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Retirement Savings Versus College Savings

For Millennials with young families, this can be a quandary. Try to save for both, but prioritize retirement savings. There are loans for college but not retirement.

SET PRIORITIES

While you value providing higher education for your children, step back and think hard before choosing to fund education over saving for retirement. Alternatively, start your children working toward winning scholarships in their freshman year of high school. Academics and sports are one way, but leadership in clubs and community service are also important.

MAXIMIZE EMPLOYER 401(K) MATCHES

A 401(k) plan matching contribution may be the best return you will ever get on an investment. In addition to the match, you also get a tax break on your contributions and the earnings on those contributions. If your employer also offers a Roth 401(k) option, all contributions, including the match, will be made with after-tax money.

CONSIDER A COLLEGE SAVINGS PLAN

Ask your professional advisor about a college savings plan only after you’ve maximized your retirement plan matching contributions. They can help you compare the benefits of saving more in your company plan, contributing to an individual retirement account or Roth IRA, or funding a separate college savings plan.

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Tracking Relative Return

A 3% return could be good enough in a bear market, and a 10% return might be mediocre in a bull market. How can you readily know how your investments are performing?

LOOK AT YOUR RELATIVE RETURN

Relative return is the return an asset or investment achieves over a period compared to a benchmark e.g., an index). It’s important for actively managed accounts because it measures investment performance. Actively managed investments should strive for a return greater than the market.

COMPARE APPLES TO APPLES

Use the right benchmark for the investment. Here are some popular stock indices: the S&P 500, considered a good measure of the US stock market at large; the Dow Jones Industrial Average, for large-cap stocks; the NASDAQ, heavily weighted in the technology stock sector; and the Russell 2000, for small-cap stocks. There are countless more US and global stock indices at your disposal.

For bond investments, look at indices that follow markets specific to your bonds, such as corporate, government, treasuries, “junk” bonds, and international bonds.

Remember that benchmarks simply show how an investment measures up against past performance, and past performance doesn’t guarantee future results.

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August 2024 Client Profile

Amy wants to buy a new car for her business but is unsure whether to do it before year-end or wait until 2025.

According to Cox Automotive, August through September is a good time for business or personal car shopping. The new models are out; many dealers still have last-year models at substantially reduced prices. Car prices also generally drop at the end of any calendar quarter.

In 2023, the Tesla Model Y was the top-selling car model worldwide. The Toyota RAV4 ranked second.

In addition to negotiating a potentially lower price on the vehicle Amy can realize potential tax advantages buying in 2024.

For example, under IRS Section 179, she could write off some or all of the vehicle’s purchase price this year as long as she uses it for business more than 50% of the time (and certain other requirements are met), rather than having to claim depreciation of the vehicle price over five tax years.

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

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Avoid the Third Generation “Curse”

Sadly, too often, wealth accumulated by one generation is lost by the third generation because of mismanagement and imprudent spending. Use core values in your estate strategy to help prevent this in your family.

GROUND YOUR ESTATE

First, recognize your core values and how they may differ from those of your beneficiaries. Help them understand that your goal isn’t to impose your values on your beneficiaries but rather to protect family assets as far into the future as possible.

START YOUNG

Educate your heirs throughout their lives. Begin with a basic financial education and bring them into the business as teens so they observe you and learn your business values.

INSTILL VALUES IN YOUR DISCRETIONARY TRUST

Trusts are often created for tax-saving purposes, but other asset-protection purposes must be clear to your trustee, especially with discretionary trusts. Write a letter to inform your trustee of any distribution wishes you have that aren’t dictated in the trust document. Such guidance is especially valuable to a successor trustee administering the trust years after it is funded.

For example, you might prefer the assets be used for higher education, a down payment on a home, or to start a business. Or you might want beneficiaries to receive specific amounts or percentages of the trust assets at certain ages or milestones. Understand that the letter is a guide for the trustee, who won’t be strictly bound to follow the wishes in your letter.

According to Cerulli Associates, a research firm, $54 trillion or more may be inherited by Gen X, Millennials, and Gen Z from their baby boomer parents through 2045. Ultra high-net-worth households, the top 1.5% of households, will account for 42% of this Great Wealth Transfer.

COMMUNICATE YOUR WISHES

Use your letter to convey the details and purposes of your wishes. That way, the trustee will have the flexibility of your intentions to be able to explain why certain distribution requests may be denied.

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How Lenders See You

Lenders often determine an individual’s creditworthiness by looking at that person’s debt-to-income ratio. If the ratio is considered acceptable, it’s more likely that lenders will make the loan. Calculating the ratio can provide insight into the state of your financial health. Here’s how to calculate your ratio.

Start by adding up all of your monthly debt obligations — mortgage, auto, and other loan payments, as well as minimum credit card payments. Next, divide that amount by your gross monthly income. That’s the amount of money you earn before taxes and other deductions are taken. Income generally includes your pay, investment income, and self-employment income.

If you multiply the ratio by 100, you’ll get the ratio as a percentage. If your ratio seems high, it may be time for you to take some action to lower it. Paying down credit cards or other debt is a good starting point.

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Some Things Get Better with Time

Fine wine, balsamic vinegar, cheese, and certain tax breaks have something in common. They can get better with age. Case in point: consider this sample list.

RETIREMENT PLAN CONTRIBUTIONS

If you’re 50 or older, catch-up contributions allow you to add an additional $1,000 to qualified retirement accounts, such as IRAs and 401(k)s. Contribution limits are based on modified adjusted gross income and begin to phase out at higher income levels.

HIGHER HEALTH SAVINGS ACCOUNT (HSA) LIMITS

Similarly, qualified individuals aged 55 or older may increase deferrals to HSAs by up to $1,000 for an annual contribution of $5,150 (single) or $9,300 (family) versus $4,150 and $8,300 for younger taxpayers with qualified high-deductible medical plans.

NO WITHDRAWAL PENALTIES

At age 59 1/2, you’re no longer subject to the usual 10% early withdrawal penalty on withdrawals from IRAs and 401(k) plans. At 65, you may withdraw HSA funds for non-medical expenses without paying an additional tax penalty. However, ordinary income tax rates apply to unqualified medical expenses.

AN EXTRA STANDARD DEDUCTION

Once you turn 65, you become eligible for an additional standard deduction. The extra deduction reduces taxable income, potentially lowering your overall tax liability. The amount of this extra standard deduction can vary based on filing status and whether you or your spouse are 65 or older. Another factor is whether you or your spouse is blind. Generally, for 2024, the deduction amounts are $1,950 if you’re single or file as head of household and $1,550 each for married, filing jointly or separately. They double for taxpayers 65 and older and blind.

This list isn’t all-encompassing. If you’re unsure whether any tax provision, credit, or deduction applies to you, consult a trusted tax professional.

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August 2024 Client Line

Some Things Get Better with Time – fine wine, balsamic vinegar, cheese and tax breaks have something in common; they can get better with age.

How Lenders See You – lenders often determine an individual’s creditworthiness by looking at that person’s debt-to-income ratio.

Avoid the Third Generation “Curse” – too often, wealth accumulated by one generation is lost by the third generation

August 2024 Client Profile

Tracking Relative Return – how can you readily know how your investments are performing?

Retirement Savings Versus College Savings – try to save for both, but prioritize retirement savings.

August 2024 Question and Answer

Communicating with Gen Z Employees – they want communication options that let them switch effortlessly between different platforms and channels.

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Warding Off Capital Gains Tax Fears

Everyone wants to minimize taxes owed, but the suitability of an investment for you is more important than whether you may, at some time, owe capital gains tax on it. The point is to handle capital gains and not avoid attractive investments that may generate the tax.

KNOW THE FACTS

Long-term capital gains apply to the appreciation of assets you sell after owning them for more than a year. Gains on assets sold within a year of purchase are taxed as ordinary income.

Long-term federal capital gains taxes are 15% to 20% and may be as low as 0% for lower income taxpayers, potentially making capital gains less costly than regular income tax. Remember to budget for the tax you’ll owe on gains.

HARVEST LOSSES

Sell losing investments and replace them with assets that offer more promise. Then offset realized capital gains with those losses. But be aware that you’II lose your tax advantage if you repurchase identical securities within 30 days of selling them.

Remember, all of your investments should help move you closer toward your finanical goals, even if it means paying capital gains taxes.

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July 2024 Question and Answer

QUESTION:

I’m a new investor and recently heard the term “Rule of 72”. What is it?

ANSWER:

The rule of 72 is a simple method to estimate how long it would take for an investment to double, given a fixed rate of compound interest.

To use the rule of 72, divide 72 by the annual rate of return. For example, an investor invests $20,000 at a 5% fixed annual interest rate. According to the rule of 72, it could take approximately 14.4 (72÷5) years to double.

Of course, investments such as stocks and mutual funds, have fluctuating returns, but this rule of 72 is one way to think about how fixed compound interest affects your investment.

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Bereavement Leave Policy Considerations for Employers

You want to be a supportive employer when an employee loses a loved one. Sometimes it can be difficult to know what’s needed. A written company bereavement policy, (also known as compassionate leave) can help. Critical elements of a good policy include:

DEFINE ELIGIBILITY

Who qualifies for leave? Full-time, part-time, and/or temporary employees? The policy may also specify that employees must have been with the company for a certain period to be eligible.

PAYROLL TRACKING

Establish a process for recording leaves with your payroll provider.

STATE REQUIREMENTS

Some states have bereavement policy regulations that you should include.

PROCESS FOR REQUESTS

Specify how employees should request compassionate leave. You might require them to submit a written request to their supervisor, a Human Resources representative or complete an online form.

LEAVE AVAILABILITY

This is usually three or four days for the loss of an immediate family member and less time for the extended family or friends. Employees should be allowed to schedule the days off with their supervisor. Another way of showing support for a grieving employee is to offer flex time or the option to work remotely.