How To Teach Your Kids About Investing
As kids enter their teenage years, as a parent, you begin to teach them more advanced life lessons that they will hopefully carry with them into adulthood. One of the life lessons that many parents teach their children early on is the value of saving money. By their teenage years many children have built up a small savings account from birthday gifts,
As kids enter their teenage years, as a parent, you begin to teach them more advanced life lessons that they will hopefully carry with them into adulthood. One of the life lessons that many parents teach their children early on is the value of saving money. By their teenage years many children have built up a small savings account from birthday gifts, holidays, and their part-time jobs. As parents you have most likely realized the benefit of compounding interest through working with a financial advisor, contributing to a 401(k) plan, or depositing money to a college savings account. As financial planners, we often get the question: “What is the best way to teach your children about the value of investing and compounding interest? "
The #1 rule.......
We have been down this road many times with our clients and their children. Here is the number one rule: Make it an engaging experience for your kids. Investments can be a very dull topic to talk about and it can be painfully dull from a child’s point of view. All they know is the $1,000 that was in their savings account is now with their parent’s investment guy.
Ignoring the life lessons for a moment, the primary investment vehicle for brokerage accounts with balances under $50,000 is typically a mutual fund. But let’s pause for a moment. We have a dual objective here. We of course want our children to make as much money as possible in their investment account but we also want to simultaneously teach them life long lessons about investing.
The issue with young investors
Explaining how a mutual fund operates can be a complex concept for a first time investor because you have all of these companies in one investment, expense ratios, different types of funds, and different fund families. It’s not exciting, it’s intimidating.
Consider this approach. Ask the child what their hobbies are? Do they have a cell phone? Have them take their cell phone out during the meeting and ask them how often they use it during the day and how many of their friends have cell phones. Then ask them, if you received $20 every time someone in this area bought a cell phone would you have a lot of money? Then explain that this scenario is very similar to owning stock in a cell phone company. The more they sell the more money the company makes. As a “shareholder” you own a piece of that company and you receive a piece of the profits if the company grows. If your child plays sports, do they wear a lot of Nike or Under Armour? Explain investing to them in a way that they can relate it to their everyday life. Now you have their attention because you attached the investment idea to something they love.
A word of caution....
If they are investing in stocks it is also important for them to understand the concept of risk. Not every investment goes up and you could start with $1,000 and end the year with $500, so they need to understand risk and time horizon.
While it’s not prudent in most scenarios to invest 100% of a portfolio in one stock, there may be some middle ground. Instead of investing their entire $1,000 in a mutual fund, consider investing $500 – $700 in a mutual fund but let them pick one to three stocks to hold in the account. It may make sense to have them review those stock picks with your investment advisor for two reasons. One, you want them to have a good experience out of the gates and that investment advisor can provide them with their option of their stock picks. Second, the investment advisor can tell them more about the companies that they have selected to further engage them.
Don't forget the last step......
Download an app on their smartphone so they can track the investments that they selected. You may be surprise how often they check the performance of their stock holdings and how they begin to pay attention to news and articles applicable to the companies that they own.At that point you have engaged them and as they hopefully see their investment holdings appreciate in value they will become even more excited about saving money in their investment account and making their next stock pick. In addition, they also learn valuable investment lessons early on like when one of their stocks loses value. How do they decide whether to sell it or continue to hold it? It’s a great system that teaches them about investing, decision making, risk, and the value of compounding investment returns.
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.
Planning for Long Term Care
The number of conversations that we are having with our clients about planning for long term care is increasing exponentially. Whether it’s planning for their parents, planning for themselves, or planning for a relative, our clients are largely initiating these conversations as a result of their own personal experiences.
The number of conversations that we are having with our clients about planning for long term care is increasing exponentially. Whether it’s planning for their parents, planning for themselves, or planning for a relative, our clients are largely initiating these conversations as a result of their own personal experiences.
The baby-boomer generation is the first generation that on a large scale is seeing the ugly aftermath of not having a plan in place to address a long term care event because they are now caring for their aging parents that are in their 80’s and 90’s. Advances in healthcare have allowed us to live longer but the longer we live the more frail we become later in life.
Our clients typically present the following scenario to us: “I have been taking care of my parents for the past three years and we just had to move my dad into the nursing home. What an awful process. How can I make sure that my kids don’t have to go through that same awful experience when I’m my parents age?”
“Planning for long term care is not just about money…….it’s about having a plan”
If there are no plans, your kids or family members are now responsible for trying to figure out “what mom or dad would have wanted”. Now tough decisions need to be made that can poison a relationship between siblings or family members.
Some individuals never create a plan because it involves tough personal decisions. We have to face the reality that at some point in our lives we are going to get older and later in life we may reach a threshold that we may need help from someone else to care for ourselves or our spouse. It’s a tough reality to face but not facing this reality will most likely result in the worst possible outcome if it happens.
Ask yourself this question: “You worked hard all of your life to buy a house, accumulate assets in retirement accounts, etc. If there are assets left over upon your death, would you prefer that those assets go to your kids or to the nursing home?” With some advance planning, you can make sure that your assets are preserved for your heirs.
The most common reason that causes individuals to avoid putting a plan in place is: “I have heard that long term care insurance is too expensive.” I have good news. First, there are other ways to plan for the cost of a long term care event besides using long term care insurance. Second, there are ways to significantly reduce the cost of these policies if designed correctly.
The most common solution is to buy a long term care insurance policy. The way these policies work is if you can no longer perform certain daily functions, the policy pays a set daily benefit. Now a big mistake many people make is when they hear “long term care” they think “nursing home”. In reality, about 80% of long term care is provided right in the home via home health aids and nurses. Most LTC policies cover both types of care. Buying a LTC policy is one of the most effective ways to address this risk but it’s not the only one.
Why does long term care insurance cost more than term life insurance or disability insurance? The answer, most insurance policies insure you against risks that have a low probability of happening but has a high financial impact. Similar to a life insurance policy. There is a very low probability that a 25 year old will die before the age of 60. However, the risk of long term care has a high probability of happening and a high financial impact. According to a study conducted by the U.S Department of Human Health and Services, “more than 70% of Americans over the age of 65 will need long-term care services at some point in their lives”. Meaning, there is a high probability that at some point that insurance policy is going to pay out and the dollars are large. The average daily rate of a nursing home in upstate New York is around $325 per day ($118,625 per year). The cost of home health care ranges greatly but is probably around half that amount.
So what are some of the alternatives besides using long term care insurance? The strategy here is to protect your assets from Medicaid. If you have a long term care event you will be required to spend down all of your assets until you reach the Medicaid asset allowance threshold (approx. $13,000 in assets) before Medicaid will start picking up the tab for your care. Often times we will advise clients to use trusts or gifting strategies to assist them in protecting their assets but this has to be done well in advance of the long term care event. Medicaid has a 5 year look back period which looks at your full 5 year financial history which includes tax returns, bank statements, retirement accounts, etc, to determine if any assets were “given away” within the last 5 years that would need to come back on the table before Medicaid will begin picking up the cost of an individuals long term care costs. A big myth is that Medicare covers the cost of long term care. False, Medicare only covers 100 days following a hospitalization. There are a lot of ins and outs associated with buildings a plan to address the risk of long term care outside of using insurance so it is strongly advised that individuals work with professionals that are well versed in this subject matter when drafting a plan.
An option that is rising in popularity is “semi self-insuring”. Instead of buying a long term care policy that has a $325 per day benefit, an individual can obtain a policy that covers $200 per day. This can dramatically reduce the cost of the LTC policy because it represents less financial risk to the insurance company. You have essentially self insured for a portion of that future risk. The policy will still payout $73,000 per year and the individual will be on the line for $45,625 out of pocket. Versus not having a policy at all and the individual is out of pocket $118,000 in a single year to cover that $325 per day cost.
As you can see there are a number of different options when it come to planning for long term care. It’s about understanding your options and determining which solution is right for your personal financial situation.
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.
Tax Secret: R&D Tax Credits…You May Qualify
When you think of Research and Development (R&D) many people envision a chemistry lab or a high tech robotics company. It’s because of this thinking that millions of dollars of available tax credits for R&D go unused every year. R&D exists in virtually every industry and business owners need to start thinking about R&D in a different light because
When you think of Research and Development (R&D) many people envision a chemistry lab or a high tech robotics company. It’s because of this thinking that millions of dollars of available tax credits for R&D go unused every year. R&D exists in virtually every industry and business owners need to start thinking about R&D in a different light because there could be huge tax savings waiting for them.
Most companies don't realize that they qualify
Road paving companies, manufactures, a meatball company, software firms, and architecture firms are just a few examples of companies that have met the criteria to qualify for these lucrative tax credits.
Think of R&D as a unique process within your company that you may be using throughout the course of your everyday business that is specific to your competitive advantage. The purpose of these credits is to encourage companies to be innovative with the end goal of keeping more jobs here in the U.S. If you have an engineers on your staff, whether software engineers, design engineers, mechanical engineers there is a very good chance that these tax credits may be available to you. The R&D tax credits also allow you to look back to all open tax years so for companies that discover this for the first time, the upside can be huge. Tax years typically stay open for three years.
Accountants may not be aware of these credits
One of the main questions we get from business owners is “Shouldn’t my accountant have told me about this?” Many accounting firms are unaware of these tax credits and the process for qualifying which is why there are specialty consulting firms that work with companies to determine whether or not they are eligible for the credit. Some of our clients have worked with these firms and the company only pays the consulting firm if you qualify for the tax credits. Kind of a win-win situation.
We recently attended a seminar that was sponsored by Alliantgroup out of New York City and on their website it listed the following description of companies that qualify for these credits:“
Any company that designs, develops, or improves products, processes, techniques, formulas, inventions, or software may be eligible. In fact, if a company has simply invested time, money, and resources toward the advancement and improvement of its products and processes, it may qualify”.
We love helping our clients save taxes and in this case, like many others, we were looking at R&D in a different light.
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.
Financial Planning To Do's For A Family
My wife and I just added our first child to the family so this is a topic that has been weighing on my mind over the last 40 weeks. I will share just one non-financial takeaway from the entire experience. The global population may be much lower if men had to go through what women do. That being said, this article is meant to be a guideline for some of the important financial items to consider with children. Worrying about your children will never end and being comfortable with the financial aspects of parenthood may allow you to worry a little less and be able to enjoy the time you have with the
My wife and I just added our first child to the family so this is a topic that has been weighing on my mind over the last 40 weeks. I will share just one non-financial takeaway from the entire experience. The global population may be much lower if men had to go through what women do. That being said, this article is meant to be a guideline for some of the important financial items to consider with children. Worrying about your children will never end and being comfortable with the financial aspects of parenthood may allow you to worry a little less and be able to enjoy the time you have with them.
There is a lot of information to take into consideration when putting together a financial plan and the larger your family the more pieces to the puzzle. It is important to set goals and celebrate them when they are met. Everything cannot be done in a day, a week, or a month, so creating a task list to knock off one by one is usually an effective approach. Using relatives, friends, and professionals as resources is important to know what should be on that list for topics you aren’t familiar with.
Create a Budget
It may seem tedious but this is one of the most important pieces of a family’s financial plan. You don’t have to track every dollar coming in and out but having a detailed breakdown on where your money is being spent is necessary in putting together a plan. This simple Expense Planner can serve as a guideline in starting your budget. If you don’t have an accurate idea of where your money is being spent then you can’t know where you can cut back or afford to spend more if needed. Also, the budget is a great topic during a romantic dinner.
You will always want to have 4-6 months expenses saved up and accessible in case a job is lost or someone becomes disabled and cannot work. Having an accurate budget will help you determine how much money you should have liquid.
Insurance
You want to be sure you are sufficiently covered if anything ever happened. One terrible event could leave your family in a situation that may have been avoidable. Insurance is also something you want to take care of as soon as possible so you know the coverage is there if needed.
Health Insurance
Research the policies that are available to you and determine which option may be the most appropriate in your situation. It is important to know the medical needs of your family when making this decision.
Turning one spouse’s single coverage into family coverage is one of the more common ways people obtain coverage for a family. Insurance companies will usually only allow changes to policies through open enrollment or when a “qualifying event” occurs. Having a child is usually a qualifying event but this may only allow the child to be added to one’s coverage, not the spouse. If that is the case, the spouse will want to make sure they have their own coverage until they can be added to the family plan.
It is important to use the resources available to you and consult with your health insurance provider on the ins and outs. If neither spouse has coverage through work, the exchange can be a resource for information and an option to obtain coverage (https://www.healthcare.gov/).
Life Insurance
The majority of people will obtain Term Life Insurance as it is a cost effective way to cover the needs of your family. Life insurance policies have an extensive underwriting process so the sooner you start the sooner you will be covered if anything ever happened. How Much Life Insurance Do I Need?, is an article that may help answer the question regarding the amount of life insurance sufficient for you.
Disability Insurance
The probability of using disability insurance is likely more than that of life insurance. Like life insurance, there is usually a long underwriting process to obtain coverage. Disability insurance is important as it will provide income for your family if you were unable to work. Below are some terms that may be helpful when inquiring about these policies.
Own Occupation – means that insurance will turn on if you are unable to perform YOUR occupation. “Any Occupation” is usually cheaper but means that insurance will only turn on if you can prove you can’t do ANY job.
60% Monthly Income – this represents the amount of the benefit. In this example, you will receive 60% of your current income. It is likely not taxable so the net pay to you may be similar to your paycheck. You can obtain more or less but 60% monthly income is a common benefit amount.
90 Day Elimination Period – this means the benefit won’t start until 90 days of being disabled. This period can usually be longer or shorter.
Cost of Living or Inflation Rider – means the benefit amount will increase after a certain time period or as your salary increases.
Wills, POA’s, Health Proxies
These are important documents to have in place to avoid putting the weight of making difficult decisions on your loved ones. There are generic templates that will suffice for most people but it is starting the process that is usually the most difficult. “What Is The Process Of Setting Up A Will?, is an article that may help you start.
College Savings
The cost of higher education is increasing at a rapid rate and has become a financial burden on a lot of parents looking to pick up the tab for their kids. 529 accounts are a great way to start saving early. There are state tax benefits to parents in some states (including NYS) and if the money is spent on tuition, books, or room and board, the gain from the investments is tax free. Roth IRA’s are another investment vehicle that can be used for college but for someone to contribute to a Roth IRA they must have earned income. Therefore, a newborn wouldn’t be able to open a Roth IRA. Since the gain in 529’s is tax free if used for college, the earlier the dollars go into the account the longer they have to potentially earn income from the market.
529’s can also be opened by anyone, not just the parents. So if the child has a grandparent that likes buying savings bonds or a relative that keeps purchasing clothes the child will wear once, maybe have them contribute to a 529. The contribution would then be eligible for the tax deduction to the contributor if available in the state.
Below is a chart of the increasing college costs along with links to information on college planning.
About Rob……...
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.
Avoid These 1099 “Employee” Pitfalls
As financial planners we are seeing more and more individuals, especially in the software development and technology space, hired by companies as “1099 employees”. “1099 employees” is an ironic statement because if a company is paying you via a 1099 technically you are not an “employee” you are a self-employed sub-contractor. It’s like having
As financial planners we are seeing more and more individuals, especially in the software development and technology space, hired by companies as “1099 employees”. “1099 employees” is an ironic statement because if a company is paying you via a 1099 technically you are not an “employee” you are a self-employed sub-contractor. It’s like having your own separate company and the company that you work for is your “client”.
There are advantages to the employer to pay you as a 1099 sub-contractor as opposed to a W2 employee. When you are a W2 employee they may have to provide you with health benefits, the company has to pay payroll taxes on your wages, there may be paid time off, you may qualify for unemployment benefits if you are fired, eligibility for retirement plans, they have to put you on payroll, pay works compensation insurance, and more. Basically companies have a lot of expenses associated with you being a W2 employee that does not show up in your paycheck.
To avoid all of these added expenses the employer may decide to pay you as a 1099 “employee”. Remember, if you are a 1099 employee you are “self-employed”. Here are the most common mistakes that we see new 1099 employees make:
Making estimated tax payments throughout the year
This is the most common error. When you are a W2 employee, it’s the responsibility of the employer to withhold federal and state income tax from your paycheck. When you are a 1099 sub-contractor, you are not an employee, so they do not withhold taxes from your compensation…………that is now YOUR RESPONSIBILITY. Most 1099 individuals have to make what is called “estimated tax payments” four times a year which are based on either your estimated income for the year or 110% of the previous year’s income. Best advice……..if 1099 income is new for you, setup a consultation with an accountant. They will walk you through tax withholding requirements, tax deductions, tax filing forms, etc. It’s very difficult to get everything right using Turbo Tax when you are a self-employed individual.
Tracking mileage and expenses throughout the year
Since you are self-employed you need to keep track of your expenses including mileage which can be used as deductions against your income when you file your tax return. Again, we recommend that you meet with a tax professional to determine what you do and do not need to track throughout the year.
The tax return is prepared incorrectly
No one wants a love letter from the IRS. Those letters usually come with taxes due, penalties, and a “guilty until proven innocent” approach. There may be additional “schedules” that you need to file with your tax return now that you are self-employed. The tax schedules detail your self-employment income, deductions, estimated tax payments, and other material items.
Important rule, do not cut corners by reducing the gross amount of your 1099 income. This is a big red flag that is easy for the IRS to catch. The company that issued the 1099 to you usually reports that 1099 payment to the IRS with your social security number or the Tax ID number of your self-employment entity. The IRS through an automated system can run your social security number or tax ID to cross check the 1099 payment and 1099 income to make sure it was reported.
Legal protection
As a 1099 sub-contractor, you have to consider the liability that could arise from the services that you are providing to your “client” (your employer). As a self-employed individual, the company that you “work for” could sue you for any number of reasons and if you are operating the business under your social security number (which most are) your personal assets could be at risk if a lawsuit arises. Advice, talk to an attorney that is knowledgeable in business law to discuss whether or not setting up a corporate entity makes sense for your self-employment income to better protect yourself.
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.
Tax Secret: Spousal IRAs
Spousal IRA’s are one of the top tax tricks used by financial planners to help married couples reduce their tax bill. Here is how it works:
Spousal IRA’s are one of the top tax tricks used by financial planners to help married couples reduce their tax bill. Here is how it works:
In most cases you need “earned income” to be eligible to make a contribution to an Individual Retirement Account (“IRA”). The contribution limits for 2021 is the lesser of 100% of your AGI or $6,000 for individuals under the age of 50. If you are age 50 or older, you are eligible for the $1,000 catch-up making your limit $7,000.
There is an exception for “Spousal IRAs” and there are two cases where this strategy works very well.
Case 1: One spouse works and the other spouse does not. The employed spouse is currently maxing out their contributions to their employer sponsored retirement plan and they are looking for other ways to reduce their income tax liability.
If the AGI (adjusted gross income) for that couple is below $198,000 in 2021, the employed spouse can make a contribution to a Spousal Traditional IRA up to the $6,000/$7,000 limit even though their spouse had no “earned income”. It should also be noted that a contribution can be made to either a Traditional IRA or Roth IRA but the contributions to the Roth IRA do not reduce the tax liability because they are made with after tax dollars.
Case 2: One spouse is over the age of 70 ½ and still working (part time or full time) while the other spouse is retired. IRA rules state that once you are age 70½ or older you can no longer make contributions to a traditional IRA. However, if you are age 70½ or older BUT your spouse is under the age of 70½, you still can make a pre-tax contribution to a traditional IRA for your spouse.
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.
Should I Buy Or Lease A Car?
This is one of the most common questions asked by our clients when they are looking for a new car. The answer depends on a number of factors:
How long do you typically keep your cars?
How many miles do you typically drive each year?
What do you want your down payment and monthly payment to be?
This is one of the most common questions asked by our clients when they are looking for a new car. The answer depends on a number of factors:
How long do you typically keep your cars?
How many miles do you typically drive each year?
What do you want your down payment and monthly payment to be?
We typically start off by asking how long clients usually keep their cars. If you are the type of person that trades in their car every 2 or 3 year for the new model, leasing a car is probably a better fit. If you typically keep your cars for 5 plus years, then buying a car outright is most likely the better option.
“How many miles do you drive each year?”
This is often times the trump card for deciding to buy instead of lease. Most leases allow you to drive about 12,000 miles per year but this varies from dealer to dealer. If you go over the mileage allowance there are typically sever penalties and it becomes very costly when you go to trade in the car at the end of the lease. We see younger individuals get caught in this trap because they tend to change jobs more frequently. They lease a car when they live 10 miles away from work but then they get a job offer from an employer that is 40 miles away from their house and the extra miles start piling on. When they go to trade in the car at the end of the lease they owe thousands of dollars due to the excess mileage.
We also ask clients how much they plan to put down on the car and what they want their monthly payments to be. If you think you can stay within the mileage allowance, a lease will more often require a lower down payment and have a lower monthly payment. Why? Because you are not “buying” the car. You are simply “borrowing” it from the dealership and your payments are based on the amount that the dealership expects the car to depreciate in value during the duration of the lease. When you buy a car……you own it……and at the end of the car loan you can sell it or continue to drive the car with no car payments.
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.
NY Free Tuition - Facts and Myths
On April 9th New York State became the first state to adopt a free tuition program for public schools. The program was named the “Excelsior Scholarship” and it will take effect the 2017 – 2018 school year. It has left people with a lot of unanswered questions
On April 9th New York State became the first state to adopt a free tuition program for public schools. The program was named the “Excelsior Scholarship” and it will take effect the 2017 – 2018 school year. It has left people with a lot of unanswered questions
Do I qualify?
How much does it cover?
What’s the catch?
Can I move my finances around to qualify for the program?
This article was written to help people better understand some of the facts and myths surrounding the NY Free Tuition Program.
Who qualifies for free tuition?
It’s based on the student’s household income and it phases in over a three year period:
2017: $100,000
2018: $110,000
2019: $125,000
MYTH #1: “If I reduce my household income in 2017 to get under the $100,000 threshold, it will help my child qualify for the free tuition program for the 2017 – 2018 school year.” WRONG. The income “determination year” is the same determination year that is used for FASFA filing. FASFA changed the rules in 2016 to look back two years instead of one for purposes of qualifying for financial aid. Those same rules will apply to the NY Free Tuition Program. So for the 2017 – 2018 school year, the $100,000 free tuition threshold will apply to your income in 2015.
MYTH #2: “If I make contributions to my retirement plan it will help reduce my household income to qualify for the free tuition program.” WRONG. Again, the free tuition program will use the same income calculation that is used in the FASFA process so it is not as simple as just looking at the bottom line of your tax return. For FASFA, any contributions that are made to retirement plans are ADDED back into your income for purposes of determining your income for that “determination year”. So making big contributions to a retirement plan will not help you qualify for free tuition.
What does it cover?
MYTH #3: “As long as my income is below the income threshold my kids (or I) will go to college for free.” DEFINE “FREE”. The Excelsior Scholarship covers JUST tuition. It does not cover books, room and board, transportation, or other costs associated with going to college. Annual tuition at a four-year SUNY college is currently $6,470. Here are the total fees obtained directly from the SUNY.edu website:
Tuition: $6,470 Covered
Student Fee: $1,640 Not Covered
Room & Board: $12,590 Not Covered
Books & Supplies: $1,340 Not Covered
Personal Expenses: $1,560 Not Covered
Transportation: $1,080 Not Covered
Total Costs $24,680
When you do the math for a student living on campus, the “Free” tuition program only covers 26% of the total cost of attending college.
What’s the catch?
There are actually a few:
CATCH #1: After the student graduates from college they have to LIVE and WORK in NYS for at least the number of years that the free tuition was awarded to the student OTHERWISE the “free tuition” turns into a LOAN that will be required to be paid back. Example: A student receives the free tuition for four years, works in New York for two years, and then moves to Massachusetts for a new job. That student will have to pay back two years of the free tuition.
CATCH #2: The student must maintain a specified GPA or higher otherwise the “free tuition” turns into a LOAN. However, the GPA threshold has yet to be released.
CATCH #3: It’s only for FULL TIME students earning at least 30 credit hours every academic year. This could be a challenge for students that have to work in order to put themselves through college.
CATCH #4: This is a “Last Dollar Program” meaning that students have to go through the FASFA process and apply for all other types of financial aid and grants that are available before the Free Tuition Program kicks in.
CATCH #5: The free tuition program is only available for two and four year degrees obtained within that two or four year period of time. If it take the student five years to obtain their four year bachelor’s degree, only four of the five years is covered under the free tuition program.
Summary
There are many common misunderstandings associated with the NYS Free Tuition Program. In general, it’s our view that this new program is only going to make college “more affordable” for a small sliver of students were not previously covered under the traditional FASFA based financial aid. Given the rising cost of college and the complexity of the financial aid process it has never been more important than it is now for individuals to work with a professional that have an in depth knowledge of the financial aid process and college savings strategies to help better prepare your household for the expenses associated with paying for college.
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.
Strategies to Save for Retirement with No Company Retirement Plan
The question, “How much do I need to retire?” has become a concern across generations rather than something that only those approaching retirement focus on. We wrote the article, How Much Money Do I Need To Save To Retire?, to help individuals answer this question. This article is meant to help create a strategy to reach that number. More
The question, “How much do I need to retire?” has become a concern across generations rather than something that only those approaching retirement focus on. We wrote the article, How Much Money Do I Need To Save To Retire?, to help individuals answer this question. This article is meant to help create a strategy to reach that number. More specifically, for those who work at a company that does not offer a company sponsored plan.
Over the past 20 years, 401(k) plans have become the most well-known investment vehicle for individuals saving for retirement. This type of plan, along with other company sponsored plans, are excellent ways to save for people who are offered them. Company sponsored plans are set up by the company and money comes directly from the employees paycheck to fund their retirement. This means less effort on the side of the individual. It is up to the employee to be educated on how the plan operates and use the resources available to them to help in their savings strategy and goals but the vehicle is there for them to take advantage of.
We also wrote the article, Comparing Different Types of Employer Sponsored Retirement Plans, to help business owners choose a retirement plan that is most beneficial to them in their retirement savings.
Now back to our main focus on savings strategies for people that do not have access to an employer sponsored plan. We will discuss options based on a few different scenarios because matters such as marital status and how much you’d like to save may impact which strategy makes the most sense for you.
Married Filing Jointly - One Spouse Covered by Employer Sponsored Plan and is Not Maxing Out
A common strategy we use for clients when a covered spouse is not maxing out their deferrals is to increase the deferrals in the retirement plan and supplement income with the non-covered spouse’s salary. The limits for 401(k) deferrals in 2021 is $19,500 for individuals under 50 and $26,000 for individuals 50+. For example, if I am covered and only contribute $8,000 per year to my account and my spouse is not covered but has additional money to save for retirement, I could increase my deferrals up to the plan limits using the amount of additional money we have to save. This strategy is helpful as it allows for easier tracking of retirement accounts and the money is automatically deducted from payroll. Also, if you are contributing pre-tax dollars, this will decrease your tax liability.
Note: Payroll deferrals must be withheld from payroll by 12/31. If you owe money when you file your taxes in April, you would not be able to go back and increase your deferrals in your company plan for that tax year.
Married Filing Jointly - One Spouse Covered by Employer Sponsored Plan and is Maxing Out
If the covered spouse is maxing out at the high limits already, you may be able to save additional pre-tax dollars depending on your Adjusted Gross Income (AGI).
Below is the Traditional IRA Deductibility Table for 2021. This table shows how much individuals or married couples can earn and still deduct IRA contributions from their taxable income.
As shown in the chart, if you are married filing jointly and one spouse is covered, the couple can fully deduct IRA contributions to an account in the covered spouses name if AGI is less than $99,000 and can fully deduct IRA contributions to an account in the non-covered spouses name if AGI is less than $184,000. The Traditional IRA limits for 2017 are $5,500 if under 50 and $6,500 if 50+. These lower limits and income thresholds make contributing to company sponsor plans more attractive in most cases.
Single or Married Filing Jointly and Neither Spouse is Covered
If you (and your spouse if married filing joint) are not covered by an employer sponsored plan, you do not have an income threshold for contributing pre-tax dollars to a Traditional IRA. The only limitations you have relate to the amount you can contribute. These contribution limits for both Traditional and Roth IRA’s are $5,500 if under 50 and $6,500 if 50+. If married filing joint, each spouse can contribute up to these limits.
Unlike employer sponsored plans, your contributions to IRA’s can be made after 12/31 of that tax year as long as the contributions are in before you file your tax return.
Please feel free to e-mail or call with any questions on this article or any other financial planning questions you may have.
Below are related articles that may help answer additional questions you have after reading this.
Traditional vs. Roth IRA’s: Differences, Pros, and Cons
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.
