Thursday, April 11, 2024

Individual Retirement Accounts: What You Need to Know

 

The 2023 income tax filing deadline is only days away (April 15, 2024 in most of the U.S.). It will be a busy weekend for many taxpayers and tax preparers who are filing tax returns or tax filing extensions.


One of the few things that taxpayers can do to reduce their income taxes after a calendar year ends is to make a tax-deductible contribution to a traditional individual retirement account (IRA) or a SEP-IRA (for small business owners and/or their employees). The maximum contribution for traditional IRAs for 2023 was $6,500 for workers under age 50 and $7,500 for those age 50+.

 

I recently attended a Financial Planning Association (FPA) webinar about traditional and Roth IRAs presented by Ed Slott, a nationally recognized expert on IRAs and frequent presenter at conferences for financial advisors. Below are nine take-aways from his presentation:




Roth IRA Contributions- Roth IRA contributions are funded with after-tax dollars (i.e., money that has been taxed) and can be withdrawn at any time for any reason tax-free and penalty-free.

 

Taxpayer Services- There is a big difference between tax preparation and tax planning. Tax preparation is based on past history; i.e., what already happened during the previous calendar year. Tax planning involves looking ahead and projecting future income and tax write-offs.

 

Baby Boomer Challenges- Baby boomers (born 1946-1964) were the first generation with the ability to save money for retirement in 403(b)s, 401(k)s, and IRAs for decades (their parent’s generation had pensions). Many have accumulated significant sums and need tax planning help.

 

Roth Conversions- Any pre-tax dollar funds that are converted (e.g., from a traditional IRA to a Roth IRA) must be included as ordinary income in the year that a Roth conversion is made.

 

RMD Inevitability- Required minimum distributions (RMDs) are inevitable if you have a traditional IRA (unless you make qualified charitable distributions), SEP-IRA, or qualified employer retirement plan (i.e., 401(k), 403(b), 457, or Thrift Savings Plan). There is no way out.

 

Five-Year Clock- The five-year clock to determine tax-free withdrawals of earnings on a Roth IRA starts on January 1 of the year of the first contribution or conversion to any Roth IRA,

 

Roth Conversion Opportunity- Between 1944 and 1963, the top U.S. tax bracket was over 90%. Mr. Slott noted that we are currently at some of the lowest tax rates ever and that people should consider moving money from traditional to Roth accounts now- before tax rates rise again.

 

Strategic Planning- Taxpayers with large tax-deferred accounts were described as “sitting ducks.” Two proactive strategies to mitigate taxes are 1. elective withdrawals between age 59½ and 73 (or 75) to spread taxes out over more years and 2. a series of small Roth conversions. Do Roth conversions near the end of a year when you have a better idea of your income for that year.

 

Charities As Beneficiaries- People may decide to name a charity as the beneficiary of their tax-loaded retirement savings accounts and gift money in taxable accounts (with a stepped-up basis) to family members. This relieves family members of RMD hassles and the only loser is the IRS.


This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 


Thursday, April 4, 2024

Highlights of Recent Webinars: First Quarter 2024

 

Every quarter, I like to review and summarize my notes from webinars I attended during the last three months. Below are some interesting tidbits from recent programs that I attended:



Future Self Thinking- Many people often think of their “future self” (who they will be decades in the future) as a stranger. As a result, they don’t think about the consequences of doing something now because their actions are affecting another person rather than themselves personally.

 

Required Minimum Distributions (RMDs)- Only IRAs and 403(b) plans (for school and non-profit sector employees) can be aggregated to calculate RMDs. All other tax-deferred plans, like 401(k)s and the thrift savings plan (TSP), must have RMDs calculated separately.

 

Saving Money on College Expenses- Suggested strategies include going to community college first, living at home with parents, going to a public college in your home state, applying for scholarships, buying used textbooks or renting textbooks, and getting a job at a college.

 

Loud Budgeting”- This is where people (mostly young adults) post videos, primarily on TikTok, about ways they are reducing expenses and saving money. In many cases, they are repackaging “tried and true” strategies from the past but are doing so to appeal to a new generation.

 

ChatGPT- This program, developed by Open AI, is the most popular large learning model (LLM). It is trained on a massive data set of text, pulls information from multiple sources, and consolidates it to create brand new content in response to prompts by users.

 

Financial Trauma- The textbook definition is any negative experience that affects how people handle money (e.g., saving and credit). The trauma can be “little t” (relatively minor) or “Big T” (a major event). Financial advisors should always remember that people are the expert of their life.

 

Roth Conversions- It is best to move money from a pre-tax account to a Roth account in low-taxable income years, during stock market downturns, and/or in small increments over time. When you do a Roth conversion, you are front-loading taxes to avoid taxes at higher rates later.

 

A Dollar Too Much- RMDs often push older taxpayers into a higher marginal tax bracket. Just one extra dollar in income can trigger tax on Social Security benefits, higher Medicare premiums, and the 3.8% net investment income tax.

 

IRMAA Medicare Surcharge- The income-related monthly adjustment amount (IRMAA) is an extra amount that high-earning retirees pay for Medicare coverage. Currently about 7% of retirees pay IRMAA and there are five IRMAA income thresholds beyond the standard Medicare premium. IRMAA is based on income earned two years earlier (e.g., 2022 for 2024) and can be avoided by lowering adjusted gross income or making an appeal to Medicare based on life events.


This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 


Thursday, March 28, 2024

Money Math for Life: A Webinar Summary

 

I recently participated as a panelist for a webinar titled Math Matters in Life: Personal Finances and Future Success. This webinar for financial educators, co-sponsored by the AFSA Education Foundation and National Math Foundation, discussed the important connection between math literacy and financial literacy and presented creative, engaging activities to teach money math.

 


Below are six take-aways from the webinar for parents and those who teach personal finance:

 

Fundamental Math Skills- The following math skills are required to make important financial decisions: addition, subtraction, multiplication, division, interpreting tables and graphs, ratios, and percentages. An example is calculating 7% sales tax on a $30,000 car ($30,000 x .07 = $2,100). Another is a 73-year old’s RMD on $100,000 IRA account ($100,000 ÷ 26.5 = $3,774, rounded).

 

Kinesthetic Learning- Information that is taught using activities that require students to touch or manipulate things (i.e., “hands-on” methods) is often retained better by students. Several examples of kinesthetic activities were shown including colorful floor mats from the National Math Foundation for elementary school students to practice adding and subtracting numbers.

 

Integrated Coursework- Only 25 states require a standalone financial education course for students to graduate and efforts are underway to include all 50 states and DC by 2030. In the meantime, students in non-requirement states can receive some financial education through other subject areas. All students are required to take math courses.

 

Financial Ratios- Financial ratios are combinations of numbers that provide valuable insights into household finances. They are calculated with basic math. (e.g., division). An example is a liquidity ratio, which is calculated by dividing monthly expenses (from a cash flow statement) into liquid assets (from a net worth statement). The higher the ratio (e.g., 5:1 vs. 2:1), the better because it means that someone has a larger emergency fund to withstand various financial shocks in life.

 

Application Activities- I shared several activities that I used with college students at Rutgers University including time value of money calculation problems (with an answer sheet containing keystrokes) and case study analyses based on real life situations. Both activities require an understanding of, or the use of, math.

 

Math Resources for Financial Educators- Among the resources that were mentioned are the 37-module AFSA Education Foundation online course MoneySKILL, which has lots of math calculations built into end-of-module assessments, and the Next Gen Personal Finance (NGPF) Math website that includes dozens of interactive activities that simultaneously teach math and personal finance concepts such as the Rule of 72 and calculating income taxes.

 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 


Thursday, March 21, 2024

Lessons from the Road: Words of Wisdom From My Brother

 

In January, I lost my brother and only sibling, Michael F. O’Neill, to a combination of heart disease and cancer. A published author of the book Road Work: Images and Insights of a Modern Day Explorer and a professional photographer for 40+ years, Michael combined his two passions of photography and extended motorcycle road trips in his book and Roadcraft USA website.

 

In 2022, Michael asked me to read a draft copy of Road Work prior to its publication and I read it like a former four-decade academic. I focused on grammar and typos, formatting, and consistency. 


A month after he died, I re-read my brother’s book as a sister and focused on insights into the soul of a departed loved one. While Michael did not want bulleted take-aways or action steps in his book (as I had advised), I realized that the book contains valuable life lessons for all of us.




Below are six key insights from Road Work with a few financial planning parallels, of course:

 

Proficiency Takes Time- While Michael was talking about motorcycling, this insight applies to most anything in life. As he notes, “It takes proper training, lots of practice, and lots of experience…before you’re ever going to be your best…the lessons learned never end and each one adds something new to your inventory of skills while fueling your passion for even more.”

 

Planning is Important- This applies to a motorcycle trip, the purchase of a motorcycle, or any other bucket list item. Michael wrote the following: Every great road trip I’ve taken…started off with a little bit of dreaming and a lot of planning. The internet enables the avid traveler [and those planning any other future financial goals] to plan things in greater detail than ever before.”

 

Stereotypes Are Limiting- What Michael wrote about motorcycle rides also applies to life in general: “Though stereotypical descriptions could easily have been assigned to every single person [at an event for motorcyclists]…it’s much more fun when…you don’t limit your exposure to other people based upon assumptions that are probably wrong to begin with.”

 

Goals Are Motivating- Michael’s words say it all, whether the goal is a motorcycle road trip, a college degree, a promotion, or anything else: “I believe that it is important…imperative even…to set ambitious and challenging goals for yourself. They keep you motivated and focused; and help build the faith, will power, and perseverance needed to achieve the objects of your desire.”

 

Gratitude Trumps FOMO- Another direct quote: “People would do much better to express gratitude for the great things they have in their lives rather than be bitter about, or jealous of, things they haven’t achieved yet….The deeds, exploits, and achievements of others are their own…not yours. The only thing that matters is your own personal satisfaction and happiness.”

 

Life is Short- Michael advised readers to “do it (a long postponed road trip) now” and added “Find the one thing that really lights you up…the one thing you’re really passionate about…and pursue it fervently. Now. Today. While you still can. Every day is a gift and people should strive to make the most of each and every one they’re blessed with. Live each and every day as if it is your last.”


Thursday, March 14, 2024

Personal and Professional Uses of Generative AI

 

I recently co-taught a webinar for one of my clients about professional uses of artificial intelligence (AI) platforms such as ChatGPT. Below are eight highlights from my webinar presentation and some advice to get started:





Previous Experience- Most people have had some experience with AI through word processing software, online searches, online pop-up ads, AI-enabled “smart home” features, and virtual assistants such as Alexa, Siri, and Cortana.

 

Simple ChatGPT Description- ChatGPT provided this simple description: "A smart robot friend who can answer questions and have conversations with users." It is a large language model (LLM) trained on a massive data set of text information that creates (generates) brand new content.

 

Login Details- The website for ChatGPT is https://chat.openai.com. To use this program, users must create an account with a username and password. After that, simply type a prompt into the “Send a Message” field and wait 5-10 seconds. The response to your query is lightning-fast.

 

Prompt Engineering- This is a skilled process of talking to LLM systems like ChatGPT and involves using carefully chosen words. The more detail the better. For example, instead of “What are mutual funds?,” say “Explain mutual funds to a 10-year old and describe five types of mutual funds.”

 

Hallucinations Happen- “Hallucinations” is the term used to describe authoritatively sounding statements that are flat out wrong. They happen and, for this reason, ChatGPT output should only be considered a “first draft” subject to review by an experienced subject matter expert.

 

Fun Ways to Start Using ChatGPT- Many people don’t have time to play with AI on work time so they need to learn how to use it on their time off. Fun personal uses of ChatGPT include poems, songs, jokes, party planning ideas, craft and hobby ideas, gift ideas, recipes and meal planning, vacation planning, restaurant reviews, exercise ideas, and learning a new language.

 

Content Creation Uses of ChatGPT- For personal finance content creators and other writers, uses of AI include newsletter articles, newspaper columns, blog posts, literature reviews, outlines for classes and webinars, speaker notes for slides, show notes for podcasts, and article, blog, and book summaries.

 

Learning Activities- A variety of learning activities can be created using ChatGPT. Examples include discussion and polling questions, talking points for debates, trivia game questions, financial case studies, student-created poems or songs, and definitions of terms.

 

A good way to get started is to write down one or more things that you would like to do with ChatGPT (e.g., summarize a book, plan a trip, research a topic, write a poem, etc.). Then write your first prompt to accomplish this task.


This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.


Individual Retirement Accounts: What You Need to Know

  The 2023 income tax filing deadline is only days away (April 15, 2024 in most of the U.S.). It will be a busy weekend for many taxpayers a...