Financial Advice For Parents

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Raising a child in today’s world can cost hundreds of thousands of dollars. As a parent of four children ranging from ages 5 to 16, I can attest to just how expensive kids can be. Besides just the essentials like food and clothes, there are club teams, tutors, dance lessons and so much more. With each additional family member comes new financial considerations and expenses. The importance of planning for these costs before they arise is a key reason why many financial advisors are targeting young families and helping them successfully navigate how to cover their children’s expenses without compromising their own financial security. Here are a few top takeaways from some of these advisors:

SAVING FOR COLLEGE

With a high school junior in our house, it won’t be long before we are paying that dreaded college tuition bill. And, due to the ballooning costs of higher education, this bill is not likely to be a small one! If possible, new parents should try to start saving as soon as they can for their child’s college tuition.The earlier you start saving, the better prepared you’ll be. If you save $500 a month at birth, you should have around $190,000 saved by the time that child reaches 18 (assuming an annual return of 6%). However, if you don’t start until your son or daughter is 10, you’ll only have around $60,000 by the time they graduate high school. Setting up a state-sponsored 529 college savings plan, allows parents to invest money and then withdraw it tax-free, so long as the funds are used for certain education expenses. However, as you prepare for your children’s future, make sure that you remain focused on your retirement saving as well. There are lots of ways to pay for college, but you can only use the resources you’ve accumulated for your own retirement.   

CHILDCARE AND HEALTH CARE

When our first child was born, my husband and I were both working, and trying to find affordable childcare was not easy. Childcare is one of the biggest expenses new parents will face, especially if both parents work. In some cases, one parent will decide to leave their job and take care of the child themselves, especially if the cost of childcare is more than one parent is making. This is exactly what happened when our second child was born, since it was no longer cost effective to pay for childcare for two children with my salary.   

Meanwhile, childbirth and adoption count as qualifying events that allow parents to make changes to their employee benefits outside of the open enrollment period at work. For example, new parents can expect to see their medical expenses rise and those who have access to a flexible savings account and health savings account at work should use them since the money put into an FSA or HSA avoids federal taxation. In some cases, employers offer a Dependent Care FSA, which can be used for costs picked up from a nanny, babysitter or childcare center.

When it comes to health insurance, if both parents work, you should examine which plan will cost less to add the child to. Most doctor visits in the first couple of years are considered wellness visits, which are typically free or very low-cost in most health-care plans today. But, you should look into which plan is most cost-effective in the event of a trip to the emergency room or having to see a specialist – even with good insurance, the price tag of a broken bone is a lot more than you might think!

LIFE INSURANCE

Even though it’s not something most people like to think about, preparing for death is of utmost importance when becoming a parent. Your financial advisor should be able to run various calculations to figure out the amount of protection you would need. Many families make the mistake of only getting life insurance for the main earner, experts say, but both parents should be covered. Many people think that since stay-at-home parent isn’t actually earning anything, they don’t need insurance. However, when it comes to life insurance, you need to evaluate what it would cost to have someone else take care of your children if something were to happen to that parent.  

It is also extremely important to put together estate planning documents, including a will and health-care directives, as well as discussing appointing a guardian in the event of an unexpected life event. When we found out we were expecting our first child, it forced us to have some difficult conversations about who we would want to take of our child and how our assets would be distributed if something happened to us. It’s also important to revisit those questions each time you add another child to your family or if there is another major change to your assets. The guardians you might have written in your will when you were 25 might not be the same guardians you would choose when you are 45. None of these decisions are easy ones, but they are vital to preparing for your life as a parent.

EMERGENCY SAVINGS

With all the additional expenses new parents can face, from diapers to a larger home and mortgage, it’s more important than ever to have a safety net for those unexpected costs. Having children is a good reason to have a bigger emergency fund, simply because there are now more people who are dependent on you financially. Aside from the random home and car repairs that always seem to pop up when you least expect them, now add braces, sports equipment and teenage social lives to the mix. Having some money from each paycheck deposited directly into an account that you don’t touch is an easy way to make sure you are creating an ample emergency fund should you need it.  

There are so many wonderful aspects of being a parent, but it is definitely a costly undertaking. Seeking some financial guidance before you become a parent is always a good idea, but it’s never too late to start planning for your future with a family. If you have any questions about saving for college, choosing the right health plan, putting together your estate documents or anything else related to your financial goals or plans, please contact us.  We offer a free 30-minute introductory consultation and would love to hear from you!  Check out our other blogs for more financial advice and tips.

 

National 529 College Savings Plan Day

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Today is Friday, May 29 which means it’s “529 Day” or “National 529 College Savings Plan Day”. Each year, National 529 College Savings Plan Day draws awareness to the tax-advantaged way of putting money away for education costs. To help ease the burden of student loans, some parents put money aside each year for their children’s education. 529 plans have grown in popularity over the years, however many people still remain unaware that 529 plans are even an option for education savings.

So, what exactly is a 529 plan? 529 plans, also referred to as “qualified tuition plans,” are tax-advantaged savings plans sponsored by states, state agencies or educational institutions. Earnings are federally tax-exempt and most states exempt earnings from state income tax.

There are two types of 529 plans: Prepaid tuition plans and education savings plans. Both can be used as a way to save for a child or beneficiary’s education, but differ in their methods.

Prepaid tuition plans allow people to purchase units or credits at higher education institutions at current prices to be used in the future by the beneficiary. The credits are purchased for participating colleges or universities, which are usually public and in-state. However, it may be able to be used for an equal payment to private or out-of-state institutions.

The second type of plan is an education savings plan. It serves as an investment account that can be used for future qualified higher education expenses. Similar to a Roth401(k) or Roth IRA, plans offer several investment options and funds will rise and fall based on the investment’s performance. Generally, the accumulated funds can be used at any participating college or university, regardless of its location. You can also use up to $10,000 to pay tuition at elementary or secondary schools.

The ways you can spend this saved money differs based on the plan. Prepaid tuition plans can be used for tuition and mandatory fees, but not room and board. Education savings plans, however, can be used for tuition, fees, books, supplies, equipment, computers and sometimes room and board. Technically, a person can use the funds accumulated in an education savings plan for any expense they choose, but if the funds are used for a non-qualified distribution, they are subject to income tax, a 10 percent penalty and any additional state penalties. If a beneficiary doesn’t need the funds, they can be withdrawn with the payment of income tax and penalties, although there are exceptions to the penalty fees.

529 Day is a great time to review your college savings progress and if you haven’t started saving for college yet, it’s not too late!  Some states currently have different contests and incentives to try to boost interest and participation in their 529 savings programs. Click here to see what your state might have to offer.  If you have any questions about 529 plans or would like us to help set up a plan for your beneficiaries, please contact us – we’re here to help!

Ways To Build Wealth And Boost Your Savings While You’re Stuck At Home

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We’re all spending more time at home these days and it’s likely that money and finances are a stress for many during this pandemic. As the markets continue to be extra volatile,  many people are feeling a lack of control when it comes to their money.  Even though there isn’t much we can do about the state of the overall economy, there are some small-scale things you can do right now, from the comfort of your own home, to help you feel more in control of your finances. If it is all you can do right now to keep up with your bills, that should continue to be your main priority.  However, if you’re in the fortunate position of having an income or some extra cash, the following tasks take 30 minutes or less and might just have you feeling a little better about the state of your finances.

REVIEW YOUR BUDGET

 

 

Every solid financial plan starts with a good budget, and now is a great time to go over yours. You should review your spending habits and try to determine which areas of your spending are relatively fixed — such as monthly rent and insurance coverage — and those that are discretionary, like your lattes, subscriptions and eating out. 

Since you’ll likely be spending a lot of time at home this month, most of your convenience purchases will probably trail off. Comparing last month’s expenditures to this month, you will see where you are spending your money and you will be better positioned to make changes to your spending habits in order to prioritize saving money and spending on what you deem essential for your household.

GET SPECIFIC ABOUT YOUR FUTURE

 

 

Write down all the things that you want to do in your future – you can do this by yourself or with a significant other. Break it down into five-year segments. What do you want to do, where do you want to go, and what do you want to accomplish during each five-year segment? If you have career goals that include starting a business, making more money, or changing your job, you might need to learn some new skills to start down that path. 

Being confined to our home offices gives us a great opportunity to focus on learning something new and developing plans for the next steps in life, whether it is signing up for an online class or doing some research on what it might take to take your career in another direction.

SET UP A 529 COLLEGE-SAVINGS PLAN FOR YOUR KID(S)

 

 

If you’ve been considering a college savings plan for your child, setting one up online is quick and easy. You should start by reviewing the 529 plan options where you live, since they often provide tax benefits while you save for your child’s college education. Just remember to keep your own future financial goals in mind, as well. Saving for your children’s education is very important, but should come second to saving for your own retirement.

REVIEW YOUR BENEFICIARY INFORMTION

 

 

You should make a list of your financial accounts that include beneficiary designations —  like your IRA, 401(k), or life insurance — and make any necessary beneficiary information adjustments. Since these designations determine who will receive your account upon your passing, if they are left blank or not updated, your wishes could be ignored and assets could go to an ex-spouse, or state law could become applicable and decide how to split your accounts.

 

SET UP A NEW SAVINGS ACCOUNT

 

Now is the perfect time to set up a separate online high-yield savings account for your specific goals, whether it be for a vacation, saving for the holidays or possibly a new car. To make things even easier, you can also set up a direct deposit so that you put a little bit away from each paycheck towards that objective. However, remember that these “extras” should take a backseat to your emergency fund.  Having three to six months of expenses set aside in a money market or high-yield savings account can provide peace of mind and can be a lifesaver in times of temporary job loss or medical costs.

DO SOME BOOKKEEPING

 

 

Now might be a good time to do some overall bookkeeping.  This can include reviewing your insurance policies to see if you still have sufficient coverage for your needs, or working on your estate plan (are your medical directives all updated?).  If your kids are old enough, this could even be a good opportunity to teach them how to balance a checkbook by showing them how you do yours.

 

EVALUATE YOUR INVESTMENT PORTFOLIOS

If you have money in the market that’s earmarked for retirement, you might be a little worried about how current events will impact your goals. Now is a good time to have a call with your financial planner to determine if your portfolio is still meeting your long-term goals, or if it needs to be adjusted based on current events. 

 

Even though we may not have expected to be spending this much time in our homes over the past few months, it’s important to take advantage of the time while we can.  These unprecedented times have given us the opportunity to slow down and focus on our families, as well as other important aspects of our lives like our finances.  Taking just a half hour each day or week to go over these tasks can help us to feel more in control and less stressed about our money as we deal with the uncertainty of the times.  As always, if you have any questions about any of the suggestions above or any other concerns about your finances, please contact us.  We are here to help and we are all in this together!

Coronavirus and Student Loan Debt: What You Need to Know

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By the end of 2019, student loan in America reached $1.48 trillion.  There were approximately 45 million borrowers across the United States.1  The COVID-19 pandemic has created even greater financial instability for many Americans and those that have student loans may have more difficulty paying them than ever before.  

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was recently enacted to provide a wide array of assistance for families and businesses.  The legislation also made some important changes to assist federal student loan borrowers. 

Here are some answers to a few important questions regarding student loan debt during the current pandemic: 

Question #1: Are Interest & Payments Suspended on All Student Loans?

The suspension of payments applies only to student loans that are held by the federal government. However, your FFEL (Federal Family Education Loan) lender or school may suspend interest and payments voluntarily, but they are not required to do so. 

Regarding your federal student loans, all interest and payments are suspended through September 30, 2020.2 

The benefits authorized by the CARES Act do not apply to private student loans that are owned by banks, credit unions, schools or other private entities. If you are trying to suspend payments to these institutions, you will need to contact them directly to find out what your options are. 

Question #2: Should I Apply to Suspend My Payments or Interest?

Until September 30, 2020, there will be no interest accrued or payments due for federal student loans.2 There is no action required on your part as these payments will be stopped automatically.  

Question #3: What Should I Do if I’m Behind on Payments?

On March 25, 2020, the Department of Education announced that it would not be withholding federal tax refunds, Social Security payments or garnishing wages from those who have defaulted on their federal student loan payments.3 In addition, private collection agencies contracted by the government will put a pause on attempting to contact defaulted borrowers. 

No defaulted federal student loan will collect interest until September 30, 2020.3

Many of us are experiencing a certain level of financial stress as we navigate this “new normal” through the COVID-19 pandemic. If you are able to continue to make regular payments to your federal student loans, it is beneficial in the long-run.  However, it is important to know your options have changed. If you have any questions relating to your student loan payments or other financial matters, please contact us.  We are here to help! 

  1. https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/hhdc_2019q2.pdf
  2. https://www.congress.gov/bill/116th-congress/house-bill/748
  3. https://studentaid.gov/announcements-events/coronavirus#defaulted-loan-questions

Teaching Children Financial Responsibility: Start Early

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Would it surprise you to know that students graduating from high school enter college with little to no knowledge about their finances, how to budget, or save for their futures? The problem has become so severe that 40% of these students wind up going into debt in order to fund their social lives and 70% of these students wind up damaging their credit ratings shortly after college graduation.

Unfortunately, it seems as though this debt will not be going away anytime soon.  The average student loan debt for the class of 2016 increased by 6% from the previous year and the financial literacy rate in the U.S. has not improved over the past three years. While college enrollment and the number of college graduates has continued to increase, financial literacy lags among these young people at record lows. Where does this disconnect come from?

Few states offer personal finance or economics courses and even fewer states test students on the financial knowledge they have acquired. It therefore comes as no surprise that American students (and we can infer American adults) have one of the lowest levels of financial literacy when compared to other countries.  While the number of student loans has increased,

  • 44% of Americans don’t have enough cash to cover a $400 emergency
  • 43% of student loan borrowers are not making payments
  • 38% of U.S. households have credit card debt
  • 33% of American adults have $0 saved for retirement

Why does it matter? How is it affecting the economy?

Students are graduating with loans they can’t afford to pay back and with minimal financial knowledge in planning for their futures. According to Student Loan Hero, Americans have over $1.48 trillion in student loan debt, which is more than double the total U.S. credit card debt of $620 billion. This debt is becoming a major barrier to home ownership. 43% of student loan borrowers are not making payments and most of these individuals do not have any savings. A lack of sound financial knowledge will affect the economy as these millennials enter the labor force burdened with student loans.

As parents, we play a vital role in educating our children about the importance of personal finances.  In the Sherman household, we are teaching our children the importance of finances on a daily basis. Our 4 year old son is learning about savings by doing chores in return for an allowance, which he saves in his piggy bank. He is learning to save and spend his money wisely.

Parents can begin educating their children at home in order to increase the financial literacy of their kids. By demonstrating wise financial habits, parents can serve as role models for their kids. Talking in an age appropriate way to your children about the dangers of debt and the importance of saving a portion of any money they earn instills financial values and lessons your child can use throughout life.  You may find that using an allowance is a way that you can teach your kids about saving and spending appropriately. Since it has been shown that kids who manage their own money have been found to demonstrate better financial habits in the future, giving your kids the opportunity to spend and save their own allowance or money earned is a good way to prepare them for later on. Even a simple trip to the store can be used as an opportunity to start the conversation about the danger of credit cards and how they should only be used in an emergency.  Educating your kids at an early age will enable them to better learn and practice sound financial habits while under your watchful eye and cause them to be less likely to make irrational decisions once they are out on their own.

This issue is not only affecting students and young adults.  Many professionals with advanced degrees have spent countless hours studying and researching information in their particular field.  Despite all of the hours spent earning their degrees, many of these people have never taken a single course in financial education and are surprisingly not prepared to deal with the important financial decisions affecting their futures.  As a result, many extremely smart and successful people are making critical financial errors which can negatively impact the amount of money they have saved upon retirement.

Beginning in 2011, studies were conducted where participants were shown a computer generated rendering of what they might look like at their age of retirement.  They were then asked to make financial decisions about whether to spend their money today or save that money for the future. In each study, those individuals who were shown pictures of their future selves allocated more than twice as much money towards their retirement accounts than those who did not see the age-progressed images.  Seeing the images gave the participants a connection with their future selves that they did not possess before. As a result, their spending/saving behavior changed dramatically because “saving is like a choice between spending money today or giving it to a stranger years from now.”

The benefits of educating your children about the importance of personal finances are undeniable, and you’ll be able to set them up for a promising future and help them prepare for retirement. Visit us online for more information about how we can help improve your financial life.

Want to Get More “Financially Fit” in 2018? Set Savings Goals Now

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One of the most important elements of a good financial plan is regular saving. Unfortunately, it is one of the biggest stumbling blocks as well, with 57% of Americans reporting they had less than $1000 in savings in a 2017 survey. To make matters worse, 1 in 3 American has no retirement account, and only 1 in 4 Americans has over $100,000 in their retirement account.

These are concerning figures, particularly now. As interest rates keep rising – short term treasuries at their highest in nine years – and the market continues its climbing streak, you’re missing out if you are not putting savings to work for you.

Why aren’t more people saving when, according to a recent you.gov survey, “saving more money” was the 4th most popular New Year’s resolution for 2018?

One factor our clients have cited that kept them from saving in the past is discouragement due to past failures. The solution is to make sure your goals are SMART goals: goals that are Specific, Measurable, Attainable, Relevant, and linked to a Timetable.

It is important to set Specific and Relevant immediate, short, and long-term savings goals that you can visualize – like a beach vacation, a bigger home, or a child’s graduation ceremony. Tying savings goals to images that align with your life and your values can make them more emotionally compelling and easier to keep in mind.

Equally critical is to make your goals Measurable and set a Timetable: how much you are planning to save each month, or by a certain date. Don’t set figures or dates that are impossible; make sure they are Attainable as well.

Just like physical fitness, financial fitness is best achieved by setting specific, achievable, and measurable goals. A defined goal, whether it’s “save 5% of each paycheck” or “add extra hours to save for a vacation,” gives you a much better shot at success rather than a simple “I should be saving more.”

A huge part of good financial planning is goal setting. A good financial planner can help you calculate the long-term benefits of saving more and on a regular sustainable basis. It’s particularly important that your financial planner is a fee-only Fiduciary: that means there will be no “additional charges” or investment recommendations with commissions for the broker that could throw off your savings calculations.

And if you’d like help defining financial goals and evaluating whether you are saving enough to achieve them, please feel free to contact me for a free introductory call. We are always on call to help you realize your highest financial potential.

How to Make “Cents” of the Changes to 529 Plans

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Are you saving for your child’s education with a 529 account?

If you are already contributing to a 529 plan, reduced deductions in the new 2018 tax law mean you may want to increase your contributions – or even create a second 529 account – to offset higher state taxes.

If you haven’t yet opened a 529 account, this year’s important changes in tax and 529 regulations have made 529 accounts an even more valuable option for parents of school-aged or college-aged children.

Here are the changes and why contributing to a 529 account is more important than ever:

K-12 Tuition is Now Covered by 529 Plans

529 plans were originally created to let you to save and invest for your child’s college education – while paying no federal tax on qualified withdrawals. The good news is that benefit has now been expanded: you’ll be able to withdraw up to $10,000 per year per student for elementary, middle, and high school tuition if your child attends or will attend a private or religious school. And, if you’ve already been saving for K-12 with a Coverdell ESA, you can also rollover that account to a 529 plan without tax consequences.

Saving by Off-Setting State Taxes

The new 2018 tax law limits deductions for your state income and property taxes to $10,000, so you might find yourself paying more state tax this year. But if you live in one of the 34 states that offers a state tax deduction for contributions to a 529 plan, you can lower your state taxes by contributing more to your 529. In most states you have to be enrolled in one of that state’s own plans to take the deduction, but several allow you to deduct contributions from any state plan. And, if you live in one of the several states whose 529 plans include state tax credits, you could also find yourself paying considerably less.

Turbo Charging the Benefits for Younger Children

529 plans allow “front-loading,” a term for making up to five years of contributions at once. This not only allows you to “catch up” for a child already in elementary or secondary school, it also allows you to maximize state tax deductions or credits. And anyone can make contributions to your child’s 529 plan. Friends and relatives can each contribute up to $15,000 per recipient, they can also “front-load” up to five years of contributions as well, maximizing their own tax savings. Additionally, if they make direct payments to services provided for beneficiaries’ tuition or medical expenses, these expenses would be tax-free, even though the costs surpass the annual gift tax exclusion.

New Benefits for Special Needs Students

The new tax law allows assets in 529 accounts to be transferred to ABLE accounts without any penalties as long as they are transferred by 2025. ABLE plans – named for the Achieving a Better Life Experience Act – are designed to provide tax-favored savings for people with disabilities without limiting their access to benefits such as Medicaid, Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). The annual contribution cap for ABLE plans is $15,000 and an account can reach $100,000 without affecting SSI benefits. You can also make tax-free withdrawals when paying for expenses such as housing, legal fees and employment trainings.

Plans Can Be Transferred to Another Child

If you no longer need the account for the child it was created for, you can change the plan’s beneficiary to another family member, saving you the income tax on 529 earnings and 10% federal penalty you pay if you withdraw money for non-educational purposes.

The Bottom Line

Every parent – and grandparent – should consider opening one or more 529 accounts for their children’s education. There is no limit to the number of plans you can contribute to, or the number of accounts that can be opened for any child, so study up to determine which plans make the most sense for you. But remember: each state’s rules are different so – like your kids – you’ll want to do your homework.

Then, as with all smart savings plans, contribute on a regular basis over time, through market ups and downs, to benefit from dollar cost averaging and watch your interest compound – and your child’s educational opportunities grow.

 

For how the new tax law affects the “Kiddie Tax” for Uniform Gifts and Transfers to Minors (UGMAs and UTMAs) please click here.

At Sherman Wealth Management we’re passionate about children’s education so please give us a call if you have any questions about your state’s 529 options.

A version of this article initially appeared on Investopedia.com

 

 

The “Kiddie Tax” is Changing: What You Need to Know Now

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Saving on taxes, while saving for your child or grandchild’s college education, just got a little trickier thanks to important changes in the “Kiddie Tax”.

The tax bill that was signed into law in December made some significant changes to how Uniform Gifts to Minors Accounts (UGMAs) and Uniform Transfers to Minors Accounts (UTMAs) are taxed.

What is the “Kiddie Tax”?

“The “Kiddie Tax” was first established in 1986 to keep parents from shielding income by placing investment accounts in the names of their children, who typically are in lower income tax brackets,” explains CPA Joshua Harris of Santos, Postal & Company. “The initial Kiddie Tax rules expired when a child turned 14. In 2008, this threshold increased to cover children through age 18 and full time students through age 23.”

How were Uniform Gifts and Transfers Taxed?

UGMAs and UTMAs have been a popular way to save money in a child’s or grandchild’s name precisely because of their significant tax advantages. A portion of the money earned – the first $1,050 of the child’s investment income (including interest, dividends and capital gains distributions) has been tax-free; the next $1,050 has taxed at the child’s rate; and investment income above $2,100 was taxed at the parent’s or grandparent’s “marginal” tax rate, ie the highest rate applied to the last dollar earned.

How is it Changing?

The 2017 Tax Cuts and Jobs Act made an important change to this graduated “Kiddie Tax.”

Instead of a child’s investment income above $2,100 being taxed at the parent or grandparent’s individual tax rate, it will be taxed at the 2018 trust and estate tax rates:

 

Investment Income Trust & Estate Tax Rate
Up to $2,550 10%
$2,551-$9,150 24%
$9,151-$12,500 35%
Over $12,500 37%

Will You Pay More or Less?

How much you will pay depends on the amount of investment income and your own marginal tax bracket. As a rule of thumb, the more you have the more you may be taxed this year.

While the Tax Code changed with this law, it unfortunately did not get simpler. And one alternative, if your rates are going up, may be to consider rolling the UTMA or UGMA into a 529 plan. Because of the complexity, it’s a good idea to speak with your Financial Planner about how the new law affects you, and what your best alternatives are now among the wide array of educational savings plans.

 

Please give us a call if you’d like to schedule a free consultation.

Saving for College and Wondering about Your Options?

Start saving early for college

For many parents, the Spring months are full of happy news, as high school seniors announce their college choices. For parents of younger children, however, those happy announcements may make them wonder if they are being savvy about starting to save for college.

One thing any parent will tell you is that time flies. Before you know it, your toddler will be taking the SATs. And one thing any financial advisor will tell you is that the earlier you start any savings plan, the better off you’ll be (although any time is better than no time.)

Not all college savings plans are created equal

The good news is that more parents than ever are already saving, including an impressive 65% of young millennial parents, according to Sallie Mae’s 2016 report How America Saves for College.

Unfortunately, 61% of the parents surveyed said they are putting their savings in regular savings accounts, and a whopping 44% of all money saved is held in savings & checking accounts, CDs, savings bonds and other low-yielding instruments. And too many of the non-savers are hoping that earnings from their own investments or savings will cover college.

So what are the best ways to save for your child’s education?

Better Ways to Save – 529s, ESAs, and UTMAs

With the availability of excellent plans with significant tax benefits and the potential for compound interest gains, why are so few parents taking advantage of them? One reason may be that the various plans, while excellent, are not always easy to understand. Even the alphabet soup of names is daunting when you’re also worried about packing lunches, soccer practice, and missing work for parent teacher conferences.

Here’s a simplified look at the top plans:

529 Plans

While 529 plans have been around since 1996, they still seem to be a well-kept secret, with only 22% of college savings invested in these portfolios of investment funds (here too, savvy Millennials are leading the charge with 44% planning to take advantage of 529 plans, while Gen X and Baby Boomer parents trail at 36% and 23%.)

529 plans are offered by each of the 50 states and allow you deposit post-tax money that grows and compounds tax-free. While you can invest in any state’s plan, investing in your own state’s plan may offer state income tax deductions in addition to the federal tax break for earnings.

Advantages: Anyone can create a 529 account (including the future student) and anyone can add up to $14,000 per year to the account (or $28,000 if married) without paying a federal gift tax. Up to a total of $400,000 can be invested in a 529 plan account per beneficiary (each state sets its own limits) and for most plans there is no age restriction for the beneficiary. They also allow withdrawals to pay for educational supplies such as computers and books, and the account owner can change the beneficiary to another eligible family member if the funds aren’t used.

Potential drawbacks: when you invest in a state plan, you do not control the financial decisions. Instead, you invest in the portfolio of funds offered by the plan. So shop around for the state plan you feel most comfortable with and that best matches your risk tolerance (a good Fiduciary Financial Advisor can help you evaluate the choices.)

Coverdell Educational Savings Accounts (ESAs)

ESA accounts are similar to a 529 plan in that you contribute post-tax money then growth in value is tax-free. Unlike 529 plans, however, you are free to invest the money as you please.

Advantages: You control the investments in the account and, like 529 plans, can use the funds to pay for educational supplies such as computers and books. You can also use ESA funds to pay for K-12 costs if your child goes to a private school. Any funds not used, may be rolled, tax-free, into the ESA of another family member.

Potential drawbacks: Contributions are capped at $2000 per year per beneficiary and must come from contributors whose adjusted gross income for that year is less than $110,000 (or $220,000 for individuals filing joint returns) so this option is not available to higher income contributors. The beneficiary must be under 18 when it the ESA is created and funded, and the funds must be used by age 30 or be subject to federal tax and a 10% penalty.

UGMA/UTMA Custodial Accounts

The UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) allow larger gifts to be made to minors, while still qualifying for gift tax exclusion. They allow a parent or grandparent to reduce their estate for tax purposes with greater flexibility in how the money is invested than a 529 offers.

Advantages: Custodial accounts have the greatest flexibility. You can contribute as much as you want, invest it as you please, and – while 529 accounts and ESAs are exclusively intended for education expenses – funds in a custodial accounts can be used for any purpose.

Potential drawbacks: Unlike 529 plans and ESAs, the earnings are not tax-free. And, while custodian controls how the funds are used while the student is a minor, after the student turns 21 (or 18 in some states,) control is transferred to the student. Another important consideration for both taxes and financial aid applications is that custodial accounts are considered the child’s assets and the income they produce (over $1,050 and up to $2,100) will be taxed as income to the child, then any earnings beyond that are taxed at your rate.

Prepaid tuition plans

If you live in a state with excellent state schools, prepaid tuition plans may be a smart solution for you. Administered by the individual states, these investment accounts allow you to pay for – or contribute to – your child’s future state school tuition at today’s rates.

Advantages: Paying now is a great hedge against rising college costs and the increase in value is not taxed.

Potential drawbacks: The funds can only be used at state schools and do not cover room and board.

Get a head start on your child’s financial education too

Once you’ve chose the plan – or combination – that makes the most sense for you, it’s a smart idea to share your investment plan with your child, as soon as they’re old enough to understand. If you get them started early understanding the power of planning, saving, and compound interest, they’ll already have an A+ in financial literacy when they get into the college of their dreams.

 

This post originally appeared on Investopedia.

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.

 

 

6 Questions to Ask A Financial Advisor

6 Questions for Financial Advisor

Finding a financial advisor who is right for you is an important process. A good financial advisor is there to prevent you from making decisions that would have a negative, unintended impact on you. Who wouldn’t love to have a financial coach to keep you on track to achieve your financial goals?

Just like with any working relationship, it’s a good idea to interview advisors until you find the one who is the best fit for you, your life, and your financial goals. Since you are entrusting your financial well-being to someone, you should get to know them and their financial planning and investing philosophy before committing to a long-term relationship.

As you may have heard the Department of Labor (DOL) has just released its new fiduciary rule in its final form. We previously wrote about the reasons why someone would oppose this rule considering it was created to improve financial transparency and eliminate conflicted advice from advisors. While this rule would still allow advisors to keep their “conflicted” commissions in some instances, it would require advisors to act as fiduciaries (a.k.a. “best interests contract”) when handling client’s retirement accounts.

We have long been proponents of more transparency and conflict-free advice and feel this is a step in the right direction.

So how does this affect your search for the right financial advisor? Here are 6 questions to ask to help with finding a financial advisor.

1. Are You a Fiduciary? (Are You ALWAYS a Fiduciary?)

As we mentioned earlier, this new rule will only require financial advisors to act as a fiduciary for client’s retirement accounts. A fiduciary is regulated by federal law and must adhere to strict standards. They must act in the client’s best interest, in good faith, and they must provide full disclosure regarding fees, compensation, and any current or potential conflicts of interest.

Until now, broker-dealers, insurance salesman, bank and financial company representatives, and others were only required to follow a Suitability Standard. That means they only had to provide recommendations that are “suitable” for a client – based on age or aversion to risk for example – but this may or may not be in that client’s best interest.

The brokerage industry, as you can probably imagine, and all those who earn their compensation from commissions are strongly against these new rules.

Even with this new law passed, we feel it is important to make sure your advisor is acting as a fiduciary when dealing with ANY of your finances, not just retirement accounts.

 

2. What is Your Fee Structure? (Difference Between Fee-Only, Fee-Based and Commission)

Advisors throw out terms like “fee-based” and consumers assume that is the same as
“fee-only.” That is not the case. At Sherman Wealth Management, we are fee-only which means that we are paid exclusively by our clients, so we are completely conflict-free. We do not get commissions from the investments or products we recommend. We do not get bonuses based on how many clients we get to invest in company products. We are paid an hourly or quarterly fee by our clients who retain us because we are making their money work for them with only their best interest in mind.

Think of it this way: would you want to work with an accountant who also gets commissions from the IRS? Of course not. You want your accountant to represent your best interests. Would you go to a doctor who makes money each time he prescribes penicillin? No, you want your doctor to prescribe what is right for you.

Do not assume that an advisor is following a fiduciary standard with their compensation now. The new rules will not be enforced until 2018. Ask your financial advisor to clearly specify their fees. With many layers of diversification that can be applied to your portfolio, you want to be aware of whether you are exposed to up-front charges, back-end fees, expense ratios, and/or whether a percentage of your returns will be deducted.

 

3. Why Are They Right for YOU?

A financial advisor should be able to tell you their strengths and what sets them apart. Some advisors will advise on investments while others specialize in comprehensive financial planning. While you may think all advisors are the same, and it certainly may seem like that on the surface, by now you should be seeing that is not the case.

Ask how involved they are with their client’s portfolios. Are they hands-on in their approach? How available are they for their clients’ needs?

For us, we enjoy serving a wide-range of clients, from young first-timers who are just getting started with investing and financial planning, to experienced savers, to high-net-worth investors who are well on their way to financial independence.

We strive to understand our clients wants and needs. We help our clients plan for the long term while simultaneously working to avoid short-term roadblocks. We do so by making it a point to SHOW you that you are not alone. We’re just like you, we’ve been there, and we know that financial planning can be an anxiety provoking activity for many. We use a fluid process to help set clear, realistic goals with an easy to understand roadmap of what you need to do to get there. We are right there with you every step of the way.

In today’s world you don’t just want a trusted advisor, you want instant access to your accounts and the progress you are making. That is why we offer some of the best in new financial services technology tools.

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The relationship with your financial advisor is an important one. You need to feel comfortable with whom you are working with.

 

4. What is Your Investment Philosophy?

Every financial advisor has a specific approach to planning and investing. Some advisors prefer trying to time the market and actively manage funds versus passive investments. Others may seek to gain high returns and make riskier investments. Your goals and risk tolerance need to align with the advisor’s philosophy.

When anyone invests money, they are doing so with the hopes of growing it faster than inflation. While some traditional investment managers not only want to generate a profitable return, they aim to beat the market by taking advantage of pricing discrepancies and attempting to time the market and predict the future. Some investment companies offer “one-size-fits-all” investment management solutions that only take into account your age and income.

We have a different approach. We believe an individuals best chance at building wealth through the capital markets is to avoid common behavioral biases in the beginning and utilize a well thought out, disciplined, and long-term approach to investing. We create a well diversified, customized portfolio that focuses on tax efficiency, cost effectiveness, and risk management. Read more about how we do this.

Make it a top priority to understand the strategy your advisor uses and that you are comfortable with it.

 

5. How Personalized Are Your Recommendations for Your Clients?

It is important that your financial advisor tailors your financial plan to your specific goals. Your retirement plan and investment strategy should be customized to take into account your risk tolerance, age, income, net-worth, and other factors specific to your situation. There should not be a one-size-fits-all approach to managing your money.

Some traditional brokers and insurance companies are so big that it becomes impossible for them to give you a truly individualized experience. They have a corporate agenda that they must follow and it can restrict the service they provide to you.

As frustrating as the requirement for a high minimum balance is for first-time investors, it has also inspired a new breed of smaller independent Registered Investment Advisors (RIAs), like Sherman Wealth Management. What our clients all have in common is that they appreciate the focus on their own individual goals and best interests that we guarantee as a boutique, independent, fee-only fiduciary.

We know that each client is unique.  We don’t look for “market efficiencies” or work for sales commissions on the products we recommend. Our focus is different. We strive to help investors build a strong foundation and grow with them, not by profiting off good or bad trades. This gives us the opportunity to create individual strategies and plans that are uniquely suited to each client, not just a cookie-cutter plan based on age, income, or broadly assessed risk tolerance.

 

6. Do You Have Any Asset or Revenue Minimums?

Some have argued that the proposed DOL rule will end up hurting the small investor because larger institutions will not be willing to serve small accounts. This logic is fundamentally backward and flawed, as those clients were never on their radar to begin with. In fact, the ability for these large institutions to generate commissions and thus charge more to these small investor clients have driven that business, without regard to the best interests of the individual investor.

For example, In a company statement quoted by Janet Levaux in Think Advisor, Wells Fargo, the most valuable financial institution in the world according to the Wall Street Journal, said that in 2016, “bonuses will be awarded to FAs with 75% of their client households at $250,000.”

Wells Fargo isn’t the only large institution effectively ignoring Millennials and other smaller and entry-level clients. Most of the corporate institutions prefer high-net-worth clients because it creates “efficiencies of scale” and a higher profit margin on larger trades.

The complaints against the new DOL rule have nothing to do with protecting the little guy. Rather, the complaints are driven by the desire of commission-based large institutions, insurance companies, and broker-dealers who are trying to protect their ability to generate commissions and charge clients unnecessary fees.

Make sure you understand your advisor’s motivations. If they don’t want you, why should you want them?

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
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