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

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A recent Private Letter Ruling (PLR) from the IRS may be of interest to IRA owners who are thinking about using IRA funds as a short-term loan. There are a couple of factors in this ruling that you need to understand if you’re looking to use IRA funds for a short-term loan (hint: it’s not recommended!).

PLR 202033008 was issued August 14, 2020. The taxpayer had, upon the advice of his real estate agent, taken a withdrawal from his IRA in order to purchase a home. At the time, his old home had not yet sold, so he needed a cash source to make the down-payment on his new home. To make a long story short, the taxpayer’s old home sale completed after the 60-day rollover window. When he tried to re-deposit the withdrawal (actually only a portion of the original amount) into the IRA, his IRA custodian informed him that this rollover was not allowed since it was past the 60-day window.

The request for ruling suggested that the taxpayer was unaware of the 60-day window, and neither his real estate agent nor his IRA custodian informed him of this restriction. Therefore, the taxpayer asserted that the lack of notice (about the 60-day limit) from either the agent or custodian constitutes an error on the part of a financial institution, and he should be allowed a rollover waiver.

In the PLR, the IRS notes that, unlike retirement plans, there is not a requirement of an IRA custodian to provide this information, and thus does not rise to the level of an error.

Additionally, IRS asserts that the purpose of such a rollover (within 60 days) is intended to facilitate portability between qualified plans, including IRAs. This provision was not intended in any way to facilitate a short-term loan, and so this usage was inconsistent with the intent of the legislation.

Since the reason for missing the 60-day window was not a financial institution error, and further that the withdrawal was not used for the intended purpose (solely to rollover into another account), the IRS denied the request for waiver of the 60-day limitation for this taxpayer.

The moral of the story is this: if you’re planning to use IRA funds as a short-term loan, don’t miss the 60-day rollover window! This taxpayer’s actions would have worked out okay if he had only completed his rollover within that time period.

Better yet – don’t try to use IRA funds as a short-term loan. If your only option to complete a transaction is to use funds from the IRA, you should either just withdraw the funds and consider the action complete (and plan to pay the taxes and penalties). Then, if it happens to turn out that you’re able to complete a rollover within the 60-day window, good for you! If not, at least you planned for this.

The other option is to give the transaction a “pass” until your situation will support it without having to lean on the troublesome short-term loan.

Also: Don’t let a real estate agent advise you on your IRA. That’s not his (or her) job.

Posted on Aug 17th, 2020

by author: jblankenship.

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Posted in: IRA, ira funds, plr, rollover.

Is It Time to Rethink the Emergency Fund?

Aug 14th, 2020

by sraskie.

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For the longest time in wealth management the recommended amount of money to have in an emergency fund has been three to six months of non-discretionary expenses (mortgage, rent, utilities, groceries).

Typically, three months was the recommendation for a single individual or married couple with dual incomes. Six months was generally for married couples with one income earner.

Every so often, something comes along challenging conventional wisdom, and that can be a good thing. In this case, it’s a pandemic that’s changing how we think – about many things.

The pandemic has wreaked havoc on many lives. People have been laid off, lost jobs, are working less hours, losing income. Those with emergency funds have seen them dry up, and those that didn’t have them to begin with were worse off.

For the future, it may be wise to consider a longer (more money) emergency fund. For example, we can consider an emergency fund of nine to twelve months, perhaps longer. In fact, many retired individuals have emergency funds of twelve to twenty-four months.

Granted, retired individuals are using their emergency funds to wait out market volatility, but in a sense, working individuals are using their funds to wait out employment and income volatility.

In both situations, the longer the emergency fund the less likely individuals will have to dip into their retirement savings either when markets are down (retired individuals), when saving for retirement (working individuals), or both.

To calculate how much you need, simply look at all your non-discretionary expenses, add them together, and multiply by 9, 12, 24, etc. The reason I say non-discretionary expenses is because we can cancel TV services, subscriptions, stop dining out, etc. in an emergency.

Once you’ve got the amount you’ll need, start saving. It may take some time, but a good goal would be to save a month’s worth at a time – thus in nine months, you’d have a 9-month emergency fund and so on.

Finally, put your emergency funds in a safe place such as an FDIC insured savings account. Don’t keep them in a safe at home (most insurance companies will not reimburse you if it lost, stolen, or destroyed), and don’t put it in risky assets such as stocks, bonds, real estate, etc.

You want easy access to this money, without worrying that when an emergency arrives, your funds have dropped from volatility.

Posted on Aug 14th, 2020

by author: sraskie.

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Posted in: emergency fund.
Tagged: emergency fund

Inherit an IRA? Don’t forget to name a beneficiary!

Aug 10th, 2020

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After the death of a loved one, there are many things that you have to deal with, not the least of which is handling your own emotions and grief over the loss. In addition to this very difficult transition, there often are lots of financial things to take care of as well. One of those matters is to make sure you have your own beneficiary designations properly assigned to any inherited IRAs or other retirement plans.

As with any IRA, if you haven’t properly designated a beneficiary, you’re dependent on the IRA custodian’s rules (and often your state probate rules) to determine where the IRA should go at your own passing. It only takes filing a form (generally) to make sure this is accomplished. Then you can move on with all of the other “stuff” that you need to deal with.

For an example of what might go wrong… imagine that you’ve inherited an IRA from your mother. First of all, you’ll likely need to either set up an account titled as an inherited IRA (or sometimes just re-titling the original account is adequate). Then you’d assign a beneficiary or beneficiaries, and perhaps a contingent beneficiary or beneficiaries, to the account.

Let’s say you’ve set up your inherited account, and your intent is to pass along this IRA, split evenly among your three children. One of the first questions you need to answer is “What happens if one of the three kids dies before I do?”

Depending on how you’ve designated this, the account could be split evenly between the two remaining children (this is called “per capita” designation). Or, another way to deal with this is for the account to still be split 3 ways, with the deceased child’s estate retaining ownership of one third (this is known as “per stirpes” designation).

If you don’t make a choice between these two (per stirpes or per capita), your IRA custodian’s default rules will apply, which may result in a split that you didn’t intend.

If you’ve chosen per capita distribution and all three children pre-decease you, your contingent beneficiary designation will apply. If you haven’t designated a contingent beneficiary, again, the IRA custodian’s rules and your state probate law will apply. Most often this means that your estate will be the beneficiary, and your estate’s heirs will have claim to the account.

Let’s complicate things a bit further: how about if you’re in the process of a drawn out divorce, and you haven’t yet set up your inherited IRA beneficiaries (to the three children) just yet. What happens if you die in the meantime? Most state probate laws would direct the inherited IRA to your (still legal) spouse, if your beneficiary designations aren’t in place yet.

Timeliness of the designation is critical in a case like this, as well as many other circumstances. Take the time to get this out of the way, and review it every once in a while (annually is good) to make sure your wishes are still reflected in your beneficiary designations.

Posted on Aug 10th, 2020

by author: jblankenship.

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Posted in: Uncategorized.

IRA Transfer to HSA: Does This Make Sense?

Aug 3rd, 2020

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In our discussion of Health Savings Accounts (you can see Part 1 here, and Part 2 here), it was mentioned that one possible method for contributing to a HSA is by way of a once-in-a-lifetime tax-free transfer from an IRA. The question is: Does this make sense? When would you want to use this one-time option?

Does This Make Sense?

The reason that the question of “does it make sense?” comes up is because when you are eligible to make contributions to your HSA, you can deduct those contributions from ordinary income. In the case of the tax-free transfer, no deduction is allowed – in fact the income isn’t included at all, so therefore there is no deduction.

For many folks, the deduction against earned income (above the line; that is, this deduction impacts Adjusted Gross Income and Modified AGI, therefore impacting all sorts of other calculations) is more valuable than any benefit of a one-time tax-free transfer.

If the IRA is the only source of funds that you have available to make the contribution, you’re probably just as well off to take the distribution, pay the tax, and then take the deduction for the HSA contribution in many cases. This option is available to you every year, not just once in your life. If you are under age 59½ you will owe the 10% early withdrawal penalty in addition to the ordinary income tax, of course.

Other Cases

So when would it make sense to use this one-time tax-free transfer? I can think of a couple of cases where this might be the right move:

If you are under age 59½ and you have no other funds available to make a contribution to your HSA, using the rollover/transfer from your IRA would bypass the 10% early withdrawal penalty. I would think you’d want to make this your last resort if you’re in that position.
If you are in a position where you are eligible to take the distribution from your IRA (you’re over age 59½) but showing the income on your tax return will impact some other external calculation – such as financial aid for college, creditors, state income tax, health insurance, or an ex-spouse.

Bottom Line

The bottom line of all this is: if you have other current income, use those funds to make your deductible HSA contribution. If you have no other source of funds beyond your IRA and you are over age 59½, take the distribution from your IRA as taxable income and then make the HSA contribution from there. As a last resort, if you are under age 59½ and have only your IRA as a source of funds to make a contribution to your HSA – then it might make sense to do the one-time IRA-to-HSA tax-free transfer.

NOTE: It is important to note that this one-time option does not increase the amount that you can contribute to your HSA, nor does it allow you to make a contribution if you are otherwise ineligible to make such a contribution.

If you can think of other situations where the tax-free rollover from your IRA to your HSA might make sense, please leave a comment below!

Posted on Aug 3rd, 2020

by author: jblankenship.

Posted in: health insurance, IRA, tax.
Tagged: IRA · tax

Why Most People Are So Bad At Stock Picking (and what does Howie Mandel have to do with it?)

Jul 20th, 2020

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You know the old game show “Deal or No Deal”, right? If you aren’t familiar with it, here’s a basic rundown of the premise: the contestant is faced with 26 briefcases, each with a dollar amount inside, ranging from one penny up to one million dollars. At the beginning of the show, the contestant chooses one of the cases as her prize. Howie Mandell was the original host of the show – I don’t know if it still exists these days but it’s a classic example.

The amount in the case she has chosen remains secret until the end of the show. Then the contestant begins eliminating the remaining 25 cases – first in groups of larger numbers, then fewer at a time, and finally one at at time. As the cases are chosen, the amount in each case is revealed. At the end of each round of reveals, a mysterious character called “the banker” offers the contestant a sum of money to drop out of the game.

The amount that the banker offers seems random, but it is actually relative to the amounts that have yet to be revealed: if more high-dollar amounts are remaining to be revealed (which means a high-dollar amount could be in the contestant’s prize case), a relatively higher amount is offered. If the amount offered is attractive enough to the contestant, she can choose to take that amount, quit the game and walk away. If the contestant refuses the offer, she will have to choose another case and reveal the amount.

As the match progresses, often we see the contestant choosing cases that reveal high dollar amounts in them – which prompts the banker’s offer to reduce. Even when faced with seemingly impossible odds against her, when this situation occurs, the contestant often becomes a risk-taker – more so than you would normally expect.

This is because the contestant feels as if she has already lost something (the earlier offer from the banker) and somehow she must make up the loss by continuing the game in spite of the odds becoming less and less that there is a large amount in her chosen prize. Statistics will rule, and on average the contestant walks away with a much smaller prize than expected.

So what does this have to do with investing?

Quite often we see the same sort of behavior in the stock market: always trying to do better than the average, folks will use all kinds of methods, including paying extra to get the top dog stock picker’s advice – because they’re sure they can beat the market. And then, if the chosen stock shoots up in value, the investor hangs on, knowing that if it went up 10% it is bound to go up another 10%. But what happens when the stock goes on up to 20%? Yep, hang in there, cuz it’s bound to keep up.

Then suddenly the stock pulls back, and now is down 5% from the original investment – what happens now? This is just like when the banker on Deal or No Deal reduces his offer: the investor feels like she’s lost something that she already had in hand, so she begins to take even more risks. Perhaps she’ll buy some more of the stock – again, knowing she’ll make up the losses with future gains. But it rarely works out for the hapless investor.

The problem is that the investor didn’t go into the investment with a plan – and the same would hold true for a contestant on Deal or No Deal. If you decided that you were shooting for a 10% return from this particular stock, you’d have sold out at that level and could have gone looking for the next great option. Without a plan, you never know when to get out of the position.

A Plan!

If a contestant were to go into the show with the plan that she’d like to do better than average – the first time the banker offered more than $131,477.50, she should take it. ($131,477.50 is the average of all the amounts in suitcases.) That would be an excellent strategy to take, especially when you consider the fact that 20 of the 26 cases have less than the average of all the cases taken together.

As an investor, the odds are much better for you, using history as a guide. If our investor chose to take a shortcut and get a return that is at least the average of the stock market – since in the last 40 or 50 years the stock market has only returned a negative roughly 20% of the time, using the average would assure you of a positive return 80% of the time. That’s much better than the results of the average Joe or Jane who plays an active stock picking game.

To get the average of the overall marketplace, the investor can choose to invest in broadly-diversified indexes, covering domestic and global markets. This is a very cost-effective way to achieve the average – and with such a strategy you don’t have to worry about when to get in or get out, or even shout “NO DEAL”. Go for it, and hang on for the wild ride of average returns. And if you want a fist-bump, fine, come by my office, I’ll be happy to oblige.

Posted on Jul 20th, 2020

by author: jblankenship.

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Posted in: financial planning, investing.
Tagged: financial planning

The day I was asked if I buy and sell gold

Jul 13th, 2020

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I was recently walking down the street and came across a man with a table set up, right on the sidewalk. He had gold and silver coins on it, each in its own special plastic case. Apparently he was attempting to sell some of his collection. I didn’t engage him, just walked around his table, where a couple of other folks were standing talking to him.

I’m pretty sure he knew me and what I do, because as I passed by he stopped his conversation with the others and asked “Do you buy and sell gold?”. I politely told him no, that I didn’t deal in metals at all.

“Wrong move, bud! Gold has outperformed the stock market for the last wawh-wah, wawh, waah…” (somehow he had turned into Charlie Brown’s teacher by this point).

Not wanting a confrontation, I just smiled politely and went on my way. After all, anything that I had to say about the subject was likely to result in a disagreement at best, and possibly turning away his potential customers.

I don’t begrudge the man for his particular choice of investment. For all I know, he may be very successful at it. He may even have multitude of different investing activities, giving him a well-diversified portfolio. Good for him! It’s just not for me.

Had I taken him up on his challenge, I would have brought out two particular points about why I don’t buy and sell gold:

Gold’s value is difficult to determine. Gold is only worth what a prospective buyer is willing to offer. Granted, in non-coin form there is a somewhat agreed-upon value in the global marketplace for gold, but that value fluctuates (sometimes wildly) and is not relative to the utility of the investment.

On the other hand, stocks have a value based on the future earnings potential of the company or companies. These values also vary (sometimes wildly) as well, but in general the value is relatively constant. One can easily look at the inherent value versus the value the marketplace has put on the stock to determine if it is currently underpriced or overpriced. With gold you don’t have an underlying stream of income (gold produces no income) to help determine its price.

If I were to buy a coin from this man for his tagged $20 price, in order for me to make money on it I’d need to convince someone else that it was worth something more. Chances are, the $20 price is either at or above the retail price for the coin, and since I’m not a coin expert I don’t know the difference. I’m simply taking his word for the fact that the coin is worth what he’s charging me for it.

I could do some research on that particular coin. Once I do, maybe I’ll find that it’s only worth $15 if I were to take it elsewhere (like an exchange) to sell. Or perhaps I’d find that an exchange might be willing to buy it from me for $22.

The likelihood of finding a coin that is underpriced in such a circumstance is pretty low. After all, the guy at the table has been doing this for a while – he knows what he paid for the coin, and he knows what he needs to sell it for to make a profit. He also knows what an exchange will pay for the coin, and he’s priced his coin above that. Obviously he wants to maximize his profit.

So as the buyer of a gold coin, I’m disadvantaged. I don’t know what the coin is worth without taking time to research about it. And going into a transaction without knowing the worth of the item is a big mistake.

The primary difference between gold and common stocks is that in buying gold you are speculating that someone in the future will be willing to buy it from you for a higher price. With common stocks, you have an understanding of the underlying company’s potential to earn a profit, which in turn should result in either a higher future price for the stock, or a dividend paid out to you as the owner of the stock, or both.

Gold doesn’t earn a profit. You must rely on the actions of future buyers and their opinion of gold’s value to determine whether you’ll make money or lose money.

You must store and secure your gold. If you own gold coins or bars, you need to find a place to put it where it will be secure from thieves. You also need to be able to get to it pretty quickly if you find a buyer for your coin. This can result in some significant costs over time.

Warren Buffett says of gold:

Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.

You might need to install an alarm system on your home or office (wherever you keep the gold). And you might have to invest in a safe – something heavy-duty enough that a thief couldn’t just pick it up and walk away. Plus, gold is heavy. It doesn’t take a lot of coins to result in some pretty serious weight – making moving it around harder, as well as possibly requiring structural adjustments to the building where you store it.

Of course, you could always rent a safe deposit box for your gold – but then again, if you’re a prepper you probably don’t trust the “system” enough to put your hoard in the hands of some bank. Besides, once the apocalypse occurs, how are you going to get your gold out of the bank?

On the other hand, with stocks (in non-apocalypse times) you don’t have to find a place to store them (unless you have stock certificates, and that’s pretty rare these days). In addition, pretty much any business day you can buy or sell stocks, and you don’t have to worry about whether your den floor will be sufficient to hold the weight. You also don’t have to worry about being robbed while you’re moving your item from your safe place to the hands of the new buyer.

In the event of some potential apocalypse, I figure there’s little likelihood that pre-event money of any kind will have much value. I think we’ll all have to work out for ourselves how to survive – and carrying around bags of gold is probably not the way this will work anyway. I’m not trying to poo-poo the prepper movement – it’s just not how I’m spending my time. How does that line from Larry Norman go…?

A piece of bread could buy a bag of gold…

Conclusion. The only reason to buy gold is to re-sell it. It’s the valuation issue that causes the most problems for gold. If you can’t find someone to buy your gold for what you think it’s worth, you either have to accept a loss, or wait until another buyer comes along. Sometimes you don’t have the luxury of time to wait. If you need money right away it’s not like you could stop by the grocery store with your bar of gold and shave off a few milligrams to buy your loaf of bread.

With stocks, even though there may be fluctuations in prices, there are also earnings from the underlying company to add to the mix. You might be caught in the same circumstance as with the gold, where the market is lower than your original cost for the stock, but presumably you’ve also had some earnings over time. Since there is economic activity associated with the company, at least you’ve got something earning you money over time, not just sitting there taking up space and costing you money to secure it (as with gold).

Also, with gold you may find yourself in the position (for example) of setting up a table on a street corner to try to attract buyers for your holdings. With stocks you don’t have to go to this extreme. Although, now that I think about it, I suppose that may be some of the attraction to holding gold. You can sell it outside of a systemic marketplace and potentially hide your profits from taxation since it’s likely a pure cash transaction. But I’m sure that doesn’t happen often, right?

Speaking of taxation, (in the US, anyhow) under our current system, capital gains from stock holdings are taxed at a maximum rate of 20%, depending on your overall income (can be as little as 0%). Gold on the other hand, is considered a “collectible” (whether in bars or coins) and is taxed at up to 28%. As with all matters, the tax tail should not wag the investing dog, of course.

Posted on Jul 13th, 2020

by author: jblankenship.

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Posted in: gold, investing.

Taxes when Re-depositing IRA Withdrawals

Jul 6th, 2020

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If you take a withdrawal from an IRA (or pretty much any tax-deferral mechanism, such as a 401(k) account), under some circumstances you may be able to re-deposit the money back into the original account, or one with similar characteristics. One such circumstance is in tax year 2020, when the CARES Act has given the opportunity to re-deposit RMDs within a certain timeframe. (Click the link for more information on Re-depositing RMD in 2020.)

What kind of tax impacts are there for re-deposits?

To understand the tax impacts of re-depositing IRA withdrawals, you must first determine what is the exact nature of the withdrawal. The withdrawal could be made up of all tax-deferred money, or it could be partly tax-deferred and partly pre-taxed contributions. In addition, the distribution could be completely made in cash to you, or a portion of the distribution could have been directed elsewhere, such as withheld for income tax purposes or sent to a charity as a Qualified Charitable Distribution (QCD).

It should be noted that the re-deposits discussed here are rollover deposits – not regular annual contributions. Regular contributions do not impact withdrawals in the same manner as rollover deposits. These are two separate activities – and they can occur in the same tax year.

All funds tax-deferred. If the entire distribution was made up of tax-deferred money, if you re-deposit the entire amount into the source account or another tax-deferred account, there will be no tax consequences (assuming you do so in a timely manner). At the end of the year, your 1099R will show a distribution, but if the re-deposit is into the same account, the entire distribution will be indicated as non-taxed.

However, if you only re-deposit a portion of your distribution, anything left over will be considered taxable income.

For example, if you withdraw $10,000 from your IRA, and you’re otherwise eligible to rollover those funds (either in the “normal” 60-day manner or under the CARES Act rules), if you only re-deposit $5,000, then at the end of the year you’ll get a 1099R indicating a $5,000 taxable withdrawal from your IRA. This amount will be included as ordinary income on your tax return.

If you re-deposit the entire $10,000, then you’ll have no taxable income attributed to this withdrawal.

Some funds pre-taxed, otherwise tax-deferred. If some of your withdrawal comes from non-tax-deferred contributions, the portion that was not tax-deferred is not included as taxable.

Sometimes we make non-deductible contributions to IRAs or 401(k) accounts. When a withdrawal is taken from an IRA and there are non-deductible contributions included, each dollar of withdrawal is partly taxable and partly tax-free. If you re-deposit the entire withdrawal, you’ll only be able to re-deposit the tax-deferred portion into a traditional IRA. The remaining non-deductible portion may be converted to Roth IRA or simply kept as untaxed funds.

Part of the money directed elsewhere. If you directed a portion of your withdrawal to go somewhere else, such as withheld for taxes or directed to a QCD, a special problem comes up. How do you re-deposit the money into your IRA if you don’t have it?

Generally, unless you talk the charity out of the money, you’re either going to have to pay tax on the difference, or come up with the money from another source.

For example, let’s say you took a $10,000 withdrawal from your IRA, and had 20% withheld for taxes. This is a common situation for folks meaning to re-deposit RMD from 2020, for example.

This means that you only received $8,000 of the distribution – and you won’t see the withheld money until you file your tax return next year. Using the example of 2020, you need to re-deposit your RMD before the end of August.

If you don’t have another source of funds to come up with the additional $2,000 withheld for taxes, at the end of the year your 1099R will indicate a taxable distribution of $2,000. Granted this is money withheld to pay taxes, so a 100% withholding rate should be plenty to pay the tax on this $2,000 distribution (with a significant amount available for refund or to pay tax on other earnings).

However, the money for the re-deposit doesn’t have to be the exact same dollars that came out of the IRA. If you have $2,000 sitting in a passbook savings account, you could use that money to include with your $8,000 net withdrawal in order to make the complete re-deposit. If you make the complete re-deposit, at the end of the year this activity will result in zero taxable income.

Posted on Jul 6th, 2020

by author: jblankenship.

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Posted in: CARES Act, IRA.

Re-depositing RMD in 2020

Jun 29th, 2020

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With the passage of the CARES Act earlier this year, changes were made to the Required Minimum Distribution (RMD) rules. Effectively, anyone who would normally be required to take a distribution from an IRA (plus 401(k), 403(b) or governmental 457 plan) is allowed to skip the distribution for tax year 2020. Inherited plans of the same varieties (which also include Roth-type accounts) are also afforded the same option to skip. Lastly, if you were first required to begin RMDs in 2019 (thus with a required beginning date of April 1, 2020) but had not taken the distribution until 2020, your RMD is waived for this period as well.

We covered a lot of the ground on the RMD changes in 2020 due to CARES in the article Required Minimum Distributions for 2020. Now we have more guidance that wasn’t available when the original article was published almost 3 months ago.

Recently the IRS issued additional guidance on this waiver of RMD. The guidance was published via Notice 2020-51, and the most significant matter (in my opinion) that had not been previously addressed is that of re-depositing RMD that were already taken in 2020.

The problem is that, when the CARES Act was passed into law, it was already several months into the tax year. Many people have their RMDs set up to take a withdrawal every month, spreading the income over the year. Because of this, by the time the CARES Act was passed, more than two and a half months had passed, and so many folks had taken as many as three distributions from their accounts already.

The original information published with CARES provided no special relief regarding re-depositing RMD in 2020, so we were left with the “regular” rules. These rules allow for a rollover contribution to an IRA (or other account) as long as you complete the rollover within 60 days of the distribution. This still doesn’t solve the problem for someone who took his first distribution in January and perhaps another in February, only to find out that he didn’t need to as of mid- to late-March.

In addition, the “regular” rules disallow the rollover of more than one amount (IRAs only) during any 12 months. So if you took 3 distributions in early 2020 (before CARES was passed), you would normally be allowed to only re-deposit one of the RMDs, not all three.

IRS Notice 2020-51

The IRS published additional guidance recently to resolve this situation. Two things were changed regarding re-depositing RMD in 2020:

Any amount taken as RMD in 2020 may be re-deposited (rolled over) into a qualified plan (IRA, 401(k), etc.) by August 31. This adjustment removes the 60-day limitation on rollovers. Inherited account RMDs must be deposited back into the originating account.
Any amount taken as RMD in 2020 may be re-deposited (rolled over) into an IRA without regard to the one-rollover-per-year rule.

Note that the rules indicate “any amount taken as RMD”. This means that amounts over and above the required minimum distribution for the year are not subject to these two new provisions.

For example, if your RMD for 2020 is $11,500 and you have set up a distribution of $1,000 per month, you would have received $3,000 in RMD distributions by the time CARES was passed. And you might not have stopped the automatic distribution for a couple of months after that. So let’s say you’ve distributed $5,000 in RMD for the year, and you’ve decided that you don’t need that money (and you’ve stopped the distributions for the remainder of the year). You’re allowed to re-deposit the entire $5,000 back into your IRA, as long as you do it by August 31, 2020.

However, if instead of monthly withdrawals you had taken a full distribution of $12,000 (extra amount just to make it certain you’ve covered your RMD for the year), you can only re-deposit $11,500 – the amount of your required minimum distribution for the year. Any amount may be re-deposited, up to the required minimum for the year.

Posted on Jun 29th, 2020

by author: jblankenship.

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Posted in: CARES Act, required minimum distribution, rmd, rmds.

Open a Roth IRA for Your Child

Jun 22nd, 2020

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Here’s a very good idea to consider – if you have a teenager who has a part-time job, rather than putting those earnings solely into a savings account (or worse, a car), open a Roth IRA. The money contributed to this account will mostly be tax free, since the first $12,400 (2020 figures) of earned income is not taxed for a single filer that is a dependent of another.

Since contributions to the Roth IRA are “after tax”, the first $6,000 earned (for 2020) and the future earnings on that income will never be taxed if contributed to a Roth IRA. And since as a parent you’re paying for most everything else that the child needs anyhow, why not encourage him to make a contribution of his first $6,000 of income into a Roth IRA?

One downside (or maybe it’s an upside?) to this strategy is that the contributions will be available (without tax or penalty) for college expenses, down payment on a home, or whatever. However, if the money is left in the account it can provide a tax-free source of income for retirement in the future. This can be a good time to introduce the concept of long-term savings to your child.

An added benefit of putting the money into a Roth IRA account is that money in retirement accounts (such as a Roth IRA) is not included in the FAFSA calculations for student financial aid. If this money was put into a standard passbook savings account, the savings account would be counted as a source of funds to pay for college expenses (on the FAFSA).

Two key factors to remember are:

The child must have earned the income. This means that the income was reported to them on a W2 or 1099, or possibly the child was self-employed. The income must be reported on an income tax return in order to account for the income, even if no tax was owed on the earnings. (Note: don’t get carried away with this idea and “invent” income for your child. Allowance for mowing the yard or cleaning her room does not generally count as income.)
The Roth IRA contribution must be made before the tax return is filed for the year in question. For the 2020 tax year, for example, the contribution to the Roth account must generally be made by April 15, 2021.

Posted on Jun 22nd, 2020

by author: jblankenship.

4 comments already - add to the conversation!

Posted in: education, fafsa, IRA, part time job, retirement accounts, retirement plan, roth ira account, roth ira contribution, teenager.
Tagged: IRA · retirement plan

Non-Parent Owned 529 Plans

Jun 19th, 2020

by sraskie.

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Photo credit: jb

Grandparents often find themselves looking for a way to help their children or grandchildren with education expenses. There are a few strategies grandparents may consider depending on their preferences. The following are a few strategies grandparents may consider to help with higher education expenses.

Grandparent-owned 529 plan. In this strategy the grandparent owns the 529 plan in their name and makes contributions to the plan. The benefit of this is that the grandparent can reduce their estate, take a potential state tax deduction (if their state allows), control the investments, take tax-free qualified distributions, and name/change the beneficiary. Furthermore, when the beneficiary files for financial aid (FAFSA), grandparent-owned 529 plans are not included in the assets of the parent or beneficiary in determining financial need.

However, there’s potential downside to this strategy when the beneficiary files the FAFSA form to determine eligibility for financial aid. FAFSA considers parent-owned 529 plans to be assets of the parent and while included in the determination for financial need, the inclusion percentage is a maximum of 5.64%.

While grandparent-owned 529 plan assets aren’t included in the FAFSA calculation, qualified distributions are – up to 50%. This means that a grandparent taking a distribution for a grandchild may inadvertently reduce the amount of financial aid of the grandchild.

For example, a grandparent taking a $25,000 qualified distribution may reduce the grandchild’s financial aid by as much as $12,500! This could be a moot point however, if there are no plans to apply for financial aid.

Contributing to a parent-owned 529 plan. Grandparents may contribute directly to the parent-owned 529 plan. Some state 529 plans even allow the grandparent (or other contributor) a state tax deduction as well. Grandparents choosing this strategy get the benefit of giving to their grandchildren without directly impacting the grandchild’s eligibility for financial aid.

Paying tuition directly to the college or university. Grandparents may also choose to pay for a grandchild’s tuition directly to the college or university without incurring any gift or estate tax consequences.

However, like a qualified distribution from a grandparent-owned 529 plan, paying tuition directly to the college or university may impact the FAFSA calculation when determining financial aid. This is because the direct paying of tuition is considered income of the student.

Again, this could be a moot point if there are no plans to apply for financial aid.

Posted on Jun 19th, 2020

by author: sraskie.

Posted in: 529, 529 plan, beneficiary, education, education expenses.
Tagged: 529 plan · grandparent 529

What Can a Broker Do For You?

Jun 15th, 2020

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Photo credit: jb

You have choices when it comes to investing. You can go directly to a mutual fund company (such as Vanguard or T. Rowe Price) and choose investments yourself, or you can use a fee-only financial advisor to assist you in choosing investments. One of the most common methods is to work with a broker. Brokers are companies like Edward Jones, plus many, many other companies, including insurance company brokerage divisions, banks, and the like.

What’s the Difference?

You’re probably wondering – what’s the difference between a broker and, for example, a fee-only advisor? You’re right to be confused, because until you start working with one or the other and you know what the difference is, they look pretty much the same from the outside. Here’s the difference:

Brokers are salesmen. It is their job to sell you an investment product, and that’s how the broker gets paid. They are required by law to ensure that the product is “suitable” to your situation.

Fee-only advisors are advisors. Fee-only advisors are bound by law to act as a fiduciary. It is the job of a fiduciary to advise you on the appropriate strategies and tactics – investment moves that are in your best interest.

That’s a pretty big difference in itself – but since that differential makes the fee-only advisor look SO much better (and since this writer is a fee-only advisor), I wanted to point out what research has born out to be true about the recommendations that you get from a broker.

What Can a Broker Do For You?

There is a study done by researchers at Harvard and the University of Oregon (Bergstresser, Chalmers, and Tufano, 2009), which strives to identify the possible benefits to the consumer of financial services in purchasing investments via a broker. They looked at five possible benefits:

Assistance in selecting funds that are harder to find or evaluate.
Access to funds with lower costs excluding distribution costs.
Access to higher performing funds.
Superior asset allocation.
Attenuation of behavioral investor biases (in other words, saving the investor from himself)

Ultimately, the researchers “found it difficult to identify the tangible benefits delivered by brokers.” But that’s getting ahead of ourselves. We’ll take each category separately and briefly describe the findings.

Assistance in selecting funds that are harder to find or evaluate

It is true that brokers often direct investors into smaller, younger funds that have less track record or are not covered by major rating services. The costs (especially in time) to the individual would be enormous in researching these funds. If the other benefits are brought about by utilizing these harder to find or evaluate funds, then there would be a benefit to working with the brokerage. What we’ll see is that the rest of the evidence doesn’t bring that conclusion.

Access to funds with lower costs excluding distribution costs

The researchers found that the funds sold through the broker channel do not have lower costs excluding distribution fees. In other words, even if funds exist that are of a lower cost, the brokers are not (in general) directing investors to those funds. Across the board, the annual cost of a brokered stock fund was on average 2 basis points (bp) higher (.02%), not including commissions or 12(b)1 fees. And the average annual cost of a bond fund was an amazing 23bp higher, and money market funds were on average 4bp greater.

Access to higher performing funds

The overall return, as well as the risk-adjusted return, is lower for the funds that the broker chooses, versus funds that are directly purchased via other channels (e.g., a fee-only advisor or through personal research by the investor). Stock funds underperformed direct-purchased funds by an average of 7.5bp (.075%) – and using risk adjustments caused these figures to get even worse. Bond funds underperformed as well, but money market funds did provide a slightly better return, by a total of 18bp on average.

Superior asset allocation

While a broker’s asset allocation recommendation is different from that of other investment channels, over time the outcome is pretty much the same for either type of investor. The difference is that, on average, the broker tends to direct a higher percentage of investors into bonds (as opposed to stocks). Since stocks, over a long run, outperform bonds and bonds demonstrate lower risk (as measured by standard deviation), this difference in allocation weights tends to even out between the two.

Attenuation of behavioral investor biases

Lastly, the research shows that most broker-driven investors are much more sensitive to short-term performance in the market than other investors. This leads to “performance chasing”, which in general does not bear greater returns, while at the same time increases incremental transaction costs. Transaction costs benefit the broker, of course.

But wait, there’s more!

In addition to the research summarized above, you need to know about how a broker is typically paid. I already mentioned that the broker is paid to sell the investor products – how does that work? There are many types of fees which can impact an investor’s account:

Front end loads: this is a commission charged when you purchase the fund. Typically these can be anywhere from 3% to 5% or more of the purchase, although at much higher balances the fees can be reduced and even eliminated.
Back end loads: this is a commission charged when you sell the fund. Often, this is used to keep an investor “locked” into a fund for a specific period of time, during which other fees can be transacted from the account. After a period of time, these back end loads are waived.
Annual loads: this is an annual commission based on the holdings in the account, and can be one of the most expensive ways to hold investments.
12(b)1 fees: this is also an annual fee based on the holdings in the account, and often is the most elusive to identify – while representing the greatest drain to the investor. This fee is usually pretty small in relation to other fees (sub 1%) but it is charged across all classes of funds, whether a front-end, back-end, or annual load. What really hurts is that the 12(b)1 fee is specifically for marketing the underlying investment. In other words, as an investor in the fund, you’re paying to help bring in more investors.

While it’s not conclusive, some of the results found in the research paper indicate what you might expect: that brokers sell the investments that pay them the most. For example, as the front-end load or 12(b)1 fee increases for a particular fund, there is an attendant increase in the sales of the fund. Not unexpected, it’s basic human nature.

Conclusion

The research shows no tangible benefit to working with a broker – in fact, results are often worse with a broker. Add to that the costs of working with a broker, above and beyond the dismal results that you achieve, a conclusion isn’t hard to come by: it makes more sense to either do the research on your own and purchase funds directly, or to work with a fee-only financial advisor who will do the research and operate as a fiduciary to ensure that the investment choices you make are in your best interests.

Posted on Jun 15th, 2020

by author: jblankenship.

Posted in: #noTOP, fiduciary, financial planning, investing, newsletter, purpose.
Tagged: fiduciary · financial planning

Have Confidence – In Good Times and Bad

Jun 8th, 2020

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Photo credit: diedoe

Note: this is a re-working of a note I received in email some time ago… it’s not necessarily about money or investing, but rather success in all things. It is particularly applicable to financial matters, I think, as it is critical to maintain confidence in your plans, both in prosperity and adversity.

Confidence is one of your most important success ingredients. With it, you can achieve most anything. Without it, there is no psychological pill that can make you succeed.

Faith is the ability to believe even when you have no reason to. Faith is necessary sometimes to move forward and do something you don’t know if you can do, or when the world around you is telling you that you cannot. This is also when a trusted guide can be useful to help you figure out what is valid and what is not.

Experience gives you the proof you want and need to build future confidence on, and is something you get after you use faith and confidence first to achieve what you want. Experience is developed incrementally – in baby steps at first, with more momentum as you gain more confidence.

It is easy to make grand gains when the greater forces like “the economy” are going in your favor. Those who are truly successful make gains by having faith and confidence in themselves no matter what direction the so-called greater forces around them appear to be going. Short-term “noise” doesn’t bother these folks one bit.

In all things you can benefit by strengthening your confidence and faith in yourself. Seek guidance from others who have the experience that you lack. Look to and recall your past successes as a foundation to build your confidence in yourself and your plans.

Posted on Jun 8th, 2020

by author: jblankenship.

Posted in: financial planning, purpose.
Tagged: financial planning

Non-Qualified 529 Expenses – Taxation and Penalties

Jun 5th, 2020

by sraskie.

2 comments

The intended purpose of 529 plans was to help individuals save for college education while receiving tax deferral of earnings and use of money tax- free for qualified expenses. However, sometimes money in the plan remains after paying for education expenses, a beneficiary decides not to go to college (and there no replacement beneficiary), or other events cause funds to be left unused.

Plan owners have few options at this point, and one option may be to use money from the 529 plan for non-qualified expenses. Should this be the case, we need to look at how this money is handled.

Generally, any money that’s taken from the plan for non-qualified expenses is taxed at the taxpayer’s ordinary income rates (marginal rates). Additionally, a 10% penalty is applied – like the 10% early withdrawal penalty on retirement funds. Furthermore, if the owners took at state income tax deduction for the contribution their state 529 plan, the state may “recapture” the deduction in the year of the withdrawal.

This can be a pretty substantial tax bite.

However, exceptions to the 10% penalty apply.

Examples of exceptions to the 10% penalty for non-qualified 529 expenses are:

Death of the beneficiary
Disability of the beneficiary
The beneficiary received a scholarship or grant

In the event of death or disability (assuming there is no successor beneficiary) the account owner can withdraw the funds, pay the taxes on the earnings, and avoid the 10% penalty.

For disability, the account owner generally must prove that the beneficiary is unable to perform the duties of any gainful occupation.

Should the beneficiary receive a scholarship or grant, the account owner can withdraw an amount equal to the scholarship or grant without incurring the 10% penalty.

Remember – these exceptions apply to the 10% penalty only! Ordinary income tax will still apply to the withdrawal.

Posted on Jun 5th, 2020

by author: sraskie.

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Posted in: 529, 529 plan, college savings.
Tagged: 529 plan · non-qualified expenses

Electronic Filing of Amended Tax Returns – Coming Soon!

Jun 1st, 2020

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Big News! The IRS just announced that amended tax returns (Form 1040X only, for now) can soon be filed electronically!

For just about anyone in the world except for tax preparers, this seems like a yawner. After all, the IRS has been requiring electronic filing of just about every other tax return for a few years now. Up until now though, the 1040X, personal amended tax return, has been a paper-only filing.

The result is that when a return needs to be amended, we preparers have had to step back in time, print and assemble a return, attach the required documentation, get signatures, and mail the return via snail mail. And then the taxpayer has to wait, wait, wait until the paper filing has been received and accepted (using the “Where’s My Amended Return” tool on IRS’s website).

This development will definitely speed up the process and eliminate a lot of paper-handling, especially in simple matters of correcting errant information on the return. Definitely looking forward to using this!

The IRS just recently announced this development in a Newswire (IR-2020-107). The contents of the original newswire are reproduced below.

IRS announces Form 1040-X electronic filing options coming this summer; major milestone reached for electronic returns

WASHINGTON- The Internal Revenue Service announced today that later this summer taxpayers will for the first time be able to file their Form 1040-X, Amended U.S Individual Income Tax Return, electronically using available tax software products.

Making the 1040-X an electronically filed form has been a goal of the IRS for a number of years. It’s also been an ongoing request from the nation’s tax professional community and has been a continuing recommendation from the Internal Revenue Service Advisory Council (IRSAC) and Electronic Tax Administration Advisory Committee (ETAAC).

Currently, taxpayers must mail a completed Form 1040-X to the IRS for processing. The new electronic option allows the IRS to receive amended returns faster while minimizing errors normally associated with manually completing the form.

“This new process is a major milestone for the IRS, and it follows hard work by people across the agency,” said IRS Commissioner Chuck Rettig. “E-filing has been one of the great success stories of the IRS, and more than 90 percent of taxpayers use it routinely. But the big hurdle that’s been remaining for years is to convert amended returns into this electronic process. Our teams have worked diligently to overcome the unique challenges related to the 1040-X, and we look forward to offering this new service this summer.”

About 3 million Forms 1040-X are filed by taxpayers each year.

The new electronic filing option will provide the IRS with more complete and accurate data in an easily readable format to enable customer service representatives to answer taxpayers’ questions. Taxpayers can still use the “Where’s My Amended Return?” online tool to check the status of their electronically-filed 1040-X.

When the electronic filing option becomes available, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically. In general, taxpayers will still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form. Additional enhancements are planned for the future.

“Adding amended returns to the electronic family also complements our partnership with the tax software industry, which continues to work with us to provide better ways to help taxpayers,” said Ken Corbin, Commissioner of the IRS Wage and Investment division.

Posted on Jun 1st, 2020

by author: jblankenship.

Posted in: income tax, tax return.

Babies from 1960: 2020 is a year you’ll never forget

May 26th, 2020

12 comments

Photo credit: diedoe

The year 2020 is, for many obvious reasons, going to be a year none of us will forget anytime soon. But for those who were born in 1960, even if the coronavirus came nowhere near you personally, 2020 will have a lasting impact on you, regardless.

If you were born in MCMLX (1960), the year 2020 is when you’ll reach age 60. For anyone, this is a momentous occasion. Reaching six decades of age is a wonderful event, opening the passageway to retirement, grandparenting (and great-grandparenting) among many other favored activities. For our purposes in this article, you should know that age 60 is also a very important year for your Social Security benefits. Age 60 is when your wage index is set, which determines many things about your Social Security benefits.

The year 2020, with the severe economic downturn, is going to have a long-lasting impact on you newly-minted sexagenarians, specifically on your Social Security benefits. This is because of the way Social Security benefits are calculated – and the economic figures that are most likely to be written in stone a bit later this year.

I’m not going to go into complete detail on how Social Security benefits are calculated in this post – my primary message here is to help you understand why 2020’s economic results will have such a lasting impact. If you’d like a complete description of how Social Security benefits are calculated, see this article about the Primary Insurance Amount or the AIME, as starting points in your education.

The problem is in the calculation

When Social Security determines your benefit amount, a very complicated set of calculations occur. One portion of that calculation is an averaging of your lifetime (the top 35 years) of earnings. The calculation isn’t a simple average, however – it’s an indexed average, and the indexing year is the year you reach age 60.

Let that sink in for a bit… I’m guessing that didn’t help much, did it? How about if I work through a simple example to illustrate the problem?

Rather than working with 35 years’ worth of earnings (because that gets unwieldy in a hurry), let’s work with an example of only 5 earnings periods. And I’ll simplify the numbers so it’s a bit easier to grasp. Look at the table below for starters:

Year	Income
1	$1,000
2	$1,100
3	$1,250
4	$1,400
5	$1,500

Simple enough. Year 5 is representing the year 2020 for 1960 children, your indexing year. When Social Security determines your benefits, they look at your overall earnings history – and for our example the above brief table will suffice.

Since Social Security is not simply based on what you’ve earned, but rather what you’ve earned relative to the rest of all earners in your age group, we need another column in the table. This column is the Average Wage Index for all people earning in any given year.

Briefly, the Average Wage Index is determined by totaling all wages earned in the US in a given year, and then dividing that number by the number of people who earned those wages (all who received a W2). Self-employed folks are counted as well, just in a slightly different manner based on their tax returns.

So for the purpose of our example, let’s fill in an Average Wage Index (AWI) for the record:

Year	Income	AWI
1	$1,000	$1,050
2	$1,100	$1,135
3	$1,250	$1,157
4	$1,400	$1,282
5	$1,500	$1,353

These AWI numbers represent that nationwide average for the year in question – don’t get hung up on the numbers themselves, I just randomly generated some numbers to fill in the slots. The point is that these are the averages for those years.

The next step in the process is to index your earnings against the averages. To do this, we set year 5 as the “index year”, and we make all of the other averages simply a comparison to that index year. To fill in the first year’s index, we simply divide our index year by the AWI figure for that year – $1,353 / $1,050 = 1.28857. And so we fill in the rest of the table:

Year	Income	AWI	Index
1	$1,000	$1,050	1.28857
2	$1,100	$1,135	1.19207
3	$1,250	$1,157	1.16940
4	$1,400	$1,282	1.05538
5	$1,500	$1,353	1.00000

Hopefully the way the index column is determined makes sense. Again, this simply shows the AWI figure in terms of each year’s relative value compared to the AWI figure for the index year, Year 5. So Year 5 is of course, 1.00000, since it is equal to itself.

Now that we’ve determined the Indexes, we apply each year’s index to your actual income for that year. We do this by multiplying the Index column by the Income column, to come up with an Indexed Income column:

Year	Income	AWI	Index	Indexed Income
1	$1,000	$1,050	1.28857	$1,289
2	$1,100	$1,135	1.19207	$1,311
3	$1,250	$1,157	1.16940	$1,462
4	$1,400	$1,282	1.05538	$1,478
5	$1,500	$1,353	1.00000	$1,500

Taking a look at the figures in the Indexed Income column, you can see that, for example, the $1,100 that you earned in Year 2 is equivalent to $1,311 when compared to the AWI for the periods, with Year 5 as the Index year.

The last bit is to average these numbers – so we add up the five years’ worth of Indexed Income, and divide by 5, the number of periods in our example. Adding up we come up with $7,040, and dividing by 5 we have $1,408 as our result. This is our Average Indexed Earnings. (Keep in mind my example is much more simplified than Social Security’s actual calculation, which works with Monthly earnings, rather than yearly, and the total years in question are 35 rather than 5. The concept is the same, however.)

Alright – so now we’ve gotten this far, let’s get to the point of the problem: since the Indexing year is kinda the foundation of the whole process, what happens when that figure is adjusted? And by adjusted, in the context of this problem we’re covering, I mean adjusted downward – perhaps significantly.

For the year 2020, it is anticipated that the AWI figure may be less than was anticipated, and most likely less than it was in 2019. To see the affect this will have on our example, I’ll adjust the AWI figure downward by the projected 6.7% less than the prior year:

Year	Income	AWI	Index	Indexed Income
1	$1,000	$1,050	1.13905	$1,139
2	$1,100	$1,135	1.05374	$1,159
3	$1,250	$1,157	1.03371	$1,292
4	$1,400	$1,282	0.93292	$1,306
5	$1,500	$1,196	1.00000	$1,500

The only figure that was adjusted was the Year 5 AWI – but this changed both of the following columns, since their values are based on the Indexing Year’s AWI value. The result is that the Indexed Income, when totaled, comes up to only $6,396, and when divided by 5 the result is $1,279 – which is $129 less than the figure we got the first time around – nearly a 10% reduction!

Hope that example helps you to understand what is so important about the Indexing year AWI value. Now let’s put this into the context of your own Social Security benefit.

Your own Social Security benefit

I explained briefly above how your Social Security benefit is calculated, and the example should have helped you understand the importance of the Indexing Year’s AWI. Now let’s talk about what’s about to happen in 2020 – real life.

Back in the first quarter of 2020 (remember way back then?) the economy was booming. Employment was at all-time highs, based on the number of people employed. And then, the coronavirus pandemic hit. More people than ever before have been affected by layoffs and furloughs, as well as complete evaporation of their jobs.

So – two takeaways that are important to the process – remember how I explained that the AWI is determined by taking the total wages earned by everyone in the year and dividing that figure by the number of people earning? The first part of that equation is very, very likely to be smaller in 2020 than it was in 2019 – because there has been a period of more than 8 weeks so far (out of 52, 15% of the year and climbing) where a significant number of those people who were earning at the beginning of the year have not been earning, or are earning significantly less than before. And the second part of the equation hits just as hard: more people than ever before were in the workforce, so the divisor is that much larger.

As a result, it is projected at this time that the AWI for 2020 is likely to be as much as 6.7% less than the anticipated AWI for 2019. (These figures are produced 1 year in arrears, and so the 2019 AWI will be released in October, 2020, and the 2020 AWI won’t be released until October, 2021.)

So the result is that, for those folks who are reaching age 60 in 2020, your Indexing Year AWI will be lower than anyone could have possibly guessed it might be. Social Security’s actuaries had projected an increase for 2020 of approximately 3.5% over the projected 2019 figure.

In addition to affecting your overall average indexed earnings, the AWI Index Year also impacts the final calculation of your benefits (see Primary Insurance Amount for more details.)

It is estimated that this anomaly across these two calculations will result in a loss of more than $2,500 a year in Social Security benefits for the average person, when compared to the previously-anticipated AWI figures. Assuming this person receives benefits for approximately 18 years, a total of more than $45,000 in benefits is lost. The figures will be higher or lower depending on your benefit amount, the age you start benefits, and how long you receive benefits, of course.

What can be done about this?

Each person individually can’t do much about this situation. Starting Social Security benefits earlier or later won’t help. The only way this can be resolved is if Congress takes up the matter to make a one-time (hopefully!) adjustment to the AWI series.

How likely is it that Congress will take action? First, consider that this situation has occurred twice in the past: in 1977 through 1981, due to a change in the process, and more recently in 2009, from impact of the Great Recession.

During 1977 to 1981 – this is the infamous “notch babies” period – since the anomaly was a result of an intended change to the rules, it’s not surprising that no Congressional action was taken.

So we have the Great Recession as a recent economic downturn to use as a guide – and once again, Congress did not take action to resolve this situation. So folks who reached age 60 in 2009 (born in 1949) had the exact same issue that those reaching 60 in 2020 are facing, and Congress did not make any changes then. So the outlook isn’t good.

However, one thing that is working in favor of a possible adjustment for folks born in 1960: it’s an election year, and Congress has been throwing money around like drunken sailors. If we can get them to pay attention to this problem, maybe they’ll do something about it – if for no other reason than to buy favor from this group of folks born in 1960. I suggest contacting your congress-people immediately, and get this issue on their plates ASAP.

I should also note – given that we have no idea whether the economy we’re seeing up to this point in 2020 will recover over the remainder of the year, or whether it will continue to languish and unemployment remains high, there’s certainly no guarantee that this same situation won’t continue for folks born in 1961 and beyond. It’s way too early to start worrying about that, and of course, worrying about it isn’t going to resolve it.

Posted on May 26th, 2020

by author: jblankenship.

12 comments already - add to the conversation!

Posted in: coronavirus, PIA, Social Security, social security benefits.

Facing the Possibility of Incapacity

May 18th, 2020

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Photo credit: mal0mar

Incapacity means that you are either mentally or physically unable to take care of yourself or your day-to-day affairs. Incapacity can result from serious physical injury, mental or physical illness, advancing age, and alcohol or drug abuse.

Incapacity can strike anyone at anytime

Even with today’s medical miracles, it’s a real possibility that you or your spouse could become incapable of handling your own medical or financial affairs. A serious illness or accident can happen suddenly at any age. Advancing age can bring senility, Alzheimer’s disease, or other ailments that affect your ability to make sound decisions about your health, or to pay your bills, write checks, make deposits, sell assets, or otherwise conduct your affairs.

Planning ahead can ensure that your wishes are carried out

Designating one or more individuals to act on your behalf can help ensure that your wishes are carried out if you become incapacitated. Otherwise, a relative or friend must ask the court to appoint a guardian for you, a public procedure that can be emotionally draining, time consuming, and expensive. An attorney can help you prepare legal documents that will give individuals you trust the authority to manage your affairs.

Likelihood of Suffering an Incapacity

According to the Center on Budget and Policy Priorities, an individual age 20 has a better than 1 out of 4 chance (26%) of suffering a disability at some point in their life prior to Social Security full retirement age. That’s a pretty significant figure – look around you, if there are 12 people in your office, 3 of them are slated to have a disability at some point in their lives.

Managing medical decisions with a living will, durable power of attorney for healthcare, or Do Not Resuscitate order

If you don’t authorize someone to make medical decisions for you, medical care providers must prolong your life using all available artificial means, if necessary. With today’s modern technology, physicians can sustain you for days and weeks (if not months or even years). If you wish to avoid this (not only for yourself, but for your family), you must have an advanced medical directive executed.

There are three types of medical directive: 1) living will; 2) durable power of attorney for healthcare; and 3) do not resuscitate order (DNR). You may find that one, two, or all three types of advanced medical directives may be necessary to carry out your wishes for medical treatment (just make sure all documents are consistent).

A living will allows you to approve or decline certain types of medical care, even if you will die as a result of the choice. However, in most states, living wills take effect only under certain circumstances, such as terminal injury or illness. Generally, a living will can be used only to decline medical treatment that “serves only to postpone the moment of death.” Even in states that do not allow living wills, you might want to have one anyway to serve as evidence of your wishes.

A durable power of attorney for healthcare (known as a health-care proxy in some states) allows you to appoint a representative to make medical decisions for you. You decide how much power your representative will have.

Lastly, the Do Not Resuscitate order (DNR) is an order that tells all medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs: one is effective only while you are hospitalized; the other is used while you are outside the hospital.

Managing your property with a living trust, durable power of attorney, or joint ownership

If no one is ready to look after your financial affairs when you have an incapacity, your property may be wasted, abused, or lost. You’ll need to put in place at least one of the following options to help protect your property in the event you become incapacitated.

You can transfer ownership of your property to a revocable living trust. In that case, you name yourself as trustee and retain complete control over your affairs as long as you retain capacity. If you become incapacitated, your successor trustee (the person you named to run the trust if you are unable) automatically steps in and takes over the management of your property. A living trust can survive your death. There are, of course, costs associated with creating and maintaining a trust.

A durable power of attorney (DPOA) allows you to authorize someone else to act on your behalf. There are two types of DPOAs: a standby DPOA, which is effective immediately, and a springing DPOA, which is not effective until you have become incapacitated. A DPOA should be fairly simple and inexpensive to implement. It also ends at your death. A springing DPOA is not permitted in some states, so you’ll want to check with an attorney on the availability.

Another option is to hold your property in concert with others. This arrangement may allow someone else to have immediate access to the property and to use it to meet your needs. Joint ownership is simple and inexpensive to implement. However, there are some disadvantages to the joint ownership arrangement. Some examples include:

Your co-owner has immediate access to your property;
You may lack the ability to direct the co-owner to use the property for your benefit;
Naming someone who is not your spouse as co-owner may trigger gift tax consequences; and
If you die before the other joint owner(s), your property interests will pass to the other joint owner(s) without regard to your own intentions, which may be different. You’ll need to coordinate any joint ownership with your last will and testament as part of an overall estate plan.

Posted on May 18th, 2020

by author: jblankenship.

Posted in: disability benefits, disability insurance, financial planning.
Tagged: financial planning

The Gift of Time

May 15th, 2020

by sraskie.

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Some thoughts that may help give some perspective with the extra time some of us may have.

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Posted on May 15th, 2020

by author: sraskie.

Posted in: podcast.
Tagged: time

Roth Conversion Planning for a Small Business Owner or Farmer

May 11th, 2020

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Photo credit: hbd

Continuing with the discussion about Roth IRA conversions – there is an opportunity for the small business owner or farmer that may be quite useful. Many small business owners and farmers have large Net Operating Loss (NOL) carryovers from previous years, due to the fact that NOL can only be deducted to the extent of the individuals’ Adjusted Gross Income. Beginning with tax year 2018, excess NOL can be carried over indefinitely, but can only offset 80% of the taxable income for the year of the return.

Prior to the Tax Cuts and Jobs Act (2018) NOL carryforward was limited to 20 years, but could offset 100% of the taxable income. In addition, not germain to this article, TCJA also eliminated the 2-year carryback NOL for all taxpayers except for farmers. Any NOL prior to 2018 uses the old rules.

For the small business owner or farmer who has retired and closed his business, a large NOL can be difficult to take advantage of – especially if his income requirement is small in relation to the carried forward NOL. If the small business owner or farmer has an IRA, there is a unique opportunity for a Roth conversion, up to an amount equal to the carried over NOL, thereby converting the funds to a tax-free account with no tax owed.

The reason that this is important is because carried over NOL disappears when the taxpayer dies. If the NOL is large enough that normal income (or Required Minimum Distributions) doesn’t utilize the NOL completely, then this opportunity can help to create tax-free income for the taxpayer in the future.

Note: estates and trusts can also have NOL, but this provision is not pertinent to estates and trusts.

Posted on May 11th, 2020

by author: jblankenship.