Getting Your Financial Ducks In A Row Rotating Header Image

IRA Distribution Pro-Rata Rule

rata-tree-by-grahamanddairneIt is important to understand the Pro-Rata rule for IRAs – which comes into play when you have both deductible and after-tax contributions in your Traditional IRA account. As you take distributions from the account, each distribution is treated as partly taxable and partly non-taxable, in proportion of the after-tax contributions related to the overall account balance.

So How Does The Pro-Rata Rule Work?

For an example, let’s say you have a Traditional IRA (TIRA) with a balance of $100,000.  Over the years you made both deductible and after-tax contributions to this account… and your after-tax contributions amount to $25,000.  It’s not necessary to know the amount of the deductible contributions (for this exercise), just the after-tax contributions.

For this tax year, you’ve chosen to take distribution of $10,000 from your TIRA.  When  you prepare your tax return next year, you’ll include $7,500 in ordinary income, excluding the $2,500 which is the proportionate amount of your distribution representing your after-tax contributions.  In this example, one dollar out of every four is considered return of your after-tax contributions.

That’s pretty simple, right?  So why is this deemed worthy of a whole blog post?  Hold your horses, I’m about to tell you…

Why This Is Worthy Of A Whole Blog Post?

This is especially important when planning your Roth IRA conversions, among other distributions.  When you do a conversion, this is essentially a distribution from your TIRA, and as such you are liable for ordinary income tax on the taxable portion of your distribution.

This is one of the reasons that well-meaning financial advisors often recommend that, if you’re going to make non-deductible contributions to a TIRA with the intent to convert the account to a RIRA, you should make them to a completely separate account.  This way, (presumably) the only portion that would be taxable at the distribution (conversion) would the be the growth of the funds, such as capital appreciation and dividends.

Unfortunately, that’s not the way it works. The pro-rata rule takes into account the balance and makeup of ALL of your Traditional IRA accounts, not just the one that you’re taking a distribution from.

For example, Joe has $50,000 in one Traditional IRA account (from only pre-tax contributions). Joe’s income is too high for him to make Roth IRA contributions or deductible Traditional IRA contributions. He’s heard of the “back-door Roth IRA contribution” strategy, and would like to put this into play for his situation. Joe opens a new Traditional IRA and contributes $5,500 to the account. This contribution is non-deductible to Joe.

Now, following the back-door strategy, Joe converts his entire new IRA over to a Roth IRA. He thinks he has done this with no tax. But the problem is in the way the pro-rata rule works. Joe must pay tax on his conversion in proportion to the total of all of his IRA account balances, less the portion that is after-tax.

Adding his two IRAs together, he has a total of $55,500 in IRAs before the conversion. Of this, only 9.9% is after-tax contributions ($5,500 divided by $55,500). So of his converted $5,500, he must pay tax on $4,954.95 (90.1%). Plus, he still has $4,954.95 of non-deductible contributions that he must continue to keep track of as he makes future distributions from the account.

This can cause a lot of headache since there may be many years between the initial contribution and final distribution from the account. For each year that you have non-deductible contributions in your IRAs, you should track these contributions via IRS Form 8606, even if you have not taken any distributions for the year. This will keep your records up-to-date for when you do take distributions later on.

But I want to only convert the after-tax portion!

There is still a way to convert only the after-tax amounts to a Roth IRA, but there are some restrictions as well.

If you have access to a 401(k) plan or other employer-sponsored retirement plan (other than an IRA) that will accept rollover amounts (you’ll have to check this with your plan sponsor, some do not accept rollovers), you may be allowed to rollover the amount from your IRA that represents everything but your after-tax contributions.  Make sure you don’t accidentally rollover the post-tax (nondeductible) contributions, because that’s not allowed and you could get into dutch with the IRS and your 401k administrator if you do. However, if you can rollover everything but the non-deductible contributions, then you can convert the remainder amounts to your Roth IRA without a taxable event.  Pretty cool, huh?

It’s important to note that this only works for 401(k), 403(b) and other employer-sponsored retirement plans. You can’t rollover the excess above the non-deducted contributions to another IRA – you’d still be in the same boat as before.

All of these transactions can carry significant tax penalties if you make a mistake, so you need to be doubly sure that you’re doing it right before you make a move.  There are no “do overs” for these transactions (well, not without jumping through hoops or other places that you don’t want to consider).  Consult your tax advisor to make sure you’re doing it correctly if you’re not sure.

Photo by GrahamAndDairne

Can I Retire Early?

Many individuals at some point in their life and career wonder if they can retire early. First, retiring early is relative to the individual. That is, retiring early for one person may mean retiring at age 55. To another, it may mean retiring at age 30.

When teaching, I’ll ask my students what the “retirement age” is. Answers range from 65 to 70. Inevitably, I will get asked the question, “How much money do you need to retire?” And the answer is the crux of this article.

Whether an individual wants to retire can be based on several factors such as money saved, age, job satisfaction, and health. For example, an individual may never want to “retire” if they love their job, or if they find fulfilment and purpose while at work.

For some individuals, the choice to retire isn’t a choice. They must continue to work to cover expenses, health care, etc. Sometimes these individuals work until they physically cannot do so any longer.  Their only retirement is Social Security.

Back to the crux. The answer I tell my students (and clients) is that how much you need to retire is a function of how much you need to spend in retirement. For example, I have seen clients needing only $38,000 annually to cover expenses and live comfortably in retirement, and half of that amount was covered by Social Security. Meaning, the clients only needed to cover $19,000 of annual expenses themselves. Based on their portfolio, they had more than enough. For other clients, their need hovered around $250,000 annually. And sadly, their portfolio would last less than 10 years.

In other words, some will be comfortable retiring with $500,000 saved, and others may find $5,000,000 will not be enough.

To retire “early” is relative to what early means for the individual and how much money they feel they would need to live on in retirement. For young individuals reading this article, it means saving a lot of money while they’re young, to reap the benefits of not working later, should you choose. For older individuals, it may mean saving much more, and perhaps cutting expenses to achieve their retirement goal. And still for others, it may mean continuing to work, since they love what they do and have no intentions to retire.

The choice is yours.

Paying Down Student Debt Early To Save More Later

When most kids enter college, they never imagined they would be leaving school four or five years later carrying a mountain of debt. They certainly couldn’t know how it would impact their lives, with many struggling, paying down student debt, while living paycheck to paycheck. The average student loan debt for today’s college graduates is $37,000, which will cost them more than $27,000 in interest costs over the life of the loan. That’s $27,000 that won’t be going towards buying a house or starting a family or retirement. You go to college to expand your opportunities, only to have them stunted by ongoing debt payments.

The High Cost of Student Loans

The problem with carrying student loan debt is that the interest costs mount up over the length of the loan, which can run 20 or 25 years depending on the type of loan. Making the minimum payment on loan allows the interest to continue to grow on the balance, much like compounding interest in reverse. If you can lower the interest rate to reduce the monthly interest cost, you could accelerate the principal payments which will reduce your interest costs, allowing you to pay the loan off sooner.

For example, if original balance on your student loans was $37,000 with an average interest rate of 5.5 percent, your monthly payment would be $227 of which $169 is your initial interest cost. Five years into your loan, your balance is $33,000 and your interest cost is around $151 out of your $227 payment and you have 20 years left on the loan.

Slashing Your Interest Costs

If you took your loans to a private lender and refinanced them at a rate of 3.5 percent for 15 years, your monthly payment would increase to $235 but your interest costs are reduced by almost 40 percent. Most of your money would be going towards principal. If you were able to increase your monthly payment to $260 a month, you would pay the loan off almost two years earlier.

The bottom line is you save nearly $18,000 in total interest costs and you have your life back.

How Does Student Loan Refinancing Work?

Refinancing student loans can only be done through private lenders. Borrowers with very good credit can qualify for low rates currently around 3 percent. If you don’t have great credit, you can apply for a loan with a cosigner who does. You will still be the primary borrower responsible for making the payments, but, the cosigner will be on the hook if you don’t.  Some lenders offer a cosigner release once the primary borrower makes 12 to 24 months of on time payments.

Loan terms vary from lender to lender but most offer terms of 10 to 15 years. Most lenders offer variable loan rates, which means your rate can start out really low, but, if interest rates rise, your loan rate can increase. However, an increasing number of lenders are starting to offer fixed rate loans.

Shopping around at banks that offer student loan refinancing as well as alternative, online lenders, is critical for comparing loan rates and finding loans with the lowest costs. The more competitive lenders don’t charge origination or application fees.

What You Need to Know Before Refinancing Your Federal Loans

Before taking the plunge into refinancing your federal loans, there is a downside you should consider. Once you convert your federal student loans into a private student loan, you no longer have access to certain protections. For instance, if you run into a financial hardship and are unable to afford the full payment on your private loan, you won’t be able to turn to one of the income-based repayment options that are available with your federal student loans. Income-based repayment options are great when you run into financial trouble; but, they will also increase your interest costs over the life of the loan. Most private lenders don’t offer any repayment options, though a few offer a temporary, graduated-payment option.

Along with the loss of repayment options, you will also lose the loan forgiveness opportunity that comes with them. Also, most private lenders don’t offer deferment or forbearance in the event of a significant financial hardship.

Should You or Shouldn’t You Refinance Your Student Loans

The thing to consider is, if you think you might need any of those protections sometime in the future, you may not be a candidate for accelerating your loan payoff anyway. If your primary objective is to lower your monthly payment to make it more affordable, you should consider one of the income-based repayment plans. However, if your objective is to lower your interest costs so you could pay down your loan more quickly, you would need to be able to commit to paying the full monthly payment and more if you can afford it.

If you have the certainty of steady employment with regular salary increases, you can and should consider refinancing your student loans. It would be important to make it a part of a long-term strategy to become totally debt free. If you can commit the resources, there is nothing stopping you from paying down student debt in less than 10 years.

By Patty Moore, blogger @WorkMomLife on Twitter!

5 No-No’s for IRA Investing

prohibition-facts-by-sarahdeerIt is generally well-known that in an IRA account you have a wide range of investment choices. These choices are typically only limited by the custodian’s available investment options.  However, there are specific prohibited transactions that cannot be accomplished with IRA funds. Often these prohibited transactions can cause your IRA to be disqualified, which can result in significant tax and penalty, along with loss of the tax-favored status of the funds.

What’s Not Allowed for IRA Accounts?

  1. Self-Dealing.  You are not allowed, within your IRA, to make investments in property which benefits you or another disqualified person.  A disqualified person includes your fiduciary advisor and any member of your family, whether an ancestor, spouse, lineal descendant (child) or spouse of a lineal descendant.  It is important to note that this limit applies to both present and future use of a property. So if you purchased a condo and rented it out exclusively for several years and then decided to convert it to personal use, this act would disqualify the investment and potentially classify it as a distribution, to be taxed and penalized (with interest) retroactively.
  2. Borrowing.  You are not allowed to borrow funds from your IRA account.  Likewise, you are not allowed to put up your IRA account as collateral for a loan.
  3. Selling.  You are not allowed to personally sell property that you own outside of the IRA, to your IRA account.
  4. Collectibles.  The single class of investments that you may not invest in with your IRA account is collectibles.  This includes art, antiques, gems, coins, and alcoholic beverages, among other items.  There is an exception to the coin prohibition, in that you are allowed to invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the United States Treasury Department with your IRA funds (if your custodian allows). You can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.
  5. Unreasonable Management Costs.  It is prohibited to pay an exorbitant amount to an advisor to manage your account.  This is due to the fact that it IS an allowed transaction to pay your advisor, tax-free, from your IRA specifically for managing the account.  If the amount is deemed unreasonable (e.g., obviously for services above and beyond managing the IRA account), this transaction is prohibited. An example of this is if you have both IRA and non-IRA funds with your advisor, but you pay the advisor’s entire fee strictly from your IRA account. Unless the non-IRA funds are an inconsequential amount, the fee paid from the IRA will be deemed exorbitant to the size of the IRA account.
  6. (bonus!) Life Insurance. You may not purchase life insurance contracts with your IRA account funds. This is a strict prohibition.

Beyond these transactions, IRAs have a pretty wide scope of available investment options. As I indicated before, your options are mostly limited by the custodian’s available investments.  In cases where the IRA funds are to be used for more unique investments, such as individual real estate transactions or gold bullion, a special custodian is often required.  These transactions can be very difficult to complete and manage over time and maintain the tax-qualified status.  If you’re interested in such a transaction, there is more information available in the article Where to Establish Your IRA Account.

How to Navigate the Equifax Hack

If you’re among the 143 million people who may have been compromised by the Equifax hack, you may be wondering what steps you can take to protect yourself in what is now the greatest data breach in history. Below are steps to take to see if you’ve been affected and what you can do to move forward with the (hopefully) least financial impact to you and your credit.

  • Go to and follow the instructions to see if your data may have been part of the compromise. If so, you’re allowed to sign up for free identity theft protection and monitoring for up to one year. Even if you’re one of the lucky ones whose data hasn’t been compromised, you’re still allowed to sign up for the service.
  • Check your credit reports. Go to and request your free credit report from the three major bureaus: TransUnion, Equifax, and Experian. Regardless of the recent hack, you’re allowed (and should) do this annually to monitor your credit and the information being supplied to the bureaus. Additionally, it allows you to see if unauthorized credit inquiries are being made on your credit.
  • Consider a credit freeze. Freezing your credit (often for a fee) locks your credit at each bureau and requires a unique PIN in order to gain access to your file.
  • How to place a credit freeze. According to the Federal Trade Commission, to place a credit freeze you will need to go to the three bureaus and give your name, address, date of birth, Social Security number, along with some other information as directed. You may also be required to pay a small fee for implementation.
  • Direct links to the bureaus and their respective freeze pages can be found by accessing:
  • Consider signing up for identity theft protection through your home insurance carrier. Generally, for a small annual additional charge, you can have this coverage added which will help pay for the costs of fixing an identity theft should it happen to you.
  • Visit the three bureaus and see what additional information or free services they offer.

Equifax –

TransUnion –

Experian –

  • Set up a fraud alert. Contact the three bureaus above and request a fraud alert be put on your account. These last for 90 days but can be renewed.
  • Keep an eye on your tax return. Do your best to file early for your 2017 taxes. Once you get all of your information, try to file your taxes as soon as you can to avoid having a fraudulent return filed on your behalf.
  • Try to relax. As one of the individuals who may have been affected, I keep telling myself that there’s only so much I can do, and this too, shall pass. It’s easier said than done, but at the very least, you can do the best you can to be proactive moving forward.

Comprehensive Financial Planning – Explained

albert-and-the-puzzle-by-emdotFrom time to time, the question is asked of me: What exactly makes up a comprehensive financial planning engagement?  Since you know from reading about my practice that I operate in an hourly, fee-only fashion, you should know that a truly comprehensive financial planning engagement requires 10 to 15 hours of effort (or more) by the financial planner.

What exactly makes up a comprehensive financial planning engagement?

Each individual situation is going to be different, and so your mileage is likely to vary from my explanation.  What I’ll do, as a starting point, is list out the areas that are typically covered in what I’d call a comprehensive plan:

  • goal-setting – spending time understanding the wishes and desires of the client, and quantifying them in terms of time horizon and costs for use in planning; this can include retirement, college, home purchase or remodel, opening a business, parents moving in, and just about any major financial event
  • priority-setting – understanding the relative importance of each goal
  • risk analysis – explaining to the client the concepts of risk, how risk is required for return, and garnering an understanding of the tolerance level for risk given the timelines and current financial condition
  • cash flow – review of financial flows, finding those “unknown” expenditures that can be managed to help meet financial goals; understanding near-term and long-term requirements for cash flow; review of prior tax returns for any issues or overlooked opportunities
  • present financial condition – review of present accounts, allocation, future planned inflows into those accounts; present position with regard to debt, as well as future debt planned and how debt is to be retired
  • projection of future cash flows – modeling the future as it pertains to the goals stated, with regard to the present financial condition and assumptions made about holdings, inflows, taxes, debt, and timelines
  • risk management – review of current insurance coverage(s), especially with regard to life, disability, and long-term care insurance needs, both now and in the future, given results from the future cash flow projections; this often also entails a review of employer-provided benefits and recommendations for participation therein
  • estate planning – review of present accounts, ensuring appropriate titling and beneficiary designation both now and in the future, given results from other components of the planning process
  • strategy development – this can entail anything from tax planning to portfolio development to insurance recommendations, debt reduction plan, distribution planning, as well as opening and funding any new accounts deemed appropriate
  • communication of the results/recommendations – sometimes this takes a couple of hours or more on its own. The point is that the client comes away with a thorough understanding of the recommendations and the reasoning behind them; additionally, the client has an understanding of how to implement the recommendations
  • implementation – not always required, but often is requested. We spend time helping the client open accounts and making allocations if required, implementing any needed additional insurance coverage (reviewing policies and the like), implementing tax strategies, etc. – or sometimes the client turns the implementation completely over to us
  • follow up – plans are reviewed after approximately one year to ensure that circumstances have not changed dramatically (with regard to the information used in the original plan). If the client doesn’t wish to engage in formal follow up review, then the engagement is complete.

The Reality – What Really Is Involved

Now, given the fact that a typical comprehensive financial plan entails at least three meetings with the client, each lasting on average one and a half hours, that leaves five and a half hours (on the low end) or ten and a half hours (on the high end of my estimate) to cover the remainder of the activities I’ve listed. In the case of the lower end of the spectrum, some of the components are either eliminated or reduced in scope. For example, if the client only has a 401(k), no debt other than his mortgage, is single and has no children – then obviously the planning cycle is reduced, due to the reduction in planning factors.

Now, the other thing is that many financial planners (myself included) notoriously under-recover – that is, we often spend more time on the plan than what we bill, due to additional research required, or additional time required for communication of the recommendations, or any of a myriad of activities.

Hope this gives you an idea of what is involved in a typical financial planning engagement.

The Only Thing Permanent is Uncertainty

For the last few months we’ve experienced some uncertain and unnerving events across the US and the globe. Presidential elections, threats of war, terrorism, and political arguing can make weathering your portfolio and financial plan uneasy, if not difficult at times.

Add that to the daily responsibilities of your occupation, family, and finances, and we can potentially lose sight of our long-term goals and be susceptible to short-term thinking that may derail our goals and take us off-track from our financial well-being.

Financial planners, wealth managers, advisors, are not immune to this uncertainty and the impact it has on our thinking as well.

If you find yourself worrying or thinking about the uncertainty, perhaps the next few thoughts can help in your thinking and provide some insight on whether changes are necessary.

  1. Have your goals changed? For example, if your retirement timeline is 20 years away, it’s highly unlikely that you need to worry about how your investments are doing today. If any volatility is stressing you too much, then perhaps your investments aren’t in line with your capacity for the risk.
  2. Has your situation changed? Have you received a promotion and pay increase? Perhaps you could be saving more then? Expecting a child – maybe it’s time to think about college savings, life insurance (for you and your spouse), and getting out of debt (a good idea regardless of kids).
  3. Understand what cannot control. Do you have any control over the market? No. This means that you should not reduce your investing in your IRA or 401k simply because you think the market is high. Conversely, don’t stop contributing if (and when) the market drops. Trying to time the market and trading is hazardous to your wealth – as shown in this paper by Barber and Odean (2000).
  4. Understand what you can control. Getting out of debt, saving and investing more than you spend, educating yourself and family, earning more money, are all examples of things you can control. Make a plan on how to improve and work on the things you can control.
  5. Be grateful. Take a moment and think about all that you have, have been given, and be grateful for it. Understand that for all that there is to worry about, the majority is likely to NOT happen, and there is almost always someone else in a worse situation. Many of us (myself included) are incredibly lucky to have the things we have. Whenever I start to worry, I count my blessings (family, health, freedom) and a unique thing happens – I feel better. I worry less, and feel happier.

Taxpayer Bill of Rights – Do You Know Your Rights?

bill of rightsThere is a set of Rights that are available to all of us as taxpayers – the Taxpayer Bill of Rights. This group of basic rights is available to us so that the government (and specifically the Treasury Department and the IRS) don’t over-step their boundaries when dealing with taxpayers.

It’s important to know your rights, and those set forth in the Taxpayer Bill of Rights can be very helpful if you’re having trouble working with the government. The rights scattered throughout the Internal Revenue Code, but are published in total in IRS Publication 1, readily available on the internet to all taxpayers.

Recently the IRS published their Summertime Tax Tip 2017-21, which outlines the Taxpayer Bill of Rights. The text of the Tip follows below:

Know Your Taxpayer Bill of Rights

Every taxpayer has a set of fundamental rights and the IRS has an obligation to protect them. The “Taxpayer Bill of Rights” groups the taxpayer rights found in the tax code into 10 categories. Know these rights when interacting with the IRS. A good way to learn about them is by reading Publication 1, Your Rights as a Taxpayer.

Below are the descriptions of each right, as listed in Publication 1:

  1. The Right to Be Informed. Taxpayers have the right to know what to do in order to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures on all tax forms, instructions, publications, notices and correspondence. They have the right to know about IRS decisions affecting their accounts and receive clear explanations of the outcomes.
  2. The Right to Quality Service. Taxpayers have the right to receive prompt, courteous and professional assistance in their interactions with the IRS. They also have the right to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.
  3. The Right to Pay No More Than the Correct Amount of Tax. Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties and to have the IRS apply all tax payments properly.
  4. The Right to Challenge the IRS’s Position and Be Heard. Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions. They also have the right to expect the IRS to consider their timely objections promptly and fairly and to receive a response if the IRS does not agree with their position.
  5. The Right to Appeal an IRS Decision in an Independent Forum.Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties and have the right to receive a written response regarding the Office of Appeals’ a decision. Taxpayers generally have the right to take their cases to court.
  6. The Right to Finality. Taxpayers have the right to know the maximum amount of time they have to challenge an IRS position as well as the amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.
  7. The Right to Privacy. Taxpayers have the right to expect that any IRS inquiry, audit or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing.
  8. The Right to Confidentiality. Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.
  9. The Right to Retain Representation. Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.
  10. The Right to a Fair and Just Tax System. Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

The IRS will include Publication 1 when sending a taxpayer notices on a range of issues, such as an audit or collection matter. Publication 1 is available in English and Spanish. All IRS facilities will publicly display the rights for taxpayers.

Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on to find out.

Additional IRS Resources:

IRS YouTube Videos:

Create Your Own Luck

“Luck is when preparation meets opportunity.”

The other day I was eating lunch with my kids. After lunch was over I gave them a “treat” from the drawer that we normally house goodies of all sorts. I happened to grab a couple of gold-wrapped chocolate coins. These coins were renditions of the JFK half-dollars. My youngest grabbed her coin and said, “heads or tails?” I quickly said “heads” while she flipped the coin in the air.

The coin landed on the floor. Tails. I said, “Well, we both lost.” My daughter quickly exclaimed, “I won daddy.” When I asked her how she won when the coin landed tails she replied to me, “I called both heads and tails.”


Essentially, my daughter had created her own luck. And I immediately thought, “This is excellent fodder for a blog post. So here we are.

The reason why I mention this is to raise the rhetorical question of how do we create our own luck? As the quote at the beginning of the post mentions, I believe luck is when preparation meets opportunity. In other words, it’s possible to create our own luck.

So how do we prepare to meet opportunity?

From a financial planning perspective, there are many ways. Of course, these can be applied to many other facets of life – not just financial.

One way is to create an emergency fund. With a properly funded emergency fund, when an emergency arises, we will have the financial resources to cover the ordeal. In other words, the preparation meets the opportunity. And we’re lucky to have had the money to cover it.

Another way is to save as much as we can for retirement. In preparing for 20, 30, or more years in retirement by saving now, when the opportunity to retire comes, we are prepared to meet it. Again, we are “lucky” to have a stable, financially rewarding retirement.

More examples include continuing to learn and educate ourselves (in preparation for the opportunity for career advancement, income increases, passing our knowledge to others), as well as why we carry auto, home, life, disability and other insurances (in the event of an unlucky situation, we are lucky to have the insurance to cover it).

I hope you see the point.

Finally, don’t be afraid to look for luck. I consider myself pretty good at finding four-leaf clovers. Many times people have asked me how I am able to find so many. My simple reply is that I look for them. So seek opportunities to be lucky.

Later that same day my kids asked if they could get a dog. Both their mother and I agree that now is not the right time. We mentioned all the responsibility that comes with a pet – training, feeding, walking, etc.

My daughters explained that they had done some “research” and found that puppies can be house trained using training pads, and cats can be trained to a litter box. And if we didn’t like the smell, we could put the box in the garage. If we were worried about shedding, we could get a dog that doesn’t shed. Clearly they had done their homework – they had prepared. They were creating their own luck.

My goal is to make the opportunity less available…😊

Divorced with Children? Social Security Benefits for You

divorced with childrenThere are special rules that apply for Social Security benefits when you are divorced with children. While the ex-spouse is living, there is a discriminatory effect on benefits, but after the ex-spouse dies, a surviving ex-spouse with children under age 16 has one advantage over a surviving ex-spouse with no children. (The age of the child is not a factor if the child is permanently disabled and the disability began before age 22.)

During the life of your ex-spouse

Beth and Steve are divorced with children, three kids under age 16. Steve, age 62, started receiving Social Security benefits this year. As we know from this article on children’s benefits, all three of their children are eligible for Social Security benefits based on Steve’s record.

Plus, if they were still married, Beth would be eligible for a parent’s benefit based on Steve’s record as well. But since they’re divorced, a special rule applies to Beth’s situation. Being divorced, Beth is not eligible for the parent’s benefit that is otherwise available to a parent caring for a child (under age 16) of a Social Security recipient.

The parent’s benefit is only available to the current spouse of the Social Security recipient who is under Full Retirement Age. Ex-spouses are not at all eligible for this benefit.

This is the discriminatory effect for divorcees versus married folks. Although everything else is the same, this benefit is not available to Beth since they are divorced.

Once she’s reached age 62 Beth can be eligible for a regular ex-spouse benefit (as long as she and Steve were married for 10 years or more). If at least one of the children is still under age 16 at the point Beth reaches age 62 and she’s still unmarried (and Steve is still alive), Beth can be eligible for an unreduced Spousal Benefit from that point until Full Retirement Age, or when the child reaches age 16, whichever is earlier. Deemed filing will not apply to this situation – in other words, if Beth becomes ineligible (child reaches 16, or she remarries), Social Security benefits cease for her until she applies for another benefit type.

After the ex-spouse has died

Drawing out our example of Steve and Beth a bit further, let’s say Steve dies at the age of 63. As we know, since the kids are all under age 18, they are eligible for survivor benefits based on Steve’s record. Beth’s situation becomes more interesting with this development…

Beth is 49 at the time of Steve’s death. Since at least one of the children (of Steve and Beth) is under age 16, Beth is eligible for a surviving parent’s benefit. The advantage here is that the length of Beth and Steve’s marriage is not a requirement. In other words, for this surviving divorced parent’s benefit, the 10-year marriage length is not a factor.

The youngest child of Beth and Steve’s will reach age 16 when Beth is 60 years of age. Up to that point, Beth can continue to receive the parent’s benefit, regardless of the length of their marriage. However, if Beth remarries during this period, she will become ineligible for the parent’s benefit – it’s only available to her while she’s unmarried.

After the last child reaches age 16, Beth is no longer eligible for this surviving parent’s benefit. At this point, if their marriage did not last at least 10 years, Beth is not eligible for any benefits now or in the future based on Steve’s Social Security record. If the marriage lasted 10 or more years, Beth becomes eligible for a regular surviving ex-spouse benefit at age 60 – as long as she doesn’t remarry before age 60. After age 60, she’s still eligible for the survivor benefit.

The Earliest Age You Can Withdraw Retirement Money Without Penalty

numbersQuick – what’s the earliest age you can withdraw money from a retirement account without paying a penalty? Is it 59½?

Well, if that was your answer, you are probably in the majority. That’s the general overall rule regarding withdrawal of IRA and 401(k) money. And definitely, you should be able to withdraw money from your account after that age without penalty (unless it’s in a 401(k), you’re still employed, and your plan restricts in-plan distributions). But this is much later than the real answer.

If your answer was 55, you’re in an elite group. You know about the age 55 provision that provides the ability to withdraw 401(k) funds without penalty if you’ve left employment at or after age 55. This is a good answer, but the real answer using this provision is age 54. This is because the rule specifically states that you can take withdrawals penalty-free from your plan if you leave employment “during the calendar year that you will reach age 55”. So, technically, if your birthday is in December, you could leave employment as early as January of that year (at age 54 and one month) and still be eligible for penalty-free withdrawals from your 401(k) plan (but not an IRA). This is still much later than the real answer.

So, looking at the age 55 paragraph, you might guess age 50 if you’re a public safety employee – which you would immediately adjust to age 49. This is an even younger (and clever) answer, but still not the earliest age.

The real answer is that this is a trick question. If you meet one of the exceptions noted in either the 401(k) withdrawal exceptions or the IRA withdrawal exceptions articles, you can take a withdrawal at ANY AGE without penalty, as long as you are an eligible participant in the retirement account. Technically there is no minimum age at which you could take a penalty-free withdrawal from your retirement plan!

Where To Establish Your IRA Account

Establishing and contributing to an IRA (Traditional or Roth) is pretty simple and straightforward. There are many institutions where you can establish your IRA accounts:  banks, savings and loans, credit unions, insurance companies, mutual fund companies, and brokerages.  There are pros and cons to each type of institution, as we’ll list below.  These alternatives represent the major options for opening your IRA, in no particular order.

where to establish your IRA




Banks, Savings and Loans & Credit Unions

Banks are well-known as some of the most stable and conservative institutions in our financial industry.  For many folks, this is an assurance that there is additional safety in placing funds with these institutions, and in a way, with FDIC insurance, there is additional safety. This is mitigated quite a bit with the protections provided by law to IRA accounts. Since banks are conservative, until recently, their options for investment of IRAs were somewhat limited.  Traditionally, cash-oriented investments such as CDs and money market savings were the primary means of investment within banks.  This has changed lately with some deregulation of the banks, as many offer mutual fund investments in addition to the traditional offerings.
Insurance Companies While there are many arguments about the merits (or demerits) of placing annuity investments into IRAs, this is one of the options that insurance companies bring to the table.  Annuity investments can provide a stable guaranteed income stream for retirement. A Qualified Longevity Annuity Contract (QLAC) is one example of an annuity used in an IRA. Many times the products that insurance companies have to offer have significantly higher costs than can be found in other similar investment choices.  Annual expense ratios run in the 2% plus range. The increased expenses are used to pay for the unique features (longevity insurance, for example) of the insurance products.
Mutual Fund Companies Typically the lowest-cost providers of IRAs, with a wide variety of investment offerings.  In addition, once the account is established, there often are no transaction costs for additional contributions (if the investments are no-load).  This supports the concept of dollar-cost-averaging through low- or no-cost additions to the account. Many mutual funds have minimum investment levels that make investment into the funds difficult within the IRA. This is especially true in the early years of the account when the balance is smaller.  In addition, with the exception of no-load mutual funds, there can be sales charges associated with the funds, ranging anywhere from 2% up to 5% and more.
Brokerage Wide variety of investment choices. Depending upon the brokerage, can be a very cost effective option, in terms of transaction costs. Typically have a transaction cost with each contribution, which is in contention with the concept of dollar-cost averaging, as each individual contribution, if invested immediately, can generate a transaction fee ranging from $10 to $50, depending upon the brokerage.
Self-Directed IRA Custodian These custodians provide access to more specialized and unique investment choices, such as real estate, private offerings, and tax liens. The custodian provides expertise in the form of attorneys and other advisors to assist in the diverse selection of investments within the IRA in order to maintain the legal status of the deferred account. Generally the highest-cost option of all choices due to the additional back-office support. Due to the investment choices, may be very limited in flexibility.

As you can see, there are positives and negatives to each type of institution.  You need to be comfortable with your choice of financial institution to establish your IRA, as you will likely be dealing with the company for many years in the future.  Although you could make a change (rollover your funds) to a different institution at pretty much any time within limits, making those changes can be a hassle, so it’s best to use careful consideration in your choice.

The Retirement Answer

Although I will admit that the title of this post is a bit glamorous, I wanted to share the simplicity of the message.

Typically, every morning we will sit down to eat breakfast. Meals at our house are generally jovial, with discussions ranging from which animal would win in a fight to how my kids will spend their day.

A few mornings ago, however, my oldest asked me a rather interesting question. Knowing what I do for a living she asked, “Daddy, what do you have to do to retire?” My immediate response was, “That’s a great question!” At age 7, my heart swelled that she was already thinking about retirement.

Before I could give an answer she quickly quipped, “Wait. I know. You have to save enough money so that one day you can retire.” I was speechless. Pretty profound for a 7-year-old. Finally, I replied, “That’s exactly what you need to do!” Then my wife threw a rock at my already fragile ego and jabbed, “And it doesn’t take a Master’s or PhD to figure that out!”

Thanks, dear.

But really, that’s all that there is to retirement – saving enough to one day retire. I told my daughter that sadly, many people forget that the answer is really that simple, yet so hard for them to employ. I told her that many people choose to prioritize their money elsewhere and don’t think to save until it’s too late.

She then asked how old you have to be to retire. My wife mentioned that many people retire at age 65. I replied that people can retire when they want to – as it’s really how much they need to spend versus how much they have saved. I also said that if you love what you do, you may never retire.

“I’m going to save a lot of money”, she replied.

“I think that’s a great plan”, I replied.

A great plan indeed.

Traveling for Charity? You may have deductions

traveling for charityMost of us realize that donating money and goods to a charity can be beneficial on our tax returns. But did you know that traveling for charity can also be deducted? It’s true – with some limitations, of course.

When you do work for a charity, whether building houses, manning a recruitment booth, or picking up items donated, travel may be required. If you use your own personal vehicle (or your company vehicle if you own the company) your travel involved with this work can often be deducted as well.

For example, you might volunteer at your church to help with the annual winter clothing drive. Your job is to visit the homes of donors to pick up the clothing for the drive, making the donation much simpler for folks who don’t have time to come down to the church. Your mileage for driving around to the donors’ homes can be counted as a deductible out of pocket expense on your tax return for the year.

A more involved example would be if you volunteer to help build a water filtration plant for a community in a third-world country, sponsored by a qualified charitable organization. Your out-of-pocket costs for airfare, lodging, and ground transportation can be deductible if those costs are strictly related to the charitable work, and the trip is predominantly associated with the work. That is to say, your trip is not a “vacation” with a small amount of time spent working for the charity – the trip should be about the charitable work first and foremost.

The IRS recently published a Summertime Tax Tip (2017-2) that gives some broad overview information on deducting expenses while traveling for charity. The text of the Tip follows below.

Tips to Keep in Mind for Taxpayers Traveling for Charity

During the summer, some taxpayers may travel because of their involvement with a qualified charity. These traveling taxpayers may be able to lower their taxes.

Here are some tax tips for taxpayers to use when deducting charity-related travel expenses:

  • Qualified Charities. For a taxpayer to deduct costs, they must volunteer for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are generally qualified, and do not need to apply to the IRS. A taxpayer should ask the group about its status before they donate. Taxpayers can also use the Select Check tool on to check a group’s status.
  • Out-of-Pocket Expenses.  A taxpayer may be able to deduct some of their costs including travel. These out-of-pocket expenses must be necessary while the taxpayer is away from home. All costs must be:
    • Unreimbursed,
    • Directly connected with the services,
    • Expenses the taxpayer had only because of the services the taxpayer gave, and
    • Not personal, living or family expenses.
  • Genuine and Substantial Duty. The charity work the taxpayer is involved with has to be real and substantial throughout the trip. The taxpayer can’t deduct expenses if they only have nominal duties or do not have any duties for significant parts of the trip.
  • Value of Time or Service.  A taxpayer can’t deduct the value of their time or services that they give to charity. This includes income lost while the taxpayer serves as an unpaid volunteer for a qualified charity.
  • Travel Expenses a Taxpayer Can Deduct. The types of expenses a taxpayer may be able to deduct include:
    • Air, rail and bus transportation,
    • Car expenses,
    • Lodging costs,
    • Cost of meals, and
    • Taxi or other transportation costs between the airport or station and their hotel.
  • Travel Expenses a Taxpayer Can’t Deduct. Some types of travel do not qualify for a tax deduction. For example, a taxpayer can’t deduct their costs if a significant part of the trip involves recreation or vacation.

For more on these rules, see Publication 526, Charitable Contributions. Get it on at any time.

Downside to the Age 55 Rule for 401k

downsideIn other articles we’ve covered the Age 55 rule for 401k plans – where you’re allowed to withdraw money from your 401k penalty-free if you leave employment at or after age 55. But there’s a downside to the Age 55 rule that you need to know about. We’ll cover the downside today.

When you reach age 55 and leave employment, you may be looking to use your 401k plan as your source of income needs for a few coming years. Perhaps you plan to withdraw from the 401k until you reach age 59½, when you’ll have access to other deferred money, or maybe until you reach age 62 and start receiving Social Security.

But there could be a problem in your strategy. Your 401k administrator might only allow a one-time lump-sum withdrawal from the plan! Many plans have this restriction – the reasoning being that they see the plan primarily as an accumulation vehicle, and they do not want to be in the position of maintaining long-term distributions.

So, for example, Steve retires from his job at age 56, knowing that he can take withdrawals from his 401k plan without penalty. So when he maps this out, he needs approximately $50,000 from his 401k plan each year. He needs this amount until he reaches age 62, when he’ll start taking his Social Security and drawing his pension.

When Steve contacts the 401k administrator to set this up, he learns that the plan only allows a lump sum distribution! This means that Steve would have to take a distribution of $150,000 to get him to age 59½. Of course this would result in significantly more tax than Steve anticipated, but there’s not much else he could do, other than going back to work. (It should be noted that not all 401k plans have this restriction – many will allow multiple withdrawals, but many do restrict withdrawals to a one-time lump sum. Check with your plan administrator as you devise your strategy.)

If he rolls over the 401k plan to an IRA, the Age 55 rule no longer applies. However, Steve has another option that can help the overall tax situation, by staging his withdrawals.

Staging Withdrawals

If Steve took the entire lump sum of $150,000 from his 401k in one year (rolling over the rest of the account to an IRA), the tax would be approximately $32,070, since he’s single. If he was married, the tax would be approximately $23,778. But, since he only needs $50,000 in the first year, he could withdraw that $50,000 for a tax cost of approximately $5,940 ($3,448 if he was married). The remaining 401k would be rolled over into an IRA.

Then in the subsequent years, Steve could take “early” withdrawals of $50,000 each year, paying the 10% penalty. His total tax each of the two following years (his age 57 and 58) would work out to $10,940 per year (or $8,448 if he was married). So his total tax for the three years amounts to $27,820 – a savings of $4,250. If he was married the total tax would have been $20,344, saving $3,434 by staging. However, any way you look at it, this is costing an extra $10,000 in penalties, so it’s not the boon you thought it would be (if your plan is restricted like this).

Often, the best option to deal with this downside to the Age 55 rule is to come up with some other source of income during the intervening years. A part-time job could be the answer, helping Steve through the couple of years before he reaches age 59½. Or perhaps one of the other exceptions to early withdrawal could apply for a portion of his income needs. At age 59½ he could have the entire amount rolled over into an IRA and he’d have unfettered (unpenalized) access to the money in any amount.

How to Get Your Social Security Statement

One of the requests we make when doing retirement or Social Security claiming plans for clients is for the clients to bring in their Social Security statements. As many readers are aware, these statements can be retrieved online from the Social Security website. Below is a step by step process to retrieve your statement online.

  1. Go to
  2. Click on “Create an Account” and agree to the Terms of Service
  3. Enter your personal information on the following page
  4. You will be required to answer questions related to your identity and background (be careful – answering these questions wrong will require you to call or go into the local office)
  5. Set up your account with a username and password.
  6. You should then be able to view and retrieve your statement, earning history, etc.

If you’re leery of giving your personal information online, you can go into your local Social Security office and verify your ID by showing a valid photo ID.

If you’re not wanting to set up an online account, there are some other means to retrieve your statement. You can request a paper statement by going here. Additionally, if you’re age 60 or older you’ll receive your paper statement in the mail three months before your birthday – if you’re currently not receiving benefits nor have access to your account online.

How to Save Even More

owe taxesIn the past, we’ve written about how to save more money by paying yourself first, saving 15-25% of your gross income, or saving just 1% more in order to have enough to retire comfortably, send a child to college, or other goals requiring capital needs.

Saving money via payroll deductions, automatic contributions to IRAs and 401ks, and directly into piggy banks (for kids and adults alike) can be considered ways to save money directly. However, there are some ways to save money indirectly – and convert that money into direct savings towards retirement, college, or other financial goals.

  1. Turn the lights off (shut the door, close the refrigerator)! This phrase still echoes in my head from when I was younger. My parents could frequently be heard telling me to turn lights off in my bedroom or in the house if I wasn’t going to be using them or needing them. Now, I catch myself telling my own kids to remember to turn lights off – explaining to them that every month, mommy and daddy have to pay to use the lights power that we need. Being frugal with your utilities means having more in your pocket; it adds up. And if you’re one of those folks who argues that it’s not a big deal leaving lights on because you have energy efficient bulbs, think of the following. Would you leave your car running in the garage or at work just because it gets good gas mileage?
  2. Don’t grocery shop hungry. When I was in college I can remember several times I would go grocery shopping when I hadn’t eaten for quite some time. This usually ended up with me buying a lot of food (ramen) I didn’t need, wasn’t very healthy, and either ended up getting wasted or sat in my pantry for a long time. One of the best times to go grocery shopping is when you’re full, and after you’ve made a list of the items you need. Being full reduces the risk of buying “with your eyes” and helps keep you focused on only the food items you need. It will also prevent you from buying junk food which is typically the body’s response to satisfy cravings when you’re hungry.
  3. Take inventory of your spending. A good way to track needless spending is to get your last three month’s bank statements and go over them with a fine-toothed comb. On a separate sheet of paper write down two columns – wants and needs. Carefully write down the items that are needs (generally food (not dining out), shelter, water, etc.) and those that are wants. This exercise allows you to take inventory of what you’re spending money on – and is generally free from bias since you’re looking at your spending in the past. Get rid of items you don’t use or need such as magazine subscriptions, TV subscriptions, dining out, etc. The wants and needs are relative to you – only you can be the best judge of what is a need and want.

These are just some starting points to use. After considering these actions, take the money you’re not spending and direct it to your retirement, college savings, or emergency fund. Better yet, ramp up your savings to these accounts first (pay yourself first) and then figure out a way to live on the rest. By doing this first, you force yourself to get rid of things you don’t need and can quickly change your mindset to remember to shut off lights, close doors, etc. It’s amazing how frugal and efficient you can be when the money is no longer there to waste – you’ve made it a priority to put it elsewhere – where it will go muc

%d bloggers like this: