If you are serious about all things money, you must put The Wealthy Barber on your reading list. Like right now! Here is just one of the many nuggets from the book that can literally transform lives:
Wealth beyond your wildest dreams is possible if you follow the golden rule: Invest ten percent of all you make for long-term growth. If you follow that one simple guideline, someday you’ll be a very rich man. -David Chilton
The Wealthy Barber: Everyone’s Commonsense Guide to Becoming Financially Independent by David Chilton
In Ye Olde England, nobles and peasants alike used a measure of time that has long been out of general usage, at least in the states, the fortnight.
A fortnight is fourteen days. The word derives from the term fēowertyne niht, literally meaning “fourteen nights.” We here across the pond prefer to say biweekly, but the Brits still like sprinkling their discourse with ye olde words on occasion.
So, what do fortnights have to do with money?
Something that happens every fortnight happens every two weeks, which is how your clients may want to pay their monthly mortgage, and here’s why.
A biweekly mortgage payment allows the borrower to make payments every two weeks rather than once a month on their thirty year mortgage. So rather than making 12 whole monthly payments, the homeowner makes 26 half payments over the course of the year. This may not seem like much of a change, until you look at how the power of accelerated payments can save the homeowner a bundle in interest payments.
As an example, if I make twelve equal monthly mortgage payments of $1000 that means I will have paid $12000. However, if I pay 26 half payments (that’s $500 every fortnight!) I will have paid $13000 in twelve months. So I end up paying $1000 more over the course of a year, but its not a budget buster for most money conscious families, and there is so much to gain. The extra $1000 works out to $2.74 a day!
Mortgage payments are comprised of interest and principal. The early years are heavy in interest and it may take some homeowners years to build up a good store of equity, the extra payments each year serve to pay off the interest owed much more rapidly, so it is common that a traditional thirty year mortgage can be paid off in twenty years. That’s cutting ten full years off of the debt service by making those extra payments each year.
Your client should schedule a call with their mortgage lender and ask for an amortization schedule which will show exactly how this fast pay approach can keep tens and hundreds of thousands of dollars in you client’s pockets. The lender can then help your client establish the non-traditional payment plan.
And while they are at it, right now (if you are reading this in December 2020) is a great time to talk about refinancing to save even more money. 30 year fixed rates are in the 2.5% range, some lower.
Deciding between a ROTH or a Traditional IRA is one of the most important money decisions you must make.
A key question you have to answer is: “Do you want to be taxed on the harvest or the seed? (Hint: If you want more bread, you’ll want to pay on the seed!)
Most investors use traditional IRAs for two key reasons: their contributions are currently tax deductible and the IRA “shelter” offers tax-deferred growth of your investments.
Since you will delay paying taxes until you take distributions sometime in the future, a tax maneuver called tax deferral, a traditional IRA is a good choice if you believe that you will be in a lower tax bracket after you retire. Your tax deductible pre-tax contribution will result in a meaningful reduction to your 2018 tax bill now, and possibly a lower tax bill later, provided you actually will be in a lower tax bracket later.
But the thing you must remember is that while you get a relatively small benefit up front (the deduction), you will pay an exponentially larger tax bill 0n the harvest (future withdrawals).
You are eligible for the contribution if you are under 70 ½ by the end of 2018 and had earnings upon which to base your contribution.
In 2020, the maximum yearly contribution is $6,000, but if you are age 50 or older at year-end your maximum contribution is $7,000, because of the catch-up provisions in the tax code. Also note that these are your combined limits for both Roth and Traditional IRAs.
When deciding between a traditional IRA or a ROTH, keep in mind that traditional IRA accounts require that you take annual Required Minimum Distributions starting by April 1 of the year after you turn age 70½. If you don’t take these mandatory distributions, each missed distribution carries a whopping 50% penalty on top of the regular tax.
If you expect to be in the same or higher tax bracket when you retire a Roth IRA may be your ticket.
While you will forfeit the tax deduction for your contribution for the current tax year, you will enjoy something far more powerful: tax-free growth. Your annual ROTH contributions are made with after-tax earnings, and because you will not get the current tax break, the tax deduction, you will forever be able to withdraw from your ROTH without owing any income tax on the growth. This means that you may be able to convert what may have been a taxable asset into a tax free asset. This is what makes the ROTH a powerful choice, and most often the right one.
In 2020, as with a traditional IRA, your maximum yearly contribution is $6,000, but if you are age 50 or older at year-end your maximum contribution is $7,000. And remember, these are your combined limits for both Roth and Traditional IRAs.
There is no age eligibility requirement with a ROTH, a super benefit for those who decide to enjoy a working retirement. Regardless of your age, as long as you are earning income you can make a ROTH contribution, but there are earnings restrictions. In 2019, contributions begin phasing out at certain levels of Modified Adjusted Gross Income: $123,000 for single and head of household, or $193,000 if married, filing jointly.
Another thumbs up for the ROTH is there are no RMDs to worry about. Traditional IRA accounts require that you take annual Required Minimum Distributions starting by April 1 of the year after you turn age 70½, but not so with a ROTH, thus completely eliminating the chance of triggering the 50% penalty.
So, which is your best choice?
Hands down, for most investors, never paying taxes on the harvest (future taxable distributions) is the logical choice over paying taxes on the seed, since ROTH accounts grow tax-free.
Converting taxable assets into a tax free income machine for life is a powerful argument, making the ROTH almost irresistible, however, everyone’s situation is different. Goals and circumstances differ from individual to individual, or couple to couple.
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