Q: I’ve got too much cash just sitting in the bank. I like having it available to me, but I’m beginning to feel foolish earning so little on it. Besides locking it up in a CD at my bank, what other options are there? 

A: Since last summer, increasingly I’ve been helping my clients with their cash management needs. After the Fed’s rate hikes over the past year, it’s absolutely time to do something with your excess cash. If you don’t, you are basically leaving money on the table.

Consider opening a brokerage account that’s solely dedicated to your excess cash. Once opened, establish an online link that connects your new brokerage account to your main checking account at your bank. This online link will allow you to freely move money whenever you want. 

After you’ve successfully shifted your cash into your new brokerage account, just invest it in a money market fund. Today, a typical money market fund pays almost 5% interest. If and when you need the cash, all you have to do is sell a portion of your money market fund, push a couple of buttons and it’ll land back in your bank account.

Q: We’re confused about how the Affordable Care Act’s premium subsidy actually works. Our tax return showed us having to pay back part of the premium subsidy we got last year. How can we avoid this?

A: It all comes down to your income guess when you signed up for your plan at the start of the year. To help, here is a simplified explanation. 

The government essentially determines how much you can “afford” to dedicate to the cost of your health insurance. It depends on the level of your income and family size. It can range from as little as 2% of your income to as much as 8.5% of your income. 

What you can afford to pay is then compared to the actual cost of the “benchmark plan” in your area. The difference is your premium subsidy and it is automatically – in advance – used to lower your monthly premium for the type of health plan you choose. 

Now, if your income turns out to be higher than your initial guess, at tax time you’ll have to pay back some of the premium subsidies you enjoyed in advance. If your income guess was too low, at tax time you’ll receive a one-time, lump sum to make up for the premium subsidies you didn’t get in advance.

To minimize any surprises at tax time, you can always adjust your income guess throughout the year. Of course, be aware that your monthly premium cost will change after you update your income. 

Q: A co-worker recently mentioned that she did a “Backdoor Roth” last year. I’ve been told that I’m not allowed to make any Roth IRA contributions because my income is too high. But, we likely earn a similar amount. Maybe I’ve been missing something. What is a “Backdoor Roth” and how does it work?

A: Your colleague may have clued you in on a little-known trick. However, it takes some careful planning. If you fully understand the rules and nuances, it might just be worth doing.

Let’s start with the income limits for making a Roth contribution. If you are single and your income in 2023 is greater than $153,000, you are not allowed to make a Roth contribution. The income limit in 2023 for those married filing jointly is $228,000.

Now, even if you happen to earn above those income limits, you are always allowed to make a “non-deductible” IRA contribution. Most people discover “non-deductible” IRA contributions totally by accident. This typically happens when you participate in your work-based retirement plan and end up making too much money to qualify for a tax deduction on your IRA contribution. Your IRA contribution then gets classified as “non-deductible.”

So, why would anyone make a non-deductible IRA contribution on purpose? Because you plan to immediately “convert” your non-deductible IRA contribution into a Roth IRA with no tax owed. And, if done right, you’ll have gone from not being allowed to make a Roth contribution to getting money into a Roth IRA “through the backdoor.”

But, there’s a small catch. This move only results in zero tax, if and only if you didn’t already have any pre-tax IRA balances in your life. If you do have pre-tax IRA accounts, then part of your subsequent Roth conversion will be taxed. In fact, the more existing, pre-tax IRA money you have will result in a greater proportion of your Roth conversion being taxed. Of course, voluntarily making a non-deductible IRA contribution and then getting taxed on a Roth conversion is not a good plan!

To fix this problem, however, there’s a perfectly legal “trick” you might consider. If you happen to be enrolled in a work-based retirement plan, you might be able to empty out your IRA balance by first doing a rollover into your retirement plan.

After the rollover is done, you’ll no longer have any existing, pre-tax IRA money mucking things up and none of your follow-on Roth conversion will be taxed. Following your rollover and after your subsequent non-deductible IRA contribution, the only dollars sitting in your regular IRA are considered to be after-tax money. With no tax deduction ever taken on that fresh IRA balance, no tax will be owed on your Roth conversion!

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

A year ago, I wrote about a rare, shining moment for Series-I savings bonds. It’s time for a quick update to help you decide to either hold them or cash them in.

Last May, new Series-I savings bonds investors were offered a guaranteed rate of almost 10%. The catch was, that amazing teaser rate was for just the first six months. After that short period, subsequent declared rates were at the mercy of inflation. Last November, the new rate came in at about 6.5%. In combination, as planned, the full first year return worked out to a healthy 8% or so.

The burning question is, what should you do now?

As widely predicted, the inflation fever has broken. Since Series-I bonds are explicitly tied to inflation, so too is their interest rate. The just-announced next six month window for Series-I bonds promises an annualized rate of only about 3.5%. That now sits below rates offered in safe money market funds at most brokerage firms.

It’s probably time to remind yourself of your TreasuryDirect login credentials and plot your next move for your excess cash savings. The US Treasury’s website is pretty awful to navigate, as you might remember!

Speaking of the US Treasury, a small group of politicians is playing a very expensive and serious game of chicken. By not automatically raising the debt ceiling, they are purposely calling into question our federal government’s willingness to pay its bills. One might see it as just political gamesmanship, but economically speaking it’s far more than that. It has real financial ramifications that could be long lasting.

To begin, we all know the government will ultimately pay its bills. The only question is, when and how will those bills be financed? If, through their political stunt, the US Treasury goes into technical default on its debt, forevermore investors across the globe will wisely demand just a bit higher interest rate when lending to our federal government in the future. After all, if you lend money and don’t get paid back on time, even just once, you don’t easily forget it.

Let’s do some math. On about $30 trillion of federal debt outstanding, how much more would it cost the American people if we had to pay a measly 0.1% more per year on our debt over the next 20 years? This works out to at least $600 billion of wasted interest expense. With that potential price tag, these politicians are clearly playing a very irresponsible game. How about using the official budget process to steer our nation’s spending priorities?

They say the only certainties in life are death and taxes. Well, that’s almost true, with one small caveat. The only true certainties are death and tax changes. Case in point: Michigan’s new tax law for retirees that’s poised to phase-in over the next four years!

For retirees, this article might bring up ugly memories of 2012 when then-Governor Snyder controversially changed how retirees were taxed. Over the last 11 tax seasons, his complex system resulted in higher taxes for a growing legion of retirees. But, starting in 2023, a new, complex system is in place. This one, however, will result in lower taxes for retirees.

To set the table on the new law, for those born on or before 1945, there are no changes. Think of this group of retirees as the “finish line” that everyone else is now marching toward. This older cohort gets to deduct their pension benefits and retirement account distributions up to about $60,000 (single) and about $120,000 (married.) These deduction limits also grow with inflation each year.

For the rest, you are going to transition into the new tax law. Over the next four tax years, your deduction amount will march in 25% steps toward the big “finish line” deductions above. This means by 2026 all retirees will essentially be taxed the same. Then, and only then, will things be simple. But, until 2026, not so much!

The new law’s complexity starts in 2023. For those born between 1946 and 1958, this year you’ll get a choice of using either the old law’s deduction limits of up to $20,000 (single) and up to $40,000 (couple) or taking 25% of the “finish line” deduction. Naturally, for 2023, this 25% multiplier adds a wrinkle for a subset of retirees in this age cohort.

For those born between 1946 and 1952, your choice for 2023 will be to use the old law. For those born in 1953, 1954, 1955 and 1956, some math is needed to determine if the old law or new law is better for you in 2023. And, for those born in 1957 or 1958, no math is needed as getting some deduction under the new law is clearly better than getting no deduction under the old law.

For everyone else, you’ll have to wait beyond 2023 for your tax relief.

For those born in 1959, 1960, 1961 and 1962, mark your calendar for tax relief starting in 2024. For those born in 1963, 1964, 1965 and 1966, mark your calendar for 2025. And, for those born in 1967 or later, your tax relief starts in 2026.

Now, let’s place a small wager. How much do you want to bet that this new law is already on the chopping block?