There is so much great information on personal finance forums. I participate on several message boards, including the Bogleheads and White Coat Investor forums. Here are some of the discussions happening around the internet.
1. White Coat Investors Facebook Group: Tax Treatment of 401(k) Withdrawals
Question: A reader on the White Coat Investors Facebook group noticed that 401(k) withdrawals are taxed as ordinary income. He was wondering why capital gains or dividends are not taken into consideration when taxes on withdrawals are calculated.
WSP’s Take: The reader is correct that 401(k) withdrawals are taxed as ordinary income. This includes the initial contribution, any capital gains, as well as dividends. It turns out that if your tax rate at the time of contribution and your tax rate at retirement are the same, then the tax treatment of a traditional 401(k) and a Roth account are roughly equivalent. The tax benefits of a Roth are very clear (you simply don’t pay taxes on capital gains or dividends).
With a 401(k), you get additional tax benefits if you contribute when you are in a high tax bracket and withdraw when you are in a low tax bracket. Your tax benefits are eroded if you contribute when you are in a low tax bracket and withdraw when you are in a high tax bracket.
2. Bogleheads: Elderly Individual Seeking 10% Annual Cash Flow On Investment
Question: Bargainhuntingking is asking a question on behalf of an elderly relative who recently received $100k on the sale of a property. The relative seeks to receive a cash flow of $10,000 per year on this $100,000 investment. The reader doesn’t know if the relative cares about drawing down the principal or leaving a portion of the money to heirs or charity. Family history suggests that his relative could live much longer than the average person. He is asking the Bogleheads community how his relative can achieve his goals of 10% annual cash flow on an investment.
WSP’s Take: The traditional rule on retirement withdrawals is that you should withdraw 4% of assets in order to make the money last 30 years. However, this person wants to withdraw 10% per year. If he does so, the money may not last 20 years, especially if there is a bear market early during the withdrawal period.
If he doesn’t care about leaving any money to heirs or charity, the clearest way to achieve his goals of generating 10% annual cash flow would be to purchase a single premium immediate annuity. This would involve giving away the $100,000 to the annuity seller, who would then provide a steady cash flow to the individual until he or she dies.
To get a rough estimate of what a company would pay for a single premium immediate annuity, I plugged in the reader’s information into ImmediateAnnuities.com. An 80-year-old male from Ohio who put $100,000 into an annuity would receive $989 in monthly income, or $11,868 per year. This would achieve the reader’s objective. Remember that no money is left to heirs or charity in this scenario — if the reader were to die next year, then a lot of the money is “lost”. There are options to guarantee a certain period of premiums, but this would lower the monthly payment.
3. White Coat Investor: HSA When Spouse Has Healthcare FSA?
Question: Gansu911 is getting married in December and his fiance has already elected to contribute to a healthcare FSA. He usually enrolls in a high-deductible health plan and contributes to an HSA. He was wondering whether this would be allowed if the two of them filed jointly on taxes for this year.
WSP’s Take: This question was addressed in a nice post on HSAEdge.com. Unfortunately, even if the fiance enrolls in her own FSA and the reader enrolls in a self-only HSA plan, the benefits of both the FSA and HSA still extend to the whole family. The spouse can use her FSA money to pay for the reader’s healthcare expenses, and the reader can get tax-free withdrawals for eligible healthcare expenses of the spouse. Because of this, it would not be allowed for the reader to enroll in an HSA while the spouse is enrolled in a FSA.
4. White Coat Investors Facebook Group: Rebalancing and Market Timing
Question: A reader on the White Coat Investors Facebook group has noticed that the market has dropped recently. This would make it a good time to rebalance his portfolio. He asks whether it is worthwhile to wait a week or two (or more) to try to rebalance at the time he believes the market will hit bottom.
WSP’s Take: Market drops are reasonable times to rebalance because often an individual’s asset allocation deviates from their desired asset allocation during these times. However, it is unlikely to be a productive endeavor to try to rebalance right at the market low rather than at regular time intervals or at pre-specified deviations from the desired asset allocation. Not only is it very difficult to time the market, but if you were successful in picking a market low, you would need to rebalance your portfolio in the other direction soon thereafter. There are more effective ways to directly time the market (i.e. just trade stocks) than through selective rebalancing.
Wall Street Shares: 5 Articles To Read This Week
- Early Retirement Now: So what, we retired at the peak of the bull market? Here are seven reasons why we’re not yet worried… — Big ERN recently retired and has written extensively on sequence of returns risk in early retirement. He is not concerned that the bull market may end right when he retires.
- The Boss MD: Raising Well Balanced Doctor’s Kids — No one wants their kids to be spoiled.
- White Coat Investor: Ultimate Guide to Student Loan Debt Management for Doctors — A how-to for physicians with student loans, from the White Coat Investor.
- Senior Resident: The Ideal Job — It may be a unicorn, but you should take small steps to get as close to it as possible.
- Physician on FIRE: Mainstream Media Misses the Mark on the FIRE Movement — FIRE is no longer an underground movement, but misconceptions about FIRE are abound.
What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?
Thanks for the mention! Great stuff as always!
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