How to think about the Spousal IRA deduction gap

Become a Patron!With the end of the year in sight and tax season around the corner, I've been brushing up on the rules for IRA contributions and deductions. Remember IRA contributions can be made for the 2019 contribution year until April 15, 2020. Most large IRA custodians make it easy to designate your contribution for the appropriate year, but if you use an independent broker and make a 2019 contribution next year, make sure they record the contribution properly or you might get an angry letter from the IRS for exceeding your contribution limit in 2020. Today I got to thinking about how and when spousal IRA's can be maximized, particularly when you fall into what I call the "spousal IRA deduction gap."

How spousal IRA's (are supposed to) work

Technically an IRA should only be referred to as "spousal" if one spouse in a married-filing-jointly couple has earned income in excess of the individual contribution limit and the other has earned income less than the individual contribution limit. In this case, contributions can be made to an IRA in the non-earning spouse's name, based on the excess earnings of the earning spouse.That's a complicated way of saying that if the total earnings of a married-filing-jointly couple are at least $12,000 (in 2019), then each spouse's IRA is eligible for the maximum $6,000 contribution, regardless of the distribution of the earnings between the spouses. If the couple's total earnings are less than $12,000, then the amount of earnings can be split arbitrarily; there's no requirement to "fill up" the earning spouse's IRA before contributing to the spousal IRA.I don't know what the original rationale was for this scheme, but it functions as a kind of "breadwinner bonus:" if a worker marries a non-worker, they get to use the non-worker's IRA deduction, a kind of annual tax stipend for bourgeois family values.Of course, most low-income people don't contribute to IRA's, and most married couples consist of two earners, so this intended use case is negligible in the real world. There's one nuance to the spousal IRA rules, however, that has a very real impact: the spousal IRA deduction gap.

Why does the spousal IRA deduction gap occur?

The spousal IRA deduction gap arises because while total contributions for married-filing-jointly couples are limited to the greater of the couple's joint earnings or the annual per-spouse contribution limit, the deductibility of contributions is determined based on the combination of the couple's joint modified adjusted gross income (adjusted gross income after adding back in certain deductions) and each spouse's workplace retirement plan coverage.This is spelled out on page 13 of IRS publication 590-A. Table 1-2 shows that a married-filing-jointly spouse covered by a workplace retirement plan can deduct a traditional IRA contribution if their MAGI is $101,000 or less. Table 1-3 shows that a married-filing-jointly spouse whose spouse is covered by a workplace retirement plan can deduct a traditional IRA contribution if their MAGI is $189,000 or less.That creates an $88,000 gap, where contributions to the non-covered spouse's IRA is still fully deductible, whether or not they have any earnings.

Maximizing the value of the spousal IRA deduction gap

Ideally you'll be maximizing your traditional, Roth, or backdoor Roth IRA contributions each year, but obviously not everyone can, and not everyone who can, will. The spousal IRA deduction gap means that for couples that fall into the gap and aren't able or willing to maximize contributions to both spouse's IRA's, it may be more tax-advantageous to fill up the non-covered spouse's IRA before making contributions to the covered spouse's Roth IRA.

Planning around the spousal IRA deduction gap

Everything above has discussed the deductible IRA rules on the assumption that a couple is already married. However, there's a second payout tucked in Table 1-2: the increased MAGI limit for covered employees when they get married.A single filer covered by a workplace retirement plan with a MAGI of $73,000 is ineligible for any traditional IRA deduction, while a married-filing-jointly filer is eligible for a full deduction up to $101,000 in MAGI.That means the same filer, upon marriage to a non-covered person earning $28,000 or less, will see their taxes fall by $4,987, from $9,235 to $4,248, assuming a maximum traditional IRA contribution of $6,000 (the spouse's taxes, if any, will also fall due to the expanded married-filing-jointly tax brackets, so the total taxes paid by the couple will fall by more than either individual's under most circumstances).Most high-income workers are covered by one or more workplace retirement plans, and those plans are almost always more generous than the IRA deduction. The $19,000 employee 401(k) and 403(b) contribution limit, for example, is so much higher than the maximum IRA contribution that it wouldn't usually make sense financially to choose, between two other-wise identical jobs, the one without a retirement plan purely to maintain eligibility for the IRA deduction.However, few jobs are identical! There's naturally some breakeven point where an increased salary more than makes up for the lack of a workplace retirement plan; that exercise is left to the reader. Furthermore, people are motivated by more than money: a dream job that leaves you eligible for the IRA deduction might, in total, be more attractive than endless drudgery with a nice retirement package.The final important planning situation arises in the case of self-employment. It's tempting to open an individual 401(k) account soon after starting a small business, since they cost virtually nothing to set up and administer, and allow you to manage your taxes through deductible employer and employee contributions, and Roth employee contributions. That's good advice, but in some cases you might consider waiting until you're generating more (or any) income from the business: if you and your spouse are currently not covered by workplace retirement plans, and if you plan to continue working at a non-covered job while you work on your small business.That's because opening an individual 401(k) may trigger the MAGI limits on your joint income, completing eliminating the traditional IRA deduction if your MAGI exceeds $189,000 or thrusting you into the spousal IRA deduction gap. Of course, if you know your MAGI will remain below $101,000, then there's no harm done, since contributions to both spouse's IRA's will remain fully deductible.The same logic applies once a small business has stopped generating income. While closing a 401(k) may seem like too much trouble, keeping it open may cause you to be considered "covered" and limit your IRA deduction. In that case, once you know you won't be making any further contributions, you may be better off simply rolling the balance into traditional and Roth IRA accounts.These corner cases can become extremely complex very quickly; only a fee-only, fiduciary financial advisor can provide advice tailored to your situation.Become a Patron!

The SECURE Act is headed into law; small employers get a few handouts

Become a Patron!I've written extensively about the hilariously-named SECURE Act, which sailed through the House but was frozen in the Senate while Ted Cruz extorted his colleagues to allow wealthy Texans to make tax- and penalty-free withdrawals from their 529 accounts for "homeschooling" expenses. Contrary to some early reporting, that provision does not seem to have made it into the final bill, although the $10,000 student loan double dip did (the changes to 529 plans start on page 642).Since the retirement provisions have been widely covered (and here ridiculed), today I want to focus on a couple features of the bill which are relevant to small employers.

Existing retirement plan startup cost credit

To understand the changes made by the SECURE Act, you need to be familiar with the status quo, particularly section 45E(b) of the Internal Revenue Code. The section provides for a credit of 50% of an employer's "qualified startup costs," up to $500, for each of the first three years of an employer's qualified retirement plan. An employer is disqualified from the credit if they had a qualified retirement plan in any of the 3 tax years preceding the establishment of the new plan.In other words, even if you wanted to hack the current credit, it would mean opening and closing qualified retirement plans every 3 years, for a maximum benefit of $1,500 every 6 years. Obviously, no one should do this, and as far as I know, no one does; the juice isn't worth the squeeze.But the biggest obstacle to claiming the current credit is the definition of qualified startup costs: "any ordinary and necessary expenses of an eligible employer which are paid or incurred in connection with— (i)the establishment or administration of an eligible employer plan, or (ii)the retirement-related education of employees with respect to such plan."I'm not a tax lawyer, and I'm especially not your tax lawyer, but I interpret this as saying that the credit can only be claimed against the actual administrative costs of starting and running the plan for the first 3 years. In other words, it can't be claimed against costs incurred by the employer making contributions to the plan.The difference is important, since starting a 401(k) plan just isn't that expensive, and administering one on an ongoing basis is essentially free (once you exclude the employer's contributions to the plan).I'm not saying it's impossible to qualify for the credit. If you have to hire an outside firm to set up your plan documents, you'll have to pay them, and the credit helps offset that. In theory if your record-keeping is good enough you could probably even claim the credit against the wages paid to an existing employee for setting up a qualifying plan. But since the credit is worth just $500 per year for a maximum of 3 years, we're left with this kind of silly corner case.

Expanded retirement plan startup cost credit

The SECURE Act does not change the definition of qualified startup costs, nor does it remove the 3-years-every-6-years time limitation. What it does do is increase the maximum credit from $500 per year to $5,000 per year (technically the greater of $500 or $250 per employee, with a maximum of $5,000 if you have 20 employees). A $15,000 tax credit might get your attention where a $1,500 credit didn't.It's still hard to spend $30,000 setting up and administering a retirement plan (since the credit is still capped at 50% of startup and administrative costs), but it's not impossible. In particular, I think it's very likely that we will see new financial instruments that charge a certain portion of the ongoing costs of administering a plan to the employer, rather than the employee, in the first 3 years, as an "ordinary and necessary expense."This is completely speculative, but once you consider the possibility, the possibilities are endless. Consider an annuity provider that charges the individual employee accounts of a 20-employee company an average of $3,000 per year for ten years. Under the SECURE Act, they could charge the employer $10,000 per year for three years, while waiving their fees on individual accounts for ten; the insurance company accelerates its payment schedule, and the federal government foots half the bill!Of course, there's no need to take my word for it; once the SECURE Act is signed into law I expect we'll see such products aggressively marketed everywhere.

Credit for auto-enrollment

What isn't speculative is section 105 of the SECURE Act, which offers employers a credit of $500 per year for establishing an auto-enrollment provision, including in existing plans. Business and finance reporters are extremely lazy so you're sure to see this misreported, but the text of the law is crystal clear and blissfully short:Here the eligible period is not determined by the establishment of the retirement plan; it's determined by the establishment of the eligible automatic contribution arrangement. In other words, virtually all small employers, whether or not they have existing retirement plans, should be eligible for this credit if they start an auto-enrollment option any time after January 1, 2020.While the credit doesn't scale up by number of employees as the startup cost credit does, that makes it more valuable for even-smaller employers, almost none of whom include auto-enrollment in their retirement plans.Become a Patron!

Strategies to pay for an early retirement

Become a Patron!Last month I got to spend some time with a relation who recently left a high-powered tech job, and who asked for some advice about financing a more or less indefinite period of unemployment. I am strongly opposed to mixing money and family, but I eventually relented and offered some ideas in general terms about how I would advise someone who came to me in his situation. I thought it might be useful to write up those ideas in case they're useful to anyone else in his situation.

Get your finances in order

Over the course of a 15 or 20 year career, workers accumulate an enormous quantity of financial junk. Multiple 401(k) and 403(b) plans, stock options and grants, individual stocks, term and whole life insurance policies, etc. Even if you tend each garden carefully, it can be hard to figure out what you really own: is a Fidelity target retirement date fund really equivalent to a Vanguard fund with the same target date? Is a Betterment "aggressive" portfolio the same as a FutureAdvisor "growth" portfolio?An underrated advantage of an early retirement or break in your working life is that it's an opportunity to get all that junk sorted out at minimal or no cost, for the simple reason that long-term capital gains are untaxed if your taxable income (after deductions) is below $39,375 for single filers and $78,750 for married joint filers. In low-income years you should be "harvesting" as many gains as possible in taxable accounts, and unlike with capital losses, there's no wash sale rule with respect to gains. In low-income years, you can realize taxable gains, pay a 0% long-term capital gains rate on them, and then buy identical securities with a new, higher cost basis.In addition to resetting your taxable basis, you should also consolidate your old retirement accounts in traditional and Roth IRA accounts with your preferred custodian. This is a good idea in general, but a break from the workforce is as good a time as any to finally get around to doing it.

How likely are you to return to work, and when?

This is the single most important question when contemplating early retirement, but unfortunately one of the most difficult to answer accurately. The two easiest answers are "I'm certain I will return to work in 1 year," and "I'm certain I'll never return to work," but few people are able to give either. On the one hand, in one year unemployment could be 15% and no one will be hiring 40-year-olds with unexplainable gaps in their resume. On the other hand, 3 months into a supposedly "permanent" retirement you might have already landscaped the lawn, oiled all the hinges, replaced your floor, repainted your living room and be pulling your hair out from boredom.Nonetheless, while it may only be an educated guess, guess you must, since whether or not you return to work is the main input into the most important question: how much risk can you expose your savings to? Unlike some people in the FIRE community, my attitude towards risk is simple: if you do not plan to return to work, you cannot risk any money you need for retirement, while if you are certain to return to work, then you can expose a relatively large amount of your assets to risky investments.You may have noticed a semantic trick I played: I'm not interested in your total assets, I'm interested in the assets you need for retirement.Take the case of a 40-year-old with $1 million in liquid, taxable assets, in a brokerage account for example, who never intends to return to work. They can spend $2,778 per month for the next 30 years, before claiming their maximum Social Security old age benefit at age 70, the very day they exhaust their brokerage account balance. But what if, upon studious reflection, they determine that they only need $1,500 per month to live? In that case, while keeping $540,000 in safe assets, they're free to invest $460,000 in risky assets, knowing that even complete disaster will leave them enough money to meet their needs.It doesn't matter what they call that $460,000, whether it's their "legacy" or "play" money or "gambling" money, what's important is that you can't risk money you need to survive.Hopefully this makes clear the importance of the return-to-work question: if you're certain to return to work in a year, then your "sabbatical" shouldn't have a substantial impact your asset allocation at all: set aside 12 or 18 months worth of cash, CD's, or Treasury bills, and leave the rest invested in an age- and risk-appropriate long-term portfolio. 5 years out of the workforce requires a higher allocation to safe assets, both for the longer timeframe and to take into account the likelihood of lower earning as your experience and skills age. To account for 10 years of early retirement you should count on a significantly lower income, if you do ultimately return to work.

Health insurance

While healthcare costs can pose a serious financial hardship for workers, in retirement the situation is much simpler: if you live in a Medicaid expansion state, you can enroll in Medicaid, which has no premiums or deductibles, and nominal co-payments for prescription drugs. There's no open enrollment period, so you can enroll as soon as your employer-sponsored insurance coverage ends.If you live in a non-expansion state, you'll need to claim the maximum advance premium tax credit and cost-sharing reductions by entering an income into your state's health insurance marketplace that's right around 140% of the federal poverty line, and selecting an eligible Silver plan. You may end up paying a few dollars a month in premiums — in non-expansion Wisconsin my monthly premium was $0.83, so I just paid the $12 once a year in advance to make sure my policy wasn't canceled in case I forgot. When you file your taxes you'll be asked to calculate how much of your advance premium credit you have to repay, which will be $0 or close to it, as long as you're sure to keep your income low enough.And once you turn 65, of course, you're eligible to enroll in Medicare. While Medicare is worse insurance than Medicaid (coming as it does with premiums, co-payments, and deductibles), it does give you access to a somewhat wider range of providers, which is increasingly valuable as you age, depending on your health status.One quick note here: many people have heard of the "Medicaid asset test," which requires people enrolled in Medicare to spend down certain assets before they become "dual eligible" and begin to receive much more generous Medicaid coverage. This asset test does not apply to non-Medicare enrollees living in Medicaid expansion states. Thanks, Obama.

The incredible advantage of working at least a little bit in pretirement

Finally, I want to point out an important advantage to bringing in at least a little bit of income in retirement, or "pretirement" as my relation calls it. Consider the same 40-year-old above, with $1 million in liquid assets and $1,500 in monthly expenses, who therefore needs $540,000 in safe assets and can invest $460,000 in risky assets — an overall asset allocation of 46/54.Earning $500 per month (33 hours at $15 per hour, or roughly 8 hours per week), reduces the cash need over the next 30 years to just $360,000, leaving $640,000 to invest in risky assets — a much risker overall asset allocation of 64/36, with a consequently higher expected final value.A few hours of work per week, whether it's as a high-powered consultant, or a low-powered Walmart greeter, relieves an enormous amount of pressure on your assets.

A few notes on timing

I mentioned above the advantages of harvesting tax-free capital gains in low-income years, but I want to point out a few other opportunities that arise once you've stopped working.Once you've rolled over your workplace-sponsored retirement balances to IRA's, you're able to convert your traditional IRA balances into Roth IRA balances. This is a taxable, but penalty-free, event, so you can convert up to the amount of your standard deduction every year (or your remaining standard deduction after accounting for earned income) tax-free (and substantially more than that at today's favorable income tax rates). Those Roth balances can then be withdrawn tax-free any time after age 59 1/2, and aren't subject to required minimum distributions.Finally, it's worth considering how and whether to make withdrawals from retirement accounts in general. An example of a "simple" strategy would be to draw down taxable assets before age 59 1/2, take distributions from qualified retirement accounts until age 70, then rely on your Social Security old age benefit and any remaining required minimum distributions from then on. More sophisticated strategies do exist, however: your assets may last longer, or accommodate higher spending (two ways of saying the same thing) if you're able to meet your spending needs with your untaxed long-term capital gains in lieu of retirement assets prior to age 70, giving the latter more time to internally compound tax-free. Retirement assets are also granted much more protection in bankruptcy, a kind of built-in insurance policy against sudden financial misfortune.These strategies can be quite complex, and I would not attempt to implement one without consulting a fee-only financial advisor, i.e. one who is not paid to sell you their firm's flavor of the week.Become a Patron!

What the media can't get right about retirement, and why

Become a Patron!A long-time reader passed along an article from the World Economic Forum's blog (yes, for some reason the World Economic Forum has a blog) titled "To retire at 65, American millennials need to save almost half their paycheck." While the article is absolute drivel, it's a good starting point to understand some things the business and financial press gets consistently wrong about savings.

The article itself makes no sense

The extremely thin premise of the article is easily dispatched with: relatively high stock market prices today suggest that future returns will be relatively low. That means projecting today's return on savings forward means today's workers will have to fund a relatively large portion of their retirement spending out of savings and a relatively small portion of their retirement spending out of dividends and price appreciation.I will make a simple observation about this thesis: retirement savings are accumulated over time, not with lump-sum contributions. The idea that "high prices today predict low returns tomorrow" only applies to this year's contributions. Next year's contributions will earn returns based on next year's prices, and contributions made 10 years from now will earn returns based on prices 10 years from now. In other words, assuming steady or rising contributions, today's prices tell you nothing about the lifetime savings rate required to achieve a given level of income replacement in retirement.To give a simple example, the 30-year Treasury bond rate reached a high of about 14.8% in 1981. Since $1 invested at 14.8% for 30 years yields $62.84, using the World Economic Forum's logic, a 35-year-old in 1981 could have invested just 0.8% of their salary each year in order to replace 50% of their pre-retirement income, since 30 years later, that 0.8% would have swollen to 50%.The problem is that 10 years later, the 30-year Treasury rate had fallen to below 8%, and the same 0.8% salary savings would replace just 8% of their salary 30 years later. The World Economic Forum is making the primitive mistake of projecting this year's expected returns forward to all future years.With the Social Security full retirement age already raised to 67 for my generation, even the oldest millennials have 25 or more earning years ahead of them; of course it's possible today's high stock market prices will continue for the next 25 years, but let's just say I have my doubts. And if we do have 2, 3, or 4 crises, recessions, or depressions between now and then, there will be plenty of opportunities to buy assets with expected returns just as high as they are low today.

The financial press doesn't get it: no one saves anything

In some ways it's unfortunate that we use the same verb in two radically different, almost opposite meanings: to "save," and to "save up for." To "save up for" is the most common and natural thing in the world, and virtually everybody does it. Whether you're saving up for Christmas presents, a new console game, a down payment on a house, or an anniversary dinner, the idea is the same: you set money aside every week or month, for a known or unknown period, and then you spend it, and it's gone. This is not fundamentally different from buying something on credit, it's just cheaper: with credit you get the object of your desire up front, then pay for it over time, while with savings you pay for it over time, then get it at the end.But "to save," let alone "to invest," means something totally different. It means setting money aside, for an indefinite period of time and for no definite purpose. This behavior is vanishingly rare because upon a moment's reflection, it makes almost no sense.First, setting money aside today comes with an obvious cost: that money could be spent instead. It's one thing to save up $300 for a new gaming console; it's another thing entirely to have saved $300 and then, instead of buying a new gaming console, keep saving instead!Second, the indefinite period creates obvious risks. I'm not talking about investment risks, since even most people who do save don't invest their savings. I just mean the risks of doing anything over time. Maybe you'll die before you ever spend any of your savings — you can't take it with you. Maybe you'll get divorced and "lose" half your savings to your former spouse. Maybe word will get around that you have savings and your friends and relatives will come around asking for a "loan."To put it as simply as possible, if saving were easy, the government wouldn't have to go to outlandish lengths to encourage people to do it. And despite those outlandish efforts, the only people who save are still the same people who would do it anyway: high-income professionals. Don't get me wrong, they're happy to take the government handouts, but the handouts are pure gravy.

The fantasy of the retirement "number"

Let's turn back to the underlying premise of the World Economic Forum post: the goal of retirement saving is to replace a certain percentage of your pre-retirement income by setting aside money during your working years. If you can project forward both your earnings trajectory and your investment returns (whether on a year-by-year basis or using the "starting year" fallacy described above), then you can determine the total balance you need to have in your accounts on the day you stop collecting a paycheck.But who could this model possibly describe with any degree of accuracy? The majority of people start collecting Social Security old age benefits on the day they become eligible, and have no savings or an amount that is simply inconsequential to their long-time retirement spending needs. Using the 4% rule, someone who has managed to accumulate the fantastic sum of $100,000 at retirement can only safely withdraw $333 per month to supplement their Social Security benefits, and if the money is kept in a risk-free account, the safe withdrawal rate must by definition be even lower.On the other hand, savvy high-income professionals pour vast sums into their pre-tax retirement accounts, 529 accounts, Roth accounts, HSA's, after-tax 401(k) accounts, and these sums accumulate so quickly they dwarf any conceivable financial needs in retirement.What the "retirement number" presupposes is that there's some group of people in-between, who can afford to save more than nothing, but less than the absolute maxima allowed in tax-advantaged accounts. And this group no doubt exists: there are a lot of numbers between $0, the amount saved by most people, and $19,000, the amount contributed by high-income professionals to their 401(k) plans in 2019, so in a country of 350 million souls there are certainly people contributing $1,000 and people contributing $18,000.Unfortunately, the first $1,000 you save does nothing for your retirement security (you'll still rely on Social Security old age benefits), and the last $1,000 you save does nothing for your retirement security (you'll retire wealthy no matter what).

Finance journalism is an ideological project

What all the above should make clear is that the relentless focus on this sliver of the population, the "in-betweeners," is not about personal finance, it is about ideology. Tax-advantaged investment accounts obviously provide the overwhelming majority of their tax benefits to the people who can afford to contribute the most money to them, and no benefit at all to people who can't afford to contribute anything.If retirement income security, or affordable higher education, were really public policy goals, then the money currently spend shielding the investments of the wealthy from taxation would go a lot further in boosts to Social Security benefits and public subsidies for higher education.But if you can create a mile-wide, inch-thick class of people who have contributed "something" to an IRA, 401(k), 403(b), or 529 plan, then you suddenly have tens of millions of people mobilized to protect those programs for the wealthy despite the trivial benefits they receive from them, and the ideological basis for cutting Social Security benefits and public higher education funding even further: anyone without sufficient retirement income should have raised their retirement contributions faster; anyone who can't afford to send their kids to college should have opened that 529 plan earlier.After all, the financial press was there all along telling you to, so you have no one but yourself to blame.Become a Patron!

What to watch for as the Senate panics over the SECURE Act

Become a Patron!My readers know that the SECURE Act, passed unanimously out of its House committee and overwhelmingly on the floor of the House, was conjured into existence by the insurance industry in order to increase the distribution of expensive, opaque annuity products in 401(k) retirement plans. It incidentally also includes a few other provisions designed to reduce the taxes paid by the extremely wealthy, like the SECURE backdoor into 529 assets. Throughout 2019 the Act has been held up in the Senate by Ted Cruz, who wants to open the backdoor even further by allowing tax-free distributions from 529 accounts for "homeschooling" expenses.The SECURE Act is back in the news since, with impeachment looming, the Senate's legislative calendar is looking increasingly time-constrained, and the insurance industry's senators are panicking to make sure their masters get what they paid for.Since some version of the Act will likely be folded into end-of-year budget negotiations, here's what to watch for as that process plays out.

What won't change: annuities and RMD's

The core of the SECURE Act, and its companion measure in the Senate, has always been to increase the distribution of annuities in employer-provided 401(k) plans by shielding employers from liability when those plans are unable to make their promised payments. The sop to individual savers to "balance out" that giveaway is an increase in the age, from 70 1/2 to 72, at which minimum distributions are required from pre-tax individual retirement accounts and 401(k)'s.Those two giveaways are the reason the Act exists, and are unlikely to change substantially since they've already been frozen in carbonite by their respective lobbyists.

The 529 backdoor

The House version of the SECURE Act includes the SECURE backdoor into 529 assets, allowing account owners to double dip into their account balance, once by taking a tax-free distribution for higher education expenses covered by a student loan, and then a second tax-free distribution of up to $10,000 in order to repay that loan.The Senate version did not contain that provision, so it remains to be seen whether the final measure will include the backdoor, and if so, whether the House's $10,000 limit will be kept, raised, or lowered.

The "homeschooling" loophole

In the smash-and-grab tax act of 2017, a private schooling loophole was added to 529 plans, allowing for up to $10,000 in tax-free distributions for certain private primary and secondary education expenses. Ted Cruz wants to blow that loophole wide open by allowing for the same tax-free distributions for "homeschooling" expenses, and has blocked passage of the Act in the Senate until he gets his way.Upon even a moment's reflection, this is simply open-ended permission for the wealthy to shield their investments from capital gains taxation. After all, education takes place throughout the year. Who is to say that tennis lessons aren't a form of homeschooled "physical education?" Who is to say that a laptop isn't necessary for homeschooled "computer science?" Who's to say that a month in France isn't a "foreign language" field trip?So far the Senate has had the good sense not to bend on this point, but in the flurry of year-end negotiations, Cruz may end up getting his way.

Changes to "stretch" IRA's

For technical reasons, it's much easier to pass legislation that does not have a budgetary cost than legislation which does, so in addition to its handouts to the very wealthy, the House version of the SECURE Act also included a measure to increase revenue: drastically shortening the period over which withdrawals from inherited IRA's and 401(k) accounts must be taken.Under current law, required distributions from an inherited IRA can be calculated based on the heir's life expectancy, rather than the original account owner's. This allows an heir to both reduce required distributions and strategically time distributions for low-tax years. Under the SECURE Act, all inherited IRA's must be completely distributed within 10 years.This is an extremely important change in the world of tax planning, but obviously not of much interest to the overwhelming majority of people: most people do not inherit anything; most people who do inherit something don't inherit IRA's; and most people who inherit IRA's just withdraw the money immediately, they don't strategically time withdrawals for the next 60, 70, or 80 years.If the SECURE student loan backdoor limit is raised, or the "homeschooling" loophole is added, the budgetary cost of the Act will soar. That may mean the stretch IRA period will be shortened further: a 7-year window raises less money than a 10-year window, since it mechanically reduces the opportunities for strategic withdrawals.It's also possible the necessary revenue will be raised elsewhere in the final bill, or the procedural point of order will be simply be waived.

Conclusion

The SECURE Act is a bad law that should not be passed: the benefits go overwhelmingly to the wealthy in the form of tax savings, and the costs, particularly the ability of annuity marketers to target employers for inclusion in 401(k) plans, will be borne exclusively by the working and middle classes.But since it likely will be passed in some form, eventually, now you know what to watch for.Become a Patron!

Job protection, wage insurance, and universal benefits

Become a Patron!As readers may have observed, I've been doing a lot of research lately on paid family and medical leave policies around the country, and I've found myself frustrated by the way several different ideas are confusingly and unnecessarily combined. Today I want to spell out the relevant issues, and try to explain how they do and don't interact with each other.

Job protection

The most basic protection workers can be provided for family and medical leave is job protection. That's because even if someone can afford to go without pay while recovering from childbirth, bonding with a child, or caring for themself or a relative, no one can afford to do so without knowing they have a job to return to.Currently, the only form of nationwide family and medical job protection is the Family and Medical Leave Act of 1993. For qualifying events, the law provides:

• 12 weeks of leave in a 12-month period;
• to employees who have worked for at least 12 months, and at least 1,250 hours in the previous 12 months, and 
• at private-sector employers who employed 50 or more employees in 20 or more workweeks inthe current or preceding calendar year.

Note that the qualifications are non-transferrable. In order to qualify for job-protected leave, it's not enough to be continually employed for 12 months and work 1,250 hours in the previous 12 months: you have to be employed for 12 months at the same employer. That means workers with working two jobs with 20 hours per week at each will never be eligible for job-protected leave from either employer, since their 1,040 hours of work each 12 months leaves them short of the 1,250 minimum.When we isolate job protection in this way, we can imagine all sorts of possible improvements:

• Increase the quantity of job-protected leave. If we think 12 weeks of leave is inadequate, we might increase the amount of time workers have to return to their jobs after taking family and medical leave. The public health consensus seems to be that about 6 months of leave after having a child is optimal for child and maternal health, so we could increase our job-protected leave from 12 to 26 weeks.
• Make more workers eligible for job-protected leave. The obvious way to do this is linking eligibility to the individual's work history instead of their employment at a specific firm. Instead of requiring 1,250 hours and 12 months of employment at a specific firm, eligibility could be based on total hours worked at all employers over the preceding 12 months. Likewise, the number of hours and required length of employment could be reduced.
• Require more firms to provide job-protected leave. Like many social phenomena, employer size has the curious characteristic that while most workers are employed by large employers, most employers are small employers. Reducing or eliminating the number of employees before a firm is required to provide job-protection is an obvious way of expanding access to job-protected leave.

The reason it's worthwhile to isolate job protection from other features of a family and medical leave policy is that job protection is valuable whether a worker's leave is paid or unpaid. That is to say, there is a difference between going 12 weeks without pay after giving birth knowing you'll have a job to return to, and going 12 weeks without pay after giving birth knowing that you'll be unemployed at the end of the 12 weeks and need to seek out a new employer.

Wage insurance

The second piece of a family and medical leave policy we can isolate is wage insurance, also sometimes called wage replacement, during a period of leave. The argument for wage insurance is that whether or not a worker is entitled to job-protected leave, they may not be able to afford to go weeks or months without a paycheck, and so return to work earlier than would be ideal for their own or their child or dependent's health.The United States has no national system of wage insurance, and consequently a substantial number of new parents return to work without using their full 12 weeks of FMLA leave, even when eligible, because they can't afford to go without a paycheck any longer. Fortunately, as demonstrated in the states operating their own paid family and medical leave systems, wage insurance is extremely cheap to provide. From a recent National Partnership for Women and Families fact sheet, the total employer and employee cost, wage replacement rate, and maximum benefit of each state's program is:

• California: 1% of employee's first $118,371 in annual wages, replaces up to 70% of average weekly wages, up to $1,252.
• New Jersey: up to 1% of employee's first $34,400 in annual wages, replaces up to 85% of average weekly wages.
• Rhode Island: 1.1% of employee's first $71,000 in wages, replaces 60% of average quarterly wages up to $852 per week.
• New York: up to roughly $139.17 per year, replaces 55% of average weekly wage, up to 55% of state average weekly wage (rising to 67% in 2021).
• District of Columbia: 0.62% of wages, replaces 90% of average weekly wage up to $1,000.
• Washington: 0.4% of employee's first $132,900 in wages, replaces 90% of average weekly wage, up to $1,000.
• Massachusetts: 0.63% of wages, replaces up to 80% of weekly wages, up to $850.
• Connecticut: up to 0.5% of wages, replaces up to 95% of average weekly wages, up to 60 times the Connecticut minimum wage.
• Oregon: up to 1% of employee's first $132,900 in wages, replaces up to 100% of average weekly wages, up to 120% of the state's average weekly wages.

Note here again that job protection and wage insurance are conceptually totally unrelated. You can provide wage insurance without providing job protection, and you can provide job protection without wage insurance. Indeed, that's precisely the situation in the 42 states that don't provide paid family and medical leave.Once you've conceptually isolated them, you can suddenly imagine all sorts of combinations: you could leave job protection at 12 weeks and expand wage insurance to 26 weeks. You could expand job protection to 26 weeks and wage insurance to 40 weeks for folks willing to forego job protection.

Universal benefits

There's a final set of benefits that are sometimes pulled into discussions of paid family and medical leave but that are rightly considered separately, and that is universal or near-universal benefits. Universal benefits in this context are those you're eligible for regardless of work or earnings history. The great advantage of universal benefits is they allow us to put the material welfare of people above incoherent attempts at social engineering.Job protection protects only those with eligible jobs and work histories. Wage insurance supplements the income of workers whether or not they are eligible for job protection. Only universal benefits are aimed at ensuring the material well-being of people regardless of their employment status or wage record.The closest thing we have in the United States to a universal benefit is the refundable Child Tax Credit, which increased to $1,400 per year in 2018, or roughly $116 per month per child.The problem with the Child Tax Credit, of course, is that it's only claimed once a year; a parent who gives birth or adopts a child in January won't see any benefit until as late as April the following year, and has to wait a full additional year to receive their next cash infusion. This is an absurd system and, oddly, another better system is already in place: Social Security Child’s Insurance Benefits. These cash payments are available to the minor children of disabled and retired workers, and are received monthly, either by paper check or direct deposit.Besides providing benefits to parents, patients, and caregivers with insufficient work and earnings histories, universal benefits are also capable of reducing the stakes involved in job protection and wage insurance. As indicated above, the maximum weekly wage insurance benefit in most states is around $1,000. Mechanically, a $1,000 monthly universal basic income would allow that maximum wage insurance benefit to fall to just $750, leaving the maximum income of parents with work histories unchanged (at $4,000 per month) but increasing the income of non-working parents from $0 to $1,000.

Conclusion

This post isn't intended to convince you of any one particular policy solution. Personally, I think we need more job protection, more universal wage insurance, and more universal benefits, but I don't know for sure whether we need 26 weeks or 40 weeks of job protection, whether we need 66% or 100% wage insurance, and whether we need fully universal benefits or a mixture of universal benefits and wage insurance and job protection.Rather, this post is meant to help you ask the right questions when your state, your congressperson, or your senator makes a paid family and medical leave proposal: does it extend job protection to additional workers, or beyond 12 weeks? Does it provide wage insurance, and if so, for whom and at what rate? Is it universal or is it means-tested?If you ask the right questions, you at least have a chance at making the policy better. And if you don't know what questions to ask, we'll be stuck with the stingiest welfare state and unhealthiest population in the developed world.Become a Patron!

The Fidelity "dead accounts" study is fake, not wrong

Become a Patron!I've noticed an interesting phenomenon, which I call "common knowledge about common knowledge" (doesn't exactly roll off the tongue, I know). It's when some piece of conventional wisdom becomes so banal that someone decides to refute it, and then the refutation becomes as widely known as the original factoid, if not more so.To give an easy example, "everyone knows" that vitamin C strengthens your immune system. But "everyone" also "knows" that's ridiculous folk wisdom based on a single poorly conducted study in the early 20th century.The problem is this can cause people to overcorrect, and end up saying "actually vitamin C has no health effects."Except vitamin C really is essential to human health!

There's no Fidelity "dead accounts" study

An ancient piece of financial lore holds that one day, the beancounters at Fidelity decided to study the performance of every account at the firm in order to identify what characteristics were shared by the accounts yielding the highest returns. Small stocks, big stocks, domestic stocks, foreign stocks, frequent trading, infrequent trading, they looked at everything.After months of crunching the data, the beancounters made a shocking discovery: there was one account type that consistently outperformed all the others. The accounts of dead people! It turned out that people who did no trading in their accounts whatsoever had higher long-term returns than any other strategy.Now, if you think about this for even a moment, you'll realize it doesn't make any sense. How many accounts could Fidelity possibly have in the names of dead people (another version sometimes includes "people who had moved and forgotten about their accounts")? If Fidelity could easily identify dead accountholders, why hadn't they notified the appropriate authorities already?Today, people gleefully debunk the apocryphal Fidelity study.

The Fidelity study is fake, not wrong

Whenever I see a reaction like this building, whether it's "actually vitamin C doesn't make you healthy" or "actually a dead person's account would not achieve better returns than an actively managed account," I like to take a second to ask, what if the conventional wisdom was right all along?To find out, I used Morningstar's portfolio tool to check the performance of two portfolios: a simple 60/40 portfolio using the Vanguard 500 (VFINX) and Vanguard Total Bond Market (VBMFX), and a Boglehead 3-fund portfolio substituting a 12% allocation to Vanguard Total International Stock (VGTSX). The 2-fund portfolio performance goes back to 1986, and the 3-fund portfolio to 1996. In both cases, I selected reinvested dividends and capital gains.For each portfolio, I checked its annual return (and the final value of an initial investment of $100,000) with a monthly, quarterly, semiannual, and annual rebalance, and with no rebalance at all.For the 2-fund portfolio dating back to 1986, the average annualized returns (and final value) for each rebalance selection were:

• Monthly: 8.73% ($1,526,134)
• Quarterly: 8.79% (1,553,836)
• Semiannual: 8.71% ($1,517,894)
• Annual: 8.73% ($1,526,244)
• No rebalance: 9.02% ($1,665,050)

Here are the same values for the 3-fund portfolio since 1996 (the pattern is similar for the 2-fund portfolio over the same period):

• Monthly: 7.06% ($486,314)
• Quarterly: 7.16% ($496,945)
• Semiannual: 7.28% ($510,056)
• Annual: 7.32% ($514,528)
• No Rebalance: 7.07% ($487,180)

Conclusion

I like this data precisely because it lends itself to multiple interpretations. Looking at the two-fund portfolio since 1986, you'd conclude no rebalancing at all yields the highest returns — the fake Fidelity was right all along, the best investor is a dead investor!On the other hand, the three-fund data since 1996 suggests annual rebalancing yields the highest returns — having a pulse matters after all.If you're reading this, I'll go ahead and assume you have a pulse, so allow me to split the difference: if you're invested in a simple 2-fund, 3-fund, or 4-fund portfolio, you're almost certainly rebalancing too often. If you're rebalancing monthly, consider switching to quarterly. If you're rebalancing quarterly, consider switching to semiannually (perhaps on the equinoctes?). And if you're rebalancing semiannually, consider switching to annually. If you're rebalancing annually, your blood is already ice cold and you don't need my advice.The logic is simple: when you rebalance a portfolio, you're by definition selling your winners and buying your losers. But the tendency of assets, especially over short periods, is for winners to keep winning and losers to keep losing, meaning frequent rebalances move you out of assets that are performing well and into assets that are performing poorly.There are good reasons to do that, for example if you are targeting a particular balance in lower-performing, more stable assets, in anticipation of a near-term expense. One of the benefits of diversification is that it tends to increase your risk-adjusted return. But while risk-adjusted returns are an important metric when designing a portfolio, you can't eat them. For that, you need the ordinary kind.Become a Patron!

What will the Social Security funding "crisis" look like?

Become a Patron!When ignorant people want to sound serious, they start solemnly intoning about the Social Security funding crisis and the need for a "long-term" "fix" to the "problem." This serves three useful purposes: it allows the speaker to change the subject from any actual problems existing today, it provides the superficial cover of concern for vulnerable populations, while also giving a sheen of non-partisanship to plans that will decimate the working class.This makes it extremely important to understand what the Social Security funding "crisis" will look like in the real world.

Nothing at all will happen until 2034

The most important chart to understand in the Social Security Trustees' report is Figure II.D2, which I'll reproduce in its entirety:What this chart says is that until 2034, under current law, with no additional benefit cuts or additional taxes or funding streams, the Social Security Administration is projected to be able to pay 100% of scheduled benefits, including old age, disability, and survivor benefits. So whether or not any changes are made to Social Security, nothing will change for any new or existing beneficiaries for the next 15 years.If you are not a current beneficiary, or planning to begin receiving benefits soon, you may find this pedantic, but if you're already receiving benefits you should know: under current law your benefits will not change in any way for the next 15 years.

What happens after 2035?

After 2035, the Social Security trust funds are projected to begin exhausting the Treasury bonds they accumulated during the years the funds took in more money than they paid out in benefits. Unlike a private company that does not receive enough income to repay its debts, the Social Security Administration cannot, and does not have any need to, "declare bankruptcy" or "go bankrupt."Instead, as Figure II.D2 shows, benefits will be reduced to the level payable through annual payroll contributions. In 2035 the actuaries predict there will be a 20% reduction in payable benefits, which will increase excruciatingly slowly to a 25% reduction by 2093.This is an important moment to remind you that the exhaustion of the trust fund cannot "reduce your promised benefits," because these are the benefits promised by the Social Security Act, as amended. If you're happy with 20-25% lower benefits in old age, disability, or widowhood after 2035, you don't need to do anything and you don't have a dog in this fight.

Should we allow this benefit cut to take place in 2035? Probably not!

If, like me, you think the American welfare state is not generous enough then, like me, you probably don't think we should suddenly cut Social Security benefits in 2035.But if you think the American welfare state is not generous enough, then you have the luxury of other, lower-hanging fruit. The Trump administration is planning to reimpose a cumbersome asset test on SNAP beneficiaries nationwide, denying 3.1 million people access to nutritional assistance. Another 500,000 elementary and secondary students are expected to lose access to free school lunches.Meanwhile, Republican officials are using a laughable legal argument to pursue the invalidation of the Affordable Care Act, including its protections for pre-existing conditions, subsidies for low-income workers who don't receive health insurance through their employers, and Medicaid expansion. And thanks to the Republican effort to amateurize the judiciary, there's no reason to believe they won't win in front of the Gorsuch-Kavanaugh Supreme Court.If you're elevating a fantasy problem in 2035 over the real problems we're facing right now, your priorities say a lot about you and nothing about Social Security's funding mechanism.

My boring solution to the imaginary Social Security funding crisis: magic it away so we can address real problems

The total funding shortfall between now and 2093, in the Social Security Trustees' actuarial report, is a bit under $14 trillion, or $186 billion per year for the next 75 years.So here's my boring solution: let's round up, and deposit $14 trillion in special issue Social Security bonds into the relevant trust funds, out of nowhere. This will, of course, increase the debt service costs of the US government as it pays interest on those bonds, and that increased cost will need to be financed through reduced spending, increased taxes, or seignorage.But this is, of course, the exact issue the Social Security funding "crisis" is supposed to present: should we reduce spending, increase taxes, or print money? It may be that we should reduce Social Security benefits, especially for higher earners. It may be that we should increase them, especially for low-income workers and those with a limited official work history.But since there's obviously no reason Social Security benefits should be tied to the year-to-year revenue produced by FICA taxes, we can easily make sure they aren't.

Conclusion

In reality, no one in politics wants to solve the imagined Social Security funding "crisis." When the Greenspan amendments to the Social Security Act were made under Reagan, they were explicitly designed to create another funding crisis further down the line, so that benefits could be cut further.Whether we want benefits to be cut or not is up to us. We can eliminate the cap on Social Security taxes and treat capital gains and dividends as ordinary income and eliminate the "funding gap" tomorrow. Some of us support those policies, others oppose them, but no one should support or oppose those policies because of their downstream effect on Social Security benefits: whether or not Social Security benefits are suddenly cut 15 years from now doesn't have anything to do with the program's funding mechanism.Rather, it's a question about who we are and what kind of country we want to live in. That's the question Roosevelt had to answer in 1935 when Social Security was created, and it's the question we have to answer today. Nothing an actuary says is going to get you out of having to answer it for yourself.Become a Patron!

What do the wealthy need from their financial advisors?

Become a Patron!I've had two conversations lately that got me thinking about a question which, for obvious reasons, doesn't come up in most people's lives: what do you do after you've exhausted all the obvious financial planning tools?

Financial planning isn't complicated, it's just hard

Most people have been trained to think about financial advice in terms of investment decisions, so when they say "give me some financial advice," what they usually mean is, "give me a stock tip." If the stock goes up, they think you're a financial genius, and if the stock goes down, they think you're a con man.That's why I always try to tell people, I have no idea what the stock, bond, commodity, real estate, or any other market is going to do over any time horizon. Not just over 6 months, but even over 30 years, the performance of individual investments is something I have no insight into.That makes asset allocation inherently unsatisfying work, as important as it is. At the end of a 30-year period, a well-diversified portfolio will have some holdings that have increased in value by much more than others, which may have even fallen in value over the previous 30 years. What is the point of diversification if it means you end up holding crap that weighs down your overall return? Why not just buy winners?Financial planning for most people can be boiled down to three inputs, in order:

1. savings rate
2. asset location
3. asset allocation

This is an inconvenient for some people because it doesn't feel like saving is something your financial advisor is doing. But if you raise your IRA contributions by 9.091%, from $5,500 (the 2018 contribution limit) to $6,000 (the 2019 limit) I can guarantee your contributions will be 9% higher. Holding your savings rate fixed, I can make at best an educated guess about the effects of asset location (predicting future tax rates) or asset allocation (predicting future market performance).The flip side of this is that by far the most important thing anyone can do to get their financial house in order feels to most people completely impossible. You earn $80,000 a year? Not anymore. Now you're contributing $19,000 to your 401(k) and $6,000 to an IRA and you make $55,000. Thinking about having a kid? Congratulations, now I need you to save even more.In other words, one of a financial advisor's most important jobs is to make you feel much poorer than your friends, family, and colleagues.

What financial advice do the wealthy need?

This is a question I want to pose as carefully as possible, since the wealthy want the same thing from their financial advisors as everyone else: a good stock tip. But obviously the wealthy need a good stock tip even less than everyone else: if you're earning more than a couple million dollars per year, you can keep your money in cash and you'll still die a millionaire.I think there are at least five important buckets financial planning can fall into for the very wealthy:

• Permission to spend. This is the flip side of financial advice for the working and middle classes. A financial advisor severely restricts the amount of spending money a middle class professional has available by directing as much of it as possible into tax-advantaged accounts. But someone who maxes out their contributions in January of each year may still be flying across the country in economy twice a week when they can easily afford business class. They may need permission from someone they trust to spend money on their own comfort.
• Permission to give. There's a cliche in financial planning circles to insist people "save every raise." In other words, if you can keep your living expenses flat, you can contribute more and more money to your retirement accounts each time you receive a promotion, raise, or cost-of-living adjustment to your salary. But this is obviously irrelevant to people who earn far more than any of those contribution limits, which is why I suggest "giving every raise." If your living expenses are already fully covered by your existing pay, then in a year where you earn a significant raise or bonus your quality of life won't be affected by giving it away.
• Permission to stop. When people luck into high-income fields there's an almost inevitable temptation to "run up the score" and earn as much as possible as long as the gravy train is running. But obviously there's no material reason to continue working once you've saved enough to satisfy your needs, and some people aren't able to give themselves permission to stop. That's another role a trusted advisor can perform.
• Permission to change. If "permission to stop" means retirement, "permission to change" means redirecting your time and energy towards other activities. Change is hard, in some ways harder than retirement: the very idea of a "serial entrepreneur" is based on the premise that someone who successfully gets rich once, increasing an initial investment 1,000- or 1,000,000-fold, has some ability to replicate that performance. But of course, after founding one successful social network, Mark Zuckerberg didn't found dozens of additional social networks, because he recognized he simply got lucky the first time. Instead, he incorporated another company to dispose of his wealth, which seems to keep him busy and happy.
• Estate planning. I put estate planning last on this list because it's what most people think of first when they think of financial planning for the wealthy. And obviously there are techniques you can use to reduce the tax and administrative burden on your heirs when you pass. But it doesn't take more than a glance at the techniques actually employed to evade estate taxation to wonder what, exactly, the point is supposed to be? I don't mean that wealthy people should feel a "patriotic duty" to pay estate taxes in order to "reduce the deficit" or any such nonsense. I simply mean that I find it absurd that the wealthiest people in the wealthiest nation in human history spend any time at all worrying that their heirs will have to pay taxes on their inheritance, let alone organize all their affairs around minimizing those taxes. It seems to me that what many wealthy people need to hear from their financial advisors is simply that "your heirs will be fine." That's not an easy thing to hear, but financial advisors aren't supposed to give easy advice; they're supposed to give true advice.

Conclusion

As I mentioned, this is an issue that has recently come up in a number of different contexts, and I plan to revisit it from multiple angles in the future. Hit the comments to let me know what you think: what financial advice do wealthy people need — with a special emphasis on the advice they need but don't want?Become a Patron!

Roth 401(k)'s are different, but they're not special

Become a Patron!The other day I got into a very frustrating argument with a popular anonymous Finance Twitter account about the epistemology of 401(k) savings vehicles. The frustration arose from a very specific phrase he used to describe one of the benefits of a Roth 401(k) over a traditional 401(k): "you’re able to contribute more with a Roth 401k." This is such a strange claim I asked him to clarify his argument, but he was never really able to do so.That being the case, I want to see if I can try to make the strong form of the argument that he wasn't able to make.

It's legal to save money in taxable accounts

While most financial planners will readily tell you that most people, under most circumstances, should maximize their workplace retirement savings contributions before investing in a taxable brokerage account, it's important to remember that it's perfectly legal to invest in taxable accounts at any time for any reason. Not only that, there are some advantages to doing so:

• Funds can be contributed in unlimited amounts, at any time, for any reason. For example, the S&P 500 hit its financial crisis low in March, 2009. If you were somehow aware of this fact at the time, making contributions through a workplace 401(k) would leave your hands somewhat tied: first of all, two months of payroll contributions had already been made for 2009, leaving you just 83% of your maximum $16,500 contribution left. Deferrals are limited to the amount of your paycheck, and sometimes to just a fraction of your paycheck, so it might take months to max out your contributions for the year, dramatically reducing the value of your clairvoyance.
• Dividends and capital gains are taxed at preferential rates, as low as 0%. Moreover, over time reinvesting dividends and capital gains allows you to establish a range of different cost bases for different lots, allowing you to right-size your capital gains depending on your tax rate year-to-year.
• Capital losses can be used to offset gains and ordinary income. A diversified taxable portfolio will experience gains and losses in different positions over time, giving taxable investors additional tools to manage their tax liability.
• Assets can be withdrawn at any time for any reason. There are no restrictions, no holding requirements, no caps, and no repayment requirements when withdrawing assets from a taxable account. It's your money from the day you deposit it to the day you withdraw it.

Of course, there are disadvantages as well, first and foremost among them that taxable investments are made with after-tax money. Thus, the price you pay for all the advantages of taxable investments is the income taxes owed on the invested amount in the year it's earned. To be consistent throughout, let's use the 22% marginal tax rate on single filers making between $51,475 and $96,200 in earned income per year. In order to make $19,000 in taxable investments, this investor must first pay $5,359 in federal income tax on $24,359 in earned income.Splitting it up in this way allows us to think about the $19,000 deposit as a "bundle" of two different assets: $19,000 in investible funds, plus the combination of rights and privileges the investor paid $5,359 for. This doesn't mean preferential taxation and ease of access are worth $5,359, rather, it means they cost $5,359.Knowing these facts allows us to perform all sorts of fancy calculations. For example, at a 0% discount rate (you value a dollar today exactly the same as a dollar in the future), it would take a little over 9 years for the benefits of maximal tax-loss harvesting ($3,000 in losses per year at a 22% income tax rate saves the taxpayer $660 per year) to recoup the amount paid for the right to tax-loss harvest. At a discount rate of 6%, it takes over 11 years to break even.It also allows us to adjust the value of our asset in the face of changing circumstances. Raising the maximum amount of deductible losses from $3,000 to $3,500 raises the value of the asset by reducing the amount of time needed to break even. Lowering or eliminating deductible losses reduces the value of the asset by extending the breakeven period.This sounds straightforward, because it is, but it's also a useful tool to use when thinking about the difference between traditional and Roth 401(k) contributions.

Traditional 401(k)'s combine a discounted investment asset and a tax liability

Traditional 401(k) contributions are made from payroll and removed from your taxable earned income before it's reported to the IRS. The same $24,359 in earned income as above can be split into a $19,000 traditional 401(k) deferral and, after paying federal income taxes at 22% on the remainder, a $4,180 taxable investment.It's essential to understand that your current-year cash flow situation is identical whether you make the traditional 401(k) deferral or whether you direct the income entirely into a taxable account: in both cases you earned $24,359 in income, in both cases you spent $0 on current-year consumption. The fact that in the first case you paid $1,179 in taxes while in the second you paid $5,359 in federal income taxes is entirely irrelevant to your current-year cash flow, which in each case is $24,359-in and $24,359-out.The difference is that in the second case you have created, alongside $23,180 in total investible assets, a new bundle of liabilities. Just as a taxable account represents "investments plus rights," a traditional 401(k) represents "investments plus duties."But this is a very peculiar liability. Most importantly, it is:

• the duty to pay taxes at your ordinary income tax rate, plus a 10% penalty, on withdrawals made before age 59 1/2.
• the duty to pay taxes at your ordinary income tax rate on withdrawals made between ages 59 1/2 and 70 1/2.
• the duty to make withdrawals (and pay ordinary income tax) starting at age 70 1/2.

Moreover, we know precisely what the federal government is willing to pay our investor for this liability: $4,180, the taxes foregone on his income when he made the traditional 401(k) deferral. The terms of this deal have some obvious advantages to the investor:

• playing with the house's money. Traditional 401(k) deferrals offer a kind of heads-I-win-tails-you-lose dynamic, since only 78 cents of each dollar in the account was contributed by the investor. This might allow the investor to take on more risk: if they hit a home run, there will be plenty left over to pay back their liability with, while if the account goes to zero, they get to walk away from their liability with no consequences.
• control over timing. While the $4,180 liability was created at a 22% marginal tax rate, it's paid back at the investor's marginal tax rate at the time of retirement. Planning on an early retirement and taking advantage of the Social Security magic trick might allow the investor to repay their liability at a 12% tax rate or below.
• pre-retirement rollovers and conversions. During a break in service it may be possible to move assets from traditional 401(k)'s into Roth IRA's, exchanging a liability for an asset at a deep discount, depending on your marginal tax rate.

Just as we can adjust the value of our taxable rights up and down as the tax code changes, we can adjust the value of our traditional 401(k) liability up and down. With the end of the "marriage penalty" and cuts in personal tax rates at least through 2028, tax brackets are historically wide and marginal tax rates are historically low. If those brackets narrow, or are tied to a slower measure of inflation, then the value of the traditional 401(k) liability might even grow faster than the value of the assets in the account. If you work longer or earn more money than expected, the value of the liability will likewise grow.Meanwhile, if you retire earlier than expected, your income is lower than expected or tax-exempt for whatever reason, tax rates are cut further, inflation adjustments are made even larger, or the required minimum distribution age is increased to 72 or higher, then the value of the liability on your books will fall.

Roth 401(k)'s are just another bundle of investments and rights

All of this brings me back to Jake's bizarre claim that Roth 401(k)'s allow you to "save more money." As should be clear at this point, nothing could be further from the truth. With $24,359 in earned income, you can:

1. invest $19,000 in a taxable account;
2. invest $19,000 in a traditional 401(k) account and $4,180 in a taxable account;
3. or invest $19,000 in a Roth 401(k) account.

In each case you have "saved" the same $24,359, in the concrete material sense that you earned the money but did not spend it. In the first case you pay $5,359 in federal income taxes for the right to preferential dividend and capital gains taxation and the ability to offset ordinary income with capital losses. In the second case you receive $4,180 in investible assets in exchange for a liability to pay your marginal ordinary income tax rate, plus penalties under certain circumstances, on any amount withdrawn from the account. And in the third case, you receive $19,000 in investible assets that can be withdrawn tax- and penalty-free in retirement.All of these assets and liabilities can be analyzed, assigned a value, and recorded on your personal ledger based on a sober analysis of present and future conditions. Moreover, the value can be adjusted over time as the future becomes clearer. It can be worth incurring liabilities to invest more money (traditional IRA's) if the investment will yield a higher return than the liability, and it can be worth paying for an asset up front (taxable and Roth investments) if you believe the value of the asset will appreciate at a faster rate than the consideration paid.And, of course, you can diversify your investments, assets, and liabilities across all three, and change that allocation over time, as public policy and your life circumstances change.That's the argument I hoped Jake was making in his initial tweet, but since he wasn't able to make it, I figured I would instead.Become a Patron!

The SECURE backdoor into 529 assets

Become a Patron!I've written extensively in the past about 529 College Savings Plans, an extremely tax-advantaged method of saving for higher education expenses. Contributions are made after federal and state taxes (although many states offer in-state tax deductions for contributions), compound internally tax-free, and are withdrawn tax-free for "qualified higher education expenses."In the Smash-and-Grab Tax Act of 2017, Republicans expanded those eligible tax-free withdrawals to $10,000 per year in elementary and secondary education expenses as well. Increasing the expenses that are eligible for tax-and-penalty-free withdrawals mechanically increases the value of the 529 tax shelter since it decreases the risk of saving "too much" in an account and being forced to pay taxes and penalties on any withdrawals.A bill is being rushed through Congress that will create a new, even more cavernous loophole to avoid taxes and penalties on 529 plan assets.

The SECURE Act Double Dip

H.R. 1994, hilariously titled the "Setting Every Community Up For Retirement Enhancement Act of 2019" (SECURE, get it?), passed the House Ways & Means Committee early last month with bipartisan support, and is being fast-tracked through the House alongside a companion measure in the Senate.The House bill makes an unprecedented change to what expenses are eligible for tax-and-penalty-free withdrawals of 529 assets.As a refresher, there are three kinds of withdrawals from 529 College Savings Plans:

• withdrawals for qualified higher education expenses paid out of pocket or with student loans are completely tax-free;
• withdrawals for qualified higher education expenses covered by grants and scholarships are penalty-free, but subject to income tax on the earnings portion of the withdrawal;
• and withdrawals for non-qualified higher education expenses are subject to income tax on the earnings portion of the withdrawal and a 10% penalty on the earnings portion of the withdrawal.

All withdrawals are made proportionately from contributions and earnings, so it's not possible to designate withdrawals as coming first from contributions or first from earnings.Section 302(c)(1) of the SECURE Act is simple: "Any reference in this subsection to the term ‘qualified higher education expense’ shall include a reference to amounts paid as principal or interest on any qualified education loan...of the designated beneficiary or a sibling of the designated beneficiary."The tax-and-penalty-free student loan withdrawals are capped at $10,000 per individual.Attentive readers have no doubt already noticed the problem: the SECURE act would allow tax-free withdrawals for higher education expenses financed with student loans and for the repayment of those student loans!

The double dip, illustrated

To see how this would work in practice, take the example of someone who contributes $10,500 to a 529 plan the day their child is born, which compounds at 6% annually for 18 years, reaching a final value of $30,000 on the child's 18th birthday, when the 529 plan account is reallocated to an FDIC-insured money market fund. On that date, the child also enrolls in a higher education institution with a total annual cost of attendance of $5,000, and receives a $2,500 annual scholarship. The student takes out $2,500 in federal Stafford loans to cover the remaining balance.Under current law, the 529 plan owner can make a $2,500 tax-free withdrawal (the amount of qualified higher education expenses paid for with student loans) and a $2,500 penalty-free withdrawal (the amount of qualified higher education expenses paid for with grants and scholarships). They would owe ordinary income taxes on the earnings portion of the second $2,500 (roughly 65% of it, or $1,625).After four years, the account owner would have withdrawn $20,000 of the $30,000 balance, with $10,000 in completely tax-free withdrawals and $6,500 taxed as ordinary income. The remaining balance in the account would be $10,000. To withdraw that balance, the account owner would have to pay ordinary income taxes plus a 10% penalty on the earnings portion, which comes to roughly $1,788. A high-income account owner in a high-income state might pay as much as 50% of that in income taxes, or $894.Under the SECURE Act, if that withdrawal is used to repay the student's $10,000 student loan balance, it is also completely tax-free.

Conclusion: the system is breaking down

There are a few foundational principles of American tax law. You can't deduct an expense incurred by someone else. You can't claim a deduction and a credit for the same expense. What we are seeing right now is that system breaking down in real time.When the second Bush administration eliminated the estate tax, they also eliminated the stepped-up basis rule, so that appreciated assets would be taxed as capital gains when sold instead. When the Trump administration all-but-eliminated the estate tax, they left the stepped-up basis rule intact, so that appreciated assets would never be taxed.Today, so many assets have been sheltered from taxation for so long, and appreciated by so much, that their value looms over the entire system, with the tiniest changes to tax law having enormous downstream effects on those sheltered assets.Pre-tax contributions to accounts like IRA's and 401(k)'s were justified with the promise that they would eventually be taxed when withdrawn in retirement. Now that the wealthiest generation in human history is in retirement and being forced to make those withdrawals and tax payments, it seems they've found that they would prefer not to. And unlike poor Bartleby, the Boomers vote.Become a Patron!

"Horizontal equity" is a perfectly reasonable idea used exclusively to make bad arguments

Become a Patron!Every once in a while a term of art is plucked from the world of academic literature and spread around like manure by journalists and pundits until people who have no idea what it originally meant start using it in casual conversation. What percentage of conservatives griping about "intersectionality" have ever read Kimberle Crenshaw's original analysis of the ways black women are multiply-burdened? What talking head whining about "cultural Marxism" on college campuses has even glanced at one of the texts of the Frankfurt School?This is not to criticize people who don't care about philosophy, which is a perfectly reasonable position; it's to criticize people who pretend to care about philosophy in order to defend their pre-existing beliefs, but refuse to seriously engage with it.

"Horizontal equity" can't help you if you don't identify the relevant axis

In the wake of Elizabeth Warren's plan to forgive some student debt, Matts as diverse as Bruenig and Yglesias have agreed that the main concern with the plan is one of "horizontal equity."Horizontal equity is the banal idea of justice which holds that similarly-situated people should be treated similarly. This principle is embodied in the United States Constitution in a variety of ways, through the Due Process and Equal Protection clauses of the 14th Amendment, and through the prohibition of bills of attainder in Article I. In general, Congress can pass only general laws, not laws respecting individual persons.But this general principle of justice does nothing to answer the question of who belongs to the similarly-situated group:

• Is a non-college-attendee who never took out student loans "similarly-situated" to a college-attendee who did?
• Is a college-attendee who paid their tuition without the need for loans "similarly-situated" to one who took out loans?
• Is a college-attendee who has paid off their student loans "similarly-situated" to a college-attendee who has not paid off their student loans?

Different problems have different solutions

The problem student loan forgiveness sets out to solve is simple, easily defined, and well-documented: after making housing, health insurance, and student loan payments, borrowers do not have enough money left over to save for retirement, settle down, invest in their community, or have children.People who do not have student loans because they never enrolled in higher education do not have those problems, but they surely have other problems: lower incomes, high housing costs, and expensive health insurance.People who do not have student loans because they have already paid them off also have problems: they may have prioritized their student loan payments over savings, for instance, and face lower income in retirement or precarity in case of unemployment.Trying to combine these groups into a single "similarly-situated" mass makes no sense: one group needs student loan forgiveness, the second needs affordable housing and health insurance, and the third needs adequate income security in retirement.To say student loan forgiveness doesn't help people who never took out student loans, or those who have already paid them off, misses the point: different problems have different solutions. Each of these problems has a solution, but solving one doesn't need to come at the expense of solving the others.If student loans are causing a problem, student loan forgiveness is the solution to that problem. If high housing prices are causing a problem, affordable housing is the solution to that problem. If unaffordable health insurance is a problem, affordable health insurance is the solution to that problem. If low savings are a problem, beefing up Social Security old age benefits and unemployment insurance is the solution to that problem.Horizontal equity only demands that everyone with student loan debt, everyone who needs housing, everyone who needs health insurance, and everyone who needs income security be treated equally, not that everyone born in the same year receive an identical amount of government assistance and pay an identical amount in taxes every year.Become a Patron!

If you have employees, adopt a written paid family and medical leave policy right now

Become a Patron!While doing some research for another project, I was reminded that in the CPA Full Employment Act of 2017, Republicans included a tax credit for employers offering paid family leave. Since I have some W-2 income in addition to my Patreon income, I decided to look into it and see exactly how the tax credit works.The good news is, it is in many ways better than I expected. The bad news is, like all such publicly-subsidized private sector schemes, it's way, way more complicated than it needs to be.

What is the paid family and medical leave credit?

The paid family and medical leave credit is a business tax credit of between 12.5% and 25% of the wage replacement offered by employers to qualifying employees who take leave for the reasons spelled out in the Family and Medical Leave Act (FMLA).

How is the credit calculated?

To qualify for the credit, qualifying employees must be offered at least 50% of their wage for at least 2 weeks per year for qualifying FMLA events. The credit is phased in at replacement wages between 50% and 100%. At a 50% replacement wage the credit is 12.5%, and at a 100% replacement wage the credit is 25%.

Who are qualifying employees?

Qualifying employees are those who have worked at the company for a year or more, and earned less than roughly $72,000 per year (this amount should be adjusted upward over time, and is based on an inscrutable IRS calculation).

What are qualifying FMLA events?

Qualifying FMLA events are:

• The birth of a son or daughter of the employee and in order to care for the son or daughter.
• The placement of a son or daughter with the employee for adoption or foster care.
• Caring for the spouse, or a son, daughter, or parent, of the employee, if the spouse, son, daughter, or parent has a serious health condition.
• A serious health condition that makes the employee unable to perform the functions of the employee’s position.
• Any qualifying exigency (as the Secretary of Labor shall, by regulation, determine) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is a member of the Armed Forces (including the National Guard and Reserves) who is on covered active duty (or has been notified of an impending call or order to covered active duty).
• Caring for a covered service member with a serious injury or illness if the employee is the spouse, son, daughter, parent, or next of kin of the service member. The FMLA purposes are the purposes for which an employee may take leave under the FMLA. The terms used in this Q&A-8 have the same meaning as defined in section 825.102 of the FMLA regulations, 29 CFR § 825.102.

How does an employer qualify for the credit?

This is the important part. To qualify for the paid family and medical leave credit, the employer must:

1. adopt a written policy;
2. providing at least 2 weeks of annual paid leave for all qualifying FMLA events;
3. with at least a 50% wage replacement rate for all qualifying FMLA events;
4. for all qualifying employees.

If any one of these four conditions is not met, you will not qualify for the credit for any of your employees!

What should a paid family and medical leave policy look like?

I'm not a lawyer (and I'm especially not your lawyer), but if you want to ensure your eligibility for the paid family and medical leave credit, you need to do the following:

• Put it in writing. The current IRS regulations do not require you to distribute your policy to employees, but you must adopt a written policy before any replacement wages are eligible for the credit. If you start offering paid leave and only later adopt a written policy, you will only be eligible for the credit for wage replacement offered after the adoption of the policy.
• Specify at least 2 weeks of paid leave for all qualifying FMLA events. You can offer different lengths of leave for different FMLA events, but your policy must include at least 2 weeks of paid leave for every FMLA event or you are ineligible for the credit.
• Specify at least 50% wage replacement for all qualifying FMLA events. You can offer different amounts of wage replacement for different FMLA events, but your policy must include at least 50% wage replacement for every FMLA event or you are ineligible for the credit.
• Specify all qualifying employees. To qualify for the credit, you must offer paid family and medical leave to all qualifying employees. You can extend the policy to other employees (those employed less than a year, and those making more than roughly $72,000 per year, although those employees' wage replacement won't be eligible for the credit) but you must offer the paid leave benefit to every qualifying employee or you are ineligible for the credit for any of your employees.

Include this text in your plan

This is so important I want to mention it separately. Your written paid family and medical leave policy must include the following language (or a lawyer-approved alternative):

[Employer] will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this policy. [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy.

The technical reason for this is that the FMLA itself does not protect employees who work less than 1,250 hours per year, but in order to claim your paid family and medical leave tax credit you must extend identical protections to employees even if they work less than 1,250 hours per year, as long as they have worked for at least one year.

How to claim the credit

File form 8994 "Employer Credit for Paid Family and Medical Leave" and Form 3800 "General Business Credit."

How pure is your hate?

Sound simple enough? Not so fast. You didn't really think you'd get off that easy, did you?Wages and salaries are, naturally, deductible business expenses. But the amount of the paid family and medical leave credit you claim is first applied against your wage and salary deduction. That means a firm with a 10% marginal tax rate that offers a 100% wage replacement for qualifying employees for qualifying FMLA events does not receive the 25% tax credit they were promised by the Smash and Grab Tax Act of 2017.A simple illustration: a $1,000 wage bill would normally be 100% deductible, reducing the firm's taxes by $100. After a $250 credit is granted, the firm's taxes are only reduced by $75, turning the statutory "25%" tax credit into a 22.5% tax credit.

Conclusion

There is no earthly reason to do things this way. But while we continue to fight for universal, comprehensive family and medical leave, we still have to do what we can to protect each other. So if you have any employees, this is as good a time as any to get started on a written policy for your company.Become a Patron!

Taking the inverted yield curve literally, not seriously

Become a Patron!Last month, a funny thing happened: the yield on a 10-year US Treasury obligation dropped below the yield on a 3-month Treasury obligation. This bizarre financial market event attracted a lot of attention, even in the mainstream press, because such "yield curve inversions" have historically been correlated with economic recessions. Given the length of the current economic expansion and the reckless mismanagement of the economy, many people leapt on the inversion of the yield curve to predict that our next recession is visible on the horizon.Gambling is fun, so if you want to gamble some money on the ability of the yield curve's shape to predict economic growth, you have my blessing, not that you need it. But due to my unfortunate literal tendency, I have a different take.

An inverted yield curve means you're not rewarded for patience

A US Treasury obligation's yield (bills, notes, and bonds) is traditionally decomposed into several pieces: the real interest rate, expected inflation, and what's often called a "duration," "maturity," or "term" premium. That last component reflects the fact that if you buy a long-term bond at a given interest rate and economy-wide interest rates rise, the price of your bond will fall so that its interest rate matches the economy-wide interest rate for comparable bonds. To compensate for those price fluctuations, long-term bonds should offer higher interest rates than short-term bills; otherwise people would only buy short-term debt, knowing they can always reinvest their principal at maturity at the prevailing interest rate.One reason an inverted yield curve is interpreted as a predictor of a recession is that it implies falling inflation or falling real interest rates, which most often occur during recessions when firms experience downward price pressure and the Federal Reserve cuts interest rates in order to stimulate the economy. If markets predict lower real interest rates or lower inflation, then they'll be unwilling to lock in today's nominal interest rates for longer periods, believing they'll be able to buy the same nominal return at a lower price in 3, 6, or 12 months.I do not know what is going to happen to interest rates, inflation, or economic growth, and have no opinion whatsoever on the ability of the yield curve's shape to predict those values. My view is much simpler: if you are not being paid to take on the risk of investing in long-term securities, don't take the risk of investing in long-term securities!

If you're not being paid to be patient, then get impatient

I mostly don't believe in investing in individual stocks and bonds (unless you're gambling which, as mentioned above, is extremely fun and 100% fine by me), but you can glance at a list of Vanguard mutual funds and get a decent sense of what kind of return you can expect over the ultra-short-, short-, medium-, and long-terms. As of April 9, 2019, these Vanguard funds earned the following SEC yields:

• Prime Money Market: 2.45%
• Short-Term Treasury: 2.33%
• Intermediate-Term Treasury: 2.32%
• Long-Term Treasury: 2.81%

These are the objective facts. The question is, given these facts, do you have any alternative investment opportunities that will yield more over the relevant timeframes? I think you probably do. My go-to resource for these things is DepositAccounts.com. They're owned by lendingtree, which is a loan origination affiliate company, but so far DepositAccounts doesn't seem to be corrupted, as long as you ignore their "sponsored" account suggestions.For short-term savings, you can take advantage of Consumers Credit Union, Orion FCU, and One America Bank, which have certain deposit and transaction requirements but earn between 3.5% and 5.09% APY.For intermediate-term savings, you have a range of options: Andrews FCU is offering 3.05% and 3.45% APY on 55-month and 84-month certificates, respectively; Sallie Mae, Freedom CU, and WebBank have competitive interest rates on other terms. These products allow you to lock in those higher rates even if rewards checking accounts radically drop their interest rates in the face of a new recession or interest rate environment.But for longer-term savings, you have a real problem. Investing in long-term securities exposes you to all the risk of rising interest rates, but pays you a negligible amount for the privilege.

How do you invest for the long term in a world without a term premium?

There are, I think, three ways to realize above-average long-term returns on your savings in a world where long-term savings don't yield above-average returns.

• Reduce your exposure to long-term debt. If an inverted yield curve is telling you that long-term debt is too expensive, then sell it while it's expensive. Whether you move to cash, equities, or anything else, when the market is screaming that your assets can fetch more than they're worth, take the market's word for it and walk away.
• Pay down debt. I have a somewhat different take on debt than many folks in the travel and finance hacking community, since I love negative-interest-rate loans, but it's indisputably true that if you have a mortgage or other long-term debt with an interest rate above what you can earn on debt with a comparable term structure, paying down the debt is likely the highest and best use of your savings. In other words, if you're paying 5% on a 30-year mortgage and the potential to earn 3% on a 30-year Treasury bond, you've got a pretty easy decision to make.
• Start a business. Remember, the reason the Federal Reserve has kept interest rates at such low levels for so long is for the simple reason that the Board of Governors wants your public sector investments to earn as little as possible, so that you will sell everything and start a business. That window is still open, as I've tried to explain in this post, but it's rapidly closing.

Conclusion

These are not predictions. I have no idea what it "means" that the yield curve is inverted, except that it means long-term debt is not offering a term premium over short-term debt. As far as I know, the yield curve might stay inverted for the next 500 years. But what I do know is that while the yield curve is inverted, long-term debt is at a rare disadvantage compared to short-term debt, accelerated debt repayment, and business investment. This isn't a theory or a coincidence: it's the definition of a situation where the Federal Reserve would strongly prefer you do literally anything else with your money than buy long-term government securities.So, take the hint!Become a Patron!

Bill Cassidy has the worst paid parental leave plan yet

Become a Patron!This morning I hauled myself out of bed early to go down to the American Enterprise Institute and listen to Bill Cassidy discuss the outlines of his plan for paid parental leave. The dervishes at AEI already uploaded the video, so you can take a look for yourself, if you can stand to listen to politicians speak for more than 30 seconds at a time. Bonus: if you hear someone guffawing off-screen a few minutes in, that's me laughing at the idea anyone is going to fall for his schtick.

The problem with existing Republican paid leave plans

I've written at length about this before, so won't belabor the point here, but the existing Republican proposals for a national paid leave program are based on forcing new parents to choose between the financial support they need to take time off work and the financial support they need to retire with dignity. It's a cruel choice to force anyone to make: do you turn down paid parental leave and return to work a few days or weeks after giving birth or adopting a child, or do you accept paid parental leave and suffer from a permanently lower income in retirement?

Cassidy's plan is designed to become as unpopular as possible as quickly as possible

If you watch past Cassidy's Hee Haw routine with Aparna Mathur (who has also graced these digital pages before), you can enjoy the much more interesting follow-up discussion between several panelists from several points on the political spectrum. The panelists over-generously described Cassidy's plan as a work in progress, the specifics of which they didn't dare speculate about. This is incorrect: a carefully trained ear allows you to clearly identify the core tenants of Cassidy's plan. Since I have such an ear, I can tell you: folks, it's not great.The first question any paid leave plan has to answer is, who is the beneficiary of the program? This might sound like a weird question, but the answer matters a great deal. In traditional paid leave programs, the beneficiaries are thought to be the workers. This allows you to apply the same logic across the board: workers are entitled to a certain number of days or weeks of paid (or in the United States, unpaid) leave to deal with a serious illness, to care for a relative, or to bond with a new child. Cassidy's plan answers the question differently: the baby is the beneficiary of the program. Why does this matter? Because it means his plan provides paid parental leave exclusively to one parent. Cassidy is a homophobe, but not an idiot, so he allows that "under some circumstances" a child's father could take the leave instead, but it's clear despite his hemming and hawing that his plan will only cover one parent. This is not parental leave, it's maternity leave, and there's a reason virtually every other social democracy has abandoned it in favor of parental leave: it reinforces gender stereotypes in the home, it penalizes the employers of women and subsidizes the employers of men, and at the most basic level it keeps fathers apart from their children during a critical early bonding period.The second question is, who is eligible for the program? Is the program universal, or is the program exclusively for those with earned income? How recent must the earned income be? Is the triggering event the birth of a child, or is the triggering event leaving work to care for a newborn child? Are you still eligible if you continue to work while caring for your child? This question has been answered in a variety of ways in a variety of contexts, and I have made clear to the relevant organs that it's one of the objections I have to the most important Democratic proposal for paid family leave: I would prefer a universal allowance detached from work history, rather than a benefit exclusively for those with work histories and tied to their earnings record. But Cassidy's plan goes the other direction: only mothers making less than $70,000 a year will be eligible for his benefit. My readers are no dummies, so they're already asking: how will income be measured? Is it based on an individual earning record, a joint earning record, or on tax returns? Can you game the system by having children at particular times of year before taxes are filed? Can you game the system by getting married — or by getting divorced? The issue is not that these are unanswerable questions. The issue is that people should not have to ask them!Having spent half an hour in a room with him, I can confirm that Bill Cassidy is a dumbass. But however little firepower he's working with under the hood, I absolutely do not believe any of this is accidental. This plan is designed, top to bottom, to generate as much animosity and antagonism towards the welfare state as possible, at the lowest possible cost. If a paid maternity leave plan like this were passed, it would be used as a cudgel by employers against workers ("if I give you a raise you won't be eligible for maternity leave"), workers against workers ("can you believe our janitors get paid maternity leave and we don't?"), and fathers against mothers ("really you can't afford to keep working since you're entitled to maternity leave").

Conclusion: this plan won't pass, but that doesn't let Republicans off the hook

There is one realistic plan for comprehensive paid family and medical leave on offer: the FAMILY Act. That's not to say it's perfect. I think the benefit should be fixed, universal, and unlinked from earnings history. But I've lost that fight, and the fact is, if you want a near-universal benefit that includes paid medical leave, caregiving leave, and parental leave, financed with a small payroll tax, you have to support the FAMILY Act, because it's the only game in town.None of the Republican efforts to destroy retirement security and worker solidarity will pass, but they weren't written to pass. They were written to serve as vehicles for Republicans to say that they, too, care about providing the paid time off American workers desperately need. But it's just not true. If they did, there would be 100 Senate votes for the FAMILY Act. Instead, there are 47 votes in favor of paid family and medical leave, and 53 votes against it.You know what to do.Become a Patron!

So you've decided to invest in real estate!

Become a Patron!Last week over at Travel is Free Drew wrote a very thoughtful post about his experience taking out long-term residential leases and then subletting them for short-term stays through a variety of platforms. The post has a lot of details on the various expenses and complications he encountered and is worth a close read if you're considering doing the same.He concludes that while this temporal arbitrage is a potentially profitable business, he wouldn't rent to arbitrage again, in the future planning to buy properties for short-term rentals instead. This ultimately led to a long, branching, fruitless Twitter argument about what kinds of risks this kind of strategy entails. At the instigation of reader calwatch, I'll make a few general observations about residential real estate in general and short-term rentals in particular.

Cash flow, basis, and return

One of the most dramatic claims Drew made on Twitter was that "the actual cash on cash return is near infinite." As ludicrous as it sounds, this is actually a fairly common claim made by real estate investors, which Drew spelled out more explicitly a few tweets later, when he said "if you buy at 80% value and refinance, then your $0 in. So all cash at that point is profit."The mechanics of what Drew is talking about here are simple enough to describe in a few words: if you buy a piece of residential real estate with a 20% down payment and an 80% mortgage, then you have 20% equity in your home. If you can then take out another loan (or refinance the existing loan) against your equity stake in the property, and you'll end up having purchased the property entirely with borrowed money.At that point you have a simple calculation: does the property produce more money than it costs, on an appropriate time scale, for example quarterly or annually? Many people make a big deal out of one real estate expense or another, but that's totally unnecessary for this calculation. Just add up all your costs: your mortgage payments, utilities, insurance, maintenance and repairs, lawyer fees, furniture, linen, dishes, housekeeping, landscaping, and everything else you can think of. Even add an additional safety buffer if you like. Then add up all the revenue the property produces. If your income is higher than your costs, you arrive at Drew's "near infinite" cash on cash return: you didn't put any of your own money into buying the property, so your return is on a basis of $0 (until your mortgage payments begin to rebuild your equity).Of course, eagle-eyed readers will have noticed the necessary corollary: if your revenue is less than your costs, then your rate of return is near-infinitely negative. You're pouring money into a hole without receiving anything of value in return, especially since traditional mortgages apply payments overwhelmingly to the loan's interest, rather than principal, for much of the loan's term.The rest of this post is not about disproving or challenging anything above, since everything above is true: if you are able to secure the necessary loans, you can achieve near-infinite positive or negative returns by purchasing real estate entirely with other people's money. Rather, I want to explain why nothing about this is "risk-free."

There's nothing special about real estate

One of the most common claims by real estate enthusiasts is that real estate is "different." Drew made this precise argument when he tweeted, "Real estate is the only investment I know of where you can benefit from appreciation (while claiming depreciation on taxes) without putting your own cash."But this is false. I've never added it up, but I probably have around $200,000 in unsecured credit available to me on my credit cards, and many of those lenders mail me checks every few weeks I can use to buy anything I want. It's true the interest rates are high, but they're not in the stratospheric, payday-loan territory. Instead, they typically top out around 30-35%. My guess is it would take me about 5 days to deposit that $200,000 into my checking account, transfer it to my Vanguard account, and then buy any mutual fund or ETF I pleased with it.And this would put me in precisely the same position as Drew's real estate investor:

• Exactly like the real estate investor, I would be making my purchase entirely with other people's money.
• Exactly like the real estate investor, I would have a near-infinite rate of return if the dividends and appreciation of my investments exceeded my cost of financing.
• Exactly like the real estate investor, if I had to sell investments to meet those financing expenses I would be able to deduct those losses against my ordinary income (the equivalent of Drew's "depreciation").

Now, you might rightly point out the difference is that my financing expenses are 30% and Drew's are 5%. That's all well and good, but as Churchill apocryphally told the society Lady, now we're just negotiating over the price. If you have an investment idea that you believe will generate more revenue than your cost of finance, you should consider pursuing it.Of course it's true real estate has some special treatment in the tax code. I've written about it before. But so does horse-breeding! The principle is the same in both cases: as long as you are calculating your total cash flow properly, i.e. including any tax benefits and penalties, then all you have to do is compare it to your equity to derive your return, whether it's on real estate, stocks, bonds, or horses.With that out of the way, let's turn to some idiosyncratic risks of investing in real estate, in particular for short-term rentals.

Regulatory risk

Regulatory risk is what I call changes in government regulations and the effect they have on your cash flow.This can happen when a community bans short-term rentals, passes new regulations, or begins enforcing its existing regulations. Importantly, this can easily affect your expenses, your revenue, the value of your property, or all three.If a community bans short-term rentals, you may still be able to rent out your property to long-term tenants, but at a lower rate. Keeping monthly expenses fixed at $1,000, moving from $6,000 in income to $800 in income is the difference between earning near-infinite profit and incurring near-infinite losses on your near-$0 equity.On the flip side, if a community passes new regulations or begins enforcing existing regulations, for example by forcing landlords to acquire hospitality licenses, pay for annual inspections, and pay hospitality taxes, then your expenses may overcome your revenue even if your revenue remains unchanged.And finally, in a real estate market where prices are driven by demand for short-term rentals, either of those changes can affect the value of your property, meaning your expenses can rise, your revenue can fall, and you can end up with a property worth less than you owe on it.

Regional risk

More than any other kind of investment, real estate is tied to the land, which creates regional risk: Drew's most profitable months were during Austin's South by Southwest festival, when demand for hotel rooms swamps the city's capacity and many people turn to expensive short-term rentals. Those profits can make up for less-profitable or even unprofitable months — as long as South by Southwest continues to drive visitors to Austin. But tastes change, fads come and go, and who knows if South by Southwest will still be a phenomenon in 5, 10, or 15 years? Relying on a few profitable months really means relying on things staying more or less the same — things you have no control over.

Secular risk

In the aftermath of the global financial crisis, Larry Summers re-popularized the idea of "secular stagnation," one version of which says that the stubborn slowness of the economic recovery was the result of long-term, economy-wide forces, not just bad short-term public policy. In other words, the best that the government could do was manage stagnation and decline, not spur accelerated catch-up growth. Larry Summers was wrong about that, but it's a useful framework to think about long-term, economy-wide changes.If Americans overall travel less, if more business is done through long-distance conference calls or virtual reality, if new technology makes it fast and cheap to build new structures, then the overall rental real estate landscape might be completely changed. Your revenue might dry up and your land and structure might become near-worthless, not because of anything you did or didn't do, but because of changes in the overall economy.

Platform risk

One fascinating element of Drew's post was the sheer number of different services he mentioned as part of his short-term rental empire: AirBnB, Homeaway, PayPal, Venmo, InstaCart, Favor, Walmart Delivery, Craigslist, TurnoverBnB, Your Porter, BeyondPricing, PriceLabs, plus a few I'm certain I missed.That's not to say he uses all these services: some of them were mentioned specifically because he tried and didn't like them. The point, rather, is that a big part of the short-term rental economy is powered by these third-party services, and the more dependent you become on them, the more vulnerable you are to platform risk: losing access to a service, either because you're (rightly or wrongly) accused of a violation, or because the service itself goes out of business.Since my expectation is that in the next downturn all the unprofitable service business platforms will go out of business, this exposes you to a kind of compound risk: just when occupancy rates are falling, you'll also lose access to your main booking channel.I'm particularly sensitive to platform risk because of my own personal experience with it, when the business PayPal account I used to collect monthly reader subscriptions was closed and I had to beg readers to create new subscriptions on my new subscription platform. Most of them migrated over, much to my surprise and pleasure, but it was still a harrowing couple months.Platform risk can be mitigated, of course: you can build your own booking channels, diversify into as many booking channels as possible, maintain multiple backup accounts, etc. But mitigating platform risk creates its own costs, and its own drag on your total cash flow.

Volatility risk

The risk that real estate investors least understand is price volatility, and no wonder: stock investors can see the price of their assets fluctuate second-by-second, which may even lead them to believe stocks are more volatile than they actually are (if you don't believe me, just turn on CNBC after the S&P 500 drops 0.5%). Meanwhile, real estate investors tend to anchor the value of their property on what they paid for it, and can only guess within broad ranges what it's worth on any given day.The other risks I mentioned revolve around factors that might permanently reduce your income, raise your costs, or lower the value of your property. Volatility risk is different: it's the risk that your property will be worth less, or worthless, at the moment when you happen to need the money.This is true whether or not you believe, as Drew does, that real estate "consistently goes up." Many people describe real estate as a kind of savings vehicle: you borrow money, and the payments on that loan slowly build up equity, which you then own and can "withdraw" through a sale or refinance. But while it may be a savings vehicle, real estate is not a savings account. A savings account has a known, federally-insured value. But even if you are certain the value of your real estate will increase over 5-year, 10-year, and 20-year time horizons, that tells you nothing about its value over any of the intermediate periods!

Conclusion

None of this is intended in any way to discourage people from investing in real estate. To me, it sound like a phenomenal amount of work, but as I always say, if you do what you love you'll never work a day in your life. I like writing, Drew likes buying and managing rental properties, it takes all kinds to make the world go 'round.But this post is intended to make it emphatically, entirely, and conclusively clear that real estate is not special, it is not risk-free and it is not even particularly low-risk, although many of the risks are unusually well-hidden. Like all investing, it can be done with your own money and it can be done with other people's money. It can be done well and it can be done poorly. It can be profitable and it can be loss-making.So if you do decide to invest in real estate, do yourself a favor and do it with both eyes wide open.Become a Patron!

The Indy Finance guide to why, where, and how to seek higher education

Become a Patron!I've written many times before about higher education, mainly from the perspective of financing it. Thanks to Aunt Becky, for the last few weeks the national spotlight has focused on much more fundamental questions: what is post-secondary education for? Who should pursue it, and why? What should they study, and where?Fortunately, the definitive answers to all these questions and more are below.

True credentialing

It has become a cliche to say that the middle class obsession with higher education is an example of "credentialism," whereby people go to college "just to collect a piece of paper." Evidence for this typically includes the fact that many jobs which required a high school diploma 25 years ago require a bachelor's degree today. I want to distinguish that process, which we can call false credentialing, from true credentialing.True credentialing describes the fact that, for a variety of historical reasons, certain work can only be performed by people who have specific credentials. If you want to become a nurse, you can't just hang out around nurses until you pick up the tricks of the trade. If you want to become a doctor, you can't just read a bunch of medical textbooks. If you want to become an architect, you can't just practice drawing blueprints until you get really good at it.In many states, everyone from hairdressers to ear piercers need a credential of some kind. Depending on the line of work you desire, you should look into what credentials are required to pursue that profession.Now, it's also true that these credentials can be very difficult and expensive to acquire, and many people who start off wanting to become nurses, doctors, and architects fail to complete the required credentials, either because they discover the work is worse than they hoped (blood, gore, sawdust), or they lack the interest or ability to finish.This is an important reason to pay as little as possible for higher education, and to maintain a very high willingness to drop out. People who complete their medical, dental, or engineering education do not usually struggle to pay their higher education expenses. But since you don't know in advance whether you will succeed at acquiring a credential or not, you should always prefer to pay less rather than more. If you succeed, there's no harm done in having below-average educational debt, and if you fail there's an enormous advantage to having below-average educational debt!

High-wage employment

Another good reason to get a post-secondary degree is if you are interested in pursuing high-wage employment. I've had enough jobs over the years that I don't particularly recommend it, but if you're the kind of person who wants to work for someone else, it's almost always better to be paid more rather than less, and better-paid jobs typically require some kind of post-secondary education, whether it's a formal degree, a vocational diploma, or even something as simple as a commercial driver's license.Note that I am distinguishing high-wage employment from having a high income. If you want a high income, you should figure out something you're good at, then charge people to do it for them. If you're not good at anything, you should get good at something, then charge people to do it for them.It might cost a few thousand dollars in art supplies to get good at screen-printing, or a few thousand dollars in gym memberships to get good at weight lifting, or a few thousand dollars in running shoes to get good at training for marathons, but if you want to work for yourself, you don't need a degree. You don't even need a resume (as long as you promise not to ask for it).This is a good time to mention a common misunderstanding people have about higher education. It's become a cliche to say that so-called "STEM" fields pay well, so students should be encouraged to study science, technology, engineering, and math in college. But this advice is only relevant if you want to seek wage employment. You do not need a college degree to own a tree nursery ("science"), Apple doesn't ask you to upload a resume before submitting apps to the App Store ("technology"), Chinese factories don't ask to see your degree before shipping you drone parts ("engineering"), and anybody can upload mathematical proofs to the internet (although I don't think there's very much money in that one).In other words, acquiring a degree in a STEM field may make sense if you want to turn your degree into high-wage employment; it's totally unnecessary if you want to work for yourself.

An advanced education

Another important reason you might pursue post-secondary education is to achieve a more comprehensive understanding of one or more subjects. Fortunately, this can usually be done for very little cost if you're able to do any planning at all. The key insight is that the cost of American higher education has a horseshoe shape: tuition at community colleges and in-state public universities is extremely cheap or free, mid-tier private universities and out-of-state public universities are extremely expensive, and tuition at elite private universities is again cheap or free due to large endowments and generous financial aid (ignore the sticker price; nobody pays that except aging 90's TV stars).Here you might object that "thanks to the Internet," information is free. Why would you pay anything to sit in a classroom and listen to a lecture when you can watch thousands of hours of lectures on any topic from the comfort of your own home.The answer, of course, is that regardless of what information costs, information is different than an education. Out of curiosity, I pulled up the requirements for an undergraduate degree in history at Yale University. Eyeballing it, students need to take about 10 classes in the Department of History to meet the degree requirements. Here's a description of a semester-long, freshman class selected at random from the Yale Spring semester course catalog:

"This course introduces students to the myth-making processes involved in the creation of nation-states in the post-Ottoman Middle East, including Iraq, Palestine, Israel, Lebanon, Turkey, as well as in Iran and Egypt. It explores the ways in which national identities and nation-states formed—in ways both organic and forced—around certain myths and ideologies. It examines the impact of these national/nationalist myths on revolutions and uprisings in the late Ottoman and post-Ottoman Middle East. The course readings, sources, and discussions examine the relationship between myths of national origin, revolution, and state-making. The class also addresses the ways in which the control over the creation of myths of origin and ethnic, racial, national, and religious identity shaped society and politics in nation-states, republics, and monarchies especially after 1918. The course focuses partly on the theoretical underpinnings of national myth-making and ideologies of nationalism in order to offer historical understandings as to how states, majority and minority groups, and different national movements in post-Ottoman society created and re-made ‘imagined communities’ of nationals and citizens, sometimes through violence. The course surveys the ways in which new identities became manifested in a number of often-revolutionary ideologies including pan-Arab nationalism, Zionism, Kemalism, Phoenicianism, Baathist socialism, and various anti-imperial and anti-colonial movements."

By contrast, Khan Academy, the most famous of the "free online universities," appears to have about an hour of video explaining the history of the Middle East in the 20th century. PragerU, the creepy conservative alternative education site, has four videos about the Middle East, including the 5-minute-long, iconic video starring the dead-eyed master of ceremonies, Dennis Prager himself: "The Middle East Problem."Look: I love Wikipedia as much as anybody, but even at its best, Wikipedia can only provide you with information, not an education.

Post-secondary education advice roundup

We're going a little bit long here, so I want to add a bunch of quick hits that will be available in the same place:

• Whenever you move between states, immediately change your voter registration, apply for a new state ID or driver's license, and file taxes in the new state (even if you don't owe any state taxes). State residency for tuition purposes is seen by amateurs as an intrinsic fact about your identity, but this is false. It's a composite of what you can and can't prove. The more facts you can prove about your presence in the state, the more likely you are to receive in-state tuition.
• If you decide to go the elite-private-school route, do not take any post-secondary classes after the summer after you graduate high school. At most elite private universities, if you take any classes after that summer, you will not be eligible for "freshman" admission, and you'll be required to meet the much stricter "transfer" admission requirements.
• On the other hand, if you decide to go the in-state public university route, you should aim to meet as many of your general education or distribution requirements as possible before enrolling, so you can focus on getting as specialized a university education as possible. The way this works is that "lower-division" courses are typically large lectures, often taught by over-worked lecturers and offering little or no personal attention, while "upper-division" courses are more often smaller classes taught by tenure-track professors. The more you can tilt your course load towards the latter, the more bang for the buck you'll get.
• Many people say the only way to gain fluency in a foreign language is to live for an extended period in a country where that language is spoken. This is false. The only way to gain fluency in a foreign language is to attend the Middlebury Language School for that language.
• Never pay for non-professional graduate school. I don't think you should pay for professional graduate school either, but I understand the world needs doctors, so I'm not going to fight that battle here. But if you are considering attending a graduate program in the humanities or sciences, only enroll if you are provided health insurance, a tuition waiver and a stipend. Do not borrow money for non-professional graduate school. Do not pay for non-professional graduate school. If you can't get admitted to a program that provides a tuition waiver and a living stipend, go do something else and apply again the next year.

Conclusion

I think college is terrific. That (and a certain global financial crisis) is why I spent a decade floating around between institutions of higher learning before I found my calling. But it's also a system that in many ways preys upon people who are, by design, too young and ignorant to know what they're doing.If there's somebody like that in your life, send them this post!Become a Patron! 

Why can't financial journalists give financial advice?

Become a Patron!I started this blog because the more I learned about the personal finance industry, the more I saw the same problems that are pervasive in my other line of work in the travel hacking community: people are either paid to lie, or too ignorant to know if what they're saying is true or not. So, I figured I'd start a blog where I could tell people the truth.One difference between personal finance and travel hacking is that personal finance has an unusual number of people who are not being paid to lie, but for one reason or another are also incapable of telling the truth.

Jason Zweig and the amazing disappearing advice

I started thinking about this last week while researching some recent Wall Street Journal columns by Jason Zweig. At least as early as February, he started writing about the fact that by shopping around you could earn more interest on your savings that the rate offered by the big national banks and on mutual fund settlement accounts offered by brokerage houses. This is true.But this is a meaningless observation if it does not rise to the level of advice. Consider the following passage:

"Many money-market mutual funds are paying 2% and up. Although they aren’t backed by the government, they hold short-term securities whose value tends to hold steady. (A money fund yielding much more than 2.5%, however, is probably taking excessive risk.)"At Vanguard Group this week, taxable money-market funds were yielding between 2.31% and 2.48%, and tax-exempt money funds yielded 1.19% to 1.32%. Fidelity Investments and Charles Schwab Corp., among other firms, also offer money-market funds with attractive yields."

This looks very close to advice, but the more closely you read it, the more you find it slipping through your fingers. It is true that Vanguard taxable money-market funds were yielding "between 2.31% and 2.48%." But this is an absurd way of framing the situation. Vanguard only offers two taxable money-market funds! They are:

• Federal Money Market (VMFXX), yielding 2.34% as of March 19, 2019.
• Prime Money Market (VMMXX), yielding 2.45% as of March 19, 2019.

What is the point of describing this situation as a "range" between yields on Vanguard money-market funds? If you are saving cash in a Vanguard account, and can meet the $3,000 minimum investment requirement, you should put it in the Prime Money Market fund. If not, you can use the Federal Money Market fund (which is also the settlement account for Vanguard brokerage accounts, so it's not like you have a choice). If your current brokerage offers less than that on your cash, you should move your cash to Vanguard.Zweig then turns to online savings accounts, and mentions Goldman Sachs's "Marcus" online savings product: "Savings accounts at Marcus, the online bank operated by Goldman Sachs Group Inc., are paying 2.25%, with no minimum investment required. It takes only a few minutes to open an account; U.S. deposits at Marcus grew in 2018 by 65%, to more than $28 billion."Again this at first appears to rhyme with advice. Why would he mention Marcus if he isn't advising readers to use Marcus? But 2.25% isn't the highest interest rate you can earn on an online account: All America Bank offers 2.5% on up to $50,000 in their Mega Money Market Checking accounts!

Education may be valuable, but most people need (good) advice, not education

Let's turn from the Wall Street Journal to that other bastion of financial erudition, Bloomberg Opinion. Barry Ritholtz, the namesake of extremely-online financial advisory Ritholtz Wealth Management, last week expressed his anxiety over the extremely poor protections enshrined in law for participants in retirement plans offered by non-profit organizations and state and local governments, so-called 403(b) plans (which I've had occasion to write about before).These extremely inadequate protections are no doubt a matter of serious concern. But a teacher searching the internet for information about her 403(b) account does not need to lobby Congress to extend ERISA protections to 403(b) accounts. She needs advice about what to do with her 403(b). And just in the case of Jason Zweig, you can begin to see the glimmer of advice in Ritholtz's article. He writes:

"403(b) plans tend to invest way too much money in annuities — 76 percent on average. Annuities have much higher costs than typical mutual funds."

And:

"If an employer and 401(k) plan sponsor put a high-cost, tax-deferred annuity into a tax deferred 401(k), they would be warned by counsel to expect litigation."And they’d probably lose, because paying a high fee to put a tax-deferred component into a tax-deferred account is pointless."

Now, if you squint at these statements closely enough you might be able to guess that Ritholtz is saying "don't put a high-cost, tax-deferred annuity into your 403(b)," and "invest less than 76% of your 403(b) account in an annuity."But why should it be that people are left guessing in the first place?

People who provide information don't provide advice, and people who provide advice don't provide information

This is the fundamental pattern I see over and over again in the world of personal finance. Take, for example, my favorite resource for mostly-up-to-date interest rate information, DepositAccounts. This is an excellent resource I use constantly to check on interest rates on rewards checking accounts, online savings accounts, CD's, and money market accounts. Go ahead and bookmark it, if you haven't already.But this is what the top of their "Savings Accounts" page looks like (in my ZIP code):Now, this is obviously absurd: why would anyone prefer an account with a $10,000 minimum paying 2.35% over an account with a $1,000 minimum paying 2.45%? But DepositAccounts found a couple banks willing to pay them for preferred placement, presumably because those banks, rightly or wrongly, calculated that preferred placement would attract deposits in excess of their account's objective appeal.

Conclusion: always look for what's not being said

It would be awfully odd to end a post like this without offering some concrete advice. Indeed, I'd be guilty of exactly what I accused Ritholtz of: educating without advising.So let me sum up my advice in the most concrete way possible:

• When you are reading a piece of financial journalism, pay close attention to what is not being said. If someone says you "can" increase the interest rate on your savings, or you "can" reduce the expenses you pay on your investments, check whether they also say you "should" increase the interest rate on your savings, or you "should" save money on management expenses. If not, why not? Does the publication have relationships with investment managers they don't want to jeopardize?
• When you're reading a source of information like DepositAccounts, the same rule applies. If a particular account is "sponsored," or a partner is "preferred," or a bank is "recommended," are you given any reason why that account is superior to any other account? Are there other, better accounts that are excluded because they are unwilling to pay for placement, or don't pay a commission to the site?

I've written elsewhere that many people make a grave mistake when compensating for conflicts of interest. They think, "now that I'm aware of the conflict of interest, I'll discount it by an appropriate amount." But this is incorrect. The correct response to a conflict of interest is to discount the advice given by 100%. If possible, you should even discount conflicted advice by slightly more than 100% (this is not always possible, for example in insurance sales where some kind of commission is typically unavoidable).The United States has some of the most vigorous protections for free speech in the world. It also has some of the most strict restrictions on professional speech, and a national media almost entirely in the control of a few powerful corporations and individuals. This curious contradiction often makes it difficult or impossible to know whose voice you're hearing at any one time: when is Jason Zweig speaking for Jason Zweig, when is he speaking for the Wall Street Journal, and when is his voice filtered through the Journal's legal department? But it is still possible, and necessary, to figure out when, for whatever reason, you're not getting the whole story and to try to put the pieces together for yourself.

Beware Republicans bearing robust debate and compromise

Aparna Mathur is a Resident Scholar, Economic Policy, at the American Enterprise Institute, a libertarian think tank with an excellent kitchen that I periodically visit when I want to save money on lunch or cocktails. If you're ever in DC I strongly recommend visiting their events page to see if you can enjoy one of their catered meals or open bars.Scholar Mathur has recently focused her residency on the question of paid parental leave in the United States, as in a recent blog post, "The Birth of a Compromise on Paid Parental Leave" (get it, "birth?").As she and her co-authors write, "history shows that when both sides express a willingness to compromise, great policies can emerge. Our elected officials are now facing one such historic opportunity. It is time for them to pass legislation that creates a national paid parental leave program."The question, as Napoleon famously asked about the pope, is "how many divisions does the AEI-Brookings Paid Leave Working group have?" More to the point, how many votes do they have?

Ted Cruz and the amazing vanishing immigration vote

The year was 2013, and after years of gridlock, Democratic and Republican moderates in the Senate had hammered out an immigration compromise that included border enforcement, changes to future immigrant flows, and legal status for long-time US residents. The bill quickly ran into a problem: the Texas Senator, and Canada native, Rafael Edward "Ted" Cruz.Cruz, the son of Cuban revolutionary Rafael Bienvenido Cruz y Díaz, was concerned that the bill as drafted would allow long-time undocumented residents of the United States to receive permanent resident status and, eventually, US citizenship like his and his father's (n.b.: his mother was born in Delaware, so while he immigrated to the US from Canada at a young age he enjoyed US citizenship from birth).What followed was a grueling rearguard action as Cruz moved heaven and earth to try to block newly normalized permanent residents from any so-called "path to citizenship." Unable to sway his colleagues, he was forced to vote, more in sadness than in anger, against final passage of the "Border Security, Economic Opportunity, and Immigration Modernization Act."At least until the 2016 primaries came around, when Ted 2.0 was launched, and much to the surprise of his colleagues and constituents, it turned out he had been opposed to the law all along, whether or not it included a path to citizenship. Incredulous reporters went back and checked the tapes, and found out Cruz had masterfully outplayed them in 2013: it turned out Cruz had never made his vote conditional on removing a path to citizenship from the bill. Indeed, it soon became clear his vote was never in play.To take one of literally hundreds of examples, on May 21 Cruz introduced an amendment to remove the path to citizenship, saying, "I don’t want immigration reform to fail. I want immigration reform to pass. And so I would urge people of good faith on both sides of the aisle, if the objective is to pass common-sense immigration reform that secures the borders, that improves legal immigration, and that allows those who are here illegally to come in out of the shadows, then we should look for areas of bipartisan agreement and compromise to come together. And this amendment—I believe if this amendment were to pass, the chances of this bill passing into law would increase dramatically" (emphasis mine).Now, you or I might look at this statement and conclude that Ted Cruz, someone who says they want immigration reform to pass, but who can't vote for a bill that includes a path to citizenship, and is proposing an amendment to remove a path to citizenship, is saying that he will vote for the bill if the amendment passes.But Ted Cruz never said that. In 2016, the trap was sprung: Cruz revealed that he had been opposed to immigration reform all along, and that his amendments were intended solely to reduce the bill's chance of passing, and to weaken it in case it did.

Olympia Snowe and the amazing vanishing healthcare vote

If you'll step into my time machine yet again, let's return to 2009, when Democrats held a filibuster-proof majority in the United States Senate. Max Baucus, Democrat of Montana and chair of the Senate Finance Committee, had been holding months of hearings and closed-door sessions in an effort to get three Finance Republicans on board with healthcare reform: Mike Enzi, Chuck Grassley, and Olympia Snowe.After months of wrangling, the death of Senator Ted Kennedy, the seating of Al Franken, and Arlen Specter's frantic last-minute party switch, all three Republicans voted against cloture and against final passage of the Affordable Care Act.

Paul Ryan and the amazing vanishing Earned Income Credit expansion

Before he decided to retire to spend more time with the Koch brothers' money, Paul Ryan reinvented himself in office one last time: as an anti-poverty champion. The so-called "Better Way" Republican agenda, launched in the summer of 2016, included an anti-poverty program (available for now at the Internet Archive). That document contains the following enigmatic paragraph:

"The Earned Income Tax Credit is another potential solution. The EITC is a refundable credit available to low-income workers with dependent children as well as certain low-income workers without children. It can help with the transition because it increases the financial rewards of work. Increasing the EITC would help smooth the glide path from welfare to work."

Fortunately, on other occasions Paul Ryan has written more extensively about his support for Earned Income Credit expansion. In a 2014 "discussion draft" for the House Budget Committee, he wrote:

"there’s a growing consensus to expand the EITC for childless workers...Given the EITC’s success in boosting work among families with children, a larger EITC should have a similar effect on childless workers. Given these troubling trends for young workers, there is a real need to consider lowering the age of eligibility for the EITC, which currently does not serve this population...Because the EITC helps low-income households while encouraging work, this proposal would expand the credit for childless workers. Specifically, it would double the maximum credit, phase-in, and phase-out rates for childless adults, and it would lower the eligibility age for workers from 25 to 21, assuming they are not a dependent or qualifying child for another taxpayer."

If you knew nothing else about Paul Ryan, you might conclude from this evidence that he supports an expansion of the Earned Income Credit for childless workers.But since you are reading this today, you know that would be wrong. When offered the opportunity to pass changes to the tax code that could increase the deficit by a total of up to $1.5 trillion over the 10-year budget window, i.e., the changes did not have to be paid for as long as they were not scored as increasing the deficit by more than that amount in that period, Paul Ryan did not lower the eligibility age for the Earned Income Credit. He did not double the maximum credit, nor the phase-in, nor the phase-out rates for childless adults. He did not expand the Earned Income Credit at all.That is because Paul Ryan does not, and never did, in fact support an expansion of the Earned Income Credit. Paul Ryan was lying.In a roundabout way, this brings us all the way back to Aparna Mathur, whom I asked on Twitter earlier this year, "why do you think Paul Ryan refused to expand the EIC after making it the cornerstone of his woke Republican anti-poverty agenda?." Aparna Mathur didn't have me muted back then, so she saw my question and even replied to it:"I wish we could move forward with an EITC expansion. I have no idea why a policy that has so much support doesn't make it through Congress..it would be so helpful."She. Has. No. Idea. Which tells you almost everything you need to know about Aparna Mathur.

The Republican Party and the amazing vanishing national paid family leave program

Aparna Mathur thinks that the time has come for a national paid parental leave program. I also think the time has come for a national paid parental leave program. The proposal with the most widespread support in Congress today is the FAMILY Act (don't ask what it stands for), which would create a small additional payroll tax and use those funds to pay for wage replacement for workers who need to take time off to care for a new child or in case of serious illness or injury. It currently has 35 Democratic co-sponsors in the Senate and 178 Democratic co-sponsors in the House of Representatives, and widespread support among Democratic members of Congress.Unfortunately, Aparna Mathur doesn't much care for the FAMILY Act. Without meticulous documentation, I can boil down her objections as follows:

• It's too long. While the FAMILY Act entitles workers to 12 weeks of paid leave, that's a little bit excessive. Isn't 8 weeks of leave a bit more realistic?
• It's too generous. While the FAMILY Act entitles workers to 66% of their weekly pay up to $1,000 per week, that seems like an awful lot of money to give to new parents. Why not limit it to $600?
• It covers too many life events. While new parents surely need some time to bond with their children, there's no need to pile family and medical leave into the same law. Why not restrict the paid leave benefit to birth and adoption events only?

I think these objections are ridiculous, but this post isn't about what I do or don't consider ridiculous. That's a judgment you have to make for yourself.This post is about the fact that Aparna Mathur, AEI, and the Brookings Institution don't have the votes. If Aparna Mathur could come up with 13 Republican Senators willing to vote for a motion to bypass Senate Majority Leader Mitch McConnell and bring this pared-down version of paid parental leave to the floor of the Senate, it would get 47 Democratic votes, and it would pass the House with a comfortable Democratic majority.But there aren't 13 Republican Senate votes for a pared-down paid family leave law. There isn't one Republican vote for a pared-down paid family leave law. There are, currently, maybe 3 votes for a Rubio-style "mortgage your retirement to spend a few weeks with your kids" bill, but there are zero Democratic votes for that idea because it's terrible.The point is, there's no secret backdoor workaround to find Republican votes for compromises, hacks, or kludges. If, like Aparna Mathur, you think "It is time for them to pass legislation that creates a national paid parental leave program," then you have to support the FAMILY Act. You have to contact your representatives in Congress and demand they support the FAMILY Act. If they refuse, you have to vote against them in your congressional primary, and vote for Democrats in general elections, until you are represented by someone who does support the FAMILY Act.That's the entire show. While Aparna Mathur and her colleagues at AEI and Brookings furiously workshop compromises, the one thing they can't do is provide the votes necessary to pass national paid family leave into law. For that, you need Democrats — and you need a lot of them. Get cracking!

There's no such thing as an "American retirement model"

There's no cliche more beloved by the financial press than the "changing American retirement model."The beauty of the changing American retirement model is that you can use it to prove any point you want:

• if you want to cut Social Security old age benefits by raising the full retirement age, the changing American retirement model is that people are living and working longer;
• if, on the contrary, you want to increase Social Security benefits, the changing American retirement model is that fewer employers offer defined benefit pension plans so the government needs to step in to supplement retirees' income;
• if you want to increase the contribution limits to tax-sheltered retirement accounts, the changing American retirement model is that retiree health care and housing expenses are increasing faster than consumer price inflation.

The problem with these arguments, some of which I'm sympathetic to and some of which I detest with every fiber of my being, is that there is no American retirement model, and there never has been. There are at least 3 different ways to illustrate this, and I think each one has value.

People who die young don't get to retire

In the 2015 United States life table, you can see that of 99,065 infants surviving to age 18, only 86,915 survive to age 62, the earliest age they'd be eligible for Social Security old age benefits, a survival rate of 87.7%. The American retirement model for the other 12.3% of the population is to die.The reason I bring this up is that arguments based on life expectancy only apply to people who survive to retirement. There are two moving pieces here. First, the number of mortalities per age rises steadily, which means for each year you raise the retirement age by, you exclude an increasingly number of people from ever being able to retire. Second, increasing longevity is concentrated in high-income, low-impact white collar professions — people who have other resources to draw on in order to meet their retirement needs in the case of a higher retirement age.No wonder higher retirement ages are so popular among the wealthy.

No one saves anything for retirement, and no one ever has

Vanguard reported in 2017 (page 45) that their average 2016 401(k) account balance was $178,963 for participants between the ages of 55 and 64, while the median balance for those participants was $66,643. I don't want to argue about whether Vanguard assets are "representative" or not, so apply as wide a margin of error to that figure as you like; maybe Vanguard participants are particularly savvy, and maybe they're particular slouches.The point is, using a primitive 4% withdrawal rule, $67,000 can produce about $2,680 in safe withdrawals per year in retirement. While the average is pulled up by what Vanguard calls "a small number of very large accounts that significantly raises the average above the median," even the average account balance can only produce $7,160 in "safe" withdrawals per year.

Defined benefit pension coverage has not changed

The third piece of the "American retirement model" puzzle is defined benefit pension plans, which have been said to be steadily shrinking for at least as long as I've been alive.In a 2018 Bureau of Labor Statistics report, 26% of civilian workers had access to defined benefit pension plans. Sounds low, right? The third leg of the American retirement model has been plucked from its fitting!The trouble is, most workers never had access to defined benefit pension plans. There are two reasons this is so confusing to people. First, defined benefit pensions are typically reported as a percentage of total retirement plans, as in this Vox.com article: "as of 1983, defined-benefit plans were the majority of retirement plans in the US. By 2004, most were defined-contribution."You can find an even more extreme claim in this report: "At one time, 88 percent of private sector workers, who had a workplace retirement plan, had a pension" (emphasis mine).But that doesn't tell you anything about the number of defined benefit pensions in existence in 1983 or at any other time — the entire effect could have been (and indeed was) created by increasing the number of defined contribution plans at employers that never offered defined benefit plans!Second, the decline in defined benefit plans is concentrated almost entirely in the private sector. According to a 2017 Congressional Research Service report, 85% of state and local government workers still have access to defined-benefit pensions today.Have I kept you in suspense long enough? Today's 26% access rate to defined benefits pension plans has fallen from a 1989 access rate of...32%. That's it. 30 years — almost my entire lifetime! — of being lectured by neoliberal think tanks about the collapse of the American retirement model, about the need to work longer, harder, re-skill, up-skill, trans-skill, and the defined benefit pension access rate has fallen, in total, by a little under 19%. Another way of thinking about it is that the total number of workers covered by defined benefit plans has risen, from 32% of the 1989 workforce to 26% of the much larger 2018 workforce.

Stop over-thinking: the suffering of the elderly is the problem and Social Security is the solution

There is no problem under our young sun that the neoliberal mainstream of our politics doesn't think can be solved with three-legged stools, with success sequences, with means-testing, and with personal responsibility.But it's not true. Elder poverty is a problem with a single cause: under our version of market capitalism, people who work get paid, and people who don't work don't get paid. If people insist on living longer than they're able to work, then they either starve or receive money from those who are still able to work. This has nothing to do with life expectancy, it has nothing to do with retirement savings, and it has nothing to do with defined benefit pension coverage.Either we transfer money from workers to retirees, or retirees die hungry and helpless. Fortunately, we already have a solution in place: monthly cash transfers to retirees through Social Security's old age benefit. Unfortunately, rather than finding a consensus to expand that system to ensure none of our elders are left in poverty, that system is under attack by people who want to reduce those benefits.We have an economy that's more than capable of providing for children, workers, retirees, and those unable to work. All we need is a politics that's up to the task.