3 Moves You Need to Make BEFORE the Holiday Rush

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Dear Rich Lifer,

We’re entering the busiest time of the holiday season, and I’m sure you have a lot going on.

But the reality is that, with the end of the year rapidly approaching, now is also the time to consider some last-minute moves that can substantially change your finances as well.

So before time runs out, I want to give you three of the best ones …

Tax Loss Harvesting

Although plenty of stocks have made big gains in 2019, others haven’t fared as well.

So if you have some open losses in your portfolio, you might consider selling them before year’s end so you can deduct the losses on Tax Day, 2020.

It works like this:


If you also booked gains this year, you’ll be able to offset them on a dollar-for-dollar basis with no limit.


If you recorded more losses than gains — or no gains at all — you can use your losses to offset some ordinary income. The maximum amount is $3,000 ($1,500 if married filing separately) … but you can carry additional losses forward for future tax years.

Doing this before year-end is a no brainer if you have losing positions that you don’t think will ever come back.

You will not only get a tax break, but you can then take the proceeds from the sale and reinvest them in better long-term choices.

Of course, even if you have underwater positions that you would like to continue holding for the long-term, you STILL might consider selling them at a loss for the tax advantage.

Why? Because as long as you wait more than 30 calendar days before buying back those same positions, the loss will count on your tax form.

The IRS applies what is known as a “wash rule.”

What Qualifies as a Wash?

Basically, they will not recognize a loss if you’ve bought replacement stock within 30 calendar days before or after you sell your losing position.

However, if you wait 31 days, you’re fine and the loss counts.

Aren’t tax laws great?

The real risk is that the stock could rebound over those 30 days and you’d miss out. But I would consider taking the chance, it all depending on the position.

You might also consider another tactic during this season of giving …

Charitable Donations

If you happened to spot some unused items while you were digging out your holiday decorations, now is a great time to take them to your local charity.

And the same thing is true if there’s a particular cause you’d like to fund.

Reason: As long as you itemize, your charitable donations will also be deductible come April 15th.

Here’s some of the fine print straight from the IRS:

“To be deductible, charitable contributions must be made to qualified organizations. Payments to individuals are never deductible.

“If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

“For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution.

“In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations.”

If you want even more details, go here. But suffice it to say that this is one of those rare tax items that helps you do well by doing good.

Last but not least, one last time…

Look at Your Retirement Accounts

Some accounts — such as IRAs — give you all the way until April 15th, 2020 to sock away money for 2019. But others must be established and/or funded by December 31st.

For example, if you have access to an employer’s 401(k) plan, your contributions have to be in before New Year’s Day.

So if you’ve been slacking, there should still be time for you to get something in there for this calendar year.

Doing so will provide you with more money for the future … the possibility of matched contributions from your employer … PLUS a nice tax break on your 2019 taxes.

Self-employed? Then DEFINITELY consider opening a Solo 401(k).

I’ve written about them before, but I never get tired of saying it: Opening one could allow you to sock away as much as $56,000 just in 2019 … or even $61,000 if you’re over 50!

But again, you have only until December 31st to establish a Solo 401(k) and elect to contribute any money that is to count as your “employee” part of the overall contribution (though the money itself can go in by April 15th).

One Last Thing

This is also the time to consider implementing any changes to existing accounts — for example, converting a traditional IRA to a Roth.

As with all the other moves I described today, personal circumstances will dictate a lot of what makes sense for you personally… and you may be best served by talking to a tax professional to get more information on all the ins and outs.

But my overall point is that — despite the holiday madness — this is also the best time of the year to make important decisions that will affect you well into 2020 and beyond.

To a richer life,

Nilus Mattive

Nilus Mattive

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Uncle Sam is Coming For Your IRA

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One of the advantages of 401(k)s and traditional IRAs is tax deferral.

Whatever amount you contribute today lowers your taxable income for the year and you don’t pay any taxes on that money until you withdraw it.

But this perk only lasts so long…

When you reach age 70 ½, Uncle Sam comes calling for his cut, and how the government takes its share is through something called Required Minimum Distributions (RMDs).

The idea is that the government wants to collect taxes for all that tax-deferred growth and the original tax-deferral you’ve benefited from but it’s willing to wait until you’re in a lower tax bracket in retirement.

However that last piece is not always the case. RMDs are meant to help supplement a retiree’s income. But some retirees don’t need the extra cash flow from RMDs and would rather minimize them and the resulting tax bill.

If you’re close to age 70 ½ and you don’t plan on using RMDs to cover your living costs, here are four ways you can limit or even eliminate RMDs altogether:

Take Your First Distribution ASAP

A big reason why RMDs get such a bad rap is that the amount you’re required to draw down can sometimes push you into a higher tax bracket, which means you end up giving away more of your hard-earned cash to Uncle Sam.

When you turn 70 ½, you have until April 1 of the following calendar year to take your first distribution. After that you must take it by December 31 on an annual basis.

A mistake I see a lot of retirees make is they opt to hold off taking their first RMD because they figure it doesn’t really matter since they’ll be in a lower tax bracket regardless.

While holding off makes sense for some people, it also means you have to take two distributions in one year, which can bump you back into a higher tax bracket.

A better strategy is to take your first distribution as soon as you turn 70 ½ to avoid having to draw down twice in the first year.

Convert to a Roth IRA

Another strategy I recommend is converting all or part of your traditional IRA to a Roth IRA. Unlike traditional IRAs or Roth 401(k)s, which require RMDs, a Roth IRA doesn’t require any distributions at all.

This means your money can stay in the Roth IRA for as long as you want or it can be passed down to heirs.

When you convert part of a traditional IRA account, you’re reducing the amount subject to RMDs later on. This strategy requires some planning and you’ll need to still navigate taxes due on the amount converted.

But you can maximize this strategy by converting during years when your income is lower than usual. Typically during your first few years of retirement,

Don’t Stop Working

As mentioned above, the reason for RMDs is that the IRS wants to get paid for previously untaxed income. If you’re still working and you don’t own 5% or more of the company you work for, you can delay distributions when you turn 70 ½.

This exemption only applies to your 401(k) at the company you currently work at. If you have money stashed away in an IRA or 401(k) from a previous employer, you’re still on the hook for those RMDs.

What happens if you don’t take your RMD?

If you forget to take your RMD or miscalculate how much you owe, you’ll be subject to an excess accumulation penalty, which is 50% of the required distribution.

For example, if your RMD is $3,000 and you don’t take it, you’ll have to pay an additional $1,500.

Give It Away to Charity

This last strategy won’t reduce your RMD, but it will lower your tax liability from the RMD you owe. You’re allowed to donate part of your RMD, up to $100,000, directly to a qualified charity.

The donation is not included as part of your income and you’re also not eligible for a charity deduction on top of this. But the benefit of this strategy is it can significantly lower your adjusted gross income.

Qualified charitable distributions apply only to IRAs and not traditional 401(k) accounts.

Final Word

A lot of retirees rely on RMDs to cover their basic living costs. If you’re one of the lucky ones who don’t need the money, consider implementing some of these strategies to limit the amount of tax you owe from RMDs.

Working longer, converting to a Roth IRA, taking distributions early, and donating to qualified charities are all solid strategies to keep what’s rightfully yours.

To a richer life,

Nilus Mattive

Nilus Mattive

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A Nasty Tax Surprise for Baby Boomers…

This post A Nasty Tax Surprise for Baby Boomers… appeared first on Daily Reckoning.

Last week, I talked about a new way that Congress might hurt lots of Americans who have used IRAs to save lots of money and I said this was just the latest in a long list of transgressions against well-prepared retirees.

If you happen to be a Baby Boomer with even moderate retirement income, you’re probably familiar with one of the biggest examples.

Or, if you started collecting Social Security benefits last year, perhaps you just found out about it when you filed your taxes.

Washington and Social Security Income

I’m talking about the fact that Washington taxes Social Security income received by millions of Americans.

As far as I’m concerned, this tactic is simply a benefit cut by another name.

Just consider: Under current law you could owe federal taxes on as much as 85% of the Social Security benefits you receive – which effectively means the government is taking back some of the money they promised you!

It all depends on how much “provisional income” you earn during retirement.

To figure this number out, you add up your adjusted gross income (not including S.S. payments), additional tax-exempt interest you’ll collect, plus half of your S.S. benefits.

If you file a joint return:

  • Your benefits are tax free if your provisional income is less than $32,000 …
  • No more than half your benefits can be taxed if your provisional income is between $32,000 and $44,000 …
  • And if your provisional income exceeds $44,000, it’s almost certain that 85% of your benefits will be taxed.

A couple of things to note:

First, if you file single or head of household, these thresholds go DOWN significantly — i.e. taxation begins at provisional income of $25,000.

Second, in that middle range the actual methodology and exact amounts get tricky but the end result is that you will likely owe a good amount of money back to Uncle Sam.

Third, these thresholds have NOT been getting re-adjusted for inflation!

And that’s just another reason why more and more retirees are getting snagged every year.

Originally, just 10% of Social Security recipients had any portion of their benefits taxed.

Now, it’s more than half!

And let’s be real – plenty of regular folks like teachers, firefighters, and low-level company employees – are receiving enough retirement income to subject their Social Security benefits to taxation. Heck, even a very modest pension would exceed the ranges I just outlined!

I don’t think this is right at all.

Can You Avoid Having SS Taxed?

I believe it punishes people who have planned adequately for retirement, and only raises more questions about the overall fairness of our current Social Security system.

So is there anything you can do to avoid having Social Security payments taxed?

You may be able to shift around certain retirement distributions and use certain types of investment accounts to control how much provisional income you receive in any given year.

I would recommend working with a tax advisor or financial planner to figure out what’s right for your particular situation, but here are a few starting points:

  1. Consider a Roth IRA over a traditional IRA since the former’s distributions are not taxable income.
  2. Take distributions from your retirement accounts in such a way that they only push you into taxable range every other year.
  3. Be careful how and when you sell stocks, real estate, or other major assets.

Oh, and based on the rapidly deteriorating condition of our nation’s retirement system, realize that this could still be just the beginning of a much larger, much nastier trend.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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New Congressional Bill Punishes IRA Holders

This post New Congressional Bill Punishes IRA Holders appeared first on Daily Reckoning.

Here’s one of my favorite Washington paradoxes…

On one hand, politicians say they want to help Americans save more for retirement.

On the other, they look for every possible way to punish people who actually succeed in the endeavor.

For proof of this look no further than a new bill that recently passed through the House Ways and

Means Committee with unanimous support. It’s called the SECURE Act and will soon go to a full vote along with a similar companion bill – called the RESA Act – working its way through the Senate.

The basic aims include:

  • Letting employers automatically raise employee 401(k) contributions from a maximum of 10% of pay to a new max of 15%
  • Increasing tax credits to small businesses that start up retirement plans and/or include automatic enrollment features
  • Creating new ways for graduate students and other special categories to participate in retirement savings programs
  • Plus, allowing penalty-free account withdrawals for births or adoptions

On the surface, these don’t sound too bad, right?

What You Might be Missing

I mean, perhaps we can argue over the idea of default 401(k) enrollment a bit, but there’s no real debate that all of these things are actually trying to improve access and general participation rates to 401(k) plans, which is positive overall.

Yes. And there are other good things in there, too. Stuff like…

  • Creating more transparency and portability regarding lifetime income features of certain retirement plans
  • Expanding 529 education plans
  • And altering IRA age limits by allowing contributions above 70 ½ and raising the start of mandatory RMDs to age 72

Still sounds good, eh?

Well, it does as long as you don’t already have a solid IRA balance and a well-prepared estate plan.

Reason: One of the ways lawmakers want to pay for the SECURE Act is by forcing non-spousal IRA inheritances to get taxed more quickly.

In short, they want to do away with the “stretch IRA” strategy.

I’ve written about this plenty of times before, including right here in the Roadmap, but here’s the general idea…

Inheriting an IRA

When someone other than your spouse inherits your IRA, they face two basic choices:

A.    Withdraw the whole amount by December 31 of the fifth year after your death

B.    Begin receiving minimum distributions based on their own life expectancy.

Here’s an example:

Say you die this year and leave your Roth IRA to your son who is 53.

If your son decides to take minimum distributions, the IRS will use its actuarial tables (available in IRS pub. 590) to figure out roughly how long your son is likely to live.

Then the IRS will divide the value of your account by that number (31.4 this year) to arrive at a dollar amount for yearly distribution.

In the case of a $100,000 portfolio, your son would have to withdraw $3,289 next year ($100,000/30.4).

Now, look into the future many years.

While your son is taking those minimum distributions, the value of his inherited investment account can continue to rise!

I’m sure you can see the appeal of this approach, especially since you’re well aware of the effect of compounding.

And this “stretch” approach is especially good if you leave behind a Roth IRA because there’s never any income tax owed on anything for as long as the nest egg keeps growing and kicking off proceeds.

That brings me to another point. While this strategy would be great for a son or daughter, it would be even better for a grandchild or a great-grandchild.

Or at least is under current law.

If Congress Gets Its Way… 

The whole opportunity will disappear.

Under the SECURE act, non-spousal beneficiaries would have to take out all the money within ten years. The Senate version forces all distributions to occur over five years if the account is worth more than $400,000. There are just a few small exceptions for minor children of the account owners and disabled beneficiaries.

So basically, if some form of this goes through, a lot of estate plans are going right out the window just like that.

In other words, these changes seek to help some Americans better prepare for retirement but they do it on the backs of plenty of people who have already been saving and planning for their families’ futures.

This is par for the course, and something I’ve predicted for years.

Indeed, three years ago, I sent out an email to hundreds of thousands of Americans with the following warning:

“For the longest time, I liked Roth IRAs for anyone with a long time horizon or for older Americans looking to preserve and grow wealth for future generations.

“But I’ve been changing my tune recently. That’s because I no longer believe lawmakers will honor the promises they’ve made regarding Roth IRAs.

“At the very least, I believe Washington will eventually alter the law so that Roth IRA beneficiaries can no longer withdraw their inheritance over their lifetimes — which was one of the primary reasons I was recommending rolling over assets from a traditional IRA to a Roth.

“Moreover, I believe it is also becoming far more likely that politicians will eventually remove the tax-free benefit on earnings within Roth IRAs… at least for wealthier Americans.

So here we are, and phase one is already happening.

Does phase two seem so outrageous, especially when you listen to some of the things being floated by some far-left politicians?

The Biggest Takeaway

Which brings me to the biggest point I want to make…

No matter how well we plan, lawmakers can completely alter the rules of the game any time they want.

That’s why we also have to continually re-evaluate our own strategies and assumptions.

Moreover, at this point, I suggest you favor approaches and loopholes that give clear, irrevocable benefits instead of relying on some status quo 30 years out… and that you always maintain one or more backup/alternate plans just to further limit your exposure to poor decisions made by politicians.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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Could This be the Best Year for a Roth IRA Conversion?

This post Could This be the Best Year for a Roth IRA Conversion? appeared first on Daily Reckoning.

Let’s begin with a few basics about IRAs…

Traditional IRAs generally provide a tax deduction for the amount you contribute. The money grows tax-deferred until you withdraw it. Then it is taxed at your ordinary income tax rate. You must begin required minimum distributions (RMDs) by April 1 following the year you turn 70½ and do so every year thereafter.

And if you die before removing all the money, your heirs will eventually have to withdraw it and pay income tax on the amount you had left them. Roth IRAs are somewhat the opposite…

You don’t receive a tax deduction for the amount you contribute. But the principal and all earnings grow tax-free for you and your heirs. And there are no requirements that you must withdraw funds at a certain age.

In other words, once money is in a Roth, it can stay there forever without the IRS or anyone else telling you have to remove it or pay income taxes on principal and growth.

The good news is that you can move money from your traditional IRA to a Roth IRA with a…

Roth Conversion

When you do a Roth conversion you’ll have to pay income tax on the amount you convert. The rate will be based on your ordinary tax rate. So the best time to convert is when you’re in the lowest tax rate possible.

I know… voluntarily sending your hard-earned dollars to the IRS takes a strong stomach.

But thanks to the Tax Cuts and Jobs Act (TCJA) of 2017, your tax rate may never be this low again.

Starting in 2018, most tax rates have been reduced. This means many people will pay less tax.

Here’s a look of how the recent tax change affects the two most common methods of filing, single and joint, for 2019.

Note that the TCJA is set to expire on Dec. 31, 2025. What will happen then is anyone’s guess. If Congress allows the tax code revert to pre-TCJA status, most households would experience tax increases beginning in 2026.

And considering the direction our nation’s deficit is heading, I’d say the odds are pretty high that we’ll have higher tax rates in the future.

As a hypothetical example, suppose you have $100,000 in a traditional IRA. It’s not all yours.

Remember you have that nagging silent partner, the IRS, wanting a piece of it. You decide to bite the bullet and buy that partner out. It’ll cost you $24,000.

Assuming you are a long-term investor, twenty years go by. If your Roth IRA has earned 7% per year, the $76,000 you converted is now worth around $298,000. It all belongs to you and your family. No taxes, no required distributions.

The big payoff comes a generation or two down the road for your loved ones…

In another 20 years, the $298,000 continuing to earn 7% per year could grow to more than $1 million. Again, no IRS expecting a handout.

Turn Lemons Into Lemonade

Do you own stocks or other investments in your IRA that have taken a temporary dive? Converting them to a Roth while their values are lower and the resulting income tax is less could be a good strategic move. 

The same when the market is down.

But it’s tough to time the market. So you might consider dollar-cost-averaging the conversions, for instance quarterly over five years, just like you do when investing. That way more shares are converted when the market takes a dump.

Also systematically converting will help you monitor your tax bracket. You don’t want to convert so much that it pushes you to the next highest bracket. Meanwhile keep a watch on how those conversions might affect the taxability of your Social Security benefits.   

And if your income is sporadic, late in the year when you can accurately estimate your earnings might be the best time for a partial conversion.

Do the Math…

Four projections might help you decide whether converting is right for you…

The first could be based on keeping your traditional IRA as is and using the current tax rates. How much will your silent partner, the IRS, take once you begin RMDs? And how will that affect your heirs? 

The second, the same as above but with 2017 tax rates.

The third might be converting your traditional IRA to a Roth in one lump sum and paying the tax using your current tax bracket.

Fourth, converting to a Roth over several years.

You may find that Medicare Part B premiums increase the year you convert if your income crosses the “higher-income” threshold of $85,000 for an individual or $170,000 for a married couple filing jointly.

The tradeoff is that all distributions from your Roth IRA will be completely tax free.

No Mulligans Allowed…

Roth conversions are irrevocable. That means you must be sure.

So I suggest asking yourself three questions:

  • Will you need the money immediately for living expenses? If so, converting might not make sense for you.
  • Do you believe your tax rate will be lower in the future? If yes, that will be a factor against converting.
  • Will the money to pay the income tax come from your IRA? It’s better to pay the conversion tax from non-IRA funds.

Should everyone convert their traditional IRAs to a Roth?

Of course not.

Still, it’s worth exploring because current tax rates aren’t going to stay where they are forever, making this possibly the best year ever to convert.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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