Make These Your Priorities in January

Did you know you can make the simplest changes to improve your finances? 

Wills and estate planning – Amazingly, many individuals and families have a spouse, children, and substantial assets but an outdated or even no will at all.   There are vast dangers in ignoring estate and probate law – failure to be proactive can have catastrophic results.  Skilled attorneys and financial professionals can ask you the right questions and help you avoid these potential pitfalls. 

An end to debit cards – Aside from convenience, there is virtually no reason you should ever use a debit card.  Firstly, you are granting a vendor access to your checking account at the point of sale – seldom a good idea.  Secondly, in the event of a dispute with the merchant, you will have far less recourse if the funds have already been deducted from your account.  Finally, you are far better off using a credit card that can protect you as a consumer and offer you rewards for usage.

Maximizing your retirement – This includes 401k and other employer-provided plans but you have many other options as well.  Although you may not be entitled to a deduction, you can contribute into your IRA each year.  You also have the option of converting your Traditional IRA to a Roth IRA.  In limited circumstances, permanent insurance may be an option worth considering.  Maximizing contributions into HSA accounts can also be very beneficial in the long run. 

A real plan for education – It is crucial to have a calculated plan for financing your children’s education.  To begin planning, you should have a sense of what schools they might attend, the current tuition and fees for those schools, and the appropriate rate of inflation so that you can estimate the overall costs.  We encourage clients to have a multi-pronged approach to education planning which can include 529 savings plans, taxable investment accounts and, if necessary, home equity and earned income savings. 

Investment allocation – It is a very good idea to review all of your investment accounts to be sure that the securities you hold align with your goals.  Your account allocation should reflect your objectives, risk tolerance, and future anticipated income.  If you are unable to say with confidence how your 401k account is being invested, then you definitely need to investigate and make adjustments.  This also applies to any other investment account including IRA’s, taxable accounts and 529 accounts for your children.

One additional thought for this year – now that tax reform appears imminent, check with your CPA to see how you will be affected.  Depending upon your financial position, the new laws may create opportunities and/or compel you to pay a little more in taxes.

You have a far greater chance of achieving your financial goals if you begin the planning process early.  Not everyone has the proper appreciation of exactly how much they will need for their children’s education or for their own retirement.  You have a finite amount of resources – be sure they are allocated properly.

Saving for Higher Education Part 2 – What is your savings strategy?

Most people want to save for their children’s education but what is the best strategy? 

There are three different savings strategies from which you can choose: 

1)         save for 100% of all education costs so that your child has no liability

2)         save a specific dollar amount and leave the remainder for your child, and

3)         target a specific percentage of the cost leaving the remainder for your child

This is entirely a personal preference and while there is no entirely right or wrong answer, we encourage clients to avoid sacrificing retirement savings for education savings.  Before deciding, first ask:

What are your costs?

The current cost of college education can be easily quantified - the US Department of Education offers detailed cost information on most universities.  Here is some recent data on a few well-known universities:

D Tepp Savings Article Graphic.png

Note that these are approximate costs from 2015 and if your child will not be going to school for many years, then you will need to factor the cost inflation.  The inflation rate can vary wildly, from as little as 2% to as much as 7% or more, and will have a substantial impact on your savings plan. 

529 Plans

These accounts have the virtue of tax-free earnings as long as the funds are used for qualified educational expenses.  Certain states offer tax benefits for contributions as well.  Annual contributions are subject to gift tax rules which, for 2017, are $14,000 per person.  This means that a husband and wife can each provide a gift of $14,000 to the same child each year; essentially, a $28,000 annual cap.  Consult your CPA regarding larger gifts.

529 accounts have distinct advantages but two significant drawbacks: 

1)      Use of the funds is restricted to educational expenses.  If 529 account funds are used for anything other than qualified educational expenses, the amounts will be subject to taxes and, possibly penalties. 

2)      The investment rates of return are often unimpressive due to limited investment options and account fees.

We advocate using 529 plans as an important, but perhaps not the only, savings vehicle.  To supplement 529 savings, consider utilizing a personal, taxable investment account.

Personal Investment Accounts

Investing funds using a personal or joint account offers substantial appeal.  You have a nearly unlimited array of investment options so that you can maximize your returns.  Further, the funds can be used for nearly any purpose such as education, life events and unforeseen expenses.  The caveat is that returns are subject to Federal and state income taxes.  Accordingly, you should invest with great care so that you garner a desirable after-tax rate of return.

The more unsure you are about your child’s college costs, the better it is to invest in flexible, personal investment accounts.

Other considerations

Drawing down cash from your home equity or cash value life insurance are options but you may be better off leaving the equity to pay for future retirement expenses.  Certain advisors may suggest using your IRA’s for education planning but we discourage this strategy in nearly all circumstances.

Conclusion

Put succinctly:

#1        Establish a strategic plan as early as you can.

#2        Invest your money carefully and look for safer options as your child gets closer to their college years.

#3        The greater the uncertainty regarding the cost of education, the greater flexibility you will need from your savings plan.

#4        Monitor your savings and educational costs on a regular basis.

#5        Seek guidance from professionals as needed.

In part 3, we will shed some light on education loans, grants and scholarships!

 

 

Saving for Higher Education Part 1 – Six Options for Savings

Introduction

Your children’s education may be the most cost-intensive purchase you ever make.  A family of three children that all attend private universities will likely pay close to $1 million for their degrees.  No matter your personal financial objectives or your children’s choice of school, establishing a sound plan to save is of critical importance.

Cost of Education

College tuition costs are skyrocketing.  According to The College Board ®, a not-for-profit corporation, the average tuition increase from 2016-2017 was 3.6% at private institutions and 2.4% for public institutions.  The only potentially good news is that the rate of increase appears to be slowing.

Savings Options

The decision of how much you are able and willing to save should be determined based on your personal objectives and available resources.  Once you decide how much to save, you have several options each with their own advantages and disadvantages:

#1        529 Savings Plan – these are state-provided investment plans in which investment earnings and withdrawals are tax-free as long as they are used for qualified educational expenses.  Certain states, such as New York and Pennsylvania, allow you to deduct contributions to these accounts for state tax purposes.  Unfortunately, the investments in these types of accounts are limited and do not always generate the best returns. 

#2        General investing – this is simple; all you need to do is fund the account and invest.  You can then use the funds for any purpose including education.  With this type of account, while you have nearly unlimited investment options, you will need to pay taxes on the earnings so be sure the money is managed in a tax-prudent manner.

#3        Coverdell Savings – these are accounts to which individuals whose income is below $110,000 ($220,000 if filing jointly) can contribute up to $2,000 per year.  Because of these contribution limitations, and because there is no tax deduction for contributing, many investors tend to focus more on 529’s and general investing.

All of the options above involve investing additional cash from your other savings or income.  If, however, you do not have a great deal of spare income, you can consider the following:

#4        Home equity – while it is common for families to utilize their home equity, we urge caution particularly when your personal retirement plan is pinned to the value of your home.  Home equity values are not always stable so before you withdraw funds, make sure that your loan-to-value ratio is in an acceptable range and that you have the means to pay back the additional debt.

#5        Whole life insurance – if you already have a whole life insurance policy with substantial cash value, you can consider borrowing against that balance to help pay for education costs.  Note, however, that the funds must be paid back or you will pay taxes on the earnings from the amounts withdrawn.  This approach is less than ideal.

#6        IRA’s – unless there are specific mitigating circumstances, we generally advise that you do not withdraw funds from IRA’s to pay for education.  While it is true that funds withdrawn from IRA’s that are used for qualified educational expenses are not subject to the 10% early withdrawal penalty, any amounts withdrawn are subject to income tax. 

Conclusion

Begin your savings plan as early as possible: the power of compounding will enable you to grow your education savings so that you can ultimately pull fewer funds from your other objectives.  Keep an eye out for part 2 on this topic when we will discuss educational loans and strategies that you can employ!       

Expanded HSA May Be Bright Spot in Healthcare Reform

It is challenging to find any degree of optimism in the healthcare debate. Mostly, what we hear are rhetorical grandstanding and bitter divisiveness.  Meanwhile, the uninsured continue to suffer and, for the fortunate ones who have coverage, their income is being siphoned by skyrocketing insurance premiums and prescription medication costs.    

Yet, there is reason for hope through the Health Savings Account. The HSA is an amazingly useful medical-expense savings and retirement tool.  Account holders can contribute thousands of dollars each year, receive a tax deduction for making the contributions, and withdraw the money for qualified medical expenses without paying penalties or income tax. Better yet, once you reach retirement age, you can draw the funds for any purpose, just as you would from an IRA, with no penalty.    

In 2017, individual HSA owners can contribute up to $3,400 per year, and families can contribute up to $6,750. The IRS also permits individuals who are 55 years old or older to make catch-up contributions that increase those limits by $1,000.   

Interestingly, some of the proposals under consideration in Washington, D.C., would nearly double the limit of allowable annual HSA contributions. Further, under the proposed legislation, HSA account owners may be able to use the funds for over-the-counter purchases (which is not currently permitted).   

The significant benefit of an HSA is that the funds you contribute remain yours even if you do not spend them.  Quite a few taxpayers are familiar with Flexible Spending Accounts (FSAs) that have a use-it or-lose it function; if you do not spend the money by the end of the year, it is gone. With HSAs, the money remains yours and it carries forward each year.    

Any distributions from an HSA account that are used for qualified medical expenses are not subject to federal income taxes. Additionally, if you are making COBRA payments due to a loss of a health insurance plan, you can use the HSA for that too.

For retirees, you can use your HSA reserve to pay for Medicare. What’s more, once you reach 65, you can withdraw funds to pay nonmedical expenses and the distribution will be taxed the same as traditional IRA income.

HSA accounts are a terrific supplement to a retirement plan but they are not without their limitations. First, the funds cannot be used to pay either health insurance premiums or Medicare supplemental policy premiums, only qualified medical expenses.  Second, you are not able to use both an FSA and an HSA; you may only use one or the other.  Third, not all states offer the same tax benefits for HSA contributions.  

Expanding HSAs to enhance eligibility and participation is smart, low-hanging fruit.  This would be an easy way to encourage Americans to save more money – something that we desperately need.

Published in njspotlight.com 7/24/17

Testing Your Resolve

Now that the ball has dropped in Times Square it is time for another annual tradition – New Year’s resolutions.  So, along with improving your diet and exercising more, consider adding these:

“Will” you? – I have lost count of how many clients with whom I have met that have a spouse, children, and substantial assets but an outdated or even no will at all.  There are vast dangers in ignoring estate and probate law – failure to be proactive can have catastrophic results.  Skilled professionals can ask you the right questions and help you avoid these potential pitfalls.  If you have not updated your will in some time, you should speak with an attorney.

An end to debit cards – Financial institutions have created a convenient method for you to pay for your purchases.  Unfortunately, aside from that convenience, there is virtually no other reason you should ever use a debit card.  Firstly, you are granting a vendor access to your checking account at the point of sale – seldom a good idea.  Secondly, in the event of a dispute with the merchant, you will have far less recourse if the charge has already hit your account.  Finally, you are far better off using a credit card that can protect you as a consumer and offer you rewards for card usage.

Maximizing your retirement – Yes, I am referring to 401k and other employer-provided plans but you have many other options as well.  Although you may not be entitled to a deduction, you can contribute into your IRA each year.  In fact, you may qualify for a “back door” Roth IRA contribution which can be very valuable.  Further, maximizing contributions into HSA accounts can be very beneficial in the long run. 

A real plan for education – If you have at least one child, it is crucial to have a calculated plan for financing their education.  To begin planning, you should have a sense of what schools they might attend, the current tuition and fees for those schools, and the appropriate rate of inflation so that you can estimate the overall costs.  I encourage my clients to have a multi-pronged approach to education planning which can include 529 savings plans, taxable investment accounts and, if necessary, home equity and earned income savings.  Assess the costs, adopt a savings plan that works, and stick to it.

Investment allocation – It is a very good idea to review all of your investment accounts to be sure that the securities you hold align with your goals.  Your account allocation should reflect your objectives, risk tolerance, and future anticipated income.  If you are unable to say with confidence how your 401k account is being invested, then you definitely need to investigate and make adjustments.  This also applies to any other account including IRA’s, taxable accounts and 529 accounts for your children.

No matter how you may feel about your financial situation, you have a far greater chance of achieving your financial goals if you begin the planning process earlier.  Not everyone has the proper appreciation of exactly how much they will need for their children’s education or for their own retirement.  Unless you have already calculated these numbers with a great deal of thought, you will likely benefit from meeting with a financial planner.  But before you do, jot down your goals and start thinking about adding one or two items to your 2017 resolutions.