Thoughts on article ‘Corporate Bond Funds Draw Record Amount of Investor Cash’

Here is the link of article - http://www.cnbc.com//id/46430171

I was looking at my short term bond allocation. I prefer to keep more money in treasury compare to corporate bond because it my understanding that treasury is more stable and liquid than corporate bonds. It is also my understanding that I will lose less than I would have otherwise (by keeping money in corporate bonds). And this will best sever my purpose to keep money in some place from where I can take money out whenever I want it and I won’t need to worry about losing a lot of real money ( if we don’t consider inflation). When I was looking at the performance of these two funds, return on corporate bond is going up and up. On the other hand, return on treasury is going down and down. Somehow I was trying to convince myself into changing my allocation. I was thinking about having more corporate bonds and keeping less money in treasury. After all return on corporate bond is higher than return of treasury and who wouldn’t like to get more return.

While thinking all these, I forgot my rules for a while. One of them says don’t chase returns and I was thinking about doing the same. One of my rules, says don’t buy into something that everyone is getting into because that’s how bubbles are created. More and more money is being invested into something that is going up. We keep pouring money into hottest thing in the market and somehow make it bubble.  We don’t realize that it is getting more and more expensive because everyone is chasing and my rule is to buy when it is cheap in my opinion.

Of course, when things are going up, people are going to talk about all positive things. Isn’t that how it works? During bubbles everything looks good and someone who is not putting his money into hottest thing is stupid because everyone is making money by getting in to hottest things.

Good thing that I read this article. It’s so hard not to get excited and get into when things are good. I need to work keeping my emotions out of it.

How does contributing to 401k reduce current tax burden?

Let’s say your federal tax bracket is 25% and your state bracket is 6%. Which means your total tax bracket is 31%.

You contribute $10,000 to your 401k.

So you will save $3,100 in your total tax this year. (31% of $10,000 is $3,100)

A couple of points on working on corp-to-corp vs W2

A couple of points on working on corp-to-corp vs W2 (with no benefits)

We are talking about scenario where no benefits are being paid by working on W2.

What are equivalent rates on W2 vs corp-to-corp?

$100k a year on W2 (with no benefits) is almost equals to $109k a year on corp-to-corp (S-corporation)

Lets understand the difference of this $9,000.

Even though we mentioned that you don’t get any benefits on W2, your employer still pays FICA (which is around 7.65% of your salary upto $110k a year) and unemployment insurance tax (http://www.workforcesecurity.doleta.gov/unemploy/uitaxtopic.asp ). So when you ask to be paid corp-to-corp compare W2, you will have to ask for amount which will cover FICA and unemployment insurance tax as you are responsible to pay them when you work on corp-to-corp by starting an s-corporation. These are basic taxes that you pay anywhere in country. Apart from this, there might be other taxes. You should research about them based on the location where you are when negotiating W2 and corp-to-corp rates.

S-corporation is basically a bypass. Company pays to your s-corp and this s-corp pays you. But by doing this, you can get some tax related advantages. Let’s understand a couple of these benefits.

Health and medical and dental expense

In W2 (with no benefits) you pay for your health insurance and you don’t get any tax deduction on it in calculating itemized deduction till your total medical and dental expenses are more than 7.5% of your total gross pay.

e.g. if you are making $100k, you won’t get any health and medical and dental expense related tax deductions till your total expenses in this category is less than $7,500 for that year. For a healthy person, it is unlikely that you are going to spend $7,500 in this category.

Let’s say your health insurance is $150 a month. $150 a month equals to $1800 a year. You don’t get any deduction on this amount when working on W2.

Now if you had established s-corp, you can take this deduction. So your taxable income will be lowered by $1080.

Unreimbursed employee expenses

One does not get full Job expense and certain miscellaneous expense deduction under itemized deduction while working on W2.  You will get deduction only on the amount which is higher than 2% of your adjusted gross income.

Let’s say your Job expense and certain miscellaneous expense is $5,000 and your adjusted gross income is $100k. The amount you will include for Job expense and certain miscellaneous expense deduction will be $5,000 - 2% of $100k = $5,000-$2,000 = $3000

How would this work when you are married?

Let’s say you are married, filing jointly and your spouse is working and your adjustable gross income is $150k. The amount you will include for Job expense and certain miscellaneous expense deduction will be $5,000 - 2% of $150k = $5,000-$3,000 = $2000

Retirement accounts

In the case of W2 (with no benefits), you can contribute maximum of $5,000 to your regular IRA. You deduct this amount from your income to calculate adjusted gross income. i.e. you can take the deduction of $5,000 by contributing it to regular IRA.

In the case of corp-to-corp, you can open SEP-IRA http://www.irs.gov/retirement/article/0,,id=111419,00.html#contributions and can contribute up to $5k. It is maximum of 25% of your compensation or $50k.

So if you are making $100k, you can contribute $25k to retirement account and it will be deducted from your income while calculating your adjusted gross income.

Salary Deferral Contribution

What if you want to contribute more than allowed maximum of 25% of your compensation?

Let say you are the only member of your s-corp. you can elect salary deferral contribution. You can choose not to pay this salary to yourself in cash. Instead, you can elect to pay this into your retirement plan upto $16,500. 

and filing free tax return saga continues..

After I wrote another email asking for allowing me to file tax return for free, I got an email saying a supervisor will contact me.

Surly after that I got a phone call. Representative confirmed offer with me by making sure that I did not fill tax return with them last year. He mentioned that I am eligible for offer, but somehow system was not allowing it. The day this conversation happened was the last day of offer. Representative told me that I can pay tax return fees for free and they will refund that fees in 10-14 days. I asked him to email me saying the same thing so that I will have something in written. He did so and I paid tax return fees. Now I am waiting for that refund.