Friday Financial Five – October 9, 2015

Friday, October 09, 2015
Dan Forbes, GoLocalPDX Contributor

Closing the carried interest loophole 

Political debates often involve the promise of a more reasonable tax code but pushing changes through is not easy once the elected official takes office. The “carried interest loophole” is the latest perk to catch the public’s eye as an unfair advantage for hedge funds and private equity firms. The firms structure as investment partners, while the managers act as a general partner. The typical compensation structure is “2 and 20” – 2 percent automatically per year and 20 percent of profits on the investments. That 20 percent is taxed as an incentive or “carried interes," allowing for a much lower tax rate as capital gains and the avoidance of billions in taxes. The end result is a much lower marginal tax rate for these individuals than one would expect, with very little evidence it leads to a public good.

Non-deductible contributions need a Form 8606

More and more high income earners are employing the strategy of making after-tax contributions to an IRA account that are not deductible on their tax return. They convert those contributions to a Roth IRA in order to take advantage of the Roth’s benefits. What sometimes is missing from the contribution to the non-deductible IRA is the filing of a Form 8606. This form allows the IRS to identify the taxpayer’s non-deductible contributions and account for them from a tax perspective. This, accompanied with a descriptive letter when a contribution is made, should help avoid double taxation on those funds when they’re withdrawn.

Retirement plan lifetime income options

The perceived gap in 401(k) plans occurs when it comes to providing lifetime income. Insurance companies would like to fill that gap and are pushing for more annuity options in retirement plans but they have less than 10% penetration at this point. That may be changing, as evidenced by GM’s recent decision to add the insurance product to their 401(k) offering. Not everyone using a 401(k) has the investment savvy to differentiate between investment options, nor the inclination to figure out how to withdraw the retirement funds as income. While the annuity option will allow for a more predictable income, it may amount to much less than current pensioners are receiving from their traditional defined benefit plans. 

Medicare open enrollment approaches

October 15th begins the enrollment period for those eligible to apply for Medicare coverage. A great resource to get details on program options is www.Medicare.gov. There are plenty of sections allowing enrollees to review plan and prescription drug options, as well as verify in-network doctors and costs. Enrollees should start the comparison process as soon as possible to avoid any unnecessary expense. The enrollment period ends December 7th, otherwise known as Larry Bird’s Birthday. 

Bill Gross suing PIMCO

When one of the most recognizable faces in investing leaves a company amidst mysterious circumstances, it makes sense that fireworks will eventually follow. For Bill Gross, co-founder of the Pacific Investment Management Company, those fireworks are starting with a lawsuit aimed at recouping “hundreds of millions of dollars” from PIMCO for wrongful termination. Gross was fired just before the end of the third quarter last year and contends that a $250 million bonus played a part in the timing of his ouster. With Gross’ estimated net worth at roughly $2 billion, reports are that any money recovered from the suit will go to various charities and foundations.

Dan Forbes, a CFP Board Ambassador, is a regular contributor on financial issues. He leads the firm Forbes Financial Planning, Inc in East Greenwich, RI and can be reached at [email protected].