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Here’s how to report Roth IRA conversions on your taxes

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If you made a Roth individual retirement account conversion in 2022, you may have a more complicated tax return this season, experts say. 

The strategy, which transfers pretax or non-deductible IRA funds to a Roth IRA for future tax-free growth, tends to be more popular during a stock market downturn because you can convert more assets at a lower dollar amount. While the trade-off is upfront taxes, you may have less income by converting lower-value investments.

“You get more bang for your buck,” said Jim Guarino, a certified financial planner and managing director at Baker Newman Noyes in Woburn, Massachusetts. He is also a certified public accountant.

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If you completed a Roth conversion in 2022, you’ll receive Form 1099-R from your custodian, which includes the distribution from your IRA, Guarino said. 

You’ll need to report the transfer on Form 8606 to tell the IRS which portion of your Roth conversion is taxable, he said. However, when there’s a mix of pretax and non-deductible IRA contributions over time, the calculation may be trickier than you expect. (You may have non-deductible contributions in your pretax IRA if you don’t qualify for the full or partial tax break due to income and workplace retirement plan participation.)

“I see a lot of people making a mistake here,” Guarino said. The reason is the so-called “pro-rata rule” which requires you to factor your aggregate pretax IRA funds into the calculation. 

How the pro-rata rule works

JoAnn May, a CFP and CPA with Forest Asset Management in Berwyn, Illinois, said the pro-rata rule is the equivalent of adding cream to your coffee then finding you can’t remove the cream once it’s poured.

“That’s exactly what happens when you mix pretax and non-deductible IRAs,” she said, meaning you can’t simply convert the after-tax portion.

For example, let’s say you have a pretax IRA of $20,000 and you made a non-deductible IRA contribution of $6,000 in 2022.

If you converted the entire $26,000 balance, you would divide $6,000 by $26,000 to calculate the tax-free portion. This means roughly 23% or about $6,000 is tax-free and $20,000 is taxable. 

Alternatively, let’s say you have $1 million across a few IRAs and $100,000, or 10% of the total, is non-deductible contributions. If you converted $30,000, only $3,000 would be non-taxable and $27,000 would be taxable.

Of course, the bigger your pretax IRA balance, the higher percentage of the conversion will be taxable, May said. Alternatively, a larger non-deductible or Roth IRA balance reduces the percentage. 

But here’s the kicker: Taxpayers also use the Form 8606 to report non-deductible IRA contributions every year to establish “basis” or your after-tax balance. 

However, after several years, it’s easy to lose track of basis, even in professional tax software, warned May. “It’s a big problem,” she said. “If you miss it, then you’re basically paying tax on the same money twice.” 

Timing conversions to avoid an ‘unnecessary’ tax bump

With the S&P 500 still down about 14% over the past 12 months as of Jan. 19, you may be eyeing a Roth conversion. But tax experts say you need to know your 2023 income to know the tax consequences, which may be difficult early in the year.

“I recommend waiting until the end of the year,” said Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, noting that income can change from factors like selling a home or year-end mutual fund distributions. 

Typically, he aims to “fill up a lower tax bracket,” without bumping someone into the next one with Roth conversion income.

For example, if a client is in the 12% bracket, Lucas may limit the conversion to avoid spilling into the 22% tier. Otherwise, they’ll pay more on the taxable income in that higher bracket.

“The last thing we want to do is throw someone into an unnecessary tax bracket,” he said. And boosting income may have other consequences, such as reduced eligibility for certain tax breaks or higher Medicare Part B and D premiums.

Guarino from Baker Newman Noyes also crunches the numbers before making Roth conversion decisions, noting that he’s “essentially performing the Form 8606 calculation during the year” to know how much of the Roth conversion will be taxable income.

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What to know as record 8.7% Social Security COLA goes into effect

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As inflation has kept prices high in 2022, Social Security beneficiaries may look forward to a record high cost-of-living adjustment in 2023.

“Your Social Security benefits will increase by 8.7% in 2023 because of a rise in cost of living,” the Social Security Administration states in the annual statements it is currently sending to beneficiaries.

The 8.7% increase will be the highest in 40 years. It is also a significant bump from the 5.9% cost-of-living increase beneficiaries saw in 2022.

The increase is “kind of a double-edged sword,” according to Jim Blair, a former Social Security administrator and co-founder and lead consultant at Premier Social Security Consulting, which educates consumer and financial advisors on the program’s benefits.

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“It’s good for people on Social Security,” Blair said. “It’s not so good for the economy with inflation.”

Social Security benefit checks will reflect the increase starting in January.

The average retiree benefit will go up by $146 per month, to $1,827 in 2023 from $1,681 in 2022, according to the Social Security Administration The average disability benefit will increase by $119 per month, to $1,483 in 2023 from $1,364 in 2022.

What’s more, standard Medicare Part B premiums will go down by about 3% next year to $164.90, a $5.20 decrease from 2022. Medicare Part B covers outpatient medical care including doctors’ visits.

Monthly Part B premium payments are often deducted directly from Social Security checks. Due to the lower 2023 premiums, beneficiaries are poised to see more of the 8.7% increase in their monthly Social Security checks.

“The good news about these letters is people are realizing 100% of the 8.7% lift,” said David Freitag, a financial planning consultant and Social Security expert at MassMutual.

“Of course, the economy is inflated at a frightful rate, but this represents the value of cost-of-living adjusted benefits from Social Security,” Freitag said.

Few other income streams in retirement offer cost-of-living adjustments, he noted.

What to look for in your Social Security statement

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If you’re wondering how much more you stand to see in your checks, the personalized letter from the Social Security Administration will give you a breakdown of what to expect.

That includes your new 2023 monthly benefit amount before deductions.

It will also tell you your 2023 monthly deduction for premiums for Medicare Part B, as well as Medicare Part D, which covers prescription drugs.

The statement will also show your deduction for voluntary tax withholding.

The good news about these letters is people are realizing 100% of the 8.7% lift.

David Freitag

financial planning consultant and Social Security expert at MassMutual

After those deductions, the statement shows how much will be deposited into your bank account in January.

Of note, you do not necessarily have to be receiving Social Security checks now to benefit from the record 2023 increase, Blair noted.

“The good news is you don’t have to apply for benefits to receive the cost-of-living adjustment,” Blair said. “You just have to be age 62 or older.”

When you may pay Medicare premium surcharges

If your income is above a certain amount, you may pay a surcharge called an income related monthly adjustment amount, or IRMAA, on Medicare Parts B and D.

This year, that will be determined by your 2021 tax returns, including your adjusted gross income and tax-exempt interest income. Those two amounts are added together to get your modified adjusted gross income, or MAGI.

In 2023, those IRMAA premium rates kick in if your modified adjusted gross income is $97,000.01 or higher and you filed your tax return as single, head of household, qualifying widow or widower or married filing separately; or $194,000.01 or higher if you are married and filed jointly.

Notably, just one dollar over could put you in a higher bracket.

“It’s important for everyone to make sure that the amount of adjusted gross income that they’re using for the IRMAA surcharges agrees with what they filed on their tax return two years ago,” Freitag said.

If the information does not match, you “absolutely need to file an appeal,” he said.

Because the IRMAA surcharges can be extremely significant, that is an area to watch for errors, Freitag said.

When to appeal your Medicare surcharges

If your income has gone down since your 2021 tax return, you can appeal your IRMAA.

That goes if you have been affected by a life changing event and your modified adjusted gross income has moved down a bracket or below the lowest amounts in the table.

Qualifying life changing events, according to the Social Security Administration, include marriage; divorce or annulment; death of a spouse; you or your spouse reduced your work hours or stopped working altogether; you or your spouse lost income on from property due to a disaster; you or your spouse experienced cessation, termination or reorganization of an employer’s pension plan; or you or your spouse received a settlement from an employer or former employer due to bankruptcy, closure or reorganization.

To report that change, beneficiaries need to fill out Form SSA-44 with appropriate documentation.

How higher benefits could cost you

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As your Social Security income goes up with the 8.7% COLA, that may also push your into a different IRMAA or tax bracket, Freitag noted.

That calls for careful monitoring of your income, he said.

Keep in mind that two years in the future you may get exposed to IRMAA issues if you’re not careful.

In addition, more of your Social Security benefits may be subject to income taxes. Up to 85% of Social Security income may be taxed based on a unique formula that also factors in other income.

It is a good idea to have taxes withheld from Social Security benefits in order to avoid a tax liability when you file your income tax returns, according to Marc Kiner, a CPA and co-founder of Premier Social Security Consulting.

“Do it as soon as you can,” Kiner said of filling out the voluntary withholding request form.

To better gauge how IRMAA or taxes on benefits may affect you going forward, it may help to consult a tax advisor or CPA who can help identify tax-efficient strategies, Freitag said.

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How to save above 401(k) deferral limits with after-tax contributions

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If you’ve already maxed out 401(k) plan contributions for 2022 and you’re eager to save more for retirement, some plans have an under-the-radar option, experts say.

For 2022, you can defer $20,500 into a 401(k), plus an extra $6,500 for investors 50 and older. But the total plan limit is $61,000 per worker, including matches, profit sharing and other deposits. And some plans let you exceed the $20,500 deferral limit with so-called after-tax contributions. 

“It’s definitely something higher-income people may want to consider at the end of the year if they’re looking for places to put additional savings,” said certified financial planner Ashton Lawrence, a partner at Goldfinch Wealth Management in Greenville, South Carolina.

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After-tax versus Roth accounts

After-tax contributions are different than Roth 401(k) plans. While both strategies involve saving money after taxes, there are some key differences.

For 2022, if you’re under 50, you can defer up to $20,500 of your salary into your plan’s regular pretax or Roth 401(k) account. The percentage of plans offering a Roth 401(k) saving option has surged over the past decade.

However, some plans offer additional after-tax contributions to your traditional 401(k), which allows you to save more than the $20,500 cap. For example, if you defer $20,500 and your employer kicks in $8,000 for matches and profit-sharing, you may save another $32,500 before hitting the $61,000 plan limit for 2022.

While the number of plans offering after-tax 401(k) contributions has been rising, it’s still less common among smaller companies, according to an annual survey from the Plan Sponsor Council of America.

In 2021, roughly 21% of company plans offered after-tax 401(k) contributions, compared to about 20% of plans in 2020, the survey found. And almost 42% of employers of 5,000 or more provided the option in 2021, up from about 38% in 2020.

Despite the uptick, after-tax 401(k) participation declined in 2021, dropping to about 10% from nearly 13% the previous year, the same survey showed.

Leverage the ‘mega backdoor Roth’ strategy

Once you’ve made after-tax contributions, the plan may allow what’s known as a “mega backdoor Roth” strategy, which includes paying levies on growth and moving the funds for future tax-free growth.

“That’s a nice way to go ahead and start boosting that tax-free money for those future years,” Lawrence said.

Depending on the plan rules, you may transfer the money to a Roth 401(k) within the plan or to a separate Roth individual retirement account, explained Dan Galli, a CFP and owner at Daniel J. Galli & Associates in Norwell, Massachusetts. And with many details to consider, working with an advisor may be worthwhile.

However, “there’s a fair number of professionals — from CPAs, attorneys, wealth managers and financial planners — who don’t understand or are not familiar with in-plan Roth [401(k)] rollovers,” he said.  

There’s a fair number of professionals — from CPAs, attorneys, wealth managers and financial planners — who don’t understand or are not familiar with in-plan Roth [401(k)] rollovers.

Dan Galli

Owner at Daniel J. Galli & Associates

While the “knee-jerk reaction” is to roll after-tax 401(k) funds out of the plan into a Roth IRA, investors need to “know the rules” and possible downsides, such as losing access to institutional pricing and funds, Galli said.

“There’s no right or wrong,” he said. “It’s just understanding the advantages, and my impression is most people don’t understand that you can do this all within the 401(k).”

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Business

Government bond yields soar as markets weigh threat of a recession

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Bond yields jumped this week after another major rate hike from the Federal Reserve, flashing a warning of market distress.

The policy-sensitive 2-year Treasury yield on Friday climbed to 4.266%, notching a 15-year high, and the benchmark 10-year Treasury hit 3.829%, the highest in 11 years.

Soaring yields come as the markets weigh the effects of the Fed’s policy decisions, with the Dow Jones Industrial Average dropping nearly 600 points into bear market territory, tumbling to a fresh low for 2022. 

The yield curve inversion, occurring when shorter-term government bonds have higher yields than long-term bonds, is one indicator of a possible future recession.  

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“Higher bond yields are bad news for the stock market and its investors,” said certified financial planner Paul Winter, owner of Five Seasons Financial Planning in Salt Lake City.

Higher bond yields create more competition for funds that may otherwise go into the stock market, Winter said, and with higher Treasury yields used in the calculation to assess stocks, analysts may reduce future expected cash flows.

What’s more, it may be less attractive for companies to issue bonds for stock buybacks, which is a way for profitable companies to return cash to shareholders, Winter said.

Fed hikes ‘somewhat’ contribute to higher bond yields

Market interest rates and bond prices typically move in opposite directions, which means higher rates cause bond values to fall. There’s also an inverse relationship between bond prices and yields, which rise as bond values drop.

Fed rate hikes have somewhat contributed to higher bond yields, Winter said, with the impact varying across the Treasury yield curve.

 “The farther you move out on the yield curve and the more you go down in credit quality, the less Fed rate hikes affect interest rates,” he said.

That’s a big reason for the inverted yield curve this year, with 2-year yields rising more dramatically than 10-year or 30-year yields, he said.  

Review stock and bond allocations

It’s a good time to revisit your portfolio’s diversification to see if changes are needed, such as realigning assets to match your risk tolerance, said Jon Ulin, a CFP and CEO of Ulin & Co. Wealth Management in Boca Raton, Florida.

On the bond side, advisors watch so-called duration, or measuring bonds’ sensitivity to interest rate changes. Expressed in years, duration factors in the coupon, time to maturity and yield paid through the term. 

Above all, investors must remain disciplined and patient, as always, but more specifically if they believe rates will continue to rise.

Paul Winter

owner of Five Seasons Financial Planning

While clients welcome higher bond yields, Ulin suggests keeping durations short and minimizing exposure to long-term bonds as rates climb.

“Duration risk may take a bite out of your savings over the next year regardless of the sector or credit quality,” he said.

Winter suggests tilting stock allocations toward “value and quality,” typically trading for less than the asset is worth, over growth stocks that may be expected to provide above-average returns. Often, value investors are seeking undervalued companies that are expected to appreciate over time. 

“Above all, investors must remain disciplined and patient, as always, but more specifically if they believe rates will continue to rise,” he added.

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Millennials’ average net worth doubled during pandemic, report finds

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Covid-19 relief and record-low interest rates boosted many Americans’ finances during the pandemic. That has been especially true for millennials, who have on average built significant wealth.

Millennials, born between 1981 and 1996, have more than doubled their total net worth, reaching $9.38 trillion in the first quarter of 2022, up from $4.55 trillion two years prior, according to a MagnifyMoney report.

And millennials’ average net worth — defined as total assets minus total liabilities — also increased twofold during the same period, jumping to $127,793 from $62,758, the report found.

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However, the report finds the average millennial net worth still lags behind older generations, with Gen Xers and baby boomers reaching an average of $647,619 and $1,021,264, respectively.

Real estate more than a third of millennial wealth

With soaring home values over the past couple of years, it’s not surprising that real estate, including primary homes and other property, is more than one-third of millennials’ total assets. 

The median U.S. home sales price was $329,000 during the first quarter of 2020, and the number jumped to nearly $429,000 two years later, according to Federal Reserve data. 

However, millennials who recently bought homes may have significant debt, the report found. Nearly 63% of millennial debt is home mortgages, followed by almost 36% in consumer credit.

I would encourage millennials to focus more on their cash flow than net worth in this stage of their careers.

DJ Hunt

Senior financial advisor with Moisand Fitzgerald Tamayo

“I would encourage millennials to focus more on their cash flow than net worth in this stage of their careers,” said certified financial planner DJ Hunt, senior financial advisor with Moisand Fitzgerald Tamayo in Melbourne, Florida.

He said millennials may be “losing financial ground in the long run” if monthly mortgage payments prevent them from fully funding their retirement accounts.

Of course, the definition of a fully funded retirement account varies by individual, Hunt said.

While older millennials in their early 40s should aim to max out 401(k) contributions at $20,500 in 2022, younger workers should deposit enough to receive their company match, striving for up to 15% of gross income, he said.

Diversification is ‘name of the game’

Although owning and living in your home serves an important purpose, diversification is “the name of the game,” especially for younger investors with more time to build assets, said Eric Roberge, a CFP and CEO of Beyond Your Hammock in Boston.

If most of your wealth is home equity, it may be wise to focus on building retirement plans or a brokerage account, he said, suggesting 20% to 25% of gross income annually for long-term investments. 

“For many people, a diversified portfolio will likely provide higher returns in the long-term,” he said.

Applying for a home equity line of credit

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If you’re sitting on wealth in your home, it may be worthwhile to apply for a home equity line of credit, or HELOC, allowing you to borrow from a pool of money over time, if needed. 

“It is always a good idea to have a HELOC in place if you have substantial equity in your home,” said Ted Haley, a CFP, president and CEO of Advanced Wealth Management in Portland, Oregon.

HELOCs are typically inexpensive to set up, with lower interest rates than credit cards, and there’s no added cost until you use it. While higher interest rates may impact how much and when to borrow, it’s still a “good idea” to have one, he said.

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Experts answer three tricky questions about Series I bonds

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The demand for Series I bonds, an inflation-protected and nearly risk-free asset, has skyrocketed as investors seek refuge from soaring prices and stock market volatility.

While annual inflation rose by 8.6% in May — the highest rate in more than four decades, according to the U.S. Department of Labor — I bonds are currently paying a 9.62% annual rate through October.

That’s especially attractive after a rough six months for the S&P 500, which plummeted by more than 20% since January, capping its worst six-month start to a year since 1970.

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Indeed, since the annual I bond rate jumped to 7.12% in November, 1.85 million new savings bond accounts have opened through June 24, according to Treasury officials. 

“I bonds are a wonderful tool for both cash reserves and investment portfolios,” said certified financial planner Byrke Sestok, co-owner of Rightirement Wealth Partners in Harrison, New York.

Backed by the U.S. government, I bonds won’t lose value. And if you’re comfortable not touching the money for 12 months, the current rate “dwarfs” other options for cash reserves, he said.

Still, there are nuances to consider before piling money into these assets. Here are answers to some of the trickier I bond questions. 

1. How does the interest rate on I bonds work?

I bond returns have two parts: a fixed rate and a variable rate, which changes every six months based on the consumer price index. The U.S. Department of the Treasury announces new rates on the first business day of May and November every year. 

With inflation rising over the past year, the variable rates have jumped, increasing to an 7.12% annual rate in November and 9.62% in May. However, the initial six-month rate window depends on your purchase date.  

For example, if you bought I bonds on July 1, you’ll receive the 9.62% annual rate through Dec. 31, 2022. After that, you’ll begin earning the annual rate announced in November.

2. How do I pay taxes on I bond interest?

While I bond interest avoids state and local levies, you’re still on the hook for federal taxes.

There are two options for covering the bill: reporting interest every year on your tax return or deferring until you redeem the I bond.

While most people defer, the choice depends on several factors, explained Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

All of these decisions come back to the ultimate purpose of this investment.

Tommy Lucas

Financial advisor at Moisand Fitzgerald Tamayo

For example, if you opt to pay taxes on your I bond interest every year before receiving the proceeds, you’ll need another source of income to cover those levies.

However, if you’ve earmarked those funds to pay for education expenses, the interest is tax-exempt, so paying levies annually doesn’t make sense, he said.    

“All of these decisions come back to the ultimate purpose of this investment,” Lucas added.

3. What happens to my I bonds if I die?

When you create a TreasuryDirect account to buy I bonds, it’s important to add what’s known as a beneficiary designation, naming who inherits the assets if you pass away. 

Without this designation, it becomes more challenging for loved ones to collect the I bonds, and may require the time and expense of going through probate court, depending on the I bond amount, Sestok explained.   

“Personally, I make sure that my clients do it correctly in the first place,” he said, explaining how adding beneficiaries upfront may avoid headaches later.

However, if you set up an account without a beneficiary, you can add one online by following the steps outlined here at TreasuryDirect. You can call support with questions, but they are currently experiencing “higher than usual call volumes,” according to the website.

With a named beneficiary, I bond heirs can continue holding the asset, cash it in or have it reissued in their name, according to Treasury Direct. 

The accrued interest up to the date of death can be added to the original owner’s final tax return or the heir’s filing. Either way, the beneficiary can decide whether to keep deferring interest or not, Lucas said.

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IRS boosts mileage rate deductions as gas prices soar to $5 a gallon

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Guy Benhamou sends a picture of gas prices to friends while pumping gas at an Exxon Mobil gas station on June 9, 2022 in Houston.

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If you’re self-employed or own a small business, you may soon be eligible for a little relief from soaring gas prices.

Starting on July 1, the standard mileage rate — used to deduct eligible business trips in a vehicle on tax returns — increases by 4 cents to 62.5 cents per mile, according to the IRS. The new rate applies to trips during the second half of 2022.

The rate for medical trips or active-duty military moving will also increase by 4 cents, allowing eligible filers to claim 22 cents per mile. But the rate for charitable organizations remains unchanged at 14 cents.

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“The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices,” IRS Commissioner Chuck Rettig said in a statement.

The change comes as gas prices continue to hit records, swelling to more than $5 per gallon nationally, sparked by an increased demand and shortages partially caused by the war in Ukraine.

Annual inflation grew by 8.6% in May, the highest increase since December 1981, according to the U.S. Bureau of Labor Statistics, with surging fuel costs significantly contributing to the gain. 

Midyear mileage changes are ‘unusual’

“It is unusual for the IRS to have a midyear change in the standard mileage rate,” said certified financial planner Tricia Rosen, principal at Access Financial Planning in Andover, Massachusetts.

There’s only been a half-yearly shift three times since 2008, she explained, with the most recent one in 2011. Each one happened after a spike in gas prices, she said.

It is unusual for the IRS to have a midyear change in the standard mileage rate.

Tricia Rosen

Principal at Access Financial Planning

To claim the deduction, keep good driving records

While it’s always important to track mileage, including travel dates, it will be even more critical in 2022 to make sure the correct rates apply to each trip, Rosen said. 

The standard mileage rate isn’t mandatory, according to the IRS. Taxpayers also have the option to calculate actual costs, which involves deducting a percentage of the vehicles’ total expenses. But either way, you’ll need detailed record-keeping.

“The IRS wants to see a logbook of business, medical and personal miles in order to prove that you are entitled to the deduction,” said Laurette Dearden, a CFP and CPA at the firm in her name in Laurel, Maryland. 

You’ll need to show the beginning and ending mileage, the business or medical purpose for the trip and the date in your logbook. But realistically, very few people keep these kinds of records, she said.

However, you can use mobile apps to automatically track mileage, which may make it easier at tax time, she suggests.

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Worried about a recession? Here’s how to prepare your portfolio

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“We all understand that markets go through cycles and recession is part of the cycle that we may be facing,” said certified financial planner Elliot Herman, partner at PRW Wealth Management in Quincy, Massachusetts.

However, since no one can predict if and when a downturn will occur, he pushes for clients to be proactive with asset allocations.

Diversify your portfolio

Diversification is critical when preparing for a possible economic recession, said Anthony Watson, a CFP and founder and president of Thrive Retirement Specialists in Dearborn, Michigan.

You can eliminate company-specific risk by opting for funds rather than individual stocks because you’re less likely to feel a company going bankrupt within an exchange-traded fund of 4,000 others, he said.

Value stocks tend to outperform growth stocks going into a recession.

Anthony Watson

Founder and president of Thrive Retirement Specialists

He suggests checking your mix of growth stocks, which are generally expected to provide above-average returns, and value stocks, typically trading for less than the asset is worth.     

“Value stocks tend to outperform growth stocks going into a recession,” Watson explained.

International exposure is also important, and many investors default to 100% domestic assets for stock allocations, he added. While the U.S. Federal Reserve is aggressively fighting inflation, strategies from other central banks may trigger other growth trajectories.

Bond allocations

Since market interest rates and bond prices typically move in opposite directions, the Fed’s rate hikes have sunk bond values. The benchmark 10-year Treasury, which rises when bond prices fall, reached 3.1% on Thursday, the highest yield since 2018. 

But despite slumping prices, bonds are still a key part of your portfolio, Watson said. If stocks plummet heading into a recession, interest rates may also decrease, allowing bond prices to recover, which can offset stock losses.

“Over time, that negative correlation tends to show itself,” he said. “It’s not necessarily day to day.”

Advisors also consider duration, which measures a bond’s sensitivity to interest rate changes based on the coupon, time to maturity and yield paid through the term. Generally, the longer a bond’s duration, the more likely it may be affected by rising interest rates.

“Higher-yielding bonds with shorter maturities are attractive now, and we have kept our fixed income in this area,” Herman from PRW Wealth Management added.

Cash reserves

Amid high inflation and low savings account yields, it’s become less attractive to hold cash. However, retirees still need a cash buffer to avoid what’s known as the “sequence of returns” risk.

You need to pay attention to when you’re selling assets and taking withdrawals, as it may cause long-term harm to your portfolio. “That is how you fall prey to the negative sequence of returns, which will eat your retirement alive,” Watson said.

However, retirees may avoid tapping their nest egg during periods of deep losses with a significant cash buffer and access to a home equity line of credit, he added.

Of course, the exact amount needed may depend on monthly expenses and other sources of income, such as Social Security or a pension. 

From 1945 to 2009, the average recession lasted 11 months, according to the National Bureau of Economic Research, the official documenter of economic cycles. But there’s no guarantee a future downturn won’t be longer.

Cash reserves are also important for investors in the “accumulation phase,” with a longer timeline before retirement, said Catherine Valega, a CFP and wealth consultant at Green Bee Advisory in Winchester, Massachusetts.

I do tend to be more conservative than than many because I have seen three to six months in emergency expenses, and I don’t think that’s enough.

Catherine Valega

Wealth consultant at Green Bee Advisory

“People really need to make sure that they have sufficient emergency savings,” she said, suggesting 12 months to 24 months of expenses in savings to prepare for potential layoffs.

“I do tend to be more conservative than many because I have seen three to six months in emergency expenses, and I don’t think that’s enough.”

With extra savings, there’s more time to strategize your next career move after a job loss, rather than feeling pressure to accept your first job offer to cover the bills.

“If you have enough in liquid emergency savings, you are providing yourself with more options,” she said.

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Business

What to do if you can’t make a required minimum distribution at Vanguard

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Vanguard investors have been grappling with partial website outages over the past several days that have blocked some customers from trade confirmations, certain statements and forms.

These interruptions may cause problems for those making year-end transactions, such as required minimum distributions, as there’s a 50% penalty for missing the deadline. 

“People are frustrated,” said Dan Wiener, co-editor of The Independent Adviser for Vanguard Investors. “When you go to look for information, it’s unavailable.”

This Friday, Dec. 31, marks the 2021 deadline for many moves, such as RMDs, some retirement plan contributions, tax-loss harvesting and more.

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However, as customers log in to make year-end transactions or check mutual fund payouts, many are missing information and struggling to reach phone support.

“This has to be the worst week of the year for this to happen,” Wiener added.

“Vanguard has been made aware of a service interruption involving a third-party mailing and check processing vendor,” a company spokesperson said in a statement, explaining clients may experience delayed mailings or be unable to access certain statements, confirmations and forms. 

“Our teams have been working on this issue around the clock, and our client service representatives are available to help clients who require immediate assistance,” the company said. 

There have been dozens of reported Vanguard outages over the past 24 hours, according to Downdetector, a website tracking real-time service issues.

“There’s nothing you can do at this point except wait on the phone,” said Wiener.

What happens if you miss the deadline for RMDs

It may be nerve-wracking to miss the year-end deadline for RMDs. However, it may still be possible to avoid the 50% penalty by fixing the mistake and applying for a penalty waiver, according to the IRS.

The first step is taking the correct RMD as soon as possible from each account. Then you can file Form 5329 to ask for penalty relief.

You can follow line-by-line instructions for Form 5329 here, or work with a tax professional to avoid mistakes.

The IRS also suggests including a brief letter of explanation, covering your “reasonable error” and steps taken to “remedy the shortfall.”

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US

U.S experiments with guaranteed income

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New York City housing advocates and tenants march to demand Gov. Andrew Cuomo cancel rent amid the pandemic on Oct. 10, 2020.

Andrew Lichtenstein | Corbis News | Getty Images

The new federal coronavirus relief bill that’s poised to be approved on Capitol Hill could put unprecedented sums of money into the hands of American families.

That includes new stimulus checks of up to $1,400 for adults and their dependents, as well as up to $300 per month per child through an enhanced child tax credit.

This week, some Democratic senators upped the ante, and called for recurring stimulus checks and indefinite expansion of unemployment benefits for the duration of the pandemic.

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To some experts, the move shows the idea of guaranteed income, where a certain floor of money is provided to a targeted set of people, could be gaining momentum in the U.S.

The idea of direct checks to Americans has become more popular. Former Democratic presidential candidate Andrew Yang brought national attention to the concept when he proposed direct payments to individuals on the debate stage in 2019.

Around that time, cities like Jackson, Mississippi, and Stockton, California, started running tests to see exactly how these kinds of programs could work.

Now, even more places are embracing the concept, with 42 cities having signed on to Mayors for a Guaranteed Income, a program that helps them to follow Stockton’s lead and run their own pilots.

Those developments come as the coronavirus has further exposed the economy’s flaws, particularly with regard to income inequality, according to Amy Castro Baker, assistant professor at the University of Pennsylvania’s School of Social Policy and Practice. She is also working as a co-principal investigator of the Stockton Economic Empowerment Demonstration, or SEED.

“It has pulled the curtain back on the fact that most communities and most households, especially working-class households, have not recovered from the wealth loss of the Great Recession,” Baker said.

Now, the pandemic has exacerbated that situation for a lot of individuals and families. The Pew Research Center recently found that 1 in 10 Americans say they will never recover from the current crisis.

“Something is broken,” Baker said.

‘Give families the support that they need’

Aisha Nyandoro, founder of Magnolia Mother’s Trust

D’Artagnan Winford

Springboard to Opportunities, a Jackson, Mississippi-based organization that helps connect families who live in affordable housing to resources to help improve their lives, has witnessed the devastation Covid-19 has brought on the community.

“It’s going to take years, if not a generation, for families to get back to that foothold that they had,” said Aisha Nyandoro, CEO of Springboard.

Nyandoro is also the founder of Magnolia’s Mother’s Trust, a program that provides African-American mothers who are living in extreme poverty in the city with $1,000 per month for a year.

In 2018, the trust ran its first one-year program with 20 mothers. Magnolia finished its second round of $1,000 payments to 110 mothers last month. Now, the program is preparing to launch a third program for about 100 mothers.

Preliminary research shows the program has helped 40% of participants to avoid borrowing money. Meanwhile, 27% were more likely to go a doctor when necessary and 20% were more likely to have children performing above their grade levels in school.

“You can trust Black moms to do what is they need for their families,” Nyandoro said of the results. “We don’t have to have all of these layers of bureaucracy in order to just give families the support that they need.”

$500 per month as a ‘financial vaccine’

Michael Tubbs, former mayor of Stockton, California.

Nick Otto | AFP | Getty Images

This week, Stockton’s SEED program also released the preliminary results from its program, which started in 2019. It gave 125 of the city’s residents $500 per month for 24 months.

The results showed that program participants were twice as likely to find full-time work compared to people who were not part of it. Furthermore, participants also said they were better able to handle emergency expenses and saw improvements in their physical and mental health.

The money was mostly used for food, sales and merchandise such as home goods or clothes, utilities and car costs, according to the data. Alcohol and tobacco represented less than 1% of the spending.

“What stuck out to me was how right we were when we talked about how no $500 would replace work, but allow people who choose to do so to work more stable jobs,” said Michael Tubbs, founder of Mayors for a Guaranteed Income and former mayor of Stockton.

The data released this week show the effects of the first year of the program. Full results due in 2022 will show how the program impacted participants during the pandemic.

“We know that the $500 acted as a financial vaccine for folks who received it,” Tubbs said.

“I’m sure their outcomes during Covid-19 will be far better, sadly, than folks who weren’t able to be part of the program.”

Guaranteed income vs. universal basic income

A sign supporting Democratic presidential candidate Andrew Yang’s plan for a $1,000 monthly universal basic income at a May 14, 2019, rally in New York.

Drew Angerer | Getty Images

Both Nyandoro and Tubbs hope to see the concept of guaranteed income embraced on a federal level.

To be sure, these kinds of policies have attracted fierce criticism as well as support.

Baker remembers how people told her she was crazy when she first started working with the Stockton project.

“I was told I was risking my career as a researcher,” Baker said. “The amount of pushback we got was unlike anything I’ve ever experienced in my career.”

Now, the pandemic has only shed light on the urgent need for these kinds of programs, Baker said.

Mayors are acting first because they don’t have the luxury of time, she said. But there could be bipartisan interest in providing more aid to families on the federal level.

Yet it’s still unclear whether that would be in the form of guaranteed income or universal basic income, according to Baker.

Universal basic income, whereby everyone receives a certain amount of money, has its share of critics.

One of the problems is that the support based for universal basic income is divided, said Daron Acemoglu, institute professor at Massachusetts Institute of Technology’s department of economics.

Some want substantial universal basic income on top of the government aid programs that already exist. Meanwhile, others want to eliminate those benefits in favor of flat payments to everyone.

“That inconsistency, I think, is dangerous,” Acemoglu said.

To date, the experiments taking place in the U.S. are guaranteed income. The advantages of those is that they are targeted, and therefore cost less.

“The world has changed,” Acemoglu said. “We haven’t updated our safety net, fiscal policy.”

Before a national policy is adopted, more testing should be done, he said.

“I think we need a lot more knowledge about what works, what will be effective, what will help poor families most effectively, so experimentation is great,” Acemoglu said.

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