401(k) + HSA + IRA

While reading online articles in preparation for writing my recent blog post about maximizing your pre-tax deductions, I came across a statement which I initially discounted because I did not understand it.  The author mentioned the annual maximum contributions one could make to retirement accounts if one had both a 401(k) and an Individual Retirement Account (IRA).  I had previously incorrectly supposed that one could not have an IRA account on top of an employer-sponsored 401(k) or 403(b) plan.

I see now that in addition to contributing to a 401(k) and a Health Savings Account (HSA), one could also save another six thousand dollars in an IRA.  For those over fifty-years-old, there is an extra one thousand dollars for a total annual contribution limit of seven thousand dollars.  Furthermore, an additional six or seven thousand dollars can be put aside in a separate IRA for a spouse even if the spouse does not earn income.

I think my initial confusion came about because of limitations on the pre-tax deductibility of the IRA when your employer offers a 401(k) plan.  If you make more than about twice median household income and you have a pre-tax 401(k), you cannot also deduct from your income tax your contributions to a traditional IRA.  I am not sure if there is any benefit to contributing to a traditional IRA if you cannot make pre-tax contributions.

An alternative to consider, however, is the Roth IRA in which you make post-tax contributions instead of pre-tax.  Unlike a traditional IRA, the benefit of a Roth IRA is that you do not have to pay taxes on your interest income in retirement.  This good deal from Congress to encourage Americans to save phases out for those making more than about three times median household income.

So in addition to contributing to your HSA and your employer-sponsored 401(k) or 403(b) plan, consider also investing in an IRA, whether Roth or traditional.  As your income increases over time, you might first put in just enough to your 401(k) to get the employer matching, then maximize your HSA contribution, followed by maximizing a Roth IRA contribution, and then returning to put any remainder of your available income in your 401(k) up to its annual limit.  You have some time to decide your financial priorities as the deadline for opening an IRA with funds that count toward the annual limit for the current tax year is not until April 15th of the following year.

Conscientiousness

I was thinking the other day about what the difference is between people who stop working on a job when they have met minimum requirements versus those who keep working on it until there is no more work to be done.  An example would be a student who hurries through an exam and turns it in early contrasted with another who spends extra time to double-check all of their work.  It is the difference between a "C" student and an "A" student.

I was also thinking about something related with regard to being inconsiderate versus considerate.  An inconsiderate person will increase the workload of others for the purpose of minimizing their own.  When an inconsiderate person fails to finish a job properly, they often are not even thinking about the impact to others who have to do the final cleanup.

It might be that the word that I am looking for to describe both of these aspects is conscientiousness.  When I read and watch videos about it online, I see that many describe it as one of the key personality traits.  Some further subdivide conscientiousness into orderliness and industriousness.

Being conscientious has long-term benefits.  This implies that those who are not conscientious should try to become more so.  Unfortunately this kind of change requires conscientious effort.

Pre-Tax Deductions

You should put as much as possible into your 401(k)/403(b) retirement plan and High-Deductible Health Plan (HDHP) Health Savings Account (HSA).  Of course you should put in at least as much into your 401(k)/403(b) plan to get the full benefit of any employer matching contributions.  You should go even further if possible and put up to the annual allowed limits in these accounts to maximize your pre-tax deductions.

With a 401(k)/403(b) retirement plan, you defer paying taxes on the income now and instead pay it later when you are retired and at a lower marginal tax rate.  With an HSA, you do not pay taxes on the income ever if you withdraw the funds for a medical expense.  At age sixty-five, HSA account owners can also withdraw the funds for non-medical expenses without penalty and simply pay income tax just as though it were another type of retirement account.

Because these are such good deals, there are annual limits on how much you can put into these savings accounts.  For the 401(k)/403(b), the annual limit for individual contributions is currently $19,000 per year for those under fifty-years-old and $25,000 for those fifty and above.  For the HSA, it is currently $3,500 for a single person and $7,000 for a family with an extra $1,000 for those at least fifty-five-years-old.

A young single worker could defer taxation on up to $22,500 of their annual income.  Of course if that worker is only making $25,000 per year, said worker will most probably not have the option of saving ninety percent of their income as they will need most of their money to meet immediate living expenses.  Regardless, everyone should strive to put into their 401(k)/403(b) plan at least enough to maximize employer matching contributions since this is usually a more readily achievable limit based on percentage of salary.

Finally, keep in mind that these saving plans can be invested and that the earnings grow tax deferred.  Your retirement and HSA plans will offer you a wide variety of different investment options.  For reasons I described in a previous blog post, I prefer index funds.

Zip Zippers

Previously I wrote about carrying a hundred dollars in assorted bills for unexpected expenses.  By happenstance just a few hours after I wrote that, I had such an expense of exactly that amount while I was out and about.  This has inspired me to write another practical advice blog entry.

Zip zippers.  Unzipped containers tend to leak their contents.  Even if you need to access the contents again soon, zip it up just in case you forget later.  Even if it is empty, zip it up just to keep spiders from nesting in there.

Lock doors.  If a door is unlocked, a child might enter and get trapped inside.  Even if you intend to come right back, lock the door before you go because you might get distracted.  An unlocked door is an unnecessary temptation but a locked door is peace of mind.

Shut cabinets.  Cabinet doors keep dust and vermin off of your items.  It is easier to focus in a work area when you do not have to keep remembering to dodge the open cabinet doors around you as you move.  A room looks less cluttered when cabinet doors are shut.

Close drawers.  People will bump into an open drawer and injure themselves if they do not see or remember that is open.  If enough drawers are open on a dresser or file cabinet, the whole thing will tip over.  An open drawer is a temptation to a child to either investigate or climb.

Cryonics Symposium

I recently watched the live stream of the Cryonics Symposium International hosted by the Church of Perpetual Life.  It was interesting to see how cryonics is spreading to other countries.  You can watch the recorded video on YouTube if you missed it.

The moderator of the event Rudi Hoffman is my cryonics life insurance agent.  He briefly mentioned that he wrote a book on the topic which I have read and can recommend.  If you are interested in signing up for cryonics, consider reading The Affordable Immortal: Maybe You Can Beat Death and Taxes.

Carrying Cash

I rarely use cash nowadays.  Paying with a credit card is more convenient than paying with cash and managing pocket change.  Plus some credit cards provide a benefit for using them such as a reward on each transaction of a percentage of the purchase price.

Because I use my credit cards for all of my purchases, any cash that I put in my wallet for emergencies is likely to stay there untouched for a long time.  Of course if I lose my wallet, I will lose the cash.  I need to balance the risk of not having enough cash on me to cover a future emergency versus the risk of the potential harm from losing all of the cash if I drop my wallet.

I have decided that the amount of cash that I should carry on me at all times is just enough to make change for any bill.  This means that I can break a five-, ten-, twenty-, fifty-, or one hundred-dollar bill upon request.  Here is what I carry:

• Five one-dollar bills
• One five-dollar bill
• Two ten-dollar bills
• One twenty-dollar bill
• One fifty-dollar bill

This adds up to an even one hundred dollars.  This is a nice big round number which is easy to remember when you need to know how much cash you have on you.  One hundred dollars is enough without being too much.

Sociopaths

Recently my neuroscience reading group covered the book The Psychopath Inside: A Neuroscientist's Personal Journey into the Dark Side of the Brain by James Fallon.  Sociopaths might be more inclined to abuse others because they lack empathy.  I think the author wrote that some one percent of women and three percent of men are sociopaths. 

Discovering that as many as one in thirty-three men are sociopaths has impressed me.  It certainly explains a lot both in my personal experience and the history of humanity in general.  I am now more inclined to search for the signs when I meet new people so that I can take defensive measures when dealing with one.

Family Funday

My wife Shannon and I decided to try what has been called Screenless Saturdays or Digital Sabbath. Our specific variation on this popular practice is to ban any form of electronic entertainment from bedtime at eight P.M. until that same time the next day. The idea is to disconnect from devices and reconnect with each other in person.

I started by unplugging the Internet router and confiscating my child's smartphone. Complaints started immediately from those in the habit of falling asleep watching television. I picked up a book that has been on my headboard shelf for a long time.

The next morning, the children slept in instead of arising early to play on their computers in the living room as they usually do. When everyone was up, we drove to the city zoo. In between bouts of fun, a child would grumble a bit, having momentarily remembered to protest.

We read to the children and played card games with them. I introduced the children to a word game in which players make up a story together by each adding one word in turn. The children played with the bubble machine and dug in the sand.

I did yard work without the benefit of an audiobook or music. I know I am old now because my mind has a lifetime of memories to ruminate over while my hands are engaged in menial labor. I guess some quiet time is needed to sort things out.

I chose Saturday instead of Sunday as our day of electronic abstinence because our local sailing club frequently meets on Saturdays. In the past, our children have been reluctant to leave their computers to go sailing with me on a pleasant day. I am hoping they will make different choices now that it is sailing versus board games.

Speaking of board games, books, and blankets, I think this also ties in to the hygge trend. Part of being cozy and comfortable with those around you is being present. This is hard to do when locked into perpetual combat in a virtual Valhalla.

MeWe

I dropped off of Facebook back in 2013 after learning that their end user license agreement required you to let them post ads to your friends that appeared as messages from you endorsing products such as herbal supplements for weight loss.  The endorsements were false in that you were not given an opportunity to review the ads or the products before they were posted in your name.  It is unethical to deceive your friends so I switched to Google+.

Google+ is shutting down in a few days so I have switched again.  For my new social network service, I chose MeWe because of its emphasis on protecting user privacy.  I invite you to connect to me on MeWe by using this link: https://www.mewe.com/i/david-wallace-croft

Household Cash Flow

My wife Shannon and I manage our household cash flow use an old copy of the desktop software application Quicken.  Instead of entering our transactions as we go, we enter our anticipated credits and debits for up to a year in advance.  If our account balance goes negative in the future, Quicken shows the balance as red which alerts us ahead of time that we will need to shuffle some cash around.

Quicken software is probably overkill for this purpose so I am not sure that we can endorse it, especially since we are not using the current version.  I am guessing you could instead use a spreadsheet for this purpose.  The main point is that you want to be able to see in time to do something about it whether buying something today will make your balance dip below zero in the future.

As much as possible, we use our two percent cashback credit card and our five percent cashback Amazon.com store card for our bills and purchases.  To avoid paying interest, we pay them both off in full every month.  For budgeting purposes, we assume that our future credit card bills will be the average of our recent past credit card bills.

Keeping track of our household cash flow at this level of detail permits us to do some things with our money that require careful timing.  We can ensure that we can make our Health Savings Account  contribution just before we file our taxes so that we can take the maximum deduction.  We can also set aside money to pay off a credit card in full just as the zero percent introductory rate ends.

Juggling debt by transferring balances from one credit card to another to take advantage of introductory rates is risky because when one introductory rate ends there might not be a new credit card offer.  One could be stuck paying interest rates at levels that in the past would have been considered usurious.  The only way to play this game successfully is to be able to accurately forecast whether you will have enough cash in the bank to pay off the credit card in full if you need to when the introductory rate ends.

When I have recommended this kind of long-term budgeting at the detailed individual transaction level to family and friends in the past, a couple of folks with irregular earnings and expenses have objected to me that they would not like to do this because it would just show them that they do not have enough income to meet their outgo.  I find that in these cases you can enter a predicted deposit with the label "magic" for the amount that you need to keep things from going in the red.  Knowing in advance how much your shortfall is somehow seems to make things work out right, possibly because you now know what to do with the unanticipated check that shows up in the mail.