For decades, Congress and several successive Administrations have encouraged individual financial responsibility by authorizing tax-favored Retirement Accounts. Over time, tax benefits from participation in retirement plans have evolved, but the final goal remains constant – encouraging personal retirement income to supplement government-based benefits.
In exchange for tax deferral, or tax elimination on the growth of some assets, Congress requires account owners to begin drawing funds from accounts as they grow older. Dubbed Required Minimum Distributions, or RMDs, these withdrawals are taxable in the year of withdrawal. No tax is due on withdrawals from Roth Accounts, and there is no requirement to take age-based distributions for (non-inherited) Roth IRAs.
Rules for withdrawals and taxes are forever being “tweaked” by Congress and IRS, making it important to follow changes to minimize lifetime tax effects on Retirement Account withdrawals. Passage of the S.E.C.U.R.E. Act (dubbed “SECURE 1.0”) in 2020 changed many rules, and a pending modification called “SECURE 2.0” is likely to further alter RMD rules.
Major changes are pending for Inherited IRAs, but as of this writing these rules have not been finalized. Due to uncertainty, IRS has waived the 50% penalty for missing an RMD on Inherited IRAs, both for 2021 and 2022. This applies to Inherited Accounts where the death of the original owner took place after December 31, 2019.
While we expect finalized rules sometime later in 2022, or certainly in early 2023, anyone who has doubts regarding their RMD status should consult a qualified professional for guidance through the maze of regulations pertaining to retirement savings. We are available on Saturday mornings during the Van Wie Financial Hour radio program on WBOB radio from 10:00 to 11:00. Your account custodian should also be able to address your questions, but they will be extremely busy until year-end.
Other changes made to RMD rules in recent years included the elimination of all RMD requirements for the year 2020 (due to COVID-19), and implementation of new Life Expectancy Tables on January 1, 2021. These welcome changes extended the expected life of affected Retirement Accounts, reflecting increased longevity in today’s citizenry.
Occasionally, IRS implements user-friendly changes, and we give credit when and where it is due. There is, however, a great deal yet to be done to bring benefits for individuals and small company employees in line with those in large company 401(k) Plans.
Van Wie Financial is fee-only. For a reason.
Decades ago, and repeated periodically, increases in gasoline prices elicited demonstrations of our political and public lack of economic understanding. Over and over, “Big Oil” took a very public whipping from politicians and “progressives.” Remember Hillary Clinton in the 2007 Senate saying, “I want to TAKE those [oil company] profits?” Shameful rants by politicians filled the evening news and local papers for weeks. Halliburton moved to Dubai to escape disparagement (and taxes) at home.
Since oil companies were getting so much negative press, I started asking the question, “Who owns ExxonMobil?” Are its owners responsible for perceived problems brought on by “Big Oil?” Many people assume that ExxonMobil is owned by evil executives and fat cat mega-shareholders. In fact, however, only 0.07% of ExxonMobil is owned by employees and executives. 59.65% of XOM is owned by 3,799 institutions and pension plans. The balance of shares are held in retirement accounts and in the hands of individual investors, otherwise not affiliated with company management.
In response to the ownership question, many were surprised to find that they and/or their parents, neighbors, teachers, firefighters, police officers, bus drivers, soldiers, sailors, Marines, and so on, were the owners (stockholders) of ExxonMobil. Nearly everyone with a pension, an IRA containing mutual funds, a 401(k), or any similar investment account, is an owner of ExxonMobil, which is among the most widely held stocks in the world. Steady dividends received from that ownership help pay the pensions for retired people all over the world. Growth in the company, and therefore in stock price, spurs rising account balances and wealth accumulation. This allows an increasing number of people to retire comfortably.
If Congress does not extend the corporate tax rate cut passed in 2017 under the Tax Cuts and Jobs Act (TCJA) of 2017, ExxonMobil and other large corporations will be subjected to a substantial tax increase in 2026. Since dividends are paid to shareholders from after-tax profits, companies will have no choice but to cut future dividends. As a result, individuals, institutions, pensions, etc., all will perform less well, and the “victims” will be various groups and individual shareholders.
Capitalism has long been the object of derision among many Americans, and even more so in foreign countries. An unbiased look into the entire impact of ExxonMobil and other major corporations uncovers the “inconvenient truth” that we are all beneficiaries of a better lifestyle that they help to produce.
Far too many Americans harbor a distorted view of our capitalistic economic system and the modern energy production techniques that underly our success. Without improved understanding, America’s future is in jeopardy.
Van Wie Financial is fee-only. For a reason.
“The coal industry is evil. Fracking must be stopped. Oil companies are ripping us off. Carbon-based energy is the bane of man’s existence, and will soon cause the death of us all. We need renewable energy sources to save the world. We need them RIGHT NOW.” Blah, blah, blah. Lather, rinse, repeat. Underlying the push for a “Green New Deal” is a deep-seated hatred of capitalism. Most of us cannot grasp this sentiment, understanding that capitalism is responsible for elevating the entire global standard of living. Instead, today’s Socialist leaning “leaders” remain convinced, like many of their predecessors, that all they need is the “right people” to implement their “Progressive” policies.
History tells us that Socialism fails every time it is tried. Are oil and coal bashing the only or even the best, examples of socialism’s failures? Hardly! Remember failed automobiles like the Yugo, or the Russian Lada? An old joke about the Lada goes like this: “What’s the difference between a golf ball and a Lada?” Answer: “You can drive a golf ball 300 yards!” Bada-Boom!
Back to renewables and the “Big Green Lie.” We are told that every family will save a minimum of $500 annually using renewables because wind and solar are “less expensive to produce.” For an excellent, comprehensive analysis of the cost of various forms of energy, we strongly recommend the article, The Real Cost of Wind and Solar, at wattsupwiththat.com. Search on “real cost” and it pops up. Hold on to your wallets if these people get their way.
Problematic in the “green” argument is the computation of costs for electric power generation versus “fossil fuels.” Cost estimates we are force-fed every day assume 100% efficiency, which cannot be realized. Solar panels experience night, wind turbines are stationary during calm weather conditions, and both are therefore inefficient. Coal and natural gas run 24 hours per day, assuming supply lines remain open. Truly efficient solar panels would need to be constantly repositioned to face directly into the sun (while the sun is up). Because of the obvious expense of constructing the needed mechanisms, most solar panels are stationary, further reducing efficiency (and increasing costs).
Downtime, either from lack of sun or wind, means that overall demand must be fulfilled from other sources. For every kilowatt of renewable power generation that goes offline for extended periods, a conventional backup generator must also be available to avoid blackouts. Duplicative construction costs further increase the actual unit costs of renewable energy sources.
For a glimpse into our future, simply watch energy-starved European households shiver during the coming winter. The only difference between them and us is their head start toward the fallacy of a “Green New Deal.”
Van Wie Financial is fee-only. For a reason.
The first known Reverse Mortgage was written in 1961 in Portland, Oregon, to help a widow save her home after losing her husband, a popular coach. In 1969, the concept reached the U.S. Senate, when the late Senator John Heinz proposed a concept that evolved into today’s Home Equity Conversion Mortgage or HECM. The more common term, Reverse Mortgage, is easier for most people, though it often conjures up self-imposed ill feelings.
Fundamentally, a Reverse Mortgage is just another property mortgage and can be used for similar purposes, including purchasing or updating a home, or replacing an existing mortgage loan. The major difference between the HECM and a Traditional Mortgage is seen in the required payment schedule. Rather than a monthly Principal and Interest payment, HECMs have no required payment schedule for so long as the owner uses the home as a primary residence. This renders the Reverse Mortgage a valuable tool in long-term Personal Financial Planning.
Far too many potential customers for Reverse Mortgages believe that “It’s just a way for the bank to take your property.” While incorrect, this belief arose out of the poor introduction of the product to consumers. Hiring celebrities to pitch the new concept, disregarding most common-sense explanations, and granting people large sums of cash with no justification, all led to horror stories the public has yet to overcome. Today, the product’s application, as well as its marketing, has vastly improved.
All Reverse Mortgages have a few common characteristics. One of the most misunderstood is that any and all funds paid out to the homeowner(s) are tax-free. Whether or not the homeowner receives any cash from the HECM, the mortgage will not be required to be repaid until the home is abandoned, whether by selling, moving, or by the death of the owner(s).
Further, once HECM repayment time comes (for whatever reason), the loan will be repaid, with any surplus of the sale price over the HECM balance refunded to the owner or owner’s estate at closing. Should the sale price be less than the HECM debt, no money is due, as this event is fully insured during the life of the HECM.
Americans are homebodies and are generally attached to their long-time residences. Enhancing the ability of older Americans to stay in their homes longer is a fundamental goal of many peoples’ long-term planning. While the HECM requires one owner to be at least 62, Certified Financial Plannersâ will assist Americans of all ages in formulating a plan to satisfy the multiple goals of living a comfortable and safe retirement, in the surroundings they prefer.
Van Wie Financial is fee-only. For a reason.
Five months ago, in this very Blog, we discussed the emergence of I-Bonds as a safe investment with an excellent yield. Backed by the full faith and credit of the U.S Government (read: printing press), and, following years of nearly non-existent yields, I-Bonds suddenly began to advertise eye-opening interest rates. Increased interest rates stirred investors, but something went wrong.
In May, annualized interest on I-Bonds rose to 9.62%. But that didn’t mean that an owner would receive a 1-year yield of 9.62% because payout rates are adjusted every 6 months. Assuming we have now passed “peak inflation” for this cycle (something we suspect, but cannot promise), the new 6-month rate, which was supposedly effective with purchases starting November 1, 2022, would be somewhat less. Rate estimates were down, but still attractive. Naturally, many people wanted to lock in before an adjustment occurred.
There are two methods of purchasing I-Bonds, and the first one is only available to a few people annually, and for a very short time. These are taxpayers receiving refunds from their last year’s tax returns, who are allowed to purchase I-Bonds with all or part of their refund.
The second, and most common, way to purchase I-Bonds is to set up an account at treasurydirect.gov. I went there on Friday, October 28, 2022, to establish an account. There was still time to capitalize on the out-sized interest rate for 6 months, right? Actually not, as the website returned a message that it would be down all weekend for maintenance. Monday morning, October 31, it was scheduled to reopen, so there was still time, right? Not so fast. The November 1 interest rate restatement would be effective on October 31, 2022. The new rate was, however, not announced until Tuesday, November 1.
Logically, any business would seek to accommodate its customers after making a big announcement, but this is government, and different rules seemingly apply. The 20+ year-old Treasury website suddenly needed maintenance that interfered with making purchases at the high yield, and the rate change date had been moved ahead of the standard declaration date.
Worse, perhaps, was that several people have told us that for days leading up to the weekend maintenance, the website crashed when they attempted to purchase I-Bonds at the most favorable rate. Government in action.
While everyone prefers a much lower rate of inflation, the new 6-month I-Bond interest rate is a healthy 6.89%, and worthy of consideration. Note that I-Bonds have many restrictions and conditions that make them suitable for some investors, but the analysis is required to determine if a particular individual would benefit from ownership. We can help make that determination.
Van Wie Financial is fee-only. For a reason.
Every day in contemporary America, more than 10,000 Baby Boomers reach Medicare age. Many of them are leaving the workforce for a variety of reasons, including health issues, as well as voluntary and involuntary retirement. As they attain Medicare Age (65), most will become Medicare participants, which requires payment of a monthly premium for Part B. Some will also opt into Medicare Part D for prescription drug coverage. Medicare coverage must be earned and is not free. Monthly premiums are deducted from Social Security benefit payments whenever possible.
Medicare beneficiaries should be aware of the cost of their monthly premiums, but many people have no clue, as premiums are deducted before Social Security benefits are electronically deposited into bank accounts. Out of sight, out of mind. While individual costs are readily available online at socialsecurity.gov, most Americans do not bother to establish an online account to review their personal benefits and costs. As a result, many new Social Security recipients are overpaying for Medicare premiums, at least for a year.
Overcharging can be easily prevented, and should be.
Total Medicare premium payments (both Parts B and D) for Social Security benefit recipients are based on household income. A base premium amount is paid by all beneficiaries, and higher income participants also incur added monthly surcharges called IRMAA, for Income Related Monthly Adjustment Amounts. Calculated total premiums are based on individual tax returns from years prior to retirement. This is simply a byproduct of the IRS not having the reporting ability to feed data to Medicare in a timely manner since tax returns always reflect prior years.
Situations resulting in artificially high IRMAA surcharges may be corrected when and if a participant incurs a covered “life-changing event.” Covered events are listed on the Social Security website (www socialsecurity.gov), on Form SA-44. Covered events include retirement, marriage, divorce, death of a spouse, work stoppage or income reduction, loss of income-producing property, loss of pension income, and employer financial settlements.
When significant income-reducing life changes occur, but will not be immediately communicated to IRS, temporary inequities can and do arise. IRS recognizes these situations and has installed procedures to immediately update individual information. Affected participants should file Form SA-44 to notify Social Security of the event. If the change in income affects IRMAA brackets, the IRMAA charge will be eliminated, reduced, and/or refunded based on the expected new annual income. Help yourself by being proactive.
Van Wie Financial is fee-only. For a reason.
When was the last time you looked at your paystub? Yes, I realize that there is no stub attached to your nonexistent paper paycheck, but that doesn’t mean it isn’t important. It is probably available online, or you can ask your employer for the details. Physical paystubs are antiquated, so most people fail to examine details of their “hidden expenses,” including paycheck withholding. Electronic tax withholding and benefits contributions are huge.
Discovering exactly what is being paid out prior to receiving “take-home pay” is important. Withheld amounts paid out to taxing authorities, insurance carriers, and company-sponsored retirement plans, all add to what we call your Invisible Cost of Living. These costs tend to rise stealthily over time.
Far too many Americans have no idea exactly how much they actually earn in a pay period, or over a year. When asked, a common response is, “I take home “X” dollars per pay period.” That does not address the question. Similarly, many people do not even know their gross monthly Social Security benefit, as they look simply at their electronically deposited amount. Opening an online account at socialsecurity.gov allows a recipient to see how much is being withheld for Medicare Parts B and D (including possible IRMAA surcharges on higher-income Americans), and Federal Income Taxes, if any.
For the dwindling group of Americans accruing Traditional Pension benefits, they should comprehend the economic value of their employer’s pension contributions. Understanding your total cost of living, including the invisible portion, is vital for everyone, especially job hunters, as well as anyone considering “gig work.”
Preparing for retirement and beyond is a years-long process, and therefore cannot be hurried. Like all insurance plans, Social Security and Medicare require minimum payments (essentially insurance premiums) to be made into these Plans. These programs require 40 or more calendar quarter contributions. Lifetime credited earnings by individuals are available on the Social Security website, and should be checked occasionally.
Failure to understand your true cost of living, including the invisible portion, can result in disastrously underestimating retirement needs. Today, many visible components of inflation are “in your face” at the gas pump, grocery store, and in the stack of unpaid bills on your desk at home. Invisible components are inflating as well, and changes in your Total Cost of Living must be understood in order to plan for eventual Financial Independence.
Like it or not, many people will be working longer than anticipated.Van Wie Financial is fee-only. For a reason.
In our current inflationary environment, finding a bargain should make our day. And so it seemed recently, when Medicare announced a price decrease for Part B premiums, starting in January 2023. However, 2022 pricing was excessive, having been predicated on an extremely high estimated cost of the new drug Aduhelm, which everyone was forced to cover, notwithstanding individual needs. The reported 2023 decrease of $5.20 monthly, coupled with a $7.00 per year reduced deductible, beats an increase of any size, right?
Not so fast. When is a price decrease not a price decrease? When your annual cost goes up, of course. And that is exactly what is happening to many Senior Citizens. The devil is always in the details, and those details lie in IRMAA, Medicare’s Income Related Monthly Adjustment Amounts. IRMAA imposes surcharges for Medicare Parts B and D, based on family income.
True, only a percentage of Medicare beneficiaries are subjected to IRMAA surcharges, but their next year’s surcharges will be raised by an amount that for many will exceed reported savings from reduced Part B premiums. IRMAA income brackets will increase somewhat, but far less than the rate of inflation. Overall, higher-income Medicare B recipients will incur a substantial increase, rather than savings. And that is after getting fleeced throughout 2022 by having had to pay for an expensive, but personally unused, Aduhelm.
Worse, IRMAA surcharges also apply to Medicare Part D, which is the optional Prescription Drug Plan. While signing up for Part D is optional, paying IRMAA surcharges is not. These same people are required to pay Part D IRMAA surcharges, despite not being part of the Drug Plan.
Only in America.
Within the overly complex U.S. Tax Code, there are many hidden costs and even more that are not necessarily hidden but require taxpayers to dig into the details to identify hidden costs. Additional costs, along with price increases, amount to bracket creep, albeit at a somewhat slower rate than in pre-Reagan days (before indexing became law).
One indicator of hidden taxes and bracket creep is easily seen in the taxation of Social Security benefits. In 1984, only 10% of Social Security recipients paid income tax on any part of their monthly benefits. That percentage has crept up to today’s 40% of recipients. That is a topic for another Blog.
Don’t be fooled; you are getting ripped off, quietly and stealthily.
Van Wie Financial is fee-only. For a reason.
We’ve all seen and heard the commercials, frantic homeowners who nearly lost their homes to fraudsters. We are told that a single piece of paper in the wrong hands is all it takes, and your house title belongs to scammers. Worse yet, the County Clerk is required to file that form once received, and you will no longer own your home. They say we can save our most valuable assets by paying a monthly fee to the providers of this novel form of “protection.”
Luckily, we can receive the same security free if we prefer. Talk about no-brainers, this one fits the bill. In certain areas, and spreading fast, is a service being offered by County Clerks’ offices, whereby anyone who registers for their service will receive an email directly from the County when any activity is detected on property owned by an individual, a couple, or a business. The Clerk’s office will not automatically file the fraudulent paperwork.
For residents of the tri-county Florida First Coast area, Duval County, St. Johns County, and Clay County, this service is offered to property owners within their boundaries. We have not researched surrounding counties, nor other states, so any readers with property outside these counties can simply search their County Clerks’ websites. If the free service is not offered, don’t automatically sign up for a needless and expensive private version. Instead, request the service, and make a note on your calendar (perhaps on your mortgage due date each month) to access your online records at the County.
For residents of our 3-county area, access to this service is on the following websites:
Duval County, FL https://www2.duvalclerk.com/property-fraud-alert/
St. Johns County, FL https://stjohnsclerk.com/recording-activity/
Clay County, FL https://trieshield.com/Agency?AgencyCode=12019
Given the severity of this uncommon scenario, taking a few minutes to establish protection of your property is a small price to pay, and is the only cost to you. In an ideal world, this would not be needed. With today’s criminal population improving their online skills daily, we all need to stay diligent and take personal responsibility.
While you’re at it, freeze your credit with all 3 reporting agencies (Experian, TransUnion, and Equifax) on their respective websites. Whenever you want to allow someone to access your credit for an authorized purpose, simply order a temporary “thaw” to your credit freeze.
Van Wie Financial is fee-only. For a reason.
Since the 1974 inception of the Individual Retirement Account, or IRA, this form of saving and investing has become ubiquitous in today’s financial world. In 1997, Congress authorized the Roth IRA, which added tax flexibility for account holders. Roth options have become an important part of many people’s retirement planning, and have expanded from the basic Roth IRA into ERISA-covered Plans, such as the Roth 401(k), and others. We will use the Roth 401(k) Plan to explain today’s concept.
Not all employers offer Roth 401(K) Plans, but more every day are adding the Roth option to their Traditional 401(k) offerings. Contributions to either, are made from after-tax income. Roth 401(k) Plan accounts can be rolled tax-free into Roth IRAs when service is terminated. No Required Minimum Distributions are required from a Roth IRA, and all withdrawals are tax-free to the original account owner. In other words, the tax treatment of the Roth 401(k) is identical to the tax treatment of a Roth IRA.
Why not simply contribute to a Roth IRA? Often, the potential Roth IRA account owner is precluded from contributing to a Roth IRA, as Congress imposes income limits on contributors. There are also other reasons to make after-tax contributions to a Traditional 401(k). Significantly higher contribution levels for ERISA Plans (such as all 401(k) Plans) attract serious savers. It is allowable to contribute to both, restricted only by eligibility rules.
Another option is the “Back-Door” Roth IRA. In this method, contributions are made to a Traditional IRA, but not deducted from the owner’s taxable income. Subsequently, those funds can be converted to a Roth IRA, through the so-called “Back Door” process.
Prioritizing Roth-style contributions should consider the long-term tax effects of the various account types. Easiest is the Roth IRA, which is tax-free forever and not subject to RMDs. Next is the Roth 401(k), which is likewise tax-free forever, but subject to RMD rules. Fortunately, Plan owners can avoid RMDs using a later tax-free rollover to a Roth IRA.
After-tax contributions to Traditional 401(k) Plans are treated differently. When eventually rolling the 401(k) funds into Individual Retirement Accounts, the only portion that can be split off into a Roth IRA is the after-tax contributions. Years of tax-deferred growth on those contributions become taxable at the time of withdrawal from the 401(k) or Traditional IRA. From the analysis, it is apparent that maximizing Roth contribution money into a pure Roth IRA or a pure Roth 401(k) has long-term benefits. Working with a qualified financial advisor is the best way to understand your options.
Van Wie Financial is fee-only. For a reason.