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:  “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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