Scott Burns' Articles -- Recent and Archived
Q. We are a retired couple, both over 65. Without withdrawing funds from our IRA's, We have a moderate gross income of $50,000 per year, which includes $20,400 Social Security. The taxable amount of the Social Security is about $3,500. Using standard deductions, our Income Tax is approximately $3,000 per year.If we withdraw $2,000 per month from our IRA's, our gross income becomes $74,000. The taxable amount on the Social Security increases to $17,300. Our Income Tax increases to approximately $11,000, an increase of $8,000. This means we are paying an equivalent 33% Tax on the $24,000 IRA funds withdrawn (We are actually paying taxes on an additional $38,000 when we only withdrew $24,000).Is there any way to avoid this "Double Dipping"? It appears that people in our situation should look at withdrawing portions of their IRA's before they start receiving Social Security (depending on income level at that time).
A. Welcome to the IRS Gotcha Club, courtesy of our friends in Congress. Younger people can expect still more nickel and diming that raises effective tax rates on future Social Security benefits.You can avoid the tax in alternate years by making your withdrawals carefully. With a Social Security income of $20,400 a year, what you face amounts to a "tax gauntlet"--- a band of income that you can get through. Once through, you no longer pay additional taxes. The law will tax up to 50 percent or 85 percent of your Social Security income or $10,200 or $17,340. It won't tax more. This means that once you pass the "threshhold" for taxing Social Security, you might as well blast through it, taking the income you intend to spend in the following year. You'll pay regular taxes on it, but you'll have paid the burden on the Social Security income. In the following year, you spend the after tax money that was withdrawn from the IRA.There is another way to avoid the tax that is available to some people. If you have a home mortgage and must withdraw from an IRA account to pay it, pre-paying the mortgage with after-tax money can often reduce your required income to a level that is below the "threshold" amount.Q. In a recent column you provided a table of "The Couch potato versus The Big Bogey" for 1973 forward. It did not give the 75/25 Couch Potato return and I would like to know what those numbers are. Most returns are for 15 years or less which I consider to have been a bull market period.--- T. P., Dallas, Texas
A. The time period was limited to 15 years because the mutual fund databases generally stop at 15 years and many of the indices in wide use today were created within the last 15 years. To get the answer to your question, I used software and data from Dimensional Funds Advisors in Santa Monica, CA. This software allows you to create different portfolios that are re-balanced annually.Combining the S&P 500 Index and the Shearson Lehman Intermediate Bonds Index from 1/73 to 12/95 I found the following results:
- The 50/50 portfolio provided a return of 10.8 percent, compounded, with a standard deviation of 10.5 percent. This portfolio had losses in 4 years, the worst being 10.3 percent in 1974. It's best return was 25.1 percent in 1985.
- The 75/25 portfolio provided a return of 11.4 percent, compounded, with a standard deviation of 13.8 percent. It had losses in 5 years, the worst being 18.4 percent in 1974. It's best return was 31.9 percent in 1995.
- A dollar invested in the 50/50 portfolio would have grown to $10.60 while a dollar in the 75/25 portfolio would have grown to $11.90.
- Starting with the bear market of 73-74, it wasn't until 1980 that the cumulative return of the 75/25 portfolio caught up with the 50/50 portfolio and it didn't lead consistently until 1989. That's one reason I think the 50/50 is more appropriate for retirees while the 75/25 is appropriate for accumulators.
Q. My wife comes from a divorce-ridden family and can't stop thinking about the possibility that we will one day divorce. She believes that my 401(K) and my IRA (begun years ago and fattened by roll-overs) are mine alone forever. (She has her own smaller IRA.) Please explain whether the IRA and 401(K) are simply "property" which will be divided like other joint property, or whether she is right and they are forever tied to that individual. Whether spoken or unspoken, this issue affects most families.---D.K., Dallas, TX
A. Whether 401(k) or IRA assets, they are divisible property. In addition, if one spouse is in a defined benefit pension plan--- the kind where the employer promises to provide a lifetime income equal to a percentage of wages times years of service--- the other spouse can seek a cash settlement for the present value of the plan or "partition" the pension for his or her share.Like most things in divorce, everything is negotiable and can be arranged to fit the circumstances of the divorcing partners.
File Name: 961128TH
Dallas Morning News file date: 11/28/96---THU
Universal Press Syndicate file date: same ©
Dallas Morning News, Universal Press Syndicate, 1996
About scottb
Scott Burns has covered the changing world of personal finance and investments for nearly 40 years. Today, he ranks as one of the five most widely read personal finance writers in the country.
Scott began his career as a newspaper columnist at the Boston Herald in 1977 where he was also the financial editor. Nationally syndicated in 1981 and now distributed by Universal Press, the column appears in newspapers from Boston to Seattle. In 1985 he joined the staff of the Dallas Morning News where his column quickly became one of the most widely read features in the paper. He left the Dallas Morning News in 2006 to become one of the founders of AssetBuilder and its Chief Investment Strategist.
Burns is a graduate of Massachusetts Institute of Technology (1962). He has written four books, including "The Coming Generational Storm" (MIT Press, 2004) coauthored with economist Laurence J. Kotlikoff. His fourth book, also coauthored with Kotlikoff, will be published this spring by Simon & Schuster. "Spend Til' the End" uses consumption smoothing to demonstrate the errors of conventional financial planning.
His business experience includes working as a staffer for a major consulting company and service as a director and audit chairman of a NASDAQ listed manufacturing company. He and his wife divide their time between Dallas and Santa Fe, New Mexico.
