I’m not sure I understand the RSU one. I just went back and did the math on my RSUs from last year and my company deducted over 22% on federal, as well as taxes for social security, Medicare, and state tax.
Assuming there isn’t a 2nd income drastically raising your income, why wouldn’t the company withhold the right percentage, considering they know what you make? Choosing a flat 22% seems odd.
It may be better for you. For example, you may want to cover the rest of the tax bill by selling other shares and doing tax lost harvesting. You may think your company is going to the moon and decide to cover the rest of your tax bill with cash and keep your shares (this is usually a bad idea). The way they do it gives you flexibility.
I wish it were easier to contribute more to my 401k during specific pay periods.
Part of my income is commission-based. I could max out my 401k when I receive my commission. It would be easier for me to budget this way. Unfortunately, contribution is all-or-nothing, and changing one's contribution percentage takes a few pay periods to go into effect.
Another tip not mentioned re 401k: change your default elections! Brokerages will usually put 401k funds into expensive "target date" managed funds that usually don't perform better than much cheaper index funds. Many 401k plans will allow contributors to choose index funds.
One more: /r/CreditCards on Reddit is an awesome resource for finding excellent credit card deals. Banks offer amazing sign-ups deals in the hopes that you'll carry a big balance in perpetuity. Taking the bait and paying off your card every month is basically free money!
Don't get sucked into churning, though. It's high risk for very low reward.
>you could have a large tax bill when you file your taxes the following year. And if it’s too large, the IRS will even impose a penalty
It is actually called an "addition to tax", not a penalty, and in fact it is merely an interest charge, just like if you don't pay the full balance on your credit card each billing period (for tax, the "billing periods" are the (roughly) quarterly dates when estimated payments are due). If you can make more money elsewhere than the interest charge by the IRS (currently 7%) you are better off not making the payments during the year.
>Health Savings Accounts are the rare unicorn of triple tax advantage: money isn’t taxed (1) going in, (2) while it’s growing in the account, or (3) when it’s taken out.
I see this a lot and it is completely ridiculous. (1) and (3) are the same thing when it comes to your contributions-- there is no scenario where you would ever pay tax on money when you contribute it and also when you take it out. It is only a double tax advantage, not triple. (And the money only comes out tax free if you use it for a limited set of expenses namely health care).
Having a single bullet point about using a trust is insufficient, as it is quite complicated to receive a trust. There are other options for managing estate planning that will work well for ordinary families (those with less than ~$28 million in total assets).
The marketing around trusts is a classic information asymmetry. Law firms selling the service of setting up a trust know it’s not simple for heirs, but that is essentially repeat business for them. Many heirs will need to hire a lawyer to help retitle and transfer assets in the trust, and dissolve the trust if they want to personally control the assets.
And people buying the service of setting up a trust will, by definition, never know how it ends up. (Maybe unless they themselves have received a trust.)
A trust is a powerful tool for protecting wealth across generations. It’s not easier than basic inheritance.
Edit to add: the easiest way to avoid probate is to designate beneficiaries on all your financial accounts. These supersede will instructions and avoid probate. You can do the same thing on vehicle titles, at least in some states.
Real estate is more complicated so the easiest thing on your heirs is to not own any real estate at the time of your death. :-) Or if you have real estate you would like to pass on, that specifically is a good use case for a living trust (with only the real estate inside it).
The article makes valid points. However, many of its recommendations are not practical for the 60% of Americans who live paycheck to paycheck. Even merely contributing to a 401(k) or HSA can be difficult for these families.
The conventional wisdom of investing the maximum into your 401(k) beyond employer contributions is a dangerous tip if you fully intend to retire early, because you are penalized so heavily on withdrawing too young and then further taxed on it.
It’s such bad advice and people parrot it all the time, probably because so many people are so bad with finances to begin with. It’s almost always a bad idea in this specific case.
If you intend to retire in your late 60s, then the conventional wisdom is fine.
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[ 3.2 ms ] story [ 26.9 ms ] threadAssuming there isn’t a 2nd income drastically raising your income, why wouldn’t the company withhold the right percentage, considering they know what you make? Choosing a flat 22% seems odd.
It may be better for you. For example, you may want to cover the rest of the tax bill by selling other shares and doing tax lost harvesting. You may think your company is going to the moon and decide to cover the rest of your tax bill with cash and keep your shares (this is usually a bad idea). The way they do it gives you flexibility.
Part of my income is commission-based. I could max out my 401k when I receive my commission. It would be easier for me to budget this way. Unfortunately, contribution is all-or-nothing, and changing one's contribution percentage takes a few pay periods to go into effect.
Another tip not mentioned re 401k: change your default elections! Brokerages will usually put 401k funds into expensive "target date" managed funds that usually don't perform better than much cheaper index funds. Many 401k plans will allow contributors to choose index funds.
Don't get sucked into churning, though. It's high risk for very low reward.
This is not always a given. If your income in retirement is much higher than your working years income, you will end up losing on taxes.
In fact, my employer didn't match at all so all my money is invested post-tax in a brokerage.
You should probably max out your Roth IRA, however.
It is actually called an "addition to tax", not a penalty, and in fact it is merely an interest charge, just like if you don't pay the full balance on your credit card each billing period (for tax, the "billing periods" are the (roughly) quarterly dates when estimated payments are due). If you can make more money elsewhere than the interest charge by the IRS (currently 7%) you are better off not making the payments during the year.
>Health Savings Accounts are the rare unicorn of triple tax advantage: money isn’t taxed (1) going in, (2) while it’s growing in the account, or (3) when it’s taken out.
I see this a lot and it is completely ridiculous. (1) and (3) are the same thing when it comes to your contributions-- there is no scenario where you would ever pay tax on money when you contribute it and also when you take it out. It is only a double tax advantage, not triple. (And the money only comes out tax free if you use it for a limited set of expenses namely health care).
The marketing around trusts is a classic information asymmetry. Law firms selling the service of setting up a trust know it’s not simple for heirs, but that is essentially repeat business for them. Many heirs will need to hire a lawyer to help retitle and transfer assets in the trust, and dissolve the trust if they want to personally control the assets.
And people buying the service of setting up a trust will, by definition, never know how it ends up. (Maybe unless they themselves have received a trust.)
A trust is a powerful tool for protecting wealth across generations. It’s not easier than basic inheritance.
Edit to add: the easiest way to avoid probate is to designate beneficiaries on all your financial accounts. These supersede will instructions and avoid probate. You can do the same thing on vehicle titles, at least in some states.
Real estate is more complicated so the easiest thing on your heirs is to not own any real estate at the time of your death. :-) Or if you have real estate you would like to pass on, that specifically is a good use case for a living trust (with only the real estate inside it).
It’s such bad advice and people parrot it all the time, probably because so many people are so bad with finances to begin with. It’s almost always a bad idea in this specific case.
If you intend to retire in your late 60s, then the conventional wisdom is fine.