Friday, April 28, 2017

IRA, RMD, IRS, OMG (part one)


Hard to believe, but the first wave of post-World War II baby boomers is turning 70 ½ years old. Born in 1946, they now approach the final landmark birthday (or half-birthday) of their financial life: this is the year they must start taking withdrawals from their individual retirement accounts (IRA’s) and workplace retirement plans such as 401k’s.  (There are some exceptions, like Roth accounts, that I will address next week.)  Even if you are only in your twenties or thirties, the Boomers’ experience will be instructive for your own retirement planning.
 
For years people have been socking away money for their retirement into these accounts and reaping the benefits of tax deferral.  Savers could generally deduct from the income reported on their tax return whatever they contributed to a retirement account, up to a certain limit (currently $5500 per year, or $6500 per year if age 50 or over, for IRA’s; and $18,000 and $24,000, respectively, for 401k accounts), thus reducing their taxable income for the year and lowering their tax bill.  Moreover, as the money in the account grew through investment, no taxes were payable.  Only upon withdrawal would taxes be owed—and presumably one’s tax rate in retirement would be lower due to lower income. 
 
Aside from saving for retirement, this has always been touted as the main benefit of IRA’s and 401k accounts.  “Save on your taxes now and pay at a lower rate when you withdraw it later.”  That sounds pretty good when you’re twenty years from retiring.  But I suspect only a minority read the fine print (or at least thought much about it at the time they opened the account) that stated they had to start withdrawing the money in the year they turned 70 ½, or realized that by law they had to withdraw at least a certain percentage of their savings each year, something called the required minimum distribution, or RMD, calculated according to an IRS-supplied table.
 
To be certain you take the RMD, the IRS imposes a 50% penalty for non-compliance.  In other words, if you were supposed to withdraw $5000 this year but you only withdrew $1000, you are taxed half of the untaken RMD, or $2000. 
 
Maybe you knew about RMD’s and none of this is a surprise to you.  But the kicker is that for many people who accumulated large sums in their retirement accounts, the annual RMD together with any other taxable income they receive, interest from savings accounts and certificates of deposit, tax-exempt interest, plus a portion of their Social Security benefits, might be enough to push them into a tax bracket not that different from what they were in as regular wage earners.  That “lower tax bracket when you retire” might just have been an illusion.
 
But even for those with modest balances in their IRA’s there could be some unforeseen consequences of the RMD.  For a taxpayer with filing status “single”, if half of his annual Social Security benefit added to his RMD and other income and interest for the tax year exceeds $25,000, then a portion of his Social Security benefits for the year becomes taxable.  The figure is just $32,000 for “married filing jointly”. Although at least 15% of one’s Social Security income will be sheltered from taxes, many folks don’t realize that ANY of that check from the government is potentially taxable.  If they didn’t plan on that, it might sink their retirement budgets.  Consider hypothetical married couple, Joe and Bridget, aged 73 and 72, respectively.

 
2016 Tax Year calculation to determine if Social Security benefits are taxable:

$9000.00         (50% of Joe’s Social Security benefit of $1500/month x 12 months)
$8700.00         (50% of Bridget Social Security benefit of $1450/month x 12 months)
$5500.00         (Bridget’s income from a part-time teaching job)
$ 250.00          (Interest income)
$6073.00         (Joe’s RMD based on the IRS table and his IRA account balance of $150,000 on December 31, 2016)
$6445.00         (Bridget’s RMD based on the IRS table and her IRA account balance of $165,000 on December 31, 2016)
________
$35,968.00      Since this couple files jointly, and this amount is over $32,000 but less than $44,000, half of their Social Security income will be taxable that year.

OMG, indeed. 

Next week I’ll offer some thoughts on tax planning for retirement.  Remember, you
should consult a tax professional to assist in your particular situation.  This blog is
intended only to provide general insights and opinion on personal financial matters.
 
Until next time,
 
Roger

“Be sure you know the condition of your flocks, give careful attention to your herds;
for riches do not endure forever, and a crown is not secure for all generations.”
Proverbs 27:23, 24 NIV®*


*Scripture quotations taken from the Holy Bible, New International Version® NIV®
Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™
Used by permission.  All rights reserved worldwide.

Friday, April 21, 2017

Run to the Danger


I read it in the news again last week: a policeman heard gunshots and ran toward the building from which they were fired—a public servant running TO the danger and not away from it.  These stories always cause me to wonder if in similar circumstances I would respond the same way, braving the hazard and thinking less of personal safety than of eliminating the danger.
 
Courage comes in many forms.  While a policeman may confront physical peril a politician, for example, may be called upon to exhibit moral courage to vote according to his conscience rather than the way that is most likely to get him reelected.
 
What would financial courage look like?  Your first impulse might be to say “investing”, and indeed, buying stocks and bonds with the hope they will grow in value and not diminish does take some bravery.  But you have plenty of company in the stock market, and it’s that fellowship, the element of “others are doing it, so it must be reasonably safe”, or perhaps “well if I go down so does everyone else” that makes investing something other than courage.  No, courage is personal and solitary.  It involves confronting the risk of losing something only you possess.  It means being the responsible party, the one whose action will make the difference.  For someone deep in debt and maybe in peril of bankruptcy, financial courage would mean running toward his creditors.
 
What do I mean by “running toward one’s creditors”?  Consider the stereotypical picture of someone being hounded by bill collectors: he won’t answer his phone or return voicemail messages.  He doesn’t open his mail and might even move or otherwise change his address—all in an effort to avoid his creditors.  Even someone who acknowledges his debts and is not trying to shirk the responsibility of paying his overdue bills will engage in this behavior because it is painful, embarrassing, to be reminded of his situation and how he got there (personal irresponsibility, an untoward life event, etc.).  But it is in just this situation that he should summon financial courage, braving the pain and embarrassment, and not only stop avoiding the creditors but seek them out, ideally before they come seeking him.
 
If you ever find yourself in that situation, as soon as you realize you will not be able to pay a bill on time or will miss a payment on a loan, contact the entity to which the money is owed.  Truthfully acknowledge the obligation but just as truthfully lay out your current budget challenges, explaining why you cannot meet the payment schedule, and then offer an alternative (e.g. “I can resume regular payments in two months”; or, “I don’t anticipate being able to make the payment of X dollars per month but I can pay Y dollars”).  Always try to go in with an alternative plan.  You can ask for a reduction in the interest rate, a waiver of penalty fees…whatever you think will get you through the immediate crisis.
 
This approach sets you apart from the crowd.  Creditors and debt collectors are accustomed to people avoiding them and trying to evade financial responsibility, and they usually welcome the client who owns the problem and doesn’t make them chase him.  It should make for a less antagonistic encounter.  This enhanced status means you are more favorably situated to negotiate.  You have probably saved the creditor many man-hours or the expense of hiring a debt collector (and consequently getting just pennies on each dollar of the debt) by coming to him first, so you have created a more trusting relationship.  Plus, you are grabbing the initiative by offering a payment plan that you carefully considered and know that you can handle.  It makes you look more responsible.
 
There’s no guarantee that some adjustments made to your debt won’t be reflected in a lower credit score.  But you have tackled your problem head-on, hopefully negotiated a more manageable payment plan (and stuck to it…very important!), and are now headed for better times.  You are one of the few who showed financial courage.
 
Until next time,
 
Roger
 
“Before you are dragged into court, make friends with the person who has accused you of doing wrong.  If you don’t you will be handed over to the judge and then to the officer who will put you in jail.  I promise you that you will not get out until you have paid the last cent you owe.”  Matthew 5: 25, 26 CEV

Friday, April 14, 2017

Does the IRS Have a Sense of Humor?


Almost everyone talks taxes in the middle of April; and I do plan to write about taxes in future posts on this blog, maybe as soon as next week.  But between now and then, your federal income tax is due.  It’s too late to be thinking of tax strategy for the 2016 tax year, so take a break and laugh or cry as you ponder these quotes about taxes.

“Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?”  Peg Bracken

“The taxpayer—that’s someone who works for the federal government but doesn’t have to take the civil service examination.”  Ronald Reagan

“If you make any money, the government shoves you in the creek once a year with it in your pockets, and all that don’t get wet you can keep.”  Will Rogers

 Did you ever notice that when you put the words “The” and “IRS” together, it spells “THEIRS”?  Unknown

 Taxes: Of life’s two certainties, the only one for which you can get an automatic extension.  Unknown

 “The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it.  If it keeps moving, regulate it.  If it stops moving, subsidize it.”  Ronald Reagan

“Be thankful we’re not getting all the government we’re paying for.”  Will Rogers

 “It’s about ten times the size of the Bible, and unlike the Bible, contains no good news.”  Don Nickles, about the Internal Revenue Code

 “The wages of sin are death, but after they take the taxes out, it’s more like a tired feeling, really.”  Paula Poundstone

 “If your biggest tax deduction was bail money, you might be a redneck.”  Jeff Foxworthy

 “An unlimited power to tax involves, necessarily, the power to destroy.”  Daniel Webster

 “Whatever you tax, you get less of.”  Alan Greenspan

 “We have a system that increasingly taxes work and subsidizes nonwork.”  Milton Friedman

 “Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay.”  Milton Friedman

 “Isn’t it appropriate that the month of the tax begins with April Fool’s Day and ends with cries of ‘May Day!’?”  Rob Knauerhase

 “Render therefore unto Caesar the things that are Caesar’s and unto God the things that are God’s.”  Jesus Christ

“Invention is continually exercised, to furnish new pretenses for revenues and taxation.  It watches prosperity as its prey and permits none to escape without tribute.”  Thomas Paine

 “The IRS spends God knows how much of your tax money on these toll-free information hot lines staffed by IRS employees, whose idea of a dynamite tax tip is that you should print neatly.  If you ask them a real tax question, such as how you can cheat, they’re useless.”  Dave Barry

Did you like these?  If so, you may find more at…..the IRS website.  Yes, it’s true; the taxes you forked over to Uncle Sam helped pay for a bureaucrat to compile quotes about taxes.  See their list by clicking here.  Can you discern a slightly different tenor to the quotes they included compared to the ones I listed?

So don’t ever say the IRS didn’t give you anything.  And by all means don’t tell them I compiled this list and sent it out free.  I might get hit with a surtax on unrealized income, or something.

Until next time,

Roger

 
“You must also pay your taxes.  The authorities are God’s servants, and it is their duty to take care of these matters.  Pay all that you owe, whether it is taxes and fees or respect and honor.”   Romans 13:6,7 CEV

Friday, April 7, 2017

First You Need a Nest

Use of the term “nest egg” as a reference to something put aside for later has been traced back to the seventeenth century.  It is a common expression now for retirement savings.  Unfortunately, too few people give much thought to the first prerequisite for having a secure nest egg: having a nest.
 
That lesson always comes home to me this time of year as spring songbirds show up at the feeders in my yard, and I start seeing signs of their nest-building in the trees and shrubs nearby.  Without fail I also find cracked and crushed bird eggs lying on the ground.  For some reason, the egg was not secure in the nest and was lost.
 
In the same way, the financial nest egg that so many people spend a lifetime accumulating is too often lost due to a poorly engineered nest—the non-financial aspects of your life, such as your happiness, your health, your relationships. 
 
How might your nest egg tumble and break?
 
Improper incubation (Health): “If you have your health you have everything.”  It’s a cliché and perhaps not literally true, but without health you are definitely poorer and will likely drain your retirement account much more quickly and not enjoy doing so.  Cultivating good health habits NOW will serve you well later.  No, the extra sleep you may grab in retirement cannot reverse the ill effects of your too-short nights now.  Yes, that added weight is harder to lose as you age.  And sitting around the house all day in proximity to a stocked refrigerator instead of being somewhere on the job will not help.
 
Not singing your song (Happiness):  Will you be happy not being employed?  If you are seeing retirement as an escape from something you dislike rather than a transition to doing something you enjoy, then you will not likely be happy and fulfilled in retirement.  Develop a hobby, or pick one up that you abandoned years ago.  Start volunteering for a cause you believe in; don’t wait until you are out of the workforce.  Or maybe start laying the groundwork for a second career.  Work in retirement?!  It’s not work if you enjoy it.  And if you were late getting started saving for retirement, a part-time gig can make your Act II more financially secure.
 
Failure to fly (Spending):  For decades you diligently built that retirement account.  Now do you have a plan to spend it?  Or are you too scared you will run out of money?  Our attitude toward money is shaped largely in childhood and the teen years or sometimes by a traumatic event in adulthood;  and if that has left you saddled with insecurities about money it will freeze you into inaction, unable to transition from saving a nest egg to pleasurably spending it.  Will you become a miser and just stay at home?  Will you hug that nest egg so close that you crush it and leave yourself and those closest to you unhappy?
 
No flock (Relationships):  Reporter Billy Baker at the Boston Globe wrote an article last month about men becoming more isolated and lonely as they move into middle age and beyond because they don’t give attention to friendships.  Will leaving the workplace spell the end of whatever outside-the-home interpersonal relationships you have?  It’s a vital consideration.  Mr. Baker cited medical experts who rate loneliness as a higher risk factor for early death than smoking or obesity.  Die early and that nest egg falls out of your nest—and into someone else’s.
 
Click here to read Mr. Baker’s article.
 
That last point hits home for me since I fall into that demographic.  Guys, read the article (you, too, ladies, if you want to help your partner; just be cautious because your guy is likely to be sensitive about it).  Why do women generally outlive men?  Is it at least partially because they are better at maintaining relationships?  Are we men too macho to admit that we need each other and are lonely without company?  Hold on to your friends, or reconnect with ones you’ve not seen in a while.  Never throw away a good friendship.
 
Until next time,

Roger
 

“Sometimes you can become rich by being generous or poor by being greedy.” Proverbs 11:24 CEV
 

“Just as iron sharpens iron, friends sharpen the minds of each other.” Proverbs 27:17 CEV