by Joe
on October 25, 2007
As the end of the year draws near, I try to think of the Year End moves and financial planning that one may wish to consider. The consideration of a Roth and how it might benefit you continue to enter my thoughts.
If this year you fall into a lower tax bracket than usual, this may be a good time to convert some money from a regular IRA to a Roth, just enough to ‘top off’ the current bracket you are in.
If your income is too high to be allowed to save in a Roth IRA, you may consider saving in a non-deductible IRA as the law allowing conversion will change: from RothIRA.com “Starting in 2010, the existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. Conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012.” This offers a remarkable opportunity to save post tax (you will only owe tax on the growth from now until 2010*.) and enjoy tax free growth and withdrawals when you retire. If left as post-tax deposits in the IRA, it woul be subject to full, ordinary income rates at withdrawal.
*For any readers who have IRA deposits which are pretax, the conversion rules require you to prorate your entire IRA balance to calculate what is taxable at conversion. e.g. If you made $10K in pretax deposits, and $20 in non deductible deposits, and the account is now worth $50K, 80% of Roth conversion would be taxable (10/50 = 20% is not taxed). If your only pretax savings is in 401(k) accounts, this will not impact you. Always glad to read feedback on my postings, don’t be shy.
JOE
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by Joe
on October 24, 2007
I am working on an upcoming article for my feature site JoeTaxpayer.com titled “Can you Save Too Much, Pre-Tax?” In a first for my blog (here) I thought I’d offer the blog readers a special sneak peak (thus, this post’s title) and ask for comments.
The point of the article is to illustrate that one would have to save a huge sum, especially as a percent of their income, to save their way into a higher bracket. I think the article makes the point pretty well, but just as I might ask a friend to proof read a feature story, I’ll ask you to take a look and tell me what you think. If the feedback is helpful, I may offer future ‘sneak peaks’.
Thanks!
JOE
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by Joe
on October 23, 2007
Well, not really. Just taking the day off, from my day job and my blog. Going to enjoy the quiet.
JOE
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by Joe
on October 22, 2007
I wrote about the high Phantom Rates one may encounter due to the taxation on Social Security benefits, and I continue to receive positive feedback on that article.
I received two questions which I thought appropriate to address here.
Is there an age after which you can earn as much as you want and the phantom tax does not apply?
If you are under ‘full retirement age’ $1 in benefits are lost for each $2 you earn above $12,960. That’s quite a hit, and someone who is working should think about whether it makes sense to draw any benefits earlier than full retirement age. Note: full retirement age changes based on the year you were born. The Social Security web site has a link to see your retirement age.
Do you count passive income the same as earned income when doing these calculations?
For the phantom tax bubble I illustrated, I show either earned income or 401(k)/ IRA withdrawals which are taxed the same. Dividends or Capital Gains have their own curves which are unpleasant in their own right, the marginal rate appearing to be 32% on what should be 5% rate dividends. The best advice is to go to www.ssa.gov which is an easy site to navigate, and to buy a copy of TurboTax, and run your own scenarios. To produce those charts, I set a fixed SS payment, changed income by $1000 increments, and charted the numbers. I offered two examples, one from experience, the other at a reader’s request. The tax software will make your exact situation clear to you.
JOE
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by Joe
on October 19, 2007
A few Weeks back I wrote “You are Rich!” because according to the data presented at Global Rich List, you are likely in the top 99% of the world’s annual income. Now comes the question, why do we feel so poor? One of the anecdotes in Nassim Nicholas Taleb’s book “The Black Swan“, offers the story of a man making a good living, $250K+, who buys a house in a nice neighborhood, as large a house as he can afford on this income. Much to his chagrin, he quickly realizes that his neighbors, who have lived there a while, make more money than he does, and have a lesser mortgage. They own boats he cannot afford and keep their wives in clothes and jewelry he cannot afford. In the US, his income puts him in the top 1.5% of wage earners, but he has managed to find himself in such a surrounding that his wife is embarrassed that he is a failure.
For others, the Joneses next door are not richer, but are living off credit, and are as they say ranchers who are “all hat and no cattle.” I won’t presume to offer any moral to this observation, but to leave it as one of my random thoughts. Enjoy the weekend.
JOE
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