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Investing Blog Roundup: the Hottest (also Safest and Most Boring) Investment

Housekeeping note: there will be no article this upcoming Monday (11/27), as I’ll be taking a few days off for Thanksgiving. I hope you all enjoy the holiday.

Based on my email inbox as well as discussions at last month’s Bogleheads Conference, Treasury Inflation-Protected Securities (TIPS) are the hottest investment topic right now. There’s something inherently funny (to me) about the safest, most boring investment being the current “hot” trend. But as John Rekenthaler notes, high TIPS yields are a tremendous boon for retirees or near-retirees.

Other Recommended Reading

Thanks for reading!

November 20, 2023

2024 Tax Brackets, Standard Deduction, and Other Changes

The IRS recently published the annual inflation updates for 2024. If you have questions about a particular amount that I do not mention here, you can likely find it in the official IRS announcements:

Single 2024 Tax Brackets

Taxable Income
 Tax Bracket:
$0-$11,600 10%
$11,600-$47,150 12%
$47,150-$100,525 22%
$100,525-$191,950 24%
$191,950-$243,725 32%
$243,725-$609,350 35%
$609,350+ 37%

 

Married Filing Jointly 2024 Tax Brackets

Taxable Income
 Tax Bracket:
$0-$23,200 10%
$23,200-$94,300 12%
$94,300-$201,050 22%
$201,050-$383,900 24%
$383,900-$487,450 32%
$487,450-$731,200 35%
$731,200+ 37%

 

Head of Household 2024 Tax Brackets

Taxable Income
 Tax Bracket:
$0-$16,550 10%
$16,550-$63,100 12%
$63,100-$100,500 22%
$100,500-$191,950 24%
$191,950-$243,700 32%
$243,700-$609,350 35%
$609,350+ 37%

 

Married Filing Separately 2024 Tax Brackets

Taxable Income
 Marginal Tax Rate:
$0-$11,600 10%
$11,600-$47,150 12%
$47,150-$100,525 22%
$100,525-$191,950 24%
$191,950-$243,725 32%
$243,725-$365,600 35%
$365,600+ 37%

 

Standard Deduction Amounts

The 2024 standard deduction amounts are as follows:

  • Single or married filing separately: $14,600
  • Married filing jointly: $29,200
  • Head of household: $21,900

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,550 for each married taxpayer or $1,950 for unmarried taxpayers.

IRA Contribution Limits

The contribution limit for Roth IRA and traditional IRA accounts is increased to $7,000.

The catch-up contribution limit for people age 50 is still $1,000.

401(k), 403(b), 457(b) Contribution Limits

The salary deferral limit for 401(k) and other similar plans is increased to $23,000.

The catch-up contribution limit for 401(k) and other similar plans for people age 50 and over remains at $7,500.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a solo 401(k)) is increased to $69,000.

Health Savings Account Contribution Limits

For 2024, the maximum HSA contribution for somebody with self-only coverage under a high deductible health plan is $4,150. The limit for somebody with family coverage under such a plan is $8,300.

The HSA catch-up contribution limit for people age 55 and over is not inflation adjusted, so it remains at $1,000.

Capital Gains and Qualified Dividends

For 2024, long-term capital gains and qualified dividends face the following tax rates:

  • 0% tax rate if they fall below $94,050 of taxable income if married filing jointly, $63,000 if head of household, or $47,025 if filing as single or married filing separately.
  • 15% tax rate if they fall above the 0% threshold but below $583,750 if married filing jointly, $551,350 if head of household, $518,900 if single, or $291,850 if married filing separately.
  • 20% tax rate if they fall above the 15% threshold.

Alternative Minimum Tax (AMT)

The AMT exemption amount is increased to:

  • $85,700 for single people and people filing as head of household,
  • $133,300 for married people filing jointly, and
  • $66,650 for married people filing separately.

Annual Gift Tax Exclusion

For 2024 the annual exclusion for gifts will be $18,000.

Estate Tax

The estate tax exclusion is increased to $13,610,000 per decedent.

Pass-Through Business Income

With respect to the 20% deduction for qualified pass-through income, for 2024, the threshold amount at which the “specified service trade or business” phaseout and the wage (or wage+property) limitations begin to kick in will be $383,900 for married taxpayers filing jointly and $191,950 for single taxpayers, people filing as head of household, and for married people filing separately.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less
Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"
November 13, 2023

Investing Blog Roundup: “We Need to Talk About Your Retirement Spending”

One of the most important messages of my recent book More Than Enough is the idea that smaller gifts made to loved ones earlier in life can be dramatically more impactful than large inheritances left later. This week Christine Benz shared exactly such a story from her own life. Benz also questions the idea that spending at an extremely low rate from a retirement portfolio should really be a badge of honor, as it’s so often treated in the personal finance world.

Other Recommended Reading

Thanks for reading!

November 6, 2023

Asset Allocation Isn’t Magic

Asset allocation is a dial that you can use to adjust the risk and expected return of the portfolio up or down. And, for the most part, that’s it. Anybody who expects more than that — anybody who expects any magic (additional return without additional risk, or a reduction in risk without a corresponding reduction in expected return) from clever asset allocation — is likely to be disappointed.

Let’s use PortfolioVisualizer’s “backtest asset allocation” tool to show you what I mean. (Note that their “backtest portfolio” tool is also of interest, but it requires you to use specific funds, which often leads to a shorter period of data available.)

Let’s start with a basic Bogleheads-style “3-fund portfolio” of 40% total US stock market, 20% total international stock market, and 40% total US bond market.

Here’s what happens when we substitute 20% of the total US stock market allocation with 20% REITs. (So now it’s 20% total US stock market, 20% international stocks, 20% REITs, 40% total US bond market.)

(Portfolio Visualizer link here.)

This is for the period Jan 1994 – Sept 2023 (because January 1994 is the earliest date for which Portfolio Visualizer has REIT data).

When I look at those two lines, the thing I overwhelmingly notice is how similar they are. Are they exactly the same? No. But boy they’re close. (And frankly this isn’t super surprising. We replaced stocks with stocks.)

No magic.

What if we use small-cap value stocks?

Here’s what happens when we substitute half of the total US stock market holding with 20% US small-cap value stocks, and then also move 1% from each of those two US stock categories into the bond fund, in order to adjust for the fact that small-cap value stocks are slightly riskier. (So now the portfolio is 19% total US stock market, 20% international stocks, 19% US small-cap value stocks, 42% total US bond market.)

(Portfolio Visualizer link here.)

This is for the period Jan 1987 – Sept 2023 (because January 1987 is the first period for which Portfolio Visualizer has data for total US bond market). Again, they’re very similar. If either portfolio is suitable for somebody, then the other portfolio would clearly be suitable also.

No magic.

What happens if we change the bonds? The chart below uses intermediate-term Treasuries instead of the total US bond market. And because Treasuries are slightly safer than a total bond fund, we’re adjusting the overall stock allocation up by 2% to keep roughly the same overall risk level. (So now the portfolio is 42% US stock market, 20% international stocks, and 38% intermediate-term Treasuries.)

(Portfolio Visualizer link here.)

This is again for Jan 1987 – Sept 2023, because January 1987 is the first period for which Portfolio Visualizer has data for total US bond market.

Again, nothing magical happening here. They’re so, so similar.

What about short-term Treasuries? Below is the chart if we use 43% total US stock market, 20% international stocks, and 37% short-term Treasuries. (Again bumping up the overall stock allocation ever so slightly, relative to the portfolio with intermediate-term Treasuries, to account for the fact that short-term Treasuries are a bit safer than intermediate-term Treasuries.)

(Portfolio Visualizer link here.)

This is again for Jan 1987 – Sept 2023, because January 1987 is the first period for which Portfolio Visualizer has data for total US bond market.

Overall, same conclusion.

Let’s do one last comparison. This time we’re using short-term Treasuries and a tilt toward small-cap/value. (The “comparison” portfolio is 21% total US stock market, 20% small-cap value, 20% international, 39% short-term Treasuries.)

(Portfolio Visualizer link here.)

I truly cannot imagine getting excited about the difference between the two lines on any one of these charts.

Admittedly, these were just comparison portfolios I came up with in a few minutes. You can test different portfolios for yourself. You could look at different periods. Some portfolios will look better than others.

But between two reasonable portfolios with similar overall risk levels, the return will generally be similar as well. Yes, one portfolio will always come out a bit ahead, but you can see periods where the other portfolio was ahead instead.

This is not to say that asset allocation doesn’t matter. But, at least in my opinion, it’s probably not worth spending a tremendous amount of time on — other than trying to figure out what overall risk level is right for you. Once you know that, there are plenty of different ways to get there. (I usually vote for whatever is simplest.)

And I would enthusiastically encourage you not to rely on any magic from having a clever asset allocation. (Asset allocation is a fruit salad, not a cake.)

October 30, 2023

Investing Blog Roundup: Spending Volatility in Retirement

If you’ve read about retirement planning at all, you’ve probably read an article discussing why low initial spending rates from savings are prudent, due to the facts that we don’t know how long we’ll live and we don’t know what investment returns we’ll get.

A point I’ve been trying to hammer home in my writing over the last year is that there’s a third reason why a low initial spending rate can be a good idea: spending in retirement isn’t entirely within our control, and a low baseline level of spending gives us more “wiggle room.”

T Rowe Price recently published a study that looks at the degree of spending fluctuation within households throughout retirement, as well as the sources of that spending fluctuation. (One point that will surprise many people: fluctuations in housing costs, rather than healthcare, are the primary source of spending variability.)

Other Recommended Reading

Thanks for reading!

October 23, 2023

Can an IRA Be Used to Buy an Annuity?

A reader writes in, asking:

“I’ve read numerous articles about the benefits of purchasing a SPIA with part of my assets to create a floor of guaranteed income (along with Social Security) in retirement. But I’ve never seen any discussion of the best funds to use to pay for the annuity. Can an annuity be purchased using traditional IRA or Roth IRA dollars? If so, what are the tax ramifications of each? Can I buy a joint life annuity to cover the lifetimes of both myself and my spouse with money from my IRA?”

Yes, a single premium immediate annuity (SPIA) can be purchased using traditional IRA or Roth IRA dollars.

If you read Internal Revenue Code section 408 (which is where we get the rules for IRAs), you’ll see that IRA can stand for individual retirement account or individual retirement annuity.

In every case I’ve ever seen personally, when IRA dollars are used to purchase an immediate annuity, the annuity is created as an individual retirement annuity. And that means two things:

  1. Whether traditional or Roth, the payments from the annuity are simply treated as distributions from the IRA and taxed accordingly.
  2. If it’s a traditional IRA, the payment from the annuity is considered to satisfy the RMD from the individual retirement annuity each year. (Point being, you don’t have to worry about calculating an RMD amount which might be different from the payment from the annuity. The payment satisfies the RMD by definition.)

Point being, payments from a traditional individual retirement annuity will generally be fully taxable, just as would be any other distribution from a traditional IRA. (If you have basis in your traditional IRA(s) due to having made nondeductible traditional IRA contributions, a pro-rata calculation would apply.)

And if it’s a Roth individual retirement annuity, payments/distributions will be treated as normal Roth IRA distributions. So they’ll be first considered to come out of contribution amounts, then converted amounts, and then earnings. And the tax treatment will be exactly what it would be if these amounts were coming out of a Roth individual retirement account. (This calculator/tool, as well as the article linked earlier in this paragraph, maybe helpful there.)

In theory, immediate lifetime annuities could be purchased within an individual retirement account, with the payments from the annuity made back into the IRA (rather than being distributions from the IRA). The tax code does not prohibit such. I’ve never seen such a thing in real life, so it doesn’t seem that many insurance companies offer this. I am aware of one person on the Bogleheads forum who has encountered such an annuity, but it’s definitely a rare situation.

Can a Joint Life Annuity (Myself and Spouse) be Purchased with IRA Dollars?

The short answer to this question is, yes, a joint life annuity that pays out for the longer of your life or your spouse’s life can be purchased with IRA dollars. One potential point to be aware of is that things get complicated if you also pick a period certain (i.e., the annuity will pay out for the longer of your lives but will also pay out for at least X years). You’ll want to read the rules in Treasury Regulation 1.401(a)(9)-6, to make sure the period certain does not cause any problems.

October 16, 2023
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