60 Minute Finance
Born and raised in Virginia, John passed the CPA exam before graduating from Virginia Commonwealth University and beginning his career at a “Big-8” accounting firm in 1987.
After two years in public accounting, he accepted employment with a client and rose through the ranks in private industry. Desiring to work in a more diversified environment, John started his own accounting practice in 2000 and added financial coaching services in 2013.
John resides in Hanover County, Virginia with his wife and children. He is active in his church, enjoys finishing a good run or workout at the gym, and leads personal finance classes in the community.
In addition to 60 Minute Finance, John is also the owner and president of Riverpine Services, Inc. Riverpine Services, Inc., provides freelance accounting services to a select number of small businesses throughout the region. In 2016, John moved to a part-time roll with Riverpine to focus his attention and energy on his personal financial education efforts.
BS, Accounting, Virginia Commonwealth University
The recommendations provided on 60 Minute Finance are educational in nature and not intended to be specific recommendations for any particular individual. Our goal is to educate and inform our readers and clients of available options, with the ultimate decision being theirs. Please consult the appropriate tax, investment, insurance or financial planning expert before making any final decisions.
If you are still employed with the company throughout the year, and don't own more than 5% of the company, you are not required to take an RMD from that specific 401k account. Other 401k's from earlier employers and any traditional IRA accounts will still require an annual RMD, though.
Of course, you can (if allowed) roll your other 401k's and traditional IRA's into the current employer 401k can avoid RMD's on the entire amount!
Best of luck!
Great question and it’s smart to plan ahead and take advantage of the lower tax brackets.
The strategy you’re describing is commonly called tax gain harvesting. Federal tax law taxes long-term capital gains (LTCG) at a zero rate if your overall taxable income (including the LTCG) is within the 15% tax bracket (now the 12% bracket with the new tax law). It’s too late to take advantage of this strategy for 2017 as the stocks or mutual funds would have to be sold by December 31, 2017.
You don’t provide their expected income for 2018, so I’ll assume it’s the same as 2017 ($15,000).
If they DON’T harvest the gains, their 2018 income tax liability would look something like this (ignoring other possible taxable items like interest, dividends, etc.):
Earned income 15,000
Total income 15,000
Standard Deduction (12,000) (per the new tax law; no personal exemptions allowed)
Taxable income 3,000
Tax Due (10% bracket) 300
If they DO harvest the gains, their 2018 Federal tax liability would look like this (again, ignoring other taxable items):
Earned income 15,000
Total income 31,000
Standard Deduction (12,000)
Taxable income 19,000
The 12% bracket (for an individual) ends at $38,700 of taxable income, therefore, they are solidly within that bracket and the LTCG would be free from any Federal Income Tax. The remaining $3,000 income would be taxed at 10%, or $300, which is the same amount of tax incurred if they didn’t harvest the gains. For no Federal Income Tax costs, they can “step-up” their basis in their holdings!
A few notes:
As they are harvesting gains (instead of losses) in this example, the 30-day wash sale rule doesn’t apply.
Keep in mind that we have not discussed any potential state tax liability, so please consult the laws in your state to determine what, if any, state tax liability may be incurred.
Lastly, with their low tax rates, they should consider funding Roth IRA’s for the year! No current tax savings for doing so but imagine what 60 years of tax-free compounding would do!
Hope this discussion helps. Feel free to contact me if you have additional questions.
Congratulations on receiving such a large inheritance! Although condolences for your loss are also in order, of course.
The key piece of information to answer your question is the amount of your annual expenses, especially if you purchase the house for $950,000. If you start your Social Security next year at 62 (which is another issue worth investigating!), your annual income will be around $53,000 with the pension and SS. Your wife's income will be about the same, although you don't mention her age. Assuming she is also currently 61 and will collect her SS next year, too, your combined incomes will be around $106,000 per year. How does this match up to your expense needs, taking into account the expenses common with home ownership as well as what you'd like to contribute to your daughters graduate school?
Your remaining inheritance of $1,250,000 could generate an additional cash flow of $43,750 (3.5%) to $50,000 (4%) per year, if needed. If this amount, plus your pensions and SS income, isn't sufficient to cover your expenses, including taxes, I'd recommend finding a less expensive housing option. Selling the co-op may be planned as well, and if so, that would reduce the amount of money needed to purchase the new home, leaving more funds available to generate additional cash flow.
Of course, it's also important to maintain an adequate emergency fund, which hopefully you already have outside of the amount you're inheriting.
Best of luck and feel free to contact me if you have any other questions.
Do you like the car you currently have? If so, I’d recommend continuing to drive it. If the $25,000 car is more appealing to you, by all means, sell your car and purchase the brand new car. Keep in mind, though, that the brand new car will most likely depreciate much faster over the next couple of years than your current car.
The issue, in my mind, is not which car to own going forward. It’s the use of a lease, or really, any financing option on a car purchase. Surely that monthly payment could be going to more productive ventures, like paying off other debt, building an emergency fund, or increasing your retirement contributions.
If you do have other non-mortgage debts, you may want to consider selling your current car, buying something much less expensive (but still dependable, of course) and use the extra cash to pay down the debts.
I enjoy a nice car, too, but is it the best use of your equity? If it is, chose the car you’d like to drive long-term and don’t finance it!
Best of luck and feel free to reach out to me if you have any other questions!
Ordinarily, I advise clients with any non-mortgage debt to focus on paying it off before investing for retirement. After all, for most of us, our greatest wealth building tool is our income, so it's important to limit debts that siphon off chunks of our income each month.
That having been said, I feel your pain about the balance of your student loans. Hopefully a large income comes with that large debt! For folks in your situation, it'd recommend contributing to your 401k enough to capture the match, then focus on keeping your lifestyle in check and hammering away on the student loans. Avoiding lifestyle creep as your income increases will free more of your income for debt service.
I'd imagine that this debt will take a few years to clear, thus the reason it would be nice to have some funds invested in the 401k during the process. Trying to do a larger 401k contribution prior to paying off the student loans will just drag the repayment process out even longer! Fight the fight; finish the race; keep the faith! Stay the course and you can rid yourself of the debt and really begin to build wealth.
Best of luck and please reach out if you have any other questions!