Money mistakes you didn't know you're making | Hacker News Reader

Money mistakes you didn't know you're making

jasuja.us

34 pointsputlake35 comments

I wish it were easier to contribute more to my 401k during specific pay periods.

Part of my income is commission-based. I could max out my 401k when I receive my commission. It would be easier for me to budget this way. Unfortunately, contribution is all-or-nothing, and changing one's contribution percentage takes a few pay periods to go into effect.

Another tip not mentioned re 401k: change your default elections! Brokerages will usually put 401k funds into expensive "target date" managed funds that usually don't perform better than much cheaper index funds. Many 401k plans will allow contributors to choose index funds.

Change your default elections - this is a great point. But I'm wary of giving out specific investment advice i.e. what to put your money in.

Having a single bullet point about using a trust is insufficient, as it is quite complicated to receive a trust. There are other options for managing estate planning that will work well for ordinary families (those with less than ~$28 million in total assets).

The marketing around trusts is a classic information asymmetry. Law firms selling the service of setting up a trust know it’s not simple for heirs, but that is essentially repeat business for them. Many heirs will need to hire a lawyer to help retitle and transfer assets in the trust, and dissolve the trust if they want to personally control the assets.

And people buying the service of setting up a trust will, by definition, never know how it ends up. (Maybe unless they themselves have received a trust.)

A trust is a powerful tool for protecting wealth across generations. It’s not easier than basic inheritance.

Edit to add: the easiest way to avoid probate is to designate beneficiaries on all your financial accounts. These supersede will instructions and avoid probate. You can do the same thing on vehicle titles, at least in some states.

Real estate is more complicated so the easiest thing on your heirs is to not own any real estate at the time of your death. :-) Or if you have real estate you would like to pass on, that specifically is a good use case for a living trust (with only the real estate inside it).

Why does regular probate cost more than passing the inheritance through a trust?

LMGT4Y

https://trustandwill.com/learn/probate-fees/

Trusts are like life insurance. It's not about when you're old and your kids are all grown up and self-reliant. The point of the trust is when you have younger kids and need to plan for you and your significant other both dying unexpectedly. It's no use naming your 8 year old as a beneficiary because they won't be able to use any of the assets without trusted adults.

This is a good use of a trust, but not what the article is about.

>you could have a large tax bill when you file your taxes the following year. And if it’s too large, the IRS will even impose a penalty

It is actually called an "addition to tax", not a penalty, and in fact it is merely an interest charge, just like if you don't pay the full balance on your credit card each billing period (for tax, the "billing periods" are the (roughly) quarterly dates when estimated payments are due). If you can make more money elsewhere than the interest charge by the IRS (currently 7%) you are better off not making the payments during the year.

>Health Savings Accounts are the rare unicorn of triple tax advantage: money isn’t taxed (1) going in, (2) while it’s growing in the account, or (3) when it’s taken out.

I see this a lot and it is completely ridiculous. (1) and (3) are the same thing when it comes to your contributions-- there is no scenario where you would ever pay tax on money when you contribute it and also when you take it out. It is only a double tax advantage, not triple. (And the money only comes out tax free if you use it for a limited set of expenses namely health care).

Don't #1 and #3 become true when you consider capital gains on an appreciated account? Genuine question, because how I'd thought of it, and your assertion shakes my confidence in my understanding.

You only get a single tax deduction, not a double deduction. If you put in $1K and also get $0.1K gains in your HSA, for example, you only get a total of $1.1K tax deduction. There is no "triple tax benefit".

The point is you never pay tax on that money. 1. Your contribution is pre-tax 2. Your growth is tax free 3. Your withdrawal is tax free as long as you have receipts for qualified expenses. I personally don’t have an HSA because it seems like a hassle and I don’t want a HDHP but I can see the appeal.

My point is that it is far from a "rare triple unicorn" or whatever overhyped language they use. You can put money in an IRA, get a tax deduction, and then not pay tax on the money and the earnings if you take it out via a QCD (qualified charitable distribution)), but no one calls this a rare triple unicorn. Also, many items paid through your employer, such as health insurance, flexible spending accounts, dependent care accounts also are tax free when contributed to and not taxed later if used for intended purposes. It is just a single tax benefit, not a "triple" tax benefit.

1. There are penalties for underpayment of estimated taxes. And there are even interest charges on penalties. https://www.irs.gov/payments/underpayment-of-estimated-tax-b...

2. The triple tax advantage is not ridiculous. (1) and (3) are not the same thing. 401k for example is not taxed going in (you fund it with pre-tax dollars) but is taxed when taken out. When you withdraw money from your 401k in retirement, you owe taxes on the capital gains that have accrued in the account since you first put the money in. But if you take money out of HSAs for paying medical bills, there is no tax on the capital appreciation you have enjoyed in your HSA account.

1. The IRS web page is not authority. See the Internal revenue code §6654. Failure by individual to pay estimated income tax (a) Addition to the tax. Like I said, it is officially (by law) called an addition to tax, not a penalty.[0] Further, it is calculated as an interest charge. There is not any further interest charged on the interest. Yes, there are actual penalties such as Failure to File/Failure to Pay that do accrue interest, but this is not either of those.

[0]https://www.law.cornell.edu/uscode/text/26/6654

2. The HSA is just a holding account. You can either pay for health expenses such as insurance pre-tax each year, or you can put it in a HSA and delay the payment. In either case, you only get one tax deduction, not two. The ridiculous claim is to say for a $1K contribution to HSA, you get a $1K tax deduction, then you get another $1k tax deduction when you take it out - not true.

[in the USA]

Yeah.

Anyone knows about similar resources for, say, the EU? Or it just varies too much by country here?

Indeed, that would have to be specific advice for each country.

Most of these are not applicable where I live: you can’t cash out your pension fund, stocks are taxed separately from income, there are no high-yield savings accounts or health savings accounts, credit cards are rarely used and have no cashback.

In Norway you can use American Express, Diner's Club and other credit cards, though the two I mentioned aren't always accepted due to higher fees. The Norwegian airline also has a credit card that's pretty popular and offers cashback or bonus points or whatever and there's something called Trumf which offers cashback at certain stores for debit cards.

Regarding tax I just go to the tax authority's website and declare my expected income, assets, debt etc and my employer gets a "tax card" from them which they use to pay taxes for me. At the end of the year the tax authority does a final calculation, sends me an overview and either returns some money or sends a bill for what I owe. I can overestimate my income if I want to avoid that bill, then the tax return is like a bonus but I personally prefer to operate with a healthy emergency fund so that a $3000 tax bill doesn't really bother me. Usually it's like +-$1000 at the end of the year.

Every country is different.

The UK (temporarily too embarrassed to be in the EU) has some very generous tax advantaged accounts which match the US ones, so you can map "401k" to pension and "Roth IRA" to ISA to get something similar.

I’m not sure I understand the RSU one. I just went back and did the math on my RSUs from last year and my company deducted over 22% on federal, as well as taxes for social security, Medicare, and state tax.

Assuming there isn’t a 2nd income drastically raising your income, why wouldn’t the company withhold the right percentage, considering they know what you make? Choosing a flat 22% seems odd.

From what I've seen in Schwab and experienced personally. The "sell shares for taxes" settings is a flat tax rate, mine is 26% last I looked. If you're in the higher brackets[1], ie making 250k+ it can be up to 9% difference. So if you get a vest of 20k in November toward the end of the year where you're likely in that higher bracket the amount Schwab sells could be 1,200~ difference (assuming 32% tax bracket, 26% flat), meaning you'd owe the federal gov that come tax time.

If you speak with a tax professional, for which I am not, they would tell you to calculate the difference and pay quarterly amounts. In practice this means that I sell more periodically just for taxes[2].

1. https://www.irs.gov/filing/federal-income-tax-rates-and-brac... 2. https://www.irs.gov/businesses/small-businesses-self-employe...

Edit: from what I understand payroll isn't informing Schwab of your current bracket, nor do I think they should have to.

Interesting. I get pay statement adjustments (they show up alongside my paychecks when I view them) to take out the taxes, so it seems like my employer is doing it, not the brokerage. I’m not sure if they do this when the RSU’s are first given, or when they vest; I’ll have to pay more attention this year.

I do need to do something weird with my taxes every year to enter that the taxes were already paid, as by default when I import, it shows that I need to pay taxes on the whole thing. Every year it feels like doing it for the first time; it’s always confusing to find the right spot in TurboTax and which numbers to enter for the taxes I already paid.

If the brokerage is doing the deduction based on a checkbox the user selects, I can see how a discrepancy could arise.

Schwab (or your brokerage) is reporting the RSU vesting on your w2 / paystub.

What you are saying is very reasonable but companies don't deduct enough in taxes at the time the RSUs vest. I don't know why that is. I'm sure there's some arcane reason. That's why it's important to keep track of this a little bit otherwise you will have an unpleasant surprise when taxes are due.

The law says 22% so they hold 22%.

It may be better for you. For example, you may want to cover the rest of the tax bill by selling other shares and doing tax lost harvesting. You may think your company is going to the moon and decide to cover the rest of your tax bill with cash and keep your shares (this is usually a bad idea). The way they do it gives you flexibility.

The article makes valid points. However, many of its recommendations are not practical for the 60% of Americans who live paycheck to paycheck. Even merely contributing to a 401(k) or HSA can be difficult for these families.

I wonder about this, because people make stupid decisions about things like vehicles.

Eg. If people prioritized this advice and didn’t buy vehicles they couldn’t afford, would America be better off?

The conventional wisdom of investing the maximum into your 401(k) beyond employer contributions is a dangerous tip if you fully intend to retire early, because you are penalized so heavily on withdrawing too young and then further taxed on it.

It’s such bad advice and people parrot it all the time, probably because so many people are so bad with finances to begin with. It’s almost always a bad idea in this specific case.

If you intend to retire in your late 60s, then the conventional wisdom is fine.

> Not investing enough in 401k up to the IRS max.

This is not always a given. If your income in retirement is much higher than your working years income, you will end up losing on taxes.

In fact, my employer didn't match at all so all my money is invested post-tax in a brokerage.

You should probably max out your Roth IRA, however.

Good point. Roth IRA was clearly a miss. It wasn't on my radar since you cannot contribute to it if your income is more than $165,000 (single) or $246,000 (married).

Dont forget about TODD as a lower cost alternative to a trust

One more: /r/CreditCards on Reddit is an awesome resource for finding excellent credit card deals. Banks offer amazing sign-ups deals in the hopes that you'll carry a big balance in perpetuity. Taking the bait and paying off your card every month is basically free money!

Don't get sucked into churning, though. It's high risk for very low reward.

What’s high risk about churning besides the risk of wasting your time?

Forgetting to pay a bill with all the accounts you are juggling then wiping out your gains with one late fee?

You must follow the rules exactly. Easy mistakes include:

For credit card:

- not meeting spending targets to earn signup bonuses

- not utilizing all the cards benefits (For example, discover requires you click a couple buttons to activate 5% reward.

- minimum points redemption (must have > x points to convert to cash)

- Forgetting to redeem points before closing the account.)

For checking/savings rewards:

- not meeting direct deposit targets

- not maintaining an account balance

That's exactly it! Got to have the discipline to make sure those balances stay at zero.

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