Investing - Miscellaneous

Investing - Miscellaneous

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Do you have a high deductible health insurance policy and have not started Medicare? If so, do you have a Health Savings Account (HSA)? If not - GET ONE. It will let you pay for medical expenses (not insurance premiums) with untaxed money. It's like an IRA that you can use to pay for medical care, including eye care and dentistry. You can get one at fidelity.com (I haven't looked elsewhere). There are limits to yearly contributions.

The Widow(er) Tax Rate and its Impact on IRA to Roth Conversions

I added this to Investing - IRA to Roth Conversion. I am repeating it here because it wasn't in the original post and I don't want anyone to miss it.

If you are married, you are using the married tax table for ordinary income on IRA withdrawals. But what happens if a spouse dies? The living spouse is suddenly single and using that tax table - way higher tax bracket for a given income. Of course the living spouse may not need to withdraw as much from the IRA, but don't forget required distributions and expenses (mortgage, rent, taxes). This is a good reason to push IRA to Roth conversion.

Keeping Up With Inflation Via Bonds and CDs

I often say that you can't keep up with inflation with bonds or CDs - and get challenged that interest rates rise with inflation as the Fed adjusts its overnight interest rate. Interest rates do reflect the inflation rate, but it doesn't compound unless you reinvest it in more bonds/CDs. Inflation compounds and if you use the interest as income, the principal does not increase.

As a safe way to invest money that grows with inflation, bonds/CDs might work well. You must reinvest the interest for this to work.

But as an income source where the income grows with inflation - no chance. For that, look at dividend stocks, and be prepared for some risk.

(Does anyone have a good mnemonic to remember whether assets are principal or principle? I have to look it up every time I need the word.)

Gross Income, AGI, MAGI

You will likely come across these terms occasionally, so I investigated the definition. Complex, so this is a simplification. To get an accurate number, you need to fill out the tax forms.

Gross Income - all of the taxable income that you receive in a year, including wages, dividends, alimony, capital gains, interest income, royalties, rental income, IRA, 401k, 403b withdrawals, etc.

IRA, 401K, 403b withdrawals are included in gross income.

Gains within an IRA, 401K, 403B are not taxable. These are taxed upon withdrawal.

Roth gains and qualified withdrawals (59.5 years old, 5 year old account, etc.) are not taxed.

AGI - Adjusted Gross Income -

The sum of all of your taxable income, i.e. your gross income, minus IRA, 401k, 403b contributions, deductible HSA contributions, half of self employment taxes, student loan interest, and a few more.

Roth contributions are not deducted from AGI. Qualified Roth withdrawals (59.5 years old, 5 year old account, etc.) are not taxable so not included in AGI. IRA, 401K, 403b withdrawals are included in AGI.

MAGI - Modified Adjusted Gross Income - 

This is your AGI but adding back in tuition-related costs or deductions, losses from rental properties, half of the self-employment tax, student loan interest, and a few more.

Incidentally, if you are not familiar with self employment, you pay double Social Security and Medicare tax. That's your part and your employer's part. The employer's part is our government attempting to hide half of these taxes by making the employer pay it. But nowhere to hide with self employment.

Fee Based Advisers

I've said this before, but I heard an ad for a fee based adviser on the radio - "We only get a raise when your portfolio goes up." Well that sounds good, and it's true. BUT if your portfolio doesn't go up, they still get their 1%. You lose the fee, a percentage of your portfolio, not a percentage of the increase, every year.

So are fee based advisors worth 1% of your assets every year? Strictly as a stock picker, I would say probably not - not many mutual fund advisors are worth 1% when compared to index funds. But there is a lot more to getting through retirement than picking stocks, such as use of tax advantaged accounts, getting income from your assets, minimizing taxes and fees. If you don't spend the money on an advisor, you will need to learn a lot and prepare a strategy. A 1% fee on one million dollars in assets is $10,000 every year, so learning and doing it all yourself could save a lot of money.

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