clear wine glass with water

Changes to retirement programs while you were on Christmas break

The so-called Secure Act 2.0, signed into law December 29, 2022, has changed some of the basics of retirement programs for 2023 and beyond, so do be aware.
The maximums you can contribute have gone up, and this may be the greatest benefit for most people who can afford to contribute.
1. Roths now have a contribution of $6,500, with a $1,000 additional catch-up if you’re over 50. This is $500 more than last year. Same for traditional deductible IRAs.
2. If you have a 401k, 403b, 457, or Roth 401k, you can contribute up to $22,500; over 50 you can add another $7,500 for a total of $30,000, up from $27,000 in 2022.
3. HSAs can now snare $3,850 for individuals and $7,750 from families, with $1,000 catch ups.

Another change was that you can delay required minimum distributions from your 401k, 403b, and traditional IRAs until 73 beginning in 2023, and until 75 beginning in 2033. I’m not sure this is actually a good idea, for several reasons:
• It encourages people to keep on working, when maybe they should consider that it’s time to stop, enjoy life, and make way for somebody younger.
• It staves off urgency to save, because, well, you may as well just work forever.
• Once you start RMDs, the required amount will be larger and could possibly kick you into a higher tax bracket where you’ll pay more taxes on your money in a shorter period of time.
• If you never actually get to spend your money, your heirs will probably be in their highest earning years and so they’ll pay more taxes on the money than a retired person might have.
Still, given the hits to investments in the past year, many people will be glad to let their investments ride a little longer without being forced to sell off in an already low market.

It’s depressing to think that the French are going to the mat to protest increasing the retirement age from 62 to 64, while Americans are faced with being forced, er encouraged, to work longer and longer or face retirement poverty on the relatively puny Social Security. And pensions—what’s that?

There are a number of other changes that depend on the discretion of plan sponsors, not individuals. For example, plan sponsors may allow linking of accounts to an emergency fund, consider student loan payments as deferrals for matching, and make emergency withdrawals available. What they actually do offer remains to be seen, and will depend somewhat (as usual) by pressure from employees or their unions. We’re likely to see that pressure exerted on big employers, but more than 99% of people work for small employers—and many don’t even offer retirement plans. So, one faint cheer for better workers’ rights.

Checkbook labeled donate

Planning to give to charities: should you consider a donor-advised fund?

It hasn’t been covered much, but charitable donation deductions were almost eliminated for the middle class in the tax “reforms”. You can only deduct your charitable contributions if you decide to itemize, and your allowable itemized deductions exceed $12,000 for a single and $24,000 for married filing jointly—and remember, all state and local taxes are capped at $10,000, no matter what your property tax is. If your mortgage interest is significant or your itemized deductions will exceed these caps, your charitable deductions will still be deductible. If not, nada.

There’s one exception. For the 2020 tax year, you can separately list up to $300/taxpayer as an “above the line” deduction, without itemizing. That’s not a fortune, but it’s something. But what if you give more, or plan to?

If your total allowable deductions exceed $12/24 K and you plan to itemize, then charitable donations will be deductible. Let’s say you pay $10,000 in property taxes, $14,000 for mortgage interest, and make a $10,000 charitable donation = $34,000 in itemized deductions.

But what if you’re married, with a paid off house, and your property tax is $10,000? Then you don’t get any deduction for the charitable donation, because you won’t itemize.  In this case, probably the simplest way to deduct charitable donations is to bunch them into years where your itemized deductions will exceed the standard deduction, even if that means you make the donation every other year. So, with $10,000 in property tax, and $20,000 ( 2 years’ worth of donations), you’ll have an itemized deduction of $30,000—but only $6,000 benefit over the standard $24,000 deduction. You’ll also have to park the yearly budgeted charitable amount in an account somewhere, and pay taxes on whatever the probably minimal earnings are.

Then there’s the donor-advised fund, available to set up at most of the big investment houses. When you establish this fund, you put in a large lump sum, for which you get a tax deduction in the year you contribute the money. Then, you can keep it invested (and hopefully growing) until you decide to distribute it. The investment house will gleefully set this up for you, AND charge you a yearly management fee of about .60% to park it in the investment(s) you select. For that, they’ll faun all over you and tell you what a good person you are. But this is another one of those instances where there’s money to be made off of you, so why not? Even better, they’ll work with your financial advisor, who will also charge you a fee. So just let me know, okay? (not!)

For the most part, it seems worthwhile to me to simply park your donations in your own investment account and avoid the .60% fee. You can always donate the appreciated investment and avoid capital gains taxes when you make the donation (if that’s a consideration). You’ll have to pay tax on any earnings (dividends, interest), but you can choose an investment with very low or no payouts of this kind. If this is a donation that you make pretty regularly, there probably won’t be that much in earnings anyway.

The one situation where I can see that a donor-advised fund makes sense is if you 1) receive a large, taxable payout in one year (as with a taxable executive compensation payout at retirement), 2) have charitable intent anyway, and 3) have sufficient taxable earnings in the same year that you can use the entire donation as a deduction. It’s not going to be a direct trade off—your deduction won’t reduce your taxes in the same amount, but you will get a break IF YOU INTENDED TO DONATE ANYWAY. Or maybe you think you’re a savvy enough investor that you can grow the money better and faster (over and above the management fee) than the charity’s endowment team can. Um.

Other than that, I think most charities would rather have the money now. Or every other year or three. In the meantime, you can always designate one of your investments or investment accounts as earmarked to be donated, keeping it invested until the year when you can itemize.

That’s the story as I see it. If anyone can point out other situations, I’d be happy to hear about them.

 

 

Pigs feeding

How you’re like Jeff Bezos

But maybe not in a good way. Every third Facebook post or so mentions that ole’ Jeff should give away his billions and that would fix everything. I used to hear this about the Catholic Church, but Bezos is become the new favorite target. Why shouldn’t he—after all, Bill Gates and Warren Buffett give away buckets.

Here’s where you come in. Do you have a nice house? Decent car? Relatively recent wardrobe? Stash of wine, beer, booze, weed? Most of us (reading a personal finance blog) can answer yes to at least some of those. So, let’s say you’re now out of work. Don’t know how that happened. Can you pay the bills with any of that? Write a check off your house (without refinancing)? Pay the utilities with a 24-pack of craft brew? Cash out your 401k with no penalty, no tax, and not losing the employer match? Just how much are you giving to charity?

Truthfully, I don’t know any insider details about Jeff Bezos’ money. But I do know the difference between assets and income. Assets are wealth, and add to your net worth, but they may or may not produce spending money for you.

You can be a little old lady in a paid-off $2 million dollar house (an asset), but be scraping by on Social Security (income) if you don’t have any other income-producing assets like bonds, dividend paying stocks, or stocks you can sell. You would have a high net worth but very little ability to spend.

As far as I can determine, post-divorce Bezos owns about 11% of Amazon’s $1.175 trillion, so we’re not feeling too sorry for him. He also owns the Washington Post and, my guess, one or two shares in other companies. However, like your wine collection, Bezos has to sell Amazon to get money out of that wealth, which he does. He can’t just dump them whenever he feels the need for a $100 billion or so in chump change, because an insider making huge sales is a pretty good way to tank the company. Amazon doesn’t pay any dividends (Microsoft does) so selling stock is his source of income from the company. Sure, they pay him $81k in salary (kind of a joke), but the rest comes from stock grants, some of which he apparently sells each quarter. The market expects those sales, so no big impact, but liquidating and giving away half his wealth would raise an eyebrow or 10,000 on Wall Street.

By the way, it’s somewhat the same with the Catholic Church—an awful lot of the wealth of the Church is in real estate, structures, art works and artifacts, etc. Many of these are not easily sold, although some (real estate) can produce income. Let’s say, for example, you have a grand piano and a house, you have the mini-version of assets that don’t produce income (unless sold). If it’s your mom’s Steinway or your kid’s harp, it might be very difficult for you to countenance turning that to cash.

Bill Gates and Warren Buffett have pledged to give away huge portions of their fortunes, but not all at once and mostly through their foundations. Bezos could certainly do the same, as well as vastly improve treatment of workers. But here’s something overlooked: a publicly traded company has a duty to maximize return to shareholders (of which you are probably one, if you have a 401k). A company is supposed to be run as frugally as possible in order to return the most to its investors.

Business practices can and do change when workers organize themselves in such a way that management must respond to their demands or lose even MORE money than that response would cost—and why most companies fight unionization tooth and nail, until strikes, vandalism, pilferage, etc. start costing more than meeting workers demands. It’s ridiculous to assume management will take care of you or is benevolent: when publicly traded, they have a duty to get you as cheaply as possible.

Another agent for change is government regulation—when those regulations impose costs of doing business that the company can’t evade, and that (hopefully) are imposed on all businesses in the industry evenly. Regulatory agencies such as OSHA, the Consumer Protection Bureau, FINRA, and the EEOC can and sometimes used to strike fear (and produce change) in the hearts of employers.

Finally, the way to get money out of the hands of the company (and CEO, and investors, which also means you if you invest in a 401k) is taxation. Sure, companies howl about this and saber rattle about going somewhere else (which can also be addressed by regulation), but western European corporations still seem able to operate even when taxed.

So if you think Jeff Bezos should be compelled to provide better working conditions, support health care, or re-distribute wealth to his workers and the society that enables his success, appealing to his personal good heart (I don’t know if he has one or not), or trying to shame him in public isn’t the way to go. Why should it be an option? Why should a very few people have the opportunity to amass that level of wealth, then be lauded as heroes if they’re magnanimous enough to give some fraction of it back to charities which mirror their own priorities?

What we should be advocating for is evenly applied government regulation, taxation, and strong partnerships with unionization. These actions might make a company less profitable in the short run, but provide for a healthier, better educated, more fairly treated workforce with a viable safety net not dependent on the largess, or lack thereof, of any smart rich person.