealth, generally speaking, when we're married. Okay. So that's one thing. And then the second thing is treatment at death. This is so important. The tax code wants you to leave your assets to your spouse. And I'll give you one example is the HSA. Oh my goodness, right? I die, I leave my HSA to my spouse. It becomes her HSA. It's totally tax and penalty free to her and now she can use it as an HSA for the rest of her life.

58:59Fantastic. What if I die and I'm single and I leave my HSA to my mom, my dad, one of my brothers? It is fully taxable to them in the year of my death and it loses its HSA status. Terrible. Well, okay, HSA, that's a small piece of the pie. Yes. What about traditional IRAs, Roth IRAs? The tax rules very much favor married people. Generally speaking, the married person can make that traditional IRA, their Roth IRA, their own delay distributions, or if it's Roth, they don't ever have to take distributions versus if I'm single and I leave that Roth IRA, traditional IRA to my sibling, my parent, they will have some tax planning, some ability to mitigate the hit, but it's nowhere near as good as my spouse does.

59:47So for the early retirement planning and for the death, the transfer of assets, particularly tax advantage assets, death. I very much think the tax code wants us married, whether we like it or not. It's just the way the rules are written. Yeah, Sean, thank you for the flavor on that. And Kiva's question on the face of it, it's, hey, I don't really understand why, because it is just doubled, right? The brackets are doubled. The standard deduction is doubled. It seems like it shouldn't favor, but yeah, you just gave a lot of flavor there that I think is really helpful. And again, this is a sense, it's an argument, right?

1:00:22In terms of, okay, look, here are the reasons why. And obviously we're not telling anybody to go out and get married specifically, none of this kind of joking stuff, but it's interesting that, okay, there are further considerations. And I think just like all of this stuff, it's just understanding. Like I had no idea until you just said that about the HSA, if it doesn't go to a spouse, that this thing is taxable in the year of death, which seems ludicrous to me because as we know it, the HSA is this incredible, essentially triple tax-free account. And then it takes on a completely different character if it's not being passed to a spouse as you're describing it, Sean.

1:00:59Yeah, Brad, let me just add one additional piece of it. So you say, oh, I didn't know about this thing where if I leave it to my son, daughter, sibling, parent, it's fully taxable to them. Well, there is one work around that if we're not married and it's leave it to a charity, right? So the charity, I mean, technically, I guess it would be taxable to them, but they don't pay income tax. So if you have an HSA, a Roth IRA, a traditional IRA, a taxable brokerage account, and you want to do something for charity at your death, maybe you don't want to do all that much, but you want to do something.

1:01:30Well, the first asset to leave to a charity is the HSA. Traditional IRA would probably be the second one, but certainly the first one, the lowest hanging fruit is, hey, I have a$20 ,000 HSA. I'll leave that to charity and then leave the rest of it to my children, my siblings, my parents, whoever it is. Okay, great. I mitigated the tax hit that way. Awesome. All right, Sean, we're coming into a close here. We've got a question from Ted. And Ted said, I actually wanted to add an additional thought to the discussion. You can use money in your IRA to pay for health insurance premiums even before 59 and a half.

1:02:07There are some rules, of course, but I don't think I've heard anyone you've spoken with talk about this so far. And Ted touched an article and he said, thanks, keep up the great work. And Sean, I'm curious, what are your thoughts about this? So using money in an IRA to pay for health insurance premiums? Yeah. So there are two potential paths that could be available to avoid that pesky 10 % early withdrawal penalty when we have medical insurance premiums before 59 and a half. One of them is the medical expenses, right? So medical expenses that are above 7.5 % of our modified adjusted gross income.

1:02:45We could take IRA distributions and pay for those medical expenses without the penalty. And it could be health insurance premiums. It could be doctor's visits. It could be any qualified medical expense. So quick examples. And most early retirees are not going to have$100 ,000 of modified adjusted gross income, but to make the number simple, let's use that. So say our modified adjusted gross income is$100 ,000. And then we had 10 ,000 of medical expenses, including health insurance premiums this year. Up to 2 ,500, there's this floor, the 7 ,500, no, we don't get credit for that. But above that floor, we could take 2 ,500 in my example out penalty free.

1:03:26We'd still pay tax if it's a traditional retirement account. So that's one potential avenue available on that. That 7.5 floor is sort of pesky in this regard, but it's at least out there. The second avenue that's available is not available to all that many in the FI community, but it's at least worth barking up the tree, right? So this rule says that health insurance premiums specifically, all right, can qualify for the exclusion from the 10 % early withdrawal penalty, regardless of amounts. We don't have to do any calculation like I just did. if during the current year or the previous year, we have received 12 or more months of unemployment insurance compensation.

1:04:08So we were essentially fired or laid off or something like that. For the early retiree, I tend to think that won't be applicable, but I guess you never know. And I certainly haven't run through all the permutations and combinations. But yeah, if we've received unemployment insurance this year or last year, and we have medical insurance premiums that we're now paying out of pocket, we might want to think about, okay, maybe that's a valve to qualify for a penalty exception. Awesome. All right. So Sean, that I think brings us to a close here in terms of the questions that we're going to talk about on the podcast.

1:04:41We did have two other ones come in that actually you wrote up a really significant article that we will link to in the show notes for sure. And I think it gives a flavor on both of these questions. So just to kind of wet people's appetites, and if you want to talk about this even for a couple of seconds here, but basically Jessica asked a very broad question about if you have different types of accounts. So she asked, what if you have a decent amount in Roth 401k in addition to Roth IRA, how would you leverage this? And in what order would you pull out the assets? And I think that was the key from Jessica's question.

1:05:16And then Kelsey asked a really cool one, which was, I can't help but wonder if there is a spreadsheet or a simple checklist for the best way to access funds when you retire early. Now, Sean, I know we don't ever like to be specific and there's no world where we could ever give advice to everyone. It's just, it is inconceivable. But I'm getting the sense from the first look that I had at this article that you did try to touch on both of these questions in that article. Yeah. So what I'll say about that is a couple of things. One, I do tend to think the taxable assets first, I think has just a lot of advantages, right?

1:05:53It's not going to be available to everybody out in the audience, but boy, the taxable assets first has so many advantages from tax planning perspective, keeping our taxable income low, creditor protections better when we take out our taxable assets first. The other thing I want to touch on, and I touch on it in the blog post is for many folks, it may be a combination of one or more of these methods. So what I mean by that is, I'll give you two examples, or just I'll give you one example, two flavors, right? Maybe someone retires and they're using the rule of 55. Great, you know, but that does create taxable income.

1:06:30And maybe it's December and they just need a few thousand more bucks to live for the rest of the year. So they're going to take out their last distribution. they say, oh, that last distribution is going to kick us into the 22 % bracket. Well, that guy Sean was talking about Roth basis. Someone wrote in to choose a FI and talked about HSA Puck Me, right? Maybe what I do for that last distribution is I've been living on rule of 55, that's fine. But just to make sure for this year, we don't go into that 22 % bracket, just that last distribution, I'm going to take old contributions from my old Roth IRA, or, oh, there's that funny term, PuckMe out there.

1:07:09I'm going to take a withdrawal of some old PuckMe. And so either one of those two will make that last distribution tax-free, meaning I will be in the 12 % bracket for this year. So that could be one way where we sort of have a primary method. In that case, it was rule of 55. And then we have a secondary complimentary method, Roth basis recovery or HSA PuckMe recovery, where we're just managing for tax rate. We're just playing the game a little more sophisticated than maybe some other people do. Very, very helpful. And like I said, we will have that article linked up in the show notes. And Sean, as always, thank you for being here.

1:07:48Thanks for all your expertise. So fitaxguy.com. Is there another way for people to reach out to you? Absolutely, Brad. You can reach me at my financial planning firm, mulaneyfinancial.com. And I am on YouTube at Sean Mulaney videos and X at Sean money and tax. Beautiful. Sean, as always, thank you. And until next time, I'm sure we're going to have another mailbag episode coming up real soon. So if you're listening to this and you have questions on this or any other topic, just send them into us feedback at choose a buy.com or really the easiest way is to get on my newsletter at choose a buy.com slash subscribe and just hit reply to any single one of those emails.

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1:10:19Thank you.