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Personal Finance Advice and Education! (2 Viewers)

gruecd

Footballguy
This is correct.  If you expect a lower tax rate in retirement a traditional mathematically makes more sense.  If you stay at the same tax rate until death then it doesn't matter - the math ends up at the same spot.

There are some other advantages to a Roth - it's much nicer to your descendants with the new 10 year rule.  This will lead me to converting traditional to Roth over a number of years.  It should have some tax advantages (though they may not be huge), but if my kids do inherit it works better there.

This is true, but in both cases you get growth in a tax free environment.  The math does work out to be equal if your tax rate stays constant.
Some would argue that the government will eventually have to start paying for all the "free" stuff it's been giving people for the last several years, and higher taxes would seem to be the most obvious way to do that.  Today's rates, by comparison, are historically low.  As such, it's entirely possible that you could have less taxable income in retirement and still be in a higher marginal tax bracket.

 

ConstruxBoy

Kate's Daddy
Some would argue that the government will eventually have to start paying for all the "free" stuff it's been giving people for the last several years, and higher taxes would seem to be the most obvious way to do that.  Today's rates, by comparison, are historically low.  As such, it's entirely possible that you could have less taxable income in retirement and still be in a higher marginal tax bracket.
This

 

ConstruxBoy

Kate's Daddy
If I understand your question, it’s the exact same.  Say you earn $100k married filing jointly.  You put 10k a year into a traditional, thus lowering your taxable income and it grow a at 7% compounded over 25 years.  Account grows to $700k+.  Or you put the equivalent amount in a ROTH ($7800 a year to keep your after tax/after contribution take home income the same).  If it grows at the same 7% annually it will only grow to $500k+.  At the same tax bracket (22%), it’s the exact same on the back end.  
The third option is to NOT do this. Still put away $10k a year in the Roth and learn to get by on less take home pay. 

 

BigJim®

Footballguy
There are some other advantages to a Roth - it's much nicer to your descendants with the new 10 year rule.  This will lead me to converting traditional to Roth over a number of years.  It should have some tax advantages (though they may not be huge), but if my kids do inherit it works better there.

This is true, but in both cases you get growth in a tax free environment.  The math does work out to be equal if your tax rate stays constant.
:thanks:

I had no idea that growth on a traditional 401K was a tax free.. though 'environment' word is throwing me a bit. if generally true, that's awesome... I may have far less traditional taxable than I assumed (assumed all of it was). 

The estate planning is also taking on greater importance in my considerations. After living through executorship in my late parent's estate, I was shocked at the reset of basis re: real estate and the significant haircut all taxable assets took.   

 

BigJim®

Footballguy
It's not.  It grows tax-deferred, but you pay taxes when you pull the money out.
Maybe reading and not commenting is best for me. In the last hour I was advised my question was off because traditional growth is in a tax free environment, then corrected that it is all taxable, bringing me back full circle. I'm obviously misfiring on something here. Don't worry, my understanding only impacts my financial planning.  :lmao:

 
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Redwes25

Footballguy
Maybe reading and not commenting is best for me. In the last hour I was advised my question was off because traditional growth is in a tax free environment, then corrected that it is all taxable, bringing me back full circle. I'm obviously misfiring on something here. Don't worry, my understanding only impacts my financial planning.  :lmao:


401K allows you to defer the tax (same rules for traditional IRA).  You are not taxed on the amount you put in and it grows tax free (interest and dividends you earn in the 401k for example).  So say you put in the max into your 401k this year ($20.5k) then the amount of your income you will be taxed on this year will be $20.5K less.  However, when you withdraw the money it is taxed at your income tax rates as income in the year of withdrawl.  So say when you are 65 you withdraw $50K for living expenses.  You will have an additional $50k of income subject to tax.

A Roth IRA is basically the reverse.  The money you put is after tax so you don't pay any less tax this year if you make a contribution to your Roth IRA.  However, when you withdraw the money at 65 you don't recognize income at that time. 

Typically, you should be doing a bit of both. 

 
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stbugs

Footballguy
The third option is to NOT do this. Still put away $10k a year in the Roth and learn to get by on less take home pay. 
Same could be said about traditional except that you put the extra money into stocks and pay long term capital gains rates. It’s easy to tell people to save more, few do it.

I do think that people forget about taxable accounts. Long term gains rates have always been lower than income tax rates.

 

stbugs

Footballguy
Some would argue that the government will eventually have to start paying for all the "free" stuff it's been giving people for the last several years, and higher taxes would seem to be the most obvious way to do that.  Today's rates, by comparison, are historically low.  As such, it's entirely possible that you could have less taxable income in retirement and still be in a higher marginal tax bracket.
I’ve mentioned this before as well that don’t be surprised if there are gains type taxes on Roths in the future.

Remember that the majority sucks at saving money and it’s easy for politicians to point at all that money growing tax free and throwing a tax on it. The people with a lot in their Roths are way outnumbered. Most voters, even the bad savers, make an income so raising taxes is less palatable than saying let’s throw a 5-10% tax on Roth withdrawals above the pre-tax money out in. Again, not trying to say anything bad about Roths, just acknowledging that people talk about potential higher tax rates and never seem to worry about politicians deciding to go after a source of money that is technically never taxed.

For me and my wife, it’s an easy choice. We can’t do a Roth IRA anyway and every dime we put in a traditional is not taxed at our highest rates. I’m more than willing to assume tax rates for us in the future will be lower. Once one of us and then both of us retires, I will absolutely tax advantage of any type of back door or front door that wasn’t available.

 
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BigJim®

Footballguy
401K allows you to defer the tax (same rules for traditional IRA).  You are not taxed on the amount you put in and it grows tax free (interest and dividends you earn in the 401k for example).  So say you put in the max into your 401k this year ($20.5k) then the amount of your income you will be taxed on this year will be $20.5K less.  However, when you withdraw the money it is taxed at your income tax rates as income in the year of withdrawl.  So say when you are 65 you withdraw $50K for living expenses.  You will have an additional $50k of income subject to tax.

A Roth IRA is basically the reverse.  The money you put is after tax so you don't pay any less tax this year if you make a contribution to your Roth IRA.  However, when you withdraw the money at 65 you don't recognize income at that time. 

Typically, you should be doing a bit of both. 
I think I understand all of that. Tell me if I'm thinking about this right:

Traditional: I get deferred taxation on both contribution and growth, but eventually the chickens come home to roost and I and/or my beneficiaries pay taxes on both contributions and investment growth.

Roth: I pay taxes on contributions, which is an immediate negative w/r/t only the amount I contribute. However, I obtain the benefit that neither I nor my beneficiaries pay any future taxes on amount withdrawn after I'm 65, including importantly, the investment growth (unlike traditional).  

 

stbugs

Footballguy
So they are going to tax the money twice? Or you mean the growth?
Growth is never taxed. That’s what I mean. I can easily see the outcry of untaxed money and see them put it into capital gains tax type buckets because of the similarity. Both being investments with after tax money and tax treatment of only gains once sold. Right now Roth is 0% on the “sell” so to speak. Remember that but of outrage at PayPal’s founder basically having billions in gains that will have no taxes. That’s your poster boy.

 
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Redwes25

Footballguy
I think I understand all of that. Tell me if I'm thinking about this right:

Traditional: I get deferred taxation on both contribution and growth, but eventually the chickens come home to roost and I and/or my beneficiaries pay taxes on both contributions and investment growth.

Roth: I pay taxes on contributions, which is an immediate negative w/r/t only the amount I contribute. However, I obtain the benefit that neither I nor my beneficiaries pay any future taxes on amount withdrawn after I'm 65, including importantly, the investment growth (unlike traditional).  


That is right but you mention beneficiaries in your notes and honestly I don't recall all those rules about inheriting a 401k, etc. but think you get some additional period of time to withdraw it. I want to say 10 years but can't be certain. 

 

BigJim®

Footballguy
That is right but you mention beneficiaries in your notes and honestly I don't recall all those rules about inheriting a 401k, etc. but think you get some additional period of time to withdraw it. I want to say 10 years but can't be certain. 
Yes, someone else mentioned that, and -Oz- linked to an article which mentioned a secondary 'Roth must have existed for 5 years' which must be managed to (or else the growth is taxable, while the contributes remain tax free). Can't really reconcile why the 10 year rule is beneficial, if the 5 year rule is met and no part of the inheritance is taxed at all... why am I benefitting from ability to leave the money there for 10 years when I could get all of it it and start doing something with it immediately tax free? Seems like a benefit that would make more sense for traditional, which is taxed, to take in a way that manages to taxation. Another confusion for another day.

 

gruecd

Footballguy
I’ve mentioned this before as well that don’t be surprised if there are gains type taxes on Roths in the future.

Remember that the majority sucks at saving money and it’s easy for politicians to point at all that money growing tax free and throwing a tax on it. The people with a lot in their Roths are way outnumbered. Most voters, even the bad savers, make an income so raising taxes is less palatable than saying let’s throw a 5-10% tax on Roth withdrawals above the pre-tax money out in. Again, not trying to say anything bad about Roths, just acknowledging that people talk about potential higher tax rates and never seem to worry about politicians deciding to go after a source of money that is technically never taxed.

For me and my wife, it’s an easy choice. We can’t do a Roth IRA anyway and every dime we put in a traditional is not taxed at our highest rates. I’m more than willing to assume tax rates for us in the future will be lower. Once one of us and then both of us retires, I will absolutely tax advantage of any type of back door or front door that wasn’t available.
HIGHLY doubt that happens, but certainly anything is possible.

 

gruecd

Footballguy
Yes, someone else mentioned that, and -Oz- linked to an article which mentioned a secondary 'Roth must have existed for 5 years' which must be managed to (or else the growth is taxable, while the contributes remain tax free). Can't really reconcile why the 10 year rule is beneficial, if the 5 year rule is met and no part of the inheritance is taxed at all... why am I benefitting from ability to leave the money there for 10 years when I could get all of it it and start doing something with it immediately tax free? Seems like a benefit that would make more sense for traditional, which is taxed, to take in a way that manages to taxation. Another confusion for another day.
Because it can stay in the Roth and continue to grow tax-free vs. pulling out it now tax-free and then having all future growth be taxed. I guess if you NEED the money now to buy/do something, then it’s a moot point.

 

gruecd

Footballguy
Growth is never taxed. That’s what I mean. I can easily see the outcry of untaxed money and see them put it into capital gains tax type buckets because of the similarity. Both being investments with after tax money and tax treatment of only gains once sold. Right now Roth is 0% on the “sell” so to speak. Remember that but of outrage at PayPal’s founder basically having billions in gains that will have no taxes. That’s your poster boy.
He was doing the Mega Backdoor Roth thing that I talked about. Dude should’ve just kept his mouth shut.

 

stbugs

Footballguy
HIGHLY doubt that happens, but certainly anything is possible.
I think it’s unlikely but when you’ve got a poster boy and a legitimate argument (gains are never taxed unlike cap gains), I see a bigger chance of it happening. Biden proposed cutting the pre-tax benefits for traditional accounts and that was before poster boy. Poster boy put the Roths on the planning wall and as more and more people retire paying no gains taxes, it may gain momentum.

 

Sand

Footballguy
It's not.  It grows tax-deferred, but you pay taxes when you pull the money out.
That is what I meant - it's not taxed while inside the space, but taxed as income on the way out.  Sorry if that was imprecise.  

He was doing the Mega Backdoor Roth thing that I talked about. Dude should’ve just kept his mouth shut.
I thought that was part of the "rich guy tax leak" that we had a while back.  Somehow the feds never found out who leaked that.

Some would argue that the government will eventually have to start paying for all the "free" stuff it's been giving people for the last several years, and higher taxes would seem to be the most obvious way to do that.  Today's rates, by comparison, are historically low.  As such, it's entirely possible that you could have less taxable income in retirement and still be in a higher marginal tax bracket.
While this is possible, they would have to reach pretty far down the scale to up the taxes on a typical retiree income.  That may be politically unpalatable to anyone in DC.

 

Sand

Footballguy
Growth is never taxed. That’s what I mean. I can easily see the outcry of untaxed money and see them put it into capital gains tax type buckets because of the similarity. Both being investments with after tax money and tax treatment of only gains once sold. Right now Roth is 0% on the “sell” so to speak. Remember that but of outrage at PayPal’s founder basically having billions in gains that will have no taxes. That’s your poster boy.
They talked about removing the ability to put unregistered securities in IRAs to take care of this.  Not sure if that went through or not.

 

ConstruxBoy

Kate's Daddy
Growth is never taxed. That’s what I mean. I can easily see the outcry of untaxed money and see them put it into capital gains tax type buckets because of the similarity. Both being investments with after tax money and tax treatment of only gains once sold. Right now Roth is 0% on the “sell” so to speak. Remember that but of outrage at PayPal’s founder basically having billions in gains that will have no taxes. That’s your poster boy.
Yeah Thiel. I think that's certainly a risk but I think it's a greater risk that the 12% tax rate will be 14% or will be a lot lower in 15 years. 

 
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-OZ-

Footballguy
I’ve mentioned this before as well that don’t be surprised if there are gains type taxes on Roths in the future.

Remember that the majority sucks at saving money and it’s easy for politicians to point at all that money growing tax free and throwing a tax on it. The people with a lot in their Roths are way outnumbered. Most voters, even the bad savers, make an income so raising taxes is less palatable than saying let’s throw a 5-10% tax on Roth withdrawals above the pre-tax money out in. Again, not trying to say anything bad about Roths, just acknowledging that people talk about potential higher tax rates and never seem to worry about politicians deciding to go after a source of money that is technically never taxed.

For me and my wife, it’s an easy choice. We can’t do a Roth IRA anyway and every dime we put in a traditional is not taxed at our highest rates. I’m more than willing to assume tax rates for us in the future will be lower. Once one of us and then both of us retires, I will absolutely tax advantage of any type of back door or front door that wasn’t available.
anything is possible I guess but the political backlash of taxing the Roth accounts could be severe. 
far more likely imo is to make the Roth IRA subject to RMDs which will make people withdraw the money and either spend it or put it in taxable accounts. 

 
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-OZ-

Footballguy
I think it’s unlikely but when you’ve got a poster boy and a legitimate argument (gains are never taxed unlike cap gains), I see a bigger chance of it happening. Biden proposed cutting the pre-tax benefits for traditional accounts and that was before poster boy. Poster boy put the Roths on the planning wall and as more and more people retire paying no gains taxes, it may gain momentum.
It would be so much easier to just add a wealth tax and make the IRAs subject to that wealth tax but not income tax. When you’re talking about wealth in excess of $50 million, most people won’t care too much. Even drop that to $10-20 million and most people won’t be affected. But even that didn’t gain enough traction. 

 

NutterButter

Footballguy
Instinctive said:
This is the key. If you max the amount either way, a Roth is functionally letting you save more dollars in a tax advantaged space.
Which seems like this would make it a moot discussion b/c the tax savings you'll get from the extra roth dollars would I think give the Roth enough of an edge unless we're taking a significant difference between your working tax rate and your retirement tax rate.   If you can max out the roth (20.5k after tax so 27k pre tax if in the 24% bracket), the alternative would be to max out the traditional and to possibly just stick the remaining amount (6.5k pre tax/5k after tax) in a trading account where you'd be paying cap gains tax.

 

stbugs

Footballguy
anything is possible I guess but the political backlash of taxing the Roth accounts could be severe. 
far more likely imo is to make the Roth IRA subject to RMDs which will make people withdraw the money and either spend it or put it in taxable accounts. 


It would be so much easier to just add a wealth tax and make the IRAs subject to that wealth tax but not income tax. When you’re talking about wealth in excess of $50 million, most people won’t care too much. Even drop that to $10-20 million and most people won’t be affected. But even that didn’t gain enough traction. 
I couldn’t even hazard on a guess on likelihood but I don’t agree on the backlash. Go look at average savings rates, the folks in here are in a small minority, hence my poster boy mention.

I just think much higher tax rates that would affect lower income retirees would be a huge backlash versus tax the rich calls like your wealth tax. I just see Roths in that potential bucket because politicians could easily throw a rich people don’t get taxed on huge gains tag on it. Traditional would be harder because everything is taxed on the way out but it could be included in wealth taxes or hit with a removal of pre-tax benefits. I think the latter might be more difficult because the government does want people to save money as it helps take a burden off SS.

Anyway, didn’t even mention this as something to be worried about, just as a possibility down the road I see as potentially likely as other tax hikes.

 
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-OZ-

Footballguy
I couldn’t even hazard on a guess on likelihood but I don’t agree on the backlash. Go look at average savings rates, the folks in here are in a small minority, hence my poster boy mention.

I just think much higher tax rates that would affect lower income retirees would be a huge backlash versus tax the rich calls like your wealth tax. I just see Roths in that potential bucket because politicians could easily throw a rich people don’t get taxed on huge gains tag on it. Traditional would be harder because everything is taxed on the way out but it could be included in wealth taxes or hit with a removal of pre-tax benefits. I think the latter might be more difficult because the government does want people to save money as it helps take a burden off SS.

Anyway, didn’t even mention this as something to be worried about, just as a possibility down the road I see as potentially likely as other tax hikes.
Roth investors might be a minority but they’re a vocal minority who vote. Plus it would largely affect those over 60, who vote and have more time to get involved in causes they care about.  
I’d put the likelihood of taxing Roth accounts significantly lower than raising taxes or even the wealth tax. 
but I don’t see huge increases in income taxes in our lifetime.  
 

 

stbugs

Footballguy
Roth investors might be a minority but they’re a vocal minority who vote. Plus it would largely affect those over 60, who vote and have more time to get involved in causes they care about.  
I’d put the likelihood of taxing Roth accounts significantly lower than raising taxes or even the wealth tax. 
but I don’t see huge increases in income taxes in our lifetime.  
 
Don’t disagree except for the likelihood. I don’t see big tax increases either but if that unlikely case occurred and it was enough to make traditional IRA/401k higher tax rates than my current tax savings rate, I’d bet there would be a tax on Roth gains and a wealth tax too. We haven’t gotten to that point and I’m not sure we ever will.

 

wilked

Footballguy
This seems like a dumb question, but I don't know the answer so why not?

When we bought our house I got the mortgage in my name only.  I think wife had a ding or two on her credit so that's why.  Since then I've refinanced twice, changed mortgage servicers seemingly five times, etc.  

We are doing some estate planning and looking into things.  I think the house may be titled in my name only, but not certain.  Where would I look / who would I contact to verify and/or change?  Is that the mortgage provider, the city, our original real estate attorney, someone else???  

Thanks

 

stbugs

Footballguy
This seems like a dumb question, but I don't know the answer so why not?

When we bought our house I got the mortgage in my name only.  I think wife had a ding or two on her credit so that's why.  Since then I've refinanced twice, changed mortgage servicers seemingly five times, etc.  

We are doing some estate planning and looking into things.  I think the house may be titled in my name only, but not certain.  Where would I look / who would I contact to verify and/or change?  Is that the mortgage provider, the city, our original real estate attorney, someone else???  

Thanks
Wouldn’t it be there if you went to your county’s tax site? I’d assume it would just have you listed. I don’t know if the deed/title is there but I’d think you’d see if just you were listed. The mortgage would show you as well but not sure if that’s official or just that you took out the mortgage and at closing both of you are listed.

 

humpback

Footballguy
They may make changes to the Roth tax advantages in the future, but zero chance they don't grandfather existing accounts in even if they do. They aren't going to all of the sudden start taxing withdrawals on existing accounts. They're already addressing the rare Paypal guy scenario in other ways.

 
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-OZ-

Footballguy
This seems like a dumb question, but I don't know the answer so why not?

When we bought our house I got the mortgage in my name only.  I think wife had a ding or two on her credit so that's why.  Since then I've refinanced twice, changed mortgage servicers seemingly five times, etc.  

We are doing some estate planning and looking into things.  I think the house may be titled in my name only, but not certain.  Where would I look / who would I contact to verify and/or change?  Is that the mortgage provider, the city, our original real estate attorney, someone else???  

Thanks


Wouldn’t it be there if you went to your county’s tax site? I’d assume it would just have you listed. I don’t know if the deed/title is there but I’d think you’d see if just you were listed. The mortgage would show you as well but not sure if that’s official or just that you took out the mortgage and at closing both of you are listed.
should be in the tax records. I know ours is. I’m also alone on the mortgage, house is deeded to both of us. 

 

matttyl

Footballguy
Think I know answer, just checking…

family member passes away with retirement accounts (not sure at present if they are traditional IRA, 401(k), 403(b), 457 or Roth - they worked for the state for much of their career).  They hadn’t updated beneficiary info since their spouse passed away a few years prior - so no living beneficiaries listed on account(s).  Their actual will, though, listed four beneficiaries.  Does estate have to distribute account funds internally (and pay taxes), or can 4 inherited IRAs be set up for four people not officially listed as beneficiaries of accounts and monies be divided among them?

 

wilked

Footballguy
Wouldn’t it be there if you went to your county’s tax site? I’d assume it would just have you listed. I don’t know if the deed/title is there but I’d think you’d see if just you were listed. The mortgage would show you as well but not sure if that’s official or just that you took out the mortgage and at closing both of you are listed.
found it - thanks!

 

Tom Hagen

Footballguy
Think I know answer, just checking…

family member passes away with retirement accounts (not sure at present if they are traditional IRA, 401(k), 403(b), 457 or Roth - they worked for the state for much of their career).  They hadn’t updated beneficiary info since their spouse passed away a few years prior - so no living beneficiaries listed on account(s).  Their actual will, though, listed four beneficiaries.  Does estate have to distribute account funds internally (and pay taxes), or can 4 inherited IRAs be set up for four people not officially listed as beneficiaries of accounts and monies be divided among them?
Not my area of expertise and please do not consider this as providing tax advice but I believe if there are no living primary or secondary beneficiaries the accounts become part of the estate and need to pass through probate.  The estate would report the income from any taxable distributions on a Form 1041 but would most likely have the option of passing the income through proportionally to each beneficiary following the terms of the will.    Estate income tax rates get very high, very quickly so passing the income to the heirs would most likely be advantageous.

I do not believe setting up inherited IRA accounts is an option because the estate is the non-designated beneficiary, not the 4 heirs.

 

matttyl

Footballguy
That’s what I was thinking.  It will be passed to beneficiaries as cash, not as a retirement account.  Funds must be withdrawn.  I guess question then becomes where (and how much) they are taxed - in the estate (which, unfortunately, I think is the case), or as income to the beneficiaries.

 

Tom Hagen

Footballguy
That’s what I was thinking.  It will be passed to beneficiaries as cash, not as a retirement account.  Funds must be withdrawn.  I guess question then becomes where (and how much) they are taxed - in the estate (which, unfortunately, I think is the case), or as income to the beneficiaries.
If the distributions to the heirs are required under the will, the estate takes a deduction for the amount distributed and the heirs end up reporting the income instead of  the estate.  Trusts often pay tax at the trust level but normally income in estates is passed through because distributions are mandatory pursuant to the will and not discretionary by the executor. 

 

matttyl

Footballguy
So all taxable income in the year in which it’s distributed?  No “5 year” or “10 year rule” you’d have with an inherited Ira?  At each tax bracket of the individual beneficiaries?  

 

matttyl

Footballguy
Did some digging about tax brackets over time and it was pretty eye opening.  Taxfoundation.org was a great resource. Just in my lifetime (41 years, which could conceivably be the length of a retirement) tax bracket rules have been set, and changed, by the revenue act of 1978, economic recovery tax act of 1981, tax equity and fiscal responsibility act of 1982, tax reform act of 1984, tax reform act of 1986, omnibus budget reconciliation act of 1990, OBRA of 1993,  economic growth and tax relief reconciliation act of 2001, jobs and growth tax relief act of 2003, American taxpayer relief act of 2012, and the tax cuts and jobs act of 2017.

As an example a married couple filing jointly with a taxable income of $50k would today be in a 12% top bracket.  5 years ago they would have been in a 15%.  20 years ago would have been in 27%, and the year before that 27.5%, and the year before that 28%.  35 years ago that would have been a 35% bracket, and the year before that 38%.  39 years ago would have been a whopping 40%, and the year prior even higher at 44%, and the year before even higher at 49%!  I understand that most of why that is is inflation ($50k 40 years ago was much more than $50k today).  

 
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GoBirds

Footballguy
Was reading an article about target date funds and was curious how many of you all use them as a retirement too or if not why you aren’t in favor of them? I only have a Roth IRA bit outside of that in my taxable account have started contributing to a Vanguard target date fund. Interested to get thoughts when you guys have time. Thanks 

 

Tom Hagen

Footballguy
Was reading an article about target date funds and was curious how many of you all use them as a retirement too or if not why you aren’t in favor of them? I only have a Roth IRA bit outside of that in my taxable account have started contributing to a Vanguard target date fund. Interested to get thoughts when you guys have time. Thanks 
They seem to be a little polarizing but I think they are a good option for a lot of people, but not everyone.  The main criticism I read is that they tend to be too conservative (especially in retirement) and I do think picking a fund with a target date 5 or 10 years after your true planned retirement year is a good idea.  I think the fees can also be a little higher because there are the target date fund fees and the underlying fund fees.  For a lot of people that either don't have the time or interest in rebalancing  or people that are inclined to try to time the market too often they are very useful set it and forget it option.  For people that enjoy investing they can be very limiting.

I use them in my wife's retirement account so I don't have to worry about it but don't use them in my accounts because I like to have a little more control over asset allocation.

 

BeTheMatch

Let it burn!
Hoping someone can help me out here...

I sold a very small business in 2021 comprised virtually 100 percent of goodwill. And the person who bought it is buying it in installments - one payable in 2021, the other in 2022.

Since selling it to him, I did some independent-contractor work for the business that he will issue me a 1099 for 2021. But now his accountant is trying to tell him that he also should just put the first installment payment for the business on the 1099 too. Makes sense for him, as he'll get to deduct the entire thing from his profits for the year.

But that would subject me to the double hit (payroll taxes) that comes with 1099 compensation. And my understanding is proceeds from the sale of a business should not be taxed that way.

I've looked around online and have a found a couple IRS forms that may or may not be relevant here.

Installment sale

Asset allocation

But I'm fairly out of my element here. Any idea on how this should be reported and what my tax hit should be? 

 
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Tom Hagen

Footballguy
Hoping someone can help me out here...

I sold a very small business in 2021 comprised virtually 100 percent of goodwill. And the person who bought it is buying it in installments - one payable in 2021, the other in 2022.

Since selling it to him, I did some independent-contractor work for the business that he will issue me a 1099 for 2021. But now his accountant is trying to tell him that he also should just put the first installment payment for the business on the 1099 too. Makes sense for him, as he'll get to deduct the entire thing from his profits for the year.

But that would subject me to the double hit (payroll taxes) that comes with 1099 compensation. And my understanding is proceeds from the sale of a business should not be taxed that way.

I've looked around online and have a found a couple IRS forms that may or may not be relevant here.

Installment sale

Asset allocation

But I'm fairly out of my element here. Any idea on how this should be reported and what my tax hit should be? 
It's tough to give advice without knowing all the details but in general money paid or received for the purchase of goodwill would not be reported on a 1099 as it is capital gain and not ordinary income (certainly not self employment income). If the money was for a covenant not to compete, that would be ordinary income to you and possibly reported on a 1099.

The important factor is do you have a written agreement specifying the allocation of the sale price and the nature of the payments.

 

BeTheMatch

Let it burn!
It's tough to give advice without knowing all the details but in general money paid or received for the purchase of goodwill would not be reported on a 1099 as it is capital gain and not ordinary income (certainly not self employment income). If the money was for a covenant not to compete, that would be ordinary income to you and possibly reported on a 1099.

The important factor is do you have a written agreement specifying the allocation of the sale price and the nature of the payments.
Yes, I have a written agreement that spells out the timing and the amount of the two installment payments. But we didn't get into specifics about how that money would be classified, for lack of a better word.

 
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Tom Hagen

Footballguy
Yes, I have a written agreement that spells out the timing and the amount of the two installment payments. But we didn't get into specifics about how that money would be classified, for lack of a better word.
You may want to talk to an attorney or at least run it by a CPA.

 

GoBirds

Footballguy
They seem to be a little polarizing but I think they are a good option for a lot of people, but not everyone.  The main criticism I read is that they tend to be too conservative (especially in retirement) and I do think picking a fund with a target date 5 or 10 years after your true planned retirement year is a good idea.  I think the fees can also be a little higher because there are the target date fund fees and the underlying fund fees.  For a lot of people that either don't have the time or interest in rebalancing  or people that are inclined to try to time the market too often they are very useful set it and forget it option.  For people that enjoy investing they can be very limiting.

I use them in my wife's retirement account so I don't have to worry about it but don't use them in my accounts because I like to have a little more control over asset allocation.
Tom I was reading the same thing, I picked 5 years further out but still don’t love a bond allocation in this rising rate environment. So beyond Vanguard’s fee that is relatively low there are additional to factor in? How would I get a handle on that? Also I noticed my unrealized gain disappeared at year end, with mutual funds did they do a distribution that got reinvested to something? I didn’t noticed my tax info showing I realized  a gain and I hadn’t done anything but continue to add shares. 
 

Are there ETF target date options that our better than using mutual funds? Somehow this simple setup has me overthinking it, thanks for the help. 😂

 

themeanmachine

Footballguy
Was reading an article about target date funds and was curious how many of you all use them as a retirement too or if not why you aren’t in favor of them? I only have a Roth IRA bit outside of that in my taxable account have started contributing to a Vanguard target date fund. Interested to get thoughts when you guys have time. Thanks 
Just be careful if using in a taxable account.  The Huge Tax Bills That Came Out of Nowhere at Vanguard 

 

Tom Hagen

Footballguy
Tom I was reading the same thing, I picked 5 years further out but still don’t love a bond allocation in this rising rate environment. So beyond Vanguard’s fee that is relatively low there are additional to factor in? How would I get a handle on that? Also I noticed my unrealized gain disappeared at year end, with mutual funds did they do a distribution that got reinvested to something? I didn’t noticed my tax info showing I realized  a gain and I hadn’t done anything but continue to add shares. 
 

Are there ETF target date options that our better than using mutual funds? Somehow this simple setup has me overthinking it, thanks for the help. 😂
I'm not honestly certain on the fees and it may make a difference what funds you use, Vanguards fees are generally low enough it may now make much of a difference.  From what I remember reading, the annual expense ratio of a target date fund is higher than the blended average of the underlying funds which makes sense because there are administrative costs to run the target date fund.

Regarding the unrealized gain, the fund most likely issued a capital gain distribution which results in reinvesting more shares while simultaneously dropping the share price so that the value of the account does not change. In a taxable account this is kind of a big deal, in a retirement account it's irrelevant because the capital gain distribution is not taxable.

 

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