Archive for Financial Education

Do you REALLY know the difference between tax-free and tax-deferred?

tax-deferred

What’s the difference?

 

Often people need help deciding whether to save for retirement in a Traditional or Roth-type of account; another way to put that is do you want tax-free or tax-deferred?  This question can come up when you are signing up for your retirement plan at work or when you are deciding to open your own Individual IRA.

The brick wall is that most people don’t understand the difference, so how can they make an informed decision?  I am here to help!

Taxes and Savings

Cast your memory back to when your savings account at the bank earned something called “interest.”  Yes, I know it was long ago. But, do you remember that at the end of the year, you would get a 1099 for interest earned? You would add that dollar amount to your income for the year and pay taxes on it.

The same process happens in your non-retirement and non-college investment accounts.  Every year you get a 1099 from your investment company reporting dividends, interest, and capital gains earned in the account.  That income is taxable to you in that year.  These are called “taxable” accounts.

Retirement accounts give us a break from those pesky annual 1099s and tax payments.  This is to encourage us to save for our old age by giving us tax incentives.

 

Tax-Deferred

In a tax-deferred account (Traditional IRAs, Traditional 401(k)s), you get to shelter your annual contribution from income taxes and not pay yearly taxes on interest/dividends/capital gains.  When you take the money out for retirement spending, you will owe income taxes on the withdrawals you make each year from the accounts.

Tax-Free

In a tax-free account (Roth IRAs, Roth 401(k)s), you do NOT get a tax deduction for the amounts you add to the account each year.  The account grows without annual taxes like the Traditional accounts above.  The big difference here is on the withdrawals.  When you take money out of Roth accounts in retirement, you will owe NO income taxes.

The difference.

So, the difference in a nutshell is do you want a tax break now (Traditional) or tax break in retirement (Roth)?  There is no right or wrong answer since we don’t know if your taxes are higher now or later.  Sometimes the best solution is to diversify – use a little of both.

Mid-Year Financial Check-Up: 4 things you should think about now

financial check-up

It’s July already????

 

Yikes, 2017 has gone by quickly!  Time to do a financial check-up on those New Year’s Resolutions to see how you are doing.  I don’t know what your resolutions were, so here are a few common ones that there is still time to tackle.  BEFORE you are making your resolutions for 2018, that is.

 

College

 

  1. Starting a 529 plan for your kids’ college. It doesn’t have to be much.  Just $50 to start and $25/month can get you going in a Colorado Direct Investment portfolio managed by Vanguard.

Retirement

 

  1. Increasing your 401(k) contribution at least 1% from last year. Most plans let you go online and change your savings amount any time during the year.  Don’t delay!  Save more today!

Health Benefits

 

  1. Use your Flexible Benefits Account money. Did you set aside pre-tax money this year to finally get those glasses, map those moles, fix that tooth, or other medical procedures you’ve been putting off?  That money has to be spent by year-end, so get those appointments made!

Budget

 

  1. Use an app to see how much you are really spending on…clothes, liquor, lunches out, fishing gear, workout clothes, kids’ sports, whatever! Try mint.com, youneedabudget.com, mvelopes.com for free and easy ways to track spending.

 

Okay, that’s enough for now.  If you do even two of those four items before the Fourth of July fireworks, I’ll consider it a victory.

Debt-free would be nice. But SHOULD you pay off your mortgage?

pay off

The payoff?

 

Wondering if you should pay off your mortgage early or stick with those monthly payments? You’re not alone. In this article from dynamicnsurance.com, I’m asked whether getting rid of your mortgage is actually a good idea.

I advise….

 

“If a client thinks they’ll be in a house for 10 years after the mortgage payoff, I encourage them to do it,” said Kristi C. Sullivan, CFP and owner of Sullivan Financial Planning. “But if they want to move soon after they are able to pay off the mortgage, I don’t.”

 

Click here for more expert advice….

 

Your Tax Refund: What you can do with that extra cash

tax refund

Got your tax refund? Let’s go crazy!

 

Shoot. You know me better than that.

The average US tax refund was $2,800 in 2016.  What to do with that mad money?

 

Here are some ideas, in order, from your friendly financial planner:

 

  1. Pay off credit card debt if you have it.
  2. Create or add to your emergency fund if you don’t have one or it’s skimpy. You should have at least 3 months’ essential expenses (rent, food, medical, utilities, car payment) set aside in a savings account.  Your 401(k) at work is NOT your emergency fund.
  3. Increase your contribution to your work retirement plan and use the tax refund to make up the smaller amount in your paycheck. Don’t have a retirement plan at work?  Open an Individual Retirement Account (IRA) at your bank or a discount brokerage firm.
  4. Put the money in a 529 account for your kid(s) college.
  5. If you’ve covered all those bases, reward yourself! Put the money in a vacation fund or refresh a room in your house with new paint and lighting.  Or treat a group of friends to a dinner and a movie.

 

Happy after-tax season!

 

Article Links:

 

This blog focused on small niche funds or ETFs.  For a list of more broad based mutual funds that meet a sustainability criteria, check out this article from Barron’s by Leslie P. Norton and Crystal Kim in October of 2016.  (Click here.)

 

This article has great advice about cleaning out a late loved one’s home. (Click here.)

 

Here is an article with some good ammo for those Social Security Number requesters. (Click here.)

 

Still looking for ways to deploy that tax refund?  Here are more ideas. (Click here.) 

Cost of Living: How much should you be spending on rent?

Kristi's Quotes

If you’re paying more than 28% of your salary on rent…

 

…you’re paying too much. In this article from Credit.com, I detail how your monthly expenses should be allotted.

 

Let’s take a look

 

If you’re like many Americans, you have debt. This is especially prevalent among young college grads. That has to be a factor in deciding what you can afford in housing costs.

“The conventional statistic is that no more than 28% of gross salary be spent on housing and no more than 36% on consumer debt. However, that does not at all take into account other obligations in people’s budgets,” said Kristi C. Sullivan, a CFP in Denver, in an email. “Student loans are a large bill for many and if that’s the case, you can’t afford to spend 28% on housing because then you’ll have nothing left for food. Rent is not the fixed expense people think it is. You can lower this cost by living in a less desirable area of town, having roommates, or living in a smaller place.”

Roberge said a common mindset he sees is that people will find a place, decide to move in and figure they’ll make everything else work afterward. To improve your chances at financial success and stability, you need to plan more carefully.

 

Click here for more….

Reverse Mortgages: How do you know if it’s right for you?

Kristi's Quotes

Let’s get detailed about reverse mortgages.

This isn’t the first time I’ve tackled this subject. But Investopedia recently published a more detailed article (written by yours truly) that provides more information about reverse mortgages and whether or not they’re right for you.

Take a look.

 

Chances are high that when I mention the idea of a reverse mortgage to clients, I’ll be met with a very sour expression. I think this is because of the impression that these instruments are expensive and that you give up ownership of your home to use them.

Now I am no expert in these products, but for clients who have most of their net worth tied up in their homes, finding a way to use that equity to pay bills is a must.

Reverse Mortgage Basics

Here are some reverse mortgage basics:

  • Reverse mortgages are also known as home equity conversion mortgages (HECM) and are administered by the FHA.
  • You enter an arrangement with the lender to take money out of your home based on the amount of equity you have and your age.
  • You don’t have to have earned income to qualify.
  • You keep the ownership of your house until the last occupant dies or moves out.
  • You can receive the income from home equity in a variety of ways: For a specific time period, as a credit line to use as needed, or for your lifetime or the time that you or your spouse occupy the home.
  • When you pass away or move from the home, whatever equity is left after the debt and fees are paid will pass back to you (if living) or to your estate. (For related reading, see: How Does a Reverse Mortgage Work?)

Your Financial Goals: Are you keeping your New Year’s resolution?

Kristi's Quotes

Yes, I know that New Year’s was a few months ago, but I just thought I’d check in and see how you’re doing with all of those financial goals you made at the beginning of the year.

 

Here’s an article that might get you back on track: Jean Chatzky, one of my favorite personal financial authors, included me in this piece that helps people achieve the monetary goals that they set way back in January.

Achieving your financial goals.

 

Only 8 percent of people who make resolutions are successful in achieving them.

That sounds like a challenge to me. Nothing gets me motivated like someone thinking I won’t succeed. So let’s make this the year we successfully keep our resolutions. And while I can’t help you lose weight or get organized, I can certainly help with the financial piece of the puzzle.

Here are five steps you can take to help stick to your resolution.

Build in rewards. You don’t want to sabotage your efforts, but much like cheat days help you diet — if you know there’s cake on Saturday, you’re more likely to eat clean on Tuesday — a small reward can give you the motivation you need to keep moving when the urge to spend strikes. “Reward yourself for small victories along the way to stay motivated,” says Kristi Sullivan, a Denver-based CFP professional. “For example, if your goal is to save $2,000, treat yourself to a movie, facial or drink with a friend for every $500 saved.”

Environmental Investing: How Do I Invest in Global Warming?

Environmental Investing

Ski season is over for the Sullivan family and it was a warm one.  It was still fun, but we were skiing on slush as early as February.  Not to get political, but this global warming debate is all fun and games until it interferes with my winter recreation. So, now it’s time to turn my attention to Environmental Investing.

 

I DON’T give investment advice in this blog, but in case you were wondering, there are some investments that you can make to help Mother Earth.  These would not be areas where I would suggest putting a lot of money.  Maybe 5%-10% at most of your total portfolio should ever go into extremely specialized investments.

Is Environmental Investing a good idea?

 

Historically these environmental sector investments have not had a great risk-reward trade off.  In other words, much risk, not so much reward. However, some are starting to do better.  Okay, disclosures over.  Here are some interesting sector investments I found.

Guggenheim S&P Global Water ETF (CGW)

“Seeks to benefit from the development of new infrastructure, intended to ensure the efficient delivery and quality of water, by investing in companies spanning the water sector.” Quoted from the Guggenheim website.

VanEck Vectors Global Alternative Energy ETF (GEX)

“Index is concentrated in companies whose technologies are involved with solar power, bio energy, wind power, hydro power, and geothermal energy.” Quoted from the VanEck website.

PureFunds ISE Mobile Payments ETF (IPAY)

“The ISE Mobile Payments Index is designed to reflect the performance of companies involved in the mobile and electronic payments industry, including card networks, processors, infrastructure/software and solutions companies.” Quoted from zacks.com.

 

PowerShares Cleantech ETF (PZD)

“The Index is designed to track the leading cleantech companies, from a broad range of industry sectors that offer the best investment returns. The Cleantech Index is a modified equally weighted index composed of stocks (and ADRs of such stocks) of publicly traded cleantech companies. The Fund and the Index are rebalanced and reconstituted quarterly.”  Quoted from invesco.com.

 

Fidelity Select Environment and Alternative Energy Portfolio (FSELX)

“Investing primarily in companies engaged in business activities related to alternative and renewable energy, energy efficiency, pollution control, water infrastructure, waste and recycling technologies, or other environmental support services.” Quoted from fidelity.com.

 

Vanguard FTSE Social Index Fund (VFTSX)

“This low-cost fund seeks to track a benchmark of large- and mid-capitalization stocks that have been screened for certain social, human rights, and environmental criteria. In addition to stock market volatility, one of the fund’s other key risks is that this socially conscious approach may produce returns that diverge from those of the broad market.” – Quoted from personal.vanguard.com.

Kristi’s Quotes: Do you know what a FED rate hike means?

Kristi's Quotes

Kristi was asked by KHOU News in Houston…what does a FED hike mean to the average American?

Here’s what you should know.

Consumers should be aware of the rate hike for a simple reason: Lenders and banks base their interest rates on the federal funds rate, so when the benchmark increases or decreases, it can impact rates on products like credit cards, auto loans, mortgage rates, and more.

So, what could change for you?

Click here for more….

How much should I have saved for at my age?

saved

What’s the magic number?

 

Forgive me if I’m like the drunk at a party and I’ve already said this to you before.  But it’s come up in a bunch of client meetings lately, so I’m going to tell you again.  And again.  And again.

 

Americans really like to compete when it comes to material wealth.  If you are surprised by this, look no further than our current president.  As such, I get asked often, “Do I have more or less than the average amount saved for someone my age?”

 

The answer is, there is no magic number that every 30-year old, 45-year old, or 70-year old should have in the bank.  There are too many variables to come up with a pat answer.  Everyone has different earnings histories, different plans for when they want to retire, different amounts of home equity, different goals, different everything!

 

But this might help.

The good news is, I found this handy article that gives a nice guideline of how much a person should have saved by various ages.  It’s tied to income (makes sense!) and anyone can use it as a benchmark; it says you should have the equivalent of your salary saved by age 30.  This includes retirement savings, emergency funds, other investments, but not home equity. (Click here for more.)

 

By 35, you should have 2 times your salary saved and up it goes like this every 5 years.  By age 65 (traditional retirement age) you should have 10 times your salary saved.

 

The beauty of this guideline is that it is income based.  If you earn more, you should be saving more.  If you earn less you will be able to save less, but then, you’re used to living on less and don’t need such a big retirement nest egg.

 

 Article Links:

 

Want more info on reverse mortgages without the sales pitch?  Check out this guide from your friendly Federal Trade Commission:  https://www.consumer.ftc.gov/articles/0192-reverse-mortgages

 

This is a very handy chart comparing different small business retirement plans side-by-side:

https://www.fidelity.com/retirement-ira/small-business/compare-plans

 

This article comparing Roth and Traditional IRAs from Nerdwallet has some handy calculators built right in.  https://www.nerdwallet.com/blog/investing/roth-or-traditional-ira-account/

 

Here is another guide to different nest egg goals for different ages and incomes.  http://www.financialsamurai.com/how-much-should-one-have-in-their-401k-at-different-ages/

 

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