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Avoiding the Underpayment Penalty with Form 2210 – Annualized Income


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In another article I covered a few ways that you might avoid an underpayment penalty in certain circumstances. Specifically, when you had not had the right amount of money withheld throughout the year or had not made timely estimated payments. But what if your income was uneven, sporadic throughout the year, and you received a good deal of your income in the last month? There’s a potential for an underpayment penalty with this sort of income, but there’s also a systematic way to avoid it. (H/T to reader P.D. for the suggestion!)

Self employment income

Generally this situation comes about when you’re either self-employed or work on a contract basis, and you’re generally responsible for making regular estimated tax payments on your income. You might also have sporadic income if you have a side-hustle or you sell some appreciated item (where the income from the sale becomes taxable). In other words, your income, or at least part of it, is not coming to you in the form of a paycheck from an employer, where the employer is withholding taxes for you.

When you’re in this position, typically you’ll make estimated tax payments throughout the year – one by April 15, for income earned through March; one by June 15 for income earned through May; one by September 15 for income earned through August; and lastly one by January 15 for the income earned through December. 

When it comes time to file your taxes (by April 15 of the following year), if the four payments you made through the year are not roughly equivalent to 1/4, 5/12, 8/12 and 100% (respectively) of your annualized income throughout the year, the IRS might say that you’ve underpaid estimated taxes. However, if you made these payments based on the actual net income that you received during the period, you have no reason to be concerned, as long as the payments were adequate for the income received.

Form 2210

There’s an IRS form, Form 2210, that is ostensibly used to determine the amount of underpayment penalty that applies to you, if any. In addition, Form 2210 provides you with a way to show that your income was not received evenly through the year, and that you made payments based on the actual taxable income during each period, if that’s the case.

At the bottom of Form 2210 is Schedule AI – Annualized Income Installment Method. This Schedule provides you with the format to report your actual income during those four periods mentioned previously: through the end of March, then May, then August, and December. In addition, you’ll report in Schedule AI the amounts that you have paid in estimated taxes.

You’ll also need detail information about your other income throughout the year, such as if you had a “regular” job with a paycheck and withheld taxes, plus interest and dividends from investments, and any other income that you earned (rent, royalties, side-hustles, etc.).

Filling out Schedule AI provides a way to show the IRS that you did make the payments correctly (assuming that you did) in correspondence with the income as you earned it. You’ll then work your results from Schedule AI into Part IV of Form 2210, and complete the process to determine if you have an underpayment penalty. This form, if necessary, is filed along with your Form 1040 for the year.

But what if you didn’t make the payments correctly?

Here’s another way that Schedule AI can help you out, especially if you haven’t been very accurate in your estimated tax payments. Let’s say, for example, you miscalculated (or just out-right didn’t pay the necessary amount) for the first payment in April, but then you corrected it and “caught up” with the June payment. Using Schedule AI can ensure that your penalty for underpayment only applies until you made the “catch up” payment. 

Then, if you made the appropriate payments through the rest of the year to correspond with your income during those periods, no further underpayment penalty would apply.

Otherwise, you might get stuck with underpayment penalties that could apply across the entire year, resulting in a considerably higher penalty.

If you didn’t make the proper payments throughout the year and you’re looking at a big underpayment penalty, you might look at the options presented in the article Understanding the Underpayment Penalty and How to Avoid It, as mentioned earlier.

Understanding the Underpayment Penalty and How to Avoid It


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While filling out your tax return this year, maybe you discovered a nasty little surprise:  you’re being hit with an Underpayment Penalty, an extra little whack on the nose that means the IRS would like to hear from you more often throughout the year. Why?

Understanding the Underpayment Penalty

When you calculate the amount of tax that you owe, along with however much you’ve had withheld or paid in estimated tax throughout the year, if you haven’t had enough withheld, the IRS will assess a penalty for underpayment. How much is enough? The penalty is based upon the lesser of two amounts:

  • 90% of the amount of tax you will pay in total for the current year; or
  • 100% of the amount of tax you paid for the previous year.

Note: These amounts are different if you are a farmer or fisherman by trade – in that case you use 66 2/3% of the tax you’ll pay instead of 90%. In addition, if you are not a farmer or fisherman by trade, and your income is greater than $150,000  or $75,000 for Married Filing Separately, the factor you use is 110% of the amount of tax you paid the previous year, rather than 100%. For the purpose of this article, we’ll just use the “regular” figures.

If the amount of withholding and estimated payments that you’ve made throughout the year is at least $1,000 less than the smaller of those two factors, you’re in a position to receive an underpayment penalty.

Calculating Your Estimated Tax

The IRS has Form 1040ES to help you determine the amount of tax that you should be withholding or making in estimated payments. It’s a little complicated and daunting, but if you bear with it you can come up with the proper numbers to make sure you’re covering the tax throughout the year.

With the information that you get from Form 1040ES, you will have calculated the amount of under-withholding – if it turns out that you’re over-withholding, you might make adjustments to your W4’s or estimated payments as well, but that’s another topic altogether. No action is necessary if the calculated under-withholding is less than $1,000.

How To Avoid The Underpayment Penalty

Assuming that the figure you come up with is more than $1,000 in under-withholding, to pay the absolute minimum in withholding or estimated payments, subtract $1,000 from your underpayment estimate. (Note:  you don’t have to reduce the amount of your withholding by $1,000, you can have more withheld if you wish.) Then you have three options:

Make estimated payments – on April 15, June 15, September 15, and January 15, pay 25% of the excess amount that you’ve calculated. Postmark these amounts on or before the due dates to avoid late payment penalties.

Adjust W4 withholding – for regular wages, the form is W4; for pensions, W4P; and for Social Security benefits, it’s form W4V. Adjust the amount being withheld via this form to match your required withholding. Make sure that if there is already tax being withheld from a particular source that you’re increasing the amount being withheld! Too often, trying to make an adjustment to have additional money withheld, we inadvertently replace the current withholding, rather than increasing it.

Take an IRA distribution and have tax withheld from it – if you’re otherwise eligible to take an IRA distribution (either you’re age 59½ or older, or one of the other exceptions applies), when you take the distribution you have the option of having tax withheld. By doing this, you can avoid the hassle of quarterly estimated payments, if you like. See the article “IRA Trick – Eliminate Quarterly Estimated Tax Payments” for all the details.

Rolling Your IRA into a 401(k) – to Avoid RMD


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In another article I pointed out a few additional reasons that might make you want to rollover your old 401(k) plan into an IRA – but there are also good reasons, in particular circumstances, that it might make sense to move your IRA funds into a 401(k) plan. One of those reasons might be to avoid having to take Required Minimum Distributions (RMDs) if you’re over age 72 and are still working.

Rolling IRA Money into a 401(k) to Avoid RMD

This is a somewhat narrow slice of folks, but as the population and workforce ages, there are bound to be people that this will be available to. Here’s how it works:

If you are age 72 or older (it used to be 70½) and you have an IRA, you will be required to take a distribution from your IRA each year. However, if you are still working and have a 401(k) plan available to you, you can avoid having to take these RMDs from the 401(k) until the year that you retire. If your 401(k) plan allows it (and today most plans do), you can rollover your existing IRA account into your 401(k) plan.

This is possible because 401(k) plans (and other Qualified Retirement Plans such as a 403(b) or a 457) don’t require you to start RMDs while you are still working, even if you’re over age 72.

So, if you don’t need the RMDs to live off of, you can eliminate the requirement by rolling over those funds into your 401(k) plan – and then begin taking RMDs upon your retirement. At that point you can also roll the funds back into an IRA as you see fit.

Of course, this shouldn’t be the only factor that you consider – you should also look at the inherent costs in your 401(k) plan, along with your investment choices and any plan-specific issues that may cause a problem for you with the rollover. In general though, this is a pretty good move for folks who happen to fit the criteria.

One last thing – if you happen to own the company that you work for (or own at least 5% or more of it), you can’t roll your IRA money into that company’s 401(k) plan to avoid RMDs. It’s just one of those IRS things… You only get to avoid RMDs if you’re not a 5% or more owner.

Year-End Planning

As the year comes to an end there are some things you may want to consider before 2021 arrives in just a few weeks.

  1. Increase your retirement savings. The maximum amounts allowed to 401k and IRA retirement plans remains unchanged for 2021 at $19,500 ($26,000 if over 50) and $6,000 ($7,000 if over 50) respectively. Consider saving as a percentage versus a dollar amount. Some 401k plans allow you to increase your percentage savings automatically every year.
  2. Replenish your emergency fund if necessary. Three to six months of living expenses is a good idea. If you found yourself using more during the pandemic, consider an emergency fund of six to nine months.
  3. Consider lowering your debt. Reducing and eliminating debt could mean making extra payments on your mortgage or vehicles. It may also necessitate refinancing your mortgage. With current rates as low as they are, it may be wise to refinance from a 30-year mortgage to a 15-year or even 10-year mortgage.
  4. Review your estate. Make sure your beneficiary designations are up to date on all of your retirement plans, life insurance, and other accounts. Review your will to make sure it’s up to date and still reflects your wishes. You may also want to discuss and consider powers of attorney and advanced medical directives.
  5. Review your insurance. Review your auto insurance policies to make sure you carry enough coverage, and if deductibles should be changed. The same is true for your home insurance. Don’t have an umbrella policy? Get at least $1 million in coverage. It’s dirt cheap. Review your life, disability, health insurance to see if any changes or additions are necessary.
  6. Commit to learning or improving on one area that interests you. Read up on the subject, take a class, practice what you’re learning. While financial improvement and stability is important, don’t let your self-improvement atrophy.

IRA Trick – Eliminate Estimated Tax Payments

ira trick

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Retirees: don’t you get tired of making those estimated tax payments? January, April, June and September, like clockwork, you have to hand over tax money, just because you’re receiving a pension, retirement funds, and/or Social Security benefits. What if there was a way to send this money off one time, and then you wouldn’t have to remember it every few months?

There is.

IRA Trick – Eliminating Estimated Tax Payments

When you receive money throughout the year, the IRS expects withholding payments or estimated payments to coincide with your receipt of the money. So when you receive a monthly pension check, you should either have some tax withheld out of each payment. On the other hand, you could send in an estimated tax payment, at four intervals throughout the year, which is treated equivalent to check-deducted withholding.

These estimated payments, often wrongly referred to as quarterly payments, are due each year on April 15, June 15, September 15, and January 15 of the following year. If you don’t make these payments in a timely fashion and you don’t have other withholding occurring with your receipt of money, the IRS may penalize you for underpayment of tax when you file your tax return.

A little-known fact about IRA distributions is that when you have taxes withheld from the distribution (which are then sent directly to the IRS), the withheld money is considered to have been received throughout the year – even if it is received late in December. Using this fact to your advantage, you could figure out how much your total estimated tax payments should be for the year sometime in early December, and then take a distribution from your IRA in that amount. Here’s the trick:  Instead of taking the distribution yourself, fill out a form W-4P (or use your custodian’s form) to direct the total amount of the withdrawal to be withheld and sent to the IRS. Voila! You’ve now made even payments to the IRS for each of the four quarters, on time with no penalties!

The downside to this plan is that, in the event of the taxpayer’s untimely death before the annual distribution is made, the estimated payments will be considered as unpaid up to the date of death, and therefore the estate will be responsible for paying the underpayment penalty. Other than that shortcoming, this trick could provide you with several months’ additional interest/return on your money, plus remove the hassle of the quarterly filings.

But Jim, what if I’m retired and under age 59½? Won’t there be a penalty?

There doesn’t have to be, although I’d place this particular move into the “higher degree of difficulty” category of tricks – not to be taken lightly.

Why does this work? IRC Sec 6654(g)(1)

There is a section in the Internal Revenue Code related to income tax withholding from paychecks and other sources, specifically Section 6654(g)(1). Turns out that any withholding through the year at any time is credited as though they were paid evenly throughout the year. IRC Sec 6654(g)(1) states verbatim:

(g) Application of section in case of tax withheld on wages

   (1) In general

For purposes of applying this section, the amount of the credit allowed under section 31 for the taxable year shall be deemed a payment of estimated tax, and an equal part of such amount shall be deemed paid on each due date for such taxable year, unless the taxpayer establishes the dates on which all amounts were actually withheld, in which case the amounts so withheld shall be deemed payments of estimated tax on the dates on which such amounts were actually withheld.

   (2) Separate application
The taxpayer may apply paragraph (1) separately with respect to—
      (A) wage withholding, and
      (B) all other amounts withheld for which credit is allowed under section 31.

Therefore, by default, withholding from a paycheck, pension or other tax withholding source is considered to have been paid in ratably during the tax year, rather than credited when they were actually withheld. That doesn’t mean the taxpayer couldn’t specify timeliness of a particular withholding (if it was to the taxpayer’s advantage), this is an election the taxpayer can choose if they wish.

Pre-59½ Retiree: How to Avoid Penalty?

Same situation as before, but now you must take another step:  once you’ve taken the distribution and properly filed the W-4P (or custodian form) to have the distribution withheld as tax – execute a 60-day rollover, placing the same amount of money either into the same IRA or another IRA… effectively, you’ve pulled the old switcheroo with the IRS on this: you’ve paid tax with a distribution that didn’t happen!

How can this be?  Well, the IRS allows you to replace (or rollover) money from any source back into your IRA, so it doesn’t matter that your original distribution was used for withholding. So you have made up for missing all those quarterly estimated payments (no underpayment penalty now) plus by rolling over the funds you’ve avoided the 10% early withdrawal penalty as well.


I mentioned that this last trick fits into the “higher degree of difficulty” category of tricks. The reason I say this is because using your account in this fashion (essentially a 60-day loan) can be hazardous – the primary reason is that 60 days is all you have, and 60 days can be a relatively short period of time. Plus, the IRS HAS NO SENSE OF HUMOR ABOUT THIS. If you miss the rollover period by one day, you’re outta luck.

In addition to the 60-day period, there is also the limitation of only one 60-day rollover per 12-month period. Again, remember: no sense of humor at the IRS. It is for these reasons that this rollover trick should only be used in the most dire of circumstances – such as if you completely forgot to make quarterly payments and are facing a stiff underpayment penalty, for example. Otherwise, I’d suggest leaving this one alone. By all means, you should not try this trick year after year. It shouldn’t be a problem if you’re over age 59½, though.

How Remarriage Affects Widow(er)s and Ex-Spouses Differently

little bit pregnant pizza

Photo credit: jb

The Social Security Administration has a special way to treat former spouses (ex-spouses) differently from widows and widowers with regard to benefits when the person in question remarries. This special rule only affects ex-Spouses while the other partner from the former marriage is still living. When the former spouse dies, the surviving spouse is treated effectively the same as a widow or widower.

Remarriage Rules for Widows and Widowers

(For brevity I’m going to refer only to widows, but everything applies as well to widowers.)

If a widow is under age 60 and remarries (and stays married), she is no longer eligible for her Survivor Benefit based upon her late husband’s record. After age 60, the widow can remarry and retain access to Survivor Benefits. This rule applies the same way for a widow who was divorced from the decedent, as long as she was married to the ex-spouse for at least ten years.

Remarriage Rules for Ex-Spouses

If a couple was married for at least 10 years and has been divorced for at least 2 years, an ex-spouse can be eligible for Spousal Benefits based upon her former husband’s record – as long as she remains unmarried. (As with other examples, the roles could be reversed.) Her ex-husband must be eligible for benefits (doesn’t have to be taking them) and she must be at least age 62 for early benefits. The same rules apply as if they were still married, except that he doesn’t have to apply for her to be eligible for the Spousal Benefit. If he does apply for benefits, the two-year waiting period is eliminated.

However – if she remarries at any time while he is still alive, she will become ineligible for the spousal benefit while married. If there is a subsequent divorce or the new spouse dies, her eligibility for Spousal Benefits from the earlier marriage is restored. If/When the first husband (or any earlier husband) dies, she becomes eligible for a Survivor’s Benefit as a Widow (see above for remarriage rules for Widows). She can choose the earlier husband (if she was married more than once) with the highest available benefit for her Spousal and/or Survivor benefit – as long as she met the eligibility (length of marriage) to that former spouse.

2021 Retirement Plan Limits

No changes in contributions limits for employees to their employer-sponsored plans and IRAs.

Charitable Contribution Deductions

George would like to speak to a manager about identity theft. – photo credit – jb

On your Schedule A, you have the ability to itemize and deduct contributions that you have made to various charities during the tax year. There are some specific rules that we have to follow when listing these contributions as deductions.

Ten Tips for Deducting Charitable Contributions

  1. Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals or to political organizations and candidates.
  2. You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance.
  3. If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received. Usually your charitable organization will itemize the FMV of the benefit received on your gift receipt.
  4. Donations of stock or other property are usually valued at the fair market value of the property. Special rules apply to donation of vehicles.
  5. Clothing and household items donated must generally be in good used condition or better to be deductible. The value of these items is generally far less than what you originally paid for the item. Imagine if the item were for sale on a garage sale to value it.
  6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For donations by text message, a telephone bill will meet the record-keeping requirement if it shows the name of the organization receiving your donation, the date of the contribution, and the amount given. Often the charitable organization will send you an electronic receipt for such donations.
  7. To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgment requirement for all contributions of $250 or more.
  8. If your total deduction for all noncash contributions (merchandise or other property) for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
  9. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser.
  10. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.

For more information on charitable contributions, refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions.  For information on determining value, refer to Publication 561, Determining the Value of Donated Property.

What to do When You Receive a Notice From the IRS

IRS-Envelope-edited-300x142You’re cruising along with everyday life, dealing with this, that and the other thing… then you go to the mailbox and there it is: A Notice From The IRS. <queue scary music here>

It’s a simple enough little envelope, much the same as a lot of other mail you might receive… but look at the return address.  IT’S. FROM. THE. IRS.


What should you do? (Other than sit down, of course, before you fall down)

Steps To Take

First and foremost: calm down. The IRS sends out literally millions of these notices, often for clarification of a minor item that was either entered incorrectly, or inadvertently omitted from your return. The point is, it’s not the end of the world. But there are some very important steps you need to take when you receive such a notice.

Read. It may sound like a ridiculous thing to say, but you’ve got to read what they’re telling you. You’d be surprised how many folks are terrified to even open the letter! Quite often all they’re asking for is clarification on your return, something didn’t match up in their records. It could be quite simple! Or it could be something more complicated, but you need to read and understand what the notice is about so you know what to do next.

Take action – don’t ignore it. The IRS has these wonderful computer systems in place that keep track of your situation, even when you’re not. Ignoring the situation will not make it go away – if they’re asking for more information, provide what they ask for. Start with the letter, and get figured out what you need to do to straighten things up.

Call the number. On your notice there should be a number to call if you don’t understand the notice, or if you have questions. Bear in mind that this first line of defense at the Service is mostly interested in collecting money – and if that’s what your notice is about, you need to be prepared to hold your ground if you disagree with the notice. Also, know that calling the number is not a five-minute affair. Especially in these days of reduced staffing, you should expect the phone call to take at least an hour if not more time to just get someone to talk to. You need to do this when you have plenty of time on your hands.

Keep records. Every notice you receive, every time you call, every time you write, keep a record of the interaction. When you talk to the IRS office, every person you speak with will give you his or her name and badge number. Write it down – along with everything you say, and everything the IRS agent says. This can be critical if something changes along the line, and you need to justify why you did one thing or another. You don’t need a complete word-by-word transcript, but make sure you have the important parts of the interaction documented – especially deadlines!

Don’t get in over your head. If you’re overwhelmed by the notice, the communication, and the whole process, get help. You can find experienced tax professionals in your area by looking on the National Association of Enrolled Agents (NAEA) website (or you can call me). These folks are ready and willing to help you through the maze of working with the IRS – even if you’ve already started the communications process and found out you’ve bitten off more than you can chew.

Don’t just give in. If the notice indicates that you owe the IRS some amount of money, don’t just pay it to get it over with. The IRS is often wrong – especially when it comes to missing tax forms or miscalculations. It may seem like the safest thing to do: give them whatever they’re asking for and get them off your back! But it can really work against you if you don’t know what you’re doing.

For example, if you had cashed in a bond and forgot to include that information on your return, the IRS is going to assume that you had a zero basis in the bond. If you purchased the bond for $10,000 and later sold it for $10,100, the IRS only knows about the $10,100 that you received when you sold the bond, and in their notice they’ll indicate that you owe tax on $10,100. But in the end, when you file your amended return with your basis properly reported on Schedule D, you end up only owing tax on the $100 gain. Big difference! And if you just gave in, you’d have given them far more than you really owed.

Work it out. If it turns out that you do owe additional money to the IRS and you just can’t swing paying it all at once, ask for a payment plan. It’s not cheap to do this, but it’s a whole lot better than just ignoring the IRS altogether. Because pretty soon after you do that, you start to notice how your entire wardrobe is made up of black and white striped clothes. (Hint: that’s what you get to wear in prison!)

Summing it all up

Okay – you’ve got the notice. It’s not the end of the world. By all means, take action, do something about it, and get help if you need it. (by the way, you can also call me directly if you need help with one of these.) Good luck!

Post-Death Options for Directing a Retirement Plan to a Spouse


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There are many cases where an IRA or other retirement plan owner has directed his or her account to someone other than his or her spouse – such as the estate, a trust, or other person(s), or – the owner may not have named a beneficiary at all. It could be that the original owner simply forgot to make his or her beneficiary designation…

In a case like this, although the intent of the original owner could still be met by distributing the account as the original beneficiary designation directs, but there may also be cases where the intended heirs think otherwise and would prefer to direct the assets to the surviving spouse. It could be important from a tax standpoint since the surviving spouse has the unique option to transfer the account to his or her own name as owner, potentially allowing for deferral of taxes for many years. Plus, the surviving spouse is one of the few eligible designated beneficiaries that are allowed to stretch inherited IRA distributions over their lifetime. There could be many reasons for this to happen, but the point is that the situation could and often does arise.  How can this be accomplished to the best interest of the surviving spouse?

After Life Actions

If the account is directed to the estate or a trust and the surviving spouse is entitled to an elective share of the estate or the trust, the IRA could be chosen as the surviving spouse’s share – and thereby available to the surviving spouse.

Another option for the account that is now owned by an estate or trust with spousal and non-spouse beneficiaries is that the non-spouse beneficiaries could disclaim their portion(s) of the estate or trust, leaving the spouse as the only beneficiary.

While there are ways around the issue, this definitely doesn’t take the place of proper estate planning, by any means. You’re always better off if you make the proper moves before death, so that there is no question about your intent and who your beneficiary should be.

Important Notes

It is important to note that the IRS doesn’t have an official position on these matters with regard to how and when the surviving spouse who wasn’t specifically named as the beneficiary may be able to utilize the inherited IRA as an owned IRA (in his or her own name).

There are many Private Letter Rulings (PLRs) that address these situations – and the consensus from those PLRs seems to be this: if the circumstance is that the surviving spouse has sole ownership and rights to assign the account and/or distributions to himself or herself, then usually the IRS allows transfer to an owned IRA (rather than an inherited IRA). If the anyone other than the surviving spouse has rights or control ownership, then the IRA is considered to have been transferred from the entity (the trust or the estate) and is not available to him or her as an owned IRA, only as an inherited IRA.

As with all PLRs, these cannot be used to support your own position with regard to an action you might take, only as guidance in determining a course to consider. You will need to get your own PLR if your situation is unusual and not covered by the IRS in any other way.

How to Build Good Money Habits


Photo credit: jb

Dealing with personal finances can be daunting. They could be a new venture for you or your current way of dealing with them is less than ideal. Here are some tips that can aid you in developing good personal finance habits.

  1. Use technology. Whether developing a budget, savings plan, etc. the use of technology can make life easier. App such as or spreadsheet software like Excel can assist you in getting organized and making clutter more organized.

For example, an app like Mint consolidates all your finances, accounts, and can give you a snapshot of what you’re spending, saving, and your net worth with the click of a button.

  1. Don’t make it complicated. It’s not rocket surgery. Chances are your finances are not as complicated as you think. They’re just unfamiliar, as is the process of working with them. But I assure you, you can do it.

Make a list of needs and wants. Start prioritizing what you must have versus what you want. Be tough. Do you need to pay rent or your mortgage? Yes. Do you really need the TV subscription? No. It’s easy. What comes in versus what comes out. The rest is yours to keep. And now you’re building wealth.

  1. Pretend you make less. Take your annual or monthly salary, and reduce it by at least 15%, more if you’re willing. Then imagine what’s left over is what you must live off of. What cuts would you make? What expenses (retirement, college?) would you prioritize over others?

After a short time, you’ll be used to living off the reduced income. You can use the difference (surplus) to fund other goals such as debt reduction, emergency funding, retirement, etc. Use it to pay yourself first; and that’s easily done with the next step.

  1. Make it automatic. Whenever possible, automate your finances. Paying bills can be easy by signing up for auto-pay – a monthly deduction from your bank account to pay utilities, mortgage, etc. Contribute to retirement accounts by having the deductions take right from your paycheck (401k, etc.) and do automatic withdrawals from your bank account to your IRA.

Automating doesn’t mean ignoring. You’ll still want to check in here and there to make sure what’s being deducted is accurate. But automating will make life easier.

Why is there GPO (Government Pension Offset) in Social Security?

gpo ferris wheel

Photo credit: coop

If you are (or were) married and you have worked in a domestic (US-based) government job where your earnings are not subject to Social Security taxation, you probably are familiar with the Government Pension Offset, or GPO. (You may also be interested in WEP – Windfall Elimination Provision – as well, but that’s another subject.) Have you ever learned just why GPO is a factor in Social Security calculations for many folks? In another article we reviewed why there is a WEP, but there are differences between WEP and GPO, so we’ll cover those first.

GPO versus WEP

You might think GPO and WEP go hand-in-hand. And for many folks, if you’re affected by one of these, likely you may be affected by the other as well. But they’re two distinctly-different provisions.

WEP, as we’ve discussed elsewhere, impacts the calculation of your own retirement benefit, by reducing the first bend point factor in calculating your Primary Insurance Amount, or PIA. See last week’s article for more details on how WEP affects your PIA.

GPO, on the other hand, affects benefits that you can receive as a spouse – either a Social Security spousal benefit that you can receive while your spouse is living, or a Social Security survivor benefit (aka “widow(er)’s benefit”) that you receive when your spouse has passed away.

The other primary difference between WEP and GPO triggering is that GPO can only be triggered by a pension from a US-based governmental entity where Social Security taxes were not withheld. WEP can also be triggered by a pension from a foreign government based on wages that were not subject to US Social Security taxation.

GPO calculation

GPO reduction is a much simpler calculation as well. If you are receiving a pension from a US-based governmental entity (based on earnings not subject to Social Security taxation) and your spouse has a Social Security retirement benefit, GPO will likely apply.

Let’s walk through an example of a non-GPO-impacted couple first:

Sid and Nancy are married, and are both reaching FRA this year. Sid worked outside the home for his entire career in a Social Security-taxed job, while Nancy worked sporadically outside the home but was primarily present to raise and home-school their four children. As a result, Sid has a Social Security retirement benefit coming to him at his Full Retirement Age (FRA) in the amount of $2,600. Nancy’s sporadic Social Security-based employment earnings has produced a relatively small Social Security retirement benefit in the amount of $500 at FRA. 

Because of the difference in the amount of Sid’s retirement benefit and Nancy’s retirement benefit, Nancy is entitled to a spousal “excess” benefit, in the amount of $800. This brings her total Social Security benefit up to 50% of Sid’s benefit, or $1,300. This is how it works when there is no GPO involved.

For an example including GPO, let’s say Simon worked as a teacher in a school district that provides a pension and his earnings were not subject to Social Security taxation. Simon’s wife, Beth, worked in Social Security-related jobs her entire career, and as such has a Social Security benefit of $2,500 per month coming to her. Simon’s teacher pension amounts to $2,100 per month.

By virtue of the fact that Simon is married to Beth, he is entitled to a spousal benefit based on Beth’s earnings. This spousal benefit is 50% of the amount that Beth could receive upon reaching her Full Retirement Age – and that amount is $2,500. So Simon is entitled to a spousal benefit of $1,250 – 50% of $2,500. 

However, GPO is in play, since Simon is receiving the teacher’s pension in the amount of $2,100. The GPO offset is 2/3 of the amount of the pension – which is $1,400 – which effectively wipes out the spousal benefit altogether for Simon.

The reason that this offset is in place is because of the original reason that spousal benefits were created. Spousal benefits are intended to make up the difference for many couples between their lifetime earnings amounts. When this was initially created, the family dynamic quite often had one spouse working outside the home while the other worked within the home (at least a portion of his or her career), raising the family and taking care of domestic chores. As a result, very often the spouse who didn’t work outside the home had no (or a very small) Social Security retirement benefit when it came time for retirement.

The same applies to Social Security survivor benefits. In the case of Sid and Nancy, when Sid dies (if he dies first), Nancy becomes entitled to a survivor’s benefit equal to the benefit that Sid was receiving prior to his death. When Nancy starts receiving that $2,600 benefit, her own benefit and the spousal excess benefit are terminated, so her final total Social Security benefit at this point is $2,600.

On the other hand, if Beth were to die before Simon, he would be (prior to GPO) entitled to a survivor’s benefit equal to the Social Security benefit that Beth was receiving prior to her death, or $2,500. However, since Simon is receiving a pension from a governmental entity based on wages that were not subject to Social Security taxation, GPO applies to the survivor benefit as well. Just the same as with the spousal benefit, GPO offsets the survivor benefit by 2/3 of the amount of the pension that Simon is receiving, or $1,400. This leaves Simon with a survivor benefit in the amount of $1,100 ($2,500 minus $1,400).

Why is there a GPO?

Much the same as with the WEP, GPO was put in place to avoid “double-dipping” in two different retirement activities. If GPO wasn’t in place, in our examples from above, Simon would have been entitled to a survivor benefit equal to Beth’s Social Security retirement benefit, while at the same time continuing to receive his full teacher’s pension. Contrast that with the treatment that Nancy receives – she has to give up her own Social Security benefit (and the spousal benefit) in order to receive the survivor benefit. This is the “double-dipping” that GPO eliminates, or helps to somewhat mitigate.

The reasoning is that the governmental pension is designed to take the place of Social Security for that employee. If there was no offset, the spousal and survivor rules, which are designed to help out a spouse who had a smaller earnings record over his or her lifetime. Since the governmental employee was outside of the Social Security system, his or her Social Security record is artificially small, and without the GPO would result in an unfair distribution.

Different from WEP, there is no way to earn your way out of GPO impact. As you probably know, if you’ve worked in Social Security-covered jobs earning “substantial earnings” for enough years, WEP can be reduced or eliminated. There is no such provision for GPO. And this makes sense, because GPO is not factored based on your own Social Security record. GPO is factored totally based on the amount of your pension from the governmental entity.

When you’re collecting a governmental pension, GPO applies to any Social Security spousal or survivor that you may be eligible for, whether for your current spouse or an ex-spouse

One additional factoid – GPO is only triggered based on your receiving a pension based on your own work. So, if Edie is receiving a survivor’s pension that her spouse Jonathan had earned from his work with the state government, this pension will not trigger GPO for Edie. (Incidentally, this survivor’s pension would also not trigger WEP for Edie either). So in this case, Edie can receive the survivor pension (with whatever offset the pension requires) in addition to her own Social Security benefit without triggering GPO.

Why is there WEP (Windfall Elimination Provision) in Social Security?

WEP impactDuring your career you may have worked for a governmental agency or a foreign employer where there was no Social Security tax withheld from your earnings (Job A). At the same time or at some other point, you may also have worked in a job that was covered by Social Security (Job B). The end result is that now you’re ready to retire, and you will collect a pension from Job A, and you’re also eligible to collect Social Security benefits based on Job B. But the Social Security benefits are being reduced because of something called WEP – Windfall Elimination Provision. Why is this WEP even in existence?

You’ve probably heard that this provision prevents “double-dipping” in retirement benefits from two systems. That’s true, but it doesn’t really explain why WEP is a factor for many retirees. In order to understand why WEP even exists we need to understand how Social Security works.

PIA calculation

As explained in other articles on this site, your Social Security benefit is calculated by determining your Primary Insurance Amount, or PIA. Your PIA is the basis for determining your Social Security benefit amount at various ages. If you file for Social Security retirement benefits at your Full Retirement Age (FRA), your benefit amount will equal to the PIA. If you file before FRA, the benefit will be less; filing after FRA results in a higher benefit above the PIA.

The PIA derives from another figure, known as the Average Indexed Monthly Earnings, or AIME – which is effectively your average earnings over your top 35 years of earnings in your career, with an index applied.

Once you know what your AIME figure is, bend points are applied to calculate your PIA. Let’s say Janice has an AIME of $6,000 and she reached 62 in 2020. For Janice, the bend points are $960 and $5,785. And, if WEP is not involved, her PIA is calculated as follows:

The first $960 of the AIME is multiplied by 90%: $960 X 90% = $864

The amount of Janice’s AIME that is greater than $960 but less than or equal to $5,785 is multiplied by 32%: $5,785 – 960 = $4,825 X 32% = $1,544

The amount of AIME that is above $5,785 is then multiplied by 15%: $6,000 –  $5,785 = $215 X 15% = $32.25

These three results are then added together, producing Janice’s PIA: $864 + $1,544 + $32.25 = $2,440.25, rounded down to $2,440.20.

Similarly, if Andrea’s AIME was $2,000, the calculation would go like this:

$960 X 90% = $864

$2,000 – $960 = $1,040 X 32% = $332.80

None of Andrea’s AIME was above $5,785, so the third is zero.

Adding together, we get Andrea’s PIA of $864 + $332.80 + $0 = $1,196.80

Now, I didn’t bring you here to work through math problems, there’s actually a point to all of this. Look at the two figures we came up with in the two examples above. From Janice’s $6,000 AIME, we produced a PIA of $2,440.20, while from Andrea’s $2,000 AIME, we produced a PIA of $1,196.80.

Janice’s PIA is 40.67% of the AIME, while Andrea’s PIA is 59.84% of the AIME. This means that Andrea’s potential Social Security benefit will replace almost 50% more of her income as opposed to the rate that Janice’s Social Security benefit will. True, Janice still has the higher benefit coming to her, but she earned 3X as much over her lifetime than Andrea did (and therefore paid in 3X as much tax).

This is a quick illustration of how Social Security prioritizes benefit replacement at lower levels of average lifetime income. The lower your AIME over your lifetime, the greater percentage of your pre-retirement income will be replaced by Social Security benefits. If your AIME was exactly (or less than) $960, you would expect a PIA of 90% of your AIME.

At the other end of the spectrum, the more you earn over your lifetime, the less your pre-retirement income will be replaced by Social Security. Once your AIME goes above the second bend point (in this case, $5,785), each additional dollar added to the average for your lifetime will only increase your PIA by 15 cents.

We’re not here to argue whether or not this is fair, just to explain how the system works. The Social Security benefit calculation is specifically designed to be weighted toward greater income replacement at the lower income levels, and far lower income replacement as average income increases.

Enter non-Social Security-taxed earnings

Now that we have a handle on how Social Security benefits are calculated in the normal circumstances, let’s add a new wrinkle to the picture: what if the individual had earnings from a non-Social Security-taxed job in the mix?

Let’s say we have Lucy, also turning 62 in 2020, who also has an AIME that is $2,000 – but Lucy didn’t produce this relatively low AIME by working in lower paying jobs. She produced this AIME because she had worked in non-Social Security-taxed jobs for most of her career, and then at the end of her career she worked in the private sector, just long enough to produce the proper number of Social Security credits to qualify for benefits (40 quarters, or 10 years). Since the AIME is calculated based on your top 35 years of earnings, and Lucy only has 10 years of earnings, her AIME is considerably low by comparison to the actual earnings. She was actually earning pretty high income during those 10 years, but the averaging mechanism brings down the AIME. If not for WEP, Lucy could wind up with the same PIA as Andrea – even though she only participated in the Social Security system for only 10 years and the rest of her career her income was not subject to Social Security taxation.

This is a quandry – it’s not right that Lucy should get the same benefit as Andrea. After all, Lucy is also collecting a pension from her non-SS-taxed job on top of the Social Security benefit. True, Lucy should get some Social Security benefit, but her income replacement level for those 10 years of earnings should not be at the upper end of the spectrum as Andrea’s are.

WEP addresses this problem by reducing the first bend point multiplier. In the case of Lucy, the first bend point is reduced to 40% (instead of 90%). The other multipliers remain the same, because the main thing the provision is addressing is the lowest levels of income replacement. So here’s how Lucy’s PIA is calculated:

40% of the first bend point: $960 X 40% = $384

32% of the second: $2,000 – $960 = $1,040 X 32% = $332.80

None of her AIME is above $5,785: $0

Adding them all together, we get $384 + $332.80 + $0 = $716.80

So Lucy’s income replacement from Social Security is 35.84%, while Andrea’s was nearly 60%. This is how and why WEP works the way it does.

Making it fair

There are a few situations when strict application of the WEP calculations is unfair to the benefit recipient. For one, if the individual has earned within the Social Security system alongside the non-covered job for many years,  the WEP calculation penalizes this person unfairly. Additionally, if the pension or Social Security benefit is small, the WEP calculation unduly penalizes the individual as well.

So what if Lucy’s $2,000 AIME was produced over 35 years of side-jobs instead of over the relatively short 10-year timeframe illustrated above? Assuming that those 35 years of earnings were “substantial” by Social Security’s definition, then the WEP impact would be eliminated from her PIA calculation, and Lucy would have the exact same PIA as Andrea. She’d collect that amount plus her pension from the non-covered job. For more details on how this works, see this article about substantial earnings.

On the other hand, what if Lucy’s pension from the non-covered job was somewhat low? What if, for example, Lucy worked in the governmental job for 10 years, then raised her children for 20 years, during which she didn’t earn any outside income, and then after the kids were all in high school she went back to work over the intervening 10 years in a Social Security covered job?

In a case like this, assuming that the pension earned from the non-covered job is relatively small, there is a limitation on the impact that WEP can apply to Lucy’s PIA. If her pension from the non-covered job was, for example, $500 a month, then the WEP reduction is limited to half of the amount of the pension. Everything else remaining the same from the earlier example, Lucy’s PIA would be calculated as:

40% of the first bend point is $384; this is a reduction of $480 from the original bendpoint rate of 90%, therefore, this reduction is capped at 50% of her pension amount, or $250. The resulting first bend point is $864 – $250 = $614.

32% of the second bend point: $332.80

None of the AIME is above $5,785: $0

Adding together, Lucy’s PIA is now $614 + 332.80 + $0 = $946.80. This is an income replacement rate of 47.34% – still less than Andrea’s, but not as low as when Lucy’s pension is larger.

Likewise, if the original (non-WEP-impacted) PIA is relatively low, there is another cap put in place to ensure that WEP doesn’t reduce the PIA to an amount less than 50% of the original PIA (before WEP). So, if Maria, who also worked in a non-SS-covered job for most of her career, but only earned enough in SS-taxed jobs to produce an AIME of $800, her PIA would be calculated like this:

Original PIA calculation is: 90% X $800 = $720. 50% of that amount is $360; WEP applied is 40% X $800 = $320. Since $320 is less than half of the “original” PIA calculation, the default is $360, 50% of the original PIA.

None of the AIME is above $960 or $5,785, so $0 and $0.

Maria’s PIA is $360 + $0 + $0 = $360. This is a replacement rate of 45% of Maria’s AIME of $800.

The point

The point of all of this is to explain why the WEP provision exists in the first place. Social Security was never designed to provide the same amount of income replacement to all individuals participating in the system. The Social Security benefit calculations are designed to specifically replace income at a higher rate for folks at the lower end of the lifetime earnings spectrum.

When an individual only participates in the Social Security system for a relatively short period of time, the average earnings are artificially lower due to the averaging method. If this is because he or she was working in a non-covered job for the rest of his or her career, the benefit calculation would give this individual a high income replacement based on this artificially low average income. WEP provides a method to adjust the benefit calculation so that income replacement is more appropriate to the circumstances.

Mistakes With NUA

mistakes with nua

Photo credit: jb

In another article on this site we discussed the concept of Net Unrealized Appreciation,  or NUA for short.  It’s a complicated affair, fraught with potential mistakes – several of the most important mistakes with NUA are listed below.

Mistakes With NUA

Moving too quickly – if you roll over your funds from the Qualified Retirement Plan (QRP) without first checking to see if there can be a benefit from the NUA treatment of company stock in the QRP, you’ve lost the chance to do so. Always check for NUA possibility within the QRP before making any rollover moves.

Not moving quickly (completely) enough – if you have determined that NUA treatment can benefit your situation, you must move ALL of the funds from the QRP within the same taxable year. If you moved your NUA stock out first and planned to rollover the rest of the account into an IRA or other employer plan, you must follow through within the tax year. Delaying even one day beyond the tax year end will break the NUA option and cause the distributed stock to be fully taxable.

Taking RMDs or other distributions in an earlier year – if you retired in an earlier year, and began taking Required Minimum Distributions (RMDs), once that tax year ends and you have not taken your Lump Sum Distribution to enact the NUA option, you no longer have the NUA option available to you. This is due to the fact that the NUA option is available ONLY after a triggering event, and the entire balance must be withdrawn in a single tax year. If another triggering event were to occur – such as disability or death – then the NUA treatment could still be available.

mistakes with nua 2

Photo credit: jb

Selling out of NUA-potential stock in the QRP – if you have significant holdings of your company’s stock in your QRP, chances are at some point you’ll get nervous about holding too much stock in a single company. Obviously, you don’t want to overexpose yourself to a volatile stock – but it may not make sense to sell all the stock while it’s still in the employer plan, either. If the stock has appreciated over a significant period of time, you might want to maintain a position simply to take advantage of the NUA treatment.

On the other hand, if you’re concerned that the stock is going to drop like a rock, (remember Enron? Worldcomm? CitiGroup? Countrywide?) you should ignore the concept of NUA altogether. You shouldn’t let the tax “tail” wag the financial responsibility “dog”. Besides, if the stock drops there might not be any appreciation to apply the NUA treatment to anyhow.

Not understanding NUA – if you don’t understand it completely, your chances of getting it right are low. This is a very strict set of rules (aren’t they all though?) and simple moves in the wrong direction can break the option altogether, potentially causing a major tax hit.

It’s also important for your heirs to understand NUA – or make sure that they will work with your NUA-savvy advisor before they make any moves. One matter that might trip up your heirs: NUA-treated stock does not receive a step-up in valuation upon inheritance. It retains the original basis when distributed.

Up to 41% of “miscellaneous” denied Social Security benefits not being reviewed

denied social security

Photo credit: jb

Many, if not most, applications for Social Security benefits are approved without any issues. But often, an application is denied, for legitimate reasons. Maybe you don’t have the requisite number of credits on your account for benefits, or something similar. But also, many times, benefits are denied without a specified reason. When this happens, the Social Security Administration staffer working on the case will apply a code of “miscellaneous suspense” to the record.

The suspension of benefits can happen either at the point of initial application, or upon a review of the record at some point. For the latter, the individual may have been receiving benefits for quite a while, and then suddenly the benefit is suspended. Apparently quite often, this happens because there is a piece of information missing from the file (or what’s on file is incorrect). In such cases there is a followup process in place to generate a letter or some communication with the benefit recipient to clarify and correct the information on file so that benefits can be resumed.

This “miscellaneous suspense” code is problematic, for a couple of reasons: first, because it is not regularly audited, this code can be used in cases where it is not the appropriate code; second, and more important, the “miscellaneous suspense” code does not have an automatic followup process to make sure that whatever the reason for the suspension of benefits is being addressed (if it can be).

Recently the SSA published the results of an audit by the Office of Inspector General (OIG), who regularly audits various components of the federal government. This particular audit was focused on the “miscellaneous suspense” code and whether follow-up had been performed appropriately on those records with this suspense code.


As briefly described above, SSA employees are tasked with keeping information in benefit recipients’ records up-to-date. Sometimes a beneficiary no longer meets the criteria to receive benefits, and when this is the case, SSA suspends benefits to the recipient. When benefits are suspended, the SSA employee identifies the issue to be resolved (to resume benefits) by inputting one of dozens of situation-specific suspense codes on the beneficiary’s record. From the audit report:

For example, when SSA does not have a beneficiary’s correct address, an employee suspends benefits using a code that indicates SSA must obtain the correct address and update its records.

As mentioned previously, there is also a “miscellaneous suspense” code which can be applied if there is not a specifically-identified code for the situation. The purpose of the “miscellaneous suspense” code is for the very limited situations where no other suspense code could apply to the case.

For all other suspense codes, since they are for a specific type of situation, there is a systematic follow-up process. If an address is incorrect, the SSA has a process to reach out via all available means to determine what the correct address information should be.

However, since the miscellaneous suspense code is for “unknown” situations, it is incumbent on the SSA employee to manually create a follow-up alert to resolve whatever the situation is that created the suspense.

To create a group for auditing, OIG identified 2,525 total records in the Social Security beneficiary records that had had benefits suspended using the miscellaneous suspense code (between the dates of January 2015 and December 2018). From those 2,525 records, 100 were chosen at random to review in-depth.

The Audit

First the good news: out of the sample of 100 records reviewed, 59 had been properly followed-up, and either benefits resumed or continued suspense if the problem was not able to be resolved. So nearly 60% of the time, the system is working the way it should.

However (and now the bad news): this means that 41% of the cases had not been properly followed-up on. This resulted in an estimated $748,000 in benefits that had been continued in suspense for these beneficiaries. When that is extrapolated to all possible date ranges, OIG estimated that 21,000 beneficiaries have had approximately $378 million in benefits in suspense that have not been properly followed-up on. This is a very big deal if you’re one of those 21,000.

Further information from the audit indicates that, of those 41 of 100 that were not followed-up on, 22 of them had the miscellaneous code applied improperly, and some other specific code (with an automatic follow-up) should have been used.

As of the writing of the report, only 10 of the 41 records had been resolved; that is, 31 of the 41 have not been followed-up on yet. Presumably these will be reviewed soon. For the complete report, follow this link to the OIG Audit report.

SSA notes that there are two issues at play here: 1) There is no automatic follow-up process to ensure that miscellaneous codes are reviewed and resolved; and 2) There are no management reports to determine if the “miscellaneous suspense” code is being mis-used by SSA employees.

So it’s in your hands if you’ve been affected by this.

What should you do?

If you have had your benefits denied or suspended and you don’t know exactly why, you should follow up with Social Security to find out why. It’s possible that you’re one of these 21,000 people who have had the “miscellaneous suspense” applied, which was either never followed up on or was erroneously coded in the first place.

You need to find out the actual reason why your benefits were suspended. If it turns out that your situation is correctly identified and you are not eligible for the benefit, then you’re only out the time to check into it. But it could be that it’s a matter of record-keeping or updates to information, incorrectly coded as “miscellaneous” and never followed up on. In that case, work with SSA to correct the record as you can and (maybe!) get your benefits resumed.

5 Free Activities to Explore While Social Distancing

During the lockdown and required social distancing it’s common to feel cooped up and restless. Finances may be strained, and we may feel the need to lockdown our own spending. During this time, and raising two daughters, it was a great way to become creative with activities that didn’t cost a thing but were a HUGE investment in building relationships. If you don’t have kids, you can still do these with friends or family.

  1. Take an adventure walk. We like to take walks frequently. However, there are times when I will set certain challenges on the walks or learning outcomes to build more into it. For example, I may tell my kids to keep a look out for coins (we find a lot), or with fall coming, gather five different leaves of trees in the neighborhood. We’ll then identify them when we get home. Sometimes, it’s identifying different birds based on plumage or call.


  1. Listen to music. Believe it or not, your kids will likely be interested in the music you like. You may even like theirs – but if not, at least take the time to have them show you why they like it. Explore new music genres together. Research the history of the songs, their composers, the lyrics, etc.


  1. Play games together (or make up your own). This can be a great time to teach patience, strategy, or overall to just goof around and have fun. A recent creation in our home was marshmallow baseball. Bag of marshmallows (baseballs), plastic kitchen utensils (bats), pillows (bases). And the best part – edible baseballs!


  1. Chances are you have plenty of books around the house waiting to be read. There’s no better time than now to dig into them. Share what you’re reading with your kids and have them share their reading interests with you. Short on books? Head to the public library – plenty of great reading there.


  1. Making meals together can be a great way to bond. Many restaurants are still closed – that can be a good thing. Staying at home and cooking together allows you to learn new recipes, techniques, and try different foods you might not have tried otherwise. Not good at cooking or baking? Now’s the time to learn.

Just Starting Out – Resources to Help With Money Stuff

Photo credit: jb

A recent college graduate approached me recently to ask about saving and investing. He had begun investing using one of the micro-brokerage apps, and had a few questions about getting started with saving and investing.

We briefly talked about saving concepts, including emergency funds, goals for saving activities and whatnot, as well as the concept of diversification. But I knew that the brief amount of time we had available to talk would not be enough to answer all of his questions. In addition, although at one time I was in his very shoes (starting his first “real” job, living on his own, etc.), it was in a very different time and place. For example, he didn’t have to worry much about being eaten by dinosaurs – which was a primary concern for me right out of college.

I also didn’t have the internet available to me. The closest we had to the resources of the internet was a library, and the comparison between the internet and a local library is laughable, of course. Yes, one might find a lot of useful information at the library, but the amount of time required to find it was enormous by comparison to a Google search today. Plus, the internet has opened up avenues to millions of additional voices, whereas in the old world we mostly had the academics (primarily) to draw knowledge from.

The downside of that Google search is that you don’t often know for sure if the source of the information you’ve found is legitimate, or if it’s a scam, or worse, just some random spewing of someone’s manifesto.

So I called upon my friends and colleagues at FinCon to give me some ideas of resources to share with my friend. FinCon, in case you don’t know, is a community of financial content creators. By “content creators”, think in terms of blogs, podcasts, and video-logs (like YouTube, Instagram, and TikTok). The mission of FinCon is:

To help personal finance content creators and brands create better content, reach their audience, and make more money.

Part of the “help” that FinCon provides is the structure of a community where ideas and resources are shared among creators from widely-diverse walks of life. I’ve found the FinCon community to be extremely creative, helpful, and resourceful, giving new perspectives that I had never considered, even as a long-time member of the financial professional community. As you’ll see from the suggestions, there are many diverse points of view, and lots of fantastic advice given, as well as knowledge to be gleaned from the creators.

Below, in no particular order, are the suggestions received from the FinCon community to my request for “all-purpose content for a recent college graduate”. Hope you find some nuggets here that are helpful to you!



One of the first stops on the list of sources of good financial information is the Plutus Foundation. You can read in-depth about the Plutus Foundation on their website. In a nutshell, Plutus (a charitable organization) exists to foster and promote the creation of financial media to enhance financial literacy, education and empowerment. Part of the fostering and promotion activities includes awards that are presented annually to many different categories of financial content creators. 

For a list of this year’s nominees, check out the 11th Annual Plutus Awards Finalists. These are the cream of the crop, in categories ranging from Best Content Series to Best Generational Financial Literacy Content to Best New Personal Finance Blog, with many, many other categories in between (27 categories altogether). The winners will be announced in a virtual format (yeah, thanks 2020!) on November 13, 2020. 

The finalists list is linked to the actual content, so spending time among these nominated entries is an excellent place to start your journey to find financial education and guidance.

One of the authors nominated in the Best New Personal Finance Blog category (Lauren Keys) reached out to me to tell of an article that she’d written that seems to fit the request for my friend very well:

… my Financial Roadmap resource is geared specifically at helping take young people from college to financial independence in just 6 steps.

The blog is Trip of a Lifestyle, and the article is Financial Roadmap: Save Money, Travel Tons, & Retire Young. I particularly like the fact that the guidance offered here is flexible enough that it can fit into many different overall financial strategies, from the extreme “retire by 35” to the more pedestrian “I just want to be comfortable and retire at 65” as well as everything in between. There are action-oriented checklists to help along the way as well.


Wealthtender is a website that 

exists to help people discover the most trusted and authentic professionals and educators in the finance community.

As such, Wealthtender curates a directory of personal finance blogs and other content, and part of this curation is a list of new blogs to keep an eye on. You can find the current year’s list of Finance Blog Startups to Watch in 2020 at this link. Previous list members are also available, and these also present a fantastic place to locate some very valuable financial content all in one place.

The College Investor

Robert Farrington, author at The College Investor, brings forth the following article as especially useful for the recent college graduate: How To Start Investing In Your Twenties After College For 22 – 29 Year Olds

This article is a one-stop shop, a primer that gives you pretty much everything you need to know and think about as you start off on your financial life. Robert covers whether an advisor is needed, what kinds of account to start with, how much to invest, and allocation (among other things). I believe this single article is probably the best place if you have little time to work with, to provide yourself with a base foundation of knowledge about getting started in investing.


Youtube has become one of the fastest-growing areas where financial advice content is created of late. Apparently the video presentation is a compelling way to receive this information, and the numbers seem to back it up. There are thousands upon thousands of videos covering pretty much anything you can imagine in the financial sphere.

Magic of Finance

One channel in particular that I was directed to (from my FinCon query) is Andrei Jikh’s Magic of Finance. Andrei has a very relatable style, and he presents some very interesting concepts in detail, in short, bite-sized videos (running around 10-15 minutes on average). 

The Bemused

Another channel pointed out is The Bemused. This channel is produced by Akeiva and Meshack, a young couple (aged 22 and 24), who are 

… passionate about helping people like us adult with their finances.

I especially liked the fact that Akeiva and Meshack are wide-open and relatable with their own financial journey, sharing their wins and stumbles along the way. They talk about everything from paying off a car, to decisions about finances as they plan to get married, along with paying student loans, and all sorts of topics of interest.

If video is your favorite way to receive content, these are great channels to check out to find great financial content.


If your lifestyle fits in more with listening to podcasts, you don’t have to look far to find lots of content in this medium. (I’m not a big fan of podcasts or video-logs, I prefer to read my content, but I’m not the target here, right?)

Young Money

One podcast that was suggested that should fit the recent college graduate’s needs is Young Money. Creator Tracey Bissett (a Chartered Financial Analyst) has generated a boatload of content on a myriad of topics. 

This mode of content, as is pretty common, is a bit more lengthy than the YouTube articles, generally running from 15 to 30 minutes in duration. Creator Tracey Bissett covers the gamut of financial advice, from evaluating your financial situation, keys to success (regarding love & money), to a series called Adulting 101 – as well as all points in between. Tracey gives great, actionable advice, that can fit into many situations across the spectrum of needs.

Find Your Freedom

Another suggested podcast, Find Your Freedom, is specifically targeted toward 

lifestyle design + financial independence for twentysomethings

Find Your Freedom’s creator Becky Blake shares her own personal story about her financial journey from paying off student debt, to reaching financial independence, to traveling the world, having created her dream life. Some of the content is podcast, and some is by way of the Twenty-Free blog, which is a common theme I’ve seen among podcasters. Becky shares her insights the topics that she has encountered, either personally or through coaching clients.

In particular, I enjoyed the topics that provided guidance on defining and designing your “ideal life” – one of the most important aspects of starting out in the financial world. Without well-defined goals, it’s hard to determine what you’re aiming for, so setting your goals should be a high priority.

Final Thoughts

As with any compilation, I don’t intend for this to be all-inclusive. The above listing is simply the result of my query to my colleagues in the FinCon community. Just knowing that the FinCon annual Expo often has 2500+ attendees tells me that there are many thousands of content creators that aren’t on this list, and many may fit the bill for my college graduate friend just as well or even better. 

If you have a particular resource, whether it’s a blog, podcast, video-log, or some other medium, that you think would meet the needs of my friend (and the others reading this!), please leave your description and link in the comments below. Please no spamming – I’ll allow only one link to each (legitimate, financial guidance-oriented) source with as many comments as each source commands, unless it gets out of hand at which time I’ll shut down comments altogether. No commercial pitches either, these will be removed – this is about sharing content, not pitching products or schemes.


Just Starting With Retirement Savings? Get All the Credit You’re Due!

ira stretch

Photo credit: jb

You probably already realize that setting up a systematic savings plan is critical to providing yourself with financial security in the future. There are

tax benefits to simply making contributions to an IRA or a 401(k) – you’ll be able to deduct (or simply not include) those funds in your taxable income come tax time. In addition, the tax-deferred growth of these funds will provide you with a source of income for the future.

But did you realize that there are other tax credits available for certain taxpayers making contributions to retirement plans? It’s called the Saver’s Credit (formally known as the Retirement Savings Contributions Credit), and it’s available for folks who meet certain eligibility requirements who have made contributions to retirement savings plans during the tax year.


Depending upon your filing status, there is a limit to the amount of income that you can have earned in order to take the credit. If your Adjusted Gross Income (AGI) is less than the amount below for your filing status, you are eligible to take at least part of this credit (these are 2019 figures, updated annually).

  • Married Filing Jointly – $64,000
  • Single, Married Filing Separately, or Qualifying Widow(er) – $32,000
  • Head of Household – $48,000

In addition to the income limits, you must have been born before January 2, 2002 (for tax year 2019), therefore age 17 or older for the calendar year. You must also not have been a full-time student during the calendar year, and you cannot be claimed as a dependent on another person’s return.

Amount of Credit

If you fit the eligibility requirements and you made contributions to an IRA (including a Roth IRA), 401(k) or 403(b) (including designated Roth accounts), governmental 457 plan, SEP or SIMPLE plan, or certain other plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit that you’re allowed is determined by both your income and the amount of the contribution that you’ve made, limited to $2,000 for singles and $4,000 for married filing jointly.

In general if you’re married and filing jointly, you can receive up to 50% credit (limited to $2,000 for married filing jointly) if your AGI is below $38,500. This credit gradually reduces down to 10% of your contribution as your AGI increases to the upper limit of $64,000. For Head of Household filing status, the 50% credit (limited to $1,000) applies if your AGI is $28,875 or below, and the upper limit is $48,000, at which point your credit is 10% of your contribution. For all other filing statuses, the 50% credit is available for an AGI below $19,250 and reduces to 10% at the upper limit AGI of $32,000. Again, these figures are for 2019, to be updated when the 2020 figures become available.

It is important to note that this credit is not fully refundable – your ordinary tax (plus any AMT) minus Foreign Tax credit, Credit for Child and Dependent Care Expenses, and Education Credits limits the Saver’s Credit further (see Example 3 below).


Example 1 You’re single and have an AGI of $23,000, and have made IRA contributions of $2,000 for the year. You do not have any additional credits to claim (those listed above). According to the schedule (found in Form 8880) you are eligible for a 10% credit on up to $2,000 of contributions to your IRA, or $200, as long as your tax is at least $200.

Example 2 You’re married and you file jointly, and you have an AGI of $32,000, and have made contributions to your employer’s 401(k) plan of $5,000 for the year and your spouse has made $2,500 in contributions to his IRA. You also do not have any additional credits to claim. According to the schedule, you are eligible to take the maximum credit of $2,000 – which is 50% of the eligible $2,000 portions of your contributions to the retirement plans for the year, as long as your tax is at least $2,000.

Example 3 You file as Head of Household, you have an AGI of $22,000, have made $1,500 contributions to your employer’s 401(k) plan and have child care credits of $500 – and your total tax before credits is $635.  According to the schedule, you can take a Saver’s Credit of $135, as your net tax after the child care credit is $135. If you had not had the child care credit, you would have been eligible for a Saver’s Credit equal to 50% of your contributions, or $750 – but since your tax is less (at $635), your Saver’s Credit is limited to $635, your total tax liability.

Last Few Comments

One final wrinkle:  you also have to take into account any distributions that you’ve taken (or will be taking up to the due date of the return) for two years prior to the year of the credit or during the year of the credit. This is to keep you from taking a distribution from your IRA, and then making a contribution of that amount back into the account in order to claim the credit.

Other than that, I think this is a great credit – and lots of folks who could take advantage of it aren’t aware of it. It’s a very good incentive to get started in a retirement plan, specifically when income is low and retirement planning isn’t the highest priority. This credit is in addition to all of the other tax benefits that you can receive from contributing to retirement plans.

Most software programs for tax preparation account for this credit automatically these days. But it pays to check up on what the program is doing for you just to make sure you get the credit you deserve!

Social Security Eligibility

In order to be eligible to receive Social Security benefits – retirement, disability, or survivor benefits – a worker must earn eligibility to receive the benefits.  The general rule of thumb is that for full benefits, the worker must earn at least 40 quarters of Social Security credit within the system.

For retirement benefits, you must have the full 40 quarters of Social Security credit earned – no partial benefit is available if you only have, for example, 39 quarters of credit earned.

Social Security Credit

A quarter of Social Security credit is earned for each $1,410 earned (in 2020).  This amount is generally indexed each year – for example, the amount of earnings for a credit in 2019 was $1,360.  So if a worker earns at least $5,640 in 2020, four quarters of credit are earned with the Social Security system.

Minimum Credits (disability only)

If you become disabled before age 62, disability benefits may be available to you if you have at least six quarters of credits earned.  Of course, these benefits will be reduced from the maximum, based upon how many credits you happen to have earned.

If you become disabled before age 24 you need only 6 quarters (credits) during the three years before you become disabled in order to be eligible for disability benefits. And if you are between age 24 and 30 inclusive, you will need to have earned credits equal to half the time between age 21 and your current age in order to qualify.

If you’re age 31 or older you need to have earned 20 or more credits for eligibility. This number of credits increases up to the point where you are 62 upon the onset of your disability, when you’ll need at least 40 quarters, or 10 years’ worth of credits.

20 Questions About 529 Plans

529 plans

Photo credit: jb

Below is a reprint of an interaction that I had with an anonymous individual several years ago on a web bulletin board, as I thought the 20 questions that the individual listed might be interesting to you.  I’ve reviewed the list and updated responses where laws have changed or where I was more snarky than necessary in my response.  Let me know if you have more questions to add to the list!

Keep in mind as you read this, the questions are one individual’s specific concerns about his situation.  The person asking the question has simply put this list of questions out on a public bulletin board hoping for responses – that’s part of why some of the questions aren’t fully answered or clarified, since the original poster didn’t come back to clarify his questions or respond to my responses…

The original questions are numbered, and my response is italicized.

1. Is there any income limit for parents to be able to qualify/ participate in the 529 plan.

No, there are no income limitations for eligibility to contribute to a 529 plan or to take qualified tax-free distributions from a 529 plan.

2. We are thinking about initiating the plan with Iowa/ Virginia (as we heard from some our contacts have done it) – Even if we move out of CA to another state – can it still be used?

Yes – there is no residence requirement for participation in a 529 plan. Many facets of state-specific plans are reserved for folks who file a tax return in that specific state, such as deducting the contribution amount from the state income tax return.

3. Is it possible to roll over from 1 state 529 plan to another state – any charges/ fees?

Yes, it is possible. Fees will depend upon the plan chosen. Generally rollovers are restricted to once per year.

4. Assume that the child does not get educated here in the USA, can the funds be used for International education – Canada, France, Singapore, India ?

The funds could be used for international education, but if the school is not accredited in the US, you’ll pay a penalty and taxes on the growth of the fund if you withdraw funds for this purpose, which is not considered a Qualified Higher Education Expense (QHEE).

5. What are the annual contribution limits – per child/ couple/ family?

In general, this is up to the plan, and the limits range between $235,000 and $500,000, depending on the state. In order to maintain simplicity, most folks limit their annual contribution to the annual gift exclusion limit ($15,000 per child per parent in 2020), while some utilize the special 5-year front-load gift limit ($75,000 per child per parent in 2020). If you contribute more than the gift exclusion limit, you’ll need to file a gift tax return and possibly pay tax on the gift.

Having said this, though – many states limit tax benefits to $10,000 per child per year. This will be different on a plan/state basis. If you’re investing in an out-of-state plan, this won’t matter to you.

6. What is the process to take out the funds in the middle? Would there be any penalties?

You contact the plan to make a distribution from the plan. There would be penalties and taxes due on the growth in the account. Depending upon state tax benefits (and the plan you’re using), there may be state taxes and/or penalties involved as well, since some states require recapture of any deduction benefit that was provided for contributions.

7. Is it possible to have a 529 in more than 1 state? Are there any restrictions?

Yes, you may have 529 plans in more than one state. Primary restriction that I can think of would be the gift tax exclusions noted earlier. Otherwise there is no reason you couldn’t have several states’ plans.

8. Is it possible to move $ across funds? Are there any restrictions/ charges?

Again, this depends upon the plan. If your question is “can I move money around to other funds/allocations within the same 529 plan?”, then the answer is yes, but depending upon the plan, there are likely restrictions, such as rebalancing can only be done once every 12 months.

If your question is “can I move money around to other 529 plans?”, the answer is yes, but I believe you need to move the entire account (roll over) when you do this, and I believe you are limited to one such rollover in twelve months.

9. What happens if I loose the $ in account? Are there chances of loosing?

You have a smaller balance at the end of the month than you did at the beginning of the month. 

Of course there are chances of losing money – just the same as any investing activity. This of course will depend upon your investment allocation decisions. The more risky your choices, the more likely you are to lose (and gain) money.

10. Who holds control in a 529? What happens if a beneficiary is no longer part of the family (God Forbid !!)? Etc or something happens to the contributor?

The owner of the account (you, your spouse, etc.) has control over the beneficiary of the account, and so you can change the beneficiary as you see fit. If something happens to the contributor (and by this I assume you mean the owner – yourself), hopefully you’ve chosen an appropriate contingent owner to manage the funds in your absence. Otherwise it is probably up to state statutes to determine management.

11. Is there any age restrictions in using this 529 $ for the beneficiary or can it be used at any age?

No restriction on the age of the beneficiary.

12. What happens if there is left over’s & I am not able to use it?

This partly depends upon why there is left over money: if this is due to the fact that the student received scholarships, then you are allowed to distribute an offsetting amount (same as the scholarship) from the 529 account, to the extent that the scholarship monies are used for QHEE. This distribution must take place in the same year that the expenses are paid.

If there are funds remaining in the account due to the death or disability of the primary beneficiary, you are allowed to remove the funds from the account without penalty. You must pay tax on the growth of the account, but no penalty.

If there are funds remaining in the account because the cost of school for that beneficiary was less than you anticipated, you have two choices: roll the funds over to a new beneficiary, or take a distribution and pay the tax/penalty. The rollover can be done to anyone who is a member of the original beneficiary’s family. Qualified family members include the beneficiary’s siblings, parents, children, first cousins, nieces and nephews, among others.

13. Can I pass this to my brothers / sisters children? & is there any limitations? Can the funds be used for self/ spouse?

Yes – as long as the new beneficiary is related to the original beneficiary as described in #12.

14. Can the 529 funds or any left over’s be used by the next generation?


15. Does having a 529 account mean, one cannot initiate a UTMA/ UGMA, Coverdall etc?

No, a 529 account does not exclude eligibility to utilize those vehicles. Funding those plans may be limited by gifting limitations as described previously.

16. I was reading an article & vaguely recall a # $239,000 (Is this the total $ contribution or the $ balance on the account (attributed due to appreciation/ dividends etc).

I don’t know – I don’t vaguely recall reading that article. The limits are going to be different for each plan. See #5.

17. Are (qualified/ nonqualified) withdrawals exempt from state taxes?

Depends upon the plan. Most qualified withdrawals are exempt for most states’ tax. Nonqualified withdrawals may or may not be exempt from state taxes – look at your state’s tax laws and the plan information.

18. How does the process work? Should I prepay for the university & give a receipt to the 529 plan? or will the 529 pay the university directly? Will it cover only University fees/ registration/ dorm/ living? Clothing, Books?

Again, take this up with your specific plan. In general, you can either pre-pay or make a withdrawal to pay the amount(s). Just keep good records. In general your QHEE will include tuition, fees and books. Room/board may also be covered, depending upon the plan in question.

In my experience, I have always found it simplest to send the distribution directly from the plan to the school to pay for expenses. This way there is only one set of accounting to maintain.

19. Is the 529 applicable for school also? or Undergraduate/ Graduate/ PhD?

Okay, what are you asking here? 529 plans are generally for post-high school education expenses, which includes undergrad, grad, and PhD studies, as well as non-degree pursuing education. The Tax Cuts and Jobs Act of 2017 also made provision for the use of up to $10,000 annually for tuition for public, private or religious elementary or secondary schools.

20. Is anyone aware of any state tax inventives for the state of CA?

No – at least not this particular anyone.

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