Rich Habits Podcast – 9: New Housing Rule, Tax Loopholes, 401(k), and Debt

Intro

In this episode of the Rich Habits Podcast, Robert and Austin discuss the new housing rule, tax loopholes, 401(k) strategies, and the importance of managing debt. They provide insights and tips on how to navigate these financial topics to build wealth and secure a stable future.

Main Takeaways

New Housing Rule

• New federal rule will force home buyers with good credit scores to pay higher mortgage rates and fees to subsidize people with riskier credit ratings
• The fee changes will go into effect May 1st and will affect mortgages originating at private banks across the country
• Home buyers with credit scores of about 680 or higher will pay about $40 per month more on a home loan of $400,000
• Home buyers who make down payments of 15 to 20% will also face extra large fees

Strategies for Homebuyers

• Consider househacking by purchasing a duplex, triplex, or fourplex instead of a primary home
• Despite higher interest rates, now is a good time to buy a home because of discounts on purchase prices
• Many people make the mistake of underestimating the true cost of homeownership, leading to being “house broke”
• Investing the extra money saved from renting or having a structured housing fee over 20-30 years can be a game changer

Tax Loopholes and Retirement

• Backdoor Roth IRA is a tax loophole for those who make more than the ceiling amount for contributions
• The process for a backdoor Roth IRA involves opening a traditional IRA, contributing to it, then converting it to a Roth IRA, but be aware of the Pro Rata Rule and fill out form 8606 on your tax return
• Investing in both the 401k up to the employer match and maxing out the Roth IRA is a good approach
• Having autonomy over your 401k investments is important

Debt Management

• Pay off high interest consumer debt before investing, as the interest on debt is often higher than potential investment returns
• The average credit card APR is currently 24%, making it more financially sound to pay off high interest debt before investing
• Compound interest is important for retirement, but it’s crucial to plug the holes in your finances first
• Consumer debt is problematic and won’t go away until you make it go away

Summary

New Housing Rule: Impact and Strategies

The new federal rule will affect home buyers with good credit scores, forcing them to pay higher mortgage rates and fees to subsidize those with riskier credit ratings. This rule aims to promote fairness in housing access but has raised concerns among financially responsible individuals. Robert and Austin suggest alternative strategies like house hacking and being strategic about housing payments to mitigate the impact of the rule and build wealth over time.

Tax Loopholes and Retirement Planning

Robert and Austin discuss the backdoor Roth IRA as a tax loophole for higher earners. They explain the process of contributing to a traditional IRA and converting it to a Roth IRA, highlighting the importance of understanding the Pro Rata Rule and filling out the necessary tax forms. They also emphasize the benefits of investing in both the 401k and maxing out the Roth IRA. Autonomy over 401k investments is crucial to optimize returns and avoid underperforming assets.

Debt Management for Financial Success

Managing debt is a key aspect of building wealth. Robert and Austin stress the importance of paying off high-interest consumer debt before investing, as the interest on debt often exceeds potential investment returns. They highlight the average credit card APR and urge listeners to prioritize debt repayment to avoid a net negative return. By plugging the holes in finances and eliminating consumer debt, individuals can position themselves for long-term financial success.

Conclusion

In this episode, Robert and Austin provide valuable insights on the new housing rule, tax loopholes, 401(k) strategies, and debt management. They emphasize the importance of being proactive and strategic in financial decisions to build wealth and secure a stable future. By understanding these topics and implementing the suggested strategies, listeners can navigate the complexities of personal finance and achieve financial success.