JoeTaxpayer

I usually don’t post on Sunday, so this post is going to be a bit off topic, a few general thoughts. First, I’m happy to see readership growing over the past weeks,

as well as steadily over the past 6 months.

I’ve gotten many comments, most of which are positive, all of which are welcome.

Recently, I’ve started posting about the Money Merge Account, and my feelings regarding that product. Lest this blog turn into my soapbox for ranting, I’ve decided to commit to a steady pattern of posts on Mon/Wed/Fri as I’ve been maintaining, and when I have more to say regarding MMA, I will add an extra post on either a Tuesday or Thursday. Other than that, I am trying to vary post topics, so technical, limited interest topics affecting a tiny percent of taxpayers will not appear more than every few weeks. I think there’s a need to bring those topics up as obscure as they may be. As always, your input is welcome and appreciated. Questions, and/or topic suggestion are always welcome.

Joe

written by JOE \\ tags: interest, irs, mma, money, money merge account, soapbox, tax

I recently read a post “Why I love Roth IRAs” in which the author ignores much of the math going in and coming out. Now, I love Roths myself, but only when used to take most advantage of the tax rates involved. Let me explain. From my feature article earlier this year titled “Can you save too much, pre-tax?” we see that a couple with $447,500 in their 401(k) or Traditional, Pre-Tax IRA, can take withdrawals and remain in the 0% bracket. This is due to the combination of standard deductions and exemptions. The next $401,250 will support withdrawals at the 10% rate.
If you have a defined benefit pension (a traditional pension) the numbers certainly will shift, and you need to take this income into account. Pensions are getting more scarce and those who frequently changed jobs are likely to have never vested into any one plan.
So, now I’ll ask, what percent of retirees are likely to have saved this sum, a total $848,750 from the numbers above? I cite an article from AARP titled 2004-05 Boomers which offers a forecast. One chart in this report offers that for those born in 1956-65, their mean (this means average, important distinction from median, middle) wealth is forecast to be $839K. But reading on, we find that after subtracting non-retirement wealth and present value of Social Security benefits, we are looking at a retirement account balance of just $140K. It turns out the 4th quintile (this is the second 20% from the top) is forecast to have $906K, this scales to about $151K in retirement accounts. Even the top quintile (top 20%) will average $2028K total wealth, with maybe $350K-$400K in retirement accounts. So it’s only the upper portion of that group (in addition to those with fat traditional pensions) that need to consider the Roth while working. For the rest of us, we will likely be in the 10% or if fortunate, the 15% bracket upon retiring.
I’ll close with this thought - each family has their own set of numbers. This is why if you write in to a web site or magazine and ask “Is Roth good for me?”, it’s impossible to answer without knowing many details. We know more the closer you are to retirement, but only have a series of clues the further away you are. Another blog “The Finance Buff” offers a view similar to mine. I remain surprised at how many wave the Roth flag without some level of analysis. For those who have access to a Roth 401(k) and Roth IRA, it would be a shame to load those up and find that they missed out on the tax savings that pretax savings could have provided.

Joe

written by JOE \\ tags: 401(k), Finance, income, IRA, Retirement, retirement account, roth ira, saving, Savings, Social Security, tax, tax rates, traditional pension, wealth

I recently fielded this multi-part question;

First, is conversion from a traditional IRA to Roth IRA still OK when over 70 and taking RMDs (required minimum distributions)?

Ok? It’s fantastic!! I will first tell you that I believe that Roth’s value while working is slightly exaggerated. Your scenario above is ideal. I have an 80+ yr old client who is in the 15% bracket. Each year we convert just enough to ‘top off’ that bracket so the next hundred dollars would have been taxed at 25%.

Second, does the “conversion” count as part of RMD?

No, the conversion must take place after you calculate the RMD. Our RMD is based on 12/31/07 year end balance. We can do the Roth conversion any time during the year, but that RMD is fixed.

Third, is it possible to transfer stock directly from Traditional IRA to Roth IRA — using current valuation on day of transfer as the basis for amount of conversion?

Yes - you can convert stock, the broker will report that value based on the day of conversion. There is no wash sale selling in one IRA and buying in another, anyway.

Joe

written by JOE \\ tags: IRA, irs, required minimum distribution, roth conversion, roth ira, tax, traditional ira

Take a moment to visit the Tax History Museum.

Joe

written by JOE \\ tags: Finance, museum, tax, Taxes

I recently read someone suggesting this, and it seemed like an interesting idea. Borrowing at a low tax-deductible rate on one’s equity line of credit, to invest in tax free municipal bonds or bond funds, which, after tax, would offer a higher return. One problem, the tax code doesn’t permit this.

From IRS Pub 936, page 4:
Mortgage proceeds invested in tax-exempt securities. You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income.

So, an interesting idea, but not one permitted by the IRS.
Joe

written by JOE \\ tags: Bond, Business, Finance, income tax, Investing, Municipal bond, tax, Tax deduction, Taxation

• Dollar Value vs Foreign Currencies
• Trade Surplus / Deficit
• Interest Rates
• Tax Rates
• Unemployment Rate
• Inflation

Did I miss anything? I don’t know if there’s a ‘general happiness’ index available, but if there were, I’d add it to the list. What is this list? It’s the data we follow and hear comments in the business news. There are ideal numbers for each, right? For trade, we want a surplus, we want to sell the goods we make in the good old USA. But we want a strong dollar, and today, the dollar is low compared to say, the Euro, or the Yen. I look at Yahoo and see that in the last few years, the Yen was as low as 123 to the dollar and recently is about 102. I remember in the early 90’s getting 240 Yen for my buck. But at 240, I could buy twice the Japanese goods I can today, so the trade balance was an issue. See where I’m going? And I’ve only looked at two variables so far.

What is the ideal unemployment level? Who was it that said “If you lose your job, it’s a recession. If I lose my job, it’s a depression.” (Some say this was Truman.) I would like to stay employed, so 0% works for me, but as unemployment drops ‘too low’ wages tend to get inflated as people are offered more money to lure them over from another company.

We had a similar issue a few year ago with inflation. As we approached 1% and less, people started to discuss the risk of deflation, as if that risk were real. At that time the budget deficit was no longer, we ran a surplus. The fear turned to ‘where will Social Security funds get invested?” and worse, “how will the Fed implement monetary policy if the purchase and sale of bonds is no longer available?” Well these fears were short-lived, but you get the idea.

I have no answers, just observations on this topic.

Joe

written by JOE \\ tags: Finance, inflation, jobs, tax, Taxes, trade, trade deficit, unemployment

My earlier post, “Do I Need Insurance?” discussed the one example of the person for whom life insurance may not be needed. For the rest of us, married, with children, we may need insurance well beyond the time the kids leave for school.
Let’s first take a step back and start with the initial need. You get married, both of you are working. Now’s the time to buy that first term policy for both of you. An amount to cover approximately 10 years’ salary should be close to the right number. If either spouse dies young, it would ease the burden by being able to pay off the mortgage and have college covered for the kids.
Let’s now move ahead 20 years. Kids are out of the house, maybe finishing up school or completely off on their own. You may still need insurance. If you’ve saved and invested well, between the 401(k), IRA, and the value of you home, you may have well over $2 million dollars in your estate. While the estate tax for 2007-8 doesn’t apply until your assets exceed $2 million (and in 2009, $3.5 million), unless congress changes the law, the estate tax exemption will drop back to $1 million in 2011, after a brief repeal for one year only. Also, while life insurance is tax free to the recipient, if you own your own policy, as most people do, the proceeds are considered part of your estate. You read that right. If you die with $1 million in 401(k), IRA, etc. and have a $500K policy, after 2011, $500K is subject to estate taxes. Of course you may leave an unlimited sum to your spouse, but that only makes her estate larger for when she passes as well. Early planning can help reduce or eliminate what may be a very large tax bill. Death and taxes, both unavoidable, but estate taxes can be reduced or eliminated. I’ll revisit this topic in a feature article on my main site in an upcoming monthly feature.
JOE

written by JOE \\ tags: estate planning, insurance, tax, Taxes

If you have any dependents, or debts that someone has cosigned on your behalf, you should consider a term policy. I believe that “no dependents, no need for life insurance” is valid for most people. One exception that may apply (I’m not fully convinced) is when the individual is likely to have the need for insurance at some point in the future, e.g. they have a strong chance of getting married and wanting children. It’s easier to buy insurance at a younger age and there’s always the chance that one becomes uninsurable just at the point when the need arises. I believe that there’s a much greater need for disability insurance. The numbers show far more people become disabled before retirement age than dying. Something to consider.
JOE

written by JOE \\ tags: annuity, Finance, insurance, tax

There are many financial issues that apply to a small group, relatively speaking, but for those for whom it applies, there’s some savings to be had by being aware. This is one such topic. Net Unrealized Appreciation (NUA) applies to company stock held in one’s qualified retirement account (such as 401(k)) and is the difference between the market value and the cost within the account. This often missed rule allows you to take the company stock out of your account and pay (regular) income tax on the original cost. The remaining difference is treated as a long term capital gain. This difference in tax rates can be huge for those who have loaded up on company stock in their retirement account especially if the shares have had a large run up in value. A bit of googling and I found a Company Stock Distribution Analysis Calculator which offers some further details and a nice calculator to see your potential savings.
JOE

written by JOE \\ tags: 401(k), Net Unrealized Appreciation, Retirement, Savings, tax, Taxes

Today I caught a bit of CNBC, in which there was a brief discussion of the AMT. The AMT (Alternative Minimum Tax) was put in place to be sure that the wealthy were not able to gather so many deductions and tax loopholes that they could avoid paying taxes on all their income. Good idea in theory, but in practice the AMT amount was never adjusted for inflation and is now hitting people it was never intended to. People who live in a state with high taxes are now finding that their Real Estate taxes and/or State Income Tax are no longer deductible, but wiped out by the AMT.

written by JOE \\ tags: AMT, income tax, irs, tax, unintended consequences