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June 2024 Question and Answer

QUESTION:

I’m fairly new to investing and am thinking of branching out from mutual funds. What can you tell me about exchange-traded funds?

ANSWER:

Simply put, an exchange-traded fund (EFT) is a basket or bundle of individual securities that track an index, sector, commodity, or other assets. Unlike their “cousin” mutual funds, EFTs are marketed on a stock exchange like stocks. They may contain a single investment type or be a mixture, including stocks, commodities, bonds, or currency. Some ETFs offer U.S.- only holdings, while other may include international securities. ETFs have low expense ratios and are generally less costly than buying the stocks individually.

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Start Your College Grad on the Path to Becoming a Millionaire

You may be able to do this utilizing any unused funds in the student’s 529 Plan. The IRS now allows rollovers of these funds to a Roth IRA in the child’s name.

REQUIREMENTS

You must have owned the 529 account for at least 15 years before rollovers are allowed. Contributions made in the five years before distributions start — including the associated earnings — are ineligible for a tax-free rollover. Rollovers can’t exceed the 2024 annual Roth contribution limit ($7,000/$8,000 for ages 50 and older).

The lifetime 529 rollover limit is $35,000, so you’d have to do a rollover annually for several years. As the owner of the Roth IRA, your graduate must have earned income at least equal to the amount of the annual rollover.

THE MILLIONAIRE PART

Look at the hypothetical example (chart) of making rollovers of $35,000 in remaining funds over five years. It assumes the annual contribution limit remains $7,000, your child makes no additional contributions, and the IRA earns a hypothetical 7% compounded interest monthly for 45 years. Consult your tax advisor about your situation.

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June 2024 Client Profile

Maureen’s yoga center has grown faster than expected, so she’s considering using a third-party service to handle payroll processing and management.

Maureen consulted her tax professional and looked at IRS Tax Tips for guidance. She found she could best protect her business by hiring one of these types of services:

Certified professional employer organizations are generally only liable for filing employment tax returns and making deposits and payments for the taxes their customers report on wages and other compensation.

Reporting agents are generally limited to depositing taxes with the Electronic Federal Tax Payment System (EFTPS). Employers retain responsibility for seeing that filing returns are filed and taxes paid on time.

Section 3504 agents withhold, report, and pay employment taxes and share liability for all federal tax withholding responsibilities with the employer. Employer returns are submitted with the agent’s Employer Identity Number (EIN). Generally, customers must still file FUTA tax returns with their EINs.

Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.

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Cash Balance Plans: What’s Your Advantage?

Need to boost your retirement savings? A cash balance plan — generally along with a 401(k) plan — might allow you to compensate for years of underfunding your retirement.

Blending features of a traditional pension plan with the look and feel of a 401(k)/profit-sharing plan, these hybrid plans require company contributions based on a percentage of pay or a flat dollar amount. An annual interest credit set in the plan documents is credited to each participant’s balance. You must ensure contributions to your plan are invested to pursue the plan’s rate goal. When a participant terminates employment, vested account balances can be withdrawn, which may trigger taxes, or rolled over to an IRA or other employer retirement plan.

POSITIVES

For owners and higher paid employees, the biggest attraction of cash balance plans is that they allow tax-deferred contributions much higher than the limits placed on 401(k) and other defined contribution plans. You and your employees can contribute to both plans, and you do not need to include all employees in the cash balance plan. Another attractive feature is that your company may claim an above-the-line tax deduction for contributions.

For those nearing retirement, cash balance plans, unlike traditional pension plans, have accelerated vesting requirements. Participants must be 100% vested in their benefits no later than after completing three years of vesting service. No graded vesting schedule is allowed. The Pension Benefit Guaranty Corp (PBGC) protects most benefits under a cash balance plan.

NEGATIVES

These plans are subject to IRS minimum funding requirements, which may require cash funding in years your company would rather not contribute at all or as much as necessary. With an exception for small benefits, a cash balance plan must offer forms of payment other than lump sums (e.g., Qualified Joint and Survivor). Generally, the plan sponsor has to pay PBGC premiums. Because they’re subject to many of the pension plan requirements, cash balance plans are more complicated than a 401(k). Consult your financial professional.

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Clean Out Your Subscriptions

You may be so used to seeing recurring charges on your monthly statements that they don’t register as the unnecessary expenses they may be. Do you use those services enough to warrant paying for them? Eliminating those fees can result in sizable savings over time.

GET STARTED

Look at your credit card and bank statements and what you’re spending on things you no longer use. Question anything you don’t recognize. If you don’t see how to unsubscribe on the company’s site, search the web, call customer service, or check with your credit card company’s customer service.

GOING FORWARD

Turn off the auto-renewal option when you subscribe. If you opt out, the company has to contact you before charging your credit card. Read the fine print on special offers. For example, opt out before a lower promotional fee ends.

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Independent Contractor Rules Updated

Whether you use independent contractors in your business or are an independent contractor yourself, take note of recent Department of Labor (DOL) changes in the Fair Labor Standard Act’s (FLSA) rule for determining independent contractor status — and the consequences of misclassification.

MULTIFACTOR ANALYSIS RESTORED

The new independent contractor rule restores the multifactor analysis used by courts for decades to determine whether a worker is an employee or an independent contractor. Under the update, six factors guide the analysis of a worker’s relationship with an employer:

  • Any opportunity for profit or loss a worker might have
  • The financial stake of any resources a worker has invested in the job
  • The degree of permanence of the work relationship
  • The degree of control an employer has over the person’s work, whether what the person does is essential to the employer’s business
  • A worker’s skill and initiative

These factors aren’t all-inclusive, and different factors might be more or less important in different cases depending on the facts of that case. Employers and individuals who consider themselves independent contractors should carefully review independent contractor and employee classifications in light of the DOL’s new rule. The DOL has a series of FAQs on its website that may answer some of your questions.

MISCLASSIFICATION

Misclassification may result in lost wages, benefits, unemployment insurance, and workers’ compensation coverage for affected workers. Whether an employer misclassifies any workers unintentionally or willfully, doing so can result in significant liabilities, including back overtime pay for up to three years and payment of attorney fees for misclassified workers.

That’s not all. Employers face additional penalties under the FLSA and other applicable employment and employee-benefit laws, including:

  • Loss of tax-qualified status for the employer’s retirement plan
  • Back FICA withholding funds for affected workers
  • Criminal and civil penalties

Talk to your trusted legal professional about the classification rule changes.

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June 2024 Client Line

Independent Contractor Rules Updated – take note of recent Department of Labor changes in the Fair Labor Standard Act’s rule for determining independent contractor status.

Clean Out Your Subscriptions – do you have recurring charges that don’t register as unnecessary?

Cash Balance Plans: What’s Your Advantage? – a cash balance plan might allow you to compensate for years of underfunding your retirement.

June 2024 Client Profile

Start Your College Grad on the Path to Becoming a Millionaire – you may be able to do this utilizing any unused funds in the student’s 529 plan.

June 2024 Question and Answer

Legal Powers: Prepare Your Child for College – along with other things necessary for a move to college, your student should have medical and personal powers of attorney.

Do You Feel Wealthy? – making it into the millionaires’ club isn’t what it used to be.

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May 2024 Short Bits

72% of female gray retirees didn’t view their engagement ring as a financial asset nor realize selling it could give them cash to invest and supplement their retirement savings.

*Building a Financial Fresh Start, Worthy.com

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Cutting the Financial Cord

In a 2023 Credit Karma survey, nearly a third of parents with children over 18 reported currently providing them with financial support. 64% of those parents said they provide support by allowing their kids to live at home, and another 49% pay monthly bills for them.* Both sides have good reasons. Most adult children are trying to save money and get student loans under control. The adjacent graph lists parents’ various reasons for continuing support.

FIRST: YOUR FINANCIAL WELL-BEING

While there are times when help is necessary, parents need to think of their financial health and overall well-being first. If you have an adult child who is still under your financial wing, you need to establish boundaries for your assistance.

SET EXIT GOALS

The best plan is to establish financial goals for when the child will become financially self sufficient up front. Or, if you’re already helping, the time is now.

Assistance might be provided until they save enough for housing, they can afford their student loan or car payments, their divorce settlement is worked out, or a similar financial milestone.

For a child with a health issue or addiction, consider talking with your legal advisor about a special needs trust, with funds going directly to the child’s treatment and recovery. And there’s nothing wrong with asking kids to contribute an affordable amount for their stay.

*Survey by Qualtrics for Credit Karma, November 2023

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Protect Your Security Data

Quite often, data security concerns surface when an employee leaves. But that’s not the only time your data may be at risk.

HAVE A PLAN

If you have yet to develop a data protection policy that applies to both new hires and existing employees, do so now. Part of that plan should include specific penalties for those who break the rules. Strive to limit the data employees can access to only what they need to perform their jobs.

On the other hand, avoid having online services and tools with credentials that are available to only one worker.

The plan should provide for quickly shutting off online services if needed.

BACK IT UP

Having a backup strategy in place and routinely backing up data is critical. With your backup strategy, consider services that can track remote systems and render them inoperable if you detect suspicious use.

REVIEW AND UPDATE CREDENTIALS

Be aware that even if sharing login/password information is against company policy, employees could be doing it to save time. Don’t forget contractors and consultants that have access to certain systems. You can’t be too careful with your company’s data.