Author: vishalkirti

Strategies for winning college financial aid

/ vishalkirti

I have written many posts on saving for college. You can refer to them here: Simplifying saving for college, How to get your money into Roth IRA even when IRS prohibits it?, The Mother of All Personal Finance Hacks- Mega Roth, How much to save for college?

If you have read the above articles, you know where, how and how much to save for college. However, what if you just cannot save enough for college. Maybe your income is too low or your expenses too high. Then, you might have to rely on Financial Aid and Scholarships/Grants.

financial-aid

First, terminology distinguishing different kinds of Financial Aid (FinAid):

  • Scholarships: Usually, merit-based, sometimes merit cum means.  They are given out by private institutions, colleges, and the Government. The student does not have to return this amount.
  • Grants: Means based. Given to students who qualify based on income and assets. The student does not have to return this amount. Again, given by private institutions, colleges, and the Government.
  • Loans: Usually means based, sometimes merit cum means. This could be a subsidized or an unsubsidized loan for education. The students have to return this amount, however, the terms of these loans vary.  The source of these loans is usually the Government.

Now, if you were to qualify for any of these FinAid opportunities, you will have to fill out one or both of the forms:

  • FAFSA: This is Free Application for Federal Student Aid (FAFSA).
  • CSS: This is the financial aid profile offered by College Board ( CSS).

Most colleges accept FAFSA but some colleges like Stanford want you to specifically fill out CSS. So, what’s the difference between the two?

  • CSS Profile is just used for private, non-federal aid while FAFSA is required for any Federal Aid.
  • FAFSA excludes the value of your equity in the primary residence and also the value of your small business, while CSS does not.
  • CSS asks for the financial information of the non-custodial parents.
  • CSS asks for the expected income and expenses (medical expenses, elementary school tuition for your other children and any other circumstances) of the academic year to better judge your ability to pay college tuition.

Now, let’s see what our strategies could be to win the financial aid.

Let’s say you belong to the following category:

  • You have low income.
  • You have no equity in your primary residence and no small business and no investments.
  • You show that in the academic year, you will not have any money leftover to be able to fund your child’s college.

In this case, from both CSS & FAFSA perspective, you don’t need any strategy. You will qualify for financial aid anyway.

So, we need strategies for people in the following groups:

  • High income, high assets.
  • High income, low assets.
  • Low income, high assets.

I am not going to deal with the question if it is moral or ethical for High-income folks to strategize for FinAid or not. I will leave this moral dilemma to the reader. 

Here are the main tenets to keep in mind:

  • FAFSA and CSS don’t look at your retirement accounts (IRAs, 401Ks). Again, if you have read my articles  Simplifying saving for college, How to get your money into Roth IRA even when IRS prohibits it? , The Mother of All Personal Finance Hacks- Mega Roth, you know that I am a big proponent of Roth IRA for college saving, precisely for this reason.
  • FAFSA and CSS both primarily look at a prior year’s tax return to assess your income. For eg., my daughter will go to college in 2026. Both FAFSA and CSS will look at my 2024 tax return. Note, they have recently changed the rule. With the earlier rule, they would have looked at my 2025 return.
  • FAFSA does not look at the equity in your primary residence nor does it look at the value of your small business.

For the purposes of a case study, let’s assume the college starting year to be 2026.

Low income, high assets strategy:

  • The main strategy here is to sell off all your investments in your taxable accounts/real-estate and pay off/down the mortgage on your primary residence with the money. For the case study, this has to be done in the year 2023 so that the capital gains don’t mess with your 2024 tax return.

High income, low assets strategy:

  • If this person does not have any assets whatsoever, including Retirement Accounts like Roth IRA, there is not much this person can do.  He will automatically get benefited by the fact that he does not have any assets in his investment accounts though.

High income, high assets strategy:

  • This person has to show reduced income as well as reduced assets.
  • Reduced assets can be shown by “selling your assets in investment accounts and paying off/down your primary residence mortgage” in 2023 strategy.
  • Since this person has a large number of assets including big sums in retirement accounts, this person can quit working (or take a break) at the end of 2023 and live off his Roth IRA. If you have read my prior post, you know the flexibility of Roth IRAs.  Of course, this works only for those people who:
    • Want to change careers so want to go back to school themselves or start something new, OR
    • Are done working and this happens to be a good sweet spot to quit, OR
    • Always wanted to take a break for a few years (or one year) and this happened to be the sweet spot.
    • It’s important that this should not be a financial strategy in isolation. This has to be holistic life decision. This is because since you are high-income, it makes more financial sense to keep your income and pay for college without financial aid than to rely on financial aid and stopping your income as a financial strategy.

I hope you enjoyed these strategies. Please share any other strategies which I can add to the list.

Good luck!

 

 

How much to save for college?

/ vishalkirti / 1 Comment

I have been writing a lot about how to get into college and how to save for college. Now is the time to write about how much to save for college.  This is an important question to ask so that we are well prepared when it’s time to pay those tuition bills.

The first question comes to people’s mind is: should the children not pay for college themselves? By paying for their college, are we not setting them up for an entitlement trap? That’s a good question. I am of the opinion that the responsibility can be shared. I, as a parent, am willing to pay for my kids’ education, provided the kids exhibit good performance, discipline and an eagerness to share the burden.

How can kids share the burden? The kids can share the burden by working harder in High School and/or in the first years of college. There are many things they can do. Here are a few items (what works best depends on the temperament of the child):

  • Go to a community college for the first two years and then transfer to a 4-year school at the end of their sophomore year.
  • Take college credits in High School by attending a community college while also attending High School and then transfer some of those credits to their 4-year college. This requires understanding what classes their prospective colleges will accept.
  • Take AP (Advanced Placement)/IB (International Baccalaureate) classes in High School and transfer those credits to college when starting the 4-year program.  Again, which classes will be accepted at the prospective college, has to be found out in advance.
  • Enroll in a Middle College instead of a traditional high school in the 11th grade. This way, the child will earn a lot of college credits while in middle college. An example of such a program in my area is Tri-Valley ROP.

The moral questions aside, let’s run the worst-case and best-case numbers, provided you are a high-income family who will not receive any means based scholarship. I will write a separate post regarding the means based scholarship strategy.

Starting with worst-case:

Let’s say, my son who is 3 right now, will attend Stanford University (private, expensive school) when he goes to college at 18. I have already saved a lot for his college but for the purposes of this worst-case simulation, let’s assume that I am starting with ‘0’. Running the numbers on  Vanguard College Cost Estimator,

NirvanhCollege

Worst case scenario for someone whose child is 3 and will be going to Stanford eventually. 

It seems that I will need $407,640 to cover his cost of college. Again, assuming the worst-case that he does not receive any scholarships and he does not get any credits transferred, I will have to save $13,176 every year, invested in an index fund with 6% returns, while the college cost is increasing by 3% every year. $407,640 includes tuition, books, room, board and everything else.

Now, the best case:

Let’s say, my daughter who is 10 right now, first goes to a community college for the first two years and then transfers to an in-state school the University of California- Berkeley for the remaining two years. Let’s also say that somehow she manages to stay with us at home this entire time and also get’s some partial merit scholarship (say 25%), while at University of California- Berkeley (we live fairly close to Berkeley). The math will work out like this:

Cost for 2 years of community college eight years from now: $9180. Need to save $720/year for that in the 6% Rate of Return index fund.

FreyjaaCommunityCollege

Best case scenario for someone whose child is 10 and will be going to a community college first.

Cost for 2 years of University of California Berkeley: $36857 (tuition & fees only) Only $27,758 needed to cover 75% of the tuition if she gets a 25% scholarship. Let’s say I am starting from 0 (which I am not), I only need to save $1710/year to cover this.

If you are having your child now, you only need to save $348/year for the first two years of community college and $1176/year for the two years of UC Berkeley, totaling ~$1500/year.

FreyjaaCollegeFinal2Years

Best case scenario for someone whose child is 10 and will transfer to UC Berkeley for the last two years of college, also scoring a 25% scholarship. Note that I selected 20 for “Age Starting College”

Hence, in this best-case scenario for a family like mine, we need to save $2430/year for the next 8-10 years, if we are starting when our child is 10 years old and has everything working out for her. The total amount needed is roughly $37,000.

The worst-case scenario for a high-income family is that you have to save $13,176/year for the next 15 years if you are starting out when your child is 3 years old and has to stay on the campus and does not get any scholarships and goes to an expensive private school for all 4 years. The total amount needed is $408,000.

You can see that this is a big range $37K-$408K, so what should you target for?  Of course, the paramters I chose were a little arbitrary as well. For the purposes of this analysis, I chose the ages of my children and started with “0” as the starting point. I chose a 3% increase in college costs annually and I chose a conservative 6% index fund return. However, the important point is that you can use the tools above and estimate your target costs. You should first look at your target schools and their costs and go from there. In general, in today’s dollars, $90,000 is the average cost of a 4-year college degree at an in-state public school (room and board included) and the corresponding number for a private school is $200,000. It is worth highlighting that the average out of state cost at a public school will be roughly $160,000 in today’s dollars.  Now, depending on your children’s ages, you might have to save either conservatively or aggressively.

Let’s say your parameters are:

  • Average 4-year in-state public school.
  • Room and Board included.
  • No scholarships expected.
  • Starting when your child is born.
  • 3% increase in college costs expected annually.

Putting the numbers in a regular FV calculator in an excel spreadsheet will give you ~$153,000. (18 is the number of years, 1 is the number of terms/year since I am using annual rate increase)

College Cost
$90,000
3.00%
18
1
$153,219

However, assuming a more aggressive annual increase of 5%  in college costs, the numbers bloat to ~$217,000.

College Cost
$90,000
5.00%
18
1
$216,596

So, this is tricky. It is better to oversave than undersave. The right number depends on various parameters and you have to estimate those parameters based on your judgement and the information available and put them in some of the calculators suggested above.

My next post will be on how to win scholarships for college, so stay plugged in. Having high income works against you for scholarships and we will go over some of the options with both low income and high income.

Cruise through College Admissions

/ vishalkirti

What if I told you that all the pundits who are asking you to drown yourself and your kids in activities for college admissions are dead wrong.  What if there is a simpler and a more organic way to cruise through college admissions. I read a book written by Cal Newport on this topic and I totally buy this new philosophy. Buy the book here: How To Be A High School Superstar. Read below to find out how this works.

HighSchoolSuperstar

The basic premise of this philosophy is that admission officers are bored to death by looking at the same kinds of applications over and over again, with lots of activities in different fields. Nobody will disagree that SAT scores and GPAs are important but how should kids approach the extracurriculars. Cal Newport argues that there are three main laws to follow, to position yourself as an interesting candidate for college admissions.

  • The Law of Underscheduling.
  • The Law of Focus.
  • The Law of Innovation.

These laws can be explained with examples.

  • The Law of Underscheduling
    • This law argues that there should be plenty of time in High School for unstructured and leisurely exploration.
    • This kind of unstructured exploration has the potential of making you interesting. 
    • He gives the example of Olivia, who earned a prestigious full-scholarship at the University of Virginia. She was exploring marine animal life in her leisure time, which led to an internship at a Marine Biology Lab because a neighbor worked there and she had shown interest. This led to her exploring the behavior of Horse Shoe Crabs. When the scholarship committee interviewed Olivia, they were amazed by her depth of understanding of her research topic and she won full scholarship even when her competition was with other high school students with more activities under their belts. The scholarship committee found her very interesting. 
    • He also gives the example of a relaxed kid, who took a gap year after high school, published a book and became a public speaker at radio shows and universities. This guaranteed his admission at a good college.
  • The Law of Focus
    • The main premise of this law is that one should not be distracted by too many activities. This will lead to a better outcome and again, will make you more interesting. Also, one should NOT use the law of under-scheduling to be lazy and play video games all day.
    • Cal gives the example of a boy Michael, who while being in High School, focused on Clean Energy initiative (and nothing much else in the way of extracurriculars) and ended up prototyping and deploying solar-powered golf carts. He made it to a good college easily.
    • Cal suggests that when the kids start practicing “The Law of Focus”, three effects start showing up in their lives:
      • The Superstar Effect: There is plenty of research that suggests that the best beats the second best by big margins in overall outcomes, even if the two are separated by a very small margin in their performances. The Law of Focus helps you in getting the Superstar Effect.
      • Matthew Effect: This just means that Good Begets Good. When you focus on one or a small number of things and get good at it, many other good things start happening to you. An example would be that if you focus on your ability to help other kids at school, you will be naturally selected for many or all leadership roles at school.
      • Countersignaling: This suggests that once you get really good at what you are interested in, you don’t have to talk about your abilities and your work. Others start paying attention to you and your work and hence your side channels and your references do the talking for you (which is way better), instead of you yourself.
  • The Law of Innovation
    • The main premise of this law is that the Law of Underscheduling and Law of Focus have given you the opportunity to first explore and then hone skills in a particular area and with the Law of Innovation, you can innovate in that area, which will put you in a much better position, compared to the other children who are drowning themselves in myriad different activities to fill their resumes.
    • Failed Simulation Effect: Cal suggests that your innovation should lead to a Failed Simulation Effect. This means that when people read your accomplishments, it should not be easy for them to simulate in their minds as to how you would have achieved the results.  For eg., somebody won a violin competition. This does NOT create a Failed Simulation Effect since it’s not very hard to understand what a violin player would have done to reach such skill levels.  A lot of practice and a lot of training. However, if you hear that Kara designed a health curriculum for tackling diabetes, which was adopted by a few organizations; that leads to the Failed Simulation Effect.
    • Cal proposes three rules for innovation, for high schoolers:
      • Don’t think up innovations from scratch.
      • Innovators join closed communities and pay their dues.
      • Innovators leverage their way up to the innovation.
    • An example to explain the rules of innovation:
      • Kara’s curriculum for tackling diabetes was a revamping of a previous anti-drug curriculum of an organization where she was working.
      • Kara joined the organization in question and did a lot of small tasks for them (paying her dues).
      • Kara first finished a reasonably important project with full commitment before proposing the revamping of the curriculum project. Hence, she leveraged her way up to the innovation.

The overall summary is that if you follow the three main laws properly- Underscheduling, Focus and Innovation, you will come out with some interesting achievements, which will strongly differentiate you in the college admissions marketplace.

Financial Outlook 2018

/ vishalkirti / 3 Comments

2018 is here and people are excited about their families, careers and education. The underlying foundation of all these pillars is their personal finance. For most Americans, the foundation of personal finance is the stock market.

We have been talking lately about the asset bubble formation and the bloated P/E ratios. (For introductory readers, P/E stands for Price to Earnings ratio and is one of the many indicators of the value of a stock). To understand where we stand, I attended Vanguard’s Financial Outlook Seminar with the new CEO Tim Buckley, Chief Investment Officer Gregory Davis and Head of Corporate Marketing and Communications, Rebecca Katz.

Vanguard

CEO Tim Buckley, Chief Investment Officer Gregory Davis and Head of Corporate Marketing and Communications, Rebecca Katz

Let’s look at various areas of the market as was discussed at the meeting.

P/E Ratios

While the panel members agreed that the cyclical P/E ratios are high at around 31, they also mentioned that under the light of low interest rates and low inflation, this is not over the top. (People are willing to pay more price for future earnings since the Future Value of Money is good in a low interest, low inflation environment)

Equity Outlook

The panelists suggested that they are looking at around 4.5%-6.5% for annualized return over the next 10 years. For 2018 specifically, the probability of recession stands at mere 5%, a mild recession at 10% and a slowdown at 15%. On the other hand, odds for the Trend to continue lie at about ~20% and the odds of growth lie at about ~50%.

Fixed Income Outlook (Bonds etc.)

The panelists pinned the 10-year annualized outlook for bonds at 2%-3%, mostly for high quality Corporate and Government bonds. Since the current interest rates are low, long term investors are encouraged to invest in short/intermediate term bonds since when the coupons mature, they can be reinvested in the higher yield bonds.

Diversification

Unsurprisingly, the panelists suggested that you should have a good mix of equities and fixed income vehicles so that if and when the market dips, you could trade your bonds with new equities. We will cover international market later in this article.

Inflation

An uptick in inflation is expected. However, it will depend on whether new money goes towards hiring more people (inflation increases) or incurring capital expenditure or financial engineering. Inflation is in check, thanks to some extent to technology because with technology, you can get more with less.

Interest Rates

The FED has indicated that it will increase interest rates in the next two years. Somewhere between 40 to 80 basis points in increase is expected.

GDP Growth

Again, unsurprisingly, the panelists mentioned that a GDP growth of ~2% in the US is expected.

Unemployment

They asked to watch this closely since unemployment is at a multiple decade low. This could lead to increase in wage pressures or using of more technology to replace humans (more capital expenditure).

Tax Cut/Bill for corporations

Begets the same question. Will the additional money  be used towards Financial Engineering (buyback stocks, a sugar rush of not much use) or expanding businesses and hiring, to increase the income potential of the corporations. However, the deficit generated is of concern because it reduces US’s credit rating, by increasing US’s debt/GDP ratio. This would mean that US will have to pay a higher interest on its new debts. Hopefully, the country does not get caught in a vicious debt cycle where a higher interest debt is serviced by another high interest debt.

Bitcoin/Crypto-currency

Vanguard will not offer anything with Bitcoins/Crypto-currency since it is a speculative thing like Gold. There is no underlying income stream/potential. However, the underlying “Blockchain” technology is being closely watched.

International Market

  • Europe
    • Affected positively by Global Economy.
    • Less political uncertainties now, leading to better valuation.
    • ~2% GDP growth expected.
  • China
    • A cooling off expected.
    • China is moving from capital intensive economy to consumer society. Capital intensive economy leads to better GDP growth, hence a fall in GDP growth to a level around 6%-6.5% is expected.

I hope I was able to convey the 2018 outlook in layman terms. Please let me know if you need further clarifications.

Happy investing!

What’s the point of education if you cannot protect your brain’s health?

/ vishalkirti / 4 Comments

I write mostly about education because education can serve two purposes, improving the quality of life by providing access to resources and increasing intellectual appetite and capabilities, which also leads to a qualitative improvement of life.

However, we don’t do a very good job at protecting our intellectual abilities. Protection of brain health involves behavior changes and behavior changes are difficult. We tend to incline towards some easy solutions like pills and supplements but pills and supplements don’t do justice. Even better, we blame the genes and so does Popular Science and hence we don’t have to do anything about it since it is not in our control.

But the truth is that it is within our control. Just like managing your finances is within your control, so is managing your health.

Brain gets two major problems: Strokes and Alzheimer’s. This leads to dementia and eventual death. Below is an image which shows the regions of high death rates because of dementia in 2012

Alzheimer's_disease_and_other_dementias_world_map-Deaths_per_million_persons-WHO2012.svg

Deaths per million persons in 2012 due to dementia including Alzheimer’s disease (Red=high)

You can clearly see that western countries are at more risk, countries like USA, Canada, Australia and several countries in Europe.

Are genes responsible for the greater risk? Interestingly, no. Presence of a specific gene called ApoE4 increases your risk for Alzheimer’s but there are countries/populations with much larger densities of ApoE4 presence but far fewer cases of Alzheimer’s. One example is Nigeria (this phenomenon is also touted as the Nigerian paradox).

There are also studies where Japanese people living in Japan have far lower cases of Alzheimer’s compared to the Japanese people living in America, ruling genes out as the major cause of the disease.

Then, what is the reason for high risk? It’s the diet. Higher the presence of animal based products and lower the presence of whole plant-based foods in your diet, higher the chances of strokes and Alzheimer’s.

Let’s delve a little deeper into both Strokes and Alzheimer’s.

  • Strokes: Clogged artery cuts off the supply to a part of the brain, killing that part and rendering that part rather useless, in a stroke. The causes of the strokes are high blood pressure and cholesterol. Here are the steps to prevent strokes:
    • Fiber: eat plenty of fiber. 97% of Americans eat fiber deficient foods. Berries, oatmeal, beans and other whole plant-based unprocessed foods have plenty of fiber.
    • Potassium: eating potassium rich foods like greens, beans and sweet potatoes will cut down the risk of strokes tremendously.
    • Citrus: citrus fruits are antioxidants and they beat the free radicals, hence preventing strokes. Think oranges and limes/lemons.
    • Optimal sleep: sleeping between seven or eight hours a night reduces the chances of strokes.
    • Other antioxidants: herbs and spices play a major role in cutting your risk of strokes. Think oregano, cloves, cinnamon and other spices.
    • Reducing meat, dairy and trans/saturated fats: meat and dairy have no fiber and meat has hardly any antioxidants. Reducing meat and dairy will also lead to reduction in cholesterol.
  • Alzheimer’s: It is believed that Alzheimer’s is caused by the clogging of the arteries inside the brain with atherosclerotic plaque. ApoE4 gene has some role to play since ApoE4 makes the protein which is the principal cholesterol carrier in the brain. However, as mentioned earlier, lifestyle choices have far greater role to play.  Here are the steps to prevent Alzheimer’s:
    • Whole plant-based unprocessed foods: replacing meat, oils high in trans/saturated fats and dairy in your diet with  vegetables, legumes, fruits and grains will lower your risk for Alzheimer’s by lowering your cholesterol and helping with other things as well. Just like stroke prevention, plants and berries have more antioxidants, which combat the free radicals.
    • Spices: Saffron and Turmeric have been found to be helpful in the prevention of cognitive decline.
    • Reducing Gerontotoxins:  Advanced Glycation End products or AGEs accelerate the aging process and elevated levels of AGEs has been found in the brains of Alzheimer’s victims. Meat products have a high amount of AGEs versus the plant products. The style of cooking also matters. Boiling and stewing leads to less AGEs versus the dry heat cooking.
    • Aerobics: Aerobics has been shown to reduce the risk of developing Alzheimer’s.

This post will receive some backlash similar to posts which encourage saving money instead of spending. This is because any lifestyle change like eating less meat and dairy is hard. For starters, human beings are naturally attracted to high fat products like meat and dairy, just like sugar, and meat and dairy products are tastier than the average vegetables and fruits. The other aspect is that there are lots of commercial interests in promoting meat and dairy, hence the popular science brainwashing is that animal based products are your only sources of protein. Unsaturated fats are not bad at all and unsaturated fats are available mostly only from plants, hence, this is absolutely not a war against fat. Cutting both bad carbs and bad fats are important. Whole plant-based unprocessed foods will give you both good fats and good carbs and keep your brain healthy for a longer time.

The source of research for this article is the book “How Not To Die” written by Michael Greger, M.D. You can read/buy it here: How Not To Die.

The Mother of All Personal Finance Hacks- Mega Roth

/ vishalkirti / 14 Comments

I am writing this specifically for Jonathan and Brad. This was one of the finest finds for me in the personal finance space and I want the community to take advantage of it ASAP. In my other posts Simplifying saving for college and How to get your money into Roth IRA even when IRS prohibits it? , I talk a lot about how to get more money into Roth IRA. This is especially very important for the people who have already maxed out all pretax contribution opportunities like pretax 401K, HSA etc. This is the last post in the series.

(BTW, if you want to understand the basics of personal investing, I advise you to read this book: Simple Path To Wealth.)

MegaRoth

Who should do it?

Let’s say you have reasonable high income and you already do the following:

After doing all the above things, if you still have money leftover to invest, please don’t invest it in a taxable account. Instead, invest it in Roth IRA via the Mega Roth because Roth IRA has some major advantages. (see Simplifying saving for college).

How does it work?

A Traditional 401K has a contribution limit of $54,000 (first surprise! most people think it is $18,000). Here are the usual ways money goes into your 401K.

  • Your pretax contribution- $18000 limit in 2017.
  • Your employer’s matching- different companies have different rules.
  • Your after-tax contribution (let’s call it ATC).

ATC is where the magic happens. In a hypothetical example for Mr. Kirti, here is the breakup.

  • Mr. Kirti contributes $18,000 of his pretax income to 401K.
  • His employer matches $9000. (again, goes into account as magic pretax money)
  • Mr. Kirti makes another $27,000 ($54,000- $18,000- $9,000) of ATC.

What happens to the 27K worth of ATC?

  • It can be left there till retirement. Not very advantageous because money does not grow tax-free (unlike Roth IRA).
  • Can we rolled over into Roth IRA called the Mega Backdoor into Roth.

Can I do this as well just like Mr. Kirti?

  • Not everyone’s employer’s 401K allows this. Your plan needs to allow something called In-Service distribution since you are still working at the company.

How often can I do this?

  • Mr. Kirti’s 401K administrator allows him to take one In-service distribution every 12 months. But your plan might have different rules.

How should I go about doing this?

  • Call your 401K provider and ask them about In-service distribution. If they allow it, go to the next step.
  • Ask them the number of such distributions allowed and any costs associated with it. If any number of such distributions are allowed without any costs, take these distributions after every paycheck. You will most likely get a check for “<company which holds your Roth IRA>  for the benefit of <your name>”.
  • If they allow only one such distribution every 12 months, then try to make your after-tax contributions into the 401K in a shorter interval of time. Eg. make ATCs around bonus time or make the maximum allowed (% of your paycheck) ATC for some consecutive number of paychecks till you reach the max cap. The reason it is important to cluster it in such a way is because your contributions might grow if left in the 401K account for long and you have to understand what happens to the growth.

So, what happens to the growth?

  • First, you decide if you want to have growth or not while your money is sitting in 401K, waiting to be rolled over to Roth IRA. You need to decide because the growth can lead to a taxable event (it matters when you are trying to keep your Modified Adjusted Gross Income-MAGI within a certain level).  Mr. Kirti likes to let it grow since in his case, “growth minus taxes” is still superior than “no growth and no taxes” because he cannot possibly benefit very much by keeping his MAGI low by relinquishing real growth since he won’t be eligible for any benefits anytime soon.
  • If you don’t want it to grow, just put it in a Settlement account (usually money market) in the 401K and when the roll over into Roth happens, there is no taxable event.
  • If you invested it in the stock market, it might have grown. Now you decide how you want to handle the growth.
    • Take it to Roth IRA: Taxable event- you pay the taxes on the growth portion that year.
    • Move the growth/earnings portion into Traditional IRA:  this makes sense for people who never intend to do the regular Backdoor Roth because if and when they do the regular Backdoor Roth, they will have a big taxable event. If you intend to separate out the In-service distribution between contributions and growth, make sure you know the respective amounts (your 401K provider tracks the cost basis of the ATCs).

That’s it. If you have any more questions, ping me via the blog or pester Brad and Jonathan. Let me know how it goes for you and feel free to provide constructive feedback.  Happy investing!

 

 

 

 

How to get your money into Roth IRA even when IRS prohibits it?

/ vishalkirti / 2 Comments

In my previous article on Simplifying saving for college, I talked about getting your money into Roth IRA since its one of the most flexible tax advantaged retirement vehicles. However, IRS has an income limit restriction. They will not let you contribute if your Modified Adjusted Gross Income (MAGI), married filing jointly, is greater than $196,000 (2017 number).

Roth

Then, how do we do it? We take advantage of a tax loophole where conversions from other Retirement accounts to Roth IRA is possible.

Let me tell you step-by-step as to how I do it. I use Vanguard heavily since the cost structure of Vanguard is pretty solid and they have extremely low expense ratio for most of their funds (I can get into more details of Vanguard in a different post). The trick is that I don’t have a Traditional IRA with loads of money in it. This is the bedrock of conversion methodology. This is because when you convert from one Retirement Account to another one like Roth IRA, it leads to a taxable event. If you have plenty of pretax money lying around in a Traditional IRA and if you convert it to Roth, it will lead to a big tax bill that year (Even if you contributed to Traditional IRA with post tax dollars, the growth/earnings portion will trigger a tax bill). Below are the right steps to achieve the most optimal results if you don’t have money lying around in an existing Traditional IRA.

  • Open a Traditional IRA with Vanguard if you don’t have one.
  • Contribute $5500 (the contribution limit in 2017). Buy whatever fund you desire.
  • Open a Roth IRA with Vanguard if you don’t have one yet.
  • Once the funds have settled into the Traditional IRA (takes a couple of days or so), ask Vanguard to convert the funds to Roth.
  • The important point is to do it ASAP after the funds are available to be converted because you don’t want the money to grow before it reaches Roth; otherwise you will have to pay taxes on the growth.

This technique is called “The Backdoor Roth”. I don’t know how long this loophole will last, hence make hay while the sun shines.

Of course, the best advice here is for people whose MAGI (married filing jointly) <$196,000, please open a Roth IRA right away and start contributing directly to Roth instead of using the Backdoor hack. IRS starts phasing out the benefits beyond the MAGI (married filing jointly) of $186000; hence you won’t get to contribute the full $5500 between $186,000 and $196,000. If your MAGI (married filing jointly) lands below $186,000, you get the full $5500 to contribute.

Eventually, I will write another post where I will tell you another trick about contributing to Roth. Meanwhile, keep reading and start saving!

 

 

 

Simplifying saving for college

/ vishalkirti / 3 Comments

CollegeSaving

College is expensive in United States and parents need to be planned so that they are not surprised with the bill when its time to ship the kids to college. They might be thinking good riddance after dropping them off at the campus but not so much when the hefty sometimes even $50,000/year bill arrives in their mail. Scholarship is hard to get if the parents have high income, even if the student is meritorious, at Tier 1 institutions. Here are my tips for my US parents:

  • Avoid big student loans if possible. They will hunt you till your grave if you don’t pay them back. It is highly irresponsible to not pay back your loans in the first place but unlike other loans which go away if you file for bankruptcy, student loans don’t.
  • Roth IRA : Roth IRA is the best investment vehicle ever. Here are the things you need to remember about withdrawing from Roth IRA. My advise is to only use the contributions (not the growth/earnings) for funding college and I advise to use this as your primary college fund:
    • You can withdraw the principal (your after-tax contribution) anytime without any restrictions.
    • You can withdraw the growth, tax and penalty free if you meet the following conditions:
      • Roth IRA account has been open for more than 5 years. AND
      • It is a qualified distribution which means:
        • You are over 59 1/2 OR
        • Death or Disability strikes OR
        • First time home buy (a lifetime limit of $10,000) for the account holder, account holder’s children and grand children.
    • You can withdraw the growth, penalty free (but not tax free unless you are older than 59 1/2) if it is for college. You will pay ordinary income taxes on the amount of growth you withdraw for college. I do NOT advise touching the growth for college though unless absolutely necessary. This exception withdrawal does not have to wait for the 5 year period as discussed in the previous bullet. The college fee and tuition can be paid for the account holder, account holder’s spouse, children, grand children, great grand children etc.
    • Advantages of using Roth IRA
      • The contributions are flexibly available and if you don’t touch the earnings, they grow tax free.
      • Assets in Roth IRA are not used in calculating the Expected Family Contribution on the FAFSA (Financial Aid Form).
    • Disadvantages of Roth IRA
      • If your income is low and you could potentially qualify for Financial Aid/Scholarships, the amount of contributions which you withdraw, even though it won’t be taxed again, is still considered untaxed income on FAFSA (Financial Aid Form) and reduces eligibility for next year’s financial aid. The strategy will be to withdraw the amount a couple of years ahead of time called Prior Prior Year- PPY (losing the opportunity of growth for two years in hopes to qualify for financial aid/scholarships).
      •  There are usually income limits for Roth IRA contributions. People like me in the high tech industry don’t qualify to contribute. However, there are some loopholes which you can use. I will not list them here. If you are interested, you can either ping me for a friendly chat or read up online.
  • 529 Plans
    • Use it as the secondary college fund.
    • After tax money goes into the fund and grows tax free.
    • Disadvantages
      • Can only be used towards post-secondary education at the universities/colleges approved in your plan. If not used for post-secondary education, you have three options:
        • Change beneficiary to somebody else in the family.  Qualified beneficiaries are:
          • The designated beneficiary’s spouse
          • The designated beneficiary’s son or daughter or descendant of the beneficiary’s son or daughter
          • The designated beneficiary’s stepson or stepdaughter
          • The designated beneficiary’s brother, sister, stepbrother or stepsister
          • The designated beneficiary’s father or mother, or ancestor of either parent
          • The designated beneficiary’s stepfather or stepmother
          • The designated beneficiary’s niece or nephew
          • The designated beneficiary’s aunt or uncle
          • The spouse of any individual listed above, including the beneficiary’s son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
            Any individual for whom the home of the designated beneficiary is his or her primary home for the entire tax year
          • The designated beneficiary’s first cousin
        • Leave it intact for your child’s graduate school or college later or your own education at some point in time if you are thinking of going back to college.
        • Withdraw the leftovers. You will pay ordinary income taxes on the earnings and will also pay 10% federal penalty tax on the earnings portion (a state penalty might also apply).
      • Assets in 529 are used to determine EFC (Expected Family Contribution) on FAFSA and reduce Financial Aid Eligibility.
    • Advantages
      • Both contributions and earnings are available to pay for college without taxes or penalty.
      • The withdrawal from 529 does not show up as income in that year for FAFSA purposes since the EFC has already taken care of including these assets in its determination, so no double counting.

I know all of this can be a bit too much but I have excluded many unnecessary things which confuse the parents. I don’t hold myself to any liability claims for this advice. Please talk to your financial advisor before making any contributions/investments. This is just a friendly advice and not a certified financial advisor’s advice.

Meditation And Education

/ vishalkirti

These two words are not often taken together and I am going to disclose why they should be.

Meditation is a term which is perceived differently by different people. One of the simplest books which clarifies what Meditation is, is a book called Mindfulness In Plain English by Henepola Gunaratana. It tells you exactly what meditation is not before instructing what it is. In plain words, meditation is an activity where a human being monitors and maneuvers her breath, leading to an observation of thoughts with non-attachment. For more details on how to meditate, read the book.

ChildrenMeditate

Meditation leads to lots of short term and long term benefits and have been studied extensively by the scientific community.  For example: A meta-analysis of 47 trials adjusted for all biases and with control groups, proves that meditation reduces psychological stress and enhances well-being. There are some studies done on a related activity- Yoga. A heavily cited experiment conducted to compare the influence of several weeks of yoga training with several weeks of nonyoga–based physical training shows children randomly assigned to the yoga condition performed better on a standard problem-solving test used to assess cognitive function.

With these proven benefits in place, these activities are catching up in the schools as well.

This article in The Atlantic states “Schools have also begun experimenting with the practice and discovering that its techniques can help its students. When a school in New Haven, Connecticut, required yoga and meditation classes three times a week for its incoming freshman, studies found that after each class, students had significantly reduced levels of cortisol, a stress hormone, in their bodies. In San Francisco, schools that participated in Quiet Time, a Transcendental Meditation program, had twice as many students score proficient in English on the California Achievement Test than in similar schools where the program didn’t exist. Visitacion Valley Middle School specifically reduced suspensions by 45 percent during the program’s first year. Attendance rates climbed to 98 percent, grade point averages improved, and the school recorded the highest happiness levels in San Francisco on the annual California Healthy Kids Survey. Other studies have shown that mindfulness education programs improved students’ self-control, attentiveness and respect for other classmates, enhanced the school climate, and improved teachers’ moods.

I think there is enough scientific evidence to warrant the pairing of the words Meditation and Education. My wife who shares my passion of Education and is a long term practitioner of meditation has founded a licensed after school “Damara Kids” in Livermore to integrate Meditation with Education in a holistic way. She reports seeing improvements in the kids in less than two months she has been operating.

My desire is that more schools and child care centers adopt it in their curriculum and provide these invaluable techniques to children to thrive in the difficult yet enjoyable journey called Life.

 

 

Are you a genius?

/ vishalkirti / 1 Comment

What is genius and are you a genius? The former is easier to answer than the latter. Silicon Valley, Athens, Vienna, Kolkata, Edinburgh, Hangzhou and Florence are all considered to be places of genius at some point in human history. Is genius a personal trait or is it cultural?

Eric Weiner tries to answer all these questions in his new book “The Geography of Genius”. Buy it here: The Geography of Genius. In summary, genius is very much the product of culture. You get the geniuses you deserve, it has been said. Whatever is valued in a society thrives in that society. Silicon Valley values entrepreneurship and sure it gets but how did it start valuing entrepreneurship in the first place?

Genius
We met Eric at Google in January and he answered several of these questions. For starters, a place like Silicon Valley is initiated by several small steps.

If we look at Silicon Valley’s history, several names come to mind- Leland Stanford, Terman, Shockley and the Traitorous Eight. Leland Stanford established Stanford in the memory of his son who had died at 15. Terman started the practical education movement and tried the first cross-pollination of Stanford and industry (encouraging H & P to stat HP from a garage). Shockley came back to his hometown Palo Alto to be close to his ailing Mom starting Shockley Semiconductors. The traitorous eight were recruited by Shockley but later started companies like Fairchild Semiconductors and Intel, pushing Silicon Valley to the forefront of technology.That attracted more talent to the Valley and the Valley kept growing in the positive feedback loop. So, genius is the product of culture.

But genius needs expertise and the capacity and grit to create expertise is a mixture of genetic, psychological and cultural phenomenon. A fine balance of hardships and opportunities helps in shaping the geniuses. All luxury creates complacence and “only” hardships  with no security breaks confidence.

For the final question of whether you are a genius or not- unfortunately, it is not for you to decide. Genius is reserved for the society which based on good or bad judgement anoints this title to some of its members. Usually, the criteria are impact, timelessness and novelty of the work! Go figure!!!

So, what if you decided one day that you want to be a genius. Here are a few things you can do:

  • Build Expertise: Malcolm Gladwell in Outliers suggests a 10,000 hour rule. If you put 10,000 hours in any activity, you will undoubtedly be an expert. You don’t need to necessarily spend 10,000 hours but getting great at doing something is important if you are eyeing that envious title.
  • Create and Deliver Products and Services: Keeping the skill and expertise to yourself is not going to help influence the opinion of the society about your genius. You have to share it with the world to be acknowledged as a genius. Imagine, Einstein not writing all those publications or Edison not writing all those patents.
  • Create impact: Just creating and delivering random products and services is not going to fit the bill. You need to create an impact on the society.
  • On a lighter note, die early: Posthumously getting acknowledged has higher probability than in your lifetime.