To Stretch or Not To Stretch – A Real Problem

money flying out of man's wallet

Maybe you have worked all of your life to build a nice IRA to help fund your retirement. In addition, you have set-up an estate plan and trust to make sure your non-spouse loved ones are not just well taken care of, but enjoy the most tax-efficient flexibility possible.

Watch out, congress is trying to tax your IRA sooner vs. later. They are trying to change the rules for “stretch IRA’s”. On May 23, 2019, the US House passed legislation called Setting Every Community Up for Retirement Enhancement Act of 2019, or the SECURE Act.

Example of a Stretch IRA – Current Policy
A person is 70 years old, have a Traditional IRA valued at say $700,000, currently take a RMD (Required Minimum Distribution) and name a 30 year old relative as the beneficiary on their IRA. The RMD and subsequent income for tax purposes is based on their expected remaining life.

Under current tax provisions, if the person passed away today, the 30 year old relative would set-up a new “Inherited IRA” and begin taking RMD based on a life expectancy of 53.3 years (IRS tables). The 1st years distribution will be $13,133 ($700,000/53.3), the relative only pays income on the $13,133!! The Inherited IRA benefits from investments being tax deferred for 53 years, or the RMD is “stretched” over a much longer life span while taking out a much smaller RMD.

Proposed SECURE Act – Changing the RMD to 10 Years
Under the SECURE act Uncle Sam wants to collect their taxes sooner vs later and therefore will require the Inherited IRA to be liquidated in 10 years. Therefore, the annual RMD payment would be $70,000. Now, the relative may like the idea of receiving $70,000 a year, but this will probably toss them into a much higher tax bracket and could cause other unanticipated consequences. The elimination of a “stretch” is a huge disadvantage. Keep in mind that the deceased person probably has an entire estate of other assets that will get transferred to the relative beyond just an IRA. Could your 30-something relative hand this money? 

Eliminating the stretch IRA provisions will have a significant impact on many existing trusts that have been set-up to accommodate IRA retirement plans. Many such trusts allow the trustee to control distributions to the beneficiary based on the timing of RMDs, typically for the life expectancy of the beneficiary. If the SECURE Act is passed, the trustee could be required to distribute the account during the 10-years following the IRA owner’s death, or 10 years following a minor child beneficiary reaching the age of majority, losing the benefit of holding the funds in trust.

Don’t Worry About Your Spouse
The SECURE Act really doesn’t affect your spouse provided your spouse does some pretty simple things. For spouses, not only can they receive distributions based on their life expectancy, they may also “rollover” the inherited IRA into their own IRA, possibly delaying RMDs until the spouse reaches age 70½.

Let’s make sure our law makers don’t get greedy and try to raise our taxes by removing the “stretch IRA” provision!

Caveat: I am not a financial planner and there are many other details to consider in all of these decisions. Please seek help for a tax expert, attorney or certified tax planner before making decisions.

News I Just Love – Dividend Increases


For those of us near or in retirement consistent, reliable cash flow is one of the very important components of our overall financial plan.

Our overall financial plan consists of 3 categories:

  • Emergency cash reserve (2 year)
  • Consistent and reliable income to “fill the gap”, the gap between our expenses and Social Security/Pensions – Your Cash Machine
  • Wealth building for future generations & charitable contributions

I am just delighted to see that some of my stocks are consistent payers and INCREASER’S of their dividends. Here are just 2 examples.

Realty Income Corporation (ticker symbol O)
I have held this REIT for many years. It pays a monthly dividend and the dividend increase announced this month is the 99th increase since the company went public 1994. Talking about consistency and reliability, they have made 582 consecutive monthly dividend payments, never missed a payment in over 48 years!

Dominion Energy (ticker symbol D)
This is a major public utility that is also active in renewable energy and LNG exporting. They just raised their dividend by 10%, this was already a 4% dividend before the increase. The “talking heads” say that utilities would get crushed by all of the “high interest rates”, but we know that as a long term income investor our utility picks will continue to pay us a healthy dividend.  So, how do we know this, well Dominion has increased it’s annual dividend for 16 consecutive years. Yes, that was even during the 2007-2009 financial crisis. 

When we follow our financial plan we just don’t need to worry about the short-term ups and downs in the stock market …. we are sleeping pretty well at night!


Bitcoin, Uber & Your Taxes


Many people flock to the ALT economy to get away from “big brother”, including the Tax Man. Where as some income in the “gig” economy may not be easily tracked for tax purposes, I can assure you that  Bitcoin and Uber are highly visible to the IRS.

Uber – Tax Reporting

Let’s deal with the easy one first, Uber (similar with Lyft), you need to pay taxes on a income generated being an Uber driver. You however can deduct your business expenses against that income.

The IRS requires that Uber provide a 1099-K for all drivers that meet BOTH of these criteria:
For settlement of third-party payment network transactions above the minimum reporting thresholds of, gross payments that exceed $20,000, AND more than 200 such transactions (rides) per year.

On the 1099-K, box 1a is the only number you need, it is your gross income and will need to be reported as business income on Schedule C. Please also note that any cash tips and “free lance” driving for a fee must also be reported as income. 

What if you are an Uber driver but didn’t make 200 trips AND $20,000, they Uber will send you a 1099-Misc “box 7” form. The dreaded box 7 is called Non-Employee Compensation. All to gets reported on Schedule C, all under Part 1, Line 1 Gross Income.

The good news is that being an Uber driver is a business and as such you can deduct business expenses from you business income to determine a profit or loss. Uber provides their drives with a Tax Summary report each year that shows all the fees paid to Uber and the “on-trip” mileage. This however is just the mileage while you had a rider in your car. A smart Uber driver will track daily all mileage to pick up the first driver, mileage to get the next rider and mileage to get home after the last ride. The easiest way to handle Uber (business mileage) is to use the IRS standard mileage deduction of $0.545 per mile. If you take the standard mileage deduction you can’t also deduct gasoline, insurance or repairs. But you can add in tolls and parking. 

The net Profit or Loss on a business Schedule C goes directly to to your personal income tax form 1040. Keep in mind that Uber income is also subject to “self employment tax” of 15.3%. There is a 50% credit of this amount against your adjusted gross income, but you are still paying for social Security and Medicare. 

Bitcoin and Taxes

Tax on Bitcoin transactions is no different than the sale of any asset like stocks or property, you don’t have to report anything unless you SELL. Bitcoin record keeping is YOUR responsibility. It can be challenging , however if you use an exchange like Coinbase and stay within that exchange they will send you a “cost basis for taxes” report. 

Here is why it can get challenging. Let’s say, in January back you bought 10 bitcoins at the rate of $3,000 each, or may have received them as a payment for work you did for a client. Say, in May those bitcoins may have be worth $15,000 each, putting your potential profit at $12,000 per coin in May. 

It is your responsibility to have the necessary records showing that you received them at the time when they were worth $3,000, and your net income is $12,000 per coin. Failing to maintain such transaction information and documents may lead to your holdings being assessed at an even higher , significantly increasing your taxes. 

Here are some general rules for Bitcoins:

  • If bitcoins are received as payment for  goods or services, the holding period does not matter. They are taxed, and should be reported, as ordinary income. 
  • If bitcoins are received from mining, it is treated as ordinary income in the year earned. Additionally, there could be a self-employment tax to be paid on such earnings.
  • If Bitcoins or any cryptocoins are received from a “hard fork” it too is treated as ordinary income.
  • However, if bitcoins are bought as an investment and sold at a profit, the treatment of such income depends on the holding period. If held for less than a year, it is treated as ordinary income. If held for more than a year, it is treated as capital gains or loss, like any other stock.

Bitcoin tip, if you have substantial losses in Bitcoins now might might be a good time to cut your losses and sell some. These losses can help offset other capital gains. Also remember that the maximum loss reported in one year is limited to $3,000 (net), but you can carry-forward capital losses for many years to come. 

Duke Power “FixedBill” – Deal or No Deal?


This month I received a flyer from Duke Power offering a FixedBill program, get a fixed billing amount for the next 12 months. Sounds good right?

Maybe not!

Here is what I’ve determined:

  1. I have to give up my current Budget Billing plan costing $235/mo.
  2. The new FixedBill costs $277/mo + state and local taxes and “other service charges”.
  3. The state and local taxes and “other service charges” I currently pay in my $235/mo amount is $14.26
  4. I calculated my additional charges under FixedBill at about $15/mo.
  5. This brings my FixedBill total to $292/mo.
  6. I can opt-out of the program before the 12 months are up but I would have to pay them back any overage, BUT I would NOT get any credit for under usage.
  7. After 12 months I’m automatically renewed for another 12 months unless I contact them and opt-out.
  8. The FixedBill amount includes a “Risk Adder not to exceed 6% and a Usage Adder will be between 4 – 6%.
  9. There is no incentive during the year to conserve energy! We are already paying about $0.13 per KWH (net)!
  10. My monthly electric bill will go up $57. Next year rate would be based on this year PLUS Risk Adder and Usage Adder

Overall, I don’t see anything but a benefit to Duke Power who will get an additional $57/mo. from me (as I calculated it).

Current Bill   $277/mo

FlexBill Bill   $292/mo

Duke -2

I don’t think I’ll be signing up for this program!

The Stock Price Never Moved & I Doubled My Investment


Would you buy a stock and keep it for 10 years if its price was flat as a pancake? I did and I doubled my investment! How is that possible? It’s the power of compounding dividends.

First look at this chart, this stock hasn’t moved more than $1.00 in the last 6 years, and it is almost the same price today as what I bought it for mid-2008. I bought it at $24.85 and sold it this week at $25.40. I only sold it because Barclay’s “called” the stock, requiring all the shareholders to turn in their shares for $25/share.


This is an excellent example of a “preferred stock” that is in my IRA “Cash Flow Machine”. It pays a 8.13% dividend at $2.03/year. It trades under the symbol BCSPRD (Fidelity) you can look it up on Yahoo Finance under BCS-PD.  Barclays Bank is a UK based and worldwide financial powerhouse. It carries a S&P BB rating (not bad at all). Typically preferred stocks are priced at $25/share.

At 8.13% dividend rate, you will double your investment every 9 years by just re-investing your dividends each quarter.  This is without the stock changing price. The chart above shows the benefits of compounding, reinvested dividends for a $50,000 investment over 10 years.

For those of us who need a well balanced portfolio and are always looking for non-volatile stocks preferred stocks are a great choice.

Here are my current Preferred Stock holdings, they make up about 16% of my IRA “Cash Flow Machine”.


Hurry Up Get That Divorce & Other Year End Tax Tips


There are major changes coming to tax payers both this year and beginning in 2019. Here are a few things you need to know.

Divorce – Alimony Rules Have a Big Change:
It’s bad enough suffering through a divorce (I have no personal experience) but beginning with divorce settlements finalized January 1, 2019 or later there are major changes to the tax law. The alimony payer (mostly men), can no longer deduct alimony paid on their taxes. AND, recipients (mostly women) of alimony payments will no longer have to declare the payments as income.  This is a huge tax differential that never existed before.

So if you are a man, you want to get the divorce finalized now and if you are a woman, probably not!

Self-Employed – Nice Boost:
Starting in 2018 if you are a small business owner, self-employed, independent contractor or “gig” employee you will get a new 20% federal tax deduction on your income. In other words if you were paying taxes on say $10,000 of income, or in the case of a LLC business Net Profit, under the new tax rules you will only pay tax on $8,000 of it! This falls under the new “pass-through” allowances that also apply to business such as a REIT, BDC or MLP. This is a pleasant surprise!

Stop Collecting Those Receipts:
For most people who collect and document all of their medical expenses for you year, you can probably stop now. The standard deduction is so high now, $24,000 (married filing jointly) and for us senior citizens it jumps to $26,600, we will most likely not be itemizing deductions ever again. Besides currently unreimbursed medical deductions must exceed 7.5% of your adjusted gross income to be counted, this jumps to 10% starting in 2019.

There are more year-end tax tips and I’ll cover them in a future article.






Kids and Taxes – Substantial Changes in 2018


Great, Susan has a good summer job and works after school to help save money for her education. In addition, her parents want to help her out by investing money in her name. Along with these paychecks come one of life’s two “guarantees” TAXES! (death and taxes). Depending on the income she received she could be in for a rude awakening!

The 2018 IRS tax rules are substantially different than prior years regarding kids and taxes. First let’s differentiate   “earned income” from “unearned income”. Earned income is from a job, whether it is on a paycheck from a company or cash paid for services rendered. Unearned income is primarily from investments and includes interest and dividends. Other forms include alimony, pensions and social security.

Each of these income types has different rules, even when combined.

1. Susan is a 17 year old dependent child and lives with her parents. She worked over the summer and part time during the school year, in 2018 she will make $13,000 in wages/tips. She does not have any unearned income. Does she have to file and pay federal income tax for 2018?
YES. She must file a tax return because she has earned income only and her total income is more than the standard deduction amount for 2018 of $12,000. If Susan had made $11,999 she would not be required to file or pay any federal taxes.

Starting in 2018, the standard deduction for a dependent child is total earned income plus $350, up to a maximum of $12,000. Thus, a child can earn up to $12,000 without paying income tax. This is a substantial increase over 2017.

Even if your child isn’t required to file a return, there are good reasons to do so anyway. If they had federal income tax withheld from their paycheck, they should file a return to receive a refund of the withholding’s.

2. Susan was paid as a “contractor”, not as a payroll employee? 
Some employers may want to avoid the hassle of tax withholding and other costs by calling a worker an “independent contractor” for tax purposes, or just write them a check every 2 weeks.  Susan might think that is just great, because she won’t have income and payroll taxes withheld from each paycheck. At the end of the year they just send that dreaded 1099-Misc (box 7) form to Susan.

This unfortunately is going to costs Susan some money out of pocket. For tax purposes, Susan would be treated as self-employed, meaning that she would be required to file a tax return and pay a 15.3% self-employment tax when income exceeds just $400. This tax is for Social Security and Medicare. For payroll type workers, the employer pays half of these taxes, but self-employed workers pay them all. Yes, they can deduct ½ of this amount as a deduction to income, but this is not as good a deal as they get from a true employer paying ½.

Susan is now subject to the same tax rules as any other business. If your child earns more than $400 through babysitting, dog walking, lemonade stands, or any of a wide range of similar money-making endeavors, the self-employment tax might be unavoidable. But look at it this way, Susan is learning valuable lessons about the responsibilities of being an “entrepreneur”.

3. Would Susan need to file a return for unearned income from investments in her name? 
If Susan has only unearned income like capital gains or dividends and interest from investments, the threshold for having to file a tax return is $1,050.

4. Susan is a 19 year old college student claimed as a dependent on her parents returns, received $250 taxable interest income (unearned income) and earned $2,500 from a part-time job during 2018 (earned income).
She does not have to file a tax return. Both her unearned and unearned income are below the thresholds, and her total income of $2,750 is less than her total earned income plus $350 ($2,850). The rule is, earned and unearned income together total more than the larger of (1) $1,050, or (2) total earned income (up to $12,000) plus $350.

However, there are different rules if your child has unearned income from savings and investments, plus self-employment income.

There are reasons a parent might want to put a child’s income on their return, you can read more about this, just take a look at Parent’s Election To Report Child’s Interest and Dividends in Part 2 of IRS Publication 929.

5. Is there any tax benefit of having investments in my kid(s) name? 
Keeping a lot of investments in a kids account used to be a popular tax strategy, because it allowed investment income to be taxed at the child’s lower rate. The so-called “kiddie tax” in 1986 was aimed at preventing parents from abusing this strategy, and in 2006 the rules became even more restrictive.

For dependent kids age 18 and younger (or under age 24 if they are a full-time student) in 2017, unearned income above $2,100 (from a taxable account) is taxed at the parents’ highest marginal income tax rate, which is likely to be higher than the capital gains rate that would otherwise apply if the investments were in the parents’ names. Below that threshold, the first $1,050 of a child’s unearned income is not taxed, and the next $1,050 is taxed at the child’s marginal tax rate.

The tax rates on minor’s unearned income were changed by the new 2018 tax law. Starting in 2018, unearned income above $2,100 is taxed at the rates that apply to trusts and estates.

So there is little tax benefit to put these investments in your kid’s name.

Caveat:  All complicated tax situations should be discussed with your tax professional.



Beware the IRS Fools with 410K Limits for High Compensation Employees!


I recently wrote about 401K plans and how they have allowed workers to build wealth over the years to cover the costs of “filling the gap” in retirement.

The main advantage of 401K plans is the amount you can contribute. For 2018, that $18,500, up from $18,000 in 2017. You can also make a “catch up” contribution if you’re 50 or older. That adds another $6,000 to the contribution. If your employer has a matching contribution, it turns into a serious wealth accumulation scheme.

Let’s say for example, let’s say you make the full $18,500, plus the over 50 $6,000 catch up, that’s $24,500 coming from you. Your employer has a 50% match, and contributes another $9,250. That brings your total contribution for the full year up to $33,750! In 2008, the overall limit for 401K contributions, which includes money from all sources, including your employer’s matching contributions, is $55,000.

As Great as that looks, there are serious limits in the plan if you fall under the category of highly compensated employee “HCE”. The thresholds defining someone as an HCE are probably lower than you think. If you fall into this category your 401K plan suddenly isn’t as generous.

First of all contributions made by HCE’s can’t be excessive when compared to those of non-HCE employees. For example, if the average plan contribution by non-HCE’s is 4%, then the most an HCE can contribute is 6%. I’ll tell you why below. But if you make $150,000, and you’re planning to max out your contribution at $18,500, you may find that you can only contribute $9,000. That 6% of your $150,000 salary. Here is something else you’ll learn, if you’re determined to be an HCE after the fact, like after you’ve made a full 40K contribution for the year, the contribution will have to be “reclassified”. The excess will be refunded to you, and not retained within the plan. An important tax deduction will be lost.

And, another little quirk, HCE isn’t always obvious. The IRS has what’s known as family attribution, which means you can be determined to be an HCE by blood. An employee whose a husband/wife, child, grandparent or parent of someone who is a 5%, or greater, owner of the business, is automatically considered to be a 5% or greater owner.

See, what happens is that every year the IRS requires a 410K plan test, these are called Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests.  

The bottom line is that lesser compensated employees may be able to contribute MORE to their plan than a HCE can.

I’ve experienced this situation, it was due to the company failing the test, we had too many newer employees who did not opt-in for their 401K plans. They were at the lower end of the compensation scale. So, these days many companies are, by default signing up all new employees into their 401K plans even with minimum contributions. Besides, without most companies offering pension plans the 410K is in all employees interest.

If you are interested in learning more about these HCE test you can check out the IRS site below:



Does Your Company “True-Up” Your 410K?


Today employer sponsored 401K accounts are the number one way to both build wealth and supplement your retirement income needs.

It is not unusual to have people retiring today with over a $1M in an IRA, much of this being transferred from an employee sponsored 401K that was converted. While $1M in an IRA might sound like an optimum situation, it may present its own problems when you turn 70 ½ and have to start taking Required Minimum Distributions (RMD), I’ll cover that in a future article. In the meantime let’s make sure you are getting the best deal possible from your current plan. 

Are you sure you are getting the maximum employer matching funds? You might be surprised that you could be leaving money on the table.

True-Up 401K Plans
Sometimes an employee can “contribute too fast” into their employer matching 401K account and thereby NOT get the full employee amount. Here’s how it could happen.

Suppose your employer’s 401K program provides a certain percentage match to each employee contribution “per pay period”. If you max out your 401K contributions early in the year and therefore you would stop making contributions, your employer will also stop making matches, assuming the employer’s plan does not provide for “true up” contributions. There is an annual limit on 401K contributions.

Let’s say an employer match’s 50% of Mary’s contribution per pay period, up to 6 percent of her earnings. Mary earning $75,000 a year, getting paid $3,125 twice a month. To contribute enough money to reach the IRS’s $18,000 contribution limit, she would need to contribute $750 per pay period, or 24 percent of her salary. In this scenario, the employer would contribute $93.75 in matching funds per pay period, since 6 percent of the employee’s pay would be $187.50, and $93.75 is half of that.

If, however, Mary decided to contribute $818.18 per pay period instead, she would max out her 401K contributions before the end of the year—by the 22nd pay period of the year, to be exact. For the two remaining pay periods of the year, her contribution would be $0— and her employer’s matching contribution would be $0 as well because there would be nothing to match. That would mean she missed out on an extra $187.50 in contributions.

Whether Mary had decided to contribute $750 or the $818.18 per pay period, she would have ended up contributing the same $18,000 total during the year to the retirement plan. That $187.50 in matching funds might not seem like much, but it can add up over the years—particularly when you factor in the returns you are missing on that money.

While Mary’s example is modest, I can tell you that if you are a high earner and say you get a large year-end bonus in the next tax year the consequences of a 401K front-loading could be a substantial loss of extra matching. Sales people who have “lumpy” earnings throughout the year can fall into this category also. 

Some employers include a feature in their 401K plans that allows workers to get the maximum employer match even if they’ve finished contributing to their 401K plans early in the year. This is called a True-Up! They calculate at year end the max amount you should have gotten and contribute this amount to your 401K. 

Does your employer offer you a True-UP?

Traditional VS ROTH IRA Misconceptions


Planning and saving for retirement is key in all of our lives. The planning part raises a lot of questions and there are a lot of misconceptions floating around today. We’ll try and clear up a few for you.

Common Misconception: Contributing to a ROTH IRA is always better than a traditional IRA!

Although there are a lot of variables involved the above statement is not necessarily true.  By design a traditional IRA contribution is a deduction against taxable income, but taxed when you withdrawal it in retirement. However, with a ROTH IRA you contribute after taxes but withdrawals are tax exempt. 

Here is a real world type model that shows similar contributions to both a traditional IRA and ROTH IRA have different outcomes. 


Here is the details behind the above calculations:

As you can see based on the above model, the traditional IRA even with taxes being paid has a better performance than the ROTH IRA. Don’t always take common claims as fitting your situation. Keep in mind that this model is very simple and does not take into consideration such things as Required Minimum Distributions from an IRA at age 70 1/2. You will also not that I included an “effective tax rate” instead of the tax bracket rate to be more precise. 

Spending a little extra time planning can improve your retirement.