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Should COVID-19 Change Your Retirement Plans?

Among the many financial uncertainties you’re experiencing as a global pandemic upheaves the country’s economy, retirement funds might be top of mind. A new survey by TransAmerica reported that 23% of workers feel their confidence in retiring comfortably has declined in light of COVID-19.

The most important thing to remember in the face of uncertainty is to not make any rash decisions. Volatility in the market is a normal factor in retirement funding and almost everyone will experience it at least once. Though this specific volatility is unique, it’s a common factor for financial investments.

Planning for retirement is not a set-it-and-forget-it investment — you must actively monitor your accounts to ensure your money is working for you so you can retire comfortably.

“Retirement planning is a continuous process of assessing your current position, implementing adjustments if needed and monitoring the results,” says Todd Soltow, the co-founder of Frontier Wealth Management.

The key to a successful retirement hasn’t changed; proactive planning and thoughtful strategy are needed to achieve retirement goals. The particular strategy will vary depending on how far away from retirement you are.

If you wanted to retire this year, don’t panic — reevaluate your goals

If you were planning on retiring in 2020 or even 2021, the pandemic-related market changes may have spooked you.

“Many 401(k)s we are seeing are now positive over the last 12 months, after being down 20% or more just a few months ago,” explains Matt Hylland, financial planner at Arnold and Mote Wealth Management. “You certainly do not need to delay retirement just because of the pandemic. However, you need to make sure your retirement portfolio is in order. The key is to be in a set of investments that you are comfortable with to ride out periods like we just experienced.”

You might want to make quick changes like buying a retirement property — but it’s a seller’s market right now. You might also think about liquidating your retirement fund into cash, but you’ll lose out when the markets take off again in addition to losing value on that cash due to inflation.

Keep calm as you examine your current retirement funds and play out all your options. Do some cash flow simulations and stress tests to see what it’d look like for your retirement portfolio if you started withdrawing soon. Depending on how diverse your portfolio is, you may be good to go without making changes.

[Read: The Easy Path to Retirement]

Perhaps the biggest reason to consider delaying retirement is sequence risk returns. This concept refers to how a bad return at the beginning of your retirement will negatively impact the entire life-long value of the fund.

Imagine it as the reverse of investing young and seeing it compound — by taking out during a dip in the market, the amount that would have continued to grow decreases. Because the market is in a negative trend, each withdrawal is not balanced out by market gains and there’s less money in the fund to grow over time. It can be a complicated concept in theory, but by playing out the hypothetical impact on your own portfolio, you can get a clear idea of what withdrawing now will do to your fund.

Though you can retire and receive Social Security benefits as early as 62, you may want to delay if you’re not at the Full Retirement Age, which is 66 to 67, depending on the year you were born. By waiting until you reach FRA, your monthly benefits will increase when you do retire (by a percentage based on your birth year.)

You certainly do not need to delay retirement just because of the pandemic.
– Matt Hyland

If you delay retirement past the FRA, the benefit increases further until age 69. If you have the means to continue working, delaying your retirement could lead to an increase in benefits (and more income to contribute) that will offset any hits your 401(k) is experiencing right now.

If your portfolio is feeling too risky, you can certainly reallocate to more stable investments.

“We have found several retirees who were invested in high-yield bonds who realized they were too risky of investments for them in their retirement portfolios,” Hyland explains. “Prices have largely recovered, and now is a great time to make changes to safer bonds, such as treasuries, to reduce volatility for the next decline.”

If you were planning on retiring soon and need help mapping out the current market’s impact, you should consult with a financial advisor.

If retirement is on the horizon, be proactive — revisit your portfolio and finances

If retiring is the next big milestone and you’re starting to plan for it in the next 5 to 20 years,, you’ll want to revisit your portfolio. You may have less time to recover from the economic effects of pandemic than younger generations, but you still have time to make big changes before retirement.

Here are some ways you can be proactive about retirement right now:

  • Pay off debt. Except for perhaps your mortgage, all other debt should be prioritized. A recession can mean a less stable source of income and you’ll need everything you have for cost of living expenses and emergency funds.
  • Diversify your portfolio. Find multiple ways to save money for retirement. This is also called a bucket plan. Invest in real estate, save cash, seek the stability of U.S. Treasury Bonds and be aggressive with some stocks.
  • Examine investment strategies. Analyze the projected returns of your current strategy and consider switching it up to maximize the current market. For example, dollar-cost averaging is a strategy often recommended for retirement funds. Its goal is to reduce the impact of market volatility by dividing up the total investment amount into periodic purchases.
  • Consider working longer. Working for a few more years than initially planned could help to increase your investments and maximize benefits. This doesn’t necessarily mean staying in your current career for longer. Side jobs like a crafting business on Etsy, online tutoring, blogging or gig work can be a simple income addition.

You still have time to consider the long game, don’t jump the gun for fear of things getting worse over the next couple years. Be proactive about setting yourself up for success and become very familiar with your current portfolio.

If you’ve got decades before retirement, don’t sweat it — maximize the time you have now

For Millennials and Gen-Zers who are just getting started on retirement investing, stay the course. Investing is all about long-term strategy and you’ve got plenty of time. With retirement decades away, the market gains and losses aren’t very impactful. The investment will self-correct and it’s unlikely you’ll feel the effects of the pandemic on your funds by the time you retire in 40 or so years. However, continue contributing to your retirement starting as early as possible to take advantage of the time you have now.

“I would encourage everyone to contribute as much as they can reasonably afford to their 401(k). Especially in their early years, the effects of compounding interest and the tax advantages really add up over time,” adds Todd Soltow, co-founder of Frontier Wealth Management. “At a minimum, you should always contribute an amount that maximizes any employer contribution.”

Experts note that you should be contributing at least enough for the full match of your employer if they offer that benefit. For example, if your company matches contributions up to 4%, then 4% should be your minimum contribution. That 401(k) matching benefit is free money, so take full advantage of it.

Consider slowing contributions and taking a more passive approach if you have significant debt to pay off and need to build up an emergency fund — both of which will be especially important during a recession. But if you can afford it, increasing your contribution while the markets are lower can pay off big time as it compounds over the next few decades.

[Read: Roth IRA vs 401(k)? You May Not Have to Choose]

Open a Roth IRA to increase your retirement savings

No matter how far from retirement you are, opening a Roth individual retirement account (IRA) is a great way to benefit your retirement fund.

“Now is also a great time to utilize a Roth IRA option in your 401(k) if your employer offers it,” says Gary Borowiec, Chartered Financial Consultant (ChFC) and CEO of Madison & Main Advisors. “With a Roth, you pay taxes upfront based on your current tax rate instead of when you withdraw your savings in retirement — and your account grows tax-free all the while.”

When you invest in a Roth IRA, you are investing your post-tax money in return for tax-free withdrawals. The future inevitably holds tax increases and inflation, making a Roth IRA a great way to make the most of your savings. While most employers don’t offer a Roth IRA, you can open an account on your own.

Too long, didn’t read?

Though 2020 has certainly been unprecedented, market volatility is normal. Now is a great time to reexamine your retirement strategy but don’t make any sudden decisions. Consider speaking with a financial advisor, especially if you want to retire soon and need to make more immediate or drastic changes.

Keep reading

We welcome your feedback on this article. Contact us at [email protected] with comments or questions.

The post Should COVID-19 Change Your Retirement Plans? appeared first on The Simple Dollar.

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Don’t Freak Out — Your Retirement Fund Is Probably Fine

Among the many financial uncertainties you’re experiencing as a global pandemic upheaves the country’s economy, retirement funds might be top of mind. A new survey by TransAmerica reported that 23% of workers feel their confidence in retiring comfortably has declined in light of COVID-19.

The most important thing to remember in the face of uncertainty is to not make any rash decisions. Volatility in the market is a normal factor in retirement funding and almost everyone will experience it at least once. Though this specific volatility is unique, it’s a common factor for financial investments.

Planning for retirement is not a set-it-and-forget-it investment — you must actively monitor your accounts to ensure your money is working for you so you can retire comfortably.

“Retirement planning is a continuous process of assessing your current position, implementing adjustments if needed and monitoring the results,” says Todd Soltow, the co-founder of Frontier Wealth Management.

The key to a successful retirement hasn’t changed; proactive planning and thoughtful strategy are needed to achieve retirement goals. The particular strategy will vary depending on how far away from retirement you are.

If you wanted to retire this year, don’t panic — reevaluate your goals

If you were planning on retiring in 2020 or even 2021, the pandemic-related market changes may have spooked you.

“Many 401(k)s we are seeing are now positive over the last 12 months, after being down 20% or more just a few months ago,” explains Matt Hylland, financial planner at Arnold and Mote Wealth Management. “You certainly do not need to delay retirement just because of the pandemic. However, you need to make sure your retirement portfolio is in order. The key is to be in a set of investments that you are comfortable with to ride out periods like we just experienced.”

You might want to make quick changes like buying a retirement property — but it’s a seller’s market right now. You might also think about liquidating your retirement fund into cash, but you’ll lose out when the markets take off again in addition to losing value on that cash due to inflation.

Keep calm as you examine your current retirement funds and play out all your options. Do some cash flow simulations and stress tests to see what it’d look like for your retirement portfolio if you started withdrawing soon. Depending on how diverse your portfolio is, you may be good to go without making changes.

[Read: The Easy Path to Retirement]

Perhaps the biggest reason to consider delaying retirement is sequence risk returns. This concept refers to how a bad return at the beginning of your retirement will negatively impact the entire life-long value of the fund.

Imagine it as the reverse of investing young and seeing it compound — by taking out during a dip in the market, the amount that would have continued to grow decreases. Because the market is in a negative trend, each withdrawal is not balanced out by market gains and there’s less money in the fund to grow over time. It can be a complicated concept in theory, but by playing out the hypothetical impact on your own portfolio, you can get a clear idea of what withdrawing now will do to your fund.

Though you can retire and receive Social Security benefits as early as 62, you may want to delay if you’re not at the Full Retirement Age, which is 66 to 67, depending on the year you were born. By waiting until you reach FRA, your monthly benefits will increase when you do retire (by a percentage based on your birth year.)

You certainly do not need to delay retirement just because of the pandemic.
– Matt Hyland

If you delay retirement past the FRA, the benefit increases further until age 69. If you have the means to continue working, delaying your retirement could lead to an increase in benefits (and more income to contribute) that will offset any hits your 401(k) is experiencing right now.

If your portfolio is feeling too risky, you can certainly reallocate to more stable investments.

“We have found several retirees who were invested in high-yield bonds who realized they were too risky of investments for them in their retirement portfolios,” Hyland explains. “Prices have largely recovered, and now is a great time to make changes to safer bonds, such as treasuries, to reduce volatility for the next decline.”

If you were planning on retiring soon and need help mapping out the current market’s impact, you should consult with a financial advisor.

If retirement is on the horizon, be proactive — revisit your portfolio and finances

If retiring is the next big milestone and you’re starting to plan for it in the next 5 to 20 years,, you’ll want to revisit your portfolio. You may have less time to recover from the economic effects of pandemic than younger generations, but you still have time to make big changes before retirement.

Here are some ways you can be proactive about retirement right now:

  • Pay off debt. Except for perhaps your mortgage, all other debt should be prioritized. A recession can mean a less stable source of income and you’ll need everything you have for cost of living expenses and emergency funds.
  • Diversify your portfolio. Find multiple ways to save money for retirement. This is also called a bucket plan. Invest in real estate, save cash, seek the stability of U.S. Treasury Bonds and be aggressive with some stocks.
  • Examine investment strategies. Analyze the projected returns of your current strategy and consider switching it up to maximize the current market. For example, dollar-cost averaging is a strategy often recommended for retirement funds. Its goal is to reduce the impact of market volatility by dividing up the total investment amount into periodic purchases.
  • Consider working longer. Working for a few more years than initially planned could help to increase your investments and maximize benefits. This doesn’t necessarily mean staying in your current career for longer. Side jobs like a crafting business on Etsy, online tutoring, blogging or gig work can be a simple income addition.

You still have time to consider the long game, don’t jump the gun for fear of things getting worse over the next couple years. Be proactive about setting yourself up for success and become very familiar with your current portfolio.

If you’ve got decades before retirement, don’t sweat it — maximize the time you have now

For Millennials and Gen-Zers who are just getting started on retirement investing, stay the course. Investing is all about long-term strategy and you’ve got plenty of time. With retirement decades away, the market gains and losses aren’t very impactful. The investment will self-correct and it’s unlikely you’ll feel the effects of the pandemic on your funds by the time you retire in 40 or so years. However, continue contributing to your retirement starting as early as possible to take advantage of the time you have now.

“I would encourage everyone to contribute as much as they can reasonably afford to their 401(k). Especially in their early years, the effects of compounding interest and the tax advantages really add up over time,” adds Todd Soltow, co-founder of Frontier Wealth Management. “At a minimum, you should always contribute an amount that maximizes any employer contribution.”

Experts note that you should be contributing at least enough for the full match of your employer if they offer that benefit. For example, if your company matches contributions up to 4%, then 4% should be your minimum contribution. That 401(k) matching benefit is free money, so take full advantage of it.

Consider slowing contributions and taking a more passive approach if you have significant debt to pay off and need to build up an emergency fund — both of which will be especially important during a recession. But if you can afford it, increasing your contribution while the markets are lower can pay off big time as it compounds over the next few decades.

[Read: Roth IRA vs 401(k)? You May Not Have to Choose]

Open a Roth IRA to increase your retirement savings

No matter how far from retirement you are, opening a Roth individual retirement account (IRA) is a great way to benefit your retirement fund.

“Now is also a great time to utilize a Roth IRA option in your 401(k) if your employer offers it,” says Gary Borowiec, Chartered Financial Consultant (ChFC) and CEO of Madison & Main Advisors. “With a Roth, you pay taxes upfront based on your current tax rate instead of when you withdraw your savings in retirement — and your account grows tax-free all the while.”

When you invest in a Roth IRA, you are investing your post-tax money in return for tax-free withdrawals. The future inevitably holds tax increases and inflation, making a Roth IRA a great way to make the most of your savings. While most employers don’t offer a Roth IRA, you can open an account on your own.

Too long, didn’t read?

Though 2020 has certainly been unprecedented, market volatility is normal. Now is a great time to reexamine your retirement strategy but don’t make any sudden decisions. Consider speaking with a financial advisor, especially if you want to retire soon and need to make more immediate or drastic changes.

Keep reading

We welcome your feedback on this article. Contact us at [email protected] with comments or questions.

The post Don’t Freak Out — Your Retirement Fund Is Probably Fine appeared first on The Simple Dollar.

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Betterment Review: Should You Put Your Money on This Robo-Advisor?

Robo-advisors have made investing accessible to everyday investors — which we find really exciting.

With an easy-to-use app, you can benefit from the stock market, even if you don’t have thousands of dollars to invest, cash to pay a certified financial planner, or a lick of knowledge about, you know, stocks… or bonds or assets or… did someone mention commodities?

Investing was a black box for a long time, and only wealthy people got to see inside. But technology can make things easier, and robo-advisor platforms are a perfect example. They make investing cheaper and simpler, so everyone can get on board.

Betterment is one of the most well-known robo-advisor platforms in the market. Since its founding more than a decade ago, it’s grown to include banking and affordable financial planning that let you manage most of your finances and see your outlook in one place.

Considering an account with Betterment? Here’s everything you need to know.

In this review of Betterment:

What Is Betterment?

Betterment is a financial services company that provides investment, banking and financial planning online and through the Betterment app. It’s best known as a robo-advisor for its automated investment service.

Like other robo-advisor apps, Betterment offers customized investment and financial planning to people who can’t traditionally afford professional investment advisors and financial planners.

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Our Betterment Review: At a Glance

Before we dive into the details, here’s a quick overview of Betterment.

Investment account minimum Digital: $0
nPremium: $500n
Account management fees Digital: 0.25% per year
nPremium: 0.40% per yearn
Additional fees Annual fees: ETF expense ratios
Account types Individual, Joint; Traditional, SEP and Roth IRAs; Trusts, 401(k) management

Pros

Here’s what we love about Betterment:

  • Low-cost, goal-based investing.
  • Diversified and tax-efficient investment portfolios.
  • Hands-off investment with a human advisor option and flexible portfolios for more advanced investors.
  • Socially responsible investing options.
  • Full financial outlook when you link external accounts.
  • Banking with no fees, with a high interest rate on savings.
  • Automatic balancing between checking and savings to maximize interest earned.

Cons

Here’s what we don’t love about Betterment:

  • No borrowing options.
  • No college savings account.

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Betterment Features

Betterment is on its way to becoming a one-stop shop for your financial needs. Its range of financial products and services can cover your spending, saving and investing needs, whether you’re a seasoned investor or opening a retirement account for the first time.

Betterment Digital Plan

Betterment’s basic investment portfolio is open to anyone, with a low annual fee and no minimum investment amount.

It gives you access to investment accounts for long-term saving or retirement goals — even to earn solid returns on savings for an emergency fund or major purchase.

All Betterment investors, for the standard 0.25% advisory fees, get access to:

  • Goal-based investing: Set goals for retirement savings, retirement income, an emergency fund, a major purchase and general investing, and Betterment will allocate your investments (based on risk and other factors) to best ensure you have the money you need when you need it. You can also connect external financial accounts to get a holistic snapshot of your savings, retirement funds and investments in one place.
  • Tax-loss harvesting: Tax-loss harvesting on taxable accounts (non-retirement accounts) automatically sells your stocks and other assets that drop in value — so you take a loss, lowering your tax bill by offsetting capital gains.
  • Charitable giving: Support causes you care about by choosing to donate shares from your taxable accounts to partner charities — and enjoy the tax benefits.
  • Financial advice: Any Betterment customer can chat with a financial advisor to answer basic financial questions through the app.

Financial Advice Packages

A woman takes a phone call while watching her daughter.

Betterment offers financial advice consulting as you need it. Anyone can set up a one-time call with a Certified Financial Planner (CFP) for personalized financial advice to plan for major life events.

Packages include:

  • Getting Started: 45-minute call to set up your Betterment account. Cost: $199.
  • Financial Checkup: 60-minute call to review your financial situation and investment portfolio. Cost: $299
  • College Planning: 60-minute call to figure out how much to save and invest for your family’s education plans, including how to set up your state’s 529 plan. Cost: $299.
  • Marriage Planning: 60-minute call with your partner for guidance on merging finances, including budgeting, goal-setting and debt management. Cost: $299.
  • Retirement Planning: 60-minute call to review your retirement accounts (within and outside of Betterment) to create a plan to stay on-target for retirement. Cost: $299.

Premium Plan

Customers with a $100,000 minimum balance in Betterment accounts can opt into the Premium Plan for an increased account management fee of 0.40%.

In addition to everything in the Digital Plan, Premium customers get:

  • More in-depth financial guidance: Get advice on investments outside of Betterment, including 401(k)s, real estate and stocks.
  • Unlimited financial planning: Get unlimited access to phone calls with a CFP for the types of guidance available in financial advice packages.

For high balances, you’ll receive a 0.10% discount on the portion of your household balance above $2 million.

Bank Account

Manage your money through Betterment’s mobile app by opening a Checking and Cash Reserve (savings) account.

  • Betterment Checking: Get a fee-free checking account and debit card backed by NBKC bank. Betterment reimburses ATM fees and foreign transaction fees, and it doesn’t charge overdraft fees.
  • Betterment Cash Reserve: Grow your savings with a no-fee, high-yield savings account, FDIC-insured up to $1 million through seven partner banks: The Bancorp Bank, Barclays, Citibank, Cross River Bank, HSBC, State Street Bank and Wells Fargo. Your balance will earn 0.40% APY.

Through its Two-Way Sweep feature, Betterment analyzes your checking account balance and spending and makes automatic deposits into your savings account. This lets you maximize the interest you earn on your cash while keeping just the right amount in checking to cover your expenses and spending habits.

Betterment also offers joint savings accounts, and joint checking is in the works.

Betterment for Business

Businesses can work with Betterment to provide an employer-sponsored 401(k) plan through Betterment for Business.

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How Betterment Works

Betterment is primarily a robo-advisor, but it also gives customers access to live human financial advisors. Its core philosophy for portfolio management is based on an investment theory called Modern Portfolio Theory — the standard in investment that says you can reduce your risk and increase your rewards by spreading investments across diverse asset classes.

Pro Tip

Asset classes are types of things you can invest in: stocks, bonds, real estate, commodities and collectibles, like fine art. Where your money is invested is called “asset allocation.”

Basically, Betterment won’t put all your financial eggs into one industry or company’s basket, so you’ll take less of a hit if any particular market takes a dive.

Portfolio Options

Betterment’s core portfolio consists of stock- and bond-based exchange-traded funds (ETFs), with asset allocation optimized for growth and tax-loss harvesting for tax efficiency. It’ll automatically rebalance your portfolio based on your risk tolerance and time horizon.

Pro Tip

Tax-loss harvesting helps lower your tax bill by reducing your overall capital gains from investing. Robo-advisors manage the feature automatically, so you don’t have to worry about the details.

You can go with that core portfolio or choose a different curated strategy based on your investing goals:

  • Socially Responsible Investing: The Socially Responsible Investing portfolio strategy follows Betterment’s core strategy but emphasizes ETFs composed of stocks of companies that meet criteria for a positive social impact.
  • Goldman Sachs Smart Beta Portfolio: Built by Goldman Sachs, this portfolio strategy uses a non-traditional approach to tracking the performance of stocks in an index (called advanced indexing) to improve your returns.
  • BlackRock Target Income: This 100%-bond portfolio built by BlackRock is a “target-income portfolio,” which aims for less risk and higher return from income by protecting you from market volatility.
  • Flexible Portfolio: Have your own ideas about investment strategy? You can opt to adjust individual asset class weights in your portfolio, instead of going with Betterment’s recommendations. You don’t have the option to choose individual companies to invest in.

The company buys fractional shares of stocks — portions of equity that aren’t a full stock. That means all your money will be invested. Brokers that only buy full shares can’t necessarily invest your full deposit, so you’d often have cash sitting in your account not earning a return.

Is Betterment a Good Investment?

A woman checks out her investments on her cell phone while getting coffee from a cafe.

You have a lot of options when you use Betterment to bank or invest.

As a robo-advisor, it’ll set you up with a portfolio strategy based on your goals and automatically rebalance based on shifts in the market and your time horizon. The company’s investment strategies are designed to maximize your returns, and minimize losses and taxes.

If the automated strategies don’t work for you, you can opt for a Flexible Portfolio and adjust your portfolio based on your own investment strategies and risk levels.

Betterment Fees

The benefit of working with a robo-advisor is that they’re easy on fees. With Betterment, you’ll pay account management fees, depending on your account level:

  • Digital: 0.25% per year
  • Premium: 0.40% per year

You’ll also pay some fees associated with trading particular ETFs. As of 2018, Betterment’s average expense ratios ranged from 0.07% to 0.15%.

Pro Tip

An expense ratio shows the portion of an ETF’s funds used for overhead rather than invested. Expense ratios are shown as a percentage; the lower, the more of your money can earn a return on investment

Is Betterment Good for Beginners?

Betterment is an easy-to-use investment app that’ll help anyone just getting started with investment.

There’s no minimum investment, you don’t have to know what’s going on with individual stocks, and a suite of free and affordable financial planning tools helps set you up with a long-term plan.

Pro Tip

Ready to start investing? Make sure to avoid these

Can You Trust Betterment?

As a fiduciary, Betterment’s first responsibility is to work in the best interest of its clients — so it’s legally (plus, karmically) bound to make responsible choices with your money. It also doesn’t own the funds it helps you invest in. It makes money when you make money, so it doesn’t have an incentive to make overly risky recommendations.

As with any investing, your accounts are also SIPC-insured in case of a problem with Betterment’s business.

Betterment uses bank-level encryption to protect financial information and personal data associated with your accounts. And it employs two-factor authentication to keep your Betterment account secure from prying eyes.

Can You Lose Money With Betterment?

You risk losing money with any investment, so your Betterment accounts could drop in value. However, all of Betterment’s investment accounts are designed for long-term savings, so you should be prepared to weather potential down-turns.

You can keep short-term savings, emergency funds and spending money in your Betterment Checking and Cash Reserve accounts or external bank accounts, where they aren’t subject to fluctuations in the stock market.

What Is the Average Return on Betterment?

Betterment created a widget in 2014 that shows how a Betterment portfolio would have performed compared to the average advised investor over the past 10 years. At the time, it would have outperformed those portfolios 88% of the time.

Average annual returns depend on the asset allocation of a portfolio (balance of stocks versus bonds). Betterment’s hypothetical historical returns between January 2004 and March 2020 range from 1.2% in a 100%-bond portfolio to 6% in a 100%-stock portfolio.

Customer Service

Betterment’s site hosts a robust archive of FAQs and resources to answer general questions about investing, finances and the app. Betterment customers can also chat with financial experts through the app or book a call to get personalized financial advice.

For other inquiries, contact:

  • Banking: Email [email protected] or call (718) 400-6898 Monday through Friday between 9 a.m. and 8 p.m. Eastern.
  • Investment and general support: Email [email protected] or call (646) 600-8263 Monday through Friday between 9 a.m. and 6 p.m Eastern (closed for market holidays).
  • Betterment for Business: Call (855) 906-5281 to ask about setting up a 401(k) for your employees.

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Is Betterment Right for You?

A man puts his leftovers in a compost bin.

Betterment is the largest independent investment firm and well-known for its user-friendly, accessible investment accounts. Depending on your financial goals, it may or may not be a great fit for you.

Betterment might be great for you if:

  • You want a low-cost, tax-efficient investment account.
  • You’re new to investing and want a simple way to plan for long-term financial goals.
  • You want to manage your banking, investing and savings all in one place.
  • You want the convenience of a robo-advisor but want to remain hands-on with your investments.
  • You have external accounts, such as an employer-sponsored retirement plan, and want to step up your investing game without losing track of all your accounts.
  • You prefer to invest in companies based on their environmental or social impact.

Betterment probably isn’t a good fit for you if:

  • Your primary investment goal is college savings.
  • You’re interested in micro-investing.

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Ready to Get Started With Betterment?

Betterment has grown over the past decade to be way more than a popular robo-advisor. Now you can manage the bulk of your financial life through this company through banking, investing, retirement savings and financial planning.

It makes these services accessible to green investors and still worthwhile for seasoned, high-dollar investors by offering a range of services and account options.

The app is a perfect place to dip your toe in the market — with no minimum investment. When you’re ready to wade into the deep end, premium options and more flexibility let you take the reins on your personal investment strategy.

To get started with Betterment, you can sign up on its website with your email address.

You’ll start by letting Betterment know what kind of account you want to open — checking, savings, long-term investing or retirement. Before opening an investment account, you’ll answer a few questions to help the app determine your risk tolerance and financial goals and make recommendations.

From there, you can connect external financial accounts to get a holistic look at your finances and see which goals need your attention.

Dana Sitar (@danasitar) has been writing and editing since 2011, covering personal finance, careers and digital media.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

Questions About Mortgage Escrow, Summer Camp, Glass Bottles, Stimulus Debit Cards and More

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Escrow shortage question
2. Reusing glass drink bottles
3. Retirement savings in my 40s
4. Frugal summer camp replacement ideas
5. Home delivery without getting scammed
6. Suggestions for mortgage payment troubles
7. Traditional or Roth 401(k)?
8. Glass jars for windowsill garden
9. Endless insurance rate cycle
10. Financial role models
11. Cheap caffeine
12. Stimulus debit card question

Many reader mailbag questions come about as a result of a longer conversation, in which a series of back-and-forth exchanges are compressed down into a single question (or series of questions) and a single answer.

Often, the first question that people ask gets right to the heart of the matter, but it’s missing some key details that sway the issue one way or another. How stable is their current situation? What is the interest rate on that debt? Are there any other debts? Do they have any savings or investments? The questions go on and on.

Often, through the simple process of asking and answering those questions, the best solution becomes really obvious. It happens more often than you think.

What does that mean for you? One of the best things you can do if you have a financial problem is to sit down with your partner or with a very close friend and simply have an open conversation about the situation. Check emotions at the door. The goal is to come up with the best route forward. Often, the simple back and forth of questions and answers between a struggling person and someone who cares about that person reveals the best path forward. Open, trusting conversation with negative emotions checked at the door is one of the most powerful tools we have as people for solving not just financial problems, but life problems of all kinds.

On with this week’s questions (quite a few of which are compressed from longer conversations).

Q1: Escrow shortage question

My escrow account has a shortage and I am faced with the question of: Do I pay it in full or pay it off in installments throughout the year? Escrow shortage happened because taxes and insurance went up and it has happened every year since 2012. No fees for escrow shortage but it is annoying to deal with extra payment. Account offers no interest on escrow money. I’ve done both single payment and installments, but I thought I’d ask your opinion on the best option.
– Brenda

If there’s no penalty for making installment payments rather than a lump sum, and there is no financial benefit for having extra money in the escrow, I would pay this as slowly as possible, keeping money in your own accounts rather than handing it to them.

If you have enough to make a lump sum payment, great — put it in a savings account where it will at least accrue a little interest for you while you make payments. Ideally, you’re able to make automatic payments and you can transfer enough from savings each month (automatically) to cover those payments.

Unless a mortgage escrow account incentivizes you to have extra money in there, either with the “carrot” of interest or the “stick” of penalties, you shouldn’t have any more than the minimum in that escrow account.

Q2: Reusing glass drink bottles

A good strategy for making iced tea and cold brew coffee at home is to get a bunch of reusable glass drink bottles like Snapple bottles and taking off the label and filling them when you make a batch. I have a bunch of 16 oz Snapple bottles that I have been using for years. I make a gallon batch of iced tea and fill about eight of them and keep them in the fridge. When I drink one it goes in the dishwasher. I usually make a new batch when I’m down to three or four in the fridge, then I put new ones behind the old ones.
– Emily

This is a really good idea! I use an old pitcher to store my cold brew coffee and just pour out a cup each morning or put it in a water bottle if I want to take it with me, but this seems more convenient.

The trick is that Snapple bottles seem to be in plastic only unless you buy a six-pack or 12-pack of them. If you bought a 12-pack, that would be a good starter setup for this kind of system. You’d be paying around $8 to $10 for 12 bottles of Snapple, which isn’t the worst thing in the world.

I can see myself migrating to this kind of system in the future. I make cold brew coffee in roughly 24-ounce batches, so I could just mostly fill up two Snapple bottles. Alternately, I could just move to a larger scale cold brew system, or make two batches at once.

It’s all about making inexpensive, good, convenient coffee and tea!

Q3: Retirement savings in my 40s

I’m 42, male, single, never intend to marry. I’ve had a bunch of jobs over the years but never bothered to contribute to retirement except for one job that contributed automatically on my behalf. I woke up one day recently and realized that I need to start doing this unless I want to work forever and I most certainly don’t! I’ve been reading about investing for retirement and I don’t really know where to start other than just putting money in my 401(k). Is that the right move for me?
– Daniel

I can absolutely guarantee that contributing to your 401(k) at work is a good move, but I can’t guarantee that it is the best thing you can do without a lot of additional information.

For starters, does your workplace offer any sort of contribution matching? If so, contributing to your 401(k) becomes practically essential — you want to gobble up every possible dime of matching because that’s basically free retirement money.

Is your income below $124,000 a year? If so, you should consider a Roth 401(k) (if it’s available through your workplace). If your income is in this range but you don’t have a Roth 401(k) at work and your employer doesn’t offer matching, you should open a Roth IRA for yourself and prioritize putting money in there. You’re capped at a total of $6,000 per year that you’re allowed to contribute to a Roth IRA, which is a hair more than $100 per week. If you use a Roth IRA, automate the contributions. This is essential. Don’t trust that you’ll just remember to do it.

Then there’s the issue of what to do with the money once it’s in retirement. The best option for most people who don’t want to spend a ton of time evaluating retirement options is to simply put it in a Target Retirement fund. Most 401(k)s and Roth IRAs offer several Target Retirement funds — you’ll want to choose one with a year close to when you’ll turn 65. For you, that would probably be a Target Retirement 2045 fund.

A final thing to consider: since you are starting later in life, you are already behind a little in terms of contributions. You will want to contribute as much as you can. You should be aiming to get every dime of matching funds from your employer. You should strive to max out your Roth IRA contributions if you possibly can, and contribute even more to your 401(k). The more you contribute right away, the better off you’ll be.

Q4: Frugal summer camp replacement ideas

My children go to a church summer camp each year but this year the camp is closed. They are so disappointed. My husband and I usually use that week for a staycation so we were thinking about trying to recreate a camp like that for them but we don’t know the first thing about how to do it and don’t have a big budget for it. The camp refunded their fees and we could add a little more, maybe $500 total? Ideas? Also want to socially distance if possible.
– Angela

Go camping! That’s your solution right there!

Go buy a sturdy family tent. Find a spot somewhere secluded — maybe a truly private campsite via Hipcamp. Pack up the car with the tent, pillows, sleeping bags, and plenty of food, and just camp. Camp for four days or so. Aim to do it during a week — Monday to Friday — as campgrounds are often pretty empty, especially smaller and more rural ones, though this summer may be an exception.

Fill your days with hiking on trails, swimming, canoeing, climbing trees, going geocaching, birding, whatever fits the bill based on the campsite you’ve chosen. Have them heavily involved in everything, from pitching the tent to making the fire to cooking the food. Get absurd amounts of fresh air.

Yeah, it’ll be different than their normal camp, and it will be a very different experience for you and your husband, particularly if you’ve never camped before, but it’s a pretty good substitute for a summer camp given your constraints.

If you’ve never done this before, here’s my guide for first-time campers. REI also has a great guide for your first time camping.

Q5: Home delivery without getting scammed

In my community, an enterprising young man started a home delivery service where he’d basically run any errand you’d like and pick things up for you for a reasonable fee. He started this in a community Facebook group. He stopped doing this after two weeks because he said that several people had scammed him, usually not paying him at all and leaving him with unwanted stuff or refusing to pay him any fee. How does one get a small business like this running without getting scammed and without appearing like you’re scamming customers?
– Barry

With any business like this, either the person doing the delivery or the person paying for the service is going to have to take the risk of getting scammed. In general, businesses like this get going by having a strong reputation upon which they can insist that people pay them beforehand for the items. That reputation means that they’re the trustworthy person in the exchange and thus can ask for upfront payment.

So, the best way to start with this is to be very selective with customers, choosing only customers that you really trust. Once you have some successful deliveries and good feedback from customers, ask them to share that feedback locally, thus establishing the strong reputation you need to be able to ask for upfront payment.

A friend of mine did this and asked for a flat $10 delivery fee as long as the item was within a certain radius, with a small addition if there were multiple items to be delivered at once from different places (so, he might grab your library books and pick up an item from the hardware store for you for, say, $13). He delivered library books, groceries, and other things. The way he got started is by doing several deliveries at the start for free in exchange for a good online review, then he began to charge for it upfront, accepting PayPal and Venmo for online payment.

Q6: Suggestions for mortgage payment troubles

Not really a question just some advice for folks who might be unable to pay their mortgage right now. First of all TALK TO YOUR LENDER ASAP. Don’t hide and don’t avoid contact with them. Talk to them! They would much rather work with someone who was obviously trying to get through a difficult time than someone avoiding them. Mortgage holders almost always lose if they have to foreclose and they don’t really want to do that unless they don’t have other options. They’d rather have a bumpy road of payments for a while than have to deal with foreclosure.

When you call your lender HAVE A PLAN. Figure out what you can afford to pay each month or if you can’t ask about some kind of forbearance for a few months. Don’t get on the phone without knowing what you can actually manage.

Most lenders right now are going to be really slow with foreclosure because it is just a terrible option for them. Remember that. Be proactive and you will not be the “low hanging fruit” for foreclosure. They will foreclose on the “low hanging fruit” first and that’s people who aren’t even trying to work with them.
– David

This is really good advice. Whenever you are really struggling to cover a debt or make a payment, the best thing you can do is contact the debt holder as soon as possible and see what you can work out. Repossession is a terrible conclusion for everyone involved. They’re losing money and you’re losing money. It is a losing proposition for everyone.

The second you feel like you’re on unstable financial ground, that there is a real risk that you can’t make a full debt payment, figure out what you actually can pay, then give them a call. The best move is to do this before you’re ever even late, but even if you are late on your payment, it’s still better than nothing.

Remember, they’re better off working with you (up to a point) than they are having to foreclose on your house. If they foreclose on your house, they have to cover all of the expenses related to the foreclosure process and then involve themselves in the process of selling that house to someone else (which involves even more expenses). They’d rather not, and if they see a reasonable path for keeping you in the home beyond this immediate rough patch, they’d rather do that. That’s why mortgage lenders don’t immediately repossess homes when someone is just a little bit late — they wait for months and months in most cases. Understand that, but understand that you need to have a plan, too. You both come out better if you work together and meet in a middle place where you stay in your home for now and they receive at least some income from the mortgage for now.

Q7: Traditional or Roth 401(k)?

My workplace offers both Traditional or Roth 401(k). Which one should I be contributing to?
– Charlie

First of all, let’s consider what would make each option “best.” The traditional option is best if the marginal tax rate you’re paying right now is higher than the marginal tax rate you will pay in retirement. The Roth option is best if the marginal tax rate you’re paying right now is lower than the marginal tax rate you will pay in retirement.

“Marginal tax rate” is the amount of tax you’d pay on an additional dollar of income. So, if you’re in the 30% tax bracket, your marginal tax rate is 30%, because the next dollar of income you earn will have a 30% tax applied to it.

The question is what will your marginal tax rate be in retirement? It’s impossible to know what the future holds for tax rates. My belief is that they will go up somewhat, but not tremendously. However, you probably have some idea of how your annual expenses in retirement will compare to your income right now.

If you expect your expenses to be a bit lower than, similar to, or higher than your income right now, you should probably use a Roth. The lower your income is, the more true this likely will be.

If you expect your expenses to be substantially lower than your income right now, you should probably stick with a traditional account. The higher your income is, the more true this likely will be.

I’m personally trying to use Roth retirement plans as much as possible, as I expect our expenses in retirement to be similar to our income now and I expect tax rates to go up a little between now and then.

Q8: Glass jars for windowsill garden

Saw some pictures on Facebook of people growing herbs in a windowsill. They had glass jars with soil in them and herbs growing out the top. Some people said this isn’t a good idea because plants might drown. Wanted your take before I bothered.
– Dani

The problem with using a glass jar as a planter is that there’s no drainage out of the bottom of the jar. This means that if you water the plant too much, the excess water can’t drain out of the bottom, meaning that you can essentially drown the plants. This doesn’t happen if you’re careful with watering, but it can happen pretty easily. I speak from experience.

A much better approach, particularly if you’re new to gardening, is to use plastic Solo cups and pop some tiny holes in the bottom of the cup. Then, put some styrofoam peanuts or gravel to fill maybe the bottom quarter of the cup, then put a circle of newspaper on top of the peanuts/gravel, then add soil on top of that. That way, if you over water, it will drip down through the newspaper and gravel/peanuts and then out the bottom without drowning the plant. You would then just set the cup on a saucer or other shallow container so that the water doesn’t run everywhere. This makes it practically impossible to drown your little plant!

I will be sharing a guide later this week on windowsill herb gardens. They’re really easy and cheap to start!

Q9: Endless insurance rate cycle

Does this always happen? About eight years ago I switched homeowners insurance because the rates seemed high and I heard they were lower if you switched. I switched to [a major insurer] and my rates dropped about 40%. The first year or two was fine, then premiums started inching up and last year I paid more than I ever did. So I shopped around and switched to [another insurer] and saved about 30%. Now my renewal came and sure enough, the premium went up about 10%. Is this just how they do business?
– Tammy

While I’m not going to say that this is a guaranteed tactic in the insurance industry, it’s definitely a common one. Insurers will throw a really low rate at you to get you to switch, then gently nudge that rate upwards over several billing cycles under the belief you’ll stick with them because it’s less hassle than shopping around.

Thus, it’s a good idea to shop around for auto and homeowners insurance every few years so that you tap into those introductory rates you get for switching. Then, when they start nudging things up too high, you just jump ship again.

It’s generally not worth it to switch if your rates are only 10% – 20% higher than they were when you first switched, but when you start seeing rates that are 40% or more above what your initial rate was, it’s time to start shopping around. In my experience, this takes a few years.

Q10: Financial role models

I have been naturally frugal as an adult and I realize now that it was because of my aunt and uncle. They were really frugal but they had such a cool unique home, and she was always showing me good things to do with stuff other people thought was trash. She’d give really cool gifts and they would be wrapped in brown paper (from grocery bags) or comic pages from the newspaper and I found out later she’d buy gifts all through the year and pay maybe $5-$10 for something that might cost $50. She inspired me to be frugal. I try to pass this along to my own nieces and nephews now by being that same kind of “cool, frugal” aunt.
– Dana

That’s a great idea! So many of the things we do as adults were inspired by good role models from our childhood.

For example, one of my big hobbies is making fermented foods and preserving them, and that’s something I learned from my father, who used to make big crocks of sauerkraut in the garage. It’s such a great way to turn abundant garden vegetables (and cheap produce from the store) into tasty healthy foods that last for a long time, plus it’s fun to do. I also picked up a lot of “fix it yourself” passion from him. From my mom, I picked up a passion for cooking at home and coming up with creative meals with what we have on hand.

It’s harder, I think, to find these kinds of inspirations as an adult. The easiest way is to try to establish friendships with people who practice frugality or practice the kind of financial restraint you want to have in your own life. Most of my friends are frugal and are fairly careful about their spending.

Q11: Cheap caffeine

What is the cheapest way to keep enjoying caffeinated drinks when I study? I added up the cost of soda and coffee and it is just too expensive, I can’t afford it. But I crash hard and have headaches if I don’t have something caffeinated.
– Brian

The cheapest caffeinated drink I know of is black tea. You can get a lot of black tea bags really cheaply — for example, you can get 312 bags of Lipton black tea on Amazon for less than $10.

You need about six tea bags and a gallon of cold water to make sun tea – you just need a gallon glass jar and a sunny spot. Put the bags in there, wait 24 hours, remove the bags, and you have a gallon of unsweetened black tea, which will definitely give you a nice little caffeine hit.

That box of tea bags will make 52 gallons of black tea. If you drink 16 ounces per study session, that’s 8 study sessions per gallon or about two and a half cents per 16 ounces drink. You can fill a 32-ounce water bottle of this stuff for a nickel’s worth of tea.

I don’t know of anything cheaper for getting your caffeine fix.

Q12: Stimulus debit card question

Got my stimulus debit card on Friday. I almost threw it away because it looked like junk mail! Should I just use this instead of cash or what? Seems like they want you to go waste it on stuff because it looks like a credit card.
– Chris

The smart thing to do with it is to use it at the grocery store instead of using cash or a credit card or your bank card, then use the money you didn’t spend to make a big extra payment on any debts or build up an emergency fund.

Let’s say you got a $1,200 debit card and you have $2,000 in credit card debt. If you buy $100 in groceries a week, just start using the debit card for groceries, then make a $400 extra payment on that credit card each of the next three months. You’ll pay off more than half the card.

The trick, then, is to utilize self-control and not just spend it. The stimulus money should be used to shore up your financial foundation, not to spend it on stuff you would not have bought anyway.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.

The post Questions About Mortgage Escrow, Summer Camp, Glass Bottles, Stimulus Debit Cards and More appeared first on The Simple Dollar.

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David

Questions About Rebalancing, Roth Contributions, Cash in Hand, Disney+, and More!

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Rebalancing my retirement funds
2. 2019 Roth IRA contribution date?
3. Prepping as hobby after this?
4. Work from home new normal?
5. Disney+ and family movie night
6. Withdrawing cash from bank?
7. Helping out while unemployed
8. Mortgage break question
9. Water and routines
10. Early retirement still a goal?
11. Stretching as time to relax
12. Handling the funk

Many of the questions that people have asked recently center around what happens after all of this is over. When things return to normal, what will we do?

The truth is that no one knows what will happen when things return to normal. No one. We all thirst for answers, but we’re at one of those turning points where there are no answers.

Some things — many things — will return to the way things were. Other things? It’s hard to say. I think there are a lot of businesses that are going to have a very hard time surviving and coming back from this. I think that some aspects of daily life will change for everyone, at least for a while, and I expect that there will be some differences between the way things were and the “new normal” that will emerge.

I will mention three things that have given me some solace during these times.

One, the Spanish flu of 1918 to 1919 was followed pretty directly by the “roaring ’20s,” a 10-year economic boom.

Two, this is a society-wide shared experience. So many of us are going through the same things right now, across economic and social differences. People throughout the world, similar to you and different from you, are going through very similar things and having very similar feelings to you, right now. We all have way more in common than the differences between us. We’re all experiencing the same worries and fears and many of the same moments of grace. Undoubtedly, some of us will suffer more than others, for reasons far beyond their own choice. The question is when this is over, what can we do about it? This is a very unique time to reflect on the realities of the modern world, and we can and should take advantage of it.

Three, the more I find for my idle hands to do besides just reading the news, the better I feel. Keep busy. It helps.

On with the questions.

Q1: Rebalancing my retirement funds

I have seen a lot of people on TV suggesting that people should think about rebalancing their retirement funds right now. What does that mean?
– Alex

Let’s say that you decided a long time ago to have half of your retirement savings in a stock market index fund and the other half in a bond market index fund. When you contribute, half goes into bonds and half goes into stocks.

Over time, one of them might grow in value more than the other one, or one of them might lose value more than the other. However, you want to stick by your plan to have half of your money in stocks and half of your money in bonds. The way you’d do that is by taking money out of the more valuable one and putting it in the less valuable one so that they’re 50/50 again.

That’s rebalancing.

Now, is rebalancing a good idea right now? It’s really hard to say. In general, the advice is that one shouldn’t rebalance in a period of high volatility, and we’re certainly in a period of high volatility in almost every economic market.

If you feel a strong desire to rebalance right now, I would encourage you to simply change your contributions rather than changing your current investments in a way that you feel will lead you back to where you want to go.

If you just have money in a target retirement fund, the consensus seems to be that people should sit tight and wait out this roller coaster drop.

Q2: 2019 Roth IRA contribution date?

I know the official filing deadline for 2019 income was pushed to July 15 but I can’t find any info about whether you can still do 2019 Roth contributions until then.
– Jerry

Yes, the official filing deadline for 2019 income has been pushed to July 15. The previous deadline seems to still apply, which was that 2019 Roth or traditional IRA contributions need to happen on or before April 15 or the day on which you file, whichever is earlier.

To be safe, I would make those contributions before that date. I think there is some chance this deadline will be extended as well (and perhaps it has, by this writing), but I wouldn’t bet on it.

This does not affect 2020 contributions. This is just some extra time to make contributions that count for 2019.

Q3: Prepping as hobby after this?

I wonder if there will be a boom in “doomsday prepping” as a hobby after this where people prepare their homes to be places that they don’t have to leave for several months if needed.
– Thomas

I can definitely see this happening for a certain segment of the country, particularly homeowners who see their situation as being more fragile than they thought.

Honestly, in terms of hobbies that are financially reasonable, some level of preparedness has a lot of value. Having a lot of canned goods that can last for years, having a garden that produces food, having chickens that can produce food, having a generator and so on. Those things are items that can seriously help in challenging moments.

Prior to this, our level of “preparedness” mostly centered around having a lot of dry goods on hand — beans, rice, pasta, and flour, along with household supplies. We mostly do this because we actively use this stuff and buying it in bulk is a money saver if you’ve got room to store it (which we do). We also actively garden — in fact, we expect to use time in April as the weather warms here in Iowa to get our garden in tremendous shape, and I expect we’ll have the best vegetable garden of our lives this year. We have a bunch of compost ready to go (from simply dumping it in the bin) as we didn’t use much of it last year, so the soil should be really rich, and we have tons of time to get a garden going and may end up using more of our yard for gardens than we have in the past. Some of our neighbors are doing this as well, which makes me wonder what farmers’ markets will be like this fall.

Anyway, it’s a very interesting thought.

Q4: Work from home new normal?

My job moved to work-from-home almost four weeks ago now and it seems to be working out for a lot of people. We have figured out some good ways of communicating with each other and I feel like I have way more time to just focus on my harder tasks without being interrupted with office chatter since I can so easily turn it off for a while. I am actually wondering whether we will even return to working in an office and then that leaves me wondering whether this will be a thing for a lot of people with desk jobs in the future.
– Derek

I expect that a lot of jobs that weren’t previously work-at-home jobs may become work-at-home jobs after this, and I think the skill set needed to really make working from home productive will become more valuable than ever. Self-directed people who can just get their stuff done without needing a boss over their shoulders are going to become even more valuable.

I suspect that some jobs will return to office environments, but I expect that will change to some extent, with people able to work from home at least part of the time if their work allows it.

This is one of those things where I think the world will change a little after this. For a lot of information economy people, it’s going to be shown that you don’t need to be in an office to get work done, and that’s going to change a lot of policies at a lot of companies. I suspect partial work-from-home will become a very big thing in the coming years, and full work-from-home will happen more and more often.

I’m going to have an article later this week that’s a thorough beginner’s guide to working from home, sharing everything I’ve learned about making it work and hitting deadlines while working from home the last 10-plus years. I hope that the advice is valuable to those working on making that transition.

Q5: Disney+ and family movie night

Wanted to say that with two young kids at home subscribing to Disney+ has been a huge lifesaver. We have made watching a Disney or Pixar movie a nightly “movie night” tradition that the kids look forward to. We are watching Disney movies and Pixar movies in release order, alternating back and forth. It costs $7 for a month. Given the sanity and regularity it has brought to our family right now, best deal ever.
– Jill

It has all of the Disney, Pixar movies, Marvel and Star Wars movies. Even if you just subscribe for a month, $7 gives you a pretty healthy pile of family movie nights.

My general feeling on streaming services is that it’s a good idea to hop between them. Stick with one until you’ve watched everything of real interest to you on there (and the rabbit hole is pretty deep on some of them, especially Netflix), then cancel (or pause) and move to another.

I will say that if you’re dealing with kids at home right now, particularly multiple kids, having a fresh kid-friendly movie to watch pretty much every evening as a “routine” to provide some normalcy and joy to your days is a good pattern, and Disney+ is pretty good for that if you have decent internet service.

Q6: Withdrawing cash from bank?

Do you think it’s a good idea to withdraw some cash from the bank right now?
– Jim

Unless you have more than $250,000 in cash sitting in the bank, there isn’t much of a reason to have more cash on hand than you might need during a typical week. Having more cash than that on hand turns one type of risk into another type of risk.

The advantage of leaving cash in the bank is that it’s FDIC insured up to $250,000. That insurance has never failed, ever, and if it did, it would likely mean that your cash is worthless, too. It’s honestly safer in the bank than it is in your house.

So, why should you have any cash at all? There are times where you need cash where you might not be able to make it to the bank, and having enough cash in hand to get through those moments is a good idea. I’d have enough cash on hand to buy a week’s worth of living expenses, but there’s no real need to have more than that. Again, if the FDIC fails, the dollar is probably collapsing and this is a non-issue.

Q7: Helping out while unemployed

Currently unemployed, the restaurant where I worked maybe out of business. Husband works from home right now and says his job is fine. Not sure what I can do right now to help with money.
– Kelly

One major thing you can do is to be as supportive as you can of your partner while he’s working from home. Give him uninterrupted time and space to focus on work tasks and keeping that job. Don’t interrupt him unless it is really urgent.

When he’s working, fill those hours being productive yourself. Make all the meals and some extras to put in the freezer. Make a meal plan for the coming week. Get caught up on every household chore. Do maintenance on the appliances, and if you don’t know what to do, look them up. Go through all of your bills and cancel any services and subscriptions you’re not really using. If you run out of things to do, look through this list for more ideas. If there’s anything you can do to get yourself ready to return to the workplace, do that, too – it’s really hard to guess what that might be without knowing more of your background, but there may be things you can do.

Treat the time he’s working as time you’re working, too, on those household tasks, so that you can spend leisure time together when he’s done working. Keeping yourself busy keeps your mind straight, too.

Q8: Mortgage break question

My mortgage lender sent me a letter informing me that my mortgage is on a six-month break, meaning I don’t have to make payments and interest won’t be accrued. Should I continue to make payments on it if my situation is okay?
– Darrell

If I were you and the mortgage is not accruing interest for six months, I would make those “payments” to a savings account of some kind and then turn over that lump sum in six months when normal payments start again.

The big reason for doing this is that there’s no reason to lock down that money in your mortgage. If you make a mortgage payment with it, that money’s effectively locked up and you can’t do anything with it if you need to. There’s also the second factor that the money will earn a little bit for you in savings over the next several months.

There is the temptation to use the money for something else, but if you have some financial diligence, you should be able to resist using it unless a major emergency occurs.

Q9: Water and routines

Something I have learned during this is that I don’t drink enough water! Before I always had a mug of some kind of beverage on my desk usually soda or coffee but at home, I don’t do it. I realized that I felt kind of funny and that’s why! So I started having a big 32-ounce water bottle with me all the time at home and it has helped!
– Annie

It’s funny what you notice when you completely upend your daily routines. If you have a set routine that you do each day and then suddenly that routine is completely upended, it’s not surprising that there are ripple effects like this.

For example, I used to have a daily work routine that worked really well when the kids were in school, and then another daily routine that worked well during the summer when I could work part of the time at the library. Since the kids are home and the library is closed, I’ve had to kind of ad-lib my daily working routine and come up with something that works. It involves working in one spot in the morning, then to another spot for working in the afternoons, and a lot of time with noise-canceling headphones on my head.

We’re all figuring it out as we go!

Q10: Early retirement still a goal?

Do you feel that your goal of retiring early which a lot of people have these days isn’t realistic anymore?
– Keith

Honestly, I don’t know. Sarah and I were looking at a 10- to 15-year timeframe for our early retirement, putting us in our early-50s. Our goal was to make sure all of our children were out on their own before officially deciding to retire. We hadn’t made any direct financial moves that assumed an early retirement date.

I did expect at least one or two major stock market corrections before we retired, so this isn’t completely unexpected.

I feel much worse for folks who were either near a decision like this or had recently made it. For almost all of them, their plans are now in complete disarray on top of all of the other societal uncertainty going on. However, no matter how things turn out for those folks, they do at least have a nice financial cushion that should last for a while, even if it means returning to work or making other unexpected changes.

Q11: Stretching as time to relax

Wanted to really recommend stretching/simple yoga as time to relax and calm the mind. You can do it basically anywhere and if you just let yourself go in the moment it really feels like a brain reset. Helping a lot right now!
– Mindy

I wholeheartedly agree! I often talk about meditation, which is something that’s really helpful to me, but yoga/stretching and prayer and journaling are all things people can do to really relax their mind in a deep way, and that can really help during this time.

I really like this 30 days of yoga series from Yoga with Adriene as a starting point for people new to this. It starts off really gentle and easy.

This is a really nice simple breathing meditation, fairly similar to what I do. It’s worth noting that this exact practice works well as a prayer of sorts – do this exactly the same way, except make a short repeated prayer your source of focus.

This is a stretching routine I really like, too. For a long time, I did this daily, but I now do my own thing that’s a little different (I do it most days).

All of these things provide a great opportunity to let your mind unwind a little bit and de-stress. I do at least one of these things each day, usually more than one, and it always helps. I feel better afterward, and it feels like it builds on itself if I do it every day for a while.

Q12: Handling the funk

The biggest challenge for me right now is that I seem to kind of fall into a funk a couple of times a day where I just want to sit here and curl up under a blanket and cry for hours. I have to make myself get up and do something.
– Denise

I think we’re all feeling some of this. And I think you have the answer already — make yourself get up and do something.

Writing is a big part of what I’m doing to keep sane. I’m finding questions that people are asking or things that I see people I know worrying about, and then I research them and look for what I know and what I’ve stored in my big archive of notes (I have all kinds of notes for post ideas or general reference squirreled away in Evernote), and try to answer that by turning it into an article. Almost everything I’ve written in the last two weeks has been an attempt to answer a worry or a stress that someone’s had, and doing that is keeping me focused.

It is hard, and there is a temptation to fall into a spiral of grief, but the best antidote I know of is to, as you say, make myself get up and do something. If I can’t write, I read. Sometimes it’s work-related, sometimes it’s just a fun novel. I try to get some exercise. I do some projects around the house. I play a game with my kids, play a computer game, or just have a chat with Sarah. When the weather isn’t cold, I like going out in the yard or taking a short walk (I live pretty rural, so I can go on a walk and not see another living soul other than maybe a car or two going by if I go in the right direction).

Get up and keep going. Take it one day at a time. It’s the best any of us can do.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.

The post Questions About Rebalancing, Roth Contributions, Cash in Hand, Disney+, and More! appeared first on The Simple Dollar.

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Questions About Building Skills, Building Routines, Emergency Funds, Stocks and More

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Lost my job. Now what?
2. Skill building during time off
3. Contributing to Roth IRA early?
4. Why are stocks crashing?
5. Free educational resources
6. Net worth calculation of debts
7. Simplest meals
8. Saving fresh vegetables
9. Bump up emergency fund?
10. Buying stocks?
11. Building some “home systems”
12. Dealing with all of this

This is going to be a somewhat different version of the mailbag, as most of the questions I’ve seen recently have centered around life adjustment and concerns about employment in the coming months. All of us are adjusting to a lot of changes right now.

Questions that I won’t address include opinions on public policy or direct medical questions about coronavirus. I am neither a public policy expert nor a medical expert.

Rather, I’m focusing on what I know best — personal finance and related issues.

Let’s dig in.

Q1: Lost my job. Now what?

I lost my job, not because of my own fault, but because of a big layoff of an entire shift. I have some unemployment benefits but I need a new job ASAP or there won’t be food on the table. But no one is hiring right now and a lot of places are completely closed. There are two factories kind of close that hired a few people because they’re producing a lot right now but I think they’re temps. Not sure what to do. I have $800 in my checking and scared.
– Andrew

First of all, I would strongly advise you to look to your state government for relief for your immediate situation. A lot of states are offering assistance to folks who are struggling to find work after recent layoffs in the current environment. Just Google for your state and “layoff assistance” to see what’s available. There may be extended unemployment benefits available.

Also, as of the time I’m writing this, there are a number of plans being discussed to aid all Americans in this moment of crisis. Just sit tight. Lots of people are in your situation and they’re not going to be left out.

In the meantime, try to keep yourself from dwelling on your own misfortune. Rather, do what you can to get yourself ready for opportunity. Rest up and get plenty of sleep. Eat healthy. Keep in contact with employers in your area that may have positions you’re right for. Talk to everyone you know who might have an “in” to help you find work.

You should be asking yourself what you can do to (a) get a job soon and (b) improve your chances of getting a job later, and doing those things as much as possible. Things will get better, and you’re not going to lose everything in the interim. Focus on what you can control, above all else.

This leads into the next question.

Q2: Building skills during time off

Do you have any recommendations for skills to build during time in isolation and ways to do that easily?
– Erika

There are lots of skills that you can easily build online using online courses and other tools. It really depends on what you want to learn, so I’d suggest starting there. What skill, if you added it to your skillset, could really help you in your career? Better focus? A foreign language? A computer programming language? Some new and promising areas in your field? Maybe you want to take the first steps in an entirely new career. Maybe you want to learn a particular piece of software. It’s almost unlimited.

The skill you choose should be one that really appeals to you and also is one that will provide some value to your career. Given those two factors, I can’t possibly list all of the skills one might build.

At that point, I’d use Google to search for a guide on that specific thing that you want to learn. For example, if you’re considering learning a foreign language, this is a good guide, which would then lead you to things like Conversation Exchange, Duolingo and common word lists for your preferred language (you might search for, say, “100 most common words in Spanish”).

Rather than just browsing a list, step back and ask yourself what fits you, choose something, find a guide on how to learn it, and lean into that hard over the next few weeks.

Q3: Contributing to Roth IRA early?

The stock market has fallen 20% in the last month, I have a counterintuitive idea. I’m thinking of finishing up maxing out ($3,500 left) my Roth IRA for 2020 ahead of schedule. For context, I have contributed the $6,000 maximum the last 3 years and am invested in the Vanguard 2060 Retirement Fund. I have the cash flow and know I’m not going to need to touch the funds for decades and realize the stock market is a long-term bet. Buying the shares of the 2060 Retirement Fund now when the price has fallen seems like a simple way to earn an extra 20%. Does this sound sensible or what factors am I not taking into account?
– Jeremy

First of all, let me make it clear that I don’t believe in market timing. The idea of “buy low and sell high” does make sense, but the problem is that it is almost impossible, particularly with the stock market, to tell when it is “low” and when it is “high.” You can observe that, yes, it’s lower than it was a few weeks ago, but how much lower will it go? Or is it already past the bottom?

If you look at the long-term history of the stock market — this current moment excluded because it’s honestly an exceptional moment — it is almost always better to put money in earlier rather than later. If you look at almost every year in the history of the stock market, it’s better to put in money at the start of the year than to space it out throughout the year.

If you’re worried about this crash, in particular, remember (a) it’s not the end of the world, no matter how difficult and crazy things seem at the moment; (b) basically all companies producing things people need (or nearly need) are going to still do really well, and (c) people will return to more normal routines as this passes and better treatments and vaccines are developed (and there will probably be some pent-up demands). It will take some time to recover, but things will recover.

If you are in a financially stable place where making that kind of early contribution to your Roth isn’t going to come back and bite you later in your daily life, then I’d say go for it.

Q4: Why are stocks crashing?

Can you explain why stocks are crashing? I guess I don’t understand the connection between [coronavirus] and stocks. I tried to follow on CNBC but they were talking way over my head.
– Adam

The stock market is declining in value because people are selling off stocks in companies that they think are going to be facing hard times in the near future. Travel companies, hotels, restaurants and businesses like that are likely to struggle in the next few months at least, so people are wary of owning stocks in those companies.

When there are lots of people selling, the buyers can hold out for the lowest prices and if the sellers are desperate to sell, they keep cutting their sale price until there’s a buyer. So, you may have a share that was selling for $50 yesterday, but if no one is willing to pay that today, you might decide to cut the price to $45 and see if anyone will buy it, or even to $40. If lots of people do that to lots of stocks, the stock market declines overall.

It’s worth noting that not everyone is selling. Many people are buying. Whenever someone sells a share of stock, there needs to be a buyer, and some people see a sale going on right now and are happy to buy at lower prices.

When you see a big drop in a single day, you have a lot of people who want to sell stocks and buyers are waiting until the price is low enough. When you see a big rise in a single day, the reverse is true — buyers want to buy and so sellers see a chance to jack up the prices on the shares they have. It’s not that different than a toy market at Christmas, where hot toys get marked up in value and unpopular toys are on discount.

Also, almost all of this is done by computers, nearly automatically. They talk to each other and negotiate the buying and selling.

That’s basically how the stock market works. It’s people just haggling over stocks, and right now people are wary of buying stocks in companies that might be affected by coronavirus.

Now, you might ask yourself why these shares have value at all. The reason is that each share is essentially a tiny piece of ownership in that company, and when the company is doing well and making a lot of money, each shareholder gets a tiny sliver of that money, which is called a dividend. If a company isn’t doing well, they might pay out a very small dividend or no dividend at all. If investors see a company isn’t doing well, they realize that they might not receive much dividend money from that share any time soon and thus want to sell it, and that’s exactly what’s happening.

I hope that all made sense! Follow up questions are welcome at the link at the bottom of this article!

Q5: Free educational resources

Don’t know if you saw this but Scholastic is offering a bunch of free educational materials for families and kids that are at home from school. Full books and activities and lesson plans separated by grade level. Here’s the link.
– Barry

That’s a really good resource! Thanks for sharing! It’s also near the top of our own list. In our own search for educational resources, we found these other free resources to also be very useful.

Khan Academy has a ton of resources for at-home learning. It has some good lesson plans and daily schedules for people at home right now, but the URLs seem to be changing a lot (probably because they’re updating on the fly), so just check the homepage and I’m sure you’ll find it.

If you’re specifically looking at math materials for K-8, Prodigy Math is excellent.

If you have somewhat older kids, particularly ones into computers, take a look at Code Academy, which is basically an online computer coding boot camp.

I could list tons of these, but these four are particularly good for varying ages.

Q6: Net worth calculation of debts

I have a question for calculating net worth, how do you compute the liability for loans? Do you include the interest you have to pay? Example: I have a $500,000 loan but if I compute the total amount I’ll be paying, it would be around $600,000.
– James

I think either measurement is fine. They both have advantages and disadvantages. The most important thing is to be consistent with how you do it – if you choose to calculate things one way, then stick with that for all debts.

I have personally chosen to just use the balance rather than the balance plus total interest. The reason is that, if and when I refinance or consolidate or transfer a loan to something with lower interest, that shouldn’t result in a big bump in my net worth. If I have a $5,000 debt that I’m going to owe $2,000 in interest on and then I merely transfer it to a zero interest credit card or something, that doesn’t raise my net worth.

At the same time, calculating the total of the balance and the interest you’ll owe as of this moment in time does create a more complete view of your liabilities. If you don’t change something, you will have to pay off $7,000 in total on that debt.

I don’t think you’re doing it “wrong,” no matter what you do, as long as it’s consistent throughout all of your debts.

Q7: Simplest meals

What are the simplest of the meals your family relies on? Read about them before but can’t find the link.
– Jerry

I don’t think I ever wrote about them before, but here are the two easiest ones I make regularly.

For our one-pot pasta, I just put three cups of water in a large pot, add a pinch of salt, and add a 24-ounce jar of pasta sauce and bring it to a boil. Then, I add a full 16-ounce box of spaghetti or other pasta of choice and bring it just up to a simmer. I then cook it according to package directions, uncovered, though I usually go a minute or two longer. This causes the water and sauce to boil down into a nice sauce that goes great on the pasta. That’s it! You can add all kinds of things to this if you want, but the rough structure of 3 cups of water plus a jar of sauce to a pound of dry pasta pretty much always works and produces something tasty. Plus, there’s only one dirty pot.

The other really simple thing I love to do is the three-ingredient mac and cheese. Basically, it’s just equal amounts of dry elbow macaroni, condensed milk and shredded cheese, with just a little water at the start. It takes eight minutes. You might want to double it for a family. Here’s the recipe. We’ll often pair this with a bag of flash-frozen vegetables. It’s healthier and tastier than boxed mac and cheese and not any more difficult to make.

Q8: Saving fresh vegetables

The local store is sold out of everything frozen but seems to have lots of fresh vegetables. Any easy way to freeze them?
– Dan

You can freeze many vegetables pretty easily in quart or gallon Ziploc bags. You’ll also need a pot and a bowl and a baking sheet. This works really well for things like broccoli, cauliflower, and carrots.

Cut up the vegetables into the size you’d want to use for cooking. Then, fill a pot partially full with water and raise it to a boil. While it’s getting there, fill a big bowl partially with ice water.

Toss vegetables into the boiling water for five or ten seconds, then immediately pull them out and put them in the ice water for a minute or so. Pull them from the ice water, shake off any excess water, pat them dry with a towel, and spread them out on a baking sheet. Then, pop that sheet in the freezer overnight. In the morning, fill up a Ziploc bag with those frozen veggies.

Q9: Bump up emergency fund?

Considering slowing down my retirement savings and bumping up my emergency fund for a while. I think things are OK right now but who knows what six months will bring. Thoughts?
– Colin

While I’m not sure that slowing down one’s retirement savings is the best option at the moment, it’s definitely a smart idea to pump up your emergency fund as we enter a period of definite economic uncertainty.

You might want to consider whether there are other options available to you for bumping up your emergency fund in the short term. I suspect a lot of people are spending a lot less on going out and on other nonessential items at the moment, and if that’s you, then you already have freed up some money for your emergency fund.

I think the decision to tone down retirement savings has more to do with the state of your retirement savings. Are you still on pace for a healthy retirement, even with the downturn? If so, then cutting back might be OK. If you’re not, then I’d look very hard at other places to come up with money for that emergency fund.

I do agree strongly with the general principle of ratcheting up one’s emergency fund right now, however. I’d just encourage you to step back and make sure you’re not robbing something more important.

Q10: Buying stocks?

At what point will you buy into stocks? How low will it have to go?
– Avery

I haven’t really thought about this at all. Honestly, I probably won’t buy in outside of my normal contributions.

In effect, this question is really about market timing and trying to guess where the bottom of this stock market drop is. Frankly, I have no idea. It might be today. It might be Friday. It might be next week. It might be a month from now. There’s really no way to know.

As I stated above, there is definitely a bottom somewhere. A lot of companies are not going to be deeply hurt by this, particularly ones producing essentials like foods and household supplies.

The issue is guessing where that bottom is, and I think that’s an impossible game. I don’t think anyone can guess.

Q11: Building some “home systems”

We are spending this downtime building some better “home systems” like your articles about laundry and dishwashing. Also trying to optimize meal planning, grocery lists and a few other things. Good time to reboot the way we do ordinary stuff!
– Jenny

I agree — right now is a great time to improve your routines for a lot of ordinary household tasks. Here’s what I wrote about optimizing laundry and optimizing dishwashing and an earlier article about our meal planning strategy that I will revise soon.

There are actually a lot of areas you can optimize in your life. Right now is a great time to go through literally every possession in your house and make a serious call about what’s worth keeping and what isn’t (and make big piles of stuff to sell and stuff to give away). It’s a great time to get your sleeping schedule under control (the healthiest thing you can do is to get in a routine of waking up naturally but then actually rising when you’re awake instead of lounging in bed). It’s a great time to get really efficient at making meals and get more comfortable in your home kitchen.

All of those things, over the long run, will save you a ton of money and time and energy, and if you’re stuck at home for a while, there’s no better time than right now to hammer those things in place.

Q12: Dealing with all of this

I am really struggling with everything going on. I am a teacher and am home through at least mid-April. My husband works from home. We don’t have any kids yet. Most days I just want to stay in bed all day and hide. [My husband] gets up and does his thing and is making the meals too. If this is every day now I don’t think I can do this.
– Amy

First of all, I strongly suggest adopting some kind of daily routine that involves getting out of bed when you wake up, practicing basic hygiene and doing some things each day. Maybe you can work on some lesson plans or learn effective methods of teaching online, or you can take on household tasks.

Another good thing to do is to just take long breaks from social media and the news. Put the phone away and don’t read the news. Focus instead on actually doing things and not looking at your phone all the time.

You should make sure to spend some time outside each day, if at all possible. Get some sunshine and fresh air. Make it a point to do this for at least a while each day.

Spend some time calling lots of people you know and just talking to them or video chatting with them. It helps.

I’m finding it helpful to do a lot of small things to brighten my day. I really like just going out on the back step when it’s sunny and just enjoying the sunshine, so I’m doing that whenever the weather cooperates. We’re making a lot of family-friendly tasty meals that everyone enjoys, kind of a “greatest hits” sort of thing. I just had a slice of toast with melted cheese on it, pretty much my favorite snack in existence. Little things really help.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.

The post Questions About Building Skills, Building Routines, Emergency Funds, Stocks and More appeared first on The Simple Dollar.

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The 5-Year Rule for Roth IRA Conversions – Podcast #146

Podcast # 146 Show Document: The 5-Year Rule for Roth IRA Alteration 401k

The 5-year regulation for Roth IRA Conversions can be confusing because there are two 5-year powers regarding Roth IRAs. The first five-year rule applies to Roth IRA contributions and determines whether the earnings will be tax-free. The second regulation applies to Roth alterations and applies to whether or not the principal that was converted will be penalty-free when it comes out.

In the case of shifts, each changeover amount actually has its own five year time period. With multiple shifts, there may be multiple different five year periods underway at once. When withdrawals come from the shift amounts, they’re deemed to come out on a first in first out basis, so that means that the oldest alterations, the ones most likely to have finished their five year requirement, come out firstly, and the most recent alterations “ve been coming” last.

We discuss in this episode why the rule is set up this mode and how it will affect your retirement planning. We too answer listener questions about Roth vs Traditional 401( k) contributions, employers is encouraging a different HSA for you, buying into a practice and losing your solo 401( k ), characterized benefit plans, how much cash to keep on hand, NNN owneds, and why every solo 401 k or SEP IRA isn’t self-directed.

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Repeat of the Day

Our quote of the day today comes from Benjamin Franklin who said,

” Taxes are indeed very heavy, but we are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly .”

That is especially the case, I ponder, for most doctors out there. They’re making so many business mistakes that the sum total of their financial mistakes is probably bigger than the sum total of their taxes.

The 5-Year Rule for Roth IRA Transition

A listener left a speak pipe question saying,

” I have an arcane question about mega backdoor 401 ks and five year waiting periods. I got into a bit of an argument with a collaborator about this and I was hoping that you could help end it. For background, everybody at my firm can put up to 15 percent of each paycheck into a 401 k after duty pail, and from there they can roll it over immediately to a Roth IRA or use an automated facet which will proselytize it to the Roth 401 k. The advantage of this piece is that it does so automatically after each paycheck so you don’t have to call Fidelity, which is nice, and because it’s done immediately there are never any earnings, and therefore no tax due on the changeover, which is also nice.

I figure most people would just use this feature, but my friend is a big proponent of continuing to do these direct rollovers to his Roth IRA every time, and his argument for it amazed me. He been suggested by doing it this route he was getting the clock started on the five year minimum waiting period to be able to withdraw these contributions without fines and penalties. He said that if you instead alter it to the Roth 401 k and then in the future you leave the company and bun that fund over to the Roth IRA from there, that starts the timer then, which is undesirable. Which one of us is right ?”

This is a very complex question. Remember with regards to the five-year rules that there was still two five year rules considering Roth IRAs. The first five-year rule applies to Roth IRA contributions and determines whether the earnings will be tax-free. The second power applies to Roth transitions and applies to whether or not the principal that was converted will be penalty-free when it comes out. In this question, we are talking about the second five-year rule, for Roth conversions.

To learn an unbelievable amount of information about this particular rule, I would refer you to an excellent blog post by Michael Kitces. It was dated January 1st, 2014, but it talks about both five-year rules in enormous extent, so I would recommend checking that out.

In the case of changeovers, each shift quantity actually has its own five year time period. With numerou conversions, there may be multiple different five year periods underway at once. When withdrawals follow from the conversion amounts, they’re deemed to come out on a first in first out basis, so that be interpreted to mean that the oldest changeovers, the ones most likely to have finished their five-year requirement, come out firstly, and the most recent alterations “ve been coming” last.

Why does it have to be in there for five years before we can get it out penalty-free? Well, imagine this scenario, a 40 -year-old wants to get into their traditional IRA money, and if he took a withdrawal at this site he would be subject to not only ordinary income taxes, but a 10 percent early withdrawal penalty.

But if he proselytized his IRA to a Roth IRA, he would be expected to clearly pay taxes on that conversion, but he could now take out the after-tax principal without give any disadvantages, so by doing the Roth conversion you would be able to get around give the 10 percentage retribution, which apparently would be tapping it before age 59 and a half. The five-year rule is there to prevent that happening so you can’t get around the IRA withdrawal penalty. It does enabling you to potentially gain access before senility 59 and a half. You only have to wait the five year period. The additions, of course, on that conversion, would still be taxable.

That is basically how the five-year rule runs, so for a transition, you have to wait five years before you can tap that principal, but that principal you can take out at any time without having to pay a penalty. It’s only earnings on a Roth IRA that you have to pay penalty on if you make them out before senility 59 and a half.

In general, the policy is to start the clock as soon as you can so you can get your money tax free and penalty-free as early as possible. This sort of planning is really important for FIRE kinds. Someone who is going to retire in their 30 s or 40 s or maybe even early 50 s. But as you get close to age 59 and a half retirement, this becomes much less of an issue.

At that degree, “youre supposed to” have other assets you’re going to be tap before you get into your Roth IRAs. You can use the substantially equal periodic fee ruler to get to your coin before senility 59 and a half without compensating any disadvantages. It’s really simply the really early retirees that mess with this sort of planning.

This listener’s question was not necessarily about IRAs but about 401 ks. When a nominated Roth account from an employer retirement account is flattened into a Roth IRA, its first year in the Roth bos history do not count toward the five-year rule. You get your own five-year rule once it goes into the Roth IRA. All that weighs is that original five-year rule for the Roth IRA.

If there was no existing Roth IRA and the rollover from the Roth 401 k created the account for the first time, that starts a new five year clock for the IRA even if the old Roth 401 k had satisfied its own five year rule. They just don’t be carried forward. Basically, in answer to the question, your friend is right. If this matters to you because you’re going to FIRE soon, and you plan to use that fund long before senility 59 and a half, you should go through the hassle of doing the Roth IRA rollovers like your friend is doing.

But for many, numerous people this just doesn’t matter because they’re either not going to retire early or the government has other funds to spend first rather than their Roth IRA principal. I signify, that would be one of the last things I would be wanting to spend in retirement. I would be going through my taxable fund and any 457 mean money I had before trying to go after my Roth IRA money. If that’s your place, then you’re right, too, so both you and your friend are right depending on what your situations are for going money out of there.

As a general rule, you intended to be igniting through your taxable fund and your 457 coin as an early retiree, and save your retirement account money, peculiarly Roth money, to be used later in retirement. In my dispute, I’ll bet my taxable portfolio right now obliges up about 60 percentage of my portfolio. Tax-deferred is probably 30 percentage and Roth money is probably 10 percentage. I’ll bet those ratios are pretty similar for most FIRE natures. They are just saving too much money to be able to save it all inside retirement accounts.

Reader and Listener Q& A Advice for Debt-Free Medical Student best free website traffic generator

A medical student will graduate with no pay thanks to his family and he asked for specific advice for someone in his shoes. I know many of you are disheartened with your student lend loading but the truth is about one-quarter of medical students don’t have any debt at graduation. That oftentimes comes from them getting a lot of support from their family. Remember that the population of medical institution definitely skews towards the higher income quintiles. I think something like 70 or 80 percent of medical students come from the top 20 to 40 percent of the population, and so it’s not surprising, I predict, that a fair number of medical students don’t have any debt at all.

But a significant chunk of those simply have contracts like what I had. I had a military contract and when they asked me that question on the departure investigation as an MS4, I applied no debt because I didn’t have any business obligation, but I owed a go obligation, and so I ponder a significant chunk of those kinfolks are also military docs and people with other sorts of contract-style debt rather than business debt.

But what do you do if you don’t have debt? You’re basically just starting $200 -3 00,000 ahead of everybody else. Rather than having to focus on those student loans, and coming up with a student credit handling project during residency, and a plan to wipe them out after residency, you only get to skip all of the hassle. Your financial life time became a lot more simple. It allows you to focus on a few other things. You can save up an emergency fund. If you have any earned income, you can made that into a Roth IRA. You can get the saver’s credit for make that because you’ll is currently under such a low-income level you should be able to get a reasonably significant saver’s credit. You may also start looking a little bit earlier into getting things like disability insurance.

A lot of ages, you actually can buy that as a medical student. I have a hard time telling people to buy it working borrowed money, but I suppose if you’re not living on borrowed money, maybe you can justify buying that as a med student rather than waiting until you’re an intern.

If you are not in debt because you saved up a bunch of money before medical institution, maybe you had another career or something like that, medical school is a great time to do some things with your retirement savings account. If you have a bunch of tax-deferred money, you can do Roth transitions during medical academy free of charge, and so as long as you keep your income below the minimum taxable income and take advantage of the standard deduction or any other reductions you were able to, you might be able to convert tens of thousands of dollars during four years of medical school without paying any taxes on it at all.

A lot of beings wonder if they should cash out of their retirement account that they saved up before medical clas in order to pay for medical academy, but I foresee a better squander of that coin is just to do free Roth changeovers in medical school. For the most part, I like the idea of using up your personal resources and any category resources you have before you acquire, but if it’s inside a retirement account I various kinds of feel a little bit differently about that.

Roth Versus Traditional 401 K Contributions

” My question revolves around Roth versus traditional 401 k contributions. I know your traditional admonition is that tenants start Roth. After going through the numbers, I’m thinking I may be better off doing predominately excise shelved, but wanted to get a second opinion.

Through my supervisor I can do either Roth or traditional 401 k contributions. I’m a fellow, so I can do a fair amount of moonlighting. My gross pay is around 150,000. My wife is a resident who makes around 55,000. I’m going for PSLF but I owe about 250 K in lends and I’m already five years old through and have at least two and a half more years at fellowship. At the time I should theoretically qualify for forgiveness, my loan equilibrium will still be around 200, usurping I is ongoing to build my remittances based on my taxable income, and where I register them separately. I maxed out my employer patronized 401 k. In my taxation shelved 401 k, I get a 1.75 percent pair which exceeds out after I kept more than four percent in, and no match for Roth contributions .”

I get lots of questions about Roth versus traditional 401 k contributions and they’re difficult to answer. It would be easy to just say,” Oh, ever use Roth all the time ,” but the problem is that’s not always right, and it’s difficult to come up with a really good rule of thumb that always cultivates every time. The basic rule of thumb is to use tax-deferred accounts during your top earnings times, “but theres” exceptions to that, particularly for Supersavers.

If you’re going to have 20 billion dollars in retirement, you may want to favor apply Roth contributions, for example, even during your peak earnings years. Then, of course, the rule of thumb when you’re not in a pinnacle earnings time is to use a Roth account, but there are exclusions to that. For example, if you are in residency and want to lower your IDR pays and hopefully get more forgiven through public service loan forgiveness, you might use a tax-deferred account instead of a tax-free account. There are exclusions in every respect.

But this doctor is wondering if he’s an exception as a fellow who’s moonlighting obligating 150,000 dollars, whose marriage is impelling 50,000 dollars as the affected residents and is going for public service loan forgiveness. Well, “youve been” just because you’re going for public service loan forgiveness. The lower your taxable income, the less you’re going to pay in IDR fees, and the more will be left to be forgiven, but that requires doing what you’re doing, which is being enrolled in the wage as you pay platform, and filing your taxes, married, filing separately.

That sounds like that’s what you’re doing, so that’s a rational exception to use a tax-deferred account at least for her. Now, since you’re married filing separately, you don’t actually need to do that, but those are really the considerations to take in there. The truth of the matter is if you’re saving something during residency or companionship, you’re prize. Even if it’s a tax-deferred account, that’s not the end of the world. The general principles during residency is use a Roth account unless you have a really good reason not to, that are generally implies going for public service loan forgiveness.

He also mentions that he’s not getting a match for Roth contributions but is getting a match for tax-deferred contributions. That doesn’t make any sense at all. I wonder if there’s some distraction on that point. I don’t think you can legally coincide one kind and not the other. Obviously, if that is somehow the event, that would be an argument against a Roth account but principally the reason why this doctor would be an exception is because of the offer as you pay, and the married filing separately, and the public service loan forgiveness plan.

Not so much the fact that your income’s a little bit higher than a typical fellow.

HSA Contributions

A listener asked if his supervisor can contribute directly to his HSA of option instead of the one that all his partners want to use with higher fees. I guess the employer could but generally, they won’t. It frequently has to go to the employer’s designated HSA in order to get those bos dollars contributed or for you to save payroll taxes on it. Now, you’re allowed to placed HSA money anywhere you like, but if you want to save the payroll taxes, the social security, and Medicare taxes on it, it has to go through payroll, and that usually symbolizes it is at least going to stop in your employer’s labelled HSA for a while.

Now, you can do a rollover once a year and move that to your promoted HSA location, whether that’s Lively or Fidelity, or whatever, but otherwise you either “re going to have to” not get those payroll duty savings, or you have to go through your employer’s designated HSA. If you’re self-employed, of course, it doesn’t really matter.

Retirement Histories When You Buy into a Practice

” My question today relates to 401( k) s. In my place, I am currently put in as an S organization. I currently work at a few different parts, and I have an individual 401 k that I made out last year, I started contributing to, and maxed out. Now, this summer, in about six months, I will have the opportunity to buy into one of those offices that I’ve been working at and I’m planning to do so. Now, it’s my understanding that once I buy in I cannot contributes to my individual 401 k as I will have to contribute to the company, or that practice’s 401 k that is available to all employees. Am I still capable, for these first six months before I buy in, am I still able to max out my individual 401 k or come as close to maxing it out as possible?

If I am, I would love to do that. Too, once I have bought into that rule, I will still have other 1099 income from other traditions. Can I use that income to contribute to my solo 401 k and contribute to that in many years to come ?”

It sounds like you are currently an independent contractor and you’re becoming a partner in a multi-partner group, while still functioning as an independent contractor for at least some of your income, so you’ll soon be able to use two 401 ks, since those two boss are totally unrelated.

That gives you two $57,000 per year maximum for the employee plus supervisor contribution restrictions. One for each 401 k, as dictated by the rules of each 401 k, but between the two of them you simply get one 19,500 dollar hire contribution, so use that one wisely. The practice most people in this situation use it is they max out the employer 401 k employee contribution, or at least put in enough to max out the accord, and then exactly applied 20 percent of their self-employed earnings into the individual 401 k.

If you didn’t use your whole work contribution in your employer’s 401 k, you are able to kept that into your individual 401 k, but often, you only do that if your employer’s 401 k is really terrible and you’re just trying to get the match out of it and that’s it.

Defined Benefits Plan

” My accountant territory this type of plan would be beneficial for me. I’m compensate around $430,000 dollars yearly as a 1099 contractor. I have an S corp with a solo 401 k which I max out every year. I also max out my backdoor Roth IRA. According to my accountant, I’m able to put away $134,000 dollars a year into a defined advantage pension plan. We’re trying to save as much pre-tax money as possible, afforded our huge dual-physician income .”

$134,000 a year into a defined interest cash balance design seems excessively high-pitched for a 37 -year-old. I’m a little skeptical, but if that’s what the actuary says it works out to be, I belief it could be true. Certainly, I know doctors in their 50 s that can put up to $ 200,000 or so into a characterized advantage cash equilibrium plan.

Unfortunately, my stupid plan only lets me put in $ 17,500 as a 44 -year-old. It goes up every five years as you get older, but it’s really not until you’re in your 50 s that you get to articulated a big chunk of money in there, so I’m a little bit envious if you really can throw quite this is something that money into a defined advantage plan.

Given your goal to put aside more tax-deferred money, it sounds like it would be a good idea for you to do it. Even if you can only throw in $ 20,000 a year, which is kind of what I expected you to say, I’d still go for it. I think that’s probably, afforded your goals, a good idea.

How Much Money to Keep in Cash

” I maintain hearing that remaining too much money as cash in the bank is not a great idea because it’s not doing anything for you. My question is how much money should you preserve cash in the bank, and how much is too much? $1,000, $5,000, $10,000? At what site after saving it would you consider moving it to investments ?”

It’s really difficult for me to answer this situation because I’m in such a different place than most doctors these days. We retain much, much more money than that in money and it’s mostly just for cashflow needs. We have payroll to make and we have business expenses coming out, and we have to realise our 401 k contributions, and all that kind of stuff, and so we end up with lots of money in money compared to those amounts that you’re talking about in this.

How much is too much? Well, I visualize most people try to keep an emergency fund of three to six months after the expenses situated away somewhere, whether that’s in a short term bond fund, or whether that’s in I-bonds, or whether that is in a high yield savings account, or a fund busines store, or Cds. I think that’s really all you have to keep in cash.

Above and beyond that, I think it’s mostly just for your own cashflow needs, and if your cashflow needs aren’t very significant then you don’t have to keep very much in cash, but if you’re spending $15,000 a month, you are able to need $15,000 in the chequing account simply to keep from bouncing checks, keep from bouncing your automatic credit cards fees, and that kind of a thing.

It certainly depends on how closely you’re going to watch that report and be moving money in and out knowing when the expenses are coming in and going to go. If you really don’t want to deal with that, you tend to do what I do and he left more cash in there. If you are willing to watch it really closely, you are able to clearly pay a little bit more money on that cash.

It is a constant count recreation of inconvenience versus a little bit of extra interest, and depending on the way in which much that interest is worth to you, you might be willing to deal with the hassle a little bit more.

Going Back into Debt to Change Careers

” I realize $300,000 as a general dentist but don’t get a lot of enjoyment at my work. I would love to go back to residency for orthodontics, but residency for three years costs $300,000 dollars. I’m not sure how much more I would make as an orthodontist, but I would enjoy the job more. Am I dedicating monetary suicide by should be going into student debt to be an orthodontist ?”

It sounds like it’s time to do some more study, to decide whether the asset is worthwhile or not. For example, I know an orthodontist preparing $225,000 dollars a year, and I know orthodontists clearing seven people. If it’s going to make you happier and it’s going to make you enough added coin to justify the speculation of occasion and money, I’d go for it. If not, I’d time figure out ways to optimize your rehearse to get you to FIRE as soon as possible.

But I thoughts those are the decisions to make. If you expect you’re going to go into a half meter pattern in a insignificant town that doesn’t have very many cases to do orthodontics, it’s probably not worth $300,000 dollars , not to mention the opportunity cost in order to do that.

But if you’re really committed that you’re going to do this for 20 or 30 years, and you have a pretty good business mind, and you’re going to open a practice, and you’re going to run it as efficiently as my kids’ orthodontist, you’re going to make a killing, and so it would be a good monetary move.

But the truth is you simply get one life, and if being an orthodontist is going to make you happy and has become a general dentist is not compiling you happy, maybe it’s worth it even if it doesn’t work out perfectly well financially. Certainly, most orthodontists are not going to have trouble thumping down an extra $300,000 dollars in student loans.

They generally build enough, more than a typical dentist, to be able to take care of that. That presupposes you do a good job, and get a nice, high-pitched income as an orthodontist.

Backdoor Roth IRA

” I is an issue about my backdoor Roth IRA. I opened it in January 2019, encouraged to my traditional IRA for 2018 and 2019, and did the conversion to my Roth IRA the same month through Vanguard. I’m going to fill in my word 8606 for my 2019 taxes as per your tutorial, My 2019 1099 for Vanguard says my contributions are $11,500, as it should, but TurboTax is saying I contributed $5,500 excess to my IRA for 2019, ensuing in a six percentage penalty until it is corrected.

Since this was for my 2018 contribution, I don’t think it is correct that I am in excess, will replenish my kind 8606 correctly resolve this issue ?”

Remember when you do late contributions, necessitating you’re contributing for 2018 in calendar year 2019, or you’re contributing from 2019 in calendar year 2020, that the contribution goes on the 8606 for the tax year, so if it was a 2018 contribution stimulated in 2019 it goes on your 2018 8606.

The conversion goes on the tax form for the calendar year that you did the transition in, so if you made a contribution in January of 2019 for 2018, and then proselytized it in 2019, the contribution would go in your 2018 8606, and the shift would go in your 2019 8606, and if you remain that straight usually the paperwork won’t be screwed up.

This is why it’s so much easier to really do such contributions and shift during the same calendar year, but that’s basically what the problem is. If you go back and realize that you didn’t file a 2018 8606, or you crowded it out mistaken, you need to go back and correct that, file a 1040 X with it, and then it should be correct for this year.

NNN Properties

One listener to know more about NNN properties or triple net dimensions. A triple cyberspace lease is not a specific asset class or major investments. It’s just the way the rental contract is written. A triple net asset is net of taxes, net of upkeep expenditures, and net of insurance, so the proprietor doesn’t money any of that stuff. The renter does. You’re transfer specific risks from the proprietor to the tenant in exchange for a lower rent.

Lots of landowners like this because it’s a little declined threat and a little weakened beset, but it’s not some sort of extra special investment. It’s just basically a different type of contract to put in place on the asset. I suppose you could do it on a residential property, but almost always these are commercial, extremely retail and industrial belongings in which the tenant’s responsible for all that sort of stuff.

But if you’re looking for even less hassle in direct real estate ownership, a triple net loan can be a way to do that.

Timing for Contributing to Traditional IRA vs Backdoor Roth IRA

” I have a question about the timing of when to contribute to a traditional IRA versus doing a backdoor Roth IRA. Currently, my wife and I have only been doing backdoor Roths. We’re both in our early 30 s but we have a insignificant tax rates of 35 percentage. I’m a private practice urologist and she’s a CRNA, and I understand the advantage of doing the traditional IRA contribution for the pretax write off, but my publication is the fact that we are still in our early to mid 30 s, and we are not going to touch this coin until we are at least 59 and a half, and hopefully much later.

Would it be more wise to take advantage of the longterm gains with the Roth IRA being levy free versus taking the pretax break right now? I are all aware that later in our vocation when the money doesn’t have as long to compound it would make sense to get it on traditional. Precisely bizarre on your thoughts on this, and about what senility would you clearly start swapping to traditional contributions in your top earning times ?”

Most urologists and CRNAs have a retirement plan at work, and they spawn too much money so they cannot deduct traditional IRA contributions at all. They also cannot contribute directly to a Roth IRA, so their only alternative there as far as their IRA histories depart is a backdoor Roth IRA. Regarding a Roth versus a tax-deferred 401 k, it’s a lot more complicated question. The usual answer is tax-deferred during your heyday earnings times and Roth at all other durations, but there are lots of exceptions.

In your speciman, though, this is really straightforward. A backdoor Roth IRA is what you ought to do.

Self Directed 401 k vs Not Self Directed 401 k

” I had a quick question about beings with individual LLCs. I am in the process of trying to start a solo 401 k versus a SEP IRA for 2020, and the question I had is what is the difference between a ego led solo 401 k versus a not self led? I know the versatility is a little bit more for the ego targeted, and to my realize you can invest in candidly what it is you crave, with some limitations, so why aren’t every solo 401 k and SEP IRA self directed, then ?”

Why aren’t they all self-directed? Well, it’s a little bit more of a inconvenience to be self-directed, and the classic speciman of a self-directed 401 k or IRA is a checkbook account, where mostly you can write a check and invest it in any allowed investment; usually, this makes real estate.

You know, you can write a check and kept it into a private real estate fund, or a syndication, or something like that, and use that 401 k or IRA money in order to invest in that sort of thing, but there’s a little bit more of a inconvenience to running the account. Someone has to keep track of the checks. They have to provide you checks begins with, and so it’s usually the large-hearted brokerage houses, the large-scale mutual fund homes don’t have this feature.

You generally have to go to a separate company, frequently, a smaller company like one of our partners My Solo 401 K or Rocket Dollar and they will help you set up an account like this. It’s going to cost you a few cases hundred dollars in rewards to set up, and then $ 100 or $200 a year to maintain it.

So it expenditure more than going to E-Trade, Vanguard, or Fidelity and just opening a solo 401 k and investing in mutual funds there, but you won’t have quite as many financing picks. There is not a right answer or a wrong answer. I’ve had a standard solo 401 k at Vanguard. I’ve had a self-directed 401 k, and they both have their pluses and minuses. It’s just a matter of whether you’re willing to pay a little bit more in costs in order to have some other investment options.

Ending

Would you have answered any of these questions differently? Let me know in the comments. If you have questions you would like rebutted on the podcast, you can record them at Speak Pipe.

Full Transcription Intro: This is the White Coat Investor podcast, where we help those who wear the white-hot coating get a fair shake on Wall Street. We’ve been helping the physicians and other high income professionals stop doing foolish things with their coin since 2011. Here’s your legion, Dr. Jim Dahle.

Jim 😛 TAGEND

auto traffic exchange

This is White Coat Investor count 146, the five year rule for Roth changeovers. Welcome back to the podcast. Hopefully, we’re giving you some useful information now. Common appreciation material, a lot of it, but sometimes we really get into the grass when it comes to financial matters.

Jim: If you are interested in we’re getting out there in the grass a little bit too much, merely give us a got a couple of minutes, and we’ll get back to the basics. We don’t waste too much time talking about that sort of stuff. We try to focus on the real issues that real the physicians and other high income professionals are dealing with.

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Jim: Make to Whitecoatinvestor.com/ locumstory and get the answers. All title, our paraphrase of the day today comes from Benjamin Franklin who said,” Taxes are indeed very heavy, but we are taxed twice as much by our idleness, three times as much by our respect, and four times as much by our folly .” And that’s extremely the dispute, I repute, for most physicians out there.

Jim: They’re making so many business mistakes that the sum total of their monetary mistakes is probably bigger than the sum total of their taxes. Speaking of taxes, it’s kind of duty time right now. If you need help with your taxes, we have a great resource for you. If you go to the Whitecoatinvestor.com website and you go up under our recommended sheets, you can go up under that menu and you will find at the bottom levy strategists.

Jim: And it’s been times we’ve consume trying to build this list up because of always being asked by parties,” Who can I go to for help with my taxes ?” But now we finally got, oh, is like one, two, three, four, five, six, seven, eight, nine firms there that you can check out and get help preparing your taxes and coming up with a strategy to lower your taxes, so a great option there. Check it out at Whitecoatinvestor.com/ tax-strategists.

Jim: Thanks for what you do. Medicine is not always easy. Sometimes it’s boring, sometimes it’s tumultuous, sometimes it’s difficult, and sometimes it’s just heart wrenching, but if nobody’s told you thanks today, let me be the first. Okay, I got to get do amia culpa to start with here. Apparently I did not answer a question a couple of weeks ago, and in fact not only did I not answer questions but I designation the part podcast according to the question I didn’t actually answer.

Jim: I got some , not dislike mail, I got some feedback on it. What’s interesting though is apparently Cindy grab this just before we went to press and she just let it go, so she has to share the condemn with me for this one. Apparently the issues I thought they asked was how to send money from the United State to India when in reality the question was how to mail fund from India to the United States.

Jim: Here’s one of the emails I came. I’m a big of your podcast. Precisely listened to your podcast today, money to India. The caller asked you about how to manage the money they from his dad in India, and I believed to be rebutted as if the caller wants to send money to India. I’m pretty sure there are a lot of legal issues with that. Could you elaborate on that in your future podcast, and remember there are some rich parents in India who can give 500,000 dollars or more to their kids in the US. Jim: And I got another one. I just listened to this podcast. I believed to be misunderstood the issues from Bershont based on which you have titled the podcast. I think what he was asking is his parents action to transport him 500,000 dollars merit of money from India to the US. I think that’s what he was asking, about how can he park that huge summing-up here. Well, it is about to change that it’s actually even easier to communicate coin from India to the US. Jim: During any committed financial year, which in India is April to March, you can send 250,000 dollars from India to the US no questions asked. There are no regulations on it, there is a lack of taxes due on it, so if you wanted to send half a million dollars to the US, you could do it. You time have to split it between two different financial years. No big deal.

Jim: Although it’s not incredibly difficult to send coin to India as well, that wasn’t really what they were asking. In the US, it’s interesting. The US has a gift tax on the person who contributes the endowment. In India, it charges the person who receives the gift, which manufactures it even easier to bring money from India to the US because you are doing neither of those things. You are neither opening the talent in the US nor receiving the endow in India, so it’s pretty easy.

Jim: Okay, let’s go onto our next question, this one from Michael. Michael: Hi, Dr. Dahle. My name is Michael. I’m a first time medical student in Kentucky. I’m married to a physician assistant who has about 110, 115, somewhere in that thousand dollars of debt, from all of her schooling combined. I currently have no debt from undergrad thanks to my father who’s also a physician who suggested that I start thinking about finances now and try to learn from some of his downfalls. He’s actually paying for my education, so I will graduate medical school with no debt.

Michael: I’m very fortunate. Because I’m so fortunate, I’ve been thinking a good deal, and listening to a lot of things, and I’ve been on your podcast for a while now and I have your book and I would just like to know if you had any specific suggestion for a youngun like me. I know a lot of my classmates haven’t even thought about that. They really kind of write it off as,” Well, I’m in debt anyways, who helps ?” Michael: But I don’t want to be that road, but especially since I’m not in debt or I won’t be in debt from medical institution. I do have some kinfolk pay, like I said, with my partner, but I would just like to know if you had any admonition for coming a jump on the game because I don’t want to be the average person who’s got a lot of obligation. Michael: I want to capitalize on my backings, which is being debt free, so any admonition you have would be great. Thank you, and I actually appreciate your podcast. Thanks. Jim: All right. What advice do I have for a medical student with no obligation at all? First of all, congratulations. There are a lot of terribly fierce people who just heard that who are frustrated with their student credits, and can’t believe that you are so fortunate as to not have any, but the truth is about one quarter of medical students don’t have any debt at graduation, and that oftentimes comes from them getting a lot of support from their family. Jim: Remember that the population of medical clas obviously skews towards the higher income quintiles. I think something like 70 or 80 percent of medical students come from the top 20 to 40 percent of the population, and so it’s not surprising, I predict, that a fair number of medical students don’t have any debt at all.

Jim: But a significant chunk of those time have contracts like what I had. I had a military contract and when they asked me that question on the departure overlook as an MS4, I articulated no pay because I didn’t have any business obligation, but I owed age indebtednes, and so I recollect a significant chunk of those kinfolks are also armed docs and people with other sortings of contract-style debt rather than financial obligation. Jim: But what do you do if you don’t have debt? Well, I think you’re mostly just beginning two or 300,000 dollars ahead of everybody else. You know, rather than having to focus on those student credits, and coming up with a student lend management project during residency, and a plan to wipe them out after residency, you really get to skip all of the hassle, so your monetary life time became a lot more simple. But it does allow you to focus on a few other things. Jim: You know, you can save up an emergency fund. If you have any earned income, you can placed that into a Roth IRA. You can get the saver’s credit for make that because you’ll is currently under such a low income level you should be able to get a somewhat substantial saver’s recognition. You may also start looking a little bit earlier into getting things like disability insurance. Jim: A heap of meters, you actually can buy that as a medical student. I have a hard time telling beings to buy it exerting acquired coin, but I belief if you’re not living on acquired fund, perhaps you can justify buying that as a med student rather than waiting until you’re an intern. Jim: If you are not in debt because you saved up a cluster of coin before medical institution, perhaps you had another career or something like that, medical institution is a great time to do some things with your retirement plans. If you have a bunch of tax deferred fund, you can do Roth transitions during medical academy for free, and so as long as you keep your income below the minimum taxable income and take advantage of the standard deduction or any other reductions you were able to, you might be able to convert tens of thousands of dollars during four years of medical institution without compensating any taxes on it at all. Jim: A fortune of beings wonder if they should cash out of their retirement accounts that they saved up before medical school in order to pay for medical institution, but I conclude a better exert of that money is just to do free Roth transitions in medical clas. For the most part, I like the idea of using up your personal resources and any household assets you have before you acquire, but if it’s inside a retirement savings account I various kinds of feel a little bit differently about that.

Jim: All claim, let’s go onto our next question from Christian, this time. Christian: Hey, Jim. This is Christian and I’m a second year cardiology fellow. First, thanks for everything you do. My question revolves around Roth versus traditional 401 k contributions. I know your traditional admonition is that citizens become Roth. After going through the numbers, I’m thinking I may be better off doing predominately levy differ, but wanted to get a second opinion. Christian: Through my supervisor I can do either Roth or traditional 401 k contributions. As stated, I’m a fellow, so I can do a fair quantity of moonlighting. My gross pay is around 150,000. My wife is a resident who makes around 55,000. I’m going for PSLF up but I owe about 250 in credits and I’m already five years through and have at least two and a half more years at fellowship. Christian: At the time, I should theoretically modify through forgiveness. My loan balance will still be around 200, accepting I is ongoing to realise my remuneration as year end pays based off my projected income, so I’m in repay as you make, as my lend fees are based on my taxable income, and where I enter them separately. I maxed out my employer patronized 401 k.

Christian: In my charge shelved 401 k, I get a 1.75 percentage join which surpass out after I gave more than four percent in, and no match for Roth contributions. Jim: Okay, always going lots of questions about Roth versus traditional 401 k contributions, and they’re difficult to answer. It would be easy to just say,” Oh, always use Roth all the time ,” as some other podcast legions sometimes do, but the problem is that’s not always right, and it’s difficult to come up with a really good rule of thumb that always succeeds every time. The basic rule of thumb is use tax deferred reports during your flower earnings times, but there are exceptions to that, particularly for Supersavers. Jim: If you’re going to have 20 million dollars in retirement, you may want to favor utilize Roth contributions, for example, even during your meridian earnings times, and then, of course, the rule of thumb when you’re not in a pinnacle earnings time is to use a Roth account, but there are exceptions to that. For example, if you are in residency and want to lower your IDR fees and hopefully get more forgiven through public service loan forgiveness, you might use a duty shelved report instead of a tax free note, and so there’s exclusions in all respects. Jim: But this doc is wondering if he’s an exception as a fellow who’s moonlighting seeing 150,000 dollars, whose spouse is manufacturing 50,000 dollars as a resident and is going for public service loan forgiveness. Well, you may be just because you’re going for public service loan forgiveness. The lower your taxable income, the less you’re going to pay in IDR remittances, and the more that will be left to be forgiven, but that requires doing what you’re doing which is being enrolled in the remunerate as you pay planned, and filing your taxes, married, filing separately.

Jim: And that sounds like that’s what you’re doing, so that’s a acceptable exception to use a tax deferred detail at least for her. Now, since you’re married filing separately, you don’t actually it is necessary do that, but those are really the considerations to take in there. You know, the truth of the matter is if you’re saving something during residency or fellowship, you’re victory, now. Even if it’s imposition deferred account, that’s not the end of the world, but the general rule is during residency, use a Roth account unless you have a really good reason not to which usually symbolizes going for public service loan forgiveness. Jim: He also mentions that he’s not getting a match for Roth contributions but is getting a match for tax deferred contributions. That doesn’t make any sense at all. I wonder if there’s some fluster on that point? I don’t think you can legally match one genu and not the other. Obviously, if that is somehow the event, that would be an argument against a Roth account but chiefly the reason why this doc would be an exception is because of the remuneration as you make, and the married filing separately, and the public service loan forgiveness intention. Jim: Not so much the fact that your income’s a little bit higher than a ordinary individual. All right, for those of you who have heard about AlphaInvestingFund1, that’s closing here at the end of the month. If you’re still interested in investing in that, go to www.Whitecoatinvestor.com/ alphainvesting. If you have no idea what I’m talking about but you’re interested in learning more about private real estate properties, syndications, or monies, be sure to sign up for our real estate properties opportunities email list at Whitecoatinvestor.com/ newsletter.

Jim: All right, our next question comes from Andrew. Andrew: Hi, Jim. I have a quite distinct question seeing HSA contributions. I’m development partners in a medium sized private practice radiology group. We use state equities for our partners and employees. The rehearsal monies each partner’s HSA in full in January of each year. For example, 7,100 dollars one time contribution for 2020 to be made in January. Last-place time, I transposed the entirety of my health equity symmetry into a personally comprised Fidelity HSA account for its lower fee formation. Andrew: All of my other partners continued to hold their resources with health equity and are not interested in switching for various reasons. Will I need to continue to have our bookkeeper situate my stores into my health equity note each year going forward and then transfer it to my Fidelity account every year, which requires some paperwork, or am I allowed to have her money it directly into my personally propped Fidelity account? Our advantages director seemed stumped when I expected this, and I cannot seem to find a good reaction online. Thank you for your time and all that you do.

Jim: Okay. He wants to know if his supervisor can contribute directly to the HSA he’s opened on the two sides. Well, I suspect they could, but they generally won’t. It commonly has to go to the employer’s marked HSA in order to get those bos dollars contributed, or for you to save payroll taxes on it. Now, you’re allowed to settled HSA money anywhere you like, but if you want to save the payroll taxes, the social security, and Medicare taxes on it, it’s got to go through payroll, and that is generally entails it’s at least going to stop in your employer’s specified HSA for a while. Jim: Now, you can do a rollover once a year and move that to your opted HSA location, whether that’s Lively, or Fidelity, or whatever, but otherwise you’ve either got to not get those payroll charge savings, or you’ve got to go through your employer’s specified HSA. If you’re self-employed, of course, it doesn’t really matter. You know, if you’re a partner, you’re on a 1099, you might as well contribute directly from Fidelity, but I couldn’t tell from this question whether Andrew was an employee or not so I had to be a little bit more general in the answer. Jim: If you need a self-directed 401 k, you can check out Whitecoatinvestor.com/ my401k to gain a better understanding of how you can use your 401 k to invest in more than mutual funds. All claim, next question comes from Phil.

Phil: Hi, Jim. My name is Phil and I’m a software engineer in the Bay Area with an arcane question about mega backdoor 401 ks and five year waiting periods. I got into a bit of an rationale with a colleague about this and I was hoping that you could help colonize it. For background, everybody at my busines can put up the 15 percent of each paycheck into a 401 k after tax container, and from there they can roll it over directly to a Roth IRA or use an automatic boast which will alter it to the Roth 401 k, and the advantage of this feature is that it does so automatically after each paycheck so you don’t have to call Fidelity, which is nice, and because it’s done immediately there are never any earnings, and therefore no taxation due on the conversion, which is also nice. Phil: I figure most people would just use this boast, but my friend is a big proponent of continuing to do these direct rollovers to his Roth IRA every time, and his argument for it caught me. He said by doing it this action he was getting the clock started on the five year minimum waiting area to be able to withdraw these contributions without a penalty. He said that if you instead alter it to the Roth 401 k and then in the future you leave the company and roster that coin over to the Roth IRA from there, that starts the timer then, which is undesirable.

Phil: I hope initially that he was just plain wrong but after some googling about this, specific with how it works for the mega backdoor 401 k, and going through some very long Boggleheads yarns, I recognized this is much more confusing than I conceived, so I was hoping that you could shed some light on the subject. Which one of us is right? Thanks. Jim: All right. Here’s the question I listed the podcast after, and this is a very complex question, but the first thing we’ve got to get to here is that the man’s name is Jack Bogle, it’s not Jack Boggle, and so his partisans are the Bogleheads , not the Boggleheads, and if you’ve only ever read the word I presume I can forgive you for mispronouncing that, but once you’ve met the man it’s hard to mispronounce his call, so I think it’s important to correct that. Jim: But recollect with regards to the five year rules that there are two five year rules involving Roth IRAs. The first five year rule applies to Roth IRA contributions and determines whether the earnings will be tax free. The second govern applies to Roth changeovers and applies to whether or not the principal that was proselytized will be penalty free when it comes out, so what we’re talking about this question is the second five year rule. The five year rule for Roth changeovers. Jim: And if you want to learn an unbelievable amount of data about this particular rule, I would refer you to an excellent blog announce at Kitchies.com. It was dated January 1st, 2014, but it talks about both five year rules in great extent in that podcast, so I would recommend checking that out, and he talks about on that podcast that in the case of shifts each changeover amount actually has its own five year time period.

Jim: With variou changeovers, there may be multiple different five year periods underway at once. When withdrawals arise from the alteration amounts, they’re deemed to come out on a first in first out basis, so that be interpreted to mean that the oldest conversions, the ones most likely to have finished their five year requirement, “ve been coming” first, and the most recent shifts “ve been coming” last, and so that’s a good thing. Jim: But to understand the purpose of this rule, why do we have this rule? Why does it have to be in there for five years before we can get it out disadvantage free? Well, imagine one of those situations, okay? Let’s say somebody’s 40. They want to get into their traditional IRA money, and if “hes taking” a withdrawal at this spot he would be subject to not only everyday income taxes, but a 10 percent early withdrawal penalty. Jim: But if he converted his IRA to a Roth IRA, he would have to certainly pay taxes on that conversion, but he could now take out the after excise principal without any sanctions, so by doing the Roth conversion you would be able to get around paying the 10 percentage disadvantage, which patently would be tapping it before you got to age 59 and a half, and so that’s why they have to have the five year rule in there, so you can’t just do that.

Jim: It time would allow you to get around the IRA withdrawal penalty. Same thing if this person accomplished this changeover, they waited five years old, and if you are at that point exclusively 45 years old then your five year conversion rule saves you from dodging the early withdrawal sanction from the IRA, even though it is does enabling you to potentially gain access before age 59 and a half. You time have to wait the five year period. Jim: The amplifications, of course, on that conversion, would still be taxable, and that’s basically how the five year rule succeeds, so for a transition you’ve got to wait five years old before you can tap that principal, but principal you can take out at any time without having to pay a penalty. It’s only earnings on a Roth IRA that you have to pay penalty on if you take them out before age 59 and a half. Jim: In general, the strategy is to start the clock as soon as you are able to so you can get your money tax free and retribution free as soon as possible. This sort of planning is really important for FIRE forms, right? Financially independent, retire early. Someone who’s going to retire in their 30 s or 40 s or maybe even early 50 s, but as you get close to senility 59 and a half retirement, this becomes much less of an issue.

Jim: At that extent you’ve probably got other reserves you’re going to be tapping before you get into your Roth IRAs, you can use the substantially equal regular fee rule to get to your coin before age 59 and a half without any sanctions. It’s really simply the really early retirees that mess with this sort of planning. Jim: Let’s get to the question, though. The question was not necessarily about IRAs but about 401 ks, so when a labelled Roth account from an employer retirement account is rolled into a Roth IRA, its first year in the Roth employer detail is not count toward the five year rule. You get your own five year rule formerly it goes into the Roth IRA. All that counts is that original five year rule for the Roth IRA. Jim: If “they dont have” existing Roth IRA and the rollover from the Roth 401 k created the account for the first time, that starts a brand-new five year clock for the IRA even if the old Roth 401 k had fulfilled its own five year rule. They only don’t be carried forward. Basically, in answer to the question, your friend is right. If this matters to you because you’re going to fire soon, and you plan to use that coin long before age 59 and a half, you should go through the hassle of doing the Roth IRA rollovers like your friend is doing.

Jim: But for numerous, many beings this just doesn’t matter because they’re either not going to retire early or the government has other funds to spend first rather than their Roth IRA principal. I imply, that would be one of the last things I would be wanting to spend in retirement. I would be going through my taxable coin and any 457 plan coin I had and any of that trash before trying to go after my Roth IRA money. Jim: If that’s your statu, then you’re right, too, so both you and your friend are right depending on what your status are for going fund out of there. He actually called back and left this meaning. Phil: Hi, Jim. This is Phil again and I just have a couple of followup items from my last question in case they’d be useful. I announced Fidelity to try to get an answer on this and they gave me on that astounded me. They said that when the conversion is done, either to the Roth IRA or to the Roth 401 k, if there were any earnings and therefore taxes due on them, then there is also a five year waiting period, but if there weren’t any earnings then there isn’t.

Phil: And since the automated facet always flows before earnings can accrue, then there is never a five year period, and that ask startled me. I didn’t know what to build of it. The other appearance that’s interesting is that in addition to being able to roll over to a Roth IRA and the Roth 401 k, there is also the ability to do a divide rollover where you send the contributions to a Roth IRA and the earnings to a traditional IRA, if there are any, and so maybe that option has different imposition upshots, or if all three are different. Phil: The other thing I thought was interesting was that at my last bos the setup was identical to this one, except that we too had the ability to send money from the Roth 401 k to a Roth IRA at any time. Obviously, merely converted coin had this feature , not direct Roth contributions, and I thought that was interesting, and I invited the Fidelity rep why the aged supervisor had it and the new one should not, and he said that Fidelity accuses a lot of money for that piece, and my new supervisor wasn’t ponying up, so I thought that was funny. Phil: It’s weird to think of how some of these procedures have costs associated with them and some don’t. Thanks again for all that you do, and for answering my question.

Jim: Okay. I think it’s hard to tell, right? All I have is a snippet of information now, but I reckon the Fidelity rep is probably incorrect about the alteration five year rule, i.e. that the proselytized earnings are treated the same as proselytized contributions, but he might be talking about the other five year rule, the one that applies to Roth contributions. That five year rule is about whether the earnings can come out tariff free , not about whether the principal can come out penalty free. Jim: But again, all of this is pretty easily shunned. As a general principles, you want to be igniting through your taxable fund and your 457 money as an early retiree, and save your retirement account money, specially Roth money, to be used later in retirement. In my instance, I’ll bet my taxable portfolio right now becomes up about 60 percentage of my portfolio. Tax deferred is probably 30 percent, and Roth money is probably 10 percent, and I’ll be those rates are pretty similar for most FIRE natures. Jim: You’re just saving too much money to be able to save it all inside retirement savings account, and so I think if you’re an early retirement kind of person this probably is a non-issue for you. You’re probably not extending after your Roth money anyway in retirement. Do you still have student credits at highway too high of an interest rate? If you’re going to be paying them off yourself you might as well refinance them and get a lower pace. Jim: Check out Whitecoatinvestor.com/ sprinkle today is how much less of a frequency Splash Financial can offer you. If you refinance through them, after getting there through that relate, they’ll give you 500 dollars money back as a bonus. No employment or pre-payment fees. Again, Whitecoatinvestor.com/ sprinkle. Jim: All right, our next question comes from an anonymous listener.

Speaker 7: Hi, Dr. Daly. Thanks for everything you do for us and devoting us the information we need to take control of our commerces and become financially self-sufficient. It is much appreciated and it’s made a big difference. My question today relates to 401 ks. In my statu, I am currently set up as an S busines. I currently work at a few different roles, and I have an individual 401 k that I made out last year, I started is encouraging, and maxed out. Speaker 7: Now, this summer, in about six months, I will have the opportunity to buy into one of those offices that I’ve been working at and I’m planning to do so. Now, it’s my understanding that once I buy in I cannot contribute to my individual 401 k as I will have to contribute to the company, or that practice’s 401 k that’s available to all employees. Am I still able, for these first six months before I buy in, am I still able to max out my individual 401 k or come as close to maxing it out as is practicable?

Speaker 7: If I am, I would love to do that. Too, formerly I have bought into that rule, I will still have other 1099 income from other rehearsals. Can I use that income to contribute to my solo 401 k and contributes to that in many years to come? I would love your penetrations there. I’m planning on meeting with an auditor to talk about this with, but I would love to hear what you have to say. Thanks again. Jim: Okay, so sounds like we’ve got somebody that’s buying into work practices and now can’t use his individual 401 k. I can’t tell exactly what’s going on here but it sounds like you are currently an independent contractor and you’re becoming a partner in a multi-partner group, while still functioning as an independent contractor for at least some of your income, so you’ll soon be able to use two 401 ks, since those two boss are totally unrelated.

Jim: That gives you two 57,000 dollar per year maximum for the employee plus supervisor contribution limits. One for each 401 k, as dictated by the rules of each 401 k, but between the two of them you exclusively get one 19,500 dollar work contribution, so use that one wisely. The mode most people in this situation use it is they max out the employer 401 k employee contribution, or at least put in enough to max out the join, and then exactly applied 20 percent of their self-employed earnings into the individual 401 k. Jim: If you didn’t application your totality work contribution in your employer’s 401 k, you are able to introduced that into your individual 401 k, but typically you simply do that if your employer’s 401 k is really terrible and you’re just trying to get the match out of it and that’s it. I hope that helps. Jim: All freedom, our next question comes in via email. I was wondering if you could do a podcast about characterized benefit plans. My accountant territory this type of plan would be beneficial for me. I’m compensate around 430,000 dollars yearly as a 1099 contractor. I have an S corp with a solo 401 k which I max out each year. I too max out my backdoor Roth IRA. According to my controller, I’m able to put away 134,000 dollars a year into a defined assistance pension plan. Jim: A little background about me. I’m 37 and my husband is a physician and W2 employee. He makes about 375,000 dollars a year and maxes out his retirement savings plan, a KIO plan, and a backdoor Roth. We have no student credits. We paid 550,000 dollars in three and a half years. Congratulations on that, very well done. And have a dwelling that is lower than 1X our revenues and no other debt.

Jim: We’re trying to save as much pre-tax money as possible, dedicated our large dual-physician income. Yes, it is a large income, but it was also a large debt, so awfully, very well done, and I’m happy to see you saving so much money. You’re going to become wealthy very quickly doing so. Jim: But 134,000 dollars a year into a defined welfare money match schedule seems exceedingly high for a 37 time old. I’m a little skeptical, but if that’s what the actuary says it works out to be, I presume it could be true. Certainly, I know docs in their 50 s that can put up to 200,000 dollars or so into a defined benefit currency symmetry design. Jim: Regrettably, my stupid plan only lets me put in 17,500 dollars as a 44 year old. That used to be 30,000 dollars a year, but now it exactly kind of goes up every five years as you go older, but it’s really not until you’re in your 50 s that you get to set a big chunk of coin in there, so I’m a little bit apprehensive if “youve been” can apply fairly that much fund into a defined advantage intention. Jim: Given your goal to put behind bars more tariff shelved coin, it sounds like it would be a good idea for you to do it. Even if you can only throw in 20,000 dollars a year, which is kind of what I expected you to say, I’d still go for it. I think that’s probably, rendered your goals, a good mind. Are you doing your own taxes? If “youre gonna”, use the software that I use, TurboTax. They’re the industry leader for a intellect. Jim: Check out Whitecoatinvestor.com/ turbotax, and if you are required to more improve than that, check out our index of recommended imposition preparers and strategists at Whitecoatinvestor.com/ taxes. All right, our next question comes from Iyal. Let’s take a listen. Iyal: Hi, Dr. Dahle. I’m an emergency medicine resident in Washington. D.C. I’m a new listener to your podcast and remain hearing that retaining too much money as cash in the bank is not a great idea because it’s not doing anything for you. My question is how much money should you hinder cash in the bank, and how much is too much? 1,000, 5,000, 10,000? At what point after saving it would you consider moving it to investments? Thank you very much.

Jim: All claim. How much money should you keep in cash in the bank, how much is too much? Is 1,000 too much? Is 10,000 too much? It’s really difficult for me to answer this situation because I’m in such a different statu than most doctors these days. We save much, much more money than that in cash and it’s mostly just for cashflow needs. We’ve got payroll to procreate, and we’ve got business expense coming out, and we’ve got to make out 401 k contributions, and all that kind of stuff, and so we end up with lots of money in cash compared to those amounts that you’re talking about in this. Jim: How much is too much? Well, I think most people try to keep an emergency fund of three to six months of expenditures situated away somewhere, whether that’s in a short term bond fund, or whether that’s in I-bonds, or whether that is in a high yield savings account, or a money busines money, or CDs, or whatever. You know, I think that’s really all you have to keep in cash. Jim: Above and beyond that, I think it’s mostly just for your own cashflow needs, and if your cashflow needs aren’t very significant then you don’t have to keep very much in money, but if you’re expend 15,000 dollars a month, well, you are able to need 15,000 dollars in the current account just to keep from bouncing checks, keep from bouncing your automatic credit card payments, and that sort of a thing.

Jim: It actually depended on how closely you’re going to watch that report and be moving money in and out knowing when the expenses are coming in and going out. If you only don’t want to deal with that, you tend to do what I do and just leave more cash in there. If you are willing to watch it really closely, you are able to patently deserve a little bit more money on that cash. Jim: And so it’s a constant weighing recreation of hassle versus a little bit of extra interest, and depending on the way in which much that interest is worth to you you might be willing to deal with the hassle a little bit more. All freedom, our next question comes via email. I’m a dentist six years out of school. I’ve be paid by all of my partner and my student loans which were 350,000 dollars. Jim: Now that we are debt free I maxed out my bos 401 k and opened a backdoor Roth. I realise 300,000 dollars as a general dentist but not get a lot of enjoyment at my job. I would love to go back to residency for orthodontics, but residency for three years payments 300,000 dollars. Jim: Yes, that’s different for you physicians who aren’t is conscious of this, but residency for many dental specialties, you still have to pay tuition. You’re not even get the salary. I’m not sure how much more I would make as an orthodontist, but I would experience the job more. Am I committing fiscal suicide by should be going into student indebtednes to be an orthodontist? Jim: Well, it sounds like it’s time to do some more investigate, be determined whether the financing is worth it or not. For example, I know an orthodontist becoming 225,000 dollars a year, and I know orthodontists representing seven chassis. If it’s going to make you happier and it’s going to make you enough additional fund to justify the asset of time and money, I’d go for it. If not, well I’d simply figure out ways to optimize your rehearsal to get you to FIRE as soon as possible.

Jim: But I speculate those are the decisions to stir. If you expect you’re going to go into a half occasion rehearsal in a tiny municipality that doesn’t have very many patients to do orthodontics, well, it’s probably not worth 300,000 dollars , not to mention the opportunity cost in order to do that. Jim: But if you’re really perpetrated that you’re going to do this for 20 or 30 times, and you have a pretty good business mind, and you’re going to open a practice, and you’re going to run it as efficiently as my kids’ orthodontist, you’re going to make a killing, and so it would be a good fiscal move. Jim: But the truth is you simply get one life, and if being an orthodontist is going to make you happy and has become a general dentist is not forming you happy, maybe it’s worth it even if it doesn’t work out perfectly well financially. Certainly, most orthodontists are not going to have trouble knocking down an extra 300,000 dollars in student lends. Jim: They generally do enough, more than a conventional dentist, to be able to take care of that. That presupposes you do a good job, and get a nice, high-pitched income as an orthodontist. All privilege, next question, also via email. I love the blog. I merely had a quick question about my backdoor Roth IRA. I opened it in January 2019, encouraged to my traditional IRA for 2018 and 2019, and did the conversion to my Roth IRA the same month through Vanguard.

Jim: I’m going to fill in my assemble 80606 for my 2019 taxes as per your tutorial, which you can find only by googling backdoor Roth IRA tutorial for late contributions. My 2019 1099 R for Vanguard says my contributions are 11,500, as it should, but TurboTax is saying I contributed 5,500 excess to my IRA for 2019, developing in a six percentage disadvantage until it is corrected. Jim: Since this was for my 2018 contribution, I don’t think it was correct and I am in excess, will replenish my form 8606 properly resolving this problem? Well, recollect “when youre doing” late contributions, meaning you’re contributing for 2018 in calendar year 2019, or you’re contributing from 2019 in calendar year 2020, that the contribution goes on the 8606 for the tax year, so it would go if it was a 2018 contribution represented in 2019 it goes on your 2018 8606. Jim: And the alteration goes on the tax form for the calendar year that you did the changeover in, so if you made a contribution in January of 2019 for 2018, and then converted it in 2019, the contribution would go in your 2018 8606, and the alteration would go in your 2019 8606, and if you save that straight frequently the paperwork won’t be screwed up. Jim: This is why it’s so much easier to simply do such contributions alteration during the same calendar year, but that’s basically what the problem is. If you go back and you realize that you didn’t file a 2018 8606, or you replenished it out wrong, you need to go back and correct that, file a 1040 X with it, and then it should be correct for this year. Jim: Do you still need disability insurance? Get a plan from an experienced independent agent at Whitecoatinvestor.com/ doctordisability. All freedom, our next question, also via email. I’ve been listening to your podcast for 1.5 years. I’m a physician grad in 2006 and manipulating as a psychiatrist in the Southwest. I own two triple net qualities merit 3.5 million with a corporate tenant, a 15 time triple net lease with around 15 percent return per year with depreciation.

Jim: I’ve never heard any of your guests talking about the benefit of triple net properties. With the article of head and still being able to build up your real estate properties with no overhead outlays, as long as you have the right corporate holder like Dollar General or Starbucks. One impediment is I have a two million dollar loan on it which might be not to everyone’s like. Jim: Some of this position on this form, I have cashflow to buy this property for cash and fix fee for those working timelines, and still this tenant has four options to renew for five years each with a tariff addition. I hope this topic can be added to one of your podcasts, as an issue from Anonymous. Jim: Well, a triple web loan is not a specific asset class or an investment. It’s just the way the rental contract is written. A triple cyberspace asset is net of taxes, net of upkeep expenses, and net of insurance, so the landlord doesn’t remuneration any of that material. The holder does. You’re transferring specific risks from the landlord to the tenant in exchange for a lower rent. Jim: Piles of landlords like this because it’s a little bit decreased hazard and a little abridged inconvenience, but it’s not some sort of extra special investment. It’s just basically a different type of contract to put in place on the belonging. I suppose you could do it on a residential property, but almost always these are business, peculiarly retail and industrial owneds in which the tenant’s responsible for all that sort of stuff. Jim: But if you’re looking for even less hassle in direct real estate ownership, a triple net rental can be a way to do that. If that sounds like too much hassle to you, you might try make some physician canvas from Curizon. They’re especially looking for oncologists, neurologists, and rheumatologists, and you can find more information on that at Whitecoatinvestor.com/ curizon, C-U-R-I-Z-O-N. Our next question’s coming off the speak pipe. Let’s take a listen.

Speaker 9: Dr. Dahle, thanks for all that you do. I’ve been a longtime listener of the podcast. I is an issue about the timing of when to contribute to a traditional IRA versus doing a backdoor Roth IRA. Currently, my spouse and I have only been doing backdoor Roths. We’re both in our early 30 s but we have a insignificant tax rate of 35 percentage. I’m a private practice urologist and she’s a CRNA, and I understand the advantage of doing the traditional IRA contribution for the pretax write off, but my publish is the fact that we are still in our early to mid 30 s, and we are not going to touch this coin until we are at least 59 and a half, and hopefully much later. Talker 9: Would it be wiser to enjoy the benefits of the longterm gains with the Roth IRA being imposition free versus taking the pretax break right now? I are all aware that last-minute in our occupation when the money doesn’t have as long to compound it would make sense to make love traditional. Just curious on your thoughts on this, and about what senility would you obviously start swapping to traditional contributions in your pinnacle giving years? I appreciate all that you do again, and I unquestionably don’t think you’re boring. Thanks. Jim: Okay. Well, most urologists and CRNAs have a retirement plan at work, and they establish too much money so they cannot deduct traditional IRA contributions at all. They also cannot contributes directly to a Roth IRA, so their alone alternative there as far as their IRA accountings goes is a backdoor Roth IRA. Regarding a Roth versus a tariff shelved 401 k, it’s a lot more complicated question. The customary refute is imposition deferred during your pinnacle earnings years and Roth at all other eras, but there are lots of exclusions. Jim: In your occasion, though, this is really straightforward. A backdoor Roth IRA is what you ought to do. If you are interested in Airbnb, we have a partner that has put together a track that teaches you everything you need to know to run a profitable Airbnb. Some doctors have found this to be an exceptionally good side bustle, especially if they can set their marriage or spouse in charge of it, but if you’re interested in learning about that, Whitecoatinvestor.com/ airbnb.

Jim: In actuality, we have about almost a dozen directions put together by ourselves or by our partners there that you can find under the courses menu at Whitecoatinvestor.com, or just go in instantly to Whitecoatinvestor.com/ onlinecourses. All kinds of stuff that you can learn from these courses. Real estate stuff, billing stuff, monetary management and planning, all kinds of courses there that you probably ought to check out if you like learning material from online routes. Jim: Next question comes from Denny off the speak tube. Denny: Hi, Dr. Dahle. I had a quick question about people with individual LLCs. I am in the process of trying to start a solo 401 k versus a SEP IRA for 2020, and the question I had is what is the difference between a self sent solo 401 k versus a not self directed? I know the versatility is a little bit more for the soul led, and to my perception you can invest in candidly what it is you miss, with some limitations, so why aren’t every solo 401 k and SEP IRA self targeted, then? Thank you so much for your steering, and I look forward to hearing back from you. Jim: Okay. I often hear lots of questions about solo 401 ks versus SEP IRAs, but the question here is really what is the difference between a soul steered 401 k and a regular one? Why aren’t they all self led, is really the question? Well, it’s a little bit more of a hassle to be self directed, and the classic instance of a self addrest 401 k or IRA is a checkbook account, where mostly you can write a check and invest it in any allowed investment, and usually, this represents real estate.

Jim: You know, you can write a check out of this, and you can threw it into a private real estate fund, or a syndication, or something like that, and use that 401 k or IRA money in order to invest in that sort of thing, but there’s a little more of a fus to running the account. Someone’s got to keep track of the checks. They’ve got to provide you checks to start with, and so it’s usually the large-hearted brokerage houses, the large-hearted mutual fund mansions don’t have this facet. Jim: You frequently have to go to a separate company, often a smaller company like one of our partners that you can find at Whitecoatinvestor.com/ mysolo4 01 k, or Whitecoatinvestor.com/ rocketdollar, and they will help you set up an account like this. What’s it going to cost you? It’s going to cost you a few hundred dollars in rewards to be established by, and then 100 or 200 dollars a year to maintain it. Jim: And it is therefore rates more than going to E-Trade or going to Vanguard or going to Fidelity and just opening a solo 401 k and investing in mutual funds there, but you won’t have quite as countless speculation picks. There’s not a right response or a wrong response. I’ve had a standard solo 401 k at Vanguard. I’ve had a self led 401 k, and they both have their pluses and minuses. It’s just a matter of whether you’re wiling to pay a little bit more in fees in order to have some other investment alternatives. Jim: Okay, I got some feedback via email. Now it is. I wanted to provide some feedback, since you often ask for it on the blog and podcast. I refinanced my 275,000 dollar medical academy credits through your link with Sofi, and per their email response below they’re not reward their referral ascribe. Apparently, I should’ve sought the ascribe within 30 daytimes of refinancing my lend. I was not aware of this timeframe and presume many other books or listeners are not either. I wanting to perform you aware to potentially prevent this from happening to others.

Jim: That’s not exactly the lane it wields. If you went through the links on the site or in the podcast support documents, you get these cashback bonuses automatically. You don’t need to request it exclusively, but you can’t just go to Sofi.com and refinance and then months later ask them to send you a few hundred dollars. They’re not going to do it. If that were allowed, they might have to pay me for customers that I didn’t even wreaking them, which is obviously not enormous for them. Jim: I mean, I can always ask for exclusions there if you’re just caught in some sort of snafu, which does sometimes happen, about once a few months. We have somebody that just for whatever reason didn’t get what they should’ve gotten, and we can always fix that up, so what I want to do in the podcast is emphasize the importance of actually going through the White Coat Investor relation if you require those special White Coat Investor negotiated slews, and so I got a response on this email.

Jim: I actually did use your attach but I speak the fine print at the highly foot and it says for new purchasers only. I forgot I had refinanced and then subsequently paid off a small private med school lend while in residency with Sofi, so I bet that’s why I didn’t get the bonus. Yeah, that’s why I didn’t get the bonus. They’re basically putting these bargains together to try to get new people introduced to the business, so if you’ve refinanced 12 different lends at Sofi, you’re not going to get the cash bonus each time you get it on. Jim: Now, if you go from one company to another to another, you could get additional bonuses, but at the same company you exclusively get it one time. I’m sorry about that. I only get paid one time and you only get paid one time. That doesn’t mean it’s not worth refinancing if you can get a lower frequency, but that’s the way the money bonuses duty. Jim: If you are interested in getting a cash bonus for refinancing your student lends, you can find out which corporations are offering those at Whitecoatinvestor.com/ student-loan-refinancing. All privilege, I think we’re getting long on the questions now, so let’s cut it off now and we’ll move our other questions out to the next podcast. Jim: Have you ever considered a different way of practicing drug? Whether you’re burned out, need a change of pace, or want to see the world, Locum Tenens might be that option for you. If you’re not sure where to start, Locumstory.com is a place where you can get real, unbiased answers to your questions, and explanation fundamental question like,” What is Locum Tenens ?” to more complex questions about pay collections, taxes, various specialties, and how Locum Tenens works for PAs and NPs. Jim: You can go to Whitecoatinvestor.com/ locumstory and get the answers. If you need help with your taxes during this tax season, be sure to check out our recommended strategists page. Thank you for leaving us a five sun further consideration and for telling your friends about the podcast. Keep your head up, your shoulders back; you’ve got this, we can help. We’ll see you next time on the White Coat Investor Podcast. Disclaimer: My dad, your legion, Dr. Daly, is a practicing emergency physician, blogger, generator, and podcaster. He is not a licensed accountant, attorney, or financial advisor, so this podcast is for your entertainment and information purposes, and should not be considered official, personalized business advice.

The post The 5-Year Rule for Roth IRA Changeover- Podcast #146 saw first on The White Coat Investor – Investing& Personal Finance for Doctors.

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How to Invest Money in 5 Easy Steps

Investing is the best way to build wealth. Ask anyone living a rich life how they got there and they’ll say investing.

I used to think investing was intimidating and scary. It actually turned out to be a lot easier than I thought. You don’t need huge sums of cash or inside information about what stocks to pick.

You don’t need to time the market, pick the right stocks, and get a hot IPO.

All you need to do is set up an automated system and stick to your plan for the long term. You’ll have an incredible retirement and set up a passive income stream along the way.

There is some nuance depending on age, income, debt, goals, and risk tolerance. I’ll go through all of it.

Regardless of your situation, you can start investing money in just five easy steps. 

1. Understand Your Options and Available Investments

Investing can be super complicated. We’re going to avoid all the crazy stuff.

Don’t feel like you need to memorize everything I’m about to cover, I’m going to go over the core types of investment so you have a feel for the landscape. It’ll make the following steps much easier to follow. Treat this stuff as a reference list, come back to it whenever you need.

Here’s a brief overview of some common investment options.

  • Stocks — When you buy a stock, you’re purchasing a share of a specific company. Publicly traded companies (like Apple or Google) sell shares to raise money. Investors can buy or sell shares of a company among themselves. While stocks can earn high returns, they hold the most risk compared to other investment vehicles. 
  • Bonds — Bonds are loans made to the government or a specific company. When you buy a bond, you’re allowing the issuer to borrow your money and pay it back with interest. Bonds offer lower returns, but they are considered to be safer than stocks. The primary risk of a bond is if the company defaults. But buying a US government bond eliminates that risk. 
  • CDs — “CD” is short for certificate of deposit. These are issued by banks and credit unions. They are similar to a bond in the sense that your money is tied up in a loan for interest earned at a fixed rate. Unlike a bond that can be sold whenever you want, a CD will tie up your money for the full duration of the deposit. If you pull your money out early, you usually pay a penalty.
  • Mutual Funds — Mutual funds are comprised of a basket of investments. Rather than picking individual stocks or bonds, you can invest in a mutual fund and they pick the investments for you. Mutual funds have a manager that will invest the money pooled by all investors into assets. Most mutual funds follow a specific strategy, such as investing in international stocks. The risk associated with a mutual fund depends on the holdings within the fund. They usually have higher fees that other investments since the investment managers need to get paid along the way.
  • Index Funds — An index fund is a type of mutual fund. But instead of paying a manager to choose investments, an index fund passively tracks a particular index (hence the name). For example, you can get an S&P 500 index fund, which holds shares of companies on that index. As a result, these funds mirror the performance of a particular market. These funds don’t try to grow faster than the market, their only goal is to match it. Since very few people can beat the market consistently, index funds are the best choice for most investors.
  • ETFs — An exchange-traded fund (ETF) is similar to mutual funds and index funds. The most significant difference is how they are traded. An ETF trades just like a stock, you can buy and sell throughout the day. A mutual fund and index fund are only priced once per day.
  • Options — Options trading involves buying a contract. This contract gives you the opportunity to buy or sell a particular stock before a specific date at a set price. You aren’t obligated to buy or sell the stock; you simply have the option as the name implies. Don’t worry about these, very few investors should consider them.
  • High-Yield Savings — Some of your investments should be kept in liquid cash. A high-yield savings account will be your best option for this. However, interest rates on these accounts will always be lower than other types of investments over the long term. Keep the cash you need for savings or emergencies in one of these accounts, then invest the rest.

You can start investing by opening a brokerage account on your own. Alternatively, you can invest through a broker who will buy and sell investment vehicles on your behalf. Be really careful with brokers, many of them will sell you under-performing investments that give them high commissions. You can handle all your investments yourself by opening a few key accounts.

2. Open The Right Investment Accounts

Before you pick the type of investments, pick the right types of accounts.

Picking the right accounts will save you hundreds of thousands of dollars in taxes.

401k

A 401k is a company-sponsored retirement plan. If your employer offers a 401k, you should open up this account right away. Especially if you get a company match.

Some employers will match your 401k contributions up to a certain percentage of your income.

This is free money that you need to take advantage of.

For example, let’s say you make $100,000 per year. Your employer offers a 5% 401k match. If you invest 5% of your salary, your employer will match the amount dollar for dollar. This doubles your investment. In this example, you invested $5,000 and got an additional $5,000 deposited into your investment account. That’s free money. Take it!

Before you contribute money to any other accounts, make sure to max out any company matching. This will grow your investments the fastest.

The maximum annual contribution limits for employees participating in a 401k plan is $19,500 in 2020. You can withdraw money from your 401k once you reach 59 ½ years of age. You could withdraw funds early, but you’ll pay a 10% penalty in addition to the taxes on your withdrawal amount.

If you’ve maxed out your 401K max, some of the other accounts in this list, and still have money left over, come back to your 401k and increase contributions until you max it out entirely.

Roth IRA

A Roth IRA is another type of retirement investment account. After taking advantage of a company 401k match, it’s the next best place to put your money.

When you put money into a Roth IRA, it’s tax-free forever. Not only does it grow tax-free, you won’t owe any taxes on it when you take money out during your retirement. It’s like having your own private tax-free island that the IRS can’t touch.

In 2020, the maximum investment for a Roth IRA is $6,000 per year.

If at all possible, max out your Roth IRA every year.

SEP IRA

A Simplified Employee Pension Individual Retirement Account, or SEP IRA for short, isn’t as common as a Roth IRA or 401k. That’s because it’s reserved for self-employed individuals and their employees.

An employer can contribute up to 25% of an employee’s annual compensation into an SEP IRA each year, as long as it doesn’t exceed $57,000.

If you work for yourself, an SEP IRA is one of the best ways to save for retirement while simultaneously getting tax benefits. Self-employed individuals will use a special calculation to determine maximum contributions for themselves.

One of the most significant benefits of an SEP IRA is that your contributions lower your taxable income. However, you’ll pay taxes on your contributions plus any growth when you withdraw funds after reaching retirement age.

Brokerage Accounts

If you’ve maxed out your retirement accounts and still have money left over, you can always dump as much cash as you like into a brokerage account.

A brokerage account is basically a bank account that lets you purchase investments like stocks and bonds. First you add money to the account, then you can purchase the investments that you want.

Unlike retirement accounts, everything in a brokerage account gets taxed. So if you get dividends or sell something for a profit, you’ll have to pay taxes on those gains.

3. Set Up Automatic Contributions

The best way to get rich is to set up monthly contribution to your investment accounts every month. Do this for 2-3 decades and you’ll wake up with a ton of money in your account.

Every account allows you to set up an automatic monthly transfer. I like to set these up for 1-2 days after I get paid. That way, it never feels like I had the money in the first place.

Follow this order when setting up contributions:

  1. Max out any company match in your 401k
  2. Max out your Roth IRA
  3. Go back and max out your total 401k
  4. Consider a SEP IRA if you’re self-employed
  5. Put anything else into a brokerage account

So how much should you be investing?

A good rule of thumb is to invest 20% of your take-home pay. It’s low enough that many folks can manage this while being large enough to give you a nice retirement. The earlier you get started with this, the better.

If you want to invest more, go for it. But don’t feel like you have to.

4. Pick Your Investments

Now that you have money coming into your investment accounts, it’s time to buy some investments.

Don’t leave cash sitting in your accounts! I’ve come across a ton of people that have done this accidentally. You’ll be losing out on a ton of money, take the 5 minutes and put that money to work.

There’s two ways to do this.

Super Easy Method = Target Date Funds

If you hate thinking about investments, find a target date fund for each of your accounts.

These funds do everything for you. You decide the year you want to retire and the fund handles the rest. They pick the investments, rebalance everything, and skew your money towards safer investments as you get closer to retirement. Pick a fund with a target date when you’ll be 65-70 years old, it doesn’t need to be perfect.

You’ll literally pick one investment, set up automatic contributions, then never think about it again. It is by far the simplest way to deal with investments.

Advanced Method = Build Your Own Portfolio

If you enjoy finding investments yourself, you can build a portfolio yourself. You will make a bit more money this way by having fewer fees, target date funds have slightly higher expenses that standard index funds.

When building portfolios, I follow these rules:

  • Stick to index funds, avoid mutual funds entirely.
  • When you’re young, skew heavily towards stocks.
  • As you get closer to retirement, skew more towards bonds.
  • Follow one of the lazy portfolios.
  • Rebalance once a year.
  • Invest up to 10% of your portfolio on any investment of your choice. Your returns will be worse but it allows you to scratch the “investment itch” without putting the rest of your portfolio at risk.

5. Sit Back and Do Nothing

Now you’re done.

You set up automated contributions and payments. Let’s say you’re making enough money to max out your 401k, Roth IRA, and have money left over for a taxable account. Your automated contributions would look something like this:

  • $1,625 per month to 401k
  • $500 per month to Roth IRA
  • $500 per month to an individual taxable account

The rest can remain in your checking account for guilt-free spending. Go out and live life, your retirement fund will take care of itself.

And when your pay increases, increase your contributions so you keep investing 20% of your income. This is the only change that you need to worry about.

How to Invest Money in 5 Easy Steps is a post from: I Will Teach You To Be Rich.