Ask Julie

“Julie knows just about everything when it comes to personal finance – I have yet to see her get stumped.” – Cheryl D.


There are so many choices and so much information available on how to spend, save, and invest your money it can be hard to wade through all you see. If you have questions, please send me a note. I’ll reply to you directly, and post your questions and the answers here for others to see, unless, of course, you’d prefer I didn’t.

Here are a few questions I’ve received recently.

Question: Regarding the Saver’s Tax Credit, does contributing to an HSA qualify? Also, how does a traditional IRA work? If funds transfer from a bank account, wouldn’t that be post-tax funds?

Answer: An HSA is not one of the accounts that qualify for the savers tax credit  Here are the accounts that do qualify:

  • Traditional IRA
  • Roth IRA
  • 401(k)
  • 403(b)
  • 501(c)(18) (union plans)
  • 457 (governmental plans)
  • SEP
  • SIMPLE IRA
  • SIMPLE 401(k)
  • ABLE

When you contribute to a traditional IRA, you can take a deduction for your contribution on your taxes. So yes, when you move money from your savings account to a traditional IRA, it is after tax money, but when you file your taxes, you can adjust your income down by the amount of your contribution, converting your contribution to before tax. By the way, you can take the savers tax credit and still take the tax deduction for your traditional IRA contribution.

Question: I have mid-six figure student loans and work for a employer that qualifies for PSLF. However, there are no employer sponsored plans available to us. Does it make sense for us to contribute to an HSA and traditional IRA (enough to lower our AGI) and then open up a Roth IRA since we are not married, most likely currently in a lower tax bracket, and tax rates are currently low?

Answer: Too bad about there not being an employer sponsored plan to contribute to. The HSA contribution and traditional IRA contributions will reduce your AGI.  However, if you max out a Traditional IRA you cannot contribute to a Roth IRA. Your total contribution to both types in the current year can only be $6,000.

Another possible way to lower your AGI would be if you owned a home with a mortgage. Your interest and property taxes would be deductible assuming total deductions exceed your standard deduction. But you need a fairly large mortgage for that to work. 

Question: I have around $20K in a traditional IRA and not sure what I should be doing with this money. Should I rollover it over to my employer’s 403b and continue to contribute until retirement, or rollover it over and start contributing via a backdoor Roth IRA instead, or maybe these two are not the right choice? I’ve never really thought too much about personal finance until now… any explanation is greatly appreciated.

Answer: Your IRA cannot be rolled into your 403B unfortunately. And since your Traditional IRA has been around for a while, you won’t benefit from the back door Roth strategy. To work, that has to be done as soon as the contribution is made. You really don’t need to do anything with the money, save ensure it is invested well. There is nothing wrong with having both traditional and Roth savings. You’ll wind up there anyway with your 403B. One recommendation that I do always make is to have as much of your money at one institution as possible. So for money outside your 403B strive to keep all your accounts at one institution, and if you have old employer retirement accounts from previous jobs, roll those into an IRA at the same institution. That way it’s easy to keep track of all your money.

Question: I will be moving to another state to work for 3-4 years. Do I need to change my drivers’ license; how will this impact me financially/how I file taxes (first job offer, besides state specific income tax)?

Answer: Congratulations on your new job! Yes, you do need to change your drivers license. Most states require you to get an in-state license within 30 days of changing your residency. You’ll also want to make the change so you can vote in your new state.

From a financial perspective, you’ll have to pay for your new license and to re-register your car, if you have one. Your car insurance rate may also change. And you’ll want to check that your bank has local branches in your new town. If not, you may want to change banks so you don’t wind up paying extra fees for ATMs and the like. It is also good idea to look for a state specific W-4 and fill that out in addition to the federal one. That will ensure you don’t wind up owing additional state income taxes at the end of the year.

Question: I understand a Roth 401k/403b can act as an additional bucket for retirement savings, but are there any benefits of that over a Roth IRA; some asset protections maybe?

Also, read through your blog posts and saw mention of bond maturity dates. Do we need to purchase individuals bonds to have this working for us, and which do you recommend? Don’t think Vanguard total bond has maturation dates.

Answer: The primary benefit of using your employers Roth 401k/403b is the additional tax exempt savings. You can contribute up to $19,500 if your below 50 years of age and $26,000 if your over 50 in your employers plan. You can only contribute $6,000 and $7,000 respectively into an IRA. The other benfit is that some employers match your contributions, so you can double your money in some cases. The final benefit, which also is not universal, is, because many employers are large enough, they have access to institutionally priced investment options, making your investment expenses lower than you could get on your own in an IRA. 

You do not need to purchase individual bonds to build a bond portfolio with maturity dates. Invesco offers a suite of self liquidating exchange traded bond funds that do the same thing. Each ETF has an effective maturity date, and holds at least 200 different bond holdings. Because these are ETFs, you can purchase them in any brokerage account. However you won’t find them in your employer’s plan.

Question: I plan to open up a savings account with my partner. However, we live in two separate states – one with income tax and one without. If our savings allows for some interest accumulation, how do we report this in regards to tax purposes?

Answer: Savings and investment earnings accrue to the owner and are included in their resident state taxes, regardless of where they live. Each account will be attributable to a single social security number. So even though it’s a joint account, you’ll have to decide whose social security number to use. That is the number the financial institution will use to report interest earned to the IRS.  How you split up the tax liability is up to you. Here is a good article on your options.

Question: Do you have a post about backdoor roth IRAs? I am confused by them. Can we contribute to a traditional IRA and then do the backdoor each year?

Answer: I haven’t done a post on backdoor Roth IRAs because they can be complex. They only work well if you currently have no or little money currently in a traditional IRA. Many folks have some traditional rollover IRA money from prior employers or prior traditional contributions. Here is a brief summary of how they work and what can go wrong.

If you want the advantages of a Roth IRA but your income is too high to be eligible to contribute to one, you can contribute to a traditional IRA and immediately convert it to a Roth. Even with a traditional account, only your earnings are taxable upon withdrawal if your contribution was after tax. Due to the immediate conversion, there are no IRA earnings to tax, so the conversion is tax free. 

However if you have any traditional IRA money from previous years or due to a 401k rollover, the IRS looks across your traditional IRA accounts and taxes the conversion according the its percentage of your total untaxed holdings. This is a particular problem for rollover 401k accounts whose entire balance has gone untaxed, and can result in your conversion being completely taxable. 

If you have no other traditional IRA holdings to muddy the process, you can do this conversion every year.

Question: Fidelity Zero Fee Index Funds vs Vanguard Index Funds? Julie, can I please hear your thoughts on them, and which one would be recommended? Is this a loss leader/inertia play or can expenses be raised in the future?

Answer: Either Fidelity or Vanguard’s index funds are great options. Fidelity only has a few zero fee funds, so they are essentially a loss leader, and you may want to branch out from those offerings. The firm says they do not intend to add fees in the future, but that is always a possibility. Both companies use full brokerage accounts now, so you can buy any investments you choose with either. There may be transaction fees for investments that are not proprietary to the fund company you choose though.

Question:  I don’t really like my employer’s Roth 403(b) options – high expenses, limited options. Should I open up a Vanguard Roth IRA, and if so, do I need to rollover my existing funds from Roth to Roth, or do something else? Is there a way to claim tax loss when I’m doing this? I realize it may be better to have both an employer Roth and my individual Roth, but I’m not earning enough to contribute to both at the moment.

Answer: In determining whether to abandon your employer sponsored plan there are a couple of questions to answer: 

Does your employer match your contributions? If so, you will want to participate at least enough to get the match. Even high expenses are worth dealing with for the promise of free money. 

Are the fees too high? The average fund expense ratio across retirement savings plans nationally was 0.53%, and only about 11% of plans had average fund fees greater than 1%. If the fund expenses are less than 1%, it may still be worthwhile to take advantage of your employer sponsored plan. The ability to save more annually on a tax deferred basis alone is well worth it, and there is likely one or two low cost index options among your choices that will allow you to create a good investment portfolio.

If you do decide to change your savings strategy to a Roth IRA, you’ll have to start a whole new account. You can’t transfer the money you’ve saved in your employer plan until you leave your employer. You also cannot realize a tax loss in a Roth savings vehicle. All capital gains and income are tax exempt, which also means you can’t take advantage of any losses.

Question: “Can one ever be in the negative? I know the change percent can be negative, but can the value of stocks actually be subzero (ie have to owe a company or fund money)? Also, if I buy and sell funds within my Roth 403, do I have to pay taxes/capital gains?”

Answer: No, you can never owe money to anyone when you buy stocks or mutual funds. The worst it could possibly get is that you lose what you invested. But there usually is some value remaining even in the worst of cases. When you buy and sell funds within your Roth 403 (b) there are no tax consequences. Dividends and capital gains are both exempt from taxes within those types of accounts.

Question: “I looked at my employer sponsored plan and am contributing to get the match. However, a lot of the funds available do not seem that good. The only one seems to be VIIIX which is not the life strategy or target fund you recommend. Any thoughts on this fund? Should I open another account and put the rest of my money there? Potential drawbacks? Relatively early in my career”.

Answer: The VIIIX fund is the lowest cost version of the Vanguard S&P 500 Index Fund. I’m surprised your employer does not offer target date funds, since most do. However, if none is available, you can combine the VIIIX fund with an international stock fund and a bond fund and get most of what you’d get from a target date fund, at least for several years, given that you are young. Most target date funds have about 80% of their investments in a mix of US and International stocks and 20% of their investments in bonds until they are about 15 years from the target date.

You mentioned the funds don’t appear to be that good. Good is a question of what you compare it to. Make sure you are comparing the funds to their appropriate benchmarks. International funds should be compared to an international benchmark. Those funds have not done as well a US funds over the last few years, because the dollar has been strong. The conditions of the last few years will be different from the conditions of the next few years, and the situation might reverse. Bond funds should be compared to bond benchmarks. Those rarely do better than the US stock market, but they reduce the risk of your portfolio.

If the investment options truly are terrible, any savings above what you need to get your match could be invested in a Roth IRA, where you would have access to a wider variety of investments.

Question: “Is this a good time to save into retirement accounts? Or just do a CD for a couple years? Trying to put a down payment on house – would residential appreciation be better than stock markets with the pandemic”?

Answer: Before you save for retirement or a house, make sure you have emergency savings. If you are already there, any time is a good time to save into a retirement account. You can invest in just about anything through and individual retirement account, and if you’re saving in an employer sponsored plan, they will still have a broad range of opportunities. If you are young, your retirement savings are there for expenses many years from now. Even if you are closer to retirement, much of your savings are to support you many years in the future. Regardless of what the investment markets do in the next few years, your savings have lots of time to grow. Invest your retirement money in line with how long you have until you access it. Target date retirement funds are a good option that will get you an investment strategy that is appropriate based on how long you have until you do retire. 

The home you live in should not be considered an investment. That is because you always need someplace to live. If you sell your home, even if it’s gone up in value, it will most likely have only kept pace with other homes in the area. There are several advantages of owning a home. The biggest one being that what you would otherwise pay in rent goes toward owning your property. But there are also significant costs. We’ve owned our home for 20 years. It has more than doubled in value. But if you consider all the maintenance and improvement costs, property taxes and interest on the mortgage we have not gained any money at all. We do own our home outright now, and that is a big comfort, but my retirement investments have netted a much bigger return.

If owning a home is a goal, you should work toward that in addition to saving for retirement. Don’t let the current volatile markets influence your decision on either.

Question: “Question about the CARES act; If we had our hours reduced, do we still qualify for the 600/week. Living in CA“.

Answer: Based on the Department of Labor guidance, you should be eligible for some unemployment  benefits, though they may be reduced since you are working part time. Here is the paragraph from the US DOL guidance.

“The Unemployment Insurance Program Letter outlines several new programs under the recent CARES Act. Pandemic Unemployment Assistance provides benefits for eligible individuals who are self-employed, seeking part-time employment, or who otherwise would not qualify for Unemployment Insurance benefits under state or federal law. To be eligible, among other requirements, individuals must demonstrate that they are otherwise able to work and available for work within the meaning of applicable state law, except that they are unemployed, partially unemployed, or unable or unavailable to work because of COVID-19 related reasons.”

Question:  “I want to start saving for retirement but my employer does not offer retirement accounts. What to do? Start my own Roth IRA? Invest, or is that risky? What are some good ways to find a CPA CFP? Fiduciary ask?”

Answer: Yes, if your company does not offer a retirement savings plan, your best bet is an IRA. With a Traditional IRA your contribution is tax deductible. While a Roth IRA contribution is not tax deductible, withdrawals in retirement are completely tax exempt. The current contribution limit is $6,000 or $7,000 if you are over 50. You can also save in a taxable account, and I recommend that you do. For most the annual limits on an IRA will not be enough savings. You can open both types of accounts with a mutual fund company, like Vanguard or Fidelity, or a discount broker, like Schwab or Etrade. Once you open your accounts, you can invest in a target retirement fund, for a one stop strategy appropriate for when you want to retire.

To find an adviser who is also a fiduciary in your area, check out the NAPFA web site. Financial advisers will generally be able to recommend a CPA as well.

Question: “I am reaching out mainly due to the economics of what is happening. I’m not looking to make hundreds of thousands of dollars, just something in the mid tens of thousands to stay afloat. willing to do almost anything and do not care about prestige/judgement. Please share with your audience; I feel that everyone can appreciate this. My question is: are there any employment opportunities that are often overlooked or you would recommend?”

Answer: Many people are struggling right now given the closure of the service industry businesses that are so important to our economy. Yet there are opportunities. The big grocery store chains are hoping to hire over 100,000 people. Amazon is hiring a similar number. You might also consider looking into UPS and Fed-Ex. Another field to look into would be call center work. Many call centers now use remote working arrangements. Best of luck to you in your search.

Question:My son is graduating soon. His friends tell him to file an income tax of $0 for this year, to help with PSLF payments next year, but I claimed him as a dependent. Can he still go ahead and file? I know there’s a “can be claimed as a dependent” or something when filing, but is it that simple? Anything else to watch for / potential issues?

Also, I know you seso-ed, and I’m trying my best to do the same. Is there a service that is similar to VITA?”

Answer: Yes, your son can file for an income based repayment plan and still qualify for the PSLF if you claim him as a dependent.  If your son is currently working, he would provide his current income and a paystub as documentation. If he has no income, he can indicate that on the annual income reporting form. However, the PSLF requires that you make 120 qualifying payments, so if he has no income and is not required to make any payment, he won’t be making any progress toward the 120 payment goal. The Student Aid website has everything you need to know about the income based repayment plans that can be used when shooting for the PSLF.

Yes, many of the tax help organizations are closed during the virus restrictions. However you can file your taxes for free if your income is less than $69,000. Here is a link to the IRS web site where you can get more information. The IRS has partnered with Turbo Tax, H&R Block and others to offer their platforms for free. I’m familiar with Turbo Tax, and the system is very easy to use. It asks you questions and tells you where to find the information.

Question: “I’m a student with a lot of debt and I hear about putting money away through 401k, HSA, 403b, IRA, etc to lower my AGI (trying for PSLF at the moment). I am new to all this so excuse me if this is a basic question, but do taxes only apply when we withdraw from these accounts, and do we have to report how much we put into them on our annual tax filing? Also, do we pay taxes on the interest we earn from a saving account/is there a threshold for this/some informative IRS form that talks about this? And what are some often overlooked ways to lower my AGI? “

Answer: Traditional IRA & 401k/403b accounts are taxed when you withdraw the money in retirement. HSA accounts are not taxed at all if you use the money for acceptable medical expenses. Contributions to your 401k/403b/HSA accounts are reported on your W-2. Your annual reporting will likely ask for info in specific boxes from your W-2. 

Interest income on savings accounts that are not among these tax advantaged accounts is included in income and taxable. Investment income on tax advantaged accounts is not included in income or taxable.
If your family has deductions such as mortgage interest, property taxes and charitable contributions that exceed your standard deduction (about $12,000 for singles and $24,000 for married couples) those would help reduce your AGI. However as someone who get’s most of their earnings from work, the best way to reduce your AGI is your retirement plan contributions which can be up to $19,500 per person this year.

Question: “I was recommended VITA to help file my taxes, but every location I visited is closed due to the pandemic. Other sites or thoughts”?

Answer: You can file your taxes for free with a few different services, including Turbo Tax and H&R Block. Here is a link to the IRS Free File site. The online services are very easy to follow. I’m familiar with Turbo Tax. It asks you questions, and tells you specifically where to find the answers in your tax documents. That would be my recommendation. You can efile directly from these services as well. Turbo tax offers an on-line chat if you get stuck.

Here is also a link to a VITA locator. Some may still be open or offer help over the phone. And here is a link to an AARP Tax Aid Locator. Or you can call 800-906-9887, which is the toll free number for VITA.
Hope this helps.

Question:My company does not offer any tax shelter annuities other than an HSA. I have heard that once you reach age 59.5, your HSA acts like a 401k since it is taxed the exact same way for non-health expenses. Can you confirm if that is true? Also, if I plan to use money in a couple years (want access before age 59.9), is there a smart way to go about this given the current state of the economy (i’ve just been holding on to the cash… :/ )”

Answer: You are partially correct on the HSA withdrawals in retirement. However you have to wait until your are 65. At that point withdrawals from an HSA for other than medical purposes are taxed at your income tax rate with no penalty. Before age 65, you would pay a 20% penalty as well as your normal taxes. 
According to the IRS Publication 502 medical expenses include the premiums for health insurance, so that would be an excellent use of your HSA money. Individual insurance premiums are quite high.

Question: “My company has given me a bonus so I can now combine that with my savings and put a down payment on a house. Save early and save often! What are some metrics you recommend to look at when making this decision? Funny thing is my co-worker (I know her for 35+ years, we work in the same dept and our sons have grown up together) wants to sell her house? Should she do this now, from a strictly financial point of view? She says her house has gone up in equity 10%. Thanks Julie.”

Answer:

When thinking about buying a house, the major thing to consider is whether it’s affordable. But you have to look beyond the payment. In addition to the mortgage, there is property taxes and insurance you weren’t paying before. There may be home owners association dues on top of your payment, and you are responsible for all the things that go wrong in you house. That means paying for appliance repairs, roofing, painting, the furnace, and all that. So you’ll want to be able to set aside money on a regular basis to cover all that. If the house is new, expect $1 per square foot per year in extra expenses. If it’s old, you should be thinking in terms of $3 to $5 per square foot. Those expenses won’t come up every year, but they will come up eventually. As for your friend, when to sell a house is a personal decision. The 10% increase in value is not a good reason, if she’s planning to buy another. All the other houses have gone up in value too. If she’s down sizing and will use the money to live on, now is as good a time as any. Good luck with your house hunt!

Question: “I’m relatively young and have a little bit of money. A finance seminar recommended this to me: online saving account like ally for short term, brokerage account like vanguard for long term. What’s your take on this? Are online saving accounts better than traditional bank ones?”

Answer: The primary benefit of an on-line savings account is that it will pay a higher interest rate than your traditional bank’s savings account. That higher interest rate may come with strings, like limits on the number of withdrawals in a month. However, that should not be a problem if the money you put there is for emergencies and not meant for day-to-day expenses. Vanguard is a great option for your long-term savings.

Question:  “My company allows me to participate in an HSA? Pro/cons to this? Already doing the 401k”.

Answer: I highly recommend saving to your HSA. If you have an HSA, you have a high deductible on your health insurance plan. So you’ll need some savings to cover out-of-pocket expenses. If those are no trouble for you, there are still several advantages.

Here are the pros with an HSA. 

  • It’s a good way to save enough to cover your deductible and other out of pocket expenses.
  • It is an additional way to save money tax free.
  • The healthcare you pay for with an HSA costs you less because your contribution was pre-tax.
  • Your employer is likely making a contribution for you – so free money! Though you will get that whether you contribute or not.
  • You can use the money for healthcare now or in the future. You don’t have to use the money in the year you contribute. Any interest on the account accrues tax free.

There are a couple of cons, but they are minor:

  • The money can only be used for health care expenses, but you’ll have them at some point.
  • If you change your job and still have a balance, it’s easy to lose track of the money. So you just need to be a bit vigilant on that.

Follow-up Question on Medicaid:Is there a document where it talks about the 6 month period (couldn’t find it in Save Yourself) but excellent nonetheless. And does that mean one will no longer qualify or need to repay? Thanks for all you do-sharing is the best.

Answer: Here is a document from DHCS that shows the allowance for up to six months to reinvest the proceeds of the sale of a home in a new residence. You will continue to qualify for Medicaid as long as you buy your new home within the six month period. If you won’t be buying a new home, or if the proceeds from the home you’re selling exceed what you need to buy a new home, the remaining proceeds would be counted as assets and could disqualify you from Medicaid. There are, however, strategies that could allow you to keep the proceeds and still qualify. But you would need to speak with an attorney who specializes in Medicaid to make sure you set that up correctly.

Question:Thanks for creating this website. My question is about Medicaid. If someone currently receives CA Medicaid but sells a home, would that qualify as income and therefore not longer qualify for Medicaid benefits/need to refund them? Is this route recommended? Many friends also have this question, so please feel free to post this online – refer them here as well. Thank you!!

Answer:

Thank you for visiting my web site. The money you receive from selling a home is exempt for Medicaid purposes for up to six months, if the proceeds are to be used to buy another home. If the proceeds will not be used for another home, or you won’t need all the proceeds, it could conceivably be counted as income for your Medicaid eligibility. 

However there are some strategies for protecting those funds. It’s crucial that you get an attorney’s help to make sure those are put in place correctly though.  Here is a web site that may be able to help you locate an attorney.

Question:  “I’ve maxed out my 401(k). Now what? I don’t meet the income requirements for a Roth IRA.”

Answer: Even if your company offers a 401(k), or other retirement savings option, you can still save in a traditional IRA. Current contribution limits are $6,000 for those under the age of fifty, and $7,000 for those fifty and over. Your contributions are after tax, but your earnings grow tax free until withdrawn. Your after tax contributions are not taxable at the time of withdrawal, but your earnings are.

That isn’t quite as good a deal as you get with a Roth IRA. There all your earnings are also tax free if you wait to withdraw them until after you turn 59 1/2.

There is a way to save in a Roth IRA, even if your income is above the Roth limit. You can contribute to a traditional IRA and immediately convert your contribution to a Roth IRA. Since there are no earnings on the traditional IRA, the conversion is tax free.

However, be careful. If you already have traditional IRA savings, due to previous 401(k) rollovers or your past contributions, this “back-door” Roth contribution probably won’t work for you. That is because, the IRS lumps all your traditional IRA holdings together, and will tax your current contribution according to the proportion of the balance that hasn’t already been taxed. This article explains the issue.

Congratulations on your savings, and remember, any savings are good savings, even if you have to pay a little tax in the future.

Question: “I’m transferring my IRA to a new financial institution, and they are asking me whether I have an option contract at my current institution. How do I know?

Answer: An option contract is a contract that allows you to purchase a company’s stock in the future for a given price, called the exercise price. In order to use this investment strategy, your financial institution will set up an account that allows you to do that. Ordinary accounts are not allowed to invest in option contracts.

You have to fill out forms and jump through some hoops to have an option contract, so if you don’t remember doing that, you almost certainly do not have any.

Question: “My company has given me a choice between receiving restricted stock units (RSU) or company stock options. Which should I take.”

Answer: Here are the pros and cons of each:

RSUs:

  • The primary advantage of RSUs is you have something that very likely will have some value in the future.
  • The tax treatment of RSUs is also simpler that with options. The award of RSUs is taxed as income in the year in which you receive them. In the future, when you sell your shares, you will incur capital gains tax if they are worth more than when they were awarded.
  • On the negative side, you are taxed on your award as income in the current year, which could boost you up into a higher tax bracket.
  • If you leave the company before they vest, your award will have no value.

Options:

  • With options, there are no immediate tax consequences to the award. You will be taxed when you exercise them.
  • The tax treatment is more complex. When you do exercise your options, the number of shares times the exercise price will be taxed as income, and the difference between the market value at the time and the exercise price will be taxed as a capital gain. There will be no losses, since you wouldn’t exercise the options if the stock value was less than the exercise price.
  • With options, there is a chance your award will be worthless. If the stock value remains below the exercise price between the time the options are vested and the expiration date, your award will have no value.
  • If you leave the company before the options are vested, your award will have no value. You may also be required to exercise any options that have vested within a short amount of time after leaving the company.

Usually, companies set up these awards so that RSUs and options are equally attractive at the time of the award. The main difference that could make one more attractive than the other is if they have different vesting schedules. Earlier vesting is better.

Congratulations on your award!

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Save Yourself; Your Guide to Saving for Retirement and Building Financial Security, is available on Amazon.

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