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Finance basics boil down to a few things:
1. Spend less than you earn
2. Pay off your highest interest rate debts first
3. Use compound interest (save, invest and reinvest as much as possible)
4. Use tax-preferred retirement accounts
5. Use cost effective insurance
6. Understand how taxes work
All this stuff is pretty obvious, but there are lots of legal provisions in the US code which are often not utilized. You can call these "loopholes" or "unknown advantages" but for some reason, a lot of people don't know about these.
Health Insurance:
Because of the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA), if you don't have health insurance coverage for a short time, it might not be a big deal. If you change jobs, you have 60 days to choose whether you want to get continuing COBRA coverage. This does work retroactively, so you can decide to take COBRA at day 59 and be covered for the previous 59 days. So, pretty much its "free" for those 59 days.
In general, you won't pay a penalty if you have a short coverage gap. A short coverage gap is defined as less than three months.
Tax Planning:
You pay no taxes at all on long-term capital gains if your taxable income (including those gains) is less than the top of the 15% tax bracket. If you're married filing jointly, you are in the 15% tax bracket if your gross income is between $18,650 and $76,000 gross income. Note: you'll want to reduce your taxable income as much as possible. This better than a ROTH IRA because you can do it at any age. So shelter as much of your income as is legally possible.
If your adjusted modified gross income (MAGI) (or income after deductions) is 31k or less (single / 60k married filing jointly), you are eligible for the Saver's Credit. The Saver's credit will let you take off a portion of your IRA or 401K contributions. The lower your MAGI, the greater the deduction.
Students are not eligible.
Capital gains on sales of a personal residence are generally not taxable if the capital gain is less than $250,000. Various rules apply.
If you rent a room in your house, some of your housing expenses (insurance, utilities, etc.) might be deductible. You'll need to declare rental income, but these expenses can offset the taxes you'd otherwise pay.
Even if you don't itemize you can still take adjustments to your income. These are commonly student loan interest, tuition, and moving costs. Don't just ignore these expenses, figure out how to take the adjustment to your income to reduce your taxes.
Retirement:
The money your employer contributes to your 401k doesn't count against the 18k limit.
If you are 50 or older, you can increase your 401k and IRA contributions. Your HSA contributions can be increased at age 55.
A lot of people think they make too much to contribute to a Roth IRA. If this is the case, you can always use the 'backdoor Roth IRA'. Basically, to do a 'backdoor Roth IRA' you contribute to a traditional IRA, then convert the traditional IRA to a Roth IRA. This won't let you avoid taxes - you'll need to pay taxes on any money in your traditional IRA that hasn't already been taxed, but the capital gains shelter offered by the Roth may be worth it.
If you change your mind about making an IRA contribution, e.g. your income becomes too high for it to be allowable, you can just take the money out before the tax filing deadline to avoid the penalty.
Self-employed people have lots of options for retirement accounts. For example, there are self-employed 401ks (SEP-401k) and self-employed IRAs (SEP-IRA). These have much higher contribution limits than regular retirement accounts. For example, the SEP-IRA has a maximum contribution limit of 25% of income or $54,000, whichever is smaller. This is much larger than the $5,500 limit for a regular IRA. Best of all, the barrier to entry for self-employment accounts is low. You are eligible for a self-employed retirement account if you have just $600 in self-employment income.
This applies even if you have employment retirement savings. So, get some self employment income and sock it away.
1. Spend less than you earn
2. Pay off your highest interest rate debts first
3. Use compound interest (save, invest and reinvest as much as possible)
4. Use tax-preferred retirement accounts
5. Use cost effective insurance
6. Understand how taxes work
All this stuff is pretty obvious, but there are lots of legal provisions in the US code which are often not utilized. You can call these "loopholes" or "unknown advantages" but for some reason, a lot of people don't know about these.
Health Insurance:
Because of the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA), if you don't have health insurance coverage for a short time, it might not be a big deal. If you change jobs, you have 60 days to choose whether you want to get continuing COBRA coverage. This does work retroactively, so you can decide to take COBRA at day 59 and be covered for the previous 59 days. So, pretty much its "free" for those 59 days.
In general, you won't pay a penalty if you have a short coverage gap. A short coverage gap is defined as less than three months.
Tax Planning:
You pay no taxes at all on long-term capital gains if your taxable income (including those gains) is less than the top of the 15% tax bracket. If you're married filing jointly, you are in the 15% tax bracket if your gross income is between $18,650 and $76,000 gross income. Note: you'll want to reduce your taxable income as much as possible. This better than a ROTH IRA because you can do it at any age. So shelter as much of your income as is legally possible.
If your adjusted modified gross income (MAGI) (or income after deductions) is 31k or less (single / 60k married filing jointly), you are eligible for the Saver's Credit. The Saver's credit will let you take off a portion of your IRA or 401K contributions. The lower your MAGI, the greater the deduction.
Students are not eligible.
Capital gains on sales of a personal residence are generally not taxable if the capital gain is less than $250,000. Various rules apply.
If you rent a room in your house, some of your housing expenses (insurance, utilities, etc.) might be deductible. You'll need to declare rental income, but these expenses can offset the taxes you'd otherwise pay.
Even if you don't itemize you can still take adjustments to your income. These are commonly student loan interest, tuition, and moving costs. Don't just ignore these expenses, figure out how to take the adjustment to your income to reduce your taxes.
Retirement:
The money your employer contributes to your 401k doesn't count against the 18k limit.
If you are 50 or older, you can increase your 401k and IRA contributions. Your HSA contributions can be increased at age 55.
A lot of people think they make too much to contribute to a Roth IRA. If this is the case, you can always use the 'backdoor Roth IRA'. Basically, to do a 'backdoor Roth IRA' you contribute to a traditional IRA, then convert the traditional IRA to a Roth IRA. This won't let you avoid taxes - you'll need to pay taxes on any money in your traditional IRA that hasn't already been taxed, but the capital gains shelter offered by the Roth may be worth it.
If you change your mind about making an IRA contribution, e.g. your income becomes too high for it to be allowable, you can just take the money out before the tax filing deadline to avoid the penalty.
Self-employed people have lots of options for retirement accounts. For example, there are self-employed 401ks (SEP-401k) and self-employed IRAs (SEP-IRA). These have much higher contribution limits than regular retirement accounts. For example, the SEP-IRA has a maximum contribution limit of 25% of income or $54,000, whichever is smaller. This is much larger than the $5,500 limit for a regular IRA. Best of all, the barrier to entry for self-employment accounts is low. You are eligible for a self-employed retirement account if you have just $600 in self-employment income.
This applies even if you have employment retirement savings. So, get some self employment income and sock it away.
I think having a will is important too to leave the next generation a legacy.
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