Archives for November 2018

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Investing Blog Roundup: Admiral Share Minimum Now Just $3,000

There’s an ongoing battle between Vanguard, Fidelity, and Schwab to win over those of us who prefer low-cost indexed investment products. Vanguard’s latest move in that battle, announced earlier this week, is that they have just reduced the minimum investment for Admiral shares of 38 different index funds from $10,000 to $3,000. They will also soon be offering Admiral shares on a handful of funds that did not previously offer them (e.g., Vanguard Total World Stock Index Fund and Vanguard FTSE Social Index Fund).

Other Recommended Reading

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Lessons from the Open Social Security Calculator

Over the last several months, many people have written in about the various things they’ve learned from using the Open Social Security calculator. I thought it would be worthwhile to collect the most common such lessons in one place.

One thing that’s interesting to me is that these are all things that I (and other people) have been writing about for years. But for many people, being able to fiddle around with a calculator was what it took for the concepts to actually “click.”

As far as Social Security rules, there are a few things that frequently surprise people:

  • Restricted application strategies are still available for people born 1/1/1954 or earlier.
  • Your benefit as a spouse may be more or less than 50% of the amount your spouse is receiving.
  • It is possible (common, even) for a person to receive a retirement benefit and a spousal benefit at the same time.

As far as claiming strategies, the big takeaways depend on whether we’re talking about an unmarried person, the higher earner in a married couple, the lower earner in a married couple, or a divorcee. (For a widow/widower, there’s no need for a calculator, as the optimal strategy is fairly easy to determine.)

For an unmarried person, it’s usually advantageous to wait until somewhere in the 68-70 range. But this decision will be significantly impacted by the life expectancy selected as well as the discount rate used.

For the higher earner in a married couple, in the overwhelming majority of cases, it is wise to wait until 70 to file for retirement benefits. Doing so usually significantly increases the amount the couple can be expected to spend over their lifetimes. That said, there are some exceptions. For instance:

  • When the spouse with the lower primary insurance amount has a sizable government pension (such that the government pension offset would eliminate any Social Security survivor benefit they might otherwise receive), it becomes considerably less advantageous for the higher earner to wait.
  • When the lower earner is considerably older and has a much lower retirement benefit, it becomes less advantageous for the higher earner to wait (because the cost of waiting is much greater — because the lower earner can’t get his/her benefit as a spouse until the higher earner has filed for retirement benefits).
  • When child benefits are involved, it often pushes the ideal filing age earlier.*

For the lower earner in a married couple, there are a few lessons:

  • Waiting until 70 is usually not the best strategy.
  • However, the decision is not usually very impactful (e.g., claiming at 63 is not usually super different from claiming at 66).
  • The decision is more heavily affected by inputs such as life expectancies and discount rates (whereas the decision for the higher earner doesn’t usually fluctuate much).

For a divorcee who was married for 10+ years prior to divorce, if your ex-spouse has a higher earnings record, the decision is analogous to the decision for the lower earner in a married couple. That is, because you might have the option for a survivor benefit later, it’s often ideal to file for your own benefit early. To be clear though, while this is the strategy that usually maximizes expected spending, it’s somewhat high-risk, in that it’s essentially a bet on your ex-spouse dying somewhere around a “typical” age. If they live well beyond their life expectancy, you’ll be stuck collecting your reduced retirement benefit in the meantime.

For a divorcee with a higher earnings record than their ex-spouse, the decision is analogous to that for an unmarried person (i.e., it’s usually advantageous to wait, but not necessarily all the way until age 70).

*I’m still working on functionality for child benefits for married couples. Progress is slow (slower than I had anticipated, frankly) but steady.

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Topics Covered in the Book:
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  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
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Investing Blog Roundup: Affordable Care Act Open Enrollment

It’s Affordable Care Act open enrollment season (through December 15), so here are a few resources that may be helpful.

First, a thorough FAQ from the Kaiser Family Foundation about buying insurance through the marketplace. Next, a good overall open enrollment walkthrough from Tara Siegel Bernard. And finally, from Harry Sit, one specific tip that may be useful for some families.

Other Recommended Reading

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How Much Does a Business Have to Earn Before S-Corp Taxation Makes Sense?

A reader writes in, asking:

“In your opinion as a CPA – is there a minimum annual revenue threshold where looking at S-Corp tax treatment for a single member LLC makes sense given all the reporting requirements?”

Unfortunately there’s no way to make a useful rule of thumb here.

The tax savings from S-corp taxation (relative to sole proprietor taxation) come from the fact that profit from the business is not subject to self-employment tax (i.e., Social Security and Medicare taxes). But before there can be any profit, the business is required to pay the owner a “reasonable” amount of compensation, which will be subject to Social Security and Medicare taxes.

And there are several downsides to S-corp taxation as well. For example:

  • The business will have to pay unemployment insurance tax to your state based on the wages the business pays to you,
  • You will likely have a lower contribution limit to your retirement plans (because it will be based on your wages, rather than being based on what would have been the full profit from the business if it were a sole proprietorship),
  • You will likely have a smaller Social Security benefit in the future (again, because it will be based on your wages, rather than being based on what would have been the profit from the business if it were a sole proprietorship),
  • You will have to file Form 1120S (for the business) and Schedule E (for yourself) rather than just Schedule C,
  • Your business will have to register with your state and with the federal government as an employer (if it has not done so already) and must satisfy all the related periodic reporting and tax-payment requirements. (A payroll service provider is super helpful here.)

So S-corp taxation doesn’t really become advantageous until the business can pay you a “reasonable” amount of compensation and then still have enough profit left over for the tax savings on that profit to outweigh all of the negatives mentioned above.

But the tricky point is that what constitutes “reasonable” varies dramatically from one situation to another. For example, a freelance writer would usually be able to get away with a much lower level of compensation than a cardiologist. Even within a given line of work it can vary significantly. For example, a business owner who spends very little time actually working for the business (e.g., because they have another full-time job) will generally be able to get away with a lower level of compensation than somebody who works full-time for their business.

The following are a list of factors that the IRS (or applicable court) will consider, in addition to any other factors that may be relevant to the situation:

  • Your qualifications;
  • The nature, extent, and scope of your duties;
  • Your background and experience;
  • Your knowledge of the business;
  • The size and complexity of the business;
  • The amount of time you devote to the business;
  • The economic conditions generally and locally;
  • The character and amount of your responsibility in the business;
  • Whether or not the compensation is pre-determined based on activities to be performed or not determined until the end of the tax year;
  • Amounts paid to you in prior years;
  • The salary policy of the business with regard to other employees; and
  • The amounts paid by similarly sized businesses in the same area to equally qualified employees for similar services.

Also, state laws play a significant role in the decision as well. In some states the cost of unemployment insurance tax is very minor because the tax rate is low, the wage base is low, or both. In some states it will have a larger impact. And some states (e.g., Illinois) impose an income tax on the S-corporation itself.

In short, there are simply too many moving pieces for a dollar-amount rule of thumb to be useful. The decision of whether or not to elect S-corporation taxation for a business really must be done on a case-by-case basis.

For More Information, See My Related Book:

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LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less

Topics Covered in the Book:
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  • How to protect your personal assets from lawsuits against your business,
  • Which business structures could reduce your Federal income tax or Self-Employment tax,
  • Click here to see the full list.
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My new Social Security calculator (beta): Open Social Security