Major Changes to Social Security – The Budget Deal


The Congress passed a new Federal Budget deal (Bipartisan Budget Act of 2015) this week that makes some significant changes to Social Security and the strategy of “file and suspend”. Just as background, many of us senior citizens have filed for Social Security but “suspended” benefits until we hit 70 years old. Why? Because we get about 8% per year in additional benefits. See my previous article about this here.

So what are the Social Security changes that might affect you?

  1. The Deemed Filing Rule. Today you can file for a “restrictive application”, you let your benefits grow and just file for spousal benefits (1/2 of your spouse’s retirement benefits). If you will be 62 or older as of 1/1/2016, there will be no changes to this deemed filing rule or to the restricted application strategy. However, if you are younger than that, two changes take place. First, the restrictive application goes away. If you file for any benefit, at any age, spousal or your retirement you will be “deemed” to have filed for all benefit types. Secondly, deemed filing now starts immediately for anybody when they become eligible for either spousal or their own retirement benefits if they’re already collecting one of these benefits (spousal or their retirement). This eliminates the restricted application strategy for those who have planned on it and will costs them a bunch of money. This was all along just a loop-hole but people took advantage of it and it costs all of us taxpayers a lot of money.
  2. File and Suspend Strategy. As I mentioned above it is a great strategy to file and suspend and earn 8% each year. Today, while you “suspend” your retirement you can get a spousal benefit. Under the new rules, suspension of benefit requests that are submitted more than 180 days after enactment of the bill, assume 4/27/2016 or later, there will be three changes: a) While your benefits are suspended, you cannot receive a spousal benefit, b) While your benefits are suspended, nobody (your spouse) can receive a benefit based on your work record, and c) You’ll no longer be the able to retroactively unsuspend (this is a little more complicated).

I guess the bottom line is that the government can change the rules at any time regarding those who get Social Security. In the above cases the changes are probably the right thing to do so that people to “game” the system, but it was a legitimate strategy.



Get a Free 12 Month Government Loan at 0% Interest for $15-$25,000 – Really!


If you are over 66 (and under 70) and not yet getting Social Security you can easily get a $15 – $25,000 loan from Social Security. It’s actually very easy to do and there is no penalty whatsoever. You just have to completely pay it back within exactly 12 months and no longer. It is best done at the very start of the year so that your 1099-SA (Social Security tax form) will show a full repayment in the same year. Just file form SSA-521.  

I actually did this in 2014. I filed and received my Social Security benefits effective January 2014 and stopped my benefits, repaying it all in December 2014. Each month I received my $2,600 benefit (the maximum payment allowed in 2014). Separately I paid my $104/mo Medicare payment and did not have any Federal Tax withheld. The net effect was that this money was invested in the market, I didn’t calculate exactly how much I made off of this loan but my overall investments were up double digits for the year. This was probably the easiest $2,000 or so I ever made.  

Unfortunately you can only do this one time!  

As you probably know from reading my other articles, I have no intentions of taking my Social Security benefits until I’m 70 years old since they grow tax free at 8%/year plus a cost of living increase compounded.


The Tax Shock for Widowhood (or Widowerhood)



The lost of a spouse in retirement can result in the following tax shock:

  1. No longer able to file as Married Filing Jointly, may have to file as Single, the highest tax bracket.
  2. Loose 50% of the Personal Exemptions.
  3. Loose 50% of the Standard Deduction.
  4. Loose 33% of dual Social Security benefits.
  5. Possible loss of spouse’s private pension, depending on plan.
  6. Higher tax bracket may raise the marginal tax rate.

As you get older and are either retired or are planning your retirement you will undoubtly work out a retirement plan that should also include a tax plan. Bad tax planning is almost as bad a bad retirement planning. There are major tax filing issues for those who become a widow(er), the loss of both a personal exemption and a 50% less standard deduction. After a death, you can bet that the survivors’ marginal tax rate will increase and you need to plan for this in your calculations.

First let’s look at what happens in the tax years after a spouse passes away;

  • In the tax year of the passing, if you did not remarry by December 31st, you can claim Married Filing Jointly, and your normal 2 exemptions. You may only do this one time.
  • After the initial tax year, if you have a dependent child living in your house and your spouse died in one of the past two years you may qualify as a Qualified Widow(er).
  • With the above dependent child or any qualified other dependant, after the 2nd year , may qualify to file as Head of Household.
  • With no dependent child, you immediately become Single status for tax purposes, the most expensive tax bracket there is.

Here is how it affects the Standard Deductions in 2014:

Filing Status

Single $6,200

Married Filing Jointly $12,400

Married Filing Separately $6,200

Head of Household $9,100

In addition for tax year 2014, the personal exemption amount is $3,950 per person, losing a spouse provides ½ the former exemption. Let’s also assume that both husband and wife were collecting Social Security, the passing of a spouse typically reduces the total annual Social Security amount by 33%.

When you do your retirement planning make sure you also look at tax planning for a surviving spouse and leave instructions behind on how best to deal with this issue.


A Tip on How to Not Over Pay Tax on Social Security

SS   First read my post on the April 1st deadline for taking your first “required minimum distribution” (RMD) from your tax-deferred accounts like IRA’s and 401K’s.

Here is the tip for reducing a potential tax bite from your Social Security benefits.

First of all, a portion of your Social Security benefits may be taxable if your Adjusted Gross Income (the very last line on your 1040) excluding your Social Security benefits for the year plus

  • Any tax-exempt interest you earned, plus
  • 50% of your Social Security benefits.

Combine these and it becomes your “combined income”, if it is below $32,000 (married filing jointly), none of your Social Security benefits will be taxed.


  • For every dollar of “combined income” above that level, $0.50 of benefits will become taxable until 50% of your benefits are taxed or until you reach $44,000 of combined income (married filing jointly).
  • For every dollar of combined income above $44,000 (married filing jointly), $0.85 of Social Security benefits will become taxable — all the way up to the point at which 85% of your Social Security benefits are taxable.

So what is the tip and what does it have to do with your RMD? Simple, if you have a medium to larger amount of tax deferred investments in IRA’s and 401K’s don’t delay your first RMD to the following year. For example if you have $500,000 in tax deferred accounts your annual RMD might be $17,000, and if you have $50,000/yr Social Security benefits you’ll already be in the 50% bracket of Social Security being taxable. However if you take your first RMD in the following year you just moved some of your Social Security to the 85% bracket.

The best thing to do for many people is take your first RMD in the year you turn 70 ½, don’t wait till April 1st of the following year.

Don’t Be a Retirement Fool on April 1st

April 1st

If you miss the April 1st date you will be taxed at a 50% penalty rate!

April 1st might be a good day to play a trick on a friend or family member, but if you turned 70 ½ during 2014, April 1st is a very serious date.

For those that crossed the 70 ½ mark, April 1st is the deadline to take your first “required minimum distribution” (RMD) from your tax-deferred accounts like IRA’s and 401K’s. Roth IRA do not require a RMD and therefore there is a planning strategy to convert tax deferred accounts into Roth’s. Keep in mind that the annual requirement for the RMD is December 31st of the same year and only in the first distribution can you delay it till April 1st. Therefore if you wait till April 1st this year, you’ll have to take another distribution for 2015 before December. This in total could amount to a 7% withdrawal from April-December 2015 which for some people is both a lot of money and a potentially large tax bill. Keep in mind that all distributions from a tax deferred account are taxed as “ordinary income”, no special breaks for dividends or LT capital gains. Fidelity Investments reports that over 40% of the people needing to take their first distribution have not done so as of a few weeks ago. The IRS says, “If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.”

This can get a little complicated, but if you have multiple IRAs, you should calculate the RMD separately for each account – but you can withdraw the total amount from a single IRA. In addition,, if you have different types of tax deferred plans – such as an IRA and 401(k) the RMDs must be taken separately from each kind of plan.

Is your 2014 Social Security Benefits Taxable – Maybe, and it’s Complicated

Many people believe the old adage that Social Security is not taxed. Years ago these benefits were not taxed, but today they can be depending on other factors.

Here are the rules for 2014 tax on Social Security, based on your filing status:


  • Your combined income* is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
  •  If your combined income is more than $34,000, up to 85 percent of your benefits may be taxable.

Married Filing Jointly

  • If you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
  • If your combined income is more than $44,000, up to 85 percent of your benefits may be taxable.

Married Filing Separately

  • You are out of luck, all of your benefits are usually taxable.
  • Keep in mind that Married Filing Separately is a really bad classification and has a lot of tax penalties.

Strategy Calculation

For every dollar of extra income you earn above the lower threshold, $0.50 of your Social Security benefits will be subject to tax. Above the upper threshold, each extra dollar of income adds $0.85 to the total benefits that the IRS will tax.

How to Calculate Combined Income

Your adjusted gross income

 + Nontaxable interest (like tax-exempt income from municipal bond interest)

+ ½ of your Social Security benefits

 = Your “Combined Income

What Type of Assets Go into Taxable vs. Retirement Accounts

It really is a classic question many investors have. How do I decide what type of stocks, bonds and funds to put into my taxable brokerage account vs. my tax deferred 401K/IRA accounts? The overall idea is to reduce the impact of taxes on your investments. There is no “one size fits all” approach and sometimes your allocation depends on what stage of life you are in. I’ll assume in this article that you are over 50 and planning or are in retirement.

Tax Deferred 401K/IRA Accounts:

  1. The strategy is to have higher tax items in these accounts.
  2. Stocks or funds where dividends are taxed as “ordinary income”.
  3. Mutual Funds or ETF’s that have a high beta, or churn. This means the portfolio can have big tax consequences since they typically have short term capital gains taxed as ordinary income.
  4. REIT’s and BDC’s, whose dividend payouts are generally considered nonqualified and taxed at ordinary income tax rates.
  5. Any preferred stock who’s dividends are taxed as ordinary income, i.e. preferred REIT’s.
  6. Trust preferred’s that are taxed as ordinary income.
  7. Dividends from some foreign stocks and funds that are taxed as ordinary income.
  8. Options trading

Taxable Accounts:

  1. Strategy is to have tax friendly assets in this account and also a high degree of control.
  2. All cash for retirement living expenses or an emergency fund.
  3. Growth stocks that don’t pay dividends but will be held for long term gains.
  4. Tax-free bonds and bond funds.
  5. Unless you are looking for a “no-income” approach, stocks or funds with “qualified dividends”.
  6. MLP’s, if held for a long time since most distributions are a “return of capital” until the stock is sold.
  7. Any investment used as a “hedge” such as Gold stocks, inverse S&P etc. since they can be used for an offsetting capital loss at tax time if desired.

ROTH IRA Accounts

  1. This is the best account to hold high tax items in.
  2. It is also probably the safest place to shelter future income since the government has constantly changed tax rates and thresholds on taxable and tax deferred accounts (ordinary income tax rates). It’s hard to believe the government would change the tax-free provisions of the ROTH IRA.

6 – New Years Retirement Planning Resolutions for 2015


New Years is always a great time to prioritize the things that are most important in our lives, not just the “urgent” things that will always distract us. As Stephen Covey says, “Most of us spend too much time on what is urgent and not enough time on what is important.” As you age, and either contemplate retirement or are actually retired, financial planning is one of the important tasks you need to continually address.

Here are 6 “important” steps to get your retirement investments and plans in order for 2015:

  1. Take responsibility, become active, plan and manage your investments.
  2. Develop or update a written financial plan.
  3. Learn how to choose and analyze investments like a professional.
  4. Take action with your investments, set up rules for adding and eliminating.
  5. Set-up or revise your “In Case of Emergency” document.
  6. Determine if you need a Revocable Living Trust.

Take Responsibility.

The finances that you and your family will live on once you leave the workforce won’t just automatically fall into place; you need to make it happen. Your retirement is your responsibility, you need to take charge. You need to become a “Vice President of Financial Responsibility”. Many older workers just don’t feel comfortable or may not have the skills to plan and manage their retirement. This however is their responsibility and they either need to develop the skills or get someone they implicitly trust to help them. The internet, including most brokerage sites like Fidelity, have tools and educational materials to also provide help.

Written Plan.

Almost everyone I speak to about retirement planning and investing claim they have a “plan”, very few can honestly say they have a written plan. A written plan can help take you from concepts to an actual roadmap. The plan should include a written description of your current situation, your short and longer term plans, tax planning strategies and investment goals. In addition to the written descriptions it should also include annual goals for income to be generated, living costs, emergency funds and yearend portfolio values. If you just have a spreadsheet and no written document, you don’t have a plan.

Analyze Like a Professional.

You don’t need to be a day-trader or professional advisor to use the basic analytical tools to help choose and manage your investments. When I trade in my professional account I might look at a 60 and 5 minute stock chart, RSI and MACD indicators and “futures” charts. However when I review my retirement investments I’m looking at completely different set of metric’s. Why? Because my goals and time horizons are different. In a future blog posting I’ll give you the tools I use for managing the stocks and bonds in my retirement accounts.

Take Action.

One of the biggest mistakes people make in their investments is to “Buy and Forget”, see my story on this here. Most people know how to buy but don’t know how or when to sell or rebalance. You need to set up rules that will help you decide how to manage your investments. The poor people that couldn’t endure the pain anymore and decided to sell their key holdings in March 2009, and then sat in cash for the next few years as the market completely rebounded.  Those that stayed with blue-chips did well, those in cash will never again recover their losses.

“In Case of Emergency” Document

Everyone who is married or has any assets whatsoever needs to have a “In Case of Emergency” document.  Check here for a detailed list of what should be in your document and how to manage it.

Revocable Living Trust

Why would you need a Trust, the new federal estate tax exclusion has been raised to $5,340,000 per person and twice that much for a married couple. Most people don’t have assets that exceed these amounts. Maybe you should just have a simple will. The issue isn’t about federal estate taxes, it about the other benefits of a trust. Here are some reasons to consider a Revocable Living Trust:

  1. Protection for or from your beneficiaries and their creditors. Do you have a 20-30 year old “child”, should they just be given the money outright, might hey spend it foolishly?
  2. Control of your wealth beyond just a will. How should the money be distributed and when. What can it be used for?
  3. Keep your privacy and money out of state probate court and avoid the high cost of probate. In general most states require a will to be implemented through the probate process and can include some substantial fees, along with being public. A Revocable Living Trust does not need to go through the probate process.
  4. Manage or avoid state estate taxes. 20 states currently have various forms of estate taxes and a Revocable Living Trust may help you batter manage or even avoid these extra costs.
  5. Always seek the help of a qualified attorney who specializes in Estate Planning and Tax law to help you determine if a trust is right for you.

Retirement Planning – A Safe Fixed Income Investing Strategy

Planning for retirement income is one of the most important jobs you’ll ever have. If you are like most investors you have a great “rear-view mirror, but very poor headlights”.


  • Many retirees need income from their investments to supplement Social Security and pensions
  • Fixed Income to many mean just buying bonds and bond funds (ETF’s)
  • Given the poor outlook for bonds during rising interest rate cycles many investors are looking for other methods of “Fixed Income” investing
  • A conservative stock portfolio with income producing stocks might look pretty attractive
  • There are tips for choosing these income producing stocks


Today’s retirees can’t rely on the traditional methods for securing income during their retirement, mostly bonds. As I’ve written before, current bond holders are going to face a huge shock when interest rates start to rise in the next 6-9 months. Many of you will think, oh good, interest rates are rising! However as they do your current bonds (or funds) will drop substantially in principle value. What good will it do to have a bond fund pay you 3%annually, drop by 15-20% in value? Just to be clear, some day it will pay handsomely for a retiree to buy bonds, when they yield 6-8%, but not now as they rise to that level.

What to do

The “Fixed Income” stock dividend theory says that you develop a stock portfolio of reliable companies with secure dividends that will pay you “bond level or better yields and just hold onto those investments. In this case you also have the possibility of capital appreciation over the years and dividend growth. Bonds do not have any possibility of dividend growth. For example, you buy a basket of blue-chip dividend growth stocks for $1,000,000 and they average 3% yield, or $30,000 a year in dividends. If, over a period of years your blue-chip stocks follow the average market return of 6% (or more) your $1,000,000 will grow by $60,000/yr compounded. Furthermore, many of these companies increase their dividend every year so the $30,000/yr also grows.

Tips for Choosing Income Stocks

  • It is relatively easy to research on line and find blue-chip companies that have a solid history of both dividend payments and growth.
  • Look for a large dividend supported out of free cash flow, not borrowing. Determine what % of free cash goes to support the dividend.
  • Choose stocks with growth potential
  • Here are some examples of dividend growth over the last 5 years:
    • McDonalds 14%
    • General Mills 12.5%
    • Phillip Morris 12%
  • Get help from sources like Morningstar or a web site I like

Here is an example of how this works:

I bought Altria (MO) the cigarette company in early 2014, it is a blue-chip stock with a long history of dividends increases. I bought it $34/share with at the time a $.48/quarter dividend or 5.6% yield. Today the stock trades for $51/share with a $52 dividend. Therefore, I’m up 50% on the value of my investment and the dividend has increased by almost 10%. Therefore my current dividend yield on my purchase price is over 6%. During this same time frame the S&P 500 up a shade less than 6%.


80% of Americans Ages 60-75 Fail Retirement Test – Take My Test of 11 Questions


American College of Financial Services in Bryn Mawr, Pa. released a poll this week based on online interviews of 1,019 people 60 to 75 years old with at least $100,000 in household assets. They asked 38 retirement literacy questions on basics, such as Social Security, life expectancy, IRAs, life insurance and investments, and how bonds work. Only 2 in 10 had passing grades! What a shame. Everyone needs to take responsibility for their own financial health, especially retirees. American College hasn’t published the actual questions they used, so I developed a few questions to help you test your retirement understanding.

Here is a Word document containing the questions and answers:

Retirement Test