Setting up a Universal Basic Income(UBI)

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Topic Author
zie
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Setting up a Universal Basic Income(UBI)

Post by zie » Thu Jul 30, 2020 12:33 am

When I retire I will have a government pension(I'm fully vested already) that will put me in the 22% tax bracket(2020 tax tables) and is more than double my current expenses, but is not inflation/cost of living adjusted. Also I qualify for social security, which even with a 25% haircut, will cover my current expenses. Once I retire, I should qualify for an HSA, but I don't currently. So my retirement is pretty safe, and am not very worried about it.

Clearly I don't spend a lot of money. I do have financial goals however. I have godchildren(so no legal relationship) and I want their eventual(hopeful?) kids to get an optional Universal Basic Income(UBI) for their lifetime. These mythical children don't exist and the quantity is unknown, but my napkin math says I need $750,000 in 2020 dollars for a 3.5% withdrawal of $26,250/year (all in 2020 dollars). I think I can get a few funded in my lifetime, depending on how the TSM performs. I'm not 100% convinced $25k/yr is the right number, but that's sort of the ballpark I'm thinking about. Enough to survive, but not enough to thrive.

My question becomes, where should all this money go, and how can I go about making the UBI happen?

Currently all(ish) of my net worth is in a taxable brokerage(holding TSM), except for a little in a Roth.

Obviously I'll max out my Roth every year from now until I'm dead, but limited to $6k/yr that isn't very much.

I could start up a 403b plan, but since I eventually have to pay tax on the $'s anyway, and my 22% tax bracket will continue for life, I don't see any benefit here, unless I'm missing something?

So the rest will be in taxable, unless I can qualify for an HSA after retirement, then I'll max the HSA out, first, right?

Around the UBI portion, my current thinking is starting a non-profit that's goal is investing and handing out UBI $'s and educating about personal finance and investing. This would help me, plus anyone else in a similar situation. Maybe there is a better way?

Anyway, this is my thinking, and I'm soliciting feedback, where I went wrong, how I can better optimize/plan and anything else of useful information I should think about as I move forward with my plans.

Thanks for reading this far!

majiaknight
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Re: Setting up a Universal Basic Income(UBI)

Post by majiaknight » Thu Jul 30, 2020 12:55 am

"Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime."

Once the kid is born, I suggest you 'superfund' his/her 529 as a gift meaning you could have one-time contribution of 5*$15,000=$75,000. In some states 529 plans can now be used for qualified K-12 tuition expenses in addition to college expenses.

For UBI like investment, you may check whether EE Savings ($10K/y after the kid is born) may partially meet your goal. You could establish a minor account for the kid and maximize EE Savings annual purchase limit until the kid is 20 when he could withdrawal $20K/y from then. In this way if you continue gifting money to purchase EE Savings for the kid even after the minor account is transferred to the grown up kid, he/she could continue receiving $20K/y for 20 years after you stop.
A Simple Way To Build Your Own Annuity
https://www.forbes.com/sites/theboglehe ... da96747ba3

You could also create a UTMA account for the kid, and teach him/her how to invest the money.

RocketShipTech
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Re: Setting up a Universal Basic Income(UBI)

Post by RocketShipTech » Thu Jul 30, 2020 1:41 am

A universal basic income would be given to everyone, hence the name.

Call this for what it is, a trust fund.

student
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Re: Setting up a Universal Basic Income(UBI)

Post by student » Thu Jul 30, 2020 5:58 am

RocketShipTech wrote:
Thu Jul 30, 2020 1:41 am
A universal basic income would be given to everyone, hence the name.

Call this for what it is, a trust fund.
I think OP is trying to be clever with the name. I would call it a trust fund too. Nevertheless, I do not see anything wrong with OP using this term. When someone advocating a universal basic income in the US, it is not for everyone in the world, the "universe" in question is the set of citizens (or is it residents) in the US. The OP has defined his/her "universe."

aristotelian
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Re: Setting up a Universal Basic Income(UBI)

Post by aristotelian » Thu Jul 30, 2020 6:57 am

student wrote:
Thu Jul 30, 2020 5:58 am
RocketShipTech wrote:
Thu Jul 30, 2020 1:41 am
A universal basic income would be given to everyone, hence the name.

Call this for what it is, a trust fund.
I think OP is trying to be clever with the name. I would call it a trust fund too. Nevertheless, I do not see anything wrong with OP using this term. When someone advocating a universal basic income in the US, it is not for everyone in the world, the "universe" in question is the set of citizens (or is it residents) in the US. The OP has defined his/her "universe."
UBI has a specific meaning. The subject title is likely to attract people wanting to discuss politics instead of answering his question. I don't think there is any world in which a couple of kids counts as universal.

Topic Author
zie
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Re: Setting up a Universal Basic Income(UBI)

Post by zie » Thu Jul 30, 2020 6:59 am

RocketShipTech wrote:
Thu Jul 30, 2020 1:41 am
A universal basic income would be given to everyone, hence the name.

Call this for what it is, a trust fund.
Fair enough, though I'm unfamiliar with trust funds. I believe they are the custody of the child? That's not what I'm after.

I want the $'s to be owned by the organization, the child just gets the payments(at their discretion). i.e. they can turn the spigot off/on at will, but they don't control the principal dollars.

The point being, any earnings above the payout would continue and at the child's death the money(if any left) then gets put into the pot for a new UBI for some other child.

In more conventional terms, my goal is more of a lifetime pension, starting around age of majority.

Unless I win every lottery on earth until I die(and probably not even then), I will never have the resources for universal, but there is no reason I can't extend my reach as far as I can.

Topic Author
zie
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Re: Setting up a Universal Basic Income(UBI)

Post by zie » Thu Jul 30, 2020 7:00 am

aristotelian wrote:
Thu Jul 30, 2020 6:57 am
student wrote:
Thu Jul 30, 2020 5:58 am
RocketShipTech wrote:
Thu Jul 30, 2020 1:41 am
A universal basic income would be given to everyone, hence the name.

Call this for what it is, a trust fund.
I think OP is trying to be clever with the name. I would call it a trust fund too. Nevertheless, I do not see anything wrong with OP using this term. When someone advocating a universal basic income in the US, it is not for everyone in the world, the "universe" in question is the set of citizens (or is it residents) in the US. The OP has defined his/her "universe."
UBI has a specific meaning. The subject title is likely to attract people wanting to discuss politics instead of answering his question. I don't think there is any world in which a couple of kids counts as universal.
I apologize, for not being clear, I'm not after the politics, I'm after the answers to my questions. I think politics are off topic for this forum anyway, aren't they? Also, not that it matters, but 'his' would be the wrong pronoun :)

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simplesimon
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Re: Setting up a Universal Basic Income(UBI)

Post by simplesimon » Thu Jul 30, 2020 7:05 am

You'll need to consult an attorney that specializes in estate planning. Someone's going to be drafting the documents anyways...might as well direct these questions at him or her.

fourwheelcycle
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Re: Setting up a Universal Basic Income(UBI)

Post by fourwheelcycle » Thu Jul 30, 2020 7:07 am

zie wrote:
Thu Jul 30, 2020 12:33 am
Around the UBI portion, my current thinking is starting a non-profit that's goal is investing and handing out UBI $'s and educating about personal finance and investing. This would help me, plus anyone else in a similar situation. Maybe there is a better way?
I thought you wanted your UBI dollars to go to your godchildren's children. Another thread on this forum concluded you cannot start up a non-profit and use it to direct money to people you select. If you want to set up a non-profit to give UBI dollars to people selected in a no-conflict-of-interest process that would presumably be fine. If the NFP also provided education to the general public about personal finance your godchildren's children could attend.

I think you will have a tough time finding a way to invest and distribute the principal of your UBI fund to benefit your godchildren's children after you have died. My wife and I will leave our money to charity and to our children. We will "trust" our children to manage our savings responsibly and use it to benefit their own charities and our grandchildren. If you do not want to leave your UBI fund dollars to your godchildren and "trust" them to distribute the SWR proceeds to their own children, you will be faced with the need to set up one or more trusts for your intended beneficiaries, presumably with paid investment managers and paid trustees to distribute the SWR, net of the trust expenses.

Topic Author
zie
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Re: Setting up a Universal Basic Income(UBI)

Post by zie » Thu Jul 30, 2020 7:08 am

majiaknight wrote:
Thu Jul 30, 2020 12:55 am
"Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime."

Once the kid is born, I suggest you 'superfund' his/her 529 as a gift meaning you could have one-time contribution of 5*$15,000=$75,000. In some states 529 plans can now be used for qualified K-12 tuition expenses in addition to college expenses.

For UBI like investment, you may check whether EE Savings ($10K/y after the kid is born) may partially meet your goal. You could establish a minor account for the kid and maximize EE Savings annual purchase limit until the kid is 20 when he could withdrawal $20K/y from then. In this way if you continue gifting money to purchase EE Savings for the kid even after the minor account is transferred to the grown up kid, he/she could continue receiving $20K/y for 20 years after you stop.
A Simple Way To Build Your Own Annuity
https://www.forbes.com/sites/theboglehe ... da96747ba3

You could also create a UTMA account for the kid, and teach him/her how to invest the money.
Nice quote! I agree.

a 529 is limited to education isn't it? and 75k is an order of magnitude to small.

EE bonds would be in the child's name correct? That's not my goal here, my goal is more like a pension. Though I guess the EE bonds wouldn't have to be in the child's name, so might be a way to invest the principal, in a very low interest environment, if that trend continues like Japan has.

A UTMA account would definitely be in the child's name, which is not the goal. I want the $'s to be owned by the organization, the child just gets the payments(at their discretion). i.e. they can turn the spigot off/on at will, but they don't control the principal dollars.

The point being, any earnings above the payout would continue and at the child's death the money(if any left) then gets put into the pot for a new UBI for some other child.

Though if I only end up with enough to fund 1 child, then this is all moot and an EE bond or UTMA might be the way to do it.

QBoy
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Re: Setting up a Universal Basic Income(UBI)

Post by QBoy » Thu Jul 30, 2020 7:09 am

You can accomplish this via a trust fund with a third-party trustee, such as Vanguard trust services. The trust document determines how much is paid out, to whom, and under what circumstances. Many states now allow "dynasty trusts," which can go on forever and provide your "UBI" for these children and their descendants. And, yes, you need an attorney to write the trust document.

aristotelian
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Re: Setting up a Universal Basic Income(UBI)

Post by aristotelian » Thu Jul 30, 2020 7:21 am

zie wrote:
Thu Jul 30, 2020 7:00 am

I apologize, for not being clear, I'm not after the politics, I'm after the answers to my questions. I think politics are off topic for this forum anyway, aren't they? Also, not that it matters, but 'his' would be the wrong pronoun :)
Yes politics is off limits. Point being, you may not get the right posters clicking through if the title isn't accurate.

hightower
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Re: Setting up a Universal Basic Income(UBI)

Post by hightower » Thu Jul 30, 2020 7:24 am

You're a very generous person. What you're asking is how to set up a trust fund. I'm tempted to criticize this decision since I don't personally feel giving kids money they never have to work for is a good thing, but it's a free country and it's your money, so I'll keep it to myself.
You'll need to meet with an estate lawyer to help you figure out how to accomplish your goals. It's not generally something you can set up yourself.

Jags4186
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Re: Setting up a Universal Basic Income(UBI)

Post by Jags4186 » Thu Jul 30, 2020 7:27 am

You could take a lump sum of money and purchase a deferred annuity for the child. That may or may not be a wise decision.

Topic Author
zie
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Re: Setting up a Universal Basic Income(UBI)

Post by zie » Thu Jul 30, 2020 7:40 am

hightower wrote:
Thu Jul 30, 2020 7:24 am
You're a very generous person. What you're asking is how to set up a trust fund. I'm tempted to criticize this decision since I don't personally feel giving kids money they never have to work for is a good thing, but it's a free country and it's your money, so I'll keep it to myself.
You'll need to meet with an estate lawyer to help you figure out how to accomplish your goals. It's not generally something you can set up yourself.
like majaknight said above "Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime."

But you can't teach a man to fish with a stick. You need a carrot.

Perhaps $25k/yr is too much carrot, but $1k/yr is almost certainly not enough carrot. I don't know what the right answer is here.

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N1CKV
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Re: Setting up a Universal Basic Income(UBI)

Post by N1CKV » Thu Jul 30, 2020 7:49 am

QBoy wrote:
Thu Jul 30, 2020 7:09 am
You can accomplish this via a trust fund with a third-party trustee, such as Vanguard trust services. The trust document determines how much is paid out, to whom, and under what circumstances. Many states now allow "dynasty trusts," which can go on forever and provide your "UBI" for these children and their descendants. And, yes, you need an attorney to write the trust document.
This is the correct answer.
The OP is avoiding the term "Trust Fund" for whatever reason, but it is precisely what you are trying to accomplish.

Topic Author
zie
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Re: Setting up a Universal Basic Income(UBI)

Post by zie » Thu Jul 30, 2020 7:55 am

fourwheelcycle wrote:
Thu Jul 30, 2020 7:07 am
zie wrote:
Thu Jul 30, 2020 12:33 am
Around the UBI portion, my current thinking is starting a non-profit that's goal is investing and handing out UBI $'s and educating about personal finance and investing. This would help me, plus anyone else in a similar situation. Maybe there is a better way?
I thought you wanted your UBI dollars to go to your godchildren's children. Another thread on this forum concluded you cannot start up a non-profit and use it to direct money to people you select. If you want to set up a non-profit to give UBI dollars to people selected in a no-conflict-of-interest process that would presumably be fine. If the NFP also provided education to the general public about personal finance your godchildren's children could attend.
I did some searching, and can't find that thread. If you happen across it again, I'd be very interested in a link. You can limit a non-profit's beneficiaries in practically limitless ways, i.e. for this group of people or only this geographic area of people with these traits, etc, as long as there aren't conflict of interest issues, which is where one gets in trouble. It's sort of like Advertising, these days with Facebook, you can target ads, even housing ads to pretty much anyone you want, even though housing ads are not supposed to be limited to a select few. So far I'm not aware of anyone even caring about this, let alone the govt attempting to do anything about it. So while the spirit of the law might say one shouldn't do that, the practice says something else entirely. Conflict of interest issues definitely apply however, so the children's parents couldn't be on the board, and that is something one would have to worry about, and may apply here.

Outright racist non-profit's exist, even though by law perhaps that's not technically allowed. I'm not trying to limit it to *only* my godchildren's children, but my resources are limited. For the sake of argument, let's accept it might be an issue, but assume that's not an issue here for this discussion.

EDIT to add: lest someone think I'm trying to be unethical, there is an ethical situation here that also needs to be resolved. I agree with your overall assessment, if it's closed and limited to only these kids, it would definitely be unethical and possibly illegal to be a non-profit.
Last edited by zie on Thu Jul 30, 2020 9:26 am, edited 1 time in total.

KlangFool
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Re: Setting up a Universal Basic Income(UBI)

Post by KlangFool » Thu Jul 30, 2020 7:58 am

https://en.wikipedia.org/wiki/Clan

OP,

Certain culture has Clan Association. They existed for hundreds of years. They distribute scholarship and welfare support to the Clan members. Richer member of the Clan association donate their wealth to the Clan association for the support of the future Clan members.

KlangFool

student
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Re: Setting up a Universal Basic Income(UBI)

Post by student » Thu Jul 30, 2020 8:08 am

aristotelian wrote:
Thu Jul 30, 2020 6:57 am
student wrote:
Thu Jul 30, 2020 5:58 am
RocketShipTech wrote:
Thu Jul 30, 2020 1:41 am
A universal basic income would be given to everyone, hence the name.

Call this for what it is, a trust fund.
I think OP is trying to be clever with the name. I would call it a trust fund too. Nevertheless, I do not see anything wrong with OP using this term. When someone advocating a universal basic income in the US, it is not for everyone in the world, the "universe" in question is the set of citizens (or is it residents) in the US. The OP has defined his/her "universe."
UBI has a specific meaning. The subject title is likely to attract people wanting to discuss politics instead of answering his question. I don't think there is any world in which a couple of kids counts as universal.
As I have said, I agree that it should be called a trust fund but in the strictest sense, it is valid as long as the universe is properly defined. Is it a good term to use this is case? No. You are right about the subject title. I clicked the thread because I was wondering why someone is talking about politics. In any case, I only responded because I felt the reply to the OP was judgemental. Since OP has already clarified and responded regarding word choice, I won't comment any further.

FoolMeOnce
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Re: Setting up a Universal Basic Income(UBI)

Post by FoolMeOnce » Thu Jul 30, 2020 8:13 am

You want a trust. Consult an estate planning attorney.

econprof
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Re: Setting up a Universal Basic Income(UBI)

Post by econprof » Thu Jul 30, 2020 9:01 am

To answer a different question: the reason to use a 403(b) is to avoid double taxation.

Regular savings/investment are taxed twice: you pay taxes on the income, and then you pay taxes on the capital gains. The capital gains are smaller because you start with a taxable amount.

401k/403b/traditional IRA allow you to avoid the first taxation, so more money grows.

Roth IRA allows you to avoid the second taxation.

Either is preferable to doubly-taxed income.

Source: I am a college economics professor.

Topic Author
zie
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Re: Setting up a Universal Basic Income(UBI)

Post by zie » Thu Jul 30, 2020 9:30 am

QBoy wrote:
Thu Jul 30, 2020 7:09 am
You can accomplish this via a trust fund with a third-party trustee, such as Vanguard trust services. The trust document determines how much is paid out, to whom, and under what circumstances. Many states now allow "dynasty trusts," which can go on forever and provide your "UBI" for these children and their descendants. And, yes, you need an attorney to write the trust document.
Thank you! and for everyone else talking about trust funds in a less friendly manner.. "you don't know what you don't know"

I knew the words "trust fund", but only from fiction stories where everyone with one was either outright evil, or at least spoiled rotten. So I've had no practical use or desire to ever know more. I'll definitely research this method!

Topic Author
zie
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Re: Setting up a Universal Basic Income(UBI)

Post by zie » Thu Jul 30, 2020 9:33 am

econprof wrote:
Thu Jul 30, 2020 9:01 am
To answer a different question: the reason to use a 403(b) is to avoid double taxation.

Regular savings/investment are taxed twice: you pay taxes on the income, and then you pay taxes on the capital gains. The capital gains are smaller because you start with a taxable amount.

401k/403b/traditional IRA allow you to avoid the first taxation, so more money grows.

Roth IRA allows you to avoid the second taxation.

Either is preferable to doubly-taxed income.

Source: I am a college economics professor.
Thanks! This makes sense. toodles off to see about setting up a 403b!

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FIREchief
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Re: Setting up a Universal Basic Income(UBI)

Post by FIREchief » Thu Jul 30, 2020 12:21 pm

zie wrote:
Thu Jul 30, 2020 12:33 am
Obviously I'll max out my Roth every year from now until I'm dead, but limited to $6k/yr that isn't very much.
Do you expect to have $6K in earned income every year until you're dead? Pension payments and SS don't count.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

adamthesmythe
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Re: Setting up a Universal Basic Income(UBI)

Post by adamthesmythe » Thu Jul 30, 2020 1:17 pm

If I wanted to benefit a younger person- I would pay for education or training.

A basic income makes sense to me only for a person with disabilities that make it impossible to work.

Katietsu
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Re: Setting up a Universal Basic Income(UBI)

Post by Katietsu » Thu Jul 30, 2020 2:40 pm

zie wrote:
Thu Jul 30, 2020 9:33 am
econprof wrote:
Thu Jul 30, 2020 9:01 am
To answer a different question: the reason to use a 403(b) is to avoid double taxation.

Regular savings/investment are taxed twice: you pay taxes on the income, and then you pay taxes on the capital gains. The capital gains are smaller because you start with a taxable amount.

401k/403b/traditional IRA allow you to avoid the first taxation, so more money grows.

Roth IRA allows you to avoid the second taxation.

Either is preferable to doubly-taxed income.

Source: I am a college economics professor.
Thanks! This makes sense. toodles off to see about setting up a 403b!
In your case, you might be better off in using a Roth 403b instead of a traditional 403b, if you have that option.

Topic Author
zie
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Re: Setting up a Universal Basic Income(UBI)

Post by zie » Thu Jul 30, 2020 2:45 pm

FIREchief wrote:
Thu Jul 30, 2020 12:21 pm
zie wrote:
Thu Jul 30, 2020 12:33 am
Obviously I'll max out my Roth every year from now until I'm dead, but limited to $6k/yr that isn't very much.
Do you expect to have $6K in earned income every year until you're dead? Pension payments and SS don't count.
No I don't. Thanks for catching this and helping me Learn something new today! :)

FoolMeOnce
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Re: Setting up a Universal Basic Income(UBI)

Post by FoolMeOnce » Thu Jul 30, 2020 2:50 pm

econprof wrote:
Thu Jul 30, 2020 9:01 am
I am a college economics professor.
You don't say! :wink:

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FIREchief
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Re: Setting up a Universal Basic Income(UBI)

Post by FIREchief » Thu Jul 30, 2020 2:52 pm

econprof wrote:
Thu Jul 30, 2020 9:01 am
Regular savings/investment are taxed twice: you pay taxes on the income, and then you pay taxes on the capital gains. The capital gains are smaller because you start with a taxable amount.

Source: I am a college economics professor.
Being taxed at two different times, for different dollars, is in no way "double taxation." The initial dollars are taxed when you earn them. The dividends are taxed as they are generated and distributed. The capital gains are taxed upon sale (deferred and at favorable tax rates), or never taxed (stepped up basis upon death or exempt if donated to your favorite charity). Hopefully you're explaining all this to your students. :beer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Topic Author
zie
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Re: Setting up a Universal Basic Income(UBI)

Post by zie » Thu Jul 30, 2020 3:01 pm

Katietsu wrote:
Thu Jul 30, 2020 2:40 pm
zie wrote:
Thu Jul 30, 2020 9:33 am
econprof wrote:
Thu Jul 30, 2020 9:01 am
To answer a different question: the reason to use a 403(b) is to avoid double taxation.

Regular savings/investment are taxed twice: you pay taxes on the income, and then you pay taxes on the capital gains. The capital gains are smaller because you start with a taxable amount.

401k/403b/traditional IRA allow you to avoid the first taxation, so more money grows.

Roth IRA allows you to avoid the second taxation.

Either is preferable to doubly-taxed income.

Source: I am a college economics professor.
Thanks! This makes sense. toodles off to see about setting up a 403b!
In your case, you might be better off in using a Roth 403b instead of a traditional 403b, if you have that option.
Thanks! my (admittedly brief) research, you are recommending this, because with a roth 403b, I can skip the RMD's and just let the $$'s grow?

Am I able to do both, a roth 403b and a regular roth at the same time? It seems the answer is yes, but only from lack of evidence that you can't.

123
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Re: Setting up a Universal Basic Income(UBI)

Post by 123 » Thu Jul 30, 2020 3:25 pm

adamthesmythe wrote:
Thu Jul 30, 2020 1:17 pm
If I wanted to benefit a younger person- I would pay for education or training.

A basic income makes sense to me only for a person with disabilities that make it impossible to work.
+1 If you provide for education and training that can allows the individual to reach their potential and be forever grateful to you. If you goal is simply to provide lifetime income it diminishes their incentive for self-achievement and can lead to them forever blaming you for not giving them enough.
The closest helping hand is at the end of your own arm.

econprof
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Re: Setting up a Universal Basic Income(UBI)

Post by econprof » Fri Jul 31, 2020 6:57 am

FIREchief wrote:
Thu Jul 30, 2020 2:52 pm
econprof wrote:
Thu Jul 30, 2020 9:01 am
Regular savings/investment are taxed twice: you pay taxes on the income, and then you pay taxes on the capital gains. The capital gains are smaller because you start with a taxable amount.

Source: I am a college economics professor.
Being taxed at two different times, for different dollars, is in no way "double taxation." The initial dollars are taxed when you earn them. The dividends are taxed as they are generated and distributed. The capital gains are taxed upon sale (deferred and at favorable tax rates), or never taxed (stepped up basis upon death or exempt if donated to your favorite charity). Hopefully you're explaining all this to your students. :beer
While I agree with you that the amounts are taxed at different times, it is still double taxation because the growth is inhibited by taxes twice.

Call B the principle, r the effective interest rate over your entire investment period, t1 the effective tax rate you pay on income (Eg you use a Roth), and t2 the effective tax rate you pay due to taxes in retirement (Eg you use a 401k).

Completely Untaxed income would be worth B(1+r) at the end of the period. Like an HSA if you manage to use it for investing.

Roth would be worth B(1-t1)(1+r)

401k would be worth B(1+r)(1-t2).

Non-tax privileged would be worth B(1-t1)(1+r)(1-t2).

The 2 (1-t) terms reflect double taxation.



Roth

econprof
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Re: Setting up a Universal Basic Income(UBI)

Post by econprof » Fri Jul 31, 2020 7:06 am

In simple terms: paying capital gains tax on money you’ve already paid income tax on is double taxation, because you lower the total amount by taxes twice (relative to entirely untaxed income).

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FIREchief
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Re: Setting up a Universal Basic Income(UBI)

Post by FIREchief » Fri Jul 31, 2020 11:59 am

econprof wrote:
Fri Jul 31, 2020 7:06 am
In simple terms: paying capital gains tax on money you’ve already paid income tax on is double taxation, because you lower the total amount by taxes twice (relative to entirely untaxed income).
Except, it's not. :twisted: You've already paid taxes on the principle, not the gains. The gains are taxed once, and only once, except when they are never taxed at all. It's really quite simple, unless somebody insists on making it sound more complicated.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Setting up a Universal Basic Income(UBI)

Post by econprof » Fri Aug 07, 2020 8:27 am

Even though you only pay taxes once on the principal and once on the gains, you are being doubly taxed on the gains (in terms of the reduced value due to tax burden).

The reason is that your gains are made on taxed money— so the gains are smaller to start with, and then also subject to tax. This is double taxation.

In economics, we care about the economic burden, not the statutory language. It’s like how a tax on a sale can be placed on the buyer or seller but /both/ pay the (economic burden of the) tax. The statutory burden is not the economic burden.

With retirement taxation, taxing principal AND gains is a form of double taxation because your gains are lowered twice.

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Re: Setting up a Universal Basic Income(UBI)

Post by barnaclebob » Fri Aug 07, 2020 8:41 am

duplicate
Last edited by barnaclebob on Fri Aug 07, 2020 8:55 am, edited 1 time in total.

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Re: Setting up a Universal Basic Income(UBI)

Post by barnaclebob » Fri Aug 07, 2020 8:47 am

FIREchief wrote:
Thu Jul 30, 2020 2:52 pm
econprof wrote:
Thu Jul 30, 2020 9:01 am
Regular savings/investment are taxed twice: you pay taxes on the income, and then you pay taxes on the capital gains. The capital gains are smaller because you start with a taxable amount.

Source: I am a college economics professor.
Being taxed at two different times, for different dollars, is in no way "double taxation." The initial dollars are taxed when you earn them. The dividends are taxed as they are generated and distributed. The capital gains are taxed upon sale (deferred and at favorable tax rates), or never taxed (stepped up basis upon death or exempt if donated to your favorite charity). Hopefully you're explaining all this to your students. :beer
In my experience econ majors don't get any more education on personal finance than the average person...which isnt much.


econprof wrote:
Fri Jul 31, 2020 7:06 am
In simple terms: paying capital gains tax on money you’ve already paid income tax on is double taxation, because you lower the total amount by taxes twice (relative to entirely untaxed income).
I think you are wrapped around the axle on this one. Capital gains are new money that's never been taxed. You'll have already paid taxes on the basis of that investment, not the gains. By your logic, when you pay taxes on the interest from the money in your savings account which got there from an appreciated investment you sold that would be triple taxation. What if the initial money came from an estate which paid death taxes? Quadruple taxation? Where does it end?
Last edited by barnaclebob on Fri Aug 07, 2020 8:56 am, edited 5 times in total.

fourwheelcycle
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Re: Setting up a Universal Basic Income(UBI)

Post by fourwheelcycle » Fri Aug 07, 2020 8:49 am

econprof wrote:
Fri Aug 07, 2020 8:27 am
.... The reason is that your gains are made on taxed money— so the gains are smaller to start with, and then also subject to tax. This is double taxation.
I agree. But I also support the perspective that corporate earnings have already been taxed as income to the corporations, so they should not be taxed again when they are distributed me as 1099-DIV income. However, I gave up on that hope long ago.

In any event, I think both you and FIREchief have a clear understanding of what is happening with the taxes, even though you prefer different terminology. The IRC drafters also know what is going on with my 1099-DIVs; they just choose not to agree with my perspective.

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Re: Setting up a Universal Basic Income(UBI)

Post by econprof » Fri Aug 07, 2020 9:21 am

I agree with your assessment. It is semantics.

But it’s important for showing people that tax privileged accounts are vital for growing your portfolio, because you avoid one of the forms of taxation.

Firechief understands this; we just prefer different terminology :)

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Re: Setting up a Universal Basic Income(UBI)

Post by Sandtrap » Fri Aug 07, 2020 9:58 am

Educational Trust with provisions based on merit at the discretion of the trustee to minimize enabling, codependency, and so forth.

Seek legal counsel.
j :happy
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zie
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Re: Setting up a Universal Basic Income(UBI)

Post by zie » Fri Aug 07, 2020 10:11 am

Sandtrap wrote:
Fri Aug 07, 2020 9:58 am
Educational Trust with provisions based on merit at the discretion of the trustee to minimize enabling, codependency, and so forth.

Seek legal counsel.
j :happy
Thanks! I also heard about a "spendthrift trust". I definitely have some learning to do. But I'm on the right track now I think.

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Re: Setting up a Universal Basic Income(UBI)

Post by Sandtrap » Fri Aug 07, 2020 10:34 am

zie wrote:
Fri Aug 07, 2020 10:11 am
Sandtrap wrote:
Fri Aug 07, 2020 9:58 am
Educational Trust with provisions based on merit at the discretion of the trustee to minimize enabling, codependency, and so forth.

Seek legal counsel.
j :happy
Thanks! I also heard about a "spendthrift trust". I definitely have some learning to do. But I'm on the right track now I think.
Also some things to ask legal counsel:
Trust Protector
Redirection of funds.
Drug testing, funding rehab.
Special needs
Etc

j🌺
Wiki Bogleheads Wiki: Everything You Need to Know

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Re: Setting up a Universal Basic Income(UBI)

Post by engineer101 » Fri Aug 07, 2020 2:22 pm

Call B the principle, r the effective interest rate over your entire investment period, t1 the effective tax rate you pay on income (Eg you use a Roth), and t2 the effective tax rate you pay due to taxes in retirement (Eg you use a 401k).

Completely Untaxed income would be worth B(1+r) at the end of the period. Like an HSA if you manage to use it for investing.

Roth would be worth B(1-t1)(1+r)

401k would be worth B(1+r)(1-t2).

Non-tax privileged would be worth B(1-t1)(1+r)(1-t2).

The 2 (1-t) terms reflect double taxation.



Roth
Isn't the last equation incorrect, i.e., shouldn't the non-tax privileged amount be this -- B1(1-t1)(1+r-r*t2) -- based on the logic below?

Code: Select all

Income			B
Tax on Income		B*t1
Invested Amount		B` = B - B*t1 = B*(1 - t1)
Growth			G = B`*r = B*(1 - t1)*r
Total After Growth	B`` = B` + G = B*(1 - t1) + B*(1 - t1)*r = B*(1 - t1)*(1 + r)
Tax on Growth		G*t2 = B*(1 - t1)*r*t2
Net Total		B``` = B`` - G*t2 = B*(1 - t1)*(1 + r) - B*(1 - t1)*r*t2
			     = B*(1 - t1)*(1 + r - r*t2)

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