The Roth IRA loophole – retirement planning for high earners!

It is a very well known truth that in the US you have no-one to rely on but yourself when it comes to retirement.

Sure, you accumulate some Social Security benefits, but they’re nowhere near to bringing you to a comfortable retirement (check this page to calculate the estimate).

So what can you do? The usual: employer’s pension (if you’re lucky, not many left providing it), 401k and the IRA.

So lets look at the IRA: there are 2 kinds – Roth and Traditional. The difference is in tax treatment: for Roth you deposit after-tax money, and all the income is free when you’re retired. For traditional – you deposit money that may or may not be deductible on your tax return, and the amounts in excess of what you didn’t deduct on your taxes now will be taxable to you when you’re retired.

What does it mean? It means that with Traditional IRA, your account will provide you taxable income on retirement. With Roth – it will be non-taxable.

If you expect your retirement tax rates be lower than current, traditional IRA makes more sense to you. But there’s a problem: you can only deduct the contributions up to a certain (and fairly low) AGI limit. Especially if you also have a 401k at work.

There are additional benefits for having Roth IRA, for example – you’re not required to have distributions from them when you’re old (from a traditional IRA you’d be required to start distributing at the age of 70 and 1/2, whether you want it or not). So if you expect to not need the IRA distributions at all and just want to leave tax-free income for emergencies or as inheritance, Roth IRA is definitely better for you.

If you cannot deduct your IRA contribution – there’s no sense in having a traditional IRA. Roth is much better then. But, you cannot contribute to Roth IRA if you’re a high earner, especially if you’re covered by a 401k plan at work.

So what to do?
Utilize the loophole.

You can always contribute to a traditional IRA, with after-tax money in a non-deductible contribution. And, you can always convert a traditional IRA to a Roth IRA. So what’s the loophole? Simple: contribute to a traditional IRA and convert it to Roth IRA. This way you can maximize your retirement income while minimizing taxes on it.

There’s a catch: when you convert your traditional IRA to a Roth IRA, you’re taxed on the untaxed portion. If you have a traditional IRA balance in excess of your current non-deductible contribution (for example, you rolled over an old 401k into an IRA), it will be taxed proportionally to your contribution. So for the loophole to work best, you should not have any other Traditional/Rollover IRA other than the one you’re converting.

Here’s an example:

1. You don’t have any Traditional/Rollover IRA at all.

2. You deposit up to the yearly maximum (currently $5500) into a traditional IRA

3. You convert your traditional IRA to become Roth IRA ($5500 change designation from Traditional IRA to Roth IRA).

4. You fill IRS form 8606 and attach it to your yearly tax return, no tax due. You have  a fully funded Roth IRA account.

Another example shows why it is important not to have any other pre-tax IRA when utilizing this scheme:

1. You have $55000 in your rollover IRA (traditional) from an old 401k.

2. You deposit $5500 (current yearly maximum) to a traditional IRA.

3. You convert the $5500 from step 2 to a Roth IRA.

4. You end up with $5500 in Roth IRA and the old $55000 in your rollover IRA.

5. You fill IRS form 8606 and attach it to your tax return, but there’s a tax due.

Because you had a pre-tax IRA ($0 basis), your tax is calculated like this: ($55000)*($5500/($55000+$5500)) = $5000 taxable. You’re calculating, in essence, what is the pre-tax portion of your total traditional IRA balance that you converted to Roth IRA, and how much of the total has been post-tax (i.e.: tax already paid). The proportion in this example is ~9.1%. Note that it doesn’t matter if the accounts are with the same custodian or not, you still have to count all of them together.

That makes ~91% of your conversion (in this example) taxable – $5000 out of the $5500.

To report Traditional IRA to Roth conversions, and non-deductible contributions, you should use IRS form 8606.

Always talk to your tax adviser before making any tax-related decisions. I’m not a tax adviser and this is not a tax advice. Always discuss your tax planning with a EA or CPA licensed in your State.

Happy Retirement,

Your Little Advisor

Posted in Savings Accounts, Taxes - General | Tagged , , , | 1 Comment

Why those who support republicans on ACA are wrong.

Following the (undoubtedly sponsored) comments I received on my previous article criticizing the Republican Speaker of the House of Representatives behavior, I wanted to debunk some of the myths.

“The majority of employees (people of the US) do not want to pay for a new soda machine, they already have one.” - meaning the commenter claims that the majority of the US population already have medical insurance and are not interested in changes.

Well, this one is easy: the problem is not the majority who have insurance, its the minority who don’t. What do we do about those who are unemployed, and thus cannot get insurance through employers? Those who are employed but whose employers don’t provide insurance? Those who are students? Those who have pre-existing conditions? Those who’ve exceeded their lifetime caps because they become sick with diseases like cancer, or got into an accident, or were born with some health issues, etc?

What do we do about all these? Do we, those who have insurance, let them just die untreated? This was a question asked in one of the Republican primary debates, and there were people in the crowd shouting “Yes”! I was horrified by that. None of the Republican candidates spoke against these shouters then. That was even more horrifying. Other than “Yes, kill them all”, Republicans do not provide any answer.

“If employees do not purchase sodas from the machine they will be fined 1% of their salary this year and 2.5% of their salary next year.” (Tax penalty for not signing up for Obamacare)

This is supposed to be a negative thing? Apparently the commenter thinks so. I think that 2.5% is not enough. Those who are not getting insurance will undoubtedly go to the ER when they actually need emergency care. Who is going to pay for that? The answer is the taxpayer. So for those people it is wrong to have others force them taking responsibility, but its perfectly fine to force others to pay their bills when its convenient? Conservative hypocrisy at its best. I would say they should pay even larger fines. 2.5% is not enough to cover their ER expenses when they actually do break a leg or have stage 4 cancer because it wasn’t diagnosed during the first 3 stages having them being too cheap to have coverage.

“Management will confiscate part of the employees paychecks regardless of the situation and use part of that money to pay for 75% of management’s sodas.” (Congress gets 75% of their costs for Obamacare paid for according to OMB)

Actually, my employer pays even more than 75%. But I do get the point – we’re the employers of the Congressmen. What I think is that the terms of their employment shouldn’t be set by them, but someone independent, as it is done in other countries. But ACA has really nothing to do with that, does it?

But the most ridiculous argument was this:

The employees are the people and did not get to vote on Obamacare (this was entirely left out of the original allegory). The managers (congress) are the ones who voted and did not represent the will of the majority of the people (employees).

Well, I’ve got news to you Aaron: people don’t vote on Federal laws. AT ALL. So claiming that ACA is bad because people didn’t get to vote on it is moot – people don’t get to vote on any Federal law. Ironically, people didn’t also get to vote on the recent government shutdown. Where are the polls on that? Where are the polls on all the wars the US went to? Where are the polls on the handouts to the corporations and the tax loopholes allowing the rich to pay 13% tax while the middle class is paying 25%-30%? Didn’t see anyone shouting that the people didn’t get to vote on that. Oh, wait, I did… Occupy Wall-Street movement… Where were the Republicans then? Did anyone ask the people when the Republican House of Representatives spent millions defending the unconstitutional discrimination?

No. I don’t think so.

So don’t try to defend Republicans here. No excuses for them

Your Little Advisor.

Posted in News and Politics | Tagged , , , , | 2 Comments

Government shutdown – workplace allegory

I was trying to figure out how to write what I feel about this stupid government shutdown, but I couldn’t really without getting into some nasty words. But then I saw this post a friend shared on his Facebook page. I copy-pasted it here, but these are neither my words nor my friend’s, I don’t know who the author is. I just think it represents what I think really well.

Edit: Initially posted as anonymous quote, this post has been re-tweeted (thanks, folks!), and the author of the allegory contacted me and asked to put a link to the original post. So here it is: Brian’s Original Post – Hilarious Allegory to the Current ACA aka ObamaCare Hoopla.

- hilarious allegory to the current ACA aka Obamacare hoopla -

So, Imagine that the company you work for held a poll, and asked everyone if they thought it would be a good idea to put a soda machine in the break room. The poll came back, and the majority of your colleagues said “Yes”, indicating that they would like a soda machine. Some said no, but the majority said yes. So, a week later, there’s a soda machine.

Now imagine that Bill in accounting voted against the soda machine. He has a strong hatred for caffeinated soft drinks, thinks they are bad you you, whatever. He campaigns throughout the office to get the machine removed. Well, management decides “OK, we’ll ask again” and again, the majority of people say “Yes, lets keep the soda machine.”

Bill continues to campaign, and management continues to ask the employees, and every time, the answer is in favor of the soda machine. This happens, lets say… 35 times. Eventually, Bill says “OK, I’M NOT PROCESSING PAYROLL ANYMORE UNTIL THE SODA MACHINE IS REMOVED”, so nobody will get paid unless management removes the machine.

What should we do???

Answer: Fire Bill and get someone who will do the fucking job.

Bonus: Bill tells everyone that he was willing to “Negotiate”, to come to a solution where everyone got their payroll checks, but only so long as that negotiation capitulated to his demand to remove the soda machine.

Bill is a fucking jackass.


- Brian K

They can agree or disagree about ACA all they want, but blackmail and extortion are not the way laws should be enacted.

ACA comes into effect now, and they’re afraid that all these horrible things they promised us because of it will never happen. Remember the “death panels“?

Your Little Adviser.

Posted in News and Politics | Tagged , , | 5 Comments

IRS published information pertaining the ACA provisions (ObamaCare)!

There’s a lot of (mis)information floating around about the tax effects of the Affordable Care Act (AKA ObamaCare). Finally, there’s some reliable information on the IRS site that can help us understand the tax-related provisions of the law.

You fan find it all on this page of the IRS web site (click).

Please consult with your tax adviser/accountant (EA or CPA) on any tax-related issue. This article is for general information only, and is not a competent tax advice.

I took the liberty of summarizing the most interesting parts (at least in my humble opinion):

1. If you don’t need to file tax return for any other reason – you don’t need to file it solely for the future ACA purposes. This is important for many low-income taxpayers.

2. Employers are required to report the cost of your health insurance premiums on your W2 (with code DD). That has started last year, in fact, but just to make sure everyone is on the same page – these amounts are **not** taxable. They’re reported for informational purposes only, and I’m guessing the IRS needs that information to correctly assess the thresholds for “limousine” plans.

3. Itemizing medical expenses is now not as simple as it was (not that it was…). If in prior years the AGI threshold (the minimum amount of expenses before you can start deducting) was 7.5% of your total AGI – now its 10%. The good part is that if you get an ACA insurance, you’re likely not to reach even the 7.5% AGI threshold.

4. Tax “penalty” for not having insurance will only be assessed starting of the tax year 2014, i.e.: on the tax returns you file in 2015. Similarly, credits for insurance purchased on the ACA exchanges will also begin as of tax year 2014, i.e.: the tax returns you file in 2015.

For business owners:

1. If you have less than 25 full time employees, you may be eligible for a credit.

2. If you have 50 or less full time employees, you may be eligible for participation in the “Small Business Health Options Program” (SHOP).

3. If you have 50 or more full time employees, you’ll need to file a return describing if and which health insurance you’re providing your employees with.

More details are on the IRS ACA Provisions Page and on the ACA HealthCare.ORG page.

Your Little Advisor

(NOT a tax adviser!)

Posted in News and Politics, Taxes - General | Tagged , , , | Leave a comment

Is religion for dumb people?

A research published in a recent “Psychology Review” shows very interesting data about the correlation between the persons’ IQ and their religious beliefs and behavior.

Researchers from University of Rochester in Rochester, New York and the Northeastern University in Boston, MA have analyzed significant amount of studies that show that there’s a negative correlation of ~0.24 (on the scale from 0 to -1) between a person’s IQ and the person’s religious behavior and beliefs.

According to the researchers, the more the person is educated – the more the correlation is stronger. For example, college graduates are less likely to be religious than younger or less educated people.

This confirms my own empiric observations: the more educated people are and the more intelligent people are – the less likely they are to become religious zealots. Sure, a lot will go to church/synagogue/mosque, but many do so not because of a strong religious conviction but rather to pay respect to their traditions. Rarely these people become fanatics. But those who are poor (and hence less educated), less intelligent (not everyone is a genius, after all…) – those are more likely to be brainwashed into fanatic bigotry.

So yes, the data is in. As Marx once said – religion is the opium of the people. Mostly uneducated masses. No wonder that they object anything that would lead to more educated society.

Your Little (and educated) Advisor.

Posted in News and Politics | Tagged , , , | Leave a comment

So the court has decided.

The Proposition 8 has been stricken down by the lower courts. The US Supreme Court tossed the appeal because the appellants have no standing. Finally, we have a legal precedence for people to mind their own f***ing business. I hope the bigots get the clue – the relations between two grown ups are none of their business. If the two grown ups happen to be of the same sex, or opposite sex, shouldn’t matter when it comes to the benefits and additional rights they get just because they make their relationship official.

DOMA Section 3, that defines the “marriage” for Federal purposes – got invalidated as unconstitutional. That was  so obvious to all that even the United States Department of Justice decided not to defend the statute any more. Millions of dollars the Republican majority in the House of Representative has spent on the fruitless defense and the prolonged suffering of the gay couples could have been spent much better in this economy. But hey, Republicans are all for fruitless waste of taxpayers’ money, aren’t they?

Unfortunately DOMA Section 2, that allows States to ignore other states’ marriage licenses, has not been challenged yet and thus yesteraday’s ruling doesn’t affect it. I hope it will get repealed by the Congress, and if not – invalidated by the SCOTUS next time.

It was a good day for all of us. Lets hope it will only get better from now on.

Your Little Advisor.

Posted in News and Politics | Tagged , , | Leave a comment

Google being evil

So Google+ is a big flop, people don’t like it and don’t want to use it.

What does Google do? Forces you.

Many people are reporting that their most frequent chat buddies on Google Talk have been blocked automatically by Google, with the only available solution to be joining Google+ and unblocking them there.

Google are aware of the “problem” and claim it is a bug, however all the other (previously available) workarounds like using the stand-alone client to unblock have been disabled after being reported working to Google in this thread.

More reports and details here.

It appears that someone became quite desperate there in Google+ team, and after all the other strategies failed decided to just force people in to boost membership. And of course, you cannot become a member without providing a great deal of personal information, starting with your name.

Google, back off.

Your Little Advisor.

Posted in News and Politics, Reviews, Software | Tagged , | Leave a comment