Harry Sit's Blog, page 12
September 18, 2023
Stay Away from Zero-Percent C of I in TreasuryDirect
There’s a saying — “A little knowledge is a dangerous thing.” When you don’t know much about a subject, you stay with the tried-and-true because there’s safety in the mainstream. As you learn more about the subject, you start to explore off the beaten path. That’s when the danger starts. You think you know what to do but you don’t know what to avoid. If you only know enough to get into trouble, you’re better off not knowing it.
We have an example of this in using TreasuryDirect.
Many people bought I Bonds last year at TreasuryDirect. You link a bank account and put in an order to buy. TreasuryDirect debits the bank account and gives you I Bonds in the account. Many readers of this blog have done that. It works in reverse when you sell. TreasuryDirect credits the linked bank account. These are all routine transactions.

Some people discover that you can also buy regular Treasuries in the TreasuryDirect account. You can buy in $100 increments as opposed to in $1,000 increments in a brokerage account. You can place the order more days in advance versus having to wait for the official announcement. TreasuryDirect supports “auto roll” whereas not all brokers support it. TreasuryDirect debits the same linked bank account for purchases and credits it when the Treasuries mature. These are all routine too.

Then some people notice this peculiar thing called a “Zero-Percent Certificate of Indebtedness” or in short “Zero-Percent C of I” or simply “C of I.” It’s basically TreasuryDirect’s version of uninvested cash in a brokerage account. It doesn’t pay any interest, hence “Zero-Percent.” Zero-Percent C of I can be designated as the destination of the credits from matured Treasuries, to be used as the source of your debits for the next purchase.

You would think this Zero-Percent C of I is useless because drawing from and sending to the bank account works just fine and you can at least earn some interest while the money is in your bank account, but some people decide to use Zero-Percent C of I to hold cash in TreasuryDirect.
That’s when the trouble starts. I read this report on the Bogleheads investment forum (I edited it slightly for brevity):
Well, I moved all of my savings into the US Treasury, in the form of four-week T-Bills that redeeem to C of I.
Normally, that’s not an issue, works every time.
Until two days ago when I got an email saying my account was flagged as having some concerns and Risk Management had placed a hard lock on the account as a precautionary measure.
I was asked to fill out a FS Form 5444. I mailed the notarized form but the processing time for this form is “20 weeks minimum.”
I called the Treasury and got transferred to the hardlock department. They said they received my form but couldn’t act on it.
They also said, the reason for the hard lock was because I bought a $1,000 C of I with my bank account, intending to use it to buy a T-Bill, and this was a fraud risk.
So I will not be able to log into my account to recover any of my money, nor will I be able to reinvest it.
Over the next 20 weeks I’m going to lose out on perhaps about $5,000 worth of interest, yikes.
False positives in risk management and account restrictions happen sometimes. Normally it wouldn’t be a big problem because at worst you can’t place new orders and money from matured T-Bills will still come back to your bank account. In this case, the money goes to Zero-Percent C of I, which earns no interest while it takes 20 weeks to resolve the account restriction.

This investor is clearly better off not knowing that Zero-Percent C of I exists.
He or she is also better off not knowing that you can use TreasuryDirect to buy T-Bills. If he or she bought T-Bills in a commercial brokerage account, at least the settlement fund or core position earns interest and it should be much quicker to resolve the risk management issue than 20 weeks.
To be clear, I don’t blame this investor for using Zero-Percent C of I or using TreasuryDirect to buy T-Bills. It still wouldn’t be a big problem if TreasuryDirect could review the notarized form and remove the restriction in two days as opposed to 20 weeks, but the reality is that TreasuryDirect is understaffed. The computer system runs routine transactions efficiently but things requiring human intervention can take a long time.
Lessons learned: Treat TreasuryDirect as a delicate object. Do as little as possible with it. Stay on the beaten path. Buy your I Bonds. Sell your I Bonds. Use your linked bank account to transact. Don’t use the browser’s back button. Remember your password and your answers to the security questions. Be extra careful not to get your account locked. Use your brokerage account when you buy regular Treasuries. Stay away from Zero-Percent C of I in TreasuryDirect.
Learn the Nuts and Bolts
The post Stay Away from Zero-Percent C of I in TreasuryDirect appeared first on The Finance Buff.
September 13, 2023
2024 2025 2026 Medicare Part B IRMAA Premium MAGI Brackets
[Updated on January 11, 2024 after the release of the inflation number for December 2023.]
Seniors 65 or older can sign up for Medicare. The government calls people who receive Medicare beneficiaries. Medicare beneficiaries must pay a premium for Medicare Part B which covers doctors’ services and Medicare Part D which covers prescription drugs. The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%.
Table of ContentsWhat Is IRMAA?MAGI2024 IRMAA Brackets2025 IRMAA Brackets2026 IRMAA BracketsRoth Conversion ToolsNickel and DimeIRMAA AppealNot Penalized For LifeWhat Is IRMAA?Medicare imposes surcharges on higher-income beneficiaries. The theory is that higher-income beneficiaries can afford to pay more for their healthcare. Instead of doing a 25:75 split with the government, they must pay a higher share of the program costs.
The surcharge is called IRMAA, which stands for Income-Related Monthly Adjustment Amount. This applies to both Traditional Medicare (Part B and Part D) and Medicare Advantage plans.
According to the Medicare Trustees Report, 7% of Medicare Part B beneficiaries paid IRMAA. The extra premiums they paid lowered the government’s share of the total Part B and Part D expenses by two percentage points. Big deal?
MAGIThe income used to determine IRMAA is your Modified Adjusted Gross Income (MAGI) — which is your AGI plus tax-exempt interest and dividends from muni bonds — from two years ago. Your 2022 MAGI determines your IRMAA in 2024. Your 2023 MAGI determines your IRMAA in 2025. Your 2024 MAGI determines your IRMAA in 2026.
There are many definitions of MAGI for different purposes. The MAGI for subsidies on health insurance from the ACA marketplace includes untaxed Social Security benefits. The MAGI for IRMAA doesn’t include untaxed Social Security benefits. If you read somewhere else that says that untaxed Social Security benefits are included in MAGI, they’re talking about a different MAGI, not the MAGI for IRMAA.
You can use Calculator: How Much of My Social Security Benefits Is Taxable? to calculate the taxable portion of your Social Security benefits.
As if it’s not complicated enough while not moving the needle much, IRMAA is divided into five income brackets. Depending on the income, higher-income beneficiaries pay 35%, 50%, 65%, 80%, or 85% of the program costs instead of 25%. As a result, they pay 1.4 times, 2.0 times, 2.6 times, 3.2 times, or 3.4 times the standard Medicare premium.
The threshold for each bracket can cause a sudden jump in the monthly premium amount you pay. If your income crosses over to the next bracket by $1, all of a sudden your Medicare premiums can jump by over $1,000/year. If you are married filing a joint tax return and both of you are on Medicare, $1 more in income can make the Medicare premiums jump by over $1,000/year for each of you.

* The last bracket on the far right isn’t displayed in the chart.
So if your income is near a bracket cutoff, see if you can manage to keep it down and make it stay in a lower bracket. Using the income from two years ago makes it more difficult to manage.
2024 IRMAA BracketsThe income on your 2022 IRS tax return (filed in 2023) determines the IRMAA you pay in 2024.
Part B Premium2024 Coverage (2022 Income)StandardSingle: <= $103,000Married Filing Jointly: <= $206,000
Married Filing Separately <= $103,0001.4x StandardSingle: <= $129,000
Married Filing Jointly: <= $258,0002.0x StandardSingle: <= $161,000
Married Filing Jointly: <= $322,0002.6x StandardSingle: <= $193,000
Married Filing Jointly: <= $386,0003.2x StandardSingle: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $397,0003.4x StandardSingle: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $397,0002024 IRMAA Brackets
Source: Medicare Costs, Medicare.gov
The standard Part B premium is $174.70 in 2024. Higher-income Medicare beneficiaries also pay a surcharge for Part D. The income brackets are the same. The Part D IRMAA surcharges are relatively smaller in dollars.
I also have the tax brackets for 2024. Please read 2024 Tax Brackets, Standard Deduction, Capital Gains, etc. if you’re interested.
2025 IRMAA BracketsWe have four data points out of 12 right now for the IRMAA brackets in 2025 (based on 2023 income). However, you can make some preliminary estimates and give yourself some margin to stay clear of the cutoff points.
If annualized inflation from January 2024 through August 2024 is 0% (prices staying flat at the latest level) or 3% (approximately a 0.25% increase every month), these will be the 2025 numbers:
Part B Premium2025 Coverage (2023 Income)0% Inflation2025 Coverage (2023 Income)
3% InflationStandardSingle: <= $105,000
Married Filing Jointly: <= $210,000
Married Filing Separately <= $105,000Single: <= $105,000
Married Filing Jointly: <= $210,000
Married Filing Separately <= $105,0001.4x StandardSingle: <= $132,000
Married Filing Jointly: <= $264,000Single: <= $133,000
Married Filing Jointly: <= $266,0002.0x StandardSingle: <= $164,000
Married Filing Jointly: <= $328,000Single: <= $166,000
Married Filing Jointly: <= $332,0002.6x StandardSingle: <= $197,000
Married Filing Jointly: <= $394,000Single: <= $198,000
Married Filing Jointly: <= $396,0003.2x StandardSingle: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $395,000Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $395,0003.4x StandardSingle: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $395,000Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $395,000Projected 2025 IRMAA Brackets
Because the formula compares the average of 12 monthly CPI numbers over the average of 12 monthly CPI numbers in a base period, even if prices stay the same in the following months, the average of the next 12 months will still be higher than the average in the previous 12 months.
To use exaggerated numbers, suppose gas prices went up from $3/gallon to $3.50/gallon over the last 12 months. The average gas price in the last 12 numbers was maybe $3.20/gallon. When gas price inflation becomes 0%, it means it stays at the current price of $3.50/gallon. The average for the next 12 months is $3.50/gallon. Brackets based on an average gas price of $3.50/gallon in the next 12 months will be higher than brackets based on an average gas price of $3.20/gallon in the previous 12 months.

If you really want to get into the weeds of the methodology for these calculations, please read this reply on comment page 2 and this other comment on page 4.
2026 IRMAA BracketsWe have no data right now for the IRMAA brackets in 2026 (based on 2024 income). We can only make some preliminary estimates and plan for some margin to stay clear of the cutoff points.
If annualized inflation from January 2024 through August 2025 is 0% (prices staying flat at the latest level) or 3% (approximately a 0.25% increase every month), these will be the 2026 numbers:
Part B Premium2026 Coverage (2024 Income)0% Inflation2026 Coverage (2024 Income)
3% InflationStandardSingle: <= $105,000
Married Filing Jointly: <= $210,000
Married Filing Separately <= $105,000Single: <= $108,000
Married Filing Jointly: <= $216,000
Married Filing Separately <= $108,0001.4x StandardSingle: <= $132,000
Married Filing Jointly: <= $264,000Single: <= $136,000
Married Filing Jointly: <= $272,0002.0x StandardSingle: <= $164,000
Married Filing Jointly: <= $328,000Single: <= $170,000
Married Filing Jointly: <= $340,0002.6x StandardSingle: <= $197,000
Married Filing Jointly: <= $394,000Single: <= $204,000
Married Filing Jointly: <= $408,0003.2x StandardSingle: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $395,000Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $392,0003.4x StandardSingle: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $395,000Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $392,000Projected 2026 IRMAA BracketsRoth Conversion Tools
When you manage your income by doing Roth conversions, you must watch your MAGI carefully to avoid accidentally crossing one of these IRMAA thresholds by a small amount and triggering higher Medicare premiums.
I use two tools to help with calculating how much to convert to Roth. I wrote about these tools in Roth Conversion with Social Security and Medicare IRMAA and Roth Conversion with TurboTax What-If Worksheet.
Nickel and DimeThe standard Medicare Part B premium is $174.70/month in 2024. A 40% surcharge on the Medicare Part B premium is about $840/year per person or about $1,700/year for a married couple both on Medicare.
In the grand scheme, when a couple on Medicare has over $206,000 in income, they’re already paying a large amount in taxes. Does making them pay another $1,700 make that much difference? It’s less than 1% of their income but nickel-and-diming just makes people mad. People caught by surprise when their income crosses over to a higher bracket by just a small amount are angry at the government. Rolling it all into the income tax would be much more effective.
Oh well, if you are on Medicare, watch your income and don’t accidentally cross a line for IRMAA.
IRMAA AppealIf your income two years ago was higher because you were working at that time and now your income is significantly lower because you retired (“work reduction” or “work stoppage”), you can appeal the IRMAA initial determination. The “life-changing events” that make you eligible for an appeal include:
Death of spouseMarriageDivorce or annulmentWork reductionWork stoppageLoss of income from income producing propertyLoss or reduction of certain kinds of pension incomeYou file an appeal with the Social Security Administration by filling out the form SSA-44 to show that although your income was higher two years ago, you had a reduction in income now due to one of the life-changing events above. For more information on the appeal, see Medicare Part B Premium Appeals.
Not Penalized For LifeIf your income two years ago was higher and you don’t have a life-changing event that makes you qualify for an appeal, you will pay the higher Medicare premiums for one year. IRMAA is re-evaluated every year as your income changes. If your higher income two years ago was due to a one-time event, such as realizing capital gains or taking a large withdrawal from your IRA, when your income comes down in the following year, your IRMAA will also come down automatically. It’s not the end of the world to pay IRMAA for one year.
Learn the Nuts and Bolts
The post 2024 2025 2026 Medicare Part B IRMAA Premium MAGI Brackets appeared first on The Finance Buff.
2023 2024 2025 Medicare Part B IRMAA Premium MAGI Brackets
[Updated on September 13, 2023 after the release of the inflation number for August 2023.]
Seniors 65 or older can sign up for Medicare. The government calls people who receive Medicare beneficiaries. Medicare beneficiaries must pay a premium for Medicare Part B which covers doctors’ services and Medicare Part D which covers prescription drugs. The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%.
Table of ContentsWhat Is IRMAA?MAGI2023 IRMAA Brackets2024 IRMAA Brackets2025 IRMAA BracketsNickel and DimeIRMAA AppealNot Penalized For LifeRoth Conversion ToolsWhat Is IRMAA?Medicare imposes surcharges on higher-income beneficiaries. The theory is that higher-income beneficiaries can afford to pay more for their healthcare. Instead of doing a 25:75 split with the government, they must pay a higher share of the program costs.
The surcharge is called IRMAA, which stands for Income-Related Monthly Adjustment Amount. This applies to both Traditional Medicare (Part B and Part D) and Medicare Advantage plans.
According to the Medicare Trustees Report, 7% of Medicare Part B beneficiaries paid IRMAA. The extra premiums they paid lowered the government’s share of the total Part B and Part D expenses by two percentage points. Big deal?
MAGIThe income used to determine IRMAA is your Modified Adjusted Gross Income (MAGI) — which is your AGI plus tax-exempt interest and dividends from muni bonds — from two years ago. Your 2021 MAGI determines your IRMAA in 2023. Your 2022 MAGI determines your IRMAA in 2024. Your 2023 MAGI determines your IRMAA in 2025.
There are many definitions of MAGI for different purposes. The MAGI for subsidies on health insurance from the ACA marketplace includes untaxed Social Security benefits. The MAGI for IRMAA doesn’t include untaxed Social Security benefits. If you read somewhere else that says that untaxed Social Security benefits are included in MAGI, they’re talking about a different MAGI, not the MAGI for IRMAA.
You can use Calculator: How Much of My Social Security Benefits Is Taxable? to calculate the taxable portion of your Social Security benefits.
As if it’s not complicated enough while not moving the needle much, IRMAA is divided into five income brackets. Depending on the income, higher-income beneficiaries pay 35%, 50%, 65%, 80%, or 85% of the program costs instead of 25%. As a result, they pay 1.4 times, 2.0 times, 2.6 times, 3.2 times, or 3.4 times the standard Medicare premium.
The threshold for each bracket can cause a sudden jump in the monthly premium amount you pay. If your income crosses over to the next bracket by $1, all of a sudden your Medicare premiums can jump by over $1,000/year. If you are married filing a joint tax return and both of you are on Medicare, $1 more in income can make the Medicare premiums jump by over $1,000/year for each of you.

* The last bracket on the far right isn’t displayed in the chart.
So if your income is near a bracket cutoff, see if you can manage to keep it down and make it stay in a lower bracket. Using the income from two years ago makes it more difficult to manage.
2023 IRMAA BracketsThe income on your 2021 IRS tax return (filed in 2022) determines the IRMAA you pay in 2023.
Part B Premium2022 Coverage (2020 Income)2023 Coverage (2021 Income)StandardSingle: <= $91,000Married Filing Jointly: <= $182,000
Married Filing Separately <= $91,000Single: <= $97,000
Married Filing Jointly: <= $194,000
Married Filing Separately <= $97,0001.4x StandardSingle: <= $114,000
Married Filing Jointly: <= $228,000Single: <= $123,000
Married Filing Jointly: <= $246,0002.0x StandardSingle: <= $142,000
Married Filing Jointly: <= $284,000Single: <= $153,000
Married Filing Jointly: <= $306,0002.6x StandardSingle: <= $170,000
Married Filing Jointly: <= $340,000Single: <= $183,000
Married Filing Jointly: <= $366,0003.2x StandardSingle: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $409,000Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $403,0003.4x StandardSingle: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $409,000Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $403,0002023 IRMAA Brackets
Source: Medicare Costs, Medicare.gov
The standard Part B premium is $164.90 in 2023.
Higher-income Medicare beneficiaries also pay a surcharge for Part D. The income brackets are the same. The Part D IRMAA surcharges are relatively smaller in dollars.
2024 IRMAA BracketsWe have all 12 data points out of 12 for the IRMAA brackets in 2024 (based on 2022 income). Medicare will make the official announcement soon.
Part B Premium2023 Coverage (2021 Income)2024 Coverage (2022 Income)StandardSingle: <= $97,000Married Filing Jointly: <= $194,000
Married Filing Separately <= $97,000Single: <= $103,000
Married Filing Jointly: <= $206,000
Married Filing Separately <= $103,0001.4x StandardSingle: <= $123,000
Married Filing Jointly: <= $246,000Single: <= $129,000
Married Filing Jointly: <= $258,0002.0x StandardSingle: <= $153,000
Married Filing Jointly: <= $306,000Single: <= $161,000
Married Filing Jointly: <= $322,0002.6x StandardSingle: <= $183,000
Married Filing Jointly: <= $366,000Single: <= $193,000
Married Filing Jointly: <= $386,0003.2x StandardSingle: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $403,000Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $397,0003.4x StandardSingle: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $403,000Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $397,0002024 IRMAA Brackets
I also project the Social Security COLA and the tax brackets for next year. Please read 2024 Social Security Cost of Living Adjustment (COLA) Projections and 2024 Tax Brackets, Standard Deduction, Capital Gains, etc. if you’re interested.
2025 IRMAA BracketsWe have no data right now for the IRMAA brackets in 2025 (based on 2023 income). However, you can make some preliminary estimates and give yourself some margin to stay clear of the cutoff points.
If annualized inflation from September 2023 through August 2024 is 0% (prices staying flat at the latest level) or 3% (approximately a 0.25% increase every month), these will be the 2025 numbers:
Part B Premium2025 Coverage (2023 Income)0% Inflation2025 Coverage (2023 Income)
3% InflationStandardSingle: <= $105,000
Married Filing Jointly: <= $210,000
Married Filing Separately <= $105,000Single: <= $106,000
Married Filing Jointly: <= $212,000
Married Filing Separately <= $106,0001.4x StandardSingle: <= $132,000
Married Filing Jointly: <= $264,000Single: <= $134,000
Married Filing Jointly: <= $268,0002.0x StandardSingle: <= $164,000
Married Filing Jointly: <= $328,000Single: <= $167,000
Married Filing Jointly: <= $334,0002.6x StandardSingle: <= $197,000
Married Filing Jointly: <= $394,000Single: <= $200,000
Married Filing Jointly: <= $400,0003.2x StandardSingle: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $395,000Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $394,0003.4x StandardSingle: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $395,000Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $394,000Projected 2025 IRMAA Brackets
Because the formula compares the average of 12 monthly CPI numbers over the average of 12 monthly CPI numbers in a base period, even if prices stay the same in the following months, the average of the next 12 months will still be higher than the average in the previous 12 months. To use exaggerated numbers, suppose gas prices went up from $3/gallon to 4.50/gallon over the last 12 months. The average gas price in the last 12 numbers was maybe $3.70/gallon. When gas price inflation becomes 0%, it means it stays at $4.50/gallon. The average for the next 12 months is $4.50/gallon. Brackets based on an average gas price of $4.50/gallon will be higher than brackets based on an average gas price of $3.70/gallon.

If you really want to get into the weeds of the methodology for these calculations, please read comment #79 and comment #164.
Nickel and DimeThe standard Medicare Part B premium is $164.90/month in 2023. A 40% surcharge on the Medicare Part B premium is about $800/year per person or about $1,600/year for a married couple both on Medicare.
In the grand scheme, when a couple on Medicare has over $194,000 in income, they’re already paying a large amount in taxes. Does making them pay another $1,600 make that much difference? It’s less than 1% of their income but nickel-and-diming just makes people mad. People caught by surprise when their income crosses over to a higher bracket by just a small amount are angry at the government. Rolling it all into the income tax would be much more effective.
Oh well, if you are on Medicare, watch your income and don’t accidentally cross a line for IRMAA.
IRMAA AppealIf your income two years ago was higher because you were working at that time and now your income is significantly lower because you retired (“work reduction” or “work stoppage”), you can appeal the IRMAA initial determination. The “life-changing events” that make you eligible for an appeal include:
Death of spouseMarriageDivorce or annulmentWork reductionWork stoppageLoss of income from income producing propertyLoss or reduction of certain kinds of pension incomeYou file an appeal with the Social Security Administration by filling out the form SSA-44 to show that although your income was higher two years ago, you had a reduction in income now due to one of the life-changing events above. For more information on the appeal, see Medicare Part B Premium Appeals.
Not Penalized For LifeIf your income two years ago was higher and you don’t have a life-changing event that makes you qualify for an appeal, you will pay the higher Medicare premiums for one year. IRMAA is re-evaluated every year as your income changes. If your higher income two years ago was due to a one-time event, such as realizing capital gains or taking a large withdrawal from your IRA, when your income comes down in the following year, your IRMAA will also come down automatically. It’s not the end of the world to pay IRMAA for one year.
Roth Conversion ToolsWhen you manage your income by doing Roth conversions, you must watch your MAGI carefully to avoid accidentally crossing one of these IRMAA thresholds by a small amount and triggering higher Medicare premiums.
I use two tools to help with calculating how much to convert to Roth. I wrote about these tools in Roth Conversion with Social Security and Medicare IRMAA and Roth Conversion with TurboTax What-If Worksheet.
Learn the Nuts and Bolts
The post 2023 2024 2025 Medicare Part B IRMAA Premium MAGI Brackets appeared first on The Finance Buff.
September 10, 2023
3 Lessons Learned From a Botched Money Transfer
We talked about the right way to transfer money in the previous post ACH Push or Pull. I read this story online related to using Fidelity as a checking or savings account. I’m not linking to it because I don’t intend to shame anyone. Let’s see what lessons we can learn from this case study of a transfer gone awry.
Use Push
I had over $6,000 in a money market fund in my Fidelity Cash Management Account one day. I transferred an additional $20,000 from another institution to that account.
Once the money arrived at Fidelity, it was available to invest as always but not to withdraw (the holding period was 7 days). Fair enough. I then invested it in the same money market fund.
Then I decided to move the money to my other Fidelity brokerage account to keep it (away) from my checking needs. So I called a rep who did that (or so I thought!). I’m now supposed to have $6,000 in my Cash Management Account as if nothing happened, but no, when the rep moved the $20k and because of the holding period, the system used first the $6,000 already cleared. Anyway, I didn’t notice that whole mess and bounced some credit card payments.
Most problems in transferring money are caused by initiating the transfer at the wrong place. If you remember only one thing from the previous post ACH Push or Pull, it’s that you should use a push when you have a choice. There are exceptions but in general, your first choice should be a push. In other words, initiate the transfer at the origin where the money currently resides, not at the intended destination. Push the money out. Don’t pull it in.
If the first transfer in this story had been initiated at the other institution (a push to Fidelity), all the subsequent problems wouldn’t have happened. Money received from a push has no hold. It’s fine to invest it or transfer it again to another account.
Go DirectWhen people travel by air, most people prefer a direct flight. It takes less time. Having fewer stops means fewer things can go wrong.
The same principle applies to transferring money. If it’s intended to be kept away from checking needs, transfer it directly to the final destination. Don’t create hops.
Even a pull directly into the brokerage account would’ve worked in the story. The Cash Management Account used as a checking account wouldn’t have been affected if the money had been pulled directly into the brokerage account. Credit card payments from the checking account wouldn’t have bounced.
The money pulled into the brokerage account would’ve still had a hold but it could be invested immediately. The hold wouldn’t have been noticed because withdrawals weren’t taken out of the brokerage account.
Let It AgeIf a money transfer landed in the wrong account by mistake, don’t exacerbate the mistake by making a back-to-back transfer. Slow down. Let it age. It makes no difference which account the money is in after it’s already invested. Just wait a week and let everything settle.
Besides fund availability problems, rapid back-to-back transfers can trigger anti-money laundering flags. Some banks and credit unions restrict or close accounts when they see an account is used as a “hub” with fast in-and-out transfers. This goes hand-in-hand with “Go Direct.” If money needs to go from A to B, don’t make an interim stop at C.
***
The transfer in the story went poorly because it took the most problematic path. These would’ve been better ways to make the transfer in question in the order of preference:
A push directly to the brokerage account.A push into the Cash Management Account followed by an internal transfer to the brokerage account.A pull directly into the brokerage account.A pull into the Cash Management Account. Transfer to the brokerage account only after it completely settles.Learn the Nuts and Bolts
The post 3 Lessons Learned From a Botched Money Transfer appeared first on The Finance Buff.
August 30, 2023
Voluntary Tax Withholding on Selling I Bonds at TreasuryDirect
Many people bought I Bonds last year when rates were high. As inflation has come down and interest rates have gone up elsewhere, some are planning to sell their I Bonds to buy new I Bonds at a higher fixed rate. I Bonds purchased between May 2020 and October 2022 have a 0% fixed rate for life. The fixed rate on new I Bonds to be announced on November 1 may potentially go higher, possibly to 1.5%. See Cash Out Old I Bonds to Buy New Ones for a Better Rate.
I chose to buy TIPS for better inflation protection than I Bonds after I sold some of my I Bonds on August 1. The money went into Fidelity’s TIPS fund (ticker FIPDX). The yield on 5-year TIPS is above 2% as I’m writing this on August 30, 2023. I’m planning to sell more older I Bonds on October 1 to buy more shares in that TIPS fund. Please read more on this in Better Inflation Protection with TIPS Than I Bonds.
Most people go by the default tax treatment on I Bonds and defer taxes on the interest until they sell (see I Bonds Tax Treatment During Your Lifetime and After You Die). By default, TreasuryDirect doesn’t withhold any taxes from the proceeds because the IRS doesn’t require tax withholding on interest payments. Banks typically don’t withhold taxes when they pay interest in savings accounts or CDs either. You download a 1099 from TreasuryDirect next year and report the interest income on your tax return.
Some people prefer to have taxes withheld even when tax withholding isn’t required. Taxes paid through withholding are assumed to have been paid throughout the year. It helps with some timing issues.
If you’d like to have TreasuryDirect withhold taxes when you sell I Bonds, here’s how to do it.

Log in to your TreasuryDirect account and click on “ManageDirect” on the top.

Click on “Update my personal information” under the heading “Manage My Account.”

Answer a security question. Scroll to the bottom. Change the “Withholding Rate” from the default 0% to your desired rate (up to 50%). This new withholding rate will be used on all future sales. If you buy regular Treasuries at TreasuryDirect, it affects payments from those regular Treasuries as well.
The withholding rate applies only when you sell I Bonds. It doesn’t reduce the interest credited to your I Bonds while you still hold them.

To sell (cash out) your I Bonds, go back to ManageDirect and click on “Redeem securities.” You will see this on the review page after you select the I Bonds to cash out:

I set the withholding rate to 20% for this test. TreasuryDirect knows how much interest is included in the sale. The withholding rate only applies to the interest portion, not to the gross amount. TreasuryDirect does not withhold state taxes because I Bonds are exempt from state taxes.
If you choose to have TreasuryDirect withhold taxes, the amount withheld for federal income tax will be in Box 4 of Form 1099-INT together with the interest amount in Box 3. Tax software will take them into account when you enter both amounts from the 1099 form. Make sure you download the 1099 form from TreasuryDirect next year. TreasuryDirect will send an email when the form is ready but you should set a reminder on your calendar in case you miss the email.
Having TreasuryDirect withhold taxes from the sale is completely optional. I choose not to do that because I prefer to pay quarterly estimated taxes myself, but it works perfectly well if you prefer withholding.
Learn the Nuts and Bolts
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Choose Tax Withholding at TreasuryDirect When You Sell I Bonds
When you earn interest in a bank account or a CD, the bank typically does not withhold taxes. The bank sends a 1099 form for the interest after the end of the year. You report the interest income from the 1099 form on your tax return.
It works similarly when you sell I Bonds at TreasuryDirect. By default, TreasuryDirect doesn’t withhold any taxes from the proceeds. You download the 1099-INT form from TreasuryDirect next year and report the interest on your tax return.
Some people prefer to pay taxes through tax withholding as opposed to paying quarterly estimated taxes. Taxes paid through withholding are assumed to have been paid throughout the year. It helps with some timing issues.
If you’d like to have TreasuryDirect withhold taxes when you sell I Bonds, here’s how to do it.

Log in and click on “ManageDirect” on the top.

Click on “Update my personal information” under the heading “Manage My Account.”

Answer a security question. Scroll to the bottom. Change the “Withholding Rate” from the default 0% to your desired rate (up to 50%). This new withholding rate will be used on all future sales. If you buy regular Treasuries at TreasuryDirect, it affects payments from those regular Treasuries as well.
The withholding rate applies only when you sell I Bonds. It doesn’t reduce the increase of the redemption value while you still hold I Bonds. You will see this on the review page when you sell I Bonds:

I set the withholding rate to 20% for this test. TreasuryDirect knows how much interest is included in the sale. The 20% only applies to the interest portion, not to the gross amount. TreasuryDirect does not withhold state taxes because I Bonds are exempt from state taxes.
If you choose to have TreasuryDirect withhold taxes, the withholding amount will be on the 1099-INT form together with the interest amount. Tax software will take that into account when you enter the 1099 form. Make sure you download the 1099 form from TreasuryDirect next year. TreasuryDirect will send an email when the form is ready but you should set a reminder on your calendar in case you miss the email.
Having TreasuryDirect withhold taxes from the sale is completely optional. I don’t choose to do that because I prefer to pay quarterly estimated taxes. Also, don’t choose tax withholding if you elected to pay taxes on I Bonds each year as opposed to deferring taxes until you sell, otherwise you’ll pay taxes twice and must get it back from a refund.
Learn the Nuts and Bolts
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August 28, 2023
Which Treasury to Buy While Keeping Your Taxes Simple
Many people are interested in buying Treasuries but they hesitate because they don’t want to complicate their taxes. That’s a legitimate concern. How much buying Treasuries will complicate your taxes depends on which Treasuries you buy and how you buy them.
We go from the simplest to the most complicated in this post. It’s better to learn how to walk before you run when you aren’t familiar with how taxes on Treasuries work.
Table of ContentsNo Worries in Tax-Advantaged AccountsHold Treasury Bills to MaturityThrough a Mutual Fund or an ETFHold New-Issue Treasury Notes and Bonds to MaturityHold New-Issue TIPS to MaturitySell Treasury Bills Before MaturityBuy or Sell on the Secondary MarketNo Worries in Tax-Advantaged AccountsBuying Treasuries in a tax-advantaged account doesn’t affect your taxes. These tax-advantaged accounts include workplace retirement accounts such as 401k or 403b, Traditional IRA, Roth IRA, or HSA. You don’t pay tax when you buy, hold, or sell investments inside a tax-advantaged account. Taxes on withdrawals from these accounts depend only on the account type. It doesn’t matter what investments you buy or how you buy them in tax-advantaged accounts.
It makes no difference in terms of taxes whether you buy Treasury Bills, Notes, or Bonds, whether you buy regular Treasuries or TIPS, whether you buy a new issue through an auction or you buy an existing bond on the secondary market, or whether you hold to maturity or you sell before maturity on the secondary market. Buy or sell to your heart’s content when you’re in a tax-advantaged account. See How To Buy Treasury Bills & Notes Without Fee at Online Brokers and How to Buy Treasury Bills & Notes On the Secondary Market.
Tax treatments are different only when you buy Treasuries outside tax-advantaged accounts.
Hold Treasury Bills to MaturityTaxes outside tax-advantaged accounts are also easy if you only buy Treasury Bills and hold them to maturity.
We’re talking about strictly Treasury Bills here. A Treasury Bill has no “coupon,” which means it doesn’t pay any interest while you hold it. A Treasury note with a coupon that was issued some time ago but now has less than one year left to maturity isn’t really a Treasury Bill. The first and the third listings in the screenshot below are Treasury Bills. The middle one isn’t.

Treasury Bills are sold at a discount to the face value. The difference between the purchase price and the face value you receive at maturity is your interest. It doesn’t matter whether you buy Treasury Bills as a new issue at a Treasury auction or on the secondary market as long as you hold them to maturity. Taxes are simple because the purchase price is the only variable.
Your broker will include the difference between the purchase price and the face value as interest on a 1099-INT form. If you buy at TreasuryDirect, make sure to download the 1099-INT form from TreasuryDirect. The specific field on the 1099-INT form says it’s exempt from state and local taxes. Your tax software will calculate both federal and state taxes automatically after you enter the 1099-INT form.
Through a Mutual Fund or an ETFBuying Treasuries through a mutual fund or an ETF in a regular taxable brokerage account also doesn’t make your taxes too complicated. The dividends from the mutual fund or ETF will be included on a 1099-DIV form. If you sell shares in a mutual fund or an ETF for a capital gain or loss, it will be included on a 1099-B form.
These tax forms aren’t new. You will have them when you buy or sell other mutual funds or ETFs as well. Your tax software will automatically handle the federal taxes without any additional steps.
Extra Step for State TaxesThe extra wrinkle is in state taxes. You’ll need to get a report from the fund manager on what percentage of the fund’s income came from Treasuries. That portion is exempt from state and local taxes. It takes an extra step but it’s not that difficult. Please read how to do that in State Tax-Exempt Treasury Interest from Mutual Funds and ETFs.
Maturity ChoicesBuying through a mutual fund or an ETF doesn’t mean that you’re buying long-term Treasuries. You have many choices in funds that invest in different maturities. Choose a fund that only invests in short-term Treasuries if you only want short maturities. Choose a fund that only invests in TIPS if you only want TIPS. The expense ratio is very low in many funds and ETFs.
Regular TreasuriesMutual Fund or ETFMoney MarketFidelity Treasury Only Money Market Fund (FDLXX)Schwab U.S. Treasury Money Fund (SNSXX)
Vanguard Treasury Money Market Fund (VUSXX)0 – 3 monthsiShares 0-3 Month Treasury Bond ETF (SGOV) 0 – 1 yeariShares Short Treasury Bond ETF (SHV)Short-TermFidelity Short-Term Treasury Bond Index Fund (FUMBX)
iShares 1-3 Year Treasury Bond ETF (SHY)
Schwab Short-Term U.S. Treasury ETF (SCHO)
Vanguard Short-Term Treasury Index Fund (VSBSX)
Vanguard Short-Term Treasury ETF (VGSH)Intermediate-TermFidelity Intermediate Treasury Bond Index Fund (FUAMX)
iShares 3-7 Year Treasury Bond ETF (IEI)
iShares 7-10 Year Treasury Bond ETF (IEF)
Schwab Intermediate-Term U.S. Treasury ETF (SCHR)
Vanguard Intermediate-Term Treasury Index Fund (VSIGX)
Vanguard Intermediate-Term Treasury ETF (VGIT)Long-TermFidelity Long-Term Treasury Bond Index Fund (FNBGX)
iShares 10-20 Year Treasury Bond ETF (TLH)
iShares 20+ Year Treasury Bond ETF (TLT)
Schwab Long-Term U.S. Treasury ETF (SCHQ)
Vanguard Long-Term Treasury Index Fund (VLGSX)
Vanguard Long-Term Treasury ETF (VGLT)TIPSMutual Fund or ETFShort-TermiShares 0-5 Year TIPS Bond ETF (STIP)
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
Vanguard Short-Term Inflation-Protected Securities Index Fund (VTAPX)Broad TermsFidelity Inflation-Protected Bond Index Fund (FIPDX)
Schwab Treasury Inflation Protected Securities Index Fund (SWRSX)
Schwab U.S. TIPS ETF (SCHP)
Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
With so many choices in funds and ETFs at a very low cost, you really don’t need to get into individual Treasury notes and bonds unless you must withdraw in a short period on a preset schedule or you just prefer the psychological comfort. See Two Types of Bond Ladder: When to Replace a Bond Fund or ETF.
Hold New-Issue Treasury Notes and Bonds to MaturityNew-issue Treasury Notes and Bonds bought at a Treasury auction and held to maturity are a little more complicated but they’re still not too bad in terms of tax complexity.
Buying at a Treasury auction doesn’t mean you must use TreasuryDirect. You can buy new issues at a Treasury auction in your brokerage account through Fidelity, Charles Schwab, Vanguard, or E*Trade with no fee whatsoever. See How To Buy Treasury Notes Without Fee at Online Brokers.
Avoid ReopeningsNot all Treasury Notes and Bonds sold at an auction are true new issues though. Some Treasury auctions are reopenings. A reopening happens when the government is selling additional quantities of a bond that was already issued some time ago. The tax treatment of buying a reopening is the same as buying on the secondary market, which is more complicated than the tax treatment of buying a true new issue.
Reopenings are marked with the letter “R” in Treasury’s auction schedule. Avoid reopenings if you’d like to keep your taxes simple.

The price of a true new issue from a Treasury auction will be at a slight discount to the face value. You’ll handle this small discount when the bond matures. Treasury Notes and Bonds pay interest every six months. Your broker will report these interest payments in the right place on a 1099-INT form. Your tax software will automatically calculate both federal and state taxes.
Accrued InterestUsually there’s zero accrued interest on a true new issue. If there is any, it’s very small. The small accrued interest doesn’t show up on the 1099 form. It’s only in the 1099 supplement. You’re allowed to add a negative entry for the accrued interest to offset the coupon payments but because it’s small, it’s not a big deal even if you don’t know how to do it or you simply forget.
Hold New-Issue TIPS to MaturityTIPS adds a little more complexity than regular Treasury Notes and Bonds because TIPS receives both interest payments and inflation adjustments. It’s still not too bad if you stay with true new issues (avoid reopenings) and you hold them to maturity.
In addition to the 1099-INT form, the inflation adjustment will be on a 1099-OID form. It’s one extra form but your tax software knows how to handle it.
Similar to regular Treasuries, the price of a true new issue TIPS from a Treasury auction will be at a slight discount to the face value. You’ll handle this small discount when the bond matures.
A true new issue TIPS has only a small amount of accrued interest. You’ll find it in the 1099 supplement and add a negative entry on your tax return to offset the interest. It’s not a big deal if you can’t figure out how to do it or you simply forget.
Buying a TIPS reopening at a Treasury auction is the same as buying on the secondary market in terms of taxes. It’s more complicated than buying a true new issue.
Sell Treasury Bills Before MaturitySelling Treasury Bills before maturity adds one variable to the otherwise simple tax treatment of holding them to maturity. Now you’ll have both interest and a capital gain or loss. Please note we’re still only talking about Treasury Bills that don’t have a coupon. It’s more complicated if you sell a Treasury note, bond, or TIPS that has a coupon.
The concept goes like this. If you bought $10,000 worth of a 13-week Treasury Bill for $9,865, you were supposed to earn $135 in interest in 91 days by holding it to maturity. Suppose you sold it for $9,947 after holding it for 60 days, you do a linear proration to calculate the interest earned:
( $10,000 – $9,865 ) / 91 * 60 = $89
Your capital gain or loss is the sale price minus the purchase price minus the interest:
$9,947 – $9,865 – $89 = -$7
You earned $89 in interest and you had a $7 capital loss when you sold this Treasury Bill before maturity.
You’ll have to calculate this split between interest and capital gain/loss yourself if your broker doesn’t do it for you. If your broker reports the difference between your purchase price and your sale price as 100% interest or 100% capital gain/loss on the 1099 form, you’ll have to correct it on your tax return.
You have this complexity from selling before maturity. You can avoid it if you hold your Treasury Bills to maturity. If you must sell something before maturity though, sell Treasury Bills. It’s still simpler than selling bonds with a coupon before maturity.
Buy or Sell on the Secondary MarketThe more complicated tax treatment comes from buying or selling Treasury notes or bonds with a coupon on the secondary market (including buying a reopening through an auction).
The current market rate can be quite different from the coupon rate of an existing bond. This results in a large discount or premium in the price. The large discount or premium makes taxes more complicated. Buying or selling on the secondary market often involves paying or receiving a meaningful amount of accrued interest, which you must also handle on the tax return.
How to handle these complexities is beyond the scope of this already long post. If you can help it, for the sake of keeping your taxes simple in a taxable account, don’t buy Treasury notes or bonds with a coupon on the secondary market, don’t buy them in a reopening, and don’t sell them on the secondary market. Use the secondary market only for Treasury Bills. If you must do those things, do them in a tax-advantaged account.
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Taxes on Treasuries get progressively more complicated as you move down the list. Learn to walk before you run.
1. Do everything in tax-advantaged accounts. No tax worries there.
2. Buy some Treasury Bills and hold them to maturity. That’s easy too.
3. Use a fund or an ETF. Not too bad there.
4. If you want longer maturities in individual Treasuries (including TIPS) in a regular taxable account, only buy true new issues in an auction, avoid reopenings, and hold them to maturity.
5. Finally, if you must sell something before maturity in a regular taxable account, only sell Treasury Bills.
That’s as far as I would go. Any more complications aren’t worth it to me.
Learn the Nuts and Bolts
The post Which Treasury to Buy While Keeping Your Taxes Simple appeared first on The Finance Buff.
August 23, 2023
Bank of America Travel Rewards Card Pays 2.625% on Everything
[Originally published in 2014. Updated on August 23, 2023. Links aren’t affiliate links. We don’t get paid if you apply for any credit cards.]
I have a brokerage account at Merrill Edge and a free checking account at Bank of America. I qualified for Bank of America’s Preferred Rewards program after three months. Then I added a Bank of America Travel Rewards credit card to the Preferred Rewards program.
This credit card isn’t that special on a stand-alone basis. It gives 1.5% rewards on every purchase with no caps or specific categories. It has no annual fee and no foreign transaction fee. There’s a small sign-up bonus. The Preferred Rewards program makes it much nicer.
75% Bonus from Preferred RewardsWhen you enroll in the Preferred Rewards program, you get a boost in the credit card rewards. $100k in assets held at Merrill Edge puts you in the Platinum Honor tier, which gives you a 75% bonus on credit card rewards. 1.5% rewards on everything then becomes 2.625% rewards on everything with no caps.
For example, $71.30 purchase earned 187 reward points worth $1.87. That’s 2.625%. You get the 75% bonus after you qualify for the Platinum Honor tier in Preferred Rewards. If your Bank of America checking account is new, it has to go through three month-ends before you qualify.

This Bank of America card with a 75% bonus gives more rewards than other 2%-rewards cards such as the Fidelity Visa and the Citi Double Cash card.
Hold ETFs at Merrill EdgeThe best way to qualify for the Platinum Honor tier in the Preferred Rewards program is by transferring $100,000 worth of assets to Merrill Edge. The $100,000 doesn’t have to sit in cash. It can be stocks, mutual funds, or ETFs held in IRA or regular brokerage accounts.
You don’t have to trade in the Merrill Edge accounts either if you prefer to use a different broker. Just holding $100,000 worth of an S&P 500 ETF and setting up free automatic dividend reinvestment will do. Merrill Edge doesn’t charge any maintenance fee.
If you do use Merrill Edge to trade, Merrill Edge charges zero commission on online stock and mutual fund trades.
Redeem Against Travel ChargesLike some other travel cards, the reward points from the Travel Rewards card are worth the most when you redeem them as a statement credit against past travel charges (100 points = $1). As long as you put some travel expenses on this card once in a while, you should be able to redeem the points easily.
These charges all counted as travel in my account:
Airlines (both tickets and baggage fees)HotelsAirbnbCar rentalsUberPublic transitSki passes and lunch at ski resortsThe minimum number of points for redemption is 2,500 points (earned by spending $952 at 2.625%). You have one year from the time of the travel charge to redeem points against it. You can redeem points against the same charge multiple times until the charge is fully covered by points redemption.
Premium Rewards CardBank of America also offers a Premium Rewards card that’s similar to the Travel Rewards card.
Travel RewardsPremium RewardsAnnual FeeNone$95Foreign Transaction FeeNoneNoneAirline incidental statement creditNoneup to $100/yearTSA PreCheck or Global Entry fee creditNoneup to $100 every 4 yearsRewards on travel charges1.5% base2.625% with 75% bonus2% base
3.5% with 75% bonusRewards on everything else1.5% base
2.625% with 75% bonus1.5% base
2.625% with 75% bonusRedeem rewardsStatement credit against travel charges in the last 12 monthsCash
You’ll get more from the Premium Rewards card to offset the annual fee if you pay airline baggage fees or charge a good amount for travel.
Auto Pay Full BalanceIt’s not obvious how you set up for automatically paying the full balance every month on Bank of America credit cards. Please follow the steps in Set Up Autopay On Bank of America Credit Card.
***
I use the Bank of America Travel Rewards card as my primary card. It works to its full potential when you also have Merrill Edge and Bank of America accounts and you make it to the Platinum Honor tier in the Preferred Rewards program.
Learn the Nuts and Bolts
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August 14, 2023
Roth IRA Withdrawal After 59-1/2 in TurboTax and H&R Block
Everyone knows the point of putting money into a Roth IRA is that withdrawals are tax-free. That’s true at a high level but it isn’t that simple when you go one level down into the details. Withdrawals from a Roth IRA follow a set of complex rules to determine how much of a withdrawal is tax-free and penalty-free.
Table of ContentsRoth IRA Withdrawal RulesRelief After 59-1/2H&R BlockTurboTaxNot Yet 59-1/2?Roth IRA Withdrawal RulesThe rules require that you understand normal contributions and conversions including backdoor Roth and mega backdoor Roth, rollovers from Roth 401k to Roth IRA, a 5-year clock on each conversion, the taxable and non-taxable amount in the conversion, and earnings in the Roth account, etc., etc. Gathering and keeping records to put dollar amounts into each bucket year by year requires another level of attention. See Maintain a Roth IRA Contributions and Withdrawals Spreadsheet.
Relief After 59-1/2The great news is that all these complexities go away when you’re 59-1/2. You only need to answer this one question when you withdraw from your Roth IRA after age 59-1/2:
Did you have a Roth IRA at least five years ago?
The answer is obviously “Yes” for most people. It’s the simplest way to make your Roth IRA withdrawal 100% tax-free. That’s the path I’m aiming for.
You’ll get a 1099-R from your Roth IRA custodian in the following year after you take a withdrawal. Let’s look at how it works on your tax return when you use tax software TurboTax and H&R Block.
H&R BlockI normally start with TurboTax when I do these tax software walkthroughs but I’m starting with H&R Block this time for reasons that will become apparent later.
The screenshots below are from H&R Block Deluxe downloaded software. The downloaded software is both less expensive and more powerful than the online version. You can buy H&R Block downloaded software from Amazon, Walmart, Newegg, Office Depot, and many other retailers.
I started the tax return with a 67-year-old single taxpayer.

Go to Federal -> Income -> IRA and Pension Income (Form 1099-R). You can import the 1099-R or enter it manually. I’m showing manual entries.

My test 1099-R is a normal 1099-R. Enter the numbers from your 1099-R as-is. It looks like this for a $10,000 withdrawal from the Roth IRA:

The amount of the withdrawal shows up in Box 1. Yours may have the same amount repeated in Box 2a and that’s OK too. It’s important to have a checkmark in Box 2b “Taxable amount not determined.” Your Roth IRA custodian isn’t determining whether your distribution is taxable. The box 7 distribution code is “T.”

I didn’t inherit it.

Here it’s asking whether I had my first Roth IRA at least five years ago. Of course I did.

That’s it. It’s tax-free after I answer just two simple questions. I didn’t have to give any detail for the past contributions, recharacterizations, conversions, rollovers, or distributions. It doesn’t matter how the money got into the Roth IRA or when.
We can see how this shows up on the tax form. Click on Forms on the top and open Form 1040 and Schedules 1-3. Click on Hide Mini WS. Scroll down to lines 4a and 4b.

It shows the withdrawal on Line 4a and zero on Line 4b. Line 4b is the taxable amount. A zero there means it’s tax-free. If you have other IRA distributions such as RMDs on Lines 4a and 4b, this tax-free withdrawal from your Roth IRA adds to your other distributions on Line 4a but it doesn’t add to the taxable amount on Line 4b.
TurboTaxNow let’s look at how it works in TurboTax. The screenshots below are from TurboTax Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax download from Amazon, Costco, Walmart, and many other places and switch from TurboTax Online to TurboTax download (see instructions for how to make the switch from TurboTax).
I started the tax return with a 67-year-old single taxpayer.

Go to Federal Taxes -> Wages & Income -> IRA, 401(k), Pension Plan Withdrawals (1099-R). Import the 1099-R if you’d like. I’m choosing to type it myself.

Just the regular 1099-R.

Box 1 shows the amount taken out of the Roth IRA. You may have the same amount copied as the taxable amount in Box 2a. That’s OK when Box 2b is checked saying “taxable amount not determined.” Pay attention to the code in Box 7. Make sure your entry matches your 1099-R exactly. I have a code “T” in my test 1099-R. The IRA/SEP/SIMPLE box is not checked because it’s from a Roth IRA.

I didn’t inherit it.

I didn’t move the money to another retirement account.

I didn’t buy a home.

It wasn’t due to a disaster. I took the money out and spent it.

We come to this 1099-R summary but we’re not done yet. TurboTax will ask more follow-up questions.

I didn’t take disaster distributions or repay them.

This is the most relevant question. Yes, I owned a Roth IRA for at least five years.

I don’t know why it matters whether I have an open Roth IRA but whatever.

Now TurboTax is trying to scare us. Why does it matter? I’m already 59-1/2!

Now TurboTax will go through the rigmarole of Roth IRA distribution ordering rules, which are irrelevant when you’re already 59-1/2 and you had your Roth IRA for at least five years. I’m going to lie to TurboTax now because I know the answers just don’t matter at this point.

If you answer truthfully which year you did a Roth conversion, TurboTax will take you through the details of your prior conversions. You will waste time doing a lot of unnecessary work. So don’t cooperate.

Again, irrelevant.

No excess contributions.
TurboTax is finally done with its irrelevant questions. Are you taxed on the withdrawal from your Roth IRA? Click on Forms on the top right.

Find Form 1040 in the left navigation panel. Scroll up or down on the right to find lines 4a and 4b.

It shows the withdrawal amount on Line 4a and zero on Line 4b. A zero on Line 4b means it’s tax-free. If you have other IRA distributions such as RMDs on Lines 4a and 4b, this Roth IRA withdrawal adds to your other distributions on Line 4a but it doesn’t add to the taxable amount on Line 4b.
TurboTax arrives at the same results as H&R Block but it takes such a long and unnecessary journey. It uses a one-size-fits-all approach that doesn’t distinguish by whether you’re 59-1/2 or not.
Nothing matters when you’re already 59-1/2 and you had your first Roth IRA at least five years ago. All your withdrawals from the Roth IRA are tax-free, end of story. You get a big relief when you’re 59-1/2. You don’t have to provide any other data or records. So don’t think you must meticulously keep everything. Just save one statement from a Roth IRA to show that you had it open at least five years ago.
Not Yet 59-1/2?It’s a whole different story if you’re planning to withdraw from your Roth IRA before age 59-1/2. You do need detailed records to answer those questions from TurboTax. You can use something like the spreadsheet I included in Maintain a Roth IRA Contributions and Withdrawals Spreadsheet.
To be honest, I gave up on keeping track of Roth IRA contributions, recharacterizations, conversions, rollovers, and distributions. I’ll take the easy path and wait until the year I’m 59-1/2.
Learn the Nuts and Bolts
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August 10, 2023
2023 2024 Tax Brackets, Standard Deduction, Capital Gains, etc.
My other post listed 2023 2024 401k and IRA contribution and income limits. I also calculated the inflation-adjusted tax brackets and some of the most commonly used numbers in tax planning for 2024 using the published inflation numbers and the same formula prescribed in the tax law. The official numbers will be announced by the IRS in October or November.
Table of Contents2023 2024 Standard Deduction2023 2024 Tax Brackets2023 2024 Capital Gains Tax2023 2024 Estate and Trust Tax Brackets2023 2024 Gift Tax Exclusion2023 2024 Savings Bonds Tax-Free Redemption for College Expenses2023 2024 Standard DeductionYou don’t pay federal income tax on every dollar of your income. You deduct an amount from your income before you calculate taxes. About 90% of all taxpayers take the standard deduction. The other ~10% itemize deductions when their total deductions exceed the standard deduction. In other words, you’re deducting a larger amount than your allowed deductions when you take the standard deduction. Don’t feel bad about taking the standard deduction!
The basic standard deduction in 2023 and 2024 are:
20232024 (projected)Single or Married Filing Separately$13,850$14,600Head of Household$20,800$21,900Married Filing Jointly$27,700$29,200Basic Standard DeductionSource: IRS Rev. Proc. 2022-38, author’s calculation.
People who are age 65 and over have a higher standard deduction than the basic standard deduction.
20232024 (projected)Single, age 65 and over$15,700$16,550Head of Household, age 65 and over$22,650$23,850Married Filing Jointly, one person age 65 and over$29,200$30,750Married Filing Jointly, both age 65 and over$30,700$32,300Standard Deduction for age 65 and overSource: IRS Rev. Proc. 2022-38, author’s calculation.
People who are blind have an additional standard deduction.
20232024 (projected)Single or Head of Household, blind+$1,850+$1,950Married Filing Jointly, one person is blind+$1,500+$1,550Married Filing Jointly, both are blind+$3,000+$3,100Additional Standard Deduction for BlindnessSource: IRS Rev. Proc. 2022-38, author’s calculation.
2023 2024 Tax BracketsThe tax brackets are based on taxable income, which is AGI minus various deductions. The tax brackets in 2023 are:
SingleHead of HouseholdMarried Filing Jointly10%$0 – $11,000$0 – $15,700$0 – $22,00012%$11,000 – $44,725$15,700 – $59,850$22,000 – $89,45022%$44,725 – $95,375$59,850 – $95,350$89,450 – $190,75024%$95,375 – $182,100$95,350 – $182,100$190,750 – $364,20032%$182,100 – $231,250$182,100 – $231,250$364,200 – $462,50035%$231,250 – $578,125$231,250 – $578,100$462,500 – $693,75037%Over $578,125Over $578,100Over $693,7502023 Tax BracketsSource: IRS Rev. Proc. 2022-38.
The projected 2024 tax brackets are:
SingleHead of HouseholdMarried Filing Jointly10%$0 – $11,600$0 – $16,550$0 – $23,20012%$11,600 – $47,150$16,550 – $63,100$23,200 – $94,30022%$47,150 – $100,525$63,100 – $100,500$94,300 – $201,05024%$100,525 – $191,900$100,500 – $191,900$201,050 – $383,80032%$191,900 – $243,700$191,900 – $243,700$383,800 – $487,40035%$243,700 – $609,250$243,700 – $609,250$487,400 – $731,10037%Over $609,250Over $609,250Over $731,100Projected 2024 Tax BracketsSource: author’s calculation.
A common misconception is that when you get into a higher tax bracket, all your income is taxed at the higher rate and you’re better off not having the extra income. That’s not true. Tax brackets work incrementally. If you’re $1,000 into the next tax bracket, only $1,000 is taxed at the higher rate. It doesn’t affect the income in the previous brackets.
For example, someone single with a $60,000 AGI in 2023 will pay:
First 13,850 (the standard deduction)0%Next $11,00010%Next $33,725 ($44,725 – $11,000)12%Final $1,42522%Progressive Tax RatesThis person is in the 22% tax bracket but only a tiny fraction of the $60,000 AGI is really taxed at 22%. The bulk of the income is taxed at 0%, 10%, and 12%. The blended tax rate is only 9.1%. If this person doesn’t earn the final $1,425, he or she is in the 12% bracket instead of the 22% bracket but the blended tax rate only goes down slightly from 9.1% to 8.8%. Making the extra income doesn’t cost this person more in taxes than the extra income.
Don’t be afraid of going into the next tax bracket.
2023 2024 Capital Gains TaxWhen your other taxable income (after deductions) plus your qualified dividends and long-term capital gains are below a cutoff, you will pay 0% federal income tax on your qualified dividends and long-term capital gains under this cutoff.
This is illustrated by the chart below. Taxable income is the part above the black line, after subtracting deductions. A portion of the qualified dividends and long-term capital gains is taxed at 0% when the other taxable income plus these qualified dividends and long-term capital gains are under the red line.

The red line is close to the top of the 12% tax bracket but they don’t line up exactly.
20232024 (projected)Single or Married Filing Separately$44,625$47,025Head of Household$59,750$62,950Married Filing Jointly$89,250$94,050Maximum Zero Rate Amount for Qualified Dividends and Long-term Capital GainsSource: IRS Rev. Proc. 2022-38, author’s calculation.
For example, suppose a married couple filing jointly has $70,000 in other taxable income (after deductions) and $20,000 in qualified dividends and long-term capital gains in 2023. The maximum zero rate amount cutoff is $89,250. $19,250 of the qualified dividends and long-term capital gains ($89,250 – $70,000) is taxed at 0%. The remaining $20,000 – $19,250 = $750 is taxed at 15%.
A similar threshold exists on the upper end for qualified dividends and long-term capital gains. When your other taxable income (after deductions) plus your qualified dividends and long-term capital gains are above a cutoff, you will pay 20% federal income tax instead of 15% on your qualified dividends and long-term capital gains above this cutoff.
20232024 (projected)Single$492,300$518,850Head of Household$523,050$551,250Married Filing Jointly$553,850$583,650Married Filing Separately$276,900$291,800Maximum 15% Rate Amount for Qualified Dividends and Long-term Capital GainsSource: IRS Rev. Proc. 2022-38, author’s calculation.
2023 2024 Estate and Trust Tax BracketsEstates and trusts have different tax brackets than individuals. These apply to non-grantor trusts and estates that retain income as opposed to distributing the income to beneficiaries. Grantor trusts (including the most common revocable living trusts) don’t pay taxes separately. The income of a grantor trust is taxed to the grantor at the grantor’s tax brackets.
Here are the tax brackets for estates and trusts in 2023 and 2024:
20232024 (projected)10%$0 – $2,900$0 – $3,10024%$2,900 – $10,550$3,100 – $11,10035%$10,550 – $14,450$11,100 – $15,20037%over $14,450over $15,200Estate and Trust Tax BracketsSource: IRS Rev. Proc. 2022-38, author’s calculation.
2023 2024 Gift Tax ExclusionEach person can give another person up to a set amount in a calendar year without having to file a gift tax form. Not that filing a gift tax form is onerous, but many people avoid it if they can. This gift tax exclusion amount will increase from $17,000 in 2023 to $18,000 in 2024.
20232024 (projected)Gift Tax Exclusion$17,000$18,000Gift Tax ExclusionSource: IRS Rev. Proc. 2022-38, author’s calculation.
The gift tax exclusion is counted by each giver to each recipient. As a giver, you can give up to $17,000 each in 2023 to an unlimited number of people without having to file a gift tax form. If you give $17,000 to each of your 10 grandkids in 2023 for a total of $170,000, you still won’t be required to file a gift tax form. Any recipient can also receive a gift from an unlimited number of people. If a grandchild receives $17,000 from each of his or her four grandparents in 2023, no taxes or tax forms will be required.
2023 2024 Savings Bonds Tax-Free Redemption for College ExpensesIf you cash out U.S. Savings Bonds (Series I or Series EE) for college expenses or transfer to a 529 plan, your modified adjusted gross income must be under certain limits to get a tax exemption on the interest. See Cash Out I Bonds Tax Free For College Expenses Or 529 Plan.
Here are the income limits in 2023 and 2024. The limits are in a phaseout range. You get a full exemption if your income is below the lower number in the range. You get no exemption if your income is above the higher number in the range. You get a partial exemption if your income falls within the range.
20232024 (projected)Single, Head of Household$91,850 – $106,850$96,800 – $111,800Married Filing Jointly$137,800 – $167,800$145,200 – $175,200Income Limit for Tax-Free Savings Bond Redemption for Higher EducationSource: IRS Rev. Proc. 2022-38, author’s calculation.
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