USA Retirement Savings Contributions Tax Credit

The USA offers a retirement savings contributions credit for those earning $63,000 or less in 2018 (in 2017 the maximum earning were $62,000). The retirement savings tax credit is not as widely know as it should be.

The income level is based on Adjusted Gross Income (AGI). So some deductions from your gross income are allowed; earnings would reduced for contributions to a Healthcare Savings Account or traditional IRA to calculate the AGI). It is also reduced by the deductible for the self employment (social security tax) and for investment losses (up to a maximum of $3,000). The AGI is the value on the bottom of the first page of the 1040.

The Credit can be taken for contributions to a traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.

The amount of the credit is 50%, 20% or 10% of your retirement contributions up to $2,000 ($4,000 if married filing jointly). Learn more on the IRS website.

Chart of Retirement Savings Contributions Credit (2018)

From the IRS website.

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ACA Healthcare Subsidy – Why Earning $100 More Could Cost You $5,000 or More

The USA healthcare system is a mess. This mess has been created by those we have elected for decades. It isn’t a short term problem, simple problem or small problem. Healthcare costs are a huge burden on the USA economy and the financial costs and extreme burdens (worry, fighting with insurance companies, forgoing needed healthcare…) are huge burdens on all those stuck with the system that is in place.

One of the benefits of the Affordable Healthcare Act (ACA) is that health insurance costs are subsidized for those earning less than 400% of poverty level income. The way that this has been designed you could get $5,000 (or more, or less) in subsidies if you earn just below the 400% level and $0 if you earn just above. Most such income limits are phased in so that there is nothing like the huge faced by those earning just a few more dollars.

If you are close to the 400% poverty level income and are paying for an ACA healthcare plan (self employed, retired, entrepreneur…) then it is wise to pay close attention to what your reported income will be.

Here are several examples, using the Kasier Family Foundations’s subsidy tool:

  • 60 year old in Virginia earning $48,200 would receive $7,073 in subsidies (60% of the cost*). Earning $48,300 would mean receiving $0 in subsidies (for this and also examples, the examples shown are for a single individual, you can use the tool to try different scenarios).
  • 60 year old in Virginia earning $38,000 would receive $8,029 in subsidies (69% of the cost).
  • 34 year old in Virginia earning $48,200 would receive $608 in subsidies (12% of the cost).
  • 50 year old in California earning $48,200 would receive $4,255 in subsidies (48% of the cost).
  • 34 year old in North Carolina earning $48,200 would receive $1,636 in subsidies (26% of the cost).
  • 64 year old in Virginia earning $48,200 would receive $8,283 in subsidies (64% of the cost*).
  • Family of 4 (ages 46, 42, 12 and 10) earning $40,000 in Colorado would receive $13,799 in subsidies. I do not believe the subsidy calculator (in the link) is properly calculating the income limits for families. It is showing the same limits for single people when I try it now. I believe for a family of 4 the income level that no longer qualifies for subsidy would be $98,400 (400% of poverty level – the poverty level would be $24,600 according to that link). But I may be wrong about this?

* The subsidy is calculated using the average silver plan costs (this results in a $ subsidy amount for you – based on your income and the silver plan costs in your area). But you can select whatever plan you want. So if you selected a bronze plan it could be your subsidy percentage is higher, or you could select a gold plan and your subsidy percentage would be lower. The subsidy values will differ in the state depending on what health plans are available specifically in your location.

As you can see the subsidy is based on the hardship the health care premiums would place on the individual. If you have a fairly low cost plan and earn $48,200 your subsidy will be low. Since the costs are largely based on age (smokers also face an increased cost) this means that the subsidy increases a great deal as the costs skyrocket for those aged 50 to 64 (at 65 you can qualify for medicare and escape the huge costs of health insurance at that age.

I think many people would be surprised at how high your income can be and yet you still qualify for a subsidy, especially if you are a family.

The subsidy levels for those with very high health insurance costs (especially those over 50 years old, or with a family) are very large. If you are close to the subsidy cutoff level the costs of going over can be huge, costing you $5,000 or even over $10,000 just by making an extra $100.

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Using Annuities as Part of a Retirement Plan

Annuities have a bad reputation, with a history that makes that bad reputation sensible. The main problem is the high costs (and often hidden costs) of many annuity products. Combine with large sales incentives this has led to annuities being abused by sales people and financial companies while providing poor returns to investors.

However the attributes of annuities fit a specific part of a retirement plan very well. Overall I am a big fan of IRA, 401(k), HSA – all of which provide the investor with control over their own financial assets. And I still believe they should be a large part of a financial plan.

In order to save for retirement, we need to start young and save substantial amounts of money to live off of in retirement. Retiring early requires that investments provide income to live off of for an even longer time.

Pensions provided an annuity (a regular payment over time). Social security (in the USA, and other government retirement payments internationally) provide an annuity payment.

A rough rule of thumb of being able to spend approximately 4% of the initial retirement investment assets (given a portfolio invested in USA stocks and bonds) gives a starting point to plan for retirement. That 4% rule however is not guaranteed to work (especially if you live outside the USA or retire early). In fact relying on it today seems questionable in my opinion (not only even if you retire at 67 in the USA (given the current seemingly high values in the stock market).

The best roll for an annuity in retirement planning in my opinion is to serve as a protection against longevity. The longer you live the more risk you have of outliving your investment savings. Life annuities have the benefit of continuing for as long as you live.

One of the disadvantages of a life annuity is that the principle is not yours to leave to heirs. That is a fine trade-off for protection that you have enough to live off of in most cases. And I wouldn’t suggest having all of your money put into an annuity so if leaving assets to heirs is important you can just factor that into the balance of how much you put into the annuity down payment.

John Hunter with lake and mountains in the background

John Hunter, Bear Hump trail, Glacier-Waterton International Peace Park

It is possible to have the annuity pay for as long as either spouse lives (so if that is a concern, as it would likely be for most married couples, that is a good option to use). The payment will obviously be less but not by a huge amount (though if one spouse is many decades younger, then the amount can be substantial).

An annuity payment is calculated based on projected investment returns and your life expectancy. The older you are the larger a percentage of the initial deposit you can expect as an annuity payment. Something like 5.5% if you are 65 today may be reasonable (this will change as investment projections, especially interest rates, change). So one thing you will notice right away is that is much greater than 4%. And that shows one advantage of using annuities.

Why is the annuity able to provide payments greater than 4%? A big reason is that the insurance company can balance the payment based on a large number of people. And many of those people will die in 10 or 15 years. That allows them to retain the assets they were investing for those individuals and still continue payments for those people that live for 25, 30+ years.

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Cheap Internet Data Options for Travelers and Nomads in the USA

The video from the excellent CheapRVliving YouTube channel provides excellent information on getting internet coverage while you travel the USA. USA internet coverage is often very expensive, but this provides some good sources for those looking to have coverage but avoid paying the highest prices.

Some of the suggestions from the video:

  • Verizon unlimited 3g mobile hotspot – (sure it is a slower but he streams Netflix, YouTube, Amazon Prime etc. without problems even using a Amazon Fire stick for his TV). Link is to device on ebay using his recommended seller glselectronics). Cost for the Flashed Novatel MIFI 4510L is $60 and the data is $5/month.
  • T-mobile via 4gantennashop. In the video he says he pays $18 a month (I don’t see that offer on the website but…). He says it is 5Gb plan but with BingeOn and Music Freedom (so Netflix, YouTube, etc. are not counted against your data use). He mentions that the network is congested sometimes.
  • Sprint via 4gcommunity. I have read plenty of great reviews on this and also hassles about getting signed up. You must buy a device from them (so it costs a total of $250 for the first year) and then pay annually for membership ($168 a year).
  • Another Sprint Network option using the same bandwidth (it is part of a deal struck with the government when Sprint bought Clearwire) is Calyx ($500 which gets you a hotspot also, and $400 in future years). Both Sprint options provide 4G coverage where available (in general Sprint’s network is good in very populated areas but not good elsewhere). Both are effectively unlimited as they have no cap and no speed reduction (though pushing it too far may result in issues from Sprint and if too many did so may result in issues for the entire program – essentially Sprint using abuses to get the government to rescind the agreement that provides us this affordable option).
  • AT&T via FreedomPop (he suggests buying via slickdeals). This can be as cheap as $1 for a sim card and then you can take various measures to get 1Gb free every month for each sim card. So you can buy multiple sim cards to have more coverage. This is the cheapest option but there are plenty of people that complain about having to deal with Freedom Pop. It can be a decent free option but realize you may have to spend time dealing with hassles of using this service. However using it as a backup to have a AT&T signal could be useful (I don’t think I would bother with multiple sim cards – you have to track your usage switch sims…). You can’t use your phone as a hotspot for free (you can pay to add that option).

He pays about $35 for his combination of plans using the networks of T-mobile, Verizon, AT&T, Sprint.

Related: Making Money as a Nomad in the USAVanlife in the USAWiring a Thermometer to Your Van to Turn on AC as Needed as You Sleep

Personal Finance Considerations for Going into Debt for Education

I think taking on debt for education is a sensible financial decision. But the level of the debt that is sensible must be considered.

When I went to college (too long ago) it was expensive, but not nearly as expensive as it is now (in the USA at least – I am not as familiar with the costs outside the USA other than knowing in many places that university education costs are very reasonable).

I don’t have any hard cutoff where I think taking on debt no longer makes sense. But I do think I would include cost as a major factor when deciding what college to attend if I were facing that decision today. From a personal finance perspective I would only consider my debt or the spending of my savings.

If my parents or the school or someone else want to pay for a large portion of the the costs that is wonderful. I do believe the expensive and highly rated schools provide a great education and great benefit. If I were a parent that was well off I would have no problem paying the very high costs if I could afford it (which would mean I was far ahead on reaching financial independence).

photo of building at Davidson College

Davidson College

The costs of college in the USA are so huge now that it may well be wiser to find a less expensive school in order to create the best personal financial base as a young adult.

The huge costs also mean I think it is much more important to take into account the likely financial picture after one graduates. It is much different to go into debt for a engineering or math degree than one with much lower expected salaries (Engineering Graduates Earned a Return on Their Investment In Education of 21%).

As I wrote on my other blog: In the USA More Education is Highly Correlated with More Wealth.

As I have said before the reason to chose a career is because that is the work you love, but in choosing between several possible careers it may be sensible to consider the likely economic results. And in choosing how much to spend on your education considering your future earnings is wise.

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A Tiny Housing Take on Multi-Generational Housing

Housing is a critical aspect of any financial plan. Many alternatives have become more popular in the last 10 years: nomad (digital nomads etc.), tiny houses, mobile living (RVs, vans…), etc.. I think such housing alternatives are important and should be given more consideration by more people.

As these options become more popular they begin to be used in specialized ways. As I have written previously I think multi-generation housing is an interesting concept that deserves more attention. It is not a new idea but in many countries (such as the USA) it has gone out of favor but it may well come back into favor, I believe.

One recent trend combines multi-generational living and tiny housing into tiny houses in a backyard for grandparents.

The 12×24-foot prefabricated house starts at $85,000 — less than the cost of traditional long-term elder care — and includes innovative safety features like webcams and cushioned floors that allow the family member privacy and the caregiver freedom.

‘Granny Pods’ Help Keep Portland Affordable

Seattle, Austin, Washington, D.C., and San Francisco also recently made it easier to add a second unit or granny flat.

These Accessory Dwelling Units (ADU) require zoning flexibility in most places (in the USA at least, I am not sure about zoning issues globally). Hopefully more localities will create options to allow more flexibility.

ADU for Medical Caregiving

MEDCottages will be fully assembled at a manufacturing facility and trucked to a site to be plugged in, like a recreational vehicle, to the electrical and mechanical systems of an existing home by a local contractor.

Related: Tiny Homes are a Great AlternativeHousing Savings by Living as a NomadFinancial Independence Retire Early (FIRE) and Location Independent Working

The Continued Failure of the USA Health Care System and Our Politicians

Providing a health care is extremely costly everywhere. Rich countries nearly universally provide a health care system that allows all citizens to get needed health care. Nowhere is it perfect and nowhere is it cheap. And nowhere is it more of a mess than in the USA.

Sadly those we elect in the USA have continued for the last few decades to keep the USA healthcare system the mess we have now. The Affordable Care Act took a relatively small step in addressing several of the most flawed aspects of the USA system. It left unaddressed many of the major flaws. Instead of taking where we are now and making improvements to address the problems left from decades of Democrat and Republican created and maintained USA health care policy all we have had it demands to “repeal Obamacare.”

This is exactly the type on avoiding improvements to maintain the existing (for the last few decades) broken healthcare system those in the USA must live with. Cutting hundreds of billions from the budget to provide health care to the elderly is not improving the health care system.

Making next to no attempts to actually improve healthcare outcomes in the USA shows how flawed the current process is. It continues the behavior of the Republicans and Democrats for the last few decades. It is sad we continue to elect people behaving so contrary to the interests of the country.

The exceedingly costly health care system in the USA is in need of a great deal of work to improve the government policy that results in the mess we have now. Some of the huge issues we face.

photo of the Capital building in Washington DC

photo of the Capital in Washington DC by John Hunter.

  • Pre-existing conditions – this has long been a huge problem with the USA healthcare system and one of 2 major things ACA dealt with well. ACA greatly improved the USA healthcare system in this area, something that Democrats and Republicans had failed to do for decades. Current attempts by the Republicans are to gut these improvements. This is a completely unacceptable area for all but the most extreme people to even be looking at. That the Republican house members approved this radical removal of health insurance coverage from tens of millions of people and the vast majority of Republican senators has not expressed outrage and such attempts to punish those who have been sick in the past is pitiful. The USA even with the ACA does a much worse job on this measure than any other rich country in the world.
  • Medical bankruptcy – due to the decades of poor leadership by the Republicans and Democrats the USA is the only rich country with this as a macro-economic factor. The ACA made small moves to improve this but much more is needed. Instead of improving the USA healthcare system to deal with this long term problem the current Republican efforts will great increase the number of medical bankruptcies in the USA if they succeed in their efforts.
  • Massive cost-tax on all economic activity due to the costs of the USA healthcare system. The USA healthcare system costs twice as much per person as other rich countries (there are few countries with costs that have costs which the USA “only” 50% or 75%… but overall it is twice as costly) with no better outcomes than other rich countries. ACA did nothing to improve this (certain aspects of the ACA did but other aspects balanced those out), the new plans are not going to do anything to improve this (in a minor way it is possible reducing medical care for the elderly could reduce costs by having people die much sooner but given the mess of the USA healthcare system for many reasons the huge reductions in Medicare and Medicaid are unlikely to actually result in cost savings that are material).
  • Tying health care to the employer – The USA is one of the few rich countries to do this. Combined with refusing or providing only inadequate coverage for those with pre-existing conditions this is a great barrier to small businesses and entrepreneurship. ACA didn’t address this directly by eliminating the pre-existing condition failure it did greatly reduce the harm this causes the USA economy and individuals in the USA. The current proposals don’t address the problem and exacerbate the issue by returning the huge problems the USA system has in dealing with pre-existing conditions (it would be slightly better than before the ACA but much worse than what we currently have with the ACA).
  • A huge burden on individuals of dealing with insurance company paperwork, fighting with the medical system and insurance companies… Neither ACA nor the current plans made any improvements in this area.
  • The USA pays much more for drugs than any other country. This is directly the result of decades of failure by Democrats and Republicans to create sensible healthcare system policies for the USA. Neither ACA or the current plans made any significant improvements in this area.
  • Of interest to the readers of this blog the current USA healthcare system doesn’t deal at all well with the reality that tens of millions of USA citizens travel and live overseas. This is a complicated issue but it has been unaddressed for decades. It is pitiful that ACA didn’t address it and the current plans don’t address it. Even things that would be able to save tens billions of dollars by allowing healthcare to be preformed overseas (at much lower costs) for say Medicare are not addressed. There are complexities in how to craft policy to save tens and hundreds of billions of dollars this way. So it isn’t something you can expect to be addressed in a year or two. But they have had well over a decade since the obvious huge savings potential has been apparent and nothing. When you are going to cut health care benefits of the elderly to save money and don’t bother using wise policy to save money without reducing the care people receive you are failing as policy makers. And we are failing by continuing to elect these people that decade after decade fail to make wise policy decisions and instead force us to suffer with a poor healthcare system.
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Tiny Homes – A Great Alternative

Homes don’t have to be huge as they are now. The ever expanding USA single family home: average square footage of single-family homes in the USA: 1950 – 983; 1970 – 1,500; 1990 – 2,080; 2004 – 2,349.

Tiny houses are looking at going back even earlier than 1950, and that is a good idea. I would also like to see experiments with small houses along the lines of 1950s (or even a bit smaller). By reducing the high cost of housing we can drastically change personal finances for the non-rich in the USA (and elsewhere).

The innovative thinking by Cass Community Social Services discussed in the video in is the type of thinking we need to see more of. The Detroit non-profit is building tiny houses and making them available for rent to low income residents. The effort includes monthly personal finance and home care classes to make those tenants ready to transition to home owners (which they can do, buying the houses they start out renting).

The plan is to use the rent-to-own model. Rent is capped at 1/3 of income (and should be something around $250/month I think). The houses cost about $40,000 build and funding from the Ford Foundation has jump started this effort. The initial effort plans to build 25 tiny houses.

I think housing innovation is one of the areas with great potential to make people’s lives better by reducing the burden on people’s finances. Tiny houses are one method. Multi-generational housing communities is another. Dorm-like housing is another (I would have found this appealing after college). These apartment buildings seek to increase the social space in the building and encourage social interaction and also often have smaller units (bringing down the cost while providing benefits people desire – social options).

Related: Making the Most of 450 Square FeetAmazingly Flexible 344 Square Foot Room Can Transform Into 24 Different Rooms

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New International Banking Solution for Small Business and Digital Nomads

One of the significant hassles of a the new digital economy is that national borders are largely irrelevant to digital businesses but the banking infrastructure is still stuck in the past. Dealing with international payments is a hassle and can be expensive.

Transferwise has been providing good service for years in helping people move money between currencies at transparent and reasonable rates and with good service. They have a very interesting new service: Borderless banking. They allow you to create an account based on many countries in Europe as well as in the USA (about 30 states so far).

This is a great service, as I have written: finding an international business bank as a digital nomad is challenging.

You may hold funds in your Borderless account in 15 different currencies at the this time. You may send money to someone else using 50 different currencies via Transferwise. With a Borderless account you will be able to accept payments as a local company from Europe, UK and the USA – those paying you can send electronic payments as they normally do using their bank (the process is seamless to them, they treat your bank account just like any other they make payments to).

image showing the currencies Transferwise allows

Transferwise allows you to hold Borderless balances in these 15 currencies.

The fees are mainly a fee to change currencies (often between .5 and 1%) which is very reasonable. So if you hold money in USD and want to pay someone in Mexican Pesos you pay 1% (reduced to .7% over $10,000). USD to Indian Rupee is .9% (reduced .7% over $10,000).

Importantly currency conversion takes place at the real mid-market rate for the currencies (many banks hide fees by giving you bad conversion rates).

In checking costs on their site I have noticed changing from USD to another currency is often higher than from another currency to USD. For example, Euro to USD is 1%, USD to Euro is .5%. USD to Singapore dollar is 1% (reduced to .5% at $5,000) while the reverse is .5%.

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Proof of Onward Travel

One of the annoying worries is the possibility of an airline asking for “proof of onward travel” before checking you into your flight. Airlines do this theoretically because they may be liable for getting you back out of the country. Airlines also check that you have a visa for the new country for this reason (which also confirms you have a passport).

It makes sense that they check that you have a passport with a visa for the destination. Still you could be rejected from entering even with the visa. If that happened I don’t see what good it would do to have a plan reservation in 50 days going somewhere. I suppose the country might push the responsibility for getting you out of the country to your departing airline but I seriously doubt it. If you claim you can pay to leave I would have to imagine if some other party gets stuck with the bill it is likely the airline that delivered you.

photo of Air Asia airplane at Yogyakarta, Indonesia airport

Air Asia airplane at Yogyakarta, Indonesia airport

I suppose it could also be the airline only gets stuck if you don’t have proof of onward travel. And if you have that proof they are still responsible for getting you back but someone else pays until someone can collect the money from you (and gets stuck with it if you never pay). This seems pretty unlikely for most “normal” travelers from rich countries that have credit cards which would just be billed for whatever cost there is.

It sure seems to me that credit cards should add a perk to “gold cards” (or even less fancy card types) that promise to bill whatever costs accrue due to you being forced out of the country to you (and just like other costs the credit card issuer is stuck paying the cost if you don’t pay them back).

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