Forbes - 7 questions to test your financial literacy

[David S Meyers CFP]

Great, short, informative article. I can’t tell you how many times I
run into #3 and have to explain the difference between a container and
what one puts into a container. And, given where I live and work, how
many people have *way* too much tied up in company stock (#5), and
often it’s in the form of highly leveraged positions (ie. options)
which multiply the volatility and risk.

 
<http://www.forbes.com/sites/financialfinesse/2013/04/04/7-questions-to-test-your-financial-literacy/>




--
David S. Meyers, CFP®
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.

[JoeTaxpayer]

On 4/15/13 5:51 PM, David S Meyers CFP wrote:
> Great, short, informative article. I can’t tell you how many times I run
> into #3 and have to explain the difference between a container and what
> one puts into a container. And, given where I live and work, how many
> people have *way* too much tied up in company stock (#5), and often it’s
> in the form of highly leveraged positions (ie. options) which multiply
> the volatility and risk.
>
> <http://www.forbes.com/sites/financialfinesse/2013/04/04/7-questions-to-test-your-financial-literacy/>

"I inherited an IRA, but I am afraid of the market, so I cashed it out,
and will stay in CDs."

She didn't just sell the stock within the IRA, but closed it out
completely. I get similar emails all the time, and only wish I could
counsel these people first. #3 brings tears to my eyes.
As long as the stretch IRA is permitted, it's a shame to have this happen.

[David S Meyers CFP]

Of course, there's been some talk about doing away with the stretch,
too, in the name of finding small and/or more obscure tax hikes that
won't raise significant revenue, but which will annoy the crap out of
all the people who do plan carefully.

I read a discussion just recently about an estate where the deceased
had intended half the proceeds to go to each of the two kids -- and
named them equally in the will, but somehow put the IRA to only go to
one of them. Not much in the way of remedy there. I don't remember
the resolution, but short of the second kid being the contingent
beneficiary and the first kid disclaiming half, there'd be no way to
equalize their treatment get them both maximum tax benefits (ie.
stretch IRA, avoiding the first kid using up gift tax credit to make a
gift to second, etc).

[Tad Borek]

On 4/16/2013 8:28 AM, David S Meyers CFP wrote:
> On 2013-04-15 16:45:21 +0000, JoeTaxpayer said:
>>
>> "I inherited an IRA, but I am afraid of the market, so I cashed it
>> out, and will stay in CDs."
>>
>> She didn't just sell the stock within the IRA, but closed it out
>> completely.

I'd put inherited IRAs more in the category of spending/saving decisions
rather than literacy. It's quite common for them to be cashed out - I
don't have the exact stats but saw some recently, as I recall it was by
far the majority of beneficiaries who did that.

> Of course, there's been some talk about doing away with the stretch,
> too, in the name of finding small and/or more obscure tax hikes that
> won't raise significant revenue, but which will annoy the crap out of
> all the people who do plan carefully.

I certainly wouldn't want it changed but if we were to write a tax code
from scratch, and someone said hey, let's add something in here so
people can delay income until retirement so they save & accumulate more,
and therefore spend more during retirement, and spread out the tax bill
over their lifetime - it would be hard to argue with a straight face
that a stretch distribution to a non-minor kid falls within the policy
rationale. Allowing the spouse to treat the IRA as his/her own makes
sense, but at the second death...well, you've hit ultimate "retirement"
and anything after that is just a tax dodge for heirs. With unusual
exceptions like a disabled or minor child who is still part of the
original IRA owner's household, that kind of thing.

Again, I don't personally want it changed as it's something I (and my
clients) benefit from. But objectively I'd say that there's no real
"retirement savings" policy rationale for allowing IRA/q-plan
distributions to be drawn out as long as currently allowed.

Also: the trend in the past few years of tax changes is back-door ways
of increasing tax on higher-income and higher-net-worth people. A change
to IRA rules for non-spouse beneficiaries fits in that category. It also
would accelerate tax revenues, as boomers die off with big IRAs.

-Tad

[JoeTaxpayer]

On 4/16/13 1:22 PM, Tad Borek wrote:
> On 4/16/2013 8:28 AM, David S Meyers CFP wrote:
>> On 2013-04-15 16:45:21 +0000, JoeTaxpayer said:
>>>
>>> "I inherited an IRA, but I am afraid of the market, so I cashed it
>>> out, and will stay in CDs."
>>>
>>> She didn't just sell the stock within the IRA, but closed it out
>>> completely.
>
>
> I'd put inherited IRAs more in the category of spending/saving decisions
> rather than literacy. It's quite common for them to be cashed out - I
> don't have the exact stats but saw some recently, as I recall it was by
> far the majority of beneficiaries who did that.

In one case, it was a brother who inherited $160K from sis who passed.
He had a bit of non-taxed worker comp, and SSI. Instead of the $9K
withdrawal he'd have been able to take each year (whatever STD deduction
+ Exemption added to) the cash-out created a $35K or so tax bill. He was
ill-advised, told that 'inheritance is tax free' when of course the tax
was income tax not inheritance.

I have no issue with beneficiaries who want to treat this like a
windfall and blow it on beer and women, if that's their desire, but this
situation I offer is probably not uncommon.

I have no idea what the stats show. I only know that 'inherited ira from
parent' (with no quotes) leads to me in a google search, and I'm
fielding questions from many in this situation.

If this guy needed the money actually withdrawn, I'd have at least
advised him to split it over two years. He would have saved a chunk by
delaying half just a few months.

[David S Meyers CFP]

On 2013-04-16 11:22:33 +0000, Tad Borek said:

> On 4/16/2013 8:28 AM, David S Meyers CFP wrote:

>> Of course, there's been some talk about doing away with the stretch,
>> too, in the name of finding small and/or more obscure tax hikes that
>> won't raise significant revenue, but which will annoy the crap out of
>> all the people who do plan carefully.
>
> I certainly wouldn't want it changed but if we were to write a tax code
> from scratch, and someone said hey, let's add something in here so
> people can delay income until retirement so they save & accumulate
> more, and therefore spend more during retirement, and spread out the
> tax bill over their lifetime - it would be hard to argue with a
> straight face that a stretch distribution to a non-minor kid falls
> within the policy rationale. Allowing the spouse to treat the IRA as
> his/her own makes sense

I certainly agree - I'd never have added stretch, but taking it away
cannot possibly raise much in the way of revenues.

All this tweaking of the little things just infuriates me. The big
things are rarely discussed or are simply off the table, so we end up
with this kind of thing, not to mention Pease, PEP, and the new one,
IRA/retirement plan caps.

The IRA cap is expected, at best, to bring in $9 billion over 10 years.

I don't have an estimate handy for the elimination of stretch, but it
can hardly be even that big, I think.

[The list of big things is a topic for another day, and a rant for a
different forum, I think]

[Rich Carreiro]

David S Meyers CFP <mi...@meyersmoney.com> writes:

>with this kind of thing, not to mention Pease, PEP, and the new one,
>IRA/retirement plan caps.
>
>The IRA cap is expected, at best, to bring in $9 billion over 10 years.

Which proves that at best it's pure demagoguery and
not any sort of honest attempt to solve anything.
I'll let people more cynical than I (they exist? :)
speculate as to what it is at worst...

--
Rich Carreiro rlc-...@rlcarr.com

[Tad Borek]

On 4/16/2013 1:07 PM, David S Meyers CFP wrote:
> I certainly agree - I'd never have added stretch, but taking it away
> cannot possibly raise much in the way of revenues.
>
> All this tweaking of the little things just infuriates me. The big
> things are rarely discussed or are simply off the table, so we end up
> with this kind of thing, not to mention Pease, PEP, and the new one,
> IRA/retirement plan caps.
>
> The IRA cap is expected, at best, to bring in $9 billion over 10 years.

I saw a figure which seems plausible: that only 0.1% of people would be
affected by a ~$3M cap on IRA/retirement plan accumulation. If that's
close, that isn't something many people need to plan around, unless
there's no inflation adjustment to the cap. If anything, I'm surprised
the proposed cap isn't lower for this first round. It could be really
harsh. Imagine if the annual IRA contribution limit of $5k/year was
translated into a "projected IRA value at retirement" and that was used
as the cap.

But I think they're onto something that makes sense...that in addition
to contribution limits, minimum required distributions, and income
limits on contributions, it's consistent to also have limits on total
IRA/qualified plan accumulation. It's a tax subsidy after all, and most
tax subsidies have limits associated with them.

As I think about it, the non-spouse beneficiary rules could well end up
in the crosshairs someday. David, it could be a big revenue generator
(or "accelerator" - taxes bumped earlier) based on who owns the majority
of IRA/q-plan assets. There's a huge number of tiny accounts, a tiny
number of huge ones. If there's truly a tax benefit to a stretch IRA,
then by extension, there's an equal and opposite revenue benefit to
eliminating that possibility.

-Tad