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Investing Blog Roundup: Rolling 529 Dollars to a Roth IRA

Due to the SECURE Act 2.0 owners of 529 plans can roll a limited amount of of the 529 money into a Roth IRA. As Allan Roth explains in a recent article, there are several rules to follow, some administrative challenges, as well as a bit of remaining ambiguity in the law.

Other Recommended Reading

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How to Research a Social Security Question

Based on reader feedback, the recent “How to Research a Tax Question” article was super popular. A handful of people suggested doing the same thing, but with Social Security. So, what follows are my tips for researching a Social Security question.

With tax questions, the three broad categories of authoritative sources are the law (Internal Revenue Code), Treasury regulations (as well as revenue rulings), and court cases.

Similarly, for Social Security, we have the law (Social Security Act), regulations, and court cases. But I will tell you that in ~13 years of dealing regularly with Social Security topics, I don’t recall a single time in which I had to refer to court cases. (One important point here is that I don’t deal with Social Security disability claims. If that’s a relevant topic for you, court cases may be of more interest.)

The three primary sources that I refer to regularly are:

The Law (Social Security Act)

Analogous to the Internal Revenue Code, it is the Social Security Act that is the most authoritative source. That is, if something written somewhere else contradicts what is plainly written in the Act, it’s the Act that wins.

But as with the Internal Revenue Code, the Social Security Act is written in legalese. So be prepared to read slowly, thoroughly, cautiously, and repeatedly in order to gain a full understanding. Be patient with yourself.

Code of Federal Regulations (CFR)

After the law itself, the regulations are the next most authoritative source. Interestingly, somewhat unlike Treasury regulations, the Social Security regulations do not seek to elaborate only upon points that might be unclear in the law. Rather, they seek to explain the whole darned thing, in plainer language than the law itself.

In other words, the CFR is more comprehensive and easier to read than the law itself. For most everyday uses, that makes it a clear win, relative to the Act, as a starting point for research. And it is indeed my first place to look, generally speaking. (But always do keep in mind that it’s a lower level of authority than the law. If there’s a contradiction between the two, the law wins.)

For me, researching via the CFR usually means starting with the homepage for Part 404 and then scrolling (or using “control/command + F”) to the applicable section. A Google-based approach (such as the following example query) can work, but it’s somewhat less successful, in my experience, than trying a similar trick for internal revenue code sections. Hence my “scroll to the relevant part” approach.

  • ssa cfr survivor benefit requirements

One last super important point about the CFR on the SSA website: it was never updated for the changes made by the Bipartisan Budget Act of 2015. So on topics of deemed filing and voluntary suspension, it’s giving you the old rules, which are no longer applicable for anybody.

Program Operations Manual System (POMS)

Next we have the Program Operations Manual System (POMS). The POMS is the SSA’s internal manual, which they make available to the public. Given that it’s written by the SSA — and is in fact the set of directions that SSA employees will use when processing an application for benefits — it’s extremely credible.  And it’s by far the most thorough source.

But it must be remembered that the POMS has no legal authority. In contexts in which you really want to be sure, you can’t rely solely on the POMS, as the SSA can reword it at any time (provided that the new wording is still in keeping with the law).*

The POMS is meant to be read by non-lawyer human beings, so the sentence structure it uses is not legalese. But it is nonetheless intended for an internal audience (i.e., SSA employees), so it’s loaded with jargon and acronyms. (Here’s a glossary of some of the most common acronyms.)

As far as finding something in the POMS, you might be able to find something just by browsing, starting at the table of contents. But I have definitely had better results starting with a Google query, such as this:

  • ssa poms deemed filing

In many cases I find that I have to take a “from both directions” approach. That is, I Google to find a POMS section that is at least closely related to the information I’m seeking. Then I look in the top of the page for the section reference (e.g., RS 00615.004). And then I start at the POMS table of contents and drill down in that direction, until I’m looking at a narrower table of contents with a list of related sections, one of which hopefully has the information I need.

Social Security Handbook

Finally, one source that you may want to check is the Social Security Handbook. It’s very similar to IRS publications in that:

  • It’s written in plain language, and it’s from a very credible source.
  • But it has no legal authority, and in some cases it leaves out various exceptions or includes simplifications.

*There was one infamous case, which I will keep anonymous because my point is only to be illustrative of the concept rather than to name names. Some years ago, a book about Social Security was written which contained a recommendation for a filing strategy for disability benefit recipients. The author believed that the strategy in question was allowed, based on his/her reading of the relevant part of the POMS. After the publication of the book, the SSA essentially said, “Sorry, you can’t do that. There’s nothing in the law that supports that position.” And indeed there isn’t. So they rewrote the POMS to be more clear that the strategy in question is not allowed.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

Investing Blog Roundup: Interview with Rob Berger about Social Security

Last week, Rob Berger interviewed me for his popular Financial Freedom show. We discussed a range of Social Security topics: basic rules, benefit calculations, terminology, planning considerations, and the Open Social Security tool. I hope you enjoy it.

Other Recommended Reading

Thanks for reading!

How to Research a Tax Question

A reader writes in asking:

“I read in one of your books that publications from the IRS don’t have any legal authority. What exactly do you mean by that? And second, if not IRS publications, where should we turn we want to know the definitive answer to how a particular part of the tax code works?”

Like most articles on the IRS website, IRS publications can be excellent for the purpose of gaining a general understanding of a given topic. They’re written in relatively plain language and, as you would expect, the information contained in them is usually an accurate representation of the applicable law.

However, because IRS publications do not carry any legal authority, if they say something that’s contrary to the actual law, it’s the actual law that matters, not what’s in the IRS publication or article. Said yet another way, IRS publications can be wrong. So if you ever want to be really, really sure about something when it comes to taxes, you’ll want to look for a more authoritative source.

And where should we turn if we want to know the definitive answer about a particular part of the tax code? Well, to the tax code. Read the law itself.

The Internal Revenue Code (IRC) is the actual body of law that contains the rules that make up the federal income tax, payroll taxes, estate and gift taxes, and so on. The language it uses is not exactly intended for a general audience, but when you want a definitive answer on a federal tax topic, the IRC is, without question, the first place to look.

How to Find the Relevant Code Section

My favorite place to reference the Internal Revenue Code is Cornell University Law School’s website. But that doesn’t mean that I’m perusing through the thousands of pages of tax law on the Cornell website, to try to find the answer to a question. I just use Google, like I do when searching for anything else.

For instance, if I can’t remember which IRC section gives information about health savings accounts, I would Google:

  • IRC section health savings accounts

And IRC §223 comes up immediately. Easy peasy.

Admittedly though, reading the Code itself takes practice. You’ll often end up with multiple tabs open at once, as one section refers to another. My tip would just be to read slowly and be patient with yourself. You will have to read things multiple times.

Other Authoritative Sources of Tax Information

In addition to the law itself, there are other authoritative sources of guidance from the Treasury department.

Treasury regulations are the Treasury Department’s interpretation of the Internal Revenue Code. They are necessary because the IRC sometimes leaves many questions unanswered with regard to how the law should actually be applied. There are multiple types of Treasury regulations, and the distinctions are important.

  • Final regulations are binding on the IRS — meaning you can rely on them.
  • Temporary regulations are also binding until superseded by another regulation.
  • Proposed regulations are not binding, but they can still be useful for getting an idea of the IRS’s viewpoint on a given topic.

Again, my favorite place to read the regulations is on the Cornell website.

Revenue rulings are an official form of guidance issued by the IRS explaining how the law would be applied to a specific set of facts.

Private letter rulings are akin to revenue rulings in that they show how the IRS would apply the law to a specific set of facts. But there’s one big difference: private letter rulings are only binding on the IRS with respect to the taxpayer who requested the ruling, so other taxpayers cannot rely on them as legal precedent. That said, like proposed regulations, private letter rulings can still be useful for getting an idea of the IRS’s view on a particular matter.

Finally, federal courts’ rulings about tax matters (e.g, opinions issued by the U.S. Tax Court) are a source of legal precedent.

Frankly though, it’s uncommon that I find myself reading revenue rulings or private letter rulings. And it’s extremely rare that I actually find myself looking at court cases. The overwhelming majority of tax questions that people ask me (and which I find myself asking) can be answered without having to look outside of the Internal Revenue Code and the regulations. And frankly, if you are faced with a situation which you are confident is not addressed in the law or in the regulations, that’s a good time to bring in a tax professional anyway.

Other Helpful Sources

And there are all sorts of other sources, which while having no authority can still be very helpful. IRS publications fall in this category. At roughly a similar level of credibility as IRS publications are articles in a trade publication, such as the Journal of Accountancy.

After that, the next step down (which I still find to be extremely accurate, in general) is what I would describe as “article by a tax attorney or CPA on his/her firm’s website” (even if you’ve never heard of this person).

The next step down would be an article in, for example, WSJ/Forbes/NYT. While these publications are of course reliable sources in general, I put them below the sources above. The article written by the CPA or tax attorney is generally going to be more reliable than the article written by somebody else, using the CPA or tax attorney as a source. I would put the Bogleheads wiki approximately at this level.

Finally, just ahead of “posts by your neighbor on Facebook,” we have Investopedia. Please don’t rely on it. (I’m calling out Investopedia specifically because it’s so pervasive in search engine results. It’s helpful when, for example, you want a simple explanation of a topic, and it’s perfectly fine if that explanation only turns out to be 85% correct. But in a context where you’re about to make a significant financial decision and the details matter, it’s not an appropriate source.)

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!"

Investing Blog Roundup: Reinvestment Risk with an Inverted Yield Curve

Since late 2022, we’ve had an inverted yield curve, which is when shorter-term fixed-income investments actually have higher yields than longer-term fixed-income investments. That’s not the typical situation. Bonds with longer duration have more interest rate risk (price volatility), so they typically have higher yields to compensate for that higher risk.

But, right now, they don’t. For instance, as of right now, the yield on 1-month Treasury Bills is more than a percentage point higher than the yield on 30-year Treasury Bonds.

And that leads to one of the most common questions I’ve received over the last year: if cash (and other super-short-term fixed-income options) actually pays more than longer-term bonds, why would I use longer-term bonds at all?

In a recent article, David Blanchett dove into one such reason: reinvestment risk. With cash and similar, you know what rate you’re getting today, but there’s no way to know what rate you’ll be getting in even the intermediate-term future. And as Blanchett found, the way an inverted yield curve often “fixes” itself is by cash yields falling.

Other Recommended Reading

Thanks for reading!

My Tax Preparer Just Raised Her Fees — What Should I do?

It’s tax season, so as you might imagine I’m seeing an increase in tax-related questions from readers. But the most common tax-related questions I’m seeing have nothing to do with tax rules or tax planning. Instead, it’s these:

  • My tax guy just told me he’s going to be charging about 40% more this year for our return, relative to what he charged for the last several years. What should I do?
  • My tax preparer told me her price is increasing to [whatever dollar amount]. Is that reasonable for [a particular level of return complexity]?
  • My CPA’s hourly rate just increased to $250. That seems insane. Do CPAs really make $10,000 per week during tax season?*

As a CPA who works in the tax field — but who does not do any tax preparation other than our own return every year — I have something of a front-row seat to watch what’s currently going on in the tax prep industry. Why are these price increases happening? There’s a good reason.

The first and most obvious point is simply that we’ve had a lot of overall inflation. Per the Bureau of Labor Statistics, prices were about 19% higher as of the end of 2023 than they were at the start of 2020. So if your tax preparer simply wants to have the same standard of living, they probably need to be charging somewhere in the range of 20-30% more than they were a few years ago. (There has also been a tremendous amount of tax legislation in the last few years, which means that the work of keeping skills up to date and preparing returns is somewhat more, per return, than it used to be.)

But there’s more going on than that.

Per a recent CPA Trendlines survey, 42% of accounting firms are turning away work (i.e., the incoming inquiries exceed their capacity). And per a 2023 AICPA survey, 62% of accounting firms are currently culling clients.

Broadly speaking, there simply aren’t enough accountants right now to do all of the work that clients want done.

Per ZipRecruiter, the national average salary for an entry level accountant is $54,749. By contrast, per the same source, the national average salary for an entry level software developer is $100,265. Imagine that you’re an 18 year old college freshman, with a general interest in personal finance. If you think you’d make a good accountant, I’ll bet that you probably think you’d make a good software developer also. And if you have an interest in personal finance, would you rather study a finance-related field, or have much better personal finances? Accounting isn’t a “calling” sort of career where people will do it regardless of the compensation level. So it’s not particularly surprising that the percentage decrease in new accounting graduates is greater than the percentage decrease in overall college graduates.

And, as with most fields, there are a lot of people leaving every year as Boomers move into retirement. And so there are staffing shortages.

Point being, at the current price (whether we’re talking about price per tax return prepared, price per billable hour of a tax preparer’s time, or annual salary for tax preparers), the quantity demanded is significantly greater than the quantity supplied.

And if you’ve ever had a microeconomics class, you know what happens next when that occurs: prices go up. Suppliers eventually realize they can raise prices and still sell as many units as they have the capacity to provide (whether that’s hours of their time or returns prepared).

And that’s what’s happening.

There are tons of small accounting firms, so it will take time for this change to permeate the entire industry. So if you want to shop around, there’s a good chance you can find somebody operating in a low cost of living area who still charges a very low price. But, in general, you can bet that the prices for professional tax preparation will rise significantly over the next few/several years.

*This one in particular makes me laugh a bit. No CPA who works 40 hours per week is making 40x their hourly rate per week. Even with an excess of demand, that’s simply now how it works, because a fair bit of time has to be spent on assorted non-billable activities. For example, per the same 2023 AICPA survey mentioned above, an hourly billable rate of $204 (which was the average for people with 8-10 years experience) equated to an average annual compensation of $105,662 — or $2,032/week (i.e., 10x their hourly billable rate).

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!"
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My Social Security calculator: Open Social Security