Harry Sit's Blog, page 6

2025 Social Security Cost of Living Adjustment (COLA) Projection

Retirees on Social Security receive an increase of their Social Security benefits each year known as the Cost of Living Adjustment or COLA. The COLA was 3.2% in 2024. Retirees on Social Security will once again receive a COLA in 2025 but it won’t be as big as the one in 2024 because inflation has cooled down.

Table of ContentsAutomatic Link to InflationCPI-WQ3 Average2025 Social Security COLAMedicare PremiumsRoot for a Lower COLAAutomatic Link to Inflation

Some retirees think the COLA is given at the discretion of the President or Congress and they want their elected officials to take care of seniors by declaring a higher COLA. They blame the President or Congress when they think the increase is too small.

It was done that way before 1975 but the COLA has been automatically linked to inflation for nearly 50 years. How much the COLA will be is determined strictly by the inflation numbers. The COLA is high when inflation is high. It’s low when inflation is low. There’s no COLA when inflation is zero or negative, which happened in 2010, 2011, and 2016.

CPI-W

Specifically, the Social Security COLA is determined by the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-W is a separate index from the Consumer Price Index for All Urban Consumers (CPI-U), which is more often referenced by the media when they talk about inflation.

CPI-W tracks inflation experienced by workers. CPI-U tracks inflation experienced by consumers. There are some minor differences in how much weight different goods and services have in each index but CPI-W and CPI-U look practically identical when you put them in a chart.

CPI-W and CPI-U 1993-2023

The red line is CPI-W and the blue line is CPI-U. They differed by only smidges in 30 years.

There’s also a research CPI index called the Consumer Price Index for Americans 62 years of age and older, or R-CPI-E. This index weighs more by the spending patterns of older Americans. Some researchers argue that the Social Security COLA should use R-CPI-E, which has increased more than CPI-W in the last 30 years.

CPI-W and R-CPI-E 1993-2023

The green line is R-CPI-E. The red line is CPI-W. R-CPI-E outpaced CPI-W in 30 years between 1993 and 2023 but not by much. Had the Social Security COLA used R-CPI-E instead of CPI-W, Social Security benefits would’ve been higher by 0.1% per year, or a little over 3% after 30 years. That’s still not much difference.

Regardless of which exact CPI index is used to calculate the Social Security COLA, it’s subject to the same overall price environment. Congress chose CPI-W 50 years ago. That’s the one we’re going with.

Q3 Average

More specifically, Social Security COLA for next year is calculated by the increase in the average of CPI-W from the third quarter of last year to the third quarter of this year. You get the CPI-W numbers in July, August, and September. Add them up and divide by three. You do the same for July, August, and September last year. Compare the two numbers and round the change to the nearest 0.1%. That’ll be the Social Security COLA for next year.

2025 Social Security COLA

We won’t have all the CPI-W data for Q3 2024 until October 10, 2024 but we can make projections based on the data we have now.

If consumer prices in August and September 2024 stay at the same level as in July 2024, the 2025 Social Security COLA will be 2.4%.

If consumer prices in August and September 2024 go up at a pace of 3% annualized (approximately 0.25% in each month), the 2025 Social Security COLA will be 2.7%.

I estimate that the 2025 Social Security COLA will be between 2.4% and 2.7%. This is lower than the 3.2% Social Security COLA in 2024 because inflation has come down.

Medicare Premiums

If you’re on Medicare, the Social Security Administration automatically deducts the Medicare premium from your Social Security benefits. The Social Security COLA is given on the “gross” Social Security benefits before deducting the Medicare premium and any tax withholding.

Medicare announces the premium for next year around the same time Social Security announces the COLA but not necessarily on the same day. The increase in healthcare costs is part of the cost of living that the COLA is intended to cover. You’re still getting the full COLA even though a part of the COLA will be used toward the increase in Medicare premiums.

Retirees with a higher income pay more than the standard Medicare premiums. This is called Income-Related Monthly Adjustment Amount (IRMAA). I cover IRMAA in 2024 2025 2026 Medicare IRMAA Premium MAGI Brackets.

Root for a Lower COLA

People intuitively want a higher COLA but a higher COLA can only be caused by higher inflation. Higher inflation is bad for retirees.

Whether inflation is high or low, your Social Security benefits will have the same purchasing power. You should think more about the purchasing power of your savings and investments outside Social Security. When inflation is high, even though your Social Security benefits get a bump, your other money loses more value to inflation. Your savings and investments outside Social Security will last longer when inflation is low.

You want a lower Social Security COLA, which means lower inflation and lower expenses.

Some people say that the government deliberately under-reports inflation. Even if that’s the case, you still want a lower COLA.

Suppose the true inflation for seniors is 3% higher than the inflation numbers reported by the government. If you get a 3% COLA when the true inflation is 6% and you get a 7% COLA when the true inflation is 10%, you are much better off with a lower 3% COLA together with 6% inflation than getting a 7% COLA together with 10% inflation. Your Social Security benefits lag inflation by the same amount either way, but you’d rather your other money outside Social Security loses to 6% inflation than to 10% inflation.

Root for lower inflation and lower Social Security COLA when you are retired.

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Ditch Banks — Go With Money Market Funds and Treasuries

Banks and credit unions offer savings accounts and CDs. Brokers such as Vanguard, Fidelity, and Charles Schwab offer money market funds and Treasuries. They serve similar purposes at a high level. Both a savings account and a money market fund allow flexible deposits and withdrawals. Both CDs and Treasuries offer a fixed interest rate for a fixed term.

Banks and Credit UnionsBrokersFlexible Deposits and WithdrawalsHigh Yield Savings AccountMoney Market FundFixed TermCDsTreasuries

While most discussions on these products from banks and brokers center around having FDIC insurance or not (see No FDIC Insurance – Why a Brokerage Account Is Safe), many people don’t realize that there’s a fundamental difference between the roles banks and brokers play. I mentioned this difference in my Guide to Money Market Fund & High Yield Savings Account. It’s worth highlighting it again.

The fundamental difference is that banks and credit unions offer a two-party private contract while a broker serves as an intermediary between you and the public market.

Two-Party Private Contract

A two-party private contract means anything goes as long as one party makes the other party agree to the terms. If a bank gets you to agree to a 0.04% rate in a savings account or a 0.05% rate in a 10-month CD (these are actual current rates from a large bank), that’s what you’ll get regardless of what the rate should be. The bank sets the rate. They don’t need to justify it. You get a bad contract if you aren’t aware of the going rate.

A bad contract doesn’t have to be this obvious. It’s been over a year now since the Fed raised the short-term interest rates above 5%. The rate on a “good” online high-yield savings account such as the one from Ally Bank is currently 4.2% while a money market fund pays 5% or more. It’s 4.2% from the bank only because the bank says so. You’re paying a “familiarity penalty” when you stay with Ally.

I’m not picking on Ally specifically. It works the same at Marcus, Synchrony, Amex, Discover, Capital One, or Barclays. Ken Tumin, the founder of DepositAccounts.com, made this observation in April 2024:

The well-established online banks are also benefiting from customer inertia. Their online savings account rates are about 100 bps under what you can get from MMFs, T-bills and the top OSAs. https://t.co/n6p4DNr93e

— Ken Tumin (@KenTumin) April 14, 2024

If you take a step back and ask why banks can benefit from customer inertia in the first place, you realize that’s the nature of a two-party private contract. Customers must take the initiative to break out of a bad contract.

Some banks play tricks by offering a new savings account under a different name with competitive rates while keeping the rate low on the existing savings accounts. The rate is low on the existing account only because that’s the contract you agreed to. The bank isn’t obligated to move you to the new program because that’s not in the contract. Nor does the bank have to tell you that you can switch to the new program to get a higher rate. It’s up to you to find out and take action.

Rates at many large credit unions aren’t any better. I’m a member of a well-regarded credit union. It’s the largest credit union in the country by far, with three times the assets of the second-largest credit union. The rate on its savings account is 1.5% when you have $50,000 in the account. That’s 3.5% lower than the yield in a money market fund.

A good contract today can turn into a bad contract tomorrow. How the contract will change is in the contract itself. A bank offers 5.0% APY on a 13-month CD today. That’s an OK rate but what happens after 13 months? You agree in the contract it will automatically renew to a 12-month CD at a rate set by the bank at that time unless you take specific actions to stop it within a short window. Guess what rate the bank will set on its 12-month CD? Almost always a bad one. It works this way because you agreed to the contract.

When you have a two-party private contract, your interest is in direct conflict with the other party in the contract. The onus is on you to know whether the contract is good or bad. It’s on you to watch when a good contract turns into a bad contract. Caveat emptor. You’ll have to jump from contract to contract if you don’t want to get stuck in a bad contract.

Some people are more alert in monitoring and jumping. They have a chance to “beat the market” but they pay for it with a heavy mental workload and time spent on opening new accounts and closing old accounts. Many fail to be vigilant at some point. They start paying the “familiarity penalty” because it’s too tiring otherwise.

Market Intermediary

A broker acts as an intermediary. They get you the market rate and take a cut. A broker doesn’t set the rate. The market does. The broker only sets its cut.

A money market fund gets you the market rate on money market securities minus the cut by the fund manager. Some fund managers take a bigger cut than others but the difference between major players is much smaller and more stable than the difference between rates offered by different banks and credit unions. If you use a money market fund with the smallest cut, such as one from Vanguard, you almost guarantee you’ll have the best rate in a money market fund at all times.

You still pay a “familiarity penalty” when you use a money market fund from Fidelity or Schwab versus one from Vanguard but the difference is in the 0.2%-0.3% range whereas the “familiarity penalty” in bank savings accounts can be more than 1%. The “familiarity penalty” is zero or negligible in buying Treasuries through Fidelity, Schwab, or Vanguard.

Treasuries don’t trick you into renewing at a bad rate. They automatically pay out at maturity. You’ll get the market rate when you buy again. If the broker offers the “auto roll” feature and you enable it at your choice, your Treasuries will automatically renew at the market rate. You can rest assured that you won’t be cheated.

Money market funds and Treasuries paid very little when the Fed kept interest rates at zero and ran several rounds of Quantitative Easing a few years ago. That wasn’t money market funds’ fault or brokers’ fault. Those were the market rates at that time. Like investing in index funds, you give up the dream of “beating the market” when you put your money in money market funds and Treasuries but you also consistently get the market rates at all times. It doesn’t require keeping your guard up, monitoring carefully, or jumping.

If you want to consistently earn a good yield with low maintenance, ditch banks and credit unions. If you normally keep money in a savings account at a bank or a credit union, put the money in a money market fund. Here are some choices at Vanguard, Fidelity, and Schwab:

VanguardFidelitySchwabDefaultVMFXXSPAXXNoneHigher yield, higher riskSPRXX or FZDXXSWVXXHigher quality, higher state tax-exemptionVUSXXFDLXXSNSXXSelect Money Market Funds at Major Retail Brokers

If you normally buy a CD from a bank or a credit union, buy a Treasury of the same term at Vanguard, Fidelity, or Schwab. See How To Buy Treasury Bills & Notes Without Fee at Online Brokers and How to Buy Treasury Bills & Notes On the Secondary Market.

I used to have many accounts with banks and credit unions. I have only $60 in bank accounts now. My cash is in money market funds and Treasuries in a brokerage account.

The Fed has signaled that they may lower interest rates soon. I don’t think they will cut rates all the way back to zero again. If one day banks and credit unions start paying more on their savings accounts and CDs than money market funds and Treasuries, which I doubt will happen, I will still stick to money market funds and Treasuries because I like the transparency and fairness. I’d rather get the market rate at all times than count on the benevolence of a bank or a credit union.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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2024 2025 Tax Brackets, Standard Deduction, Capital Gains, etc.

My other post listed 2024 2025 401k and IRA contribution and income limits. I also calculated the inflation-adjusted tax brackets and some of the most commonly used numbers in tax planning for 2025 using the published inflation numbers and the same formula prescribed in the tax law.

Table of Contents2024 2025 Standard Deduction2024 2025 Tax Brackets2024 2025 Capital Gains Tax2024 2025 Estate and Trust Tax Brackets2024 2025 Gift Tax Exclusion2024 2025 Savings Bonds Tax-Free Redemption for College Expenses2024 2025 Standard Deduction

You don’t pay federal income tax on every dollar of your income. You deduct an amount from your income before you calculate taxes. About 90% of all taxpayers take the standard deduction. The other ~10% itemize deductions when their total deductions exceed the standard deduction. In other words, you’re deducting a larger amount than your allowed deductions when you take the standard deduction. Don’t feel bad about taking the standard deduction!

The basic standard deduction in 2024 and my estimate for 2025 are:

20242025 estimatesSingle or Married Filing Separately$14,600$15,050Head of Household$21,900$22,500Married Filing Jointly$29,200$30,100Basic Standard Deduction

Source: IRS Rev. Proc. 2023-34, author’s calculations.

People who are age 65 and over have a higher standard deduction than the basic standard deduction.

20242025 estimatesSingle, age 65 and over$16,550$17,050Head of Household, age 65 and over$23,850$24,550Married Filing Jointly, one person age 65 and over$30,750$31,700Married Filing Jointly, both age 65 and over$32,300$33,300Standard Deduction for age 65 and over

Source: IRS Rev. Proc. 2023-34, author’s calculations.

People who are blind have an additional standard deduction.

20242025 estimatesSingle or Head of Household, blind+$1,950+$2,000Married Filing Jointly, one person is blind+$1,550+$1,600Married Filing Jointly, both are blind+$3,100+$3,200Additional Standard Deduction for Blindness

Source: IRS Rev. Proc. 2023-34, author’s calculations.

2024 2025 Tax Brackets

The tax brackets are based on taxable income, which is AGI minus various deductions. The tax brackets in 2024 are:

SingleHead of HouseholdMarried Filing Jointly10%$0 – $11,600$0 – $16,550$0 – $23,20012%$11,600 – $47,150$16,550 – $63,100$23,200 – $94,30022%$47,150 – $100,525$63,100 – $100,500$94,300 – $201,05024%$100,525 – $191,950$100,500 – $191,950$201,050 – $383,90032%$191,950 – $243,725$191,950 – $243,700$383,900 – $487,45035%$243,725 – $609,350$243,700 – $609,350$487,450 – $731,20037%Over $609,350Over $609,350Over $731,2002024 Tax Brackets

Source: IRS Rev. Proc. 2023-34.

My estimated 2025 tax brackets are:

SingleHead of HouseholdMarried Filing Jointly10%$0 – $11,950$0 – $17,050$0 – $23,90012%$11,950 – $48,550$17,050 – $64,950$23,900 – $97,10022%$48,550 – $103,500$64,950 – $103,500$97,100 – $207,00024%$103,500 – $197,600$103,500 – $197,600$207,000 – $395,20032%$197,600 – $250,925$191,950 – $250,900$395,200 – $501,85035%$250,925 – $627,300$250,900 – $627,300$501,850 – $752,75037%Over $627,300Over $627,300Over $752,750Estimated 2025 Tax Brackets

Source: author’s calculations.

A common misconception is that when you get into a higher tax bracket, all your income is taxed at the higher rate and you’re better off not having the extra income. That’s not true. Tax brackets work incrementally. If you’re $1,000 into the next tax bracket, only $1,000 is taxed at the higher rate. It doesn’t affect the income in the previous brackets.

For example, someone single with a $70,000 AGI in 2024 will pay:

First 14,600 (the standard deduction)0%Next $11,60010%Next $35,550 ($47,150 – $11,600)12%Final $8,25022%Progressive Tax Rates

This person is in the 22% tax bracket but only a tiny fraction of the $70,000 AGI is taxed at 22%. Most of the income is taxed at 0%, 10%, and 12%. The blended tax rate is only 10.3%. If this person doesn’t earn the final $8,250, he or she is in the 12% bracket instead of the 22% bracket but the blended tax rate only goes down slightly from 10.3% to 8.8%. Making the extra income doesn’t cost this person more in taxes than the extra income.

Don’t be afraid of going into the next tax bracket.

2024 2025 Capital Gains Tax

When your other taxable income (after deductions) plus your qualified dividends and long-term capital gains are below a cutoff, you will pay 0% federal income tax on your qualified dividends and long-term capital gains under this cutoff.

This is illustrated by the chart below. Taxable income is the part above the black line, after subtracting deductions. A portion of the qualified dividends and long-term capital gains is taxed at 0% when the other taxable income plus these qualified dividends and long-term capital gains are under the red line.

The red line is close to the top of the 12% tax bracket but they don’t line up exactly.

20242025 estimatesSingle or Married Filing Separately$47,025$48,425Head of Household$63,000$64,850Married Filing Jointly$94,050$96,850Maximum Zero Rate Amount for Qualified Dividends and Long-term Capital Gains

Source: IRS Rev. Proc. 2023-34, author’s calculations.

For example, suppose a married couple filing jointly has $70,000 in other taxable income (after deductions) and $25,000 in qualified dividends and long-term capital gains in 2024. The maximum zero rate amount cutoff is $94,050. $24,050 of the qualified dividends and long-term capital gains ($94,050 – $70,000) is taxed at 0%. The remaining $25,000 – $24,050 = $950 is taxed at 15%

A similar threshold exists on the upper end for qualified dividends and long-term capital gains. When your other taxable income (after deductions) plus your qualified dividends and long-term capital gains are above a cutoff, you will pay 20% federal income tax instead of 15% on your qualified dividends and long-term capital gains above this cutoff.

20242025 estimatesSingle$518,900$534,200Head of Household$551,350$567,550Married Filing Jointly$583,750$600,950Married Filing Separately$291,850$300,450Maximum 15% Rate Amount for Qualified Dividends and Long-term Capital Gains

Source: IRSRev. Proc. 2023-34, author’s calculations.

2024 2025 Estate and Trust Tax Brackets

Estates and trusts have different tax brackets than individuals. These apply to non-grantor trusts and estates that retain income as opposed to distributing the income to beneficiaries. Grantor trusts (including the most common revocable living trusts) don’t pay taxes separately. The income of a grantor trust is taxed to the grantor at the grantor’s tax brackets.

Here are the tax brackets for estates and trusts in 2024 and my estimates for 2025:

20242025 estimates10%$0 – $3,100$0 – $3,15024%$3,100 – $11,150$3,150 – $11,45035%$11,150 – $15,200$11,450 – $15,65037%over $15,200over $15,650Estate and Trust Tax Brackets

Source: IRS Rev. Proc. 2023-34, author’s calculations.

2024 2025 Gift Tax Exclusion

Each person can give another person up to a set amount in a calendar year without having to file a gift tax form. Not that filing a gift tax form is onerous, but many people avoid it if they can. This gift tax exclusion amount will increase from $18,000 in 2024 to $19,000 in 2025.

20242025 estimateGift Tax Exclusion$18,000$19,000Gift Tax Exclusion

Source: IRS Rev. Proc. 2023-34, author’s calculations.

The gift tax exclusion is counted by each giver to each recipient. As a giver, you can give up to $18,000 each in 2024 to an unlimited number of people without having to file a gift tax form. If you give $18,000 to each of your 10 grandkids in 2024, you still won’t be required to file a gift tax form. Any recipient can also receive a gift from an unlimited number of people. If a grandchild receives $18,000 from each of his or her four grandparents in 2024, no taxes or tax forms will be required.

2024 2025 Savings Bonds Tax-Free Redemption for College Expenses

If you cash out U.S. Savings Bonds (Series I or Series EE) for college expenses or transfer to a 529 plan, your modified adjusted gross income must be under certain limits to get a tax exemption on the interest. See Cash Out I Bonds Tax Free For College Expenses Or 529 Plan.

Here are the income limits in 2024 and my estimates for 2025. The limits are in a phase-out range. You get a full exemption if your income is below the lower number in the range. You get no exemption if your income is above the higher number in the range. You get a partial exemption if your income falls within the range.

20242025 estimatesSingle, Head of Household$96,800 – $111,800$99,650 – $114,650Married Filing Jointly$145,200 – $175,200$149,500 – $179,500Income Limit for Tax-Free Savings Bond Redemption for Higher Education

Source: IRS Rev. Proc. 2023-34, author’s calculations.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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2024 2025 401k 403b 457 IRA FSA HSA Contribution Limits

Retirement account contribution limits are adjusted for inflation each year. Inflation has moderated in recent months. Some contribution limits and income limits are projected to go up in 2025.

Before the IRS publishes the official adjustments for the next year in late October or early November, I calculate them using the published inflation numbers by the same rules the IRS uses as stipulated by law. I’ve maintained a track record of 100% accuracy ever since I started doing these calculations.

Some projections sit on a borderline. They can go a little higher or lower depending on the upcoming inflation data.

Table of Contents2024 2025 401k/403b/457/TSP Elective Deferral Limit2024 2025 Annual Additions Limit2024 2025 SEP-IRA Contribution Limit2024 2025 Annual Compensation Limit2024 2025 Highly Compensated Employee Threshold2024 2025 SIMPLE 401k and SIMPLE IRA Contribution Limit2024 2025 Traditional and Roth IRA Contribution Limit2024 2025 Deductible IRA Income Limit2024 2025 Roth IRA Income Limit2024 2025 Healthcare FSA Contribution Limit2024 2025 HSA Contribution Limit2024 2025 Saver’s Credit Income LimitAll Together2024 Tax Brackets and Standard Deduction2024 2025 401k/403b/457/TSP Elective Deferral Limit

The 401k/403b/457/TSP contribution limit is $23,000 in 2024. I estimate it will go up by $1,000 to $24,000 in 2025 (or $23,500 if inflation is low).

If you are age 50 or over by December 31, the catch-up contribution limit is $7,500 in 2024. I estimate it will go up by $500 to $8,000 in 2025 (or $7,500 if inflation is low).

If your age is 60 through 63 by December 31, 2025, your catch-up contribution limit is 150% of the normal catch-up contribution limit. It’ll be $12,000 in 2025 (or $11,250 if inflation is low).

If your prior year’s wages from the employer were over $145,000, your 2024 catch-up contribution must go to a Roth subaccount in the plan. The limit is the same at $145,000 in 2025. The IRS has temporarily suspended enforcement of this rule.

Employer match or profit-sharing contributions aren’t included in these limits. If you work for multiple employers in the same year or if your employer offers multiple plans, you have one single employee contribution limit for 401k, 403b, and the federal government’s Thrift Savings Plan (TSP) across all plans.

The 457 plan limit is separate from the 401k/403b/TSP limit. You can contribute the maximum to both a 401k/403b/TSP plan and a 457 plan.

2024 2025 Annual Additions Limit

The total contributions from both the employer and the employee to all defined contribution plans by the same employer is $69,000 in 2024. I estimate it will increase to $70,000 in 2025 (or $71,000 if inflation is high).

The age-50-or-over catch-up contribution is separate from this limit. If you work for multiple employers in the same year, you have a separate annual additions limit for each unrelated employer.

2024 2025 SEP-IRA Contribution Limit

If you have self-employment income, you can contribute a percentage of your self-employment income to a SEP-IRA. The SEP-IRA contribution limit is always the same as the annual additions limit for a 401k plan. It is $69,000 in 2024, and I estimate it will increase to $70,000 in 2025 (or $71,000 if inflation is high).

Because the SEP-IRA doesn’t allow employee contributions, unless your self-employment income is well above $200,000, you have a higher contribution limit if you use a solo 401k. See Solo 401k When You Have Self-Employment Income.

2024 2025 Annual Compensation Limit

The maximum annual compensation that can be considered for making contributions to a retirement plan is always 5x the annual additions limit. Therefore the annual compensation limit is $345,000 in 2024. I estimate it will increase to $350,000 in 2025 (or $355,000 if inflation is high).

2024 2025 Highly Compensated Employee Threshold

If your employer limits your contribution because you’re a Highly Compensated Employee (HCE), the minimum compensation to be counted as an HCE is $155,000 in 2024. I estimate it will go up to $160,000 in 2024.

2024 2025 SIMPLE 401k and SIMPLE IRA Contribution Limit

Some smaller employers offer a SIMPLE 401K or a SIMPLE IRA plan instead of a regular 401k plan. SIMPLE 401k and SIMPLE IRA plans have a lower contribution limit than standard 401k plans. The contribution limit for SIMPLE 401k and SIMPLE IRA plans is $16,000 in 2024. I estimate it will go up to $16,500 in 2025.

If an employer has fewer than 25 employees or if a larger employer contributes more to the plan, the contribution limit to their SIMPLE IRA plan is 10% higher. It will be $18,150 in 2025.

If you are age 50 or over by December 31, the catch-up contribution limit in a SIMPLE 401k or SIMPLE IRA plan is $3,500 in 2024. I estimate it will go up by $500 to $4,000 in 2025.

If your age is 60 through 63 by December 31, 2025, your catch-up contribution limit is 150% of the normal catch-up contribution limit. It’ll be $6,000 in 2025.

Employer contributions to a SIMPLE 401k or SIMPLE IRA plan aren’t included in these limits.

2024 2025 Traditional and Roth IRA Contribution Limit

You need taxable compensation (“earned income”) to contribute to a Traditional or Roth IRA but there’s no age limit. The Traditional IRA or Roth IRA contribution limit is $7,000 in 2024. It will stay the same at $7,000 in 2025.

If you are age 50 or over by December 31, the catch-up limit is $1,000 in 2024. It will stay the same at $1,000 in 2025.

The IRA contribution limit is shared between the Traditional IRA and the Roth IRA. If you contribute the maximum to a Roth IRA, you can’t contribute the same maximum again to a Traditional IRA, and vice-versa.

The IRA contribution limit and the 401k/403b/TSP or SIMPLE contribution limit are separate. You can contribute the respective maximum to both a 401k/403b/TSP/SIMPLE plan and a Traditional IRA or Roth IRA.

2024 2025 Deductible IRA Income Limit

The income limit for taking a full deduction for your contribution to a Traditional IRA while participating in a workplace retirement plan in 2024 is $77,000 for single filers and $123,000 for a married couple filing jointly. The deduction completely phases out when your income goes above $87,000 in 2024 for singles and $143,000 for married filing jointly.

The full-deduction limits will go up in 2025 to $79,000 for single filers and to $126,000 for a married couple filing jointly. The deduction will completely phase out when your income goes above $89,000 in 2025 for singles; and above $146,000 for married filing jointly.

When you’re not covered in a workplace retirement plan but your spouse is, the income limit for taking a full deduction for your contribution to a Traditional IRA is $230,000 in 2024. The deduction completely phases out when your joint income goes above $240,000 in 2024.

The full-deduction limit will go up to $237,000 in 2025. The deduction completely phases out when your joint income goes above $247,000 in 2025.

When you exceed the income limit for taking a deduction for contributing to a Traditional IRA, consider contributing to a Roth IRA instead.

2024 2025 Roth IRA Income Limit

The income limit for contributing the maximum to a Roth IRA depends on your filing status. It’s $146,000 for singles and $230,000 for married filing jointly in 2024. These limits will go up to $150,000 for singles and $237,000 for married filing jointly in 2025.

You can’t contribute anything directly to a Roth IRA when your income goes above $161,000 in 2024 for singles and $240,000 in 2024 for married filing jointly. These limits will go up to $165,000 for singles and $247,000 for married filing jointly in 2025.

Your contribution eligibility is prorated in the income phase-out range. When you exceed the income limit for contributing to a Roth IRA, consider doing the Backdoor Roth.

2024 2025 Healthcare FSA Contribution Limit

The Healthcare FSA contribution limit is $3,200 per person in 2024. It will go up to $3,300 in 2025.

Some employers allow carrying over some unused amount to the following year. The maximum amount that can be carried over to the following year is set to 20% of the contribution limit in the current tax year. As a result, the carryover limit is $640 per person in 2024. It will go up to $660 in 2025.

2024 2025 HSA Contribution Limit

You need to have a High Deductible Health Plan with no other coverage to contribute to a Health Savings Account (HSA). Not all high-deductible health insurance is HSA-eligible. Medicare or your spouse having a general-purpose healthcare FSA counts as having other coverage, which makes you ineligible to contribute to an HSA.

You don’t need taxable compensation (“earned income”) to contribute to an HSA.

The HSA contribution limit for single coverage is $4,150 in 2024. The HSA contribution limit for family coverage is $8,300 in 2024. These limits will go up to $4,300 for single coverage and $8,550 for family coverage in 2025. The new limits were announced previously in the spring. Please see HSA Contribution Limits.

Those who are 55 or older by December 31 can contribute an additional $1,000. If you are married and both of you are 55 or older by December 31, each of you can contribute the additional $1,000 but they must go into separate HSAs in each person’s name.

2024 2025 Saver’s Credit Income Limit

The income limits for receiving a Retirement Savings Contributions Credit (“Saver’s Credit”) in 2024 for married filing jointly are $46,000 (50% credit), $50,000 (20% credit), and $76,500 (10% credit). These limits in 2025 will go up to $47,500 (50% credit), $51,500 (20% credit), and $79,000 (10% credit).

The limits for singles are half of the limits for married filing jointly. The 2024 limits are $23,000 (50% credit), $25,000 (20% credit), and $38,250 (10% credit). The 2025 limits will be $23,750 (50% credit), $25,750 (20% credit), and $39,500 (10% credit)

All Together20242025 estimateIncrease401k, 403b, or 457 plan employee contributions limit$23,000$23,500 or $24,000$500 or $1,000401k, 403b, or 457 plan ages 50-59 and 64+ catch-up contributions limit$7,500$7,500 or $8,000None or $500401k, 403b, or 457 plan ages 60-63 catch-up contributions limit$7,500$11,250 or $12,000$3,750 or $4,500SIMPLE 401k or SIMPLE IRA contributions limit$16,000$16,500$500SIMPLE IRA contributions limit at certain eligible employers$17,600$18,150$550SIMPLE 401k or SIMPLE IRA ages 50-59 and 64+ catch-up contributions limit$3,500$4,000$500SIMPLE 401k or SIMPLE IRA ages 60-63 catch-up contributions limit$3,500$6,000$2,500Maximum annual additions to all defined contribution plans by the same employer$69,000$70,000 or $71,000$1,000 or $2,000SEP-IRA contributions limit$69,000$70,000 or $71,000$1,000 or $2,000Highly Compensated Employee definition$155,000$160,000$5,000Annual Compensation Limit$345,000$350,000 or $355,000$5,000 or $10,000Traditional and Roth IRA contribution limit$7,000$7,000NoneTraditional and Roth IRA age 50+ catch-up contribution limit$1,000$1,000NoneDeductible IRA income limit, single, active participant in workplace retirement plan$77,000 – $87,000$79,000 – $89,000$2,000Deductible IRA income limit, married, active participant in workplace retirement plan$123,000 – $143,000$126,000 – $146,000$3,000Deductible IRA income limit, married, spouse is active participant in workplace retirement plan$230,000 – $240,000$237,000 – $247,000$7,000Roth IRA income limit, single$146,000 – $161,000$150,000 – $165,000$4,000Roth IRA income limit, married filing jointly$230,000 – $240,000$237,000 – $247,000$7,000Healthcare FSA Contribution Limit$3,200$3,300$100HSA Contribution Limit, single coverage$4,150$4,300$150HSA Contribution Limit, family coverage$8,300$8,550$250HSA, age 55 catch-up$1,000$1,000NoneSaver’s Credit income limit, married filing jointly$46,000 (50%)
$50,000 (20%)
$76,500 (10%)$47,500 (50%)
$51,500 (20%)
$79,000 (10%)$1,500 (50%)
$1,500 (20%)
$2,500 (10%)Saver’s Credit income limit, single$23,000 (50%)
$25,000 (20%)
$38,250 (10%)$23,750 (50%)
$25,750 (20%)
$39,500 (10%)$1,250 (50%)
$1,250 (20%)
$1,750 (10%)

Source: IRS Notice 2023-75, author’s calculations.

2024 Tax Brackets and Standard Deduction

I also have the 2024 income tax brackets, standard deduction, capital gains, and gift tax exclusion limit. Please read 2024 Tax Brackets, Standard Deduction, Capital Gains, etc.

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Brokerage Transfer Bonus Made Easy for Total Beginners

Although I stopped chasing bank and brokerage bonuses, it’s still a valid way to make some money. You can easily make $5,000 or more each year with a large enough account. The bonus can fund nice-to-have toys or experiences or simply add to your long-term investments.

I’m not saying you should or shouldn’t do it. If you’re interested but haven’t done it before, here are some pointers to help you pull it off more easily.

Table of ContentsThe Big PictureChoose a Bonus PromotionTransfer an IRAIdentify Shares to TransferOpen a New AccountSubmit Transfer RequestTurn On Dividend ReinvestmentSet Calendar RemindersThe Big Picture

Some brokers want to attract new customers and more activities. Offering a bonus to actual customers can be more effective than spending millions on advertising. You receive a bonus from the broker by participating in the promotion. They get to show growth to Wall Street. Win-win.

Choose a Bonus Promotion

Many promotion offers are listed in Best Brokerage Bonuses on the Doctor of Credit blog at any time. Some offers are from larger brokers you’ve heard of. Some are from smaller brokers you didn’t know. All offers require that you hold the transferred assets at the new broker for some time. I would favor offers from a larger institution with a shorter required holding period.

For instance, as I’m writing this, WeBull offers a 2% bonus with a 2-year holding period and Wells Fargo offers a $2,500 bonus for transferring $250,000. Although WeBull’s bonus is twice as large ($5,000 versus $2,500 for transferring $250,000), Wells Fargo’s promotion only requires holding the transferred assets for 90 days. You get the bonus sooner and the assets can move again after 90 days to earn another bonus elsewhere. Wells Fargo is also a better-known institution than WeBull. I would pick Wells Fargo’s offer over WeBull’s.

Transfer an IRA

If the promotion doesn’t exclude IRAs, it’s easier to transfer an IRA than a taxable brokerage account. Although the cost basis for holdings in a taxable account should transfer over to the new broker, there’s a risk that it doesn’t or it’s messed up by the transfer. You avoid this risk by transferring an IRA (either Traditional or Roth), where the cost basis doesn’t matter.

If the bonus is paid into an IRA, it counts as earnings in the IRA. You can still receive the bonus in the IRA even if you already maxed out the IRA contributions for the year or you’re no longer eligible to contribute. The specific Wells Fargo promotion I used as an example pays the bonus into a checking account, which makes it taxable, but other promotions usually pay the bonus to the account transferred.

There are no tax consequences when you match the IRA type to transfer: Traditional-to-Traditional or Roth-to-Roth. There won’t be any 1099 forms for the transfer.

Transferring an IRA avoids complications otherwise present in a taxable account. Because an IRA is always in only one person’s name, if you’re married, you and your spouse can sign up for the promotion separately and double up on the bonus by transferring your respective IRAs.

Identify Shares to Transfer

You don’t need to transfer the entire IRA. Identify some shares that you won’t touch. Those shares can go to the new broker.

Don’t sell the shares. You’re only moving the same shares “in kind” from one broker to another. The values of those shares will be the same no matter where they’re held. Individual stocks and ETFs are easier to transfer than mutual funds. Keep any cash in your existing account.

If you intend to trade some of the shares, leave those in the existing account. Rebalancing and withdrawing from the IRA usually involves only a small percentage of your holdings. For example, suppose you have 10,000 shares in a holding, 8,000 shares can be transferred to the new broker. You use the remaining 2,000 shares in your existing IRA to rebalance or take withdrawals.

The idea is that you’ll split your IRA into an “at-home” account and a “traveling” account. You still do everything you normally do in the “at-home” account that you’re already familiar with. The “traveling” account contains holdings you won’t touch. It travels from one place to another to earn bonuses. You won’t do any trading in the “traveling” account at the new broker besides turning on automatic dividend reinvestment. You don’t need to learn how the new account works. It only sits idle waiting for the bonus.

Open a New Account

After you identify which IRA and which shares you’ll transfer, you open an empty new account of the same type at the new broker. Be sure to read the promotion requirements. This part is critical to receive the bonus. If you need to enter a promo code when you open the account, include the promo code. If you must use a specific link, use the link. If you must visit a branch, visit a branch.

Make sure to match the exact spelling of your name and your Social Security Number between your existing and new accounts. Set up your online login, password, and 2-factor authentication at the new broker. Designate beneficiaries for your new IRA.

Submit Transfer Request

Inter-broker transfers go through a system called ACATS, which stands for Automated Customer Account Transfer Service. You always initiate it at the receiving broker. You give them your account number at the sending broker with a recent account statement. You request a partial account transfer with the positions and the number of shares you identified. It takes a week or two to complete.

If the sending broker charges you a transfer fee, you can request a reimbursement from the receiving broker. If they don’t reimburse you, chalk it up as being covered by the transfer bonus you’ll receive.

Turn On Dividend Reinvestment

Turn on dividend reinvestment at the new broker after your transferred assets arrive. Now the new account will run on autopilot while it waits for the bonus.

Set Calendar Reminders

Set a calendar reminder for when you expect the bonus to show up based on the terms of the promotion plus 7-10 days. I received the promised bonus in all the promotions that I participated in before. Some of them might have been late by a few days but they always came.

Set another calendar reminder for when your assets are free to move again without losing the promotion bonus. Give a liberal buffer. If the promotion requires a 90-day holding period, hold your assets at the new broker for 120 days. Look for the next destination for your “traveling” account after you’ve fully satisfied the terms of the promotion. Your next transfer can be a full-account transfer of this “traveling” account to its next destination.

***

It takes some time to plan and execute for the first time but it isn’t too difficult. It gets easier the second time or the third time around. You decide whether it’s worth making $5,000 a year with this endeavor.

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Why I Stopped Chasing Bank and Brokerage Bonuses

I met the blogger Frugal Professor last week when he traveled to my area for a family gathering. I learned from his blog post that he earned over $5,000 tax-free by transferring a Roth IRA to Robinhood.

That specific promotion has since ended. I knew about the promotion when it was active but I didn’t jump on it. I would’ve done it years ago but not anymore. I stopped chasing these promotion bonuses from banks and brokers.

A bank account promotion usually asks you to deposit a minimum sum to a new or existing account and keep the money there for a minimum number of days or months. Sometimes the account requires direct deposits, sometimes not. You get a promotion bonus credited to your account when you have met the requirements. The bank account bonus is taxable.

A credit card promotion usually asks you to sign up for a card and spend a minimum amount in the first X statement cycles. You get bonus points after you fulfill your end of the deal. Some cards have an annual fee. The value of the signup bonus is higher than the annual fee. You close the card before the next annual fee hits. The bonus points earned on a personal card aren’t taxable because they’re treated as a discount on your purchases.

A brokerage account promotion typically asks you to transfer assets into a new or existing account and hold them there for some time. The assets transferred can be existing holdings. You’re only changing where they’re held. You don’t trigger taxes when you don’t sell your holdings. Whether the bonus credited to your account is taxable depends on the account type. It’s taxable if it’s credited to a taxable account. It’s tax-deferred if it’s credited to a Traditional IRA. You pay tax eventually when you withdraw from the Traditional IRA. It’s tax-free if it’s credited to a Roth IRA.

The promotions are legit. I did many of them in the past. It wasn’t difficult to follow the terms of the promotions and they all paid as advertised. I was never cheated out of a bonus. Based on his comments in the blog post, Frugal Professor sets the threshold to make a move at $1,000:

[M]ost promotions below $500 aren’t worth my time. At $1k, I start to get a little interested. At a few thousand, they are usually worth the effort. These days, checking account (or most CC [credit card]) bonuses don’t get me interested, but brokerage bonuses seem to be pretty lucrative. Move $250k from broker A to broker B, collect a $2.5k bonus (taxable), netting $1.75k after-tax, leave for 90 days. Rinse, repeat. Probably a few hours of effort yielding an attractive after-tax dollars per hour.

He expects to make at least $5,000 a year from these bonuses. $5,000 is a lot of money. My wife bought a mountain bike recently for $2,500. $5,000 would give us two mountain bikes. That’d be nice, right? And every year? I see many new toys.

At around the time this Robinhood promotion was going on, my phone popped up this photo I took when I left the building on my last day of work six years ago:

It reminded me that I didn’t leave my full-time job to make more money. I would’ve earned much more by staying at that job if I had wanted more money. If I must do something now to make some money, I want it to be useful to other people as well, such as publishing a new edition of my books or doing a better job at maintaining the Advice-Only Directory. It takes more time and it isn’t as lucrative as getting a bonus from a bank or a broker but I feel I’m adding more value. Of course I can do both but I’m using this self-imposed boundary to focus on a mission.

Everything has its time. There’s nothing wrong with earning promotion bonuses from banks and brokers. I did it many times in the past. The time has passed for me but that doesn’t have to be the case for everyone else. You’ll get the promised bonus if you follow the terms of the promotion. It doesn’t take that much time. It gets easier after you do a few of them. The bonus can fund many nice-to-have toys and experiences.

If you’re interested in these bonuses, you can follow The Final, Definitive Thread on Brokerage Transfer Bonuses on Bogleheads (jump to the last page and read backward for the latest active bonuses) or the Doctor of Credit blog, which features many types of promotions including ones that fall below the $1,000 threshold set by Frugal Professor.

If you don’t chase them, that’s OK too. I’m going for simplicity these days. Fewer accounts, fewer movements, everything on autopilot. I want to see a perpetual motion machine.

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2 Ways to Use Fidelity as a Bank Account

[Rewritten on June 20, 2024 after Fidelity made a money market fund available as the default option in the Cash Management Account. Also added a section on debit card security.]

Fidelity Investments is best known as an administrator for workplace retirement plans and an online broker for retail investors. In addition to 401k/403b accounts, Traditional and Roth IRAs, HSAs, and taxable brokerage accounts, Fidelity also offers accounts that can be used for the same purpose as a checking account and a savings account.

Because Fidelity is interested in having a full relationship with its customers for both banking and investing and its primary focus is on the investing part, it’s in a good position to offer better rates and features than banks in the banking part.

This is not a sponsored post. Fidelity isn’t paying me to promote it. I’m only writing as a satisfied customer of over 20 years. Here are two ways to use a Fidelity account to manage day-to-day spending and savings.

Table of Contents1. CMA as CheckingIncluded FeaturesChoose Core PositionRouting Number and Account NumberLimitationsSecure Your Debit CardLink to External Account2. CMA as Checking/Savings ComboBuy Another Money Market FundCash Manager Not NeededAdd Treasury Bills or Brokered CDs1. CMA as Checking

Fidelity Cash Management Account (CMA) is a separate account type from Fidelity’s regular taxable brokerage account officially called “The Fidelity Account.” You have to choose the account type when you open the account. A Cash Management Account can’t be changed to a regular taxable brokerage account after you open the account. Nor can an existing regular taxable brokerage account be changed to a CMA.

Included Features

The Cash Management Account is specifically designed to meet banking needs. It has pretty much everything people need for a checking account and nearly everything is free.

– FDIC-insured balance (2.72% APY as of June 19, 2024) or a money market fund (4.95% 7-day yield as of June 19, 2024).

– No minimum balance. No maintenance fee. Does not require direct deposit.

– Provides a routing number and an account number for direct deposits and direct debits.

– Accepts check deposits by mobile app or in person at a Fidelity branch.

– Free checkbook. No minimum amount for writing a check.

– Free Visa debit card for purchase, ATM withdrawal, and teller cash advance. It does not require using the debit card a minimum number of times per month.

– No fee to use any ATM worldwide. Reimburses the ATM fee charged by the machine.

– Free Bill Pay service with eBill.

– Free same-day ACH. Push $100,000 per business day out of Fidelity and pull $250,000 per business day into Fidelity by online self-service. Call customer service to transfer a higher amount.

– Free wire transfers. Same $100,000 per business day by online self-service. Call customer service to wire a higher amount.

Choose Core Position

The “core position” in a Fidelity account is the default holding. Money coming into the account lands in the core position and money going out of the account is withdrawn from the core position first.

You have a choice to keep your core position either in FDIC-insured banks or in a money market fund. The money market fund isn’t FDIC-insured but its underlying holdings are short-term government securities. I’m comfortable keeping my money in the money market fund for a higher yield. See No FDIC Insurance – Why a Brokerage Account Is Safe.

To switch from the FDIC-Insured Deposit Sweep Program to the Fidelity Government Money Market Fund (SPAXX), click on the “Positions” tab and select your cash balance. You will see a “Change Core Position” button.

Your chosen core position stays effective until you change it again. If you make Fidelity Government Money Market Fund (SPAXX) your core position, your existing core balance and all future deposits will automatically go into the money market fund.

The 4.95% yield from the money market fund is higher than the yield on many high-yield savings accounts as of June 19, 2024. For example, Ally Bank pays only 4.2% on its high-yield savings account, which doesn’t have all the checking features such as Bill Pay.

Routing Number and Account Number

You see the routing number and the account number for direct deposits and direct debits when you click on the routing number link below the account name.

Choose “checking” as the account type if you’re asked to select one.

If your bank uses Plaid to add a Fidelity account as a linked bank account, search for a non-existent bank and then click on “Link with account numbers.” It will make Plaid use a micro-deposit to verify your Fidelity account.

You go back to verify the link after you receive the micro-deposit in your Fidelity account.

Limitations

Fidelity Cash Management Account has some limitations that aren’t a deal-breaker to me.

– Does not accept deposits of physical cash or money orders.

– Does not support Zelle in the account. You can link the debit card in the Zelle mobile app.

– Does not link instantly through Plaid (must go through micro-deposits).

– Does not offer sub-accounts for tracking different goals.

– Does not provide cashier’s checks.

– Recurring ACH pushes out of Fidelity only support monthly and annual frequencies. Recurring ACH pulls into Fidelity only support weekly, biweekly, and monthly frequencies.

– 1% transaction fee on debit card purchases in foreign countries. This fee doesn’t apply to international ATM withdrawals.

– ACH pulls and check deposits are held for up to five business days. The money still earns interest. It’s just not available for withdrawal while it’s on hold. You won’t be subject to the hold if you know the right way to transfer money.

I use my otherwise dormant Bank of America checking account on those rare occasions when I need to deposit physical cash, get a cashier’s check, or set up recurring transfers on an odd schedule. I don’t use a debit card for purchases or track my savings by separate goals.

The hold time on ACH pulls and check deposits will shrink over time for established accounts on smaller amounts. My ACH pulls and check deposits are usually available for withdrawal in two business days. I do an ACH push from the other side when I need it to be available immediately.

Secure Your Debit Card

The account automatically comes with a Visa debit card. The debit card can be used for purchases without a PIN when it’s run as a credit card. This creates a problem in case your debit card is lost or stolen. A user posted on Reddit that he or she was having a hard time getting the money back after thieves bought $6,000 worth of gift cards with the stolen debit card.

It’s better not to carry the debit card with you in your wallet. If you prefer to use a debit card for purchases, put the debit card in Apple Pay or Google Pay and tap your phone to pay. It’s more difficult for criminals to crack a phone than to tap your lost or stolen debit card everywhere. If you normally don’t use a debit card for purchases, keep it at home and only take it with you when you anticipate needing to withdraw cash at an ATM.

You can also lock your debit card on Fidelity’s website or in the Fidelity mobile app. Locking the card makes it decline all transactions. I previously used the debit card in Venmo to pay friends for shared expenses. Venmo also works with a bank account. I added the Fidelity account as a bank account and removed the debit card from Venmo. Now my debit card is securely locked at all times. I’ll only unlock it when I need to use it to withdraw cash.

To lock the debit card online, open a new tab in your browser after you log in to Fidelity and go to fidelitydebitcard.com. Find your debit card and click on “Lock card.”

If you install the Fidelity mobile app on your phone, you can unlock the debit card right before you need to use the card to withdraw cash and lock it again when you’re done. Tap the head icon on the top right to find “Manage debit cards” in your profile in the Fidelity app. Tap “Lock or unlock card” on the next screen to lock or unlock the card.

Link to External Account

When you use a Fidelity CMA as your checking account, you can link it to an external account as you normally do with a checking account. For example, the settlement fund in a Vanguard brokerage account pays 5.27% as of June 19, 2024. You can use Vanguard as your savings account to earn a slightly higher yield while using the Fidelity CMA as your checking account. The bulk of your cash earns 5.27% at Vanguard while the amount you need for spending earns 4.95% in the Fidelity CMA.

2. CMA as Checking/Savings Combo

Instead of linking to an external savings account, you can put the money in a different money market fund in the Cash Management Account and keep both checking and savings in the same account.

Buy Another Money Market Fund

Although the CMA is designed for banking needs, it’s still a brokerage account. With some exceptions (no margin or options), you can buy in the CMA pretty much everything available in a regular brokerage account. This includes stocks, bonds, brokered CDs, mutual funds, and ETFs.

The CMA becomes a checking/savings combo when you buy a different money market fund in it. The core balance in the CMA serves as the checking part and the manually purchased non-core money market fund serves as the savings part. Fidelity will automatically sell from the non-core money market fund when your core balance in the CMA is insufficient to cover a debit. This is like having free automatic overdraft transfers from savings to checking.

Some people prefer to buy Fidelity Money Market Fund (SPRXX) or Fidelity Money Market Fund Premium Class (FZDXX). Their yields were 5.02% and 5.14% respectively as of June 19, 2024, which were slightly higher than the 4.95% yield on Fidelity Government Money Market Fund (SPAXX) in the core position. Some people prefer to buy Fidelity Treasury Only Money Market Fund (FDLXX), which had a 4.93% 7-day yield as of June 19, 2024 but more of the income is exempt from state income taxes. None of the these funds can be set as the default core position but you can buy them manually. See Which Fidelity Money Market Fund Is the Best at Your Tax Rates.

Because Fidelity will automatically sell from the non-core money market fund to cover debits, if you’re so inclined, you can be aggressive in keeping the core balance in the CMA close to zero while keeping the bulk of your account in a different money market fund earning a slightly higher yield. Or you can set a maximum target balance alert with the Cash Manager to buy more shares of the non-core money market fund when you have excess cash in the “checking” part.

Some people prefer to just keep everything in the default Fidelity Government Money Market Fund (SPAXX) because the extra yield from a non-core money market fund is quite small.

Cash Manager Not Needed

You may have seen some convoluted setups using the Cash Manager overdraft feature in the Fidelity CMA. It’s unnecessary and undesirable.

The only thing remotely useful in the Cash Manager is the maximum balance alerts. An alert only tells you that your CMA core balance exceeded the maximum target balance. It doesn’t automatically buy a non-core money market fund in the CMA for you. You still have to buy it manually if you want.

You don’t need an alert for the CMA core balance dropping below a minimum balance when you have enough savings in a non-core money market fund held in the CMA. Selling from the non-core money market fund held within the CMA to cover debits works out of the box. It happens automatically anyway even if you don’t set up anything in the Cash Manager.

The Cash Manager has a “self-funded overdraft protection” feature to link the CMA to another Fidelity account or an external bank account. This is unnecessary and undesirable when you want the CMA to stand by itself. You don’t want unauthorized debits to affect your other accounts.

Add Treasury Bills or Brokered CDs

If you’d like to take it one step further, you can also buy Treasury Bills or brokered CDs in the CMA when you have money that you know you won’t need for some time. The CMA then becomes a checking/savings/CD combo. The money automatically goes into the “checking” part when the Treasury Bill or brokered CD matures. For example, the amount set aside for the next property tax bill can go into a Treasury Bill or a brokered CD. See How To Buy Treasury Bills & Notes Without Fee at Online Brokers and How to Buy CDs in a Fidelity Brokerage Account.

Please note if you enable the “auto roll” feature when you buy new-issue Treasury Bills or brokered CDs in the CMA, the amount for the next roll reduces your “available to withdraw” number for a few days during the roll. A debit may fail if you don’t have enough available to withdraw. It’s not a problem if you don’t use auto roll or if you keep a substantially higher amount in a money market fund than the amount for the next roll.

Using a Fidelity CMA for spending and savings becomes truly set-and-forget. All deposits automatically earn about a 5% yield as of June 19, 2024. All debits come out of this money market fund. It’s like using a savings account as a checking account. You can manually buy a non-core money market fund but you don’t have to. The yield on the default Fidelity Government Money Market Fund (SPAXX) is close enough to the yield on another Fidelity money market fund.

You can still buy Treasury Bills or brokered CDs to set aside money for specific bills in the future. Please note the caveat on “auto roll” and “available to withdraw” mentioned above. It’s better to do it in a different brokerage account if you prefer to use “auto roll.”

***

The biggest draw of using the Fidelity CMA for spending and short-term reserves is the checking features. You effectively use a savings account as a checking account and earn a good yield from the first dollar. Everything is seamlessly together.

A Vanguard money market fund and some less well-known high-yield savings accounts pay more but they don’t offer checking features. When you pair it with a checking account that pays close to zero, the blended yield on all your cash goes down. For example, if you have $5,000 in a checking account that pays 0.1% and you have $50,000 in a Vanguard money market fund that pays 5.27%, your blended yield on $55,000 is 4.8%. You might as well put the whole $55,000 in a Fidelity CMA earning 4.95% and eliminate the need to watch your checking account balance and transfer back and forth between two accounts.

Transitioning a checking account takes some time and effort. Banks know it. That’s why they pay you close to zero in checking accounts. They bet that you think it takes too much work to switch. Don’t fall for it. It’s easier than you think when you take your time to make the move.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Model Big Financial Decisions with MaxiFi Software

I use the free Fidelity retirement planning tool to keep an eye on our current investments relative to our spending. Using that tool revealed two fundamental drivers of financial success in retirement.

Good ReturnsBad ReturnsLow SpendingOKOKHigh SpendingOKNot OK

Although my wife said the two fundamental drivers were only too obvious, the planning tool gives us an idea of how low is low and how high is high.

Table of ContentsConventional Retirement CalculatorMaxiFiBase Plan and Maximized PlanDiscretionary Spending as a MetricSocial Security Claiming StrategyAssumptions, Assumptions, AssumptionsAlternative ProfilesRoth ConversionsIgnore the PrecisionMonte CarloSupportOther SoftwareConventional Retirement Calculator

The Fidelity retirement planning tool uses a conventional approach. It gathers your investments and asks you how much you plan to spend. Then it simulates future returns to see how well your investments will cover your planned spending. It’s a success if your projected balance is above zero at the end of your planning horizon. Many retirement planning tools work like this. I just happen to use the one from Fidelity because it’s available and free.

It isn’t easy to use the tool to model big financial decisions such as staying in a high-cost-of-living area after retirement versus relocating as we did last time in Moving to Lower Cost of Living After You Retire. You can run the projections and save the report as a PDF, change the assumptions, run it again, save the new report as a PDF, and compare the two PDFs. If you’d like to go back to your original assumptions, you must remember where you made changes and back out all your changes.

When I compare the effects of different levels of spending, I use my login to run one level of spending and my wife uses her login to run a different level of spending. Then we compare the two PDFs. It works for a simple A-B comparison but it’s difficult to do more than that.

MaxiFi

Other financial planning applications are better equipped for tactical planning. MaxiFi is one of them.

MaxiFi is online financial planning software from a company led by Boston University economics professor Larry Kotlikoff. The Standard version costs $109 for the first year ($89/year for renewal) and the Premium version costs $149 for the first year ($109/year for renewal). I bought the Premium version last year to see how it worked.

I played with the software but I’m far from an expert user. Reader Dennis Hurley is more experienced with MaxiFi. He helped me get up to speed. I’m only describing how I used MaxiFi. It may not be the officially correct way as intended by the software maker.

MaxiFi takes an unconventional approach. It doesn’t link your accounts. It only asks for the total amount in your pre-tax, Roth, and taxable buckets respectively. It doesn’t ask what investments you have in your accounts. You enter your expected safe return for each bucket in the settings. It doesn’t ask how much you plan to spend unless it’s one-time or episodic (“special expenses”). The software calculates your available discretionary spending based on the principle of consumption smoothing.

Discretionary spending in MaxiFi is in economic terms. It isn’t what we normally think of as discretionary in everyday life. MaxiFi treats housing, taxes, Medicare Part B premiums, life insurance, and special expenses as fixed spending. Everything else is discretionary spending. You would think food isn’t discretionary but that’s just how MaxiFi categorizes things. If the term “discretionary” bothers you, just give it a different name or simply call it “other.”

Base Plan and Maximized Plan

MaxiFi starts by asking about your current financial situation and your assumptions for inflation, expected returns, your desired retirement age, when you will start withdrawing from your retirement accounts, and when you’re thinking of claiming Social Security. This generates a Base Plan.

Then it offers to improve the Base Plan by automatically testing changes to when you will claim Social Security, when you will start smooth withdrawals from your retirement accounts, whether you’ll withdraw from pre-tax accounts first or Roth accounts first, and whether you’ll consider buying an annuity.

You can say yes or no to which item you want the software to change. MaxiFi will generate a Maximized Plan by testing different combinations of those items and picking a plan that has the highest lifetime discretionary spending. If you’re happy with the changes, you can apply them to the Base Plan in one click.

Discretionary Spending as a Metric

MaxiFi sees a change as an improvement when it increases the calculated discretionary spending. I treat the annual discretionary spending from MaxiFi only as a metric. I don’t see it as the software mandating that I must spend that amount every year. I only use the amount of discretionary spending to compare different situations. I know that a move is a good one if it increases my available discretionary spending.

Social Security Claiming Strategy

If you’re married and you set the maximum age to 98 or 100 for both of you, MaxiFi will most likely suggest that you both delay claiming Social Security to age 70. Don’t be surprised this differs from the output of other tools such as Open Social Security.

Open Social Security uses mortality tables with weighted probabilities of living to different ages. MaxiFi uses fixed ages from your inputs. If you say both of you will live to 100 for sure, the best strategy naturally is to delay to age 70 for both. You’ll see different strategies when you create different profiles with both spouses living to 85 or one spouse living to 95 and the other living to 83, etc. I like Open Social Security’s approach better in this regard.

The maximum age inputs also affect annuity suggestions in the Maximized Plan. If you say both of you will live to 100 in the profile, buying an annuity will naturally be helpful if you turn on optimizing annuities. I set the annuity options to “no” when I run a Maximized Plan.

Assumptions, Assumptions, Assumptions

MaxiFi is a modeling tool. It can’t predict the future. No software can. All outputs are based on a specific set of assumptions. I automatically add “based on this set of assumptions” to every output I read from MaxiFi.

The Maximized Plan is optimal only based on one set of assumptions. The optimal plan will be different under a different set of assumptions. I see the value of MaxiFi not as much in generating a withdrawal and spending plan based on a set of assumptions but more in testing different assumptions.

Alternative Profiles

MaxiFi makes it easy to compare different scenarios. You duplicate the Base Profile into an Alternative Profile, make changes in the Alternative Profile, and compare it with the Base Profile. You can have up to 25 alternative profiles and compare between different profiles. This helps answer all sorts of “Can I afford it?” and “Should I do A or B?” questions:

Can I retire now versus 5 years from now?

Can I afford to buy a more expensive house?

Will sending my kids to private school derail my retirement?

Should I pay cash for a home or get a mortgage?

Should I stay in my current home or downsize or relocate?

Should I sell my house or rent it out?

These big financial decisions require more attention because they tend to be one-time, all-or-nothing, and costly to switch.

You’ll see the impact on your available discretionary spending when you compare outputs between alternative profiles. You know you’ll have more money to spend if you work another 5 years, but by how much? You create one profile with retiring now, duplicate it, change the retirement date, and compare. You know you’ll have less money for retirement if you send your kids to private school, but by how much? You duplicate your current profile into an alternative profile, add the extra expenses, and compare it with your current profile.

A reader said he was interested in moving from a high cost-of-living area but selling his home will trigger taxes on a large capital gain well beyond the $500k tax exemption. The NYT buy-or-rent calculator I used in the previous post doesn’t take into account the built-in capital gain. MaxiFi does.

I created one hypothetical profile in MaxiFi with a home in California worth $2.5 million and a cost basis of $500k ($2 million unrealized capital gain before the tax exemption). I duplicated it into another profile and made changes to sell the home in California, pay federal and state taxes on the capital gains, and buy a $1 million home in Georgia. MaxiFi shows this when I compared the two profiles:

It shows how much the lifetime discretionary spending would increase based on a set of assumptions by selling the California home and moving to Georgia despite having to pay capital gains taxes on $2 million. I can create additional profiles and compare again with the home value growing faster in California than in Georgia or different inflation rates and different investment returns.

MaxiFi can’t predict the future but it can help you model different scenarios.

Roth Conversions

You can also use alternative profiles to model Roth conversions. MaxiFi doesn’t suggest how much you should convert but you can test converting different amounts between ages X and Y in alternative profiles. Here’s a video from MaxiFi on how to model a Roth conversion:

Ignore the Precision

Any modeling software will calculate to the exact dollar but I ignore the precision. Because projections are based on assumptions, it will be a miracle if a projection gets the first two digits correct in real life. It’s difficult to even get the first one digit right.

In the previous example, if a retired couple sells a $2.5 million home in California and moves to Georgia, will they really increase their lifetime discretionary spending by $500,817? It could turn out to be $300k, $400k, $600k, or $700k. I don’t think you can have high confidence it’ll be $500k in real life. All you can say is that selling and moving is directionally beneficial if the assumptions aren’t too far off.

The Roth conversion video from MaxiFi shows that the conversion amount being considered would raise the annual discretionary spending from $75,739 to $76,109 based on a set of assumptions. I would call it a toss-up. The $370 difference is too small because it’s less than 0.5% of the annual discretionary spending. Converting that amount in real life could be better or it could be worse. I can’t even say it’s directionally beneficial. I would look for moves that make a bigger difference.

Monte Carlo

The Premium version of MaxiFi includes Living Standard Monte Carlo®, which simulates how different investment strategies and spending behaviors impact your living standard. The $40 price difference between the Stand version and the Premium version in the first year isn’t much. You might as well try the Monte Carlo reports to see if they’re helpful but I find the standard reports more useful than the Monte Carlo reports.

A problem with Monte Carlo is that it always shows a wide range of outcomes. My available spending can be $50k a year if returns are poor or it can be $200k a year if returns are good. So do I spend $50k or $200k? If I spend $50k a year, I’ll have a ton of money left that I could’ve enjoyed when returns aren’t that bad. If I spend $200k a year, it won’t be sustainable when returns are poor. This isn’t unique to MaxiFi. That’s just the nature of the beast. No software can remove this uncertainty.

I find more value in the reports in the Standard version of MaxiFi because I only use the annual spending from the software as a metric to compare different scenarios. I don’t go by the spending output from the software for my actual spending. If you want to save a little bit of money, maybe start with the Standard version and upgrade to Premium when you decide to use MaxiFi long term.

Support

MaxiFi has a user’s manual on its support website and how-to videos and webinars on YouTube. The company also offers online office hours twice a month to answer questions. If you can’t figure out how to model something, you can send an email to MaxiFi customer service and they’ll tell you. If you want a MaxiFi expert to review your plan and help you interpret the results, it’s $250 for a one-hour video session. I get the sense that they really want to help you make good financial decisions with the software.

Other Software

I’m satisfied with MaxiFi overall. It’s inexpensive and useful to model big financial decisions. No software can predict the future but you don’t have to throw up your hands and leave big financial decisions to gut feelings.

I don’t expect any software to tell me how much I can spend that won’t lead to having a big pile of money in the end when returns are good or having to adjust the spending down when returns are poor. That’s not how I use MaxiFi.

Set a wide range of assumptions and evaluate the wide range of outcomes. You still won’t know how exactly a big financial decision will turn out in real life but you’ll have some idea of a range and understand what will influence the outcomes. It’s a steal to pay only $109 or $149 for a tool to help you make big financial decisions.

MaxiFi isn’t the only financial planning software. I can’t say it’s the best because I haven’t used many other software to compare. I only know it’s more powerful than the free Fidelity retirement calculator. NewRetirement and Pralana are in the same $100 – $150 price range. If you have big financial decisions coming up and you’re not sure which software to use, try them all and pick your favorite. I’m going to buy Pralana to try it when my MaxiFi license expires.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Check These Before You Transfer an Account From Vanguard

I received an email from Vanguard notifying me of upcoming changes to its fee schedule. The one change that stands out for me is that Vanguard may charge $100 effective July 1 if I transfer an account to another broker unless I have $5 million with Vanguard.

I’ve been investing with Vanguard for over 25 years. I have had the feeling from some changes by Vanguard in recent years that I’m not as valued as before. This latest announcement finally pushed me to the inevitable. I submitted a request to transfer my account to Fidelity before the new fee takes effect.

If you’re thinking along the same lines, you should check a few things before you transfer your accounts out of Vanguard.

Table of Contents1. Do you have a taxable account at Vanguard?2. Cost Basis Method Election in Taxable Account3. Do you have Vanguard mutual funds?4. Do your Vanguard mutual funds have ETF shares?5. Wait for Everything to Settle6. Save Cost Basis Details of Taxable Accounts7. Save Account Number and Recent Statement8. Request Transfer of Assets at the Receiving Firm9. Verify Cost Basis in Taxable Account10. Residual Sweep11. Dividend Reinvestment and Cost Basis Settings in the New Account1. Do you have a taxable account at Vanguard?

Tax-advantaged accounts such as Traditional and Roth IRAs can be transferred to another broker without tax consequences. The transfer doesn’t generate a 1099 form. It doesn’t count toward your annual contribution limit. Please skip to Step 3 if you only have tax-advantaged accounts at Vanguard.

Transferring a regular taxable brokerage account needs more careful attention.

2. Cost Basis Method Election in Taxable Account

If you have mutual funds (not stocks, ETFs, bonds, or brokered CDs) in a regular taxable brokerage account, you should first make sure the cost basis method of your holdings is set to Specific Identification (“SpecId”). The default cost basis method for mutual funds is Average Cost. Setting it to SpecId will transfer the cost basis of each tax lot when you transfer your account. It’ll help you minimize taxes when you sell in the future.

This only applies to taxable accounts. You don’t need to do anything with the cost basis method in tax-advantaged accounts.

You can see or change your current setting in Profile & settings (the head icon) -> Accounts & trading tab -> Cost basis method.

The change may take a day or two to complete. Wait until it’s done before you continue.

3. Do you have Vanguard mutual funds?

Individual stocks, ETFs, bonds, and brokered CDs are all equally available at another broker. You can transfer these easily to another broker and hold, buy, or sell them at the new broker. Please skip to Step 5 if you only have individual stocks, ETFs, bonds, and brokered CDs in your Vanguard account.

If you have Vanguard mutual funds, there’s usually no charge for holding existing shares or automatically reinvesting dividends at another broker but you may have to pay a commission when you buy more shares of those funds. Fidelity and Charles Schwab don’t charge a commission for selling shares of Vanguard mutual funds you already own but they do charge for buying additional shares outside of automatic dividend reinvestments. Some other brokers charge for both buying and selling.

I have Vanguard mutual funds but I’m not buying new shares in those funds. I will only hold, automatically reinvest dividends, and sell my existing shares over time. I won’t incur any fees when I hold my Vanguard mutual funds at Fidelity.

4. Do your Vanguard mutual funds have ETF shares?

If you have Vanguard mutual funds and you want to buy more shares in the future besides automatically reinvesting dividends, see if your funds are also available as an ETF. Look up the fund on Vanguard’s website. If the fund is also available as an ETF, it will say so under the name of the fund.

Vanguard can convert these mutual funds to the equivalent ETF tax-free without a fee. You’ll need to call Vanguard to convert them to ETF. After your funds are converted to ETFs, you can transfer the resulting ETFs to another broker and buy more shares of the ETFs at the new broker.

Be sure to complete Step 2 before you call Vanguard to convert your mutual fund to ETF in a taxable account. If the mutual fund is still on the Average Cost method when it gets converted, the converted ETF will only have the average cost.

There’s a small risk that Vanguard will mess up the cost basis when you convert your mutual funds to ETFs in a taxable account. I didn’t want to take that chance when I transferred a taxable account from Vanguard. I’m OK with only holding the Vanguard mutual funds, automatically reinvesting dividends, and selling without a commission at Fidelity. I just won’t buy new shares.

Some Vanguard funds aren’t available as an ETF. If you transfer your account, buying new shares of those funds will likely incur a commission at the new broker. You’ll have to find an alternative. Some Vanguard funds not available as an ETF are still the best-in-class. Maybe you should keep your account at Vanguard if you will buy more shares of those funds.

5. Wait for Everything to Settle

If you decide to transfer and you have recent transactions in your Vanguard account (money in, money out, trades, converting mutual funds to ETFs), you should wait for everything to settle before you transfer your account. It’s easier for everyone if you transfer when nothing is in the air.

6. Save Cost Basis Details of Taxable Accounts

It’s important to keep the cost basis records accurate when you transfer a taxable account. You should save or print your cost basis details before you transfer. This doesn’t apply to tax-advantaged accounts.

You see these details under Portfolio -> Cost basis.

Expand “Show lot details” under each holding. Save the page to a PDF or print it.

7. Save Account Number and Recent Statement

You’ll need to give your Vanguard account number and a recent statement when you transfer your account. The statements are under Activity -> Statements.

The statement doesn’t show your full account number. You need to copy your account number and save it separately.

8. Request Transfer of Assets at the Receiving Firm

You should initiate the transfer at the receiving firm. The process is usually online. It’s under Accounts & Trade -> Transfers and then “Move an account to Fidelity” in Fidelity. Look for something similar at other brokers.

You’ll be asked where you’re transferring from, the account number at the sending firm, what type of account it is, whether you’d like to transfer everything in the account or only part of it, whether you’re transferring into an existing account or a new account (and create this new account when applicable), and finally to attach a recent account statement of the source account.

The account type should match (Traditional-to-Traditional, Roth-to-Roth, taxable-to-taxable, trust-to-trust). The account name should also match (individual-to-individual, joint-to-joint). If they don’t match, please fix them on either side first.

If you’re asked whether you’d like to transfer in-kind or sell and transfer cash, make sure to choose in-kind. In-kind means transferring each holding as-is without any change. Only transferring in-kind won’t trigger taxes in a taxable account.

The transfer usually takes a week or sooner to complete.

9. Verify Cost Basis in Taxable Account

If the transfer is successful, the holdings will come over first without the cost basis details. That’s normal. The cost basis details will come in another week or two. You should verify the cost basis details against the records you saved in Step 6.

10. Residual Sweep

If you do a full account transfer and any of your investments paid dividends during the transfer, the dividends may still go into your old account. There will be another automatic sweep to transfer any residual amounts. You don’t have to initiate it. It will come over in a few weeks.

11. Dividend Reinvestment and Cost Basis Settings in the New Account

Dividend reinvestment and cost basis tracking method for your newly transferred holdings will follow the settings in the receiving account. Take a look and set them to your preference.

I automatically reinvest dividends and use the default cost basis method in tax-advantaged accounts. In a taxable account, I automatically send the dividends to the spending account and use Actual Cost for cost basis and Fidelity’s Tax-Sensitive default disposal method.

***

Transferring a Vanguard account isn’t difficult but it requires some planning, especially when you’re transferring a taxable account with mutual funds. Sometimes it’s better not to transfer. The most important parts are not to sell anything and trigger taxes and to preserve the cost basis records for individual lots in taxable accounts.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Is It Worth Moving to Lower Cost of Living After You Retire?

I wrote in a previous post Our Experience in Building a Home Over Buying an Existing Home that I built a new home. By coincidence, the final all-in cost of this new home came to about the same as the net proceeds from selling my previous home in California four years ago. That previous home is worth a lot more now. If I take an average of the estimated value from Zillow and Redfin, it’s worth 50% more than my new home.

As a house though, the previous home has nothing to compare to the new home. It was a tract house built in the 1960s with 1/3 of the living space of my new home. Successive owners updated it here and there over 60 years but the structure was still the original.

How come a 60-year-old home is worth 50% more than a brand-new home three times its size? The value is obviously in the land. The land under that previous home is worth at least five times the land under my new home although the two pieces of land are of similar size.

When people talk about low-cost-of-living (LCOL) areas, high-cost-of-living (HCOL) areas, and very-high-cost-of-living (VHCOL) areas, the difference in cost of living is mostly driven by the cost of housing. After all, prices are the same when you order stuff from Amazon. Groceries and gas may cost a little more in some places but they don’t make up a large part of spending. Why is housing so much more expensive in some places than others?

We get some clues by looking at where home prices are most expensive in the country.

Conforming Loan Limit Map

The Federal Housing Finance Agency (FHFA) sets a dollar limit on “conforming loans.” Mortgages under the conforming loan limit can be sold to Fannie Mae and Freddie Mac. The loan limit is the same in most places across the country. It’s 50% higher in some pockets with high home prices. The conforming loan limit map shows where these high-cost areas are.

Source: Conforming Loan Limit Map, Federal Housing Finance Agency

This map goes by counties. The dark orange counties on the map have the highest conforming loan limit in the country, which is a sign of the highest home prices.

AlaskaHawaiiNorthern California near San FranciscoSouthern California near Los AngelesTwo counties in Wyoming and Idaho near Jackson, WYTwo counties in Utah near Park City, UTThree counties in Colorado near Aspen, COWashington D.C. and nearby areas in Maryland, Virginia, and West VirginiaNew York City and nearby areas in New York, New Jersey, and PennsylvaniaTwo counties in Massachusetts near Martha’s Vineyard

We see two themes from this list: major economic centers and vacation spots.

Homes are more expensive in major economic centers but so are incomes. I couldn’t have made it this far if I didn’t live in a VHCOL area with abundant good-paying jobs.

Homes are more expensive in vacation spots because people buy second homes there for their vacations and to rent to vacationers.

If you’re working, is it worth moving to a VHCOL area for a higher salary? If you’re retired, is it better to move away from a VHCOL area when jobs are no longer a factor?

Cost of Ownership

Although I said a buy-or-rent calculator should be the last step you take when you explore whether you should buy or rent, it’s a useful tool to compare the cost of owning a home in different places because the calculator converts the various costs of owning a home to a single rent-equivalent number. If owning a home in one place is equivalent to $4,000/month in rent and owning a home in a different place is equivalent to $3,000/month in rent, we know that housing in the first area costs $1,000/month more.

I ran the New York Times buy-or-rent calculator with these assumptions for three homes in different places costing $500k, $1 million, and $2 million:

Plan to stay in home: 20 yearsDown payment: 100% (no mortgage)Home price growth rate: 3%Rent growth rate: 3%Investment return rate: 7%Inflation rate: 3%Property tax rate: 1% of home valueMarginal tax rate: 25% (federal and state)Closing cost to buy: 0%Closing cost to sell: 6%Maintenance: $5,000 a yearHomeowner’s insurance: $2,000 a yearUtility covered by landlord if renting: $0Monthly common fees: $0Common fees deduction: 0%Security deposit if renting: 1 monthBroker’s fee if renting: $0Renter’s insurance if renting: $150/year

I set the maintenance cost and homeowner’s insurance to a fixed amount because the difference in the home values in different places is primarily in the land. A home in a VHCOL area doesn’t necessarily cost more to maintain or insure.

These are the rent-equivalent numbers for homes in three different places under my assumptions above. Please re-run the numbers if you prefer a different set of assumptions.

$500k Home$1 million Home$2 million HomeCost of Ownership$2,215/month$3,939/month$7,439/month

Under these assumptions, a job seeker moving from an area where a home costs $500k to an area where a home costs $1 million will need to make $1,700/month or $20k per year more after taxes to cover the higher cost of housing. A retiree moving from where a home costs $2 million to where a home costs $1 million will save $3,500/month or $42k per year from the lower cost of housing under the same assumptions.

The difference in housing costs is sensitive to the assumed home price growth rate. If home prices in a VHCOL area grow faster because the area is a major economic center or a popular vacation spot, it lowers the cost of ownership. Here are the costs of ownership with different home price growth rates:

$500k Home$1 million Home$2 million HomeHome Price Growth3%/year4%/year4%/yearCost of Ownership$2,215/month$3,476/month$6,492/month

If home prices in a VHCOL area grow only 1%/year faster, a $2 million home in the VHCOL area is still more expensive to own than a $500k home in the LCOL area, but it’s only 2.9 times as expensive, not 4 times. A 1% faster growth rate reduces the gap in costs of ownership between a $1 million home and a $2 million home from $42k a year to $31k a year. 1% faster growth lowers the gap between a $500k home and a $1 million home from $20k a year to $15k a year.

When you’re working, it’s worth moving to a VHCOL area when higher incomes and better career opportunities cover the higher cost of housing. That’s why housing costs more in those places.

For retirees, whether to move out of a VHCOL area is ultimately a lifestyle choice. Yes, it may cost $30k or $40k more per year but if you have family there and you can afford it, it may be worth it for you to stay put. On the other hand, if you aren’t too attached to a VHCOL area and you were there only for jobs, moving to a different place may free up $30k or $40k per year to spend on other things.

I still like this tweet on where to live in retirement from Christine Benz, Director of Personal Finance at Morningstar:

When I think about factors influencing where to live in retirement, my list would be:

1. Proximity to family/friends
2. Culture/activities/"fit"
3. Weather
4.
5.
6. Cost of housing
7.
8.
9.
10. Taxes

But not everyone thinks that way. My latest. https://t.co/xkbcHjHl7p

— Christine Benz (@christine_benz) June 12, 2020

You hear a lot about the difference in state taxes but I think the tax aspect is way overblown. We saved less than $1,000/year in state income tax when we moved from high-tax California to no-tax Nevada. It’s not worth moving to save only $1,000 a year. The difference in the cost of housing is more substantial. Running the numbers helps you quantify it. You may choose to stay put or move to a place closer to family, friends, activities, or a place with the weather you prefer. Quantifying the difference in housing costs helps you make an informed decision.

In our case, we didn’t save much money by moving but we improved our lifestyle. We could’ve chosen a different place with a lower cost of living but we like it here. That makes it worth it. Lifestyle comes first when you can afford it.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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