3 Things 8-1
08/01/2022 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 rates/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 Investing Tips From The 1700s The founding father who first became known to many of us for flying a kite during a thunderstorm, Benjamin Franklin, is also known to have said, “An investment in education pays the best dividend.” There are different ways to interpret that statement. One can reasonably assume that the investment Franklin was speaking of back then was the time spent studying in a particular subject area and the dividend was the new knowledge gained as a result. But today that statement could literally mean making outlays of cash with the idea of improved outcomes for the investors (the students and their families). Either way, the idea of investing time or money is assumed to create a favorable return. With that, please note the following statistics concerning San Francisco schools that were recently presented in a report by the non-profit group, Brightbeam; “70% of white students are proficient in math, compared to only 12% of black students reaching proficiency—a 58-point gap.” This is a fact despite all the money - California’s K-12 spending exceeds $20,000 per pupil - and time “invested”. Please note that while the data above concerns San Francisco, the problem is national and it’s being addressed in ways that should concern us all -that is if we’re interested in the long-term financial well-being of our young people. For instance, in New York, which has a similarly bad proficiency gap, one of the solutions being implemented is admission quotas (limits) on high achieving students (typically Asian) to the elite K-12 schools along with the granting of admission to non-Asian students (typically black and Latino) with sub-par academic credentials to those same schools. The idea can only lead to a dumbing down of the standards at the high-performing schools and a reduction (or possibly an elimination) of the supposed dividends to be attained by investing in education. We believe Franklin’s assertion was right on. And we also believe the corollary must also be true: A non-investment in education pays the worst (or negative) dividends. Lowering educational standards is a non-investment. Expecting less from students from a particular demographic group is a non-investment. Excusing poor performance is a non-investment. The negative dividends will accrue to the students over their lifetimes in the form of reduced earning power and reduced ability to accumulate wealth. Schools are starting back this week so there is not much to be done to affect curriculums and outcomes for the incoming students but there’s always next year. With that in mind, we’ll end this post with a question: What would you do if you were given $20,000 to spend each year on your child for his/her K-12 education? Maybe you should be allowed to make that investment choice – whatever it is. And maybe your neighbor should be allowed to make a different investment choice if he or she is so inclined
Thing Three Just A Thought “Education is like a double-edged sword. It may be turned to dangerous uses if it is not properly handled.” – Wu Ting-Fang