Dave Ramsey's debt Snow Ball Method - how good is it?

Dave Ramsey recommends using the Debt Snowball Method. 


That means to knock out the debts one by one starting with the smallest without worrying about the interest rates (unless there are two debts with similar payoffs, then you take the highest interest first). 

You are supposed to attack the smallest debt and keep paying the minimum payments on all other debts. After the first debt is payed off, you apply the additional payments to the next one. 

This method will definitely work - at some point you will pay off the debt if you stick with the payments. But is it the best method? 

The trade off will be some $ versus increased motivation. This would work best for people with multiple debts who start to lose overview and motivation and are about to give up. 

For anyone with enough motivation and who is less prone to panicking, it would make sense to go with the highest interest debt first. Since it is a trade of $ versus increased motivation, for those people the $ will be more useful than additional motivation. 


I made calculations to illustrate the difference between the two methods: the Snow Ball Method and the method where you pay the highest % debt first. 
I used multiple calculators. The calculations  are not extremely exact, but good enough to get the picture. 

Debts:
$1,000 at 4%
$10,000 at 10%
$20,000 at 18%
Minimum payments are approximately 2% of the loan (that is what the credit card companies are using for their minimum payment calculations).


Snow Ball Method

1. We start with the smallest debt, disregarding the interest rates. 

Starting with $1,000 at 4%. Minimum payment is $18.42 (approximately 2% of the loan). 
We apply extra payments of $100 per month. 
Total payed for this loan: $1,016.
Time it took to pay it off: 9 months. 


After 9 months, the first $1,000 loan is paid off. The extra payment of $100 can now be added as extra payment for the second loan of $10,000 at 10%. 

During those 9 months the minimum payments were still paid on the other two loans. 
After 9 months the $10,000 loan at 10% shrank to $8,997 and the payments plus interest amounted to $1,718 for that time.
The third loan of $20,000 and 18% shrank to $19,117 and the minimum payments plus interest were $3,528.

After 9 months the total paid for all loans is $6,262.

2. Now we start to add extra payments to the second loan which is now $8,997. 
We can add $118 of extra payments (extra payment of $100 for the first loan and the minimum monthly payment of the first loan of $18). 
The time to pay it off is 36 months. 
The total payment will be $10,347, including $1,350 in interest. 

During those 36 months the last $20,000 loan was still needing minimum payments and it shrunk now to $15,961. 
Now after 45 months (9 months for the first loan and 36 months for the second loan) the total payments are $16,154. 

3. Now  we start paying off the last loan, originally $20,000 at 18% which is now $15,961.
The extra payments are now $310. The time to pay it off is 28 months. 
The total amount paid in these 28 months is $19,580. 

Totals for the Snow Ball Method:
$1,000 loan: $1,016, 9 months
$10,000 loan: $1,717 and $10,347, additional 36 months
$20,000 loan: $3,528, $16,154 and $19,580, additional 28 months
Total payments: $52,342
Total time to pay off: 73 months or 6.08 years


Highest Interest First Method 

1. The highest interest loan will be paid off first. 

That is the $20,000 at 18%.
With $100, extra monthly payments it will take 58 months and the total payment is $30,032.

During those 58 months the other two loans required minimum payments. 

The smallest loan of $1,000: only $203 are left to pay and $913 were payed in total.
The second loan of $10,000: it shrunk to $5,062.
The total paid during those 58 months was $8,463.

2. Now we focus on the second loan with 10% interest. 
The second loan already shrunk to $5,062. 
While paying off the second loan, the smallest loan took care of itself. There were only $203 left to pay. It was completed in a few months. 

It took 9 months and the total payments for the second loan were $5,262.

Totals for the Highest Interest First Method 
:
$20,000 loan: $30,032, 58 months
$10,000 loan: $8,260, and 5,262, additional 9 months
$1,000 loan: $1,126, 0 extra months, it was paid off with minimum payments only wile paying of the other two loans
Total payments: $44,680
Total time to pay off: 67 months or 5.6 years

So it is $52,342 versus $44,680. The Highest Interest First Method wins. 

Dave Ramsey's philosophy on debt - are you his target audience?

M. asked me: Dave Ramsey's philosophy on debt - do you agree? He recommends to delay any retirement contributions or filling up the emergency fund until all debt is paid off. He also doesn't recommend to use credit cards. I don't understand what speaks against using them, collecting the rewards but paying them off each months? 


I heard of Dave Ramsey a bit on some of the FIRE blogs, but I didn't look up his philosophies before.
So who is Dave Ramsey? Per wikipedia, he was in the real estate business and after some successes and failures he started counseling couples at his local church and developed a set materials based partially on his own experience and partially others. He published books and has significant presence in the media.


Here are his 7 Baby Steps to financial freedom, which you can read in their completion on his website here.

Dave Ramsey's 7 Baby Steps:

Baby Step 1 – $1,000 to start an Emergency Fund

Baby Step 2 – Pay off all debt using the Debt Snowball
Baby Step 3 – 3 to 6 months of expenses in savings
Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement

Baby Step 5 – College funding for children
Baby Step 6 – Pay off home early
Baby Step 7 – Build wealth and give!


M. has the impression that Dave Ramsey suggests to follow the steps one after another. And she doubts that it would make sense. 

Let's see what would make sense. 

Imagine yourself giving recommendations to someone. Any recommendations. The structure of your recommendations will depend on if you are talking to a child or to an adult.  

The more background knowledge and resources the person has, the more nuanced will be your recommendations. In addition, it will also be limited by the amount of your own knowledge. 

For example if you talk to someone who just starts his first job, with very limited knowledge about finances and who maybe never heard of emergency fund, Dave Ramsey's steps could be great. They sound simple to follow and they are not too many. 

But the more people know, the more questions they will have and the more they will think for themselves. They will test the suggestions to agree or disagree with them. Those 7 simple steps may not be sufficient for people with more background knowledge.  

Target audience is the key.

You can check it if you are Dave's Ramsey's target audience. 
If some information in those steps is entirely new to you, you may be his target audience.

If you see nothing absolutely new, and if you start thinking and maybe questioning some of the mentioned strategies, you are not his target audience. You have grown beyond that.


You see that the Step 1 is about starting an emergency fund with $1,000. Yes, everyone has to start somewhere and that would be a good start. 

Trying to pay off all debt before putting anything into the 401k will not always be the smartest thing to do. If your employer contributes to your 401k too (many do that), you would not get that additional money if you don't contribute anything yourself (see my post here).

To me it looks like after the completion of Step 1, all other Steps can be taken care of at the same time. 
Paying off mortgage and other debt can go hand in hand with maxing out your retirement accounts. Unless your debt/income ratio very bad, which will require some special handling. 

Organizing your personal finances is not about winning in every area immediately. It is about optimizing it for your personal situation and sometimes trying to lose the minimum amount because sometimes losses are inevitable. 

Once you get used to the idea that it is not possible to win everywhere, the expectations will adjust to "realistic". Realistic expectations will reduce your decision making stress, especially the fear of missing out on something. 

By ranking your priorities - pay off all debt, max out 401k, or pay off your mortgage, if you miss out on something, that will be the area of your least priority. 

How to determine the priorities?

1. If paying off debt is your least priority, you can pay only the minimum payments for the rest of your life. It will not bother you very much that your debt will still be there when you die and it will be counted against the inheritance if there will be any. 

2. If you think that you will not live very long and don't want to die with a lot of unused money, retirement accounts may not be your first priority. But if you don't die early, you will have to work until you die or until you are so sick that you have to retire, hoping that the social security will be enough. 

3. If you are sure that your life will always go as planned and your salary situation will always stay stable to pay off your 30 year mortgage as scheduled, you can just go with regular payments without any extra principal payments.

Those descriptions are extreme and don't really apply to high income professionals. But they can help you to decide what would be the least comfortable option for you. If all of those scare you equally, you may attack all three of them at the same time equally.  

Your strongest fear will determine your highest priority. The others will follow in order of decreasing fear.   

You can work toward minimizing all three but at a different percentage for each. If mortgage bothers you most, allocate the majority of the additional payments toward the mortgage. If it is debt, allocate more toward debt. 

My priorities were 1. Debt, 2. Retirement funds, 3. Mortgage. 
According to that I started making extra payments to the mortgage only after retirement contributions were maxed out. 

I could shrink Dave Ramsey's 7 Steps to only 2 Steps:

1. Start an emergency fund (I had $2,000 in my emergency fund before even thinking about anything else).
2. Assess your debt, your retirement accounts and your mortgage. What is the highest priority for you? Allocate % accordingly. Re-evaluate every year.  


Regarding using credit cards: to me, nothing speaks against using them for cash back or points as long as you pay them off each month. The cards are not evil just by themselves. It is the lack of self-discipline and organization. If you can make sure to pay them off every months, there is no problem. It is like giving a little child a toy with small parts he can chock on. He doesn't understand. There is no danger to give anything with small parts to an adult who knows not to swallow them or to stuck them up the nose. 

All my credit cards give me cash back.  I don't want worry about missing a payment while traveling, so they are all on auto pay. 

But again, think of Dave Ramsey's target audience - people with limited knowledge in personal finance. 

Here is another interesting topic related to Dave Ramsey - his recommended Debt Snowball Method. He recommends to reduce the debts one by one starting with the smallest without worrying about the interest rates. Is it really a better way? I made my calculations, see my post about the Debt Snowball Method here. 

How I would pick a financial advisor

You should be able to trust your financial advisor. 
For me, since I trust almost nobody, it is very difficult. 


I have one financial advisor which comes for free together with my employer related 401k. Do I trust him? No. 

He didn't offer his additional services outside 401k yet. But if/when he asks, I will have a serious talk with him. 

Just imagine you are thinking about consulting a dietitian. You would definitely have to see how he looks like. To see with your own eyes if he is successful himself in the assumed area of his expertise of weight loss and weight maintenance. 
If he looks slim, you would interview him to see if his experience is real and he is not just someone 20 years old fresh out of a dietitians school and had never had any weight problems himself. 
You would like to see the real results of the strategies he can offer. 

The same is with the financial advisor for me. 
His financial strategies and results will not be as obvious as the body of the dietitian. 
So I would have to ask him to provide his own results for me before I can trust him. Especially I would focus on how the accounts were handled just before and during the last recession. 
Anyone can talk. I would ask to see the results. 

But I don't think he will go for it and show me the results. He probably would say that this information is too personal or something like that. 
And I probably wouldn't insist if he is still against it after I explain the example with the dietitian to him. 


I know, some would bring the arguments against it, such as: a doctor who is healing a particular disease doesn't have be sick with it himself. He can still heal it going with the treatment guidelines. I agree with that. 

A financial advisor can give you general "treatment guidelines" for your finances. But those guidelines are not very difficult. You can gather that information yourself. 

I would compare a personalized financial advise to a opinion of a medical expert. Like one on some specific topic where the general information is not sufficient anymore. 
What you usually get from financial advisers is the general information. If your financial situation is very complicated, that can be compared to some complicated disease where you need an expert medical advise. 

For that reason I will probably stay without a financial advisor, at least for now. My situation is not complicated and I already have sufficient general financial knowledge. 
Maybe my expectations of a financial advisor are too high. 





  

Update on my "Challenge 102" - December 2018

There was an interesting effect I got from starting this challenge. 
In many ways I was just the same as many other people - struggling to lose weight which was slowly but surely creeping up.

After starting "Challenge 102" I stopped focusing on weight. My thoughts went deeper. Much deeper. 
Thinking my deeper thoughts I used my already available knowledge on the human body processes but suddenly the puzzle pieces became strangely rearranged. Suddenly I saw everything in a different new light. 

After applying my new understanding I lost weight without any struggle. 
I am physically stronger than I ever was and I wasn't as strong even in my twenties. I always was a weakling. 

My body shape has changed. Sometimes I look at it and can't believe it is my body. It is like I am living in a parallel reality where I got a different body. 

I always thought: genes are genes, you can't do much. And yes, genes are genes, but there was a hidden capacity I didn't know about and that is quite amazing. 

The phrase "I don't have anything to wear" doesn't exist for me anymore. I am happy.

This amazing transformation made me think about the mechanism behind this thoughts rearrangement which appears to be produced by asking a different question. 

What has actually happened? It looks like I stopped focusing on just one aspect of what I thought is a component of a healthy life. 
Instead I generated an overreaching goal: Leave to at least 102 years old. Achieving that goal already implies the underlying health. The answer to a question "What do I have to do do live that long?" came on its own and it was quite unexpected.

Now I am trying to deconstruct this example and apply it to another situation.
The example with the weight:
The conventional goal was "lose weight" as a representative for health.
The overreaching goal is "become at least 102 years old" which implies health as a major component.

What about money?
My conventional goal right now is to reach $3,000,000. It is a representative for financial freedom.
But what is the overreaching goal? The financial freedom? But comparing to the weight example that can't be my overreaching goal. The weight loss was representative for health, but the health was not the overreaching goal. I have to change magnification and see what is above the financial freedom. 

What do I want this freedom for? Having financial freedom  means that I will not bother by being dependant on work circumstances, on people, on people's opinions. But that is impossible when I live in a society. As long as I have connections and people I want to have relationships with, I will always have to adjust to some degree. And I don't mind that. I learned my ways and I like being in relationships with people. I also like my work. So relationship with others or work is not the factor. 

Maybe I want to reduce anxiety and have more fun. I want that much money primarily to feel safe. Feeling of safety is when you know that you will always have enough resources for your needs. What will I do when I know that I am safe? I will enjoy life? Is "Life joy" that overreaching goal where the financial freedom is a component, like health is a component for becoming 102 years old? 

It could be. 

Things that work, work fast. I started seeing the effects of my "Challenge 102" in about 5 months.
So if this new goal is defined correctly I could start seeing the effects in approximately the same time. I will add few months wiggle room and see what happens. 

So the results may come in May-September 2019. If nothing happens it will be either because of the wrong goal definition or maybe different goals require different times to work. 

I will think about it again in May-September 2019 and adjust. Of course I know that my interpretation of those mechanisms may be wrong, but  I will not know if I don't try. 

Thank you for your comments!

Thank you for very nice comments, guys!

I started this blog in September 2017 as a write up of information that I need to research for myself. Then one of my friends started to ask me financial questions which I found very interesting I and incorporated them as posts which usually start as "M. asked me".

Recently I started to see comments which are very positive. It is especially nice because I was not asking for any comments and I was not expecting any comments, sinse I am not producing any commercial material. 
I am glad that the information I collect and write up for myself is useful for someone else.

I have the comment moderation switched on so that no nonsense comments appear, something like "make money working from home" you can see on some blogs with unmoderated comments. But I have not had any of those yet.

I am not advertising anywhere. You can see the real time total blog view numbers on the right side which is at 3343 today. It is not much but it doesn't bother me. 


I do have some ads running but it is not a viable source of revenue because since the start of the blog they brought in $2.91.  Obviously this ad revenue is not a motivation for me to have this blog. But I will keep the ads out of curiosity to see if they will ever cover the blog costs which are $12 per year. The $12 are very tolerable and if I would classify this blog as a hobby it makes it a very cheap hobby. 

My main motivation is collecting reliable information which I research thoroughly myself because I trust so few people. I have to check everything myself, that always works best for me.

Why am I staying anonymous? I am writing down the information I have found and sometimes I also write down my thoughts to that. I like to write down my thoughts.
When I am anonymous, I can write what I really think. I am not bound by any need to keep my image because I don't have any. I really can write what I think. 
Only 5 people know who I am. 4 of them are not  interested in finances and they don't read my blog. I think that only one of them really reads it from time to time (that is M. who asks questions).

Basically I only use this blog for my personal needs and I am glad to see that it is useful for some people I don't even know. Thanks again for the nice comments!

How to pay for child's college? Does it still make sense to go to medical school?

Making a snow cat, December 2018 

I am not sure if my child will decide to go to college. It is very likely.

She is 8 and with determination she says that she wants to be a doctor. That means that there will be a college and maybe even a graduate school. If she chooses to go to college, it will be in about 10 years.

The college costs are rising. Per www.collegeboard.org the increase in college costs in the last ten years in 2018 dollars was $9,790 for private non-profit colleges and $4,910 for public colleges. 
The estimated costs for 2018-19 year for private non-profit college is $48,510 and $21,270 for public college. This includes room and board.

I used an inflation calculator and it looks like the increase is in keeping with the inflation of about 3% per year, at least for this data for the last 10 years. 
With the estimated 3% of inflation, the costs in the next 10 years will rise by approximately $20,000 to $78,740 for private college and by $9,000 to $35,183 for public college. 


If the pace of cost increase will not change, then in 2028 the costs will be accordingly $58,300 and $26,180 per year. Take that x4 for the 4 years of college and you will get $233,200 and $104,720 respectively.
If you add medical school, double it.


The physician's profession becomes less and less attractive with the recent increase in paperwork, new compliance hurdles, increasing costs of education and decreasing pay. Does it still make financial sense to become a doctor?

Taking the approximate education costs of $400,000, you will start working 6-7 years later than, for example a dietitian. The average dietitian's salary (per web search) is about the same as the resident salary. 

If as a dietitian you have approximately 45 productive years to work, as a physician you start later and have approximately 34 productive years. That is if you pick 65 as your retirement age.


If just as an example, you take a physician salary of $250,000 per year times 34 it will make $8,500,000. That is the money you will earn during the 34 work years.

The dietitian's salary of $50,000 taken x45, for the longer 45 years of working, will be $2,250,000.

Even including the high college debt the physician salary is still more attractive. These numbers are very approximate, not including inflation, raises or decreases. I did it just to see if the difference in total earnings even remotely makes sense. It looks like it still does.


Of course it is not just the money that makes you to choose a profession. When I told my mother that I have chosen pathology, she exclaimed sadly: "Why? Now I can't even tell the neighbors about that!  Why do you like the morgue? Who do you have that interest from?" And my father added gravely: "Are you doing it just for the money?"

I told my father that since his engineering genes didn't cross over to me, I had to do what I can. 
And since my mother opens every of her chickens that dies without an obvious cause, and calls me to ask what are the spots in that dead chicken's liver, I told her that she is basically "a chicken pathologist without a license".
My father agreed that you have to do what you can.
My mother was happy to discover that her interests are not that different from mine. And quickly everything was fine again.

I am curios what profession my daughter will pick. But in any case, there will be probably some college costs.


What are the options to save/pay for the college? 

Before making any decisions about supporting the child with the college costs one needs to make sure that his own financial well being including retirement is taken care of. After that I see following options:

1. Child will pay all costs. 
It would make sense to try to get stipends for which you need good grades and some outstanding extracurricular activities. The child's motivation to complete education will be high. Parents will have minimal or no costs.

2. Funding a 259 account.
That is doable but one needs to make sure there is enough motivation present to take the college seriously. One of the motivational ways may be the promise to pay for all college costs after college is competed but that will not work with the 529 account, because the costs have to be reimbursed in the same calendar  year.


3. Using gift to finance college costs.
3a. Each of the parents can give a cash gift of $15,000 (IRS reporting limit for 2018). That should cover $30,000 per year. The tuition can be paid directly to the institution and then it will not count as a gift.
3b. Gifts over the IRS limit are an option. Also the IRS allows taxpayers to give $75,000 into a 529 plan without paying tax or reducing the $11.2 million lifetime limit (see post on gift tax). 


4. Funding a custodial account.
There will be no penalty if the child doesn't go to college but the money will not be yours (like in 529 account) - you can't just take it back. It is officially your child's money. I have started one custodial account and which I plan to use for her wedding costs.

It also can be a combination of those methods.

Tricks for dealing with negative situations

M. asked me recently: How do you extract yourself from work drama? A work friend dragged me into one but I don't want to be in it. But I want to stay loyal to her.

M. doesn't want to be a part of the drama but wants to be loyal to her colleague. It sounds that M. doesn't want to take sides, but she wants to be liked by her colleague.

The main conflict here: M. wants to be liked but at the same time she wants to be herself by separating from other's opinions. Those two things are difficult to combine.  Difficult but possible.

I remember a situation when I was doing some rotations in Ireland as a medical student. The patient complained to me about the surgeon who was my supervisor. I couldn't really take anyone's side. By taking patient's side I would go against my boss. By taking surgeon's side I would go against the patient. Both could mean trouble for a medical student. 

A seasoned and very kind Irish nurse saw my helpless face, took me quietly to the side and told me: Don't take sides. Don't agree or disagree. Give some emotional support. Just say "Oh, dear, that is a terrible situation. I feel you."
I used it and indeed that was a neutral support phrase without making me to take any side.

Now I use it a lot at parties and weddings when people with not matching political views are passionately talking about recent political events. I have no goal or intent to change anyone's opinions or to convince them that they are wrong and I am right. Especially not at a wedding. 
Sometimes I don't even know who is wrong and who is right. 

They all can believe whatever they want. "Oh dear" and "I feel you" helps really me well.  I am not taking sides and at the same time I am not lying either. People like to talk and I let them talk. I might tell them what I think if they ask directly. But mostly I can redirect the question back to them, which is easy if you answer a question with another question.

Along the way I collected few more tricks about how to stay emotionally independent in "negative" situations.

1. Being able to listen to opinions different form your own, sometimes very different...

It is very helpful if you can listen to opinions of others which may be different and sometimes even the opposite of your own. When you start feeling inner diagreement, tell yourself: "It is not my way of thinking or doing things, but it sounds interesting" and after that just play a journalist and ask curious questions. Journalists don't necessary share the opinions and views of those they interview. But they still listen and ask questions.
Just because you don't argue, it doesn't automatically mean that you agree.

2. If you are pushed to an action, use a delay tactic
If someone asks you to make a decision on a spot, for example your financial advisor asks you to make a decision and you feel uncomfortable and are not ready to decide, just say: "It does sound very interesting. But I am not sure right now, I need more time to think about it." 
Some people may be very insisting and say: "What is there to think about?" You just repeat the same you just said: "As I just said, it does sound very interesting. But I am not sure right now, I need more time to think about it." You can repeat it indefinitely. They will feel a strong but polite resistance and will give up.

3. Be able to listen to critique without immediately fighting it 
Listen is the key word. You don't have to accept it. You can listen and evaluate if the advise is useful to you or not. 

Any unsolicited critique or advise is an attack. Use "marshal art" techniques to defend yourself. Step aside and let them fall. Say: "Thank you for you input, I appreciate it and I will think about it." Again, you don't agree or disagree and don't promice to change anything either.

4. Accept yourself as you are. 
With all your qualities. My parallel parking is pretty bad. Sometimes I get lost even with GPS. I get nauseated on roller coasters. 
There is no reason for me to hide that or to pretend to be stronger then I am.

If someone tells me: You can't park! I will answer: Yes, I can't park. And that is usually the end of the conversation. 

If someone who's definition of fun is a roller coaster ride will push me to "have fun" and to go on a roller coaster, it will be my own fault if I mess up the entire rest of my day after I get nauseated. 
Once you admit your weaknesses, life will become easier because there will be no more energy spent on pretending.


Have you noticed that none of the responses contain any lies or distorted truths. They are acknowledgment of received information, delaying of responses, or just acknowledgment of a fact without labeling the information as right or wrong. All of that is mainly avoiding or redirecting.

Tax advantaged accounts contribution changes in 2019

Contribution limits for 401k, 403b and most 457 plans are increased to $19,000.
For people over 50 - catch-up contributions are additional $6,000.

Traditional IRA and Roth IRA: $6,000.
For people over 50 - catch-up contributions are additional $6,000.

HSA: $3,500 for single and $7,000 for family.
For people over 55 - catch-up contributions are additional $1,000.

 

Gift tax - will it be ever applicable to you?

If you give a large cash gift to someone, it is useful to know the rules on taxation. The rules are very generous and it is very likely that you will never pay the gift tax. 

In 2019 the gift tax exclusion is $15,000 per person per year and $11,4 million per person per lifetime. A gift includes cash, stocks, real estate, land, vehicles.

Any gift below the exclusion limit doesn't have to be reported to IRS. 

Any gift above the exclusion will need the IRS Form 709 to disclose the gift at the time you file taxes.  Check if your state also requires you to report gifts over the limit (very few do).  
The person receiving the gift doesn't have to report the gift. 

If you give more than the limit, the amount over the limit will be recorded against the life time limit. So if you give your daughter $40,000 in one year, $15,000 will not be counted, and the sum exceeding that - the $25,000 will be reported and the records will be kept and will be counted against the life time limit. Later when she inherits your estate, her limits for estate tax will be lowered by that amount. 

If you (unlikely) use up your life time exclusions, you will have to pay the gift tax of 18%-40%. The person giving the gift will have to pay the tax.  

If gifted property is sold, a capital gains tax can be triggered.

If you add your child to your checking account, half of the money in the account will be considered a gift.

If you sell your relative a house below the market value, the difference will be taken out of the life time limit. 

Things that are not considered gifts:
- Anything given to a spouse (who is US citizen)
- Anything given to a dependent 
- Charitable or political donations
- Funds paid directly to medical service or health insurance provider, or funds paid directly to educational institutions (tuition only) on behalf of someone else


If you want to give someone a gift to help with education costs, you might give more than the yearly limit. The IRS allows taxpayers to give $75,000 into a 529 plan without paying tax or reducing the $11.4 million lifetime limit. 

What to do if your 60 days roll-over period is over and you still didn't finish the rollover?

There can be several reasons for the missed or prolonged rollover.

Not serious reasons

Forgetfulness, procrastination, laziness - nothing will help there. If you have no serious reason, you will have to pay taxes due and you will get them refunded after you file your tax return for that year.

Serious reasons
If one of the reasons below delayed your transfer, you can file the self-certification waiver which you will submit to the institution receiving the transfer. 

After 60 days allotted to the rollover are passed, the financial institution will not accept your rollover. 
The self-certification error is a form which you give to the institution to extend the rollover for another 30 days (safe harbor period for the reason stated in the form). 
The form is part of the IRS Revenue Procedure 2016-47 which you can google, download and fill out.  

To be granted the waiver you will need documentation supporting your claim that the rollover was not completed in time due to one of the qualifying reasons which are listed on the waiver page. 

   

Financial institution error

Copy and record the dates of all communications with both financial institutions. If the process takes too long you will have evidence that it was not your fault. 

It will not work if you wait with the initiating the rollover just one or two weeks before the deadline because it is obvious to anyone that such process may take longer than 2 weeks. Our rollover took 3 weeks (see the rollover update post here).  

Unusual circumstances

You have to have evidence that you were physically prevented from being able to complete the rollover.  Examples are severe home damage, serious illness (for example dementia or hospitalization), death in the family or of the person who is performing rollover, misplaced check or incarceration.

Postal error

Make sure to verify the address of the receiving institution before mailing the check. It is best to mail with tracking number. I used tracking number. The mail had 3 days delay for an unknown reason but I could follow the status every day.
Tracking also helped me to speed up the processes at the receiving institution. I emailed the customer service the day I saw that the letter was received and asked to process the transfer timely. I received an email response and the the transfer was processed on the same day.