Archives for September 2012

How to Pay Zero Income Taxes in Retirement With Mixed IRAs

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How about another mental exercise on taxes? I usually enjoy Christine Benz’s articles on Morningstar, and When Taxes Collide With Your Asset Allocation was no exception. She presents the following scenario:

Let’s say a 65-year-old woman is prepping her portfolio for retirement. Her assets are ultra-streamlined, with a $500,000 Roth IRA account containing stocks and $500,000 in a traditional IRA portfolio consisting of bonds.

Is her asset allocation:
a) 50% bonds and 50% stocks
b) Heavier on stocks than bonds
c) Both of the above statements are true.

The basic premise of the article is that because she has to pay taxes on withdrawals from her Traditional IRA accounts at ordinary income tax rates, while not owing any taxes on her Roth IRA accounts, the woman effectively has more exposure to stocks than bonds. I agree that taxes are an important facet to consider.

However, Benz makes a quick assumption that her federal income tax rate is 25%. Here we meet the difference between marginal and effective overall tax rates, as well as the difference between gross and taxable income, in our progressive tax system. While the woman’s marginal tax rate may be 25%, unless she has a lot of outside income, her effective tax rate on those bond withdrawals would be much less. In fact, my wife and I would like to pay zero taxes in retirement with a similar portfolio.

How? Let’s say we are a couple both age 65 as in the example, which is over 59.5 we can start taking withdrawals without penalty. We have no pensions to rely upon. Like above, we have $500,000 in Roth IRA and $500,000 in Traditional IRA. With 401k plan rollovers and regular IRA contributions, this is not unrealistic. With a 4% withdrawal rate that is $40,000 a year, let’s say $20,000 from both.

What taxes do we owe? The $20,000 Roth IRA withdrawal is tax free. Now onto the $20,000 Traditional IRA withdrawal. Well, since this isn’t earned income, you won’t have to pay any payroll taxes like Social Security and Medicare taxes. For 2012, the standard deduction for a married filing joint couple is $11,900 plus $1,150 per person for being 65+ and the personal exemption is $3,800 per person. That adds up to $21,800. That’s more than $20,000, so our taxable income is zero! In fact, the first $17,400 of taxable income is taxed at the 10% bracket, so your total withdrawals could total up to $39,200 and still owe an overall percentage less than 5%.

As always, there are things that could skew the math. You might have a pension. There’s also the possibility of state income taxes, although if we take California the effective tax rate would less than 1%. Finally, Social Security benefits could create a greater tax liability, although it might be wise if you’re healthy to defer Social Security until age 70 to maximize the payout of what is effectively an inflation-adjusted lifetime annuity.

When you contribute to a Traditional IRA, you take the tax break upfront and pay taxes later. When you contribute to a Roth IRA, you pay taxes now and take withdrawals tax-free after age 59.5. Keep in mind this example when choosing as by carefully mixing the two, your effective tax rate in retirement may be lower than you think.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


Save More vs. Earn More: A Dollar Saved Is Two Dollars Earned

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Earn more. Save more. Those are the two ways to get out of debt and build wealth. I’m a big proponent of doing both, but for many people it may be easier to cut back on some luxuries rather than land a higher-paying job, start a side business, or become an investing wizard. It’s also more effective due to marginal tax rates. Let’s say you are single resident of California and your (taxable) gross income is $50,000 a year.

If you were to go out and earn another dollar as an employee, here’s how that additional $1 would get broken down:

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You’d only keep 58 cents. On top of that, a lot of extra or freelance work is done as an independent contractor. That means you’re self-employed and get the happy task of paying another 7.65% of payroll taxes (the employer share), which brings your total tax hit to 49.6%! So in order to keep $1 in your pocket, you’d have to get someone to pay you $1.99. In that case, your choice becomes:

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This relationship helps me visualize the power of spending less. Now when you save $1, you can feel good knowing that you’d have to have earned $2 of income to equal that. But on the flip side, when I get a check from a side project for $500, I know I’ll only keep $250 of it. 🙁

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My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


College Tuition Inflation: Net Out-of-Pocket vs. Published Sticker Prices

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Now that I have a renewed interest in college costs (read: a kid), I’m paying more attention to the ongoing student loan debt discussion. One major talking point is the rising cost, but there seems to be a big difference between the published or “sticker” prices and the actual prices paid by students after grants and scholarships. As illustrated by this SmartMoney article, only 1/3rd of private university student pay the full sticker price, and the most attractive students get the best aid packages. Therefore, I wanted to find information comparing the differences between actual and sticker prices. The results were surprising:

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My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


Free Business & Finance Audiobooks on Audible.com

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Here are some finance-related audiobooks from Audible.com (owned by Amazon.com) that are currently free with no trial required. Download them now, listen to them later. Via gymsock of SD.

  • The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change – The Stephen Covey classic.
  • Tribes: We Need You to Lead Us – A book about leadership by Seth Godin.
  • Bound to Rise (Or, Up the Ladder) by Horatio Alger – If you like rags to riches stories where hard work and grit pay off, he’s your man.
  • FREE: The Future of a Radical Price – “Chris Anderson explores this radical idea for the new global economy and demonstrates how this revolutionary price can be harnessed for the benefit of consumers and businesses alike.”
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


Stop Delivery of Physical Phone Books – YellowPagesOptOut.com

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Visit YellowPagesOptOut.com to stop the delivery of those huge phone books. The site is reasonably easy-to-use, although they ask for a phone number and I chose not to provide my real phone number to an industry based on unsolicited advertising. I don’t have a landline anyway, so I don’t see why they should require it. It would be nice if they made the process opt-in, but I know that’s wishful thinking.

I’m sad to say I missed this up until now, and the last few phone books have gone straight from my doorstep to the recycling bin. If you don’t use printed yellow pages, fight the behavioral tendency to do nothing and opt-out today!

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


Loyal Financial Group – Possible Scam or Ponzi Scheme?

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

(Update: They are now blocking visits with my referral domain. You can view the site directly by typing in www.loyalfinancial.com.)

I received an e-mail today asking me to look into Loyal Financial Private Investments at LoyalFinancial.com and give my opinion whether it was legit or a possible scam or ponzi scheme. I found that Loyal Financial Private Group claims some of the most consistently positive returns I’ve ever seen on their website. Here are screenshots for posterity:

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My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


Coupons.com Savings Club Free 1-Year Membership

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Get premium coupons in the Coupons.com Savings ClubCoupons.com is – surprise! – a site that offers digital and printable coupons online to many major brands. They also have a “Savings Club” where you pay $30 a year and get access to bigger coupons and a Coupon Finder tool. To celebrate their anniversary, they are offering a free 1-year Savings Club membership with the promotion code BIRTHDAY. The only catch is that you must provide a credit card and if you don’t cancel, the next year will be $30 charged on your card. You can cancel anytime during the free first year with no charges.

Despite a few tries, I am just not cut out to be a extreme couponer. Perhaps it’s our small family or the fact that I’m unwilling to drive out of my way to chase down sales when there is already a Costco, a supermarket, and a weekly farmer’s market just minutes away from my house. I’m not judging though – I’m happy that others can save a lot of money with coupons.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


Recent Investment Returns By Asset Class – August 2012

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Now that our portfolio size has become more significant, I want to keep on top of things better while still avoiding most of the market noise. I took some ideas from how others share investment return data (see here and my 2011 year-end returns post) and will try each month to update the trailing total returns for the major asset classes that I find useful. I am using passive ETFs to track asset classes, as they represent “real” investments that you can buy and sell.

Asset Class
Representative ETF
Benchmark Index
1-Mo 1-Year 5-Year 10-Year
Broad US Stock Market
Vanguard Total Stock Market (VTI)
MSCI US Broad Market Index
2.52% 17.13% 1.77% 7.31%
Broad International Stock Market
Vanguard Total International Stock (VXUS)
MSCI All Country World ex USA Investable Market Index
2.74% -2.25% -4.01% 7.80%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
MSCI Emerging Markets Index
0.45% -6.18% -0.73 14.68
REIT (Real Estate)
Vanguard REIT ETF (VNQ)
MSCI US REIT Index
-0.10% 20.04% 3.92% 11.22%
Broad US Bond Market
Vanguard Total Bond Market ETF (BND)
Barclays U.S. Aggregate Float Adj. Bond Index
0.10% 5.90% 6.66% 5.46%
US Treasury Bonds – Short-Term
iShares 1-3 Year Treasury Bond ETF (SHY)
Barclays U.S. 1-3 Year Treasury Bond Index
0.00% 0.28% 2.82% 2.77%
US Treasury Bonds – Long-Term
iShares 20+ Year Treasury Bond ETF (TLT)
Barclays U.S. 20+ Year Treasury Bond Index
-1.31% 22.02%% 11.78% 8.54%
TIPS / Inflation-Linked Bonds
iShares TIPS Bond ETF (TIP)
Barclays U.S. TIPS Index
-0.31% 8.10% 7.96% n/a
Gold
SPDR Gold Shares (GLD)
Price of Gold Bullion
4.94% -7.60% 19.81% n/a

In addition, for relative comparison, I’ll update a chart each month comparing the 1-year trailing returns of the major asset classes. This should be useful in determining which areas I should be rebalancing my asset allocation. Instead of performance-chasing, I’ll be buying more of the worst-performing asset classes. Note that I do not necessarily invest in all the listed asset classes, see my personal portfolio for more details.

Listed are total returns (includes dividends and interest) as calculated by Morningstar as of 8/31/12. All periods longer than one year are annualized. NAV returns are listed except in the case of GLD, as there is not a significant premium/discount to NAV for the other ETFs and the NAV returns match the equivalent Vanguard mutual fund returns. In certain cases, I am using the long-term returns of the equivalent Vanguard mutual funds as Vanguard ETFs are simply a different share class of the mutual funds, share the same underlying investments (VXUS/VTIAX, VWO/VEIEX, VNQ/VGLSX, BND/VBLTX).

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.