Archive for Investments

 

Mr. BudgetPro celebrated his 55th birthday last week. I’m a younger 50-something myself (which is why all you young 20 & 30 year old whippersnappers should listen to me. I’ve been there, done it, done it wrong, know how to do it right)

Retirement saving is front and center in my plans these days, and it’s time we got really serious about evaluating what we have and what we will need. If it turns out we’re short – how do we fix it?

I’ve been self-employed more in the last 30 years than I’ve been an employee. I made a choice many years ago to leave a very good job to work for myself, and I’m wondering if I did the right thing.

I find myself asking questions

• Has being self-employed hurt me when it comes to retirement?
• Would I have been better off to be an employee, banking a 401K with matching contributions and automatic payroll deductions that went straight to savings?
• Would I own more “stuff” if I had relied on a regular paycheck? (stuff = assets)
• Due to my age, has the timing of this recession hurt me more?

It turns out I’m not the only one asking questions

In Dec 2012 an SBA government study was done that examined the retirement savings decisions of small business owners over age 50. Particular attention was paid to how badly the recession might have hurt those retirement savings.

Overall, the study found that small business owners over the age of 50 are significantly less likely than employees to have pension or 401K retirement plans. At the same time, small business owners tend to have significantly greater IRA & Keogh plan savings than employees.

  • Makes sense. People are using the savings vehicles available to them, depending on circumstance.

The study also found that being an employee or being self-employed didn’t really make a difference when it came to how much was saved and how the money was invested.

People, being people, act basically the same when it comes to their retirement money. There was very little difference between the retirement savings habits of a self-employed small business owner and an employee.

  • Think about that one for a minute. We exhibit herd mentality when it comes to our retirement and our money. Wonder if anyone will ever use that knowledge against us?

The report had a few more interesting findings:

The over-50 small business owner had greater financial knowledge than an employee.

  • It’s all those monthly P&L’s, bookkeeping ledgers, and tax returns we self-employed have to immerse ourselves in!

Older small business owners thought about retirement LESS frequently than employees

  •  Could that be because there are no savings to think about? What do your retirement accounts look like? Do you save regularly by paying yourself first?

And, the kicker and take away from the study is, the small business owner has a significantly later expected retirement age than an employee. The small business owner may be LESS likely to retire at all. Small business owners in 2010 reported they would retire, on average, at age 72.6. The expected retirement age of an employee? 68.4.

  • In the end, it’s all about the money. How much thought do you give your retirement savings? Do you make regular contributions to an established account? When you retire, will you be able to continue living in the manner to which you have become accustomed?

 

Small Business Research Summary
"Retirement, Recessions, Older Small Business Owners" 
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Nov
13

Give Your Money Away – Tax Free!

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The end of the year is coming fast, which makes tax season right around the next corner.  Quite a lot of people receive income tax refunds, so they are in a hurry to file and get that money back! There are bills to pay and things to do!  The kids need shoes! 

There are things you can do now that will make filing your income taxes easier when the time comes.  In the coming months I’ll be writing about different tax topics you should be aware of, and tax saving tips you can use to get back the maximum refund you’re owed! 

White Gift Box with Red Ribbon BowJanie is a friend of mine, and every year her parents gift Janie and her husband Steve a 5 figure check – each.  This year, each of them received $13,000 from her parents – for a total of $26,000 – and that is completely tax free income.  Janie and Steve don’t owe any taxes on the money, and Janie’s parents don’t have to pay any gift taxes for giving their money away.

If your estate is sizable, and you’re trying to minimize estate taxes, you can use the Annual Gift Tax Exclusion to reduce your estate tax liability.  You can give away up to $13,000 tax free this year to any individual, and to as many individuals as you want – and, if you are married filing joint, your spouse can also give $13,000 to the same people.  Tax free!

According to the tax code, any gift is a taxable gift.  Gifts can be property, money, the use of property, or the right to receive income from a property.  According to the tax code, there are exceptions to this “any gift is a taxable gift” rule.  (Of course there are, Congress wouldn’t have it any other way!)

The following gifts are usually not considered taxable:

  • Gifts that are not more than the annual calendar year exclusion (from 2009 through 2012 this has been $13,000 annually for each gift)
  • Tuition or medical bills paid for someone else (you must pay the institution directly, not the person)
  • Gifts to your spouse
  • Gifts to a political organization
  • Gifts to charities

If someone receives a gift that is valued at more than $13,000, taxes are owed on the amount that is above the $13,000 exclusion.

Any gift you receive is not treated as income.  The person giving the gift is responsible for paying the gift tax.

For example:

1.  Mary gave Joe a cash gift of $9,000 during the calendar year.  This gift is not taxable because it is under the $13,000 exclusion.

2.  Jack gave Susan a cash gift of $16,000 during the calendar year to pay for college tuition.  IF Jack had paid this gift directly to the state university Susan attended, the entire $16,000 would be non-taxable due to the education exclusion.  BUT, Jack gave Susan the money personally – so the first $13,000 is not taxable due to the annual exclusion, but the remaining $3,000 is considered a taxable gift.  Jack, as the donor or gift giver, is responsible for paying any gift tax due.

3.  Aunt Joan gave Lisa $20,000 cash to purchase a used car.  The first $13,000 of this gift falls under the yearly exclusion and is not considered taxable, but the remaining $7,000 is considered a taxable gift.  Aunt Joan is responsible for paying any gift tax due.

4.  Pete and Sally are married.  Sally gave a cash gift of $25,000 to her daughter during the calendar year.  Pete gave his son a gift of $15,000.  Neither of the gifts are taxable, both are completely excluded from the the gift tax.

This example messed up your thinking, didn’t it?  If Sally gave her daughter $25,000, then the amount over $13,000, which is $12,000, should be taxable, right?  What about the gift Pete gave his son – that was $15,000, or $2000 over the exclusion limit.  That $2000 is taxable, isn’t it?

Not so fast.

When you are married, and both spouses agree to the gift, Gift Splitting becomes a factor.  When Pete and Sally agreed to split the gifts they made during the year, each gift was split equally between the two of them.  That $25,000 Sally gifted her daughter?  When split, Sally gave $12,500 and Pete gave $12,500 – this is under the exclusion amount of $13,000, and therefore this gift is not taxable.  The same math works with Pete’s son:  his gift was $15,000, but when equally split between Sally and Pete, the gift becomes $7500 from each – well under the $13,000 exclusion and not taxable.

Take a minute and realize how powerful a tool this can be – you can get creative and give gifts that will benefit you as well as the gift receiver.  You can gift your children yearly to the max, and not only build a nest egg for their future, you can do it relatively tax free.

Let’s try one more example:

5.  This year, Sonny decided to give 10 of his grandchildren checks for $13,000 each.  Sonny also paid the college tuition for a nephew, writing a check to the local college for $15,000.  Sonny paid a local hospital $14,000 for medical care his son, Carl, received.  The $14,000 bill was the balance due after Carl’s health insurance paid in full.  Carl was off work for 3 months, recuperating from his injuries.  During this time, Sonny also paid $2500 in health insurance premiums for his son.  Carl’s wife, Connie, took an unpaid leave of absence from her job to care for Carl.  Sonny gave Connie a gift of $25,000 to replace her lost income.  Sonny gave $20,000 to Shari, a good friend of his.  Shari promptly sailed to Hawaii.  Sonny also gave $25,000 to his sister, Ellen.

  • None of the $130,000 gifted to the grandchildren is considered a taxable gift.  The $13,000 exclusion applies in each case.
  • The $15,000 paid for college tuition falls under the education exclusion.  This gift is non-taxable.
  • The $16,500 Sonny paid for Carl’s medical bills and health insurance premiums is non-taxable due to the medical exclusion.  (Sonny paid the hospital and the insurance company directly, which classifies this as medical exclusion.  If Carl would have been paid directly, only $13,000 would have been excluded from tax)
  • The first $13,000 of Connie’s gift is not taxable.  $12,000 remains after applying the exclusion and is considered taxable.
  • $7000 of the gift Sonny gave Shari is taxable.  ($20,000 – $13,000 = $7000)
  • Sonny owes gift tax on $12,000 of the gift he gave Ellen.  ($25,000 – $13,000 = $12,000)
  • Sonny gave away $231,500 in cash gifts this year.  $31,000 of that is subject to gift tax.

Sonny will be required to file a Form 709, US Gift Tax Return, and $6,220.00 in taxes will be assessed on the $31,000 we’ve determined is the taxable amount of all the gifts Sonny gave this year.  But guess what?  Sonny won’t pay a dime in gift tax.

I’ve really confused you now, haven’t I?  (Please don’t bang your head on your desk, and stop pulling your hair – this will eventually make sense) Let me explain about the Unified Credit to Gift Tax.

You see, because Congress writes the tax code, and because Congress is made up of of millionaires and billionaires, they write the tax code to benefit themselves and their friends.  Become familiar with what is in the tax code as it applies to your situation, and use the law to your benefit.

In addition to an Annual Gift Tax Exclusion amount, and in addition to a list of gifts that are not considered taxable, there is a Unified Credit available.  This credit is used to eliminate and/or reduce any gift tax due.  As an added bonus, any Unified Credit not used to eliminate gift tax can be used to eliminate or reduce estate tax.

Back in 1979, the Unified Credit available was capped at $38,000.  In the year 2012, the Unified Credit is $1,772,800.  (The Unified Credit to may increase – it was steady at $330,800 from 2002 through 2010, but then jumped to $1,730,800 in 2011 and increased another $42,000 in 2012)

Remember:  this is a tax credit – as you can see by the example above, $31,000 in gifts generated $6220 in tax – the Unified Credit available is $1,772,800 – and Sonny will use this credit to offset his gift tax due.  Tax credits are applied to tax due, reducing or eliminating tax.  A tax credit “pays” for the tax instead of you – and everyone gets the credit.

Do you understand how powerful gift giving can be when it comes to reducing your estate tax burden?  You can give away your money, not pay any taxes on it when giving it away, reduce your estate, and in the end save major dollars when it comes to any estate tax assessed!  Set up accounts for your children, gift them to the max, and they don’t have to report the gift as income.  It sounds unbelievable, doesn’t it?  See how nice Congress is when it comes to making the law concerning gifts and taxes – and take note that one of those examples above of non-taxable gifts is money given to “political organizations”!

I hope I’ve given you food for thought when it comes to your income, giving cash gifts throughout the year if you can afford it, building wealth for family members, and possible tax strategies when it comes to the tax on those gifts and your estate.

 

There is a spirit in the world of generosity that brings good things to all of us, whoever we may be … A Christmas Carol

Note:  Please consult a qualified tax professional when mapping out your gift giving.  This is a brief overview, and there are more rules when it comes to the definition of a non-taxable gift.  If a husband and wife are gift-splitting, certain tax forms must be filed.  The gifts you give may or may not have have to be reported to the IRS.  When gifting to grandchildren, Generation-skipping Transfer Tax may apply.  Giving away real property may come with tax disadvantages, and may be better left in an estate until death.  Usually, the gift giver is responsible for paying the gift tax, but if he doesn’t, the gift recipient may have to pay the gift tax.  Nest eggs built for children could impact them in a negative way when it comes to qualifying for college financial aid.  Exclusion and credit amounts are subject to change based on changes to the current law.

 

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Oct
11

Emergency! Emergency!

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No Job SignSix months ago, April 6th, on Good Friday (oh, the irony!) – my husband lost the job he had for 13 years. This came completely out of the blue, with no warning. I now know what the bug hitting the zapper in the back yard feels like.

Once the initial shock wore off, we took stock. We had an Emergency Fund, and my husband was owed vacation pay. When I added the two together, we had approx. $25,000 cash. I knew we’d be alright for a few months with the emergency fund, but I also knew we’d have to cut spending to the bone. We didn’t have any credit card debt, nor any car payments, which was a big plus. Those are expenses that can drain finances quickly. We did have a mortgage, insurance, utilities, food, gas – basic and necessary expenses that kept the roof over our heads, the Internet lights on, and food on the table.

I wasn’t overly worried. MrBP is good at his job. I knew the phone would be ringing fairly soon with a job offer, or he’d be able to network a bit and find an opening. This layoff was going to be just a little bump in the road in the overall scheme of things, and we would be fine.

The first thing MrBP did was file for unemployment. Unemployment in this country is not fair to the unemployed, as I’m sure anyone out of work will tell you. MrBP did qualify for the maximum amount of weekly unemployment: $320.00. Wow. I know $320 is better than nothing, but a month of unemployment checks still wouldn’t cover the mortgage. MrBP could also draw unemployment for the maximum number of weeks: 20. Another Wow. Twenty weeks of unemployment equals thirteen years of work history. If he had worked the for company for 30 years, 20 weeks was still the maximum number of weeks he could draw. There is something wrong with that government math!

When a person files for unemployment it takes some time to get that first check. Remember that vacation pay I mentioned? That had to be claimed as income for 3 weeks.  (If what you claim is more than the amount you’re eligible for – you don’t get paid unemployment that week)  At the end of the 3 “vacation” weeks, a waiting week had to be “put in”. This happens to everyone – the first week you are unemployed basically doesn’t count – for anything. Unemployment benefits don’t become available until the second week a person is out of work. Checks don’t come the second week either – the process of being approved for unemployment can take 2-3 weeks, or much longer. Considering the majority of the working population lives paycheck to paycheck, losing a job can be a big deal. All of this waiting for money is going on when people need that money the most!

MrBP was out of work for a month. He never did draw an unemployment check, because the 3 vacation weeks and the 1 waiting week took up that month. We had enough money in the bank that life went on as normal – we just didn’t spend any extra, we didn’t go out to eat, we didn’t go to the movies. Cutting out all unnecessary spending opened my eyes to the kind of money we did spend in some areas. Because there was enough coming in, neither of us had paid much attention to some of the conveniences that were going out. (After all, life shouldn’t be all work and no play, right?)

If we hadn’t had our Emergency Fund, life would have been a completely different story. We would have been in financial trouble fast, as fast as the bills came due. We spend $3000 monthly on house, utilities, insurance, and cell phone payments, but that doesn’t count food, gas for the cars, incidentals, etc.

Emergency Funds are as necessary as homeowners insurance is if you own your home, as necessary as car insurance is if you drive a car. Everyone should have an Emergency Fund. If you don’t have one, you need to start one. Don’t tell me you can’t afford one – you can’t afford NOT to have one!

An Emergency Fund is intended to replace income if you can’t work, but it’s also nice to have when the car needs major repair or the AC unit quits on a 100 degree day in July.

Most financial planners recommend having 3-6 months worth of living expenses saved. But, due to the state of the economy, the average length of time a person is unemployed these days is 9 months (Bureau of Labor Statistics). If you’ve only got a 3 month cushion, what are you going to do the other 6 months when the rent is due, and you’re still looking for work? I know what you’re thinking – you’ve got those credit cards in your billfold, and you’ll fall back on those if you really need to. Let me ask you this: when the credit line is used up, how are you going to repay that debt?

Starting and regularly adding to your Emergency Fund may feel daunting, and may seem like an insurmountable task.   The good news is, you may not need as much as you think. Sit down and make a list of every single bill you pay every month. Go through your bank statement and write down all debit card transactions and what they were for. Check the bank statement for ATM cash withdrawals, and write down what those were for. Get out your credit card statements and add those transactions to the list of money going out for the month. Add all the numbers up.

Now, cut out what isn’t absolutely necessary. The mortgage payment is necessary. $5 at Starbucks twice a week is not. Look closely at bills such as cell phone, cable, gym memberships, newspaper delivery, lawn care – if it came down to it, are these as necessary as food and electricity? No?  Cut those out. Once you figure out the basic living expenses you need to survive, multiple that by 12. Write that number down. Your savings goal is 12 months of basic living expenses in an Emergency Fund.

Work out a savings plan, even if all you can do is save $1 a week, or $25 a month, or the change from your pocket at the end of the day. Put that money in savings and forget it. Cut out one or both of those lattes every week and put that money in savings instead. Treat your Emergency Fund like it’s your water or gas bill, figure out how much you can save regularly, and pay the savings account just like it’s the mortgage company.  Start today.

I was glad we had savings to fall back on. We spent a lot of it, and it went faster than planned because the AC unit did break down on the hottest day of the year, along with a few other things.

During the 5th week of unemployment, the phone rang and MrBP was offered a job – at the opposite end of the state. A 3 hour drive, one way, from the home we’ve lived in for the last 24 years. Whoa.

The new job – and where it was at – brought up a lot of questions: were we going to relocate? Sell our home here? Rent it out? Rent in the new location, or buy? Where would MrBP live for the near future – with family in that area, and if so, for how long? How much was all of this going to cost? There were so many variables and many unknowns six months ago!  A few things didn’t work out, while great truths were learned … stay tuned to find out what happened!

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Oct
04

Free One-on-One Financial Planning Help

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Financial Planning Day What is Financial Planning?

What financial goals would you like to obtain?  What’s on your “Wish List” when it comes to money?

Do you want to buy a home?  Do you own your home, but dream about a vacation home in the mountains or a weekend home at the lake?

Do the kids want to go to Disney World next summer, but you’re not sure you can afford a local pool pass for the season?

Are you able to save today for college for the kids, or have you put that off until tomorrow? Tomorrow is already here, you know.

What about your retirement – how many retirement accounts do you have, and do you regularly fund those to the max?  Is your retirement diversified, or do you have all of your eggs in one basket?  Can you retire without Social Security and live in the manner to which you are now accustomed?  Have you thought about retirement very much, or is that something you’re going to do “tomorrow”?

Financial planning is a must, no matter who you are or what your circumstances are.  What is your financial plan right now?  What strategy do you have in place – right now – that will allow you to retire financially independent?  Do you know where to start to make your financial dreams your reality?  Do you know how to make your dreams your reality?  Are you lost when it comes to implementing changes to your money situation?

We all have money dreams, but most of us aren’t smart enough to know how to make our dreams come true.  We don’t have the time to do the research we need in order to know where to invest, or how, or how much.  We don’t know what goal to tackle first.  We aren’t sure of the quickest way to the goal line.  We’re lost when it comes to the math.  We need help.  During the month of October 2012, personal, one-on-one help is available in many cities across the country.

Financial Planning Days Initiative

During the month of October 2012, “Financial Planning Days Initiative” is taking place.  Four different non-profit organizations**  are bringing together highly qualified, professional, Certified Financial Planners to provide one-on-one counseling sessions to the public.  There will also be classroom style learning sessions held, and free packets of financial literature given away.  All of the work being done by the professionals is on a volunteer basis, and no payment is expected.  Services are free.  You can sit down with a financial planner and ask for personal advice – with no strings attached.  The volunteers will not try to sell you anything, they won’t even give you their business card.  No business will be promoted at all – the professionals are there to answer your questions and help – that’s it.  (If you are a professional, certified financial planner and would like to volunteer, you can find out how here)

Gather your questions about retirement planning, debt, credit issues, budget questions, taxes, college, mortgage loans, investments, estate planning, small business finance, and insurance together, and find out if the Initiative is available where you live:

Click here to find a Financial Planning Day in your area

A list of 2012 events can be found by clicking here

A list of participating states:

  • Arizona
  • California
  • Colorado
  • District of Columbia
  • Florida
  • Illinois
  • Indiana
  • Maryland
  • Minnesota
  • Nebraska
  • New Jersey
  • Ohio
  • Oregon
  • Pennsylvania
  • Texas
  • Virgina
  • Washington

Can’t go?  You Can Still Get the Same Information Packet Being Handed Out

If there is no Financial Planning Initiative in your state, the free information packet information is still available to you and can be found at the links below.  Take a look at the information available, and give yourself a quick education in the basics of financial planning.  Pick up tips and advice on everything from a college savings plan to long term care insurance.

You Can Organize & Simplify Your Financial Life:  A How To Guide

Saving and Investing:  A Roadmap to Your Financial Security Through Saving and Investing

Savings Fitness:  A Guide to Your Money & Your Financial Future

Smart Saving for College – 529 Plans & Other College Savings Options

Guide to Disability Income Insurance

Guide to Long Term Care Insurance

Consumer Guide to Financial Self-Defense

 

** Certified Financial Planner Board of Standards, Inc.®, Financial Planning Association®, the Foundation for Financial Planning, and the U.S. Conference of Mayors

 

 

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