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Ponderings For the Week of June 14 to 20, 2021

Falling Interest Rates and Rising Inflation Dominate Market Action

Treasury note yields decreased sharply and the rate of inflation posted a 13-year high last week. DC policy wonks continued to say don’t worry, these conditions are temporary. Stocks were mixed in light trading. Foreign stocks are receiving a lot of attention…and investor money. Shares in Europe are higher for the fourth consecutive week.

Other news was generally encouraging. Consumer confidence increased after last month’s setback. In Washington, while far from a done deal, a bipartisan Senate group reached an agreement on an infrastructure plan, albeit at a considerable spending haircut from the Biden plan.

Keeping Track of Nondeductible IRA Contributions Can Be a Taxsaver

Most taxpayers report all traditional IRA account withdrawals as taxable distributions on their tax returns, although some of the money withdrawn often consists of nondeductible (after-tax) distributions that are not subject to income taxes. So they’re overpaying their taxes. What happens is that after-tax contributions are often lost when taxpayers either forget that these amounts were after-tax or do not track and report them correctly on their tax returns.

In order to avoid the double taxation of amounts withdrawn from nondeductible contributions, you or your tax preparer needs to keep track of them. IRS Form 8606, Nondeductible IRAs, is designed to do just that. The problem is that the vast majority of taxpayers haven’t completed and filed the form resulting in lost basis information and overpaid taxes.

While it will take some digging in old tax files, it is possible to quantify the amount of past nondeductible contributions, even if you’re starting from scratch. You may conclude that it’s not worth the hassle, but you should first make a ballpark estimate of the amount of money involved. It could amount to tens of thousands of dollars for higher income individuals. Otherwise, you might want to start keeping track of future nondeductible IRA contributions to provide a modicum of future tax savings.


Smart Money Tips 

  • Keep your eyes on the retirement prize.  Everything you do in your financial life, from saving to investing, from obtaining insurance to controlling your debt is geared toward one overriding goal: to be able to afford to retire and, once you’re retired, to thrive financially throughout your retirement years. Arranging your financial life around that goal is not something that is best begun a year or two before retirement – or forgotten a year or two after you retire. The earlier you begin to think of all aspects of your financial life in the context of retirement, the better able you will be to retire in fine fettle.  
  • It’s time to practice “Reverse keeping up with the Joneses.” The pandemic has caused many people to load up on cash with designs on spending it now that the economy is opening up. If your neighbor starts spending like there’s no tomorrow, you may fear being derided about your less-than-spectacular lifestyle. But instead of trying to keep up with the Joneses, I recommend that my disciples practice the reverse. In other words, while it’s important for us as a nation to spend abundantly since consumer spending is essential to fueling the economy, you don’t have to be a good citizen in this instance. So my advice is to simply sit back and let your neighbors, friends, and everyone else consume with alacrity while you quietly restrain your spending. Then we have the best of both worlds – robust consumer spending spurring the economy while you’re saving for a more prosperous future.


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