It's not only governments that want to take your money. It's also the banks. But you knew that already.
The main thing I look out for is fees. Less fees are more good. And when you are using your money overseas there are all sorts of fees banks like to charge you. So when I was planning my move overseas I paid close attention to these fees. I guess there are two main fees to look out for: international ATM fees, and a fee for exchanging currencies (sometimes both by the bank and Visa/Mastercard/whatever). Currency exchange fees are often charged at a percent of the exchanged amount. That can cut into your margins which is especially painful if you don't have much margin for error. And a three dollar ATM fee could be a couple meals here.
Luckily, there are a some large banks that do not charge these fees, such as Charles Schwab and Capital One. Here is a wiki with more information. Capital One seemed somehow more evil, so I went with Charles Schwab. I opened a Schwab Bank High Yield Investor Checking account with them. When you open this type of combined account there are no relevant account fees, minimums, or activity requirements. As for the international fees, they reimburse any ATM fees charged by other banks, including overseas, at the end of each month. They also cover the Visa currency exchange fee charged by Visa. They don't charge any other relevant fees. So basically that means I'm not loosing any money when I use my card overseas (or otherwise).
I was hoping for a bank that made things easy to manage and set up. Compared to the other online bank account I have (which has horrible international fees), I would say Schwab falls quite a bit short in this regard. But once you are set up it doesn't matter too much anymore. I also needed to notify Schwab of my travel plans (by phone) so that they wouldn't block any transactions made overseas. For some reason, when one receptionist at a hotel tried to use my card to add another night, it didn't work. However, I was able to immediately go and use the card online to book the room. Not sure what happened there. So far I haven't noticed any fees being charged. Actually, it's a bit weird because ATM fees are supposed to be reimbursed at the end of the month, but I haven't seen any ATM fees in my transactions or missing from my withdrawal amounts. At this point I'm pretty happy with them in terms of using the card overseas.
You'll notice I haven't linked to Schwab. I don't like promoting companies (including this one) and I have no interest with Schwab. I just thought I'd share what I'm doing in case it helps you.
Out Of Bounds
My flight to Malaysia had three segments. The first was inside the US. The next was to Hong Kong. Then the final portion was to Penang, Malaysia. But first you have to get through security...
It should be quite easy to leave your own country, right? Not necessarily. The first leg of my travel was with American Airlines. I made it through the security check and was walking towards my gate when my name was announced over the PA system and they called me back to the ticketing desk.
When I got back the lady exhasperatedly asked whether I had proof of onward travel from Malaysia and whether I had proof of funds. Well luckily I did get an onward ticket for this very type of situation. Unfortunately, I didn't prepare proof of my funds during the trip. So we ran through various ways I might get this proof of funds. The lady at the desk said she didn't care, but she wanted to make sure the officials in Malaysia wouldn't "send me back to the U.S." We figured out that once I got back inside I could use my laptop to download my most recent statements and put them on my flash drive and mp3 player. Then if they asked in Malaysia or wherever I could just show those.
Apparently, they don't have free wi-fi in airports. FYI, the same Boingo service in U.S. airports doesn't charge the same rate in different airports. So I decided to skip on the internet. I got a balance print out from the ATM instead. Hopefully that will satisfy anyone who wants to see I have money.
On the second leg of my trip, when I switched to Cathay Pacific, the lady at the desk didn't ask anything about proof of onward travel or funds. Prior to my flight, I was a little worried about Cathay Pacific once I realized they have a tiered weight allowance for carry on baggage (which was all I took). I flew Economy Class which had a limit of 15 pounds. A weight limit for a second smaller carry on bag wasn't mentioned. I didn't bring much, but what I had weighed more than 15 pounds. I only brought two carry on's total for my trip. Without planning I just happened upon a solution to the problem. When the lady asked me to place my baggage on the scale, I placed my laptop bag first and without asking for my larger backpack she said "Oh, you're traveling light today." I was! It seems she took my laptop bag as my main carry on baggage. So somehow I did a switcheroo and she didn't ask to weigh my larger bag.
The flight was pretty okay. None of my neighbors were too bothersome. The food was good enough and I was served first.* I finished my meals by the time the regular meals got to my area. I could have asked for unlimited free beer if I choose to, like the guy next to me. There were first run movies and TV shows to watch in the console in the headrest in front of me.
*At booking I requested one of the five or six different vegetarian meal options. Since they had to prepare my meal separately on the plane I got served first each time. On the flight segment to Malaysia I waited a bit since there were a number of people that I guess were requesting the Halal meal.
Once I got to Hong Kong I needed to prepare for a long layover. I was hoping I didn't need to go through Immigration and luckily I didn't. So I ended up visiting Hong Kong without actually going into Hong Kong. I arrived at about 9pm and didn't depart until about 3pm the next day. I didn't feel like going into the city for just a night because I've done that before and didn't feel like it was that special. However, when I tried to pass through into the departure area the lady checking flight information gave me a look like "You're kidding, right?" I just said "I'll wait" and she let me through. The airport was pretty crowded even past midnight and I wondered if lots of people were doing the same thing. It turns out they just had late flights. It got pretty empty in the early hours of the morning. But everything went well enough and the next day I just walked around and used my computer a few times while I waited for my final flight.
The last flight was pretty much the same as the second, but it was shorter and on an older plane. I arrived in Penang and the Immigration official didn't ask to see any proof of onward travel or any proof of funds. All he asked was if I was here for holidays and I said I was. In the arrival zone, my friend was there waiting to pick me up. The weather was finally warm.
Give Me Back My Money
To be quite honest with you, I prefer to avoid taxes when legally possible. It also happens that I am interested in financial independence and simple living. If that weren't enough, all these things support each other in the process. So after reading some relevant sections of the tax code I was happy to discover it is possible to live a comfortable life without paying any or much federal income tax.
As it turns out, there's a pretty neat loophole for low income people like myself. I didn't know all of this when I started working, but with The Epiphany all the pieces finally came together. The following is based on 2011 law and is applicable to people who are single and will spend less than $9,350 after working years. If that doesn't apply to you then you'll need to do some more research. Before you go and do something crazy like me, let me say that this is not tax, financial, or legal advice. This is what I learned (which may be incorrect) based on 2011 tax law (which may change). If you do this you will certainly lose all your money, get fined, and end up in jail. This is complicated and very individual!
Step one, is to save as much as possible during working years. Really, you can't get anywhere without saving more than you spend. I now understand I should have maxed out my 401(k) account and after that my traditional IRA with these savings. This is important because earned income that is contributed to a 401(k) or traditional IRA is not taxed on contribution, but on withdrawal. Any extra could have been placed in a taxed account. Alternatively, you could max out the 401(k) account and then fund a Roth IRA and any extra savings could again go in a taxed account.
In either case, you'll need some money you can tap for the five years you need to wait for the process to fully work. That money would either need to be in the taxed account or the Roth IRA. If the money is in the Roth IRA you can only withdraw the amount you contributed, which may not be much since there are annual contribution limits. Contributions to a Roth IRA are not taxed when withdrawn regardless of when they are withdrawn. Contributions that are subsequently withdrawn are not taxed, because you already paid tax on them prior to contribution.
Keep saving until you have 300 to 400 times your planned monthly expenses. Then you will be financially independent if your money is invested and bringing in more money. I say "planned" expenses, because if your expenses during working years are more than they need to be, then you can reduce expenses instead of increasing savings. At this point you should have a large percentage of your money in tax deferred accounts. In your taxed accounts (or Roth IRA contributions if you chose that route) you should have at least five years of living expenses. Otherwise, you could work part-time to cover minimal living expenses, but that would affect how the process would work without being taxed. Now comes the fun part...
Step two, after quitting work you will need to rollover your 401(k)-type account into your traditional IRA. If your 401(k) has good investment options, low fees, and is easy to work with then you might just skip this step since the 401(k) and traditional IRA will be treated (somewhat) similarly after quitting. Not all plan administrators will allow a conversion from a 401(k) to a Roth IRA, so rolling over to a traditional IRA may be easier. The rollover will not be taxed if you don't do anything weird because 401(k)'s and traditional IRAs are both tax deferred retirement vehicles.
Step three, after quitting work, once a new calendar year has begun* you will want to start converting your traditional IRA (possibly 401(k) if you chose that option) into a Roth IRA once per year. You can only do this once per year. The conversions will be taxed as regular income. You can convert up to $9,350 per year if you want to avoid federal income tax. Amounts up to $9,350 will not be taxed at the federal level because of the personal exemption and standard deduction for a single person. Keep converting money from the traditional IRA to the Roth IRA annually until the year you turn age 59.5.
*You may want to wait until a new year so that you don't bump that IRA money into a higher tax bracket when you factor in your previous salary. If you only made a little bit for the year, then you could do the conversion in that same year without much consequence (or just convert less).
Be careful not to convert your traditional IRA money too fast. This is the basis for your income from year six after quitting until you turn 59.5. In the best case scenario you would want your last dollar converted from the traditional IRA to the Roth IRA on the year you turn 59.5, when you can start withdrawing from the Roth IRA penalty free.
During this step, you also start withdrawing your current living expenses from the taxed account (or withdrawing Roth IRA contributions if you went that route).
During this step, you also start withdrawing your current living expenses from the taxed account (or withdrawing Roth IRA contributions if you went that route).
Step four, in the sixth year after quitting work you can start withdrawing the converted money from the Roth IRA. Only withdraw as much as you need for the year and not more than you converted five years ago. This money will not be taxed on withdrawal, since it was already "taxed" on conversion (actually, it was below the level that would be taxed at the federal level, but it still counts). In this regard a Roth IRA conversion is treated as a Roth IRA contribution (no penalty for withdrawal). The difference is that you need to wait those five years to access the money without penalty. Withdrawal of earnings on contributions are taxed and penalized.
Step five, in the year you turn 59.5, almost all your money should be in the Roth IRA. At that point you can withdraw everything without limit, penalty, or taxes. You probably wouldn't want to withdraw more than 4% of your savings though, in order to preserve capital.
If you have been following along you may have noticed something interesting about the above scenario. Excluding possible state taxes, you wouldn't have needed to pay any tax on the money you earned originally or while it was invested in the traditional IRA. There was:
- No tax on your salary that is contributed to tax-deferred retirement accounts (401(k) and traditional IRA).
- No tax on the 401(k) rollover to traditional IRA.
- No federal tax on the conversion from a traditional IRA to Roth IRA.
- No tax on gains or dividends in any retirement accounts.
- No tax on withdrawal from Roth IRA.
What I like about this plan:
It is not irrevocable. If your situation changes you can change your plan. Other options such as 72(t) withdrawals seem more complicated and you can't stop them once you start.
If you screw it up, then you pay income tax plus a 10% penalty. If you are below the federally taxable income level, then you just pay the 10% penalty. 10% is still way lower than any other normal tax rate.
You can convert more or less than $9,350 if you want to. You will just need to pay the corresponding income tax at the regular rate on conversion for the amount you withdraw.
What I don't like about this plan:
You have to file extra tax forms each year to help the government keep track of your conversions and withdrawals. They want to make sure you don't take out more than the converted amount.
It's not possible to begin the conversions if you are still working for the same employer. If you were going to quit anyways, you're good.
Here is the plan mapped out:
Here is the plan mapped out:
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KEY TERMS
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RESOURCES
IRS Publication 590 (pdf)
Book
Fairmark Forum
Common IRA Rollover Mistakes
Roth IRA Distributions
Roth IRA Early Withdrawals
Tax Treatment of Roth IRA Distributions
Glittering Speck Of Emotion
I knew someone who described airplanes something like that. She told me about it as we were hiking around a desert mountain in the southwest US picking sage. It was a beautiful day with clear blue skies. Not a cloud or sign of civilization around. Then she said that phrase: "glittering speck of emotion." I didn't know what she was talking about and she pointed up to the sky where there was a plane flying high above. There's so much energy and emotion in planes, she explained. Everyone on board is feeling something. Someone is going home after a long time away; someone is leaving someone they loved; someone is going to a funeral; someone is flying for the first time; someone else is going on a great journey to a place they always wanted to see. All of those emotions are crammed into that tiny silver speck of glittering light in the sky.
This was so long ago that I can't even remember who my friend was or where exactly we were. But I remember the scene and the sentiment. That was a wonderful day.
So anyways, speaking of airplanes, I bought my plane ticket to Malaysia a while ago. As with any purchase, I did a lot of research. I started by searching some nifty sites like Hipmonk, Matrix Airfare Search, and Momondo. These were the best sites I found to start my search from. These sites are cool because they are aggregators which pull results from all over, but they also search a wide range of dates. They can tell you which airline and date has the cheapest ticket. When you're not on a fixed schedule, this is the way to go. So I started searching for flights from the nearest international airport to the capital of Malaysia, Kuala Lumpur. I figured that would be the cheapest. These sites also let you simultaneously search nearby airports too, so I included the nearest large airports. Only after a long time of checking and re-checking prices did I decide to check for flights from here to my actual destination, Penang. Lesson learned. I should have searched my direct route from the beginning, because the price to fly to Penang was exactly the same as to Kuala Lumpur. Once I figured out the cheapest destination and date and airline, I went directly to the airline's website to check the fare there. The price was better and the policies were more lenient and the fees for amending the ticket were lower. I ended up getting a one way ticket from the Big Decayed City to Penang on Cathay Pacific. This is one of the better airlines out there, but also had the lowest price. Funny world.
On the downside, the whole journey will take about two days of travel time. I'll have an extended layover in Hong Kong, during which I expect I will become very familiar with their airport.
One thing to note about booking with Cathay Pacific (and maybe all the others) is their fare prices give a warning that there are only a few seats left at that price. Maybe that's true sometimes, but this time they seemed to be fibbing. I went back and checked the price a number of days as I debated and it stayed the same. I just went back and checked as of this writing and the price rose a bit, but is still reasonable. The price rose about 3.5% three weeks before the departure date, and about 5.5% now one and a half weeks out.
In a week and a half a whole bunch of emotions will be on my plane to Penang, and a lot of them will be from me.
This was so long ago that I can't even remember who my friend was or where exactly we were. But I remember the scene and the sentiment. That was a wonderful day.
So anyways, speaking of airplanes, I bought my plane ticket to Malaysia a while ago. As with any purchase, I did a lot of research. I started by searching some nifty sites like Hipmonk, Matrix Airfare Search, and Momondo. These were the best sites I found to start my search from. These sites are cool because they are aggregators which pull results from all over, but they also search a wide range of dates. They can tell you which airline and date has the cheapest ticket. When you're not on a fixed schedule, this is the way to go. So I started searching for flights from the nearest international airport to the capital of Malaysia, Kuala Lumpur. I figured that would be the cheapest. These sites also let you simultaneously search nearby airports too, so I included the nearest large airports. Only after a long time of checking and re-checking prices did I decide to check for flights from here to my actual destination, Penang. Lesson learned. I should have searched my direct route from the beginning, because the price to fly to Penang was exactly the same as to Kuala Lumpur. Once I figured out the cheapest destination and date and airline, I went directly to the airline's website to check the fare there. The price was better and the policies were more lenient and the fees for amending the ticket were lower. I ended up getting a one way ticket from the Big Decayed City to Penang on Cathay Pacific. This is one of the better airlines out there, but also had the lowest price. Funny world.
On the downside, the whole journey will take about two days of travel time. I'll have an extended layover in Hong Kong, during which I expect I will become very familiar with their airport.
One thing to note about booking with Cathay Pacific (and maybe all the others) is their fare prices give a warning that there are only a few seats left at that price. Maybe that's true sometimes, but this time they seemed to be fibbing. I went back and checked the price a number of days as I debated and it stayed the same. I just went back and checked as of this writing and the price rose a bit, but is still reasonable. The price rose about 3.5% three weeks before the departure date, and about 5.5% now one and a half weeks out.
In a week and a half a whole bunch of emotions will be on my plane to Penang, and a lot of them will be from me.
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