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.

Valuable Tax Items I’ve Seen People Miss


I’ve been doing 2014 tax returns for the last 6 weeks as an IRS certified volunteer and I thought I’d share with you some tax items that some people are missing.



  1. Education Credits. These are a tax credit (better than an income deduction) available to a self-supporting student or a parent assisting with educational expenses. The American Opportunity Credit offers up to $2,500 per student per year covering tuition, required enrollment fees and course materials. The Lifetime Learning Credit offers up to $2,000 credit per “return” and can be even be used for just picking up an educational course not related to any specific degree.
  2. Child and Dependent Care Credit. If you pay someone to watch your children (under age 13) or for a spouse or dependant who can’t care for themselves so that you can work you can qualify for a Credit. You’ll need either a tax ID or the social security number of the person you paid for these services.
  3. Married Filing Separately. This is a really lousy tax filing status and will be costly to both parties. Even filing as “Single” may result in lower tax burdens. The best situation if you are married as of the last day of 2014, is to agree to file a joint return and just split any taxes due or refund.
  4. Not understanding who must or should file. Parents are often unsure if their dependents should file their own taxes. In general if the dependent is under age 65 and had earned income over $6,200 they must file a federal tax return. From a practical point of view if they worked any job that withheld any tax from their pay, they should file just to get this back.
  5. You can’t negotiate a dependent. I’ve seen parents say that they had a young adult son or daughter still living with them, they paid for ½ of their expenses but say they will allow the son or daughter to claim themselves as a dependent. Sorry it doesn’t work that way, if your son or daughter “can be” claimed by you, they cannot claim themselves on their own return.

Taxpayers who do their homework ahead of time may be able to save money be either getting a larger refund or owe less tax.



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.

5 Advantages of Roth IRA’s you may not have considered



In the years leading to retirement you face a decision, whether to fund a Traditional IRA or a Roth IRA.

  1. Tax-free withdrawal. This you already know, however another major advantage of a Roth is that withdrawals are not included in any “income” calculations, including Social Security benefits or the current 3.8% surtax on net investment income above $250k for joint returns.
  2. No minimum distribution. Have a sizeable IRA in retirement is both great and a problem. The problem is that at age 70 ½ you must begin a Minimum Distribution from an IRA, and if you do the math, it isn’t so “minimum”. If you really don’t need this money, you first pay taxes on it as ordinary income, then you invest it into a taxable account and continue to pay taxes on it. The Minimum Distribution possibly raises your tax rate on your Social Security benefits. The Roth is 100% tax free after the age of 59 ½ with no requirements to ever distribute it.
  3. Penalty free withdrawal. If you fund a Roth IRA you can withdrawal your contribution with no tax penalty. A withdrawal from an IRA before 59 ½ incurs both income tax and a 10% penalty. A Roth can become an emergency fund if necessary.
  4. Estate planning. With a Roth you can pass your account to your heirs and other than an annual tax free withdrawal the account could continue for decades all tax free. The power of compounding could turn a modest account into a 7 digit account in no time. A Traditional IRS can be left to heirs but they must pay taxes on the annual withdrawals.
  5. Conversion flexibility. Let’s say that in January you convert $100,000 of Apple stock from a IRA to a Roth, you immediately incur a tax liability for $100,000 of income. Unfortunately by October 15th the market has dropped substantially and this investment is worth only $75,000. You can actually reverse the conversion (still only $75,000) and eliminate the tax on $100,000. This protects you in a down market. Of course if the market goes up as in the last few years you are even further ahead with a conversion.

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


Beware Mutual Fund Owners – Here Comes the Tax Man

Many people still invest money in mutual funds held in their taxable accounts.  Mutual funds give investors the opportunity to pool money with others and own securities such as stocks, bonds and so forth. A more recent investment type has surfaced in the last decade called Exchange Traded Funds (ETF’s).

So what is the issue with the “tax man”? Normally in December Mutual Funds make distributions to their shareholders that can be quite a tax surprise. Let’s say that you own 1,000 shares of a well-known equity fund that currently trades for $50/share. In mid-December the fund declares a $2/share distribution classified as capital gains. In December you elect to get this distribution as cash in your account instead of additional shares. On the distribution date the mutual fund share price (NAV) will drop to $48, representing the distribution and you will get $2,000 in your cash account.

Now comes the surprise, you have to pay capital gains tax on the $2,000 even though you never sold any of your mutual fund shares. Now let’s add fuel to the fire, you actually bought these shares at $100/share and this year you lost $50,000 in the value of your fund, yet still owe taxes.

Tax Man

That’s how it works with mutual funds. This happens because mutual funds must periodically sell shares to fund investors who sell their mutual fund shares.

There is another way to get the same benefit, switch from mutual funds to ETF’s. ETF’s act just like stocks from a tax point of view. If you don’t sell them you don’t have any capital gains! No December surprises. ETF’s have many other advantages for all types of investors.

Just Google ETF’s and read about the advantages.

BTW, if you act quickly you can sell your mutual fund before the distribution date and save on taxes. Many mutual funds have already posted their expected “distributions” on their web site.  



Problems Getting a Mortgage if you are Asset Rich, but Have Little “Income”

So, you’ve worked hard all your life, saved and invested smartly and now you’d like to retire and enjoy yourself. That’s all well and good, but you might have a problem getting a simple mortgage.

Let’s say that you live up north, have your house paid off and would like to sell it and move to your dream house in Florida or Arizona. Maybe you have decided to delay your Social Security until you are 70 and earn 8% a year while you wait. So in effect, you have little or no income other than maybe a small pension or two and dividend and interest. Your financial advisor suggests you invest the proceeds of your house up north and take out a mortgage on your new Florida home. Since mortgage interest rates are around 4% and are tax deductible this might make good sense.  When you apply for your loan the new mortgage rules call for 43% debt to income ratio, but you no longer have “income”. Under the new rules the banks want to see a demonstrated process where you are already turning investments into income. Your substantial base might not qualify, as such, for even a smaller $100,000 – $250,000 mortgage.

Here is what you can do well before you try and apply for a new mortgage:

  1. Reduce your debt, you are retired and no longer have a paycheck. Once you get a budget in place you can go back to enjoying your new retirement life.
  2. Make sure there no other obstacles to getting a mortgage, for example your Credit Score. It is helpful to have an 800+ credit score.
  3. If you are going to hold your new house in a revocable trust along with your other assets, set it all up ahead of time. You’ll still need to meet the income retirements.
  4. Even though you want to delay Social Security until you are 70, start it at least 3-4 months before applying for your loan, you now have income. You can later (within 1 year) stop Social Security and send them all the money back, with no penalty.
  5. Modify your investments in your taxable account so that you are generating a good bit of monthly and quarterly dividend income. Check the ex-dividend and payment dates so that you can prove income.
  6. Set up a systematic, monthly withdraw from your brokerage account into your household checking account and make sure you have 3-4 months of proof these transactions took place.

With the above steps in place you should now have “income” to meet the debt/income ratio. You’ll feel pretty secure that once the closing on the new house has taken place and the boxes are unpacked you can reverse some of the steps shown.

Enjoy your retirement.