Why Dad…Why? A Life Insurance Story!

kid-handshake

Let me start off by saying I am very appreciative of all the help that friends and family have provided me over the years!  I don’t mean to sound ungrateful at all, but rather want to use my situation to teach others.

My dad recently called me and told me that he had taken out a whole life insurance policy on me right after I was born and he was turning it over to me now that I have my own family.  I was stoked!  Free Money!

It was a $25,000 whole life policy that my dad paid $189/year in the event I passed away, they would have money to bury me.  Kinda morbid, but a reality.  The sales person talked about me having the ability to use it for college and the ability to take loans from the policy tax-free…blah…blah…blah…

Today I own a whole life policy that has a death benefit of $28,002 or I could take my cash value of $6,668.62 out to use for anything I want.

Here’s the problem…

If my dad would have just put that FIRST $189 payment into an S&P 500 fund it would have grown to $10,542.42 of cash.  THAT IS JUST THE FIRST PAYMENT!

If he would have put that same $189/year into an S&P 500 fund until he turned it over to me, I would have an account balance of $74,511.36!

Again, I am not ungrateful for the gift, but that can be the difference between the next generation going to college or not…having the ability to take on the risk of a business venture or not…spending more time with kids or not.

What would an extra $67,842.74?

 

Education Planning 102

Piggy Bank with savings formula

Want to take your education planning, and tax deductions, to the next level?  Keep reading! 

To add a layer of sophistication to education planning, you must recognize that Ohio allows a tax deduction of $4,000 per beneficiary and allows you to move accounts between beneficiaries within the same family. 

Let’s look at an example.  If a married couple (H & W) has two children (B & G) in private school, they could potentially pick up $16,000 in state tax deductions.  They would open an account with B as beneficiary, G as beneficiary, H as beneficiary, and W as beneficiary contributing $4,000 to each account. Then H and W would move their accounts to B and G to be used for tuition. 

$4,000 tax deduction * 4 beneficiaries = $16,000 Ohio tax deduction!

If you have questions, please do not hesitate to reach out!

Save Taxes Paying For Private School

EducationPrivate school education can have many upsides, but saving for college while paying private school tuitions can be daunting.  I have found very few people are aware of a recent tax change that can help reduce your taxes! 

The recent tax change has now allowed section 529 education savings plans (if you don’t know what this is, I address it here) to be used for primary education expenses up to $10,000 per year.   This can be a big tax win for Ohio parents with children in private school. 

Ohio allows for a $4,000 state tax deduction per beneficiary (up from $2,000 last year) for funds contributed to an Ohio College Advantage plan.  While the accounts were originally established for college savings, now they can be used to pay for private education. 

So instead of making your next private school tuition payment from your checking account, simply contribute to your child’s College Advantage account and then request reimbursement for the tuition you paid.  Simple as that and you have a $4,000 state tax deduction!

Feel free to reach out to me if you have questions!

529 College Savings FAQs

529 College Savings Plan Theme With Textbooks And Piggy Bank

Many times when I talk about 529 college savings plans with friends and clients, I am surprised by the lack of basic understanding of how the plans work.  Below is a list of the most common questions I get asked about college savings.

If you know someone thinking about college planning, have them reach out to me!

Q: What is a section 529 education plan? 

A: Named after a section of IRS code, it is just a fancy name for an education savings account.  These plans were originally established for families to save money for college in a tax-advantaged way.  The money you put into the account grows over the years and you can pull the money out for college without having to pay taxes on the growth. 

Q: Do I make too much money to contribute to a 529 account? 

A:  No.  Unlike many retirement accounts, there are no income limits, age restrictions, or annual contribution limits.  There are maximum contribution limits that vary by plan, but are at least $235,000! 

Q: Can I use the funds in my Ohio 529 to pay for a school out of state? 

A: Absolutely!  Just because you put money into the Ohio plan doesn’t mean that your student must attend college in Ohio.  It can be used for any qualified institution across the country. 

Q:  What if my student doesn’t go to college? 

A:  The best option is to transfer the money in the account to another family member for education expenses.  If you decide to pull the money out for non-education expenses, then you could be subject to investment income taxes and a 10% tax penalty on the earnings of the account (not the full withdrawal). 

Q: What happens if my student gets a scholarship to college? 

A:  If your student receives a scholarship and doesn’t need the funds in the 529 account, then you are eligible to withdrawal the money and avoid the above mentioned 10% penalty.  You will still be subject to investment income taxes, but this is no different than an ordinary investment account. 

Q:  Can my family add contributions? 

A: Anyone can make a contribution to your child’s 529 account.  However, the person making the contribution is the one who will take the potential state tax deduction.  This can be a good excuse to tell grandparents to save for college instead of buying that toy that will be gone next year. 

Q:  Will my 529 account impact my financial aid eligibility? 

A:  Depends.  If the account is owned by the custodial parent or the student, then it is treated as a favorable asset for financial aid purposes.  If the account is owned by anyone else (i.e. grandma) then it doesn’t count against financial aid.  However, once grandma starts taking withdrawals from the account to help you pay for college it can have a large negative impact. 

Q:  What does it cost? 

A:  Ohio has one of the most affordable 529 college savings programs in the country.  The direct plan offers many mutual fund options (many from Vanguard) at a low cost.  However, if you go into a bank or work with a commissioned investment advisor, you are going to pay substantially more. 

Q:  How do I start an Ohio College Advantage 529 account? 

A:  As mentioned above, you can do this on your own.  Go to www.collegeadvantage.com and click on “Open an Account” in the upper right-hand corner.  You can start an account with as little as $25! 

Required Minimum Distributions (RMD)

rmd-withdrawal-rules-retirement-income-penalty-fine-tax-ira-401k_largeDo you know how much you HAVE to take out of your traditional IRA each year?  If you are 70 years old or older (or if your parents are) then listen up!

The IRS requires you to take a minimum amount of your Individual Retirement Account (IRA) and/or 401k each year.  The logic is that you have saved money for retirement and the IRS has not received tax revenue on that money yet.  So once you turn 70.5 (why is it not 70?…probably some politician was about to turn 70 years old!) the IRS makes you take a required minimum amount out so that they can begin receiving their tax revenue.  They take the required minimum distribution (RMD) very serious by levying a 50% penalty if you forget!  That right…if you had to take $5,000 out and you forgot, you get the privilege of writing the IRS a check for $2,500!

So how do you calculate the RMD?  I regularly hear people say that they are confused by the calculation.  However, it is pretty simple once you understand what you are doing.

You take your IRA balance on last years 12/31 and divide it by the life expectancy/distribution factor in the IRS table (link below).  The result is the minimum you HAVE to remove from the account in that given year.

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf 

Let’s look at an example:

You turned 70 years old on 5/1/2018 (born 5/1/1948).  You had $520,000 in your traditional IRA  at the end of last year.  It is now up to $600k because you worked with me and we grew your account.

Since you will celebrate your 70.5 Birthday this year on 11/1/2018 you have to take an RMD!  Since you turned 70 years old this calendar year, you will use 27.4 as your divisor (see link above).  Your numerator is your IRA account balance as 12/31/2017 ($520,000 in this example).

RMD = $520,000/27.4
RMD = $18,979 (notice I rounded up just to be safe).

In 2019 you will have to take the total of 12/31/2018 IRA balance/26.5.
In 2020 you will have to take the total of 12/31/2019 IRA balance/25.6. etc…

Note, there are a few special circumstances where this calculation is not applicable or you have the option to use a more favorable calculation.  A few examples: IRAs that you have inherited from someone else.  RMDs if your spouse is more than 10 years younger than you (and he/she is the only beneficiary).  Roth IRA’s.

Go Away In May?

I have several friends that are do-it-yourself investors (you know who you are).  I hear their stories of moving between mutual funds in their 401k accounts.  Or they bought this stock and sold that stock.  Some investors even believe in selling everything in May!  However, just being in the markets is enough for most people.  Play along, keep expenses low and avoid stupid mistakes with your money by leaving it alone!  The chart below was created by American Funds and helps visualize why you should not sell out of your investments (even when the markets go down).

American Funds

So what do you say…should you “sell in May and go away?”

The Big Bang Theory – On money…

The Big Bang Theory is one of my favorite television shows!  My wife and I had several years where we would put the kids to bed and then watch a couple hours of syndicated episodes on TBS (since kids don’t allow for primetime television!).  So naturally, when I saw an article written by executive producer, Dave Goetsch, that had to do with finances…it became a must read.

Turns out it is one of the better articles about the market I have read in a long time.

Now and Then

By Dave Goetsch

Dave Goetsch, Executive Producer of  The Big Bang Theory, reflects on his investment experience in the recent market downturn and contrasts his new perspective with memories of the 2008-2009 financial crisis.

Seeing all the recent headlines about the sudden downturn in the stock market has transported me back to February of 2009, when I was close to despair. It’s striking how different I feel now.

In February 2009, the stock market was down around 50% from its high, and everyone seemed to feel like the sky was falling. I was familiar with this state of panic because my relationship to the financial markets was that I didn’t trust them.

They were always going up and down in ways no one could predict, and I couldn’t trust those folks who said that they could anticipate what was going to happen. So when the market went down, I went down with it—sinking into a depression, knowing there was nothing I could do.

What a difference nine years make. I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing. I was right not to trust those people who thought they could predict what was going to happen in the markets, but I was wrong in thinking that there was nothing to do. I’ve learned that I can have a great investment experience if I just accept a few simple truths.

I have to understand the uncertainty of the market. The stock market, as measured by the S&P 500 Index, has returned about 10% per year over the last 90 years,1 but there are very few individual years in which it has ever actually returned that amount. In fact, how many of those 90 years do you think the S&P 500 was up more than 20% or down more than 20% for that year? The answer is 40. Astounding, right? I wish somebody had explained that to me decades ago. Then I would have known to look at stock market returns in terms of decades—not years, months, days, or hours. I would understand that so many of those articles and cable news pieces are just noise, designed to keep an audience obsessed and unsettled.

I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing.

In order to be a long-term investor, you have to have a long time horizon. This can be hard to remember when you’re being assaulted by noise, but if you can stay strong, the results are stunning. By results, I don’t mean the investment returns, which hopefully are good. The return I’m talking about is how I feel every day. I worry less—not just about the future, but also about the present. Of course, I know that there are no guarantees when it comes to investing, but I feel like I’m going to be okay. I have a plan.

There’s no way I could’ve done this without a financial advisor. I needed someone who could not just talk me through what my asset allocation should be, but also help me work through how I felt about investing and what exactly I could do to change my perspective.

I was a mess nine years ago. Now, my outlook is totally different. The markets haven’t changed; they still go up and down. The difference is, I don’t anymore.