Archives for January 2018

401k, 403b, 457, TSP Historical Contribution Limits 2009-2018

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Employer-based retirement plans like the 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan are not perfect, but they are often the best available option to save money in a tax-advantaged manner. For 2018, the employee elective deferral (contribution) limit for these plans increased to $18,500 (they are indexed to cost-of-living). The additional catch-up contribution allowed for those age 50+ is $6,000.

Here’s a historical chart of contribution limits for the last 10 years (2009-2018).

401k_limits_2018

Year 401k/403b Elective Deferral Limit Additional Catch-Up Allowed (Age 50+)
2009 $16,500 $5,500
2010 $16,500 $5,500
2011 $16,500 $5,500
2012 $17,000 $5,500
2013 $17,500 $5,500
2014 $17,500 $5,500
2015 $18,000 $6,000
2016 $18,000 $6,000
2017 $18,000 $6,000
2018 $18,500 $6,000

 

The limits are the same for both Roth and “Traditional” pre-tax 401k plans, although the effective after-tax amounts can be quite different. Employer match contributions do not count towards the elective deferral limit. Curiously, some employer plans set their own limit on contributions. A former employer of mine had a 20% deferral limit, so if your income was $50,000 the most you could put away was $10,000 a year.

Also see: IRA Historical Contribution Limits 2009-2018

Sources: IRS.gov, IRS.gov COLA Table [PDF]

Citi Simplicity Card Review: 0% for 18 Months (1.5 Years), No Late Fees, No Penalty Rates

CitiSimplicityCard (1)One of the most common New Year’s resolutions is to pay down debt. Rewards-earning credit cards paying 2% on purchases barely make a dent when you are paying a whopping 18% interest in your balances.

Our partner Citi offers the Citi Simplicity® Card, which is uniquely suited for those that want to transfer higher rate balances to a long 0% intro period while also offering some “accident forgiveness insurance”. The highlights:

  • The ONLY card with No Late Fees, No Penalty Rate, and No Annual Fee…EVER
  • 0% Intro APR on Balance Transfers and Purchases for 18 months. After that, the variable APR will be 15.74% – 25.74% based on your creditworthiness*
  • There is a balance transfer fee of either $5 or 5% of the amount of each transfer, whichever is greater
  • The same great rate for all balances, after the introductory period
  • Save time when you call with fast, personal help, 24 hours a day – just say “representative”
  • Enjoy the convenience of setting up your own bill payment schedule on any available due date throughout the month

No late fees, no penalty rate details. On most other credit cards, if you make a late payment, you’ll first be charged a late payment fee of about $35. On top of that, your super-low interest rate disappears and instead gets jacked up to something called their “default rate” or “penalty rate”. This is often close to 30% APR! The Citi Simplicity card adds a bit of flex in that they do not charge penalty rates or late fees.

Note that if you are 30 days late on this or any credit card, Citi will still report this activity to the credit bureaus. This card may be forgiving but you’re still trying to pay down debt and keep your credit score as high as possible. (Before the Credit CARD Act of 2009, there was something called “universal default” where you could be subject this penalty if you were late on another credit card. This is not longer allowed.)

The strong part of this card is the long 18 month period, so you can spread out payments over 1.50 years and ideally pay it all off by the end. There is a 5% balance transfer fee ($5 min). However, if you’re currently paying 18% APR, then 5% works out to 3 months of interest over a 18 month period. Once the intro period on all 0% cards expire, the rates will go right back up. You’ll either need to pay it off or transfer your balance again if you need more time. This card lets you spread your payments out over 18 months instead of 6 or 12.

If you know you will pay it off within a shorter time period, look for a card with no balance transfer fee. Compare with other low fee 0% APR balance transfer offers.

In terms of rewards structure… this is not that type of card. The Citi Simplicity does not earn any cash back, points, miles, or free toasters. I’d open a separate card for rewards after your balances are paid off and you join the “Paid in full every month” club.

Bottom line. The Citi Simplicity® Card is a card targeted that for those serious about paying down their balances. You get a 0% introductory period of 1.5 years on both purchases and balance transfers, with a one-time 5% balance transfer fee ($5 min). The card includes consumer-friendly features that help ensure your low rates don’t get hiked. If you do the math and can make adequate payments to pay down your balance over a span 1.5 years, this card may help get you debt-free with minimal gotchas. No annual fee.

“Disclaimer: This content is not provided or commissioned by the issuer. Opinions expressed here are author’s alone, not those of the issuer, and have not been reviewed, approved or otherwise endorsed by the issuer. This site may be compensated through the issuer’s Affiliate Program.”

Historical IRA Contribution Limits 2009-2018

ira_heartIndividual Retirement Arrangements (IRAs) are way to save money towards retirement that also saves on taxes. Each year, an individual’s total contributions to both traditional and Roth IRAs cannot be more than a certain dollar limit. If you are age 50+ at some time during the year, you can also contribute an additional amount. (You can’t contribute more than your taxable compensation for the year.)

Note that there are also income restrictions on Roth IRA contributions, although you may be able to get around these income restrictions with a Backdoor Roth IRA (non-deductible Traditional IRA + Roth conversion).

If your income is low enough (less than $63,000 AGI for married filing joint), the Saver’s Credit can get you back 10% to 50% of your contribution (of up to $2,000 per person) when you file your taxes.

Since I enjoy visual aides, here’s an updated historical chart and table of contribution limits for the last 10 years. I’m happy to say that we’ve both done the max since 2004. Have you been taking advantage of your potential IRA tax break?

ira_limits_2018

Year IRA Contribution Limit Additional Catch-Up Allowed (Age 50+)
2009 $5,000 $1,000
2010 $5,000 $1,000
2011 $5,000 $1,000
2012 $5,000 $1,000
2013 $5,500 $1,000
2014 $5,500 $1,000
2015 $5,500 $1,000
2016 $5,500 $1,000
2017 $5,500 $1,000
2018 $5,500 $1,000

 

Also see: 401k, 403b, 457, TSP Historical Contribution Limits 2009-2018

Sources: IRS.gov, IRS.gov COLA Table [PDF]

Khan Academy: Free Educational App of The Day

khanapp0Khan Academy is a non-profit with a goal of offering a free, world-class education to anyone, anywhere. I noticed that Khan Academy was the iTunes App of the Day yesterday (Android link), and I found that they have definitely made a lot of improvements since the last time I used it. There seem to be more interactive questions and the app interface is much cleaner. I remember when it was just a bunch of videos. The iPad app now includes handwriting recognition.

I would say the content focus is still on the K-12 level and college prep. Khan Academy covers everything from counting to alegbra to computer science to world history. In fact, they are now the official practice partner for Advanced Placement (AP) tests. They also offer free SAT test prep (MCAT, GMAT too + LSAT coming soon) along with college admissions assistance. Yes, they even have a section on personal finance! All free with no ads. Check it out if you haven’t recently.

Infographic: Asset Type Breakdown by Net Worth

There are many things that can make up your net worth: cash savings, primary residence, car, IRA, taxable bonds, or private business interest. Visual Capitalist has a infographic called What Assets Make Up Wealth? that shows how this mix changes with net worth. The data is taken from the 2016 Federal Reserve Survey of Consumer Finances.

assets-net-worth

Some overall observations:

  • As net worth increases, the following components tend to make up a smaller percentage of the pie: liquid cash, primary residence, and vehicles.
  • As net worth increases, the following components tend to make up a larger percentage of the pie: taxable investments (stocks, bonds, mutual funds) and business interests.
  • Most multi-millionaires have business interests as the biggest component of their net worth.

I noticed a few unique quirks in the trends. At the $100k level, primary residence has its biggest share among all of the tiers. Perhaps as you go from the $10k to $100k, you are more likely to own a home and thus it temporarily becomes a bigger component of the picture.

At the $1 million level, pensions/IRAs have their biggest share among all of the tiers. Perhaps above that level, more of your net worth goes into taxable investments. Due to contribution limits, it is hard to hold more than a certain amount in tax-sheltered IRA and pension accounts.

At the $1 billion level, perhaps my eyes are deceiving me, but it appears that the vehicles sliver is nearly twice as wide than for the $10 million level. If a $10 million household has 1% in vehicles, that works out to $100,000. Okay, that’s a Mercedes S-Class or Tesla Model X. If a $1 billion household has 2% in vehicles, that’s $20 million in vehicles! Wow, those $10 million households now seem really tight! It takes a lot more money before they let loose and splurge on some fun toys.

Backdoor Roth IRA: Now Officially Supported by Congressional Intent?

rothheartIn 2010, the tax laws were changed to eliminate the income limits on conversions from Traditional IRAs to Roth IRAs. Since Roth IRAs still have income limits on direct contributions, this opened up a “backdoor” where high-income individuals could first contribute to a non-deductible Traditional IRA and then immediately convert to a Roth IRA. If there were no capital gains upon conversion, there would be no taxes due. Thus, the term “Backdoor Roth IRA”.

Some financial experts fretted about the legality of this move due to something called the step transaction doctrine. Some financial advisors instructed people to take special steps to help ensure the legitimacy of their Roth IRA conversions. You also have to be careful if you have other Traditional IRA accounts that you are not rolling over (“IRA aggregation rule”).

Even with all this discussion, there was never any official acknowledgement of this tax move. In past years, there were explicit budget proposals that would have curbed this option. Some argued that this talk itself was implicit acknowledgement that it was legal. Confused yet?

Apparently, the official acknowledgment finally came with the new tax law when they stopped allowing Roth IRA recharacterizations (undos). According to this Forbes article Congress Blesses Roth IRAs For Everyone, Even The Well Paid, a conference committee report by Congress included the following footnotes. Thanks to reader Abel for the tip.

268 Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA, as discussed below.

269 Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA.

276 The provision does not preclude an individual from making a contribution to a traditional IRA and converting the traditional IRA to a Roth IRA. Rather, the provision would preclude the individual from later unwinding the conversion through a recharacterization.

277 In addition, an individual may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA, but the provision precludes the individual from later unwinding the conversion through a recharacterization.

Do these footnotes end all speculation? Ed Slott seems to think that this indicates “intent” by Congress, and he is a respected tax source. The same conclusion is also drawn by Natalie Choate in this Morningstar article.

Both my wife and I have made non-deductible Traditional IRA contributions every year since 2010. I think if it was really an “unintended loophole”, they would have closed it by now (as with Social Security benefits). I am not a tax professional, I’m just a guy who wishes we didn’t need experts to interpret every little thing. If there were any people who needed additional convincing, perhaps this will give them the confidence to proceed.

Royalty Exchange: Buying Music Royalty Rights as Income Investment

sesameFor many songwriters and musicians, their primary asset is the rights to their music. Instead of a house, they have intellectual property. Every time their song is bought for a film, streamed online, or aired on TV they receive a royalty payment for the rest of their lives + 70 years. But what if the artist wanted a lump sum? They would usually sell their rights privately. Royalty Exchange is an online marketplace that aims to do this via public auction instead.

Until recently, you probably never had the opportunity to own income-producing intellectual property. That’s where Royalty Exchange comes in. We’re a marketplace where these types of royalty assets are bought and sold. We specialize in intellectual property with a documented track record of regular, consistent income.

You can view their live and closed listings here. Past auctions include works by Rihanna, Taylor Swift, Jay Z, Dr. Dre, Chris Brown, and Earth, Wind and Fire. You could have bought rights to “Elmo’s Song” from Sesame Street or Wiz Khalifa and Charlie Puth’s “See You Again” (Fast and Furious 7 soundtrack). I wonder if you get paid from any of the 3 billion YouTube views?

You do not need to be an accredited investor, but know that most auctions have ended between $10,000 and $100,000. Often, you are only bidding on a percentage of the complete royalty stake. Royalties are generally paid to you on a quarterly or biannual basis. There may be admin fees charged that vary per listing.

I like the idea of receiving an lifetime income stream, but I am not nearly familiar enough with the music industry to invest in royalties of individual artists or songs. You would think the artist has much more information than you. If they thought their income was going to decrease from the current level, wouldn’t they be much more likely to sell than if they thought income would stay high. I suppose you could say this for any business sale, though.

I’d also worry that the income stream wouldn’t be very reliable as songs go in and out of fashion quickly. The starting yields appear to be in the 10% to 15% range (i.e. $10k to $15k earned last year on a $100,000 investment) at least partially in consideration of this risk. Perhaps these sales are more about risk reduction for the artists.

For a music insider, royalties might be a nice non-correlated asset. But for me, this would be more of a consumer purchase than an investment. It’s fun to look through the listings and imagine owning the rights to a lesser-known song of a favorite artist.

PenFed Power Cash Rewards Visa Card: 2% Cash Back With Military Service or Checking Account

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Pentagon Federal Credit Union (PenFed), the 3rd largest US credit union by assets, launched the PenFed Power Cash Rewards Visa Card in 2017. This credit card offers up to 2% flat cash back with no earning caps and no annual fee. Here are the highlights:

  • Sign-up bonus: $100 statement credit when you spend $1,500 in the first 90 days.
  • 2% cash back on all purchases with PenFed Honors Advantage (qualifying military service or PenFed checking account, details below). Otherwise, you get 1.5% cash back on all purchases.
  • No annual fee.
  • 0% Intro APR on balance transfers for 12 months. 3% balance transfer fee.
  • No foreign transaction fees.

PenFed Honors Advantage requires either of the following:

  • Military service (active, reserve, retired, or honorably discharged).
  • Checking account. Have and maintain a PenFed Access America Checking Account. This account has no monthly fee with daily balance or monthly direct deposit of $500 or more. $25 minimum opening deposit. As long as the account is open, you qualify for the 2% cash back.

In other words, if you don’t have military service, opening and keeping $500 in their Access America Checking Account will keep you qualified without a direct deposit or minimum activity requirements.

Cash back redemption options. Your cash back rewards can be redeemed as a statement credit, a deposit into a PenFed account, or a deposit into an external bank account. Simple.

Competition. The following cards currently offer a competitive level of cash back rewards. Some offer higher rewards, but with additional requirements and/or an annual fee. Please read my card-specific reviews for details.

PenFed CU membership eligibility. Check out their eligibility tool. If you have a military affiliation, chances are that you can join immediately. However, anyone in the general public can also gain access by first joining either the National Military Family Association or Voices for America’s Troops. Both of these partner organizations can be joined with a one-time donation of $17.

Bottom line. The PenFed Power Cash Rewards Visa Card offers 2% flat cash back on all purchases with no annual fee. There is currently a $100 sign-up bonus if you make $1,500 in purchases within the first 90 days. PenFed Credit Union membership is required, but is also open to anyone willing to donate $17 to the National Military Family Association (NMFA).

If you already have one of the other 2% cash back cards available with less requirements, this may not warrant an additional credit check and new bank account. However, PenFed does offer good customer service and other financial products. You might consider making them your primary banking institution if you live near PenFed branches (often near military bases).

Debitize: Will Making Your Credit Card Feel Like Debit Help You Budget? ($10 Bonus)

debitizeappIn our increasingly cashless world, I prefer to use credit cards over debit cards for a few reasons:

  • Credit cards usually have better cash back, points, or rewards programs.
  • Credit cards have additional features like free checked bags, extended warranties, and price drop protection.
  • Credit cards have more consumer protections explicitly required by federal law.
  • Having a certain amount of revolving credit card usage with a good payment history improves your credit score.

A major benefit of debit cards is that it feels more like “cash”, so it can be easier to control your spending. When you make a debit card purchase, your bank balance is immediately reduced so you know much money you have left. If this helps your manage your cashflow, it can help you avoid credit card debt. Indeed, if you try to buy something with a debit card and your bank account has a zero balance, the purchase will be rejected (depending on your specific settings, some banks allow small overdrafts).

debitize1

Debitize is a new start-up that makes your existing credit card feel more like a debit card. I had no idea this was a thing. Apparently they were profiled by the NY Times. Basically, you link up both your credit card and bank account, and they will match up your credit card purchases and take the same amount out of your checking account on a daily basis (weekdays). The money accumulates in your Debitize Reserve Account, and then they pay off your credit card bill when it is due each month.

We initiate withdrawals once a day on weekday mornings. Typically it takes one more day to hit your checking account. So if you go to the movies on Tuesday night, we’ll initiate the withdrawal on Wednesday morning and you will see the funds out of your checking account on Thursday.

You keep your existing credit card. This means you get to keep all the credit card perks like cash back, airline miles, hotel points, free checked bags, etc. You can still do credit card fraud disputes, refunds, etc.

You keep your existing bank account. You can set a minimum balance that Debitize will never go below so you won’t get hit with any overdraft or low-balance fees, or you may want a buffer for some other reason. Debitize will send you an alert if you hit this minimum balance.

Debitize has a freemium pricing model. The basic functionality is free. They take money out your bank account daily, but only pay the credit card company once a month at the due date. There is also a $3/month Credit Optimizer tier that pays off your credit card balance once every week so that your credit utilization ratio is lower and thus your credit score is higher.

My take? I can see why people would want this feature. Credit card perks. Free. I think Debitize is best for folks that have a handle on their debt, but prefer the feel of debit cards for better day-to-day budgeting.

I think the primary drawback is the added complexity. If someone has problems with credit card balances, they might do better with more simplicity. Focus on paying down that debt. Stick with the plain debit card with no rewards (and no option to carry a balance). In fact, one might go all the way back to physical cash where possible.

Debitize is offering a $10 credit for new customers towards your credit card bill. You must wait until at least 5 automated withdrawals from your checking account have been processed. I am a member of their affiliate program and will also receive a referral fee if you qualify for this bonus.

$10 credit will be applied to your Debitize account and paid towards your credit card bill as long as you have been active long enough to have at least five automated withdrawals. We really just want you to give us a real try — if you do and don’t think Debitize is for you, just shoot us a note.

Anthony Bourdain: Taking One More Risk Changed Everything

Anthony Bourdain gets to travel around the world, eat great food, and hang out with interesting people. I have read a few of his books and enjoy his TV shows, but this YouTube video from 1 Step Away revealed some new details about how it all started.

Bourdain loved writing but spent long days working as a chef. At age 44, having already made a few attempts at literary success, he decided to write up a short piece about restaurants. Finally, despite already having been rejected, he decided to send it over to The New Yorker (after a nudge from his mother). It ended up being printed in 1999. After taking that risk and that initial “yes”, he went on to write the bestseller Kitchen Confidential in 2000.

Having a day job but working for yourself as well definitely sounds familiar. You don’t need to quit everything and chase your dreams into bankruptcy. There is honor in taking a job that puts a roof over your head and supports your family. However, that doesn’t mean you shouldn’t keep taking some calculated risks. Look for upside potential without taking a lot of downside risk. What if Bourdain had given up after the first round of rejections? It only takes one “yes”.

Previous mentions of Anthony Bourdain:

Research Affiliates: 10-Year Asset Class Returns Forecast, Q1 2017

ra_logo200Investment advisory firm Research Affiliates has an interactive Asset Allocation tool that provides estimates of expected returns for many different asset classes and model portfolios. Their default model is based on valuations like the CAPE (cyclically adjusted PE, or Shiller PE) ratio that divides the current price by 10 years worth of earnings. If you believe that valuations like price/earnings and price/book matter, then this database helps show you what is relatively “cheap” or “expensive” in such terms.

Here’s an updated snapshot of expected returns for several major asset classes, as of January 2018. Click to enlarge.

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You can see that Emerging Markets and Developed International (EAFA or Europe, Australasia and the Far East) have the highest current expected return. This is explored more in-depth in their article CAPE Fear: Why CAPE Naysayers Are Wrong. Here’s a chart that summarizes their position:

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Takeaways:

  • US stocks are still relatively expensive based on historical values. Future 10-year expected average returns are around 1% above inflation.
  • Broad US (Core) Bonds, Long-term US Treasuries, Short-Term Treasuries, and TIPS are all expected to have low forward returns. Their low current yields offer little alternative.
  • Emerging Markets stocks, Developed International (EAFA) stocks, and Emerging Markets bonds (both local currency) are relative bright spots with the highest future expected returns.

These numbers are not very useful as a timing to jump in and out of something. The US has been highly valued for a couple years, yet returns for those last two years have also been quite high. However, Research Affiliates maintains that CAPE and similar valuation tools are a powerful predictor of long-term market returns.

I like holding both US and international stocks in my personal portfolio, and I have been slightly overweight emerging markets for a decade. Emerging markets have been hurting my overall returns for a while now, but knowing that they are “cheap” makes it easier to keep holding them in the hopes of riding the next upward wave. Of course, I’m holding onto my US stocks as well.

p.s. The most recent GMO letter by Jeremy Grantham also puts Emerging Markets as the “single reasonably-priced asset class”.

Charlie Munger’s Life as a Financial Independence Blueprint

blueprintCharles Munger is probably best known as the Vice Chairman of Berkshire Hathaway and partner of Warren Buffett. The University of Michigan Ross School of Business recently shared a hour-long talk with Munger on YouTube (embedded below). Munger has plenty of mentions on this site already, but my main takeaway from this talk was a more nuanced overview of his early years and how he personally achieved financial independence before really getting involved with Warren Buffett.

Here is a summary of my notes from the talk:

  • He was not born poor, but he was also not born into exceptional wealth. Munger wanted to go to Stanford for undergrad, but his father encouraged him to go to the University of Michigan as it was still an excellent school but more affordable. He ended up dropping out after only one year in 1943 to serve in the US Army Air Corps.
  • Military service, then law school. After World War II, he took college courses with the GI Bill and eventually went to Harvard Law School (getting accepted even though he never earned an undergraduate degree).
  • Successful law career. He practiced as a successful real estate lawyer until he achieved about $300,000 in assets. This was 10 years of living expenses for his family at the time (he now had a wife and multiple kids). At this point, he started doing real estate development at the same time. When this took off, he stopped practicing law.
  • Successful real estate development. When he achieved about $3 to $4 million in assets, he also wound down his real estate development firm. He was now “financially independent” but still mostly anonymous.
  • At this point, he decided to become a “full-time capitalist”. This last stage is what led him to his current status as a billionaire philanthropist. Along with his work with Warren Buffett and Berkshire Hathaway, he was also the chairman of Wesco Financial, which also grew to be a conglomerate of different wholly-owned businesses along with a carefully-run stock portfolio. Wesco Financial eventually became a wholly-owned subsidiary of Berkshire Hathaway.

Using Charlie Munger’s life as a blueprint, here’s a pathway towards financial independence.

  • Work hard, get an education, develop a valuable skill. Munger didn’t start Facebook from his dorm room or trade penny stocks in high school. He served in the military, earned a law degree, and went to work everyday for years. At this point, work means exchanging your time for money, but hopefully at a good hourly rate.
  • Use that work career and save up 10x living expenses. Munger called himself a “cautious little squirrel” saving up a pile of nuts. He dutifully saved his salary while supporting a family and kids (and some other personal family drama that a luckier person wouldn’t have to deal with). I don’t think you’ll need 10x if you don’t have a family to support.
  • To accelerate wealth accumulation, you can now take some more risk and start some sort of business. You need something that scales, something that’s not paid per hour. Munger did real estate development. If you look at people who got wealthy quickly, nearly all of them are business owners of some type.
  • At some point, your investments will enough money to support your living expenses. This is financial independence. It doesn’t matter what you do during the day, as you earn enough money while you’re sleeping. However, many people choose to continue doing one of the paths above: (1) employee-based career, (2) active business management, or (3) actively managing their investments.

Bottom line. Charlie Munger offers up great words of wisdom in this talk. He reminds us that our choice in marriage is much more important than our choice in career. He reminds us that just showing up every day and plugging away will yield great dividends over time. He reminds us that easy wealth without work is not a good thing for society. (He also says to give Bitcoin a wide berth.)

However, you can also learn a lot by noting and observing his actions. Munger was not a huge risk-taker. He grew his wealth in steps and never exposed his family to possible ruin. He worked hard for a long time and only became extraordinarily rich and famous later in his life. He primarily wanted to be independent “and just overshot”.