Get Rich - Start Early
18 Jul 2020 - Nuruddin Pethani
Photo Credit: Helena Lopez
You got your dream job and are very excited. You go through training and orientation. The HR department gives you the company handbook. It is a nice binder that you open and glance through it, and realize that all the financial provisions look like Greek to you. Don’t worry, let’s see what you should do.
The W-4 form
This form asks you whether you are Single or Married and how many exemptions are you claiming. The best thing to do is regardless of your Marital Status mark the ‘Single” box and claim ‘zero’ exemptions. This allows the company you work for to cut your taxes at the maximum possible rate.
These are not your actual taxes, but only the estimated taxes cut from your salary. This ensures that you will most likely not have any balance due at the end of the year when you file your taxes. The chances are great that you will have a refund.
Contribute to IRA:
If you follow the above W-4 suggestion, at the end of the year, you will most likely have a refund, when you file your taxes. Put the entire refund in an IRA account. You should talk to your accountant and ask him if you are eligible to do Roth IRA. If yes then do it. If no, then ask him how can you do a Back-door Roth IRA.
401K / 403B:
When you are in your 20’s or early 30’s, retirement is the last thing that concerns you. The earlier you start saving, the more your money compounds for you. Most companies will match what you contribute to a 401K plan.
The matching is generally limited to 3 to 5 % of your annual salary. Let say someone is making a salary of 100,000 and the company matches 5%. What that means is if you contribute 5,000 out of your salary the company will match that amount. That means your account now has 10,000 and it grows.
If you contribute only 1,000 then the company also puts in only 1000. Let say you contribute the entire 401k limit of 19,500 currently the company will stop their contribution at 5,000 (5% of your salary of 100K)
So, it’s a no brainer that you should contribute whatever the company matches as it free money but should you contribute more though if you can?
The answer is “Yes”: But why?
When you contribute 19,500 if it is a regular 401k amount you get a tax deduction on that amount. If the company has a Roth 401k option, which is even better than there is no tax deduction right now but the money grows tax-free. You don’t pay taxes on the principal, plus the entire growth when you withdraw money at retirement.
Meeting your accountant at least once before the end of the year:
Most of the youngsters I meet generally use their family accountant or one that their friends suggest. In both cases, you are not wrong. Make sure that he has enough clients from your professions and knows the intricacies of your tax issues.
Your needs will change over the years. For example, when you are a medical resident your accounting and tax needs are very minimal. When you go into medical practice, your accounting, tax, and planning needs are completely different. At that point, go to an accountant who is experienced with the nuances of the medical practice.
All accountants are very busy during the tax season and they concentrate on getting the taxes done at that time. It is a bad time to ask for advice. You should always make a point to meet your accountant at least once before the year ends. That is not a busy time for accountants and a good time for them to analyze your income and taxes and suggest some tax planning ideas. Go to an accountant who does not invest your money himself. There are more chances that he is independent in that case.
Pay off credit cards in full every month:
Repeat after me “I will pay off my credit cards in full every month.” If you do not follow anything else, it is ok, but follow this mantra. The interest rate on credit cards is 18-24%. If you pay the minimum balance every month, chances are you will be paying on the card for more than 25 years.