Episode 86: Navigating Roth IRAs, Money Markets, and Financial Advisor Fees

In this episode of Accessible Finance for Retirement, hosts Eric and Rachael Johns answer audience questions on retirement account strategies. They discuss the benefits and considerations of opening a Roth IRA for a spouse, strategies for optimizing returns on money market accounts, and delve into the pros and cons of active versus passive investment management with regards to financial advisor fees. The episode wraps up with advice on handling taxes for Roth conversions. Tune in for detailed insights on making the most of your retirement funds.

🎙️ Have a financial scenario you’d like us to discuss (without giving personalized advice)? Send your questions to podcast@equilibriumfp.com—we’ll keep your information completely anonymous!

📢 Don’t forget to like, subscribe, and share with friends who could benefit from smarter retirement planning tips!

Read the Transcript

Episode 86

Eric: [00:00:00] Welcome to episode 86 of Accessible Finance for Retirement.

I'm Eric Johns. And I'm Rachael Johns. Let's dive in. 

Rachael: So Eric, I have a number of questions that have been sent that we are gonna help answer. 

Eric: These are fun. Let's go. Are you excited? Yes, ma'am. 

Rachael: All right. Question number one. All my retirement accounts are over five years old. My wife and I are over 60. Okay, this is likely the last year where I could open a Roth IRA in my wife's name due to retiring in 2025.

I'm not sure if I should open a Roth IRA in her name. Is there a future scenario where I pass and the widow would benefit from already having five years in a [00:01:00] Roth IRA when she inherits mine? 

Eric: Hmm, that's a good question. Um, yes, she would then be able to, well, she'd be able to roll the account into her name.

Let's think about this. She'd be able to roll the account to her name. Right. And like, how is that good though? It's a Roth, so there's no RMDs. Mm-hmm. For him or for her? Mm-hmm. I guess it just depends on whether or not she cares about the custodian. It's, there's not a huge benefit, I guess. There's not a huge benefit.

You don't have to do it. Um, I probably would just for the flexibility of being able to move custodians or have all the accounts in her name, it might be marginally more annoying for her to gain access to your account versus hers. If you have her account as like the designated beneficiary or like the TOD, well, it's not gonna be a TOD, but it'll be a beneficiary on your account, then I think it'd be a little bit quicker for the institution to just take the money transfer.

Yeah, yeah, yeah, yeah, yeah, yeah. To treat it as her own. Um, but you're not, you're that, I don't think it matters six and one half. 

Rachael: Excellent. 

Eric: Sorry, question number two. Had to think that one through. 

Rachael: That's You should, these are new. These would never see them. 

Eric: Well, that's [00:02:00] the idea. My favorite way to do it.

Gotta be good at the game. Right. 

Rachael: All right. Are you ready? 

Eric: Yes, ma'am. 

Rachael: Where are you putting your cash? I've been holding about $175,000 in an an ally high yield money market account. Okay. But over the last couple years, the rates dropped from over 4% to three point half. I'm looking for someplace relatively safe.

That would have a better return. 

Eric: Hmm. 

Rachael: By the way, I'm not interested in advice on how much cash I should have or not 

Eric: have. Wow. I like that. This is, the guy knows what he wants. All right. Nothing wrong with that. He also knows probably what you're about to say. Little bit assertive there. Yeah. Um, I, unless this question is incredibly old, um, the, 

Rachael: it is not old.

It was made two weeks ago. Got it. One week 

Eric: ago. Okay. The. Ally money market then is slightly below rate. I would say in that most money markets are still at like 4.1 or so net of fees. So you could just move to Fidelity, Vanguard, Schwab, and have 4.1% yield on the money market. [00:03:00] But. Yeah, that's, that's probably what I do.

That's an extra a hundred basis points. Right? He said he was down to three. Is that what he said? Three and half hundred 70 5K. He 

Rachael: said it went from over four Sure. Down to three and a half. 

Eric: I mean, I haven't looked at the money market this week, but I mean, interest rate expectations, there's an 80% chance of the Fed CME tool that they're gonna cut.

Uh, so maybe the money mar the money markets usually don't move ahead of that though. So I, I would have to go Google S-W-V-X-X current yield. 

Rachael: It's just tough. 'cause I think the options when you're trying to hold something in. Cash. Typically money market's fine going be money 

Eric: market's usually the thing we'd recommend.

So to the extent that allies money market's usually par like with everybody else, like if he said he was over four or a little at four, he is probably still in this, in the ballpark of reasonability. I don't know. That would make a huge change based on, you know, a few basis points. No. Yeah, probably not. I think you're fine.

Keep doing what you're doing. Allied money market's fine. 

Rachael: Alright, number three. You ready? I'm getting close to retirement and I've spoken with a few advisors. But I'm hung up on the fees. Sure. It seems that the ones that charge a [00:04:00] UM of 1% seem more active in the investments. While some of the flat fee people seem more passive.

In other words, the a UM seem to tweak and add slash remove segments based on markets and environment. But I've read many times that most cannot be investing in s and p or a total stock market, so, or Oh, that most times it's better. Oh, okay. To do s and p or Total Stock Market. So is active really better?

All the other services seem similar. They all do rebalancing, et cetera. I guess I'm just looking for thoughts on active versus passive as it feels like it's a big difference in fees. 

Eric: Boy, this is such a great question. Um, fantastic question. First of all. The where do we, where do we start? So I've listened to so many podcasts.

I start with the first shout out to, oh, sorry. Oh, no, go, go. Shout to, I was just gonna say, shout out to Rational Reminder Podcast. If anybody's really interested in super granular discussions. I mean, nobody's really gonna want that, but he loves it. It's my favorite. It's so good. Uh, Ben Felix [00:05:00] is just the man.

The guy is great. And the, the, just the pursuit of knowledge. I, I hope so. He, well, I, I love that guy. He is great. Um, the pursuit of knowledge on that podcast in my mind is second to none, right? Like they're, they're strictly speaking to academia. They only care about like objective data-driven results and conclusions based on those data-driven results.

So like academic, peer-reviewed studies, papers, everything else. This is a long-winded way of saying there's a huge. Vibrant conversation about active versus passive right now. Mm-hmm. Even the passive funds that you might think of as completely passive, like VOO for example, like a Vanguard s and p 500 ticker, you would say that like they still have to make decisions.

They have to decide when they're buying IPOs and they negotiate directly with the issuers of the IPOs, which I found out recently on one of their podcasts. Um, when they interviewed Vanguard's, uh, CFO and our CIO and then their, um, chief research Officer, so CRO and CIO, and. Then to get to negotiate those on their IPOs.

But they have to decide when are they gonna rebalance? Are you gonna do it quarterly? Are you gonna do it [00:06:00] monthly? How are you gonna rebalance? Like, you know, like how are you gonna buy international? Like what are you thinking about when you do that? What's included in the indexes that you're tracking?

Mm-hmm. How thoroughly are you gonna, like, there are a number of decisions that even these passive funds that are really just trying, they're just trying to copy the index, but they still have to make decisions right 

Rachael: now to be clear. He was not being critical of the 

Eric: index funds themselves. Yes. No, he, he wants index funds.

Rachael: It, it, it was, the concern was the change in the fees charged by the financial advisor. Mm-hmm. Right. And so I think that he said, you know, what I found is that those charging a UM fees are more actively managing funds and those charging flat fees are more passively managing my. Investments. Got it. Okay.

And so I think the idea there is that while that may be his experience, there are people who are charging a UM who are outsourcing. Outsourcing also not doing anything. Yeah. Or passively doing investment management. There are people [00:07:00] charging flat fees that are actively managing things, so, mm-hmm. While his experience may be like active equals a UM, passive equals flat feet, that would be a.

Just not accurate. Um, correct, 

Eric: correct. Correct. That's, that's fair. That's a false dichotomy there. Um, I agree. So I would say that it's d it is difficult because I think the question under the question is like, how. Is this active management actually gonna justify the 1% AUM fees, right? Like, how am how are you gonna beat the market?

And, and you know, we get, frankly, we, we get that question a lot. Like a prospect will sit with you and you'll say like, okay, your fee's 1%, whatever. Like, we'll just use 1% 'cause that's what he used, right? Yeah. So your fee's 1% are you, so that means you're gonna beat the s and p by 1%, right? And we're like, whoa, whoa.

No, absolutely not. We're not gonna guarantee any returns. Right. We cannot do that from a compliance perspective. You can't do that, period. Some of us don't do it, but, but, but to be objectively clear, like no, that, that's not even the goal. Right? Right. Like, we're gonna be participating in the markets. To the extent that you're comfortable with that, it meets your risk tolerance and risk [00:08:00] profile and everything else 

Rachael: really quickly.

The goal is certainly to save. More than the fees. 

Eric: Correct. You say that won? That's not, that's not the goal. No. We're just here to pocket the fees and much you lose, like the 

Rachael: goal is definitely to put the people that the clients are working with in a better position. Better position, better. A hundred percent without a doubt.

So I would say ways to do that though. Correct? 

Eric: I believe that the ways to do that are tax alpha, um, helping keep the clients in the, in the seat. Right. You might think of that. So like a lot of it is considered is, is behavioral finance to be mm-hmm. To be honest with you. So it's, um. Education on markets that are gonna help provide comfort.

The idea that somebody that's a professional does this every day, is actually watching these things every day and you know, staying up to like, Hey, is a crypto market actually a viable, you know, investment strategy? Like, how good is that right now? Like, should we be all in a AI stocks? I know a coworker of mine had a 300 x return on, you know, insert AI company here.

Rachael: I think that's what it is. I think that it's so real. It's so tangible to see how impactful. Investing in a stock that has just [00:09:00] shot to the moon has been, or Bitcoin that people Exactly. That. People, um, I think tend to, the general public tends to believe that the biggest area where they are going to make money is through their investments.

Right. But the goal with your investments is to keep up with inflation. Right. To follow the up and to the right over time. Right. Um, and I think that because the things like tax law, um. Withdrawal strategies. I think all of that is so. Confusing. It's so granular that it's a lot harder to have a firm grasp on how much money can be lost or saved.

Mm-hmm. By making mistakes or smart choices in those arenas. 

Eric: Right. So just succinctly, I would put, again, this is a fantastic question. I feel like I could speak about it for hours, but just to, I would say that you would want to look for an advisor or firm whose investment philosophy aligns with yours.

Mm-hmm. Right. And that does not mean like if they're charging a UM. And they're using mostly what you would consider passive funds. I don't [00:10:00] think that's a bad thing. Like I would actually argue that that's a good thing, right? Mm-hmm. Um, and then even some of like the more active managers in the space, like DFA, you would hear Dimensional funds and Avantis, which is kind of a spinoff of DFA, um, you, you, they could be considered active.

What, what they're doing is actually curating the lists of like broader index funds into what they would track because they feel like their valuation metrics are better and the timing around the rebalancing creates less, um, arbitrage opportunities for, you know. Um, institutional investors. So this is all like granular stuff that we could probably get into if you wanted to talk about it.

But I would say that you want your investment philosophies to align. You're looking the, you, you'd always be looking for, to work with a firm that. Um, is gonna generate value for you in excess of their fees, but the way that they're doing that should not necessarily be linked just to outperforming the market.

Mm-hmm. It should be in putting you in the portfolio that meets your risk tolerance so that you're not jumping ship when you shouldn't be. Um, and you're looking for tax alpha, essentially, right? Like [00:11:00] changes in tax rates over time and what you're paying and how you're getting the money outta the account.

Because really all you should care about is your after tax balances. You know, if you have. $10 million pre-tax and you're only gonna get 2 million after tax. That should be viewed very D That should be viewed as only 2 million after tax. Versus if you have 10 million pre-tax and then you're somehow able to get like 4 million, 

Rachael: sometimes you get blind by the, I just use one by the number on the account without realizing how much of it's mine and how much of it belongs to the government.

Eric: Right. And I'm, again, I'm just using random numbers, I'm just pulling numbers outta the air. But the point is most people have huge. Pre-tax balances and aren't quite sure about how the mechanics of this all work and how these pieces fit together. So, you know, there's, there's again, tax planning, estate planning, retirement planning.

How are you taking the distributions, when are you taking the distributions, RMDs, social Security, there's a lot of. Granular things that will be coming together there converging, you know, Medicare. Um, so yeah, you've got insurance planning, should you get life insurance? How much should you get? Like these, these things holistically should be accounted for.

And I would say that in general, well, I can't say in general, but I would say that you wanna be sure that you're gaining access to all of these areas that you feel [00:12:00] like you need access to. Right. And I would argue that most people do need access to, to all of these areas. Correct. So look for value in access of the fees for sure.

Um. And it's just a question of can that advisor provide the value and articulate the value that he's gonna be he or she's gonna be providing in access to those fees? Oh yeah, 

Rachael: she, thank you. 

Eric: Yeah, for sure. There's some great advisors 

Rachael: I know. 

Eric: Fantastic. 

Rachael: Okay, so our next question, our last question for this episode, I have a Roth conversion question.

I did my first Roth conversion earlier this year, moving $50,000 for my TIRA to my Roth. I am planning on paying the taxes out of my high yield savings account, but I have not done so yet. I was planning on paying when I do my normal taxes, but now I'm afraid I may have made a mistake. Am I supposed to file a quarterly withholding with the IRS when this is done?

And if so, do I have time to file so I don't get penalized next to you? 

Eric: That's a fantastic question. Let's first add all the relevant disclaimers. This is not tax advice. Please don't construe any part of this as tax advice. Please consult your tax advisor [00:13:00] or tax preparer 

Rachael: hypothetically talking about, 

Eric: right.

Let's just educate you a little bit on how this works. Yeah, so you could potentially be subject to timing penalties. It depends. Right? So on what, on the amount of taxes you owe on whether or not the tax payments are being withheld from your, uh, W2 or if you have other sources of income or distributions, if you withheld the taxation from your, how old did she say?

Did she say no? Nope. Okay. We don't know. 

Rachael: So there were questions asked in response to this and the. Original poster did not 

Eric: elaborate. Yeah. Got it. So real quick, if you missed your deadline, like, I'm not exactly sure when this 50 K was converted, but if it was in quarter three, then the deadline for the estimated payment there is September 15th.

So you still have time, you can make that. Um, alternatively 

Rachael: now, so the posters made we're in August. Sure. Posters made this week. Okay, 

Eric: so when they said, yeah, you have time, you have, when 

Rachael: they said it was made [00:14:00] earlier this year, so Oh, see? See? I see. I see. It could 

Eric: have been January one. Sure. Let's assume it's January one.

Okay. Let's assume it's January one. Worst case scenario. Yeah. Let's see. Worst case, yeah, worst case scenario. You converted 50 K January one. You didn't pay any tax on that. And do, do they have a job? 

Rachael: Not that they specified. 

Eric: Okay. Possibly. Okay. If they have. A job, right? Where they're going to have withholdings they can withhold from their W2 even on their last pay statement.

Right. Like obviously you're not usually gonna be, you're not gonna have substantial enough gross wages to be able to withhold all of it and have that state substantiate entire tax, have 

Rachael: increase their withholdings for the rest of the year, for the rest of the year to make up for whatever taxes. Exactly.

Correct. Taxes are 

Eric: here. Exactly. Correct. So you're withholdings that you have. At any point in time, including December 31st, are counted as if you paid them in on January 1st because the IRS has no way to know when you actually, when those taxes were actually withheld, they treat it. That's what one comes through W2.

Correct. Or any other firm that's gonna pay, you know that Any other way that you're gonna be paid that's gonna withhold taxes to, for the government. It could be your own 10 [00:15:00] 99. 

Rachael: What if our Roth converter did not, is not working? 

Eric: If our Roth converter, 

Rachael: yeah, if the person doing the Roth conversion. Like, what if this person did not, 

Eric: oh, is not working, what are they gonna do?

Well, they're probably just going to pay the taxes now and they're gonna owe it's, it is just gonna be interest, like you're gonna pay at the federal, uh, what is it? A FR rate applicable federal rate? I believe it is. Um, so the sooner they're 

Rachael: the ta, like let's say it was January one, Andre not working, 

Eric: they're gonna be treated as yesterday.

Correct. They're gonna be having, they're gonna be treated as having underpaid for the. Period of time that you know essentially Correct. Yeah, exactly. So for every month or quarter that they've underpaid, they're gonna be assessed like some percentage, a quarter of the A ffr, the applicable federal rate.

And then they take that to the amount that is considered underpayment. They're gonna tack that on. It shouldn't be nonsensically expensive. It's not gonna be all that different than the prevailing federal funds rate. Which means that if you had the money in a high yield savings account, like you said, then you're probably not even losing that much, right?

So you might be generating [00:16:00] 4%, you're paying four and a quarter. Four and a half. So like it's a kind of a wash. 

Rachael: So they said, you know, am I supposed to file a quarterly withholding, um, with the IRS? So the answer there would be no correct, because it needs to be paid in the quarter if you're not having it withheld from your.

W2, 

Eric: if you're not having it withheld, you would just make an estimated quarterly payment, uh, to be, to be honest, I'm not familiar with a quarterly withholding, 

Rachael: well, I'm sure I'm assuming this. 

Eric: If they mean quarterly estimated payment, then yes, just make an quarterly estimated payment due to the, the amount that you're gonna use.

Use your tax preparation software. Probably like use free tax, USA Turbo Tax, you know, whatever you, we use, we use the list a plan, but you know, that's planning software, so use your tax preparation software. To know what your total tax liability is, and then you can adjust your withholdings so that your total tax liability is withheld by Jan by December 31st.

Mm-hmm. And you'll have no issue regardless of the timing of the payments. Regardless of the timing of the earnings. Okay. Does that make sense? So if I can make sure that my total withholdings on my W2 Correct. That I'm gonna receive, [00:17:00] you know, at the beginning of the next year. Mm-hmm. Are, um, sufficiently covering the entirety of my tax liability.

Really, if they cover 90% of my tax liability, I'm good. Same if they cover a hundred percent of prior year, if I make under 150,000 or 110%, if I make over 150,000, then I'm covered as well. So that's all fine. You can avoid the penalties that way. There are still, 

Rachael: so there's an added perk there if you are still working and having.

Mm-hmm. Uh, taxes withheld. 

Eric: Correct. That's for, that's for, I'm sorry, that's for tax payment penalties, but the timing could still apply. The W2 withholding is, if that is sufficiently covering your tax liability, you're good to go, period. Mm-hmm. Does that make sense? Mm-hmm. Sorry, I went on the tangent there, but the, the, the timing still matters.

The timing does still matter. It's interesting because I used to think it didn't, but it does. The 

Rachael: question, it's interesting because the question is something that seems so simple on the surface, but because of the lack of information that we have about. You know, when it was paid, if they're working, if they're having taxes withheld on anything else, what their tax liability correct is there's, [00:18:00] that's what makes tax.

There's lots of what ifs. 

Eric: That's what makes tax planning interesting, honestly, is there's, it's, it's very personal. There are a number of variables, so it's every puzzle's unique and that's what makes it fun to solve. 

Rachael: There you go. You already here. Alright, well next week we will answer some more questions.

We have no shortage of them. Um, if you enjoy this segment or these types of things and have questions yourself that you would like us to discuss, please don't hesitate to send them in to podcast@equilibriumfp.com. Thanks 

Eric: guys. 

Rachael: Till next time.

 I was supposed to say, I know.