Money mistakes you didn't know you're making(jasuja.us) |
Money mistakes you didn't know you're making(jasuja.us) |
Part of my income is commission-based. I could max out my 401k when I receive my commission. It would be easier for me to budget this way. Unfortunately, contribution is all-or-nothing, and changing one's contribution percentage takes a few pay periods to go into effect.
Another tip not mentioned re 401k: change your default elections! Brokerages will usually put 401k funds into expensive "target date" managed funds that usually don't perform better than much cheaper index funds. Many 401k plans will allow contributors to choose index funds.
The marketing around trusts is a classic information asymmetry. Law firms selling the service of setting up a trust know it’s not simple for heirs, but that is essentially repeat business for them. Many heirs will need to hire a lawyer to help retitle and transfer assets in the trust, and dissolve the trust if they want to personally control the assets.
And people buying the service of setting up a trust will, by definition, never know how it ends up. (Maybe unless they themselves have received a trust.)
A trust is a powerful tool for protecting wealth across generations. It’s not easier than basic inheritance.
Edit to add: the easiest way to avoid probate is to designate beneficiaries on all your financial accounts. These supersede will instructions and avoid probate. You can do the same thing on vehicle titles, at least in some states.
Real estate is more complicated so the easiest thing on your heirs is to not own any real estate at the time of your death. :-) Or if you have real estate you would like to pass on, that specifically is a good use case for a living trust (with only the real estate inside it).
It is actually called an "addition to tax", not a penalty, and in fact it is merely an interest charge, just like if you don't pay the full balance on your credit card each billing period (for tax, the "billing periods" are the (roughly) quarterly dates when estimated payments are due). If you can make more money elsewhere than the interest charge by the IRS (currently 7%) you are better off not making the payments during the year.
>Health Savings Accounts are the rare unicorn of triple tax advantage: money isn’t taxed (1) going in, (2) while it’s growing in the account, or (3) when it’s taken out.
I see this a lot and it is completely ridiculous. (1) and (3) are the same thing when it comes to your contributions-- there is no scenario where you would ever pay tax on money when you contribute it and also when you take it out. It is only a double tax advantage, not triple. (And the money only comes out tax free if you use it for a limited set of expenses namely health care).
Anyone knows about similar resources for, say, the EU? Or it just varies too much by country here?
Most of these are not applicable where I live: you can’t cash out your pension fund, stocks are taxed separately from income, there are no high-yield savings accounts or health savings accounts, credit cards are rarely used and have no cashback.
The UK (temporarily too embarrassed to be in the EU) has some very generous tax advantaged accounts which match the US ones, so you can map "401k" to pension and "Roth IRA" to ISA to get something similar.
Assuming there isn’t a 2nd income drastically raising your income, why wouldn’t the company withhold the right percentage, considering they know what you make? Choosing a flat 22% seems odd.
Eg. If people prioritized this advice and didn’t buy vehicles they couldn’t afford, would America be better off?
It’s such bad advice and people parrot it all the time, probably because so many people are so bad with finances to begin with. It’s almost always a bad idea in this specific case.
If you intend to retire in your late 60s, then the conventional wisdom is fine.
This is not always a given. If your income in retirement is much higher than your working years income, you will end up losing on taxes.
In fact, my employer didn't match at all so all my money is invested post-tax in a brokerage.
You should probably max out your Roth IRA, however.
Don't get sucked into churning, though. It's high risk for very low reward.
Forgetting to pay a bill with all the accounts you are juggling then wiping out your gains with one late fee?
For credit card:
- not meeting spending targets to earn signup bonuses
- not utilizing all the cards benefits (For example, discover requires you click a couple buttons to activate 5% reward.
- minimum points redemption (must have > x points to convert to cash)
- Forgetting to redeem points before closing the account.)
For checking/savings rewards:
- not meeting direct deposit targets
- not maintaining an account balance
2. The triple tax advantage is not ridiculous. (1) and (3) are not the same thing. 401k for example is not taxed going in (you fund it with pre-tax dollars) but is taxed when taken out. When you withdraw money from your 401k in retirement, you owe taxes on the capital gains that have accrued in the account since you first put the money in. But if you take money out of HSAs for paying medical bills, there is no tax on the capital appreciation you have enjoyed in your HSA account.
[0]https://www.law.cornell.edu/uscode/text/26/6654
2. The HSA is just a holding account. You can either pay for health expenses such as insurance pre-tax each year, or you can put it in a HSA and delay the payment. In either case, you only get one tax deduction, not two. The ridiculous claim is to say for a $1K contribution to HSA, you get a $1K tax deduction, then you get another $1k tax deduction when you take it out - not true.
If you speak with a tax professional, for which I am not, they would tell you to calculate the difference and pay quarterly amounts. In practice this means that I sell more periodically just for taxes[2].
1. https://www.irs.gov/filing/federal-income-tax-rates-and-brac... 2. https://www.irs.gov/businesses/small-businesses-self-employe...
Edit: from what I understand payroll isn't informing Schwab of your current bracket, nor do I think they should have to.
I do need to do something weird with my taxes every year to enter that the taxes were already paid, as by default when I import, it shows that I need to pay taxes on the whole thing. Every year it feels like doing it for the first time; it’s always confusing to find the right spot in TurboTax and which numbers to enter for the taxes I already paid.
If the brokerage is doing the deduction based on a checkbox the user selects, I can see how a discrepancy could arise.
It may be better for you. For example, you may want to cover the rest of the tax bill by selling other shares and doing tax lost harvesting. You may think your company is going to the moon and decide to cover the rest of your tax bill with cash and keep your shares (this is usually a bad idea). The way they do it gives you flexibility.
Regarding tax I just go to the tax authority's website and declare my expected income, assets, debt etc and my employer gets a "tax card" from them which they use to pay taxes for me. At the end of the year the tax authority does a final calculation, sends me an overview and either returns some money or sends a bill for what I owe. I can overestimate my income if I want to avoid that bill, then the tax return is like a bonus but I personally prefer to operate with a healthy emergency fund so that a $3000 tax bill doesn't really bother me. Usually it's like +-$1000 at the end of the year.