Roth IRA vs. Traditional IRA

In the personal finance world an often debated topic is whether to contribute to the Roth IRA or the traditional IRA. An IRA stands for individual retirement account. The two accounts are mutually exclusive. The IRS currently allows you to contribute 5,500 dollars per year to IRA accounts (6,500 if you are over the age of 50). The two account have different tax advantages. The Roth IRA allows you to withdraw earnings tax free but requires you to contribute to with after tax dollars. The traditional IRA differs in that the traditional IRA allows you to contribute with before tax dollars, but requires you to pay income taxes on the withdraws.

So how do you choose which account to contribute to? The first step is understanding the problem. The problem is that without using IRA’s you are being inefficient from a tax standpoint. What IRA’s do is help you defer your taxes until a later point. The value in this is that we live in a progressive tax environment where as you earn higher and higher amounts of money you pay a progressively higher and higher rates of tax on each dollar you earn. If you are able to spread out when you take income and pay taxes on certain amount of money you will be able to put more money into the lower tax brackets.

A Quick Example

Albert and Bob are both are average gold miners. They both earn 88,000 per year. Albert takes advantage of his traditional IRA to the maximum and Bob doesn’t use it at all. The table below shows how much difference there will be between the two of them in just the last ten years leading up to their retirement. In the example I’ve assumed they are both single filers and take all the standard deductions and exemptions.

tira-example

So using an IRA is clearly helpful. Albert saved $4,238.75 when compared to Bob.

Now to optimize between choosing a Roth IRA and traditional IRA I like to start with the best case scenario for how a person would go about minimizing taxes over their entire life. What would that look like? In the chart below I’ve shown the average college graduates income in two different cases. The first is the optimal income scenario and the second is the typical income scenario.  If you wanted to pay the absolute minimum amount of taxes you would take the amount of money you are going to spend over your lifetime and take it as income evenly over the number of years you are going to live, so from 14 to whenever you kick the bucket (average life expectancy in the US is 79 years). In the typical scenario I’ve shown what a typical college graduate’s income looks like over their lifetime. At first you have relatively little income and as you acquire more human and skills capital your earning potential increase.

life-time-income

Clearly the optimal case won’t play out very often, because no 14-year-old is going to have near the salary to get close to their average life time yearly spending. This ideal scenario does give us a helpful clue about where we should be hunting though.

When taxable income is low compared to life time average we should be looking to increase taxable income and when taxable income is high we should be looking to minimize taxable income.  I’ll spare you the math this time but the optimal point for when traditional IRA’s are better than Roth IRA’s is when your future spending needs are less than your current taxable income. When your future spending needs are less than your current taxable income you are better off delaying when you pay taxes on money until later in life when you are able to fit more money into a lower tax bracket. This is actually the case most of the time. There are only a very select number of years at the start of a person’s earning history when their future spending needs are higher than your current taxable income. This is because more than likely your spending needs now are similar to what they will be in the future and unless you happen to be going further into debt every year your income in currently covering your spending needs and some additional savings.

KEY ASSUMPTION AND MAJOR RISK TO CONSIDER

Stable tax environment. This is a safe assumption if you are a typical wage earner. Historically speaking, effective tax rates for the middle class have not fluctuated significantly. All bets are off if you are making enough to be in the top tax bracket. Then again if you making enough money to be in the top tax bracket you likely are ineligible to use many of the advantages of an IRA. If you think our current tax environment is unstable you may want to diversify between both types of IRA’s in case future tax rules are changed.

Limited liquidity needs. Both type of retirement accounts perform much better when held as equities for a long period of time. If you will need cash from your IRA in less than a few years an IRA might not be the best option for you.

KEY TAKEAWAYS
  • Forecast / estimate your future spending needs.
  • Compare that to your current taxable income.
  • If your future spending needs are lower than your taxable income, then choose the traditional IRA.

Most of the time, choosing a traditional IRA is the optimal solution.

The Roth IRA in my opinion is not a useful retirement account because when your taxable income is low compared to your future spending needs you won’t have the ability to save money because you are not as likely to have enough cash to fund your current spending needs, much less fund a retirement account as well.

 

Everyday Tactic for Better Parking

I was listening to some old episodes of The Hidden Brain podcast when I found out that 88% of people in China back in their cars when parking compared to only 6% of Americans. I happen to be part of the 6% of Americans that back their cars in when parking. I’ve spent more time thinking about whether you should be pulling in or backing in than I think most all people would find reasonable. Here are my conclusions on why people should be backing in and doing their future selves a favor.

Backing up is more difficult than going forward. The view when backing up is significantly reduced when compared to going forward. For this reason, I think there is opportunity to mitigate risk. In general, you are going to have to back up either when you first park or when you leave later. There are some notable exceptions to this rule, like pull through parking spots which are a good idea.

Backing in allows you to back into an area with lower activity. When you back into a parking space you have to drive by the space and in doing so you get a complete view of the area you will be backing into. I know you are probably thinking, “wait I can get a complete view of the area I back out of by walking around the car before I pull out of my parking spot”. The difference is the level of activity in the two spots. I am going to argue that there is not much going on in a parking spot, but in the road or parking lot there are cars and people. This means that there is a lower risk of something changing in the parking spot when you check for safety versus in the road or parking lot.

Backing in allows you to save time later. Since backing up when you leave takes extra time a big deciding factor of when you should pull in and when you should back in should be how much time you have when you arrive and how hurried you will be when you are leaving. This is a big reason why people in China always back in. They are very long term thinkers compared to people in the US.

Hofstede
Image Credit: geert-hofstede.com

Look for pull through parking. These spots are rarely near the front of the lot so just find the first spot you see where you can pull through and take. Yes, you might have to walk a little further, but a little extra exercise is an efficient use of your time since you aren’t going to be looking for the perfect parking spot.

Pull Through
Image Credit: fancyparking.com

Next time you park your car do yourself a favor and back in.

Do you back in or pull in? Have you ever thought about it?

Be Efficient with Capital – Review of Gift Card Resellers

By now I hope some of you have acquired some type of rewards credit card and have shaved off some years of your required working life. So today I’m going to give you a tip to help boost your savings rate or (1-expenses rate) even further.

Every year millions of dollars in gift cards go unused by people who don’t really want or need them. Some enterprising online companies realized this and setup a marketplace to help people sell their gift cards for cash. Where people previously used to leave their gift cards lying around gathering dust they can now liquidate them and put the cash to good use. This marketplace is a win for everyone because the seller is able to get cash out of their gift cards the marketplace owners are getting a cut of the revenues and the buyers are able to purchase gift cards they will use at a discount from the face value of the gift cards.

If you are selling a gift card expect to lose between 10 to 50 percent of the face value of the gift card. If you are buying gift cards, you can expect to buy gift cards at 1 to 40 percent off the face value of the gift card.

Raise

Out of all the options I like Raise the best. I regularly use their mobile app to buy gift cards and they arrive in my email inbox within a few minutes each time. I find this especially handy when I am in stores and know exactly the gift card amount I need to buy to make my in-store purchase. I can just go to the app and find a gift card for close to that amount, purchase it with my rewards credit card, and then use the gift card(s) a minute later when I checkout. I never have to carry gift card inventory because I always spend the entire gift card I just bought.

Some other users have complained about receiving gift cards with no balance on them. I have never had this issue, but Raise is very clear they will refund any money spent on bad gift cards. (The link to raise up top is a referral link. When you buy a gift card through raise using that link I will get 5 dollars.)

CardCash

I’ve only used CardCash to buy 5 Home Depot gift cards, but I was highly unsatisfied with how the transaction worked out. I was building a deck and when I needed supplies Raise happened to be out of gift cards, so I thought I would give CardCash a try. Unbeknownst to me CardCash processed my transactions like cash advances, which incurred rather hefty credit card fees that I was not expecting. Nowhere on their site do they disclose this fact. Cash advances also begin accruing interest expenses immediately, so I was on the hook for all the interest charges I racketed up before I reviewed my credit card statement and found out what had transpired. CardCash stated that this issue only occurs with cobranded American Express cards, but be sure to check with CardCash before you make a purchase or check your credit card statement immediately after any purchase.

eBay

eBay is always another option. It has its pro and cons though and is very different from the previous two websites/companies. When using eBay you will not get your gift card quickly through your email like you will with Raise and CardCash. Instead you will have to wait for it to come in the mail from the seller. eBay offers strong buyer protections; however, if you are going to buy a gift card from eBay I recommend you spend it immediately. The seller could potentially have all of the gift card information and spend the gift card when the seller protection period expires. if you are going to sell gift cards I would not recommend going through eBay. The buyer could claim there was no money on the gift card you sold and I do not think eBay has worked out a system to fairly protect the seller.

I don’t have any experience selling gift cards on any sites. I generally try to use my gift cards when I receive them, but I do have a gift card to the Star that I’ve been carrying around for several years. I think I’m going to use it this coming Thursday to celebrate with my wife when my MBA program is officially complete. What do you say Staci? Leave a comment if you are interested.

Title Image Credit: Raise.com

Be Efficient with your Time – Learn to Make Your Own Shortcut Keys

The other day I talked about learning how to use shortcut/hot keys to make yourself more efficient while using the computer. So at this point I’m going to assume you’ve completely mastered Windows, Word, and Excel hot keys and your boss bought you a new computer because you were making the old one look so slow.  It feels good doesn’t it. There is only one problem. You want more. You get that first taste of flying through a program as fast as it can go and you realize there should be a hot key for the next action you want to take, but there isn’t.

This is where a program called AutoHotkey steps in to solve your problem. AutoHotkey is a program that can record macros, run scripts, and expand text. These words might sound intimidating to some of you, but I assure you AutoHotkey is amazingly easy to use. With these functions combined it makes for an incredibly powerful automation tool.

One of the features that makes AutoHotkey so easy to use is that it has great documentation about how to use the tool. The help manual that comes with the program is extremely well written.  Whenever I have had a problem in AutoHotkey and consulted the help manual I have been able solve my problem within a matter of a few minutes. If you get past the beginner problems and start to face more difficult problems AutoHotkey has a huge community of users who help one and another out with their problems using the tool. You would have to try very hard to stump some of the people on the AutoHotkey forums.

AutoHotkey is free to download.

I’ll share my most commonly used AutoHotkey hot key. My AutoHotkey is super handy when using Excel and wanting to paste special values because it is done in one fluid step rather than three steps.  Usually you would have to press Ctrl, Alt, v, to bring up the paste special menu then v to select the values, then hit enter.  Instead I used AutoHotkey to do this task by pressing Shift(+), Alt(^), Ctrl(!), and v all at the same time and it sends a message to the computer to send Alt(^), Ctrl(!), and v followed by v again and then hitting enter.

+^!v::
Send ^!vv{Enter}
Return

Do you use any programs similar to AutoHotkey? Do you have any similar tips the world shouldn’t go on without hearing about? Let me know in the comments.

I did not receive any form of compensation for this review. It is just my honest opinion. If you have another similar software that you think I’m missing out on let me know I’d love to check it out.

Be Efficient with your Time – Learn to Use Shortcut Keys

If you work in any type of professional setting or really any setting in the world except under a rock, using a computer is a requirement or will be one shortly. It is time to admit it and start becoming better at using one.

The skill level that got you to the point where you are now is not going to be good enough. Becoming more efficient is a necessity if you want to remain competitive.

One method available to make your life on the computer easier is to learn the commonly available shortcut keys or hot keys to every program you commonly use.

I recommend you read through the list I’ve provided down below and find the hot keys you could use. Print out a list of the all the hot keys and post it somewhere you can see. Next time you are performing an action that could use a hot key, stop and look at which keys you need to push to do the same action. The first couple times you do this it will be cumbersome and slower and feel like a step backwards, but remember your current skills are not good enough for tomorrow. Embrace change and soon you will be shaving seconds off every action you perform on the computer. I know it seems small, but as I’ve shown before little details can add up over time to become life changing amounts.

Windows Keyboard Hot Keys Via Wikipedia

Microsoft Excel Hot Keys Via Exceljet.net

Microsoft Word Hot Key Via Shortcutworld.com

Microsoft Outlook Hot Keys Via Shortcutworld.com