Life with Physics

This post is for knowledge sharing only. It is not intended to be tax or legal advice. I used to believe that trusts were only for the wealthy. But recently, I learned that there is at least one trust that ordinary families, especially those living in California, should establish for seamless family wealth inheritance: a revocable living trust. One may need to find a lawyer on the estate planning to discuss and set up a revocable living trust. But it is still good to learn some background knowledge before talking to a lawyer.   Why revocable living trust A revocable living trust, as implied by its name, allows the grantor (who created the trust) to make changes or completely revoke the trust while they are still alive. This means the grantor maintains full control over the assets placed within the trust. As a result, assets held in a revocable living trust are NOT protected from creditors. Avoid Probate The primary reason to establish a revocable living trust is to avoid probate . Pro

 This post is for knowledge sharing only. It is not intended to be investment or tax advice. Highlight There are a lot of ETF s on the market. Personally, I only prefer the following two ETFs for long term investments: VOO  (or IVV ): Both VOO and IVV passively track the well known S&P 500 index . The expense ratios of VOO and IVV are the same: 0.03%. SPY also tracks S&P 500 index but with a higher expense ratio: 0.0945%. It is more suitable for trading rather than buying and holding. QQQM (or QQQ ): Both QQQM and QQQ passively track the Nasdaq 100 index . They are almost identical. QQQM is a newer ETF launched very recently for buying and holding. The expense ratio of QQQM is 0.15% while the expense ratio QQQ is 0.2%. Notes on QQQM (or QQQ): Although QQQM concentrates heavily on tech companies, fundamentally it is NOT a  sector ETF . For example, in the top 10 holdings of QQQM as of January 2024, we see the name of Costco Wholesale that belongs to the consumer discretionary

This post is for knowledge sharing only. It is not intended to be investment or tax advice. If one does not manually select or change investments,  the default investment options in most 401K plans are usually some target data funds similar to  Vanguard Target Retirement Funds . Such funds are dynamically mixed with stocks and bonds, and the asset allocation gradually weights more to bonds from stocks. My personal opinion is very simple: NO target date funds.  Instead, choose a low-cost S&P 500 index fund in the 401K plan. Here are the main reasons: The fees of target date funds are high. For example, the expense ratio of  Vanguard Target Retirement Funds  is 0.08%. Some target funds are even more expensive. In contrast, the expense ratio of  Vanguard 500 Index Fund Institutional Select Shares is only 0.01%. The long term performance is worse than the S&P 500 index. This is not surprising because of the existence of bonds in the target date funds. The fund may also include int

This post is for knowledge sharing only. It is not intended to be investment or tax advice. 529 Plans are tax-advantaged accounts specific for education saving: Contribution are made with after-tax dollars. Growth within the account is tax-free. Withdraw for qualified education expenses is also tax free. Roth IRA First 529 Plans are very similar to Roth IRA . But Roth IRA withdraw under  the 5-year rule  is tax free for any purpose. Therefore, unless for the state tax deduction in some states, it is always better to max out Roth IRA first (through backdoor and mega backdoor  for high income earners) before funding a 529 plan. Note: there is NO California state tax deduction for any 529 plan. 529 or Not? Here are some considerations in reality before funding a 529 plan: What if no qualified education expenses In the worst case that there will be no qualified education expenses, you can still take money out for non-qualified expenses, but you have to pay: federal income tax + 10% federa

This post is for knowledge sharing only. It is not intended to be investment or tax advice. [Update] Consider BOXX ETF for more tax advantages. Before investing risky assets, one should reserve enough cash for both expected expenses (like down payment of home purchase) and unexpected expenses (in case of layoff for example).  The goal of cash reserve is NOT high return, but safety and liquidity . Even so, we still want to earn some interest from the cash reserve. In the table below, we list some common options for high income CA residents to park cash reserve for a relatively high interest rate or after tax earnings as of  January 12, 2024 . Note that interest is taxed as ordinary income plus a so called  net investment income tax . The total tax rate can be as high as 51% including 37% federal income tax, around 10% CA state income tax and nearly 4% net investment income tax. Account Interest Rate Total Tax Rate After Tax Earning Marcus High Yield Saving [1] 5.50

This post is for knowledge sharing only. It is not intended to be investment or tax advice. In U.S. the tax rate on the capital earnings in 2024 can be as high as 20% + 10% + 4% = 34% for long term capital gains and qualified dividends . 37% + 10% + 4% = 51% for short term capital gain , ordinary dividends and interests  (all taxed as ordinary income). Notes: 20% is the highest federal tax bracket of long term capital gain while 37% is the highest federal income tax bracket.  10% is the CA state income tax. CA tax treats all capital gains as ordinary income, without distinction between short term and long term. 4% is the so-called net investment income tax for high income earners, which is less known. For high income earners, it is really not a good idea to do short-term trading from the tax perspective. Even for long-term trading, one third of the earnings will be paid as taxes. Instead, the buy and hold strategy may be preferred. Note that there is NO tax on the asset appreciation

This post is for knowledge sharing only. It is not intended to be investment or tax advice. Health saving account (HSA) is another tax-free investment account that is even better than Roth IRA . HSA offers three tax advantages: The contribution is tax deductible. Investment grows tax-free. Finally, withdrawals for qualified medical expenses are also tax-free. To fully utilizes the advantages, it is better to let the money stay and grow in HSA as long as possible. To achieve this, Do NOT use HSA money to cover the current medical expenses. Instead, save the receipts and ask for reimbursement in future year of withdrawal. Remarks: HSA does NOT have any CA state tax benefits. Both HSA enrollees and their spouse are NOT eligible to contribute to the general   flexible spending account (FSA) . One can have a HSA and  limited purpose FSA (LPFSA) at the same time. Unlike the general FSA, LPFSA can only cover vision and dental expenses. High Deduction v.s. HSA Saving To be eligible for HSA,