 Welcome to episode number two of the Bogle Heads Life Stages podcast. Bogle heads are investors who follow John Bogle's investing philosophy for attaining financial independence. Today's episode features Bogle head member 5K. This recording was made on March 31, 2021. Nothing in this video should be construed as personalized investment advice. Over at the Money Mustache Forum, where it was originally designed to help people just add up all their expenses, and most of the emphasis on that site was helping people reduce expenses. Where's all your money going? It's kind of grown to the point where now I think it's the tax portion of it, at least on this tab, it probably gets used more than the expense portion. Expense portion is still there. What I have right now is the example that's in the Bogle Heads wiki article on Roth IRA conversion. So we have filing status or married filing jointly. One person 65, one person is age 62, no dependents at this point. We've got 500 bucks in interest, non-qualified dividends, etc., 11,000 qualified dividends, 19,000 in pension income, and 25,000 in social security income. So the question then is if they want to do Roth conversions, how does the amount of Roth conversion affect the marginal tax rate that they will pay? And it's set up by default that the amount of Roth IRA conversion is what it looks at. This is just a standard Excel chart. So for example, if you just want to change the y-axis and don't worry about negative numbers. A negative number in a marginal tax context here would be that as the value, the x-axis value increases, if your tax amount would decrease. So for example, if you wanted to look at marginal rates for 401k contributions or traditional IRA contributions, the more you contribute, the less there would be in tax. So you get negative numbers, but we're just looking at the positive numbers there. So you can change the axis, so it blows it up a little bit, and it has a 50% maximum right now. And so if you wanted to make change that, you can change that also. It's standard Excel charting. So this one says that they're very close, looks like they can contribute a few dollars at no tax whatsoever. But then it's going to jump up to the, what do we have here, 18 and a half percent. So that's somebody in the 10% bracket except each additional dollar makes 85 cents of social security taxable, so they're in the 18.5%. And they get to the 22.2, which is 12% bracket with each additional dollar making another 85 cents of social security being taxable, and so forth and so on. This peak here is the 27% marginal rate when now up until this point, none of the qualified dividends were taxable. But now as you take more and more rough conversion, you're getting 12% on each additional dollar of rough conversion plus 15% because you've made another dollar of the qualified dividends taxable. There's a little notch here because the qualified dividends and the ordinary income brackets don't completely align, and then you're just simply in the 22% nominal tax bracket. If you wanted to look at huge amounts of Roth conversions, you can change the number up here. This is just the x-axis increment, and now it'll show you, okay, if you're looking at anywhere from zero to 500,000, what would you be running into? And these four spikes here, you see are, those are the Irma tiers because one of our example couple was age 65, and so subject to Irma. For those not familiar with Irma, the income related Medicare adjustment amount or some such acronym. The more you make, two years later, the more you get to pay for Medicare. So you have all the little changes here. I think this one, this little one right here is the net investment interest tax. Not sure what this one out here is off the top of my head, might be some phase out. But anyway, you can look at this, and this gives you the actual marginal rates, and you see only, it's almost by exception that these marginal rates are exactly what the tax brackets are. You've got the 22% in there, you've got some 24, and then you get beyond some of the lower things, and you're into the 32 and 35 and so forth. So being able to see this in picture form, I think is a, just a particularly useful, useful thing. You know, there's just lots of things you can input here. One of them would be for the third EIP, if you've already received it, you can put this in and then it says, okay, well, you're not going to, you can't get any more. But if, for, let's say this couple had filed and their income was too high to receive it, and so they want to say, well, what if we wanted to get that this year? I'll change, say, okay, they have not received that. And now you see an extra, I'll put this back. So now this would be the phase out, maybe they, if they were thinking of converting somewhere between 90 and 120,000, well, they get to this point and that would show them that now they're going to not receive the 30 IP if they push their income up that high. So, when people use this spreadsheet, there are, there are a lot of notes in each of the cells or not all the cells, but many of them with a little bit of extra information on what's going on. So, you can look at all the cells with a little red corner note there that says there's a comment in this cell and see what it does, number of dependents, description of what makes one eligible for the earned income credit, and so forth and so on. And of course, when all else fails, read the instructions. There is an instructions tab that talks about a quick start so that you would enter the filing status in these particular cells and then just go down the row by row and all the green background cells is where the input goes. The other thing is the spreadsheet is set up to prevent you from inadvertently over typing something. So, for example, let's just say you thought you wanted to put the combined salary and wages into that particular cell there, and you start typing says, oops, can't change that because it's protected. But if you want to change something, then go to unprotect sheet, and there is no, there's no password here, so now you could go in and you could do that. You would wreck the calculation because now if you start to put a number in here, well, it doesn't show up over here because you've overwritten the calculation. So, you know, caveat user, generally a good idea unless you really want to make a change to keep that, keep that protected. That's just a quick overview of the tax calculation sheet. There's it also allows for looking at affordable care act items, so if let's say somebody has a pay in $600 a month and let's just say that they were going to get in an advanced premium tax credit of 500 a month, and then I think there's a comment here, yeah, you've got to go over, put in your second lowest cost silver plan there, and it will now it will include affordable care act, so that's that's got to be an affordable care act thing in there. Let's see, is it was that the cliff? Can't remember off the top of my head, but anyway, it's as I said, this or maybe I didn't say but this thing has probably all at least all of the common phase outs, credits, phase ins, it's got the Irma the N I I T the social security calculation, affordable care act doesn't have what doesn't have doesn't have adoption credits doesn't have electric vehicle credits, but most of the common things that people are going to run into it's it's like what ragu it's in there so. So this is probably the tab that's used the most reason why it gets called the toolbox is it's got a bunch of other tabs, so especially if I go over to the tab towards the far right miscellaneous calculations there's a whole bunch of different widgets on this. So the first section here, you've got the five main financial functions future value. Number of of years monthly payment in interest rate calculation, present value calculation. So the idea here is you put all the things in green and it will then calculate the cell that's in white so just a quick widget for that. And then there's a bunch of others. I think this is this one is just people say well is it better to pay off the mortgage or invest and this one will just show if the the after tax rate is the same the result is is identical. Time to financial independence so if you know what your expenses are and what your starting value is. It's just a simple rate calculation and for those who are really into the money share it will even show you derivatives of the time to fi without or based on all these different, different items. Evaluation of pensions so let me skip over this one come down here. So for example if somebody has a choice between getting a $600,000 lump sum versus $36,000 a year, then this shows the curve of mathematical indifference. You can overlay this with all your thoughts about what the market might do or what your own longevity is or what the whether the insurance company is going to still be around to pay out an annuity. But this curve shows on a pure mathematical look that these two are identical. For example if you life expectancy is what somewhere just sort of 28 years and then you assume you're going to get 4% per year on your lump sum that would be identical to taking the $36,000 a year pension. If the lump sum amount was going to be significantly less, well that would tell you that you're almost certainly ahead by choosing the annuity unless you think you're only going to live for 5 to 10 years. If your lump sum is much more then you're almost certainly ahead by choosing the lump sum unless you don't think unless you think you're going to just put it in a bank and earn 1% interest and live for 35 years. If you're going to have a COLA on the pension let's say 3%, well that makes it a little bit tougher choice or it makes the annuity that much more favorable. So the orange curve here is with the cost of living adjustment and the blue curve is without that. A bunch of other widgets here, this is the one where you ask a person would you rather invest $1,000 a year between when you're aged 21 and 35 or $2,000 a year from age 35 for the rest of your life and it turns out that the earlier you invest the better the results so that it solves that calculation. Growth in a taxable account so it accounts for the tax drag and then the capital gains might at the end. This does reference the Boglehead's forum discussion on if you contribute the maximum there's a slight advantage or there can be a slight advantage to Roth just because of the tax drag you would have to have when contributing the maximum to traditional you can put more into the Roth. Now if you take the traditional extra tax deferred or tax free amount, pre-tax amount and put that into a taxable side account it's going to have some amount of tax drag and then a bunch of others off the top of my head I'm not not sure and looks like there's some some work in progress stuff down here so that's the I'll just go through all the other tabs on here fairly quickly so the very last I'll just go from the the far right work my way back towards the beginning so this is oh yeah so back on the calculations tab everything that I showed was using 2021 tax brackets if anyone thinks that in 2026 the brackets are going to revert to exactly what they were in 2017 except for inflation adjustment you can go you can show it real quick here up here you can change that 2021 to 2026 and now you get the the brackets as they would be if nothing else changes in the law I wouldn't bet a whole lot on either the 2021 or the 2026 number is actually being the way the tax law will will be when we get to 2026 but it's it's something next tab there's a basic terms tab I think this is one for people who say you know should I invest in an index fund or a 401k it it it attempts to educate people just some some basics let's see so skipping over the miscellaneous calculation so the question of if somebody's in the 12% bracket should they do tax gain harvesting on capital gains or should they take advantage of a low marginal rate to do Roth conversions if they assume that in the future their marginal rate will be higher so you can play around with this turns out from the playing I've done if you think you're going to keep the money in there for any significant length of time it works out ever so slightly better to do the Roth conversion but it's it's not a huge deal either way usually around October timeframe October November you get a lot of questions on gee should I sign up for high deductible health plan or not a high deductible health plan and this is one of several widgets that are available on the internet to to take a look at that all the insurance plans are a little different they get into well you co-pay for this a little bit for that but it's anyway it's a widget that will help at least in in some cases for people to compare the HD HP with HSA to PPO or other non HD HP without HSA the social security benefit predictor put in your your actual earnings and then it will go ahead and calculate your oh AI me adjusted average average something monthly earnings and then it goes into the social security calculation with the two breakpoints and comes up with your your base PIA so this is this is the number that you would feed into something like Mike Piper's open Social Security dot com you need that tool needs to know what the primary insurance amount is so you can calculate this for one person's earnings and then you could either make a copy of the sheet or or just overwrite here with another person's earnings and get the other person's primary insurance amount feed that in the open Social Security dot com deductible array oh this so this references a Bogle heads wiki and if you want to see I guess how that that wiki table came to be I don't I think the wiki table was there before this spreadsheet but anyway 401k versus taxable traditional is or Roth is always going to be better than or at least no worse than taxable but then the question is where does traditional fall in and so I guess if you wanted to you can you can project out as many years as you want to and just see what the the effects are for 86 okay this one get a lot of people with a backdoor Roth IRA and they get into problems with form 86 06 or or they not that they don't get into in addition to getting into problems with it even worse sometimes people don't even know what it is and if you read various forum threads the questions that turbo tax or h and r block or whatever ask sometimes those questions are kind of confusing this seems to be at least to me it seems much more understandable than some of the turbo tax questions having gone through that myself so so for example if let's say if someone they're still looking at 2020 and they say well okay contributions made for this in this calendar year well now we're already in 2021 so okay so someone's going to put $6,000 into their 2020 IRA well they did it in the next calendar year for the 2020 tax year and it would say okay well this is what your form 86 06 is probably going to look like when you run it through tax software then in 2021 if they say okay I'm going to contribute another $6,000 and I think I'll convert and maybe 50 bucks will have increased in value so it would say all right so this is what your form 86 06 should look like and you're going to pay 50 bucks in tax most I think the the tax software runs things through a pub for 590 b worksheet 1 1 you can force this to just use 86 06 so if if someone was filling it out on their own they'd probably see something like this instead 62 so alternative minimum tax and not many people need to worry about that under current tax law this just shows tax rate shows the nominal nominal brackets but you know that's interesting on a theoretical basis but the the calculation sheet with the actual marginal rates is is much more interesting there is a bunch of state brackets in here and if I remember right yeah so this is based on the taxfoundation.org publishes individual stat tax individual state tax rates so I think this is good for the brackets themselves and then in the state calculation it does have some things about what's the the standard deduction or personal exemption state earned income credit as a percent of federal etc etc etc I'm sure it doesn't have every possible nuance in here about state taxation so I think the claim is that the federal talc federal calculations are really really good and state calculations are probably decent but again caveat user if you know if there's something about specific pension exclusions depending on exactly how old you are that may may not be in here