Social Security Loophole: Age 62+ With Kids In High School
There is a little known loophole in the social security system for parents that are age 62 or older with children still in high school or younger. Since couples are having children later in life this situation is becoming more common and it could equal big dollars for families that are aware of this social security filing strategy.
There is a little known loophole in the social security system for parents that are age 62 or older with children still in high school or younger. Since couples are having children later in life this situation is becoming more common and it could equal big dollars for families that are aware of this social security filing strategy.
Here is how it works. If you are age 62 or older and you have children under that age of 18, they can collect a social security benefit based on your earnings history equal to half of the parents social security benefit at normal retirement age. This amount could equal as much as $16,122 per year for one child for higher income earners. If you have multiple children the total annual amount paid to your family members could equal between 150% to $180% of your normal retirement benefit which could be in excess of $40,000 per year depending on your earnings history.
There are some key considerations. First, your children cannot collect on this “family benefit” until you have begun to collect your social security benefit. You can turn on your social security benefit as early as age 62 but they reduce the monthly amount that you receive if you turn on the benefit prior to your normal retirement age. However, it may make sense to do so depending on the amount of the family benefit paid and the duration of the benefit. If you wait until normal retirement age, you will receive a slightly higher social security benefit for yourself, but all of the social security dollars that could have been paid to your children is lost.
Second, if you are still working and your earned income exceeds certain thresholds this filing strategy may not be advantageous due to the earned income penalty. They reduce your social security benefit by $1 for every $2 earned over a given threshold ($16,920 in 2017). Not only is your social security benefit reduce but also the benefit to your dependents.
Due to these restrictions, this filing strategy yields that greatest benefit to parents that are either fully or partially retired, age 62 or older, with a child or children below the age of 18.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Who Pays The Tax On A Cash Gift?
This question comes up a lot when a parent makes a cash gift to a child or when a grandparent gifts to a grandchild. When you make a cash gift to someone else, who pays the tax on that gift? The short answer is “typically no one does”. Each individual has a federal “lifetime gift tax exclusion” of $5,400,000 which means that I would have to give
This question comes up a lot when a parent makes a cash gift to a child or when a grandparent gifts to a grandchild. When you make a cash gift to someone else, who pays the tax on that gift? The short answer is “typically no one does”. Each individual has a federal “lifetime gift tax exclusion” of $5,400,000 which means that I would have to give away $5.4 million dollars before I would owe “gift tax” on a gift. For married couples, they each have a $5.4 million dollar exclusion so they would have to gift away $10.8M before they would owe any gift tax. When a gift is made, the person making the gift does not pay tax and the person receiving the gift does not pay tax below those lifetime thresholds.
“But I thought you could only gift $15,000 per year per person?” The $15,000 per year amount is the IRS “gift exclusion amount” not the “limit”. You can gift $15,000 per year to any number of people and it will not count toward your $5.4M lifetime exclusion amount. A married couple can gift $30,000 per year to any one person and it will not count toward their $10.8M lifetime exclusion. If you do not plan on making gifts above your lifetime threshold amount you do not have to worry about anyone paying taxes on your cash gifts.
Let’s look at an example. I’m married and I decide to gift $20,000 to each of my three children. When I make that gift of $60,000 ($20K x 3) I do not owe tax on that gift and my kids do not owe tax on the gift. Also, that $60,000 does not count toward my lifetime exclusion amount because it’s under the $28K annual exclusion for a married couple to each child.
In the next example, I’m single and I gift $1,000,000 my neighbor. I do not owe tax on that gift and my neighbor does not owe any tax on the gift because it is below my $5.4M threshold. However, since I made a gift to one person in excess of my $15,000 annual exclusion, I do have to file a gift tax return when I file my taxes that year acknowledging that I made a gift $985,000 in excess of my annual exclusion. This is how the IRS tracks the gift amounts that count against my $5.4M lifetime exclusion.
Important note: This article speaks to the federal tax liability on gifts. If you live in a state that has state income tax, your state’s gift tax exclusion limits may vary from the federal limits.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Small Business Owners: How To Lower The Cost of Health Insurance
As an owner of a small business myself, I’ve had a front row seat to the painful rise of health insurance premiums for our employees over the past decade. Like most of our clients, we evaluate our plan once a year and determine whether or not we should make a change. Everyone knows the game. After running on this hamster wheel for the
As an owner of a small business myself, I’ve had a front row seat to the painful rise of health insurance premiums for our employees over the past decade. Like most of our clients, we evaluate our plan once a year and determine whether or not we should make a change. Everyone knows the game. After running on this hamster wheel for the past decade it led me on a campaign to consult with experts in the health insurance industry to find a better solution for both our firm and for our clients.
The Goal: Find a way to keep the employee health benefits at their current level while at the same time cutting the overall cost to the company. For small business owners reducing the company’s outlay for health insurance costs is a challenge. In many situations, small businesses are the typical small fish in a big pond. As a small fish, they frequently receive less attention from the brokerage community which is more focused on obtaining and maintaining larger plans.
Through our research, we found that there are two key items that can lead to significant cost savings for small businesses. First, understanding how the insurance market operates. Second, understanding the plan design options that exist when restructuring the health insurance benefits for your employees.
Small Fish In A Big Pond
I guess it came as no surprise that there was a positive correlation between the size of the insurance brokerage firm and their focus on the large plan market. Large plans are generally defined as 100+ employees. Smaller employers we found were more likely to obtain insurance through their local chambers of commerce, via a “small business solution teams” within a larger insurance brokerage firm, or they sent their employees directly to the state insurance exchange.
Myth #1: Since I’m a small business, if I get my health insurance plan through the Chamber of Commerce it will be cheaper. I unfortunately discovered that this was not the case in most scenarios. If you are an employer with between 1 – 100 employees you are a “community rated plan”. This means that the premium amount that you pay for a specific plan with a specific provider is the same regardless of whether you have 2 employees or 99 employee because they do not look at your “experience rating” (claims activity) to determine your premium. This also means that it’s the same premium regardless of whether it’s through the Chamber, XYZ Health Insurance Brokers, or John Smith Broker. Most of the brokers have access to the same plans sponsored by the same larger providers in a given geographic region. This was not always the case but the Affordable Care Act really standardized the underwriting process.
The role of your insurance broker is to help you to not only shop the plan once a year but to evaluate the design of your overall health insurance solution. Since small companies usually equal smaller premium dollars for brokers it was not uncommon for us to find that many small business owners just received an email each year from their broker with the new rates, a form to sign to renew, and a “call me with any questions”. Small business owners are usually extremely busy and often times lack the HR staff to really look under the hood of their plan and drive the changes needed to improve the plan from a cost standpoint. The way the insurance brokerage community gets paid is they typically receive a percentage of the annual premiums paid by your company. From talking with individuals in the industry, it’s around 4%. So if a company pays $100,000 per year in premiums for all of their employees, the insurance broker is getting paid $4,000 per year. In return for this compensation the broker is supposed to be advocating for your company. One would hope that for $4,000 per year the broker is at least scheduling a physical meeting with the owner or HR staff to review the plan each year and evaluate the plan design options.
Remember, you are paying your insurance broker to advocate for you and the company. If you do not feel like they are meeting your needs, establishing a new relationship may be the start of your cost savings. There also seemed to be a general theme that bigger is not always better in the insurance brokerage community. If you are a smaller company with under 50 employees, working with smaller brokerage firms may deliver a better overall result.
Plan Design Options
Since the legislation that governs the health insurance industry is in a constant state of flux we found through our research that it is very important to revisit the actual structure of the plan each year. Too many companies have had the same type of plan for 5 years, they have made some small tweaks here and there, but have never taken the time to really evaluate different design options. In other words, you may need to demo the house and start from scratch to uncover true cost savings because the problem may be the actual foundation of the house.
High quality insurance brokers will consult with companies on the actual design of the plan to answer the key question like “what could the company be doing differently other than just comparing the current plan to a similar plan with other insurance providers?” This is a key question that should be asked each year as part of the annual evaluation process.
HRA Accounts
The reason why plan design is so important is that health insurance is not a one size fits all. As the owner of a small business you probably have a general idea as to how frequently and to what extent your employees are accessing their health insurance benefits.
For example, you may have a large concentration of younger employees that rarely utilize their health insurance benefits. In cases like this, a company may choose to change the plan to a high deductible, fund a HRA account for each of the employees, and lower the annual premiums.
HRA stands for “Health Reimbursement Arrangement”. These are IRS approved, 100% employer funded, tax advantage, accounts that reimburses employees for out of pocket medical expenses. For example, let’s say I own a company that has a health insurance plan with no deductible and the company pays $1,000 per month toward the family premium ($12,000 per year). I now replace the plan with a new plan that keeps the coverage the same for the employee, has a $3,000 deductible, and lowers the monthly premium that now only cost the company $800 per month ($9,600 per year). As the employer, I can fund a HRA account for that employee with $3,000 at the beginning of the year which covers the full deductible. If that employee only visits the doctors twice that year and incurs $500 in claims, at the end of the year there will be $2,500 in that HRA account for that employee that the employer can then take back and use for other purposes. The flip side to this example is the employee has a medical event that uses the full $3,000 deductible and the company is now out of pocket $12,600 ($9,600 premiums + $3,000 HRA) instead of $12,000 under the old plan. Think of it as a strategy to “self-insure” up to a given threshold with a stop loss that is covered by the insurance itself. The cost savings with this “semi self-insured” approach could be significant but the company has to conduct a risk / return analysis based on their estimated employee claim rate to determine whether or not it’s a viable option.
This is just one example of the plan design options that are available to companies in an attempt to lower the overall cost of maintaining the plan.
Making The Switch
You are allowed to switch your health insurance provider prior to the plan’s renewal date. However, note that if your current plan has a deductible and your replacement plan also carries a deductible, the employees will not get credit for the deductibles paid under the old plan and will start the new plan at zero. Based on the number of months left in the year and the premium savings it may warrant a “band-aide solution” using HRA, HSA, or Flex Spending Accounts to execute the change prior to the renewal date.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Do I Have To Pay Taxes On My Inheritance?
Whenever people come into large sums of money, such as inheritance, the first question is “how much will I be taxed on this money”? Believe it or not, money you receive from an inheritance is likely not taxable income to you.
Whenever people come into large sums of money, such as inheritance, the first question is “how much will I be taxed on this money”? Believe it or not, money you receive from an inheritance is likely not taxable income to you.
Of course there are some caveats to this. If the inherited money is from an estate, there is a chance the money received was already taxed at the estate level. The current federal estate exclusion is $5,430,000 (estate taxes and the exclusion amount varies for states). Therefore, if the estate was large enough, a portion of the inheritance may have been subject to estate tax which is 40% in most cases. That being said, whether the money was or was not taxed at the estate level, you as an individual do not have to pay income taxes on the money.
Although the inheritance itself is not taxable, you may end up paying taxes if there is appreciation after the money is inherited. The type of account and distribution will dictate how the income will be taxed.
Basis Of Inherited Property
Typically, the basis of inherited property is the fair market value of the property on the date of the decedent’s death or the fair market value of the property on the alternate valuation date if the estate uses the alternate valuation date for valuing assets. An estate will choose to value assets on an alternate date subsequent to the date of death if certain assets, such as stocks, have depreciated since the date of death and the estate would pay less tax using the alternate date.
What the fair market value basis means is that if you inherit stock that was originally purchased for $500 and at the date of death has appreciated to $10,000, you will have a “step-up” basis of $10,000. If you turn around and sell the stock for $11,000, you will have a $1,000 gain and if you sell the stock for $9,000, you will have a $1,000 loss.
Inheriting a personal residence also provides for a step-up in basis but the gain or loss may be treated differently. If no one lives in the inherited home after the date of death, it will be treated similar to the stock example above. If you move into the home after death, any subsequent sale at a loss will not be deductible as it will be treated as your personal asset but a gain would have to be recognized and possibly taxed. If you rent the property subsequent to inheritance, it could be treated as a trade or business which would be treated differently for tax purposes.
Inheriting An IRA or Retirement Plan Account
Please read our article “Inherited IRA’s: How Do They Work” for a more detailed explanation of the three different types of distribution options.
When you inherit a retirement account, and you are not the spouse of the decedent, in most cases you will only have one option, fully distribute the account balance 10 years following the year of the decedents death. The SECURE Act that was passed in December 2019 dramatically change the distribution options available to non-spouse beneficiaries. See the article below:
If you are the spouse of the of the decedent, you are able to treat the retirement account as if it was yours and not be forced to take one of the options above. You will have to pay taxes on distributions but you do not have to start withdrawing funds immediately unless there are required minimum distributions needed.
Note: If the inherited account was an after tax account (i.e. Roth), the inheritor must choose one of the options presented above but no tax will be paid on distributions.
Non-Qualified Annuities
Non-qualified annuities are an exception to the step-up in basis rule. The non-spousal inheritor of a non-qualified annuity will have to take either a lump sum or receive payments over a specified time period. If the inheritor chooses a lump sum, the portion that represents the gain (lump sum balance minus decedent’s contributions) will be taxed as ordinary income. If the inheritor chooses a series of payments, distributions will be treated as last in, first out. Last in, first out means that the appreciation will be distributed first and fully taxable until there is only basis left.
If the spouse inherits the annuity, they most likely have the option to treat the annuity contract as if they were the original owner.
This article concentrated on inheritance at a federal level. There is no inheritance tax at a federal level but some states do have an inheritance tax and therefore meeting with a professional is recommended. New York currently does not have an inheritance tax.
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.
The Process Of Buying A House
Buying a house can be a fun and exciting experience but it’s also one of the most important financial decisions that you are going to make during your lifetime. This article is designed to help home buyer’s understand:
Buying a house can be a fun and exciting experience but it’s also one of the most important financial decisions that you are going to make during your lifetime. This article is designed to help home buyer’s understand:
The home buying process from start to finish
The parties involved in the process (real estate agent, attorney, bank, etc.)
Common pitfalls to avoid
What to expect when applying for a mortgage
How to calculate the amount of your down payment
Owning Versus Renting
You first have to determine if owning a house is the right financial decision for you. Society wires us to think that owning a house is automatically better than renting but that is not necessarily true in all situations. From a pure dollar and cents standpoint, it may make sense to keep renting given your personal situation. We typically tell clients if there is a fair chance that they may need to sell their house within the next 5 years, in many cases it may make sense to keep renting as opposed to buying a house given all of the upfront costs associated with purchasing a house. It takes a while to recoup closing costs and when you go to sell your house you will most like have to pay your real estate agent 5% - 6% of the selling price.
Determine How Much You Can Afford
Before you even start looking at houses you have to determine two things:
The down payment and closing costs
The amount of the monthly mortgage payment that fits into your budget
There is no point in looking at $300,000 houses if you cannot afford the down payment or the monthly mortgage payment so the initial step involves determining what you can afford.
Calculating Your Closing Costs
Closing costs are in addition to your required “down payment”. First time home buyers often make the mistake of just using the 5% down or 10% down as a rule of thumb for their total upfront cost for buying a house. They often forget about closing costs which can add an additional 2% - 5% of the purchase price of the house to the amount due at closing. Closing costs include:
Discount Points: An up-front fee that you can choose to pay if you want to reduce the interest rate on your loan.
Origination Charge: Fee for processing your mortgage application, pulling credit reports, verifying financial information, and creating the loan
Rate-lock Fee: If you choose to lock in your interest rate beyond a certain period of time
Other Lender Fees: Document preparation fee, processing fee, application fee, and underwriting fees
Appraisal & Inspection Fees: Fees for the lender to inspect and appraise the value of the house
Title Services: Fee charged by the title agent to determine the rightful ownership of the house you are buying and some lenders require title insurance.
Government Recording Charges: Every home buyer must pay these charges for the state and local agencies to record the loans and title documents
Transfer Taxes: Depending on where you live, your state, county or city may charge a tax when the ownership of a home is transferred
Escrow Deposit: At the closing of your home loan, if you decide to escrow or if an escrow is required, there will be an initial deposit in your escrow account to pay for future recurring charges associated with your home, such as property taxes, school taxes, and insurance. You will typically need to pay for the first year of your homeowner’s insurance in full before your home loan closes.
Daily Interest Rate Charge: This charge covers the amount of interest that you will owe on your home loan from the time your loan closes to the first day of your regular mortgage billing cycle.
Flood Insurance: This is a form of hazard insurance that is required by lenders to cover properties in flood zones.
Attorney Fees: Fees typically vary from $300 - $1,000. Most individuals will work with a real estate attorney to review and negotiate the purchase agreement on their behalf. These fees are sometimes paid to the attorney prior to the closing.
As you can see there are a number of fees that you have to be prepared to pay in addition to the down payment required by the lender. Lenders are required by law to give you a “good faith estimate” (GFE) of what the closing costs on your home will be within three days of when you apply for a loan. However, these are just estimates and many of the fees listing on the GFE can legally change by up to 10%, potentially adding thousands of dollars to your final closing cost bill. A day before your closing the lender should provide you with a copy of your HUD-1 settlement statement, which outlines all of the closing fees.
Calculating Your Down Payment
The amount of your down payment will vary based on the type of loan that you received to purchase your house. The three main types of home loans are:
FHA Loan
Conventional Mortgage
VA Loan (Veterans Affairs)
FHA Loan: FHA stands for Federal Housing Administration. The loans are made by banks but they are guaranteed by the FHA which added additional protection for the lender. FHA loans come with a minimum down payment of 3.5% which make them very popular. With these loans borrowers pay PMI (private mortgage insurance) premiums both upfront and each year until the loan is paid down to a specified level. Loan limits vary by housing type and county. These loans tend to favor low to middle income borrowers who do not have a means to make the traditional 10% - 20% down payment at closing.
Conventional Mortgage: Minimum down payment varies from 5% - 20%. Borrowers that put down less than 20% will have to pay PMI (private mortgage insurance). Conventional mortgages typically require a higher FICO score than FHA loans. These loans tend to favor borrowers with higher credit scores and have enough cash on hand to make a sizable down payment.
VA Loan: VA loans are available only to veterans. The greatest benefit of these loans is they require no down payment and they allow qualified borrowers to purchase a home without the need for mortgage insurance. VA loans also tend to have more flexible and forgiving requirements. The VA charges a mandatory Fund Fee of 2.15% for regular military and 2.40% for Reserve/Guard on purchase loans.Let’s bring it all together in an example. If you anticipate on buying a house for $200,000 and you plan on taking an FHA loan, the amount that you will need to save for the closing will be in the range of $11,000 - $17,000 (3.5% for the down payment and 2% - 5% for the closing costs). This calculation will obviously vary based on the type of loan you plan on taking to purchase your house.
Determine what your monthly mortgage payment
After you have determined how much you need to save to meet the upfront cost of purchasing a house, the next step is to determine the monthly mortgage payment that fits into your budget.
Step 1: Establish your current monthly and annual budget. There is no way to determine what you can afford if you have no idea where you are now from an income and expense standpoint. Tip: Be brutally honest with yourself when listing your expenses. The last thing you want to do is underestimate your expenses, buy a house you cannot afford, and then go through a foreclosure. You will also have to factor in additional expenses into your budget as if you owned the house today such as lawn care, snow removal, appliances, and maintenance expense. As a renter you may not have any of these expenses now but as soon as you own a house, now when something breaks you have to pay to fix it. Homeownership is often times more expensive than most individuals anticipate.
Step 2: Based on your current monthly income and expenses, how much is left over to satisfy a monthly mortgage payment? The general rule is your monthly mortgage payment (including property taxes, PMI, and association fees) should not exceed 32% of your monthly gross income. Tip: Leave some extra room in your budget for life’s unexpected surprises. For example, furnace need to be replaced, dishwasher brakes, spouse loses a job, plumbing issues, etc.
Step 3: Use an online mortgage calculator to determine the loan amount that meets your estimated monthly mortgage payment. Do not forget to take into account property taxes, school taxes, association fees, PMI, and homeowners insurance when reaching your estimated monthly payment.
The parties involved in the home buying process
There are a lot of different professionals that you will interact with during the process of purchasing your house. It’s important to understand who is involved, what their role is in the process, and how they are compensated.
Buyer & Seller: This is pretty self-explanatory. Most buyers and sellers work through realtors and attorneys to complete the real estate transaction so there is typically little or no direct interaction between the buyer and the seller. However, in a “for sale by owner”, the buyer or the buyer’s realtor/attorney will be in direct communication with the seller since there is no real estate agent on the sellers side.
Real Estate Agent (Realtor): Real estate agents are important partners when you are buying a house. They can provide you with helpful information on homes and neighborhoods that isn’t easily accessible to the public. Their knowledge of the home buying process, negotiation skills, and familiarity with the area you want to live in can be very valuable. In most cases, as the buyer, it does not typically cost you anything to use a realtor because they are compensated from the commission paid by the seller of the house.
Real Estate Attorney: Remember, buying a home is a legally binding transaction. A real estate attorney can help you avoid some common pitfalls when purchasing your home. The home buying process eventually results in a formal purchase agreement between the buyer and seller. The purchase agreement is the single most important document in the transaction. Although standard printed forms may be used, a lawyer can explain the forms and make changes and additions to reflect the buyer’s wishes. Examples are:
What are the legal consequences if the closing does not take place?
What happens if the inspection reveals termites, radon, or lead based paint?
Will money be held in escrow from the seller’s proceeds to replace certain items?
How much does a real estate attorney cost? It varies, but expect to pay somewhere in the range of $350 - $1,000. Often times you have to pay the attorney a retainer or pay them in advance of the closing. The amount an attorney charges is usually dependent on the level of services that they are provided to you. Some attorneys may just be preparing the deed while other attorney’s may provide you with a more complete package which can include deed preparation, title examination, purchase agreement review, and lender work. Make sure you fully understand how the attorney’s fee structure works and it often helps to ask your professional network or friends for attorney’s that they have worked with and would recommend.
Bank / Credit Union: Most home buyers need a mortgage to finance the purchase of their house. It is recommended that you contact a few banks and credit unions in your area to compare interest rates, closing costs, and fees associated with the issuance of your mortgage. Similar to selecting a real estate attorney we strongly recommend asking your professional network (accountant, investment advisor) for lenders that they recommend working with. You will have a lot of interaction with the lender throughout the home buying process and working with a lender that makes the underwriting process as smooth as possible will make the overall home buying experience much more enjoyable.
Home Inspector: After your offer has been accepted by the seller you will need to hire a home inspector to visit the house. Your real estate agent will most likely recommend a home inspector to use. The job of the home inspector is to visit the property to make sure there are no issues with the house that may not be apparent to the untrained eye. They look for termite damage, structural issues, mold, condition of the roof, electric, plumbing, drainage, septic, radon levels, etc. A few days after their visit they will provide you with a formal report of their inspection. You typically pay them at the time they conduct the inspection. The cost of a home inspection typically ranges from $250 - $600.
Insurance Broker: You will need to obtain a homeowners insurance policy prior to the closing date. Since you are adding a house to your insurance coverage, often times this is a good opportunity to look at your insurance coverage as a whole because insurance companies will usually offer discounts on “bundling” your insurance coverage. Meaning that a single provider covers your house, cars, and personal umbrella policy. The annual cost of your homeowners insurance will vary greatly depending on the value of your house and where the house is located. For homeowners that have an escrow account associated with their mortgage, the homeowners insurance premium is typically baked into your total monthly mortgage payment , the insurance company issues the invoice directly to the bank, and the bank pays your homeowners insurance directly out of your escrow account.
Timeline: The home buying process from start to finish
Now that we have explained how to determine what you can afford and the parties involved in the home buying process it’s time to put it all together so you know what to expect step by step through the process of purchasing your new home.
Step 1: Get prequalified for a mortgage. You may think you can qualify for a $250,000 mortgage but you really do not know until you actually apply. In the preapproval process you will provide some information to the bank that will be issuing your mortgage such as tax returns, statements showing investment and savings accounts, and they will usually run a credit report. The more intense financial due diligence happens after an offer has been accepted on your house and they are actually preparing to provide you with the loan.
Step 2: Begin looking at houses. Most individuals at this point will hire a real estate agent to help them find and look at houses.
Step 3: Make an offer. Once you find the house that you want, you will have your real estate agent present the seller with your offer. This is where the negotiation process begins. If the seller is listing the house for $200,000, you can make an offer for whatever amount you choose. Once an offer is presented to the seller, three things can happen:
The seller can accept it
The seller can reject it
The seller will counter offer
Your real estate agent can really help you in this process to determine what may be a reasonable offer. It is usually dependent upon how long the house has been on the market, where is the property located, is there a situation that requires selling the house quickly, and what have other similar houses sold for in the area. After making the offer you will typically receive a response within 48 hours. The seller will sometimes give their real estate agent a range saying that they will accept less than the asking price but only to a specific threshold. In most situations the buyer and the seller meet somewhere in the middle. If the house is listed for $200K, the buyer may put in an offer for $180K and after some back and forth they eventually meet somewhere around $190K. But that is not always the case. If there are multiple offers on the house you could end up in a “bidding war”. Offers are “blind bids” meaning that you and your real estate agent have no way of knowing what other people are offering the seller for the house. Buyers are essentially making their “best guess” that their offer will win. You may make an offer for full price only for another buyer to come in two hours later and offer $10,000 over their asking price. You really have to lean on your real estate agent to give you some guidance based on their knowledge of the market.
Step 4: Offer accepted……now what? Typically, purchase offers are contingent on a home inspection of the property. Your real estate agent will usually help you arrange to have a home inspection conducted within a few days of your offer being accepted. There are usually contingencies in your offer agreement that provides you with the chance to renegotiate your offer or withdraw it without penalty if the inspection reveals significant material damage. If the inspector discovers issues with the house you will have to make the decision if you want to ask the seller to fix the issue prior to the closing date. Prior to the close you will have a walk-through of the house, which gives you a chance to confirm that any agreed-upon repairs have been made.
Step 5: Apply for a mortgage. Now that your offer has been accepted the mortgage underwriting process will kick into high gear. The bank will assign you a “loan officer” or “mortgage broker” to serve as the direct contact at the bank throughout the mortgage approval process. You will provide them with the information on the house that you intend to purchase, they will send you the mortgage application with all of financial documents that they will need to formally approve you for the mortgage. The bank will also arrange for an appraiser to visit the house and provide an independent estimate of the value of the house. After all if they are giving you a loan for $200,000, they want to make sure that house is worth at least $200,000 in case you were to stop paying the mortgage then essentially the bank would own the house and have to sell it. You will receive a “commitment letter” from your bank once your mortgage has been formally approved.
You will need to show the bank documentation of the account that is currently holding the cash that will be used for your down payment and closing costs. If someone gifts you money to buy your house, the person that made the gift will most likely have to sign a letter stating that it was an outright gift and not a loan.
Step 5½ : You will simultaneous engage a real estate attorney to begin working with at this time. Your attorney will review the purchase agreement, initiate a title search and review the results, begin prepping the deed, and communicate directly with the seller’s attorney if changes or additions need to be made to the purchasing agreement.
Step 6: Set a closing date. The closing date is the date that you will sign a huge pile of papers and the house officially becomes yours. There is typically an “estimated closing date” set in the purchase agreement but a firm date needs to be set by the buyer, seller, attorneys, and the bank. The seller’s real estate agent, the buyer’s real estate agent, your mortgage broker, and the attorneys on both sides will typically communicate with each other to establish the closing date. A special note……..a lot can happen during a real estate transaction that can delay the closing date. Issues can arise on the seller’s side or the mortgage process could take longer than expected. In other words, even though you have a “final closing date” be prepared for the closing date to change. If you are renting right now and have a lease, if your closing date is May 1st it’s usually recommended that you have your current lease run until May 30th or June 30th in case the closing date gets pushed back. Real estate transactions have a lot of moving parts and a lot of unexpected things that are out of your control can happen.
Step 7: Contact your insurance broker to establish a homeowner’s policy. Your bank will require you to have homeowners insurance on the property. You must pay for the policy and have it at closing. You are free to select your own insurance carrier but the lender will typically require the insurance company issuing the policy to be a specific rating or higher.
Your insurance broker may also help you with your title insurance policy. Many lenders will require you to have a title insurance policy at closing. As part of the home buying process a title search should be conducted which results in a report that shows who owns the property and if there are any liens against the property. Title insurance protects you and the lender up to the full value of the property if fraud, a lien, or faulty title is discovered after your closing.
Step 8: The day BEFORE the closing. It is recommended that you send a reminder email to your real estate agent, attorney, and mortgage broker to confirm that everything is a “go” for the closing the next day. You and your real estate agent should make a final inspection of the property within 24 hours prior to the closing. In many cases, the lender will make a similar inspection before closing. The bank that is issuing you the loan should also be able to provide you with a copy of your HUD-1, which is a long, one page document that details all of the financial activity associated with the purchase of your house. You should review this document with your mortgage broker and/or attorney prior to the closing to make sure everything is accurate.
You will also need to confirm with your attorney/mortgage broker the amount of the certified check that you will need to bring to the closing. A certified check is a special type of check issued by a bank that guarantees that the funds to back that check are guaranteed by the bank issuing the check.
Step 9: The date of your closing. You made it!!!!!! Today is the day your new house officially becomes yours. There are two primary things that you need to bring with you to the closing:
Certified check
Homeowners policy and proof of payment
The actual closing is conducted by a “closing agent” who may be an employee of the lender or title company, or it may be an attorney representing you or the lender. The lender and seller, or their representatives, and the real estate agents may or may not be at the actual closing. It is not unusual for the parties to the transaction to complete their roles without ever meeting face to face.
For the most part, your role at closing is to review and sign the numerous documents associated with a mortgage loan. The closing agent should explain the nature and purpose of each one and give you and your attorney an opportunity to check them before signing.
At the conclusion of the meeting you receive the keys to the house and you are officially a new homeowner.
Step 10: Begin making your monthly mortgage payments. One of the top questions that we get is “What is an escrow account?” You will hear that term a lot when you are going through the mortgage process. Think of an escrow account as a separate savings account that is attached to your mortgage. When you make a monthly mortgage payment, it is made up of a few components:
Principal & Interest Payments: Amount applied against your actual loan
PMI (if applicable): Mortgage insurance
Escrow: Cash reserve to pay taxes and homeowners insurance
If my monthly mortgage payment is $2,000, only $1,100 of that amount may actually be applied against the loan. The other $900 may be used to pay my monthly PMI and the remainder is deposited to my escrow account.
When your property taxes and school taxes are due, the county that you live in will typically send those tax bills directly to the bank holding your mortgage and then the bank in turn pays those bills out of your escrow account. The bank will typically mail the homeowners a receipt that the tax bill has been paid. It’s basically a forced monthly savings account for your anticipated tax bills. The same thing is true for your homeowner insurance premium payments. The bank that is holding your mortgage forecasts how much your taxes and homeowner insurance is going to be for the next 12 months and then builds those amounts into your monthly mortgage payments. The bank does not want you to lose your house because you were unable to pay your property or school taxes. The property and school tax bills show up once a year and depending on where you live those bills can be for thousands of dollars.
If there is additional money left in your escrow account after the taxes and homeowner insurance has been paid, the bank is usually required to send a portion of that additional cash reserve to the homeowner in the form of a check. Those are fun checks to get in the mail.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
How is my Social Security Benefit Calculated?
The top two questions that we receive from individuals approaching retirement are:
What amount will I received from social security?
When should I turn on my social security benefits?
how is social security calculated
The top two questions that we receive from individuals approaching retirement are:
What amount will I received from social security?
When should I turn on my social security benefits?
Are you eligible to receive benefits?
As you work and pay taxes, you earn Social Security “credits.” In 2015, you earn one credit for each $1,220 in earnings—up to a maximum of four credits a year. The amount of money needed to earn one credit usually goes up every year. Most people need 40 credits (10 years of work) to qualify for benefits.
When will I begin receiving my social security benefit?
You are entitled to your full social security benefit at your “Normal Retirement Age” (NRA). Your NRA varies based on your date of birth. Below is the chart that social security uses to determine your “normal retirement age” or “full retirement age”:
social security retirement age
For example, if you were born in 1965, your NRA would be 67. At 67, you would be eligible for your full retirement benefit.
Delayed Retirement or Early Retirement
You can claim benefits as early as age 62, but your monthly check will be cut by 25% for the rest of your life. The way the math works out, for each year you take your social security benefit prior to your normal retirement age, you benefit is permanently reduce by 6% for each year you take it prior to your NRA.
On the opposite end of that scenario, if you delay claiming past your NRA, you will get a delayed credit of approximately 8% per year plus cost of living adjustments.
There are a number of variables that factor into this decision as to when to turn on your benefit. Some of the main factors are:
Your health
Do you plan to keep working?
What is your current tax bracket?
The amount of retirement savings that you have
Income difference between spouses
social security age chart
What amount will I receive from social security?
Social security uses a fairly complex formula for calculating social security retirement benefits but the short version is the formula uses your highest 35 years of income. If you have less than 35 years are income, zeros are entered into the average for the number of years you are short of 35 years of income. They also apply an inflation adjustment to your annual earnings in the calculation.
You can obtain your Social Security statement by creating an account at www.ssa.gov. Your statement contains lots of valuable information, such as:
Your estimated benefit amount at full retirement age
Eligibility for benefits
A detailed history of how much you've earned each year
Keep in mind that the figures in your statement are just estimates, and your eventual benefit amount could be quite different, especially if you're relatively young now.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Comparing Different Types of Employer Sponsored Retirement Plans
Employer sponsored retirement plans are typically the single most valuable tool for business owner when attempting to:
Reduce their current tax liability
Attract and retain employees
Accumulate wealth for retirement
But with all of the different types of plans to choose from which one is the right one for your business? Most business owners are familiar with how 401(k) plans work but that might not be the right fit given variables such as:
comparison of different types of retirement plans
Employer sponsored retirement plans are typically the single most valuable tool for business owner when attempting to:
Reduce their current tax liability
Attract and retain employees
Accumulate wealth for retirement
But with all of the different types of plans to choose from which one is the right one for your business? Most business owners are familiar with how 401(k) plans work but that might not be the right fit given variables such as:
# of Employees
Cash flows of the business
Goals of the business owner
There are four main stream employer sponsored retirement plans that business owners have to choose from:
SEP IRA
Single(k) Plan
Simple IRA
401(k) Plan
Since there are a lot of differences between these four types of plans we have included a comparison chart at the conclusion of this newsletter but we will touch on the highlights of each type of plan.
SEP IRA PLAN
This is the only employer sponsored retirement plan that can be setup after 12/31 for the previous tax year. So when you are sitting with your accountant in the spring and they deliver the bad news that you are going to have a big tax liability for the previous tax year, you can establish a SEP IRA up until your tax filing deadline plus extension, fund it, and take a deduction for that year.
However, if the company has employees that meet the plan’s eligibility requirement, these plans become very expensive very quickly if the owner(s) want to make contributions to their own accounts. The reason being, these plans are 100% employer funded which means there are no employee contributions allowed and the employer contribution is uniform for all plan participants. For example, if the owner contributes 15% of their income to the SEP IRA, they have to make an employer contribution equal to 15% of compensation for each employee that has met the plans eligibility requirement. If the 5305-SEP Form, which serves as the plan document, is setup correctly a company can keep new employees out of the plan for up to 3 years but often times it is either not setup correctly or the employer cannot find the document.
Single(k) Plan or “Solo(k)”
These plans are for owner only entities. As soon as you have an employee that works more than 1000 hours in a 12 month period, you cannot sponsor a Single(k) plan.
The plans are often times the most advantageous for self-employed individuals that have no employees and want to have access to higher pre-tax contribution levels. For all intensive purposes it is a 401(k) plan, same contributions limits, ERISA protected, they allow loans and Roth contributions, etc. However, they can be sponsored at a much lower cost than traditional 401(k) plans because there are no non-owner employees. So there is no year-end testing, it’s typically a boiler plate plan document, and the administration costs to establish and maintain these plans are typically under $400 per year compared to traditional 401(k) plans which may cost $1,500+ per year to administer.
The beauty of these plans is the “employee contribution” of the plan which gives it an advantage over SEP IRA plans. With SEP IRA plans you are limited to contributes up to 25% of your income. So if you make $24,000 in self-employment income you are limited to a $6,000 pre-tax contribution.
With a Single(k) plan, for 2016, I can contribute $18,000 per year (another $6,000 if I’m over 50) up to 100% of my self-employment income and in addition to that amount I can make an employer contribution up to 25% of my income. In the previous example, if you make $24,000 in self-employment income, you would be able to make a salary deferral contribution of $18,000 and an employer contribution of $6,000, effectively wiping out all of your taxable income for that tax year.
Simple IRA
Simple IRA’s are the JV version of 401(k) plans. Smaller companies that have 1 – 30 employees that are looking to start a retirement plan will often times start with implementing a Simple IRA plan and eventually graduate to a 401(k) plan as the company grows. The primary advantage of Simple IRA Plans over 401(k) Plans is the cost. Simple IRA’s do not require a TPA firm since they are self-administered by the employer and they do not require annual 5500 filings so the cost to setup and maintain the plan is usually much less than a 401(k) plan.
What causes companies to choose a 401(k) plan over a Simple IRA plan?
Owners want access to higher pre-tax contribution limits
They want to limit to the plan to just full time employees
The company wants flexibility with regard to the employer contribution
The company wants a vesting schedule tied to the employer contributions
The company wants to expand the investment menu beyond just a single fund family
401(k) Plans
These are probably the most well recognized employer sponsored plans since at one time or another each of us has worked for a company that has sponsored this type of plan. So we will not spend a lot of time going over the ins and outs of these types of plan. These plans offer a lot of flexibility with regard to the plan features and the plan design.
We will issue a special note about the 401(k) market. For small business with 1 -50 employees, you have a lot of options regarding which type of plan you should sponsor but it’s our personal experience that most investment advisors only have a strong understanding of 401(k) plans so they push 401(k) plans as the answer for everyone because it’s what they know and it’s what they are comfortable talking about. When establishing a retirement plan for your company, make sure you consult with an advisor that has a working knowledge of all these different types of retirement plans and can clearly articulate the pros and cons of each type of plan. This will assist you in establishing the right type of plan for your company.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
