Author Archives: Joe

If you have children, you’ve probably started thinking about saving for college. How about a 529 plan? It’s a great tax savings seeing how you can invest money, let it grow, and be able to use the money and its gains tax free for educational expenses.

529 Plan vs A Regular Savings Account

Let’s walk through a possible scenario. Making it easy, let’s say you open two accounts, one 529 and one regular savings account with $10k each, make no additional contributions, and they grow for 16 years. Note: no estimate for annual account fees, etc, is in included here.

529
$10,000 initial contribution
0 additional contributions
7% interest (average stock market rate over the years)
$29,521 – value after 16 years (gain of $19,521)
-$1,952 – 10% penalty (on the gain of $19,521)
-$4,880 – 25% ordinary income tax on $19,521
$22,689 – final value (est w/o annual fees and such)

Savings Account
$10,000 initial contribution
0 additional contributions
1% interest rate (highest rate you’d find today)
$11,725 – final value after 16 years

What a difference! Know, though, the stock market isn’t consistent. The 7% is an average over decades of tracking. Which is good for long term investors because 7% is pretty good. But the market is still volatile. It may be in a low year when you need to pull the money for school. If you’re not going to use it for school, you can always leave it in the account until a good year comes up. There’s no time limit for leaving it in the account.

What if my child decides not to go to college?

This is the biggest concern most people have when contemplating opening up a 529 plan. There are alternatives, however!

• The money can be transferred to another family member. You can even use the funds to go back to school yourself!
• The money can be used for trade school instead.

Penalties if neither option above works

Worst case scenario there is no one to transfer the money to and your child doesn’t use it. In that case there would be a 10% penalty to pull the money out in addition to having to pay taxes on the gains made. The 10% penalty is only on the gains, not the entire amount in the account.

Keep in mind the tax part you would have to pay regardless of this or any investment in an ordinary account. So really, it’s just the 10% penalty you would incur for withdrawing for non-educational related purposes.

Penalty Example

Say the account increased in value by $5000 over the years and you withdraw the full amount. There will be a $500 tax penalty (10% of the $5000), leaving you with $4500 (will be a little less after brokerage company fees). You will be taxed at your current tax rate for the $5000. Say you’re in the 25% tax bracket, that means you’ll be taxed $1250 ($5000 x 25%). You’ll account for it when you do your taxes for that year.

Retirement first, then 529 plan

Before you think about opening a 529 plan, however, be sure you’re saving for retirement fully. If you already are, great. Keep going with it. Otherwise, start saving now before saving for your children. That’s selfish, right? Not really. Ask yourself this – do I want to be in a position where I HAVE to work after retirement age even if I don’t WANT to?

You can’t borrow for retirement, but your little one can borrow for college. If you’re not in a good place yourself with saving for retirement, you should take care of that first. Your child can always take loans and look for scholarships (there are tons out there, many of which go unclaimed) for college. And once you’re set up with a secure financial future you can always help your children pay off their loans.

Does anyone have any of their own experiences with college savings they’d like to share???

It’s that time of the year again – time to receive your annual performance review. It’s a perfect time to take advantage of what will hopefully be an increase in your annual pay.

Why not take a % of the increase and move that to your 401k? After years throughout a career it could make the difference between retiring and not.

Let’s use an example of an employee who will receive a 3% increase on their annual merit. Why not take 1 or even 1.5% of that merit review and increase your 401k by that amount? It’s like a double bonus! You’ll receive more in your paychecks and at the same time you’ll be contributing more % to your 401k. That’s called a win-win!

Some employers have adopted an option where your 401k will automatically increase by x% each year based on your selection. It’s like the old adage, money burning a hole in your pocket. If you tuck it away before you have it, you won’t be tempted to use it.

A new year brings a new opportunity to contribute to your Roth IRA. Not only for your 2015 contribution, either. You can still contribute to your 2014 Roth IRA until April 15th!

The annual contribution limit for 2014 and 2015 is $5,500 (and $6,500 if you’re over 50). Don’t fret if you don’t feel you don’t have enough to contribute to your Roth IRA – $5,500 is just the limit. Not everyone has the means to contribute that amount and that’s ok. Many brokerage firms will take monthly contributions of even $50 a month. No matter what amount you choose, it all adds up. And something is better than nothing.

My recommended strategy for contributing to your retirement accounts

In order to take full advantage of your retirement accounts, you should only put money into your Roth IRA after you have contributed to your 401k up to the company match. In other words, if your employer matches 3% of your 401k contribution, your best move would be to put 3% into your 401k, and the rest into your Roth IRA in order to make the most of the tax advantages. And if you have the means to do so, contribute the match into your 401k, contribute fully into your Roth IRA, and then go back and increase your 401k contributions even more.

It’s never too late to take advantage of the options out there. Many brokerage firms have a great selection of no-load or low-load funds to chose from. A couple of my favorites are Vanguard and Fidelity. Check them out – sooner is better than later!

I don’t know why, but life insurance is a hot topic with some folks. Some strong opinions about what kind of life insurance is best, how much you should have, and what it’s intended use is.

There are two main types of insurance:

• Term
• Universal/Variable/Whole Life

Universal/Variable/Whole Life Insurance

Let’s talk about the universal/variable/whole life first. These combine an investment with insurance and they build cash value. I’ll be honest, I cringe when I hear someone mention they have one of these policies. If you want an investment vehicle, there are many other (much better) ways to do so. Investments should be kept separate from your life insurance needs.

Here are some of my thoughts around why I don’t care for whole life type policies. First, the benefit amount (when you die) is generally low and not enough to cover the amount you should have. Another reason is the fees involved. There’s a reason why insurance agents push this type of policy, they get some sweet commissions off of sales and the annual fees associated with administering the policy are high. When you run through and figure all the fees involved, your rate of return (which is low to begin with) is reduced even further.

In my opinion, you’re better off putting your money into a term policy for your life insurance needs. For investments, put your money in an investment account. With a little research you have a shot at better annual returns than that universal life policy. Remember, the stock market has a historical rate of return around 8% over the long term. Go ahead and try to find a policy that will give you that.

Term Life Insurance

Term is pretty straight forward, it’s just what the name implies. It’s in effect for a set period of time and only pays out in the event of death. It’s the simplest and cheapest form of life insurance you can buy. And the type of policy I would say everyone who should have life insurance should have. No, not everyone needs life insurance. We’ll get into that later.

How much?

As far as how much is a good amount of life insurance to carry there are several things to consider. Are you younger, older? Is your home paid for? Do you have a lot of financial obligations? For me it comes down to how much of an impact your missing income will be to the household. Generally, the younger and more obligations you have, your replacement should be higher. I shoot to be covered for 7-10 times my annual income. If my income were to disappear today, I want to ensure Nicole and the kids have enough to cover what my income would have been needed for. But maybe you’re retired, your home is paid for, your kids are financially independent and you have regular monthly income which would pass along survivor benefits. Probably not a big deal for those in that type of situation to even have life insurance.

Where to buy?

All of my coverage as well as Nicole’s comes through my employer. They have really good term rates for myself and spouse coverage. I price it out at open enrollment time every year and it’s a better deal than I can find elsewhere. That may not be the case for everyone so do your homework.

But there are plenty of places out there to shop including; State Farm, Progressive, AIG, USAA, Met Life and many many others. Personally, my first stop would be State Farm. I’ve had State Farm for insurance since I started driving and have the same agent to this day. We’ve priced it out a few times over the years. Sure, there are a few places who are a little cheaper. But to me State Farm is worth the few extra bucks. The times we’ve had to deal with them, it’s been really effortless on our part. Their help and follow-up has been great and they work to not make things an inconvenience to you. You’re damn right, I’ll pay the little extra for better customer service no matter what the industry.

Conclusion

You’ve heard me say it many times in other posts, do your homework. Check into the different types of coverage, ask a lot of questions and research a good insurance provider.

Disclaimer: I am in no way affiliated with State Farm, nor am I employed by them or compensated by them to publish content found on this site.