Blog Archives

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? Part III

1/31/2014

In Part II of our social security benefits taxation discussion, we used a few examples. This post will continue the discussion.

Taxation Of Social Security As A Marginal Tax
Because the formulas to determine the amount of Social Security benefits to include in income are themselves based on income, the net result is that the inclusion of Social Security functions like a surtax on income while it is phasing in. And because of the high percentage of Social Security benefits that become taxable as income rises, the effect can be significant.

The earlier example of Jeremy and Martha
If the couple decides to take another $1,000 out of their IRA, this will increase their AGI by $1,000 to $29,000. As a result, it will also increase their provisional income by $1,000, which leaves them $4,000 above the threshold, resulting in $2,000 of their Social Security benefits being taxable. In the end, this means Jeremy and Martha end out with a total AGI of $31,000... their AGI increased by $1,500 even though they only took out a $1,000 IRA withdrawal due to the taxation of Social Security benefits! If the couple is subject to the 15% tax bracket, their additional tax liability on $1,500 of income is $225, which equates to a marginal tax rate of $225 (additional taxes) / $1,000 (additional income) = 22.5%. In other words, even though the couple is in the 15% tax bracket, their $1,000 IRA withdrawal is subject to a 22.5% marginal tax rate due to the formulas triggering taxation of Social Security benefits!

The earlier example of Donald and Sarah
If they decide to take out another $1,000 from their IRA, their provisional income will rise to $57,000, and another $1,000 x 85% = $850 of Social Security benefits will be subject to taxation. This increases their AGI by $1,850, which leads to $277.50 of additional taxes. The end result: Donald and Sarah face a $277.50 / $1,000 = 27.75% marginal tax rate even though they're in "just" the 15% tax bracket, due to their greater income triggering taxation of additional Social Security benefits at 85 cents on the dollar!

The earlier example of Paul and Megan
If they decide to take out another $1,000 from their IRA, their provisional income will increase to $71,000. However, since they are already capped at 85% of their maximum Social Security benefits being subject to taxation, their AGI simply increases to $59,000 + $20,400 = $79,400. In other words, because the maximum amount of Social Security benefits were already subject to taxation, another $1,000 of income simply increases their AGI by... $1,000! Assuming the couple is subject to the 15% tax bracket (which they should be after personal exemptions and itemized deductions), the additional taxes on $1,000 of income will be $150, which means their 15% tax bracket really does mean a 15% marginal tax rate!

The bottom line
The net result of these formulas is that while 50% of Social Security benefits are being phased in, the marginal tax rate is essentially boosted by 50%, from 15% to 22.5%. For those whose income exceeds the upper threshold, the marginal tax rate is boosted by extra 85%, from 15% to 27.75%! This essentially results in a tax bracket "bubble" that occurs as Social Security benefits are being phased in, until the maximum phase-in is reached and the client's tax rate returns his/her normal tax bracket again.

For individuals, the effect can be even more severe, see our next blog post.

0 Comments

Cool Little Known Tablet Tricks That Can Save You Time and Money

1/30/2014

0 Comments

These little known tablet tricks can save you time and money.

1. Use as a monitor
Look for a preinstalled "TV Remote" app to tap, or download one of the many free third party apps that can do the same thing.

2. Scanner on the go
Try the Handy Scanner Free app for Android, it has optical character recognition, so it makes the text editable and searchable.

3. Access home pc remotely
Try free apps such as Splashtop Remote Desktop to log in securely and remotely.

4. Use as a second monitor
Try Avatron's Air Display to turn your tablet into a wireless display for your PC.

5. Use as a phone
There are many free apps, such as ePhone, magicJack, NetTalk, Viber and others, that can enable you to make free VoIP calls.

0 Comments

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? Part II

1/30/2014

0 Comments

In Part I of our series, I said the taxation of social security benefits is important. Now I will get into some of the details.

Provisional Income
In order to determine the taxability of Social Security benefits, it's first necessary to calculate "provisional income" - a measurement of income used specifically for these purposes.

Provisional income is calculated as your total income (essentially the net amounts included on the front page of your tax return in calculating Adjusted Gross Income), plus any tax-exempt income (e.g., from municipal bonds) and excluded foreign income, plus one half of your Social Security benefits.

If this total exceeds $25,000 for individuals ($32,000 for married couples), then 50% of the excess is the amount of Social Security benefits that must be included in income. If provisional income exceeds $34,000 for individuals ($44,000 for married couples), then 85% of the excess amount is included in income. (Notably, if provisional income exceeds the 85% threshold amount, it must have already surpassed the 50% threshold amount, and there are some additional calculations to coordinate between the two, until a maximum of 85% of all Social Security benefits become taxable.)

Example 1.
Jeremy and Martha have an AGI of $28,000 (and no tax-exempt or foreign income), and receive combined Social Security benefits of $14,000. As a result, their provisional income is $28,000 + $7,000 (half of Social Security benefits) = $35,000, which is $3,000 above the $32,000 threshold. This means that 50% x $3,000 = $1,500 of their Social Security benefits are subject to taxation, which ultimately increases their AGI to $28,000 + $1,500 = $29,500.

Example 2.
Donald and Sarah have an AGI of $44,000 and receive combined Social Security benefits of $24,000. As a result, their provisional income is $44,000 + $12,000 = $56,000, which is $12,000 above the upper $44,000 threshold. This means that $16,200 of benefits are subject to taxation (which is technically 50% of the amount from $32,000 to $44,000 plus 85% of the excess above $44,000), which ultimately increases their AGI to $44,000 + $16,200 = $60,200.

Example 3.
Paul and Megan have an AGI of $58,000 and receive combined Social Security benefits of $24,000. As a result, their provisional income is $58,000 + $12,000 = $70,000, which is $26,000 above the upper $44,000 threshold. This means that $20,400 of benefits are subject to taxation (which is the maximum 85% of the $26,000 excess above the upper threshold, capped out at 85% of their total Social Security benefits), which ultimately increases their AGI to $58,000 + $20,400 = $78,400.

The bottom line
As income rises, more Social Security benefits are subject to taxation, until eventually a maximum of 85% of all benefits are included in income for tax purposes!

0 Comments

Are Online Rating Services Trustworthy?

1/30/2014

0 Comments

Q. Can I trust the top providers recommended on Angie's List?

A. There are a few famous online service rating companies, such as Angie's List, Yelp, and Google Plus Local. But when you search on them, are those companies coming up at the top of your search list at those companies trustable?

Unfortunately, based on a report by Consumer Reports, the answer is no!

Typically the top of the list providers are all paid ones, Yelp clearly indicates it with a small sign on the top right of the company's information, but not on Angie's List or Google Plus Local. Plus, many of the reviews are bogus.

In the end, the best route is to seek recommendations from someone you know or can verify.

0 Comments

Does Your Risk Tolerance Change With the Stock Market Performance

1/29/2014

1 Comment

Reading the above chart, one can probably draw the conclusion - investors' risk tolerance changes with the stock market performance, because the chart shows a high correlation between the two.

From your personal experience, you probably feel the same way - in a bull market, you are more risk tolerant, while in a bear market, you are intolerant of risks.

However, a recent study indicates, investors' risk tolerance level actually is quite stable, what changes is the perception of risk. See chart below:

What does this finding mean to you, as an investor?

Don't over-read any measurement of your risk tolerance, in other words, no need to change your portfolios due to risk tolerance score "wobble" in the midst of volatile markets. Of course, that doesn't mean taking a hands-off approach in the midst of market volatility - to the upside or the downside - but it does reinforce the conclusion that in the end, risk tolerance may be something that's stable enough to measure once as an anchor, but managing risk perceptions (or more importantly, mis-perception) is something need to continue to do.

1 Comment

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? Part I

1/29/2014

0 Comments

I will use several blog posts to discuss the taxation of social security benefits and its impact on one's retirement life.

How much Social Security Benefits Taxable?

Social Security benefits first became partially taxable in 1983, and the rule was expanded in 1993 to its current form. As the rules stand now, rising income can subject 50% or even 85% of Social Security benefits to taxation, until a maximum of 85% of all Social Security benefits are included in income for tax purposes.

Why It Matters?
The reason the taxability of Social Security matters is not just that it raises one's tax burden in the aggregate, but that it can boost one's marginal tax rate far above the tax bracket alone; those in the 15% tax bracket may actually face marginal rates of 22.5% to 27.75%, and those in the 25% tax bracket can see marginal tax rates spike as high as 46.25%!

What Are the Consequences?
Fortunately, this rate eventually reaches a cap - when the maximum amount of Social Security benefits are being taxed. Nonetheless, while you are going through the income levels where Social Security phases in - which can begin with as little as $25,000 of income for individuals - tax rates rise high enough that more proactive tax planning, from Roth conversions to the use of annuities and asset location strategies, becomes crucial to manage your overall tax exposure!

0 Comments

How to Make the Wise Decision? Try the WRAP Approach!

1/28/2014

0 Comments

Do you want to make a wise decision, in life or work?

The basic approach is relatively straightforward: you encounter a choice, analyze the options, make a choice, and then live with it. However, do you realize there are four "villains" that cause this approach to be ineffective?

You encounter a choice. But narrow framing makes you miss options.
You analyze your options. But the confirmation bias leads you to gather self-serving information.
You make a choice. But short-term emotion will often tempt you to make the wrong one.
Then you live with it. But you'll often be overconfident about how the future will unfold.

So what's the solution to these cognitive biases and behavioral challenges we face? Try the WRAP framework to deal with each of the four challenges:

Widen your options when framing the problem (to avoid narrow framing that makes you miss options).
Reality-check your assumptions (to avoid confirmation bias)
Attain distance from your emotions to see the choices more clearly
Prepare to be wrong (to avoid overconfidence), because the future is uncertain

I didn't make this up, actually, this "WRAP" framework - Widen frame, Reality-check, Attain distance, and Prepare to be wrong, forms the core of the book "Decisive". If you want to know the strategies to implement in each category, I recommend you getting this book from Amazon to read by yourself. It's worth it, just read the reviews posted at Amazon!

0 Comments

Why You Should Be Worried About Excellent Back-tested Results

1/28/2014

0 Comments

Q. My friend told me about an investment strategy that has been modeled and back-tested with excellent results. I am ready to jump in, or should I?

A. Before you jumping in, imagine the following -

You want to manage money using a quantitative, momentum-based investment strategy that is all the rage with today’s investors.

You have hired a fabulous quantitative analyst in the past year who has been tinkering with several investment models that would have delivered excellent returns over the past ten years based on back-testing the results.

You are allowed to publish those completely fictional returns as supplemental information as long as you disclose to investors that the returns are fictional… or supplemental.

You then put together a glossy, five-page marketing brochure which shows how you neatly sidestepped down markets over the past ten years and earned investors fabulous returns with little risk.

The supplemental track record is in large, bold print with multicolored explanatory graphs.

The disclaimer showing the actual six-month Global Investment Performance Standards (GIPS) compliant track record and the statement that the large print multi-year track record is hypothetical and back-tested is found in very small print at the bottom of page five.

You then hire a sales force that does a terrific job of simplifying the “complex,” “proprietary,” and “scientific” investment process behind the amazing returns, using language effective with investors yearning for mystical success in dangerous markets ...

and you raise a few billion dollars of assets under management before launch.

This is a terrific way to make a living… except for the fact that you never actually managed money using the fictional strategy!

Institutional investors avoid hypothetical back-tested returns like the plague. They know that investing in a strategy that is only successful in the rear-view mirror is completely different than investing with a money manager who earned their returns in “real-time.”

It turns out that quantitative investment strategies are notorious for working until they don’t work anymore.

The typical reason that quant strategies stop working in real-time is that other investors see what is working in the market and arbitrage away any excess returns by piling into the same strategy. In many instances the quant model is tinkered with and changed after short periods of underperformance. Or, the money manager simply “overrides” the model when it inevitably stops working in untested or unprecedented market conditions.

As a student of rhetoric and persuasion, I know that long columns of performance numbers, coupled with colorful charts and graphs can be very persuasive. I wonder if consumers of investment management who are desperately trying to make an informed investment decision are aware of just how misleading the numbers can be. And, I wonder when consumers will be educated enough to avoid comparing our actual, GIPS compliant track record of performance earned in real time and with the same analysts that we employ today, with fictional returns based on “too good to be true” back-tested nonsense.

0 Comments

The Mega Trend That is Changing the Personal Finance Industry

1/27/2014

0 Comments

Technology advancement in the Financial Planning industry is commoditizing what used to be premium financial services and products.

For example, tools like SigFig and Jemstep are making it easier for consumers to analyze an existing portfolio and get immediately actionable advice about what can be improved, at a price as low as $10.

The end result? Consumers will be the winner! Equipped with better insights, every consumer could use "robo-advisors" such as Betterment and Wealthfront to construct the entire asset-allocated passive strategic portfolio for a mere 0.25% or less.

0 Comments

A Different View If You Change Your Perspective

1/27/2014

0 Comments

Frog

Vase

Angels

Old Lady

Horse

Girls

Evils

Young Lady

0 Comments

How to Select Target Date Retirement Funds?

1/27/2014

0 Comments

Q. I am considering target date funds so the portfolio holdings are adjusted automatically as I approach my retirement year. How do I pick the right target date funds?

A. Generally speaking, a target date retirement fund automatically adjusts the stock/bond holdings when approaching its predetermined target date, so an investor can sit back and relax.

Unfortunately, you pay a price for it. And there are a few other considerations as well.

First, your investment style
Are you an active or passive investor? Most target date fund investors prefer their target date funds hold low cost index funds. That's the reason Vanguard's target retirement funds are very popular nowadays.

Second, consider expenses
Vanguard's target retirement funds have the lowest expenses. Followed by Fidelity's Freedom Index funds. However, investors typically forget to consider the holding funds' expenses which you have to pay for as well. So target date fund expenses are actually not low, if you are DIY investor.

Third, end stage holdings
How the target date fund invests when it approaches the target date is also important. Most funds will put more holdings in bonds, however, Morningstar studies indicate the funds that still hold a relatively higher portion in stocks have a higher chance for a better return well into your retirement time, such as when you approach the age of 95. This is also consistent with a recent academic finding.

0 Comments

How to Improve My 401(k) Return?

1/27/2014

0 Comments

Q. My 401(k) had a great year in 2013, what can I do to get a good return in 2014?

A. 2013 is the best performing year in the past 10 years, however, there are still a few ways you can pay attention to in order to improve your 401(k)'s return.

a. Increase your contribution
Many companies provide automatic enrollment for 401(k) accounts, but there is typically a limit, such as 3% of salary. If you can contribute more, you need to make manual change in your HR system.

b. Get the maximum employer match
Most employers have picked up or even increased their employee 401(k) contribution match in 2013 or 2014, make sure you get it. If you have more money, you can put more, if you haven't reached the allowed 401(k) contribution ceiling in 2014: $17,500. If you are older than 50, you can have additional $5,500 catch up contribution in 2014.

c. Rebalance your portfolio
Especially for target date retirement fund, if it is a core holding in your 401(k) account, you need to double think, because some of such target date funds are loaded with more expensive funds. And some are loaded more cash or bonds, which are supposed to be safe but chances are not in 2014.

d. Check your expenses
Even 1% expense in your 401(k) holding could create a big difference to your available retirement use fund. The best way is to use low cost index funds, or at least keep them as the core holding of your 401(k) portfolio.

0 Comments

Why Bitcoin Matters

1/26/2014

0 Comments

I found this article from Marc Andreesen (head of the noted technology venture capitalist firm Andreesen Horowitz) on NYtimes interesting.

Andreesen views Bitcoin in a similar context to personal computers in 1975 and the Internet in 1993 - an emerging new technology that idealists love, the establishment scorns, and technologists are transfixed by, that ultimately becomes mainstream with profound effects.

To understand why, Andreesen explains why Bitcoin is such a big deal breakthrough from the computer science perspective: it solves the so-called "Byzantine Generals Problem" [BGP]. What is the BGP? It originates from a paper that examined the hypothetical problem of how in the Byzantine era generals surrounding a city could cooperate battle plans when they can only communicate by messengers, one or more of whom may be traitors trying to confuse them; in essence, the issue is how to establish trust between otherwise unrelated parties over an untrusted network, whether generals laying siege to a city or people communicating via the Internet. Bitcoin solves the BGP problem, which means for the first time, one Internet user can transfer a unique piece of digital property to another Internet user, guaranteed safe and secure, where everyone knows the transfer has occurred and no one can challenge its legitimacy. Ultimately, this could allow the transfer of significant digital property - digital signature or contracts, digital keys, digital ownership of physical assets, or digital ownership of stocks, bonds, and money - without requiring a central intermediary like a bank or broker.

The removal of the intermediary matters so much not just for security purposes, but because it means all of these transfers can occur with little or no fees, in a world where existing payment systems often charge fees of 2% to 3% (think credit card interchange fees that vendors/businesses typically absorb).

While so far Bitcoin has been incredibly volatile and speculative, Andreesen notes that its speculation may actually be accelerating its ability to be adopted mainstream as well, and even if it's not stable as a currency it may still be effective as a payment system, not only because it has near-zero costs, but also because it eliminates the risk of credit card fraud (for instance, the Target credit card hack couldn't have happen with a Bitcoin currency system). In addition, Bitcoin also facilitates international transactions and money transfers (the system isn't US specific), and micropayments (think $1 or even $0.01 transactions, feasible with a no-fee payment system).

As Andreesen notes, there is no shortage of regulatory and other issues that still have to be addressed with Bitcoin, but the bottom line is that Bitcoin is a way, way bigger deal than "just" about some new speculative digital crypto-currency.

0 Comments

Should You Increase Exposure to Stocks in Your Retirement Portfolio?

1/26/2014

0 Comments

Q. I know the convention wisdom is to reduce retirement portfolio's exposure to stocks gradually. However, I wonder with the increased longevity, how do I ensure my retirement portfolio can keep growing to maintain my lifestyle?

A. The traditional asset allocation is a L-shape in terms of stock exposure as you age, however, a recent study indicates the optimal asset allocation is probably a U-shape!

The Journal of Financial Planning research article finds that the optimal outcome is actually to increase equity exposure in retirement. Notably, though, this doesn't mean increasing the exposure up to 100% in equities. Instead, the point is that cutting equity exposure lower and then slowly gliding back to the original may be better.

For instance, a portfolio that starts at 30% in equities and is rebalanced for an additional 1% per year (such that it climbs to 60% in equities after 30 years) performs better than a 60/40 stock/bond portfolio that is just rebalanced to 60/40 every year, even though it has less in average equities throughout retirement and less in equities every year except the last (when it finally gets 'back' to 60%).

The authors test various stock/bond return assumptions, and the benefits for this "rising equity glide path" are modest but consistent, though the best glidepaths vary depending on return assumptions (not surprisingly, more conservative equity returns lead to lower overall equity exposures).

If returns are low enough and/or withdrawals are high enough, eventually the optimal portfolio is simply to own significant equity exposure and 'pray' for a good outcome, but for those consuming at reasonable 'modest' withdrawal rates relative to their wealth and returns, the rising glidepath effect holds.

The strategy is framed as a "heads you win, tails you don't lose" outcome, as in situations where equity returns are bad early on and better later the strategy wins (more conservative during the bad years, and dollar-cost-averaging into equities in the later years that are better), while if equity returns are good early on the retiree will be so far ahead that the retirement can't fail even if the bear market comes later with slightly higher equity exposure.

Overall, the research implies that the optimal lifetime asset allocation may look less like a flat line or a steadily declining one, and more like the letter U where equities are higher in the early years, glide down as retirement approaches, trough at the point of retirement, and then slowly start to slide up again in the later retirement years (albeit still not as high as they were in the early years).

0 Comments

Where to Get Best Value for Used Smartphones

1/24/2014

0 Comments

Q. Where can I get the maximum value from my used smartphone?

A. It's best to compare across the following companies' prices for your second hand smartphone and decide which one pays the highest price.

1. Amazon
2. Bestbuy
3. Gazelle
4. BuyMyTronics
5. eBay

Of these vendors, Amazon typically offers the best value, plus you probably already shop at Amazon, so you can easily use the points it offers. Let's use iPhone 4S 16GB as an example, see price comparison table below (note, these prices could change any time).

Vendor	Great	Good	Poor
Amazon	$140	$126	$95.5
Best Buy	$99.75	$95	$42.75
Gazelle	$100	$90	$40
Buy My Tronics	$105	$95	$31

0 Comments

A Few Common Term Insurance Riders

1/24/2014

0 Comments

What is a Rider
Riders are special additions to the policy provisions that offer benefits not found in the original contract, or that make adjustments to it. These special provisions are, in effect, attached to the policy. Riders are not necessarily found in all policies. Because all riders provide some kind of benefit to the policyowner, an extra premium may be charged for them.

Accelerated Death Benefit
Many companies offer an Accelerated Death Benefit Rider for life insurance policies. This rider may allow insureds who are diagnosed as terminally ill, or who require long term care, or permanent confinement in a nursing home, to collect all or part of the death benefit from the policy on their life while they are still alive. The rider specifies exactly how much of the death benefit may be available.

This can help relieve some of the financial burden caused by an insured's inability to continue working and the rising cost of health care.

Death benefits payable under the policy are reduced by any amounts paid under this rider.

Accidental Death Benefit Rider
An Accidental Death Benefit Rider may be added to a life insurance policy to provide for an additional amount to be paid to the beneficiary should the insured die as the result of an accident. This amount is usually the same as the death benefit of the policy and is, therefore, often referred to as double indemnity. The Accidental Death Benefit can be paid only when the insured dies as the result of an accident.

Accidental Death and Dismemberment Rider
An Accidental Death Benefit Rider to a life insurance policy may also include an additional benefit for Dismemberment. In that case, it's called an Accidental Death and Dismemberment (AD&D) Rider. The AD&D Rider usually provides that the accidental death benefit will also be paid if the insured loses sight in both eyes or suffers the loss of any two limbs. Sometimes a smaller amount may be paid for the loss of sight in one eye or the loss of one limb.

Disability Income Rider
The policyowner can secure a regular monthly income from the insurance company should he or she become totally and permanently disabled with a Disability Income Rider. Usually covering policyowners who are also the insured, the Disability Income Rider guarantees a specified level of income for either as long as the disability lasts or a time frame specified in the rider.

Guaranteed Insurability Rider
The Guaranteed Insurability Rider allows the policyowner to purchase additional coverage at certain stated intervals (either age or policy year options) without requiring further evidence of insurability. This coverage could be very significant when an insured has become uninsurable sometime after the initial policy was issued and would be otherwise unable to obtain additional coverage.

Level Term Rider
A Level Term Rider provides a fixed amount of term insurance that is added to a permanent life policy for a specified period of time. Generally, a level term rider is written for an amount that may be up to three or even five times the death benefit of the permanent policy to which it is attached.

Waiver Of Premium Rider
One of the most common riders attached to a life insurance policy provides for Waiver of Premium. Prompt premium payment is the major responsibility of the policyowner. Since premium payment is generally necessary to keep the policy in force, it follows logically that even if the policyowner becomes disabled, the premiums must still be paid or the policy will lapse.

Disability often results in the inability to work and earn income - income needed to make premium payments. The Waiver of Premium Rider exempts a disabled policyowner from making premiums payments during the term of the disability while keeping the policy in force.

How a waiver of premium rider works may vary from company to company and from policy to policy. The policyowner may be exempt from paying premiums while disabled, but there will likely be conditions, such as length of time of disability, that must be met first before benefits from this rider can be triggered.

0 Comments

Should I Invest in IRA If I Cannot Fully Deduct the IRA?

1/23/2014

1 Comment

Q. I cannot fully deduct the IRA, should I invest in it or not?

A. My opinion is, if your AGI is so high that you cannot fully deduct the IRA, do NOT invest in it, for the following reasons:

Not flexible to use.
When you need it, you find it hard to get. IRA has 10% penalty for distributions under age 59.

Tough regulation on distribution
When you don't need it, you may find you are under the gun of IRS because of the required minimum distribution rules (RMD).

Higher tax
Your gains will be taxed as ordinary income (chances are due to your high income, in your retirement stage, your annual income is still high, resulting in higher tax rates).

So why for the benefit of deferred tax, you suffer these big drawbacks, especially considering if you invest the money in a diversified portfolio for the long term, your dividend payout will be taxed at a much lower 15% dividend tax rate?

In addition, you have the freedom of using or not using the money at your will.

Of course, if you are thinking of using the backdoor conversion to contribute to the non-deductible IRA then convert to Roth IRA, it will be another discussion, see our discussion here.

1 Comment

6 Ways to Take Money Out of Retirement Fund Penalty-free

1/23/2014

0 Comments

Q. I have some emergency fund but I don't think it's enough. When can I take money out of my retirement fund penalty-fee?

A. You are correct that if you are under 59.5 years old, you will have to pay 10% penalty for any money you withdraw from retirement accounts.

But if you face one of the following 6 situations, IRS allows you to take money out of IRA account without any penalty.

1. Pay medical bill. If you have a huge medical bill (exceeding 10% of your AGI), you can take money out of retirement account (must happen in the same year as the medical bill happens) penalty free.

2. Permanently disabled. In this case, you don't have to wait till age 59.5 to start withdrawing money from IRA account penalty free, the evidence is simple - start receiving disability insurance benefits from social security bureau.

3. Pay medical insurance bill. If you have been unemployed for over 12 weeks, you can take money out of IRA to pay health insurance bill, penalty free.

4. You died. In this case, your beneficiary can take money out of your retirement account, but IRS has some strict limitations for this situation.

5. Down payment of a house. If you have not owned a property in the past 2 years, you can take some money out of IRA account to pay for down payment. The limit is $10,000 lifetime. Note, this applies to IRA only, not 401(k) account.

6. College education expenses. You can take money out of IRA account, but not 401(k) account, to pay for higher education expenses, this could be for yourself, your spouse, children, grandchildren, or even direct relatives.

0 Comments

Credit Cards That Offer 0% Interest Rate

1/22/2014

0 Comments

Q. Which credit card offers 0% interest rate so I can pay my bills slowly, without interest charges?

A. The following 5 credit cards are the most popular 0% rate credit cards, you can Google them and sign up by yourself.

1. Chase Slate
No balance transfer fee. 0% for 15 months. No annual fee.

2. Chase Freedom
0% for 15 months. $100 cash back bonus if you spend $500 within 3 months of account opening. 1% cash back on any purchase, 5% cash back on selected items each quarter. No annual fee.

3. American Express Blue Cash Preferred
0% for 15 months. Very attractive cash back rates: 6% on grocery shopping, 3% on gas, 1% on everything else.
Bad: 3% transfer fee, annual fee $75.

4. Discover Discover It
0% for 18 months. 1% cash back on everything, 5% cash back on selected items each quarter.

5. Citi Simplicity
0% rate for 18 months, but with 3% transaction fee.

0 Comments

Is Extended Warranty Worth it?

1/21/2014

0 Comments

Q. Should I spend $100 to buy an extended warranty for my new smartphone?

A. There is a rule of thumb to determine if an extended warranty for cars, iPads, smartphones, homes or any other luxury products is worth it or not -

if the cost of extended warranty exceeds 20% of the cost of the product, chances are - it is not a good investment!

The reasons are simple:

1. Most new products are required by law to provide some basic warranties already.

2. Many common causes of the problem - for example, you dropped your smartphone to the ground and broke it - wouldn't be covered by the warranty.

3. There is usually a deductible which means your actual cost will be higher.

4. All major credit cards already provide some sorts of warranties free, although it's not easy to file a claim with a credit card company for such coverage, see table below for more details.

Program	What It Covers	What's Not Covered	Product Exclusions	How to File a Claim	Cost
MasterCard Extended Warranty	Doubles the manufacturer's warranty or a purchased service contract, up to 12 months. Covers repairs or replacement up to $10,000	Normal wear and tear; damage from power surges; failures covered by product recalls; shipping costs; losses due to natural disasters; mold damage	Cars and boats; software; antiques; pets; plants; perishables; consumables; refurbished or used items; data storage media such as DVDs; real estate or permanently installed items such as ceiling fans	Call 800- MC-ASSIST within 30 days, then submit a signed claim form, credit card receipt and statement, itemized purchase receipt, manufacturers' warranty, plus an itemized repair estimate	Free
Visa Extended Protection	Doubles the manufacturer's warranty up to 12 months. Covers repairs or replacement up to $10,000. Maximum annual benefit: $50,000	Normal wear and tear; items lost during delivery; theft or damage from baggage handlers; losses due to natural disasters	Cars and boats; software; antiques; pets, plants; perishables; consumables; medical equipment; used items; items purchased for resale; real estate or permanently installed items like ceiling fans	Call 800-882-8057 or go to Visa.com/eclaims within 60 days. You'll need a claim form, your card receipt, itemized store receipt, manufacturer's warranty, any other applicable warranty, repair order, a description of the item and its serial number	Free
Discover Extended Warranty	Doubles the manufacturer's warranty or a purchased service contract, up to 12 months. Covers repairs or replacement up to $10,000. Maximum annual benefit: $50,000	Damage not covered by the original warranty; repairs at an unauthorized facility; normal wear and tear; power surge damage; shipping costs	Cars and boats; services; plants; software; perishables; used or refurbished items; items purchased for resale	Call 800-DISCOVER within 45 days and submit a claim form with the store receipt, Discover statement, manufacturer's warranty, any purchased warranty, and proof that you've repaired or replaced the broken item. (They'll reimburse you.)	Free
American Express Extended Warranty	Doubles the manufacturer's warranty up to 12 months. Covers repairs or replacement up to $10,000. Maximum annual benefit: $50,000	Damage from natural disasters or power surges, unless covered by manufacturer's warranty; failures covered by product recalls; shipping costs; maintenance; damages to computers or their components covered by a purchased service contract	Motorized vehicles; motorized devices used for landscaping, demolition or construction; real estate or motorized devices installed in a building; plants; pets; perishables; consumables; items purchased for resale	Call 800- 225-3750 or file at AmericanExpress .com/ onlineclaim within 30 days. You'll need to provide your card receipt, original store receipt, original manufacturer's warranty, service contract, a repair estimate and the defective item	Free

0 Comments

How Much Life Insurance Coverage Is Allowed for Non-working Spouse

1/21/2014

0 Comments

Q. I want to buy a Term insurance for my stay-at-home wife who has no income. How much coverage can I buy for her?

A. Generally, most insurers allow 50% of what a working spouse has in force. For example, if you have $1M life insurance in force, then non-working spouse would be eligible for $500K coverage.

However, it is possible for a non-working spouse has higher coverage, in order to obtain that, the client will be required to submit a written letter explaining the need for the requested face amount on the non-working spouse. Such needs could be mortgage, day care for the kids, school expense for the kids, etc. The final decision will be made by the insurer.

0 Comments

Gradually and Suddenly

1/17/2014

0 Comments

This is how companies die, how brands wither and, more cheefully in the other direction, how careers are made.

Gradually, because every day opportunities are missed, little bits of value are lost, customers become unentranced. We don't notice so much, because hey, there's a profit. Profit covers many sins. Of course, one day, once the foundation is rotted and the support is gone, so is the profit. Suddenly, apparently quite suddenly, it all falls apart.

It didn't happen suddenly, you just noticed it suddenly.

The flipside works the same way. Trust is earned, value is delivered, concepts are learned. Day by day we improve and build an asset, but none of it seems to be paying off. Until one day, quite suddenly, we become the ten-year overnight success.

This is the way it works, but we too often make the mistake of focusing on the 'suddenly' part. The media writes about suddenly, we notice suddenly, we talk about suddenly.

That doesn't mean that gradually isn't important. In fact, it's the only part you can actually do something about.

0 Comments

Is There a Product That is Safe and Earns Higher Than CD Rate?

1/16/2014

0 Comments

Q. I have about $50K that I don't need for about 5 years. I don't want to put it in stock market or bond market as both are very risky. However, I am not happy with the CD rate offered by the bank. Is there any other option?

A. For money that you know for sure you will need access to in a few years, safety is #1 concern. So you are prudent not to gamble the money in the stock and bond markets.

While CD or Money Market funds are good candidates, since your time horizon is a little longer than 2-3 years, I think MYGA (multi-year guaranteed annuity) is a potential consideration. Its name includes "annuity", but it is just like a CD, except instead of putting your money into a commercial bank's CD account, you are putting the money into an insurance company's account. As a return, the insurance company gives you the guaranteed rate for that period, and the rate is usually higher than CD rate. Plus, you don't have to pay tax on the interest until you take out the entire principle plus interest over the entire period.

0 Comments

Does Term Life Have Living Benefits?

1/16/2014

0 Comments

Q. Does a Term life insurance have living benefits?

A. It depends on the insurance carrier you choose.

Many Term insurance providers offer accelerated death benefit rider, some even offer it free.

What is Accelerated Death Benefit Rider
The rider acts as an advance on a portion of the policy’s existing cash value. It allows the policyholder to receive a portion of the death benefit while the insured is still alive, should the insured be diagnosed with a terminal illness.

What is the Eligibility
This rider offers a one-time election if a verified physician’s statement indicates the insured has a terminal illness which will result in death within 12 months.

How Does Accelerated Death Benefit Work
The rider is available at no premium charge on the issue date of the base policy. There is a fee only at the time of exercise. The rider accelerates up to 50 percent of the base death benefit, including any paid-up additional insurance purchased with dividends, up to $250,000. Premiums and gross cash values will not change as a result of the rider’s acceleration. The death benefit is reduced by the amount accelerated plus accumulated interest.

Some Examples
Banner Life Opt-Term
Maximum acceleration of death benefit is the lesser of $500,000 or 75% of the policy’s primary death benefit less any loans. This reduces the death benefit plus any accumulated interest.

Protective Custom Choice UL
Accelerates 60% of the policy’s death benefit or $1 million, whichever is less. This also reduces the death benefit plus any accumulated interest.

SBLI Term Product
Accelerates up to 50% of the base death benefit, up to $250,000. This also reduces the death benefit plus any accumulated interest.

Prudential has a good no cost option as well.
Living Needs Benefit. No cost to the client. It covers that same terminal illness as above, but also covers confinement to a nursing home for at least 6 months and expects to be permanently confined.

0 Comments

Backdoor Roth IRA Contributions - Part II

1/10/2014

1 Comment

In our previous blogpost, we discussed Roth IRA conversion and IRA Aggregation Rule, now we will discuss the step transaction doctrine.

Complication II. Step Transaction Doctrine
The step transaction doctrine is the legal principle that a series of related steps in a transaction should be taxed based on the overall economic nature of the transaction, not "just" based on the separate individual steps.

In the context of the contribute-then-convert strategy, the step transaction doctrine would examine the overall result of the transaction - dollars came out of a taxable account and ended up in a Roth IRA - and tax it according to the substantive result that occurred: that the taxpayer constructively made a contribution to a Roth IRA. After all, the taxpayer contributed to the non-deductible IRA for the sole purpose of converting it to a Roth IRA, and did those two steps together for the sole purpose of getting a new annual contribution into a Roth IRA.

Of course, Roth IRA contributions themselves are not actually taxable anyway. They are a contribution of after-tax funds in the first place. But treating the transaction as being substantively the same as a Roth IRA contribution does mean that one who made a Roth IRA contribution while income is too high. And if income exceeded the limits when the Roth contribution was made, it is an excess contribution, that must either be unwound or be subject to the 6% excess contribution penalty tax.

Thus, if the step transaction doctrine adjusts the strategy to be "what really happened" - a Roth IRA contribution - then when the IRS "taxes" it accordingly, it may assess the penalty tax for excess contributions if income was, in fact, too high. And if the strategy is implemented repeatedly for years, one could face an excess contributions tax of 6%, per year, per contribution, for as far back as the statute of limitations allows (in addition to being responsible for unwinding the contribution itself, along with all subsequent earnings).

So, does the strategy of contributing to a non-deductible IRA and converting it to a Roth IRA to avoid the Roth IRA contribution income limit constitute a step transaction scenario?

The reality is that the application of the step transaction doctrine is done on a case-by-case basis, and depends on a subjective interpretation of the facts and circumstances of one's particular situation. What do the courts look for in evaluating the potential of a step transaction? Simply put, they are looking for a series of transactions, all inter-related, where the final outcome of the overall series of transactions was to accomplish the equivalent of another single-step (or fewer steps) transaction.

In the case of someone who contributes to a non-deductible IRA, specifically for the purpose of converting it, and does those multiple steps precisely because it is a way to try to avoid the Roth IRA contribution income limits, then it seems clear that the step transaction doctrine could be applied.

How to Make Step Transaction Doctrine Not Applicable?
The easiest way to make the case that the step transaction doctrine shouldn't apply is the passage of time, and the possibility that the tax and economic situation could change between the steps. Although a pre-meditated decision to contribute to a non-deductible IRA with the specific intention to convert it shortly thereafter can be viewed unkindly by the IRS over any time period, an individual who has contributed to non-deductible IRAs in the more distant past and now chooses to convert is less likely to face scrutiny than someone who completes the conversion just a few days later. Many taxpayers choose to implement the strategy by converting a prior year's non-deductible IRA contribution, and then making a new non-deductible contribution for the current year, specifically to introduce at least some economic uncertainty to the situation, reducing the likelihood of step transaction treatment.

It's also notable that step transactions are not something that is typically captured in the "automatic reporting" processes for non-deductible IRA contributions and Roth conversions on IRS Forms 1099-R and 5498 and the tax return itself with a supporting Form 8606. Accordingly, many people may choose to "take the gamble" and proceed with such a transaction anyway, under the auspices that there is a low probability they will be caught. While that may be true, it does not change the fact that one would face a high risk of losing, if he/she was caught, if the IRS and/or the courts decided to view the transaction through the lens of the step transaction doctrine.

Conclusion
In the end, the contribute-and-then-convert strategy is not expressly prohibited by the tax code, but the IRS does have the right to tax a transaction according to its true economic reality. And if the express goal and intent of one is merely to circumvent the clear intent of the law, and is done in a manner that blatantly disregards it, beware. While the reality is that the likelihood of getting caught is extremely low, when the IRS believes that a transaction is abusive, not only do they act to shut it down, but they don't always provide leniency for those who have already tried to take advantage of it in the past.

1 Comment

<<Previous

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? Part III

Cool Little Known Tablet Tricks That Can Save You Time and Money

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? Part II

Are Online Rating Services Trustworthy?

Does Your Risk Tolerance Change With the Stock Market Performance

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase? Part I

How to Make the Wise Decision? Try the WRAP Approach!

Why You Should Be Worried About Excellent Back-tested Results

The Mega Trend That is Changing the Personal Finance Industry

A Different View If You Change Your Perspective

Frog

Vase

Angels

Old Lady

Horse

Girls

Evils

Young Lady

How to Select Target Date Retirement Funds?

How to Improve My 401(k) Return?

Why Bitcoin Matters

Should You Increase Exposure to Stocks in Your Retirement Portfolio?

Where to Get Best Value for Used Smartphones

A Few Common Term Insurance Riders

Should I Invest in IRA If I Cannot Fully Deduct the IRA?

6 Ways to Take Money Out of Retirement Fund Penalty-free

Credit Cards That Offer 0% Interest Rate

Is Extended Warranty Worth it?

How Much Life Insurance Coverage Is Allowed for Non-working Spouse

Gradually and Suddenly

Is There a Product That is Safe and Earns Higher Than CD Rate?

Does Term Life Have Living Benefits?

Backdoor Roth IRA Contributions - Part II

Author

Archives

Categories