Protecting Income – Shopping for Life & Disability Insurance

1. Life Insurance
2. Disability Insurance
3. Shopping for Life & Disability Insurance
4. Social Security Survivor & Disability Benefits
5. Will Life insurance benefits be taxed?
6. Emergency Fund
7. Umbrella Insurance

Shopping for both life and disability insurance can be a daunting task.  And while we typically don’t like to use services by people who have “agent” in their title, using one for obtaining life and disability is advised.  Our agent helped us with all the paperwork, met us at our work to sign the papers, came to our home to talk with us etc.  He certainly made the experience much easier.  AND when our nasty habit proved to be a problem, he was able to go out and find another company which satisfied our criteria without having to do another medical screening.  Tres simple.  The price is the same whether you use an agent or not, so you should use the service of a good agent.  There are plenty out there, so if you run across one you don’t like, move onto the next one.  Wash, rinse and repeat until you find an agent you like.

Protecting Income – Disability Insurance

1. Life Insurance
2. Disability Insurance
3. Shopping for Life & Disability Insurance
4. Social Security Survivor & Disability Benefits
5. Will Life insurance benefits be taxed?
6. Emergency Fund
7. Umbrella Insurance

Did you know you are more likely to become disabled than you are to die?  We don’t know if that is true, but you hear it a lot and there are some old statistics sited on the interwebz from agencies we have never heard of.  Not to say they are invalid, just that we can’t vouch for them.  The Social Security Administration claims you have 30% chance of becoming disabled before you reach retirement age.  Either way, you still need disability insurance.

Disability insurance is tricky.  Life insurance will seem simple after going through all this mainly because when you are dead, you are dead.

Whoo-hoo-hoo, look who knows so much. It just so happens that your friend here is only MOSTLY dead. There’s a big difference between mostly dead and all dead. Mostly dead is slightly alive. With all dead, well, with all dead there’s usually only one thing you can do.

-Miracle Max, The Princess Bride

Ok, aside from what we all learned in The Princess Bride, being dead is cut & dry.  Being disabled, now that is interesting.  It is similar to being sick, it means different things to different people.  Someone can have a headache and be sick.  Or they can have a cold.  Or pneumonia.  And being disabled, means different things to different insurance companies.

Protecting Income – Life Insurance

We have come to realize that the Personal Finance blügs are stuffed full of, “Yea! Roth IRA!,” “Debt is evil,” “Earn more with a blüg,” “Landlord = Passive Income” etc.  The same themes seem to be recycled and regurgitated in different size chunks and a different color.  But, one topic is rarely covered, investing.  Actual, investing advice.  While we don’t pretend to be experts, we are going to start series for putting people on the path to retirement and achieving their goals.  Perhaps this is not as interesting as how much we spent on clothes last week.  But, actual investing articles aren’t regularly covered in hot & heavy detail in the personal finance blüg-o-sphere.  We choose not to disclose our portfolio size and age because we believe our ideas should stand on their own.  That is to say, it doesn’t matter if we are 25 year old millionaires or 50 year old wannabe retirees with $10k to our name, because our ideas are valid regardless.  Well, maybe it would give us some street cred if we did unveil our portfolio, but our ideas should stand without the backing of (or lack there of) our personal portfolio.  And perhaps this will bring the readership down from 1 person to 0 people.

We still plan to post twice a week, and we may jump around from series to series or whatever we think is important.  But, you’ll know what is coming down the pipeline.  And if you want to see something or see something sooner, let us know.  We are thinking of adding a “carnival” type post on Fridays, but focusing more on those who ignore us or offer up misleading information.  But right now, we’re still at 2 posts per week, Monday & Thursday.  Without further adieu…

1. Life Insurance
2. Disability Insurance
3. Shopping for Life & Disability Insurance
4. Social Security Survivor & Disability Benefits
5. Will Life insurance benefits be taxed?
6. Emergency Fund
7. Umbrella Insurance

Ok, so after our diatribe above about blügs not talking about investing, we start out talking about a non-investing topic.  But, protecting your income is SOOOOOOOO important, that we will kick off with this series.  Your ship can be sunk if you aren’t protected.

At one point or another, we will all think about the need for life insurance.  And while this topic is covered ad nauseous in the personal finance blüg-o-sphere, we have some additional points to offer.  First, only consider life insurance if someone depends on you.  If you vanish like a fart in the wind, will the loss of your income result in others eating cat food?  If not, you don’t need life insurance.  That funeral thing is a crappy sole reason to take out a life insurance policy.  If no one depends on your income, you should be debt free (see entire personal finance blüg-o-sphere on why it is a bad idea to be in debt – “bad” debt as it is coined – and how you can escape its grasp) and have an emergency fund in cash (or CD’s) that should cover those expenses.

IRA to IRA to IRA Rollover in one year?

Why surfing the interwebz, we’ve run into some potentially misleading information.  Well, it most definitely can be interpreted as being misleading, but the intent of the individuals is unknown.  Of course, the point of this blüg is to make sure people don’t use this misleading information.  So, regardless of what someone’s intention is, we hope people walk away with more knowledge than they did before they invested a few minutes in what we have written.

Over at Retire by 40’s blüg, “Ray” gave some advice in the comments that certainly deserves an asterisk.  And, we put that asterisk in the comment section.  But, here is what “Ray” said which could be misleading.

What people don’t understand is you can roll it over to say Vanguard and if you don’t like them, then roll it over to Etrade and if you don’t like them, roll it over to Schwab etc.

Usually from start to finish it’s no more than 7-10 business days if you do it right…

The implication here is that you can just rollover whenever you please.  Which is true, but not without consequences.

Why we want the standard tax deduction

Welcome again from our advanced tax study center.  It’s Tax Day!  One of the greatest days of the year, second to Columbus Day.  No other day offers 15% off at PF Chang’s without a coupon!  And while tallying up the total amount paid to Uncle Sam is pseudo-fun, the most important thing is saving that 15% at PF Chang’s.  We bring about 798 collective dog years of tax experience and we thought we would offer some sage advice-Strive to take the standard deduction.

Why you should use 5 year CD’s for your emergency fund

We have advised not to reach for yield by doing things like investing in P2P lending or beyond your risk profile.  This is especially true for one’s emergency fund, where it should be desired to have the money liquid with no risk of loosing principal.  These two characteristics of an emergency fund leave us with a few, unexciting options.  Unfortunately, today’s options don’t provide much inflation protection.

Gratitude for being able to care about minutiae

While this blüg is mainly about investing for retirement and we promised ourselves we would leave lifestyle topics out, we can’t help but reflect on how grateful we are to live a very comfortable life.

With one of us being of Korean heritage, an article was sent to us about a North Korean woman’s escape from the awful conditions and tyranny.  If you don’t want to read the whole article (and you should), we will summarize what was endured.  A woman and her family lived off of grass as their main source of nutrition. 

You are not Buffet

What’s interesting around the interwebz and personal finance blüg-o-sphere are the individuals who think they can beat the market.  While not impossible to do so, we can’t help but ask ourselves, is this from luck? or is this because of skill?

Many point to the “Oracle of Omaha” as the poster child of being able to analyze a company, pick the winners and reap the benefits with your feet kicked up as the cabana girl/pool boy bring you fruity drinks with those little umbrellas.  But another question we would like to delve into is, “Is how Warren Buffet invests the same way we invest?”

We (the working stiffs of the world) are retail investors.  We pay a premium to invest.  And when we do invest, we are given the scraps and leftovers that those higher in the pecking order have left us.  No one calls us about investing in oil wells in North Dakota, no one calls us with great business deals needing capital without the opportunities first being picked over.

When we buy a security, we don’t get invited to the board meetings.  We don’t get a say in what the company does, when it does something or how it does something.  We pay a premium for the privilege of investing in a company and we are asked to stand on the street with all the other working stiffs.

When debt becomes due, we may be the first to line up to get paid.  But we are quickly shuffled to the back of the line.

When Warren Buffet invests in a company, he is usually issued preferred shares of a company, often times reaping unheard of dividends.  He is invited to the board meetings and very much has a say in how business is conducted.  This contrasts from how we working stiffs get to invest.  So, on that level, it’s not fair to think Warren Buffet is the poster child of all retail investors.

This is not to say where Buffet is today wasn’t from the bottom and without hard work.  He certainly wasn’t fed with a silver spoon and truly started by delivering newspapers.  And maybe that is why so many people aspire to be like him, where he came from is the same as the majority of us and we desire to be known as an Oracle.  And surely, someone will eventually rise to his level if they haven’t already.  And some will pick some winners and profit handsomely.  But, we shouldn’t be fooled into thinking we can follow in their footsteps.  More than likely, a stock picker’s success is in luck, although they may think it is skill.  And if it truly is skill, why would you tell everyone about it, as that will most likely ruin your success?

In conclusion, we’ll leave you with Warren Buffet’s own advice to the working stiff, retail investor like ourselves.  In Berkshire Hathaway’s 1996 annual report, the following was said in the Chairman’s Letter:

Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

misconception about roth IRA first time home buyer distribution

Well, with April here, spring in the air, flowers blooming and tax time looming, we thought we would dispel a misconception about the Roth IRA first time home buyer’s reduction in earnings while taxes are fresh in the mind of half the population.

We’ve seen this lately being mentioned as an advantage of a Roth IRA here, here and here.  And, we’ve attempted to alert some of them to the complexity of this acrobatic maneuver they suggest.  Some willing to learn, but mostly with us being shrugged off.  So, we thought we would move it to a stage where we can fully (at least attempt to) explain this complex tax move.

First, we should point out, that we think using an IRA for anything else other than retirement is a mistake.  GASP!  A blanket statement.  They are powerful tools which help people to retire.  In an indirect way, yes, buying a home does help one to retire, or paying for a child’s college education (if that is an expense you decide to bear) does help you to retire.  But, there are other ways to help you save for those things.  Look at it this way, you only get $5000/yr (under current rules) to contribute.  Maxing this out year after year will barely get you into retirement, if ever.  Use a wrench to turn nuts & bolts, and a hammer to pound nails.  So, even if you read through what we are about to say and still think saving for a home in a Roth IRA is a good idea, you certainly don’t have our endorsement.  But, our opinion is worth what you paid for it (should we set up a paypal link for some luv?).

The origin of the Roth IRA first time home buyer’s earnings distribution misconception is the interwebz.  It is undoubtedly true that you can withdraw from a Roth IRA, an amount up to $10,000 for the purchase of a primary residence to be your “first” home (usually if you haven’t owned a home in two years, you are a born again “first” time home buyer).  We would certainly hope everyone would due their do diligence (why do we feel like we messed something up there?).  And, if you want a great summary of why most people think this is an easy peasy tax move, read Publication 590, page 62, bottom right of the page.  It is right there, plain as day under big bold words that say, “What are Qualified Distributions”:

One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

And if you’re looking at the Pub 590 document that we link to, page 62 and you click on the hyperlink of “first home,” then it takes you to the part where it defines who you can buy a home for, what defines a “first” home and even points out that you and your spouse can both do this for the same home!

This is a qualified distribution, so the normal roth ordering rules don’t apply (rules which say when there is a non-qualified distribution that you first take out your contributions, then conversions-this has a few caveats-and then earnings).  Being a qualified distribution, you can take from the earnings.  If you think you can have your cake and eat it too by keeping your contributions as an emergency fund and reducing your earnings for the home purchase you are WRONG!  You will have to reduce your basis (or contributions) by the amount of earnings you withdrew the prior year for a first time home purchase, up to $10,000.

Sounds confusing, well it is.  Let’s look at some tax forms.  To do this, we must go back to 2010 so you can see how this works.  For our example we’ll assume you have $30,000 in a Roth IRA, $10K of earnings and $20k of contributions.  Let’s say you want to tap that $10k of earnings for a home in 2010.  First off, you must have a Roth IRA account at least 5 years old.  Withdrawing anything before that can trigger taxes and penalties.  But, what is so lucrative about using the earnings instead of the contributions?  The main reason is so in our example, you could take all $30k out for a home purchase, tax and penalty free.  But, if you aren’t going to completely wipe out the account, you are not gaining anything (and some would argue you are loosing things).

One of the hard sells of Roth IRA’s are their flexibility.  And they are the Gumby of retirement investment vehicles because contributions can be tapped, tax and penalty free.  If you like this about a Roth, here is why you need to be cautious with this first time home buyer deal.  Let’s assume you take the $10k of earnings in our example above in 2010 for the purchase of your first home.  You would fill out the 2010 form 8606 like so…

That’s it.  You can download this 2010 8606 form here.  The 2010 form is a little more complicated than other years because of being able to allocate taxes due on conversions over two years, but all that is in Part III.

So, in 2011 (or any year into the future), let’s say you want to take out the $20k of contributions, for whatever reason.  Let’s fill out your form 8606 in 2011.  This is what it would look like (oh, and you’ll need the instructions, linked here for your pleasure).

WHOA! What just happened?  How did you end up with taxable money in line 36?  Should line 22 be $10,000?!  OR $20,000?  As they say, the devil is in the details.  Let’s look at those instructions for the 2011 8606, line 22.

Figure the amount to enter on line 22 as follows.

• If you did not take a Roth IRA distribution before 2011 (other than an amount rolled over or recharacterized or a returned contribution), enter on line 22 the total of all your regular contributions to Roth IRAs for 1998 through 2011 (excluding rollovers from other Roth IRAs and any contributions that you had returned to you), adjusted for any recharacterizations.
• If you did take such a distribution before 2011, use the chart on page 9 to figure the amount to enter.

We hop to page 9 and find the following chart.

So, using this chart on page 9 of form 8606 instructions for 2011, if we took a distribution for a first time home buyer in a prior year, we must take that off of our Roth basis in the following year (2010 8606 line 29 less line 26).  Essentially, the Roth ordering rules are restored and the Roth basis (contributions) is reduced by the amount used for the home buyer’s distribution in any following year you take a distribution.  You can find the 2011 8606 form here.

If you were planning on having an emergency fund and use a home buyer distribution within your Roth accounts, it would be wise to treat the home buyer distribution as being from the basis.  In fact, it would be wise, if you aren’t wiping out the entire amount of Roth funds, to take from the basis and save yourself not only a headache, but your lifetime $10,000 home buyer  distribution from any IRA.  The wisest thing you could do, however, is not touch your retirement accounts until needed in retirement.

And you should check out our legalese page to know we are not professionals at anything, except maybe at barking.  H&R block won’t even hire us to prepare 1040EZ’s.  So, talk to them or a real tax professional.