Category: Smart Money Tips

Have you ever imagined what it would feel or look like to be stress-free about money? It’s not uncommon for most people, wealthy or not, to worry about money. One study found that money was the leading cause of stress among Americans, and 64% of people consider money to be a somewhat or very significant source of stress. (1)

While there’s no guarantee that any amount of planning or investing can cure all of your worries, taking proactive control of your financial situation and future can significantly help you feel more confident. At Archer Investment Management, we like to tackle financial planning in five different areas, each of which is designed to improve your life in a unique way. Together, these strategies cohesively work together to help you pursue your goals and visualize what financial peace can look like for you and your family.

1. LIFE PLANNING

Before you can accomplish something, you need a goal. Otherwise, you’re essentially driving blind without a map for guidance. The foundation of a strong financial plan is clarity regarding what you want to accomplish now and in the future. In this area of financial planning, it’s important to consider:

• When do I want to retire?
• What do I want to achieve in 5, 10, and 20 years?
• Do I plan on expanding my family or sending a child to college?
• What does a comfortable lifestyle look like?

Addressing these questions can help you prioritize your objectives and define what steps to take.

2. INVESTMENT PLANNING

Investing can play a powerful role in your financial planning, but it’s overwhelming for most people. Investing doesn’t have to be scary if you have set intentions, needs, and a partner to guide your decisions.

Along with identifying your overall money goals, you’ll want to consider your investments and how they are working for or against you. This involves asking:

• Is my money working as hard for me as it can be?
• Am I paying fees that are too high?
• Do I have too much risk in my portfolio?
• Do I understand what I’m investing in?

The more you understand about your portfolio, investment opportunities, and goals, the more you can feel confident about how your money is working for you.

3. ESTATE PLANNING

Beyond your personal goals, you likely have dreams for your children, grandchildren, loved ones, or charitable organizations. Estate planning helps you have a stronger handle on where your money will go and how it will be used in the future. When considering your estate, you’ll want to ask:

• Does my family know my intentions should I ever become incapacitated?
• Have I named and updated my beneficiaries?
• Is my estate subject to federal estate taxes?
• Does my family know where our important household documents are stored?

Planning for your estate can help both you and your family feel more confident about the future and any decisions they may have to make in an emergency.

4. INSURANCE PLANNING

There’s no such thing as a life without risk, but you can actively work to reduce its negative impact. Too often, people push insurance off to the back burner without realizing how important of a role it can play in their life. As you consider these other elements of your finances, ask yourself the following:

• Am I and my loved ones protected from an unexpected life event?
• Would an illness permanently derail my retirement?
• How would we budget if I or my spouse could no longer work?

As they say, expect the best and plan for the worst. Insurance may seem like betting against yourself, but just as you wouldn’t drive without auto insurance or go without health insurance, put a plan in place to safeguard your wealth.

5. TAX PLANNING

Last but not least, there are taxes, which play a role in everyone’s financial life. Many people don’t realize that there are legal ways to reduce the amount of taxes you have to pay, which means more money in your pocket and for your future retirement. Beyond your annual tax return and taking advantage of credits, consider the following questions:

• Do I have an executive compensation plan?
• Am I taking maximum advantage of my tax-deferred savings opportunities?
• Are there other opportunities for me to save for retirement while reducing taxes?

Tax planning and retirement planning can work hand-in-hand, especially if you collaborate with both your CPA and financial advisor.

PURSUING YOUR IDEAL FINANCIAL FUTURE

Addressing all of these questions and creating a detailed plan to pursue your goals can help guide you toward greater financial confidence and peace. At Archer Investment Management, we help our clients build comprehensive financial plans and provide them a customized website that helps them monitor their progress. We believe this helps our clients stay engaged with their plan and understand how they can take small steps to work toward big goals.

If you’re interested in learning more about what your financial future can look like and how to start taking steps toward your goals, I encourage you to reach out to me. You can book an appointment online here so we can talk about your answers to these questions and what you’d like to accomplish.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

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(1) http://www.apa.org/news/press/releases/stress/index.aspx

In a few short weeks, I will embark on one of my toughest cycling trips yet, Pico de las Nieves. The setting is the island of Gran Canaria, which lays just 100 km west of Morocco. The route rises from the tropical coast to above the clouds over the course of one long day. The gradient gets steeper (consistent double digit gradients) as the day goes on, making it a very difficult climb. I look forward to a challenging, beautiful, and rewarding ride. Watch this video to see the route!

It was a seemingly ordinary day when it happened. My phone rang and, when I answered, I heard the voice of an unknown man.

“Hello, is this Mr. Richard Archer? This is John from Neiman Marcus in Atlanta. We’re just calling to confirm that you were just in our mall location and applied for a new store credit card.”

These three sentences commenced my unfortunate identity theft journey. In the next few days, I came to learn that a man had my Social Security number and full name and had created a fake driver’s license with my correct home address alongside his picture. He walked around the Atlanta mall impersonating me, moving from store to store trying to open credit accounts. So far, he had succeeded at Neiman Marcus, Best Buy, Toys ‘R’ Us, and several times at Verizon. Before we were alerted, he’d run up more than $1,000 in cell phone charges.

HOW DID IDENTITY THEFT HAPPEN TO ME?

Some people might wonder how I, a financial planner, could become the victim of identity theft. I’ve helped multiple clients get through identity theft, and I know what a mess it can be. Hoping to avoid it happening to me, I shred account statements religiously, watch my credit score online, consistently update my passwords, use a locked mailbox, and never click on suspicious links online. So what went wrong?

I thought long and hard about it and then I remembered notices from my alma mater and TJ Maxx. Both had suffered huge data breaches in the past two years, and they had each notified me that my personal information might have been compromised.

Here’s the truth: identity theft can happen to anyone — even to a financial planner and even to people who proactively safeguard their personal information. If you’ve ever had a bank account, credit card, shopped online, or included your Social Security number on an application, your identity could potentially be stolen.

WHAT TO DO ABOUT IDENTITY THEFT

It was in the evening when I received that call from Neiman Marcus, and it was hard not to panic at the thought of everything I was going to have to do to get this fixed. I knew I needed to cancel my credit cards, change my account passwords, and notify my bank and credit agencies. I had read stories about others who had their identities stolen and it had taken them, on average, a year and 200+ hours to get to a point where they could use their rebuilt credit again.

But then I remembered I had purchased ID Theft Concierge Protection from Zander ID Theft Solutions. I found their hotline number and called them, crossing my fingers that their office wouldn’t be closed at this time of night. My anxiety was high as I pictured a crook walking around Atlanta ruining the good credit I had worked so hard to build.

Luckily, a professional from Zander was available and immediately helped by placing a freeze on my credit and requesting me to send in everything I could to help him fix this problem. Over the next four weeks, I scanned and sent copies of all related correspondence I received regarding my many new credit accounts while the folks at Zander personally contacted and cancelled each new fake credit request. They had to contact several companies multiple times because the companies really wanted to get paid the thousands of dollars they were owed.

Three months later, Zander had my entire credit report back to normal, and within four months my credit score was restored.

LESSONS LEARNED

Experiencing this process firsthand, I learned the value of having expert help. It was such a relief not having to figure out all of the ins and outs of rebuilding my credit by myself. The professionals at Zander were faster, more persistent, and more successful than I could have been while also trying to run a business and spend time with my family.

Based on the amount of information my identity thief knows about me, I am positive it will happen again in the future. However, I have alerts set now that tell me when anyone requests new credit and a special verbal password to use with the credit agencies and my banks. I continue to do everything I can to protect my data myself, but a lot of it is out of my hands since I’ll frequently have to share my Social Security number, date of birth, name, address, driver’s license number, or other information. Furthermore, data breaches are becoming more common, so it’s just a matter of time before it happens again.

However, I feel more confident and at ease knowing someone else is also looking out for me. These are the feelings I hope to provide my clients. By serving as a family’s financial professional, I am there to provide a second set of experienced eyes on their strategies, offer guidance, and take some of their responsibilities off their plate so they can focus on their family.

Whether you have questions about protecting your identity or seek advice about other elements of your finances, I’m here to help and am available to chat. You can easily book an appointment with me online here.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

At Archer Investment Management, I’ve spent nearly two decades specializing in serving successful professionals and couples, providing comprehensive investment guidance and personalized care and attention. Whether they’ve built or inherited their wealth, they want to ensure they are maximizing its potential and as well building a secure financial future for themselves.

From personalized investment management to executive compensation planning, my comprehensive services are designed to address all of my clients’ complex needs and guide them along their financial journey. My ultimate goal is to offer people financial peace of mind and confidence in our abilities and advice.

Proactive financial planning and customized investment strategies can make a significant impact on your financial future. Here are three recent examples of clients I have helped.

CASE STUDY #1: TACKLING COMPLEX EXECUTIVE COMPENSATION

I work with many LGBT couples who want to ensure their partner or spouse is taken care of should one of them prematurely pass. One such individual is a successful corporate executive who is receiving ongoing and extensive stock options and restricted stock awards through his company. With so many opportunities, he wasn’t sure how to best handle them. He was also concerned with minimizing income taxes due to his high income, and ensuring his new spouse would be taken care of after he passed.

Working together, we started with their estate. Collaborating with a knowledgeable estate attorney, I ensured they developed an estate plan that ensured his husband had all the proper legal rights and protections and was named the beneficiary on their investment accounts. This would ensure the client’s wishes were carried out.

Next, we tackled his investments. After collecting and reporting the missing cost basis on years of company stock positions, we developed a plan with his CPA and company benefits administrator. Ultimately, we set up a multi-year, systematic exercise schedule of incentive stock options and restricted stock awards to smooth his income, minimize ongoing taxes, and to mitigate his single stock risk to his employer as new options are granted in the future.

Along with consolidating his company stock positions with the rest of his portfolio to simplify his finances, I helped him plan for his cash flow needs to cover his ongoing taxes from his investment plan and diversified the sales proceeds into a global portfolio to lower his high investment risk. By the end, the client had an up-to-date estate plan, an understanding of his cash flow and financial goals, and a great CPA who could assist with sophisticated executive compensation tax issues. On an ongoing basis, we monitor his company stock and adjust our strategy as stock prices increase. He continues to minimize his taxes and maximize his corporate retirement plan contributions to make the most of his savings.

CASE STUDY #2: BUILDING FINANCIAL CONFIDENCE

I work with many successful working professionals, including attorneys. One very intelligent lawyer I work with had an overwhelming and confusing financial picture. He had accounts with multiple advisors, various insurance policies, complex legal partnership deferred compensation and ownership benefits, children from previous marriages who required financial support, an upcoming wedding, and a desire to purchase a second home. Needless to say, he had trouble keeping things organized and knowing what steps to make.

To help, we embarked on establishing an in-depth financial plan. To assist with the purchase of the new high-end residence he wanted, I helped him determine how much money he could afford to spend, and I provided a letter of reference to his Homeowners Association board. Explaining that he had a professionally-developed financial plan in place was valuable knowledge for the board. Along with projecting second home expenses, we also reviewed college savings projections for all of his children to ensure 529 college savings plans were fully funded and invested in low-cost, age-based portfolios.

Next, we tackled his business needs. This included establishing a baseline valuation of his firm partnership share, discussing partnership buy-in loan payoff options, maximizing employer retirement plan contributions to take advantage of the tax deferrals, and exploring the benefits and risks of using his firm’s deferred compensation plan. We also analyzed his insurance needs and rolled over multiple IRAs, consolidating them at one custodian to simplify his portfolio. The result is a portfolio with lower costs and more predictable long-term investment returns.

Through this process, we integrated all of his financial assets, files, and financial plan into a secure client portal so he can keep track of his entire financial life in one location. As a result, the client has a stronger grasp on his financial picture and feels more confident in his future. We continue educating him on his complex finances, how his portfolio is invested, and how to manage his wealth.

CASE STUDY #3: MANAGING AN UNEXPECTED INHERITANCE

While an influx of wealth is usually a good surprise, it’s a surprise nonetheless. One of my clients is a couple with a parent who suddenly passed away and they became first-time executors of a large estate.

The thoughtful and judicious couple had always been very cautious with money, saved well, and had long followed my financial planning advice as they built their wealth. In a sense, they were doing everything right. Upon receiving the large inheritance, they didn’t know how best to manage it and wanted to make sure they didn’t squander it. As investors with a long-term focus, they turned to me to help them efficiently manage and grow the wealth.

We began by working through some complex family issues that arose as the estate was being administered. From there, we focused on developing a detailed financial plan that reflected their goals for their new, significantly larger investment portfolio.

One important goal was for the wife to be able to leave her stressful job and stay home while their two children were still in school. We put these new lifestyle needs at the forefront of their financial strategies. This involved budgeting, implementing an accelerated debt repayment plan, updating their estate plan, fully funding their two children’s 529 college savings plan, and taking proper inherited IRA distributions.

With their new plan in place, the family feels much more confident in their financial future. They still prefer to live frugally, but they know they can live comfortably and enjoy some of their wealth through more family vacations.

HELPING YOU

I work with a broad range of clients facing unique needs and circumstances. Whatever the situation, I strive to address them through a proactive process that focuses on understanding your personal situation, addressing your concerns, and creating strategies that help you work toward your goals.

If you’re experiencing a situation similar to one of these case studies or face an entirely different need, I encourage you to reach out to me. I can evaluate your situation and share how I can help. There are no obligations, and your consultation is on us.

You can easily book an appointment with me online here. 

I look forward to speaking with you.

You may think I’m crazy, but I’m about to embark on the hardest physical challenge of my life: The Gran Canaria & Tenerife Ride Camp. Some of you may remember that I rode in the climbing camp at the Tour de France two years ago, so this is right up my alley. Here’s what the trip will look like: 7 days, 426 miles, and 60,000 feet of climbing. That’s like riding from Chicago to Pittsburgh while climbing Mt. Everest twice…all in one week!

This camp is the annual spring mecca for top Tour de France contenders, and it will not be a leisurely ride through the park. I’ll face immense climbs, such as the Valley of Tears (the name says it all) and Pico de las Nieves. The most difficult, though, will be the famous inactive volcano, El Teide. It’s the longest continuous climb in Europe, with an incline of 5-7% as it rises to over 12,200 feet.

How am I preparing myself for this enormous challenge? How does a physical race compare to your finances?

SET SHORT-TERM GOALS

I’m approaching my training the same way I work through financial planning with my clients: breaking big, long-term goals down into smaller, achievable pieces.  We all know that saving for retirement is a long-term goal, but having short-term goals along the way can help you stay focused to make your dreams seem attainable. Planning for retirement requires mental fortitude!

As a real-life example of this concept, last weekend I completed a 112 mile, eight-hour climbing ride that, taken as a whole, seemed absurd and unachievable.  However, I had already ridden each of the hills on the course and completed a relatively flat century ride, so I knew I could complete both the distance and the hills. Mentally, I broke the route up into three 35 mile segments and focused on one loop at a time as I rode.

I kept energy in reserve, knowing that I would need it for the hardest climbs at the end of the ride. When it comes to saving for your future, you will also require more focus, energy, and resources as you get closer to your retirement date. Do everything you can to ensure that you stay strong after decades of working hard.

As I train for the Gran Canaria camp, I’m tackling increasingly difficult goals each week, taking baby steps to prevent injury and strengthen myself physically and mentally. I’m planning to build my mileage and climbing each week while staying just within my physical abilities.

HAVE THE RIGHT SUPPORT

One thing that is crucial to my success is having the best equipment and professional support. I will ride a light, carbon fiber Bianchi climbing bike with an excellent seat. I will also have access to an experienced support team to assist me when I need food, water, guidance, and encouragement.

In the same way, you will be most successful with your financial plan if you have the proper support and tools. You may be okay doing it on your own, but if you have professionals who can guide and encourage you as well as educate you, the chance of reaching your goals is higher.

Just like I did at the Tour de France a few years ago, I look forward to riding and living with cyclists from all over the world. I’ve met athletes from Australia, England, France, Spain, and Italy on previous trips and these encounters always remind me how small the world is and how similar people are, no matter where they come from. Cycling trips like these make me feel small and big at the same time as I experience the elation of successfully summiting a massive climb in a foreign land while simultaneously hearing jubilation in four different languages. Surrounding yourself with people who are on a similar journey as yourself can create a community that will strengthen you when things get rough.

PREPARE FOR THE DESCENT

Most people don’t know this, but the descent is more difficult than the climb. This is when my equipment, preparation, and support team are essential. The absolute focus and preparation it takes to descend safely requires me to clear my mind of everything else and stick to my riding plan no matter what. Descending at speed for long distances on unfamiliar, foreign roads is scary. Knowing my own riding ability and tolerance for risk is of absolute importance to complete my ride in one piece. 

As you are saving for retirement, you can expect to experience market volatility and multiple downturns. When these situations arise, stay calm, rely on your support team, and focus on the solid strategy that you have created with your advisor. This is how you keep your portfolio safe when the markets go haywire.

BE PROUD OF YOURSELF

As you get closer to your goals and see growth in your portfolio, be proud of yourself for your determination and hard work. Find ways to reward yourself for reaching your goals!

My reward for all of this training is a week on an exotic Spanish island that I would probably never visit if it weren’t for this cycling trip.

When was the last time you pushed yourself to do something that scared you? Have you ever taken the time to evaluate your goals, your support team, and your “equipment”? If you think your retirement “trek” is missing something, I’d love to chat with you! Click here to schedule a phone call.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

This year’s presidential election results were full of mixed emotions, but those within the LGBT community were particularly stressed and concerned. Pundits have claimed President-elect Donald Trump will be an anti-LGBT president, and several times, he himself has stated he would “strongly consider” overturning the Supreme Court’s 2015 decision that allowed same-sex couples the right to marry. Vice President-elect Mike Pence is also known to be strongly opposed to same-sex marriage.

Now that Trump is officially our President-elect, same-sex couples worry their rights are about to change. If the Supreme Court’s decision were repealed, would a same-sex couple’s marriage become unlawful and no longer be recognized as legal? Could couples marry in states that do still recognize the union? Will it now be too late for same-sex couples to marry in the coming years?

Unfortunately, we just don’t know until President-elect Trump announces his next move. However, we can look ahead and see what could potentially happen.

UNDERSTANDING THE WORST OUTCOME

While we don’t want to be doomsayers and assume the worst, it’s important to understand the financial implications same-sex couples face should their marriage no longer be recognized by the government.

Social Security

If your marriage isn’t recognized, your Social Security benefits will be more limited. Same-sex couples who aren’t or can’t be married will not be eligible for the spousal benefit, which can help couples when both are living but one spouse earns more than the other. Couples could lose an average of $780 per month. Additionally, couples won’t be eligible for the survivor benefit, which is provided to the surviving individual when their spouse dies.

Health Benefits & Medical Decisions

Same-sex couples may no longer be eligible to receive health benefits from their partner’s company as a married couple can. This will depend on the individual company. On a positive note, 66% of Fortune 500 companies offer health and retirement benefits to same-sex partners — even in states that don’t recognize the marriage.

Additionally, if a partner in a same-sex relationship fell ill, the other partner may not be legally allowed to make important health decisions on their behalf.

Estate Planning

If you were to die, your closest living relative, such as your spouse, has legal rights to your inheritance. But if your marriage isn’t recognized, that may not be the case. This may also be true for the survivor benefit protection within defined benefit plans. Same-sex couples would need to make sure they include their partner in their will for them to receive an inheritance.

Income Taxes

Filing taxes is already tricky for same-sex couples who are married but live in a state that doesn’t recognize same-sex marriage. However, if same-sex marriage is no longer legal, couples may no longer be able to file jointly and won’t be eligible for several tax benefits.

PLANNING FOR THE FUTURE

While this could potentially happen, it’s important not to panic or make emotionally-driven financial decisions. It’s more important to ensure you have your ducks in a row and a plan in place should things change. Here are a few steps you and your partner can take:

1. Review your beneficiary designations. On all life insurance and retirement plan policies, make sure you have the correct beneficiary listed and, if not, update immediately.
2. Compile your estate planning documents. Beyond creating or updating a will, make sure you acknowledge your partner in other essential documents, including durable power of attorney, healthcare power of attorney, letter of intent, living will, and advanced medical directive. This can help provide your partner more power when it comes to decision-making should you be unable to make decisions yourself.
3. Get your financial documents in order. Review to see which accounts include both of your names. If one partner isn’t listed, you may want to add them to the account. Make sure both of you know where all-important financial and legal documents are stored, including account passwords.

NEXT STEPS

Whatever you do, don’t make any extreme changes. Ultimately nothing has changed yet and nothing may ever change regarding same-sex marriage. If you have your financial strategies and paperwork in order, you’re on the right track.

However, it’s also understandable if you’re feeling nervous or uncertain. You may not know if you have everything in order, or you may wonder if there are steps you need to take. This is when it can be helpful to speak with a financial advisor. As an advisor who frequently works with same-sex couples, I understand the common questions and concerns you face. I’d be happy to meet with you to discuss your situation and how I may be able to help. You can easily book an appointment with me online here. I look forward to speaking with you.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst^®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

If you missed the earlier posts in this series, find them here: Getting Started Simply: How the College Financial Aid Process Works, Long-Term Strategies for Paying for College & 529 College Savings Plans.

I speak to many clients who are worried about saving into 529 college savings plans. They fear their child may not use the money because of earned scholarships, attending school overseas, or not going to college. Below is a brief Q&A and synopsis of your options, if you’re afraid of finding yourself with the problem of excess 529 savings and having to take non-qualified distributions.

As a quick review, contributions to your 529 plan grow tax deferred and earnings are tax free, if the money is used to pay the beneficiary’s qualified education expenses. The earnings portion of any withdrawal not used for qualified college costs is taxed at the recipient’s income tax rate and subject to a 10% penalty.

Qualified 529 plan withdrawals include:

• Tuition and fees
• Books
• Equipment required for course enrollment (including special needs equipment)
• Some room and board expenses

Some easily mistaken non-qualified withdrawals include:

• Transportation costs
• Computers (unless the school requires them)
• Student loan repayments

Q: What is the penalty for using leftover 529 plan funds for non-qualified expenses?

A: The first rule to know is that only the earnings portion of a non-qualified withdrawal is subject to a 10% withdrawal penalty. Distributions are allocated between principal and earnings on a pro-rata basis. That means that your withdrawal is divided into contribution and earnings based on the following formula: Account Contributions / Account Value x Distribution = Contribution Portion. Your contributions (the amount you originally deposited) will never incur a penalty.

Q: Are there exceptions to the 10% penalty rule for scholarships and other circumstances?

A: Yes! If the 529 account beneficiary receives a scholarship or is admitted to a U.S. Military Academy, the amount of the scholarship or value of the military education may be withdrawn from the 529 account without incurring the 10% penalty. Additionally, if the beneficiary dies or becomes disabled, no 10% penalty applies to your withdrawals.

Note: In all of these cases, all earnings on non-qualified distributions will still be subject to tax as ordinary income at your tax rate. However, some 529 plans allow you to direct the withdrawal to the beneficiary, which would presumably keep it in a lower tax bracket. In addition, if you were able to deduct your original contributions on your state income tax return, you will generally have to report additional state “recapture” income.

Q: What are the alternatives to incurring penalties for taking non-qualified distributions from 529 funds?

A: Consider changing the beneficiary to another qualifying family member who may attend college, or continue to grow the funds in the account in case the original beneficiary wants to pursue graduate school later. You also might make yourself the beneficiary and further your own education.

Source: SavingForCollege.com

As more Americans shoulder the responsibility of funding their own retirement, many rely increasingly on their 401(k) retirement plans to provide the means to pursue their investment goals. That’s because 401(k) plans offer a variety of attractive features that make investing for the future easy and potentially profitable.

What is a 401(k) plan?

A 401(k) plan is an employee-funded savings plan for retirement. For 2016, a 401(k) plan allows you to contribute up to $18,000 of your salary to a special account set up by your company, although individual plans may have lower limits on the amount you can contribute. Individuals aged 50 and older can contribute an additional $6,000 in 2016, so-called “catch up” contributions.

How are 401(k) plans taxed?

401(k) plans come in two varieties: traditional and Roth-style plans.

A traditional 401(k) plan allows you to defer taxes on the portion of your salary contributed to the plan until the funds are withdrawn in retirement, at which point contributions and earnings are taxed as ordinary income. In addition, because the amount of your pretax contribution is deducted directly from your paycheck, your taxable income is reduced, which in turn lowers your tax burden.

A Roth 401(k) plan features after-tax contributions, but tax-free withdrawals in retirement. Under a Roth plan, there is no immediate tax benefit. However, plan balances have the potential to grow tax free; you pay no taxes on qualified distributions.

Matching contributions

One of the biggest advantages of a 401(k) plan is that employers may match part or all of the contributions you make to your plan. Typically, an employer will match a portion of your contributions, for example, 50% of your first 6%. Under a Roth plan, matching contributions are maintained in a separate tax-deferred account, which, like a traditional 401(k) plan, is taxable when withdrawn. Total contributions, including employee and employer portions, cannot exceed $53,000 in 2016. Note that employer contributions may require a “vesting” period before you have full claim to the money and their investment earnings.

Distributions

Both traditional and Roth plans require that distributions be taken after 59½ (or age 55 if you are separating from service with the employer from whose plan the distributions are withdrawn), although there are certain exceptions for hardship withdrawals. If a distribution is not qualified, a 10% IRS additional federal tax will apply in addition to ordinary income taxes on all pretax contributions and earnings.

When you change jobs

When you change jobs or retire, you generally have four different options for your plan balance:

1. Keep your account in your former employer’s plan, if permitted;
2. Transfer balances to your new employer’s plan;
3. Roll over the balance into an IRA;
4. Take a cash distribution.

The first three options generally entail no immediate tax consequences; however, taking a cash distribution will usually trigger 20% withholding, a 10% additional federal tax if taken before age 59½, and ordinary income tax on pretax contributions and earnings.

Borrowing from your plan

One potential advantage of many 401(k) plans is that you can borrow as much as 50% of your vested account balance, up to $50,000. In most cases, if you systematically pay back the loan with interest within five years, there are no penalties assessed to you. If you leave the company, however, you may have to pay back the loan in full immediately, depending on your plan’s rules. In addition, loans not repaid to the plan within the stated time period are considered withdrawals and will be taxed and penalized accordingly.

Choosing investments

Most plans provide you with several options in which to invest your contributions. Such options may include stocks for growth, bonds for income, or cash equivalents for protection of principal. This flexibility allows you to spread out your contributions, or diversify, among different types of investments, which can help keep your retirement portfolio from being overly susceptible to different events that could affect the markets.

401(k) Advantages

• Tax-free withdrawals for qualified distributions from Roth-style plans
• Choice among different asset classes and investment vehicles
• Potential for employer-matching contributions
• Ability to borrow from your plan under certain circumstances

A 401(k) plan can become the cornerstone of your personal retirement savings program, providing the foundation for your financial future. Consult with your plan administrator or financial advisor to help you determine how your employer’s 401(k) plan could help make your financial future more confident. Pretax contributions and tax-deferred earnings on traditional plans.

Source/Disclaimer: Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund may seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Diversification and asset allocation do not ensure a profit or protect against a loss. Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2016 Wealth Management Systems Inc. All rights reserved.

If you missed the first posts in this series, find them here: “Getting Started Simply: How the College Financial Aid Process Works” & “Long-Term Strategies for Paying for College“

Section 529 plans are tax-advantaged college savings vehicles and one of the most popular ways to save for college today. I recommend them to clients often because they offer a unique combination of features that no other college savings vehicle can match.

What are the advantages of 529 plans?

• Federal tax advantages: Contributions to your account grow tax deferred and earnings are tax free if the money is used to pay the beneficiary’s qualified education expenses. The earnings portion of any withdrawal not used for college expenses is taxed at the recipient’s rate and subject to a 10% penalty.
• State tax advantages: Many states offer income tax incentives for state residents, such as a tax deduction for contributions or a tax exemption for qualified withdrawals.
• High contribution limits: Many plans let you contribute more than $300,000 over the life of the plan.
• Unlimited participation: Anyone can open a 529 plan account.
• Professional money management: College savings plans are offered by states, but they are managed by designated financial companies who are responsible for managing the plan’s underlying investment portfolios.
• Flexibility: Under federal rules, you are entitled to change the beneficiary of your account to a qualified family member at any time, as well as roll over money from your 529 plan account to a different 529 plan once per year without income tax or penalty implications.
• Wide use of funds: Money in a 529 college savings plan can be used at any undergraduate college in the United States or abroad that’s accredited by the U.S. Department of Education and, depending on the individual plan, for graduate school.
• Accelerated gifting: 529 plans offer an estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren’s education. Specifically, a lump-sum gift of up to five times the annual gift tax exclusion ($14,000 in 2016) is allowed in a single year, which means that individuals can make a lump-sum gift of up to $70,000 and married couples can gift up to $140,000. No gift tax will be owed, provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years.

How do I choose the right 529 plan?

You can join any state’s 529 college savings plan. To make the process easier, it helps to consider a few key features:

• Your state’s tax benefits: A majority of states offer some type of income tax break for 529 college savings plan participants, such as a deduction for contributions or tax-free earnings on qualified withdrawals. However, some states limit their tax deduction to contributions made to in-state 529 plans only.
• Investment options: Ideally, you’ll want to find a plan with a wide variety of investment options that range from conservative to more growth-oriented to match your risk tolerance. To take the guesswork out of picking investments appropriate for your child’s age, most plans offer aged-based portfolios that automatically adjust to more conservative holdings as the beneficiary approaches college age.
• Fees and expenses: Fees and expenses can vary widely among plans, and high fees can take a bigger bite out of your savings. Typical fees include annual maintenance fees, administration and management fees (usually called the “expense ratio”), and underlying fund expenses. Compare the costs among plans using Savingforcollege.com.
• Reputation of financial institution: Make sure that the financial institution managing the plan is reputable and that you can reach customer service with any questions.

How do I open a new plan account?

Once you’ve selected a plan, you’ll need to fill out an application, where you’ll name a beneficiary and select one or more of the plan’s investment portfolios to which your contributions will be allocated. Also, you’ll typically be required to make an initial minimum contribution, which must be made in cash or a cash alternative. Thereafter, most plans will allow you to contribute as often as you like. This gives you the flexibility to tailor the frequency of your contributions to your own needs and budget, as well as to systematically invest your contributions.

What is a 529 prepaid tuition plan?

There are actually two types of 529 plans–college savings plans and prepaid tuition plans (prepaid plans are the less popular type). The tax advantages of college savings plans and prepaid tuition plans are the same, but the account features are very different. A prepaid tuition plan lets you prepay tuition at participating colleges at today’s prices for use by the beneficiary in the future. The following table describes the main differences:

Note:  Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated.

Source: Broadridge Investor Communication Solutions, 2016.