Bogleheads forum member FiveK demonstrates the Personal Financial Toolbox.
Hosted by the Chicago Bogleheads chapter. Recorded on March 31, 2021.
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Bogleheads® Chapter Series – Personal Financial Toolbox
Presentation host: Welcome to episode number two of the Bogleheads Life Stages Podcast. Bogleheads are investors who follow John Bogle's investing philosophy for attaining financial independence.
Today's episode features boglehead member Fivek. This recording was made on March 31, 2021. Nothing in this video should be construed as personalized investment advice.
Fivek: Over at the Money Mustache forum, where it was originally designed to help people just add up all their expenses, and most of the emphasis on that site was helping people reduce expenses: “Where's all your money going?” It's kind of grown to the point where now I think it's the tax portion, at least on this tab. It probably gets used more than the expense portion. The expense portion is still there.
What I have right now is the example that's in the bogleheads wiki article on Roth IRA conversion. So we have a filing status of married filing jointly. One person 65, one person's age 62 ,no dependents. At this point we've got $500 in interest, non-qualified dividends etc; $11,000 qualified dividends; $19,000 in pension income and $25,000 in Social Security income.
So the question then is if they want to do Roth conversions, how does the amount of Roth conversion affect the marginal tax rate that they will pay. And it's set up by default that the amount of Roth IRA conversion is what it looks at. This is just a standard excel chart, so for example if you just want to change the the y-axis--and don't worry about negative numbers--so a negative number in a marginal tax context here would be that as the the value the x-axis value increases, if your tax amount would decrease, so for example, if you wanted to look at marginal rates for 401-k contributions or traditional IRA contributions,
the more you contribute the less there would be in tax, so you get negative numbers. But we're just looking at the positive numbers there,so you can change the axis so it blows it up a little bit. And it has a 50 maximum right now, and so if you want to make a change, you can change that also, it's just standard excel charting.
So this one says that they're very close. Looks like they can contribute a few dollars at no tax whatsoever, but then it's going to jump up to the, what do we have here, 15%, now 18.5%. So that's somebody in the 10% bracket except each additional dollar makes 85 cents of Social Security taxable, so they're in the 18.5%, and then they get to the 22.2%, which is 12% bracket with each additional dollar making another 85 cents of Social Security being taxable and so forth and so on. This peak here is the 27% marginal rate.
Now up until this point none of the qualified dividends were taxable. But now as you take more and more Roth conversion you're getting 12% on each additional dollar of Roth conversion plus15% because you've made another dollar of the qualified dividends taxable.
There's a little notch here because the qualified dividends and the ordinary income brackets don't completely align.
And then you're just simply in the 22% nominal tax bracket. You know if you wanted to look at huge amounts of Roth conversions you can change the number up here. This is just the x-axis increment, and now it'll show you, okay if you're looking at anywhere from zero to five hundred thousand, what would you be running into, and these four spikes here, you see are the IRMA tiers. Because one of our example couple was age 65, and so subject to IRMA. For those not familiar with IRMA, the income related medicare adjustment amount, or some such acronym. The more you make, two years later the more you get to pay for medicare.
So you have all the little changes here. I think this one, this little one right here is the NIIT [Net Investment Income Tax]. Not sure what this one out here is, off the top of my head, might be some phase out.
But anyway you can look at this and this gives you the actual marginal rates. And you see only, it's almost by exception that these marginal rates are exactly what the tax brackets are.
Now you've got the 22% in there; you've got some 24%; and then you get beyond some of the lower things and you're into the 32% and 35% and so forth.
So being able to see this in picture form, I think, is just a particularly useful thing. You know, there's just lots of things you can input here. One of them would be for the third EIP [Economic Income Payment]. If you've already received it you can put this in and then it says, okay well you're you can't get any more.
But let's say this couple had filed, and their income was too high to receive it. And so they want to say, well what if we wanted to get that this year. I’ll change, say okay they have not received that. So now this would be the phase out.
Maybe they were thinking of converting somewhere between $90,000 and $120,000. Well they get to this point and that would show them that now they're going to not receive the EIP if they push their income up that high.
So when people use this spreadsheet there are a lot of notes in each of the cells, or not all the cells, but many of them, with a little bit of extra information on what's going on. So you can look at all the cells with a little red corner note that says there's a comment in this cell and see what it does. For example, the number of dependents, description of what makes one eligible for the earned income credit, and so forth and so on.
And of course when all else fails read the instructions. There is an instructions tab that talks about a quick start so that you would enter the filing status in these particular cells and then just go down row by row and all the green background cells is where the input goes. The other thing is the spreadsheet is set up to prevent you from inadvertently over typing something. So for example, let's just say you thought you wanted to put the combined salary and wages into that particular cell there and you start typing it says oops you can't change that because it's protected.
But if you want to change something then you can go to the unprotect sheet and there is no password here. So now you could go in and you could do that but it would wreck the calculation because now if you start to put a number in here well it doesn't show up over here because you've overwritten the calculation. So you know, caveat user. Generally a good idea, unless you really want to make a change, to keep that protected.
So that's just a quick overview of the tax calculation sheet.
It also allows for looking at Affordable Care Act items. So if, let's say, somebody is paying $600 a month, and let's just say that they were going to get an advance premium tax credit of $500 a month--and then I think there's a comment here, yeah-- you've got to go over, put in your what's the second lowest cost silver plan there. And it will now include the Affordable Care Act.
So that's got to be an Affordable Care Act thing in there. Let's see, it was at the cliff, I can't remember off the top of my head, but anyway it's as I said, or maybe I didn't say, but this thing has probably at least all of the common phase-outs, credits, phase-ins. It's got the IRMA, the NIIT, the Social Security calculation, and the Affordable Care Act.
What doesn't it have? Doesn't have adoption credits. Doesn't have electric vehicle credits. But most of the common things that people are going to run into, it's like what, Ragu, it's in there.
So this is probably the tab that's used the most. The reason why it gets called the toolbox is it's got a bunch of other tabs.So especially if I go over to the tab towards the far right, the miscellaneous calculations there's a whole bunch of different widgets on this.
So, the first section here you've got the five main financial functions: future value, number of years of monthly payment, an interest rate calculation, present value calculation. So the idea here is you put all the things in green and it will then calculate the cell that's in white.
So now just a quick widget for that. And then there's a bunch of others. I think this one is just, you know, people say, well is it better to pay off the mortgage or invest. And this one will just show if the after tax rate is the same, the result is identical.
Time to financial independence. So if you know what your expenses are and what your starting value is, it's just a simple rate calculation. And for those who are really into the minutiae it will even show you derivatives of the time to financial independence without based on all these different items.
Evaluation of pensions. So let me skip over this one, come down here. So for example if somebody has a choice between getting a six hundred thousand dollar lump sum versus thirty six thousand dollars a year then this shows the curve of mathematical indifference. You know you can overlay this with all your thoughts about what the market might do, or what your own longevity is, or whether the insurance company is going to still be around to pay out an annuity. But this curve shows on a pure mathematical look that these two are identical. For example if your life expectancy is somewhere just short of 28 years and you assume you're going to get four percent per year on your lump sum, that would be identical to taking the thirty six thousand dollar a year pension.
If the lump sum amount was going to be significantly less,well that would tell you that you're almost certainly ahead by choosing the annuity unless you think you're only going to live for five to ten years. If your lump sum is much more then you're almost certainly ahead by choosing the lump sum, unless you think you're going to just put it in a bank and are in one percent interest and live for 35 years.
If you're going to have a cola on the pension, let's say a three percent, well that makes it a little bit tougher choice, or it makes the annuity that much more favorable. So the orange curve here is with the cost of living adjustment and the blue curve is without that.
Just a bunch of other widgets here.
This is the one where you ask a person would you rather invest $1,000 a year between when you're age 21 and 35 or $2,000 a year from age 35 for the rest of your life and it turns out that the earlier you invest the better the results. So it solves that calculation, growth in a taxable account. It accounts for the tax drag and then the capital gains bite at the end.
This does reference the Bogleheads forum discussion on if you contribute the maximum there's a slight advantage, or there can be a slight advantage to Roth just because of the tax drag you would have to have when contributing the maximum to traditional. You can put more into the Roth. Now if you take the traditional extra tax deferred or tax-free amount pre-tax amount and put that into a taxable site account it's going to have some amount of tax drag.
And then a bunch of others. Off the top my head, I'm not not sure, and it looks like there's some work in progress stuff down here
Let me just go through all the other tabs on here fairly quickly. So now the very last, I'll just go from the far right and work my way back towards the beginning. So this is, oh yeah.
So back on the calculations tab, everything that I showed was using 2021 tax brackets. If anyone thinks that in 2026 the brackets are going to revert to exactly what they were in 2017 except for inflation adjustment you can go you can-- I'll show it real quick here--up here you can change that 2021 to 2026 and now you get the brackets as they would be if nothing else changes in the law. I wouldn't bet a whole lot on either the 2021 or the 2026 numbers actually being the way the tax law will be when we get to 2026, but it's something.
Next tab. There's a basic terms tab. I think this is one for people who say should I invest in an index fund or a 401-k. Now it attempts to educate people on just some basics.
Let's see, so skipping over the miscellaneous calculations, so the question of if somebody's in the 12% bracket should they do tax gain harvesting on capital gains or should they take advantage of a low marginal rate to do Roth conversions if they assume that in the future their marginal rate will be higher.
So you can play around with this. Turns out from the playing I've done, if you think you're going to keep the money in there for any significant length of time it works out ever so slightly better to do the Roth conversion. But it's not a huge deal either way.
Usually around October time frame, October/ November, we get a lot of questions on gee should I sign up for a high deductible health plan or not a high deductible health plan. And this is one of several widgets that are available on the internet to take a look at that. All the insurance plans are a little different. They get into well, you co-pay for this, a little bit for that.
But it's a widget that will help, at least in some cases, for people to compare the HDHP [high-deductible health plan] with HSA [Health Savings Account] to PPO [Preferred Provider Organization] or other non-HDHP without HSA.
The Social Security benefit predictor. Put in your actual earnings and then it will go ahead and calculate your AAME [adjusted average monthly earnings]. And then it goes into the Social Security calculation with the two break points and comes up with your base PIA. So this is the number that you would feed into something like Piper's opensocialsecurity.com. You need--that tool needs--to know what the primary insurance amount is.
So you could calculate this for one person's earnings and then you could either make a copy of the sheet or just overwrite here with another person's earnings and get the other person's primary insurance amount. Feed that into opensocialsecurity.com.
Non-deductible IRA. Oh this so this reference is a bogleheads wiki and if you want to see--I guess, how that wiki table came to be, I don't think the wiki table was there before this spreadsheet--but anyway 401k versus taxable. Traditional is, or Roth is, always going to be better than,or at least no worse than taxable. But then the question is where does traditional fall in? And so I guess if you wanted to you can project out as many years as you want to and just see what the effects are.
Form 8606. Okay this one gets a lot of people with a backdoor Roth IRA, and they get into problems with form 8606 or not that they don't get into. In addition to getting into problems with it, even worse, sometimes people don't even know what it is. And if you read various forum threads, the questions that TurboTax or H&R Block or whatever ask, sometimes those questions are kind of confusing.
This seems to be, at least to me, it seems much more understandable than some of the TurboTax questions, having gone through that myself. So for example, if let's say if someone is still looking at 2020 and they say well okay, contributions made for this calendar year, well now we're already in 2021.
So okay. So if someone's going to put $6,000 into their 2020 IRA, well they did it in the next calendar year for the 2020 tax year, and it would say, okay, well this is what your form 8606 is probably going to look like when you run it through tax software.
Then in 2021, if they say okay I'm going to contribute another $6,000 and I think I'll convert, and maybe $50 will have increased in value. So it would say, alright, so this is what your form 8606 should look like. Then you're going to pay $50 in tax at most. I think the tax software runs things through Pub. 590-b worksheet one. You can force this to just use 8606. So if someone was filling it out on their own they'd probably see something like this instead.
So alternative minimum tax, and not many people need to worry about that under current tax law. This just shows the tax rate, shows the nominal brackets. But, you know, that's interesting on a theoretical basis, but the calculation sheet with the actual marginal rates is much more interesting.
There are a bunch of state brackets in here and if I remember right this is based on the taxfoundation.org which publishes individual state tax rates. So I think this is good for the brackets themselves. And then in the state calculation it does have some things about what's the standard deduction or personal exemption, state earned income credit as a percent of federal et cetera et cetera et cetera. I'm sure it doesn't have every possible nuance in here about state taxation.
So I think the claim is that the federal tax, federal calculations are really ,really good and the state calculations are probably decent but again caveat user. If there's something about specific pension exclusions depending on exactly how old you are, that may not be in here.