From $0 in 2011, my Roth IRA reached $100,000 in 2015. I will explain in detail with screenshots everything that I did in these 4 years.
The below table summarizes the entire process from 2011 – till date 2015:
Six Figure Roth IRA ($100,000+)
We will get into specific details but broadly speaking here is what I have done:
- Maxed out my Roth IRA contributions in 2011
- Maxed out my Traditional IRA contributions and rollover over to Roth every year (2012 – 2015)
- I maxed out my After-tax (Thrift) contributions to the 401k plan
- Periodically rolled over the After-tax 401k money to Roth IRA (paying taxes on earnings)
Let me break up the above table and explain each section in a little more detail, along with my commentary. Continue reading
IRS Audit – 4 main reasons
99.9% of IRS audits happen for 1 of the following 4 reasons: Information reported by others about you, Your historical information, Tons of ‘peer data’, and the Information you are submitting in your current year tax return.
IRS audit returns based on what they know about you – and how do they know about you? They know about you because others (employers, banks) report information about you to the IRS, they know about you because you have submitted tax returns in the past, they ‘know’ what your ‘peers’ report on their income tax returns, and lastly they know about you because of what you are submitting now (current year tax returns).
Let us take these 4 categories of information one by one:
Category 1: Others report information to the IRS
Others like your employer or the bank will report information about you to the IRS. These others fall broadly into two Continue reading
Rich and poor both use credit. Poor need credit while the rich have mastered the game of credit. For them, credit means leverage, tax benefits, and liability insurance.
A few days back, I had posted ‘Why did I refinance my car loans today‘, I had someone ask me “Oh, so you went into debt with 2 cars” -> That is what prompted me to write this post.
What is Credit?
Let us first define what do we mean by Credit -> Credit is any form of borrowing. The most common forms of Credit include credit cards, student loans, auto loans, and mortgage.
Everyone uses Credit – rich as well as poor
Everyone uses Credit, the poor as well as the rich. At first it sounds ironical – why would someone rich borrow money (use credit/ go under debt). Well, read on, and by the end of this post you will know why?
The image conceptually represents what I am trying to say – poor use a large proportion of credit lines available to them. The middle class tries to minimize the use of their credit lines, and then the rich again try to use as much credit as possible.
This chart is more conceptual, we will make a couple of minor tweaks to it as we develop this post today.
Why do Poor use Credit
We will discuss the purpose of W-4 form, why is it important to you as a taxpayer, and what are the things to keep in mind while filling it, and how often should you update it.
Purpose of a W-4 form is to inform your employer about the personal allowances you are planning to claim when you file your tax return for the current year. This information will help the employer assess the amount of taxes you will owe on your wages and withhold a proper amount every pay check.
An excellent starting point to update the W-4 is to look at your tax return for last year. Did you get a refund or did you owe money to the IRS? If you received a refund, then it means your employer was withholding too much throughout the year because your W-4 information was not accurate.
1040 section showing your refund/ Amount due
When too much is withheld from your paycheck, it is like giving IRS an interest-free loan. IRS is not going to pay you any interest on your excess withholding, it will simply return your excess.
We will understand what IRS Notice CP14 is and go through a real IRS Notice CP14 that a reader sent to me – understand each section before deciding a future course of action.
A reader sent me the attached asking for my interpretation of the notice. (It is an actual notice that came in today, I have deleted all the PII (Personally identifiable information) – name, address, and social.
What is IRS Notice CP14?
Understanding IRS Notice CP14 is pretty straight forward, as it is with most things when someone tries to explain it in simple English. There are two reasons why ‘some’ professionals do not explain things in a simple manner – sometimes they use arcane esoteric language purposefully so that they can charge you a lot of money or they don’t understand the subject well enough.
IRS Notice CP14 is an automated system notice that one usually gets after about 3 – 4 weeks from the date of filing your tax returns. In this case, the reader filed the taxes for 2014 on 10/15/2015 and the Notice date is 11/16/2015 (so about 4 weeks).
Simply stated – IRS Notice CP14 states that the taxes you owed (per your calculations) have not been paid yet. There is underpayment of taxes – tax reported on your return is more than the payments that have been made to your account. This usually is accompanied by interest and penalty charges too.
Payments that have been made to your account
This is not always the same as the payments that you have made. Continue reading
Today we will compare real estate versus the stock market – based on 11 different factors, including rate of return, tax benefits, use of leverage, effort requirements, and chances of making mistakes.
If you have never wondered how real estate investing compares with stock market investing, then you haven’t taken up investing seriously yet. Following are the 11 factors that I have compared for the two most common investment avenues – real estate and the stock market.
Let us first understand these 11 factors and then do the comparison.
We will take a real example to understand how to compare health care insurance plans. We will discuss pros and cons of a high deductible plan versus the high premium plan, with lots of pictures.
Today we will analyze why do people take health insurance and do a real life case study requested by one of the readers (we will call her ‘DB’).
Insurance is closely related to risk. Whenever you face risk, you have 4 options: Transfer, Accept, Reduce, Avoid (popularly known as the TARA model).
For the health care expenses risk, Avoid is not really an option -> Avoid would mean you are dead, therefore there is no risk of incurring health care expenses.
So in the health care expenses risk context, the high probability high impact quadrant becomes ‘Transfer’ instead of ‘Avoid’.
And in this post today, we will focus on ‘Transfer’ -> Insurance is a way to transfer the health care expenses risk to the insurer (insurance company). And we buy insurance for events where the impact is high.
Now let us talk about the specific real life case study of a reader (we will call her DB).
I will explain my entire thought process behind the decision to refinance my cars. I will start by telling you the reasons why I refinanced and everything that was going on in my mind while I was talking to the credit union for an hour.
I bought both the cars (a Mercedes and a Ford) in 2013. I financed both of them with the manufacturer’s preferred financial institutions because both of them gave me an incentive via a discount on the purchase price.
I had very limited credit history (just one credit card and nothing else, that too was just about 2 years old). The rates that I received were upwards of 9% for one car and upwards of 6% on the other.
Soon afterwards, I refinanced both the car loans with my local credit union. With the exact same credit history (limited), I was able to get an interest rate of 3.89%. They dropped it a quarter point further (0.25% or 25 basis points) because I agreed to take a credit card (this was my second credit card ever).
I made all the payments on time for these 2.5 years. As expected my credit score improved tremendously.
Why did I decide to refinance today
- Interest rate of 3.64% was too high. I knew I will get the best rate (or very close) available given my very good credit history now.
- I wanted cash out of my ‘equity in the car’ – more on that later in this post
- I do not foresee any large purchase on credit coming up soon (like a mortgage), so a little temporary drop in the credit score (by an additional inquiry today) does not bother me.
Here is how the process went
Anyone can contribute to a Roth IRA, irrespective of their income. It is true that IRS has an income limit on who can contribute to the Roth IRA but it has a really neat (and simple) workaround.
For the year 2015, IRS rules (IRC – Internal Revenue Code, to be specific) specify that single filers making more than $131,000 and married filers filing jointly making more than $193,000 cannot contribute to Roth IRA.
Now here comes the neat trick and it has two parts - contribute to traditional IRA and do a Roth conversion.
Yes, it is that simple and achieves what you would have achieved by being able to contribute directly to a Roth IRA. Once the money is in Roth IRA, the money is there in the Roth IRA – irrespective of whether you made the contribution from your checking account or a rollover from your traditional IRA account.
Can you time the market? In my opinion, you just cannot time the market. Today we will explore this topic first conceptually and then with a detailed example taking S&P 500 data from 6,848 trading sessions from 1988 – 2015.
Let us first understand this conceptually – there are millions of players (traders, investors, institutions) in the stock market and what is it that you know/ can analyze that none of them has already done? So, in my opinion, markets are almost always trading at a fair value.
For a long term disciplined investor, it hardly matters whether he/ she attempts to time the market or just keep buying regularly without worrying about the highs and the lows.
To illustrate my point mathematically, I took S&P 500 total index from 6/1/1988 to 7/31/2015.
As soon as I had the data in Excel, I could not resist the temptation to see how much S&P 500 has returned over this 27 years 2 month period (we could call it 27 years from now on for simplicity). The answer is 10.3% – S&P 500 returns have averaged 10.3% over these 27 years (1988 – 2015).
Now coming back to people who want to time the market – there are many professionals around me who keep Continue reading