Bogleheads® Chapter Series – Personal Financial Toolbox
00:00:00.000 | (upbeat music)
00:00:02.580 | - Welcome to episode number two
00:00:08.240 | of the Bogleheads Life Stages Podcast.
00:00:11.120 | Bogleheads are investors who follow
00:00:12.660 | John Bogle's investing philosophy
00:00:14.480 | for attaining financial independence.
00:00:16.980 | Today's episode features Boglehead member 5K.
00:00:20.720 | This recording was made on March 31st, 2021.
00:00:24.500 | Nothing in this video should be construed
00:00:26.060 | as personalized investment advice.
00:00:29.400 | I sit over at the Money Mustache Forum
00:00:32.460 | where it was originally designed
00:00:35.640 | to help people just add up all their expenses.
00:00:40.300 | And most of the emphasis on that site
00:00:44.200 | was helping people reduce expenses.
00:00:47.840 | Where's all your money going?
00:00:49.280 | It's kind of grown to the point where now I think it's
00:00:55.160 | the tax portion of it, at least on this tab,
00:00:58.480 | and it probably gets used more than the expense portion.
00:01:02.120 | Expense portion's still there.
00:01:03.760 | What I have right now is the example
00:01:08.840 | that's in the Bogleheads Wiki article
00:01:11.080 | on Roth IRA conversion.
00:01:13.800 | So you have filing status of married filing jointly.
00:01:18.160 | One person's 65, one person's age 62,
00:01:24.200 | no dependents at this point.
00:01:28.160 | They've got 500 bucks in interest,
00:01:30.960 | non-qualified dividends, et cetera,
00:01:33.600 | 11,000 qualified dividends,
00:01:36.140 | 19,000 in pension income,
00:01:40.260 | and 25,000 in social security income.
00:01:44.220 | So the question then is if they want to do Roth conversions,
00:01:48.400 | how does the amount of Roth conversion
00:01:50.840 | affect the marginal tax rate that they will pay?
00:01:54.800 | And it's set up by default that the amount
00:01:59.800 | of Roth IRA conversion is what it looks at.
00:02:03.360 | This is just a standard Excel chart.
00:02:08.120 | So for example, if you just want to change the Y-axis
00:02:13.120 | and don't worry about negative numbers.
00:02:17.720 | So a negative number in a marginal tax context here
00:02:22.960 | would be that as the value, the X-axis value increases,
00:02:27.960 | if your tax amount would decrease.
00:02:32.120 | So for example, if you wanted to look at marginal rates
00:02:34.840 | for 401(k) contributions or traditional IRA contributions,
00:02:39.840 | the more you contribute, the less there would be in tax.
00:02:43.840 | So you'd get negative numbers,
00:02:45.240 | but we're just looking at the positive numbers there.
00:02:48.560 | So you can change the axis so it blows it up a little bit.
00:02:52.820 | And it has a 50% maximum right now.
00:02:56.400 | And so if you wanted to make, change that,
00:02:59.400 | you can change that also just it's standard Excel charting.
00:03:04.080 | So this one says that they're very close.
00:03:06.820 | Looks like they can contribute a few dollars
00:03:09.480 | at no tax whatsoever, but then it's going to jump up
00:03:14.200 | to the, what do we have here?
00:03:16.800 | 15, 18 and a half percent.
00:03:19.880 | So that's, what's that?
00:03:21.760 | That's somebody in the 10% bracket,
00:03:24.500 | except each additional dollar makes 85 cents
00:03:27.960 | of social security taxable.
00:03:31.600 | So they're in the 18.5% and then they get to the 22.2,
00:03:36.600 | which is 12% bracket with each additional dollar
00:03:41.520 | making another 85 cents of social security being taxable
00:03:46.280 | and so forth and so on.
00:03:50.000 | This peak here is the 27% marginal rate
00:03:55.000 | when now up until this point,
00:03:59.720 | none of the qualified dividends were taxable,
00:04:03.920 | but now as you take more and more Roth conversion,
00:04:08.180 | you're getting 12% on each additional dollar
00:04:12.640 | of Roth conversion plus 15%
00:04:15.880 | because you've made another dollar
00:04:17.520 | of the qualified dividends taxable.
00:04:20.960 | There's a little notch here because the qualified dividends
00:04:26.100 | and the ordinary income brackets don't completely align.
00:04:29.520 | And then you're just simply in the 22%
00:04:32.800 | nominal tax bracket.
00:04:37.620 | You know, if you wanted to look at huge amounts
00:04:43.160 | of Roth conversions, you can change the number up here.
00:04:48.160 | This is just the X-axis increment.
00:04:52.160 | And now it'll show you, okay,
00:04:54.280 | if you're looking at anywhere from zero to 500,000,
00:04:58.200 | what would you be running into?
00:05:00.120 | And these four spikes here you see are,
00:05:03.280 | those are the Irma tiers
00:05:04.880 | because one of our example couple was age 65
00:05:09.840 | and so subject to Irma.
00:05:13.400 | For those not familiar with Irma,
00:05:15.320 | the income related Medicare adjustment amount
00:05:19.120 | or some such acronym, the more you make two years later,
00:05:23.320 | the more you get to pay for Medicare.
00:05:26.280 | So you have all the little changes here.
00:05:30.520 | I think this one, this little one right here
00:05:32.960 | is the net investment interest tax.
00:05:39.720 | Not sure what this one out here is off the top of my head.
00:05:43.080 | Might be some phase out.
00:05:45.200 | But anyway, you can look at this
00:05:48.040 | and this gives you the actual marginal rates.
00:05:50.680 | And you see only, it's almost by exception
00:05:54.680 | that these marginal rates are exactly
00:05:59.840 | what the tax brackets are.
00:06:02.080 | Now you've got the 22% in there.
00:06:05.400 | You've got some 24, and then you get beyond
00:06:08.480 | some of the lower things
00:06:10.760 | and you're into the 32 and 35 and so forth.
00:06:14.360 | So being able to see this in picture form,
00:06:19.720 | I think is just a particularly useful thing.
00:06:24.720 | You know, there's just lots of things you can input here.
00:06:34.040 | One of them would be for the third EIP,
00:06:38.560 | if you've already received it, you can put this in
00:06:41.440 | and then it says, okay, well, you're not going to,
00:06:43.720 | you can't get any more.
00:06:44.680 | But if for, let's say this couple had filed
00:06:49.000 | and their income was too high to receive it.
00:06:52.920 | And so they want to say,
00:06:53.840 | well, what if we wanted to get that this year?
00:06:57.240 | I'll change, say, okay, they have not received that.
00:07:01.000 | And now you see an extra, I'll put this back.
00:07:06.000 | So now this would be the phase out.
00:07:10.760 | Maybe they, if they were thinking of converting
00:07:16.120 | somewhere between 90 and 120,000,
00:07:20.360 | well, they get to this point and it would show them
00:07:23.880 | that now they're going to not receive the 30 EIP
00:07:27.600 | if they push their income up that high.
00:07:31.680 | So when people use this spreadsheet,
00:07:35.440 | there are a lot of notes in each of the cells,
00:07:40.440 | or not all the cells, but many of them
00:07:43.200 | with a little bit of extra information on what's going on.
00:07:48.200 | So you can look at all the cells
00:07:51.320 | with a little red corner note there
00:07:55.400 | that says there's a comment in this cell
00:07:57.920 | and see what it does.
00:08:01.120 | The number of dependents,
00:08:03.320 | description of what makes one eligible
00:08:06.800 | for the earned income credit and so forth and so on.
00:08:11.000 | And of course, when all else fails, read the instructions.
00:08:15.240 | There is an instructions tab that talks about a quick start
00:08:20.240 | so that you would enter the filing status
00:08:23.000 | in these particular cells.
00:08:24.880 | And then just go down the row by row
00:08:28.680 | and all the green background cells
00:08:31.800 | is where the input goes.
00:08:34.000 | The other thing is the spreadsheet is set up
00:08:38.880 | to prevent you from inadvertently over typing something.
00:08:43.800 | So for example, let's just say you thought you wanted
00:08:48.280 | to put the combined salary and wages
00:08:51.360 | into that particular cell there,
00:08:53.800 | and you start typing and it says, oops,
00:08:55.840 | can't change that because it's protected.
00:08:58.760 | But if you want to change something,
00:09:02.640 | then go to unprotect sheet
00:09:07.640 | and there is no password here.
00:09:11.160 | So now you could go in and you could do that.
00:09:16.160 | It would wreck the calculation
00:09:20.800 | because now if you start to put a number in here,
00:09:24.600 | well, it doesn't show up over here
00:09:27.240 | because you've overwritten the calculation.
00:09:29.440 | So, you know, caveat user.
00:09:31.600 | Generally a good idea,
00:09:36.840 | unless you really want to make a change
00:09:39.040 | to keep that protected.
00:09:41.920 | So that's just a quick overview
00:09:46.000 | of the tax calculation sheet.
00:09:52.720 | There's, it also allows for looking
00:09:57.480 | at affordable care act items.
00:10:01.200 | So if, let's say somebody has,
00:10:04.160 | paying $600 a month and let's just say
00:10:11.680 | that they were going to get an advanced premium tax credit
00:10:15.520 | of 500 a month.
00:10:18.040 | And then I think there's a comment here.
00:10:19.720 | Yeah, you've got to go over.
00:10:22.080 | And then put in your,
00:10:25.880 | what was it?
00:10:30.840 | Second lowest cost silver plan there.
00:10:34.920 | And it will, now it will include affordable care act.
00:10:39.920 | So that's got to be an affordable care act thing in there.
00:10:50.920 | Let's see, is it, was that the cliff?
00:10:52.760 | Can't remember off the top of my head,
00:10:55.520 | but anyway, it's, as I said, this,
00:11:00.520 | or maybe I didn't say it,
00:11:01.440 | but this thing has probably all,
00:11:05.000 | at least all of the common phase-outs,
00:11:07.960 | credits, phase-ins, it's got the IRMA, the NIIT,
00:11:12.960 | the social security calculation, affordable care act.
00:11:19.200 | Doesn't have, what doesn't it have?
00:11:22.640 | Doesn't have adoption credits,
00:11:24.680 | doesn't have electric vehicle credits,
00:11:27.240 | but most of the common things
00:11:28.720 | that people are going to run into,
00:11:30.800 | it's like what ragu, it's in there.
00:11:33.520 | So this is probably the tab that's used the most.
00:11:38.520 | Reason why it gets called the toolbox
00:11:43.600 | is it's got a bunch of other tabs.
00:11:46.280 | So especially if I go over to the tab
00:11:49.320 | towards the far right, miscellaneous calculations,
00:11:52.160 | there's a whole bunch of different widgets on this.
00:11:55.600 | So the first section here,
00:12:01.200 | you've got the five main financial functions,
00:12:04.760 | future value, number of years, monthly payment,
00:12:13.040 | interest rate calculation, present value calculation.
00:12:18.040 | So the idea here is you put all the things in green
00:12:22.600 | and it will then calculate the cell that's in white.
00:12:26.200 | So just a quick widget for that.
00:12:31.200 | And then there's a bunch of others.
00:12:36.400 | I think this is, this one is just,
00:12:39.560 | people say, well, is it better to pay off the mortgage
00:12:41.840 | or invest?
00:12:44.080 | And this one will just show if the after tax rate
00:12:47.720 | is the same, the result is identical.
00:12:51.320 | Time to financial independence.
00:12:57.080 | So if you know what your expenses are
00:12:59.920 | and what your starting value is,
00:13:03.200 | it's just a simple rate calculation.
00:13:06.640 | And for those who are really into the minutiae,
00:13:10.400 | it will even show you derivatives of the time
00:13:13.640 | to FI without, or based on all these different items.
00:13:18.640 | Evaluation of pensions.
00:13:25.320 | So let me skip over this one, come down here.
00:13:29.400 | So for example, if somebody has a choice
00:13:32.080 | between getting a $600,000 lump sum versus $36,000 a year,
00:13:39.640 | then this shows the curve of mathematical indifference.
00:13:44.640 | You can overlay this with all your thoughts
00:13:48.520 | about what the market might do or what your own longevity is
00:13:52.440 | or what the, whether the insurance company
00:13:57.440 | is gonna still be around to pay out an annuity.
00:14:03.080 | But this curve shows on a pure mathematical look
00:14:09.160 | that these two are identical.
00:14:11.800 | For example, if you, life expectancy is what,
00:14:15.280 | somewhere just short of 28 years,
00:14:18.960 | and you assume you're gonna get 4% per year
00:14:23.720 | on your lump sum, that would be identical
00:14:26.960 | to taking the $36,000 a year pension.
00:14:30.420 | You know, if the lump sum amount was going to be
00:14:38.800 | significantly less, well, that would tell you that,
00:14:43.800 | you know, you're almost certainly ahead
00:14:48.720 | by choosing the annuity unless you think
00:14:52.400 | you're only going to live for five to 10 years.
00:14:56.040 | If your lump sum is much more,
00:15:05.240 | then you're almost certainly ahead
00:15:09.080 | by choosing the lump sum unless you don't think,
00:15:13.080 | unless you think you're gonna just put it in a bank
00:15:15.760 | and earn 1% interest and live for 35 years.
00:15:18.840 | If you're gonna have a COLA on the pension,
00:15:25.240 | let's say a 3%, well, that makes it a little bit
00:15:29.800 | tougher choice, or it makes the annuity
00:15:35.120 | that much more favorable.
00:15:36.820 | So the orange curve here is with the cost
00:15:40.720 | of living adjustment, and the blue curve is without that.
00:15:44.320 | Just a bunch of other widgets here.
00:15:48.840 | This is the one where you ask a person,
00:15:51.400 | would you rather invest $1,000 a year
00:15:55.360 | between when you're age 21 and 35,
00:15:59.880 | or $2,000 a year from age 35 for the rest of your life?
00:16:05.160 | And it turns out that the earlier you invest,
00:16:10.080 | the better the results.
00:16:11.480 | So it solves that calculation.
00:16:14.860 | Growth in a taxable account.
00:16:17.660 | So it accounts for the tax drag,
00:16:20.540 | and then the capital gains bite at the end.
00:16:30.200 | This does reference the Bogleheads Forum discussion.
00:16:35.200 | If you contribute the maximum, there's a slight advantage,
00:16:42.440 | or there can be a slight advantage to Roth
00:16:44.560 | just because of the tax drag you would have to have
00:16:48.400 | when contributing the maximum to traditional.
00:16:53.400 | You can put more into the Roth.
00:16:55.240 | Now, if you take the traditional extra tax-deferred
00:17:00.240 | or tax-free amount, pre-tax amount,
00:17:02.960 | and put that into a taxable side account,
00:17:06.160 | it's going to have some amount of tax drag.
00:17:08.720 | And then a bunch of others, which off the top of my head,
00:17:15.080 | I'm not sure, and it looks like there's
00:17:17.880 | some work-in-progress stuff down here.
00:17:21.600 | So that's the, I'll just go through all the other tabs
00:17:26.440 | on here fairly quickly.
00:17:28.220 | So the very last, I'll just go from the far right,
00:17:34.560 | work my way back towards the beginning.
00:17:36.560 | So this is, oh, yeah, so back on the calculations tab,
00:17:43.200 | everything that I showed was using 2021 tax brackets.
00:17:51.480 | If anyone thinks that in 2026,
00:17:55.960 | the brackets are going to revert
00:17:57.600 | to exactly what they were in 2017,
00:18:02.160 | except for inflation adjustment,
00:18:04.260 | you can go, you can, I'll show it real quick here.
00:18:08.560 | Up here, you can change that 2021 to 2026.
00:18:16.480 | And now you get the brackets as they would be
00:18:21.480 | if nothing else changes in the law.
00:18:24.660 | I wouldn't bet a whole lot on either the 2021
00:18:28.800 | or the 2026 numbers actually being the way the tax law
00:18:33.800 | will be when we get to 2026, but it's something.
00:18:39.440 | Next tab, there's a basic terms tab.
00:18:46.220 | I think this is the one for people who say,
00:18:49.120 | should I invest in an index fund or a 401k?
00:18:52.520 | It attempts to educate people on just some basics.
00:18:59.780 | Let's see.
00:19:03.260 | So skipping over the miscellaneous calculations.
00:19:07.080 | So the question of if somebody is in the 12% bracket,
00:19:12.080 | should they do tax gain harvesting on capital gains
00:19:15.600 | or should they take advantage of a low marginal rate
00:19:19.480 | to do Roth conversions?
00:19:21.480 | If they assume that in the future,
00:19:23.200 | their marginal rate will be higher.
00:19:25.240 | So you can play around with this.
00:19:28.160 | Turns out from the playing I've done,
00:19:30.680 | if you think you're gonna keep the money in there
00:19:34.060 | for any significant length of time,
00:19:36.360 | it works out ever so slightly better
00:19:38.580 | to do the Roth conversion,
00:19:40.400 | but it's not a huge deal either way.
00:19:44.800 | Usually around October timeframe, October, November,
00:19:48.360 | you get a lot of questions on,
00:19:50.600 | gee, should I sign up for high deductible health plan
00:19:53.760 | or not a high deductible health plan?
00:19:56.740 | And this is one of several widgets that are available
00:20:01.160 | on the internet to take a look at that.
00:20:04.800 | All the insurance plans are a little different.
00:20:06.680 | They get into, well, you co-pay for this,
00:20:09.920 | a little bit for that,
00:20:12.160 | but it's anyway, it's a widget that will help
00:20:17.160 | at least in some cases for people to compare the HDHP
00:20:24.280 | with HSA to PPO or other non-HDHP without HSA.
00:20:29.360 | The social security benefit predictor,
00:20:38.000 | put in your actual earnings and then it will go ahead
00:20:43.000 | and calculate your AIME adjusted average,
00:20:48.640 | something monthly earnings.
00:20:54.360 | And then it goes into the social security calculation
00:20:59.880 | with the two break points and comes up with your base PIA.
00:21:05.760 | So this is the number that you would feed
00:21:09.440 | into something like Mike Piper's opensocialsecurity.com.
00:21:14.440 | That tool needs to know
00:21:15.960 | what the primary insurance amount is.
00:21:20.160 | So you can calculate this for one person's earnings
00:21:23.680 | and then you could either make a copy of the sheet
00:21:27.800 | or just overwrite here with another person's earnings
00:21:31.760 | and get the other person's primary insurance amount
00:21:35.360 | and feed that into opensocialsecurity.com.
00:21:38.700 | Non-deductible IRA, so this references Vogelhead's wiki.
00:21:46.120 | And if you wanna see, I guess how that wiki table came to be,
00:21:52.940 | I think the wiki table was there before this spreadsheet,
00:21:58.360 | but anyway, 401(k) versus taxable.
00:22:04.200 | Traditional is, or Roth is always going to be better than,
00:22:09.200 | or at least no worse than taxable,
00:22:13.080 | but then the question is where does traditional fall in?
00:22:16.720 | And so I guess if you wanted to,
00:22:18.440 | you can project out as many years as you want to
00:22:23.040 | and just see what the effects are.
00:22:25.280 | Form 86, okay, this one,
00:22:28.600 | you had a lot of people with a backdoor Roth IRA
00:22:33.120 | and they get into problems with form 8606
00:22:37.000 | or not that they don't get into,
00:22:41.080 | in addition to getting into problems with it,
00:22:42.880 | even worse sometimes people don't even know what it is.
00:22:46.340 | And if you read various forum threads,
00:22:51.120 | the questions that TurboTax or H&R Block or whatever asks,
00:22:56.880 | sometimes those questions are kind of confusing.
00:23:02.160 | This seems to be, at least to me,
00:23:04.960 | it seems much more understandable
00:23:07.400 | than some of the TurboTax questions
00:23:10.160 | having gone through that myself.
00:23:12.520 | So for example, if let's say if someone,
00:23:17.280 | they're still looking at 2020 and they say,
00:23:21.560 | well, okay, contributions made for this
00:23:25.920 | in this calendar year.
00:23:26.980 | Well, now we're already in 2021.
00:23:29.520 | So, okay, so if someone's gonna put $6,000
00:23:34.360 | into their 2020 IRA,
00:23:36.600 | well, they did it in the next calendar year
00:23:42.520 | for the 2020 tax year.
00:23:45.320 | And it would say, okay, well,
00:23:47.360 | this is what your form 8606 is probably going to look like
00:23:51.100 | when you run it through tax software.
00:23:53.060 | Then in 2021, if they say, okay,
00:23:57.760 | I'm gonna contribute another 6,000
00:24:00.640 | and I think I'll convert
00:24:04.440 | and maybe 50 bucks will have increased in value.
00:24:09.440 | So it would say, all right,
00:24:12.200 | so this is what your form 8606 should look like.
00:24:16.160 | And you're gonna pay 50 bucks in tax.
00:24:20.260 | Most, I think the tax software runs things
00:24:25.480 | through a pub for 590B worksheet 11.
00:24:29.920 | You can force this to just use 8606.
00:24:36.000 | So if someone was filling it out on their own,
00:24:42.160 | they'd probably see something like this instead.
00:24:45.080 | 62, so alternative minimum tax
00:24:50.160 | and not many people need to worry about that.
00:24:53.040 | Under current tax law, this just shows,
00:24:56.000 | tax rate shows the nominal brackets,
00:24:59.600 | but that's interesting on a theoretical basis,
00:25:04.080 | but the calculation sheet
00:25:06.680 | with the actual marginal rates is much more interesting.
00:25:10.980 | There is a bunch of state brackets in here.
00:25:17.320 | And if I remember right, yeah,
00:25:20.680 | so this is based on the taxfoundation.org
00:25:24.280 | publishes individual state tax rates.
00:25:29.280 | So I think this is good for the brackets themselves.
00:25:34.820 | And then in the state calculation,
00:25:38.160 | it does have some things about what's the standard deduction
00:25:42.200 | or personal exemption,
00:25:44.020 | state earned income credit as a percent of federal,
00:25:50.240 | et cetera, et cetera, et cetera.
00:25:51.880 | I'm sure it doesn't have every possible nuance
00:25:54.520 | in here about state taxation.
00:25:57.240 | So I think the claim is that the federal calculations
00:26:02.240 | are really, really good.
00:26:04.260 | And the state calculations are probably decent,
00:26:07.060 | but again, caveat user,
00:26:09.440 | if there's something about specific pension exclusions,
00:26:13.640 | depending on exactly how old you are,
00:26:16.280 | that may not be in here.
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