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OBLIVIOUS INVESTOR
Articles are published Monday and Friday. You can unsubscribe at any time. Firstly, while this is not exactly an estate planning tool, simplifying your finances (e.g., consolidating accounts, minimizing the number of investment holdings, automating payment of INDIVIDUAL TIPS VS. TIPS FUNDS TIPS (Treasury Inflation-Protected Securities) are U.S. government bonds that provide a specific after-inflation return (as compared to “nominal” bonds which provide a specific before-inflation return). Here’s the description of how they work, right from the source: “The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. IS IT BETTER TO BE TAXED AS AN EMPLOYEE OR INDEPENDENT On the other hand, one advantage of independent contractor tax treatment is that your work-related expenses will be business expenses, which will save you money on income tax as well as Social Security and Medicare taxes. In contrast, as an employee, unreimbursed work expenses are generally itemized deductions, meaning that you getno value
ESTIMATED TAX PAYMENTS AND ROTH CONVERSIONS Yes, a Roth conversion could cause you to need to make estimated tax payments. There are two ways to avoid penalty for underpayment of estimated taxes. First, you will not owe any penalty if your total tax for the year, minus your withholding, minus your refundable credits is less than $1,000. And your estimated tax payments were each of the HOW CAN THERE BE “MORE SELLERS THAN BUYERS”? Yes, you’re absolutely right. When people talk about there being more buyers than sellers (or vice versa) over a given period, they’re using sloppy wording, for two reasons. First, it’s not the number of buyers and sellers that matters, but rather with the number of shares that people want to buy/sell. (After all, one huge buyer candrive
WHICH SHARES SHOULD I SELL WHEN USING THE SPECIFIC A reader writes in, asking: “With regard to selecting a ‘cost basis method’ for a brokerage account, Vanguard and others say that the specific identification method may allow for ‘greater tax efficiency’ than other methods. WHAT COUNTS AS COMPENSATION (EARNINGS) FOR IRA In plain language, that means that the following count as compensation: Wages/salary, Commissions, Net earnings from self-employment, Scholarship or fellowship income if the income is reported in Box 1 of Form W-2 (i.e., reported as wages), Taxable alimony and separate maintenance (i.e., for divorces that became finalized prior to 2019), and. HOW FAR DOES $300,000 OF RETIREMENT SAVINGS GO This week I came across a recent survey by Wells Fargo which found (among other things) that when middle class Americans were asked how much savings they would need in order to support themselves in retirement, the median reply was just $300,000. That’s a much lower savings target than you typically hear discussed in financial media. And the press release about the survey sure seemed to SOCIAL SECURITY STRATEGIES WITH DIFFERENT-AGE SPOUSES If the spouses are more than 8 years apart, that strategy isn’t an option, because by the time the lower earner reaches age 62 (the minimum age to file for retirement benefits, which the lower-earning spouse must do in order for the higher earner to file for spousal benefits), the higher-earning spouse will already be age 70 andcollecting
SOCIAL SECURITY EARNINGS TEST WITH SPOUSAL BENEFITS The earnings test can still reduce Betty’s benefit as a spouse even though she has reached her full retirement age. The key point is that Arthur is the one with earnings, and he hasn’t reached his full retirement age. Example 2: Connie is 68, and her husband Daryl is 64. Daryl is receiving a spousal benefit based on Connie’s work record.OBLIVIOUS INVESTOR
Articles are published Monday and Friday. You can unsubscribe at any time. Firstly, while this is not exactly an estate planning tool, simplifying your finances (e.g., consolidating accounts, minimizing the number of investment holdings, automating payment of INDIVIDUAL TIPS VS. TIPS FUNDS TIPS (Treasury Inflation-Protected Securities) are U.S. government bonds that provide a specific after-inflation return (as compared to “nominal” bonds which provide a specific before-inflation return). Here’s the description of how they work, right from the source: “The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. IS IT BETTER TO BE TAXED AS AN EMPLOYEE OR INDEPENDENT On the other hand, one advantage of independent contractor tax treatment is that your work-related expenses will be business expenses, which will save you money on income tax as well as Social Security and Medicare taxes. In contrast, as an employee, unreimbursed work expenses are generally itemized deductions, meaning that you getno value
ESTIMATED TAX PAYMENTS AND ROTH CONVERSIONS Yes, a Roth conversion could cause you to need to make estimated tax payments. There are two ways to avoid penalty for underpayment of estimated taxes. First, you will not owe any penalty if your total tax for the year, minus your withholding, minus your refundable credits is less than $1,000. And your estimated tax payments were each of the HOW CAN THERE BE “MORE SELLERS THAN BUYERS”? Yes, you’re absolutely right. When people talk about there being more buyers than sellers (or vice versa) over a given period, they’re using sloppy wording, for two reasons. First, it’s not the number of buyers and sellers that matters, but rather with the number of shares that people want to buy/sell. (After all, one huge buyer candrive
WHICH SHARES SHOULD I SELL WHEN USING THE SPECIFIC A reader writes in, asking: “With regard to selecting a ‘cost basis method’ for a brokerage account, Vanguard and others say that the specific identification method may allow for ‘greater tax efficiency’ than other methods. WHAT COUNTS AS COMPENSATION (EARNINGS) FOR IRA In plain language, that means that the following count as compensation: Wages/salary, Commissions, Net earnings from self-employment, Scholarship or fellowship income if the income is reported in Box 1 of Form W-2 (i.e., reported as wages), Taxable alimony and separate maintenance (i.e., for divorces that became finalized prior to 2019), and. HOW FAR DOES $300,000 OF RETIREMENT SAVINGS GO This week I came across a recent survey by Wells Fargo which found (among other things) that when middle class Americans were asked how much savings they would need in order to support themselves in retirement, the median reply was just $300,000. That’s a much lower savings target than you typically hear discussed in financial media. And the press release about the survey sure seemed to SOCIAL SECURITY STRATEGIES WITH DIFFERENT-AGE SPOUSES If the spouses are more than 8 years apart, that strategy isn’t an option, because by the time the lower earner reaches age 62 (the minimum age to file for retirement benefits, which the lower-earning spouse must do in order for the higher earner to file for spousal benefits), the higher-earning spouse will already be age 70 andcollecting
SOCIAL SECURITY EARNINGS TEST WITH SPOUSAL BENEFITS The earnings test can still reduce Betty’s benefit as a spouse even though she has reached her full retirement age. The key point is that Arthur is the one with earnings, and he hasn’t reached his full retirement age. Example 2: Connie is 68, and her husband Daryl is 64. Daryl is receiving a spousal benefit based on Connie’s work record. INVESTING BLOG ROUNDUP: MOVING FROM GOOGLE/FEEDBURNER TO 4 hours ago · As I mentioned in the roundup article on 5/28, due to Google/Feedburner closing down their email newsletter service, I have had to switch to another provider (“follow.it”).. If you would like to continue receiving the newsletter, please do click the confirmation link that they provided if you have not yet done so. (When a publisher imports a list of subscribers, follow.it willtemporarily
8 LAZY ETF PORTFOLIOS I’m a firm believer that investing doesn’t have to be complicated and that it doesn’t have to require a great deal of ongoing effort.In that vein, I’m always drawn to “lazy portfolios.” The following are ETF renditions of some of the most popular lazyportfolios.
HOW TO CALCULATE AMORTIZATION EXPENSE Amortization is the process—very analogous to depreciation —in which an intangible asset’s cost is spread out over the asset’s life. Generally, intangible assets are amortized using the straight-line method over the shorter of: The asset’s legal life. Example: Kurt runs a NEW FREE, OPEN-SOURCE SOCIAL SECURITY CALCULATOR New Free, Open-Source Social Security Calculator. When deciding when to claim Social Security benefits, it can be helpful to use a calculator that runs the math for each possible claiming age (or, if you’re married, each possible combination of claiming ages) and reports back, telling you which strategy is expected to provide themost total
OBLIVIOUS INVESTOR
A reader writes in, asking: “Last month Facebook’s price fell because the new European privacy law hurt their advertising revenue. I always see the ‘experts’ saying that we shouldn’t invest in individual stocks because an ‘efficient market’ makes it impossible to pick winners and losers.OBLIVIOUS INVESTOR
A few years ago, I read and enjoyed Jeremy Siegel’s The Future for Investors.In the book’s appendix, Siegel provides a list of the original 500 companies in the S&P 500, as well as how they had performed up until the book was written (i.e., from 1957-2003). REBALANCING, WITH AN EYE ON TAX COSTS Rebalancing with new money (if you’re in the contribution stage) can bring your allocation back toward the target without tax costs. Rebalancing by changing the allocation within tax-advantaged accounts can bring the overall allocation back toward the target without tax costs. If you have plans for charitable giving, donating appreciated HOW TO CALCULATE DEPRECIATION EXPENSE x40% =. $864. Example (continued): Because the equipment is being depreciated over five years, Randy would record $1,296 (that is, 2,160 – 864) of depreciation expense in the fifth year in order to reduce the asset’s net book value to zero. Another GAAP-accepted method ofdepreciation is
HOW CAN THERE BE “MORE SELLERS THAN BUYERS”? Yes, you’re absolutely right. When people talk about there being more buyers than sellers (or vice versa) over a given period, they’re using sloppy wording, for two reasons. First, it’s not the number of buyers and sellers that matters, but rather with the number of shares that people want to buy/sell. (After all, one huge buyer candrive
HOW FAR DOES $300,000 OF RETIREMENT SAVINGS GO This week I came across a recent survey by Wells Fargo which found (among other things) that when middle class Americans were asked how much savings they would need in order to support themselves in retirement, the median reply was just $300,000. That’s a much lower savings target than you typically hear discussed in financial media. And the press release about the survey sure seemed toOBLIVIOUS INVESTOR
Dimensional Fund Advisors is known for its “factor” funds (e.g., funds with heavy tilts toward small-cap stocks and/or value stocks). Collectively, investors pulled $37 billion out of DFA funds last year, and the negative fund flows have continued in 2021. In a recent article for ETF.com, Allan Roth takes a look at why that might be thecase.
WHICH FUNDS TO TAKE RMDS FROM As of the end of last year, Joe’s IRA balance was $395,000. Using an RMD calculator, we can see that his RMD for this year would be $17,249 (which we’ll round to $17,250 for simplicity’s sake). Today, Joe’s portfolio looks like this: In his $100,000 taxable brokerage account: $55,000 in Vanguard Total Stock Market Index Fund, $45,000 in SIMPLIFYING A RETIREMENT BUCKET PORTFOLIO That is, a bucket strategy can be helpful if: It helps you to stick with your overall allocation (and glide path). For example, some people may find that the easiest way to settle on an allocation is to think of it in terms of buckets (e.g., “I want 3 years in short-term bonds, 7 years in intermediate term bonds, 15 years in stocks”). And MEAN VS. MEDIAN LIFE EXPECTANCY FOR RETIREMENT PLANNING The same relationship holds true for females at birth, for the same reasons. Specifically, according to the SSA’s 2014 period life table: Mean life expectancy at birth is 81 years, Median life expectancy at birth is roughly 84.5 years, and. Mode age at death is 89 years. Overall point being: a person’s life expectancy at birthsomewhat
SOCIAL SECURITY STRATEGIES WITH DIFFERENT-AGE SPOUSES If the spouses are more than 8 years apart, that strategy isn’t an option, because by the time the lower earner reaches age 62 (the minimum age to file for retirement benefits, which the lower-earning spouse must do in order for the higher earner to file for spousal benefits), the higher-earning spouse will already be age 70 andcollecting
WHICH SHARES SHOULD I SELL WHEN USING THE SPECIFICCOVERED SHARES COST BASISWHICH COST BASIS TO USEWHICH STOCK TO SELL FIRSTSELLING SHARES OF STOCKGIFTING SHARES COST BASIS A reader writes in, asking: “With regard to selecting a ‘cost basis method’ for a brokerage account, Vanguard and others say that the specific identification method may allow for ‘greater tax efficiency’ than other methods. WHAT COUNTS AS COMPENSATION (EARNINGS) FOR IRA In plain language, that means that the following count as compensation: Wages/salary, Commissions, Net earnings from self-employment, Scholarship or fellowship income if the income is reported in Box 1 of Form W-2 (i.e., reported as wages), Taxable alimony and separate maintenance (i.e., for divorces that became finalized prior to 2019), and. GETTING OUT OF THE MARKET IN RETIREMENT? A reader writes in, asking: “An acquaintance emailed recently to ask input on her portfolio. She said her ultimate goal is to get out of the stock market. This woman and her husband are both retired and in their early 70s I think, with no extreme wealth. I assume they are comfortable enough but live simply and likely need to watch expenses. WHEN IS THE BEST TIME OF YEAR FOR A ROTH CONVERSIONBEST TIME FOR ROTH CONVERSIONONE TIME ROTH CONVERSIONWHEN TO DO ROTH CONVERSIONTIMING OF ROTH CONVERSIONTIMING OF ROTH IRA CONVERSIONONE TIME ROTH IRACONVERSION
A reader writes in, asking: “Is there a time of a year when it’s best to do a Roth conversion? Perhaps close to the year end such that a person can estimate their income/AGI, or whenever the market is down in order to make the cost of conversion lower?”. If you have a high tolerance for hassle, doing a conversion ASAP at the beginning of SOCIAL SECURITY EARNINGS TEST WITH SPOUSAL BENEFITSSOCIAL SECURITY EARNINGS TEST 2017SOCIAL SECURITY EARNINGS TEST CALCULATORSOCIAL SECURITY QUESTIONS SPOUSAL BENEFITS2020 SOCIAL SECURITY EARNINGS TESTSOCIAL SECURITY EARNINGS PENALTY CALCULATORSOCIAL SECURITY SPOUSAL BENEFITS APPLICATION The earnings test can still reduce Betty’s benefit as a spouse even though she has reached her full retirement age. The key point is that Arthur is the one with earnings, and he hasn’t reached his full retirement age. Example 2: Connie is 68, and her husband Daryl is 64. Daryl is receiving a spousal benefit based on Connie’s work record.OBLIVIOUS INVESTOR
Dimensional Fund Advisors is known for its “factor” funds (e.g., funds with heavy tilts toward small-cap stocks and/or value stocks). Collectively, investors pulled $37 billion out of DFA funds last year, and the negative fund flows have continued in 2021. In a recent article for ETF.com, Allan Roth takes a look at why that might be thecase.
WHICH FUNDS TO TAKE RMDS FROM As of the end of last year, Joe’s IRA balance was $395,000. Using an RMD calculator, we can see that his RMD for this year would be $17,249 (which we’ll round to $17,250 for simplicity’s sake). Today, Joe’s portfolio looks like this: In his $100,000 taxable brokerage account: $55,000 in Vanguard Total Stock Market Index Fund, $45,000 in SIMPLIFYING A RETIREMENT BUCKET PORTFOLIO That is, a bucket strategy can be helpful if: It helps you to stick with your overall allocation (and glide path). For example, some people may find that the easiest way to settle on an allocation is to think of it in terms of buckets (e.g., “I want 3 years in short-term bonds, 7 years in intermediate term bonds, 15 years in stocks”). And MEAN VS. MEDIAN LIFE EXPECTANCY FOR RETIREMENT PLANNING The same relationship holds true for females at birth, for the same reasons. Specifically, according to the SSA’s 2014 period life table: Mean life expectancy at birth is 81 years, Median life expectancy at birth is roughly 84.5 years, and. Mode age at death is 89 years. Overall point being: a person’s life expectancy at birthsomewhat
SOCIAL SECURITY STRATEGIES WITH DIFFERENT-AGE SPOUSES If the spouses are more than 8 years apart, that strategy isn’t an option, because by the time the lower earner reaches age 62 (the minimum age to file for retirement benefits, which the lower-earning spouse must do in order for the higher earner to file for spousal benefits), the higher-earning spouse will already be age 70 andcollecting
WHICH SHARES SHOULD I SELL WHEN USING THE SPECIFICCOVERED SHARES COST BASISWHICH COST BASIS TO USEWHICH STOCK TO SELL FIRSTSELLING SHARES OF STOCKGIFTING SHARES COST BASIS A reader writes in, asking: “With regard to selecting a ‘cost basis method’ for a brokerage account, Vanguard and others say that the specific identification method may allow for ‘greater tax efficiency’ than other methods. WHAT COUNTS AS COMPENSATION (EARNINGS) FOR IRA In plain language, that means that the following count as compensation: Wages/salary, Commissions, Net earnings from self-employment, Scholarship or fellowship income if the income is reported in Box 1 of Form W-2 (i.e., reported as wages), Taxable alimony and separate maintenance (i.e., for divorces that became finalized prior to 2019), and. GETTING OUT OF THE MARKET IN RETIREMENT? A reader writes in, asking: “An acquaintance emailed recently to ask input on her portfolio. She said her ultimate goal is to get out of the stock market. This woman and her husband are both retired and in their early 70s I think, with no extreme wealth. I assume they are comfortable enough but live simply and likely need to watch expenses. WHEN IS THE BEST TIME OF YEAR FOR A ROTH CONVERSIONBEST TIME FOR ROTH CONVERSIONONE TIME ROTH CONVERSIONWHEN TO DO ROTH CONVERSIONTIMING OF ROTH CONVERSIONTIMING OF ROTH IRA CONVERSIONONE TIME ROTH IRACONVERSION
A reader writes in, asking: “Is there a time of a year when it’s best to do a Roth conversion? Perhaps close to the year end such that a person can estimate their income/AGI, or whenever the market is down in order to make the cost of conversion lower?”. If you have a high tolerance for hassle, doing a conversion ASAP at the beginning of SOCIAL SECURITY EARNINGS TEST WITH SPOUSAL BENEFITSSOCIAL SECURITY EARNINGS TEST 2017SOCIAL SECURITY EARNINGS TEST CALCULATORSOCIAL SECURITY QUESTIONS SPOUSAL BENEFITS2020 SOCIAL SECURITY EARNINGS TESTSOCIAL SECURITY EARNINGS PENALTY CALCULATORSOCIAL SECURITY SPOUSAL BENEFITS APPLICATION The earnings test can still reduce Betty’s benefit as a spouse even though she has reached her full retirement age. The key point is that Arthur is the one with earnings, and he hasn’t reached his full retirement age. Example 2: Connie is 68, and her husband Daryl is 64. Daryl is receiving a spousal benefit based on Connie’s work record. FINANCIAL PLANNING FOR THE POSSIBILITY OF COGNITIVE 1 day ago · A reader writes in, asking: “Would you consider writing a column on options for protecting oneself from being taken advantage of in dotage if there are no children to take over the finances? We’ve done wills and named beneficiaries for all accounts. Is there a document or trust or process toOBLIVIOUS INVESTOR
Get new articles by email: Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning.OBLIVIOUS INVESTOR
The following is an excerpt from my book Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.. In short, the difference between deductions, exemptions, and credits is that deductions and exemptions both reduce your taxable income, while credits reduce yourtax.. Exemptions
8 LAZY ETF PORTFOLIOS I’m a firm believer that investing doesn’t have to be complicated and that it doesn’t have to require a great deal of ongoing effort.In that vein, I’m always drawn to “lazy portfolios.” The following are ETF renditions of some of the most popular lazyportfolios.
NEW FREE, OPEN-SOURCE SOCIAL SECURITY CALCULATOR New Free, Open-Source Social Security Calculator. When deciding when to claim Social Security benefits, it can be helpful to use a calculator that runs the math for each possible claiming age (or, if you’re married, each possible combination of claiming ages) and reports back, telling you which strategy is expected to provide themost total
OBLIVIOUS INVESTOR
William Bernstein recently wrote an article for Money magazine where he proposes the idea that your emotional fitness is a huge factor in determining your investment results. Here’s how he explains it: are handing over their stocks, at cheaper prices, to the disciplined investors who began the race in good financial condition. HOW FAR DOES $300,000 OF RETIREMENT SAVINGS GO This week I came across a recent survey by Wells Fargo which found (among other things) that when middle class Americans were asked how much savings they would need in order to support themselves in retirement, the median reply was just $300,000. That’s a much lower savings target than you typically hear discussed in financial media. And the press release about the survey sure seemed to SELF-INSURING FOR LONG-TERM CARE From there, however, you would need to adjust the amount upward to account for the fact that when you’re self-insuring, you don’t get to take advantage of risk pooling. That is, to self-insure for long-term care, you would have to save as if you will need to pay for long-term care. In comparison, when using insurance, the cost isspread out
IS IT BETTER TO BE TAXED AS AN EMPLOYEE OR INDEPENDENT On the other hand, one advantage of independent contractor tax treatment is that your work-related expenses will be business expenses, which will save you money on income tax as well as Social Security and Medicare taxes. In contrast, as an employee, unreimbursed work expenses are generally itemized deductions, meaning that you getno value
SOCIAL SECURITY IS A YEAR-BY-YEAR (OR MONTH-BY-MONTH Social Security is a Year-by-Year (or Month-by-Month) Decision. For simplicity’s sake, writers and financial advisors often compare claiming Social Security at 62 to claiming at 70, in order to show the difference between the two extreme strategies. But in reality, the decision should be made step-by-step along the way.* My Books
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INVESTING BLOG ROUNDUP: PORTFOLIO MAKEOVERS If you’ve hung out on the Bogleheads forum very much, you’ve surely seen plenty of discussions in which a person comes in with a mess of a portfolio and forum members provide suggestions for how to clean it up: changes that would improve diversification, reduce costs,simplify, etc.
This week Morningstar is publishing a similar series from Christine Benz — providing portfolio makeovers for people in a range ofcircumstances.
* Getting a Second Opinion on a Stock-Heavy Portfoliofrom Christine Benz
* 50-Year-Old Asks: Is It Time for More Bonds?from Christine Benz
* Career Changer Plays Catch-Up on Retirement Savingsfrom Christine Benz
* Retired DIY Investor: Is It Time to Delegate?from Christine Benz
RECOMMENDED READING
* Marriage, Mental Health, and Moneyfrom Chris
Mamula
* The Intersection Between Income and Wealth and The Role ofFrugality
from Harry Sit
* The Virtues of a Minimalist Portfolio (Jim Dahle, interviewed by Christine Benz and Jeffrey Ptak) * It’s Open Enrollment Season for the Affordable Care Act from Margot Sanger-Katz * Does Late-Career Nontraditional Work Improve Retirement Security? from Matthew Rutledge and Gal Wettstein * Using Retirement Accounts to Reduce Estimated Tax Penalties Via Tax Withholding from Distributionsfrom Jeffrey Levine
Thanks for reading!
November 13, 2020
2021 TAX BRACKETS, STANDARD DEDUCTION, AND OTHER CHANGES The IRS recently published the annual inflation updates for 2021. If you have questions about a particular amount that I do not mention here, you can likely find it in the official IRS announcements: * Rev. Proc. 2020-45 contains most inflation adjustment figures, and* Notice 2020-79
contains figures relating to retirement accounts. SINGLE 2021 TAX BRACKETSTaxable Income
TAX BRACKET:
$0-$9,950
10%
$9,950-$40,525
12%
$40,525-$86,375
22%
$86,375-$164,925
24%
$164,925-$209,425
32%
$209,425-$523,600
35%
$523,600+
37%
MARRIED FILING JOINTLY 2021 TAX BRACKETSTaxable Income
TAX BRACKET:
$0-$19,900
10%
$19,900-$81,050
12%
$81,050-$172,750
22%
$172,750-$329,850
24%
$329,850-$418,850
32%
$418,850-$628,300
35%
$628,300+
37%
HEAD OF HOUSEHOLD 2021 TAX BRACKETSTaxable Income
TAX BRACKET:
$0-$14,200
10%
$14,200-$54,200
12%
$54,200-$86,350
22%
$86,350-$164,900
24%
$164,900-$209,400
32%
$209,400-$523,600
35%
$523,600+
37%
MARRIED FILING SEPARATELY 2021 TAX BRACKETSTaxable Income
MARGINAL TAX RATE:
$0-$9,950
10%
$9,950-$40,525
12%
$40,525-$86,375
22%
$86,375-$164,925
24%
$164,925-$209,425
32%
$209,425-$314,150
35%
$314,150+
37%
STANDARD DEDUCTION AMOUNTS The 2021 standard deduction amounts are as follows: * Single or married filing separately: $12,550 * Married filing jointly: $25,100 * Head of household: $18,800 The additional standard deduction for people who have reached age 65 (or who are blind) is $1,350 for each married taxpayer or $1,700 for unmarried taxpayers. IRA CONTRIBUTION LIMITS The contribution limit for Roth IRA and traditional IRA accounts is unchanged at $6,000. The catch-up contribution limit for people age 50 or over does not get inflation adjustments and therefore is still $1,000. 401(K), 403(B), 457(B) CONTRIBUTION LIMITS The salary deferral limit for 401(k) and other similar plans is unchanged at $19,500. The catch-up contribution limit for 401(k) and other similar plans for people age 50 and over is unchanged at $6,500. The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a solo 401(k)) is
increased to $58,000.CHILD TAX CREDIT
The child tax credit ($2,000 per child) and the related phaseout threshold ($200,000 of modified adjusted gross income, $400,000 if married filing jointly) do not get inflation adjustments. The portion of the credit that can be refundable (up to $1,400 per child) does receive inflation adjustments, but it is still $1,400 for 2021. CAPITAL GAINS AND QUALIFIED DIVIDENDS For 2021, long-term capital gains and qualified dividends face the following tax rates: * 0% tax rate if they fall below $80,800 of taxable income if married filing jointly, $54,100 if head of household, or $40,400 if filing as single or married filing separately. * 15% tax rate if they fall above the 0% threshold but below $501,600 if married filing jointly, $473,750 if head of household, $445,850 if single, or $250,800 if married filing separately. * 20% tax rate if they fall above the 15% threshold. ALTERNATIVE MINIMUM TAX (AMT) The AMT exemption amount is increased to: * $73,600 for single people and people filing as head of household, * $114,600 for married people filing jointly, and * $57,300 for married people filing separately.ESTATE TAX
The estate tax exclusion is increased to $11,700,000 per decedent. PASS-THROUGH BUSINESS INCOME With respect to the 20% deduction for qualified pass-through income, for
2021, the threshold amount at which the “specified service trade or business” phaseout and the wage (or wage+property) limitations begin to kick in will be $329,800 for married taxpayers filing jointly, $164,900 for single taxpayers and people filing as head of household, or $164,925 for married people filing separately. FOR MORE INFORMATION, SEE MY RELATED BOOK: _TAXES MADE SIMPLE: INCOME TAXES EXPLAINED IN 100 PAGES OR LESS_* See it on Amazon
.
TOPICS COVERED IN THE BOOK: * The difference between deductions and credits, * Itemized deductions vs. the standard deduction, * Several money-saving deductions and credits and how to make sure you qualify for them, * Click here to see the full list.
A TESTIMONIAL FROM A READER ON AMAZON: "Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!" * Read other reviews on AmazonNovember 9, 2020
INVESTING BLOG ROUNDUP: SOCIAL SECURITY — BECOMING A NEAR-TERMPROBLEM
It’s no secret that Social Security is insufficiently funded. For as long as I’ve been dealing with personal finance, the Trustees (of the Old-Age and Survivors Insurance Trust Fund) have been putting out an annual report that the fund is expected to deplete somewhere around 2033, give or take a couple of years. As Tara Siegel Bernard notes this week, the pandemic will have a negative effect on that projection as well, due to the reduced tax revenue this year (if a person is out of work, they aren’t paying payroll tax). The sooner we enact a solution, the less drastic the solution will have to be. * Social Security Seemed Like a Future Problem. The Virus ChangedThat.
from Tara Siegel Bernard OTHER RECOMMENDED READING * The 3 Breaks You Need to Take Every Day from Laura Vanderkam * Out of Work in America from The New York Times * Fidelity Allowing Fractional-Share ETF Ordersfrom
Harry Sit
* New Insights on Self-Employment of Older Adults from Joelle Abramowitz * Transitions from Career Jobs to Bridge Jobs and Retirement from John Ameriks et al. * ESG Investing and Public Pensions: an Updatefrom
Jean-Pierre Aubry et al. * New ETF Players May Bring Back the Price Wars from Claire BallentineThanks for reading!
October 30, 2020
WHAT IS A ROLLOVER IRA? (ROLLOVER IRA VS. TRADITIONAL IRA) A reader writes in, asking: > “At my primary brokerage firm I have two IRAs: a traditional IRA > and a rollover IRA that holds assets that came from my prior > employer’s 401-k plan. What is the difference between the two?” “Rollover IRA” is just a subcategory of “traditional IRA.” In other words, a rollover IRA _is_ a traditional IRA. Specifically, rollover IRAs are traditional IRAs that contain nothing but assets that came from an employer-sponsored plan. Because a rollover IRA is a traditional IRA, it gets all the same tax treatment as a normal traditional IRA. That is, distributions from the account are generally taxable; you can do a Roth conversion of the assets in the account; it’s treated the same way with regard toaggregation rules
as other
traditional IRAs; and so on. Rollover IRAs are designated as such (rather than just being called regular traditional IRAs) for two reasons. REASON #1: _some_ employer plans only accept rollovers from an IRA when the IRA contains only assets from another employer-sponsored plan. So keeping those assets separate in their own IRA (rather than combining them with other assets in a traditional IRA) could preserve your ability to roll those assets into a different employer plan at a later date. But fewer and fewer employer plans have this policy every year, so this distinction is becoming less relevant. REASON #2: assets in an employer-sponsored plan have unlimited creditor protection in bankruptcy under federal law. In contrast, IRA assets are only protected up to a certain limit ($1,362,800 as of 2020). If assets from an employer-sponsored plan are rolled into an IRA and kept separate (i.e., kept in a separate “rollover IRA”), they continue to receive that unlimited protection. If the assets get commingled with other assets in a traditional IRA, then they might lose that unlimited protection and “only” be protected up to the $1,362,800 limit. That said, some people make the case that if you have good records and could prove that the assets in question came from an employer plan, you would still have unlimited protection for those assets. Also, many states provide additional protection to IRA assets beyond what federal law provides. And of course most people’s IRA assets are never going to exceed the federal protection limit anyway. To summarize, a rollover IRA _is_ a traditional IRA and is taxed as such, but there are two reasons for keeping rollover IRA assets separate from other traditional IRA assets. It may well be the case, however, that neither of those two reasons is particularly applicable to your own circumstances.October 26, 2020
INVESTING BLOG ROUNDUP: EXPECTED AND UNEXPECTED RETURNS On Monday we discussed the expected return from the Vanguard Total Bond Market Index Fund.
This week I came across an article from esteemed economist Kenneth French discussing the expected and unexpected returns of Facebook, Amazon, Apple, Netflix, and Alphabet (i.e., Google). A key point about expected returns is that, except for a few specific types of investments (e.g., Treasury bonds that we intend to hold to maturity), we don’t actually expect to get the expected return. That is, we will almost always get more or less than the expected return (i.e., there will be some level of positive or negative _unexpected_ return — we just don’t know how much). * Investing in FAANG Stocks: Should You Expect Unexpected Returns?from Kenneth French
RECOMMENDED READING
* Multi-Year Guaranteed Annuities (MYGAs) from David Blanchett and Michael Finke * Robinhood Internal Probe Finds Hackers Hit Almost 2,000 Accounts from Sophie Alexander * Wells Fargo Fires Over 100 Employees for COVID-19 Relief FundMisuse
from Reuters*
* When You Have Enough, It’s Time to Help Othersfrom Paul Brown
* My Recent State Tax Auditfrom Jim Dahle
* Can Baby Bonds Shrink the Racial Wealth Gap?from Aron Szapiro
* New Climate Maps Show a Transformed United Statesfrom Pro Publica
*After the account fraud scandaland
auto insurance scandal,
I don’t understand why anybody still trusts this company with theirmoney.
Thanks for reading!
October 16, 2020
WILL A TOTAL BOND FUND KEEP UP WITH INFLATION? In reply to the previous article about fixed-income options in a low-yield environment,
a reader wrote in with the following question: > “Would Vanguard’s Total Bond Market fund (or the equivalent) be > expected to match inflation over time?” For a bond (or bond fund), the best estimate for its expected return is its yield. Right now, the SEC yield for Vanguard Total Bond Market Index Fund is 1.19% You can find this on either the “Overview”
or “Price & Performance”
tab on the fund’s page on the Vanguard site. But there are two important points of note here. FIRST POINT OF NOTE: that’s the expected return _over the fund’s average duration_. We can click over to the “Portfolio & Management”
tab to find the fund’s average duration: 6.5 years. So what we’re seeing here is that the fund’s expected return over the next 6.5years is 1.19%.
For periods shorter or longer than 6.5 years, there’s a greater degree of uncertainty about what the actual return will be. For shorter periods, 1.19% is still probably the best expected return estimate, but the actual return is going to be primarily affected by price movements (i.e., whether the bonds’ prices move up or down as a result of interest rate changes). See any of the following articles for a discussion of how bond prices respond to changes in interestrates:
* Bond Duration
* What Happens to Bond Funds When Interest Rates Go Up? * Why Do Longer-Term Bonds Have Greater Price Volatility? For longer periods, 1.19% is (again) likely the best guess, but we (again) have a lower degree of certainty. In this case, a major cause of the uncertainty is that, as we look at longer and longer periods, we simply don’t know what bonds are going to be in the fund’s portfolio. For example, imagine that we were concerned with the expected return over the next 20 years. Given the fund’s average effective maturity of 8.5 years, most of the bonds _currently_ held by the fund will have matured before the 20-year period is even halfway over. In other words, the return earned by the fund over the next 20 years will be hugely affected by the yields on bonds that it hasn’t even bought yet — and which haven’t even been issued yet. And since those bonds don’t even exist yet, we have absolutely no way to know what their yields will be. SECOND POINT OF NOTE: because this is a nominal bond fund, the 1.19% figure is a nominal yield (i.e., before inflation) and therefore a nominal expected return. A good way to get a rough estimate of the market’s expectation for inflation over a given period is to find the difference in yields between TIPS and nominal Treasury bond for the period in question. For example, since our expected return is for a 6.5-year period, we could look at the yields for 7-year TIPS and 7-year Treasuries.
Right now, the yield on 7-year TIPS is -1.10%, and the yield on 7-year Treasuries is 0.55%. That’s a difference of 1.65%, which tells us that the market is expecting inflation of _roughly_ 1.65% over thenext seven years.
So, in summary, with an expected nominal return of 1.19% over the next 6.5 years and expected inflation of roughly 1.65% over the next 7 years, we can say that the expected return for Vanguard Total Bond Market Index Fund is about 0.46% below inflation over the next 6.5years.
But that’s just an _expected_ return. The actual nominal return could be meaningfully different from the 1.19% figure. Or inflation could be meaningfully different from the 1.65% figure. And as discussed above, for periods shorter or longer than 6.5 years, there’s an even greater degree of uncertainty.October 12, 2020
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Hi. I'm Mike Piper, the author of this blog. I'm a CPA and the author of several personal finance books. The point of this blog is to show that investing doesn't have to be complicated. Click here to read more, or enter your email address in the blue form to the left to receive freeupdates.
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