How Do I Love Thee? Let Me Invest In A Roth IRA For You.

By: Principal, Tana Gildea, CFP®, CPA, CCFS   

It doesn’t have the lyrical style of the Bard but showing your love to your partner and family with financial security is a beautiful and loving thing, nonetheless. Let’s start with a little primer on the Roth IRA as not everyone is able to provide their financial gift of love via a Roth.

For starters, you must have earned income to be eligible to contribute – that means some kind of a job or self-employment income. As you think about teens and college students, this is important because if they are working, they are eligible for a Roth.

For married couples, one partner’s income covers both people so for stay-at-home parents, they are eligible based on their spouse’s income assuming all other criteria are met.

Also, the funds contributed to the Roth don’t necessarily have to come directly from the job like employer retirement plan contributions do (via payroll withholding). A Roth contribution can come from savings or from a gift. For parents, this is a great way to help your working kids have experience with saving and investing – even if it is a small part–time job. And encouraging them to save a percentage of their income will help them create this important financial habit.

  • You can directly give them the funds for contribution to their Roth for birthdays or holidays.
  • You can match what they contribute to their Roths so that you are incentivizing and rewarding a great financial habit.
  • The limit for 2022 is $6,000 and for 2023 it is $6,500; however, the other limit is earned income. A teen earning $2,000 per year would be limited to $2,000 for his or her Roth contribution. However, that $2,000 can come from a savings account or a gift from a parent or other relative.
  • For anyone over 50, an additional $1,000 “catch-up” contribution can be added to the annual contribution limit. Again, you must have the earned income to be eligible for this as well.

Benefits of a Roth

  • All income earned on assets in a Roth grows tax-free if you follow the Roth rules. All the interest, dividends, and capital gains over someone’s lifetime avoids income tax. That is huge especially for someone in their teens or early 20’s.
  • That means in retirement, taking funds from a Roth will be tax-free; this is a great tool for limiting your tax burden in retirement.
  • There are no required distributions like there are with traditional IRAs and employer retirement plans.
  • Once you have owned the Roth for five years, you can take distributions, without penalty or income tax, for certain expenses (first time home buying and college expenses to name a couple) and you can withdraw contributions without penalty. Hopefully you don’t withdraw the funds early as you want to keep that money earning tax-free income.

Drawbacks of a Roth

  • Penalty-free and tax-free withdrawals (except as noted above) begin at age 59 ½ so this is an account meant to be primarily for retirement savings. It can’t be used like a savings account for cash flow.
  • There is no tax deduction for a contribution to a Roth in the current year like there may be for a traditional IRA contribution (traditional IRA deductions have income limits as well, though. Anyone can contribute but not everyone can deduct it on their tax return. It’s still valuable, though!).
  • There are income limits so those making more money are prohibited from contributing to their Roth directly.
    • Certain taxpayers over the limit of MAGI – modified adjusted income – cannot contribute to a Roth.
      • What is MAGI? Modified adjusted gross income starts with your AGI – adjusted gross income – on your tax return and adds back some income or deduction items that are excluded from AGI. If you are close to the income limit and need to be precise about MAGI, there are calculators online or you can discuss with your CPA or financial advisor.
      • What is the income limit? While these numbers can make your eyes glaze over a bit, they are determined by your “filing status” (single or married filing jointly) and by the year since the limitations change periodically to adjust for inflation.
        • For single taxpayers, MAGI must be under $129,000 for 2022 and under $138,000 for 2023 to get the full Roth contribution.
        • For married filing jointly taxpayers, MAGI must be under $204,000 for 2022 and under $218,000 for 2023 to get the full Roth contribution.
        • There is a range for both taxpayer groups where you may get a partial Roth contribution.
          • For 2022, single taxpayers with MAGI of $129,001 to $143,999 will have a reduced Roth contribution.
          • For 2022, married taxpayers with MAGI of $214,000 to $203,999 will have a reduced Roth contribution.
          • For 2023, single taxpayers with MAGI of $138,001 to $152,999 will have a reduced Roth contribution.
          • For 2023, married taxpayers with MAGI of $218,001 to $227,999 will have a reduced Roth contribution.
        • Once the taxpayer exceeds that upper limit for their filing status, there is no direct Roth contribution allowed. There is a work-around called a back-door Roth, but that is a bit more involved for our discussion today.

 

The bottom line here is that for most people, if you can get some money into your Roth, it will likely benefit your long-term financial situation. And for your kids, getting them interested in and investing in a Roth of their own from their first dollar of earned income, can be life changing. For anyone under age 18, the parent or guardian will need to open a custodial Roth account until the child reaches the age of majority in their state.

 

What about a Roth 401K option?

  • Some employer 401k plans offer a Roth option for your contributions. I love the Roth option, but you need to think about your cash flow and how much you contribute when you are not getting that tax break for the contributions like you would with the traditional 401k.
  • The tax bracket that you are in matters too. For a high-income worker in the 37% bracket, it may be too expensive from a tax perspective to contribute to the Roth especially if you believe you will be in a lower bracket in retirement. There are also other taxes that come into play for high earners, so it is best to discuss with your financial or tax advisor if this is your situation.
  • For everyone else, perhaps you can start with 1% Roth and 9% traditional (if 10% is your contribution rate as an example). Then every 3-6 months, shift it by 1% toward the Roth as you see the impact on your cash flow from the extra tax burden.
    • For the younger workers, the power of that Roth growth over your working years will be significant so do your best to work some dollars into the Roth portion consistently.

If you want to give the Roth gift of love to someone in your life, reach out to your advisor to get this set up. It doesn’t have to be the parent setting up the account for their kids – grandparents, aunts, uncles, friends, and relatives can all help the kids in their lives get started on a path to financial security (assuming the student is working). The annual contribution limit applies to all accounts held by the taxpayers, though, so make sure that you know what accounts already exist.

We have until April 15th to fund Roth contributions for 2022. Note that you can record the Roth contributions on your tax return, and it is a good idea to do so; however, if no return is required to be filed or the return has already been filed, it’s fine to make the contribution. Your account custodian will send a Form 5468 sometime in May to document the contribution, and it’s a good idea to retain those.

How do I love thee? Let me count the Roth dollars contributed. Ok, still not as poetic as Shakespeare but those dollars will accumulate and grow tax-free and that is a gift of love that will keep on giving.

To learn more or discuss your Roth options, please email me at gildea@homrichberg.com.

Download a copy of this article here.

Important Disclosures

This article may not be copied, reproduced, or distributed without Homrich Berg’s prior written consent.

All information is as of date above unless otherwise disclosed.  The information is provided for informational purposes only and should not be considered a recommendation to purchase or sell any financial instrument, product or service sponsored by Homrich Berg or its affiliates or agents. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. This material may not be suitable for all investors. Neither Homrich Berg, nor any affiliates, make any representation or warranty as to the accuracy or merit of this analysis for individual use. Information contained herein has been obtained from sources believed to be reliable but are not guaranteed. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.

©2023 Homrich Berg.

Saving For College – 529 Planning Options

By: Philip Clinkscales

1/30/2023

A 529 plan gives parents, grandparents, and others a vehicle in which to save funds for college, invest those funds, and receive possible tax-free treatment of all gains, dividends, and interest. Some states offer incentives such as tax deductions or tax credits for contributions to their 529 plans. While both federal and state taxing authorities promote these plans, their treatment of contributions or distributions may not always align. Depending on the state, the newly added K-12 tuition qualified education expense may not prove quite as valuable as initially thought.

Contributions

The federal contribution limitation lines up with the annual gift tax exclusion of $17,000. This exclusion allows gifts up to the exclusion amount from a donor without paying gift tax or using your lifetime exemption. There are other nuances like the five year gift tax averaging that allows for super funding a 529 plan, but this limitation also coordinates with the annual gift tax exclusion.

As mentioned above, many states promote contributions through tax incentives. Georgia, for example, allows a tax deduction up to $4000 for single filers ($8000 for joint filers) per beneficiary per year. Each state is different.

Distributions

The investments in a 529 plan grow and cash distributes tax free if distributions are spent on qualified educational expenses either directly or through reimbursement. Qualified educational expenses include tuition, fees, books, supplies, equipment, computers, software, internet access, and sometimes room and board. Non-qualified distributions are “discouraged” similar to an early IRA distribution. Both incur a 10% penalty and income taxes on any growth distributed.

Conclusion

There are many factors to consider in any planning decision, but all things being equal, a 529 should still be used for qualified higher education costs (college). The 2 main reasons are:

1) The primary benefit to 529s remains the possible tax free growth especially over longer periods of time due to compounding returns. Contributions in the plan for a short term with little or no growth and used to pay for K-12 tuition leave the state tax deduction as the only possible substantive benefit. This can be slightly more advantageous than paying directly.

2) The state may not actually allow spending on K-12 tuition without making one pay income tax or a penalty, so please check with a tax advisor to confirm state distribution qualifications before writing the check.

Generally, one would want to contribute more funds to a 529 early in the beneficiary’s life, maximize any state incentives in continuing years, earn strong positive returns on the investments, spend the funds late in the beneficiary’s educational career rather than early, and, if you live in Georgia with multiple children like myself, hope that the beneficiary receives the Zell Miller scholarship!

One Financial Habit That Trumps All The Resolutions

By: Principal, Tana Gildea, CFP®, CPA, CCFS   

Most of us look to the new year as an opportunity to “start again,” clean up our bad habits, make big changes, and reach for the stars! We’ll exercise! Lose weight! Save more! And then Monday comes. It’s another start to another week that feels exactly like those that have come before it. The thrill of the promise crumbles when faced with the reality of packing a lunch, forgoing a latte, or passing up those great sales in favor of a workout.

There are many books, websites, and experts who teach that creating a habit is the clear path to lasting success regardless of what we are trying to change or improve in our lives. So what financial habit is the keystone habit? In my opinion: track your spending.

If a client is having trouble hitting savings goals, I’ll ask them to review three months of spending (don’t you love downloading!) categorize by Giving, Must Do, Want to Do, Stuff, Savings, and Debt Payments. I then suggest they make a little pie chart showing the totals by category. By making a pie chart, everyone can see how the pie divides leading to some great discussions around how the client feels about where the money is going. That can be a great “look back” exercise to help you identify things you want to change. The categories should be those that are important for you but keep it to a few so as not to get overwhelmed. Maybe you need kids, pets, hobbies or travel. Eating out is an interesting one as well!

Analyzing what happened provides some insight but tracking problem areas “in the moment” is what creates awareness and change.

Here are some things to try:

  • Track a particular category of spending.
    • Identify your problem area and track it. Eating out tends to be a trouble spot for a lot of people so, for example, every time you eat out, get in the habit of writing it down. This could be the notes section on your phone, a little notepad, or the back of an envelope in the sun visor of the car. Whatever works for you is the best tool. When you know that you are writing it down, you are being accountable to yourself and perhaps to your significant other.
    • It may be helpful to jot down the circumstances like “left lunch in the fridge” or “traveling” or “overslept and went through the drive-through.” You might see patterns of when the spending is happening. This helps you develop strategies to counter these situations.
  • Learn from the data that you are collecting.
    • Have a spirit of curiosity and learning around what is happening instead of judgment and condemnation. We don’t thrive when we beat ourselves up mentally so seek understanding and solutions.
    • Don’t expect perfection! Developing a habit and changing behavior is a process and will have ups and downs.
    • Keep trying – knowing what doesn’t work helps us figure out what does work.
  • Identify situational triggers that lead to certain types of spending.
    • Author Charles Duhigg describes the “habit cycle,” and it’s clear that a trigger leads to a behavior. If we can identify the trigger and replace the undesirable behavior with a different behavior, we can change a bad habit into a good one or at least a neutral one. For example, if a frantic day at the office triggers the desire for a fast-food fix on the way home, recognize that, and create a new “if I have a frantic day at the office” behavior: “then I’ll go to the gym” or “then I’ll call a friend on the way home.”

Whatever financial goal you have will benefit from having a clear picture of where the money is going. The backward look helps you see what happened and identify what you want to change. Tracking helps you be mindful and aware as it is happening or about to happen. Developing this one habit and looking at it with curiosity and interest can lead you toward a lot of ways to make small, consistent changes that will last long after the resolution has been forgotten.

For Parents

For anyone with children in their lives, modeling some good financial habits teaches kids to be mindful with money. Many of us are fortunate enough to be comfortable with our cash flow and no longer have the need to track every penny. Unfortunately, the “we can spend whatever we want” approach does not help instill in our kids a respect and appreciation for money.

Whether you are flush with cash or barely getting by, it is helpful to discuss money choices with kids. Just because you can afford something doesn’t mean it is wise to buy it. Kids need to see you making conscious and thoughtful choices about money and spending. “We decided that we should only eat out once per week so that we can save for our vacation. Should we do that now or wait for Friday night?” Consistently taking that approach helps kids start to understand money choices.

Help your kids develop their own plan for the cash that they receive as gifts or from allowance or chores. If they get to spend every cent on their desires, they won’t get in the habit of saving, giving to those less fortunate, or handling some of life’s less fun obligations like buying gas for the car or paying for a new tire. At some point we all must learn that every dollar doesn’t get to go toward “fun stuff.” Adulting is full of the not-fun stuff!

Look for opportunities to talk about your own saving and investing choices, how you make money decisions, and let them play a part in planning activities within a spending plan. Letting them help research activities and including the cost of those activities helps them start to compare and think about the value of choices from a financial perspective. “This camp costs $X and this one $Y – do you think that camp is that much better than the other one? What could we do with that extra money if you went to the cheaper camp?”

Challenging family members to come up with ideas for free activities can create a little fun competition and identify the plethora of activities that don’t cost much if anything. This works well for those on a tighter budget or trying to save for a house or trip – get the friends involved in a little competition to replace the happy hour! Perhaps putting the savings into a “Disney” fund (or whatever your kids long to do) will help them see the value of sacrificing smaller things in favor of a bigger goal.

Kids get all kinds of messages about money and most of them are heavy on spending and light on savings, sacrificing, and being frugal. You want to make sure that your values get some airtime as well! In the hustle of daily life, it is hard to be mindful and purposeful about those conversations just as it is hard to be mindful and purposeful about our spending but developing the habit of discussing and deliberating on financial decisions will provide a good model for your kids.

To learn more or get help with your financial habits, please email me at gildea@homrichberg.com.

Download a copy of this post here.

 

Important Disclosures

This article may not be copied, reproduced, or distributed without Homrich Berg’s prior written consent.

All information is as of date above unless otherwise disclosed.  The information is provided for informational purposes only and should not be considered a recommendation to purchase or sell any financial instrument, product or service sponsored by Homrich Berg or its affiliates or agents. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. This material may not be suitable for all investors. Neither Homrich Berg, nor any affiliates, make any representation or warranty as to the accuracy or merit of this analysis for individual use. Information contained herein has been obtained from sources believed to be reliable but are not guaranteed. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.

 

Let’s Plan For A Fantastic Financial Year

By: Principal, Tana Gildea, CFP®, CPA, CCFS   

I love the blank canvas of a new year!  There’s so much possibility and opportunity – the best of life is waiting to happen. It is idealistic and fanciful to say it, believe it, hope, and wish for it, and then do nothing but “wait” for it to happen. Expect the most wonderful things and then plan for them. Opportunity without action is no better than no opportunity at all.

So, this year, what is possible? What opportunity are you longing to seize? What dream are you ready to commit to? What adventure do you long to embark on? Make a list, cut out a picture, do a web search. Put in black and white what you most want to bring into your life in this glorious new year. You must name it to claim it.

Let’s not call it a goal – goals seem very hard and tedious. Let’s call it the destination – what is your desired destination? What wonderful destinations do you have in mind for the new year? A destination could be paying off debt or building savings. It could be taking care of nagging paperwork, getting insurance, filling out forms, resolving tax matters or other nagging tasks that have been weighing you down – destination: burden-free! Destination: hideous tasks completed! It might be buying that house or starting that business or getting that dream job – your destination is as individual as you are and in the wonder of a new year, everything is possible.

Now, sit back, close your eyes and revel in the feeling of your destination. How would it feel to have that debt paid off, that balance in the bank, those tasks complete? How would it feel to have that adventure (paid for!), that trip booked, that business started? As you are basking in the feeling, is your mind starting to percolate? Are ideas, fears, and doubts bubbling up? Good – that means you are human, and humans are part adventurer and part protector. Some people are heavier on the adventurer part – those go-for-it-at-all-costs sorts – and some people are heavier on the protector part – consider-all-the-perils sorts. The good news is that both are needed to reach that glorious destination.

Now comes the fun part – get creative and write down all the little things you could do to move in the direction of the destination. Make them little things as jumping in with big things will make them seem hard, scary, and overwhelming, and then nothing gets done. Don’t make a numbered list; grab a paper, and write all over it – no order, no timeline – just random thoughts and ideas – they can be crazy ideas – it’s just “how could I….” Keep your destination at the top of the page, top of mind, ahead of everything else that competes with that one destination.

Opening yourself up to possibilities feels amazing and light and energizing. And then we look around; we see the bank balance, the credit card balance, the job, and the responsibilities. We see obstacles. We see shortcomings. We see past failures. That’s the other side of the coin – the realist, the protector, the “play-it-safe” part of us.

What cuts the fear is action; it’s taking a small step toward that destination. It’s doing one positive thing and then another, and then another. It’s making the plan to take a small step toward the destination every day. Sometimes those small steps involve money – yes, many of our destinations require money to make them happen hence the “fantastic financial year” in the title. The money part matters most of the time – some destinations don’t require money – losing weight, getting fit – those might save you some money, but realistically, a lot of our destinations involve money – having more, owing less, being able to take a trip or buy a house or start a business.

As you look at the money part, it’s time for choices – this or that? Adventures require sacrifice – what are you willing to give up and do without now so you can move a step closer to that glorious destination? Every little thing – every five bucks – matters. You give up 10 five-buck things and you have 50 bucks. If you do that repeatedly, over, and over, keeping your destination in mind over the “shiny thing” in the now, you will move closer and closer. Make the plan. Make the choice moment by moment – does this move me closer to the destination or farther away? What do you choose? What are you willing to do to get to your glorious destination? How will you look back on this year – as the year that you could have or as the year that you did? As the year you thought about it or the year you took action?

If you are interested in going deeper into creating your plan for a fantastic financial year, join me for a free webinar on January 25th from 12:00 p.m. – 1:00 p.m. ET – Let’s Plan for a Fantastic Financial Year! During the webinar we’ll delve further into identifying the destination that you want to focus on, creating your plan, and defining some concrete actions you take to make sure your money is supporting your vision of the destination.

You can CLICK HERE to Register.

If you’d like to participate but have a conflict, register anyway as all registrants will receive the recording and the resources after the event. Here’s to your glorious destination!

To learn more or get help planning your financial goals, please email me at gildea@homrichberg.com.

Download a copy of this article here.

 

Important Disclosures

This article may not be copied, reproduced, or distributed without Homrich Berg’s prior written consent.

All information is as of date above unless otherwise disclosed.  The information is provided for informational purposes only and should not be considered a recommendation to purchase or sell any financial instrument, product or service sponsored by Homrich Berg or its affiliates or agents. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. This material may not be suitable for all investors. Neither Homrich Berg, nor any affiliates, make any representation or warranty as to the accuracy or merit of this analysis for individual use. Information contained herein has been obtained from sources believed to be reliable but are not guaranteed. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.

©2023 Homrich Berg.

Tana Gildea

Help Your Kids March Toward Financial Security, Part 2

In a previous post, we talked about the importance of helping our kids March Toward Financial Security by having conversations about saving and how best to allocate a paycheck – or any money that comes their way.

We want to continue that theme by exploring ideas to help them save and invest on their own. An obvious first step is to open accounts like savings and checking accounts. You can walk into your own bank with your teen and open accounts like we did when we were kids. (Anybody remember having a “passbook?” Yes, I am that old.) Some banks allow teens to have their own account in their name prior to age 18; others may require a parent to be a joint account holder. Regardless, I recommend setting up balance alerts or some other method of monitoring because there are likely to be a few “oops” moments as your teen is learning the mechanics of banking, and overdraft fees are not cheap. (Although offer a good teaching moment!)

There are now many online options for teens to open an account from the convenience of a phone. Do your research and check ratings and user comments. Sites like NerdWallet and The Balance have ratings for such accounts and a quick online search will lead you to articles and resources to help analyze the options. The important part is to make sure that you help your child understand how these accounts work and what tools the online app has for monitoring and tracking.

The more interesting part comes in working through the mechanics of depositing paychecks and setting up automatic transfers to savings and investment accounts. What a gift it is to teens to get them primed to have a formula for receiving money:

  • X% to charity (if that’s important to your family),
  • Y% to the emergency savings account, and
  • Z% to long-term investing.
  • Maybe you add a C% for saving for college or a G% for paying for gas each week.

Teaching teens how to allocate their earnings to important goals and priorities sets them up for financial success throughout their lives. They don’t need a job to be introduced to this structure. It is great to set priorities for any money they receive.

This is also an opportunity to teach them about the differences between interest on a savings account and opportunities for dividends and investment growth in an investment account. Savings accounts have low interest rates because the safety of the principal is guaranteed – lower risk, lower reward (interest). Investing carries a risk of loss so must provide greater reward (higher interest rate, dividends, or the opportunity for increases in the value of the investment).

When your teen does have earned income[1] (wages from a job), we recommend they open a Roth IRA account. The beauty of a Roth IRA is that the owner can invest those funds and as long as they follow the Roth rules, they will never be taxed on the returns from those investments (called “unearned” income in tax lingo). Wow – that is a great deal! Interest, dividends, and capital gains over their lifetime build up and are never taxed (under the current tax rules anyway). Unearned income in a non-retirement investment account is subject to tax at “ordinary income” rates which go from 10% to 37%.

It is important to note that the contribution amount is limited to the lessor of earned income or the limit set in the Tax Code which is $6,000 for 2021 and 2022. Other important points:

  • The contribution can be made from any source so a parent could incent savings by matching the teen’s contribution. So, if the teen is going to contribute 20% of their income to the Roth, a parent could match that and gift the teen the money to contribute an additional 20%, thus, doubling the contribution to 40% of income. The limit would be that total contributions cannot exceed the $6,000 limit (2021 & 2022).
  • Everyone has until April 15th to make the contribution for the PRIOR tax year so you can fund 2021’s contribution until April 15, 2022. (They must have earned income for 2021, though, so if they just got a job this year, they would be funding their 2022 contribution.)
  • Your teen should report the contribution on his or her tax return for the year of contribution but is not required to. If no return was required to be filed or they have already filed for 2021, they can still make the contribution. They should track their contributions, and the custodian of the account will send a Form 5498 each year, usually in May, which they should keep for record-keeping purposes.

How should they invest those funds? That is a topic for a different day, but this is a great way to get teens interested in and exploring the differences between stocks, bonds, ETF’s, and mutual funds. All of the online investing platforms like Schwab, TD Ameritrade, and Fidelity have tools and resources to help people learn about investing and are reputable sources of information. Time is a real friend in terms of investing so starting early and investing consistently will make their march toward financial security that much easier.

As part of our Financial Foundations series, we have a free webinar on April 6th at noon on Investing Basics for our clients.  These webinars are a great resource for children of our clients to learn more about the basics of personal finance.

[1] Earned income is a tax-related term and indicates that wages and other such income is available for contributions to retirement accounts like IRAs and Roth IRAs while unearned income, like interest and dividends, is not available for such contributions.

Tana Gildea

Help Your Kids March Toward Financial Security, Part 1

As parents, we all want to raise kids to be independent and competent adults. We work hard to build their self-esteem, their confidence, and guide them through life’s many choices. However, we don’t always do a lot to build their financial skills. Sometimes this is because it’s difficult or uncomfortable to talk about money. Sometimes it’s because we don’t feel very confident in our own financial prowess and are concerned about questions that we may not know how to answer ourselves!

Regardless of the reasons, if we want our kids to be financially stable and secure, it’s up to us to start teaching them about money basics. One easy way to do that is to teach them about saving once they get their first job.

Before the paycheck comes, discuss these questions with your kids:

  • Does your family believe in tithing or making charitable contributions with those first dollars?
  • What percentage of income goes to “emergency” savings? (We recommend at least 10% for those with bills to pay but perhaps much higher for a teen.)
  • What percentage of income goes to long-term financial security? (We recommend at least 10% for those with bills to pay but perhaps much higher for a teen.)
  • Do you expect your child to contribute toward college expenses? What percentage should be saved for that expense?
  • How about for buying or maintaining a car? Do they have responsibilities toward that or for gas and insurance? It’s important to learn that those things get expensive!
  • Do they need to start paying for their cell phone or clothing?
  • How much should be free to spend on “wants,” fun, and entertainment?

If teens get a check and are free to spend it all on anything they want, they go down a spending path. Their wants can get bigger and bigger, and they can become less and less discerning about how they spend their money. When it is time to pay their own bills, it’s a brutal shift in their reality! Most of the money goes to taxes and living expenses! Where’s the fun stuff? (We know, parents feel the pain every payday.)

However, if they learn that earned income should be allocated to financial security first, to basic needs next, and then to “fun stuff,” they learn how life really works for adults. They are building up their own resources and starting to create financial security for themselves separate from their parents. We all hope this creates a feeling of pride and independence for them and puts them on a path to self-sufficiency and financial confidence.

We recommend that parents have these discussions with their teens, whether or not they currently have a job, and share their own beliefs and practices around saving. It’s ok to admit to not knowing all the answers but offering to work together to find good answers. It’s also important to admit to your own financial mistakes and regrets. No one has been perfect with their money, and there is always much to be learned from mistakes. It’s great to teach our kids the power of learning from successes and failures. Henry Ford said it best, “The only real mistake is the one from which we learn nothing.” You bet.

In future posts, we’ll continue to help our kids March Toward Financial Security by discussing the benefits of opening and funding checking and savings accounts, starting Roth IRA accounts, and using other tools to help them improve their financial skills.

Did I hear a (52)9er?

By: Dave Kochamba

04/29/2020

This past weekend while social distancing at home I was looking for a comedy to watch.  While searching I found Tommy Boy, one of my favorite movies from the 1990s starring Chris Farley and David Spade.  While there are many hilarious scenes, one of my favorites that can be written about in a blog article is when Tommy (played by Farley) lies to Richard (played by Spade) at the airport saying he left a message that he was going to miss his flight back to his hometown.  Richard then proceeds to needle him about the length of time he needed to complete his undergraduate degree.

Tommy: [gets off the airplane] Richard Hayden!

Richard: Tommy.

Tommy: Where’s my Dad? I thought he was supposed to pick me up at the airport?

Richard: He was at the airport this morning, but you weren’t on the plane.

Tommy: He said he had a surprise for me.

Richard: Maybe. I guess that’s why you should’ve called.

Tommy: I did call, earlier, when… using the phone.

Richard: Earlier? When was that?

Tommy: Er… later… When, when then I, I left a message.

Richard: A message? What number did you call?

Tommy: Two… four.. niner… five, six seven…

Richard: I can’t hear you, you’re trailing off. And did I hear a “niner” in there? Were you calling from a walkie-talkie?

Tommy: No, it was cordless.

Richard: You know what? Don’t. Not here, not now.

Tommy: Did you hear I finally graduated?

Richard: Yeah, and just a shade under a decade too. All right.

Tommy: Hey, you know a lot of people go to college for seven years.

Richard: I know. They’re called doctors

 

Reading this exchange doesn’t do the scene justice, so I recommend watching the clips below if you haven’t seen the movie:

https://www.youtube.com/watch?v=SWBrM117_II

https://www.youtube.com/watch?v=yKA70sI7Kt0

So at this point you may be asking how this all ties into financial planning.  Well, if Tommy did attend college for seven years, hopefully his parents planned ahead for his education expenses and contributed to a 529 early in his childhood.  529 plans have received a large amount of attention over the last few years as the cost of undergraduate education has increased.  Parents, grandparents, and friends and family members are looking for ways to save for this potentially significant expense.   According to the College Savings Plans Network (CSPN), 529 plan assets grew 16% from the prior year to $319.1 billion as of year-end 2017, while the number of accounts rose 3% to 13.3 million. Like many financial products that have become popular, the number of 529 plans being offered to consumers has risen over time as states and investment management companies are looking to get a piece of the market.  When selecting a 529 plan, consumers can open a plan through a broker or an account on their own and invest directly. Direct plans typically are the lower-cost option, as broker-sold 529 plans usually have higher annual costs, including commissions on contributions to the fund that can eat into returns.

With the number of 529 plan options available today, how should you proceed with picking a plan?  We recommend reviewing state sponsored 529 plans in your state of residence.  Many states (Utah, New York, Georgia, South Carolina, Connecticut and others) offer a state income-tax deduction or income-tax credit on residents’ contributions to their state’s own plans.  For instance, contributions by Georgia residents to the Path2College 529 plan are deductible up to $4,000 each year per beneficiary for joint income tax filers, and up to $2,000 each year per beneficiary for all others.  Georgia income tax filers also have until July 15, 2020 in order to make contributions that can be deductible for tax year 2019.  Tax year 2020 contributions to the Path2College 529 plan are deductible up to $8,000 per year per beneficiary for joint filers and $4,000 per year per beneficiary for all other tax filers in the state of Georgia.  Incoming rollovers from other 529 plans do not qualify as contributions eligible for the Georgia state income tax deduction.

It is also important to review a 529 plan’s fees.  Some plans charge an annual maintenance fee, asset management fee, and/or administrative fee.  These fees vary widely depending on the 529 plan.  For instance, the Delaware College Investment Plan managed by Fidelity has fees ranging from .05% to .99% depending on the investments selected.  The Hawaii 529 plan, HI529, charges a .55% plan management fee (on top of the underlying fund expenses) and a $20 fee for non-residents according to their program description.  TIAA, who manages the Georgia Path2College 529 Plan, recently reduced its program management fee to .07 percent, down from .08 percent, effective last May in recognition of plan assets reaching $3 billion. The plan has no sales charges, enrollment fees, or other maintenance fees, making it among the lowest cost 529 college savings plan in the country.

A great resource in reviewing 529 plans is Morningstar’s annual 529 ratings report.  Their 2019 report assigned ratings to 62 plans, which represent more than 97% of assets invested in 529 plans.  They named 30 plans as the best of the bunch rating the top plans Gold, Silver, or Bronze.  However, five plans received negative ratings from the Morningstar analysis, meaning they have at least one flaw that may make them worth avoiding for most college savers, such as an unstable investment team or high fees.

Now that you have some tips on what to look for in evaluating 529 plans, here’s hoping that the beneficiary of your 529 plan won’t need seven years to complete their degree like Tommy did.  And if the beneficiary of your plan does need seven years or more, hopefully they have an M.D. or Ph.D. after their name.  If you have any questions related to 529 plans, please contact a member of your Homrich Berg service team.

Did I hear a (52)9er?

By: Dave Kochamba

04/29/2020

This past weekend while social distancing at home I was looking for a comedy to watch.  While searching I found Tommy Boy, one of my favorite movies from the 1990s starring Chris Farley and David Spade.  While there are many hilarious scenes, one of my favorites that can be written about in a blog article is when Tommy (played by Farley) lies to Richard (played by Spade) at the airport saying he left a message that he was going to miss his flight back to his hometown.  Richard then proceeds to needle him about the length of time he needed to complete his undergraduate degree.

Tommy: [gets off the airplane] Richard Hayden!

Richard: Tommy.

Tommy: Where’s my Dad? I thought he was supposed to pick me up at the airport?

Richard: He was at the airport this morning, but you weren’t on the plane.

Tommy: He said he had a surprise for me.

Richard: Maybe. I guess that’s why you should’ve called.

Tommy: I did call, earlier, when… using the phone.

Richard: Earlier? When was that?

Tommy: Er… later… When, when then I, I left a message.

Richard: A message? What number did you call?

Tommy: Two… four.. niner… five, six seven…

Richard: I can’t hear you, you’re trailing off. And did I hear a “niner” in there? Were you calling from a walkie-talkie?

Tommy: No, it was cordless.

Richard: You know what? Don’t. Not here, not now.

Tommy: Did you hear I finally graduated?

Richard: Yeah, and just a shade under a decade too. All right.

Tommy: Hey, you know a lot of people go to college for seven years.

Richard: I know. They’re called doctors

 

Reading this exchange doesn’t do the scene justice, so I recommend watching the clips below if you haven’t seen the movie:

https://www.youtube.com/watch?v=SWBrM117_II

https://www.youtube.com/watch?v=yKA70sI7Kt0

So at this point you may be asking how this all ties into financial planning.  Well, if Tommy did attend college for seven years, hopefully his parents planned ahead for his education expenses and contributed to a 529 early in his childhood.  529 plans have received a large amount of attention over the last few years as the cost of undergraduate education has increased.  Parents, grandparents, and friends and family members are looking for ways to save for this potentially significant expense.   According to the College Savings Plans Network (CSPN), 529 plan assets grew 16% from the prior year to $319.1 billion as of year-end 2017, while the number of accounts rose 3% to 13.3 million. Like many financial products that have become popular, the number of 529 plans being offered to consumers has risen over time as states and investment management companies are looking to get a piece of the market.  When selecting a 529 plan, consumers can open a plan through a broker or an account on their own and invest directly. Direct plans typically are the lower-cost option, as broker-sold 529 plans usually have higher annual costs, including commissions on contributions to the fund that can eat into returns.

With the number of 529 plan options available today, how should you proceed with picking a plan?  We recommend reviewing state sponsored 529 plans in your state of residence.  Many states (Utah, New York, Georgia, South Carolina, Connecticut and others) offer a state income-tax deduction or income-tax credit on residents’ contributions to their state’s own plans.  For instance, contributions by Georgia residents to the Path2College 529 plan are deductible up to $4,000 each year per beneficiary for joint income tax filers, and up to $2,000 each year per beneficiary for all others.  Georgia income tax filers also have until July 15, 2020 in order to make contributions that can be deductible for tax year 2019.  Tax year 2020 contributions to the Path2College 529 plan are deductible up to $8,000 per year per beneficiary for joint filers and $4,000 per year per beneficiary for all other tax filers in the state of Georgia.  Incoming rollovers from other 529 plans do not qualify as contributions eligible for the Georgia state income tax deduction.

It is also important to review a 529 plan’s fees.  Some plans charge an annual maintenance fee, asset management fee, and/or administrative fee.  These fees vary widely depending on the 529 plan.  For instance, the Delaware College Investment Plan managed by Fidelity has fees ranging from .05% to .99% depending on the investments selected.  The Hawaii 529 plan, HI529, charges a .55% plan management fee (on top of the underlying fund expenses) and a $20 fee for non-residents according to their program description.  TIAA, who manages the Georgia Path2College 529 Plan, recently reduced its program management fee to .07 percent, down from .08 percent, effective last May in recognition of plan assets reaching $3 billion. The plan has no sales charges, enrollment fees, or other maintenance fees, making it among the lowest cost 529 college savings plan in the country.

A great resource in reviewing 529 plans is Morningstar’s annual 529 ratings report.  Their 2019 report assigned ratings to 62 plans, which represent more than 97% of assets invested in 529 plans.  They named 30 plans as the best of the bunch rating the top plans Gold, Silver, or Bronze.  However, five plans received negative ratings from the Morningstar analysis, meaning they have at least one flaw that may make them worth avoiding for most college savers, such as an unstable investment team or high fees.

Now that you have some tips on what to look for in evaluating 529 plans, here’s hoping that the beneficiary of your 529 plan won’t need seven years to complete their degree like Tommy did.  And if the beneficiary of your plan does need seven years or more, hopefully they have an M.D. or Ph.D. after their name.  If you have any questions related to 529 plans, please contact a member of your Homrich Berg service team.

Tana Gildea

Investing In College Grads – Literally

By: Tana Gildea

9/20/2019

Tired of the same old investment stock and bond options? How about investing in a future teacher, engineer, or doctor and getting a percentage of their future income as your return? That’s what some institutional investors are doing via Income Share Arrangements (ISAs). While it sounds like a new idea, Milton Friedman actually proposed such an arrangement back in the 1950’s with Yale University implementing it. They had the requirement that all funded graduates pay a percentage of their income until the entire pool was paid off. Sounds great if you are a low-salary earner who pays less over the term than the higher-earning counterparts! Of course, there were defaults and Yale ended up bailing out the program. Regardless, the interest has been building since 2009 when Lumni, one of the pioneering companies, entered the ISA space.

With the rising cost of college and student loan debt at over $1.5 trillion, schools as well as students are looking for better options. Purdue University has been a leader in developing and implementing ISA programs. “Purdue has arranged more than 700 contracts worth $9.5 million and closed two investment funds totaling $17 million.”1 They have had various iterations and modifications to their agreements including putting a cap of 2.5 times what the student borrowed to keep the most successful from over-paying on the defined “share of income” over the required term.

From the students’ standpoint, there are mixed reviews. Consider that English majors will pay 4.5% of their income for almost 10 years versus computer science majors who will pay 2.6% of their income for just over 7 years. That is an agreement to cover one year of college. If a student has multiple agreements or also took out student loans, the burden is still heavy. According to Julie Margetta Morgan, a fellow who studies higher education, “It’s pretty darn near impossible to say whether an ISA is better or worse for an individual.”1 That means that students have to read the fine print and do the math to compare options. Whether a student commits future income or repays debt, it is still a drain on resources post-graduation.

For investors, there are only a few schools using outside investment firms to provide capital for the ISA program. Some schools do solicit individual donors, usually wealthy alumni who are already generous in their support of the school. For those offering ISA investment funds, such as Purdue, those investments “may make the most sense for socially conscious investing.”1 The return history is just not sufficient to quote the type of returns that investors focused on maximizing return may be likely to see.

For now, it’s unlikely that we will offer you any opportunities to invest in engineers or scientists, but one never knows how this will play out in the future. You can certainly give this a try with your own budding professional!

Chuck Trafton of Flowpoint Capital Partners says he can “envision a whole new equity market for higher education in the next five years where today there is only debt.”1. May it be for the benefit of the students as well as the investors!

 1 “Investing in College Grads—Literally,” Clair Boston, Bloomberg Business, April 15, 2019

Todd-Hall

Important Information for College-Bound Children

By: Todd Hall

07/12/2019

This is an exciting time for parents with children headed off to their first year of college. Over the past 18 months or so, you have been planning for this transition, and it may be hard to believe that freshman orientation will be starting soon. Hopefully you have had time to have a meaningful conversation with your son or daughter about what it means to be 18 years old and living away from home for the first time.

In the midst of all the change, many parents and young adults preparing for college may not be aware of how their changing legal status will impact them in a variety of ways. For that reason, we encourage parents who have college-bound children to think about estate planning for their young adults. Estate planning for this age group is easy to overlook, however, having certain documentation in place is highly recommended.

Specifically, we recommend that all parents living in Georgia who have children over the age of 18 should ask their children to sign the Georgia Advance Directive for Health Care form. This statutory form enables a child to name a parent or another trusted individual as a health care agent, and it authorizes health care providers to share medical information with the named agent.

Why this is important: Once children reach the age of majority (which is 18 in Georgia and most other states), they are legally considered adults. As adults, privacy laws generally protect their medical information. We hope you don’t ever need to use it, but in the unfortunate scenario where a child experiences a medical emergency, this document helps avoid any challenges in obtaining information about your child’s medical condition or making decisions on his or her behalf. Additional information, including the form itself and some helpful instructions can be found here: https://aging.georgia.gov/.

Once completed, you should give a copy of this form to people who might need it, such as your health care agent, your family, and your physician. Keep a copy of this completed form at home in a place where it can easily be found if it is needed. Many clients also ask their HB client service team to keep a copy in our files.

If you have children who live in other states, we recommend signing both the Georgia form and the appropriate form for the other state. If you sign more than one form, please be sure to name the same health care agent and backup agent on both. You can find links to forms from other states at this website: https://www.nhpco.org/patients-and-caregivers/advance-care-planning/advance-directives/downloading-your-states-advance-directive/