Get new articles by email:

Investors Happy offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning.

Join over 19,000 email subscribers:

Articles are published every Monday. You can unsubscribe at any time.

Investing Blog Roundup: SECURE Act 2.0

The SECURE Act 2.0, signed into law 12/29/22, made a long list of changes to retirement accounts. The two best write-ups I’ve seen so far are from Jeff Levine and Jim Dahle.

And of course reading the legislation for yourself can be informative. (The link above will take you to text of the whole Consolidated Appropriations Act, 2023. Do a search for “Division T” on that page to get to the SECURE Act 2.0.)

Other Recommended Reading

Thanks for reading!

My Experience with Check Fraud – And What You Can Learn From It

As many of you know, I’m currently serving as the Secretary for The John C. Bogle Center for Financial Literacy. A few months ago, there was a form I needed to file with the Texas Secretary of State on behalf of the Center.

The form in question requires a $5 filing fee. For just $5, I decided it was simpler to pay the fee myself, rather than bothering Ben Holland (Treasurer for the Center) to have the Center pay the fee. So I wrote a personal check, included it in the envelope with the form, and dropped the envelope in the blue USPS mailbox down the block.

Below is the check I wrote. (Please forgive the messy handwriting. I was not expecting to show this check to thousands of people. The address is an old address, but I rarely write personal checks anymore, so I had never bothered to have new checks made.)

And below is what the check looked like, when it was cashed/deposited. (If the images are not coming through in your email/browser, here’s the original check and here’s what it looked like after alteration.)

Apparently somebody intercepted the check, chemically “washed” it to remove the ink on specific portions of the check, and wrote in a new payee, amount, and (partial) memo.

In the months since this occurred, I’ve seen a handful of articles about the topic and heard from many people who have had a similar experience, as it’s apparently nothing short of a fraud epidemic at the moment.

Per the police detective who was in charge of the case, they’re getting ~30 of these reports per day. And that’s just in our patrol district (i.e., a few neighborhoods in St. Louis).

We did eventually get our money back. But, in total, resolving the situation took more than 3 months and required 14 phone calls (including I have no idea how much time spent on hold), 2 visits to local Bank of America branches, and 2 visits to the police station.

If I had not scanned the original check before mailing it, the process likely would have taken longer.

And we had to close our checking account, open a new one, and switch over everything that automatically charged to the old account.

In short, even if you get your money back, I assure you that it’s an experience you’d like to avoid, if possible.

As far as how to avoid being on the receiving end of check fraud, the most important and easiest thing you can do is just to avoid mailing checks. Pay electronically whenever you can. (I know that’s my own preference regardless of this mess.)

If you do have to mail a check, if possible have it sent via your bank (i.e., using a “bill pay” feature) rather than writing it by hand.

If that’s not possible, write the check in sharpie, as apparently that ink is the hardest to remove.

And if you do have to mail a check, do not put it in your mailbox or a blue mailbox on the corner, as those locations have a higher likelihood of being physically intercepted. Instead, drop it off directly at the post office. (Though I have heard from people who have been victims of check washing fraud despite mailing the check at the post office, which suggests there’s some degree of an “inside job” going on here. So again, best to not mail checks at all, if possible.)

Investing Blog Roundup: 2022 Bogleheads Conference Videos Now Available

Administrative note: there won’t be an article next Monday (12/26) as I’ll be taking time off to spend with family. I hope you all enjoy your holiday season, and I wish you the best in 2023.

The videos from the 2022 Bogleheads Conference are now available.

The first day of the conference was an optional, separate event: Bogleheads University. It was a group presentation, covering the basic principles of Bogleheads investing, intended for people newer to the Bogleheads group. You can find those videos here:
https://boglecenter.net/bogleheads-university/

The videos for all of the other sessions can be found here:
https://boglecenter.net/2022conference/

As far as my own personal participation: for Bogleheads University I was in charge of the principles “Minimize Taxes” and “Invest with Simplicity“, and I participated in the panel discussion at the end. The next day, I gave a talk about Social Security and tax planning in retirement. And on the final day I participated in a panel with Christine Benz and Allan Roth (hosted by Karen Damato) about broader financial planning, rather than just investing.

Recommended Reading

Thanks for reading!

The 4 Effects of a Roth Conversion

We’ve talked quite a bit about Roth conversions over the years. (For instance, see: Roth Conversion Rules FAQ, Roth Conversion Planning: A Step-By-Step Approach, and Roth Conversion Analysis: Not Breakeven Analysis.) Yet they are still one of the topics that comes up most frequently in questions from readers.

So what follows are the four primary things I think about when evaluating a potential Roth conversion — the four primary ways in which a Roth conversion can change a household’s trajectory.

Effect #1: Pay Tax Now Instead of Latter

The first effect of a Roth conversion is that you pay tax now (on the conversion) instead of later (i.e., whenever the money would come out of the account later, if you don’t convert it right now). This is the effect that gets the most discussion because it’s the most obvious one and because it is, in many cases, the largest effect. (That is, the difference between the two tax rates in question is often more impactful than effects #2-4 below.)

This first effect can be helpful or harmful. It’s helpful if the tax rate you pay on the conversion is lower than the tax rate that would have been paid later. And it’s harmful if the tax rate paid on the conversion is higher than the tax rate that would have been paid later.

With regard to this first effect, there are two important subtleties to keep in mind:

Effect #2: Using Taxable Dollars to “Buy More” Roth Dollars

The second effect of a Roth conversion occurs when you get to use taxable dollars (i.e., non-retirement-account dollars) to pay the tax on the conversion. If applicable, this effect generally is beneficial, though how beneficial it is varies from one household to another. Some relevant factors would include:

  •  The length of time that the money will stay in the Roth. (That is, how long do you get to benefit from the tax-free growth that the dollars will now experience, because they’re no longer in a taxable account?) This could be “time until you spend the dollars.” Or it could be “time until the dollars have to come out of the account as distributions to heirs” (in which case your age and health would be major factors).
  • What rate of return you anticipate earning on the assets and how that return is broken down in terms of interest/dividends/price appreciation.
  • The tax rate(s) you would have to pay on that return (and when you would have to pay it), if the assets stayed in a taxable account.
  • What (if any) tax cost must be incurred as a result of selling the taxable assets in question now in order to use that money to pay the tax on the conversion.

Of course, if you don’t have significant assets in taxable accounts (and you would therefore be using dollars from the traditional IRA to pay the tax on the conversion), this effect is not applicable.

Effect #3: Smaller RMDs (Less Future Tax Drag)

The third effect of a Roth conversion is that it reduces your later RMDs (because Roth IRAs don’t have RMDs during the original owner’s lifetime), thereby reducing future tax drag if you aren’t spending (or donating) your RMD dollars.

To be clear, we’re not talking here about the tax paid on the RMDs themselves. That would fall under effect #1. What we’re talking about here is that, after an RMD is taken, if the money is just reinvested in a taxable brokerage account, it will incur taxes on any further growth. (And, critically, that tax would not occur if a conversion were done, because the dollars would be in a Roth IRA.)

This effect of a conversion can never be harmful. Though, as with effect #2, it might not apply. RMDs are (in a several way tie for) the most tax-efficient dollars to spend every year. If you’re going to spend (or QCD) your entire RMD every year, this effect is a zero because the dollars aren’t getting reinvested in a taxable account.

Other relevant factors that influence the size of effect #3 include:

  • The length of time that the money would be in a taxable brokerage account (rather than a Roth IRA) after taking the RMD. Of note, unlike with effect #2 above, your current age is not a factor here unless you’re already age 72, because this effect by definition does not begin until age 72. Your health is a major factor though.
  • What rate of return you anticipate earning on the assets and how that return is broken down in terms of interest/dividends/price appreciation.
  • The tax rate(s) you would have to pay on that return (and when you would have to pay it), if the assets stayed in a taxable account.

Effect #4: Fewer Dollars Appearing on the Balance Sheet

The fourth effect of a Roth conversion is that you now have fewer total dollars. For example, there might now be $75,000 in a Roth IRA whereas before there was $100,000 in a traditional IRA.

For most people, this doesn’t matter at all. But it is helpful for anybody whose estate will be subject to an estate tax. (Given the current federal estate tax exclusion amount, few people have to worry about federal estate tax. But 12 states, as well as Washington DC, have estate taxes, many of which kick in at significantly lower thresholds.)

So like effects #2 and #3, this effect will be irrelevant for many households, whereas it will be helpful for others. (I’m not aware of any ways in which it would be harmful.)

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Investing Blog Roundup: Bogleheads on Investing Podcast (Estate Planning)

Rick Ferri recently invited me back on the Bogleheads on Investing podcast to discuss some of the topics covered in my recent book After the Death of Your Spouse: Next Financial Steps for Surviving Spouses. We were also joined by estate planning attorney Ryan Barrett. You can find the podcast below, as well as on any of the other major places you’d find a podcast.

Recommended Reading

Thanks for reading!

How Do I Calculate My Income Tax Refund?

The following is an excerpt from my book Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

Many taxpayers in the U.S. have come to expect a sizable refund check every tax season. To some people who don’t prepare their own tax returns, it’s a mystery how the refund is calculated.

The idea is really quite simple. After calculating your taxable income, you use the information in the tax tables to determine your total income tax for the year. This amount is then compared to the amount that you actually paid throughout the year (in the form of withholdings from your paychecks). If the amount you paid is more than your tax, you are entitled to a refund for the difference. If the amount you paid is less than your tax, it’s time to get out the checkbook.

Withholding: Why It’s Done

If you work as an employee, you’re certainly aware that a large portion of your wages/salary doesn’t actually show up in your paycheck every two weeks. Instead, it gets “withheld.”

The reason for this withholding is that the federal government wants to be absolutely sure that its gets its money. The government knows that many people have a tendency to spend literally all of the income they receive (if not more). As a result, the government set up the system so that it would get its share before taxpayers would have a chance to spend it.

The amount of your pay that gets withheld is based upon an estimate of how much tax you’ll be responsible for paying over the course of the year. (This is why you are required to fill out Form W-4, providing your employer with some tax-related information, when you start a new job.)

Withholding: How It’s Calculated

At this point you may be thinking, “OK. Well I’m in the __% tax bracket, and it’s obvious that my employer is withholding way more than that!”

You’re probably right. That’s because your employer isn’t just withholding for federal income tax. They’re also withholding for Social Security tax, Medicare tax, and (likely) state income tax.

The Social Security tax is calculated as 6.2% of your earnings, and the Medicare tax is calculated as 1.45% of your earnings. Before you’ve even begun to pay your income taxes, 7.65% of your income has been withheld.

Your refund is determined by comparing your total income tax to the amount that was withheld for federal income tax. Assuming that the amount withheld for federal income tax was greater than your income tax for the year, you will receive a refund for the difference.

EXAMPLE: Nick’s total taxable income (after subtracting deductions) is $32,000. He is single. Using the 2023 tax table for single taxpayers, we can determine that his federal income tax is $3,620.

Over the course of the year, Nick’s employer withheld a total of $8,500 from his pay, of which $4,000 went toward federal income tax. His refund will be $380 (i.e., $4,000 minus $3,620).

Simple Summary

  • Every year, your refund is calculated as the amount withheld for federal income tax, minus your total federal income tax for the year.
  • A large portion of the money being withheld from each of your paychecks does not actually go toward federal income tax. Instead, it goes to pay the Social Security tax, the Medicare tax, and possibly state income tax.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. The information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2023 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My Social Security calculator: Open Social Security