LET ME TELL YOU about Alvan Bobrow. His tale—and specifically his lawsuit—are important for every investor to understand. That’s because the legal loophole he sought to exploit is now a pothole for everyone else.
The first thing to know about Bobrow: He’s a tax attorney and, back in 2008, he had a clever idea. In need of cash, he took a $65,000 distribution—the technical term for a withdrawal—from his IRA. Ordinarily, a distribution from an IRA (unless it’s a Roth IRA or includes nondeductible contributions) is treated entirely as taxable income.
CONGRESS IS BACK at it, aiming to change the tax laws again. Just since 2017, there’s been the Tax Cuts and Jobs Act (TCJA), the SECURE Act and the CARES Act, each of which contained tax provisions, some very significant. As I type this, Congress and the White House are horse-trading on another round of changes.
Because new legislation is still being negotiated, I think it’s too soon to change your financial plan. But there’s one strategy that makes sense for a lot of people,
THE THREE-LEGGED stool is a metaphor for how the post-Second World War generation looked at retirement. The legs represented Social Security, an employer pension and personal savings. All three legs were viewed as necessary for a solid retirement plan.
Today, that notion seems quaint. Pension plans continue to be phased out. The number of employees covered by a defined benefit pension has been declining for decades, falling to 26% as of 2019, according to the Bureau of Labor Statistics.
MANY EYEBROWS WERE raised during a recent city budget meeting in Portsmouth, New Hampshire. According to the Portsmouth Herald, the city manager told city councilors that Portsmouth’s mandated contribution to the state retirement system would balloon from $290,000 to a whopping $1.9 million per year. Councilors called the development, which would cause a sizable increase in the city’s 2022 budget, “ugly” and “a kick in the shins.” Had anyone been paying attention,
MY FIRST JOB AFTER college was as an officer in the U.S. Navy. I was an engineer on a nuclear-powered submarine, the USS Albuquerque. While I didn’t make the Navy a career, it left one indelible imprint on me: the need to understand how things work.
Before ever setting foot on the Albuquerque, I spent more than a year learning exactly how nuclear power propelled a submarine, everything from how to operate a valve—it isn’t as simple as you think—to how the reactor worked on a sub-atomic level.
ONE OF THE GREATEST business books I’ve ever read is Antifragile by Nassim Nicholas Taleb. In it, he postulates the idea that, while things that become damaged by stress are considered fragile and things that resist stress are considered resilient, “there is no word for the exact opposite of fragile,” things that become stronger due to stress. So, he coined the word “antifragile” and then wrote an entire book about the subject.
INSPIRED BY THE TV series The Queen’s Gambit, many people suddenly want to master the game of chess. But I’m more interested in mastering the practical world of retirement gambits—and that means matching wits with Congress and the IRS.
During my working career, I saved money in taxable brokerage accounts, IRAs and 401(k)s, but never focused on Roth accounts. At age 55, having left my last employer, I had two things that compelled me to begin—time and reduced income.
I’M A DINOSAUR. Not only do I prepare my own tax return with no help from an accountant or tax preparer, but also I do it by hand. Yep, that’s right—no TurboTax or other computer program.
I really can’t use the computer programs because I often attach an oddball form or two that they don’t offer. On top of that, I always add “annotations” to parts of my return. These additional explanatory notes may be helpful to the IRS.
LATE LAST YEAR, Congress voted to kill off the so-called stretch IRA, which had allowed those who inherited retirement accounts to draw them down slowly over their lifetime. Many folks were surprised by the stretch IRA’s demise, but they shouldn’t have been.
When a tax break or some other government provision benefits only a few folks, Congress often changes the law. Think back to 2015. That year, Congress eliminated the ability to “file and suspend” Social Security—another strategy that tended to be exploited only by a privileged few.
ONE OF MY FAVORITE things to do is sit on our local beach with a cold beverage on a beautiful day, and talk finance with interested friends and family members. This past Labor Day weekend, I did just that with a soon-to-be retiree.
One of the big issues facing him and his wife: where to live. He had been relocated to New York by his employer. But he and his wife are natives of the Philadelphia region,
WHAT’S YOUR CAPITAL gains tax rate? It’s a crucial number to know—and it could open the door to some big tax savings.
Most investors are aware that there’s a significant difference between the tax rate on short-term capital gains—investments held for a year or less—and that on long-term gains, those held more than a year. Realized short-term gains are dunned as ordinary income, just like your salary or any interest income you earn, while long-term appreciation gets taxed at a lower rate.
THIS YEAR’S TAX DAY was the strangest I can remember. Amid the pandemic, the filing deadline had been pushed back to July 15, three months later than usual. And for me, it was our most complicated tax year ever. I had both retirement income and income from various in-state and out-of-state consulting gigs.
But the biggest complication stemmed from last year’s sale of our second home. This was a vacation home that we rented part-time and also used ourselves.
ARE YOU PLANNING to withdraw funds from your Roth IRA? If you aren’t careful, you could owe both taxes and penalties, even though you’ve already paid taxes on the money that went into the Roth. At issue: the IRS’s five-year rule. How do you sidestep its unpleasant consequences? Bear with me while I explain.
First, a word of caution: You don’t have to take distributions from your Roth IRA during your lifetime. Withdrawals are strictly up to you.
SHOULD YOU CONVERT your traditional IRA to a Roth IRA? Below, you’ll find five questions to help you decide. If you answer “yes” to the first three questions, you’re a good candidate for a Roth conversion. If you answer “yes” to all five questions, you’re an outstanding candidate.
Question No. 1: Are you taxed at lower rates today than you will be in future?
Roth conversions make sense if your federal and state tax rates today are below what they’ll likely be when you have to take required minimum distributions (RMDs) from your traditional IRA.
ONE OF MY GOALS for 2020: develop a plan for doing Roth IRA conversions over the next 10 years. Once the money is out of traditional IRAs and in a Roth, it’ll grow tax-free. Problem is, the conversion means taking a tax hit today.
So why am I interested? There are several reasons: lowering lifetime taxes for my wife and me, creating the flexibility to manage future tax bills and leaving a tax-free inheritance to our children.
