Taxes — Page 2 — My Money Blog

Treasury Bills + State Income Tax Exemption = 6%+ Effective APY (October 2023)

Posted on October 26, 2023 // 11 Comments

I’ve mentioned this before, but here’s a quick reminder as the tax-equivalent yields are now at 6% APY in most states with income taxes (anything 5% and up, see above graphic). Due especially to high state income taxes, my cash is mostly held in Treasury bills and money market funds that contain 90%+ treasury bills. Both can be owned within most major brokerage accounts that allow the purchase of individual bonds from either auction or secondary markets. (Treasury Direct allows purchase at auction, but I don’t like the user interface or customer service.)

So while I enjoy keeping track of new fintech apps, unless there is a good upfront bonus, it’s hard for me to justify another application at current rates. I skipped Milli when it hit 5.25% APY in August 2023. I skipped Elevault when it hit 5.50% APY in October 2023. I will likely skip Domain Money at 6% APY.

Treasury bond interest is exempt from state incomes taxes, which gives them a comparative boost over interest from banks. If you are subject to state income taxes, use a tax-equivalent yield calculator to compare Treasury bill/bond yields with interest rates from bank accounts and other bonds.

For example, if you are single with $70,000+ taxable income in California, your marginal state income tax rate is at least 9.3%. That means the 5.57% interest from a 4-week Treasury bill is equivalent to a bank account paying 6.42% interest or higher!

Be sure to check and make sure your “Treasury” money market fund is holding 90%+ Treasuries and not repurchase agreements. I’ve noticed that Vanguard Treasury Money Market Fund is now back to 94% Treasuries and only 4% repos, but that could change again in the future, so I’m keeping an eye on it.

Finally, at tax time be sure to look up the appropriate U.S. government obligations income information and use it when filing your state income taxes. You may need to nudge your accountant along with supplying this information.

[Top image credit – Wikipedia]

Filed Under: Banking, Investing, Taxes //

Last updated: October 26, 2023

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Optimal Asset Location For Different Types of Stocks (US vs. International, Active vs. Passive)

Posted on October 23, 2023 // Leave a Comment

There is asset allocation (what asset classes to buy and how much) and then there is asset location (where to put those asset classes). In general, there are three overall types: pre-tax accounts (Regular 401ks, 403bs, Traditional IRAs), post-tax accounts (Roth IRA, Roth 401k), and taxable brokerage accounts.

Here are two Vanguard research papers and associated articles which dig into the details. (I always download these PDFs because sometimes Vanguard takes them down after a while.) I won’t rehash the entire topic here, I’m just going to drop some links with the major highlights.

Asset location can lead to lower taxes. Here’s how to get more value.
Revisiting the conventional wisdom regarding asset location (PDF, October 2022)
Asset location for equity (PDF, October 2023)

Major takeaways:

The first paper found that even super-simple asset location principles such as placing taxable bonds in pre-tax-deferred and stocks in taxable/Roth account can still boost returns between 0.05% and 0.30% a year.
The second paper concludes that “additional return that can be attained from asset location according to three equity subclass characteristics: region (ex-U.S., U.S.), dividend yield (growth, high dividend yield) and management style (passive, active).”
Specifically, the second paper advises that “for most investors, ex-U.S., growth, and passive equity are best placed first in a taxable account, while U.S., high-dividend-yield, and active equity are best placed first in a tax-advantaged account.”

Here is an example chart and quote that summarizes their analysis as to why international (ex-US) stocks should have a slight preference in a taxable account.

We find that investors can potentially add up to 10 bps of additional after-tax return to their portfolio by thoughtful asset location of ex-U.S. equities. For most investors, preferentially placing ex-U.S. equity in a taxable account is the asset location strategy that maximizes after-tax return. The higher end of the added value is associated with portfolios that have both high levels of qualified dividend income and high foreign withholding rates. Only investors in the top tax bracket, who hold relatively tax-inefficient ex-U.S. equities, may find it beneficial to shield their ex-U.S. equity in a tax-advantaged account.

These conclusions still align very well my this rough “rule of thumb” graphic that I created way back in 2007 (been doing this for too long! 😱):

Filed Under: Investing, Retirement, Taxes //

Last updated: October 23, 2023

Michigan MESP 529 College Savings Plan: $100 Bonus Per Accountholder/Beneficiary Combo

Posted on September 11, 2023 // 8 Comments

The Michigan Education Savings Program (MESP) is offering a $100 bonus when you open a new account by 9/30/23 and deposit $1,000+ within 10 business days of establishing the account. Your $100 matching deposit will arrive by 1/31/24. The 529 account must be open with a non-zero balance to receive the bonus.

Compared to all 529 plans nationwide, MESP is a top overall plan with reasonable costs and good investment options (official plan of Michigan, run by TIAA-CREF), making it an excellent option for those without specific in-state tax incentives. See here to compare 529 tax benefits across all 50 states.

This offer is very similar to the ScholarShare 529 promo, as both are managed by TIAA-CREF and this also has a limit of “one (1) Matching Deposit pernew Michigan Education Savings Program (MESP) account per unique accountholder/beneficiary combination.” Please see that post for more background information. Additional considerations for this promo:

Michigan taxpayers may qualify for a state tax deduction up to $10,000 if married filing jointly ($5000 single), for contributions made into an MESP account.
You should be able to stack this with other 529 offers like that from California Scholarshare. If you have multiple 529 accounts from different state plans/managers, you can later transfer the balances and merge them into each other, although there may be a modest amount of paperwork required each time. You are allowed one rollover per beneficiary during a rolling 12-month period.

From the full fine print:

Offer Description: The Michigan Education Savings Program (MESP) is a 529 college saving splan administered bythe Michigan Department of Treasury, and managed by TIAA-CREF Tuition Financing, Inc. (“TFI”). To receive a $100 matching deposit (“the Matching Deposit”), eligible individuals must (a) open a new Michigan Education Savings Program (MESP) account (for a new beneficiary) online at www.MIsaves.com between September 1, 2023 at 12:01 AM Eastern Time (ET) and September 30, 2023 at 11:59 PM ET with an initial deposit of at least $1,000 to be contributed and invested at the time the new Michigan Education Savings Program (MESP) account is opened. The initial $1,000 deposit must be received within 10 business days after the account is established. The Matching Deposit will be made to the eligible Michigan Education Savings Program (MESP) account on or before 8:59 PM ET on January 31, 2024. To receive the Matching Deposit, the Michigan Education Savings Program (MESP) account must be open with a dollar balance greater than zero on the day the Matching Deposit is made. Limit: one (1) Matching Deposit per new Michigan Education Savings Program (MESP) account per unique accountholder/beneficiary combination.

Filed Under: College & Education, Deals & Offers, Investing, Taxes //

Last updated: September 11, 2023

Oklahoma 529 College Savings Plan: $50/$100 Bonus Per Beneficiary

Posted on September 11, 2023 // Leave a Comment

The Oklahoma 529 College Savings Plan is offering a $50 or $100 bonus when you open a new account and meet these deposit requirements:

$50 bonus: Open with a minimum initial deposit of $250 and set up recurring contributions via bank account or direct deposit) of $50 or more per month until 3/31/2024.
$100 bonus: Open with a minimum initial deposit of $500 and set up recurring contributions (via bank account or direct deposit) of $100 or more per month until 3/31/2024. Note that the info on the offer page conflicts with the fine print.
After six months, your $50 or $100 bonus will be deposited in your account on or before 5/17/2024.

Compared to all 529 plans nationwide, MESP is an above-average overall plan with reasonable costs and investment options (official plan of Oklahoma, run by TIAA-CREF), making it an acceptable option for those without specific in-state tax incentives. See here to compare 529 tax benefits across all 50 states.

Note that this offer has a limit of “Only one Matching Deposit per new Oklahoma 529 account per beneficiary”, which is more restrictive than the ScholarShare 529 bonus promo. Please see that post for more background information. Additional considerations for this promo:

Oklahoma taxpayers may qualify for a state tax deduction up to $20,000 if married filing jointly ($10,000 single) for contributions made into Oklahoma 529 account.
You should be able to stack this with other 529 offers like that from California Scholarshare. If you have multiple 529 accounts from different state plans/managers, you can later transfer the balances and merge them into each other, although there may be a modest amount of paperwork required each time. You are allowed one rollover per beneficiary during a rolling 12-month period.

From the full fine print:

PROMOTION DESCRIPTION: To receive a $50 promotion deposit (“the Promotion Deposit”), eligible individuals must (a) open a new Oklahoma 529 account (for a new unique Account Owner/Beneficiary combination) online during the Promotion Period with an initial deposit of at least $250 to be contributed and invested at the time the new account is opened and (b) establish a recurring contribution (from a bank account or by payroll direct deposit) for the new account of at least $50 per month, and shall be maintained at minimum through 11:59 PM CT on March 31, 2024. The Promotion Deposit will be made to the eligible account on or before May 17, 2024.

To receive a $100 promotion deposit, eligible individuals must: a) open a new Oklahoma 529 account (for a new unique Account Owner/Beneficiary combination) online during the Promotion Period with an initial deposit of at least $500 to be contributed and invested at the time the new account is opened and (b) establish a recurring contribution (from a bank account or by payroll direct deposit) for the new account of at least $100 per month, and shall be maintained at minimum through 11:59 PM CT on March 31, 2024. The Promotion Deposit will be made to the eligible account on or before May 17, 2024.

Limit: Only one Matching Deposit per new Oklahoma 529 account per beneficiary. Void where prohibited or restricted by law.

Filed Under: College & Education, Deals & Offers, Investing, Taxes //

Last updated: November 30, 2023

ScholarShare 529 College Savings Plan: $100 Bonus Per Accountholder/Beneficiary Combo

Posted on September 5, 2023 // 10 Comments

The ScholarShare 529 College Savings Plan is offering a $100 bonus when you open a new account by 9/30/23 and deposit $1,000+ within 10 business days of establishing the account. Your $100 matching deposit will arrive by 1/31/24. The ScholarShare 529 account must be open with a non-zero balance to receive the bonus.

Compared to all 529 plans nationwide, the ScholarShare 529 is a solid overall plan with reasonable costs (official plan of California, run by TIAA-CREF), making it a good option for those without specific in-state tax incentives. See here to compare 529 tax benefits across all 50 states.

I find that having an open 529 plan is a great way to redirect various gifts from friends and family (like grandparents) so that the money doesn’t just get spent mindlessly and then forgotten. If someone gives them a gift card, I just put the equivalent value into the 529 and spend the gift card myself. Since by the time they really understand money it will have been 10 years since birth, it can been a good lesson on how steady saving and investing adds up. Finally, opening a plan and making any contribution also starts the 15-year clock on potential future 529-to-Roth IRA rollovers.

This specific bonus is also interesting due to the limit of “one (1) Matching Deposit per new ScholarShare 529 account per unique accountholder/beneficiary combination.” That means a couple with three children could open six accounts for $600 in total bonuses. It would also require a significant upfront deposit, but many families are already setting aside $100+ each month per kid for future college expenses.

Spouse 1 + Child 1
Spouse 1 + Child 2
Spouse 1 + Child 3
Spouse 2 + Child 1
Spouse 2 + Child 2
Spouse 2 + Child 3

If you have multiple 529 accounts from different state plans/managers, know that you can later transfer the balances and merge them into each other, although there may be a modest amount of paperwork required each time. You are allowed one rollover per beneficiary during a rolling 12-month period.

From the full fine print:

Offer Description: The ScholarShare 529 College Savings Plan (“ScholarShare 529”) is a 529 college savings plan administered by the ScholarShare Investment Board (“SIB”), an instrumentality of the state of California, and managed by TIAA-CREF Tuition Financing, Inc. (“TFI”). To receive a $100 matching deposit (“the Matching Deposit”), eligible individuals must (a) open a new ScholarShare 529 account (for a new beneficiary) online at www.ScholarShare529.com between September 1, 2023 at 12:01 AM Pacific Time (PT) and September 30, 2023 at 8:59 PM PT with an initial deposit of at least $1,000 to be contributed and invested at the time the new ScholarShare 529 account is opened. The initial $1,000 deposit must be received within 10 business days after the account is established. The Matching Deposit will be made to the eligible ScholarShare 529 account on or before 8:59 PM PT on January 31, 2024. To receive the Matching Deposit, the ScholarShare 529 account must be open with a dollar balance greater than zero on the day the Matching Deposit is made. Limit: one (1) Matching Deposit per new ScholarShare 529 account per unique accountholder/beneficiary combination.

Filed Under: College & Education, Deals & Offers, Investing, Taxes //

Last updated: September 11, 2023

Money Market Mutual Funds, Repurchase Agreements, and State/Local Tax Exemptions

Posted on July 13, 2023 // 3 Comments

If you live in a state that taxes interest income, you may know that can significantly alter the net after-tax yield on your investments. This is because direct U.S. government obligations like Treasury bills and bonds are generally exempt from taxation in most states. For example, if a Treasury bill is yielding 5% but is exempt from a 8% state income tax, that would make it the equivalent after-tax yield of a bank CD at 5.65% APY (assuming 22% federal tax rate). That’s a pretty big difference! See Treasury Bond vs. Bank CD Rates: Adjusting For State and Local Income Taxes for details.

Money market mutual funds (available in most brokerage accounts) usually hold part of their portfolio in securities that count as US government obligations (USGO). (See Vanguard Federal Money Market Fund: How to Claim Your State Income Tax Exemption.)

For the 2022 tax year, Vanguard Federal Money Market Fund (VMFXX) had about 38% in USGOs, but the Vanguard Treasury Money Market Fund (VUSXX) had 100% in USGOs (source). As long as the yields were pretty close, your after-tax yield would be much higher with the Treasury Money Market fund if you were in a high state/local tax bracket. (VMFXX is the default sweep though, so you’d have to manually purchase VUSXX.)

However, these USGO percentages can change from year to year, and it is happening in 2023. A quick rewind – here is a list of what is and is not exempt from state and local taxes.

*Investments in U.S. government obligations may include the following: Federal Farm Credit Banks, Federal Home Loan Banks, the Student Loan Marketing Association, the Tennessee Valley Authority, the U.S. Treasury Department (bonds, notes, bills, certificates, and savings bonds), and certain other U.S. government obligations. GNMA, FNMA, Freddie Mac, repurchase agreements, and certain other securities are generally subject to state and local taxes.

In particular, even though the Vanguard Treasury Money Market Fund has “Treasury” in its name, it doesn’t only hold Treasury Bonds. It can also hold something called repurchase agreements (“repos”). These are often sold on a very short-term basis (overnight or less than 48 hours). While a repo is considered a very, very safe loan backed by government securities, it is not itself a government security, which means the income it creates is taxable at the state and income level.

As of July 2023, here is the percentage of repurchase agreements held by these two example money market funds: 58% for VMFXX and 34% for VUSXX. This would suggest that the USGO number for VUSXX will be significantly less than 100% for 2023, although VUSXX still holds less repos than VMFXX.

For an in-depth comparison, “retiringwhen” of the Bogleheads forum has created a detailed Google Spreadsheet that tracks and calculates the after-tax yields for several different money market funds from Vanguard and Fidelity. I would point out that the low expense ratio of Vanguard funds makes their money market funds consistently better than Fidelity money market funds across the board.

I also hold some Treasury bonds directly and while laddering isn’t that much hassle, recently I have been considering simplifying to VMFXX and VUSXX as the go-to place for my liquid cash savings account. For now, the tax-equivalent yield is higher than nearly all other savings accounts due to my high state-tax situation. I am also looking at ETFs that hold mostly T-bills like SGOV and BIL.

Bottom line. If you want to be precise, the full-geek DIY investor with state/local income taxes has to take into account the percentage of repos in their money market fund portfolios in order to calculate the true tax-equivalent yield to compare against other cash alternatives.

[Top image credit – Wikipedia]

Filed Under: Banking, Investing, Taxes //

Last updated: July 13, 2023

IRS Clarifies Federal Taxation of Special State Relief Payments

Posted on February 26, 2023 // Leave a Comment

In 2022, 21 states issued special relief payments to eligible residents in 2022. The Tax Foundation has a partial list of state rebate checks.

But do these state relief checks count as taxable income at the federal level? After taking a bit to think about it, the IRS has issued official guidance on how to account for these payments while filing your federal income taxes. Please see the full details there, but here is a quick summary below. For most people, the payments will not be taxable.

Filers in the following 17 states do NOT need to report “general welfare and disaster relief payments” from their state on their 2022 tax return:

Alaska*
California
Colorado
Connecticut
Delaware
Florida
Hawaii
Idaho
Illinois*
Indiana
Maine
New Jersey
New Mexico
New York*
Oregon
Pennsylvania
Rhode Island

For individuals in the remaining 4 states listed below, state payments will not be included for federal tax purposes if the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit.

Georgia
Massachusetts
South Carolina
Virginia

(* For Alaska, this applies only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend. Illinois and New York issued multiple payments and in each case one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.)

For example, in California, residents who received a California Middle Class Tax Refund (MCTR) of $600 or more received a 1099-MISC form. I am not a tax advisor, but based on this IRS guidance, you should not have to report this income on your federal taxes. If you already filed, you may need to file an amended return.

Filed Under: Taxes //

Last updated: February 26, 2023

Problems with TASC Denying Dependent Care Expense Reimbursement With No Reason Provided?

Posted on March 6, 2022 // 20 Comments

My muscles tense up with just the thought of dealing with health insurance claims and flexible spending account reimbursement. I feel they are both incentivized to deny your claims and thus put up layers and layers of bureaucracy in the hopes that you’ll just give up. Sometimes I feel like I’m a customer of Insuricare.

I have actually skipped participating in FSAs for entire years due to bad administrators. At some point, the potential tax savings isn’t worth the added stress and time spent to submit $20 receipts for approval. However, I thought it might be different for the Dependent Care Flexible Spending Account (DCFSA). I can contribute $5,000 and a single preschool tuition alone was easily over that. Just one receipt and done! Right?

No. This is light paraphrasing of my recent interaction with TASC (Total Administrative Services Corporation), which is the benefits administration provider for our DCFSA. I wish I had a recording of the call; I really felt that I was in the movie Office Space. Even worse, it wasn’t this person’s fault. The highly-paid people who created this situation made sure they had a layer of low-paid workers shielding them from the actual customers (again, see Insuricare). You can skip to the end if you want the final resolution.

Me: Hi! I am checking in again on why my dependent care expense reimbursement request was denied (again).

TASC: I see that it was denied again. I can’t tell you why it was denied. I can tell you the things we usually look for: name of provider, name of service recipient, date, amount, and description of service.

Me: The receipt that I sent in has all of those things.

TASC: I see. I can tell you the things we usually look for: name of provider, name of service recipient, date, amount, and description of service.

Me: So which of those things was missing in my reimbursement request?

TASC: I can’t tell you that.

Me: Can I talk to the people who denied me?

TASC: No, you can’t talk to them. They are in a separate department. They don’t talk to customers. We talk to the customers.

Me: So I can’t talk to the people who denied my request. They are just allowed to deny my request without providing even the tiniest clue to say WHY they denied my request?

TASC: That is correct.

Me: So can you tell me EXACTLY what I need to do to get my reimbursement approved? I am contributing $5,000 of my paycheck to this Dependent Care FSA this year. It’s a lot of money.

TASC: You need to send in a new reimbursement request. I can tell you the things we usually look for: name of provider, name of service recipient, date, amount, and description of service.

Me: How should it be different than my previous reimbursement request?

TASC: I can’t tell you that.

Me: I must point out that I submitted the exact same documentation in 2020 and it was approved.

TASC: I can’t help you with that. I can tell you the things we usually look for: name of provider, name of service recipient, date, amount, and description of service.

Me: Umm… we don’t seem to be making any progress here. Can I talk to a supervisor?

Stitch Frustration GIFfrom Stitch GIFs

After an additional 15-minute hold time (where I reminded myself of the $1,000 in tax savings at the end of the rainbow) and another discussion with the supervisor, they finally told me about the existence of an alternative method: the TASC Dependent Care Contract. My preschool provider had to fill it out (I felt bad making more work for them), I signed it, scanned it, uploaded it, and it was finally approved. (There may be different versions of the form out there. I wouldn’t put it past them.)

Note that I had talked to three different customer service reps about my denied reimbursement request, and NONE of them mentioned this magical form. Only after escalating to a supervisor was this option finally revealed to me. I hope that some of these keywords will make it into Google and other search engines and help the next parent pulling out their hair.

If you want to cover all your bases, you should also ask your care provider to fill out IRS Form W-10, “Dependent Care Provider’s Identification and Certification” at the same time as the TASC form.

Filed Under: Deals & Offers, Family, Taxes //

Last updated: March 6, 2022

Year-End Portfolio Rebalancing Check-In Time

Posted on December 14, 2021 // 2 Comments

Although you can rebalance the stocks and bonds in your portfolio back towards your target asset allocation at any time, I usually see more articles about it at years-end. This works out well as the evidence doesn’t really support doing it more often than once a year. Morningstar has a couple of interesting rebalancing articles where the overall conclusions are the similar to those from the previously-mentioned Vanguard research, but with some added context.

Rebalancing is about risk control, not necessarily increasing returns. Sometimes rebalancing will increase returns, and sometimes buy-and-hold (not rebalancing) will lead to bigger returns. In the long run, you’d expect buy-and-hold to win as you allow the stocks to keep growing, but you might be surprised when comparing these trailing 15, 20, and 25 year timeframes ending May 2020.

Most common rebalancing strategies all work similarly. This means there is no need to do it more often annually. There is no single rebalancing rule that always results in the highest returns on all portfolios and over every timeframe. Therefore, why not pick an easy one that works for you, such as rebalancing once every year on the same date or using +/- 5% bands that may only get triggered once every 2 years on average.

I’ll end with a good conclusion sentence from the Vanguard paper:

Once you construct the appropriate allocation for your goals, remove yourself from difficult decisions by implementing an easy-to-follow, consistent rebalancing rule. […] We find that, over the long term, no one rebalancing strategy is dominant. Selecting and sticking with a reasonable rebalancing approach is better than not rebalancing at all.

Filed Under: Investing, Taxes //

Last updated: December 14, 2021

Healthcare and Dependent Care FSA Check-up Reminder (Average Loss $157)

Posted on October 21, 2021 // 1 Comment

As we head into the last few months of 2021, this is a reminder to check on your Healthcare and Dependent Care Flexible Spending Accounts (FSA). This NYT article outlines some temporary changes this year, while also revealing that nearly half of all FSA participants have lost some amount of their contributions, with a median lost balance of $157.

Healthcare FSA carryover allowance for 2021 into 2022.

Employers may allow a “full” carry-over of remaining balances for next year — up to the total balance in the worker’s F.S.A. So if you had $1,000 in your account at the end of this year, you could carry it all over into 2022. (The usual carry-over limit is $550.)

Masks, hand sanitizer, sanitizing wipes, and at-home COVID tests are FSA eligible expenses. See official IRS notice. The Amazon FSA and HSA Store accepts your FSA/HSA debit card for hassle-free reimbursements and is also an easy way to find eligible items that may be useful to you.

The accounts can be used for medical care and co-payments, nonprescription drugs, and a variety of health-related services, products and supplies, including menstrual pads and tampons, breast pumps, contact lenses and lens solution.

And the I.R.S. recently clarified that masks, hand sanitizer and other items that protect against the spread of Covid-19 are eligible for reimbursement. At-home Covid tests also qualify, the I.R.S. said, because “the cost to diagnose Covid-19 is an eligible medical expense for tax purposes.”

Dependent Care FSA carryover allowance for 2021 into 2022..

Under a temporary pandemic relief change, however, all funds in dependent care accounts may be rolled over into 2022 — if the employer chooses to allow it.

Balance carryover extensions are thus possible but still require your employer’s approval, so check with your HR department first.

I hate wasting potential tax savings, but this is another year of struggling with my Dependent Care FSA benefits provider over reimbursement approvals. FSA “stores” made some things easier, but many childcare providers simply aren’t used to providing detailed, itemized receipts like Amazon or Walgreens.

Filed Under: Frugal Living, Taxes //

Last updated: October 22, 2021

Crazy Rich IRAs: From Peter Thiel to Ted Weschler

Posted on August 31, 2021 // 6 Comments

Propublica recently reported that venture captialist Peter Thiel has a $5 billion Roth IRA. Essentially, he bought some lottery tickets using his IRA wrapper, and they paid off. The controversial part is that these lottery tickets weren’t available to everyone. They were dirt-cheap private shares of a startup that were only available to founders and a handful of early investors. At such an early stage, you can pretty much value your private company shares at whatever you wish. Here’s the Propublica version:

Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments.

It’s not clear how they found this data, but they also included the owners of other large IRAs:

Ted Weschler, a deputy of Warren Buffett at Berkshire Hathaway, had $264.4 million in his Roth account at the end of 2018. Hedge fund manager Randall Smith, whose Alden Global Capital has gutted newspapers around the country, had $252.6 million in his. Buffett, one of the richest men in the world and a vocal supporter of higher taxes on the rich, also is making use of a Roth. At the end of 2018, Buffett had $20.2 million in it. Former Renaissance Technologies hedge fund manager Robert Mercer had $31.5 million in his Roth, the records show.

Ted Weschler, along with Todd Combs, are the heirs to the “stock picking” part of Warren Buffett’s job at Berkshire Hathaway. Greg Abel will be the future CEO and help handle all the wholly-owned subsidiary companies within Berkshire, and Ajit Jain will run the large insurance operation.

As a public figure, Weschler submitted this personal statement defending and explaining his IRA, and it reveals some interesting details. He opened his first “IRA” in 1984 as a 22-year-old Junior Financial Analyst making $22,000 a year. He seems to be mixing up the terms for 401k and IRAs in his letter (confirmed in WaPo story below). His timing was lucky, as 401k plans had just been born with the earliest ones starting around 1980. Here is a 1982 WSJ newspaper scan about these newfangled “salary reduction plans”, which were what 401k plans were initially called.

Anyhow, his 401k/IRA balance had grown to $70,385 by the end of 1989, when he rolled it over into a self-directed IRA at Charles Schwab. Fast forward 23 years, and by the end of 2012, his IRA was worth $131,000,000! Thanks to the new Roth IRA conversion option when he promptly rolled it over into a Roth IRA even though he had to pay $29 million in taxes. By 2018, the balance was at $264 million.

Also significant:

I invested the account in only publicly-traded securities i.e., all investments in this account were investments that were available to the general public.

[…] In closing, although I have been an enormous beneficiary of the IRA mechanism, I personally do not feel the tax shield afforded me by my IRA is necessarily good tax policy. To this end, I am openly supportive of modifying the benefit afforded to retirement accounts once they exceed a certain threshold.

This WaPo article is a follow-up with Ted Weschler about his amazing IRA skills.

I also realized that Weschler wanted to encourage young people to do what he did to accumulate his nine-digit net worth: save and invest, early and often, and take advantage of any retirement account benefits offered by their employer. “In a perfect world, nobody would know about this account,” he said. “But now that the number is out there, I’m hopeful that some good can come of it by serving as a motivation for new workforce entrants to start saving and investing early.”

My takeaways:

You may not agree with all the tax rules, but there is a reason why standard personal finance advice includes maximizing your Roth IRA contribution each year AND taking full advantage of your 401k plan with any employer contribution.
If you believe that your future tax rate after age 60 will be higher than your current tax rate, then you should consider converting any pre-tax “Traditional” IRA balances into Roth IRAs, even if it requires a big lump sum payment today.
If your income is too high to qualify for a regular Roth IRA, check if you are eligible to contribute to a “backdoor” Roth IRA, essentially making a non-deductible Traditional IRA contribution and quickly performing a Roth IRA conversion. If you are high-income and a big saver, look up the “mega backdoor” Roth IRA, which involves making a non-deductible contribution to your 401k plan (if allowed by employer plan document).
Roth IRAs have differences from Traditional IRAs beyond just the timing of the tax being upfront or at withdrawal. If you want to leave an inheritance (as these rich people most likely do), realize that Roth IRAs don’t have the required minimum distribution (RMD) rules that apply to traditional IRAs. Bottom line: More compounding + more tax shelter = bigger estate.
Consider putting your riskiest investments with the highest potential upside inside your Roth IRA. My Roth IRA holds REITs: low tax-efficiency and higher risk/return profile. No sleepy bonds!
As a BRK shareholder, if you were to think of a contest to win “The Next Warren Buffett”, finding the person who built the biggest IRA in the world using publicly-available investments would be a pretty smart filter! Maybe Berkshire Hathaway’s investment side will be alright after Buffett and Munger are gone.

Filed Under: Investing, Taxes //

Last updated: August 31, 2021

IRS Tools to Track and Manage Enhanced Child Tax Credit Payments (Starts July 15th)

Posted on June 23, 2021 // 3 Comments

The American Rescue Plan Act (ARPA) of 2021 “enhances” the Child Tax Credit, increasing it to up to $3,600 for each child under 6 and $3,000 for each one under age 18. Eligible parents will receive half in advance via direct payments spread out equally over the last 6 months of 2021 (starting July 15th). The other half will be received when you file your tax return. This breaks down to:

For each qualifying child under age 6, six monthly payments of up to $300 each ($1,800 total, half of $3,600).
For each qualifying child over age 6 and under age 18, up to six monthly payments of up to $250 each ($1,500 total, half of $3,000).

The IRS released the following new tools to help you manage this process:

Advance Child Tax Credit Eligibility Assistant.
Child Tax Credit Update Portal. This one requires authentication of your identity. Although the initial button says “Unenroll me”, which is a bit scary-sounding, it really just helps you manage the tax credit. You’ll be able to see your history of payments as well.
Child Tax Credit Non-filer Sign-up Tool. If you did not file a 2020 tax return, this tool may help you get these payments.

These advance payment amounts begin to be reduced if your modified adjusted gross income (MAGI) exceeds:

$150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
$112,500 if filing as head of household; or
$75,000 if you are a single filer or are married and filing a separate return.

Kiplinger has a calculator if you’re that phase-out area. You may still be eligible for the “standard” child tax credit when you file your 2021 tax return. These tax credits are now also fully refundable, which is important for those with lower incomes that can’t fully take advantage of these tax credits otherwise.

It’s quite likely you won’t need to use any of these tools, although I still used them to confirm our eligibility. For most households, the payments will automatically be sent to the bank account and/or address used for your previous tax returns. Just be on the lookout around July 15th, 2021. These tools are meant for those that don’t file tax returns, their tax situation has changed significantly since their last return, or otherwise need help updating how their payments are handled.

Also: Expanded Child and Dependent Care Tax Credit. A reminder that there is also an increased tax credit towards childcare/dependent care for 2021.

For 2021, now worth up to $4,000 for one qualifying individual or $8,000 for two or more. More expenses are eligible, at a higher percentage. The net increase in value could be worth up to $5,900 (see chart below).
Now fully refundable.
Qualifying children are under the age of 13 for the entire year.

Filed Under: Taxes //

Last updated: July 8, 2021

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IRS Tools to Track and Manage Enhanced Child Tax Credit Payments (Starts July 15th)

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