Savings

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®

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.

Emergency Fund: Preparing For The Unexpected

You’ve probably heard how important it is to establish and maintain an emergency fund. Unfortunately, most people don’t fully realize how important this is until a financial emergency strikes. Are you financially prepared for a leaky roof? How about a broken-down car? If you lost your job, how long would you be able to support yourself and your family until you got a new one? 

An emergency fund is money that you’ve set aside to be used in these critical situations, whether its to handle a minor home repair or to pay for something more serious, like medical bills. Despite the importance of having an emergency fund, however, more than three in five Americans have accumulated no savings for unforeseen expenses, according to a recent Bankrate report.

So what do you do? 

Set a goal

How much you need to save depends on a variety of factors. Generally speaking, your emergency fund should cover three to six months of living expenses. I always tell clients to start with three months and aim to work your way up to six months. There are plenty of free online tools that can help you figure out how much you should have on hand.

Keep your funds accessible

It’s important to pick a bank and a savings vehicle that will give you easy access to your emergency fund when you need it. Consider keeping a portion of your money in a regular savings account, as it will provide some return and you’ll be able to withdraw it at any time without penalty. Online banks such as Ally Bank offer significantly higher interest rates when compared to your local banks. For longer-term funding, you might want to use a savings vehicle with higher interest, such as a certificate of deposit (CD) or multiple CDs.  

Avoid savings pitfalls

Naturally, there may be obstacles to overcome as you build your emergency fund. Take a look at some of the most common pitfalls and ways to avoid them:

 

Using your credit card as an emergency fund.

Although credit cards may be convenient, there is a lot to consider before turning to plastic. Using your credit card will likely resolve the immediate need, but when you think about interest on the debt and possible penalties, it may not be worth it in the long run. 

Cheating other accounts to fund your emergency stash.

Withdrawing money allocated to other resources, particularly your retirement savings account, can do long-term damage to your financial picture. If you borrow from your retirement account and default on the loan, you could face serious tax implications and penalties. Think of it this way: taking cash out of your retirement account is like stealing from your future self.

Thinking that you can’t afford it.

The most common excuse for not maintaining an emergency fund is that you don’t make enough money to save. Although your budget may be tight, you don’t need to put away hundreds or thousands of dollars all at once. Starting small works just as well. You might try making your morning coffee at home instead of buying it or bringing your lunch to work instead of going out. The savings may not be dramatic initially, but it will add up.

 

Start today!

Establish your savings goal, figure out how much money you need to put away every month, and stick to the plan. Remember: it’s better to have an emergency fund and never use it than to face hard times with no means to support yourself and your family! If you have questions or want help, please don't hesitate to send me a message.

 
"It's not how much money you make, it's how you save it"
                                            -Anonymous
 

A New Year - A New Financial You

January means a New Year is upon us, bringing a fresh opportunity to consider your goals. For 2018, I am taking a different approach to resolutions. Instead of giving you a laundry list of tasks to accomplish, I want to encourage you to make this the year you really own your financial life. 

Imagine fast forwarding your life to December 31, 2018, and looking back on the year. What do you think you will have accomplished? How did your financial life change? What roadblocks did you remove? Answering these questions can help you identify your true goals for 2018.

If your vision for next year differs from where you are today, then you need a clear strategy for making changes—and a plan to follow along the way. It all begins with knowing how to define and reach your goals.

According to a study on the science of achieving goals, 3 key steps make you more likely to achieve what you set out to accomplish:

  • Written goals
  • Accountability
  • Commitment

Using these findings, I have created 3 steps to help you set—and keep—your financial resolutions for 2018.

 

1. Written Goals: Define and record what you want.

Financial worries keep 65% of Americans up at night. From paying for health care to saving for retirement, people’s concerns span an array of life events. Fortunately, writing down goals can improve your chance of reaching them and moving past these stressors.

When defining your financial resolutions, ask yourself which priorities matter most to you and would help create the greatest comfort in your life. Your financial needs are unique to you, and they should guide the goals you set for the coming year.

2. Commitment: Outline specific action items for each day.

Once you have defined your goals for 2018, you can outline the actions you will take to help make your dreams a reality. Create and maintain your commitment to the goal by building a clear strategy for bringing it life. For example, rather than saying, “I want to pay down debt,” define the exact amount of money you will pay toward your liabilities each month. Determine which steps you need to take to achieve your goal, and then build a schedule for accomplishing the necessary tasks each day.

3. Accountability: Share your goals and progress with someone else.

When studying goal-setting, individuals who shared their objectives and actions with another person had better results than those who did not. To help increase your chances of achieving your 2018 financial resolutions, share your plan with someone else, such as a spouse, family member, or friend. Make sure you give them a detailed account of exactly what you want to achieve—and the steps you will take to do so.

Once you’ve selected someone to share your goals with, keep them in the loop on your progress. In fact, sending weekly updates to your chosen accountability partner can make you significantly more likely to achieve your goals.

 

As you look to 2018 and what you hope to accomplish, I encourage you to follow these steps to start out on the right path. I am always here to guide your financial goals and help you create the future you desire.

Here’s to a happy, healthy, and fulfilling New Year!

National Financial Literacy Month

Did you know that April is National Financial Literacy Month?

What started out as a financial-literacy awareness day more than a decade ago is now a month-long campaign. The program is designed to highlight the importance of financial literacy and teach people of all ages how to manage their money wisely. And, according to recent surveys, Americans have a lot of room to improve in their financial knowledge.

About 40% of those surveyed spend less than they earn. The other 60% are either breaking even or spending more than they earn, which means they are unable to save money steadily.

It’s no surprise then that the study also shows that 50% of Americans don’t have a “rainy day” fund to cover expenses for three months — in case of emergencies such as sickness, job loss or economic downturn. Those without an emergency savings face unexpected financial blows that not only compromise their personal financial stability, but decrease overall economic stability as well.

Let’s look at three tips that could enhance your financial literacy, or that of one of your friends or family members.

Set and Follow a Budget that Works for You

There are norms in budgeting, but those are variable and defined by influences out of your control, including your zip code and tax bracket. Ask yourself what your normal is. An estimation tool you might use is the 50/30/20 rule. That ratio breaks down like this:

  • 50% of net income: Spend about 50% of your take-home pay on “fixed costs” — bills that are about the same amount each month. This might include things such as rent/mortgage, car payments, utilities, cell phone service, and memberships or subscriptions (Netflix, gym, Spotify).
  • 30% of net income: In the 50/30/20 plan, about 30% of your net pay would go toward flexible spending — also commonly called disposable income or lifestyle expenses. These might include costs for hobbies, shopping, and entertainment. We will include gas and groceries in this category because even though they are needs, how you spend your money on these things might vary. One month, you might travel, which means you might spend more that month on gas and food/groceries.

  • 20% of net income: Reserve about 20% of your net income for your financial goals. Three important goals to think about are paying down credit-card debt, saving for retirement, and building that emergency fund.

Manage your habits; change them if needed so they work for you. And remember that financial stability doesn’t necessarily mean mortgages and car payments. Determine your normal.

Start Saving Now

Saving money is easy to put off doing, since the consequences of not steadily saving may not be noticed or felt until later in life when you try to buy a house, send your kids to a top college or retire at a certain age.

So, start now — one of the easiest ways to make regular savings deposits is to pay yourself first from each paycheck. That way, it’s gone before you even notice it’s missing. Though saving for retirement usually is priority, you might also want to make sure you have financial reserves for emergencies.

Set Specific Financial Goals

It's never too soon, or too late to set financial goals.The first steps to setting financials goals include:

  • securing a steady source of income;

  • making sure you have financial reserves;

  • protecting yourself and your family from financial upheavals or disaster by buying the right insurance for life, health, disability income, and possessions.

Getting further ahead each year takes patience and planning. If your reserves stay flat, inflation will diminish its value. Stay alert and ready to go after opportunities to grow your money.

Think about what your personal financial goals are — sorting them by wants or needs might help. Decide which ones are long-term or short-term goals and prioritize them. Choose goals you’re enthusiastic about to help you reach them.

With your 50/30/20 budget, you should be able to distribute your limited resources in ways that make it possible to reach your goals.

We specifically designed Wealth Wise to offer the next generation an opportunity to start now. If you have questions or would like to learn more about certain financial topics, we are happy to talk. If you think you're ready to start planning, check out Wealth Wise Plan.