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A Good Reason to Not Convert to Roth

While there are many reasons that it may be in your best interest to pay tax and convert funds from a traditional IRA to a Roth IRA, there are a few situations that you might want to keep in mind as you consider converting.

I covered Three Reasons You May Not Want to Convert to a Roth IRA in an earlier article, and here we’ll be talking about another – the probability of paying medical expenses from your traditional IRA.

Under current tax law, you are allowed to deduct medical expenses to the extent that the expenses exceed 7.5% of your Adjusted Gross Income (AGI). In effect, if you utilized IRA distributions to pay for these medical expenses, everything above 7.5% of your AGI can be tax free after deduction. This is much better than paying up to 35% on a Roth conversion and then using those funds later at no tax. Of course, if your medical expenses are something less than 7.5% of your AGI, or a relatively insignificant amount over that level, it might not make as much sense.

Since many of us can expect to pay a considerable amount for future medical expenses – whether for doctors and hospitals, or for nursing home costs, or even for in-home nursing care – it might make good sense to maintain a balance in a traditional IRA rather than converting all of it to a Roth IRA.

Just another item to consider as you think about converting money from your traditional IRA to a Roth IRA.

Earnings Tests in the Year You Begin Benefits


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As you may already be aware, there are limits to the amounts that you can earn while receiving Social Security benefits. This factor is covered in detail in the article at this link – Social Security Earnings Tests.

What isn’t clear is just how these earnings impact your benefits in the year that you first begin receiving your Social Security benefits…

If you’re at FRA (Full Retirement Age) or later when you begin receiving your benefits, you have no earnings limit at all. And if you’re younger when you begin your benefits (as the earlier article outlined) up to the year you will reach FRA your benefit will be reduced by $1 for every $2 that you earn over the limit ($19,560 for 2022). During the year you are FRA (before you reach the actual FRA), your benefit will be reduced by $1 for every $3 that you earn over the FRA limit ($51,960 for 2022).

What’s important to know is that, no matter when you start your benefits, you can earn as much as you like, prior to starting your benefits. The earnings limits only apply AFTER you’ve begun receiving your benefits, and then only if you’re younger than FRA when you commence receiving benefits. In the case of the years prior to FRA, your benefit will be reduced when your monthly income is greater than $1,630 per month, for every month that you are receiving Social Security benefits, but only if your total income for the year is more than $19,560. This is just a pro-rated application of the annual limit of $19,560 for 2022, and it only applies during your first year of receiving benefits.

The same pro-rate method is applied for the year of FRA – the monthly limit is $4,330 for 2022. This only applies when you start benefits during that year you’ll reach FRA.

And as stated before, once you get to FRA, there is no earnings limit at all.

Hope this clears up the Earnings Limit issue during the year you begin receiving benefits.

Determining Your MAGI


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There are income limits for contributing to an IRA (traditional and Roth). These limits, along with your filing status and your Modified Adjusted Gross Income (MAGI) are important factors in setting the limits for Traditional IRAs, as there is the issue of deductibility at stake.

In order to fully understand the limitations, you also need to understand what makes up your Modified AGI (MAGI).  The MAGI is calculated as follows:

  1. Start with your Adjusted Gross Income (line 11, Form 1040, Form 1040SR or Form 1040NR)
  2. Add back in your IRA deduction amount (line 20 on Schedule 1)
  3. Add back in your student loan interest (line 21 on Schedule 1)
  4. Add back any foreign earned income and/or housing exclusions from line 45 of Form 2555
  5. Add back any foreign housing deduction from line 50 of Form 2555
  6. Add back any excluded qualified savings bond interest from Form 8815 line 14
  7. Add back in any excluded employer-provided adoption benefits shown on line 28, Form 8839

The total of these seven items listed above make up your Modified Adjusted Gross Income, or MAGI.

The MAGI is used to determine the amount, if any, of your Traditional IRA contribution that is deductible if you or your spouse is covered by an employer retirement plan.

For a Roth IRA contribution, your MAGI is calculated as follows:

  1. Start with your Adjusted Gross Income (line 11, Form 1040, Form 1040SR or Form 1040NR)
  2. Subtract any income from the AGI that is the result of IRA funds to a Roth IRA, or from a rollover conversion from a qualified employer retirement plan to a Roth IRA
  3. Add back in your IRA deduction amount (line 20 on Schedule 1)
  4. Add back in your student loan interest (line 21 on Schedule 1)
  5. Add back any foreign earned income and/or housing exclusions from line 45 of Form 2555
  6. Add back any foreign housing deduction from line 50 of Form 2555
  7. Add back any excluded qualified savings bond interest from Form 8815 line 14
  8. Add back in any excluded employer-provided adoption benefits shown on line 28, Form 8839

Tallying up those 8 items will result in your MAGI for the purpose of a Roth IRA contribution.

For the current MAGI limits for each type of contribution, see IRS Publication 590A.

PS – Reader Paul correctly points out that there are other MAGI calculations (his example was for IRMAA) that are slightly different from the above MAGI calculations. Pay close attention to the requirements for the MAGI that you’re looking to calculate for your specific purposes.

IRA Cross Loans – Don’t Even Think About It

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Once again in the category of terrible things you can attempt to do with your IRA, there is the concept of a “cross loan” from your IRA to another, unrelated party.

You know from previous articles that it’s not allowable to transact business with disqualified persons. Therefore, you can not take a loan from your IRA to finance your business, or your brother’s business (among others). But what if you came to an agreement with someone else not related to you in any way, who is not a disqualified person, to loan money from your IRA to finance her business, while she loans money from her IRA to finance yours? Whatever could go wrong with this arrangement?

While the technical provision of transacting business with a disqualified person has been avoided, there’s a small problem with the plan. There is another test that prohibits the IRA owner from receiving an indirect benefit from a transaction. In the case of the cross loans, there is an indirect benefit in that one loan facilitates the other – and the IRS would figger this out before you could say “Bob’s your uncle”.

Entering into such a series of loans would most likely result in both IRAs being disqualified and taxable immediately. It should be noted that this would also be considered a prohibited transaction if the second loan was from another source besides an IRA, since the indirect benefit would still have come into play.

IRA Charitable Distributions – If You’re Less Than Age 70½


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We discussed the IRA Qualified Charitable Distribution (QCD) option for folks age 70½ or better in other articles. It’s possible from those articles that you got the impression that if you are younger than 70½, you are not able to make charitable contributions with money from your IRA. Nothing could be further from the truth! You can always make charitable contributions of any money you wish… the question is, what will such a move do for you tax-wise?

First of all, even though the age for RMD has increased to 72, the age for Qualified Charitable Distributions remains at 70½, so don’t get these two confused.

If you’re under age 70½

You can make charitable contributions from your IRA account – the only problem is that you must first count the distribution from your IRA as income, and then you account for the charitable contribution among your Schedule A Itemized Deductions. The end result is the same, right? Au contraire, mon ami.

The problem is that, by having to count your IRA distribution as income, you will increase your Adjusted Gross Income (and therefore your Modified AGI), both of which can have a significant impact on other items on your tax return.


Let’s run through an example: you’re age 72, have an IRA worth $50,000, and you want to contribute the entire amount to your favorite charity. Your other income, along with your spouse’s income, totals $70,000. Included among your tax return items is $10,000 in medical expenses, along with other deductions (real estate tax, home mortgage interest, etc.) amounting to $15,000. You had no other charitable contributions for the year.

Under the QCD rules, your AGI is $70,000. Your itemized deductions amount to $19,750 – because your medical expense deduction is limited to the amount over 7.5% of your AGI. Since 7.5% of $70,000 is $5,250; we subtract that amount from $10,000 and come up with $4,750, which we then add to the rest of your itemized deductions for a total of $19,750 in deductions. Since the standard deduction for a couple of this age is $28,700, you’d use the standard deduction.

Subtracting the standard deduction from your AGI ($70,000 minus $28,700) equals $41,300. This is your taxable income, assuming you don’t have any other deductions such as QBI. Tax on this amount is $4,545 (2022 tax tables).

If you were younger than age 70½, your AGI is $120,000. This because the IRA distribution of $50,000 is added to the rest of your income. So if you were age 65 for example, itemized deductions are now $66,000, because your medical expense deduction was reduced to $1,000 ($120,000 times 7.5% equals $9,000, subtracted from $10,000 equals $1,000). We add the rest of your itemized deductions (including the $50,000 charitable contribution deduction) and come up with $66,000 ($15,000 plus $1,000 plus $50,000).

Subtracting the itemized deductions from your AGI equals $54,000, which is your taxable income, absent any other deductions. Tax on this amount is $6,069 (2022 tax tables).

Even though you had a significant itemized deduction amount, you’re still better off if you can use the QCD. Under these rules, by not using a QCD you paid $1,524 more in taxes than you would have if you were 70½ or older and used a QCD, with otherwise all of the same circumstances. So, while it’s possible to make a charitable contribution from your IRA account when you’re younger, it’s more costly to do so. It’s also possible to make charitable contributions after age 70½ without using the QCD option, but you’re throwing tax money away – might as well take advantage of this option!

Other items affected by AGI

There are several items on your tax return that are impacted by the amount of your AGI. The AGI gets increased when you take a distribution from your IRA, unless you have the distribution treated as a QCD. Listed below are some of the more common items that are impacted:

  • taxable amount of Social Security (or Railroad Retirement) benefits
  • allowable losses from rental real estate activity with active participation
  • deductible traditional IRA and spousal IRA contributions
  • ability to contribute to a Roth IRA
  • miscellaneous itemized deductions, including non-reimbursed employee job expenses
  • and a number of miscellaneous credits

These and many other components of your tax return can be impacted by an increase in your AGI. By using the QCD option, you are avoiding this increase to AGI, which can limit these other tax benefits.

Prohibited Transactions and Disqualified Persons

prohibited by Phillip McI have covered the topic of Prohibited Transactions in an earlier article – one of the main prohibitions is that you can’t self-deal with your IRA by borrowing from, selling to, or allowing a class of persons, called Disqualified Persons, to transact business with your IRA as well.

The problem that often comes up, especially with IRAs that invest in “self-directed” activities like Real Estate, is that folks look at the list of Disqualified Persons and determine that there are other persons that they can allow to make transactions with their IRA – and that since these others are not Disqualified, the transaction will no longer be a prohibited transaction.

Let’s back up and define Disqualified Persons – this means you, as the account owner, your spouse, your parents, grandparents or other ancestors, as well as your children, grandchildren, or other descendants, as well as the spouses of any of these persons. So, for example, your step-child wouldn’t be a Disqualified Person, as long as you haven’t legally adopted the child. In addition, your siblings aren’t Disqualified Persons either, nor would your girlfriend or boyfriend be disqualified. So technically, one of these people could transact business with your IRA – as long as there is no other reason to prohibit the transaction.

The problem is, if you (or another Disqualified Person) benefit directly or indirectly from a transaction with the IRA, the transaction is prohibited – no matter who the person is that you’ve transacted with. So, for example, if you’ve invested in a condo with your IRA money, and you rent the condo out to non-related persons, you’re in good shape. But if you try to play it cute and rent the condo out to your boyfriend, and you send your children to vacation with him for three weeks in the summer, the rental transaction is prohibited since disqualified persons have benefited from it.

In this case, it’s possible that the transaction could result in a penalty, or possibly invalidating your IRA, prompting an immediate disqualification and distribution including taxes and penalties, which could be a very bad thing.

The Impact of Zero Years

zeroRemember when we talked about how your Social Security Benefit is calculated? Your highest 35 earning years during your career are put into a formula, and the earnings are indexed, then averaged by dividing the result by 420, the number of months in 35 years. And if you have less than 35 years of earnings, those years without earnings are counted as zeros…

So, you can guess what might happen when you have years with zero earnings in your record. Naturally your average is going to be reduced (perhaps dramatically) by any year when you had zero earnings.

Let’s say you have 35 years of earnings at the maximum amount, which will give you (for 2022) a FRA benefit of $3,262. But if you only had 30 years at the maximum earnings amount, your benefit would be reduced to $3,010, an annual reduction of $3,024. Taking this further, if there were only 20 years of earnings at the maximum amount, your FRA benefit would be reduced to $2,509, for an annual reduction of $9,036.

This comes up when an individual chooses to retire early, or has years in which he or she has not earned during his or her career, such as when raising children or going to school.

The above is an excerpt from the book A Social Security Owner’s Manual.

Social Security’s PIA – What is this?

peoria il by kla4067If you’ve ever read up on Social Security retirement benefits, you’ve likely come across a number called the Primary Insurance Amount, or PIA. So just what is PIA? That is, besides the airport designation for the General Wayne A. Downing, Peoria (IL) International Airport?

Primary Insurance Amount – PIA

The Primary Insurance Amount (PIA) is the projected amount of Social Security retirement benefits that you will receive if you file for benefits at exactly your Full Retirement Age – FRA, in Social Security Administration parlance.  (see this article for information about determining your FRA).

The PIA is one of the factors used in determining the actual amount of your retirement benefit when you file at other ages – the other factor being the date (or rather your age) when you elect to begin receiving retirement benefits.

So, how is PIA calculated?

In true government style, this calculation can be pretty complicated.  You start off with your Average Indexed Monthly Earnings (AIME – which we defined here). Then, hold onto your hat, because it gets hairy from here:

  • the first $1,024 of your AIME is multiplied by 90%
  • the amount between $1,024 and $6,172 is multiplied by 32%
  • any amount in excess of $6,172 is multiplied by 15%

Note: these are the figures for 2022. The figures used (referred to as “bend points”) are based upon the year when the retiree is first eligible to claim benefits – at age 62.

So let’s work through a couple of examples:

Our first retiree is age 62 in 2022, and is hoping to begin taking Social Security benefits immediately upon eligibility – to get what’s coming to her. Her AIME has been calculated as $6,500. Applying the formula, we get the following:

  • first bend point: $921.60 ($1,024 * 90%)
  • second bend point: $1,647.36 ($6,172 – $1,024 = $5,148 * 32%)
  • excess: $49.20 ($6,500 – $6,172 = $328 * 15%)
  • For a total PIA of: $2,618.16 ($921.60 + $1,647.36 + $49.20), rounded down to $2,618.10

The second example retiree also is age 62 in 2022. His AIME has been calculated as $4,000.  Applying the formula:

  • first bend point: $921.60 (same as before)
  • second bend point: $952.32 ($4,000 – $1,024 = $2,976 * 32%)
  • excess: $0
  • For a total PIA of: $1,873.92 ($921.60 + $953.32), which is rounded down to $1,873.90

You should note that the PIA is always rounded down to the next lower multiple of $0.10.

… And that’s just the start!

Once your PIA is calculated, it doesn’t just sit there like the boring number that it is. Each year, your PIA may be adjusted, according to any additional (increased) earning years you accrue that may impact your AIME. Plus, your Primary Insurance Amount is simply the basis for your Social Security retirement benefit calculation: the age that you begin taking the payment of retirement benefits is taken into the equation as well, which you’ll see in the Retirement Benefit Calculation article.

Social Security Bend Points Explained

bend points

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Bend points are the portions of your average income (Average Indexed Monthly Earnings – AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series. They’re called bend points because they represent points on a graph of your AIME graphed by inclusion in calculating the PIA. The points on the graph “bend” as the rate of inclusion changes.

If you’re interested in how Bend Points are used, you can see the article on Primary Insurance Amount, or PIA. Here, however, we’ll go over how Bend Points are calculated each year. To understand this calculation, you need to go back to 1979, the year of the Three Mile Island disaster, the introduction of the compact disc and the Iranian hostage crisis. According to the AWI Series, in 1979 the Social Security Administration placed the AWI figure for 1977 at $9,779.44 – AWI figures are always two years in arrears, so for example, the AWI figure used to determine the 2022 bend points is from 2020.

With the AWI figure for 1977, it was determined that the first bend point for 1979 would be set at $180, and the second bend point at $1,085. I’m not sure how these first figures were calculated – it’s safe to assume that they are part of an indexing formula set forth quite a while ago. At any rate, now that we know these two numbers, we can jump back to 2020’s AWI Series figure, which is $55,628.60. It all becomes a matter of a formula now:

Current year’s AWI Series divided by 1977’s AWI figure, times the bend points for 1979 equals your current year bend points

So here is the math for 2022’s bend points:

$55,628.60 / $9779.44 = 5.6883

5.6883 * $180 = $1,023.89, which is rounded up to $1,024 – the first bend point

5.6883 * $1,085 = $6,171.81, rounded up to $6,172 – the second bend point

And that’s all there is to it.  Hope this helps you understand the bend points a little better.

Wash Sale Rules and IRAs


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You may already be familiar with the Wash Sale Rule for buying and selling securities. Briefly, when you sell a security at a loss, if you’ve purchased it within 30 days (either before or after the sale), then the loss is disallowed for tax purposes, and the basis of the newly-purchased stock is then increased by the amount of the disallowed loss.

The general rule disallowing the loss is relatively clear, but what’s not clear to many folks is that this applies to all accounts that you and your spouse own – including IRAs. How can capital losses be considered within IRAs, you may ask?

Here’s an example: Say you purchased 100 shares of ABC stock in your taxable account at $50 per share several years ago. After holding the shares for quite a while and watching them languish and continue to lose value, you decide to sell the shares at $40 so that you can at least take the tax loss for some minimal benefit from the situation.

Then, a week after you sell the shares, you learn that ABC is ready to introduce a brand-new, absolutely revolutionary, widget. This new widget is expected to blow the industry away – and you want to get in on the action. So, realizing that you just sold 100 shares for a loss, you have your spouse buy 100 shares in his IRA for $43, 8 days after you sold the original 100 shares.

Bingo. You just triggered the wash sale rule, disallowing the original loss for tax purposes. This is because in considering the wash sale, all accounts, IRA and otherwise, for you and your spouse, are included. Unfortunately in this case your tax loss is gone forever since your IRA purchase has no tax basis.

Had the accounts been different – that is, if the original purchase had been made in your taxable account and the subsequent purchase made in another (or the same) taxable account, you’d at least have your basis of $43, plus the disallowed loss of $10 (new basis = $53) against which future capital gains or losses would be calculated. Additionally, if you had only waited 30 days from the original sale of the shares of ABC, you could have made the purchase in either account with no wash sale impact.

So be careful as you make tax loss moves – consider all of the ramifications of the wash sale rules.

Wash Sale Rules

wash sale

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If you’ve been investing for any period of time, you may have run across the term Wash Sale. Do you know what it means? And what are the IRS rules regarding Wash Sales?

In a nutshell, a wash sale occurs when you sell a security (stock, bond, or mutual fund, for example) at a loss, either followed by or preceded by a purchase of substantially the same security within 30 days of the sale. The IRS disallows the recognition of the loss for tax purposes in such cases. Without the purchase portion of the set of transactions, you would be allowed to utilize the capital loss to offset other capital losses and possibly offset ordinary income, depending upon the circumstances.

The Details

When you sell, at a loss, a security of any sort that would be treated as a capital item, the loss will be disallowed for tax purposes if you purchased substantially the same security within 30 days before or after the sale:

  • In a taxable account or a deferred account (all accounts under your household are counted together, that is, yours, your spouse’s, and any corporation you control) or
  • As options or futures contracts

Of course, the initial sale of the security must be within a taxable account – that is, not within an IRA or other deferred-tax account. This is because we’re referring to capital gains treatment of gains and losses, which do not apply to IRAs and deferred-tax accounts. Prior to Revenue Ruling 2008-5, one could effectively purchase a new, substantially same position in your IRA or Roth IRA within the 30 day period after the loss sale in your taxable account, and it would not engage the wash rule. This has been disallowed now.

So what makes up a substantially identical security?

In the IRS’ own words:

In determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case. Ordinarily, stocks or securities of one corporation are not considered substantially identical to stocks or securities of another corporation. However, they may be substantially identical in some cases. For example, in a reorganization, the stocks and securities of the predecessor and successor corporations may be substantially identical.

Similarly, bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation. However, where the bonds or preferred stock are convertible into common stock of the same corporation, the relative values, price changes, and other circumstances may make these bonds or preferred stock and the common stock substantially identical. For example, preferred stock is substantially identical to the common stock if the preferred stock:

  • Is convertible into common stock,
  • Has the same voting rights as the common stock,
  • Is subject to the same dividend restrictions,
  • Trades at prices that do not vary significantly from the conversion ratio, and
  • Is unrestricted as to convertibility.
The above is quoted directly from IRS Publication 550

The question comes up all the time – I always say as a rule of thumb that if you have to question whether your choice of a replacement is substantially identical or not, then it’s not worth it to have to argue the point with the IRS when you’re audited. It’s only 30 days, after all.

Examples of Wash Sale Avoidance

Below are a few examples to help understand the idea of substantially identical, and how to avoid it in practice.

Example 1:  You sell, at a loss, shares of a mutual fund that is invested in the S&P 500 index. On the same day you purchase a mutual fund that is invested in a total stock market index. The two investments are not substantially identical, so you avoid wash sale treatment. If you instead purchased another mutual fund (perhaps with another fund family) that invests in the S&P 500 index, you will be subject to the wash sale rules because the new fund is substantially identical to the original fund.

Example 2: You sell, at a loss, shares of a mutual fund that owns a portfolio of Treasury Inflation-Protected Securities (TIPS). Within 30 days you use the proceeds from the sale to purchase another mutual fund that invests in GNMA bonds (Government National Mortgage Association, or Ginny Mae). This set of transactions avoids the wash sale, because GNMA bonds are not identical to TIPS.

Example 3: You sell your S&P 500 index investment mentioned in example 1. You wait 30 days, and on the 31st day you purchase the exact same (or another fund family’s) S&P 500 index investment. This set of transactions avoids wash sale treatment because enough time has passed (30 days) since the sale for a loss.

Examples for Handling Wash Sale Disallowed Losses

So, instead of allowing the loss, the IRS gives you the ability to increase the basis of the security that you purchased, by the amount of loss that you were disallowed.

Example 1: You own 100 shares of stock that you purchased last year for $1,000. You sell those shares for $750, and within 30 days, you purchase another 100 shares for $800. You have a disallowed loss of $250, which will be added to the basis of your current holding, making the basis now $1,050 ($800 plus $250).

Example 2: You purchase 100 shares of stock for $1,000, and then sell them for $750 within 30 days. Your loss is disallowed. In this case, since you don’t own the stock any more, the loss is just gone, unless you repurchase the position within 30 days, within a taxable account. Purchasing the shares in an IRA won’t provide the benefit of the disallowed loss added to basis, since your stock in the IRA has no basis. All sales within an IRA result in zero tax impact.

Example 3: You own 100 shares of stock that you purchased last year for $1,000. You sell all 100 of those shares for $500, and within 30 days you purchase 50 shares again for $200. These 50 shares will have a basis of $450 due to the disallowed loss of $250 (since you only have wash impact on half of your sale). You would still have an allowed loss of $250 for the activity (the other half) unless you repurchased additional shares within 30 days.

It can get really complicated if you have multiple purchases and sales and overlapping 30 day periods, so if you have a particular situation that you’d like to review, please let me know. Other complicating factors include the use of short sales, options, and futures contracts.

Principles of Pollex: Debt Reduction


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(In case you’re confused by the headline: a principle is a rule, and pollex is an obscure term for thumb. Therefore, this series is all about Financial Rules of Thumb.)

Try as we might, there are times when debts just overtake us. Quite often it is one of several things that causes this to happen – either we’ve had unexpected expenses hit us “alla sudden-like”, or perhaps a layoff or lean time with little or no income. Or maybe we just didn’t pay attention and debt grew out of control.

How’d I Get Here?

The reason we’re in this position is important, because we can’t let the debts continue to increase – so the first order of business in reducing your debts is to stop the bleeding. Figure out what the cause of the debt was, and work out a way to stop increasing the debt (if possible). If it’s just regular spending, shopping and the like, you need to get a handle on your outflows, or come up  with a way to increase your income so that you’re not adding to the debt load. Whatever the cause of the debt in the first place, you need to stop it from increasing.

I recognize that folks with high medical expenses (for example) are not in a position to reduce the outflows. In a situation like that, godspeed to you, hope your situation improves.

After you’ve stopped your debt from increasing, it’s time to come up with a plan to start reducing the debt load. In order to do this, we go back to the time-honored method of Organization, Efficiency, and Discipline to work through your debt reduction.


To start off with, you need to Organize. List all of your debts, including the balance, interest rate and minimum payment for each. You can do this on a sheet of tablet paper, or on a spreadsheet like Excel or Google docs. Once you’ve listed all of your debts, you can tally up your total amount that you owe, as well as how much your monthly cost is at a minimum.

For many folks this is the first time they’ve put it all together in one place, and it can be a bit scary. What’s important is that now you know where you are… and of course, where you’re going is to take that balance down to zero. It becomes a matter of filling in the space in between.

One way to do this is to just make the minimum payments every month, and eventually you’d pay it all off. But there are better ways to go about this, more efficient ways, especially if you have a little extra to pay each month above the minimum. If you don’t have any extra, consider eliminating some other monthly expense, or selling an item (or items) that you no longer use.


Let’s use a very simple example – say you have three debts, totaling $200 each, at rates of 10%, 15%, and 20% respectively. These three debts each have a monthly minimum payment of $10 each. If you paid the minimum on each debt every month, you’d pay off the 10% debt in 24 months, the 15% debt in 26 months, and the 20% debt in 27 months. But let’s say you have a total of $40 to apply toward debt each month…

If you split the $40 evenly between the debts, now your 10% and 15% debts would be paid off in 19 months and the 20% debt in 20 months. Pretty good deal, right? You’ve shaved 8 months off the time to pay it all off. But there’s a better way to do this.

What if you took the extra $10 and paid it toward the highest rate first? Now the 20% loan would be paid off in 14 months. Then, if you took the $20 that you’d been paying toward the 20% debt and added that to the $10 minimum that you’d been paying on the 15% debt (so that the total payment now is $30), that debt would be eliminated by the 17th month. Adding that $30 to your 10% debt payment, you’d be finished paying off that debt by the 18th month.

Not only have you shortened the timeline by a month, but by paying the highest rate debt first, you’d reduce the overall cost of the debt earlier. This method is known as a “debt snowball”.


The debt snowball will only work if you stick to it… and the whole idea of debt reduction requires discipline in order to make it work. If you start off on the project and free up some of your credit line, only to build up the debt again, you’ll be back to square one again before you know it. This is why I mentioned at the start that you need to understand how you got into this debt position in the first place. If you’re simply spending far more money than you can bring in with your income, you have to figure out a way to fix that situation. There is no way to resolve this problem without either bringing in more money or reducing your expenditures.

Are You Really Diversified?


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Sometimes we fool ourselves. Sometimes we think we’re doing the right thing, when in fact the result is that we’re not at all doing what we think we are.

I’m talking about your investment diversification. Within your 401(k) you have certain options available for you to choose from: a large cap stock fund, a mid cap stock fund, an international stock fund, and a bond fund. Recalling an article you read somewhere… you know you need to split up your investments among many allocation options. So, wanting to do this diversification thing right, you split up your 401(k) contributions with 25% in each of the funds available. You’re well-diversified, right?

Wrong city, bucko.


Welcome to correlation. Investopedia defines correlation as:

a statistical measure of how two securities move in relation to each other.

It’s pretty complicated, but the gist is this – if two securities are perfectly correlated, when one moves up or down, the other moves up or down in perfect relation to the other. Such securities are said to have a correlation coefficient of +1.

On the other hand, if one security moves up and the other moves down (and vice versa, by the same proportions), they are said to be negatively correlated, with a correlation coefficient of -1.

Lastly, if one security’s movement has no relationship whatsoever to the other security – that is, any particular movement by one of the securities may or may not result in a movement in the same direction, the opposite direction or no movement at all. These two securities have a correlation coefficient of 0 (zero).

Most pairs of common securities fit somewhere along the spectrum between +1 and 0, since very few are perfectly correlated. Negative correlation is typically found in hedge funds – which are a costly, complex sort of asset to hold, being designed to work opposite of the general market movements. Since long-term stock market movement is in a positive direction, many hedge funds are “hedging” that the opposite will occur.

With the above explanation, hopefully it becomes clearer to you why we want securities in our portfolio that are not correlated closely to one another… having such pairs of securities spreads out our risk of any single market event having adverse impact on everything in our portfolio.

Examples of Correlation

Back to our example portfolio, here are the hypothetical correlation coefficients* for your four choices, shown in a matrix:

1 2 3 4
1. Large-Cap Stock 1.00 0.96 0.93 0.28
2. Mid-Cap Stock 0.96 1.00 0.91 0.27
3. International Stock 0.93 0.91 1.00 0.44
4. Bond Fund 0.28 0.27 0.44 1.00

*Note: These hypothetical correlation coefficients are for illustration only, but were accurate at one time, but they are subject to change over time. In addition, the specific makeup of each fund will produce a different correlation coefficient versus the other funds in the real world. Use one of the many tools available on the internet to get a handle on the coefficients for your chosen funds.

As you can see, the large cap, mid cap, and international stock choices are very closely related to one another. That’s why, even though you thought you were well-diversified during the market slump a couple of years ago, everything you had took a dive.

Note how the Bond Fund is far less correlated to the to the stock funds. Each of the correlation coefficients is less than 0.5. The large- and mid-cap are nearing 0.25, coming very close to the 0 of perfect non-correlation.

This is why the first, most important allocation choice you can make is between stocks and bonds (we’ll get to some other allocation options later). These two, of the choices you have, are the least correlated, so it’s very important to include these non-correlated assets together in your allocation scheme. And then within your chosen split into stocks, you can choose some of the other asset options – large cap, mid cap, small cap, international – since those assets aren’t perfectly correlated, it can be beneficial to include diversification among these options as well.

The same goes for bonds – other types of bonds, such as Treasury Inflation-Protected bonds, are not perfectly correlated with the total bond market, so it might make sense to include some of these as allocation options as well.

What about other types of assets?

We’ve talked about some very basic allocations – but what about other types of assets? There’s real estate (both domestic and international), emerging markets stocks, commodities, and others. How does the correlation of these assets look?

The table below details the hypothetical correlation matrix for these additional assets in relation to domestic stocks, international stocks, and bonds.

1 2 3 4 5 6 7
1. Domestic Stock 1.00 0.93 0.27 0.84 0.93 0.89 0.60
2. Int’l Stock 0.93 1.00 0.44 0.79 0.96 0.93 0.65
3. Domestic Bond 0.27 0.44 1.00 0.33 0.39 0.32 0.25
4. Domestic RE 0.84 0.79 0.33 1.00 0.83 0.68 0.44
5. Int’l RE 0.93 0.96 0.39 0.83 1.00 0.88 0.65
6. Emerging Stock 0.89 0.93 0.32 0.68 0.88 1.00 0.71
7. Commodities 0.60 0.65 0.25 0.44 0.65 0.71 1.00

As you can see in the matrix, adding these additional asset classes gives you even more diversification (per the correlation). Commodities show up as the next most non-correlated to stocks (after bonds), which explains why this is a popular asset class to consider. Not only are commodities not well correlated with stocks, they are even less correlated to bonds.

Real estate, both domestic and international, gives you additional diversification, but not nearly as much as bonds and commodities – turns out that real estate, while not a perfect match for stocks, does follow the movement of stocks somewhat closely.


You might be saying “but I don’t have those kinds of options available in my 401(k)” – what can you do? This is part of why it can be useful to have other savings plans in your scheme, such as a Roth IRA or a taxable account. With these other accounts, you can have the flexibility to invest in whatever asset classes you like.

Investing in multiple asset classes has the effect of lowering the overall risk in your portfolio, while (potentially) enhancing the return, more than just averaging the returns together. Since your well-diversified assets do not move in direct relation to one another, when the domestic (US) stock market has a downturn, your other assets don’t necessarily reflect that same downturn, buoying your overall return.

Social Security vs. Saving


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I received a question from a reader that sort of dovetails with the earlier post about payback from Social Security, so I thought I’d run through the numbers on his question here. I never met a spreadsheet I didn’t like!

Here’s the question from the reader, verbatim (yes, I get emails this brief and to the point sometimes):

started work at age 20 retire at age 70.

Over 50 years of work I average $50,000 a year.

If I put 10% of my income away every month from age 20 to age 70 how would I come out versus depending on the government social security checks I would receive after retirement.

Initial Reaction

My initial reaction to this question was that you’d be much better off with the savings option, since you’re saving at a much greater rate (10%) than the withholding, and for fifteen more years than the Social Security system takes into account. However, that’s not altogether correct, since the Social Security system includes both your withholding and your employer’s withholding, for a rate in 2022 of 12.4%. So let’s go ahead and run the numbers.


There are a few assumptions that we have to make in order to complete this exercise:

  • In order to come up with an average wage, I first looked at the maximum Social Security withholding.  By calculating the average from 1962 to 2022, we come up with an average of $60,422. This is more than the average that the reader suggested, but it will work for our purposes and keep the calculations a bit simpler.
  • Putting aside 10% each year requires that we come up with a rate of return for this investment account.  I used a simple 5% return, which is reasonable over a long period of time.
  • I assumed that the side account is an IRA or a 401(k), so taxes have not been factored into the acquisition phase equations.


As we saw in the earlier post, earning the Social Security maximum over the final 35 years of your working career will give you a monthly benefit of $3,878 in 2022 if you file at age 70.

Saving 10% of your earnings (using the maximum Social Security wage base) over 50 years at 5% will bring you to a total in your IRA or 401(k) of $1,055,178. Running a few simple quotes from single premium annuity websites indicates that an immediate joint and survivor annuity with a single deposit of $1,055,178 will result in approximately a $4,873 monthly payment.  And that’s a fixed payment, not a COLA-adjusted payment like your Social Security benefit is.

As well, the $4,873 is fully taxed, whereas the Social Security benefit is, at most, 85% taxed. It could be much less, even zero, depending on your other income in retirement. If we take the reader’s word as literal, that this is all he has available to him (either the IRA or the Social Security), we see that the annuity will be taxed at 12% assuming married filing jointly (2022 rates), while the Social Security would be tax free. The end result is that the savings is a better option, with a net $4,609 per month after taxes, versus $3,878 in Social Security (no tax).

With a modest 1.5% COLA, the Social Security benefit catches up with the net annuity by his age 82.

However, upon the death of both you and your spouse, there is nothing left over in either situation – so the question becomes one of longevity. If you both live long, full lives, the Social Security option works out much better. If you and your spouse die earlier, any time before about age 85, there may be something left over for your heirs in the savings option.


In the end result, it seems that the Social Security benefit option is a pretty good deal, especially since we all hope to live a long, full life. The savings option works better if you die earlier than age 85, by possibly providing a residual amount to your heirs. This is a little different from what I’d originally thought, but when you consider that the average life expectancy of a male age 70 is roughly 84 (86 for females), there’s about even probability between outliving and not outliving your savings.

The fact that the Social Security benefit is tax preferred (85% at most, as little as zero taxed), subject to COLA adjustments, and is guaranteed (ok, don’t beat me up on that one, because any adjustments to the guarantee are bound to be pushed out way beyond the lifespan of this individual), it’s a triple-decker. Social Security is the hands down winner, assuming you live long enough. Plus, instead of 10% being put into savings, only 6.2% of your own income is going toward the Social Security taxation. The other 3.8% could be diverted to savings, making the SS side even better.

And finally, since you don’t really have a choice in the matter, the entire question is really moot – but an interesting exercise, nonetheless.

Running Afoul of the One-Rollover-Per-Year Rule (and How to Fix It)


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In case you’re not aware of it, there is a strict rule that the IRS applies with regard to IRA rollovers: you are allowed to roll funds over from an IRA using the 60-day rule only once during each 12-month period. FYI: Trustee-to-trustee transfers are not considered rollovers for this rule.

Here’s an example of what could happen: Early in the year, you withdraw some money from your IRA to help you catch up on some bills. Then, you receive a bonus within the 60-day period after your withdrawal, so you deposit those funds back into the same (or any other) IRA.

Later in the year, you want to take another short-term distribution from your IRA, and once again circumstances present the opportunity to put the funds back into the first IRA… but now you’re stuck. You can’t roll the distribution back into the original IRA (or any IRA), since you’re still within the 12-month period, and the 12-months won’t be up until after your 60 days is past. And you can’t roll it into another IRA either, since the rule applies to all IRAs.

You’ll be liable for the tax on this distribution, which might be troublesome in itself. Plus, you’ll be derailing a portion of your retirement funding, taking this money out of the deferred-tax bucket. Also, unless you meet one of the exceptions (see #3 below) you may be subjected to an additional 10% penalty for the withdrawal.

Here’s what you can do

You have a few choices in a situation such as this:

  1. Rollover the IRA money into a qualified plan, such as a 401(k) or 403(b). Not all of these plans allow “roll-ins” but many allow roll-ins nowadays. The 12-month rule doesn’t apply to rollovers from an IRA to other types of plans. This will keep the money in a deferred-tax account, costing you no additional tax or penalties at this time.
  2. Convert the funds to a Roth IRA. Even though you’ll have to pay tax on the conversion, this can be a valid move as well. The 12-month rule also doesn’t apply to conversions. You’ll have to pay tax on the withdrawal anyway since it can’t be rolled back into a traditional IRA, so you might as well make lemonade from your lemony situation.
  3. Review the list of exceptions to the early withdrawal rules in 19 Ways to Withdraw IRA Funds Without Penalty – you might be able to at least avoid the early withdrawal penalty of 10% by applying one of these options.

That’s all I can come up with to help you deal with a situation where you’re affected by the one-rollover-per-year rule. See the article The One-Rollover-Per-Year Rule: Revised for more information about how this limitation rule works.

Your Payback from Social Security


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One of the big questions that many folks face with regard to Social Security benefits is – I’ve paid in so much, will I ever see it come back?

I thought I’d show what a payback break-even might look like, in terms of the money you put into the system and what you’ll get back out of it.  I made an assumption in the calculations:

Future COLAs were not calculated into the example, keeping things in terms of today’s dollars. COLAs would only confuse the calculations.

Full Retirement Age

In this first series I assumed the normal, Full Retirement Age scenario, with two options: 1) you earned exactly half of the wage base that SSA requires withholding for each year of your 35-year working life, and you’re now age 66 and 2 months, Full Retirement Age; and 2) you earned exactly (or more than) the maximum amount of money that the SSA requires withholding during that period. Here’s the outcome:

Earnings Withholding Benefit Payback Period
Half $1,608,000 $99,696 $2,113/month 3 years, 11 months
Full $3,216,000 $199,392 $2,889/month 5 years, 9 months

Did you find that surprising? I bet you might have. So, in terms of dollars in, dollars out, you get your money back out of the system in less than six years, less than four if you earned half of the max.

I’ve included the half wage base example to point out the fact that people who earn more take a longer time to receive all of their money back out of the system. This is because of the way your benefit is calculated – notice that the benefit for the half wage base earner is actually 73.1% of the benefit of the full wage base earner, even though the half wage base earner only earned (and paid in) half of what the full wage base earner did.

But wait a second… if I didn’t have that money withheld by SSA, I’d be doing something with it, right? Okay, let’s look at the situation if you had put that money into a savings account for later use (even though there’s a strong likelihood you’d have just bought something with it, right?).

Saving The Withholding Yourself

So we’ll assume that you put this money aside in a savings account which earns 3% per year. Here’s the outcome:

Earnings Withholding
(plus interest)
Benefit Payback Period
Half $1,608,000 $160,884 $2,113/month 6 years, 4 months
Full $3,216,000 $321,770 $2,889/month 9 years, 3 months

Still, in my opinion, a pretty surprisingly low number. This means that, in the maximum withholding example, you’ll get back everything that you put into the system in less than nine and a half years, by your age 75 and a few months. In the half wage base earner example, your money is returned to you in less than six and a half years, by age 72 and a few months.

What happens though, if you take your benefit early, at age 62?

Starting at age 62

Since at age 62 you’d be taking the benefit at a 75% rate, this will take a bit longer to pay back, but you’re starting earlier so you’ll perhaps have more life ahead of you to achieve the payback. Here’s the result from these calculations (with the interest factor built in):

Earnings Withholding
(plus interest)
Benefit Payback Period
Half $1,409,400 $139,938 $1,585/month 7 years, 4 months
Full $2,818,800 $279,875 $2,167/month 10 years, 9 months

In the half wage base example, your payback period is increased to more than 7 years, but you’re only age 69 and 4 months at this stage. With the full wage base, a year and a half is added to the payback period, but instead of age 75, you hit the break-even point just before age 73.

Just for grins, let’s figure this out for filing at age 70.

Starting at age 70

By delaying to age 70, you achieve an 8% increase in your benefit each year. Here’s the tale of the tape (again, with interest added in):

Earnings Withholding
(plus interest)
Benefit Payback Period
Half $1,923,900 $205,265 $2,845/month 6 years, 0 months
Full $3,847,800 $410,529 $3,878/month 8 years, 9 months

In the full wage base example, your personal money paid into the system, with interest added, is paid back in just a bit less than nine years (right at six years in the half wage base example), when you’re just less than age 79. In the half wage base option you’ve been paid back in full just at your age 76.

A note about the calculations: Don’t get too hung up on the specifics of the calculations – they’re meant to be a representative example that the payback of what you had withheld occurs relatively quickly. The assumptions that I made throughout may not match your own circumstances, so the result will differ somewhat, but the principle is the same.


If you happen to have the mindset that you should try to get your money back out of the system as soon as possible (which I believe is a short-sighted approach), then you should start taking your benefit as early as possible at age 62. You’ll get your payback before age 72 if you’ve maxed out your withholding, or before age 69½ in the half wage base example.

Unfortunately, you’ll be short-changing yourself (and your spouse, if you’re the primary breadwinner) of future increased benefits at the cost of saving only four years in the payback cycle (or five years in the half wage base example). Of course, this assumes that you do live at least to the ages we calculated. See the article Ah, Sweet Procrastination! for more details on the benefit of delaying taking your Social Security benefit.

RMDs in 2022 and beyond


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In case you didn’t realize it, the IRS made some changes to the RMD process, which applies to Required Minimum Distributions in 2022 and years thereafter. For most folks this is a minor adjustment which actually reduces your RMD a bit. But for folks with inherited IRAs that aren’t subject to the 10-year payout or the 5-year payout, you’ll want to pay attention to the section below about RMDs for Inherited IRAs.

So what changed? The actuaries at the IRS (under an executive order from the President) reviewed the then-current tables in 2018 and determined that the changes in longevity made the old tables inaccurate. So new tables were generated, and they are applicable beginning with tax year 2022.

These tables – specifically Table I (the Single Life Expectancy table – used for inherited IRAs), Table II (Joint and Survivor table – for use when there is more than 10 years between the ages of a couple), and Table III (Uniform Life Expectancy table – for regular IRAs when there is less than 10 years between the ages of a couple, or the individual is single) – were updated for 2022 to reflect longer lifespans for Americans that are subject to these required distributions.

Generally the Uniform Life Table (Table III) is the most commonly used table. If you’re using this table for RMDs from your IRA (or other qualified plan), you will just refer to the new table (use the link above) when you calculate the RMD for 2022. It’s really that simple, and you may notice that using the new table results in a slightly smaller percentage of your account as an RMD. This is because the table was lengthened, making the earlier payments a bit smaller.

The same is true if you have a regular IRA and you’re using Table II, for a situation where your spouse is more than 10 years younger. Again, just apply the new table factor and you’re good to go, with a slightly decreased RMD percentage for 2022 and beyond.

RMDs for Inherited IRAs

Beginning with 2022, if you inherited an IRA prior to the rule changes which took effect in 2020, you were likely using Table I, the Single Life Expectancy table. If you inherited an IRA in 2020 or later, unless you’re a Eligible Designated Beneficiary (EDB), you’ll be subject to the 10-year payout period. This means that you don’t have to take annual distributions from the inherited IRA, you just need to completely distribute the IRA by the end of year of the 11th anniversary of the death of the original owner (it’s called the 10-year payout period because you have a full 10 years to withdraw). In some cases you might be subjected to a 5-year payout period, but that’s a topic for another time.

If you just inherited this account in 2021, the RMD for 2022 (your first year of RMDs) is straightforward. Look up your current age on Table I, the Single Life Expectancy table, and divide your 2021 year-end balance by the factor given. Then in each subsequent year, subtract 1 from the factor you got for the prior year, and divide your previous year-end balance by the new figure to produce your RMD.

However, if you inherited the IRA sometime prior to 2021 and had begun taking RMDs in 2021 or earlier based on the old tables, you have to make an adjustment to your process. Essentially you need to go back to when you first calculated an RMD for yourself on this account, and replace that figure with the new figure from the updated Single Life Expectancy table. Now, you’ll subtract 1 from the new factor for each year that has passed since you started. This will bring you to the new RMD factor for 2022. For each subsequent year, you’ll just subtract 1 from last year’s factor and divide.

Let’s walk through an example which may help your understanding:

Michelle inherited an IRA from her father, who died in 2018. Michelle was required to begin taking RMDs from the account in 2019 when she was 52 years old. The account’s year-end balance for 2018 was $90,000. From the old Single Life table, Michelle’s age 52 gave her a factor of 32.3. Dividing the year-end balance by 32.3 results in $2,786.38, which is Michelle’s Required Minimum Distribution for 2019.

For 2020, no RMDs were required (waived by the CARES Act), so Michelle skipped this distribution. If the “skip” wasn’t in place, Michelle would have taken the 2019 year-end balance in the IRA ($92,446) and divided it by her updated factor of 31.3 (subtracting 1 from her original factor). This would have resulted in an RMD of $2,953.55 for 2020.

For 2021, RMDs were once again required. Michelle took the year-end balance from the IRA ($97,992) and divided it by the updated factor of 30.3 (again, subtracting 1 from last year’s factor). The resulting RMD is $3,234.06.

The 2021 year-end balance of the IRA has grown to $103,286. If the old table was still in effect, all Michelle would have to do is subtract 1 from last year’s factor, resulting in 29.3, and divide the balance by that number. The result would have been an RMD of $3,525.12. 

However. There’s a new table in town.

The implementation of the new table requires Michelle to go back and do some adjusting. She needs to go to the new Single Life Expectancy table and get her new factor from when she started RMDs – her age 52. This new factor is 34.3. Since 2022 is the third year since she started RMDs, she’ll subtract 3 from her factor, to come up with the new factor of 31.3. Dividing the 2021 year-end balance of $103,286 by 31.3 results in an RMD of $3,299.87 – a few hundred less than the original table’s result.

Then for next year, Michelle will subtract 1 from her 2022 factor, which results in 30.3. She’ll divide the 2022 year-end balance in the IRA by that factor to calculate her 2023 RMD. 

In all cases that I can think of, these new tables will result in a lower RMD for everyone. The good news is that if you don’t make the adjustment, the only thing that will happen is you will take a slightly higher RMD than you had to. This will result in a slightly shorter payout period for your IRA – not the end of the world, but if you’re hoping to stretch that IRA out as long as possible, you’ll want to use the new tables.

A sample spreadsheet to calculate RMDs

Here’s a way you can use a simple spreadsheet to calculate the figures:

In a blank spreadsheet (Excel or GSheets or whatever spreadsheet tool you use), list the year in the first column. Second column will have your year-end balance from the prior year. The third column will hold your Table I factor. And in the fourth column, you can calculate the resulting RMD. I use the simple formula of “=B2/C2” (don’t include the quotation marks) in the fourth column (column D).

It looks like this when finished:

Then for the next year you can put the formula “=C2-1” (don’t include the quotation marks) in your third column (cell C3), which will subtract 1 from the prior year’s factor. In my sample I just made up a number for the 2022 year-end balance (which is in cell B3) to make the calculation in D3 work.

For subsequent years, fill in column A with the applicable year, column B with the new year-end balance, and then copy down the formulas in columns C and D. You can do this quickly by highlighting the current year’s C column, then while holding down the shift key hit the right arrow and the down arrow once each – this expands your highlight to current cells C and D and the corresponding C & D below. Release the shift key, and then hit Ctrl+D on your keyboard. Sorry Mac users, I don’t have your shortcut but I’m sure it’s just as simple.

Rolling Over Your Roth 401(k)


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Roth 401(k) plans have been around for a while now, but here’s something you want to keep in mind about these accounts. When you leave your employer, generally speaking, you should always rollover your Roth 401(k) to a Roth IRA. There may be a few exceptions, but that’s the general advice.

This is primarily due to the Required Minimum Distribution (RMD) requirement that is placed on Roth 401(k) accounts… unlike a Roth IRA, the owner of a Roth 401(k) is required to take minimum distributions (RMDs) beginning at age 72, just like traditional 401(k) and IRA plans. Therefore, at some point before age 72 (often upon separation from service) the owner of the Roth 401(k) should rollover the account to a Roth IRA. But see the caution below!!

Roth IRAs do require the beneficiary to take RMDs after the death of the primary owner, but the distributions are tax free, as would be expected. But otherwise, during the life of the primary owner of the account, there is no RMD required.

A Word of Caution

The Roth 401(k) (and Roth IRA) both require you to have held the account for five years, and a triggering event must have occurred (such as reaching age 59½), before the distribution is qualified and therefore tax-free. The tricky part is that the time in the Roth 401(k) doesn’t count toward time held in a Roth IRA.

So, if you roll over the Roth 401(k) account before you’ve met the five year requirement, all the time that you’ve held that account is wiped out, and the time you’ve held the Roth IRA is the new holding period. If you put the funds into a new Roth IRA, you will have to wait another five years before you can take the money out in a qualified fashion.

If you’d held the Roth 401(k) for five years or longer and a triggering event has occurred, rolling the funds over to a Roth IRA (of any age) allows you to withdraw the funds at any time, for any purpose, without tax.

Book Review: Stacked – Your Super Serious Guide to Modern Money Management



If you’ve looked for a good book to help you manage your money better, I’m sure you’ve been overwhelmed by all of the possible options out there. The problem with most of these books is that they take a very serious approach to teaching you about money – after all, money is a serious matter, right? And being serious is not a very enjoyable place to be, so unfortunately working through many of the books available can be a real slog.

What if I told you that there’s another option out there, a book that will entertain you, even make you snicker, along with teaching you some very serious things about money?

Today I have the privilege of reviewing a new book by my friend Emily Guy Birken and her co-author, Joe Saul-Sehy. The book is entitled Stacked – Your Super Serious Guide to Modern Money Management. These two folks have taken on the monumental task of keeping you engaged, entertained, and learning all the way through their guide to a quite serious subject – and they’ve done an amazing job! 

You might recognize the names – Emily has been writing in the personal finance space for many years now, and Joe has a very successful personal finance podcast, Stacking Benjamins. If you’ve spent any time at all searching through the internet for personal financial guidance, you’re sure to have come across one or the other (or both!) many times. As I understand it, this is the first time they’ve worked together, and they have done a wonderful job, in my opinion.

Throughout the book, you’ll find many new and interesting angles to consider each financial concept – and you’ll find a peppering of interesting factors as well. Who knew you could learn about money management alongside such diverse references as: Oregon Trail, Gordita Supremes, Thomas Jefferson (“stone-cold red headed Tommy Jeff”), Tetris, platform shoes with goldfish in the heels, Veruca Salt, MFs, a Snoopy Sno-Cone maker, beanie babies, a notorious tatoo, fine Michigan wine, as well as David Lee Roth and Brian Wilson (in the same paragraph, no less!). 

You’ll also find out the answers to some burning questions that you didn’t even realize you needed to know, such as why you might need to call Sallie Mae “Ms. Mae”, why debt-payoff strategies are so snowy, and what makes a sleeping financial professional exclaim “Past performance is no guarantee of future results” without actually waking up. 

Clearly this isn’t your typical money management book. But the lessons within are fantastic, and all of the wonderful sidebars and somewhat silly examples kept me entertained throughout. 

Joe and Emily don’t do all of this alone, either. Sprinkled throughout the book are timely advice from Joe’s Mom, who is a surprisingly astute observer of all things financial. In addition, each chapter contains a transcript from the popular Stacking Benjamins podcast, from financial industry and personal finance luminaries such as Jean Chatzky, Paula Pant, David McKnight, Jill Schlesinger, and Farnoosh Torabi, to name a few. With these additions, you not only get Joe & Emily’s view of matters, but some of the finest minds in the personal finance space to boot.

All in, I thoroughly enjoyed reading this book. At 300+ pages, it was a surprisingly quick read, primarily due to the fun and irreverent ways the authors present these serious topics. I highly recommend this book for anyone who has been left cold by the current offerings of money management guides, as well as for anyone who could use another perspective to help them along the way to managing your money. I’ve been in this industry for, well let’s just say a long time, and I picked up a few gems myself!

Kudos, Emily and Joe!

3 Ways of Dealing Without Recharacterization

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As of the passage of the Tax Cuts and Jobs Act of 2017, recharacterization of a Roth IRA conversion is no longer an option. What can you do to now, to simulate the benefit had by recharacterization of a conversion?

It should be noted that regular contributions to a traditional or Roth IRA can still be recharacterized – it’s only a traditional IRA-to-Roth IRA conversion that is disallowed.

If you recall, the primary reason that you would want to recharacterize is if you converted funds and then, by the time you pay the tax, the holdings that you converted have dropped in value. So, instead of paying tax on something that is much less in value than previously, for a Roth IRA conversion you can recharacterize the conversion up to October 15 of the following year (see Help Mr. Wizard – I didn’t wanna do a Roth Conversion for more details on recharacterization).

While you can no longer just recharacterize and “reset” things when you face a situation like that with a Roth conversion, there are ways to reduce the risk associated with your Deemed Roth Account Conversion (since you are not eligible to recharacterize the conversion).

For one thing, you could use dollar-cost averaging to spread the risk of market fluctuations over several points in time through the year. Simply split your intended conversion amount into four amounts (or 12 amounts, if you want to do it monthly), and convert one of those amounts each quarter, for example. This way if the market drops through the year, you’re converting funds at the lower values.

Another option would be to spread the date-specific risk over several years, by converting smaller amounts each year. This would also reduce the risk of adverse market results, and spread out the tax over several years (if possible).

Timing the conversion for late in the tax year will give you the opportunity to fully (to a degree) understand the tax impact of the conversion. With little time remaining in the tax year, presumably there will be little in the way of fluctuation. This is the opposite of the recommendations that used to apply, which was to do your conversion early in the year to potentially take advantage of a recharacterization event, or (more hopefully) realize significant gains on a your converted sum.

Yet another choice could be to convert only those assets that have very low volatility, such as bonds. The probability of a major drop in value is much lower for these assets, so your need for a recharacterization would be far less likely. Sell your bond holdings in the IRA, convert the funds over to Roth, and then re-purchase the bond holding again in the Roth IRA.

There are many other, more complicated ways to reduce your risk against such a situation, but these are a few that are easily implemented. Hopefully this will help you in your process of converting retirement plan assets to Roth.

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