Two Truths – One Tale

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Can You Find the False Statement?

Love a quick game? Love learning? Want to improve your personal finance acumen? 

We’ll post a weekly challenge similar to the popular game “Two Truths and a Lie”.  There is no actual “lie” (never a good practice!), but instead it’s a game of finding the incorrect statement followed by a quick explanation of the three statements.

Let’s Play!  Which one of the three statements is incorrect?

Scroll down to find the answer.

Statement #1:  You are more likely to feel the pain of losing $100 two to three times more strongly than you would feel the joy of winning $100.
Statement #2:  There are 2 general categories of biases: emotional and cognitive error. Emotional biases are typically easier to overcome than cognitive errors.
Statement #3:  Framing, confirmation bias, and herd behavior are all examples of heuristics which are mental shortcuts or tools we use to simplify complex decision making.
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If you guessed that Statement #2 was incorrect, you WIN!
Loss aversion states this clearly.  We are wired to have a strong preference to avoid losses over acquiring gains. How might this affect your investment style?  Investing too conservatively over the long-term may prove to be a detriment in reaching  your goals.
 
Cognitive errors are actually more easily corrected than emotional biases. Cognitive errors are often a result of lack of factual knowledge, whereas emotional biases deal with people’s feelings and instincts. Oftentimes, it’s much more straightforward to shed light on black-and-white facts versus changing someone’s longstanding opinions and impulses.
 
These three biases are a handful of many biases recognized in the behavioral finance world.  We will be publishing more on these powerful concepts in an upcoming blog post.

Let’s Play Again!

Statement #1: I can pay my tax liability when I file my return, even if I extend.
Statement #2: When I stop working, my tax rate actually may go UP.
Statement #3:  I have until April 15th of 2024 to make an IRA or HSA contribution for tax year 2023.
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If you guessed that Statement #1 was incorrect, you WIN!
Statement #1: Even if you file for an extension, this only applies to your return due date – your payment is still due by 4/15.
Statement #2: Yep, it’s true. Your tax rate may go up in retirement!  Counterintuitive? Required Minimum Distributions kick in which are distributions from IRAs, 401(k)s and other tax-deferred accounts that must be taken per IRS regulation (see table below).  There is often an opportunistic window between the age of retirement and RMD age where partial Roth conversions and tax-bracket management can play a meaningful role in lifetime tax liability. (See chart below to see when you will need to take RMDs).
Statement #3: You sure do! Some would argue that it’s better to do this at the beginning of each calendar year for that tax year to allow the maximum time for compounding to work for you, but better at the end than not at all.  Once that April 15th deadline passes, the opportunity is no longer available for the previous tax year (gone forever)!

Let’s Play Again!

Statement #1:  In 2020, women controlled only about 1/3 of the nation’s household wealth ($10.9 trillion). By 2030, it’s predicted that American women will control close to $30 trillion.
Statement #2:  In 1944, women were granted the right to open bank accounts and apply for credit cards on their own.
Statement #3:  2021 data from the U.S. Census Bureau shows that women who are working full-time earn about $0.84 for every $1 that men earn.
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If you guessed that Statement #2 was incorrect, you WIN!

Women are on track to manage an exponentially increasing amount of the nation’s household income. As the baby boomer generation ages, more and more of these women are inheriting wealth from their late spouses (source: McKinsey & Company).

It wasn’t until the Equal Credit Opportunity Act was passed in 1974 (yep, you read that right…1974) that women finally assumed the right to open bank accounts and lines of credit without the need for their spouse’s (or another male’s) co-signature (Source: Forbes Advisor).

While the pay gap is narrowing, women still ultimately earn about $0.16 less than men. One institution suggests gender pay equity won’t become a reality until 2056 (source: Center for American Progress).

Let’s Play Again!

Statement #1:  During the 1950s, 1960s and 1970s, the top federal income tax never dipped below 70 percent
Statement #2:  Transfer-in-Kind means that my positions will be sold to cash and then that cash is transferred to the target account (potentially triggering capital gains/losses)
Statement #3:  My HSA Account Catch-up Contribution age is 55
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If you guessed that the definition for Transfer-in-Kind was incorrect, you WIN!

Painful as it is, the tax statement is true.  Our top tax bracket currently is 37% so if you are wincing as you file your return, know that it could be worse!

It’s also true that the HSA Catch-up Contribution age is 55.  IRA and Defined Contribution Plan Catch-up Contribution eligible age is 50 so it’s confusing.  Why?!  We feel your pain! 🙁

Transfer-in-Kind is simple.  It is a transaction in which you move your invested assets from one custodian (ex Fidelity, Vanguard or Schwab) to another custodian.  There is no selling or buying of assets, nor there are any capital gains/losses transacted.  It IS possible that the custodian that you are transferring from will charge an administrative fee for the transfer, however.

Want to learn more about these types of topics?  Let us know if you’d like to talk!

Let’s Play Again!

Statement #1:  The acronym FIRE stands for Females in Retirement Early
Statement #2:  The acronym FOMO stands for Fear of Missing Out
Statement #3:  The acronym TCJA stands for Tax Cuts and Jobs Act
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If you guessed that the FIRE acronym definition was incorrect, you WIN!
  • While not altogether different in spirit, the acronym FIRE is widely used to abbreviate “Financial Independence, Retire Early”.  It is a movement that encompasses early career savings, reduced expenditures and investing strategies that pave the way to retirement or financial freedom sooner than the “standard” age of 65.  Another acronym that you might consider adding to your alphabet soup pot is FIERCEFemales in Every Role Changing Everything.  Check them out!
  • FOMO – Fairly commonly known as the Fear of Missing Out, this condition can wreak great havoc in all sorts of ways – financial and otherwise.  Investing FOMO can often lead to “buying high and selling low” – a recipe for losing money.
  • TCJA stands for the Tax Cuts and Jobs Act passed into law on December 22, 2017.  The entire document (approximately 1,025 pages of light reading-ha!) has many facets, but of particular interest to anyone who pays taxes, the provisions that lowered certain tax rates will automatically expire on December 31st, 2025 barring further legislative updates.  What does this mean for you?  Tax planning over the time remaining may well benefit those that take advantage of this window.  Here’s how.

Want to learn more about these types of topics?  Let us know if you’d like to talk!