Miser Inheritance – When Contribution Maximums Matter 

Making the most of gainful surprises

When we think of financial surprises it’s usually in the form of an unplanned tax debt, a sudden bill, or some irksome expense that comes out of the blue.

Every now and then though, luck (or, more likely circumstance) decides to give us a break and sends some handy extra cash our way. Sometimes it’s a bittersweet inheritance, sometimes it’s from an upheaval, such as a severance package, and for the rare few, it simply comes from holding that one, lucky lottery ticket. But, no matter how the windfall came about, once its reality starts to sink in, the mind naturally leans towards what to do with it.

A smart strategy may be to invest it for a more comfortable retirement. But if you put it all in a term deposit or add to an investment portfolio, the earnings will generally incur tax. A more effective option, may be to contribute to your 401(k) workplace plan. But beware, like other countries, such as Australia, there are actually limits to how much you can plough in each year. In the US, these caps are called 401(k) Employee Annual Contribution Limits.

Windfalls and 401(k) plans

There are two types of 401(k) options. The standard ‘Traditional’ version gives you an up-front tax break, while the ‘Roth 401(k)’ gives you a tax-free income in retirement (since you’ve already paid tax on the money you’ve contributed).

Either way though, the annual limits are the same.

Currently (in 2023) the contribution limits for individuals are:

Under 50yo: $22,500 total per year

50yo or older: $30,000 total per year

The limit for over-50s is higher thanks to the $7,500 catch-up contribution that’s available once you hit 50.

Provided you opened your 401(k) at least five years beforehand, using a windfall to boost your retirement gives you the benefit of additional tax-free income stream when you reach 59 years and six months.

Even if retirement for you is years away, investing surplus cash in your 401(k) up to the maximums can still be a sound strategy, as long as your current miserly approach to spending is covering your needs right now.

Windfalls, investments and tax

One side-effect of a sudden rush of cash to the hip pocket, can be a sudden rush of blood to the head – figuratively speaking at least.

Even smart minds may briefly picture a shiny Mercedes parked outside the new beach house, but such visions should be quickly shrouded by more sensible and astute ideas.

As previously mentioned, interest accrued on term deposits and earnings on investments generally attract some form of tax, and while the tax shouldn’t exceed your returns, they can take a fair bite out of them. That’s why, it’s always shrewd to seek professional advice if your windfall is substantial – especially if you want to maximise the tax advantages.

Of course, some bonanzas are taxed at the outset.

Lottery wins across the US are taxed at federal level as they’re considered to be part of your income. And then depending on where you live, even more may be collected by the state coffers. The same goes for severance packages.

On the flip-side, inheritances are not taxed, except in a handful of states1 (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania), and even then, there are conditions based on the amount you inherit, and how you’re related to your benefactor.

This means that, outside of contributing to a 401(k), the source of your financial bonus may influence where and how you invest.

Ultimately though, if you find yourself the recipient of an unexpected windfall, the best advice is professional advice.

Let the emotions settle before making any big decisions, make an appointment with a financial planner, and definitely do not duck into a luxury auto showroom on the way.

I Won My Healthy Wage Weight Loss Bet

Back in June I made a bet with HealthyWage that I could lose 29 pounds in 6 months. I’m happy to report that I made my weight loss goal and won the bet. I apologize for the lack of updates along the way. I went from 218 pounds at the start to 189 pounds for my final weigh-in.

It wasn’t easy to lose the weight. The weight initially came off fairly easy. I had a hike on the Appalachian Trail which provided me with plenty of exercise and kept my eating under control. I also had another hike on the Camino de Santiago in Spain. That hike didn’t help as much since the hiking was much easier and there were multiple places to purchase food each day. After stalling out for a while, I decided to try the Keto diet. I did lose weight on Keto, but it didn’t happen as fast as I was hoping.

I traveled to Thailand at the beginning of December and gave up on the Keto diet at that time. I went with a low calorie diet and strenuous exercise every day. That allowed me to lose the remaining weight I needed to lose. The 2 weeks of little food and a lot of exercise kind of sucked, but I wasn’t going to lose $1200 without a fight. Luckily, my efforts did pay off and I won the bet.

Since I won the bet I have backslid a bit since the exercise and diet routine I was following wasn’t sustainable for me in the long run. I also indulged in fast food and junk food that I hadn’t been allowing myself to eat. After those few days of indulgence, I have now started working on losing weight again. I go the gym and workout every day. Since I’m not working here in Thailand I have plenty of time and no excuse not to go to the gym. I’m also getting a lot of exercise just walking to wherever I need to go since I don’t have a car here. I have cut way back on the junk food and fast food and am trying to eat more Thai food and fresh food. I think exercising most days and keeping my diet reasonably under control will be sustainable for me and allow me to lose more weight. I have a goal of weighing 185 pounds or less by the time I leave Thailand next month. If that goal proves too easy I will set a new goal of 180 pounds. My ideal weight would be 170 pounds. I am going to work towards that weight through 5 pound goals. I’ll try to do a better job of keeping you informed on my future weight loss progress.

If you would like to sign up for your own weight loss bet you can do so by clicking on the following affiliate link. Make a HealthyWager Today!

Moved into My New House

I’ve now been living in my (really my mom’s) new house for a little over a week. The house buying process was not without a few bumps in the road. We’ll be dealing with some of those bumps for a while.

Just three days before the original closing date the mortgage company did my employment verification and since I wasn’t employed with my employer at that time, my name had to be taken off the mortgage and closing was pushed back a week. That was a bummer for me. I ended up being rehired just one day after closing. The timing didn’t quite work out for me there.

We will add my name to the title once the mortgage has been paid off. Alternatively, we’ll add my name to the title if we’re able to refinance and add my name to the mortgage. It seems unlikely that a refinance will make sense though. We have a 3.375% APR. We were told we didn’t qualify for a lower interest rate due to the small ($50k) size of the mortgage. The small mortgage means it probably won’t be worth paying the required fees to refinance the mortgage.

Although my name isn’t on the mortgage I will be paying it. The payments are only $357 a month for 15 years which makes it cheap rent for me. We hope to have the mortgage paid off well before the 15 years are up. My mom will be paying the property taxes and insurance which are a little less than $175 a month. My mom volunteered to also pay the utilities if I match that payment with an extra mortgage payment.

The house looks pretty nice from the front. However, when we moved in the inside was filthy and the backyard was a mess and full of junk. It was in the purchase contract that the seller had to remove the junk in the backyard, but he just didn’t do it. He also refused to make a financial concession for failing to fulfill his contractual duty to clear the back yard. The realtors didn’t want to lose the sale and they hired and paid for a cleaning lady to do a quick clean of the house and for someone to haul off the junk from the back yard. That improved things a lot, but we still had a lot of work to do to get things to what we consider an acceptable level. We’ll have projects for months to get things how we would like them.

For now buying the house gives me a permanent home and cheap rent. Sometime in the future it will provide me with a bit of a financial windfall. Even with the bumps in the road I think buying the house with my mom was a good idea and will benefit both of us.

Covid-19 Plan C: Buy a House

My initial plan for this summer was to spend a week in Japan, followed by a couple of months in Thailand, then coming home in September by way of Hong Kong and London. That would have made an around the world trip. Due to the travel restrictions caused by the global pandemic, all of those plans had to be scrapped.

My plan B was to hike the Appalachian Trail instead. I’ve hiked the AT all the way to the Massachusetts/Vermont border. Both MA and VT are currently requiring out of state visitors to quarantine for 14 days. That requirement makes hiking the AT a no go for me. Perhaps those restrictions will be lifted later this year, but for now continuing my section hike of the AT isn’t an option.

This left me with plan C, which is buying a house with my mom. We were going to look into buying a house together when I returned from my overseas trip. Since that trip didn’t happen we went ahead with the house buying plan.

We should be closing on the new home this Thursday. My mom’s house already sold a couple of weeks ago leaving us homeless until we close on the new house. We’ve been staying at my aunt’s house since it didn’t make sense to rent a place for such a short term and we didn’t want to actually be homeless. Hopefully, everything will go smoothly and we can finish moving on Friday. It will be nice to be in a permanent home again.

The house is a small upgrade from my mom’s previous house. She sold her old house for $135,000 and we’re buying the new house for $170,000. Where I live $170k can buy a pretty nice house. The new house is also in a much nicer neighborhood so it should appreciate faster than the old house.

The proceeds from the sale of the old house are being used as a down payment on the new house and we’re taking out a $50,000 mortgage for the rest. I’ll be responsible for paying the mortgage, which will be about $350 a month since we got a 15-year mortgage and won’t have escrow. That’s a good deal since it is cheaper than rent. I’ll also be getting 50% equity in the new house. I’m basically getting my inheritance early. The equity in the new house minus the mortgage liability will result in about a $35,000 increase in my net worth. That isn’t money I can spend today, but someday it will be a nice nest egg.

My mom is wanting to pay off the mortgage quickly. I’m thinking we should be able to pay it off in 7 or 8 years, if not sooner. By the time mortgage is paid, I’ll hopefully be ready to retire. Not having a house payment would make it much easier to retire. A lot can change in 7 or 8 years so we will see what happens.

I’ll write another post once the house purchase and move-in has been completed.

My Coronavirus Update

Before I get to how the Coronavirus has affected me, I want to acknowledge how lucky I am. Nobody that I personally know has gotten sick or died from the virus. My sympathies go out to those who have truly suffered during this crisis.

The virus is affecting me financially. I was laid off, as was everyone else, from my full-time job. They have completely closed the office for an indefinite time. This was a bit of a surprise, as one day we were working like normal and the next everybody was told not to come into the office. I was planning on quitting this job in April, but missing out on a little over a month’s pay will hurt my finances.

Luckily, I have been working a second job and that job is still going strong. It is only 15 hours a week, but luckily I have arranged my life that my monthly expenses are less than my earnings from my part-time job. I’m also lucky that I can work my part-time job from home. The part-time job was supposed to end in April. Now that the tax filing deadline has been extended I’m not sure when it will end.

Another thing working in my favor is that I have saved a few thousand dollars for my trip to Asia this Summer. That money may end up being my emergency fund to live on for the rest of the year instead.

I had two trips planned for this year. My first trip was going to be a hiking trip on the Appalachian Trail at the end of April. The flight for that trip hasn’t been canceled yet. I doubt it will be safe to hike by the end of April, but for now I’m just waiting to see how things change. The airline hasn’t offered a refund or free change on my flight yet so I’m not going to cancel the flight ahead of time in hopes that they will eventually offer a refund or free cancellation for my flight.

My second trip was going to be a trip to Asia. The plan was to fly to Japan at the beginning of June for a few days, then fly to Thailand with a layover in Singapore. This trip appears unlikely to happen. Singapore isn’t currently allowing any foreigners to transit through their airport. Thailand is requiring foreigners to have a certificate of good health before they are allowed into the country. It isn’t really possible to get that certificate right now since doctors have much more important things to attend to right now. Neither of my flights for this trip have been cancelled by the airlines yet. Again, I’m not going to cancel the flights ahead of time in hopes that the airlines will eventually offer a refund or free cancellation for my flights.

The stock market plunge has hit my retirement savings hard. I haven’t looked at my balances for a couple of weeks, but I know they are even lower than when I last checked. Right before the stock market started to tank, I added $4,000 to my IRA in order to increase my tax refund. That ended up being bad timing. I’ve added $200 to my taxable dividend stock account this month to try to buy some bargains. I want to add more, but I also want to conserve my savings. I have a little over $1k left to max out my IRA contribution limit for 2019 and I’m undecided if I should contribute the additional $1k. Since the filing deadline has been extended until July 15, I have a few more months to make up my mind.

As an introvert the social isolation hasn’t been that big of a deal for me. My two main activities outside of the home, other than work, were to go to the movies and to eat at a fast food restaurants while reading my magazines. Neither of those activities are an option now so I’m just staying home and watching Netflix and YouTube for my entertainment. My annual trip to Thailand basically fulfills my physical and mental needs for social interaction for the year. If I’m not able to go this year, I’ll have to figure something else out so I don’t get depressed.

Overall, things are not that bad. Although the Coronavirus has negatively affected me, I think I’m better off than most. How are you doing?