Easy Street Investing

Readers ask about Roth IRAs, inflation bonds & other topics…

Over the last few weeks, I’ve received a bunch of questions about recent articles on Roth IRAs and inflation-protected bonds as well as a few other topics.

And while I have already shared these answers with my Income Superstars subscribers, I think they bear repeating here in this free column as well …

Let’s start with a question that doesn’t seem related to money at first, but could actually end up posing a big risk to the security of ALL your financial information …

My doctor’s office asked for my Social Security number. Should I give it to them?

If you are participating in Medicare, you will probably need to provide your SSN. Otherwise, it is entirely possible (and advisable) to avoid giving this information to healthcare providers.

I have refused many times before, offering instead to provide my insurance plan number, a phone number and/or the last four digits of my SSN.

In a recent article, you said Treasury Inflation-Protected Securities are composed of two factors — the baseline interest and the inflation adjustment. You indicated that the first part was now 0%, but that the inflation adjustment was 1.38% giving a combined 2.76% rate. Wouldn’t it just be the 1.38% since the other part is zero?

You will actually earn 1.38% for the first six months of ownership if the I-Bonds are purchased between Nov. 1 and April 30. But the Treasury cites a composite rate that is essentially an annualized version of the six-month rate.

The iShares TIPS Bond ETF seeks to track the investment results of an index composed of inflation-protected U.S. Treasury bonds. It’s up 0.7% in 2017.

Please provide additional guidelines on switching from a traditional IRA to a ROTH.

There really isn’t much to it. Most brokerages allow you to do this with a simple form, and would also be happy to walk you through the process over the phone. As I stated in my original article, the biggest issue is going to be the tax liability, and how you pay for it.

My understanding and planning has been based on the terms of most IRA plans requiring individual designated beneficiaries to take required minimum distributions using the life expectancy rules, unless such beneficiaries elect to take distributions using the 5-year rule.

Here’s the simplified deal: Both types of IRAs require distributions to non-spousal heirs based on life expectancies if the original account owner had already begun RMDs.

If RMDs had not begun, the "withdraw all funds by the end of the fifth year" option is also available.

Since Roth IRAs never require RMDs, it is probably more likely that the five-year option will be available. And since Roth IRAs are tax-exempt, the lifetime distribution option is also far more valuable.

Your Roth IRA article failed to mention that, in addition to AGI limitations, there is also an earned income limitation. Most retirees have AGI but no earned income. As a result, we are not allowed to make contributions. Furthermore, there is a yearly penalty on the disallowed contribution. If you claim an excess contribution and withdraw the funds before April 15, the penalty is waived. My guess is a lot of retirees are in the same boat and don’t realize it.

I said, "Young children with jobs all the way up to retirees with earned income can have and fund these accounts."

But yes, it’s a point worth repeating: "Earned income" is different than income for IRA contribution purposes!

More importantly, with April 15 drawing near, your additional information could really help any other reader who made a mistake in 2016.

You say, "When you do the conversion, you will be forced to pay taxes on pre-tax contributions and earnings made in the account. But if you are close to the point of RMDs already, that may not be a big issue." It would have been a big issue for me, because I am taking advantage of Qualified Charitable Distributions to fulfill my RMDs.

Everyone’s situation is going to be different, which is why I said "may."

The basic point was that most people nearing RMD age are going to begin paying taxes on at least some of the money in their accounts whether they convert to a Roth or take distributions.

The best thing to do is carefully consider your own goals and/or consult a tax professional before making any type of decision.

Best wishes,
Nilus Mattive

P.S. In the latest issue of Income Superstars that just went to press, I also issued another brand-new recommendation for the real-money retirement portfolio that I share with readers. If you want to get that idea, just click here and sign-up for a risk-free trial.

LEAVE A COMMENT

We want you to know that we take your questions and comments very seriously. In fact, they directly influence how we operate our Website. While we can't give specific tailored investment advice to you, we will do our best to address your inquiry through a personal response, in our regular issues or dedicated Q&A issues.