Financial Planning

Merging Your Money When You Marry

If you’re newly engaged or just tied the knot – Congratulations! Getting married is exciting, but it can also come with several challenges. One challenge that you and your spouse will have to face is how to merge your finances. Planning carefully and communicating clearly are important, because the financial decisions that you make now can have a lasting impact on your future.

Discuss your financial goals

The first step in mapping out your financial future together is to discuss your financial goals. Start by making a list of your short-term goals (e.g., paying off wedding debt, new car, vacation) and long-term goals (e.g., having children, your children's college education, retirement). Then, determine which goals are most important to you. Once you've identified the goals that are a priority, you can focus your energy on achieving them.

Prepare a budget

Next, you should prepare a budget that lists all of your income and expenses over a certain time period (e.g., monthly, annually). You can designate one spouse to be in charge of managing the budget, or you can take turns keeping records and paying the bills. If both you and your spouse are going to be involved, make sure that you develop a record-keeping system that both of you understand. And remember to keep your records in a joint filing system so that both of you can easily locate important documents.

Begin by listing your sources of income (e.g., salaries and wages, interest, dividends). Then, list your expenses (it may be helpful to review several months of entries in your checkbook and credit card bills). Add them up and compare the two totals. Hopefully, you get a positive number, meaning that you spend less than you earn. If not, review your expenses and see where you can cut down on your spending.

Bank accounts--separate or joint?

At some point, you and your spouse will have to decide whether to combine your bank accounts or keep them separate. Maintaining a joint account does have advantages, such as easier record keeping and lower maintenance fees. However, it's sometimes more difficult to keep track of how much money is in a joint account when two individuals have access to it. Of course, you could avoid this problem by making sure that you tell each other every time you write a check or withdraw funds from the account. Or, you could always decide to maintain separate accounts.

Credit cards

If you're thinking about adding your name to your spouse's credit card accounts, think again. When you and your spouse have joint credit, both of you will become responsible for 100 percent of the credit card debt. In addition, if one of you has poor credit, it will negatively impact the credit rating of the other.

If you or your spouse does not qualify for a card because of poor credit, and you are willing to give your spouse account privileges anyway, you can make your spouse an authorized user of your credit card. An authorized user is not a joint cardholder and is therefore not liable for any amounts charged to the account. Also, the account activity won't show up on the authorized user's credit record. But remember, you remain responsible for the account.

Insurance

If you and your spouse have separate health insurance coverage, you'll want to do a cost/benefit analysis of each plan to see if you should continue to keep your health coverage separate. For example, if your spouse's health plan has a higher deductible and/or co-payments or fewer benefits than those offered by your plan, he or she may want to join your health plan instead. You'll also want to compare the rate for one family plan against the cost of two single plans.

It's a good idea to examine your auto insurance coverage, too. If you and your spouse own separate cars, you may have different auto insurance carriers. Consider pooling your auto insurance policies with one company; many insurance companies will give you a discount if you insure more than one car with them. If one of you has a poor driving record, however, make sure that changing companies won't mean paying a higher premium.

Employer-sponsored retirement plans

If both you and your spouse participate in an employer-sponsored retirement plan, you should be aware of each plan's characteristics. Review each plan together carefully and determine which plan provides the best benefits. If you can afford it, you should each participate to the maximum in your own plan. If your current cash flow is limited, you can make one plan the focus of your retirement strategy.

Choosing The Right Method For You

The most important thing in deciding how to combine finances is to be honest about your feelings from the start and always keep an open line of communication. Money is frequently considered to be the biggest strain on relationships, but working together to find solutions that work for everyone can reduce some of the stress.

If you’re looking for some objective outside perspective to help make some of these tough decisions, please feel free to schedule a free consultation. We also have a great checklist for newlyweds – click here to get your copy.

Financial Planning: Helping You See The Big Picture

As a financial planner, it always shocks me to hear some of the reasons people have for not having a financial plan in place.

“I don’t have enough money yet”

“I’m too young”

“It’s too expensive”

The question I usually respond with is: “Do you picture yourself owning a new home, launching a business, starting a family or retiring comfortably?”  These are just a few of the financial goals that may be important to you, and each comes with a price tag.

This is where financial planning comes in. Financial planning helps you target your goals by evaluating your whole financial picture and outlining strategies that are tailored to your individual needs and available resources.

Why is financial planning important?

A financial plan serves as a framework for organizing all of the pieces of your financial life. With a financial plan in place, you'll be able to focus on your goals and understand what it will take to reach them.

One of the main benefits of having a financial plan is that it can help you balance competing financial priorities. A financial plan will clearly show you how your financial goals are related--for example, how saving for your children's college education might impact your ability to save for retirement. Then you can use that information to decide how to prioritize your goals, implement specific strategies, and choose suitable products or services. Best of all, you'll know that your financial life is headed in the right direction.

The financial planning process

Creating and implementing a comprehensive financial plan generally involves working with financial professionals to:

 
  • Develop a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, your investment portfolio, your tax exposure, and your estate plan

  • Establish and prioritize financial goals and time frames for achieving these goals

  • Implement strategies that address your current financial weaknesses and build on your financial strengths

  • Choose specific products and services that are tailored to help meet your financial objectives

  • Monitor your plan, making adjustments as your goals, time frames, or circumstances change

 

Why can't I do it myself?

If you have enough time and knowledge - you absolutely can. Keep in mind that developing a comprehensive financial plan typically require expertise in several areas. It is also difficult to give yourself objective advice. A financial professional can give you, fact-based information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered.

Staying on track

The financial planning process doesn't end once your initial plan has been created. Your plan should be reviewed at least once a year to make sure that it's up-to-date. It's also possible that you'll need to modify your plan due to changes in your personal circumstances or the economy.

Common questions about financial planning

 

What if I'm too busy?

Don't wait until you're in the midst of a financial crisis or 10 years out from retirement before beginning the planning process. The sooner you start, the more options you may have.

Is it expensive?

This a typical assumption based on some stereotypes that are quickly becoming outdated. If you envision an older man in a fancy office who profits off the financial products you buy — well, it’s probably time to take another look. We’ve redesigned the cost to be more affordable for the younger generations. 

Is the financial planning process complicated?

Each financial plan is tailored to the needs of the individual, so how complicated the process will be depends on your individual circumstances. But no matter what type of help you need, the goal is to make the process as easy as possible.

What if my spouse and I disagree?

This is more common than you would think, but I’ve been trained to listen to your concerns, identify any underlying issues, and help you find common ground.

 

Conclusion

Your financial health — just like the physical or mental kind — takes time and effort. We all have financial goals and, in many cases, there are several that require our attention at any given time. Having a well-designed financial plan in place will help you navigate those important decisions and keep you on track. By starting earlier in life, you have the advantage of time. Don’t let your “fears” stand in the way of making real progress.

As a financial planner, my goal is to make every effort to help you make smart financial decisions and hopefully avoid making crucial mistakes. I’m invested in your success. If you’re on the fence, please reach out and ask me questions.

How Do Restricted Stock Units Work?

A question I often get from clients and friends – “I have these things called Restricted Stock Units (RSUs)what are they and how do they work?”

An RSU is a contractual right to receive company shares or an equivalent cash payment at some point in the future. They are an increasingly popular form of equity award offered by companies of all shapes and sizes. Many companies here in the Raleigh-Durham area have shifted to RSUs because they are administratively convenient, are “easy” for employees to understand, and can be structured in a way that helps attract and retain key employees and drive performance.

So with that in mind, let’s take a closer look at what RSUs are and how they can work for you.

You’ve been granted RSUs: Now what?

If you’ve been granted RSUs, congratulations! It’s most certainly not a bad thing! You have likely been given this equity award because you are valued, and your employer wants you to stay with the company and meet certain performance benchmarks. But it’s important to understand that your employer has merely promised to deliver shares (or an equivalent cash payment) to you at a future date. As such, RSUs can be thought of as a form of deferred compensation.

You do not owe any tax at the time of the RSU grant. In fact, you will not owe tax until you actually receive the shares. RSUs typically come with a vesting schedule, and there may be performance conditions that must be satisfied before the stock can be delivered. Unlike a stock option, your RSU has intrinsic value; whether the value of the company increases or decreases after the grant, the stock will have value and can never be “out of the money.”

What happens when RSUs vest?

Once RSUs vest, they will be delivered to you and you will recognize ordinary income based on the fair market value of the stock at the time of delivery. Unlike with stock options, no analysis regarding when to exercise is needed. In most cases, the employer will withhold shares in order to cover the tax, delivering the net shares to you. You may have additional options for withholding, you may be able to elect to receive cash instead of stock, or you may be able to defer the delivery of the shares beyond the vesting date. Be sure to check your plan document to ensure that you understand all of your options.

Once you own the employer stock, you are free to hold it or sell it immediately. Your cost basis in the shares is the fair market value on the date they were delivered. So, if you sell the shares immediately, there will be no additional taxable gain. But if you choose to hold the shares and sell them down the road? You would pay capital gains tax on any gains earned since you acquired the shares; if the shares decrease in value, you would have a capital loss that you can use to offset other capital gains.

Planning questions you should be asking

 

·       Should I hold or sell?

·       What happens if I leave the company?

·       What if I’m planning to retire?

·       What’s the risk?

·       Will I be pushed into a higher tax bracket?

 

A valuable benefit

RSUs can be a valuable piece of an employee benefits package, especially when they are incorporated into a financial plan. As you can see – there are lots of moving parts and several important questions that need to be reviewed. Working with a financial advisor and tax professional can help you plan accordingly and make the most out of your RSUs.

Still confused or want to talk about your situation – contact us and we’d be happy to schedule a time that is convenient for you.

Are You Maximizing Your Employee Benefits?

For many of you, your salary and bonus are likely just a part of the total compensation you receive from your employer. Why not give yourself a raise by learning about and taking advantage of all your company benefits? This article will help you ensure that you’re making the most of the benefits your employer offers.

Retirement Plans

Your company’s 401(k) plan can play an important role in your future financial security. If your employer matches contributions, you should be contributing at least enough to get the maximum match. If you plan to max out your contributions, make sure you don’t do so too early in the year and potentially miss out on the matching.

For those of you that are considered highly compensated, your employer may also provide a nonqualified deferred compensation plan with matching to cover wages above the qualified limit. It is important to find out how the plans interact and how you can maximize your benefit.

Stock Options and RSUs

Some companies still grant employee stock options as a form of compensation. These can add significant value to your long-term financial success, but they can be complicated and have additional risk that needs to be considered.

 
  • Risk of termination before vesting

  • Risk of market volatility in the stock price

  • Risk of asset concentration

 

There are also several tax considerations that need to be evaluated when working with stock options and RSUs. I recommend working with a financial advisor to determine what works best for you.

Health Insurance

Many companies subsidize health insurance coverage for their employees, and some offer a choice of different plans.

 
  • HMOs generally have lower premiums and lower costs to access health care but limit which providers you can see.

  • PPOs allow you to choose any physician, but they charge higher fees if you decide to see an out-of-network provider.

 

Before selecting a plan, I recommend confirming that your doctor is a preferred provider.

If one of your health insurance choices is a high-deductible health plan, you may have the option to set aside money in a health savings account (HSA) to pay for qualified health care expenses on a pretax basis. HSA contributions remain in your account until you use them, distributions for qualified medical expenses are tax-free, and the account is portable. Some companies even contribute to employees’ HSA accounts.

Flexible Spending Account

Your company may offer flexible spending accounts (FSAs) for a variety of expenses, including health care, dependent care, transportation, and parking. If you have any of these qualified expenses, you may benefit by having pretax money taken out of your paycheck to fund them. For example, if it costs you $100 per month to park at work, you can set aside that amount in an FSA to cover the expense. By contrast, you’d have to earn $157.36 to pay for this expense after taxes, assuming a total tax rate of 36.45 percent.

Life and Disability Insurance

Some employers provide life insurance coverage equal to a multiple of your salary. In many cases you may be able to purchase group supplemental life insurance coverage through payroll deductions. While this can be convenient, the coverage amounts and features may be limited, so I recommend shopping the market to ensure that you’re getting coverage at the best price.

Your employer may also pay for long-term disability insurance. LTD payments from an employer-paid policy are taxable to you; if you pay the premiums, you will receive LTD payments tax-free. If your company gives you the option of paying for your own LTD coverage, you should weigh the cost of covering the premiums yourself versus the benefit of receiving tax-free payments.

Additional Benefits

Some companies offer employee discounts on everything from wireless plans and vision care to movie tickets, hotels, and car rentals. Your employer may also offer reimbursement for certain education expenses.

I see far too often employees missing out on key employer benefits. Working with an adviser and doing a little research could be well worth your while! Contact Us today so we can help you maximize your benefits.

Take Charge of Your Student Debt Repayment Plan

Student loans are a lot like a ball and chain, slowing down what could be a perfectly good financial plan. Outstanding student loan debt in the United States has tripled over the last decade, surpassing both auto and credit card debt to take second place behind housing debt as the most common type of household debt. Today, more than 44 million Americans collectively owe more than $1.4 trillion in student debt. Here are some strategies to pay it off.

Look to your employer for help

The first place to look for help is your employer. While only about 4% of employers offer student debt assistance as an employee benefit, it's predicted that more employers will offer this benefit in the future to attract and retain talent.

Many employers are targeting a student debt assistance benefit of $100 per month.3 That doesn't sound like much, but it adds up. For example, an employee with $31,000 in student loans who is paying them off over 10 years at a 6% interest rate would save about $3,000 in interest and get out of debt two and a half years faster.

Understand all your repayment options

Unfortunately, your student loans aren't going away. But you might be able to choose a repayment option that works best for you. The repayment options available to you will depend on whether you have federal or private student loans. Generally, the federal government offers a broader array of repayment options than private lenders. The following payment options are for federal student loans. (If you have private loans, check with your lender to see which options are available.)

 

Standard plan: You pay a certain amount each month over a 10-year term. If your interest rate is fixed, you'll pay a fixed amount each month; if your interest rate is variable, your monthly payment will change from year to year (but it will be the same each month for the 12 months that a certain interest rate is in effect).

Extended plan: You extend the time you have to pay the loan, typically anywhere from 15 to 30 years. Your monthly payment is lower than it would be under a standard plan, but you'll pay more interest over the life of the loan because the repayment period is longer.

You have $31,000 in student loans with a 6% fixed interest rate. Under a standard plan, your monthly payment would be $344, and your total payment over the term of the loan would be $41,300, of which $10,300 (25%) is interest. Under an extended plan, if the term were increased to 20 years, your monthly payment would be $222, but your total payment over the term of the loan would be $53,302, of which $22,302 (42%) is interest.

Graduated plan: Payments start out low in the early years of the loan, then increase in the later years of the loan. With some graduated repayment plans, the initial lower payment includes both principal and interest, while under other plans the initial lower payment includes interest only.

Income-driven repayment plan: Your monthly payment is based on your income and family size. The federal government offers four income-driven repayment plans for federal student loans only:

 
 
  • Pay As You Earn (PAYE)

  • Revised Pay As You Earn (REPAYE)

  • Income-Based Repayment (IBR)

  • Income-Contingent Repayment (ICR)

 
 

You aren't automatically eligible for these plans; you need to fill out an application (and reapply each year). Depending on the plan, your monthly payment is set between 10% and 20% of your discretionary income, and any remaining loan balance is forgiven at the end of the repayment period (generally 20 or 25 years depending on the plan, but 10 years for borrowers in the Public Service Loan Forgiveness Program). For more information on the nuances of these plans or to apply for an income-driven plan, visit the federal student aid website at studentaid.ed.gov.

 

Can you refinance?

Yes, but only with a new private loan. (There is a federal consolidation loan, but that is different.) The main reason for trying to refinance your federal and/or private student loans into a new private loan is to obtain a lower interest rate. You'll need to shop around to see what's available.

If you refinance, your old loans will go away and you will be bound by the terms and conditions of your new private loan. If you had federal student loans, this means you will lose any income-driven repayment options.

Watch out for repayment scams

Beware of scammers contacting you to say that a special federal loan assistance program can permanently reduce your monthly payments and is available for an initial fee or ongoing monthly payments. There is no fee to apply for any federal repayment plan.

Still Need Help?

Student loans can be complicated and can have a significant impact on your long-term financial success. It’s important to develop the right plan for your unique situation. Don’t let your student loan debt derail your financial progress Contact Us for a free consultation.

How Accurate is Your W-4 Withholding?

As you are probably aware, in most cases federal income taxes are withheld from your paychecks. But did you know just how much control you have over the amount that is actually being withheld? In this blog post we’ll discuss the importance of having an accurate W-4 holding, including how recent changes to the tax code present a unique situation for taxpayers in 2018.

W-4 Breakdown

Let’s start with how the W-4 actually works. In a nutshell, your employer adjusts your gross pay and calculates how much federal income tax to withhold from your paycheck based on the withholding allowances you claim on Internal Revenue Service (IRS) Form W-4 (Employee’s Withholding Allowance Certificate). Each allowance you claim exempts a portion of your income from federal tax withholding and thereby increases what you receive in your paycheck. So, if you claim too many allowances, not enough tax will be withheld from your paycheck, and you will owe the IRS come April 15. If you claim too few allowances? An unnecessarily high amount of tax will be withheld from your paycheck, and you will get a tax refund.

Of course, no one wants to get hit with a large tax bill. But getting a tax refund is not necessarily a better option. It simply means you have paid more than your share in federal income tax and essentially have given the federal government an interest-free loan. As such, the optimal result from a cash flow and financial planning standpoint is to land right in the middle: maximizing income received in each paycheck without owing additional taxes when you file.

Time to check your W-4 Withholding

Best practice is to review your W-4 annually. It is especially important to check when you experience a major life event, such as marriage, birth or adoption of a child, a spouse getting or losing a job, or a significant pay raise or pay cut. Each of these events can directly affect the amount of tax you will owe. This year presents a unique situation, however, because the implementation of the Tax Cut and Jobs Act means that everyone’s tax situation has changed in 2018. With seven new income tax brackets, many people, making the same income in 2018 that they did in 2017, will find themselves in a lower tax bracket. This means more money in their paychecks in 2018 compared with 2017. The new tax law also increased the standard deductions across the board and eliminated miscellaneous itemized deductions.

So what does this mean to you?

The amount you will owe in federal income tax, the deductions you will be able to take, and the amount that should be withheld from your paycheck will have all likely changed.

Finding your “Sweet Spot”

The simplest and most accurate way to determine your appropriate W-4 withholding election is to use the IRS Withholding Calculator, available on the IRS’s website. Keep in mind that this calculator is designed for most taxpayers.

The calculator will ask for your filing status, your family situation, your income, your current withholding, and other information that could affect your 2018 taxes. If the calculator recommends adjusting your withholding, there’s no need to wait! You can adjust your W-4 withholding with your employer at any time, and the change will be reflected in your future paychecks.

Want to learn more?

Of course, this is a general discussion of ensuring accurate W-4 withholdings. If you have additional questions or would like more in-depth information about your withholding, feel free to reach out to me for a free consultation.

 

2018 Commonwealth Financial Network®

Building Your Budget: Start With The Basics

A budget is an estimate of income and expenses for a set period of time. Creating a budget can help you get control of your finances and achieve important financial goals, including buying a car, saving for college, purchasing a home, and providing for a family. It can also be beneficial in meeting unexpected financial challenges, such as losing a job. Honestly I know this doesn't sound fun or exciting, but budgeting will help you improve every aspect of your financial life, and the earlier you begin, the better off you’ll be.

Write down your financial goals.

Before you start evaluating how much you can actually save each month to achieve your important goals, you should consider setting some near-term financial goals. This is essential to tracking your progress. So you need to:

 

· Determine what percentage of your paycheck you would like to save.

· Decide how much money you would like to save each month or how much money you need to save in order to achieve one of your longer-term financial goals.

· Consider how much money you want to allocate to future purchases, as well as how much you want to contribute to an emergency fund and a retirement plan.

 

Whether your goal is to put away a couple of hundred—or a few thousand—dollars every year, you need to know what that amount is. Once you have a realistic idea regarding how much you’d like to save, review the steps below, which can help you determine precisely how much you actually can save.

Next Steps

 

1. Track your income for a month. Figure out how much you make per month. Think in terms of your net income, that is, the amount of money you actually take home (i.e., your net pay) after federal, state and local taxes; contributions to employer-sponsored health insurance; and so forth have been subtracted from your gross pay.

2. Track your expenses for a month. This is the most important step to budget creation. You should record every purchase you make—without exception. No dollar should escape accountability. If you bank online, it is extremely easy to track noncash expenses and debit card charges by simply exporting the information from your user login to a spreadsheet.  

3. Create spending categories. Split your expenses into luxury items and necessities. Necessities would include rent, groceries, car payments, insurance, utilities, and so on. Luxuries would include dining out, entertainment, and other unnecessary items (e.g., extra trips to Starbucks).

To be safe, you should include your saving goal as a necessary item, so you would be less likely to sacrifice saving for other luxuries. Excel is a wonderful tool for this because you can color code your expenses, making it more obvious to tell which type of expense is which.

4. Evaluate your budget. This is the final step in budget preparation. Take a good look at your expenses. Do you see numerous luxury items that you can live without? One benefit to having expenses displayed on an electronic spreadsheet is the ability to make quick and easy calculations. You can set limits on your spending based on the results of your calculations. 

 

Besides preparing yourself for big purchases later in life, your budget can help save you from going into debt in the event of an emergency that requires you to unexpectedly spend a large amount of money.

Check your budget frequently

Keep in mind that it’s important to check your budget frequently to be aware of any changes that may have occurred in your financial situation. Every three months is a good rule of thumb for tracking your spending habits. Not doing so could result in overspending, under saving, and therefore delaying your big financial goals.

What are you waiting for? Get started now!

Now that you know how valuable a budget can be to your financial future and achieving your dreams, what are you waiting for? No doubt you’ll want to begin a savings program as soon as possible. Begin by considering the steps outlined here. Our Wealth Wise Plan program would provide you with personalized financial portal to help you track, monitor and improve your budget and cash flow situation. Contact Us today!

Should You Consolidate Your Retirement Accounts?

If you’re like many of the young professionals I work with every day, myself included, you’ve probably had a few different jobs at this point in your career. In many cases you may have started saving for retirement using the available employer plan or even an individual retirement account (IRA). As you change jobs, it may make sense to consolidate all of your savings into one account to achieve a coordinated investment plan.

Why consolidate?

Consolidating your retirement accounts offers several potential benefits:

 

Less administrative hassle. You’ll receive just one account statement, making it easier to keep track of your funds. Consolidating your accounts also simplifies required minimum distribution calculations and tracking. You’d be surprised how often we discover clients have additional accounts they forgot they even had.

No overlap. If you have multiple accounts, that doesn’t necessarily mean that your investments are properly diversified. In fact, your money may be invested in similar asset classes with significant overlap. Consolidating your retirement accounts gives you a clearer view of your asset allocation picture, as well as any adjustments you may need to make.

Easier rebalancing. Any retirement savings account requires periodic rebalancing to keep it in line with your objectives. By consolidating your accounts, you’re more likely to achieve a cohesive investment strategy.

Proper Beneficiary Management. I can’t tell you how often we see clients with multiple IRAs and 401k plans, all with different beneficiary designations. Even more shocking is how often that information is incorrect or outdated. Consolidation makes it much easier to keep these up to date and accurate.

 

How to consolidate

Moving a retirement account to a new employer plan or to an IRA can be done via direct rollover or trustee-to-trustee transfer.

With a trustee-to-trustee transfer, the funds are sent directly from one plan to another. The plan administrator will make the check payable to your new IRA custodian (never to you directly). That is why this type of transfer is often referred to as a direct rollover. Unlike regular rollovers, there is no tax withholding requirement for this type of transaction. When requesting a transfer from your employer’s plan or another retirement account, be sure to use the right terms to avoid unwanted tax consequences. If you’re unsure, contact your financial planner for assistance.

Should you move your employer plan to an IRA?

A former employer will generally let you keep your money in its retirement plan for as long as you want. You may also choose to move those savings to an IRA. Before making the switch to an IRA, however, it’s wise to consider the following factors:

 

Investment choices. An employer’s 401(k) plan may be lower cost, but your choice of investments will be limited, as 401(k) plan sponsors tend to simplify the investment decision for employees by reducing the number of options. With an IRA, you have a potentially unlimited choice of investments, including individual stocks, mutual funds, and alternative investments rarely offered by employer plans.

Control over distributions. Another benefit of IRAs is that you have more control over when your retirement savings are paid to you. Distribution requirements vary among IRA providers, so be sure to understand the choices available to you and your beneficiaries.

Creditor protection. If creditor protection is a concern, both employer plans and IRAs safeguard your retirement savings from creditors to a certain extent. Employer plans generally offer better protection than IRAs do, however. The level of protection an IRA offers depends on your state laws.

Early withdrawal. One reason to keep funds in an employer account, at least temporarily, is that you may need to tap into your retirement savings before you reach age 59½. There is no tax penalty for taking a distribution from your former employer’s plan after you reach age 55. Although you’ll still pay income taxes, you will avoid the 10-percent penalty for early withdrawal, which would be assessed if you withdrew funds from an IRA before age 59½. Exceptions to the penalty on early IRA distributions include:

 
 
  • Unreimbursed medical expenses that amount to more than 10 percent of your adjusted gross income
  • Disability
  • Distributions from a beneficiary IRA upon the death of the original IRA owner
  • Qualified higher-education expenses
  • Qualified first-time home purchase
  • Distributions under a “substantially equal payment” plan, per Section 72(t) of the Internal Revenue Code
 

A Retirement Strategy That Works For You

As you can see there are some great benefits to consolidating your retirement accounts, however, there are many factors that should be considered. I recommend working with a financial planner to determine what is right for you. Please feel free to reach out to me if you have questions. I'd rather develop the best strategy for you and help you implement it properly, than you potentially creating issues trying to do it yourself.

Is a 529 the Best Way to Save for College?

For parents with aspirations of sending their children to college, the costs associated with doing so can be daunting. For decades, the price of higher education has risen at a rate close to three times that of the Consumer Price Index. And although the rate of increase recently has subsided to some degree, this expense continues to be among the most significant faced by parents. 

Let's consider the following statistics:

 
  • According to Trends in College Pricing 2017 produced by The College Board, a nonprofit organization serving students and schools, the average published tuition and fees for in-state students at public four-year colleges and universities for 2017–2018 are $20,770.
  • In addition, the study states that the average published tuition and fees at private four-year colleges and universities for 2017–2018 are $46,950.
 

There is no question that the pursuit of higher education will come at a substantial cost.  You may be searching for the best way to save for that moment when your child leaves home and the bills roll in. To celebrate National 529 Day, let's take a closer look at 529 plans and their effectiveness when it comes to saving for college.

What is a 529 plan anyway?

Excellent question and probably a great place to start! A 529 plan is a qualified tuition savings program listed in section 529 of the Internal Revenue Code. While these plans are governed by federal law, the 529 plan itself is sponsored by the individual state and managed by a mutual fund company that provides the underlying investment choices for the plan. If the state savings plan meets the federal requirements, the plan’s balance and the future distributions from the plan receive favorable tax treatment.

Income tax benefits

A 529 plan provides some very nice tax benefits, with the primary benefit found in the tax treatment of contributions, earnings, and distributions. Contributions to a 529 plan are typically invested in a mixture of stock and bond mutual funds. Similar to an IRA, the earnings on the contributions are tax deferred; however, unlike a traditional IRA, distributions from the 529 plan are tax free, as long as they are used to pay for qualified higher education expenses.

Qualified higher education expenses are defined as expenses incurred for the enrollment and attendance of a full- or part-time student at an eligible educational institution. Common qualifying expenses for both full- and part-time students include tuition, books, supplies, and associated fees.  For a detailed list of what is included, visit www.savingforcollege.com

The Tax Cuts and Jobs Act of 2017 includes an expansion of 529 savings plans that allows families to save for K−12 expenses as well as college expenses. 529 plans will be able to use qualified distributions of up to $10,000 per year, per student, for elementary and secondary school expenses.

The effect on financial aid

529 plans not only provide substantial income, gift, and estate tax savings, but they also often have minimal effects on financial aid. 529 plans owned by parents are considered parental assets; this means they are assessed at a rate of 5.64 percent when determining how much a family is expected to contribute to tuition costs. Plans owned by students are considered student assets; student assets are assessed at a much higher rate of 20 percent. Qualifying distributions from 529 plans also receive advantageous treatment when determining eligibility for the subsequent year of financial aid. 

A wise choice

When considering all of the options available to parents, a 529 plan offers the most beneficial means to save for college. Tax deferral on the growth of underlying investments, tax-free withdrawals for qualifying higher education expenses, the possibility of a state income tax deduction, the low impact on eligibility for financial aid, and the gift and estate tax benefits make a 529 plan an excellent vehicle for saving toward higher education goals.

If you'd like to discuss what makes the most sense for you, please don't hesitate to give us a call. 

 

The fees, expenses and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10% penalty. By investing in a plan outside of your state residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance and administrative/management fees and expenses.

The Powerful Effects of Compound Interest

Getting an early start on your retirement savings may end up being one of the best financial moves you can make for yourself and your family. Thanks to the power of compound interest, you have the opportunity to make your money work for you and grow exponentially in many cases on a tax-deferred basis.

Think of interest as a fee paid for using borrowed money. The original amount of money in your  account (without added interest) is known as the principal. Compound interest is beneficial because it’s calculated based on the principal plus the interest, resulting in greater interest accrual over the life of the investment.

The benefits of saving early and often

Let’s look at the investing choices of two hypothetical investors, Amy and John.

 

Amy

Amy started investing at age 25. She invests $3,600 per year for 15 years at an 8-percent interest rate and then stops. At age 40 her account has grown to $104,500. By age 70 her investment has grown to $1,050,000.

John

John didn’t start investing until he was 40. He invests $3,600 per year for 30 years at an 8-percent interest rate. At age 40 he has $0 in his account. At age 70 his account has grown to $450,000

 

Clearly this is for illustrative purposes only.  The figures above do not represent the performance of any specific investment and assumes no withdrawals, expenses and tax consequences.

By now you're probably saying, “Okay, I get it. Saving earlier is better than later.” While this is a key point (and one you’ve probably heard before), many people don’t realize just how important it is until they fall into financial trouble. After all, many things can get in the way of retirement saving besides procrastination, such as paying off a mortgage, car loans, sending kids to college, and unexpected injuries or illnesses. The best way to be prepared is to kick off a pattern of saving and take advantage of compound interest as early as you can.

Retirement Readiness

Although retirement may be the furthest thing from your mind at this point, recognizing how costly it can be may help you stick to a savings plan. Here’s an overview of some of the expenses that may come into play:

 

Income taxes. When you begin withdrawing funds from retirement accounts, you may lose more of your financial “nest egg” than you thought possible to income taxes.

Everyday expenses. Groceries, home maintenance and insurance, utilities, and other basic living expenses can eventually start to chip away at your savings.

Travel and hobbies. Many retirees want to travel and take up new hobbies (after all, this is what retirement should be about). Unfortunately, such dreams may not happen if you haven’t saved enough to cover the more crucial expenses highlighted above.

 

Ready to start saving big?

Clearly, getting an early start on your retirement savings (and sustaining that habit over time) can greatly improve your future financial stability. To see how much your money could grow, schedule a free consultation with us here.