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Roth Conversions and Taxes

ArticleJohn Urban  |  Aug 8, 2026

EVERY ARTICLE ABOUT Roth conversions says the same thing: pay the tax from taxable money, not from the IRA. That is good advice if you have taxable money. Plenty of retirees do not. Their savings sit almost entirely in a traditional IRA, built from years of 401(k) contributions and a rollover at retirement, with little brokerage money and no cash reserve worth naming. For them, “pay from outside money” is not advice. It is a condition they do not meet. Their real choice is a self-funded conversion or no conversion at all. The familiar warning is that self-funding requires a gross-up. You withdraw money to pay the conversion tax, that withdrawal is itself taxable, so you have to withdraw a little more. Less discussed is what else that withdrawal sets off. It makes more of your Social Security taxable, it raises your Medicare premiums two years later, and in a high-tax state it enlarges the amount that has to leave the IRA. Here is what those three cost, on one household. A cautious conversion Meet Dianne, a composite rather than a real person. She is 66, single, retired to Florida, with $1 million in a traditional IRA and nothing outside it. Social Security pays her $28,000 a year. She is past 59 and a half and already on Medicare. Florida keeps state income tax out of the arithmetic for now. She converts $40,000. Careful, modest, the size people choose when they are trying not to do anything dramatic. The tax on that conversion, paid from a checking account she does not have, would be $4,234. Funding it from the IRA instead, the withdrawal that covers it is $5,125, and her tax rises to match. That extra $891 is 17.4% of the $5,125 she withdrew. Her ordinary-income bracket is 12%. Twelve of those points are the tax on the withdrawal itself, which is the gross-up everybody expects. The other 5.4 points come from $2,300 of her Social Security being pulled into taxable income by that same withdrawal. Paying from cash, $21,500 of her benefit would be taxable. Self-funding, $23,800 is. The difference is caused by how she paid, not by what she converted, and nothing on her return will label it. Not a smaller version of a large one The effect is not linear. Run the same woman at $150,000 and 85% of her benefit, the statutory maximum, is already taxable before she funds the tax. The funding withdrawal drags in nothing further, and this particular cost is zero. That is not an argument for converting more. It is an argument against assuming a small conversion is simply a smaller version of a large one. The one that looks cautious can carry the higher marginal rate. What self-funding actually costs Give Dianne the $150,000 conversion, still with no outside cash, and add the state question. Still in Florida, $195,469 has to leave the traditional IRA to put $150,000 into the Roth. Move her to California, changing nothing else, and it is $219,751. That is $1.30 of IRA spent for every dollar reaching the Roth, against $1.47, and the gap is California income tax compounded through the gross-up. If a move across state lines is anywhere in your plan, the order of operations may matter more than the size of the conversion. But $1.47 invites a conclusion it does not support, and I would rather correct that myself than let it travel. A conversion is taxable whichever pocket pays. Of the $69,751 Dianne withdraws in California, roughly $44,639 replaces cash she would have spent anyway. The incremental cost of self-funding, in wealth given up, is $25,111. About 17% of the conversion, not 47. The bill that arrives in 2028 At that $150,000 conversion, self-funding also costs Dianne $1,735 in higher Medicare premiums, a surcharge of $6,355 rather than $4,620, charged on top of the standard premium, for one year, and hers alone as a single filer. The bill arrives two years late. Medicare sets her 2028 premiums from her 2026 income, so the cost is invisible at the moment she is deciding how to pay the 2026 tax. When it can still make sense Doing nothing is not free either. Money left in a traditional IRA comes out eventually, under required distributions, at whatever rates apply then, possibly to a survivor filing single, possibly to heirs facing a 10-year deadline. Where self-funding still holds up, a few things tend to be true. The rate gap is durable rather than a one-year accident. Whether it repays a cost this size depends on time, future tax rates and investment returns. A temporary dip in income is a thin foundation. A structural window, after retirement and before Social Security or required distributions begin, is more compelling. There is runway, because shrinking the portfolio to change its tax character needs years of tax-free growth to earn back. Age 59 and a half is cleanly behind you. The converted amount is not subject to the 10% additional tax on early distributions. A separate distribution taken to pay the tax generally is, unless an exception applies. And enough is left afterward. Check the balance after the funding withdrawal, not after the conversion. Dianne’s California IRA drops to $780,249, and whether that funds the next 30 years matters more than whether the conversion was tax-efficient. A practical warning about withholding Withholding from the conversion is not a cheaper way to pay the tax. It reduces what reaches the Roth. Elect 24% on Dianne’s $40,000 conversion, as this illustration does rather than as any custodian requires, and $9,600 goes to the IRS while $30,400 lands in the Roth, against $4,234 actually owed. The cash comes back next spring as a refund. The Roth room does not come back at all. Restating the rule Pay the conversion tax from outside cash if you have it. That remains the best answer. It is not an answer for the retiree whose savings are almost entirely in a traditional IRA. For that person, “never pay from the IRA” skips the actual decision, which is whether a self-funded conversion, with its full marginal cost, beats leaving the money where it is. Before deciding, count the gross-up, the Social Security effect, state tax and the Medicare bill two years later. Sometimes that arithmetic still says no. It beats applying a rule written for somebody with a different balance sheet. ________________________________________________________________________________ John Urban is the founder of RetireSmartIRA, a retirement tax-planning app. Earlier, he founded GT Nexus, a supply-chain software company acquired by Infor in 2015. He lives in Northern California with his wife, Kathy, and enjoys time with family, travel, reading, Bay Area sports, and the occasional deep dive into the fine print of the tax code.
Read more »

Looking Back On My Hard Luck Days

DAN SMITH  |  Aug 7, 2026

"Worry is the wrong word, but vigilance may be right. Our investments are our security blanket and our legacy. I just don’t like seeing the numbers go down regardless of the reason. It literally took 65 years to achieve our goals. It’s not logical I know, but I still think of my parents who had only SS and my sister who is only a bit better off, but still no investments and it disturbs me. On the other hand, I know for sure there are far more important things in life than money, things over which we have little or no control."
- R Quinn
Read more »

Risk and Taxes

ArticleAdam M. Grossman  |  Aug 8, 2026

AFTER YEARS OF heady gains in the stock market, many investors are facing the same question: To manage risk, they’d like to cut back on one or more of their holdings. But because of the potentially costly tax bill that might result, they aren’t sure exactly how to do that. How can you square this circle? One easy option would be to donate appreciated assets to charity. But that would make sense only if it aligns with your charitable goals and, of course, if you don’t need those funds for other uses. How else could you strike a balance between managing risk and limiting taxes? Here’s how I would answer this question. Step 1. I’d start by estimating the potential risk level among your holdings. While there’s no single litmus test, you could ask the following questions. First, how large a portion of your assets does any single holding represent? As a rule of thumb, I’d focus first on individual stocks that top 5%. Why 5%? My operating assumption is that any individual stock could experience a 50% decline during a crisis. So if a holding is limited to 5%, then a 50% drop would result in an overall portfolio impact of just 2.5%. I see that as very manageable. To be sure, stocks can certainly decline by more than 50%, but I view this as a reasonable figure for risk management. While I worry most about the risk posed by single stocks, it’s also important to examine the overall composition of your portfolio. That’s because, counterintuitively, a portfolio of 30 stocks could end up being riskier than a group of just 10. Harry Markowitz, the father of Modern Portfolio Theory, explained why. In his initial work back in the 1950s, Markowitz used railroad company stocks to explain the concept of diversification. There’s nothing inherently wrong with railroad stocks, Markowitz explained. But if a portfolio consists of only railroad stocks, then that would be a problem—because companies in the same industry are often impacted by the same economic factors. In other words, a portfolio consisting of a large number of holdings might only appear diversified, so it’s important to look under the hood. Another risk factor to consider: Do you work for a public company and own the company’s stock? If so, that would be a reason to consider diversifying more quickly (within the permitted time windows). What if you own only mutual funds or ETFs? Diversified funds tend to be less risky than individual stocks, but that’s not always the case. The fund industry launches as many as 1,000 new funds each year, including many with very aggressive strategies. So it’s important to check each fund’s holdings. You can find that information on the fund company’s website or on a site like Morningstar (Here, for example, are the top holdings in Vanguard’s S&P 500 index fund). Step 2. Next, you’d want to estimate how much a loss might impact you. As with most questions in personal finance, there are two answers to consider: how it might affect you in dollar terms, and the degree to which a loss would simply be upsetting. Both are important. Step 3. If you determine the holding in question does represent a material risk, then you’d want to estimate the potential tax impact. Here are questions you might ask: What would the tax be if you exited the entire position? Would it push your income into the next capital gains bracket? Are there tax lots with less appreciation you could take advantage of? Do you have losses you could use to offset some of the gains? Do you expect to be in a higher or lower tax bracket next year? Step 4. If you conclude that the tax bill might be significant, what steps could you take to reduce a holding tax-efficiently? Here are strategies to consider: For starters, I suggest deciding on a target percentage for the holding. While ideally I prefer bringing any individual stock down to a 5% weighting, that figure isn’t a rule. All things being equal, the larger a portfolio, the more risk you can afford. After deciding on a target percentage, the simplest approach would be to set up a long-term sale plan—like dollar cost averaging but in reverse. Suppose you’d like to sell 1,200 shares of a given stock. You could sell 100 shares each month for twelve months. You’d do that regardless of whether the stock happens to be up or down that month. That 12-month schedule isn’t a rule. If your holding is very significant, you might opt for a longer timeframe. On the other hand, if you feel the stock has a particularly highflying valuation, you might choose a quicker pace. The key, in my view, is just to get started. As the writer Carveth Read wrote, “it’s better to be roughly right than precisely wrong.” Selling a stock down over time is the simplest way to reduce risk, but it’s hardly the most tax efficient. Another approach that’s been gaining in popularity is known as a 351 exchange fund. With a 351, the idea is that a group of investors, each with their own portfolios of appreciated securities, come together and collaborate to diversify their respective holdings. To provide a simplified illustration, imagine two investors, each with a concentrated holding, one in Microsoft and the other in Apple. Each would benefit by diversifying, and that’s what a 351 exchange fund allows. Each would contribute their respective shares into a common pool that would then hold some Apple and some Microsoft. This new investment would be structured as an ETF, and each investor would be issued shares proportional to the size of their contribution. Importantly, the initial creation of a 351 fund doesn’t entail any tax. Taxes are due only when an investor later sells shares of that ETF. This is a simplified example. In reality, a 351 exchange fund would hold many more than just two holdings. They’re actually required to meet various diversification requirements. As a result, investors in 351 funds may end up feeling sufficiently diversified and thus comfortable holding their fund shares for the long term. That would make this strategy potentially the most tax-efficient way to manage portfolio concentration risk. This is just an overview, though. If you’re interested in 351 strategies, I suggest further research. In July, The Wall Street Journal discussed these funds in some detail. In addition, a firm called Alpha Architect, the largest player in this area, has a number of helpful explanatory videos on its site.   Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Read more »

Jonathan’s Parting Thoughts: No. 8

Jonathan Clements  |  Aug 7, 2026

"Thank you JC as you continue to read, write and listen to everything from above. I recently read two fascinating books: Knowing Enough by John Bogle and William Bernstein, Bogleheads' Guide to the Three-Fund Portfolio by Taylor Larimore. In both the books, there are many references to Jonathan Clements' timeless quotes, wisdom and tips."
- Senthil Nathan
Read more »

Taxing Social Security benefits

R Quinn  |  Aug 6, 2026

"Sorry, you lost me on this comment."
- R Quinn
Read more »

“Gerontocracy” in America

Chris Rush  |  Aug 6, 2026

"Part of the solution isn't stripping away benefits from seniors—it's making it easier for them to share their wealth while they're still around. And I mean seniors at all income levels. You don't need to give $500K or more to a younger person to make a difference in their life. If we actually want intergenerational equity, one clear path is fixing the tax code's hoarding incentive. Right now, the 'step-up in basis' rule means if older folks give assets to their kids while alive, those assets carry a heavy future capital gains tax bill. But if they hold them until they die? Poof—the capital gains taxes vanish entirely. The tax code literally penalizes passing wealth down early, rewards hoarding it until death, and undermines intergenerational equity."
- John Katz
Read more »

For most retirees, the greatest fear is not death—it is running out of money before they die.

Matt Halperin  |  Aug 6, 2026

"reminds me of Wimpy asking Popeye for money: "I will gladly pay you Tuesday for a hamburger today." Maybe one alternative would be to sit on that $100k (or whatever you would turn over) in a TIPS or a total stock fund for 20 years, then buy the annuity, if we're still around to need it..."
- Catherine
Read more »

Before Someone Else Decides

Kathleen Rehl  |  Aug 2, 2026

"Excellent booklet Kathleen. The chart for comparing alternatives is excellent. Thanks for sharing."
- DavidHLancaster
Read more »

Inflation, prices, COLAs, retirement and the last 16 years

R Quinn  |  Jul 27, 2026

"I suspect the posts you read from seniors are those that do not really have adequate funds built up in IRAs (or other investment orientated savings) to act as the buffer on top of SS. The world has however changed and anyone who has retired in the past 10 years (or is coming up to retirement) should be aware of the utility in maintaining equity market exposure as a key part of managing inflation (and other life event) risks. As has been discussed before SWR is only a tool not the entire answer. If you're asking how much can I draw from $1m capital then 40k pa (rising with inflation) is a reasonable answer for a 30 year lifespan etc. That does nothing to tell you whether $40k will support your lifestyle and/or leave enough surplus for unexpected needs. Hence why you also need a budget or alternately the discipline to live within the income. I'd suggest it is wise to at least think about financial strategy in weathering unexpected needs. But it doesn't need to negate the overall drawdown strategy - for some it might be drawing at only 3.5%, for others maintaining a cash-like emergency fund or being prepared to sell a second home or whatever. My approach is to have a notional "when it's gone, it's gone" pot to cover lumpy one-off spend. Then I top it up from excess from my planned drawings or if it goes, replenish by paring back lifestyle spending a bit. Some people might need to see that as a physically separate fund/account. That's personal choice (possibly for those allergic to spreadsheets/budgeting ;) ) and largely just accounting presentation."
- bbbobbins
Read more »

When your 401(k) excludes target date funds

JM  |  Aug 1, 2026

"What are the lowest fee funds? Maybe there's actually a good one."
- Randy Dobkin
Read more »

Short term and long term Social Security planning

William Perry  |  Aug 4, 2026

"My statement,”If there are going to be further cuts in benefits and raises in taxation let younger people who have time to adapt their financial plans be the people to sacrifice to ensure their future beyond, just like we were asked to do in the past.”, is that the above changes would secure our promised benefits and those of younger generations. We had to sacrifice a significant amount from when we first started, so why not younger generations?"
- DavidHLancaster
Read more »

Yet-Another Social Security Spreadsheet Analysis on what Age to Start taking Benefits

Big Green Monster  |  Aug 2, 2026

"When the most important value in the equation is unknowable, any decision is simply a roll of the dice."
- Mike A
Read more »

Roth Conversions and Taxes

ArticleJohn Urban  |  Aug 8, 2026

EVERY ARTICLE ABOUT Roth conversions says the same thing: pay the tax from taxable money, not from the IRA. That is good advice if you have taxable money. Plenty of retirees do not. Their savings sit almost entirely in a traditional IRA, built from years of 401(k) contributions and a rollover at retirement, with little brokerage money and no cash reserve worth naming. For them, “pay from outside money” is not advice. It is a condition they do not meet. Their real choice is a self-funded conversion or no conversion at all. The familiar warning is that self-funding requires a gross-up. You withdraw money to pay the conversion tax, that withdrawal is itself taxable, so you have to withdraw a little more. Less discussed is what else that withdrawal sets off. It makes more of your Social Security taxable, it raises your Medicare premiums two years later, and in a high-tax state it enlarges the amount that has to leave the IRA. Here is what those three cost, on one household. A cautious conversion Meet Dianne, a composite rather than a real person. She is 66, single, retired to Florida, with $1 million in a traditional IRA and nothing outside it. Social Security pays her $28,000 a year. She is past 59 and a half and already on Medicare. Florida keeps state income tax out of the arithmetic for now. She converts $40,000. Careful, modest, the size people choose when they are trying not to do anything dramatic. The tax on that conversion, paid from a checking account she does not have, would be $4,234. Funding it from the IRA instead, the withdrawal that covers it is $5,125, and her tax rises to match. That extra $891 is 17.4% of the $5,125 she withdrew. Her ordinary-income bracket is 12%. Twelve of those points are the tax on the withdrawal itself, which is the gross-up everybody expects. The other 5.4 points come from $2,300 of her Social Security being pulled into taxable income by that same withdrawal. Paying from cash, $21,500 of her benefit would be taxable. Self-funding, $23,800 is. The difference is caused by how she paid, not by what she converted, and nothing on her return will label it. Not a smaller version of a large one The effect is not linear. Run the same woman at $150,000 and 85% of her benefit, the statutory maximum, is already taxable before she funds the tax. The funding withdrawal drags in nothing further, and this particular cost is zero. That is not an argument for converting more. It is an argument against assuming a small conversion is simply a smaller version of a large one. The one that looks cautious can carry the higher marginal rate. What self-funding actually costs Give Dianne the $150,000 conversion, still with no outside cash, and add the state question. Still in Florida, $195,469 has to leave the traditional IRA to put $150,000 into the Roth. Move her to California, changing nothing else, and it is $219,751. That is $1.30 of IRA spent for every dollar reaching the Roth, against $1.47, and the gap is California income tax compounded through the gross-up. If a move across state lines is anywhere in your plan, the order of operations may matter more than the size of the conversion. But $1.47 invites a conclusion it does not support, and I would rather correct that myself than let it travel. A conversion is taxable whichever pocket pays. Of the $69,751 Dianne withdraws in California, roughly $44,639 replaces cash she would have spent anyway. The incremental cost of self-funding, in wealth given up, is $25,111. About 17% of the conversion, not 47. The bill that arrives in 2028 At that $150,000 conversion, self-funding also costs Dianne $1,735 in higher Medicare premiums, a surcharge of $6,355 rather than $4,620, charged on top of the standard premium, for one year, and hers alone as a single filer. The bill arrives two years late. Medicare sets her 2028 premiums from her 2026 income, so the cost is invisible at the moment she is deciding how to pay the 2026 tax. When it can still make sense Doing nothing is not free either. Money left in a traditional IRA comes out eventually, under required distributions, at whatever rates apply then, possibly to a survivor filing single, possibly to heirs facing a 10-year deadline. Where self-funding still holds up, a few things tend to be true. The rate gap is durable rather than a one-year accident. Whether it repays a cost this size depends on time, future tax rates and investment returns. A temporary dip in income is a thin foundation. A structural window, after retirement and before Social Security or required distributions begin, is more compelling. There is runway, because shrinking the portfolio to change its tax character needs years of tax-free growth to earn back. Age 59 and a half is cleanly behind you. The converted amount is not subject to the 10% additional tax on early distributions. A separate distribution taken to pay the tax generally is, unless an exception applies. And enough is left afterward. Check the balance after the funding withdrawal, not after the conversion. Dianne’s California IRA drops to $780,249, and whether that funds the next 30 years matters more than whether the conversion was tax-efficient. A practical warning about withholding Withholding from the conversion is not a cheaper way to pay the tax. It reduces what reaches the Roth. Elect 24% on Dianne’s $40,000 conversion, as this illustration does rather than as any custodian requires, and $9,600 goes to the IRS while $30,400 lands in the Roth, against $4,234 actually owed. The cash comes back next spring as a refund. The Roth room does not come back at all. Restating the rule Pay the conversion tax from outside cash if you have it. That remains the best answer. It is not an answer for the retiree whose savings are almost entirely in a traditional IRA. For that person, “never pay from the IRA” skips the actual decision, which is whether a self-funded conversion, with its full marginal cost, beats leaving the money where it is. Before deciding, count the gross-up, the Social Security effect, state tax and the Medicare bill two years later. Sometimes that arithmetic still says no. It beats applying a rule written for somebody with a different balance sheet. ________________________________________________________________________________ John Urban is the founder of RetireSmartIRA, a retirement tax-planning app. Earlier, he founded GT Nexus, a supply-chain software company acquired by Infor in 2015. He lives in Northern California with his wife, Kathy, and enjoys time with family, travel, reading, Bay Area sports, and the occasional deep dive into the fine print of the tax code.
Read more »

Looking Back On My Hard Luck Days

DAN SMITH  |  Aug 7, 2026

"Worry is the wrong word, but vigilance may be right. Our investments are our security blanket and our legacy. I just don’t like seeing the numbers go down regardless of the reason. It literally took 65 years to achieve our goals. It’s not logical I know, but I still think of my parents who had only SS and my sister who is only a bit better off, but still no investments and it disturbs me. On the other hand, I know for sure there are far more important things in life than money, things over which we have little or no control."
- R Quinn
Read more »

Risk and Taxes

ArticleAdam M. Grossman  |  Aug 8, 2026

AFTER YEARS OF heady gains in the stock market, many investors are facing the same question: To manage risk, they’d like to cut back on one or more of their holdings. But because of the potentially costly tax bill that might result, they aren’t sure exactly how to do that. How can you square this circle? One easy option would be to donate appreciated assets to charity. But that would make sense only if it aligns with your charitable goals and, of course, if you don’t need those funds for other uses. How else could you strike a balance between managing risk and limiting taxes? Here’s how I would answer this question. Step 1. I’d start by estimating the potential risk level among your holdings. While there’s no single litmus test, you could ask the following questions. First, how large a portion of your assets does any single holding represent? As a rule of thumb, I’d focus first on individual stocks that top 5%. Why 5%? My operating assumption is that any individual stock could experience a 50% decline during a crisis. So if a holding is limited to 5%, then a 50% drop would result in an overall portfolio impact of just 2.5%. I see that as very manageable. To be sure, stocks can certainly decline by more than 50%, but I view this as a reasonable figure for risk management. While I worry most about the risk posed by single stocks, it’s also important to examine the overall composition of your portfolio. That’s because, counterintuitively, a portfolio of 30 stocks could end up being riskier than a group of just 10. Harry Markowitz, the father of Modern Portfolio Theory, explained why. In his initial work back in the 1950s, Markowitz used railroad company stocks to explain the concept of diversification. There’s nothing inherently wrong with railroad stocks, Markowitz explained. But if a portfolio consists of only railroad stocks, then that would be a problem—because companies in the same industry are often impacted by the same economic factors. In other words, a portfolio consisting of a large number of holdings might only appear diversified, so it’s important to look under the hood. Another risk factor to consider: Do you work for a public company and own the company’s stock? If so, that would be a reason to consider diversifying more quickly (within the permitted time windows). What if you own only mutual funds or ETFs? Diversified funds tend to be less risky than individual stocks, but that’s not always the case. The fund industry launches as many as 1,000 new funds each year, including many with very aggressive strategies. So it’s important to check each fund’s holdings. You can find that information on the fund company’s website or on a site like Morningstar (Here, for example, are the top holdings in Vanguard’s S&P 500 index fund). Step 2. Next, you’d want to estimate how much a loss might impact you. As with most questions in personal finance, there are two answers to consider: how it might affect you in dollar terms, and the degree to which a loss would simply be upsetting. Both are important. Step 3. If you determine the holding in question does represent a material risk, then you’d want to estimate the potential tax impact. Here are questions you might ask: What would the tax be if you exited the entire position? Would it push your income into the next capital gains bracket? Are there tax lots with less appreciation you could take advantage of? Do you have losses you could use to offset some of the gains? Do you expect to be in a higher or lower tax bracket next year? Step 4. If you conclude that the tax bill might be significant, what steps could you take to reduce a holding tax-efficiently? Here are strategies to consider: For starters, I suggest deciding on a target percentage for the holding. While ideally I prefer bringing any individual stock down to a 5% weighting, that figure isn’t a rule. All things being equal, the larger a portfolio, the more risk you can afford. After deciding on a target percentage, the simplest approach would be to set up a long-term sale plan—like dollar cost averaging but in reverse. Suppose you’d like to sell 1,200 shares of a given stock. You could sell 100 shares each month for twelve months. You’d do that regardless of whether the stock happens to be up or down that month. That 12-month schedule isn’t a rule. If your holding is very significant, you might opt for a longer timeframe. On the other hand, if you feel the stock has a particularly highflying valuation, you might choose a quicker pace. The key, in my view, is just to get started. As the writer Carveth Read wrote, “it’s better to be roughly right than precisely wrong.” Selling a stock down over time is the simplest way to reduce risk, but it’s hardly the most tax efficient. Another approach that’s been gaining in popularity is known as a 351 exchange fund. With a 351, the idea is that a group of investors, each with their own portfolios of appreciated securities, come together and collaborate to diversify their respective holdings. To provide a simplified illustration, imagine two investors, each with a concentrated holding, one in Microsoft and the other in Apple. Each would benefit by diversifying, and that’s what a 351 exchange fund allows. Each would contribute their respective shares into a common pool that would then hold some Apple and some Microsoft. This new investment would be structured as an ETF, and each investor would be issued shares proportional to the size of their contribution. Importantly, the initial creation of a 351 fund doesn’t entail any tax. Taxes are due only when an investor later sells shares of that ETF. This is a simplified example. In reality, a 351 exchange fund would hold many more than just two holdings. They’re actually required to meet various diversification requirements. As a result, investors in 351 funds may end up feeling sufficiently diversified and thus comfortable holding their fund shares for the long term. That would make this strategy potentially the most tax-efficient way to manage portfolio concentration risk. This is just an overview, though. If you’re interested in 351 strategies, I suggest further research. In July, The Wall Street Journal discussed these funds in some detail. In addition, a firm called Alpha Architect, the largest player in this area, has a number of helpful explanatory videos on its site.   Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Read more »

Jonathan’s Parting Thoughts: No. 8

Jonathan Clements  |  Aug 7, 2026

"Thank you JC as you continue to read, write and listen to everything from above. I recently read two fascinating books: Knowing Enough by John Bogle and William Bernstein, Bogleheads' Guide to the Three-Fund Portfolio by Taylor Larimore. In both the books, there are many references to Jonathan Clements' timeless quotes, wisdom and tips."
- Senthil Nathan
Read more »

Taxing Social Security benefits

R Quinn  |  Aug 6, 2026

"Sorry, you lost me on this comment."
- R Quinn
Read more »

“Gerontocracy” in America

Chris Rush  |  Aug 6, 2026

"Part of the solution isn't stripping away benefits from seniors—it's making it easier for them to share their wealth while they're still around. And I mean seniors at all income levels. You don't need to give $500K or more to a younger person to make a difference in their life. If we actually want intergenerational equity, one clear path is fixing the tax code's hoarding incentive. Right now, the 'step-up in basis' rule means if older folks give assets to their kids while alive, those assets carry a heavy future capital gains tax bill. But if they hold them until they die? Poof—the capital gains taxes vanish entirely. The tax code literally penalizes passing wealth down early, rewards hoarding it until death, and undermines intergenerational equity."
- John Katz
Read more »

For most retirees, the greatest fear is not death—it is running out of money before they die.

Matt Halperin  |  Aug 6, 2026

"reminds me of Wimpy asking Popeye for money: "I will gladly pay you Tuesday for a hamburger today." Maybe one alternative would be to sit on that $100k (or whatever you would turn over) in a TIPS or a total stock fund for 20 years, then buy the annuity, if we're still around to need it..."
- Catherine
Read more »

Before Someone Else Decides

Kathleen Rehl  |  Aug 2, 2026

"Excellent booklet Kathleen. The chart for comparing alternatives is excellent. Thanks for sharing."
- DavidHLancaster
Read more »

Inflation, prices, COLAs, retirement and the last 16 years

R Quinn  |  Jul 27, 2026

"I suspect the posts you read from seniors are those that do not really have adequate funds built up in IRAs (or other investment orientated savings) to act as the buffer on top of SS. The world has however changed and anyone who has retired in the past 10 years (or is coming up to retirement) should be aware of the utility in maintaining equity market exposure as a key part of managing inflation (and other life event) risks. As has been discussed before SWR is only a tool not the entire answer. If you're asking how much can I draw from $1m capital then 40k pa (rising with inflation) is a reasonable answer for a 30 year lifespan etc. That does nothing to tell you whether $40k will support your lifestyle and/or leave enough surplus for unexpected needs. Hence why you also need a budget or alternately the discipline to live within the income. I'd suggest it is wise to at least think about financial strategy in weathering unexpected needs. But it doesn't need to negate the overall drawdown strategy - for some it might be drawing at only 3.5%, for others maintaining a cash-like emergency fund or being prepared to sell a second home or whatever. My approach is to have a notional "when it's gone, it's gone" pot to cover lumpy one-off spend. Then I top it up from excess from my planned drawings or if it goes, replenish by paring back lifestyle spending a bit. Some people might need to see that as a physically separate fund/account. That's personal choice (possibly for those allergic to spreadsheets/budgeting ;) ) and largely just accounting presentation."
- bbbobbins
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Manifesto

Aug 7, 2026

NO. 4: GOOD SAVINGS habits are the greatest of the financial virtues. If we aren’t good savers, it’s all but impossible to grow wealthy. What if we are? We’ll likely prosper, even if we’re mediocre investors.

think

Aug 8, 2026

MIMETIC DESIRE. While our needs may be driven by hardwired instincts to avoid, say, hunger and cold, our wants are often heavily influenced by others. According to mimetic theory, those we look up to show us what’s worth wanting. For instance, the boss or a celebrity discusses the joys of jogging—and suddenly we find ourselves buying running shoes.

act

Aug 8, 2026

REFINANCE if it'll noticeably reduce your mortgage rate. That can be a smart move if, within a few years, you can recoup the refinancing’s cost through lower monthly payments. Want to get a handle on how much you’re truly saving? If you have, say, 19 years left on your loan, find out the monthly payment on a 19-year mortgage at today’s lower rate.

Truths

Aug 7, 2026

NO. 15: WE FAVOR the familiar. We suffer from home bias, meaning we’re drawn to our employer’s shares, local corporations and stocks of companies whose products we use. We also favor U.S. stocks and shy away from foreign shares. These familiar investments create a portfolio we’re comfortable with—but maybe not one that’s well diversified.

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Manifesto

Aug 7, 2026

NO. 4: GOOD SAVINGS habits are the greatest of the financial virtues. If we aren’t good savers, it’s all but impossible to grow wealthy. What if we are? We’ll likely prosper, even if we’re mediocre investors.

Spotlight: Lists

What I Watch

Dennis Friedman   |  Jan 15, 2025

MANY FINANCIAL planners say you shouldn’t look at your investment portfolio too often because it may prompt you to make poor decisions based on short-term stock market performance. I try to follow this advice, even though it would be easy for me to take a peek, because we have almost all our money with Vanguard Group.
Ever since we consolidated our investments, I’ve noticed a change in my wife’s attitude toward money: Rachel is more willing to spend.

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Risk at Every Turn

Michael Flack   |  May 30, 2024

DEAR DAVID: LAST WEEK, you emailed me, “If you had $20,000, didn’t want to take risk and wanted the best return, how would you invest?” It’s a timeless issue, most likely first asked the day after money was invented.
You may be wondering why, besides asking where your money is currently invested, which turns out to be Bank of America at 0.2%, I haven’t asked about your risk tolerance, current financial situation and future financial needs.

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Fully Committed

Jonathan Clements   |  Apr 20, 2024

IF YOU THINK IT’S irritating to debate an issue with folks who have already made up their mind, there’s one situation that’s even worse: debating an issue with those who have not only made up their mind, but also gone ahead and acted on their decision—especially if that decision is irreversible.
And, yes, many retirement decisions are irreversible.
Take issues such as when to claim Social Security, whether to take pension payments or a lump sum,

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Gimme a Reason

Jonathan Clements   |  Jun 5, 2025

When we deploy our hard-earned dollars, we all have our financial reasons. But are we focusing on the right thing? Consider four examples:
Homes. When folks buy a home, they’ll often dwell on the potential price appreciation, the tax benefits and the advantages over renting. But I’d contend there are two reasons that are even more compelling: Buying a home locks in our housing costs and, with every monthly mortgage payment, forces us to save.

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Money Memories

Edmund Marsh   |  Sep 6, 2024

Six years ago, Jonathan Clements published an article in HumbleDollar recounting some of the  anecdotal influences on his financial thinking. Rather than research and facts, he explained, it’s often the exploits we experience, the tales we’re told or the comments that come our way that shape how we view money matters.
I know that holds true for me. Years later, I can still hear the voices and see the faces attached to these events:
1.

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Worth Repeating

Adam M. Grossman   |  Dec 29, 2024

IN THE FINANCIAL world, some topics are serious, others not so much. Since it’s the holiday season, it seems appropriate to look back at some of the past year’s lighter moments.
No joke. In 2019, artist Maurizio Cattelan unveiled a collection he called Comedian. The item that received the most attention: a sculpture that consisted only of a banana duct-taped to a wall. The banana gained fame when it sold at a Miami auction for $120,000.

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Spotlight: McGlynn

Don’t Delay

James McGlynn   |  Apr 18, 2024

I HAD LUNCH RECENTLY with a longtime friend—a 66-year-old retiree. I asked him how he’s generating income since he hasn’t filed for Social Security and doesn’t have a pension. He said that, for now, he’s just drawing down his savings. I know his wife is three years older and her lifetime earnings were much lower than his, so I asked him if she’d filed for Social Security. He proudly said that she hadn’t—because she expects to live to age 90, like her mother. What he didn’t know: Because the Social Security benefit based on his wife’s own earnings record is less than half of his benefit as of his full Social Security retirement age (FRA), it probably didn’t make sense for her to delay her own benefit beyond her FRA. Why? Let’s start with the basics: His wife’s spousal benefit is a maximum 50% of his FRA amount. Her benefit would be reduced if she receives benefits—whether it’s benefits based on her own earnings record or his—before her FRA. What if she claims after her FRA? That’ll increase the benefits based on her own earnings record. But it won’t increase her spousal benefit. Moreover, she can’t receive that spousal benefit until her husband claims his benefit. Got all that? Many retirees delay benefits until age 70, thinking that’s the prudent course, given the chance they’ll live to a ripe old age. But in many cases, it’s best to file at your FRA if your spouse is entitled to a much larger Social Security benefit. Let’s continue with the example of my friend and his wife. Suppose his Social Security benefit at FRA is $3,000 a month, while his wife’s benefit at FRA is $1,000 based on her own earnings record. To keep things simple, we’ll also assume her FRA is…
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Last Call

James McGlynn   |  May 14, 2019

WERE YOU BORN between 1950 and 1953, have been or are currently married, and haven’t yet filed for Social Security benefits? There’s a loophole you may want to take advantage of—before it disappears. For couples, settling on the right strategy for claiming Social Security benefits is critically important, because it affects the size of each spouse’s benefit or spousal benefit, as well as the survivor benefit. But the payoff can be especially large for the group I’m discussing here—those born between 1950 and 1953. In 2015, Congress changed some of the Social Security rules affecting couples, including eliminating so-called restricted applications for those born in 1954 and later. But if you were born before 1954, you were grandfathered and can—for a brief time—still take advantage of this filing option. What’s a restricted application? It’s when a husband or wife files for spousal benefits only. They can do so at their full retirement age—66 for the group we’re discussing—or later. Result: They receive 50% of the other spouse’s full retirement age benefit. For a restricted application to work, the other spouse must have already filed for his or her own benefit. Sound good? It gets even better: Once the spouse who filed the restricted application turns age 70, that spouse can upgrade from the spousal benefit to a benefit based on his or her own earnings record—and that benefit would have grown eight percentage points a year over the intervening four years, for a total of 32%, thanks to delayed retirement credits. Whenever folks tell me they were born before 1954 and haven’t filed for their Social Security benefit, I start thinking about whether they should use this strategy. Take my sister and brother-in-law. My brother-in-law was born in December 1953, so he qualifies to file a restricted application, because he…
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Paying Those Premiums

James McGlynn   |  Sep 14, 2023

I'M 64 AND PREPARING to sign up for Medicare next year. I’ve done extensive research, including earning the Retirement Income Certified Professional designation. I’ve also written articles for HumbleDollar on Medicare coverage, Medicare premiums, Medigap and health savings accounts. In addition, I’ve befriended Medigap salespeople, advised others on which plans to choose, and asked those on Medicare for advice on their experience with the program. I feel as if I’ve been preparing to take the Medicare filing “exam,” and I’m excited to sign up. I plan on enrolling in traditional Medicare—Part A hospital insurance, Part B doctor services and outpatient coverage, and Part D prescription drug coverage. I’m also purchasing Medigap Plan G, which will pay for my medical expenses after I’ve met my annual deductible. My planning doesn’t stop there, however. Once I’m enrolled in Medicare, I’ll no longer be eligible to contribute to my health savings account (HSA). My 65th birthday is next June, so I’ll only be allowed to save in my HSA through May 2024. In 2024, the HSA contribution limit will increase to $4,150 for a solo contributor like me. Because I’m over 55, I can add another $1,000, bringing the annual total to $5,150. Did you know that allowable HSA contributions are pro-rated in the year you enroll in Medicare? Since I’m only eligible to contribute to the HSA for five months next year, I can contribute 5/12th of $5,150, or $2,145. I’ve got around $25,000 in my HSA already, so my final contribution should bring my balance to around $27,000. I’m saving all I can in my HSA because it’s arguably the best tax-favored account around. The contributions reduce my taxable income. The account grows tax-deferred. And if I use distributions for qualified medical expenses, there are no taxes owed on my withdrawals.…
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Retirement Gambit

James McGlynn   |  Jan 13, 2021

INSPIRED BY THE TV series The Queen’s Gambit, many people suddenly want to master the game of chess. But I’m more interested in mastering the practical world of retirement gambits—and that means matching wits with Congress and the IRS. During my working career, I saved money in taxable brokerage accounts, IRAs and 401(k)s, but never focused on Roth accounts. At age 55, having left my last employer, I had two things that compelled me to begin—time and reduced income. As an experienced investor but a Roth novice, I wanted initially to take it slowly. The first thing I learned is that you should start a Roth IRA by age 55, so you can withdraw all amounts—contributions and earnings—tax-free beginning at age 59½. For your earnings to be entirely free of taxes and penalties, there’s a five-year waiting period, plus you need to reach the magical retirement age of 59½. If I didn’t open my Roth until age 58, I’d have had to wait until age 63 to access everything tax-free. Aware of this rule, I opened a Roth IRA at age 55 by transferring $1,000 from my traditional IRA. This was my first Roth conversion. I made the transfer in December, but that was enough to claim that year as the first year toward meeting the five-year rule. The reason: Under the tax regulations, what matters is the year you start, not the actual month. Next, I had to analyze if there were any other uses for my traditional IRA that should limit how much I convert to a Roth. I came up with three. The first reason for not converting too much: I wanted to use my IRA to buy deferred income annuities and, under the rules that govern so-called qualified longevity annuity contracts (QLACs), I could only do…
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As the Years Go By

James McGlynn   |  Aug 7, 2019

YOU CAN THINK of retirement as having four phases. Want to make sure you make the right decisions at the right time? An age roadmap can help. Phase No. 1 is the preretirement period beginning at age 55. Why start then? If you leave your employer after this age, you can access your 401(k) without the usual 10% tax penalty on retirement account withdrawals before age 59½. To have this option, keep your 401(k) at your old employer, rather than rolling it into an IRA. Also aim to open a Roth IRA by age 55. To access the earnings from a Roth without owing taxes, the account must be open for five years and you must be age 59½ or older. You can, however, withdraw your original contributions to a Roth IRA at any time, with no taxes or penalties owed. Bear in mind that, if you have a Roth 401(k) that you plan to roll into a Roth IRA, the five-year clock doesn’t start until you have the Roth IRA established. Don’t have long-term-care insurance? This might be the time to buy. The average age to purchase LTC insurance is 59. Phase No. 2 is age 60 to just before 65, and it revolves around Social Security and Medicare planning. At age 60, Social Security survivor benefits are available. At 62, Social Security worker benefits are available, but they’ll only be 75% of your full retirement age amount—assuming your full retirement age for Social Security benefits is 66. Three months before turning age 65, you should file for Medicare if you aren’t covered by an employer’s plan. Don’t wait until you turn 65, because it takes time to process the paperwork. By filing three months before turning 65, you should be covered on the first day of your birth month. Traditional…
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Roth While You Can

James McGlynn   |  Sep 30, 2021

NEWS OF ENTREPRENEUR Peter Thiel’s $5 billion Roth account, which was funded with PayPal stock, has motivated Congress to look at restricting the growth and size of Roth accounts. There’s talk of limiting Roth account balances to $5 million or $10 million. There are also proposals to limit both backdoor IRA conversions and so-called mega-backdoor conversions. The latter involves funding a nondeductible 401(k) and then immediately converting the money to a Roth. There’s even discussion of not allowing high-income workers to convert traditional IRAs to Roth accounts. In recent years, Congress has nixed Social Security’s file-and-suspend option and compelled beneficiaries to empty inherited IRAs within 10 years, rather than over their lifetime. But both changes were grandfathered, meaning those already using the file-and-suspend strategy and those who already had inherited IRAs weren’t affected. Presumably, it would be a similar situation with existing Roth accounts. The upshot: If Congress limits the ability to take advantage of Roth accounts in future, it makes even more sense to convert to a Roth today, while the door is still open.
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