3 Things 6-27
06/27/2022 Although MAS is a financial services company, not everything published herein will be about numbers or investing. But no matter the topic, we hope for three things: 1) That you find the time you spend engaged worthwhile. 2) That you’ll reach out to us for help in any of our areas of expertise if something we discuss creates an urging in you to do so. 3) That you’ll share this with somebody new each time you read it. Thing One Your 401k/IRA Is Not All Yours If you have a tax-qualified retirement plan like a 401k or an IRA, Uncle Sam is expecting his cut of your retirement distributions. That’s because unlike a Roth IRA, where you pay taxes upfront and get to take all future distributions (including those made possible by capital gains) without paying taxes, in traditional retirement accounts, the taxes are deferred until you start taking out cash. While this allows for tax-free growth, you eventually have to pay up. So what are your options? Well, you could:1) do nothing 2) convert your 401k/IRA to a Roth 401k/IRA all at once 3) convert your 401k/Ira over time. 1. If you do nothing, you will just pay taxes at the future rate when you start taking distributions. This may or may not be an issue for you. On one hand, tax rates are likely to be higher by the time you retire (if retirement is more than a couple of years away), but on the other hand, you may be in a lower tax bracket when you retire if you have less income. 2. If you convert all of it at once, you’ll have to pay taxes on the converted amount immediately. Be sure you are prepared for that by figuring what the additional income does to your tax bracket. There are currently 7 tax rate/brackets. The single filer brackets are shown below: 10% - $0 - $9,950 12% - $9,951 - $40,525 22% - $40,526 - $86,375 24% - $86,376 - $$164,925 32% - $164,926 - $209,425 35% - $209,426 - $523,600 37% - $523,601 or more See the simplified example below (note it doesn’t count any other income adjustments): Pre conversion annual income: $30,000 Traditional IRA balance: $30,000 Total amount planned to convert to Roth: $30,000 Pre-conversion highest tax bracket: 12% (on income of $30,000) Post-conversion highest tax bracket: 22% (on income of $60,000) In the above example, your income would double and the taxes you paid on $20,000 of the additional $30,000 would almost double (12 to 22 equals an 83% increase). Note that if you did the full conversion, you’d never have to pay taxes on any distributions as long as you followed the early-withdrawal rules so if you could afford to pay the taxes now and you think you might be in a higher bracket at retirement, this still might be advisable. 3. You could switch from a Traditional IRA to a Roth gradually by converting only the amount that “fills up” the current bracket, or some version of that plan that doesn’t cause excessive bracket jumps in one year. So in the same example from above, instead of converting all $30,000 and moving from the 12% bracket to the 22% bracket for one-third of your income, you could convert only $10,000 this year. If you did that, your income would increase by 33% but your tax rate would remain the same at 12%. You could repeat this annually until you had converted it all. Let us know if you think you might want some help figuring out your situation.
Thing Two When The Federal Reserve Raises Interest Rates, Your Credit Card Bill Rises We all know the Federal Reserve is raising interest rates. As that happens, the interest rates on everything else will rise. Accordingly, the interest rates on credit cards will be heading up. The expert (and common sense) advice for credit card use is to pay balances off in full every month. But according to creditcards.com, about 40% of consumers don’t do that. And among that group, the average balance outstanding is $17,000. That’s $17,000 that the consumer has borrowed from the older version of himself. That’s $17,000 that was spent on things he couldn’t afford at the time. That’s $17,000 owed that could easily turn into $34,000 owed in just 5 short years if the card is continuously used and no serious effort to pay down the balance is undertaken. And finally, that’s $17,000 that can’t be invested to provide funds for old age. Just what does that last one mean in real numbers? Well, let’s look at what might happen if he invested that same amount. We’ll assume our borrower is 35 yrs old. And we’ll also assume that the average return on the stock market for the next 30 years will be about what it has been for the last 30. At age 65, our borrower could have accumulated almost $130,000 from an initial investment of $17,000. That amount represents the huge and largely unconsidered opportunity cost of credit card debt that many individuals unwittingly pay. And all it would take in many cases to avoid that huge cost would be to start thinking about debt differently
Thing Three Just A Thought “A man is but what he knows." - Sir Francis Bacon