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3 Things 2-12-24

Thing One


A Last-Minute Deduction To Consider


If either you or your spouse had earned income in 2023, the following excerpt from the Wall Street Journal might have something in it for you to think about regarding your 2023 tax return:


“The window to use most tax breaks slams shut at year-end, so there aren’t many ways Americans can still cut their 2023 taxes. But here’s an option many filers overlook: a spousal IRA contribution. It can benefit married couples when one partner earns less than the other—or even nothing.  


Eligible couples can use it to double contributions to traditional individual retirement accounts (IRAs) and deduct $15,000 rather than $7,500 for 2023, as long as they do so by April 15 this year (April 17 in Maine and Massachusetts). Or they can contribute to Roth IRAs with no deduction. 

The idea of savings contributions for nonearning spouses emerged in the 1970s when IRAs were enacted. Congress expanded them in the mid-nineties at the urging of Sen. Kay Bailey Hutchison (R., Texas), who believed that unpaid and lower-earning spouses—typically women—deserved a savings incentive. The provision now bears her name, though it’s seldom used…


…The rules for these accounts are often the same as for other IRAs. For example, spousal contributions go into individually owned accounts.  

As with other IRAs, the taxpayer—in this case the couple—must have “earned” income from wages or self-employment at least equal to the total IRA contributions. Income from investments, Social Security, and pensions don’t count for this purpose. Also as with other IRAs, the contribution limit is up to $6,500 for savers under 50 and $7,500 for older savers for 2023. For 2024, it’s $7,000 and $8,000, respectively…


…Say Stacey and Dana are married and both are age 61. Stacey earns $100,000 in wages while Dana has retired and earns $4,000 from consulting. The couple likely can put up to $7,500 in a traditional or Roth IRA for Stacey in 2023 another $7,500 for Dana. It makes no difference which of them writes the check for the spousal contribution to Dana’s IRA…”


In a nutshell, there are rules and exclusions, but if you qualify, you have up until the tax filing deadline this year to make IRA contributions and potentially qualify for deductions to your joint 2023 tax bill.  You’re on the clock!



Thing Two


Five Things


If you’ve ever been pitched an annuity, the following excerpt from about things your annuity salesman won’t tell you might be of some interest:


…1. Just wait for the tax surprise.

Annuities are often touted for their tax-deferral. Earnings in annuities are tax-deferred — but only while they are in the account. Once you take money out, any gain is taxed as ordinary income.


2. Good luck trying to understand your contract.

A good rule of thumb is “the more complex the investment, the more likely it’s enriching someone other than the investor.” For example, fixed indexed annuity providers offer “point to point” crediting, but the investor must choose monthly or annual valuation, and the fees for each option differ. Then there are crediting caps, participation rates, buffers and floors that also impact the actual return on your annuity investment.


3. That rider is a money maker (for the seller).

Riders are “bells and whistles” that add features to a standard annuity — and they come at a cost.


4. You’re more likely to be a redhead than collect that death benefit.

Many annuities offer a “death benefit” rider, which promises that when you die, your heirs will get back your original investment, even if the account is worth less than that. Before purchasing such a benefit, calculate the odds of such an event happening.


For example, the statistical chance a 65-year-old man will die within three years is 4.7%. And historically, the S&P 500 has a 15% chance of experiencing a loss in any rolling three-year period. Combining those odds puts the chances of both happening at less than 1%. Is it worth paying 1% per year (or more) for such a low-probability event?


5. You’re locked in.

To paraphrase the Bard, parting is such expensive sorrow. Want to take your money out of the Athene Performance Elite 15 annuity? It will cost you 15% the first two years after purchase. And the surrender charges last for 15 years!


In addition, most annuities charge surrender fees not only to principal but to earnings as well. Annuities are among the most lucrative products a commission-compensated adviser can sell — so be sure to understand the seller’s motivation in their recommendation…”


This doesn’t mean you should never buy an annuity.  It’s just another reminder that the devil is in the detail so you should be prepared to a spend a considerable amount of time digging into it before you make your decision.



Thing Three


“The whole purpose of education is to turn mirrors into windows.” -Sydney J. Harris



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