Tricks for dealing with negative situations

M. asked me recently: How do you extract yourself from work drama? A work friend dragged me into one but I don't want to be in it. But I want to stay loyal to her.

M. doesn't want to be a part of the drama but wants to be loyal to her colleague. It sounds that M. doesn't want to take sides, but she wants to be liked by her colleague.

The main conflict here: M. wants to be liked but at the same time she wants to be herself by separating from other's opinions. Those two things are difficult to combine.  Difficult but possible.

I remember a situation when I was doing some rotations in Ireland as a medical student. The patient complained to me about the surgeon who was my supervisor. I couldn't really take anyone's side. By taking patient's side I would go against my boss. By taking surgeon's side I would go against the patient. Both could mean trouble for a medical student. 

A seasoned and very kind Irish nurse saw my helpless face, took me quietly to the side and told me: Don't take sides. Don't agree or disagree. Give some emotional support. Just say "Oh, dear, that is a terrible situation. I feel you."
I used it and indeed that was a neutral support phrase without making me to take any side.

Now I use it a lot at parties and weddings when people with not matching political views are passionately talking about recent political events. I have no goal or intent to change anyone's opinions or to convince them that they are wrong and I am right. Especially not at a wedding. 
Sometimes I don't even know who is wrong and who is right. 

They all can believe whatever they want. "Oh dear" and "I feel you" helps really me well.  I am not taking sides and at the same time I am not lying either. People like to talk and I let them talk. I might tell them what I think if they ask directly. But mostly I can redirect the question back to them, which is easy if you answer a question with another question.

Along the way I collected few more tricks about how to stay emotionally independent in "negative" situations.

1. Being able to listen to opinions different form your own, sometimes very different...

It is very helpful if you can listen to opinions of others which may be different and sometimes even the opposite of your own. When you start feeling inner diagreement, tell yourself: "It is not my way of thinking or doing things, but it sounds interesting" and after that just play a journalist and ask curious questions. Journalists don't necessary share the opinions and views of those they interview. But they still listen and ask questions.
Just because you don't argue, it doesn't automatically mean that you agree.

2. If you are pushed to an action, use a delay tactic
If someone asks you to make a decision on a spot, for example your financial advisor asks you to make a decision and you feel uncomfortable and are not ready to decide, just say: "It does sound very interesting. But I am not sure right now, I need more time to think about it." 
Some people may be very insisting and say: "What is there to think about?" You just repeat the same you just said: "As I just said, it does sound very interesting. But I am not sure right now, I need more time to think about it." You can repeat it indefinitely. They will feel a strong but polite resistance and will give up.

3. Be able to listen to critique without immediately fighting it 
Listen is the key word. You don't have to accept it. You can listen and evaluate if the advise is useful to you or not. 

Any unsolicited critique or advise is an attack. Use "marshal art" techniques to defend yourself. Step aside and let them fall. Say: "Thank you for you input, I appreciate it and I will think about it." Again, you don't agree or disagree and don't promice to change anything either.

4. Accept yourself as you are. 
With all your qualities. My parallel parking is pretty bad. Sometimes I get lost even with GPS. I get nauseated on roller coasters. 
There is no reason for me to hide that or to pretend to be stronger then I am.

If someone tells me: You can't park! I will answer: Yes, I can't park. And that is usually the end of the conversation. 

If someone who's definition of fun is a roller coaster ride will push me to "have fun" and to go on a roller coaster, it will be my own fault if I mess up the entire rest of my day after I get nauseated. 
Once you admit your weaknesses, life will become easier because there will be no more energy spent on pretending.


Have you noticed that none of the responses contain any lies or distorted truths. They are acknowledgment of received information, delaying of responses, or just acknowledgment of a fact without labeling the information as right or wrong. All of that is mainly avoiding or redirecting.

Tax advantaged accounts contribution changes in 2019

Contribution limits for 401k, 403b and most 457 plans are increased to $19,000.
For people over 50 - catch-up contributions are additional $6,000.

Traditional IRA and Roth IRA: $6,000.
For people over 50 - catch-up contributions are additional $6,000.

HSA: $3,500 for single and $7,000 for family.
For people over 55 - catch-up contributions are additional $1,000.

 

Gift tax - will it be ever applicable to you?

If you give a large cash gift to someone, it is useful to know the rules on taxation. The rules are very generous and it is very likely that you will never pay the gift tax. 

In 2019 the gift tax exclusion is $15,000 per person per year and $11,4 million per person per lifetime. A gift includes cash, stocks, real estate, land, vehicles.

Any gift below the exclusion limit doesn't have to be reported to IRS. 

Any gift above the exclusion will need the IRS Form 709 to disclose the gift at the time you file taxes.  Check if your state also requires you to report gifts over the limit (very few do).  
The person receiving the gift doesn't have to report the gift. 

If you give more than the limit, the amount over the limit will be recorded against the life time limit. So if you give your daughter $40,000 in one year, $15,000 will not be counted, and the sum exceeding that - the $25,000 will be reported and the records will be kept and will be counted against the life time limit. Later when she inherits your estate, her limits for estate tax will be lowered by that amount. 

If you (unlikely) use up your life time exclusions, you will have to pay the gift tax of 18%-40%. The person giving the gift will have to pay the tax.  

If gifted property is sold, a capital gains tax can be triggered.

If you add your child to your checking account, half of the money in the account will be considered a gift.

If you sell your relative a house below the market value, the difference will be taken out of the life time limit. 

Things that are not considered gifts:
- Anything given to a spouse (who is US citizen)
- Anything given to a dependent 
- Charitable or political donations
- Funds paid directly to medical service or health insurance provider, or funds paid directly to educational institutions (tuition only) on behalf of someone else


If you want to give someone a gift to help with education costs, you might give more than the yearly limit. The IRS allows taxpayers to give $75,000 into a 529 plan without paying tax or reducing the $11.4 million lifetime limit. 

What to do if your 60 days roll-over period is over and you still didn't finish the rollover?

There can be several reasons for the missed or prolonged rollover.

Not serious reasons

Forgetfulness, procrastination, laziness - nothing will help there. If you have no serious reason, you will have to pay taxes due and you will get them refunded after you file your tax return for that year.

Serious reasons
If one of the reasons below delayed your transfer, you can file the self-certification waiver which you will submit to the institution receiving the transfer. 

After 60 days allotted to the rollover are passed, the financial institution will not accept your rollover. 
The self-certification error is a form which you give to the institution to extend the rollover for another 30 days (safe harbor period for the reason stated in the form). 
The form is part of the IRS Revenue Procedure 2016-47 which you can google, download and fill out.  

To be granted the waiver you will need documentation supporting your claim that the rollover was not completed in time due to one of the qualifying reasons which are listed on the waiver page. 

   

Financial institution error

Copy and record the dates of all communications with both financial institutions. If the process takes too long you will have evidence that it was not your fault. 

It will not work if you wait with the initiating the rollover just one or two weeks before the deadline because it is obvious to anyone that such process may take longer than 2 weeks. Our rollover took 3 weeks (see the rollover update post here).  

Unusual circumstances

You have to have evidence that you were physically prevented from being able to complete the rollover.  Examples are severe home damage, serious illness (for example dementia or hospitalization), death in the family or of the person who is performing rollover, misplaced check or incarceration.

Postal error

Make sure to verify the address of the receiving institution before mailing the check. It is best to mail with tracking number. I used tracking number. The mail had 3 days delay for an unknown reason but I could follow the status every day.
Tracking also helped me to speed up the processes at the receiving institution. I emailed the customer service the day I saw that the letter was received and asked to process the transfer timely. I received an email response and the the transfer was processed on the same day.

Update on our 401k rollover - step by step

As mentioned before we decided to do a 401k rollover to IRAs do to a job change.

We decided to do trustee-to-trustee transfer (see previous post with specifics on how to do a rollover).


It is best to start early and plan the rollover in time where you will not travel much. There was a bit of hands on in our rollover process.


1. We called the previous employer 401k and requested a trustee-to-trustee transfer. 
They said that they only have one way they do it - issuing a check in the trustee name and mailing it to your address. That qualifies as trustee-to-trustee transfer because the check is in trustees name. 
They mailed us two checks, one for the Roth 401k portion and another one for the non-Roth 401k portion. 
It took about 7 days until we had the checks in our hands.


2. We called the receiving institution to verify the address to mail the checks to. 
They explained which form to fill out and to mail together with the checks. 
They also recommended to mail the checks in separate envelopes to avoid that someone might erroneously switch the Roth and non-Roth checks and and deposit the checks to wrong accounts. That was also my concern and I agreed.
We were also advised NOT to sign the back of the checks since the checks were issued to the receiving institution and not to us. 
It took us about 4 days including weekend.


3. We mailed both checks separately with tracking numbers. 
It took 7 days, 3 days longer then expected by USPS.


4. I was tracking the checks. On the day I saw that the checks were arrived, I emailed the receiving institution and asked them to perform a timely rollover. That was completed correctly on the same day and I received a confirmation email from them. 


It took about 3 weeks in all.

IRS wanted taxes on Back-door ROTH IRA conversions - They were wrong. What did I do?

In September I received a letter from IRS stating that I owe $7,000 in taxes on IRA distributions.

I didn't take any distributions!

The IRS letter stated that I took 3 distributions from my IRA, each of the distributions were $5,000.


The IRS was wrong on that. Those were not distributions, these were same year Back-door traditional IRA to ROTH IRA conversions.

You would think that IRS should know better. They have all information in their hands: my tax returns which clearly state each of the conversions and the 1099R forms from the broker which state that those were conversions. 
Why did they still sent me the letter?

They probably didn't bother to look at documentation. That is my guess because for anyone who will take a look at the tax return will see that everything is documented appropriately. And what about the corresponding 1099R forms they have received from the IRA broker? Maybe the broker didn't report the conversion?

I checked the accounts and it looked like the broker did report the conversion to IRS. All forms were on file.


Even if I knew that I was right, it was a bit stressful to see $7,000 in owed taxes in the IRS letter.

First I tried to look up online what others did in such situations. I could find only a few mentions on forums and blogs.  Most people called IRS and explained to the IRS person the issue on the phone. Some did mail documentation to them. Usually the issue was resolved.

What did I do?
Since it seemed that IRS already didn't do their diligence in checking the appropriate paperwork, how could I trust them to solve the issue on the phone? I wouldn't be able to document that phone call and anything they would tell me. In such an important issue I needed my own documentation.

I decided to mail in the supporting documentation without calling them. I mailed it with a tracking number and return receipt. $7,000 are worth that trouble.


My CPA wrote a detailed letter to the IRS and attached the copies of the tax reports with marks pointing exactly where the conversions were reported. 
I also attached the forms 1099R forms from the broker. The forms were available online so I didn't have to call the broker.

But I called them anyway and asked when do they submit those forms to IRS. The customer service representative said that the forms are automatically sent to the IRS as soon as  they are issued. 


The IRS gave me about 3 weeks to respond to their letter. I mailed the response in time. 
I was tracking my response letter and saw that it was received before the deadline.

Two weeks after that I got a letter stating that they have received my response and are working on it.
Then one month later another IRS letter arrived which stated that the issue was resolved and I owe no taxes.

Who has to pay estimated quaterly taxes?

IRS penalties can be painful.

Most people avoid penalty if they owe less than $1,000 in taxes for the year, or if they paid at least 90% of the tax for the current year, or 100% of the tax of the previous year tax amount, whichever is smaller.

If your AGI is less than $150,000 (married, filing jointly) or $75,000 (single or filing separately) - you have to cover 100% of previous year income taxes.

If your AGI is over $150,000/$75,000 - you have to cover 110% of previous year income taxes.


Why would that matter?

If you have a significant income from your investments (capital gains or dividends) or rental income, the income tax is not automatically deducted. You are responsible for paying additional taxes yourself.

As I hit $100,000 in additional income coming from my "Cash flow" challenge account this year, I want to make sure not to be on the hook for this penalty.


How high is the penalty?

It is a 5% penalty.
It is calculated from the due date (see the quarterly due dates below) until the payment is made.

Usually the estimated payment are equal amounts, you can also make payments each month instead of quarterly.

With investments, you can't estimate the income accurately. If you didn't send equal payments, you may have to file IRS Form 2210 to explain why you didn't send equal payments.

By filing this form (Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts) together with your tax return you can show that your uneven estimated payments match up with the income that you received unevenly over the course of the year.

  
When to pay the IRS?

The are quarterly due dates for the quarterly estimated payments.
They are on April 15, June 15, September15 and January 15. If one of those dates falls on a Saturday, Sunday or legal holiday, the date moves to the next business day.


How to pay the IRS?

There are two ways:

1. If you have a job where the taxes are withheld, you can increase your paycheck withholding.

2. If you don't have traditional job, or you don't want to decrease the amount of your paycheck (in cases where the additional income is very variable), you can pay the IRS directly.
The online method may be the most convenient for many, but there are different payment methods listed on the IRS web site IRS.gov/Payments.

The difference between paying as payroll withholding versus estimated quarterly taxes is that the by paying quarterly you have to be more careful not to underpay for each quarter. The payroll withholding will be handled by IRS as the entire year independent of quarters.  

Update to fraud alert, credit freeze and credit freeze for minors

In September 2018 there were few changes regarding security measures by credit reporting companies. 

This is an update to my previous article about fraud alert versus credit freeze. 

The changes 

1. Credit freeze will be performed at no charge.

2. Fraud alert is now placed for 1 year (previously 90 days).

3. You can put a credit freeze for minor children, also free. 

By placing credit freeze on a child file it would make sense to check the credit report for fraudulent activity. But per Equifax the credit reporting companies do not knowingly keep credit files on children under 13. 
If you have suspicions and you can request it by mail from the reporting agencies. 

You can still place credit freeze on a child under 13 without requesting the credit report beforehand.  
Minors between the ages of 13 through 17 can order a report through the AnnualCreditReport.com website.

Preparations for the coming bear market

What am I going to do when the bear market comes?

It is easy to get good returns when the market is going up. It is just carrying you up. 
But the a bear market will come. And then you will find yourself on the edge of the waterfall and the strong waters will carry you down very fast.
And no one knows when the turn will happen.


We are in an extended bull market right now. There might be a couple of genius people out there who know when this bull market ends. I don't know that and I don't know anyone who knows that. So I am on my own here.

In the last 70 years, there have been 13 bear markets. The average length of a bear market was 13 months. The average decline was about 25%.
Compared to the bull markets for the same 70 years there were 14 bull markets. The average length of a bull market was 46 months. The increase was on average 125.3%.

We judge our success by comparing to others and that leads either to "better" or "worse" evaluation.
But what if you compare your results only to that what matters?

What if I compare my results just to the one goal I had in mind when I started the 'Cash flow" challenge - to cover the yearly expenses. As long as I can achieve this, it is all fine.

Without knowing when the bear market comes, what remains for me is to prepare for the unknown.

What I have to work with:
I don't know when the market turns down.
I know for certain that it is going to happen.
I don't know how deep the drawdown will be. It could be as much as 50-60%.
I don't know how good the recovery will be.
I don't know if some of the stocks will ever recover (some stocks still didn't after 2018).


What I can do:

I can try to cover yearly expenses with the income from "Cash flow challenge". It is certain that all stocks will go down significantly. What will be left are just the dividends some of which may be reduced. I can try to cover the expenses with dividends but I think that will not be enough.  

Also I need to make sure that the other income sources will cover the time when the cash flow is insufficient. The other sources are jobs and emergency fund.

As long as I have the job, the yearly expenses are covered.
As long as my husband has a job, the yearly expenses are covered too.
Our emergency fund will cover at least 2 years of  absent income.

That way we have triple safety in case if the bear market will not produce the sufficient cash flow. That way the pressure is off.

The second step is to optimize the investments for the time of the bear market:

1. I need to go trough my holdings and see how they reacted to the last bear market and maybe eliminate those which didn't recover from the last one in 2009.
2. I will only use dividend paying stocks that in case of the bear market, there still will be some income from the dividends.
3. Bear markets are temporary and shorter than bull markets so the savings for retirement should not be severely affected. Even if the retirement savings will be affected, I am not planning to retire early or at least not before the next bear market is over. That should give the retirement funds enough time to recover.

Do you celebrate financial milestones?

M. asks: Do you celebrate financial milestones? For example reaching 500k in total investments/retirement savings? I saw a list of goals in an article suggesting celebrating. 


The article she is probably referring to is the one from WCI: 14 financial milestones worth celebrating.  
The post suggests to celebrate 14 financial milestones as they are reached, including becoming student debt free,  paying off the mortgage and being financially independent. Reaching 500k in net worth is goal #6.

Yes, I celebrate all the milestones mentioned in that article and many more. 

I celebrate everything. And I support everyone who is celebrating. I like to celebrate whatever it is. For example for my Birthday I don't limit my celebrations to one day, I celebrate the entire month. 

People from Russia will know the Russian calendar which suggests reasons for celebrations for each and every day. I remember as a child I was looking at every new page every day to see what can I celebrate that day. 

One day I thought that if I celebrate so much, I must be a happy person. 
I found a psychological test online testing how happy you are.

I filled out all questions and my result was: "You are too happy. Please abstain from using drugs while taking this test." Imagine how surprised I was, I was laughing a lot. I am so boring in terms of drugs, I dont' even drink alcohol. That was just too funny.  

The non-financial freedom. Should you care about opinions of others?

M. asks:
How do you define moderate selective frugality? And what separates selective frugality versus being cheap?
I recently had an experience where I questioned this. I went to Target with a discounted gift card. They couldn't scan it and asked me to download their store app. I automatically asked if they had a free Wi-Fi so I don't have to use my data.  I realized, after getting weird looks, that I was carrying my Louis Vuitton bag. I was a little embarrassed.



I never heard of moderate selective frugality. I thought it is either frugality or it is not. 


It seems that M. is embarrassed to appear frugal to others.  Probably because for some people frugal equals cheap. And cheap sounds negative. So there is a certain fear of negative judgment from others. 

How to stop caring about opinions or judgment from others?
I am not sure if my advise will help, I am not a psychologist, but I will try.

What separates frugality from being cheap?

It is the emotional valuation of "good" versus "bad". 
Many people use the word cheap in a negative sense. Frugal sounds a little better. It is similar to cheap but is considered to be a good and responsible solution.

As I already mentioned in one of the previous posts, I replace "good" and "bad" with "useful" and "useless". The emotional valuation of cheap being "bad" and frugal being "good", is useless to me.

I would have asked for free Wi-Fi, if the savings were significant. One time I downloaded an app in the store using data because the discount was $20. That was useful. If the savings are only $1, I would use free Wi-Fi and use of the data would not be as useful. 

If the cashier gives me a weird look, this look is useless to me, because this person has zero influence on my life.

This emotionless evaluation as "useful" versus "useless"  may be difficult to practice for some people. Let's try to look at the situation from a different angle.


On the surface it looks like there is a mismatch between M.'s appearance decorated with a Louis Vuitton bag and her asking for free Wi-Fi. 
Her appearance signals that she is well off. 
Her question about free Wi-Fi signals that she is trying to save money.
This mismatch was noticed by a random cashier. 
Why should this cashiers reaction bother M.? 

M. has fear of being judged by others. Can this fear do any good? 

I think, at least, the fear of judgment should to be adequate.

In few areas opinions of others can matter. For example, at work you have to fit in with your behavior and dress code because of certain standards.  If people give me weird looks because of my appearance or behaviour at work, it is necessary to catch those looks and act on them, because that can have consequences.

If the the weird look is coming from a person who is unrelated to my financial well being, like a cashier at Target, I usually completely ignore it.

The fear of judgment from a random cashier is inadequate.


Supposedly the cashier is judging M. for having an expensive bag but trying to save money.

The cashier may think:

1. Is it a real Louis Vuitton bag if you are so frugal? Are you pretending about how rich you are?

2. Oh you poor girl with an expensive bag, you are so cheap that you can't spend a dollar on your data?

4. I hate you and your expensive bag. You should not care about spending money on data.

What may be coming over from the cashier is jealousy or contempt. 

What is the worst that can happen after M. got that weird look?
The cashier only spent 1-2 seconds on that look. He probably immediately forgot about that. In the worst case he went home and told about that to his friends or family: "There was a weird woman at the store today, she was carrying an expensive bag but asked for free Wi-Fi. How cheap of her."

Let's make it worse. If that person is a real freak, he may tweet about it or post something on Facebook.
But in reality he may never think about it again.


What actually happened in a neutral view of things:
A random non-related to M. person expressed jealousy or contempt toward her. 
M. cares about opinions of others and she is hurt by the opinion of the cashier because he doesn't like something about her. 



Of course if M. is afraid of judgment, she can just try to avoid all situations which may produce weird looks. She can either stop carrying expensive bags or she can stop trying to save money, because others will be unhappy with her. 
And even if she manages to please most, there will still be somebody who will be unhappy with her for some reason. Will she ever be able to please everyone? 

Those efforts to please others and to avoid negative reactions from others - what are they worth to M.? Are they worth $1 she may have saved in this case? 

I will take $1 over an irrelevant opinion. I have enough of my own opinions.  

What if she is going to buy a car and the salesman gives her a weird look because of her bag? Will she stop negotiating for a better price and agree with a higher price just to make the salesman happy who she will never see again? That will be worth more than $1. But is the situation really different? 


It is very helpful to realize that:

1. Other people don't really care as much about you (and  me) as you think.

2. You may spend more time thinking about what others think about you then they really do. 

3. You are very generous to random people to give them control over your emotions.


No one really spends a lot of time thinking about others. Others are mostly busy with thinking about themselves. 

Realizing that no one really cares about you (and me) should give you FREEDOM! 
With this freedom you can do whatever you want. 

And if others notice you doing whatever you want, they will very judmentally say: "She does whatever she wants". And you will just smile and not bother spending your time or your thoughts on an irrelevant opinion.   


When you care about opinion of others you give others power to influence your life. They take the wheel of your car and you let them drive the direction they want. Just because they want to take your wheel, should you really give it to them?







   

Challenge "Cash flow" update September 2018

Today I hit $100,000 in cash flow from the investments for this year so far.
And with that I reached Level 2 of my "Cash flow challenge" - "Sailing".

With $100,000 the yearly expenses are more than covered. Anything above that will be just fun.  

Below is my cash flow per month compared to the S&P 500 performance. 

my cash flow

S&P500 returns in % to date (September non included yet)

Deadlines for tax advantaged accounts 2018

Deadlines for contributions


Age 50
Start catch up contributions for 
401k ($6,000) - total $24,500

IRA, traditional and Roth ($1,000) - total $6,500

Age 55
HSA ($1,000) - total $7,900

Before age 70½
If you are completely retired, you can't contribute to retirement accounts because it requires to have earned income. 
If you have a side job, you still can contribute but the contribution amount can't exceed the earned income amount.

Age  70½
Have to stop contributions to traditional IRA even if you are still working. 
If you still have earned income, you can still contribute to Roth IRA.

If you are still working, you can still make contributions to the work sponsored 401k.



Deadlines for benefits

Age 62
Minimum age you can start receiving social security benefits. If you are still working, your benefits may be reduced. If you have high combined income even if you are not working, your benefits may also be reduced. 

Age 65
Eligible for Medicare.

Age 67
For anyone born after 1960, 67 is full retirement age.

Age 70
If you wait until 70, you will receive the largest possible monthly social security benefit. More time delay will not produce any more increases.

Age 70½
Must begin taking required minimum distributions (RMD) from traditional 401k and traditional IRA. 
However, if you are still working, there is a "still working" exception for delaying taking RMD from the work sponsored 401k plan. 

If you are not working and don't take required minimum distributions, you will have to pay additional tax of 50% on the difference between the amount  taken out and the required amount.

There are no RMDs on Roth 401k and Roth IRA.



Deadlines for penalties

Age 55
If you leave work you can start taking distribution from work related 401k without 10% penalty.

Age 59½
Withdrawals from 401k and IRAs are not subject to 10% penalty.