Jonathan Clements's Blog, page 43
May 1, 2025
Kitces – Analyzing Congressional Republicans’ Budget Proposal For The 2025 TCJA Extension
On April 30 Kitces posted an comprehensive article regarding the Tax Cuts and Jobs Act (TCJA) describing in detail where the congress is currently at and what steps are necessary to extend and/or change the the TCJA before the current tax law sunsets at the end of 2025.
I agree with the conclusion of the article to currently "wait and see" before taking action until I have a concrete expectation of what the individual income tax rules will look like in 2026. For me that means I plan to delay any traditional to Roth conversions and, as I have earned income for 2025, I will wait until 2026 to decide to fund any 2025 traditional or Roth IRA.
The one action I am doing is to have sufficient 2025 federal income tax and estimated tax payment paid in to protect us from the possibility of underpayment penalty based on the safe harbor rule determined using our 2024 adjusted gross income and 2024 tax liability.
Any other tax actions you are planning to take during 2025?
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April 30, 2025
Quinn needs some advice about his RMD
After several years of RMDs from my rollover IRA, I’ve run out of cash to cover the withdrawal. In 2025 there is enough cash to cover about half the required RMD.
So, where does the rest come from? Which fund(s) do I sell? Here are the funds and their percentage of the account balance.
NOTE about these funds. There is no rhyme or reason. A logical strategy does not exist. Some resulted from the transfer of the account. We don’t use the funds to live on. The RMD will mostly be given to charity and our children. Whatever is left reinvested.
FSPGX 48%. FIDELITY LARGE CAP GROWTH INDEX FUND
FTHRX 18%. FID INTERMEDIATE BOND FUND
FIVFX 11%. FIDELITY INTL CAP APPRECIATION FUND
FBALX 8%. FIDELITY BALANCED
FSMDX 6%. FIDELITY MID CAP INDEX FUND
LEGAX <6%. COLUMBIA LARGE CAP GROWTH CL A
VHYAX < 6%. VANGUARD HIGH DIV YLD IDX ADMIRAL SHS
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April 29, 2025
The Opposite of HumbleDollar
If there is an antonym to HumbleDollar it surely must be in the form of a gift my wife just received from her niece. The gift is a bag. It’s a designer thing. From Paris. I googled the bag, and if you are interested you can buy one of your very own for about $4000.
My wife’s bag is actually a knock off, a counterfeit. The niece only paid 50 bucks. I couldn’t figure out how to post a picture, so I will try to describe it.
It’s a bag, it has strap, no zipper, totally open on the top. Picture one of your reusable shopping bags for the grocery store.
Chrissy just looked over my post, and has informed me that it is not a bag. It is a tote. I stand corrected.
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Bogle has saved us a Trillion Dollars through Vanguard’s 50th Anniversary
Vanguard serves over 50 million investors, has over $9 Trillion assets under management, and has fund expenses that average a meager $0.07%. We have about half our assets invested through Vanguard, and particularly appreciate that Mr. Bogle's fee savings have been adapted across large segments of the brokerage industry.
For a great post summarizing Vanguard's Trillion Dollar savings contribution to us all, check out Nick Maggiulli's Be Minimally Extractive here:
https://ofdollarsanddata.com/be-minim...
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Buying an Annuity from the SSA
HumbleDollar has hosted a lot of interesting and useful discussion recently about the benefits of buying an annuity to provide guaranteed income to a retiree. Once you have decided to purchase an annuity, you are faced with the complicated choice of what annuity to buy. In 2012, Boston College’s Center for Retirement Research published a paper that posited that delaying your Social Security benefits and using other resources to fund your lifestyle was akin to purchasing an annuity from the Social Security Administration (SSA). Their take was that “buying an annuity” from the SSA was the “best deal in town.” I wrote an article about this a few years ago, and I thought it was worth rolling out again.
Since 2012 interest rates have risen and commercial annuities have become more attractive. Additionally, the SSA’s full retirement age, or FRA, has continued to rise. The last cohort to reach FRA at 65 was in 2003. In 2027, the FRA will max out at 67. Future retirees planning to wait to FRA before claiming their SS retirement benefits will be faced with a 3-year period if they choose to wait until the maximum claiming age of 70. Funding a 3-year bridge may appear easier than the previous 5-year gap.
One thing I’ve learned from preparing tax returns for lower incomes retiree is the importance of SS retirement benefits (another great topic on HumbleDollar). I, and others, have observed that there are many retirees whose sole retirement income comes from SS. The stark reality is that these retirees would benefit most from delaying their SS benefits, and increasing their benefits by some 8% per year of delay.
I tend to think of this decision in three groups. At one end you have retirees in desperate financial situations. They may need their SS benefits as soon as possible to live. At the other end you have folks with more than enough financial resources to retire. For them the decision on when to claim SS is much less important. They can do what they want. For a large group of retirees, SS is important but not necessarily time critical. If they have enough retirement funds to consider purchasing an annuity, they might want to consider using some of their resources to purchase one from the SSA.
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April 28, 2025
A False Sense of Security
Like many HD contributors, I don’t own a Single Premium Immediate Annuity (SPIA). Social Security and pensions cover most all of our spending, I don’t need no stinkin’ SPIA.
Or do I? I’ve done the math. The calculators tell me I’m in good shape. But I know this sense of security I feel is precarious. There are any number of things that could blow up my plan. Lengthy care in a nursing home, victim of fraud, catastrophic market events are all examples of things that could upset my applecart.
In a perfect world I can make lots more money in the market than by purchasing a SPIA. Sadly, this world isn’t perfect, and a SPIA can guarantee my income will last as long as I do. Yes there is a cost to be paid, just as there is with insurance for my health, home, cars and life. I’ll probably never need the insurance, but then again, I might.
If I do end up buying, I’ll get one with a return of premium, or a period certain that guarantees my beneficiary at least gets back the unused portion of the premium. The moral of my story is to keep an open mind about SPIAs.
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Kind Hearts are More than Coronets
The Cancer Center seemed a little bleaker and colder during my last session. My husband usually accompanies me to my sessions but I was alone for the first time.
I noticed the woman in the cubicle next to me, as we had both been there at the same time for the past 4 weeks. She was also alone, getting her treatment, wearing a bonnet- the bonnet type hat many women wear who have lost their hair to chemotherapy.
Conversation isn’t the norm at the center and I settled in my chemo chair, while the staff prepared me. They usually start me off with a drip of Benadryl - just to make me drowsy enough so I won’t be fully aware of what’s going on. The infusion nurse, a nice young man, then says “ok, let’s filler up.”
I had my iPad and a book to distract me, and noticed the woman next to me was engaged with her cell phone. The time passed and, as it happened, we both finished treatment at the same time.
I’m not an intrusive person and tend to be a little on the private side—but there was something about this little woman that was touching. So upon leaving I walked over to her cubicle, gave her my best smile and asked her how she was feeling. We had a pleasant exchange and As I turned around and started to walk away, I felt someone tugging on the bottom of my jacket. I turned around and it was my bonny bonnet lady who asked me sweetly “will you be here next week?”
It was just a chance human encounter, a sharing of compassion, a little touch of kindness and concern. A reminder that even in our own distress, reaching out to others makes life more pleasant.
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April 27, 2025
Deducting Medical Expenses of a Decedent
Often when a person dies the surviving spouse or executor receives huge medical bills from the last illness or accident of the decedent. Hopefully most of such final medical expenses are covered by medical insurance but as anyone who has been tasked with dealing with the after death financial matters knows this is a long, complex and time consuming process.
Any medical expenses of the decedent not paid before death are by default liabilities of the decedent's estate. If a federal estate tax return, form 706, is required those unpaid medical expenses are a liability of the estate.
However, the estate personal representative (PR) or surviving spouse if there is no PR may elect to treat such eligible medical expenses as paid by the decedent at the time the medical services were provided. Such medical expenses must be paid within the one year period beginning with the day after the date of death (DOD) to be eligible to deduct by itemizing.
Assuming such deduction provides an income tax benefit on the final 1040 of the decedent, regardless of their tax filing status (MFJ, single, etc.), then the personal representative or surviving spouse must attach a separate statement, in duplicate, to the decedent's final form 1040 in addition to schedule A itemizing deductions and stating such medical expenses were paid post death in the one year following the DOD and have not been and will not be claimed on the decedent's estate (form 706) tax return.
I will not go into the reporting needed on form 706 as it is infrequently filed because of the high exemption amount we each have that eliminates the requirement to file a 706 for most of us and because such reporting is beyond the scope of this article. Note, just because no 706 will be filed does not eliminate the need for the statement in the 1040 for post DOD medical expenses if itemizing.
In a nutshell this information is often most useful if the decedent has a surviving spouse, huge uninsured medical expenses paid after DOD, will itemize on the final 1040 and has a 1040 tax liability in the year of death without such itemized deductions. This action will be a lot of work and the PR and/or spouse will need to decide if the time and dollar cost is worth any expected tax benefit before doing the work.
If the decedent's 1040 return has been filed and such post death medical expenses were not included on the original 1040 then an amended 1040X may be filed within the normal time period for filing amended returns to claim such medical expenses as a itemized deduction.
IRS Pub 502 and Pub 559 have short commentaries on the procedures for post DOD medical expense deduction requirements for itemizing.
My hope is that these actions and decisions will never be an issue for you.
Best, Bill
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Tweaking the 4% Rule
With recent stock gyrations I thought that their most recent look at withdrawals and retirement accounts might be helpful.
Here are a few points made in the article:
"Morningstar researchers have investigated and identified their latest starting safe withdrawal rate. Here’s a hint: it’s slightly lower than the previous year. "
About saving for retirement, "it’s pretty straightforward as long as you start early and you’re consistent about it. But when it comes to taking your retirement portfolio and figuring out how to turn that into a paycheck for yourself, that gets much more complicated."
There’s sort of a balance. You want to make sure that you’re spending enough so that you can enjoy your retirement and enjoy hobbies and travel, that kind of thing, but not spend too aggressively so that you might have to cut back later in life. "A lot of people actually end up underspending."
Morningstar states that their approach is different. "We decided that instead of looking at past data, we would do something more forward-looking, using market estimates for possible future returns."
Looking at the past 15 years Morningstar says the market returns were "actually the best 15-year period for stocks that we’ve seen going back to 1970."
Morningstar has reduced their return assumptions for stocks and bonds.
Morningstar's analysis looks at 900 outcomes using a base case of 3.7% and "various flexible or dynamic withdrawal strategies." These alternatives "can often lift the starting withdrawal rate."
Here's a link to the article:
https://www.morningstar.com/retirement/retirees-heres-how-tweak-4-rule-protect-your-nest-egg
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You versus Social Security – Quinn is betting against you.
One thing (?) really bothers me and that is the idea that Social Security is a bad deal. That view is based on the theory that a person would be far better off if the FICA taxes instead of going toward Social Security, were invested by the worker.
There are two major flaws in that view. First, Social Security is far more that a individual retirement income - disability benefits, survivor income, dependent income, ex-spouse income are included.
So, for the theory to have a chance, everything must go right throughout a persons entire life, no job loss, no disability, no divorce, no disabled child, no early death and no bad investments or bad timing.
Second, we must assume a person exercises forty or so years of financial discipline and investment skills. No diverting any of the money, no skipping new investments, no speculation, good diversification based on years to retirement and more.
I suggest relatively few people are capable of doing that and I think the overall financial state of many retirees and most Americans provides ample evidence.
So, the argument against SS based on what one person expects to successfully do is irrelevant in my opinion. The collective benefits for society are what matter.
During my working life of over fifty years beginning in 1959 I and my employers combined paid $266,314 in FICA Social Security taxes. I have no idea what that would be worth if invested in lieu of the taxes as paid weekly, but I do know that Connie and I collected in benefits all those taxes paid in about seven years of retiring and that today after sixteen COLAs, our combined SS benefits based on my taxed earnings only are $60,496 a year and the survivor benefit would be $40,320. And all that is about as guaranteed as is possible.
Did I miss out on accumulating a million or two? I doubt it, but I also don’t care. In my book Social Security still wins. I see that as the case for 99% of workers, even HD readers.
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