Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial

2 comments

Back in the olden days, we all received an annual statement from the Social Security Administration detailing your benefits projected to your potential retirement age(s). Nowadays you can go online (www.SocialSecurity.gov) and request a current statement at any time. If you haven’t gone online for your statement and you’re at least age 60, you should receive a mailed copy of the statement annually until you start receiving benefits.

While the statement is designed to be pretty well self-explanatory, I thought it might be beneficial to review the statement so that you know what the statement is telling you. The statement has been redesigned recently, so it will look considerably different from the old school statement.

First Page

The first page of the statement contains a host of really important information for your benefit. Under “Retirement Benefits” you’ll find your Full Retirement Age (based on your date of birth), and to the right of this paragraph you’ll find a chart with the estimated monthly benefit that you are eligible for, with the assumption that you continue to earn at the same rate as your most recently-reported earnings.

Below “Retirement Benefits” you’ll find information about your “Disability Benefits”, including the amount that you could receive if you became disabled right now.

Next on the page is the estimate of “Survivor Benefits” that could be available to your spouse and/or dependents upon your demise.

To the right (below the Retirement Benefit chart) is the information about your eligibility for Medicare benefits. This includes your age for eligibility and your current status – whether you’ve earned enough credits for Medicare eligibility.

Second Page

The Second Page of the statement lists out the details of your Earnings Record in the left column. This section is important to review carefully… you should review the earnings listed for each year against your tax records or W2 statements, to make sure that the information the SSA has is correct. In addition to reviewing for correctness, you should look over your record and note the “zero” earnings years, as well as years that you earned considerably less than what you earned (or are earning) in later years.

There are details on how to report any inaccuracies that you might find on your statement. It’s much easier to resolve things earlier in the process rather than later – when you’re possibly under the gun about applying for your benefits.

It should be noted that in the interest of saving space, your earliest earnings records are combined by decade. You can review each individual year’s earnings record online in your my Social Security account.

As we’ve discussed in the past, your benefits are based upon your 35 highest earning years. If you have had some “zero” years in the past or some very low earnings years, you can expect for your estimated benefit to reflect any increases that the current year’s income represents over your earlier low earnings or zero years. This only becomes significant once you have a full 35 year record in the system.

Another key here is that your projected benefits listed on the first page are based upon your earnings remaining the same until your projected retirement age(s). If you choose, for example, to retire at age 55 and have no earnings subject to Social Security withholding, your projected benefit could be reduced since those years projected at your current earning level will actually be “zero” years. Alternatively, your earnings might not be zero but much lower than projected if you have a lower salaried job during that period. This reduction is in addition to any actuarial reductions that you would experience if you choose to take retirement benefits before FRA.

There are tools and calculators available on my Social Security to help you with projecting your potential benefit with more accuracy. In addition, there are many tools available, some free and some paid, all around the internet.

If you have gaps showing in your earnings history, you may have had a job that was not covered by Social Security, so you will be interested in knowing how the Windfall Elimination Provision (WEP) affects you, and how the Government Pension Offset (GPO) may affect your family or benefits that you may be eligible for from your spouse. This is briefly covered in the right column, and if it is apparent that you might be impacted by WEP or GPO, there may be an additional fact sheet attached to your statement.

The bottom of the left column shows how much tax you and your employer have paid into the system over the years – both the Social Security system and Medicare system. This can be an eye-opener… quite often we don’t realize how the money we’ve paid in can stack up!

Third Page (there’s a third one?)

The Third Page of the statement lists Important Things to Know about Your Social Security Benefits. Hopefully you already know these facts, but just in case you don’t, it makes good sense to review them periodically. (For some folks, this list is provided on the second page of the statement and the overall statement is only two pages in length. I think most standard statements are three pages long these days, along with addenda listed below.)

Addenda

Included with your statement could be several addenda, depending on your circumstances. Among the possible addenda for your statement could be:

Retirement Ready Fact Sheet (everyone should get one of these, adjusted messages depending on your age)
Social Security Basics for New Workers (when you’re just starting out)
How You Become Eligible For Benefits (you’ll receive this until you have the required 40 quarters of coverage)
Additional Work Can Increase Your Future Benefits (you may receive this if you’ve begun recording zero years)
You Have Earnings Not Covered By Social Security (You will receive this if your earnings record indicates some of your earnings was not covered. This doesn’t mean WEP or GPO is part of your future, just that they might impact your future benefits.)
Medicare Ready (when you’re approaching age 65)
Supplemental Security Income And Other Benefits (you may receive this addendum if it appears by the facts that you might be eligible for SSI or other programs)

Posted on Jul 18th, 2022

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: Social Security, social security administration, social security benefits, social security retirement, Social Security spousal benefit.
Tagged: Social Security

What Your Social Security Statement Is Telling You

Jul 11th, 2022

6 comments

Photo credit: jb

There is a portion of your Social Security statement that is often a source of misunderstanding. The portion I’m talking about is the projection chart on the right-hand side of the first page.

If you’ll take a look at this portion of the statement, you’ll see a projection of your Social Security retirement benefits, at each age between 62 (unless you’re already past that age) up to age 70. Also listed elsewhere on the statement are the amounts that you would receive for Disability Benefits, as well as amounts that your family would receive upon your death as survivors.

What gets missed for many folks is the last line of the corresponding paragraph (just left of the chart) which states:

These personalized estimates are based on your earnings to date and assume you continue to earn $xx,xxx per year until you start your benefits.

With that short phrase comes a great deal of confusion and misunderstanding. This statement means that, assuming that you are something less than age 70, the statement reflects an assumption of your future earnings from now until those projected ages listed in the chart. Those amounts provided are based upon the assumption that you will continue earning at the rate most recently reported to SSA, usually what was on your tax return in the previous year.

If, for example, you chose to stop working at age 62 and delay receiving benefits until FRA, the benefit that you’ll receive will likely be less than the amount shown on your statement, because you did not continue earning at your current rate to FRA, as the projection assumes.

Another example is where you continue working, but your income has been reduced, due to layoff or other dramatic change in your employment. With the “great resignation” going on over the past few years, it’s not hard to imagine a situation where this might be the case.

Your future income might also be higher than the assumption, which could potentially result in a higher benefit than the chart indicates.

There are several calculators available on the Social Security website that can help you to get a clearer picture of your actual benefit if your projected earnings will be something different than what you’ve experienced up to the present (or actually, up to last year, since that’s all the more that is generally covered with the statement).

Posted on Jul 11th, 2022

by author: jblankenship.

6 comments already - add to the conversation!

Posted in: Social Security, social security administration, social security benefits.
Tagged: Social Security · social security administration · social security benefits

The Non-Deductible IRA Contribution: A Bad Idea?

Jul 4th, 2022

2 comments

Photo credit: jb

While many folks would tell you that it can be a good idea to make non-deductible contributions to your traditional IRA, I believe it’s in the “Bad Idea” category for most situations. This is primarily due to the way the tax law works for IRA and non-IRA money. There can be good reasons for non-deductible IRA contributions, but today we’ll focus on the downside.

IRA Taxation

As you may be aware, distributions from your IRA are generally subject to ordinary income taxation. Of course, your non-deductible contributions are not taxed, but any growth in your account and any deductible contributions will be taxed at the ordinary income tax rate.

And since non-deductible contributions (typically) make up a small amount of your total IRA balance when it comes time to withdraw the money, there is little benefit to be had, pro rata from the non-taxed portion of each withdrawal. This is because of the way your withdrawals are treated: all of your IRA funds are considered in total and only the percentage of your entire IRA balance that represents the non-deductible contribution will be applied to each withdrawal.

Here’s an example: You have an IRA, which you’ve made deductible and non-deductible contributions over the years. Your non-deductible contributions total $20,000. The deductible contributions amounted to $50,000. The investments for each contribution have increased by 50%, so the entire IRA is worth $105,000. Since the non-deductible contributions equal 19.05% of the balance, if you take a distribution from your IRA of $1,000, only $190.50 (19.05%) will be non-taxable, the remaining $809.50 will be taxed at ordinary income tax rates. As you’re likely aware, the ordinary income tax rates range from 10% to 37% (in 2022), so this taxation can amount to quite a hit.

Non-IRA Taxation

By contrast, in a non-IRA account, you are taxed on the gains using the capital gains tax rates. So from our example above, if you had made your $20,000 investment in a taxable account instead of a non-deductible IRA contribution, and gains on the $20,000 amounted to 50% or $10,000, if you withdraw $1,000 from this account you’ll only owe capital gains tax on the $333.33 of capital gain. And capital gains tax rates presently range between 0% and 15% for most folks, up to a maximum of 20% at the highest bracket (2022 figures).

When you put the two concepts together and compare them, it’s hard to imagine why you might choose to subject your investments to a higher tax rate when you don’t need to. And that’s why I think this is a bad idea. The only thing you’re giving up is tax deferral on growth of your non-deductible contribution, but you can achieve this (more or less) by investing in growth-oriented assets that don’t produce dividends or other current income. With strict capital gains applying, your tax rate is much lower than the corresponding ordinary income tax rates applied to an IRA withdrawal.

Two More Things

Two additional benefits to the taxable investment over the non-deductible IRA:

Your taxable account will never require you to take Required Minimum Distributions, but your IRA will, at your age 72. So technically you could leave that investment alone to grow for your entire life, never having to sell it and pay the capital gains tax on it… which brings us to the second additional benefit:
At your death, your heirs can receive a stepped-up basis on the entire account. So not only can you avoid having to pay taxes for your entire life, your heirs may not have to pay tax on the capital gains in your taxable account either! With an IRA, all of those gains would still be taxable as ordinary income to your heirs.

Posted on Jul 4th, 2022

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: capital gains tax rates, investing, IRA, ira account, ira funds, ira money, non deductible ira, non deductible ira contribution, retirement plan, tax, traditional ira.
Tagged: IRA · retirement plan · tax

Staging Your Roth IRA Conversion

Jun 27th, 2022

4 comments

Photo credit: jb

So you have a substantial IRA (or several IRAs), and you’ve retired. For the first time since you started your career, you’re in a low tax bracket. You’re not age 72 just yet, so you don’t need to concern yourself with Required Minimum Distributions (RMDs).

But then again, maybe you should concern yourself with those Required Minimum distributions…?

Think about it – you’re in a good place, tax-wise, and your IRA money is bound to continue to grow over time. You are getting along just fine with your pension, Social Security, and other investment income. This is the perfect time to strategically reduce your future tax bite.

Staging the Roth IRA Conversion

Let’s say for example that your taxable income puts you in one of the lowest tax brackets… say 22% or less. You have some “headroom” left in the bracket to spare, meaning that you could realize some additional income without bumping up to the next bracket. The amount you’re converting in any given year doesn’t seem like a lot, but since you’ve got a few years before you reach age 72, little by little you could be reducing (or eliminating) the amount of RMDs that you’ll be forced to take later on.

Each year you can convert an amount from your IRA to a Roth IRA that will bring you just up to the top of your tax bracket (but not over). By doing this, you’re controlling the flow of the money at a point when you can afford to, rather than having income forced on you when you don’t want it.

Then, when you reach age 72, you have either reduced your IRA down to an easily-manageable amount for RMDs, or completely eliminated the IRA altogether, and the RMDs with it! If that’s the case you don’t have to worry about taking RMDs from the funds that you’ve transferred (converted) to the Roth IRA – and if you want to take money out of the Roth IRA, you can do so tax free!

The funds in the Roth IRA can continue growing over time, and you don’t have to worry about paying tax on the growth at all. You paid tax at today’s (assumedly lower) rates and today’s value of the old IRA account before all of that future growth occurred.

If you don’t have a need for the funds in the Roth IRA, you will never be required to take the money out – and your heirs can stretch out the tax-deferral over many years. This can amount to some very substantial tax savings!

The Downsides

There are a few downsides to such a strategy, as you might have guessed. As you convert funds from your IRA to your Roth IRA, the increase in your taxable income in any given year has some additional impacts that you need to keep in mind. Increasing taxable income can increase the amount of your Social Security benefit that is taxed, for one thing.

Another is that, as your income increases, so does your Adjusted Gross Income (AGI), which controls a lot of your deductions, such as medical expenses. Your medical expense deduction is limited to the amount greater than 7.5% of your AGI. If you increase your AGI by converting IRA funds to a Roth IRA, you’ll effectively reduce the amount of your medical deduction by 7.5% of the amount you convert.

In addition, you need to come up with a source of money to pay the tax – either from your IRA (thus reducing the potential Roth IRA and its potential for growth), or from other investment accounts, which will reduce the available funds from there.

Medicare premiums could be impacted by a Roth conversion as well, but if you’re in the 22% tax bracket and you stay below that threshold, you shouldn’t have any issue with IRMAA increases to Medicare premiums.

Posted on Jun 27th, 2022

by author: jblankenship.

Posted in: IRA, retirement plan, Roth conversion, roth conversion, Roth IRA, roth ira, roth ira conversion, tax.
Tagged: IRA · retirement plan · tax

A Good Reason to Not Convert to Roth

Jun 13th, 2022

4 comments

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

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

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

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

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

Posted on Jun 13th, 2022

by author: jblankenship.

Posted in: IRA, Roth conversion, Roth IRA, tax.
Tagged: IRA · tax

Earnings Tests in the Year You Begin Benefits

Jun 6th, 2022

4 comments

Photo credit: jb

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

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

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

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

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

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

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

Posted on Jun 6th, 2022

by author: jblankenship.

Posted in: Earnings Limits, earnings test, Social Security.
Tagged: Social Security

Determining Your MAGI

May 9th, 2022

5 comments

Photo credit: jb

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

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

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

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

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

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

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

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

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

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

Posted on May 9th, 2022

by author: jblankenship.

5 comments already - add to the conversation!

Posted in: IRA, iras, magi.
Tagged: IRA · magi

IRA Cross Loans – Don’t Even Think About It

May 2nd, 2022

No comments yet

Photo credit: jb

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

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

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

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

Posted on May 2nd, 2022

by author: jblankenship.

No comments yet - start the conversation!

Posted in: IRA, prohibited transaction, retirement plan, Roth IRA, roth ira.
Tagged: IRA · retirement plan

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

Apr 18th, 2022

1 comment

Photo credit: jb

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

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

If you’re under age 70½

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

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

Example

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

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

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

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

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

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

Other items affected by AGI

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

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

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

Posted on Apr 18th, 2022

by author: jblankenship.

Posted in: IRA, QCD, qualified charitable distribution, retirement plan, tax.
Tagged: IRA · retirement plan · tax

Prohibited Transactions and Disqualified Persons

Apr 11th, 2022

5 comments

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

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

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

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

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

Posted on Apr 11th, 2022

by author: jblankenship.

5 comments already - add to the conversation!

Posted in: investing, IRA, retirement plan.
Tagged: IRA · retirement plan

Social Security’s PIA – What is this?

Mar 28th, 2022

2 comments

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

Primary Insurance Amount – PIA

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

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

So, how is PIA calculated?

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

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

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

So let’s work through a couple of examples:

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

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

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

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

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

… And that’s just the start!

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

Posted on Mar 28th, 2022

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: financial planning, PIA, primary insurance amount, retirement plan, Social Security, social security benefits.
Tagged: financial planning · retirement plan · Social Security

Social Security Bend Points Explained

Mar 28th, 2022

1 comment

Photo credit: jb

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

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

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

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

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

$55,628.60 / $9779.44 = 5.6883

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

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

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

Posted on Mar 28th, 2022

by author: jblankenship.

Posted in: bend point, PIA, primary insurance amount, Social Security.
Tagged: Social Security

Wash Sale Rules and IRAs

Mar 21st, 2022

1 comment

Photo credit: jb

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

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

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

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

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

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

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

Posted on Mar 21st, 2022

by author: jblankenship.

Posted in: investing, IRA, tax.
Tagged: IRA · tax

Wash Sale Rules

Mar 14th, 2022

4 comments

Photo credit: jb

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

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

The Details

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

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

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

So what makes up a substantially identical security?

In the IRS’ own words:

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

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

Is convertible into common stock,

Has the same voting rights as the common stock,

Is subject to the same dividend restrictions,

Trades at prices that do not vary significantly from the conversion ratio, and

Is unrestricted as to convertibility.

The above is quoted directly from IRS Publication 550

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

Examples of Wash Sale Avoidance

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

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

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

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

Examples for Handling Wash Sale Disallowed Losses

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

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

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

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

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

Posted on Mar 14th, 2022

by author: jblankenship.

Posted in: financial planning, investing, IRA, tax, wash sale.
Tagged: financial planning · IRA · tax · wash sale

Principles of Pollex: Debt Reduction

Mar 7th, 2022

1 comment

Photo credit: jb

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

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

How’d I Get Here?

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

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

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

Organization

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

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

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

Efficiency

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

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

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

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

Discipline

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

Posted on Mar 7th, 2022

by author: jblankenship.

Posted in: financial planning, principles of pollex, rules of thumb.
Tagged: financial planning

Are You Really Diversified?

Feb 21st, 2022

1 comment

Photo credit: steelo

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

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

Wrong city, bucko.

Correlation

Welcome to correlation. Investopedia defines correlation as:

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

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

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

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

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

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

Examples of Correlation

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

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

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

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

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

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

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

What about other types of assets?

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

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

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

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

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

How?

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

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

Posted on Feb 21st, 2022

by author: jblankenship.

Posted in: financial planning, investing, IRA, retirement plan.
Tagged: financial planning · IRA · retirement plan

Social Security vs. Saving

Feb 14th, 2022

4 comments

Photo credit: jb

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

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

started work at age 20 retire at age 70.

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

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

Initial Reaction

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

Assumptions

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

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

Calculations

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

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

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

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

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

Conclusion

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

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

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

Posted on Feb 14th, 2022

by author: jblankenship.

Posted in: financial planning, investing, IRA, reader questions, retirement plan, Social Security.
Tagged: financial planning · IRA · retirement plan · Social Security

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

Feb 7th, 2022