Category: Finances

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Finances

Better than 2.2% High Interest Savings Accounts

I recently discovered this alternative to the high interest online savings accounts that I believe will return higher gains. The gist is that you take your current lump sum and split them up into 4 piles and purchase 4 week Treasury Bills (TBills) once a week and then just continue to reinvest once they mature.

The 4 week is currently returning ~2.4% which is higher than the 2.35% that I’m seeing for savings accounts and doesn’t require a 1 year locked like a CD that gives ~2.7% at the moment. Let me also mention that gains on TBills are not subject to state and local taxes (just Federal). I don’t know if this is something that’s common or if it’s because of the slightly inverted yield curve. Either way it seems pretty cool.

Disclaimer: I am not a financial anything, I’m just a rando on the internet.

I just set up my two weeks of this plan and it’s not difficult if you have a bit of knowledge. First off while TBills have a secondary market it trades like stock and I believe are already partway through their cycle. I don’t know enough about it so to keep things simple I just purchased “New Issue” TBills. This is basically buying brand new TBills with the full maturity date. The rates seem to be pretty stable buying these so you more or less know what yield to expect. They are only sold in $1000 increments at most brokerages and are released on Tuesday.

New Issue 4 week TBills are released on Tuesday and are purchased in $1000 increments (from most brokerages)

Now you just do the above for 4 weeks in a row and after the initial 4 weeks you’ll have small gains landing in your brokerage account. I believe some brokerages allow you to automatically reinvest (like a DRIP), but so far I’ve only found info about this at Fidelity (called auto roll) so far.

I’m using Schwab (referral link) because they allow commission free trades for TBills, allow purchases of New Issues, and I already have a bank account with them for international ATM usage (they have a really great foreign exchange rate and don’t charge ATM fees abroad so I can pull whatever foreign currency I need at arrival rather than carry it all with me). I’ve heard that Fidelity and Vanguard also allow for commission free TBill access. I tried Merrill and they don’t have online access to New Issues.

Rough steps to purchase at brokerages

  1. Make sure it’s Tuesday
  2. Log into your account
  3. Go to the Trade tab
  4. Look for Fixed Income or Bonds and go there
  5. Look for something that says New Issue and go there
  6. If it’s asking for a CUSIP number look for an option to search for the instrument
  7. Look for the 4 week Treasury Bill
    • Missing? Is it Tuesday?
  8. Buy (make sure it’s the 4 week one…or just don’t buy the wrong one)

Update: After confirming Schwab does not have the auto roll feature I also wanted to try TreasuryDirect which is the US Govt’s site for purchasing Treasury things. The sign-up was pretty easy, but prepare a bank account to be linked. The login is a bit more cumbersome because of some security things they do. But you can purchase TBills in $100 dollar increments (up to 5M) and they let you reinvest for up to 2 years (they ask you for the number of times you want to reinvest so you might have to do the math). You can also schedule purchases for future auctions (they seem to have about 2 months worth). It looks like the site will just pull from your bank for the purchase and deposit the gains into your linked bank. Internet sources state that you’ll have to remember to download the 1099 yourself.

  • Pros for TreasuryDirect
    • $100 dollar increments
    • Scheduled future purchases
    • Set reinvestment up to 2 years (editable too)
  • Cons for TreasuryDirect
    • No secondary market like in a brokerage aka you have to wait for it to mature to get the money. You’ll have to transfer your bill to your brokerage account to sell it before it matures.
    • Login seems to be more of a pain
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#DadLife Finances

529s: Parents vs Grandparents

As promised here is a follow up on the implications of a 529 from Parents vs the Grandparents.  Most of the complexity stems from how the 529s are viewed with regards to the expected contribution calculations below.

Parent’s Assets: Reduce aid by up to 5.64%
Kiddo’s Assets: Reduce aid by up to 20%
Kiddo’s Income: Reduce aid by up to 50%

Note: I’m not really going to talk about Kiddo’s assets, but if you have opened a custodial account (usually a UGMA/UTMA) these will fall under that category.

For Parents

Pros:

  • Tax free growth of assets
  • As you use it, it gets used up and affects aid less (because you have less assets)

Cons:

  • 529 assets are counted towards kiddo’s FAFSA calculation (part of the expected family contribution) and parent’s assets reduce financial aid by a maximum of 5.64%.
    Example: A parent’s 529 valued at $10000 reduces kiddo’s financial aid by $564

For Grandparents

Pros:

  • Tax free growth of assets
  • Assets in the 529 are not counted towards kiddo’s FAFSA calculation

Cons:

  • When kiddo takes a distribution from the Grandparent’s 529 it is considered income for the kiddo.  This used to affect next year’s aid, but there seems to be a new rule where income now affects next next year’s aid (e.g. income in 2015 affects eligibility for 2017-2018 school year)
    Example: Kiddo takes $10000 out of grandparent’s 529.   Aid for in 2 years could be reduced by $5000

Mitigation Plans

  • Communicate and plan distributions between parents and grandparents.  It would be horrible to have both pull money out and there not be enough qualified expenses to cover the withdrawals.
  • Grandparents can deposit in the parent’s 529 (if the plan allows) or give cash to the parents (up to the gift limit, 14k for 2017)
  • Grandparents can transfer the ownership of the 529 to the parents (not all 529s allow this so check)
  • Grandparents can strategically time payments for college.  Due to the new rule  grandparents should aim to pay for senior and junior years.  Assuming graduation after senior year, the income from these years never affect financial aid.

Ultimately if kiddo doesn’t qualify for financial aid anyways then none of this matters and everyone can reap the benefits of tax free growth on assets for higher education!

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#DadLife Finances

5-20 What? 529 Basics

If you’re interested in this you’re probably a parent and looking to save for your kid’s future college fund and heard that a 529 is a great way to do it.  That’s awesome and from what I can tell mostly true.  Given how fast higher education costs are growing planning ahead is a good thing, but is it always the right time?  Let’s dig in a bit more.

Should I open a 529?

First thing we need to look at is if the 529 is actually the right thing vehicle for you at this point.  Generally speaking I’d consider the 529 after you’ve started contributing pretty heavily to (and hopefully are close to maxing out) your own retirement savings accounts (401k/IRAs as I’ve discussed before).

If the above isn’t true, I’d suggest starting with the more traditional retirement vehicles.  Both options have similar preferential tax treatment, but the 529 is much more limited in its use.

What exactly is a 529 Plan?

Sweet so assuming you’re setting yourself up for retirement already let’s talk about 529s.

From the SEC’s website

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
Sounds pretty good.  So essentially they are funds, usually run by the State, that grow and can be used tax-free on qualified expenses.  Ok, let’s dig in some more on the state funds part.

States and 529s

In general each state seems to run their own 529s.  Note that while each state has their own program you do not generally have to be a resident of that state to use their program.  For example: To participate in the Utah 529 you do not have to live in Utah.  Note that some states do offer some tax deductions if you participate in their 529, e.g. Virginia.  In California, they offer no such benefits so I’m free to use any state’s 529 without feeling like I left something on the table.
These programs let you choose from a selection of market funds to create your portfolio.  Many have an easy “age based target” set of funds.  These funds will usually have a theme (domestic, aggressive, moderate, etc) and will become more conservative as the 529 beneficiary reaches college age.  You will generally also have the option to create your own mix of funds (from a limited selection they offer).

Qualified Institute

Awesome so you can grow investments and use the gains tax free for higher education at a qualified institute.  Most people think of college when you hear “higher education” and they are probably going to be pretty safe that those are qualified institutes, but 529s are actually a little bit more flexible than that.  Qualified institutes could be schools abroad and vocational schools as well.
According to the IRS:

An eligible educational institution is a school offering higher education beyond high school. It is any college, university, vocational school, or other post secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education.

This includes most accredited public, nonprofit and privately-owned–for-profit postsecondary institutions.

The best way to check is the ask the school and check online.  Do both as some schools may not show up in the list online.

Qualified Expenses

Generally these are any expenses that are required to attend the school.  A few examples below:
  • First up are any tuitions for the school
  • Room and board also count, but it can’t exceed the room and board cost used when calculating financial aid (a.k.a how much the school would charge you for room and board on campus).  Best to check with the school to find out the amount if the plan is to live off campus.
  • Any required books for courses.
  • Computers can be counted as a qualified expense as long as they are mainly used by the beneficiary during years that they are enrolled.
  • Computer software is less clear, but if it’s required for class it counts.  Pro-tip: check the campus store for education versions as they tend to be much cheaper too.

Not Qualified Expenses

  • Transportation (even to/from school)
  • Health Insurance (even university insurance)
  • Sports or club fees

Flexible Beneficiary System

So…what happens if your student decides, they don’t want to be a student.  Does all that money go to waste?  Not exactly.  The plan is fairly flexible and there are no penalties to changing the beneficiary.  Again…the IRS:
Yes. There are no tax consequences if you change the designated beneficiary to another member of the family. Also, any funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 for one of your children into a sibling’s plan without penalty.

529 Drawbacks

  • Note that 529s can only be used on higher education.  You can’t use these funds for a private high school for example.
  • If your student qualifies for financial aid 529s can also affect the amount they may get.
  • There’s also some minor complexity as to how the 529 disbursements are counts depending on who the account owner is (generally this manifests as parents vs grandparents).  More on that in a future post.
  • If you take money out of it for a non-qualified expense there’s a 10% penalty on top of the regular income tax.

This is by no means a deep discussion of 529s, but I consider the above a decent starting point to understand how they work and decide if it’s something you should investigate further.

Categories
Finances Retirement

IRAs Roth and Traditional – Which do I choose?

First off, CONGRATULATIONS!  If you’re asking this question you’re already on your first step to that “Rich Life”.  What are IRAs?  They’re essentially vehicles for retirement (Individual Retirement Account – IRA).  As you’ve noticed there are two kinds: Traditional and Roth.

As the names suggest the Traditional came first and the Roth I believe is more a function of my generation, but now they’re very prevalent.  Well what’s the difference?  If you assume normal usage of these accounts it boils down to one thing…when you get taxed.

Traditional – Use Pre-Tax income.  Get taxed on anything that is withdrawn after you retire.
Skip taxes now.  Get taxed on everything later.

Roth – Use After-Tax income.  Anything you withdraw after you retire is tax free.
Get taxed now.  Pay no taxes on everything later.

Here is some math with non-real life numbers for additional visualization.

Traditional –
Today: Income: 60k.  Invest 10k into Traditional.  Get taxed on 50k. 20% Tax Rate (10k).  40k Income.
Retirement: 10k becomes 100k.  Your tax bracket at retirement is 10%.  You are taxed 10k and keep 90k.

Roth –
Today: Income: 60k.  Invest 10k into Roth.  Get taxed on 60k. 20% Tax Rate (12k).  38k Income (60k – 12k taxes – 10k Roth)
Retirement: 10k becomes 100k.  Your tax bracket at retirement is 10%…it doesn’t matter.  You already paid taxes so you keep 100k.

The numbers aren’t realistic, but you get the idea.  I really like Roth IRAs if you’re under 35.  If you believe in the power of compounding and you have time, Roth is probably for you.  It’s because your earnings/growth on your investment is all tax free.  The longer you let your money grow the more the earnings you get so that’s why I suggest people start this young.  It’s the 2nd thing I would consider for retirement (The first being a 401k match from work, if they offer it.  401ks also nowadays come in the Traditional and Roth flavors.  Above rules apply as well).  IRAs tend to also have much lower limits than 401ks ($5500 in 2016.  Rules different if you’re over 50).

This may or may not apply to you, but another reason why I say do it soon is because Roth IRAs have income limits and people generally make less early (the limits change yearly and are fairly high).  For 2016 if your income falls is above $183,000 you can put less as you make more (at $188k you can only put in $2750) until…$193,000 you can’t contribute.  If you contribute more than you were supposed to you have to take it out and possibly pay some penalties.  It gets a bit messy so be aware if you’re close to this threshold.

You can technically take money out before retirement, but you’ll pay taxes (only applies to Traditional since you paid taxes on the Roth already) AND an additional 10% penalty (Applies to both).  Just don’t do it.

There’s a lot more, but this will hopefully get you started in understanding IRAs and which is best for you.

Wow you read to the end.  Hit me up on Twitter (or upper right icon) if you’re interested in something more specific or just want to chat.  I’m trying to be better about trying it out.

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Finances

On Money Part 2

So…since the first post on money had a part 1 I feel obligated to at least post a part 2 and here it is.

Based on my previous post it may sound like I don’t support credit, but I totally do.  There have been many times that I wish I understood credit a lot better growing up.  You know what they say tho, hindsight is 20/20.  The best tip I can give is to stay informed.  That being said I’ll cover some areas in credit that I wish I understood better growing up.

1. Credit Scores

Here’s the thing.  I didn’t know much about credit scores till way later in life.  And even now they’re somewhat of a magical black box.  There are 3 main companies that give scores that people care about: Equifax, Experian, and TransUnion.  They each have their own proprietary algorithm, but tend to score pretty closely.  There are many factors that affect credit scores like credit history, available credit, and % of credit left over/used.

Tip #1: Try not to close credit lines, especially if they’re your oldest credit card.  I closed my student credit card during my college years not knowing it would have a negative impact.  This hits you in two ways.  One, if it’s one of your older lines you’ll lose some history.  Two, your total available credit will suddely drop.  Just cut them up and keep the lines open.  By doing so you’ll also keep the % credit used lower which also helps.

Tip #2: Avoid bad credit history.  This means pay your bills on time.  Yea not super genius right?  It’s simple, but really important.  Negative info will stay on your credit history for 7 years.  If something like an unpaid credit line is tainting your credit score it’s sometimes worth trying to contact the company directly and paying them the amount owed to try and get it off your history.  Your mileage may vary.  That leads into the final Tip.

Tip #3: Know your credit!  This is probably the most important tip, especially nowadays with all the id fraud.  You can check your credit report for free once a year from each of the big 3 agencies here and no it’s not freecreditreport.com like that catchy commercial says.  The suggested way is to spread them out over the year to keep an eye out for mistakes.  Note that you get your credit history, but not your score.  The scores you’ll still have to pay for.

2. Loans

I used to think they were all bad so I didn’t take advantage of any of the lower interest loans available to me during college.  It was only after I graduated and understood more about how those loans worked did I see a missed opportunity.  Lucikily my brother and sister were able to take advantage my new found knowledge and lock in those low rates.  Loans can also be a chance to create a history of good payments that will help your credit score, but it’s a bit of a double edged sword as you’ll now have some debt being calculated into your score.  With some loans the interest is also tax deductible here in CA (I know that student and mortgage loans are structured that way).  The only takeaway here I guess is to not write them off right away, but consider the rates and opportunity cost.

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Finances

On Money Part 1

I was just sitting here thinking about how many people seem to have credit and money issues.  At the base level it seems pretty simple.  Don’t spend more than you make and save the rest.  Right?  Ok don’t jump down my throat.  I know it’s not always that easy or that simple as life is complicated and I can fully appreciate that.

Specifically, my issue lies with our obsession with buying stuff with money we don’t have (this means CREDIT)…I mean why dig the hole?  Again I understand the idea of leveraging for really big stuff.  But for everything else what makes us do this and how do we fool ourselves into thinking that it’ll be fine?  Why can’t you wait another 2 months when you have the money?  Who actually spends the time to read the terms and conditions that CC’s set forth.  For those that pay on time and in full you could care less right?  But the one time you miss or decide to finance that big purchase you’ll notice pretty fast on that statement.

I’m no financial planner, but I feel that I’m pretty good about living within my means (though it’s barely sometimes).  It made me think…why?  Why are some people smart about their money and why do others live on the wild side?  I think it breaks down into 3 main parts.

1. Education

As strange as it sounds I think there needs to be more emphasis on teaching the basics of how money and credit works.  What’s a credit card vs a debit card?  What does it mean to balance my checking account (I don’t feel the actual task is necessary with the advent of online banking)?  In my experience, we don’t really grow up being taught these life lessons then we get to college not understanding credit cards, how they affect our personal credit, and sign up for student cards for some free schwag.  Sometimes it ends there and other times we add to our already large college debt.  The good news is I believe this is covered much better nowadays.

2. Habit a.k.a Where are my piggy banks?

Growing up I had a piggy bank.  Maybe I dated myself, but I don’t see piggy banks anymore.  I think this may be a downside of this digital age.  I like to think of the piggy bank as the antithesis to the credit card.  CC’s teach spending cause it’s easy.  You swipe and the item is yours.  The loss of money just happened in the future where you can’t see it yet.  With the piggy bank you get to give your mental decision to save a physical attribute.  I believe in muscle memory.  When my brother and I were kids we each had a plastic piggy bank.  He had a blue one and I had a red one they had these green hats…anyways I digress.  I can remember putting money into that piggy bank.  I wasn’t even saving for anything and I’m not sure why I started doing it so I’m going to chalk this up to my parents slamming yet another value into me.  But there was something exciting about feeling it get heavier and even opening it up once in a while to see how much you actually had saved (free math lesson!).  Where did I get my money?  We didn’t get chore money =(  But my grandfather would always give us each a dollar when we went to go see him at the restaurant plus you find random stuff on the floor and change from lunch.  Having that piggy bank there and seeing it means you have to make a decision every time you see it.  Bring the piggy banks back!

3. Culture

Americans are consumers compared to other cultures.  I remember in my High School economics class my teacher mentioned the savings rate of Singapore was something, but what struck me is that America’s saving rate was negative.  There actually seems to be a recent swing with America saving more and other places spending more, but I think the culture still deserves a category on its own.  It’s that powerful.  There’s not much you can do, except be aware of it and make your individual change.  Knowledge is power.