IRAs, Roths, and the AARP

Posted on September 24, 2014September 24, 2014 by Danielle

One of the benefits of reaching 50 is that you get to join AARP. No, I’m not talking about the endless promos you will then begin to receive for dubious insurance, but their magazine and Bulletin, which offer some of the most sensible consumer financial and health advice around. Even if you’re not over 50, it’s worth taking a look at the September Bulletin’s Retirement Guide, which offers an excellent primer on most of the issues. I do have a few comments on their Step 4: Avoid a Nasty Tax Surprise.

It’s a pretty good discussion of the benefits of choosing a Roth or Roth 401k over contributing to a Traditional IRA or a regular 401k. I heartily agree that retirees can find themselves in quite a predicament when they discover that their required minimum distributions (RMD) from the regular 401k or Trad IRA don’t come free—you’re going to pay ordinary income tax on that, and the RMD even has the possibility to kick you up into a higher tax bracket. So that withdrawal is definitely not going to be all spendable income, ouch.

Honestly, I’ve only recommended a client favor contributing to a Trad IRA once this year. In nearly every other circumstance, the better choice is a Roth (and Roth 401k, if your company offers it). Ask yourself:

Is your income over $60K (single) or $95K (couple)? You’re probably not going to get the deduction anyway. You can contribute to a Roth without phase-out until $114K (single) or $181K (couple). (Regular 401k limits apply to Roth 401ks.)
Do you think taxes are going down? Most people, according to the article, stay in the same tax bracket when they retire. But it’s probably a safe bet that taxes will be higher in 10, 20, or 30 years so you’ll be paying more on that Trad IRA/401k, plus being taxed fully on increases produced by the investment.
Does the deduction really help that much? Here, probably the answer is yes in the 401k and no for the Trad IRA. So split it up.
Could you withdraw money in such a way that in at least some years your taxable income will be low enough so that you won’t pay tax on your Social Security benefits? This is a pretty complex question, so you probably need to give me a call to work through that possibility.
Any chance you won’t need all your possible income at 70, or maybe at all? With no RMD, you can leave that money invested to grow longer, or leave it to your heirs. Or take it all out at once if you need to pay for long-term care, without incurring more income taxes.

Although the article suggests that you should be at least ten years from retirement to select a Roth, I’m not so sure. Some of these reasons make a Roth desirable even for people much closer to retirement, and in the case of some earners, worthwhile because of the income eligibility limits on the Trad IRA. If you didn’t save from your very first job, and are trying to power-save now, a Roth might still be the right answer.

The old concept of the three legged retirement stool is one I love: no matter a little shortfall or instability in one area, the whole can provide a steady seat.

Regular taxable investments—at least right now, tax savvy allocation can produce taxation at the capital gains rate rather than at the usually higher ordinary income rate
Pensions, Social Security, and other guaranteed income, so you have a solid floor.
Retirement funds—nice if you can manipulate them so that they’re all tax-free coming out (pay attention, those not yet old enough to join AARP). Older workers—don’t beat yourself up! Roths have only been available since 1997.

No, you’re probably not going to be able to dodge the tax man entirely, but paying attention to tax requirements and thoughtful asset location can loosen his hoary grip.

Domestic abuse and money

Posted on September 16, 2014September 16, 2014 by Danielle

It’s about money, whether the headlines are horrific cases of bride burning, or a knockout in an elevator with an NFL sports star. Despite the myriad reasons women have been posting on Why I Stayed, many of them boil down to not enough money to leave.

Sure, many of us can answer because I loved him, but I think that the next time he smacks you around, if you had, say, a cool $5 million in the bank you’d think twice about whether love was enough. If you have children, or haven’t worked in a while, or your spouse is making more money than you ever saw before—more than you have any hope of ever making, well, you’ll try to make it work.

Money gives you a much better chance at safety, from beginning to end. When I got a court order of protection, the process server rang my husband’s doorbell a time or two, even though he was living 4 doors away and I could see he was home. What a surprise that he never answered. No, despite what you see on TV, court process servers don’t sit outside waiting, or go to any of the other places you could tell them the husband would be—they never even asked me. But when I filed divorce papers, I paid a private server, and the service was delivered in two days (they nailed my ex at church).

If you have money, you can pay for a better hotel to move into (rather than trying to find a bed at a shelter). You can stay at a residence inn until you find an apartment with a doorman or a security system. You can write a check for the security deposit. You can buy a mattress and some basic furniture. You can eat out until you equip a kitchen. You won’t have to make the humiliating move of begging family, and you won’t need to be somewhere where he can easily find you.

If you have money, you can choose a good lawyer—your pick of lawyers. And if you have money, that attorney won’t be hounding you to find a way to pay, and won’t jettison you because the money ran out and the settlement is too far away. While I know good, caring, and savvy divorce attorneys, like most of the rest of the world, you’ll get more attention if you have money. If you don’t like that lawyer, you can afford to fire him or her and hire another one, with no fear about a second retainer fee.

You can pay for health insurance. For many women, finding themselves off the policy with no employment is terrifying and can certainly be life threatening.

With money, you can pay for the therapy you and your kids are going to need. Without money, you’ll stay and hope for the best, or that you can make it okay for the kids. Or maybe you’ll be talked into couple’s therapy, so the abuser can find another opportunity to make it (“at least partly”) about you. With decent therapy, you can restore your self-esteem (which most abusers are expert at taking apart) and find out you weren’t an idiot or a professional victim or a weakling. Like all victims of abuse and bullying, it had nothing to do with anything you did.

With money, more people will believe you. Most domestic abuse victims should be prepared to lose most of their friends. Maybe, maybe if the guy looks like a thug, is twice your size, and smells in court, some people will give you the benefit of a doubt. But if he’s charming, employed, and can speak a coherent sentence, people will believe him and not you. Particularly if you come off as a teensy bit angry—I mean, why should you be a little angry? Well, obviously you’re a bitch who drove the nice guy to distraction. An abuser’s modus operandi is to fool people into believing that he’s not abusive or that he had a lapse and will never do it again. After all, you believed it so why shouldn’t mostly everyone else? He’s a charmer, that one.

If you, too, can pay to look good, more people will believe you. Go to court in a nice suit or dress. Have your face dermabraded and your teeth fixed, with the confidence that money brings, and your credibility takes a pole vault. Nobody is going to say without him she’d be nothing.

If you start talking about what happened? Well, quiet, you’re embarrassing people. Be noble and shut up (so he can go on abusing you by silencing you). When you have money, you’re way more able to speak out. With money, far fewer people are going to give you parenting or behavioral advice.

If you have money, your kids’ college will be taken care of, you won’t be facing retirement on ½ his Social Security, and you can keep the house or get another one.

So, my guess is that at least one of these reasons is why Janay Palmer Rice is staying for the time being. Does anyone believe they’ll still be together 20 years from now? Given the money involved, and the alternatives open to her, maybe the marriage wasn’t such a dumb idea. As long as she doesn’t pay with her life.

Home ownership and (not so) routine maintenance

Posted on August 20, 2014August 20, 2014 by Danielle

I’m a born condo dweller so I don’t know why I still have this darn house. Okay, it was because I didn’t follow my own advice and kept the house in the divorce. (See this post for why you shouldn’t.) It wasn’t a terrible decision financially—the divorce valuation was at the height of the bust, so the value has allegedly gone up quite a bit, it has a great home office, and my dog thinks the yard is her kingdom. But the reason I should be living in a condo is because I hate maintenance.

If you’ve slugged it out for a while in a divorce, or been on the rocks for a few years before (my hand is up!), you can bet there’s a ton of deferred maintenance. But even if you’re as on top of maintenance as my mom used to be, you can count on being frenemies with some contractors every year your address is a single family dwelling. It’s very important to recognize the ongoing nature of repairs, and budget for them (especially when you’re thinking through a divorce or retirement).

A decent rule of thumb is to budget 1% of the home’s value for regular, ongoing repairs and maintenance. I suppose this might have been accurate if the ex had been dependable and completed the myriad of projects he either started or ignored. But the first few years after my own divorce I had a ton of clean-it-up projects to fix—including the raining in my office which he had been “getting to” for 7 years.

The 1% is a good place to start, but take a closer look at your home for better estimation. Consider these points:

What’s the house made of? If you have wood siding or a lot of trim, you need a paint job probably every 5-7 years. Get an estimate and divide by 5. If it’s stucco, not so much maintenance but in my first hand experience you occasionally have a piece crack and fall off. Even if you have brick, you’re not home free—tuck-pointing and trim painting will need to be done if you’re not going to develop “unexpected” leaks.
What’s the yard look like? Personally, I’m continually at war with the weeds. In 20 years, I haven’t won, but they really gained ground during two consecutive summers when I first broke my foot and then had to get my dad’s (neglected) home ready for market–I barely touched the yard. My DIY tendencies are rampant when it comes to the yard and I’ve wasted a ton on harebrained ideas—a push mower, lots of plants that I forget to water, and plants sold to me as shade tolerant that succumbed nearly instantly. Nevertheless, if you have a yard you have to budget for plants and trees: replacement plants for the ones that inevitably croak, and tree maintenance. Trees are huge (ugh, pun)—trimming at least every other year, various schemes to abate or prevent pests, and crashes. In 5 years I’ve had to remove 3 trees–$890, $1,600, $2,500. Breathtakingly expensive and often an emergency. If you have teenage kids or are paying for a health club, in my view you don’t need a lawn service. Your mileage may vary. Lawn services, if regular, are not really part of this 1% rule.
How old is your heating plant, water heater, and roof? Make a good guess and put them on the maintenance calendar.
Painting, floor refinishing, and new carpeting are a few things home and condo owners will both need to replace, but for most other issues, the condo assessment fee (if well thought out by the association) should pay for most structural, exterior, or common elements.

As an aside, if you are a condo dweller and want to analyze your assessment, add up the cost of any utilities and insurance it covers, a decent allowance for “saving” for future repairs, and that 1% of value and you have a rough gauge of whether your assessment is reasonable. I’m not quite sure how to measure the aggravation level of finding contractors who actually show up and finish the project.

Every once in a blue moon, I don’t actually spend that 1%. Okay, I do (and more) but I dream about the time when I might get a break. You might not spend that every year, but suddenly get hit with the need to replace the furnace. Start that repair fund now and you’ll keep your plastic in your pocket and your heart in your chest.

So long carpenter. I have to go call the painter.